UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 | ||
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: June 30, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-13447
ANNALY CAPITAL MANAGEMENT INC
(Exact Name of Registrant as Specified in its Charter)
Maryland | 22-3479661 | |||||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
| 1211 Avenue of the Americas | ||||||||
| New York, | New York | 10036 | ||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(212) 696-0100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||||||
| Common Stock, par value $0.01 per share | NLY | New York Stock Exchange | ||||||
| 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.F | New York Stock Exchange | ||||||
| 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.G | New York Stock Exchange | ||||||
| 6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock | NLY.I | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The number of shares of the registrant’s Common Stock outstanding on July 23, 2024 was 501,018,415.
WEBSITE AND SOCIAL MEDIA DISCLOSURE
We use our website (www.annaly.com) and LinkedIn account (www.linkedin.com/company/annaly-capital-management) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive email alerts and other information about Annaly when you enroll your email address by visiting the “Investors” section of our website, then clicking on “Investor Resources” and selecting “Email Alerts” to complete the email notification form. Our website, any alerts and social media channels are not incorporated into this quarterly report on Form 10-Q.
| ANNALY CAPITAL MANAGEMENT, INC. | |||||
| FORM 10-Q | |||||
| TABLE OF CONTENTS | |||||
| Page | |||||
Consolidated Statements of Financial Condition at June 30, 2024 (Unaudited) and December 31, 2023 (Derived from the audited consolidated financial statements at December 31, 2023) | |||||
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended June 30, 2024 and 2023 | |||||
Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 30, 2024 and 2023 | |||||
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2024 and 2023 | |||||
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS | ||
1
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) (Unaudited) | |||||||||||||||||||||||
| For The Three Months Ended June 30, | For The Six Months Ended June 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net interest income | |||||||||||||||||||||||
| Interest income | $ | 1,177,325 | $ | 921,494 | $ | 2,271,813 | $ | 1,739,744 | |||||||||||||||
| Interest expense | 1,123,767 | 953,457 | 2,224,706 | 1,752,244 | |||||||||||||||||||
| Net interest income | 53,558 | (31,963) | 47,107 | (12,500) | |||||||||||||||||||
| Net servicing income | |||||||||||||||||||||||
| Servicing and related income | 120,515 | 83,790 | 235,599 | 168,063 | |||||||||||||||||||
| Servicing and related expense | 12,617 | 8,930 | 24,833 | 16,810 | |||||||||||||||||||
| Net servicing income | 107,898 | 74,860 | 210,766 | 151,253 | |||||||||||||||||||
| Other income (loss) | |||||||||||||||||||||||
| Net gains (losses) on investments and other | (568,745) | (1,308,948) | (1,562,872) | (1,307,236) | |||||||||||||||||||
| Net gains (losses) on derivatives | 430,487 | 1,475,325 | 1,807,631 | 574,573 | |||||||||||||||||||
| Loan loss (provision) reversal | — | — | — | 219 | |||||||||||||||||||
| Other, net | 24,791 | 9,105 | 48,158 | 24,603 | |||||||||||||||||||
| Total other income (loss) | (113,467) | 175,482 | 292,917 | (707,841) | |||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||
| Compensation expense | 33,274 | 30,635 | 61,995 | 60,026 | |||||||||||||||||||
| Other general and administrative expenses | 11,617 | 12,280 | 21,466 | 23,717 | |||||||||||||||||||
| Total general and administrative expenses | 44,891 | 42,915 | 83,461 | 83,743 | |||||||||||||||||||
| Income (loss) before income taxes | 3,098 | 175,464 | 467,329 | (652,831) | |||||||||||||||||||
| Income taxes | 11,931 | 14,277 | 10,988 | 25,310 | |||||||||||||||||||
| Net income (loss) | (8,833) | 161,187 | 456,341 | (678,141) | |||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests | 650 | (5,846) | 2,932 | (918) | |||||||||||||||||||
| Net income (loss) attributable to Annaly | (9,483) | 167,033 | 453,409 | (677,223) | |||||||||||||||||||
| Dividends on preferred stock | 37,158 | 35,766 | 74,219 | 67,641 | |||||||||||||||||||
| Net income (loss) available (related) to common stockholders | $ | (46,641) | $ | 131,267 | $ | 379,190 | $ | (744,864) | |||||||||||||||
| Net income (loss) per share available (related) to common stockholders | |||||||||||||||||||||||
| Basic | $ | (0.09) | $ | 0.27 | $ | 0.76 | $ | (1.51) | |||||||||||||||
| Diluted | $ | (0.09) | $ | 0.27 | $ | 0.76 | $ | (1.51) | |||||||||||||||
| Weighted average number of common shares outstanding | |||||||||||||||||||||||
| Basic | 500,950,563 | 494,165,256 | 500,781,701 | 491,939,177 | |||||||||||||||||||
| Diluted | 500,950,563 | 494,358,982 | 501,415,515 | 491,939,177 | |||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Net income (loss) | $ | (8,833) | $ | 161,187 | $ | 456,341 | $ | (678,141) | |||||||||||||||
| Unrealized gains (losses) on available-for-sale securities | (54,243) | (294,045) | (336,112) | 381,329 | |||||||||||||||||||
| Reclassification adjustment for net (gains) losses included in net income (loss) | 179,234 | 462,128 | 514,585 | 945,036 | |||||||||||||||||||
| Other comprehensive income (loss) | 124,991 | 168,083 | 178,473 | 1,326,365 | |||||||||||||||||||
| Comprehensive income (loss) | 116,158 | 329,270 | 634,814 | 648,224 | |||||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interests | 650 | (5,846) | 2,932 | (918) | |||||||||||||||||||
| Comprehensive income (loss) attributable to Annaly | 115,508 | 335,116 | 631,882 | 649,142 | |||||||||||||||||||
| Dividends on preferred stock | 37,158 | 35,766 | 74,219 | 67,641 | |||||||||||||||||||
| Comprehensive income (loss) attributable to common stockholders | $ | 78,350 | $ | 299,350 | $ | 557,663 | $ | 581,501 | |||||||||||||||
| See notes to consolidated financial statements. | |||||||||||||||||||||||
2
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| For The ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands) (Unaudited) | ||||||||||||||||||||||||||
| For The Three Months Ended June 30, | For The Six Months Ended June 30, | |||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||
| Preferred stock | ||||||||||||||||||||||||||
Beginning of period | $ | 1,536,569 | $ | 1,536,569 | $ | 1,536,569 | $ | 1,536,569 | ||||||||||||||||||
