UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:  MARCH 31, 2016

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER:  1-13447


ANNALY CAPITAL MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)

MARYLAND
22-3479661
(State or other jurisdiction of incorporation or organization)
 (IRS Employer Identification No.)

1211 AVENUE OF THE AMERICAS
  
NEW YORK, NEW YORK
10036 ……
(Address of principal executive offices)
(Zip Code) ……..

(212) 696-0100
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☑   No ☐


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑   No ☐
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☑

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

Class
Outstanding at April 30, 2016
Common Stock, $.01 par value
924,862,679

 

 


 
   
ANNALY CAPITAL MANAGEMENT, INC.
   
FORM 10-Q
   
TABLE OF CONTENTS
       
       
PART I  -  FINANCIAL INFORMATION  
       
  Item 1.  Financial Statements
Page
  Consolidated Statements of Financial Condition at March 31, 2016 (Unaudited) and December 31, 2015
1
  Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the quarters ended March 31, 2016 and 2015
2
  Consolidated Statements of Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2016 and 2015
3
  Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2016 and 2015
4
  Notes to Consolidated Financial Statements (Unaudited)  
   
6
   
6
   
6
   
16
   
18
   
23
   
24
   
27
   
28
   
32
   
32
   
33
   
34
   
34
   
34
   
35
   
35
   
36
   
37
    37
   
38
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  
  Special Note Regarding Forward-Looking Statements
39
  Overview
41
  Pending Acquistion of Hatteras 41
  Business Environment
42
  Results of Operations
43
  Financial Condition
51
  Capital Management
55
  Risk Management
57
  Critical Accounting Policies and Estimates
66
  Glossary of Terms
68
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk
76
       
  Item 4. Controls and Procedures
76
       
PART II  -  OTHER INFORMATION  
       
  Item 1. Legal Proceedings
77
       
  Item 1A. Risk Factors
77
       
  Item 2. Unregisterd Sales of Equity Securities and Use of Proceeds
78
       
  Item 6. Exhibits
79
       
  SIGNATURES
81
 
 
 
PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
  
(dollars in thousands, except per share data)
  
             
   
March 31,
    
December 31,
  
   
2016
    
2015 (1)
  
   
(Unaudited)
        
ASSETS
            
             
Cash and cash equivalents (including cash pledged as collateral of $2,223,009 and $1,584,686, respectively) (2)
  
$
2,416,136
    
$
1,769,258
  
Investments, at fair value:
                
Agency mortgage-backed securities (including pledged assets of $60,742,440 and $60,678,548, respectively)
    
65,439,824
      
65,718,224
  
Agency debentures (including pledged assets of $0 and $0, respectively)
    
157,035
      
152,038
  
Credit risk transfer securities (including pledged assets of $150,479 and $184,160, respectively)
    
501,167
      
456,510
  
Non-Agency mortgage-backed securities (including pledged assets of $1,057,282 and $744,783, respectively)
    
1,157,507
      
906,722
  
Commercial real estate debt investments (including pledged assets of $4,401,725 and $2,911,828, respectively) (3)
    
4,401,725
      
2,911,828
  
Commercial real estate debt and preferred equity, held for investment (including pledged assets of $523,787 and
$578,820, respectively) (4)
    
1,177,468
      
1,348,817
  
Loans held for sale
    
278,600
      
278,600
  
Investments in commercial real estate
    
527,786
      
535,946
  
Corporate debt
    
639,481
      
488,508
  
Interest rate swaps, at fair value
    
93,312
      
19,642
  
Other derivatives, at fair value
    
77,449
      
22,066
  
Receivable for investments sold
    
2,220
      
121,625
  
Accrued interest and dividends receivable
    
232,180
      
231,336
  
Other assets
    
234,407
      
119,422
  
Goodwill
    
71,815
      
71,815
  
Intangible assets, net
    
35,853
      
38,536
  
Total assets
  
$
77,443,965
    
$
75,190,893
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                 
Liabilities:
                
