Annaly Capital Management, Inc. (NYSE: NLY) ("Annaly" or the "Company") today announced its financial results for the quarter ended June 30, 2020.

Financial Highlights

  • GAAP net income of $0.58 per average common share for the quarter, up from ($2.57) in the prior quarter
  • Core earnings (excluding PAA) of $0.27 per average common share for the quarter, up 28.6% from the prior quarter
  • GAAP return on average equity of 25.8% and core return on average equity (excluding PAA) of 12.8% for the quarter
  • Book value per common share of $8.39, up 11.9% from the prior quarter
  • Economic leverage of 6.4x, down from 6.8x in the prior quarter
  • Declared quarterly common stock cash dividend of $0.22 per share
  • Economic return of 14.8% for the second quarter

Business Highlights

Well-Positioned Investment Portfolio

  • Capital allocation remains predominantly to Agency, with $96.3 billion Agency portfolio representing 93% of total assets and 75% of dedicated equity capital given favorable outlook for the sector(1)
  • Credit businesses are well-positioned with relatively low leverage and high-quality portfolios
    • Annaly Residential Credit Group continues to add and expand residential whole loan partnerships, which support the growth of its conservatively positioned whole loan portfolio comprised of borrowers with comparatively high FICOs and strong LTVs
    • Annaly Commercial Real Estate Group navigated the market environment through continued focus on asset management, prudent new investment screening and capital preservation
    • Annaly Middle Market Lending Group's growth within the current portfolio and long-standing private equity relationships have enabled continued highly selective deal execution amidst the pandemic

Focus on Shareholder Value

  • Completed management internalization enhancing corporate governance and more strongly aligning management with shareholders
  • Repurchased approximately $175 million in common stock since the beginning of the second quarter(2)

Driving Funding Efficiency and Diversity

  • $7.9 billion of unencumbered assets, including cash and unencumbered Agency MBS of $5.3 billion
  • Average GAAP cost of interest bearing liabilities declined 90 basis points to 0.96% and average economic cost of interest bearing liabilities declined 62 basis points to 1.29%
  • Annaly Residential Credit Group priced a $489.4 million residential whole loan securitization in July 2020, bringing aggregate issuance to approximately $4.5 billion since the beginning of 2018(3)
  • Annaly Residential Credit Group added $1.125 billion of capacity across two new credit facilities since the beginning of the quarter(4)

Maintaining Organizational Resilience and Continuity

  • Continued to utilize extensive business continuity planning in response to COVID-19, including ongoing successful remote-working capabilities as well as modifications to headquarters for eventual return to office
  • Appointed Steve Campbell as Chief Operating Officer; Glenn Votek to retire as Senior Advisor and remain a Director

“We are pleased with the rebound in our results this quarter as we posted our strongest quarterly book value growth since the start of the Great Recession and our core earnings per share outperformed our recently declared dividend,” remarked David Finkelstein, Annaly’s Chief Executive Officer and Chief Investment Officer. “Our portfolio performed well due to the relative attractiveness of the MBS sector as well as accommodative monetary policy and fiscal support for the economy. While we are optimistic about our outlook and ability to generate attractive returns, Annaly will remain nimble and conservatively positioned as we prepare for a variety of potential economic scenarios.

“In line with our capital allocation philosophy, we've repurchased $175 million in common stock since the beginning of the second quarter given our discount to book value and strong performance fundamentals. Additionally, we closed our management internalization as planned, which will better align us with our shareholders, drive long-term cost savings and provide greater strategic flexibility. This is the latest in a series of corporate responsibility and governance enhancements, which continues to be an area of significant focus for the Company.”

(1)

Assets represent Annaly’s investments that are on balance sheet, net of securitized debt of consolidated VIEs, as well as investments that are off-balance sheet in which the Company has economic exposure. Assets include TBA purchase contracts (market value) of $19.1 billion and CMBX derivatives (market value) of $460.3 million and are shown net of securitized debt of consolidated VIEs of $6.5 billion.

(2)

Share repurchases are under Annaly’s current authorized share repurchase program that expires in December 2020. Amount excludes fees and commissions and includes $31.3 million of repurchases that settled subsequent to quarter end.

(3)

Includes three residential whole loan securitizations totaling $1.1 billion in 2018, five residential whole loan securitizations totaling $2.1 billion in 2019 and three residential whole loan securitizations totaling approximately $1.3 billion in 2020 (with the July 2020 securitization expected to close on July 30, 2020).

(4)

Represents an $875 million credit facility closed during the second quarter and a $250 million credit facility closed subsequent to quarter end.

Financial Performance

The following table summarizes certain key performance indicators as of and for the quarters ended June 30, 2020, March 31, 2020 and June 30, 2019:

 

June 30, 2020

 

March 31, 2020

 

June 30, 2019

Book value per common share

$

8.39

 

 

$

7.50

 

 

$

9.33

 

Economic leverage at period-end (1)

6.4:1

 

6.8:1

 

7.6:1

GAAP net income (loss) per average common share (2)

$

0.58

 

 

$

(2.57

)

 

$

(1.24

)

Annualized GAAP return (loss) on average equity

25.84

%

 

(102.17

%)

 

(45.13

%)

Net interest margin (3)

1.89

%

 

0.18

%

 

0.58

%

Average yield on interest earning assets (4)

2.77

%

 

1.91

%

 

3.03

%

Average GAAP cost of interest bearing liabilities (5)

0.96

%

 

1.86

%

 

2.71

%

Net interest spread

1.81

%

 

0.05

%

 

0.32

%

Non-GAAP metrics *

 

 

 

 

 

Core earnings (excluding PAA) per average common share (2)

$

0.27

 

 

$

0.21

 

 

$

0.25

 

Annualized core return on average equity (excluding PAA)

12.82

%

 

9.27

%

 

9.94

%

Net interest margin (excluding PAA) (3)

1.88

%

 

1.18

%

 

1.28

%

Average yield on interest earning assets (excluding PAA) (4)

3.01

%

 

2.91

%

 

3.48

%

Average economic cost of interest bearing liabilities (5)

1.29

%

 

1.91

%

 

2.41

%

Net interest spread (excluding PAA)

1.72

%

 

1.00

%

 

1.07

%

*

 

Represents a non-GAAP financial measure. Please refer to the "Non-GAAP Financial Measures" section for additional information.

