UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2008
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 (IRS Employer Identification No.)
incorporation or organization)
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10036
(Zip Code)
(212) 696-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and 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:
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |X| Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date:
Class Outstanding at May 7, 2008 Common Stock, $.01 par value 468,518,137
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Financial Condition at March 31, 2008 (Unaudited) and December 31, 2007 1
(Derived from the audited consolidated statement of financial condition at December 31, 2007)
Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the quarters ended 2
March 31, 2008 and 2007
Consolidated Statement of Stockholders' Equity (Unaudited) for the quarter ended March 31, 2008 3
Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2008 and 2007 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 38
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 1A. Risk Factors 39
Item 6. Exhibits 40
SIGNATURES 41
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Part I
Item1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except for share data)
(Unaudited)
March 31, 2008 December 31, 2007(1)
------------------------------------------
ASSETS
------
Cash and cash equivalents $ 1,549,041 $ 103,960
Reverse repurchase agreements 800,000 -
Mortgage-Backed Securities, at fair value 56,115,025 52,879,528
Agency debentures, at fair value 738,837 253,915
Available for sale equity securities, at fair value 44,546 64,754
Trading securities, at fair value 1,836 11,675
Receivable for Mortgage-Backed Securities sold 174,413 276,737
Accrued interest receivable 287,261 271,996
Receivable for advisory and service fees 4,581 3,598
Intangible for customer relationships, net 8,840 9,842
Goodwill 22,966 22,966
Other assets 4,347 4,543
------------------------------------------
Total assets $59,751,693 $53,903,514
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Repurchase agreements $51,324,007 $46,046,560
Payable for Investment Securities purchased 828,235 1,677,131
Trading securities sold, not yet purchased, at fair value 37,268 32,835
Accrued interest payable 172,575 257,608
Dividends payable 224,823 136,618
Accounts payable 20,123 36,688
Interest rate swaps, at fair value 789,859 398,096
------------------------------------------
Total liabilities 53,396,890 48,585,536
------------------------------------------
Minority interest in equity of consolidated affiliate - 1,574
------------------------------------------
6.00% Series B Cumulative Convertible Preferred Stock:
4,600,000 shares authorized, 4,597,550 and 4,600,000 111,405 111,466
shares issued and outstanding
------------------------------------------
Commitments and contingencies (Note 13) - -
Stockholders' Equity:
7.875% Series A Cumulative Redeemable Preferred Stock:
7,637,500 shares authorized 7,412,500 issued and outstanding 177,088 177,088
Common stock: par value $.01 per share; 487,762,500 shares
authorized, 468,380,797 and 401,822,703 issued and
outstanding, 4,684 4,018
respectively
Additional paid-in capital 6,506,494 5,297,922
Accumulated other comprehensive loss (335,814) (152,197)
Accumulated deficit (109,054) (121,893)
------------------------------------------
Total stockholders' equity 6,243,398 5,204,938
------------------- ----------------------
Total liabilities, minority interest, Series B Cumulative
Convertible Preferred Stock and stockholders' equity $59,751,693 $53,903,514
=================== ======================
(1) Derived from the audited consolidated financial statements at December 31, 2007.
See notes to consolidated financial statements.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(dollars in thousands, except per share amounts)
For the Quarter Ended For the Quarter Ended
March 31, 2008 March 31, 2007
------------------------- -------------------------
Interest income $791,128 $449,564
Interest expense 537,606 380,164
------------------------- -------------------------
Net interest income 253,522 69,400
------------------------- -------------------------
Other income:
Investment advisory and service fees 6,598 5,562
Gain on sale of Investment Securities 9,417 6,145
Gain on termination of interest rate swaps - 67
Income from trading securities 1,854 3,429
Dividend income from available-for-sale equity securities 941 -
Loss on other-than-temporarily impaired securities - (491)
------------------------- -------------------------
Total other income 18,810 14,712
------------------------- -------------------------
Expenses:
633 904
Distribution fees
General and administrative expenses 23,995 12,886
------------------------- -------------------------
Total expenses 24,628 13,790
------------------------- -------------------------
247,704 70,322
Income before income taxes and minority interest
Income taxes 4,610 2,604
------------------------- -------------------------
Income before minority interest 243,094 67,718
Minority interest 58 286
------------------------- -------------------------
Net income 243,036 67,432
Dividends on preferred stock 5,373 5,373
------------------------- -------------------------
Net income available to common shareholders $237,663 $62,059
------------------------- -------------------------
Net income available per share to common shareholders:
Basic $0.54 $0.29
========================= =========================
Diluted $0.53 $0.28
========================= =========================
Weighted average number of common shares outstanding:
Basic 443,812,432 217,490,205
========================= =========================
Diluted 452,967,457 225,928,127
========================= =========================
Net income $243,036 $67,432
------------------------- -------------------------
Comprehensive income:
Unrealized gain on available-for-sale securities 217,563 45,948
Unrealized loss on interest rate swaps (391,763) (24,155)
Reclassification adjustment for net gains
included in net income (9,417) (5,721)
------------------------- -------------------------
Other comprehensive (loss) income (183,617) 16,072
------------------------- -------------------------
Comprehensive income $59,419 $83,504
========================= =========================
See notes to consolidated financial statements.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED MARCH 31, 2008
(UNAUDITED)
(dollars in thousands, except per share data)
Common Other
Stock Additional Accumulated
Preferred Par Paid-In Comprehensive Accumulated
Stock Value Capital Loss Deficit Total
------------------------------------------------------------------
BALANCE JANUARY 1, 2008 $177,088 $4,018 $5,297,922 ($152,197) ($121,893) $5,204,938
Net income - - - - 243,036 243,036
Other comprehensive loss - - - (183,617) - (183,617)
Exercise of stock options - 2 1,633 - - 1,635
Stock option expense - - 322 - - 322
Net proceeds from direct purchase and dividend
reinvestment - 33 54,524 - - 54,557
Net proceeds from follow-on offerings - 587 1,080,244 - - 1,080,831
Net proceeds from ATM programs - 44 71,788 - - 71,832
Conversion of Series B Cumulative Convertible
Preferred Stock - - 61 - - 61
Series A Cumulative Redeemable Preferred Stock
dividends declared, $0.492188 per share - - - - (3,648) (3,648)
Series B Cumulative Convertible Preferred Stock
dividends declared, $0.375 per share - - - - (1,725) (1,725)
Common dividends declared, $0.48 per share - - - - (224,823) (224,823)
------------------------------------------------------------------
BALANCE, MARCH 31, 2008 $177,088 $4,684 $6,506,494 ($335,814) ($109,053) $6,243,399
==================================================================
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See notes to consolidated financial statements.
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
(dollars in thousands)
For the Quarter For the Quarter
Ended March 31, 2008 Ended
March 31, 2007
-------------------------------------------
Cash flows from operating activities:
Net income $243,036 $67,432
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of Mortgage Backed Securities premiums
and discounts, net 27,513 15,369
Amortization of intangibles 1,002 356
Amortization of trading securities premiums and discounts (3) -
Gain on sale of Investment Securities (9,417) (6,145)
Gain on termination of interest rate swaps - (67)
Stock option and long-term compensation expense 322 311
Net realized gain on trading investments (5,294) (670)
Unrealized depreciation (appreciation) on trading investments 4,427 (1,661)
Loss on other-than-temporarily impaired securities - 491
Increase in accrued interest receivable (15,309) (32,562)
Increase in trading sales receivable 157 -
(Increase) decrease in other assets 196 (845)
Purchase of trading securities (746) (3,865)
Proceeds from sale of trading securities 9,926 4,566
Purchase from trading securities sold, not yet purchased (4,044) (7,831)
Proceeds for securities sold, not yet purchased 9,848 17,685
(Increase) decrease in advisory and service fees receivable (983) 229
Decrease in interest payable (85,033) (4,636)
Decrease in accrued expenses and other liabilities (16,565) (10,874)
-------------------------------------------
Net cash provided by operating activities 159,033 37,283
-------------------------------------------
Cash flows from investing activities:
Purchase of Mortgage-Backed Securities (10,453,627) (9,590,176)
Proceeds from sale of Investment Securities 4,160,361 1,410,092
Principal payments of Mortgage-Backed Securities 2,536,577 1,674,576
Purchase of agency debentures (500,000) (54,567)
Proceeds from termination of swaps - 67
Purchase of reverse repurchase agreements (800,000) -
-------------------------------------------
Net cash used in investing activities (5,056,689) (6,560,008)
-------------------------------------------
Cash flows from financing activities:
Proceeds from repurchase agreements 114,589,490 97,057,073
Principal payments on repurchase agreements (109,312,043) (91,223,083)
Proceeds from exercise of stock options 1,635 417
Proceeds from direct purchase and dividend reinvestment 54,557 -
Net proceeds from follow-on offerings 1,080,831 737,249
Net proceeds from ATM programs 71,832 -
Minority interest (1,574) 286
Dividends paid (141,991) (44,389)
-------------------------------------------
Net cash provided by financing activities 6,342,737 6,527,553
-------------------------------------------
Net increase in cash and cash equivalents 1,445,081 4,828
Cash and cash equivalents, beginning of quarter 103,960 91,782
-------------------------------------------
Cash and cash equivalents, end of quarter $1,549,041 $96,610
===========================================
Supplemental disclosure of cash flow information:
Interest paid $622,639 $384,800
===========================================
Taxes paid $254 $2,476
===========================================
Noncash financing activities:
Net change in unrealized loss on available-for-sale securities and
interest rate swaps, net of reclassification adjustment ($183,617) $16,072
===========================================
Dividends declared, not yet paid $224,823 $52,577
===========================================
See notes to consolidated financial statements.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Annaly Capital Management, Inc. (the "Company") was incorporated in Maryland on November 25, 1996. The Company changed its name from Annaly Mortgage Management, Inc. to Annaly Capital Management, Inc. effective August 2, 2006. The Company commenced its operations of purchasing and managing an investment portfolio of mortgage-backed securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity capital, and completed its initial public offering on October 14, 1997. The Company is a real estate investment trust (REIT) under the Internal Revenue Code of 1986, as amended. The Company acquired Fixed Income Discount Advisory Company ("FIDAC") on June 4, 2004. FIDAC is a registered investment advisor and is a taxable REIT subsidiary of the Company. On June 27, 2006, the Company made a majority equity investment in an affiliated investment fund (the "Fund"), which is now wholly owned by the Company. The Company acquired approximately 3.6 million shares of common stock of Chimera Investment Corporation ("Chimera") for approximately $54.3 million on November 21, 2007. Chimera is a newly-formed, publicly traded, specialty finance company that invests in residential mortgage loans, residential mortgage-backed securities, real estate related securities and various other asset classes. Chimera is externally managed by FIDAC and intends to elect and qualify to be taxed as a REIT for federal income tax purposes.
A summary of the Company's significant accounting policies follows:
Basis of Presentation - The accompanying unaudited consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP"). The consolidated interim financial statements are unaudited; however, in the opinion of the Company's management, all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the financial positions, results of operations, and cash flows have been included. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007. The nature of the Company's business is such that the results of any interim period are not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of the Company, FIDAC and the Fund. All intercompany balances and transactions have been eliminated. The minority shareholder's interest in the Fund is reflected as minority interest in the consolidated financial statements.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and money market funds.
Reverse Repurchase Agreements - The Company may invest its daily available cash balances via reverse repurchase agreements to provide additional yield on its assets. These investments will typically be recorded as short term investments and will mature daily. Reverse repurchase agreements are recorded at cost and are collateralized by mortgage-backed securities pledged by the counterparty to the agreement.
Mortgage-Backed Securities and Agency Debentures - The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans, and in certificates guaranteed by the Government National Mortgage Association ("GNMA") (collectively, "Mortgage-Backed Securities"). The Company also invests in agency debentures issued by Federal Home Loan Bank ("FHLB"), Federal Home Loan Mortgage Corporation ("FHLMC"), and Federal National Mortgage Association ("FNMA"). The Mortgage-Backed Securities and agency debentures are collectively referred to herein as "Investment Securities."
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities, requires the Company to classify its Investment Securities as either trading investments, available-for-sale investments or held-to-maturity investments. Although the Company generally intends to hold most of its Investment Securities until maturity, it may, from time to time, sell any of its Investment Securities
as part of its overall management of its portfolio. Accordingly, SFAS No. 115 requires the Company to classify all of its Investment Securities as available-for-sale. All assets classified as available-for-sale are reported at estimated fair value, based on market prices from independent sources, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. The Company's investment in Chimera is accounted for as available-for-sale equity securities under the provisions of SFAS 115.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been lower than carrying value, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized losses on Investment Securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to other-than-temporary factors, are recognized in income and the cost basis of the Investment Securities is adjusted. For the quarter ended March 31, 2008 there was no loss on other-than-temporarily impaired securities. For the quarter ended March 31, 2007 the loss on other-than-temporarily impaired securities was $491,000.