| End of period | $ | 1,536,569 | $ | 1,536,569 | $ | 1,536,569 | $ | 1,536,569 | ||||||||||||||||||
| Common stock | ||||||||||||||||||||||||||
Beginning of period | $ | 5,004 | $ | 4,939 | $ | 5,001 | $ | 4,683 | ||||||||||||||||||
Issuance | 6 | — | 6 | 253 | ||||||||||||||||||||||
Stock-based award activity | — | — | 3 | 3 | ||||||||||||||||||||||
| End of period | $ | 5,010 | $ | 4,939 | $ | 5,010 | $ | 4,939 | ||||||||||||||||||
| Additional paid-in capital | ||||||||||||||||||||||||||
Beginning of period | $ | 23,673,687 | $ | 23,543,091 | $ | 23,672,391 | $ | 22,981,320 | ||||||||||||||||||
Issuance | 10,941 | (118) | 10,893 | 562,338 | ||||||||||||||||||||||
Stock-based award activity | 10,035 | 7,373 | 11,379 | 6,688 | ||||||||||||||||||||||
| End of period | $ | 23,694,663 | $ | 23,550,346 | $ | 23,694,663 | $ | 23,550,346 | ||||||||||||||||||
| Accumulated other comprehensive income (loss) | ||||||||||||||||||||||||||
Beginning of period | $ | (1,281,918) | $ | (2,550,614) | $ | (1,335,400) | $ | (3,708,896) | ||||||||||||||||||
Unrealized gains (losses) on available-for-sale securities | (54,243) | (294,045) | (336,112) | 381,329 | ||||||||||||||||||||||
| Reclassification adjustment for net (gains) losses included in net income (loss) | 179,234 | 462,128 | 514,585 | 945,036 | ||||||||||||||||||||||
| End of period | $ | (1,156,927) | $ | (2,382,531) | $ | (1,156,927) | $ | (2,382,531) | ||||||||||||||||||
| Accumulated deficit | ||||||||||||||||||||||||||
| Beginning of period | $ | (12,523,809) | $ | (10,741,863) | $ | (12,622,768) | $ | (9,543,233) | ||||||||||||||||||
Net income (loss) attributable to Annaly | (9,483) | 167,033 | 453,409 | (677,223) | ||||||||||||||||||||||
Dividends declared on preferred stock (1) | (37,158) | (35,766) | (74,219) | (67,641) | ||||||||||||||||||||||
Dividends and dividend equivalents declared on common stock and stock-based awards (1) | (327,741) | (322,448) | (654,613) | (644,947) | ||||||||||||||||||||||
| End of period | $ | (12,898,191) | $ | (10,933,044) | $ | (12,898,191) | $ | (10,933,044) | ||||||||||||||||||
| Total stockholder’s equity | $ | 11,181,124 | $ | 11,776,279 | $ | 11,181,124 | $ | 11,776,279 | ||||||||||||||||||
| Noncontrolling interests | ||||||||||||||||||||||||||
Beginning of period | $ | 86,580 | $ | 116,911 | $ | 89,298 | $ | 98,983 | ||||||||||||||||||
Net income (loss) attributable to noncontrolling interests | 650 | (5,846) | 2,932 | (918) | ||||||||||||||||||||||
Equity contributions from (distributions to) noncontrolling interests | (5,450) | 1 | (10,450) | 13,001 | ||||||||||||||||||||||
| End of period | $ | 81,780 | $ | 111,066 | $ | 81,780 | $ | 111,066 | ||||||||||||||||||
| Total equity | $ | 11,262,904 | $ | 11,887,345 | $ | 11,262,904 | $ | 11,887,345 | ||||||||||||||||||
(1) Refer to the “Capital Stock” Note for dividends per share for each class of shares. | ||||||||||||||||||||||||||
| See notes to consolidated financial statements. | ||||||||||||||||||||||||||
3
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (Unaudited) | |||||||||||
| For The Six Months Ended June 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income (loss) | $ | 456,341 | $ | (678,141) | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | |||||||||||
| Amortization of premiums and discounts of investments, net | 40,216 | 105,438 | |||||||||
| Amortization of securitized debt premiums and discounts and deferred financing costs | 5,238 | 6,435 | |||||||||
| Depreciation, amortization and other noncash expenses | 16,134 | 12,032 | |||||||||
| Net (gains) losses on investments and derivatives | 383,762 | 1,543,662 | |||||||||
| Income (loss) from unconsolidated joint ventures | (2,617) | (289) | |||||||||
| Loan loss provision (reversal) | — | (219) | |||||||||
| Payments on purchases of loans held for sale | (20,225) | — | |||||||||
| Proceeds from sales and repayments of loans held for sale | 17,368 | 747 | |||||||||
| Proceeds from U.S. Treasury securities | 4,039,385 | — | |||||||||
| Payments on U.S. Treasury securities | (4,118,083) | — | |||||||||
| Net receipts (payments) on derivatives | 963,260 | (332,685) | |||||||||
| Net change in | |||||||||||
| Other assets | (7,208) | (12,979) | |||||||||
| Interest receivable | 305,552 | (306,771) | |||||||||
| Interest payable | 81,169 | (184,660) | |||||||||
| Other liabilities | 14,670 | (34,903) | |||||||||
| Net cash provided by (used in) operating activities | 2,174,962 | 117,667 | |||||||||
| Cash flows from investing activities | |||||||||||
| Payments on purchases of securities | (16,710,894) | (18,067,651) | |||||||||
| Proceeds from sales of securities | 14,936,642 | 12,501,702 | |||||||||
| Principal payments on securities | 3,050,093 | 3,012,034 | |||||||||
| Payments on purchases and origination of loans | (5,978,114) | (1,946,157) | |||||||||
| Proceeds from sales of loans | 92,637 | — | |||||||||
| Principal payments on loans | 928,297 | 466,538 | |||||||||
| Payments on purchases of MSR | (636,658) | (213,346) | |||||||||
| Proceeds from sales of MSR | 1,068 | — | |||||||||
| Proceeds from reverse repurchase agreements | 295,838,237 | 32,900,024 | |||||||||
| Payments on reverse repurchase agreements | (295,838,237) | (32,900,024) | |||||||||
| Distributions in excess of cumulative earnings from unconsolidated joint ventures | 11,189 | — | |||||||||
| Net cash provided by (used in) investing activities | (4,305,740) | (4,246,880) | |||||||||
| Cash flows from financing activities | |||||||||||
| Proceeds from repurchase agreements and other secured financing | 2,731,104,468 | 2,519,472,348 | |||||||||
| Payments on repurchase agreements and other secured financing | (2,732,418,011) | (2,517,093,741) | |||||||||
| Proceeds from issuances of securitized debt | 5,158,091 | 2,355,559 | |||||||||
| Principal payments on securitized debt | (844,020) | (397,043) | |||||||||
| Payments on purchases of securitized debt | — | (2,504) | |||||||||
| Payment of deferred financing cost | (1,331) | — | |||||||||
| Proceeds from participations issued | 2,279,391 | 532,445 | |||||||||
| Payments on repurchases of participations issued | (2,214,696) | (825,613) | |||||||||
| Principal payments on participations issued | (27,729) | (20,954) | |||||||||
| Net contributions (distributions) from (to) noncontrolling interests | (10,450) | 13,001 | |||||||||
| Net proceeds from stock offerings, direct purchases and dividend reinvestments | 10,899 | 562,591 | |||||||||