(1)

  

Computed as the sum of recourse debt, cost basis of to-be-announced ("TBA") and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Securitized debt, certain credit facilities (included within other secured financing) and mortgages payable are non-recourse to the Company and are excluded from this measure.

(2)

  

Net of dividends on preferred stock. The quarter ended June 30, 2019 includes cumulative and undeclared dividends of $0.3 million on the Company's Series I Preferred Stock as of June 30, 2019.

(3)

  

Net interest margin represents interest income less interest expense divided by average Interest Earning Assets. Net interest margin (excluding PAA) represents the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average Interest Earning Assets plus average outstanding TBA contract and CMBX balances. PAA represents the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities.

(4)

  

Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

(5)

  

Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

Other Information

This news release and our public documents to which we refer contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and 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, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions; changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; our ability to grow our commercial real estate business; our ability to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt; risks related to investments in mortgage servicing rights; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940 and the risk that the expected benefits, including long-term cost savings, of the internalization are not achieved. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in 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, except as required by law.

Annaly is a leading diversified capital manager that invests in and finances residential and commercial assets. Annaly’s principal business objective is to generate net income for distribution to its stockholders and to optimize its returns through prudent management of its diversified investment strategies. Annaly is internally managed and has elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes. Additional information on the company can be found at www.annaly.com.

Annaly routinely posts important information for investors on the Company’s website, www.annaly.com. Annaly intends to use this webpage as a means of disclosing material, non-public information, for complying with the Company’s disclosure obligations under Regulation FD and to post and update investor presentations and similar materials on a regular basis. Annaly encourages investors, analysts, the media and others interested in Annaly to monitor the Company’s website, in addition to following Annaly’s press releases, SEC filings, public conference calls, presentations, webcasts and other information it posts from time to time on its website. To sign-up for email-notifications, please visit the "Email Alerts" section of our website, www.annaly.com, under the "Investors" section and enter the required information to enable notifications. The information contained on, or that may be accessed through, the Company’s webpage is not incorporated by reference into, and is not a part of, this document.

The Company prepares a supplemental investor presentation and a financial summary for the benefit of its shareholders. Both the Second Quarter 2020 Investor Presentation and the Second Quarter 2020 Financial Summary can be found at the Company’s website (www.annaly.com) in the Investors section under Investor Presentations.

Conference Call

The Company will hold the second quarter 2020 earnings conference call on July 30, 2020 at 9:00 a.m. Eastern Time. Participants are encouraged to pre-register for the conference call to receive a unique PIN to gain immediate access to the call and bypass the live operator. Pre-registration may be completed by accessing the Pre-Registration link found on the homepage or "Investors" section of the Company's website at www.annaly.com, or by using the following link: http://dpregister.com/10146025.

Pre-registration may be completed at any time, including up to and after the call start time.

For participants who would like to join the call but have not pre-registered, access is available by dialing 844-735-3317 within the U.S., or 412-317-5703 internationally, and requesting the "Annaly Earnings Call."

There will also be an audio webcast of the call on www.annaly.com. A replay of the call will be available for one week following the conference call. The replay number is 877-344-7529 for domestic calls and 412-317-0088 for international calls and the conference passcode is 10146025. If you would like to be added to the e-mail distribution list, please visit www.annaly.com, click on Investors, then select Email Alerts and complete the email notification form.

Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(dollars in thousands, except per share data)

 

June 30,
2020

 

March 31,
2020

 

December 31,
2019 (1)

 

September 30,
2019

 

June 30,
2019

 

(unaudited)

 

(unaudited)

 

 

 

(unaudited)

 

(unaudited)

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

1,393,910

 

 

$

2,823,521

 

 

$

1,850,729

 

 

$

1,793,921

 

 

$

1,982,311

 

Securities

77,805,743

 

 

79,357,596

 

 

114,833,580

 

 

116,094,061

 

 

119,926,869

 

Loans, net

3,972,671

 

 

4,068,189

 

 

4,462,350

 

 

3,946,614

 

 

3,546,468

 

Mortgage servicing rights

227,400

 

 

280,558

 

 

378,078

 

 

386,051

 

 

425,328

 

Assets transferred or pledged to securitization vehicles

7,690,451

 

 

7,671,662

 

 

7,002,460

 

 

4,688,144

 

 

4,211,582

 

Real estate, net

746,067

 

 

751,738

 

 

725,638

 

 

725,508

 

 

733,196

 

Derivative assets

165,642

 

 

238,776

 

 

113,556

 

 

168,755

 

 

75,142

 

Receivable for unsettled trades

747,082

 

 

1,006,853

 

 

4,792

 

 

193,229

 

 

5,322

 

Principal and interest receivable

300,089

 

 

335,170

 

 

449,906

 

 