SFAS No. 107, Disclosure About Fair Value of Financial Instruments, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The estimated fair value of Investment Securities, available-for-sale equity securities and interest rate swaps is equal to their carrying value presented in the consolidated statements of financial condition. The estimated fair value of trading securities and trading securities sold, not yet purchased, is equal to their carrying value presented in the consolidated statements of financial condition. The estimated fair value of cash and cash equivalents, accrued interest receivable, receivable for securities sold, receivable for advisory and service fees, repurchase agreements with maturities shorter than one year, payable for mortgage-backed securities purchased, dividends payable, accounts payable, and accrued interest payable, generally approximates cost as of March 31, 2008 due to the short term nature of these financial instruments.
Interest income is accrued based on the outstanding principal amount of the Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Investment Securities are amortized into interest income over the projected lives of the securities using the interest method. The Company's policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, consensus prepayment speeds, and current market conditions. Dividend income on available-for-sale equity securities is recorded on the declaration date on an accrual basis.
Investment Securities transactions are recorded on the trade date. Purchases of newly-issued securities are recorded when all significant uncertainties regarding the characteristics of the securities are removed, generally shortly before settlement date. Realized gains and losses on sales of Investment Securities are determined on the specific identification method.
Derivative Financial Instruments/Hedging Activity - The Company hedges interest rate risk through the use of derivative financial instruments, comprised of interest rate caps and interest rate swaps (collectively, "Hedging Instruments"). The Company accounts for Hedging Instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133") as amended and interpreted. The Company carries all Hedging Instruments at their fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. As the Company's interest rate swaps are designated as cash flow hedges under SFAS No. 133, the change in the fair value of any such derivative is recorded in other comprehensive income or loss for hedges that qualify as effective. At March 31, 2008, the Company did not have any interest rate caps. The ineffective amount of all Hedging Instruments, if any, is recognized in earnings each quarter. To date, the Company has not recognized any change in the value of its interest rate swaps in earnings as a result of a hedge or a portion thereof being ineffective.
Upon entering into hedging transactions, the Company documents the relationship between the Hedging Instruments and the hedged liability. The Company also documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities. The Company assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is "highly effective," as defined by SFAS 133. The Company discontinues hedge accounting on a prospective basis with changes in the estimated fair value
reflected in earnings when (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including hedged items such as forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as a Hedging Instrument is no longer appropriate.
When the Company enters into an interest rate swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the London Interbank Offered Rate ("LIBOR"). The Company's interest rate swaps are designated as cash flow hedges against the benchmark interest rate risk associated with the Company's borrowings.
All changes in the unrealized gains/losses on any interest rate swap are recorded in accumulated other comprehensive income or loss and are reclassified to earnings as interest expense is recognized on the Company's hedged borrowings. If it becomes probable that the forecasted transaction, which in this case refers to interest payments to be made under the Company's short-term borrowing agreements, will not occur by the end of the originally specified time period, as documented at the inception of the hedging relationship, then the related gain or loss in accumulated other comprehensive income or loss would be reclassified to income or loss.
Realized gains and losses resulting from the termination of an interest rate swap are initially recorded in accumulated other comprehensive income or loss as a separate component of stockholders' equity. The gain or loss from a terminated interest rate swap remains in accumulated other comprehensive income or loss until the forecasted interest payments affect earnings. If it becomes probable that the forecasted interest payments will not occur, then the entire gain or loss would be recognized in earnings.
Credit Risk - The Company has limited its exposure to credit losses on its portfolio of Investment Securities by only purchasing securities issued by FHLMC, FNMA, or GNMA and agency debentures issued by the FHLB, FHLMC and FNMA. The payment of principal and interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by those respective agencies, and the payment of principal and interest on the GNMA Mortgage-Backed Securities are backed by the full faith and credit of the U.S. government. Principal and interest on agency debentures are guaranteed by the agency issuing the debenture. All of the Company's Investment Securities have an actual or implied "AAA" rating.
Market Risk - The current situation in the sub-prime mortgage sector, and the current weakness in the broader mortgage market, could adversely affect one or more of the Company's lenders and could cause one or more of the Company's lenders to be unwilling or unable to provide it with additional financing. This could potentially increase the Company's financing costs and reduce liquidity. If one or more major market participants fails, it could negatively impact the marketability of all fixed income securities, including government mortgage securities, and this could negatively impact the value of the securities in the Company's portfolio, thus reducing its net book value. Furthermore, if many of the Company's lenders are unwilling or unable to provide it with additional financing, the Company could be forced to sell our Investment Securities at an inopportune time when prices are depressed. Even with the current situation in the sub-prime mortgage sector, the Company does not anticipate having difficulty converting its assets to cash or extending financing terms due to the fact that its investment securities have an actual or implied "AAA" rating and principal payment is guaranteed.
Trading Securities and Trading Securities sold, not yet purchased - Trading securities and trading securities sold, not yet purchased, are presented in the consolidated statements of financial conditions as a result of consolidating the financial statements of the Fund, and are carried at fair value. The realized and unrealized gains and losses, as well as other income or loss from trading securities, are recorded in the income from trading securities balance in the accompanying consolidated statements of operations.
Trading securities sold, not yet purchased, represent obligations of the Fund to deliver the specified security at the contracted price, and thereby create a liability to purchase the security in the market at prevailing prices.
Repurchase Agreements - The Company finances the acquisition of its Investment Securities through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
Cumulative Convertible Preferred Stock- The Company classifies its Series B Cumulative Convertible Preferred Stock ("Series B Stock") on the consolidated statements of financial condition using the guidance in SEC Accounting Series Release No. 268, Presentation in Financial Statements of "Redeemable Preferred Stocks," and Emerging Issues Task Force ("EITF") Topic D-98, Classification and Measurement of Redeemable Securities. The Series B Stock contains fundamental change provisions that allow the holder to redeem the Series B Stock for cash if certain events occur. As redemption under these provisions is not solely within the Company's control, the Company has classified the Series B Stock as temporary equity in the accompanying consolidated statements of financial condition.
The Company has analyzed whether the embedded conversion option should be bifurcated under the guidance in SFAS No. 133 and EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, and has determined that bifurcation is not necessary.
Income Taxes - The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), with respect thereto. Accordingly, the Company will not be subjected to federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and stock ownership tests are met. The Company and FIDAC have made a joint election to treat FIDAC as a taxable REIT subsidiary. As such, FIDAC is taxable as a domestic C corporation and subject to federal and state and local income taxes based upon its taxable income.
Use of Estimates - The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Goodwill and Intangible assets - The Company's acquisition of FIDAC was accounted for using the purchase method. Under the purchase method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. In addition, the cost of FIDAC was allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired was recognized as goodwill. Intangible assets are periodically (but not less frequently than annually) reviewed for potential impairment. Intangible assets with an estimated useful life are expected to amortize over a 6.0 year weighted average time period. During the quarters ended March 31, 2008 and 2007, there were no impairment losses.
Stock Based Compensation - The Company accounts for its stock-based compensation in accordance with SFAS No. 123 (Revised 2004) - Share-Based Payment ("SFAS 123R"). SFAS 123R, which requires the Company to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions. The compensation cost should be reassessed based on the fair value of the equity instruments issued.
The Company recognizes compensation expense on a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award). The Company estimated fair value using the Black-Scholes valuation model. During the quarter ended March 31, 2008 and 2007, there were no options granted.
Recent Accounting Pronouncements - In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are required to provide enhanced disclosure regarding instruments in the level 3 category (the valuation of which require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS 157 was adopted by the Company on January 1, 2008. SFAS 157 did not have an impact on the manner in which the Company estimates fair value, but it requires additional disclosure, which is included in Note 5.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 was effective for the Company commencing January 1, 2008. The Company did not elect the fair value option for any of its financial instruments.
In April 2007, the FASB issued a FASB Statement Postion (FSP) on FASB Interpretation (FIN) 39-1 (FIN 39-1) which modfies FIN 39, Offsetting of Amounts relating to Certain Contracts (FIN 39). FIN 39-1 addresses whether a reporting entity that is party to a master netting arrangement can offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with FIN 39. Upon adoption of this FASB Staff Positon (FSP), a reporting entity shall be permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The guidance in this FSP is effective for fiscal years beginning after November 15, 2007. The implementation did not have an effect on the financial statements of the Company.
In February 2008, FASB issued FASB Staff Position No. FAS 140-3 Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, or FSP FAS 140-3. FSP FAS 140-3 addresses whether transactions where assets purchased from a particular counterparty and financed through a repurchase agreement with the same counterparty can be considered and accounted for as separate transactions, or are required to be considered "linked" transactions and may be considered derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. FSP FAS 140-3 requires purchases and subsequent financing through repurchase agreements be considered linked transactions unless all of the following conditions apply: (1) the initial purchase and the use of repurchase agreements to finance the purchase are not contractually contingent upon each other; (2) the repurchase financing entered into between the parties provides full recourse to the transferee and the repurchase price is fixed; (3) the financial assets are readily obtainable in the market; and (4) the financial instrument and the repurchase agreement are not coterminous. This FSP is effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating FSP FAS 140-3 but does not expect its application to have a significant impact on its financial reporting.
In February 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. FAS 157-2, "Effective date of FASB Statement No. 157," or "FSP FAS 157-2." This FSP delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. FSP FAS 157-2 became effective upon issuance. The Company does not expect the adoption to have a significant impact on its financial reporting.
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. FAS No. 161 attempts to improve the transparency of financial reporting by providing additional information about how derivative and hedging activities affect an entity's financial position, financial performance and cash flows. This statement changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosure about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. To meet these objectives, the Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This disclosure framework is intended to better convey the purpose of derivative use in terms of the risks that an entity is intending to manage. SFAS 161 is effective for the Company on January 1, 2009. The Company expects that adoption of SFAS 161 will increase footnote disclosure to comply with the disclosure requirements for financial statements issued after January 1, 2009.
2. MORTGAGE-BACKED SECURITIES
The following tables present the Company's available-for-sale
Mortgage-Backed Securities portfolio as of March 31, 2008 and December 31, 2007,
which were carried at their fair value:
Federal Home Loan Federal National Government
Mortgage Mortgage National Mortgage Total Mortgage-
March 31, 2008 Corporation Association Association Backed Securities
----------------------------------------------------------------------------------------
(dollars in thousands)
Mortgage-Backed
Securities, gross $20,974,991 $33,901,277 $373,440 $55,249,708
Unamortized discount (30,394) (46,352) (1,598) (78,344)
Unamortized premium 165,808 294,279 2,353 462,440
----------------------------------------------------------------------------------------
Amortized cost 21,110,405 34,149,204 374,195 55,633,804
Gross unrealized gains 231,045 420,420 3,041 654,506
Gross unrealized losses (64,504) (107,388) (1,393) (173,285)
----------------------------------------------------------------------------------------
Estimated fair value $21,276,946 $34,462,236 $375,843 $56,115,025
========================================================================================
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Gain Loss Value
----------------------------------------------------------------------------------------
Adjustable rate $17,374,854 $125,674 ($139,480) $17,361,048
Fixed rate 38,258,950 528,832 (33,805) 38,753,977
----------------------------------------------------------------------------------------
Total $55,633,804 $654,506 ($173,285) $56,115,025
========================================================================================
Federal Home Loan Federal National Government
Mortgage Mortgage National Mortgage Total Mortgage-
December 31, 2007 Corporation Association Association Backed Securities
----------------------------------------------------------------------------------------
(dollars in thousands)
Mortgage-Backed
Securities, gross $19,789,792 $32,155,740 $367,066 $52,312,598
Unamortized discount (30,679) (45,496) (506) (76,681)
Unamortized premium 136,780 266,357 2,678 405,815
----------------------------------------------------------------------------------------
Amortized cost 19,895,893 32,376,601 369,238 52,641,732
Gross unrealized gains 141,248 224,795 2,229 368,272
Gross unrealized losses (52,623) (75,949) (1,904) (130,476)
----------------------------------------------------------------------------------------
Estimated fair value $19,984,518 $32,525,447 $369,563 $52,879,528
========================================================================================
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Gain Loss Value
----------------------------------------------------------------------------------------
(dollars in thousands)
Adjustable rate $15,361,031 $96,310 ($76,853) $15,380,488
Fixed rate 37,280,701 271,962 (53,623) 37,499,040
----------------------------------------------------------------------------------------
Total $52,641,732 $368,272 ($130,476) $52,879,528
========================================================================================
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Actual maturities of Mortgage-Backed Securities are generally shorter than stated contractual maturities. Actual maturities of the Company's Mortgage-Backed Securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. The following table summarizes the Company's Mortgage-Backed Securities on March 31, 2008 and December 31 2007, according to their estimated weighted-average life classifications:
March 31, 2008 December 31, 2007
Amortized Amortized
Weighted-Average Life Fair Value Cost Fair Value Cost
(dollars in thousands)
----------------------------------------------------------------------------------------------------------------------
Less than one year $ 1,504,109 $ 1,508,684 $ 324,495 $ 326,754
Greater than one year and less than five years 41,448,272 41,075,565 35,772,813 35,586,721
Greater than or equal to five years 13,162,644 13,049,555 16,782,220 16,728,257
---------------------------------------------------------------------
Total $56,115,025 $55,633,804 $52,879,528 $52,641,732
=====================================================================
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The weighted-average lives of the Mortgage-Backed Securities at March 31, 2008 and December 31, 2007 in the table above are based upon data provided through subscription-based financial information services, assuming constant principal prepayment rates to the reset date of each security. The prepayment model considers current yield, forward yield, steepness of the yield curve, current mortgage rates, mortgage rate of the outstanding loans, loan age, margin and volatility.