Repurchase agreements
  
$
54,448,141
    
$
56,230,860
  
Other secured financing
    
3,588,326
      
1,845,048
  
Securitized debt of consolidated VIEs (5)
    
3,802,682
      
2,540,711
  
Participation sold
    
13,182
      
13,286
  
Mortgages payable
    
334,765
      
334,707
  
Interest rate swaps, at fair value
    
2,782,961
      
1,677,571
  
Other derivatives, at fair value
    
69,171
      
49,963
  
Dividends payable
    
277,456
      
280,779
  
Payable for investments purchased
    
250,612
      
107,115
  
Accrued interest payable
    
163,983
      
151,843
  
Accounts payable and other liabilities
    
54,679
      
53,088
  
Total liabilities
    
65,785,958
      
63,284,971
  
                 
Stockholders’ Equity:
                
7.875% Series A Cumulative Redeemable Preferred Stock:
7,412,500 authorized, issued and outstanding
    
177,088
      
177,088
  
7.625% Series C Cumulative Redeemable Preferred Stock:
12,650,000 authorized, 12,000,000 issued and outstanding
    
290,514
      
290,514
  
7.50% Series D Cumulative Redeemable Preferred Stock:
18,400,000 authorized, issued and outstanding
    
445,457
      
445,457
  
Common stock, par value $0.01 per share, 1,956,937,500 authorized,
924,853,133 and 935,929,561 issued and outstanding, respectively
    
9,249
      
9,359
  
Additional paid-in capital
    
14,573,760
      
14,675,768
  
Accumulated other comprehensive income (loss)
    
640,366
      
(377,596
)
Accumulated deficit
    
(4,487,982
)
    
(3,324,616
)
Total stockholders’ equity
    
11,648,452
      
11,895,974
  
Noncontrolling interest
    
9,555
      
9,948
  
Total equity
    
11,658,007
      
11,905,922
  
Total liabilities and equity
  
$
77,443,965
    
$
75,190,893
  

(1) Derived from the audited consolidated financial statements at December 31, 2015.
(2) Includes cash of consolidated VIEs of $50.7 million and $48.5 million at March 31, 2016 and December 31, 2015, respectively.
(3) Includes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $4.0 billion and $2.6 billion at March 31, 2016 and December 31, 2015, respectively. 
(4) Includes senior securitized commercial mortgage loans of a consolidated VIE with a carrying value of $211.9 million and $262.7 million carried at amortized cost, net of an allowance for losses of $0, at March 31, 2016 and December 31, 2015, respectively. 
(5) Includes securitized debt of consolidated VIEs carried at fair value of $3.7 billion and $2.4 billion at March 31, 2016 and December 31, 2015, respectively. 

See notes to consolidated financial statements.
 
1

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1.  Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
  
(dollars in thousands, except per share data)
  
(Unaudited)
  
             
   
For the Quarters Ended
  
   
March 31,
    
March 31,
  
   
2016
    
2015
  
Net interest income:
            
Interest income
  
$
388,143
    
$
519,114
  
Interest expense
    
147,447
      
129,420
  
Net interest income
    
240,696
      
389,694
  
                 
Realized and unrealized gains (losses):
                
Realized gains (losses) on interest rate swaps(1)
    
(147,475
)
    
(158,239
)
Realized gains (losses) on termination of interest rate swaps
    
-
      
(226,462
)
Unrealized gains (losses) on interest rate swaps
    
(1,031,720
)
    
(466,202
)
Subtotal
    
(1,179,195
)
    
(850,903
)
Net gains (losses) on disposal of investments
    
(1,675
)
    
62,356
  
Net gains (losses) on trading assets
    
125,189
      
(6,906
)
Net unrealized gains (losses) on financial instruments measured at fair value through earnings
    
128
      
(33,546
)
Subtotal
    
123,642
      
21,904
  
Total realized and unrealized gains (losses)
    