483,744

 

 

440,940

 

Goodwill and intangible assets, net

137,680

 

 

98,293

 

 

92,772

 

 

94,904

 

 

96,591

 

Other assets

271,918

 

 

284,918

 

 

381,220

 

 

381,189

 

 

357,027

 

Total assets

$

93,458,653

 

 

$

96,917,274

 

 

$

130,295,081

 

 

$

128,956,120

 

 

$

131,800,776

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Repurchase agreements

$

67,163,598

 

 

$

72,580,183

 

 

$

101,740,728

 

 

$

102,682,104

 

 

$

105,181,241

 

Other secured financing

1,538,996

 

 

1,805,428

 

 

4,455,700

 

 

4,466,030

 

 

4,127,989

 

Debt issued by securitization vehicles

6,458,130

 

 

6,364,949

 

 

5,622,801

 

 

3,856,082

 

 

3,470,168

 

Mortgages payable

508,565

 

 

484,762

 

 

485,005

 

 

485,657

 

 

498,772

 

Derivative liabilities

1,257,038

 

 

1,331,188

 

 

803,866

 

 

972,415

 

 

1,043,197

 

Payable for unsettled trades

2,122,735

 

 

923,552

 

 

463,387

 

 

245,626

 

 

620,784

 

Interest payable

180,943

 

 

261,304

 

 

476,335

 

 

565,797

 

 

691,327

 

Dividends payable

309,686

 

 

357,606

 

 

357,527

 

 

359,491

 

 

364,066

 

Other liabilities

121,359

 

 

100,772

 

 

93,388

 

 

99,214

 

 

95,825

 

Total liabilities

79,661,050

 

 

84,209,744

 

 

114,498,737

 

 

113,732,416

 

 

116,093,369

 

Stockholders’ equity

 

 

 

 

 

 

 

 

 

Preferred stock, par value $0.01 per share (2)

1,982,026

 

 

1,982,026

 

 

1,982,026

 

 

1,982,026

 

 

2,110,346

 

Common stock, par value $0.01 per share (3)

14,077

 

 

14,304

 

 

14,301

 

 

14,380

 

 

14,562

 

Additional paid-in capital

19,827,216

 

 

19,968,372

 

 

19,966,923

 

 

20,034,970

 

 

20,195,419

 

Accumulated other comprehensive income (loss)

3,842,074

 

 

3,121,371

 

 

2,138,191

 

 

2,313,815

 

 

1,365,003

 

Accumulated deficit

(11,871,927

)

 

(12,382,648

)

 

(8,309,424

)

 

(9,125,895

)

 

(7,982,649

)

Total stockholders’ equity

13,793,466

 

 

12,703,425

 

 

15,792,017

 

 

15,219,296

 

 

15,702,681

 

Noncontrolling interests

4,137

 

 

4,105

 

 

4,327

 

 

4,408

 

 

4,726

 

Total equity

13,797,603

 

 

12,707,530

 

 

15,796,344

 

 

15,223,704

 

 

15,707,407

 

Total liabilities and equity

$

93,458,653

 

 

$

96,917,274

 

 

$

130,295,081

 

 

$

128,956,120

 

 

$

131,800,776

 

 

(1)

Derived from the audited consolidated financial statements at December 31, 2019.

(2)

7.625% Series C Cumulative Redeemable Preferred Stock - Includes 0 shares authorized, issued and outstanding at June 30, 2020, March 31, 2020, December 31, 2019 and September 30, 2019. Includes 7,000,000 shares authorized, issued and outstanding at June 30, 2019.

7.50% Series D Cumulative Redeemable Preferred Stock - Includes 18,400,000 shares authorized, issued and outstanding.

6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock - Includes 28,800,000 shares authorized, issued and outstanding.

6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock - Includes 19,550,000 shares authorized and 17,000,000 shares issued and outstanding.

6.75% Series I Preferred Stock - Includes 18,400,000 shares authorized and 17,700,000 issued and outstanding at June 30, 2020, March 31, 2020, December 31, 2019 and September 30, 2019. Includes 18,400,000 shares authorized and 16,000,000 issued and outstanding at June 30, 2019.

(3)

Includes 2,914,850,000 shares authorized at June 30, 2020, March 31, 2020, December 31, 2019 and September 30, 2019, and 2,907,850,000 shares authorized at June 30, 2019. Includes 1,407,662,483 shares issued and outstanding at June 30, 2020; 1,430,424,398 shares issued and outstanding at March 31, 2020; 1,430,106,199 shares issued and outstanding at December 31, 2019; 1,437,964,466 shares issued and outstanding at September 30, 2019; and 1,456,263,410 shares issued and outstanding at June 30, 2019.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share data)

(Unaudited)

 

For the quarters ended

 

June 30,
2020

 

March 31,
2020

 

December 31,
2019

 

September 30,
2019

 

June 30,
2019

Net interest income

 

 

 

 

 

 

 

 

 

Interest income

$

584,812

 

 

$

555,026

 

 

$

1,074,214

 

 

$

919,299

 

 

$

927,598

 

Interest expense

186,032

 

 

503,473

 

 

620,058

 

 

766,905

 

 

750,217

 

Net interest income

398,780

 

 

51,553

 

 

454,156

 

 

152,394

 

 

177,381

 

Realized and unrealized gains (losses)

 

 

 

 

 

 

 

 

 

Net interest component of interest rate swaps

(64,561

)

 

(13,980

)

 

45,221

 

 

88,466

 

 

83,653

 

Realized gains (losses) on termination or maturity of interest rate swaps

(1,521,732

)