The following table presents the gross unrealized losses, and estimated fair value of the Company's Mortgage-Backed Securities by length of time that such securities have been in a continuous unrealized loss position at March 31, 2008.
Unrealized Loss Position For:
------------------------------------------------------------------------------------------------------------
Less than 12 Months 12 Months or More Total
------------------------------------------------------------------------------------------------------------
Estimated Fair Unrealized Estimated Fair Unrealized Estimated Fair Unrealized
Value Losses Value Losses Value Losses
------------------------------------------------------------------------------------------------------------
(dollars in thousands)
$10,059,144 ($141,620) $2,932,145 ($31,665) $12,991,289 ($173,285)
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The decline in value of these securities is solely due to market conditions and not the quality of the assets. All of the Mortgage-Backed Securities are "AAA" rated or carry an implied "AAA" rating. The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment of the principal amount of the securities.
The adjustable rate Mortgage-Backed Securities are limited by periodic caps (generally interest rate adjustments are limited to no more than 1% every nine months) and lifetime caps. The weighted average lifetime cap was 9.7% at March 31, 2008 and 9.9% at December 31, 2007.
During the quarter ended March 31, 2008, the Company realized $9.4 million in net gains from sales of Investment Securities. During the quarter ended March 31, 2007, the Company realized $6.1 million in net gain from sales of Investment Securities.
3. AVAILABLE FOR SALE EQUITY SECURITIES
All of the equity securities are shares of Chimera. Shares of Chimera were purchased for $54.3 million and had a fair value of $44.5 million at March 31, 2008.
The Company evaluated the near-term prospects of Chimera in relation to the severity and duration of the impairment. Based on that evaluation and the Company's ability and intent to hold this investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2008.
4. REVERSE REPURCHASE AGREEMENT
At March 31, 2008, the Company had lent $800.0 million in an overnight reverse repurchase agreement. The interest rate at March 31, 2008 was 2.45%.
5. FAIR VALUE MEASUREMENTS
SFAS 157, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:
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 fair value.
Available for sale equity securities, trading securities, and trading securities sold, not yet purchased are valued based on quoted prices (unadjusted) in an active market. Mortgage-Backed Securities, Agency debentures, and interest rate swaps are valued using quoted prices for similar assets and dealer quotes. The dealer will incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, rate reset period and expected life of the security. Management reviews all prices used to ensure that current market conditions are represented. This review includes comparisons of similar market transactions and comparisons to a pricing model. The Company's financial assets and liabilities carried at fair value on a recurring basis are valued as follows:
Level 1 Level 2 Level 3
(dollars in thousands)
----------------------------------------------------------------------------------------------------------------
Assets:
Mortgage-Backed Securities - $56,115,025 -
Agency debentures - 738,837 -
Available for sale equity securities $44,546 - -
Trading securities 1,836 - -
Liabilities:
Trading securities sold, not yet purchased 37,268 - -
Interest rate swaps - 789,889 -
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6. REPURCHASE AGREEMENTS
The Company had outstanding $51.3 billion and $46.0 billion of repurchase agreements with weighted average borrowing rates of 3.85% and 4.76%, after giving effect to the Company's interest rate swaps, and weighted average remaining maturities of 229 days and 234 days as of March 31, 2008 and December 31, 2007, respectively. Investment Securities pledged as collateral under these repurchase agreements and interest rate swaps had an estimated fair value of $54.9 billion at March 31, 2008 and $48.3 billion at December 31, 2007.
At March 31, 2008 and December 31, 2007, the repurchase agreements had the following remaining maturities:
March 31, 2008 December 31, 2007
(dollars in thousands)
-------------------------------------------------------------
Within 30 days $38,908,210 $34,940,600
30 to 59 days 3,853,681 4,005,960
60 to 89 days 912,116 300,000
90 to 119 days - -
Over 120 days 7,650,000 6,800,000
-------------------------------------------------------------
Total $51,324,007 $46,046,560
=============================================================
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The Company did not have an amount at risk greater than 10% of the equity of the Company with any counterparties as of March 31, 2008 or December 31, 2007.
The Company has entered into repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date. The repurchase agreements totaled $7.7 billion and the market value of the option to call is ($354.4 million) at March 31, 2008. The repurchase agreements totaled $6.4 billion and the market value of the option to call is ($176.7 million) at December 31, 2007. Management has determined that the call option is not required to be bifurcated under the provisions of SFAS 133 as it is deemed clearly and closely related to the debt instrument, therefore the option value is not recorded in the consolidated financial statements.
7. INTEREST RATE SWAPS
In connection with the Company's interest rate risk management strategy, the Company hedges a portion of its interest rate risk by entering into derivative financial instrument contracts. As of March 31, 2008, such instruments are comprised of interest rate swaps, which in effect modify the cash flows on repurchase agreements. The use of interest rate swaps 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 contracts. In the event of a default by the counterparty, the Company could have difficulty obtaining its Mortgage-Backed Securities pledged as collateral for swaps. The Company does not anticipate any defaults by its counterparties.
The Company's swaps are used to lock-in the fixed rate related to a portion of its current and anticipated future 30-day term repurchase agreements.
The table below presents information about the Company's swaps outstanding at March 31, 2008 and December 31, 2007.
Net Estimated Fair
Notional Amount Weighted Weighted Average Value/Carrying Value
(dollars in thousands) Average Pay Rate Receive Rate (dollars in thousands)
----------------------------------------------------------------------------------------------------
March 31, 2008 $17,001,050 4.90% 2.85% ($789,859)
December 31, 2007 $16,243,500 5.03% 5.06% ($398,096)
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8. PREFERRED STOCK AND COMMON STOCK
(A) Common Stock Issuances
On January 23, 2008 the Company entered into an underwriting agreement pursuant to which it sold 58,650,000 shares of its common stock for net proceeds following underwriting expenses of approximately $1.1 billion. This transaction settled on January 29, 2008.
During the quarter ended March 31, 2008, the Company raised $54.6 million by issuing 3.3 million shares through the Direct Purchase and Dividend Reinvestment Program.
During the quarter ended March 31, 2008, 170,617 options were exercised under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate exercise price of $1.6 million.
On August 3, 2006, the Company entered into an ATM Equity Offering(sm) Sales Agreement with Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, relating to the sale of shares of its common stock from time to time through Merrill Lynch. Sales of the shares, if any, are made by means of ordinary brokers' transaction on the New York Stock Exchange. During the quarter ended March 31, 2008, 588,000 shares of the Company's common stock were issued pursuant to this program, totaling $11.5 million in net proceeds. On August 3, 2006, the Company entered into an ATM Equity Sales Agreement with UBS Securities LLC, relating to the sale of shares of its common stock from time to time through UBS Securities. Sales of the shares, if any, will be made by means of ordinary brokers' transaction on the New York Stock Exchange. During the quarter ended March 31, 2008, 3.8 million shares of the Company's common stock were issued pursuant to this program, totaling $60.3 million in net proceeds.
(B) Preferred Stock
At March 31, 2008, the Company had issued and outstanding 7,412,500 shares of Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock"), with a par value $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series A Preferred Stock must be paid a dividend at a rate of 7.875% per year on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company's option commencing on April 5, 2009 (subject to the Company's right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve its qualification as a REIT). The Series A Preferred Stock is senior to the Company's common stock and is on parity with the Series B Preferred Stock with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up. The Series A Preferred Stock generally does not have any voting rights, except if the Company fails to pay dividends on the Series A Preferred Stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series A Preferred Stock, together with the Series B Preferred Stock, will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series A Preferred Stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of Series A Preferred Stock and Series B Preferred Stock. Through March 31, 2008, the Company had declared and paid all required quarterly dividends on the Series A Preferred Stock.
At March 31, 2008, the Company had issued and outstanding 4,597,550 shares of Series B Preferred Stock, with a par value $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends (whether or not declared). The Series B Preferred Stock must be paid a dividend at a rate of 6% per year on the $25.00 liquidation preference before the common stock is entitled to receive any dividends.
The Series B Preferred Stock is not redeemable. The Series B Preferred Stock is convertible into shares of common stock at a conversion rate that adjusts from time to time upon the occurrence of certain events, including if the Company distributes to its common shareholders in any calendar quarter cash dividends in excess of $0.11 per share. Initially, the conversion rate was 1.7730 shares of common shares per $25 liquidation preference. Commencing April 5, 2011, the Company has the right in certain circumstances to convert each Series B Preferred Stock into a number of common shares based upon the then prevailing conversion rate. The Series B Preferred Stock is also convertible into common shares at the option of the Series B preferred shareholder at anytime at the then prevailing conversion rate. The Series B Preferred Stock is senior to the Company's common stock and is on parity with the Series A Preferred Stock with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up. The Series B Preferred Stock generally does not have any voting rights, except if the Company fails to pay dividends on the Series B Preferred Stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, the Series B Preferred Stock, together with the Series A Preferred Stock, will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock and Series A Preferred Stock. Through March 31, 2008, the Company had declared and paid all required quarterly dividends on the Series B Preferred Stock. During the quarter ended March 31, 2008, 2,450 shares of Series A Preferred Stock were converted into 4,552 shares of common stock.
(C) Distributions to Shareholders
During the quarter ended March 31, 2008, the Company declared dividends to common shareholders totaling $224.8 million or $0.48 per share, which were paid to shareholders on April 29, 2008. During the quarter ended March 31, 2008, the Company declared dividends to Series A Preferred shareholders totaling approximately $3.6 million or $0.492188 per share, and Series B shareholders totaling approximately $1.7 million or $0.375 per share, which were paid to shareholders on March 31, 2008.
9. NET INCOME PER COMMON SHARE
The following table presents a reconciliation of the net income and
shares used in calculating basic and diluted earnings per share for the quarters
ended March 31, 2008 and 2007.
------------------------------------------
For the Quarters Ended
------------------------------------------
March 31, 2008 March 31, 2007
Net income $243,036 $67,432
Less: Preferred stock dividends 5,373 5,373
------------------------------------------
Net income available to common shareholders, prior to
adjustment for Series B dividends, if necessary 237,663 62,059
Add: Preferred Series B dividends, if Series B shares
are dilutive 1,725 1,725
------------------------------------------
Net income, as adjusted $239,388 $63,784
------------------------------------------
Weighted average shares of common stock
outstanding-basic 443,812 217,490
Add: Effect of dilutive stock options and 409 153
Series B Cumulative Convertible Preferred Stock 8,746 8,285
------------------------------------------
Weighted average shares of common
stock outstanding-diluted 452,967 225,928
==========================================
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Options to purchase 5,000 shares of common stock were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for the quarter ended March 31, 2008.
Options to purchase 1,795,375 shares of common stock were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for the quarter ended March 31, 2007.
10. LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted a long term stock incentive plan for executive officers, key employees and non-employee directors (the "Incentive Plan"). The Incentive Plan authorizes the Compensation Committee of the board of directors to grant awards, including non-qualified options as well as incentive stock options as defined under Section 422 of the Code. The Incentive Plan authorizes the granting of options or other awards for an aggregate of the greater of 500,000 shares or 9.5% of the diluted outstanding shares of the Company's common stock, up to ceiling of 8,932,921 shares. Stock options are issued at the current market price on the date of grant, subject to an immediate or four year vesting in four equal installments with a contractual term of 5 or 10 years. The grant date fair value is calculated using the Black-Scholes option valuation model.