(1,055,553
)
    
(828,999
)
                 
Other income (loss):
                
Investment advisory income
    
-
      
10,464
  
Dividend income from affiliate
    
-
      
4,318
  
Other income (loss)
    
(6,115
)
    
(1,024
)
Total other income (loss)
    
(6,115
)
    
13,758
  
                 
General and administrative expenses:
                
Compensation and management fee
    
36,997
      
38,629
  
Other general and administrative expenses
    
10,948
      
12,309
  
Total general and administrative expenses
    
47,945
      
50,938
  
                 
Income (loss) before income taxes
    
(868,917
)
    
(476,485
)
Income taxes
    
(837
)
    
14
  
Net income (loss)
    
(868,080
)
    
(476,499
)
Net income (loss) attributable to noncontrolling interest
    
(162
)
    
(90
)
Net income (loss) attributable to Annaly
    
(867,918
)
    
(476,409
)
Dividends on preferred stock
    
17,992
      
17,992
  
Net income (loss) available (related) to common stockholders
  
$
(885,910
)
  
$
(494,401
)
                 
Net income (loss) per share available (related) to common stockholders:
                
Basic
  
$
(0.96
)
  
$
(0.52
)
Diluted
  
$
(0.96
)
  
$
(0.52
)
                 
Weighted average number of common shares outstanding:
                
Basic
    
926,813,588
      
947,669,831
  
Diluted
    
926,813,588
      
947,669,831
  
                 
Dividends Declared Per Share of Common Stock
  
$
0.30
    
$
0.30
  
                 
Net income (loss)
  
$
(868,080
)
  
$
(476,499
)
Other comprehensive income (loss):
                
Unrealized gains (losses) on available-for-sale securities
    
1,017,707
      
631,472
  
Reclassification adjustment for net (gains) losses included in net income (loss)
    
255
      
(62,356
)
Other comprehensive income (loss)
    
1,017,962
      
569,116
  
Comprehensive income (loss)
  
$
149,882
    
$
92,617
  
Comprehensive income (loss) attributable to noncontrolling interest
    
(162
)
    
(90
)
Comprehensive income (loss) attributable to Annaly
    
150,044
      
92,707
  
Dividends on preferred stock
    
17,992
      
17,992
  
Comprehensive income (loss) attibutable to common stockholders
  
$
132,052
    
$
74,715
  

 
(1) Consists of interest expense on interest rate swaps. 

2
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1.  Financial Statements
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
  
(dollars in thousands, except per share data)
  
(Unaudited)
  
                                                             
   
7.875% Series A Cumulative Redeemable Preferred Stock
    
7.625% Series C Cumulative Redeemable Preferred Stock
    
7.50% Series D Cumulative Redeemable Preferred Stock
    
Common stock par value
    
Additional paid-in capital
    
Accumulated other comprehensive income (loss)
    
Accumulated deficit
    
Total stockholders’ equity
    
Noncontrolling interest
    
Total
  
BALANCE, December 31, 2014
  
$
177,088
    
$
290,514
    
$
445,457
    
$
9,476
    
$
14,786,509
    
$
204,883
    
$
(2,585,436
)
  
$
13,328,491
    
$
5,290
    
$
13,333,781
  
Net income (loss) attributable to Annaly
    
-
      
-
      
-
      
-
      
-
      
-
      
(476,409
)
    
(476,409
)
    
-
      
(476,409
)
Net income (loss) attributable to noncontrolling interest
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(90
)
    
(90
)
Unrealized gains (losses) on available-for-sale securities
    
-
      
-
      
-
      
-
      
-
      
631,472
      
-
      
631,472
      
-
      
631,472
  
Reclassification adjustment for net (gains) losses included in net income (loss)
    
-
      
-
      
-
      
-
      
-
      
(62,356
)
    
-
      
(62,356
)
    