 

(397,561

)

 

(4,615

)

 

(682,602

)

 

(167,491

)

Unrealized gains (losses) on interest rate swaps

1,494,628

 

 

(2,827,723

)

 

782,608

 

 

(326,309

)

 

(1,276,019

)

Subtotal

(91,665

)

 

(3,239,264

)

 

823,214

 

 

(920,445

)

 

(1,359,857

)

Net gains (losses) on disposal of investments and other

246,679

 

 

206,583

 

 

17,783

 

 

66,522

 

 

(38,333

)

Net gains (losses) on other derivatives

170,916

 

 

206,426

 

 

(42,312

)

 

(16,888

)

 

(506,411

)

Net unrealized gains (losses) on instruments measured at fair value through earnings

254,772

 

 

(730,160

)

 

(5,636

)

 

(1,091

)

 

(4,881

)

Loan loss provision

(68,751

)

 

(99,326

)

 

(7,362

)

 

(3,504

)

 

—

 

Subtotal

603,616

 

 

(416,477

)

 

(37,527

)

 

45,039

 

 

(549,625

)

Total realized and unrealized gains (losses)

511,951

 

 

(3,655,741

)

 

785,687

 

 

(875,406

)

 

(1,909,482

)

Other income (loss)

15,224

 

 

14,926

 

 

42,656

 

 

35,074

 

 

28,181

 

General and administrative expenses

 

 

 

 

 

 

 

 

 

Compensation and management fee

37,036

 

 

40,825

 

 

40,403

 

 

41,161

 

 

44,231

 

Other general and administrative expenses

30,630

 

 

36,804

 

 

32,948

 

 

24,977

 

 

34,177

 

Total general and administrative expenses

67,666

 

 

77,629

 

 

73,351

 

 

66,138

 

 

78,408

 

Income (loss) before income taxes

858,289

 

 

(3,666,891

)

 

1,209,148

 

 

(754,076

)

 

(1,782,328

)

Income taxes

2,055

 

 

(26,702

)

 

(594

)

 

(6,907

)

 

(5,915

)

Net income (loss)

856,234

 

 

(3,640,189

)

 

1,209,742

 

 

(747,169

)

 

(1,776,413

)

Net income (loss) attributable to noncontrolling interests

32

 

 

66

 

 

68

 

 

(110

)

 

(83

)

Net income (loss) attributable to Annaly

856,202

 

 

(3,640,255

)

 

1,209,674

 

 

(747,059

)

 

(1,776,330

)

Dividends on preferred stock (1)

35,509

 

 

35,509

 

 

35,509

 

 

36,151

 

 

32,422

 

Net income (loss) available (related) to common stockholders

$

820,693

 

 

$

(3,675,764

)

 

$

1,174,165

 

 

$

(783,210

)

 

$

(1,808,752

)

Net income (loss) per share available (related) to common stockholders

 

 

 

 

 

 

 

 

Basic

$

0.58

 

 

$

(2.57

)

 

$

0.82

 

 

$

(0.54

)

 

$

(1.24

)

Diluted

$

0.58

 

 

$

(2.57

)

 

$

0.82

 

 

$

(0.54

)

 

$

(1.24

)

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

Basic

1,423,909,112

 

 

1,430,994,319

 

 

1,431,079,108

 

 

1,453,359,211

 

 

1,456,038,736

 

Diluted

1,423,909,112

 

 

1,430,994,319

 

 

1,431,079,108

 

 

1,453,359,211

 

 

1,456,038,736

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

Net income (loss)

$

856,234

 

 

$

(3,640,189

)

 

$

1,209,742

 

 

$

(747,169

)

 

$

(1,776,413

)

Unrealized gains (losses) on available-for-sale securities

986,146

 

 

1,374,796

 

 

(153,192

)

 

1,034,873

 

 

1,654,783

 

Reclassification adjustment for net (gains) losses included in net income (loss)

(265,443

)

 

(391,616

)

 

(22,432

)

 

(86,061

)

 

29,596

 

Other comprehensive income (loss)

720,703

 

 

983,180

 

 

(175,624

)

 

948,812

 

 

1,684,379

 

Comprehensive income (loss)

1,576,937

 

 

(2,657,009

)

 

1,034,118

 

 

201,643

 

 

(92,034

)

Comprehensive income (loss) attributable to noncontrolling interests

32

 

 

66

 

 

68

 

 

(110

)

 

(83

)

Comprehensive income (loss) attributable to Annaly

1,576,905

 

 

(2,657,075

)

 

1,034,050

 

 

201,753

 

 

(91,951

)

Dividends on preferred stock (1)

35,509

 

 

35,509

 

 

35,509

 

 

36,151

 

 

32,422

 

Comprehensive income (loss) attributable to common stockholders

$

1,541,396

 

 

$

(2,692,584

)

 

$

998,541

 

 

$

165,602

 

 

$

(124,373

)

 

(1)

The quarter ended September 30, 2019 excludes, and the quarter ended June 30, 2019 includes, cumulative and undeclared dividends of $0.3 million on the Company's Series I Preferred Stock as of June 30, 2019.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except per share data)

 

For the six months ended

 

June 30, 2020

 

June 30, 2019

Net interest income

 

 

 

Interest income

$

1,139,838

 

 

$

1,793,784

 

Interest expense

689,505

 

 

1,397,912

 

Net interest income

450,333

 

 

395,872

 

 

 

 

 

Realized and unrealized gains (losses)

 

 

 

Net interest component of interest rate swaps

(78,541

)