For the quarters ended March 31,
2008 2007
----------------------------------------------------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------
Options outstanding at the beginning of quarter 3,437,267 $15.23 2,984,995 $15.10
Exercised (170,617) 9.58 (41,800) 9.99
Forfeited - - (174,240) 6.06
----------------------------------------------------------------------
Options outstanding at the end of quarter 3,266,650 $15.53 2,768,955 $15.11
======================================================================
Options exercisable at the end of the quarter 1,738,900 $15.78 1,298,692 $14.98
======================================================================
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The weighted average remaining contractual term was approximately 6.9 years for stock options outstanding and approximately 5.8 years for stock options exercisable as of March 31, 2008. The weighted average remaining contractual term was approximately 7.1 years for stock options outstanding and approximately 6.1 years for stock options exercisable as of March 31, 2007. As of March 31, 2008, there was approximately $2.3 million of total unrecognized compensation cost related to nonvested share-based compensation swards. That cost is expected to be recognized over a weighted average period of 2.5 years.
The following table summarizes information about stock options outstanding at March 31, 2008:
Weighted Weighted Average Weighted Weighted Average
Average Remaining Average Remaining
Total Exercise Price Contractual Life Total Exercise Contractual Life
Range of Exercise Options on Total (Years) on Total Options Price on (Years) on
Prices Outstanding Outstanding Outstanding Exercisable Exercisable Exercisable
----------------------------------------------------------------------------------------------------------------------------
$7.94-$19.99 3,261,650 $15.52 6.9 1,733,900 $15.77 5.8
$20.00-$29.99 5,000 $20.70 0.2 5,000 $20.70 0.2
-------------------------------------------------------------------------------------------------------
3,266,650 $15.53 6.9 1,738,900 $15.78 5.8
=======================================================================================================
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During the year ended December 31, 2007, the Company granted 7,000 shares of restricted common stock to certain of its employees. As of March 31, 2008, 5,250 of these restricted shares were unvested and subject to forfeiture.
11. INCOME TAXES
As a REIT, the Company is not subject to federal income tax on earnings
distributed to its shareholders. Most states recognize REIT status as well. The
Company has decided to distribute the majority of its income and retain a
portion of the permanent difference between book and taxable income arising from
Section 162(m) of the Code pertaining to employee remuneration.
During the quarter ended March 31, 2008, FIDAC recorded $734,000 of
income tax expense for income attributable to FIDAC, its taxable REIT
subsidiary, and the portion of earnings retained based on Code Section 162(m)
limitations. During the quarter ended March 31, 2008, the Company recorded $3.9
million of income tax expense for a portion of earnings retained based on
Section 162(m) limitations. The effective tax rate was 51% for the quarter ended
March 31, 2008.
During the quarter ended March 31, 2007, the Company recorded $428,000
of income tax expense for income attributable to FIDAC, its taxable REIT
subsidiary, and the portion of earnings retained based on Code Section 162(m)
limitations. During the quarter ended March 31, 2007 the Company recorded $2.2
million of income tax expense for a portion of earnings retained based on
Section 162(m) limitations. The effective tax rate was 45% for the quarter ended
March 31, 2007.
12. LEASE COMMITMENTS
The Company has a non-cancelable lease for office space, which commenced in May 2002 and expires in December 2009. The Company's aggregate future minimum lease payments are as follows:
Total per Year
(dollars in thousands)
2008 399
2009 532
------------------------
Total remaining lease payments $931
========================
13. INTEREST RATE RISK
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The primary market risk to the Company is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company's control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with the interest-bearing liabilities, by affecting the spread between the interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of the Investment Securities and the Company's ability to realize gains from the sale of these assets. A decline in the value of the Investment Securities pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels. Liquidation of collateral at losses could have an adverse accounting impact, as discussed in Note 1.
The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. The Company may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in the portfolio of Investment Securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. As of March 31, 2008, the Company entered into interest rate swaps to pay a fixed rate and receive a floating rate of interest, with a total notional amount of $17.0 billion.
Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on Mortgage-Backed Securities. The Company will seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets purchased at a premium with assets purchased at a discount. To date, the aggregate premium exceeds the aggregate discount on the Mortgage-Backed Securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce net income compared to what net income would be absent such prepayments.
14. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's consolidated financial statements.
15. RELATED PARTY TRANSACTIONS
In March 2008, the Company entered into a repurchase agreement and a receivable sales agreement with Chimera. These agreements contain customary representations, warranties and covenants contained in such agreements. As of March 31, 2008, the Company did not have any outstanding obligations under either agreement.
16. SUBSEQUENT EVENTS
At a special meeting of the Company's stockholders held on April 21, 2008, the stockholders of the Company approved an amendment to the Company's Amended and Restated Articles of Incorporation to increase the number of authorized shares of capital stock from 500 million shares to 1 billion shares. The Company filed its Articles of Amendment reflecting this amendment with the State of Maryland on April 21, 2008.
Special Note Regarding Forward-Looking Statements
Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the "SEC" or the "Commission"), in our press releases or in our other public or shareholder communications may not be based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements, which are based on various assumptions, (some of which are beyond our control) may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates, changes in yield curve, changes in prepayment rates, the availability of mortgage-backed securities for purchase, the availability of financing, and, if available, the terms of any financings, changes in the market value of our assets, changes in business conditions and the general economy, and risks associated with the investment advisory business of FIDAC, including the removal by FIDAC's clients of assets FIDAC manages, FIDAC's regulatory requirements, and competition in the investment advisory business, changes in governmental regulations affecting our business, and our ability to maintain our classification as a REIT for federal income tax purposes. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. We do not undertake and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Overview
We are a REIT that owns and manages a portfolio of mortgage-backed securities. Our principal business objective is to generate net income for distribution to our stockholders from the spread between the interest income on our investment securities and the costs of borrowing to finance our acquisition of investment securities and from dividends we receive from FIDAC. FIDAC is our wholly-owned taxable REIT subsidiary, and is a registered investment advisor that generates advisory and service fee income. We acquired approximately 3.6 million shares of common stock of Chimera Investment Corporation, or Chimera, for approximately $54.3 million in connection with Chimera's initial public offering on November 21, 2007. In addition to our investment, Chimera raised net proceeds of approximately $479.3 million in its initial public offering. Chimera is a newly-formed, publicly traded, specialty finance company that invests in residential mortgage loans, residential mortgage-backed securities, real estate related securities and various other asset classes. Chimera is externally managed by FIDAC and intends to elect and qualify to be taxed as a REIT for federal income tax purposes. We also own 100% of an investment fund.
We are primarily engaged in the business of investing, on a leveraged basis, in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed Securities"). We also invest in Federal Home Loan Bank ("FHLB"), Federal Home Loan Mortgage Corporation ("FHLMC"), and Federal National Mortgage Association ("FNMA") debentures. The Mortgage-Backed Securities and agency debentures are collectively referred to herein as "Investment Securities."
Under our capital investment policy, at least 75% of our total assets must be comprised of high-quality mortgage-backed securities and short-term investments. High quality securities means securities that (1) are rated within one of the two highest rating categories by at least one of the nationally recognized rating agencies, (2) are unrated but are guaranteed by the United States government or an agency of the United States government, or (3) are unrated but we determine them to be of comparable quality to rated high-quality mortgage-backed securities.
The remainder of our assets, comprising not more than 25% of our total assets, may consist of other qualified REIT real estate assets which are unrated or rated less than high quality, but which are at least "investment grade" (rated "BBB" or better by Standard & Poor's Corporation ("S&P") or the equivalent by another nationally recognized rating agency) or, if not rated, we determine them to be of comparable credit quality to an investment which is rated "BBB" or better. In addition, we may directly or indirectly invest part of this remaining 25% of our assets in other types of securities, including without limitation, unrated debt, equity or derivative securities, to the extent consistent with our REIT qualification requirements. The derivative securities in which we invest may include securities representing the right to receive interest only or a disproportionately large amount of interest, as well as inverse floaters, which may have imbedded leverage as part of their structural characteristics.
We may acquire Mortgage-Backed Securities backed by single-family residential mortgage loans as well as securities backed by loans on multi-family, commercial or other real estate related properties. To date, all of the Mortgage-Backed Securities that we have acquired have been backed by single-family residential mortgage loans.
We have elected to be taxed as a REIT for federal income tax purposes. Pursuant to the current federal tax regulations, one of the requirements of maintaining our status as a REIT is that we must distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain) to our stockholders, subject to certain adjustments.
The results of our operations are affected by various factors, many of which are beyond our control. Our results of operations primarily depend on, among other things, our net interest income, the market value of our assets and the supply of and demand for such assets. Our net interest income, which reflects the amortization of purchase premiums and accretion of discounts, varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. Prepayment speeds, as reflected by the Constant Prepayment Rate, or CPR, and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds on our Mortgage-Backed Securities portfolio increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. The CPR on our Mortgage-Backed Securities portfolio averaged 15% and 17% for the quarters ended March 31, 2008 and 2007, respectively. Since changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to effectively manage interest rate risks and prepayment risks while maintaining our status as a REIT.
The current situation in the sub-prime mortgage sector, and the current weakness in the broader mortgage market, could adversely affect one or more of our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with additional financing. This could potentially increase our financing costs and reduce liquidity. If one or more major market participants fails, it could negatively impact the marketability of all fixed income securities, including government mortgage securities, and this could negatively impact the value of the securities in our portfolio, thus reducing its net book value. Furthermore, if many of our lenders are unwilling or unable to provide us with additional financing, we could be forced to sell our Investment Securities at an inopportune time when prices are depressed. Even with the current situation in the sub-prime mortgage sector we do not anticipate having difficulty converting our assets to cash or extending financing term, due to the fact that our investment securities have an actual or implied "AAA" rating and principal payment is guaranteed.
The table below provides quarterly information regarding our average balances, interest income, yield on assets, average repurchase agreement balances, interest expense, cost of funds, net interest income and net interest rate spreads for the quarterly periods presented.
Average Yield on Average Net
Investment Total Average Balance of Average Interest
Securities Interest Investment Repurchase Interest Cost of Net Interest Rate
Held (1) Income Securities Agreements Expense Funds Income Spread
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(ratios for the quarters have been annualized, dollars in thousands)
Quarter Ended
March 31, 2008 $56,119,584 $791,128 5.64% $51,399,101 $537,606 4.18% $253,522 1.46%
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Quarter Ended
December 31, 2007 $49,619,857 $720,925 5.81% $45,272,782 $558,435 4.93% $162,490 0.88%
Quarter Ended
September 30, 2007 $43,075,489 $628,696 5.84% $40,201,513 $519,118 5.17% $109,578 0.67%
Quarter Ended
June 30, 2007 $38,822,274 $556,262 5.73% $36,560,359 $468,748 5.13% $87,514 0.60%
Quarter Ended
March 31, 2007 $31,682,974 $449,564 5.68% $29,834,208 $380,164 5.10% $69,400 0.58%
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(1) Does not reflect unrealized gains/(losses).
The following table presents the CPR experienced on our Mortgage-Backed Securities portfolio, on an annualized basis, for the quarterly periods presented.
Quarter Ended CPR ------------- --- March 31, 2008 15% December 31, 2007 12% September 30, 2007 14% June 30, 2007 15% March 31, 2007 17% |
We believe that the CPR in future periods will depend, in part, on changes in and the level of market interest rates across the yield curve, with higher CPRs expected during periods of declining interest rates and lower CPRs expected during periods of rising interest rates.
We continue to explore alternative business strategies, alternative investments and other strategic initiatives to complement our core business strategy of investing, on a leveraged basis, in high quality Investment Securities. No assurance, however, can be provided that any such strategic initiative will or will not be implemented in the future.
For the purposes of computing ratios relating to equity measures, throughout this report, equity includes Series B preferred stock, which has been treated under GAAP as temporary equity. Even though it is treated as temporary equity for GAAP purposes, we believe that for financial performance measures it should be considered equity to provide a more realistic measure of our quarter performance.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations is based on the amounts reported in our financial statements. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make various judgments, estimates and assumptions that affect the reported amounts. Changes in these estimates and assumptions could have a material effect on our financial statements. The following is a summary of our policies most affected by management's judgments, estimates and assumptions.