-
      
(62,356
)
Stock compensation expense
    
-
      
-
      
-
      
-
      
39
      
-
      
-
      
39
      
-
      
39
  
Net proceeds from direct purchase and dividend reinvestment
    
-
      
-
      
-
      
1
      
569
      
-
      
-
      
570
      
-
      
570
  
Equity contributions from (distributions to) noncontrolling interest
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(115
)
    
(115
)
Preferred Series A dividends, declared $0.492 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
(3,648
)
    
(3,648
)
    
-
      
(3,648
)
Preferred Series C dividends, declared $0.477 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
(5,719
)
    
(5,719
)
    
-
      
(5,719
)
Preferred Series D dividends, declared $0.469 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
(8,625
)
    
(8,625
)
    
-
      
(8,625
)
Common dividends declared, $0.30 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
(284,310
)
    
(284,310
)
    
-
      
(284,310
)
BALANCE, March 31, 2015
  
$
177,088
    
$
290,514
    
$
445,457
    
$
9,477
    
$
14,787,117
    
$
773,999
    
$
(3,364,147
)
  
$
13,119,505
    
$
5,085
    
$
13,124,590
  
BALANCE, December 31, 2015
  
$
177,088
    
$
290,514
    
$
445,457
    
$
9,359
    
$
14,675,768
    
$
(377,596
)
  
$
(3,324,616
)
  
$
11,895,974
    
$
9,948
    
$
11,905,922
  
Net income (loss) attributable to Annaly
    
-
      
-
      
-
      
-
      
-
      
-
      
(867,918
)
    
(867,918
)
    
-
      
(867,918
)
Net income (loss) attributable to noncontrolling interest
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(162
)
    
(162
)
Unrealized gains (losses) on available-for-sale securities
    
-
      
-
      
-
      
-
      
-
      
1,017,707
      
-
      
1,017,707
      
-
      
1,017,707
  
Reclassification adjustment for net (gains) losses included in net income (loss)
    
-
      
-
      
-
      
-
      
-
      
255
      
-
      
255
      
-
      
255
  
Stock compensation expense
    
-
      
-
      
-
      
-
      
69
      
-
      
-
      
69
      
-
      
69
  
Net proceeds from direct purchase and dividend reinvestment
    
-
      
-
      
-
      
1
      
523
      
-
      
-
      
524
      
-
      
524
  
Buyback of common stock
    
-
      
-
      
-
      
(111
)
    
(102,600
)
    
-
      
-
      
(102,711
)
    
-
      
(102,711
)
Equity contributions from (distributions to) noncontrolling interest
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(231
)
    
(231
)
Preferred Series A dividends, declared $0.492 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
(3,648
)
    
(3,648
)
    
-
      
(3,648
)
Preferred Series C dividends, declared $0.477 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
(5,719
)
    
(5,719
)
    
-
      
(5,719
)
Preferred Series D dividends, declared $0.469 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
(8,625
)
    
(8,625
)
    
-
      
(8,625
)
Common dividends declared, $0.30 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
(277,456
)
    
(277,456
)
    
-
      
(277,456
)
BALANCE, March 31, 2016
  
$
177,088
    
$
290,514
    
$
445,457
    
$
9,249
    
$
14,573,760
    
$
640,366
    
$
(4,487,982
)
  
$
11,648,452
    
$
9,555
    
$
11,658,007
  
 
 
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 Quarters Ended March 31,
  
   
2016
    
2015
  
             
Cash flows from operating activities:
            
Net income (loss)
  
$
(868,080
)
  
$
(476,499
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating  activities:
                
Amortization of Residential Investment Securities premiums and discounts, net
    
355,671
      
284,777
  
Amortization of commercial real estate investment premiums and discounts, net
    
(247
)
    
(160
)
Amortization of intangibles
    
2,429
      
1,195
  
Amortization of deferred financing costs
    
520
      
2,914
  
Amortization of net origination fees and costs, net
    
(1,737
)
    