 

217,688

 

Realized gains (losses) on termination or maturity of interest rate swaps

(1,919,293

)

 

(755,747

)

Unrealized gains (losses) on interest rate swaps

(1,333,095

)

 

(1,666,575

)

Subtotal

(3,330,929

)

 

(2,204,634

)

Net gains (losses) on disposal of investments

453,262

 

 

(132,249

)

Net gains (losses) on other derivatives

377,342

 

 

(621,570

)

Net unrealized gains (losses) on instruments measured at fair value through earnings

(475,388

)

 

42,748

 

Loan loss provision

(168,077

)

 

(5,703

)

Subtotal

187,139

 

 

(716,774

)

Total realized and unrealized gains (losses)

(3,143,790

)

 

(2,921,408

)

Other income (loss)

30,150

 

 

58,683

 

General and administrative expenses

 

 

 

Compensation and management fee

77,861

 

 

89,064

 

Other general and administrative expenses

67,434

 

 

73,081

 

Total general and administrative expenses

145,295

 

 

162,145

 

Income (loss) before income taxes

(2,808,602

)

 

(2,628,998

)

Income taxes

(24,647

)

 

(3,334

)

Net income (loss)

(2,783,955

)

 

(2,625,664

)

Net income (loss) attributable to noncontrolling interests

98

 

 

(184

)

Net income (loss) attributable to Annaly

(2,784,053

)

 

(2,625,480

)

Dividends on preferred stock (1)

71,018

 

 

64,916

 

Net income (loss) available (related) to common stockholders

$

(2,855,071

)

 

$

(2,690,396

)

Net income (loss) per share available (related) to common stockholders

 

 

Basic

$

(2.00

)

 

$

(1.88

)

Diluted

$

(2.00

)

 

$

(1.88

)

Weighted average number of common shares outstanding

 

 

Basic

1,427,451,716

 

 

1,427,485,102

 

Diluted

1,427,451,716

 

 

1,427,485,102

 

Other comprehensive income (loss)

 

 

Net income (loss)

$

(2,783,955

)

 

$

(2,625,664

)

Unrealized gains (losses) on available-for-sale securities

2,360,942

 

 

3,254,181

 

Reclassification adjustment for net (gains) losses included in net income (loss)

(657,059

)

 

90,687

 

Other comprehensive income (loss)

1,703,883

 

 

3,344,868

 

Comprehensive income (loss)

(1,080,072

)

 

719,204

 

Comprehensive income (loss) attributable to noncontrolling interests

98

 

 

(184

)

Comprehensive income (loss) attributable to Annaly

(1,080,170

)

 

719,388

 

Dividends on preferred stock (1)

71,018

 

 

64,916

 

Comprehensive income (loss) attributable to common stockholders

$

(1,151,188

)

 

$

654,472

 

 

 

 

 

(1)

The six months ended June 30, 2019 includes cumulative and undeclared dividends of $0.3 million on the Company's Series I Preferred Stock as of June 30, 2019.

Key Financial Data

The following table presents key metrics of the Company’s portfolio, liabilities and hedging positions, and performance as of and for the quarters ended June 30, 2020, March 31, 2020, and June 30, 2019:

 

June 30,
2020

 

March 31,
2020

 

June 30,
2019

Portfolio related metrics

 

 

 

 

 

Fixed-rate Residential Securities as a percentage of total Residential Securities

98

%

 

99

%

 

96

%

Adjustable-rate and floating-rate Residential Securities as a percentage of total Residential Securities

2

%

 

1

%

 

4

%

Weighted average experienced CPR for the period

19.5

%

 

13.6

%

 

11.2

%

Weighted average projected long-term CPR at period-end

18.0

%

 

17.7

%

 

14.5

%

Liabilities and hedging metrics

 

 

 

 

 

Weighted average days to maturity on repurchase agreements outstanding at period-end

74

 

48

 

70

Hedge ratio (1)

40

%

 

19

%

 

74

%

Weighted average pay rate on interest rate swaps at period-end (2)

1.01

%

 

1.63

%

 

2.12

%

Weighted average receive rate on interest rate swaps at period-end (2)

0.75

%

 

1.16

%

 

2.46

%

Weighted average net rate on interest rate swaps at period-end (2)

0.26

%

 

0.47

%

 

(0.34

%)

Leverage at period-end (3)

5.5:1

 

6.4:1

 

7.2:1

Economic leverage at period-end (4)

6.4:1

 

6.8:1

 

7.6:1

Capital ratio at period-end

13.0

%

 

12.3

%

 

11.4

%

Performance related metrics

 

 

 

 

 

Book value per common share

$

8.39

 

 

$

7.50

 

 

$

9.33

 

GAAP net income (loss) per average common share (5)

$

0.58

 

 

$

(2.57

)

 

$

(1.24

)

Annualized GAAP return (loss) on average equity

25.84

%

 

(102.17

%)

 

(45.13

%)

Net interest margin (6)

1.89

%

 

0.18

%

 

0.58

%

Average yield on interest earning assets (7)

2.77

%

 

1.91

%

 

3.03

%

Average GAAP cost of interest bearing liabilities (8)

0.96

%

 

1.86

%

 

2.71

%

Net interest spread

1.81

%

 

0.05

%

 

0.32

%

Dividend declared per common share

$

0.22

 

 

$

0.25

 

 

$

0.25

 

Annualized dividend yield (9)

13.41

%

 

19.72

%

 

10.95

%

Non-GAAP metrics *

 

 

 

 

 

Core earnings (excluding PAA) per average common share (5)

$

0.27

 

 

$

0.21

 

 

$

0.25

 

Annualized core return on average equity (excluding PAA)

12.82

%

 

9.27

%

 

9.94

%

Net interest margin (excluding PAA) (6)

1.88

%

 

1.18

%

 

1.28

%

Average yield on interest earning assets (excluding PAA) (7)

3.01

%

 

2.91

%

 

3.48

%

Average economic cost of interest bearing liabilities (8)

1.29

%

 

1.91

%

 

2.41

%

Net interest spread (excluding PAA)

1.72

%

 

1.00

%

 

1.07

%

*

Represents a non-GAAP financial measure. Please refer to the "Non-GAAP Financial Measures" section for additional information.