Valuation of Investment Securities: All assets classified as available-for-sale are reported at fair value, based on market prices. Although we generally intend to hold most of our Investment Securities until maturity, we may, from time to time, sell any of our Investment Securities as part our overall management of our portfolio. Accordingly, we are required to classify all of our Investment Securities as available-for-sale. Our policy is to obtain market values from independent sources. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. Consideration is given to (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Investments with unrealized losses are not considered other-than-temporarily impaired if the Company has the ability and intent to hold the investments for a period of time, to maturity if necessary, sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Unrealized losses on Investment Securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognized in income and the cost basis of the Investment Securities is adjusted.
Interest income: Interest income is accrued based on the outstanding principal amount of the Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Investment Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, Wall Street consensus prepayment speeds, and current market conditions. If our estimate of prepayments is incorrect, we may be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.
Repurchase Agreements: We finance the acquisition of our Investment Securities through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
Income Taxes: We have elected to be taxed as a REIT and intend to comply with the provisions of the Internal Revenue Code of 1986, as amended (or the Code), with respect thereto. Accordingly, we will not be subjected to federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and stock ownership tests are met. We and FIDAC have made a joint election to treat FIDAC as a taxable REIT subsidiary. As such, FIDAC is taxable as a domestic C corporation and subject to federal and state and local income taxes based upon its taxable income.
Impairment of Goodwill and Intangibles: Our acquisition of FIDAC was accounted for using the purchase method. The cost of FIDAC was allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of cost over the fair value of the net assets acquired was recognized as goodwill. Goodwill and finite-lived intangible assets are periodically reviewed for potential impairment. This evaluation requires significant judgment.
Recent Accounting Pronouncements: In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of its financial instruments according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are required to provide enhanced disclosure regarding instruments in the level 3 category (the valuation of which require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS 157 was adopted by us on January 1, 2008. SFAS 157 did not have an impact on the manner in which we estimate fair value, but it requires additional disclosures.
In February 2007, the FASB issued SFAS No 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 was effective for the Company commencing January 1, 2008. We are not expecting SFAS 159 to have an effect on the consolidated financial statements. We did not elect the fair value option for any existing eligible financial instruments.
In April 2007, the FASB issued a FASB Statement Postion (FSP) on FASB Interpretation (FIN) 39-1 (FIN 39-1) which modfies FIN 39, Offsetting of Amounts relating to Certain Contracts (FIN 39). FIN 39-1 addresses whether a reporting entity that is party to a master netting arrangement can offset fair value
amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments that have been offset under the same master netting arrangement in accordance with FIN 39. Upon adoption of this FASB Staff Positon (FSP), a reporting entity shall be permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The guidance in this FSP is effective for fiscal years beginning after November 15, 2007. The implementation did not have an effect on the financial statements of the Company.
In February 2008, FASB issued FASB Staff Position No. FAS 140-3 Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, or FSP FAS 140-3. FSP FAS 140-3 addresses whether transactions where assets purchased from a particular counterparty and financed through a repurchase agreement with the same counterparty can be considered and accounted for as separate transactions, or are required to be considered "linked" transactions and may be considered derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. FSP FAS 140-3 requires purchases and subsequent financing through repurchase agreements be considered linked transactions unless all of the following conditions apply: (1) the initial purchase and the use of repurchase agreements to finance the purchase are not contractually contingent upon each other; (2) the repurchase financing entered into between the parties provides full recourse to the transferee and the repurchase price is fixed; (3) the financial assets are readily obtainable in the market; and (4) the financial instrument and the repurchase agreement are not coterminous. This FSP is effective for fiscal years beginning after November 15, 2008. We are currently evaluating FSP FAS 140-3 but do not expect its application to have a significant impact on our financial reporting.
In February 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. FAS 157-2, "Effective date of FASB Statement No. 157," or "FSP FAS 157-2." This FSP delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. FSP FAS 157-2 became effective upon issuance. It will be adopted by us on January 1, 2009.
In March 2008, the FASB issued FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. FAS No. 161 attempts to improve the transparency of financial reporting by providing additional information about how derivative and hedging activities affect an entity's financial position, financial performance and cash flows. This statement changes the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosure about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. To meet these objectives, the Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This disclosure framework is intended to better convey the purpose of derivative use in terms of the risks that an entity is intending to manage. SFAS 161 is effective for us January 1, 2009. We utilize interest rate swaps which are designated as cash flow hedges under FAS 133 and therefore expect that adoption of SFAS 161 will increase footnote disclosure to comply with the disclosure requirements for financial statements issued after January 1, 2009.
Results of Operations:
Net Income Summary
For the quarter ended March 31, 2008, our net income was $243.0 million or $0.54 basic income per average share related to common shareholders, as compared to $67.4 million or $0.29 basic net income per average share for the quarter ended March 31, 2007. Net income per average share increased by $0.25 per average share available to common shareholders and total net income increased $175.6 million for the quarter ended March 31, 2008, when compared to the quarter ended March 31, 2007. We attribute the increase in total net income for the quarter ended March 31, 2008 from the quarter ended March 31, 2007 to an increase in net interest income, resulting from the increased asset base, and the increase in interest rate spread. Net interest income increased by $184.1 million for the quarter ended March 31, 2008, as compared to the quarter ended March 31, 2007.
Quarter Ended Quarter Ended
March 31, 2008 March 31, 2007
-------------------------------------
Interest income $791,128 $449,564
Interest expense 537,606 380,164
-------------------------------------
Net interest income 253,522 69,400
-------------------------------------
Other income:
Investment advisory and service fees 6,598 5,562
Gain on sale of investment securities 9,417 6,145
Gain on termination of interest rate swaps - 67
Income from trading securities 1,854 3,429
Dividend income from available-for-sale equity securities 941 -
Loss on other-than-temporarily impaired securities - (491)
-------------------------------------
Total other income 18,810 14,712
-------------------------------------
Expenses:
Distribution fees 633 904
General and administrative expenses 23,995 12,886
-------------------------------------
Total expenses 24,628 13,790
-------------------------------------
Income before income taxes and minority interest 247,704 70,322
Income taxes 4,610 2,604
-------------------------------------
Income before minority interest 243,094 67,718
Minority interest 58 286
-------------------------------------
Net Income 243,036 67,432
Dividends on preferred stock 5,373 5,373
-------------------------------------
Net income available to common shareholders $237,663 $62,059
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Weighted average number of basic common shares outstanding 443,812,432 217,490,205
Weighted average number of diluted common shares outstanding 452,967,457 225,928,127
Basic net income per average common share $0.54 $0.29
Diluted net income per average common share $0.53 $0.28
Average total assets $56,827,604 $35,150,250
Average equity $5,835,604 $3,036,273
Return on average total assets 1.71% 0.77%
Return on average equity 16.66% 8.88%
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Interest Income and Average Earning Asset Yield
We had average earning assets of $56.1 billion for the quarter ended March 31, 2008. We had average earning assets of $31.7 billion for the quarter ended March 31, 2007. Our primary source of income is interest income. Our interest income was $791.1 million for the quarter ended March 31, 2008, and $449.6 million for the quarter ended March 31, 2007. The yield on average Investment Securities was 5.64% and 5.68% for the quarters ended March 31, 2008 and 2007, respectively. The prepayment speeds decreased to an average of 15% CPR for the quarter ended March 31, 2008 from an average of 17% CPR for the quarter ended March 31, 2007. Even though the yield on assets declined by .04%, the total interest income increased by $341.5 million, due to the increase in average earning assets.
Interest Expense and the Cost of Funds
Our largest expense is the cost of borrowed funds. We had average borrowed funds of $51.4 billion and total interest expense of $537.6 million for the quarter ended March 31, 2008. We had average borrowed funds of $29.8 billion and total interest expense of $380.2 million for the quarter ended March 31, 2007. Our average cost of funds was 4.18% for the quarter ended March 31, 2008 and 5.10% for the quarter ended March 31, 2007. The cost of funds rate decreased by 92 basis points and the average borrowed funds increased by $21.6 billion for the quarter ended March 31, 2008 when compared to the quarter ended March 31, 2007. Interest expense for the quarter ended March 31, 2008 increased by $157.4 million due to the substantial increase in the average repurchase balance. Since a portion of our repurchase agreements are short term, changes in market rates are directly reflected in our interest expense. In addition to short term financing, the Company has entered into longer term repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date. Our average cost of funds was 0.87% above average one-month LIBOR and 1.00% above average six-month LIBOR for the quarter ended March 31, 2008. Our average cost of funds was 0.16% below average one-month LIBOR and 0.20% below average six-month LIBOR for the quarter ended March 31, 2007. Our cost of funds, when compared to six-month LIBOR and one-month LIBOR, increased in the first quarter of 2008 because, in addition to short term financing, the Company has entered into longer term repurchase agreements which typically have a higher cost of funds.
Average
Average Average Cost Cost of
One-Month of Funds Funds
Average Average LIBOR Relative to Relative to
Average Average One- Six- Relative to Average Average
Borrowed Interest Cost of Month Month Average Six- One-Month Six-Month
Funds Expense Funds LIBOR LIBOR Month LIBOR LIBOR LIBOR
----------- ----------- ------- -------- ----------- ------------- -------------- -------------
For the Quarter Ended
March 31, 2008 $51,399,101 $537,606 4.18% 3.31% 3.18% 0.13% 0.87% 1.00%
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For the Year Ended
December 31, 2007 $37,967,215 $1,926,465 5.07% 5.19% 5.19% (0.00%) (0.12%) (0.12%)
For the Quarter Ended
December 31, 2007 $45,272,782 $558,435 4.93% 4.86% 4.85% 0.01% 0.07% 0.08%
For the Quarter Ended
September 30, 2007 $40,201,513 $519,118 5.17% 5.37% 5.31% 0.07% (0.20%) (0.14%)
For the Quarter Ended
June 30, 2007 $36,560,359 $468,748 5.13% 5.32% 5.37% (0.05%) (0.19%) (0.24%)
For the Quarter Ended
March 31, 2007 $29,834,208 $380,164 5.10% 5.26% 5.30% (0.04%) (0.16%) (0.20%)
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Net Interest Income
Our net interest income, which equals interest income less interest expense, totaled $253.5 million for the quarter ended March 31, 2008, and $69.4 million for the quarter ended March 31, 2007. Our net interest income increased for the quarter ended March 31, 2008, as compared to the quarter ended March 31, 2007, because of the increased average earning assets and the increased interest rate spread. Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.46% for the quarter ended March 31, 2008 as compared to 0.58% for the quarter ended March 31, 2007. This 88 basis point increase in interest rate spread was the result in the decreased cost of funds of 92 basis points, partially offset by a decrease in the average yield of 4 basis points.
The table below shows our interest income by average Investment Securities held, total interest income, yield on average interest earning assets, average balance of repurchase agreements, interest expense, average cost of funds, net interest income, and net interest rate spread for the quarter ended March 31, 2008, the year ended December 31, 2007 and the four quarters in 2007.
Net Interest Income
(Ratios for the quarters in have been annualized, dollars in thousands)
Yield on
Average Average Average Average Net
Investment Total Interest Balance of Cost Net Interest
Securities Interest Earning Repurchase Interest of Interest Rate
Held Income Assets Agreements Expense Funds Income Spread
------------- ------------ ----------- ------------ ----------- ------- --------- --------
For the Quarter Ended
March 31, 2008 $ 56,119,584 $ 791,128 5.64 % $ 51,399,101 $ 537,606 4.18 % $ 253,522 1.46 %
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For the Year Ended
December 31, 2007 $ 40,800,148 $ 2,355,447 5.77 % $ 37,967,215 $ 1,926,465 5.07 % $ 428,982 0.70 %
For the Quarter Ended
December 31, 2007 $ 49,619,857 $ 720,925 5.81 % $ 45,272,782 $ 558,435 4.93 % $ 162,490 0.88 %
For the Quarter Ended
September 30, 2007 $ 43,075,489 $ 628,696 5.84 % $ 40,201,513 $ 519,118 5.17 % $ 109,578 0.67 %
For the Quarter Ended
June 30, 2007 $ 38,822,274 $ 556,262 5.73 % $ 36,560,359 $ 468,748 5.13 % $ 87,514 0.60 %
For the Quarter Ended
March 31, 2007 $ 31,682,974 $ 449,564 5.68 % $ 29,834,208 $ 380,164 5.10 % $ 69,400 0.58 %
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Investment Advisory and Service Fees
FIDAC is a registered investment advisor which specializes in managing fixed income securities. FIDAC generally receives annual net investment advisory fees on the gross assets it manages, assists in managing or supervises. FIDAC expanded its line of business in 2007 to manage Chimera Investment Corporation, a newly-formed specialty finance company that invests in residential mortgage loans, residential mortgage-backed securities, real estate related securities and various other asset classes. At March 31, 2008, FIDAC had under management approximately $3.2 billion in net assets and $12.7 billion in gross assets, compared to $2.5 billion in net assets and $16.1 billion in gross assets at March 31, 2007. Net investment advisory and service fees for the quarters ended March 31, 2008 and 2007 totaled $6.0 million, and $4.7 million respectively, net of fees paid to third parties pursuant to distribution service agreements for facilitating and promoting distribution of shares or units to FIDAC's clients. Gross assets under management will vary from time to time because of changes in the amount of net assets FIDAC manages as well as changes in the amount of leverage used by the various funds and accounts FIDAC manages.