(1,190
)
Amortization of contingent beneficial conversion feature and equity component of Convertible Senior Notes
    
-
      
11,758
  
Depreciation expense
    
4,570
      
2,823
  
Net (gains) losses on sales of Residential Investment Securities
    
1,675
      
(62,356
)
Stock compensation expense
    
69
      
39
  
Unrealized (gains) losses on interest rate swaps
    
1,031,720
      
466,202
  
Net unrealized (gains) losses on financial instruments measured at fair value through earnings
    
(128
)
    
33,546
  
Equity in net income from unconsolidated joint ventures
    
3,147
      
-
  
Net (gains) losses on trading assets
    
(125,189
)
    
6,906
  
Proceeds from repurchase agreements of RCap
    
466,225,000
      
386,000,000
  
Payments on repurchase agreements of RCap
    
(466,825,000
)
    
(391,250,000
)
Proceeds from reverse repurchase agreements
    
14,550,000
      
15,325,000
  
Payments on reverse repurchase agreements
    
(14,550,000
)
    
(15,325,000
)
Net payments on derivatives
    
91,358
      
(66,604
)
Due to / from brokers
    
(5
)
    
-
  
Other assets
    
(66,389
)
    
(2,627
)
Accrued interest and dividends receivable
    
(1,547
)
    
28,886
  
Receivable for investment advisory income
    
-
      
134
  
Accrued interest payable
    
12,140
      
(25,425
)
Accounts payable and other liabilities
    
26,530
      
3,709
  
Net cash provided by (used in) operating activities
    
(133,493
)
    
(5,041,972
)
                 
Cash flows from investing activities:
                
Payments on purchases of Residential Investment Securities
    
(4,644,731
)
    
(5,065,764
)
Proceeds from sales of Residential Investment Securities
    
3,596,677
      
13,973,224
  
Principal payments on Agency mortgage-backed securities
    
1,946,498
      
2,596,964
  
Payments on purchases of corporate debt
    
(181,079
)
    
(63,015
)
Principal payments on corporate debt
    
30,578
      
1,733
  
Purchases of commercial real estate debt investments
    
(76,862
)
    
(185,925
)
Sales of commercial real estate debt investments
    
-
      
41,016
  
Purchase of securitized loans at fair value
    
(1,489,268
)
    
(1,370,011
)
Origination of commercial real estate investments, net
    
(179,099
)
    
(61,502
)
Principal payments on commercial real estate debt investments
    
1,374
      
-
  
Principal payments on securitized loans at fair value
    
52,287
      
-
  
Principal payments on commercial real estate investments
    
351,930
      
82,408
  
Purchase of investments in real estate
    
(610
)
    
-
  
Distributions in excess of cumulative earnings from unconsolidated joint ventures
    
1,053
      
-
  
Purchase of equity securities
    
(88,062
)
    
(3,602
)
Proceeds from sales of equity securities
    
16,112
      
-
  
Net cash provided by (used in) investing activities
    
(663,202
)
    
9,945,526
  
 
 
Statements continued on following page.
 
4
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1.  Financial Statements
 
Cash flows from financing activities:
            
Proceeds from repurchase agreements
    
43,970,988
      
57,776,249
  
Principal payments on repurchase agreements
    
(45,153,707
)
    
(63,410,797
)
Payments on maturity of convertible senior notes
    
-
      
(107,541
)
Proceeds from other secured financing
    
2,146,084
      
90,000
  
Payments on other secured financing
    
(402,806
)
    
-
  
Proceeds from issuance of securitized debt
    
1,381,640
      
1,267,914
  
Principal repayments on securitized debt
    
(96,861
)
    
(37,680
)
Payment of deferred financing cost
    
(400
)
    
(641
)
Net proceeds from direct purchases and dividend reinvestments
    
524
      
569
  
Principal payments on participation sold
    
(77
)
    
(76
)
Principal payments on mortgages payable
    
(99
)
    