| Settlement of stock-based awards in satisfaction of withholding tax requirements | (6,157) | (5,810) | |||||||||
| Dividends paid | (724,717) | (800,908) | |||||||||
| Net cash provided by (used in) financing activities | 2,305,738 | 3,789,371 | |||||||||
| Net (decrease) increase in cash and cash equivalents | 174,960 | (339,842) | |||||||||
| Cash and cash equivalents including cash pledged as collateral, beginning of period | 1,412,148 | 1,576,714 | |||||||||
| Cash and cash equivalents including cash pledged as collateral, end of period | $ | 1,587,108 | $ | 1,236,872 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Interest received | $ | 1,823,472 | $ | 1,550,061 | |||||||
| Interest paid (excluding interest paid on interest rate swaps) | $ | 1,805,416 | $ | 1,780,252 | |||||||
| Net interest received (paid) on interest rate swaps | $ | 1,087,460 | $ | 618,036 | |||||||
| Taxes received (paid) | $ | (657) | $ | (654) | |||||||
| Noncash investing and financing activities | |||||||||||
| Receivable for unsettled trades | $ | 320,659 | $ | 787,442 | |||||||
| Payable for unsettled trades | $ | 1,096,271 | $ | 4,331,315 | |||||||
| Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment | $ | 178,473 | $ | 1,326,365 | |||||||
| Dividends declared, not yet paid | $ | 325,662 | $ | 321,031 | |||||||
| See notes to consolidated financial statements. | |||||||||||
4
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES | ||
1. DESCRIPTION OF BUSINESS | ||
Annaly is an internally-managed company that has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).
The Company’s three investment groups are primarily comprised of the following:
| Investment Groups | Description | ||||
| Annaly Agency Group | Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including Agency commercial MBS. | ||||
| Annaly Residential Credit Group | Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets. | ||||
| Annaly Mortgage Servicing Rights Group | Invests in mortgage servicing rights (“MSR”), which provide the right to service residential mortgage loans in exchange for a portion of the interest payments made on the loans. | ||||
2. BASIS OF PRESENTATION | ||
The accompanying consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Form 10-K”). The consolidated financial information as of December 31, 2023 has been derived from audited consolidated financial statements included in the Company’s 2023 Form 10-K.
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
3. SIGNIFICANT ACCOUNTING POLICIES | ||
Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation.
Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE.
Variable Interest Entities – A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
5
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion to change. Refer to the “Variable Interest Entities” Note for further information.
Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of joint ventures accounted for under the equity method. These investments are included in Other assets with income or loss included in Other, net.
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled $1.3 billion and $1.1 billion at June 30, 2024 and December 31, 2023, respectively.
Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the FVO in order to simplify the accounting treatment for certain financial instruments. Items for which the FVO has been elected are presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the FVO refer to the table in the “Financial Instruments” Note.
Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments.
Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they meet the offsetting criteria. Refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements.
Derivative Instruments – Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on derivatives. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. Refer to the “Derivative Instruments” Note for further discussion.
Stock-Based Compensation – The Company measures compensation expense for stock-based awards at fair value, which is generally based on the grant-date fair value of the Company’s common stock. Compensation expense is recognized ratably over the vesting or requisite service period of the award. Stock-based awards that contain market-based conditions are valued using a model.
Compensation expense for awards with performance conditions is recognized based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market conditions is recognized irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. Forfeitures are recorded when they occur. The Company generally issues new shares of common stock upon delivery of stock-based awards.
Interest Income - The Company recognizes interest income primarily on Residential Securities (as defined in the “Securities” Note), residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not received is recognized as Interest receivable in the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item in the Consolidated Statements of Comprehensive Income (Loss).
6
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
For its securities, the Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), taking into account estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.
Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis.
Premiums or discounts associated with the purchase of multifamily securities are amortized or accreted into interest income based upon their contractual payment terms. If a prepayment occurs, an adjustment is made to the unpaid principal balance and unamortized premium or discount in the current period and the original effective yield continues to be applied.
Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss).
If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower.
The Company has made an accounting policy election not to measure an allowance for loans losses for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual due date for commercial loans carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income.
Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income.
Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“TRSs”). As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). The Company has early adopted ASU 2023-07, Improvements to Segment Reporting, as its Residential Credit and MSR operating segments have become a more significant component of consolidated results. Refer to the “Segments” Note for more information.
The Company reviewed other recently issued ASUs and determined that they were not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption.