Gains and Losses on Sales of Investment Securities and Interest Rate Swaps
For the quarter ended March 31, 2008, we sold Investment Securities with a carrying value of $4.1 billion for an aggregate gain of $9.4 million. For the quarter ended March 31, 2007, we sold Investment Securities with an aggregate historical amortized value of $1.2 billion for an aggregate gain of $6.1 million and terminated interest rates swap agreements with a notional amount of $300 million for a gain of $67,000. We do not expect to sell assets on a frequent basis, but may from time to time sell existing assets to move into new assets, which our management believes might have higher risk-adjusted returns, or to manage our balance sheet as part of our asset/liability management strategy.
Income from Trading Securities
Gross income from trading securities held by our investment fund totaled $1.9 million for the quarter ended March 31, 2008 and $3.4 million for the quarter ended March 31, 2007.
Dividend Income from Available-For-Sale Equity Securities
We acquired approximately 3.6 million shares of common stock of Chimera. The investment in Chimera is accounted for as available-for-sale equity securities.
Dividend income from available-for-sale equity securities totaled $941,000 for the quarter ended March 31, 2008. For the quarter ended March 31, 2007 we did not have an investment in available-for-sale equity securities.
Loss on Other-Than-Temporarily Impaired Securities
At each quarter end, we review each of our securities to determine if an other-than-temporary impairment charge would be necessary. We will take these charges if we determine that we do not intend to hold securities that were in an unrealized loss position for a period of time, to maturity if necessary, sufficient for a forecasted market price recovery up to or beyond the cost of the investments. For the quarter ended March 31, 2008 there were no losses on other-than-temporarily impaired securities. For the quarter ended March 31, 2007, the loss on other-than-temporarily impaired securities totaled $491,000.
General and Administrative Expenses
General and administrative (or G&A) expenses were $24.0 million for the quarter ended March 31, 2008, and $12.9 million for the quarter ended March 31, 2007. G&A expenses as a percentage of average total assets was 0.17% and 0.15% for the quarters ended March 31, 2008 and 2007 respectively. The increase in G&A expenses of $11.1 million for the quarter March 31, 2008 was primarily the result of increased salaries.
The table below shows our total G&A expenses as compared to average total assets and average equity for the quarter ended March 31, 2008 and the year ended December 31, 2007and the four quarters in 2007.
Total G&A Total G&A
Expenses/Average Expenses/Average
Total G&A Expenses Assets Equity
------------------- ---------------- -------------------
For the Quarter Ended March 31, 2008 $23,995 0.17% 1.64%
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For the Year Ended December 31, 2007 $62,666 0.15% 1.69%
For the Quarter Ended December 31, 2007 $20,174 0.16% 1.72%
For the Quarter Ended September 30, 2007 $17,334 0.16% 1.94%
For the Quarter Ended June 30, 2007 $12,272 0.12% 1.50%
For the Quarter Ended March 31, 2007 $12,886 0.15% 1.70%
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Net Income and Return on Average Equity
Our net income was $243.0 million for the quarter ended March 31, 2008, and net income was $67.4 million for the quarter ended March 31, 2007. Our return on average equity was 16.66% for the quarter ended March 31, 2008 and was 8.88% for the quarter ended March 31, 2007. Even with the increase in G&A expenses, net income for the year increased by $175.6 million. We attribute the increase in total net income for the quarter ended March 31, 2008 over the quarter ended March 31, 2007 to the increase in interest rate spread and increase in interest-earning assets.
The table below shows our net interest income, net investment advisory and service fees, gain (loss) on sale of Mortgage-Backed Securities and termination of interest rate swaps, loss on other-than-temporarily impaired securities, income from equity investment, G&A expenses, income taxes, minority interest, and dividend income from equity investment, each as a percentage of average equity, and the return on average equity for the quarter ended March 31, 2008, the year ended December 31, 2007, and the four quarters in 2007.
Gain/(Loss)
on Sale of
Mortgage-
Backed
Securities Loss on Dividend
Net and other-than- income
Net Investment Interest temporarily from
Interest Advisory and Rate impaired available- G&A Income Minority Return
Income/ Service Swaps/ securities/ Income from equity for-sale Expenses/ Taxes/ interest/ on
Average Fees/Average Average Average investment/Average equity Average Average Average Average
Equity Equity Equity Equity Equity securities Equity Equity Equity Equity
--------------------------------------------------------------------------------------------------------------- --------
For the
Year
Ended
March
31, 2008 17.38% 0.41% 0.64% - 0.13% 0.06% (1.64%) (0.32%) 0.00% 16.66%
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For the
Year
Ended
December
31, 2007 11.56% 0.50% 0.57% (0.03%) 0.52% 0.00% (1.69%) (0.24%) (0.02%) 11.17%
For the
Quarter
Ended
December
31, 2007 13.89% 0.41% 0.16% - 0.61% 0.00% (1.72%) (0.26%) (0.02%) 13.07%
For the
Quarter
Ended
September
30, 2007 12.23% 0.49% 0.65% - 0.93% - (1.94%) (0.26%) (0.01%) 12.09%
For the
Quarter
Ended
June 30,
2007 10.71% 0.55% 0.89% (0.09%) 0.03% - (1.50%) (0.10%) - 10.49%
For the
Quarter
Ended
March 31,
2007 9.14% 0.61% 0.82% (0.06%) 0.45% - (1.70%) (0.34%) (0.04%) 8.88%
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Financial Condition
Investment Securities, Available for Sale
All of our Mortgage-Backed Securities at March 31, 2008, were adjustable-rate or fixed-rate mortgage-backed securities backed by single-family mortgage loans. All of the mortgage assets underlying these mortgage-backed securities were secured with a first lien position on the underlying single-family properties. All of our mortgage-backed securities were FHLMC, FNMA or GNMA mortgage pass-through certificates or CMOs, which carry an implied "AAA" rating. All of our agency debentures are callable and carry an implied "AAA" rating. We carry all of our investment assets at fair value.
We accrete discount balances as an increase in interest income over the life of discount Investment Securities and we amortize premium balances as a decrease in interest income over the life of premium Investment Securities. At March 31, 2008 and December 31, 2007, we had on our balance sheet a total of $79.1 million and $77.4 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current historical amortized cost of our investment securities acquired at a price below principal value) and a total of $462.4 million and $405.8 million, respectively, of unamortized premium (which is the difference between the remaining principal value and the current historical amortized cost of our investment securities acquired at a price above principal value).
We received mortgage principal repayments of $2.5 billion for the quarter ended March 31, 2008, and $1.7 billion for the quarter ended March 31, 2007. The average prepayment speed for the quarter ended March 31, 2008 and 2007 was 15%, and 17% respectively. During the quarter ended March 31, 2008, the average CPR declined to 15% from 17% during the quarter ended March 31, 2007, due to a decline in refinancing activity. Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our Mortgage-Backed Securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life of our Mortgage-Backed Securities, all other factors being equal, our net interest income would increase during the life of these Mortgage-Backed Securities as we would amortize our net premium balance over a longer time period.
The table below summarizes certain characteristics of our Investment Securities at March 31, 2008, December 31, 2007, September 30, 2007, June 30, 2007, and March 31, 2007.
Amortized Fair Weighted
Principal Net Amortized Cost/Principal Value/Principal Average
Amount Premium Cost Amount Fair Value Amount Yield
------------- --------- ------------ ------------- ----------- ---------------- ----------
At March 31, 2008 $56,006,707 $383,334 $56,390,041 100.68% $56,853,862 101.51% 5.36%
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At December 31, 2007 $52,569,598 $328,376 $52,897,974 100.62% $53,133,443 101.07% 5.75%
At September 30, 2007 $44,904,820 $229,713 $45,134,533 100.51% $44,890,633 99.97% 5.74%
At June 30, 2007 $39,102,277 $211,438 $39,313,715 100.54% $38,753,509 99.11% 5.71%
At March 31, 2007 $39,053,196 $195,649 $39,248,845 100.50% $39,230,648 100.45% 5.67%
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The table below summarizes certain characteristics of our Investment Securities at March 31, 2008, December 31, 2007, September 30, 2007, June 30, 2007, and March 31, 2007. The index level for adjustable-rate Investment Securities is the weighted average rate of the various short-term interest rate indices, which determine the coupon rate.
Principal
Amount at
Weighted Period End as %
Weighted Average Term Weighted Weighted of
Average to Average Average Total
Principal Coupon Next Lifetime Asset Investment
Amount Rate Adjustment Cap Yield Securities
--------------- ------------- ------------ ------------- ------------ ---------------
At March 31, 2008 $ 17,487,518 5.19% 35 months 9.73% 4.40% 31.22%
-----------------------------------------------------------------------------------------------------------------
At December 31, 2007 $ 15,331,447 5.90% 39 months 9.89% 5.63% 29.16%
At September 30, 2007 $ 13,148,355 5.99% 41 months 10.02% 5.68% 29.28%
At June 30, 2007 $ 9,553,827 5.85% 32 months 10.11% 5.77% 24.43%
At March 31, 2007 $ 9,657,221 5.79% 30 months 10.05% 5.66% 24.73%
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Principal Amount at
Period
End as % of Total
Principal Weighted Average Weighted Average Investment
Amount Coupon Rate Asset Yield Securities
-------------- ------------------ ----------------- -----------------------
At March 31, 2008 $38,519,189 5.98% 5.80% 68.78%
------------------------------------------------------------------------------------------------
At December 31, 2007 $37,238,151 6.00% 5.80% 70.84%
At September 30,
2007 $31,756,465 5.93% 5.76% 70.72%
At June 30, 2007 $29,548,450 5.87% 5.69% 75.57%
At March 31, 2007 $29,395,975 5.85% 5.67% 75.27%
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At March 31, 2008 and December 31, 2007, we held Investment Securities with coupons linked to various indices. The following tables detail the portfolio characteristics by index.
12- 11th Monthly
One- Six- Twelve Month District 1-Year Federal
Month Month Month Moving Cost of Treasury Cost of Other
Libor Libor Libor Average Funds Index Funds Indexes(1)
------ ------ ------ -------- --------- --------- -------- -----------
Weighted Average Term
to Next Adjustment 1 mo. 32 mo. 61 mo. 1 mo. 1 mo. 35 mo. 1 mo. 14 mo.
Weighted Average
Annual Period Cap 6.42% 2.8% 2.00% 0.01% 0.00% 1.90% 0.00% 1.94%
Weighted Average
Lifetime Cap at
March 31, 2008 10.73% 10.73% 10.99% 9.19% 11.29% 10.91% 13.43% 12.01%
Investment Principal
Value as Percentage of
Investment Securities at
March 31, 2008 9.62% 2.26% 14.81% 0.72% 0.22% 3.39% 0.12% 0.08%
(1) Combination of indexes that account for less than 0.05% of total investment securities.
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12- 11th Monthly One- Twelve
One- Six- Twelve Month District 1-Year 3-Year Federal Month Month
Month Month Month Moving Cost of Treasury Treasury Cost of Libor- Libor- Other
Libor Libor Libor Average Funds Index Index Funds USD USD Indexes(1)
------ ------ ------ -------- --------- --------- --------- -------- ------- ------- -----------
Weighted Average
Term to
Next Adjustment 1 mo. 38 mo. 72 mo. 1 mo. 1 mo. 36 mo. 18 mo. 1 mo. 1 mo. 60 mo. 10 mo.
Weighted Average
Annual
Period Cap 6.48% 1.72% 2.00% .42% 0.00% 1.88% 2.07% 0.00% 2.00% 2.00% 1.84%
Weighted Average
Lifetime
Cap at December 31,
2007 7.13% 11.25% 11.08% 9.15% 12.08% 10.73% 13.18% 13.43% 12.8% 10.94% 10.73 %
Investment Principal
Value as
Percentage of
Investment
Securities at
December 31, 2007 8.24% 1.89% 7.23% 0.67% 0.19% 3.39% 0.05% 0.13% 0.19% 7.14% 0.04%
(1) Combination of indexes that account for less than 0.05% of total investment securities.