(69
)
Distributions to noncontrolling interests
    
(230
)
    
(115
)
Net payment on share repurchase
    
(102,712
)
    
-
  
Dividends paid
    
(298,771
)
    
(302,285
)
Net cash provided by (used in) financing activities
    
1,443,573
      
(4,724,472
)
                 
Net (decrease) increase in cash and cash equivalents
    
646,878
      
179,082
  
Cash and cash equivalents, beginning of period
    
1,769,258
      
1,920,326
  
Cash and cash equivalents, end of period
  
$
2,416,136
    
$
2,099,408
  
Supplemental disclosure of cash flow information:
                
Interest received
  
$
726,930
    
$
815,765
  
Dividends received
  
$
-
    
$
4,048
  
Investment advisory income received
  
$
-
    
$
10,992
  
Interest paid (excluding interest paid on interest rate swaps)
  
$
127,449
    
$
124,673
  
Net interest paid on interest rate swaps
  
$
152,458
    
$
176,395
  
Taxes paid
  
$
244
    
$
643
  
   
 
 
    
 
 
  
Noncash investing activities:
                
Receivable for investments sold
  
$
2,220
    
$
2,009,937
  
Payable for investments purchased
  
$
250,612
    
$
5,205
  
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment
  
$
1,017,962
    
$
569,116
  
Dividends declared, not yet paid
  
$
277,456
    
$
284,310
  
 
See notes to consolidated financial statements.
 
5
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1. DESCRIPTION OF BUSINESS

Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, Agency debentures, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, commercial real estate assets and corporate debt. The Company’s principal business objectives are to generate net income for distribution to its stockholders from its investments and capital preservation. The Company is externally managed by Annaly Management Company LLC (the “Manager”).
The Company’s business operations are primarily comprised of the following:

· Annaly, the parent company, which invests primarily in Agency mortgage-backed securities and related derivatives to hedge these investments. Its portfolio also includes residential credit investments such as CRT and non-Agency mortgage-backed securities.
· Annaly Commercial Real Estate Group, Inc. (“ACREG,” formerly known as CreXus Investment Corp.), a wholly-owned subsidiary that was acquired during the second quarter of 2013 which specializes in acquiring, financing and managing commercial real estate loans and other commercial real estate debt, commercial mortgage-backed securities and other commercial real estate-related assets.
· Annaly Middle Market Lending LLC (“MML,” formerly known as Charlesfort Capital Management LLC), a wholly-owned subsidiary which engages in corporate middle market lending transactions.
· RCap Securities, Inc. (“RCap”), a wholly-owned subsidiary, which operates as a broker-dealer and is a member of the Financial Industry Regulatory Authority (“FINRA”).
The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).

2.
BASIS OF PRESENTATION

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP").
The accompanying consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent annual report on Form 10-K. The consolidated financial information as of December 31, 2015 has been derived from audited consolidated financial statements not included herein.
In the opinion of management, all normal, recurring adjustments have been included for a fair presentation of this interim financial information. Interim period operating results may not be indicative of the operating results for a full year.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and consolidated variable interest entities. All intercompany balances and transactions have been eliminated in consolidation.  The Company reclassified previously presented financial information so that amounts previously presented conform to the current period presentation.

The Company has evaluated all of its investments in legal entities in order to determine if they are variable interests in Variable Interest Entities ("VIEs"). 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 variable interest is an investment or other interest that will absorb portions of a VIE's expected losses or receive portions of the entity’s expected residual returns. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that (i) has the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
 
6
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, the Company considers all facts and circumstances, including the Company’s role in establishing the VIE and the Company’s ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.

To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, the Company applies significant judgment and considers all of its economic interests, including debt and equity investments and other arrangements deemed to be variable interests, both explicit and implicit, in the VIE. This assessment requires that the Company applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.

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 regarding the VIE to change.