7
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
4. FINANCIAL INSTRUMENTS | ||
Financial Instruments (1) | |||||||||||||||||
| Balance Sheet Line Item | Type / Form | Measurement Basis | June 30, 2024 | December 31, 2023 | |||||||||||||
| Assets | (dollars in thousands) | ||||||||||||||||
| Securities | Agency mortgage-backed securities (2) | Fair value, with unrealized gains (losses) through other comprehensive income | $ | 9,669,178 | $ | 15,665,352 | |||||||||||
| Securities | Agency mortgage-backed securities (3) | Fair value, with unrealized gains (losses) through earnings | 54,721,727 | 50,643,436 | |||||||||||||
| Securities | Residential credit risk transfer securities | Fair value, with unrealized gains (losses) through earnings | 838,437 | 974,059 | |||||||||||||
| Securities | Non-agency mortgage-backed securities | Fair value, with unrealized gains (losses) through earnings | 1,702,859 | 2,108,274 | |||||||||||||
| Securities | Commercial real estate debt investments - CMBS | Fair value, with unrealized gains (losses) through earnings | 112,552 | 222,444 | |||||||||||||
| Total securities | 67,044,753 | 69,613,565 | |||||||||||||||
| Loans, net | Residential mortgage loans | Fair value, with unrealized gains (losses) through earnings | 2,548,228 | 2,353,084 | |||||||||||||
| Assets transferred or pledged to securitization vehicles | Residential mortgage loans | Fair value, with unrealized gains (losses) through earnings | 17,946,812 | 13,307,622 | |||||||||||||
| Liabilities | |||||||||||||||||
| Repurchase agreements | Repurchase agreements | Amortized cost | $ | 60,787,994 | $ | 62,201,543 | |||||||||||
| Other secured financing | Loans | Amortized cost | 600,000 | 500,000 | |||||||||||||
| Debt issued by securitization vehicles | Securities | Fair value, with unrealized gains (losses) through earnings | 15,831,915 | 11,600,338 | |||||||||||||
| Participations issued | Participations issued | Fair value, with unrealized gains (losses) through earnings | 1,144,821 | 1,103,835 | |||||||||||||
| U.S. Treasury securities sold, not yet purchased | Securities | Fair value, with unrealized gains (losses) through earnings | 1,974,602 | 2,132,751 | |||||||||||||
(1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. (2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities purchased prior to July 1, 2022. (3) Includes interest-only securities and reverse mortgages and, effective July 1, 2022, newly purchased Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. | |||||||||||||||||
5. SECURITIES | ||
Impairment – Management evaluates available-for-sale securities where the fair value option has not been elected and held-to-maturity debt securities for impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be
8
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
recognized in the Consolidated Statements of Comprehensive Income (Loss) as a securities loss provision and reflected as an allowance for credit losses on securities in the Consolidated Statements of Financial Condition, while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). When the fair value of a held-to-maturity security is less than the cost, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security.
Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”).
Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis. TBA securities without intent to accept delivery (“TBA derivatives”) are accounted for as derivatives as discussed in the “Derivative Instruments” Note.
CRT Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors.
Non-Agency Mortgage-Backed Securities - The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, prime jumbo loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Agency mortgage-backed securities, non-Agency mortgage-backed securities and residential CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio.
Commercial Mortgage-Backed Securities (“Commercial Securities”) - The Company invests in Commercial Securities such as conduit, credit CMBS, single-asset single borrower and collateralized loan obligations.
The following table represents a rollforward of the activity for the Company’s securities for the six months ended June 30, 2024:
| Agency Securities | Residential Credit Securities | Commercial Securities | Total | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
Beginning balance January 1, 2024 | $ | 66,308,788 | $ | 3,082,333 | $ | 222,444 | $ | 69,613,565 | |||||||||||||||
| Purchases | 14,195,878 | 353,033 | — | 14,548,911 | |||||||||||||||||||
Sales | (12,543,493) | (731,027) | (107,464) | (13,381,984) | |||||||||||||||||||
| Principal paydowns | (2,781,021) | (264,073) | (4,438) | (3,049,532) | |||||||||||||||||||
| (Amortization) / accretion | (39,917) | 2,747 | 468 | (36,702) | |||||||||||||||||||
| Fair value adjustment | (749,330) | 98,283 | 1,542 | (649,505) | |||||||||||||||||||
Ending balance June 30, 2024 | $ | 64,390,905 | $ | 2,541,296 | $ | 112,552 | $ | 67,044,753 | |||||||||||||||
9
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following tables present the Company’s securities portfolio that were carried at their fair value at June 30, 2024 and December 31, 2023:
| June 30, 2024 | |||||||||||||||||||||||||||||||||||||||||
| Principal / Notional | Remaining Premium | Remaining Discount | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||||||||||||||
| Agency | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Fixed-rate pass-through | $ | 62,483,207 | $ | 1,273,211 | $ | (1,194,156) | $ | 62,562,262 | $ | 142,638 | $ | (2,230,420) | $ | 60,474,480 | |||||||||||||||||||||||||||
| Adjustable-rate pass-through | 173,655 | 14,982 | (49) | 188,588 | 2,118 | (12,945) | 177,761 | ||||||||||||||||||||||||||||||||||