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Trading Securities and Trading Securities Sold, Not Yet Purchased
Trading securities and trading securities sold, not yet purchased, are included in the balance sheet as a result of consolidating the financial statements of an affiliated investment fund. The resulting realized and unrealized gains and losses are reflected in the statements of operations. The fair value of the trading securities was $1.8 million and the trading securities sold, not yet purchased, was $37.3 million at March 31, 2008. The fair value of the trading securities was $11.7 million and the trading securities sold, not yet purchased, was $32.8 million at December 31, 2007.
Borrowings
To date, our debt has consisted entirely of borrowings collateralized by a pledge of our Investment Securities. These borrowings appear on our statement of financial condition as repurchase agreements. At March 31, 2008, we had established uncommitted borrowing facilities in this market with 30 lenders in amounts which we believe are in excess of our needs. All of our Investment Securities are currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and thus increase the liquidity and strength of our balance sheet.
For the quarter ended March 31, 2008, the term to maturity of our borrowings ranged from one day to ten years. We have entered into structured borrowings giving the counterparty the right to call the balance prior to maturity. The weighted average original term to maturity of our borrowings was 266 days at March 31, 2008. For the quarter ended March 31, 2007, the term to maturity of our borrowings ranged from one day to three years, with a weighted average original term to maturity of 245 days at March 31, 2007.
At March 31, 2008, the weighted average cost of funds for all of our borrowings was 3.85% with the effect of the interest rate swaps, and the weighted average term to next rate adjustment was 229 days. At March 31, 2007, the weighted average cost of funds for all of our borrowings 5.17% and the weighted average term to next rate adjustment was 200 days.
Liquidity
Liquidity, which is our ability to turn non-cash assets into cash, allows us to purchase additional investment securities and to pledge additional assets to secure existing borrowings should the value of our pledged assets decline. We may need to pledge assets for interest rate swaps, if the value of the swaps decline. Potential immediate sources of liquidity for us include cash balances and unused borrowing capacity. Unused borrowing capacity will vary over time as the market value of our investment securities varies. Our non-cash assets are largely actual or implied AAA assets, and accordingly, we have not had, nor do we anticipate having, difficulty in converting our assets to cash. Our balance sheet also generates liquidity on an on-going basis through mortgage principal repayments and net earnings held prior to payment as dividends. Should our needs ever exceed these on-going sources of liquidity plus the immediate sources of liquidity discussed above, we believe that in most circumstances our Investment Securities could be sold to raise cash. The maintenance of liquidity is one of the goals of our capital investment policy. Under this policy, we limit asset growth in order to preserve unused borrowing capacity for liquidity management purposes.
Borrowings under our repurchase agreements increased by $5.3 billion to $51.3 billion at March 31, 2008, from $46.0 billion at December 31, 2007. The increase in borrowings was the result of our deployment of additional capital raised during 2007 and the first quarter of 2008, which permitted us to increase our borrowings.
We anticipate that, upon repayment of each borrowing under a repurchase agreement, we will use the collateral immediately for borrowing under a new repurchase agreement. We have not at the present time entered into any commitment agreements under which the lender would be required to enter into new repurchase agreements during a specified period of time, nor do we presently plan to have liquidity facilities with commercial banks.
Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties (i.e., lenders) in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (a "margin call"), which may take the form of additional securities or cash. Similarly, if the estimated fair value of our Investment Securities increases due to changes in market interest rates of market factors, lenders may release collateral back to us. Specifically, margin calls result from a decline in the value of the our Mortgage-Backed Securities securing our repurchase agreements, prepayments on the mortgages securing such Mortgage-Backed Securities and to changes in the estimated fair value of such Mortgage-Backed Securities generally due to principal reduction of such Mortgage-Backed Securities from scheduled amortization and resulting from changes in market interest rates and other market factors. Through March 31, 2008, we did not have any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral. However, should prepayment speeds on the mortgages underlying our Mortgage-Backed Securities and/or market interest rates suddenly increase, margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.
The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase agreements, interest expense on repurchase agreements, the non-cancelable office lease and employment agreements at March 31, 2008.
(dollars in thousands)
----------------------
Within One One to Three Three to More than
Contractual Obligations Year Years Five Years Five Years Total
---------------------------------------------------------------------------------------------------------------------
Repurchase agreements $43,674,007 $3,800,000 $2,450,000 $1,400,000 $51,324,007
Interest expense on repurchase
agreements 374,880 442,921 209,590 230,002 1,257,393
Long-term operating lease obligations
399 532 - - 931
Employment contracts 64,342 8,895 - - 73,237
------------------------------------------------------------------------------
Total $44,113,628 $4,252,348 $2,659,590 $1,630,002 $52,655,568
================ =============== ============ =============== ================
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Stockholders' Equity
During the quarter ended March 31, 2008, we declared dividends to common shareholders totaling $224.8 million or $0.48 per share, which were paid to shareholders on April 29, 2008. During the quarter ended March 31, 2008, we declared and paid dividends to Series A Preferred shareholders totaling $3.6 million or $0.492188 per share, and Series B Preferred shareholders totaling $1.7 million or $0.375 per share. During the quarter ended March 31, 2007, we declared dividends to common shareholders totaling $52.6 million or $0.20 per share, which were paid on April 26, 2007. During the quarter ended March 31, 2007, we declared and paid dividends to Series A Preferred shareholders totaling $3.6 million or $0.492188 per share, and Series B Preferred shareholders totaling $1.7 million or $0.375 per share.
On January 23, 2008 we entered into an underwriting agreement pursuant to which we sold 58,650,000 shares of our common stock for net proceeds following underwriting expenses of approximately $1.1 billion. This transaction settled on January 29, 2008.
During the quarter ended March 31, 2008, we raised $54.6 million by issuing 3.3 million shares through the Direct Purchase and Dividend Reinvestment Program.
During the quarter ended March 31, 2008, 170,617 options were exercised under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate exercise price of $1.6 million.
On August 3, 2006, we entered into an ATM Equity Offering(sm) Sales Agreement with Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, relating to the sale of shares of common stock from time to time through Merrill Lynch. Sales of the shares, if any, are made by means of ordinary brokers' transaction on the New York Stock Exchange. During the quarter ended March 31, 2008, 588,000 shares of our common stock were issued pursuant to this program, totaling $11.5 million in net proceeds. On August 3, 2006, we entered into an ATM Equity Sales Agreement with UBS Securities LLC, relating to the sale of shares of our common stock from time to time through UBS Securities. Sales of the shares, if any, will be made by means of ordinary brokers' transaction on the New York Stock Exchange. During the quarter ended March 31, 2008, 3.8 million shares of our common stock were issued pursuant to this program, totaling $60.3 million in net proceeds.
Unrealized Gains and Losses
With our "available-for-sale" accounting treatment, unrealized fluctuations in fair values of assets do not impact our GAAP or taxable income but rather are reflected on our statement of financial condition by changing the carrying value of the asset with the change included in stockholders' equity under "Accumulated Other Comprehensive Income (Loss)." By accounting for our assets in this manner, we hope to provide useful information to stockholders and creditors and to preserve flexibility to sell assets in the future without having to change accounting methods.
As a result of us using fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their investments may not be meaningful.
The table below shows unrealized gains and losses on the Investment Securities, available-for-sale equity securities and interest rate swaps in our portfolio.
Unrealized Gains and Losses
---------------------------
(dollars in thousands)
December 31, September 30,
March 31, 2008 2007 2007 June 30, 2007 March 31, 2007
-------------------------------------------------------------------------------------------
Unrealized gain $654,506 $379,348 $68,015 $102,641 $138,211
Unrealized loss (990,320) (531,545) (453,974) (570,281) (198,251)
-------------------------------------------------------------------------------------------
Net Unrealized loss ($335,814) ($152,197) ($385,959) ($467,640) ($60,040)
===========================================================================================
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Unrealized changes in the estimated net fair value of investment
securities have one direct effect on our potential earnings and dividends:
positive fair value changes increase our equity base and allow us to increase
our borrowing capacity while negative changes tend to limit borrowing capacity
under our capital investment policy. A very large negative change in the net
fair value of our investment securities might impair our liquidity position,
requiring us to sell assets with the likely result of realized losses upon sale.
Leverage
Our debt-to-equity ratio at March 31, 2008 and December 31, 2007 was 8.1:1 and 8.7:1, respectively. We generally expect to maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this range from time to time based upon various factors, including our management's opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity and over-collateralization levels required by lenders when we pledge assets to secure borrowings.
Our target debt-to-equity ratio is determined under our capital investment policy. Should our actual debt-to-equity ratio increase above the target level due to asset acquisition or market value fluctuations in assets, we will cease to acquire new assets. Our management will, at that time, present a plan to our board of directors to bring us back to our target debt-to-equity ratio; in many circumstances, this would be accomplished over time by the monthly reduction of the balance of our Mortgage-Backed Securities through principal repayments.
Asset/Liability Management and Effect of Changes in Interest Rates
We continually review our asset/liability management strategy with respect to interest rate risk, mortgage prepayment risk, credit risk and the related issues of capital adequacy and liquidity. Our goal is to provide attractive risk-adjusted stockholder returns while maintaining what we believe is a strong balance sheet.
We seek to manage the extent to which our net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition, we have attempted to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in our portfolio of investment securities by entering into interest rate swaps. At March 31, 2008, we had entered into swap agreements with a total notional amount of $17.0 billion. We agreed to pay a weighted average pay rate of 4.90% and receive a floating rate based on one month LIBOR. At December 31, 2007, we entered into swap agreements with a total notional amount of $16.2 billion. We agreed to pay a weighted average pay rate of 5.03% and receive a floating rate based on one month LIBOR. We may enter into similar derivative transactions in the future by entering into interest rate collars, caps or floors or purchasing interest only securities.
Changes in interest rates may also affect the rate of mortgage principal prepayments and, as a result, prepayments on mortgage-backed securities. We seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets we purchase at a premium with assets we purchase at a discount. To date, the aggregate premium exceeds the aggregate discount on our mortgage-backed securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce our net income compared to what net income would be absent such prepayments.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities. As such, we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.
Capital Resources
At March 31, 2008, we had no material commitments for capital expenditures.
Inflation
Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors drive our performance far more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our dividends are based upon our net income as calculated for tax purposes; in each case, our activities and balance sheet are measured with reference to historical cost or fair market value without considering inflation.
Other Matters
We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Code for the quarters ended March 31, 2008 and 2007. We also calculate that our revenue qualifies for the 75% source of income test and for the 95% source of income test rules for the quarters ended March 31, 2008 and 2007. Consequently, we met the REIT income and asset test. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, as of March 31, 2008 and December 31, 2007 we believe that we qualified as a REIT under the Code.
We at all times intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act of 1940, or the Investment Company Act. If we were to become regulated as an investment company, then our use of leverage would be substantially reduced. The Investment Company Act exempts entities that are "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate" (qualifying interests). Under current interpretation of the staff of the SEC, in order to qualify for this exemption, we must maintain at least 55% of our assets directly in qualifying interests and at least 80% of our assets in qualifying interests plus other real estate related assets. In addition, unless certain mortgage securities represent all the certificates issued with respect to an underlying pool of mortgages, the Mortgage-Backed Securities may be treated as securities separate from the underlying mortgage loans and, thus, may not be considered qualifying interests for purposes of the 55% requirement. We calculate that as of March 31, 2008 and December 31, 2007, we were in compliance with this requirement.
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond our control. Changes in the general level of interest rates
can affect our net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with our interest-bearing liabilities, by affecting the spread
between our interest-earning assets and interest-bearing liabilities. Changes in
the level of interest rates also can affect the value of our Mortgage-Backed
Securities and our ability to realize gains from the sale of these assets. We
may utilize a variety of financial instruments, including interest rate swaps,
caps, floors, inverse floaters and other interest rate exchange contracts, in
order to limit the effects of interest rates on our operations. When we use
these types of derivatives to hedge the risk of interest-earning assets or
interest-bearing liabilities, we may be subject to certain risks, including the
risk that losses on a hedge position will reduce the funds available for
payments to holders of securities and that the losses may exceed the amount we
invested in the instruments.