(1)

Measures total notional balances of interest rate swaps, interest rate swaptions (excluding receiver swaptions) and futures relative to repurchase agreements, other secured financing and cost basis of TBA derivatives outstanding; excludes MSRs and the effects of term financing, both of which serve to reduce interest rate risk. Additionally, the hedge ratio does not take into consideration differences in duration between assets and liabilities.

(2)

Excludes forward starting swaps.

(3)

Debt consists of repurchase agreements, other secured financing, securitized debt and mortgages payable. Certain credit facilities (included within other secured financing), securitized debt and mortgages payable are non-recourse to the Company.

(4)

Computed as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

(5)

Net of dividends on preferred stock. The quarter ended June 30, 2019 includes cumulative and undeclared dividends of $0.3 million on the Company's Series I Preferred Stock as of June 30, 2019.

(6)

Net interest margin represents interest income less interest expense divided by average interest earning assets. Net interest margin (excluding PAA) represents the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances.

(7)

Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

(8)

Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

(9)

Based on the closing price of the Company’s common stock of $6.56, $5.07 and $9.13 at June 30, 2020, March 31, 2020 and June 30, 2019, respectively.

The following table contains additional information on our residential and commercial investments as of the dates presented:

 

For the quarters ended

 

June 30,
2020

 

March 31,
2020

 

June 30,
2019

Agency mortgage-backed securities

$

76,761,800

 

 

$

78,456,846

 

 

$

118,202,040

 

Credit risk transfer securities

362,901

 

 

222,871

 

 

491,969

 

Non-agency mortgage-backed securities

619,840

 

 

585,954

 

 

1,097,752

 

Commercial mortgage-backed securities

61,202

 

 

91,925

 

 

135,108

 

Total securities

$

77,805,743

 

 

$

79,357,596

 

 

$

119,926,869

 

Residential mortgage loans

$

1,168,521

 

 

$

1,268,083

 

 

$

1,061,124

 

Commercial real estate debt and preferred equity

618,886

 

 

649,843

 

 

623,705

 

Corporate debt

2,185,264

 

 

2,150,263

 

 

1,792,837

 

Loans held for sale

—

 

 

—

 

 

68,802

 

Total loans, net

$

3,972,671

 

 

$

4,068,189

 

 

$

3,546,468

 

Mortgage servicing rights

$

227,400

 

 

$

280,558

 

 

$

425,328

 

Agency mortgage-backed securities transferred or pledged to securitization vehicles

$

1,832,708

 

 

$

1,803,608

 

 

$

—

 

Residential mortgage loans transferred or pledged to securitization vehicles

2,832,502

 

 

3,027,188

 

 

2,106,981

 

Commercial real estate debt investments transferred or pledged to securitization vehicles

2,150,623

 

 

1,927,575

 

 

2,104,601

 

Commercial real estate debt and preferred equity transferred or pledged to securitization vehicles

874,618

 

 

913,291

 

 

—

 

Assets transferred or pledged to securitization vehicles

$

7,690,451

 

 

$

7,671,662

 

 

$

4,211,582

 

Real estate, net

$

746,067

 

 

$

751,738

 

 

$

733,196

 

Total residential and commercial investments

$

90,442,332

 

 

$

92,129,743

 

 

$

128,843,443

 

 

Non-GAAP Financial Measures

To supplement its consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles ("GAAP"), the Company provides the following non-GAAP measures:

• core earnings (excluding PAA);

• economic net interest income (excluding PAA);

• core earnings (excluding PAA) attributable to common stockholders;

• average yield on interest earning assets (excluding PAA);

• core earnings (excluding PAA) per average common share;

• average economic cost of interest bearing liabilities;

• annualized core return on average equity (excluding PAA);

• net interest margin (excluding PAA); and

• interest income (excluding PAA);

• net interest spread (excluding PAA).

• economic interest expense;

 

These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. While intended to offer a fuller understanding of the Company’s results and operations, non-GAAP financial measures also have limitations. For example, the Company may calculate its non-GAAP metrics, such as core earnings (excluding PAA), or the PAA, differently than its peers making comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which the Company will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.

These non-GAAP measures provide additional detail to enhance investor understanding of the Company’s period-over-period operating performance and business trends, as well as for assessing the Company’s performance versus that of industry peers. Additional information pertaining to the Company’s use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.

Core earnings (excluding PAA), core earnings (excluding PAA) attributable to common stockholders, core earnings (excluding PAA) per average common share and annualized core return on average equity (excluding PAA)

The Company's principal business objective is to generate net income for distribution to its stockholders and to preserve capital through prudent selection of investments and continuous management of its portfolio. The Company generates net income by earning a net interest spread on its investment portfolio, which is a function of interest income from its investment portfolio less financing, hedging and operating costs. Core earnings (excluding PAA), which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-core income allocated to equity method investments and other non-core components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-core income (loss) items) and excludes (g) the premium amortization adjustment ("PAA") representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities is used by the Company's management and, the Company believes, used by analysts and investors to measure its progress in achieving its principal business objective.