| CMO | 90,987 | 1,539 | — | 92,526 | — | (15,607) | 76,919 | ||||||||||||||||||||||||||||||||||
| Interest-only | 2,281,909 | 408,515 | — | 408,515 | 8,991 | (143,950) | 273,556 | ||||||||||||||||||||||||||||||||||
Multifamily(1) | 20,155,207 | 433,555 | (9,197) | 3,425,145 | 17,494 | (81,456) | 3,361,183 | ||||||||||||||||||||||||||||||||||
| Reverse mortgages | 25,823 | 2,902 | — | 28,725 | — | (1,719) | 27,006 | ||||||||||||||||||||||||||||||||||
| Total agency securities | $ | 85,210,788 | $ | 2,134,704 | $ | (1,203,402) | $ | 66,705,761 | $ | 171,241 | $ | (2,486,097) | $ | 64,390,905 | |||||||||||||||||||||||||||
| Residential credit | |||||||||||||||||||||||||||||||||||||||||
| Credit risk transfer | $ | 780,293 | $ | 1,863 | $ | (3,843) | $ | 778,313 | $ | 60,272 | $ | (148) | $ | 838,437 | |||||||||||||||||||||||||||
| Alt-A | 165,585 | 37 | (1,889) | 163,733 | 2,934 | (9,739) | 156,928 | ||||||||||||||||||||||||||||||||||
Prime (2) | 1,372,222 | 14,026 | (10,409) | 30,527 | 2,844 | (559) | 32,812 | ||||||||||||||||||||||||||||||||||
| Subprime | 295,067 | 13 | (30,949) | 264,131 | 6,963 | (11,728) | 259,366 | ||||||||||||||||||||||||||||||||||
| NPL/RPL | 1,114,675 | 8,087 | (9,181) | 1,113,581 | 3,247 | (20,660) | 1,096,168 | ||||||||||||||||||||||||||||||||||
Prime jumbo (>=2010 vintage) (3) | 10,046,140 | 80,970 | (30,794) | 143,697 | 18,670 | (4,782) | 157,585 | ||||||||||||||||||||||||||||||||||
| Total residential credit securities | $ | 13,773,982 | $ | 104,996 | $ | (87,065) | $ | 2,493,982 | $ | 94,930 | $ | (47,616) | $ | 2,541,296 | |||||||||||||||||||||||||||
| Total residential securities | $ | 98,984,770 | $ | 2,239,700 | $ | (1,290,467) | $ | 69,199,743 | $ | 266,171 | $ | (2,533,713) | $ | 66,932,201 | |||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial securities | $ | 112,288 | $ | 116 | $ | (47) | $ | 112,357 | $ | 199 | $ | (4) | $ | 112,552 | |||||||||||||||||||||||||||
| Total securities | $ | 99,097,058 | $ | 2,239,816 | $ | (1,290,514) | $ | 69,312,100 | $ | 266,370 | $ | (2,533,717) | $ | 67,044,753 | |||||||||||||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Principal / Notional | Remaining Premium | Remaining Discount | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||||||||||||||
| Agency | (dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
| Fixed-rate pass-through | $ | 63,444,987 | $ | 1,448,886 | $ | (1,318,948) | $ | 63,574,925 | $ | 477,242 | $ | (1,853,226) | $ | 62,198,941 | |||||||||||||||||||||||||||
| Adjustable-rate pass-through | 188,996 | 15,834 | (51) | 204,779 | 1,663 | (14,953) | 191,489 | ||||||||||||||||||||||||||||||||||
| CMO | 94,448 | 1,612 | — | 96,060 | — | (13,088) | 82,972 | ||||||||||||||||||||||||||||||||||
| Interest-only | 2,010,697 | 416,955 | — | 416,955 | 4,729 | (157,679) | 264,005 | ||||||||||||||||||||||||||||||||||
Multifamily (1) | 17,130,045 | 400,781 | (9,752) | 3,552,217 | 52,055 | (59,744) | 3,544,528 | ||||||||||||||||||||||||||||||||||
| Reverse mortgages | 26,183 | 3,193 | — | 29,376 | — | (2,523) | 26,853 | ||||||||||||||||||||||||||||||||||
| Total agency investments | $ | 82,895,356 | $ | 2,287,261 | $ | (1,328,751) | $ | 67,874,312 | $ | 535,689 | $ | (2,101,213) | $ | 66,308,788 | |||||||||||||||||||||||||||
| Residential credit | |||||||||||||||||||||||||||||||||||||||||
| Credit risk transfer | $ | 924,729 | $ | 2,240 | $ | (4,358) | $ | 922,611 | $ | 51,984 | $ | (536) | $ | 974,059 | |||||||||||||||||||||||||||
| Alt-A | 164,384 | 9 | (3,922) | 160,471 | 2,135 | (12,371) | 150,235 | ||||||||||||||||||||||||||||||||||
Prime (2) | 1,076,497 | 8,590 | (21,163) | 207,077 | 1,704 | (28,134) | 180,647 | ||||||||||||||||||||||||||||||||||
| Subprime | 272,955 | — | (31,751) | 241,204 | 5,622 | (11,221) | 235,605 | ||||||||||||||||||||||||||||||||||
| NPL/RPL | 1,237,531 | 8,336 | (9,224) | 1,236,643 | 4,578 | (43,666) | 1,197,555 | ||||||||||||||||||||||||||||||||||
Prime jumbo (>=2010 vintage) (3) | 9,425,280 | 71,960 | (49,859) | 365,676 | 10,696 | (32,140) | 344,232 | ||||||||||||||||||||||||||||||||||
| Total residential credit securities | $ | 13,101,376 | $ | 91,135 | $ | (120,277) | $ | 3,133,682 | $ | 76,719 | $ | (128,068) | $ | 3,082,333 | |||||||||||||||||||||||||||
| Total residential securities | $ | 95,996,732 | $ | 2,378,396 | $ | (1,449,028) | $ | 71,007,994 | $ | 612,408 | $ | (2,229,281) | $ | 69,391,121 | |||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial securities | $ | 224,597 | $ | 15 | $ | (822) | $ | 223,790 | $ | 19 | $ | (1,365) | $ | 222,444 | |||||||||||||||||||||||||||
| Total securities | $ | 96,221,329 | $ | 2,378,411 | $ | (1,449,850) | $ | 71,231,784 | $ | 612,427 | $ | (2,230,646) | $ | 69,613,565 | |||||||||||||||||||||||||||
(1) Principal/Notional amount includes $17.2 billion and $14.0 billion of Agency Multifamily interest-only securities as of June 30, 2024 and December 31, 2023, respectively. (2) Principal/Notional amount includes $1.3 billion and $0.9 billion of Prime interest-only securities as of June 30, 2024 and December 31, 2023, respectively. (3) Principal/Notional amount includes $10.0 billion and $9.1 billion of Prime Jumbo interest-only securities as of June 30, 2024 and December 31, 2023, respectively. | |||||||||||||||||||||||||||||||||||||||||
10
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents the Company’s Agency mortgage-backed securities portfolio by issuing Agency at June 30, 2024 and December 31, 2023:
| June 30, 2024 | December 31, 2023 | ||||||||||
| Investment Type | (dollars in thousands) | ||||||||||
| Fannie Mae | $ | 59,746,320 | $ | 60,477,303 | |||||||
| Freddie Mac | 4,576,036 | 5,778,809 | |||||||||
| Ginnie Mae | 68,549 | 52,676 | |||||||||
| Total | $ | 64,390,905 | $ | 66,308,788 | |||||||
Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages.