Our profitability and the value of our portfolio (including interest rate swaps) may be adversely affected during any period as a result of changing interest rates. The following table quantifies the potential changes in net interest income, portfolio value should interest rates go up or down 25, 50, and 75 basis points, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve. All changes in income and value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates at March 31, 2008 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.
Projected Percentage Change in
Projected Percentage Change in Portfolio Value, with Effect of
Change in Interest Rate Net Interest Income Interest Rate Swaps
----------------------------------------------------------------------------------------------------------------------
-75 Basis Points 11.28% 2.32%
-50 Basis Points 6.86% 2.07%
-25 Basis Points 2.82% 1.70%
Base Interest Rate - -
+25 Basis Points (4.14%) 0.63%
+50 Basis Points (8.47%) (0.09%)
+75 Basis Points (12.80%) (0.91%)
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ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. We attempt to control
risks associated with interest rate movements. Methods for evaluating interest
rate risk include an analysis of our interest rate sensitivity "gap", which is
the difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of
our interest-earning assets and interest-bearing liabilities at March 31, 2008.
The amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature and does include the effect of the interest rate
swaps. The interest rate sensitivity of our assets and liabilities in the table
could vary substantially based on actual prepayment experience.
More than 1 Year
Within 3 Months to 3 Years 3 Years and
4-12 Months Over Total
(dollars in thousands)
--------------------------------------------------------------------------------
Rate Sensitive Assets:
Investment Securities (Principal) $6,380,808 $1,264,878 $1,731,284 $46,629,738 $56,006,708
Cash Equivalents 1,420,000 - - - 1,420,000
Reverse Repurchase Agreements 800,000 - - - 800,000
--------------------------------------------------------------------------------
Total Rate Sensitive Assets 8,600,808 1,264,878 1,731,284 46,629,738 58,226,708
Rate Sensitive Liabilities:
Repurchase Agreements,
with the effect of swaps 27,484,857 2,487,000 12,642,300 8,709,650 51,324,007
--------------------------------------------------------------------------------
Interest rate sensitivity gap ($18,884,049) ($1,222,322) ($10,911,016) $37,920,088 $6,902,701
================================================================================
Cumulative rate sensitivity gap ($18,884,049) ($20,106,372) ($31,017,387) $6,902,700
=================================================================
Cumulative interest rate sensitivity
gap as a percentage of total
rate-sensitive assets (34%) (36%) (55%) 12%
=================================================================
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Our analysis of risks is based on management's experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in the above tables and in this report. These analyses contain certain forward-looking statements and are subject to the safe harbor statement set forth under the heading, "Special Note Regarding Forward-Looking Statements."
ITEM 4. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, (1) were effective in ensuring that information regarding the Company and its subsidiaries is made known to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in providing reasonable assurance that information the Company must disclose in its periodic reports under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC's rules and forms. There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial statements.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The materialization of any risks and uncertainties identified in our forward looking statements contained in this report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Special Note Regarding Forward Looking Statements" in this quarterly report on Form 10-Q. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.
Agency Mortgage-Backed Securities that are guaranteed by FNMA and FHLMC are subject to the risk that these U.S. Government-sponsored entities may not be able to fully satisfy their guarantee obligations, which may adversely affect the value of our investment portfolio and our ability to sell or finance these securities.
The interest and principal payments we expect to receive on the Mortgage-Backed Securities in which we intend to invest will be guaranteed by FNMA, FHLMC, or GNMA. Unlike the GNMA certificates in which we may invest, the principal and interest on securities issued by FNMA and FHLMC are not guaranteed by the U.S. Government. All the Mortgage-Backed Securities in which we invest depend on a steady stream of payments on the mortgages underlying the securities. The recent economic challenges in the residential mortgage market have affected the financial results of FNMA and FHLMC. For the year ended 2007, both FNMA and FHLMC reported substantial losses. FNMA has also reported a net loss of $2.2 billion in the first quarter 2008, compared with a fourth quarter 2007 net loss of $3.6 billion. FNMA recently stated that it expects severe weakness in the housing market to continue in 2008. If FNMA and FHLMC continue to suffer significant losses, their ability to honor their respective Mortgage-Backed Securities guarantees may be adversely affected. Further, any actual or perceived financial challenges at either FNMA or FHLMC could cause the rating agencies to downgrade the corporate credit ratings of FNMA or FHLMC.
Any failure to honor guarantees on Mortgage-Backed Securities by FNMA or FHLMC or any downgrade of securities issued by FNMA or FHLMC by the rating agencies could cause a significant decline in the cash flow from, and the value of, any Mortgage-Backed Securities we may own and the market for these securities may be adversely affected for a significant period of time. We may be unable to sell or finance Mortgage-Backed Securities on favorable terms or at all and our financial position and results of operations could be adversely affected.
Item 6. EXHIBITS
Exhibits:
The exhibits required by this item are set forth on the Exhibit Index attached hereto.
EXHIBIT INDEX
Exhibit Exhibit Description
Number
3.1 Articles of Amendment and Restatement of the Articles of
Incorporation of the Registrant (incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-11 (Registration No. 333-32913) filed with the Securities and
Exchange Commission on August 5, 1997).
3.2 Articles of Amendment of the Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-3 (Registration
Statement 333-74618) filed with the Securities and Exchange
Commission on June 12, 2002).
3.3 Articles of Amendment of the Articles of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 of the
Registrant's Form 8-K (filed with the Securities and Exchange
Commission on August 3, 2006).
3.4 Articles of Amendment of the Registrant.
3.5 Form of Articles Supplementary designating the Registrant's 7.875%
Series A Cumulative Redeemable Preferred Stock, liquidation
preference $25.00 per share (incorporated by reference to Exhibit
3.3 to the Registrant's 8-A filed April 1, 2004).
3.6 Articles Supplementary of the Registrant's designating an
additional 2,750,000 shares of the Company's 7.875% Series A
Cumulative Redeemable Preferred Stock, as filed with the State
Department of Assessments and Taxation of Maryland on October 15,
2004 (incorporated by reference to Exhibit 3.2 to the Registrant's
8-K filed October 4, 2004).
3.7 Articles Supplementary designating the Registrant's 6% Series B
Cumulative Convertible Preferred Stock, liquidation preference
$25.00 per share (incorporated by reference to Exhibit 3.1 to the
Registrant's 8-K filed April 10, 2006).
3.8 Bylaws of the Registrant, as amended (incorporated by reference to
Exhibit 3.3 to the Registrant's Registration Statement on Form
S-11 (Registration No. 333-32913) filed with the Securities and
Exchange Commission on August 5, 1997).
4.1 Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-11 (Registration No. 333-32913) filed with the
Securities and Exchange Commission on September 17, 1997).
4.2 Specimen Preferred Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement on Form S-3
(Registration No. 333-74618) filed with the Securities and
Exchange Commission on December 5, 2001).
4.3 Specimen Series A Preferred Stock Certificate (incorporated by
reference to Exhibit 4.1 of the Registrant's Registration
Statement on Form 8-A filed with the SEC on April 1, 2004).
4.4 Specimen Series B Preferred Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registrant's Form 8-K filed with
the Securities and Exchange Commission on April 10, 2006).
31.1 Certification of Michael A.J. Farrell, Chairman, Chief Executive
Officer, and President of the Registrant, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Kathryn F. Fagan, Chief Financial Officer and
Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Michael A.J. Farrell, Chairman, Chief Executive
Officer, and President of the Registrant, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Kathryn F. Fagan, Chief Financial Officer and
Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
40
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ANNALY CAPITAL MANAGEMENT, INC.
Dated: May 7, 2008 By: /s/ Michael A.J. Farrell
-------------------------
Michael A.J. Farrell
(Chairman of the Board, Chief Executive
Officer, President and authorized
officer of registrant)
Dated: May 7, 2008 By: /s/ Kathryn F. Fagan
---------------------
Kathryn F. Fagan
(Chief Financial Officer and Treasurer
and principal financial and chief
accounting officer)
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Exhibit 3.4
ANNALY CAPITAL MANAGEMENT, INC.
ARTICLES OF AMENDMENT
Annaly Capital Management, Inc., a Maryland corporation (the "Corporation"), hereby certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: The charter of the Corporation is hereby amended by deleting ARTICLE VI(A) in its entirety and adding a new ARTICLE VI(A) to read as follows:
"ARTICLE VI
A. The total number of shares of stock of all classes which the Corporation has authority to issue is one billion (1,000,000,000) shares of capital stock, par value one cent ($0.01) per share, amounting in the aggregate par value to ten million dollars ($10,000,000). Of these shares of capital stock, 987,987,500 shares are classified as "Common Stock," 7,412,500 shares are classified as "7.875% Series A Cumulative Redeemable Preferred Stock," and 4,600,000 shares are classified as "6.00% Series B Cumulative Convertible Preferred Stock." Our Board may classify and reclassify any unissued shares of capital stock by setting or changing in any one or more respects the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications or terms or conditions of redemption of such shares of stock."
SECOND: The amendment to the charter of the Corporation as set forth above has been duly advised by the Board of Directors and approved by the stockholders of the Corporation as required by law.
THIRD: Immediately prior to the amendment to the charter, the
Corporation had the authority to issue five hundred million (500,000,000) shares
of capital stock, par value one cent ($0.01) per share, amounting in the
aggregate par value to five million dollars ($5,000,000), classified as follows:
487,762,500 shares were classified as "Common Stock;" 7,637,500 shares were
classified as "7.875% Series A Cumulative Redeemable Preferred Stock;" and
4,600,000 shares were classified as "6.00% Series B Cumulative Convertible
Preferred Stock." Following the amendment to the charter, the Corporation will
have the authority to issue one billion (1,000,000,000) shares of capital stock,
par value one cent ($0.01) per share, amounting in the aggregate par value to
ten million dollars ($10,000,000), classified as follows: 987,987,500 shares are
classified as "Common Stock;" 7,412,500 shares are classified as "7.875% Series
A Cumulative Redeemable Preferred Stock;" and 4,600,000 shares are classified as
"6.00% Series B Cumulative Convertible Preferred Stock."
FOURTH: The preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the Corporation's shares of capital stock were not changed by the amendment to the charter.
FIFTH: The undersigned Chief Executive Officer and President of the Corporation acknowledges these Articles of Amendment to be the corporate act of the Corporation and, as to all matters or facts required to be verified under oath, the undersigned Chief Executive Officer and President acknowledges that, to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties of perjury.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to be signed in its name and on its name and on its behalf by its Chief Executive Officer and President and attested to by its Secretary on this 21st day of April, 2008.
ATTEST ANNALY CAPITAL MANAGEMENT, INC.
By: /s/ R. Nicholas Singh (SEAL) By: /s/ Michael A.J. Farrell
--------------------- ------------------------
Name: R. Nicholas Singh Name: Michael A.J. Farrell
Title: Secretary Title: Chief Executive Officer and
President
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EXHIBIT 31.1
I, Michael A.J. Farrell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Annaly Capital
Management, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 7, 2008
/s/ Michael A.J. Farrell
------------------------
Michael A.J. Farrell
Chairman of the Board of Directors, Chief
Executive Officer, President and principal
executive officer
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EXHIBIT 31.2
I, Kathryn F. Fagan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Annaly Capital Management, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors:
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 7, 2008
/s/ Kathryn F. Fagan
--------------------
Kathryn F. Fagan
Chief Financial Officer, Treasurer and
Principal Financial Officer
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EXHIBIT 32.1
ANNALY CAPITAL MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
SUITE 2902
NEW YORK, NEW YORK 10036
CERTIFICATION OF CHIEF EXECUTIVE
OFFICER REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS
I, Michael A.J. Farrell, the Chairman of the Board of Directors, Chief
Executive Officer, and President of Annaly Capital Management, Inc. (the
"Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the
Company's Quarterly Report on Form 10-Q for the period ended March 31, 2008 (the
"Report") filed with the Securities and Exchange Commission:
o fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
o the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Michael A.J. Farrell ------------------------ Michael A.J. Farrell |
Chairman of the Board of Directors, Chief Executive Officer, and President
May 7, 2008
EXHIBIT 32.2
ANNALY CAPITAL MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
SUITE 2902
NEW YORK, NEW YORK 10036
CERTIFICATION OF CHIEF FINANCIAL
OFFICER REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS
I, Kathryn F. Fagan, the Chief Financial Officer and Treasurer of
Annaly Capital Management, Inc. (the "Company") in compliance with 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, hereby certify that, the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 2008 (the "Report") filed with the Securities and
Exchange Commission:
o fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
o the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Kathryn F. Fagan -------------------- Kathryn F. Fagan Chief Financial Officer and Treasurer May 7, 2008 |