The Company seeks to fulfill this objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of the Company's capital allocation policy and risk governance framework.

The Company believes these non-GAAP measures provide management and investors with additional details regarding the Company’s underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss) and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to provide additional transparency into the operating performance of the Company’s portfolio. Annualized core return on average equity (excluding PAA), which is calculated by dividing core earnings (excluding PAA) over average stockholders’ equity, provides investors with additional detail on the core earnings (excluding PAA) generated by the Company’s invested equity capital.

The following table presents a reconciliation of GAAP financial results to non-GAAP core earnings (excluding PAA) for the periods presented:

 

For the quarters ended

 

June 30,
2020

 

March 31,
2020

 

June 30,
2019

 

(dollars in thousands, except per share data)

GAAP net income (loss)

$

856,234

 

 

$

(3,640,189

)

 

$

(1,776,413

)

Net income (loss) attributable to noncontrolling interests

32

 

 

66

 

 

(83

)

Net income (loss) attributable to Annaly

856,202

 

 

(3,640,255

)

 

(1,776,330

)

Adjustments to exclude reported realized and unrealized (gains) losses

 

 

 

 

 

Realized (gains) losses on termination or maturity of interest rate swaps

1,521,732

 

 

397,561

 

 

167,491

 

Unrealized (gains) losses on interest rate swaps

(1,494,628

)

 

2,827,723

 

 

1,276,019

 

Net (gains) losses on disposal of investments and other

(246,679

)

 

(206,583

)

 

38,333

 

Net (gains) losses on other derivatives

(170,916

)

 

(206,426

)

 

506,411

 

Net unrealized (gains) losses on instruments measured at fair value through earnings

(254,772

)

 

730,160

 

 

4,881

 

Loan loss provision (1)

72,544

 

 

99,993

 

 

—

 

Other adjustments

Depreciation expense related to commercial real estate and amortization of intangibles

8,714

 

 

7,934

 

 

10,147

 

Non-core (income) loss allocated to equity method investments (2)

4,218

 

 

19,398

 

 

11,327

 

Transaction expenses and non-recurring items (3)

1,075

 

 

7,245

 

 

3,046

 

Income tax effect of non-core income (loss) items

3,353

 

 

(23,862

)

 

(3,507

)

TBA dollar roll income and CMBX coupon income (4)

97,524

 

 

44,904

 

 

33,229

 

MSR amortization (5)

(25,529

)

 

(18,296

)

 

(19,657

)

Plus:

 

 

 

 

 

Premium amortization adjustment cost (benefit)

51,742

 

 

290,722

 

 

139,763

 

Core earnings (excluding PAA) *

424,580

 

 

330,218

 

 

391,153

 

Dividends on preferred stock

35,509

 

 

35,509

 

 

32,422

 

Core earnings (excluding PAA) attributable to common stockholders *

$

389,071

 

 

$

294,709

 

 

$

358,731

 

GAAP net income (loss) per average common share

$

0.58

 

 

$

(2.57

)

 

$

(1.24

)

Core earnings (excluding PAA) per average common share *

$

0.27

 

 

$

0.21

 

 

$

0.25

 

Annualized GAAP return (loss) on average equity

25.84

%

 

(102.17

%)

 

(45.13

%)

Annualized core return on average equity (excluding PAA) *

12.82

%

 

9.27

%

 

9.94

%

*

 

Represents a non-GAAP financial measure.

(1)

  

Includes $3.8 million and $0.7 million of loss provision on the Company’s unfunded loan commitments for the quarters ended June 30, 2020 and March 31, 2020, respectively, which is reported in Other income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss).

(2)

  

The Company excludes non-core (income) loss allocated to equity method investments, which represents the unrealized (gains) losses allocated to equity interests in a portfolio of MSR, which is a component of Other income (loss).

(3)

  

The quarters ended June 30, 2020 and March 31, 2020 include costs incurred in connection with the Internalization and costs incurred in connection with the CEO transition. The quarter ended March 31, 2020 also includes costs incurred in connection with securitizations of Agency mortgage-backed securities and residential whole loans. The quarter ended June 30, 2019 includes costs incurred in connection with securitizations of residential whole loans.

(4)

  

TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income totaled $1.6 million, $1.2 million and $0.8 million for the quarters ended June 30, 2020, March 31, 2020 and June 30, 2019, respectively.

(5)

  

MSR amortization represents the portion of changes in fair value that is attributable to the realization of estimated cash flows on the Company’s MSR portfolio and is reported as a component of Net unrealized gains (losses) on instruments measured at fair value.

From time to time, the Company enters into TBA forward contracts as an alternate means of investing in and financing Agency mortgage-backed securities. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency mortgage-backed security with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the "drop". The drop is a reflection of the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency mortgage-backed security less an implied financing cost.

TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. The Company records TBA derivatives at fair value on its Consolidated Statements of Financial Condition and recognizes periodic changes in fair value in Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed security (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss).

The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities ("CMBS") of a particular rating and vintage. The CMBX index allows investors to take a long exposure (referred to as selling protection) or short exposure (referred to as buying protection) on the respective basket of CMBS securities and is structured as a "pay-as-you-go" contract whereby the protection buyer pays to the protection seller a standardized running coupon on the contracted notional amount. The Company reports income (expense) on CMBX positions in Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss). The coupon payments received or paid on CMBX positions are equivalent to interest income (expense) and therefore included in core earnings (excluding PAA).