The following table summarizes the Company’s Residential Securities at June 30, 2024 and December 31, 2023, according to their estimated weighted average life classifications:
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | ||||||||||||||||||||
| Estimated weighted average life | (dollars in thousands) | ||||||||||||||||||||||
| Less than one year | $ | 158,772 | $ | 160,077 | $ | 254,753 | $ | 257,170 | |||||||||||||||
| Greater than one year through five years | 1,758,528 | 1,783,897 | 5,159,969 | 5,213,575 | |||||||||||||||||||
| Greater than five years through ten years | 63,127,997 | 65,303,899 | 62,158,711 | 63,662,144 | |||||||||||||||||||
| Greater than ten years | 1,886,904 | 1,951,870 | 1,817,688 | 1,875,105 | |||||||||||||||||||
| Total | $ | 66,932,201 | $ | 69,199,743 | $ | 69,391,121 | $ | 71,007,994 | |||||||||||||||
The estimated weighted average lives of the Residential Securities at June 30, 2024 and December 31, 2023 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected.
The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at June 30, 2024 and December 31, 2023.
The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities have an actual or implied credit rating that is the same as that of the U.S. government. An impairment has not been recognized in earnings related to these investments because the decline in value is not related to credit quality, the Company currently has not made a decision to sell the securities nor is it more likely than not that the securities will be required to be sold before recovery.
During the three and six months ended June 30, 2024, the Company disposed of $5.2 billion and $13.3 billion amortized cost basis of Residential Securities, respectively. During the three and six months ended June 30, 2023, the Company disposed of $8.4 billion and $13.6 billion amortized cost basis of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three and six months ended June 30, 2024 and 2023, which is included in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss).
11
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| Gross Realized Gains | Gross Realized Losses | Net Realized Gains (Losses) | |||||||||||||||
| For the three months ended | (dollars in thousands) | ||||||||||||||||
| June 30, 2024 | $ | 7,302 | $ | (382,254) | $ | (374,952) | |||||||||||
| June 30, 2023 | $ | 9,496 | $ | (608,732) | $ | (599,236) | |||||||||||
For the six months ended | |||||||||||||||||
| June 30, 2024 | $ | 40,226 | $ | (853,425) | $ | (813,199) | |||||||||||
| June 30, 2023 | $ | 13,765 | $ | (1,134,849) | $ | (1,121,084) | |||||||||||
6. LOANS | ||
Excluding loans transferred or pledged to securitization vehicles, as of June 30, 2024 and December 31, 2023, the Company reported $2.5 billion and $2.4 billion, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $3.9 million and $1.2 million at June 30, 2024 and December 31, 2023, respectively.
The following table presents the activity of the Company’s loan investments, excluding loans transferred or pledged to securitization vehicles, for the six months ended June 30, 2024:
Residential
The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). The Company also consolidates securitization trusts in which it retained securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts.
The mortgage loans are secured by first liens on primarily one-to-four family residential properties. A subsidiary of the Company has engaged a third party to act as its custodian, agent and bailee for the purposes of receiving and holding certain documents, instruments and papers related to the residential mortgage loans it purchases. Pursuant to the Company’s custodial agreement, the custodian segregates and maintains continuous custody of all documents constituting the mortgage file with respect to each mortgage loan owned by the subsidiary in secure and fire resistant facilities and in a manner consistent with the standard of care employed by prudent mortgage loan document custodians. At or prior to the funding of any residential mortgage loan, the related seller, pursuant to the terms of our mortgage loan purchase agreement, must deliver to the custodian, the mortgage loan documents including the mortgage note, the mortgage and other related loan documents. In addition, a complete credit file for the related mortgage and borrower must be delivered to the subsidiary prior to the date of purchase.
The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles, at June 30, 2024 and December 31, 2023:
12
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
| June 30, 2024 | December 31, 2023 | |||||||
| (dollars in thousands) | ||||||||
| Fair value | $ | 20,495,040 | $ | 15,660,706 | ||||
| Unpaid principal balance | $ | 21,482,560 | $ | 16,611,204 | ||||
The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2024 and 2023 for these investments:
The following table provides the geographic concentrations based on the unpaid principal balances at June 30, 2024 and December 31, 2023 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:
| Geographic Concentrations of Residential Mortgage Loans | ||||||||||||||
| June 30, 2024 | December 31, 2023 | |||||||||||||
| Property location | % of Balance | Property location | % of Balance | |||||||||||
| California | 38.0% | California | 40.1% | |||||||||||
| Florida | 10.8% | Florida | 10.6% | |||||||||||
| New York | 10.6% | New York | 10.5% | |||||||||||
| Texas | 5.6% | Texas | 5.6% | |||||||||||
| All other (none individually greater than 5%) | 35.0% | All other (none individually greater than 5%) | 33.2% | |||||||||||
| Total | 100.0% | 100.0% | ||||||||||||
The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at June 30, 2024 and December 31, 2023:
| June 30, 2024 | December 31, 2023 | ||||||||||||||||||||||
Portfolio Range | Portfolio Weighted Average | Portfolio Range | Portfolio Weighted Average | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Unpaid principal balance | $1 - $4,396 | $476 | $1 - $4,396 | $477 | |||||||||||||||||||
| Interest rate | 2.00% - 14.13% | 6.12% | 2.00% - 13.25% | 5.63% | |||||||||||||||||||
| Maturity | 7/1/2029 - 7/1/2064 | 8/14/2052 | 7/1/2029 - 12/1/2063 | 4/22/2052 | |||||||||||||||||||
| FICO score at loan origination | 549 - 850 | 757 | 549 - 850 | 758 | |||||||||||||||||||
| Loan-to-value ratio at loan origination | 3% - 100% | 69% | 3% - 100% | 68% | |||||||||||||||||||
At June 30, 2024 and December 31, 2023, approximately 15% and 11%, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.