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. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. RCap is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. 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 approximately $2.2 billion and $1.6 billion at March 31, 2016 and December 31, 2015, respectively.

Fair Value Measurements – The Company reports various financial instruments at fair value.  A complete
discussion of the methodology utilized by the Company to estimate the fair value of certain financial instruments is included in these Notes to Consolidated Financial Statements.

Revenue Recognition – The revenue recognition policy by asset class is discussed below.

Agency Mortgage-Backed Securities, Agency Debentures, Non-Agency Mortgage-Backed Securities and CRT Securities – The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans and certificates 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”). These 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”). The Company also invests in Agency debentures issued by the Federal Home Loan Banks, Freddie Mac and Fannie Mae, as well as 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, Freddie Mac and/or third parties to private investors. The Company also invests in non-Agency mortgage-backed securities, such as those issued in non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Agency mortgage-backed securities, Agency debentures, non-Agency mortgage-backed securities and CRT securities are referred to herein as “Residential Investment Securities.” Although the Company generally intends to hold most of its Residential Investment Securities until maturity, it may, from time to time, sell any of its Residential Investment Securities as part of the overall management of its portfolio. Residential Investment Securities classified as available-for-sale are reported at fair value with unrealized gains and losses reported as a component of other comprehensive income (loss). The fair value of Residential Investment Securities classified as available-for-sale is estimated by management and is compared to independent sources for reasonableness. Residential Investment Securities transactions are recorded on trade date, including TBA securities that meet the regular-way securities scope exception from derivative accounting. The Company previously changed its accounting policy for determining the realized gains and losses on sales of Residential Investment Securities from the average cost method to
 
7
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
the specific identification method. The Company determined that the specific identification method was preferable because it more accurately matches gains or losses with costs and is the methodology predominantly used by its industry peers, among other considerations. The impact of the change was immaterial to the consolidated financial statements and prior periods.
The Company elected the fair value option for interest-only mortgage-backed securities, non-Agency mortgage-backed securities and certain CRT securities. Interest-only securities and inverse interest-only securities are collectively referred to as “interest-only securities.” These interest-only mortgage-backed securities represent the Company’s right to receive a specified proportion of the contractual interest flows of specific mortgage-backed securities. Interest-only mortgage-backed securities, non-Agency mortgage-backed securities and certain CRT securities are measured at fair value with changes in fair value recorded as Net unrealized gains (losses) on financial instruments measured at fair value through earnings in the Company’s Consolidated Statements of Comprehensive Income (Loss).  The interest-only securities are included in Agency mortgage-backed securities at fair value on the accompanying Consolidated Statements of Financial Condition.

Interest income from coupon payments is accrued based on the outstanding principal amounts of the Residential Investment Securities and their contractual terms. In addition, the Company recognizes income under the retrospective method on a substantial portion of its Residential Investment Securities classified as available-for-sale. Premiums and discounts associated with the purchase of Residential Investment Securities are amortized or accreted into income over the remaining projected lives of the securities. Using a third-party supplied 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 investment 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 amoritization recognized in any given period.
Equity Securities – The Company may invest in equity securities that are classified as available-for-sale or trading.  Equity securities classified as available-for-sale are reported at fair value, based on market quotes, with unrealized gains and losses reported as a component of other comprehensive income (loss). Equity securities classified as trading are reported at fair value, based on market quotes, with unrealized gains and losses reported
in the Consolidated Statements of Comprehensive Income (Loss) as Net gains (losses) on trading assets.  Dividends are recorded in earnings based on the declaration date.

Derivative Instruments – The Company may use a variety of derivative instruments to economically hedge some of its exposure to market risks, including interest rate and prepayment risk. These instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA contracts without intent to accept delivery (“TBA derivatives”), options on TBA contracts (“MBS options”) and U.S. Treasury and Eurodollar futures contracts.  The Company may also invest in other types of mortgage derivatives such as interest-only securities and synthetic total return swaps, such as the Markit IOS Synthetic Total Return Swap Index.  Derivatives are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. 