Premium Amortization Expense

In accordance with GAAP, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities, excluding 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. 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.

The Company’s GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. Certain of the Company’s non-GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term CPR.

The following table illustrates the impact of the PAA on premium amortization expense for the Company’s Residential Securities portfolio and residential securities transferred or pledged to securitization vehicles, for the quarters ended June 30, 2020, March 31, 2020, and June 30, 2019:

 

 

For the quarters ended

 

 

June 30,
2020

 

March 31,
2020

 

June 30,
2019

 

 

(dollars in thousands)

Premium amortization expense (accretion)

 

$

270,688

 

 

$

616,937

 

 

$

318,587

 

Less: PAA cost (benefit)

 

51,742

 

 

290,722

 

 

139,763

 

Premium amortization expense (excluding PAA)

  

$

218,946

 

 

$

326,215

 

 

$

178,824

 

 

Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)

Interest income (excluding PAA) represents interest income excluding the effect of the PAA, and serves as the basis for deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below. The Company believes this measure provides management and investors with additional detail to enhance their understanding of the Company’s operating results and trends by excluding the component of premium amortization expense representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to the Company’s Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.

Economic interest expense includes GAAP interest expense and the net interest component of interest rate swaps. The Company uses interest rate swaps to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. Accordingly, adding the net interest component of interest rate swaps to interest expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of the Company's financing strategy. The Company may use market agreed coupon (“MAC”) interest rate swaps in which the Company may receive or make a payment at the time of entering into such interest rate swap to compensate for the off-market nature of such interest rate swap. In accordance with GAAP, upfront payments associated with MAC interest rate swaps are not reflected in the net interest component of interest rate swaps in the Company's Consolidated Statements of Comprehensive Income (Loss). The Company did not enter into any MAC interest rate swaps during the quarter ended June 30, 2020.

Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.

 

 

For the quarters ended

 

 

June 30,
2020

 

March 31,
2020

 

June 30,
2019

Interest income (excluding PAA) reconciliation

  

(dollars in thousands)

GAAP interest income

 

$

584,812

 

 

$

555,026

 

 

$

927,598

 

Premium amortization adjustment

 

51,742

 

 

290,722

 

 

139,763

 

Interest income (excluding PAA) *

  

$

636,554

 

 

$

845,748

 

 

$

1,067,361

 

Economic interest expense reconciliation

  

 

 

 

 

 

GAAP interest expense

 

$

186,032

 

 

$

503,473

 

 

$

750,217

 

Add:

  

 

 

 

 

 

Net interest component of interest rate swaps

 

64,561

 

 

13,980

 

 

(83,653

)

Economic interest expense *

  

$

250,593

 

 

$

517,453

 

 

$

666,564

 

Economic net interest income (excluding PAA) reconciliation

 

 

 

 

Interest income (excluding PAA) *

 

$

636,554

 

 

$

845,748

 

 

$

1,067,361

 

Less:

  

 

 

 

 

 

Economic interest expense *

 

250,593

 

 

517,453

 

 

666,564

 

Economic net interest income (excluding PAA) *

  

$

385,961

 

 

$

328,295

 

 

$

400,797

 

 

* Represents a non-GAAP financial measure.

Average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA), net interest margin (excluding PAA) and average economic cost of interest bearing liabilities

Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense divided by average interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances, provide management with additional measures of the Company’s profitability that management relies upon in monitoring the performance of the business.

Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates the Company’s performance.

 

 

For the quarters ended

 

 

June 30,
2020

 

March 31,
2020

 

June 30,
2019

Economic metrics (excluding PAA)

  

(dollars in thousands)

Average interest earning assets

 

$

84,471,839

 

 

$

116,063,895

 

 

$

122,601,881

 

Interest income (excluding PAA) *

 

$

636,554

 

 

$

845,748

 

 

$

1,067,361

 

Average yield on interest earning assets (excluding PAA) *

 

3.01

%

 

2.91

%

 

3.48

%

Average interest bearing liabilities

 

$

76,712,894

 

 

$

107,029,466

 

 

$

109,628,007

 

Economic interest expense *

 

$

250,593

 

 

$

517,453

 

 

$

666,564

 

Average economic cost of interest bearing liabilities *

 

1.29

%

 

1.91

%

 

2.41

%

Economic net interest income (excluding PAA) *

 

$

385,961

 

 

$

328,295

 

 

$

400,797

 

Net interest spread (excluding PAA) *

 

1.72

%

 

1.00

%

 

1.07

%

Interest income (excluding PAA) *

 

$

636,554

 

 

$

845,748

 

 

$

1,067,361

 

TBA dollar roll income and CMBX coupon income

 

97,524

 

 

44,904

 

 

33,229

 

Interest expense

 

(186,032

)

 

(503,473

)

 

(750,217

)

Net interest component of interest rate swaps

 

(64,561

)

 

(13,980

)

 

83,653

 

Subtotal

  

$

483,485

 

 

$

373,199

 

 

$

434,026

 

Average interest earnings assets

 

$

84,471,839

 

 

$

116,063,895

 

 

$

122,601,881

 

Average TBA contract and CMBX balances

 

18,628,343

 

 

9,965,142

 

 

12,757,975

 

Subtotal

  

$

103,100,182

 

 

$

126,029,037

 

 

$

135,359,856

 

Net interest margin (excluding PAA) *

  

1.88

%

 

1.18

%

 

1.28

%

* Represents a non-GAAP financial measure.