7. MORTGAGE SERVICING RIGHTS | ||
13
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents activity related to MSR for the three and six months ended June 30, 2024 and 2023:
| Mortgage Servicing Rights | Three Months Ended | Six Months Ended | |||||||||||||||||||||
| June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | ||||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Fair value, beginning of period | $ | 2,651,279 | $ | 1,790,980 | $ | 2,122,196 | $ | 1,748,209 | |||||||||||||||
Purchases (1) | 120,896 | 177,521 | 636,627 | 214,151 | |||||||||||||||||||
| Sales | (1,068) | — | (1,068) | — | |||||||||||||||||||
| Change in fair value due to: | |||||||||||||||||||||||
Changes in valuation inputs or assumptions (2) | 59,902 | 80,323 | 106,038 | 110,530 | |||||||||||||||||||
| Other changes, including realization of expected cash flows | (45,395) | (29,928) | (78,179) | (53,994) | |||||||||||||||||||
| Fair value, end of period | $ | 2,785,614 | $ | 2,018,896 | $ | 2,785,614 | $ | 2,018,896 | |||||||||||||||
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. (2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates. | |||||||||||||||||||||||
8. VARIABLE INTEREST ENTITIES | ||
Residential Securitizations
The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. The Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. Refer to the “Securities” Note for further information on Residential Securities.
OBX Trusts
Residential securitizations are issued by entities generally referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions that provide non-recourse financing to the Company and are collateralized by residential mortgage loans purchased by the Company. Residential securitizations closed as of June 30, 2024 are included in the following table:
| Securitization | Date of Closing | Face Value at Closing | ||||||
| (dollars in thousands) | ||||||||
| OBX 2024-NQM1 | January 2024 | $ | 413,581 | |||||
| OBX 2024-NQM2 | January 2024 | $ | 495,980 | |||||
| OBX 2024-HYB1 | February 2024 | $ | 412,084 | |||||
| OBX 2024-NQM3 | February 2024 | $ | 439,904 | |||||
| OBX 2024-NQM4 | March 2024 | $ | 592,448 | |||||
| OBX 2024-HYB2 | March 2024 | $ | 397,787 | |||||
| OBX 2024-NQM5 | April 2024 | $ | 574,553 | |||||
| OBX 2024-NQM6 | April 2024 | $ | 441,421 | |||||
| OBX 2024-NQM7 | May 2024 | $ | 551,759 | |||||
| OBX 2024-NQM8 | May 2024 | $ | 723,086 | |||||
| OBX 2024-NQM9 | June 2024 | $ | 532,126 | |||||
As of June 30, 2024 and December 31, 2023, a total carrying value of $15.8 billion and $11.6 billion, respectively, of bonds were held by third parties and the Company retained $1.9 billion and $1.4 billion, respectively, of MBS, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. Effective August 1, 2022, upon initial consolidation of new securitization entities, the Company elected to apply the measurement alternative for consolidated collateralized financing entities in order to simplify the
14
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
accounting and valuation processes. The liabilities of these securitization entities are deemed to be more observable and are used to measure the fair value of the assets. The Company incurred $5.3 million and $2.7 million of costs during the three months ended June 30, 2024 and 2023, respectively, and $9.1 million and $4.0 million of costs during the six months ended June 30, 2024 and 2023, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $16.9 billion and $12.6 billion at June 30, 2024 and December 31, 2023, respectively. During the three months ended June 30, 2024 and 2023, the Company recorded $4.8 million and $130.5 million, respectively, and $90.8 million and ($81.4) million during the six months ended June 30, 2024 and 2023, respectively, of unrealized gains (losses) on debt held by third parties issued by OBX Trusts, which is reported in Net gains (losses) on investments and other in the Company's Consolidated Statements of Comprehensive Income (Loss).
Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation.
Residential Credit Fund
The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of June 30, 2024 and December 31, 2023, the Company had outstanding participating interests in residential mortgage loans of $1.1 billion and $1.1 billion, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings.
9. DERIVATIVE INSTRUMENTS | ||
In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, U.S. Treasury futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts.
Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on derivatives. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes.
The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged or received under such transactions. At June 30, 2024 and December 31,
15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
2023, ($3.3) billion and ($2.4) billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value. Initial margin is reported in Cash and cash equivalents in the Consolidated Statements of Financial Condition.
Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may have outstanding interest rate swap agreements where the floating leg is linked to the SOFR, the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value.
Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values.
TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities.
Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing.
Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis.
Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps.
The following table summarizes fair value information about the Company’s derivative assets and liabilities at June 30, 2024 and December 31, 2023:
| Derivatives Instruments | June 30, 2024 | December 31, 2023 | ||||||||||||
| Assets | (dollars in thousands) | |||||||||||||
| Interest rate swaps | $ | 16,824 | $ | 26,344 | ||||||||||
| Interest rate swaptions | 148,040 | 105,883 | ||||||||||||
| TBA derivatives | 14,641 | 20,689 | ||||||||||||
| Futures contracts | 1,723 | — | ||||||||||||
| Purchase commitments | 6,640 | 9,641 | ||||||||||||
| Total derivative assets | $ | 187,868 | $ | 162,557 | ||||||||||
| Liabilities | ||||||||||||||
| Interest rate swaps | $ | 15,314 | $ | 83,051 | ||||||||||
| TBA derivatives | 2,193 | 39,070 | ||||||||||||
| Futures contracts | 81,730 | 179,835 | ||||||||||||
| Purchase commitments | 1,592 | 339 | ||||||||||||
| Total derivative liabilities | $ | 100,829 | $ | 302,295 | ||||||||||
16
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following tables summarize certain characteristics of the Company’s interest rate swaps at June 30, 2024 and December 31, 2023:
| June 30, 2024 | |||||||||||||||||||||||
| Maturity | Current Notional (1) | Weighted Average Pay Rate | Weighted Average Receive Rate | Weighted Average Years to Maturity (2) | |||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
0 - 3 years | $ | 19,861,229 | 3.35 | % | 5.33 | % | 1.29 | ||||||||||||||||
3 - 6 years | 14,533,021 | 3.36 | % | 5.30 | % | 4.82 | |||||||||||||||||
6 - 10 years | 20,501,637 | 2.80 | % | 5.28 | % | 8.06 | |||||||||||||||||
Greater than 10 years | 1,559,384 | 3.47 | % | 5.18 | % | 23.75 | |||||||||||||||||
| Total / Weighted average | $ | 56,455,271 | 3.13 | % | 5.30 | % | 5.28 | ||||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Maturity | Current Notional (1) | Weighted Average Pay Rate | Weighted Average Receive Rate | Weighted Average Years to Maturity (2) | |||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
0 - 3 years | $ | 21,397,358 | 3.17 | % | 5.26 | % | 1.23 | ||||||||||||||||
3 - 6 years | 12,461,799 | 3.09 | % | 5.37 | % | 4.75 | |||||||||||||||||
6 - 10 years | 22,949,150 | 2.85 | % | 5.34 | % | 8.02 | |||||||||||||||||
Greater than 10 years | 2,021,247 | 3.53 | % | 5.27 | % | 22.71 | |||||||||||||||||
| Total / Weighted average | $ | 58,829,554 | 3.04 | % | 5.31 | % | 5.36 | ||||||||||||||||
(1) As of June 30, 2024, 6% and 94% of the Company’s interest rate swaps were linked to the Federal funds rate and the SOFR, respectively. As of December 31, 2023, 6% and 94% of the Company’s interest rate swaps were linked to the Federal funds rate and the SOFR, respectively. (2) The weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed. | |||||||||||||||||||||||
The following tables summarize certain characteristics of the Company’s swaptions at June 30, 2024 and December 31, 2023:
| June 30, 2024 | ||||||||||||||||||||||||||||||||
| Current Underlying Notional | Weighted Average Underlying Fixed Rate | Weighted Average Underlying Floating Rate | Weighted Average Underlying Years to Maturity | Weighted Average Months to Expiration | ||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Long pay | $1,250,000 | 2.21% | SOFR | 7.19 | 2.15 | |||||||||||||||||||||||||||
| December 31, 2023 | ||||||||||||||||||||||||||||||||
| Current Underlying Notional | Weighted Average Underlying Fixed Rate | Weighted Average Underlying Floating Rate | Weighted Average Underlying Years to Maturity | Weighted Average Months to Expiration | ||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Long pay | $1,250,000 | 2.21% | SOFR | 7.69 | 8.21 | |||||||||||||||||||||||||||
| Long receive | $500,000 | 1.65% | SOFR | 10.30 | 3.53 | |||||||||||||||||||||||||||
17
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following tables summarize certain characteristics of the Company’s TBA derivatives at June 30, 2024 and December 31, 2023:
| June 30, 2024 | |||||||||||||||||||||||
| Purchase and sale contracts for derivative TBAs | Notional | Implied Cost Basis | Implied Market Value | Net Carrying Value | |||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Purchase contracts | $ | 2,395,000 | $ | 2,313,203 | $ | 2,324,113 | $ | 10,910 | |||||||||||||||
| Sale contracts | (733,000) | (673,262) | (671,724) | 1,538 | |||||||||||||||||||
| Net TBA derivatives | $ | 1,662,000 | $ | 1,639,941 | $ | 1,652,389 | $ | 12,448 | |||||||||||||||
| December 31, 2023 | |||||||||||||||||||||||
| Purchase and sale contracts for derivative TBAs | Notional | Implied Cost Basis | Implied Market Value | Net Carrying Value | |||||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||||
| Purchase contracts | $ | 988,000 | $ | 920,626 | $ | 915,790 | $ | (4,836) | |||||||||||||||
| Sale contracts | (1,491,000) | (1,475,847) | (1,489,392) | (13,545) | |||||||||||||||||||
| Net TBA derivatives | $ | (503,000) | $ | (555,221) | $ | (573,602) | $ | (18,381) | |||||||||||||||
The following tables summarize certain characteristics of the Company’s futures derivatives at June 30, 2024 and December 31, 2023:
| June 30, 2024 | |||||||||||||||||
| Notional - Long Positions | Notional - Short Positions | Weighted Average Years to Maturity | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| 2-year swap equivalent SOFR contracts | $ | 2,790,000 | $ | — | 1.97 | ||||||||||||
U.S. Treasury futures - 2 year | — | (1,306,400) | 1.97 | ||||||||||||||
U.S. Treasury futures - 10 year and greater | — | (6,025,500) | 10.72 | ||||||||||||||
| Total | $ | 2,790,000 | $ | (7,331,900) | 7.18 | ||||||||||||
| December 31, 2023 | |||||||||||||||||
| Notional - Long Positions | Notional - Short Positions | Weighted Average Years to Maturity | |||||||||||||||
| (dollars in thousands) | |||||||||||||||||
U.S. Treasury futures - 2 year | $ | — | $ | (5,001,400) | 1.97 | ||||||||||||
U.S. Treasury futures - 10 year and greater | — | (1,733,600) | 14.26 | ||||||||||||||
| Total | $ | — | $ | (6,735,000) | 5.13 | ||||||||||||
The Company presents derivative contracts on a gross basis in the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty.
18
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset in the Company’s Consolidated Statements of Financial Condition at June 30, 2024 and December 31, 2023, respectively.
| June 30, 2024 | |||||||||||||||||||||||
| Amounts Eligible for Offset | |||||||||||||||||||||||
| Gross Amounts | Financial Instruments | Cash Collateral | Net Amounts | ||||||||||||||||||||
| Assets | (dollars in thousands) | ||||||||||||||||||||||
| Interest rate swaps, at fair value | $ | 16,824 | $ | (9,263) | $ | — | $ | 7,561 | |||||||||||||||
| Interest rate swaptions, at fair value | 148,040 | (62,215) | |||||||||||||||||||||