Some derivative agreements contain provisions that allow for netting or setting off by counterparty; however, the Company elected to present related assets and liabilities on a gross basis in the Consolidated Statements of Financial Condition.

Interest rate swap agreements - Interest rate swaps are the primary instrument used to mitigate interest rate risk.  In particular, 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.  Swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”).  Uncleared swaps are fair valued using internal pricing models and compared to the counterparty market values.  Centrally cleared swaps are fair valued using internal pricing models and compared to the DCO’s market values.

Interest rate swaptions - Interest rate swaptions are purchased/sold to mitigate the potential impact of increases or decreases in interest rates.  Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future.  They are not centrally cleared.  The premium paid/received for interest rate swaptions is reported as an
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
asset/liability in the Consolidated Statements of Financial Condition. The difference between the premium and the fair value of the swaption is reported in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss). If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received/paid. If the Company sells or exercises a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid.

The fair value of interest rate swaptions is estimated using internal pricing models and compared to the counterparty market value.

TBA Dollar Rolls - TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on similar methods used to value Agency mortgage-backed securities with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).

MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns.  MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid.  MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).
Futures Contracts - Futures contracts are derivatives that track the prices of specific assets. Short sales of futures contracts help mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts that 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 measured at fair value based on exchange pricing with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).
Repurchase Agreements – The Company finances the acquisition of a significant portion of its Agency mortgage-backed securities with repurchase agreements. The Company examines each of the specified criteria in ASC 860, Transfers and Servicing, at the inception of
each transaction and has determined that each of the financings meet the specified criteria in this guidance.

Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities in the Consolidated Statements of Cash Flows. The Company reports cash flows on reverse repurchase and repurchase agreements entered into by RCap as operating activities in the Consolidated Statements of Cash Flows.

Goodwill and Intangible Assets – The Company’s acquisitions are accounted for using the acquisition method. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain.
The Company tests goodwill for impairment on an annual basis and at interim periods when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill utilizes a two-step approach, whereby the Company compares the carrying value of each identified reporting unit to its fair value. If the carrying value of the reporting unit is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its carrying value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair value. An impairment of the goodwill associated with the Company’s acquisition of Fixed Income Discount Advisory Company (“FIDAC”) was recorded during the year ended December 31, 2015.
Intangible assets with an estimated useful life are amortized over their expected useful lives.

Convertible Senior Notes – The Company recorded the 4% Convertible Senior Notes and 5% Convertible Senior Notes (collectively, the “Convertible Senior Notes”) at their contractual amounts, adjusted by the effects of a beneficial conversion feature and a contingent beneficial conversion feature (collectively, the “Conversion Features”). The Conversion Features’ intrinsic value is included in “Additional paid-in capital” on the Company’s Consolidated Statements of Financial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
Condition and reduces the recorded liability amount associated with the Convertible Senior Notes. A Conversion Feature may be recognized as a result of adjustments to the conversion price for dividends declared to common stockholders. The 4% and 5% Convertible Senior Notes matured in February 2015 and May 2015, respectively.

Stock Based Compensation – The Company is required to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions. The Company recognizes compensation expense on a straight-line basis over the requisite service period for the entire award.

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.  Accordingly, the Company will not be subject to federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and stock ownership tests are met.  The Company and certain of its direct and indirect subsidiaries, including FIDAC, RCap and certain subsidiaries of ACREG, 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 their taxable income.
The provisions of ASC 740, Income Taxes, (“ASC 740”) clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position.  Thus, no accruals for penalties and interest were necessary as of March 31, 2016 and December 31, 2015.

Use of Estimates – The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Commercial Real Estate Investments

Commercial Real Estate Debt Investments - The Company’s commercial real estate debt investments are
comprised of commercial mortgage-backed securities and loans held by consolidated collateralized financing entities.  Commercial mortgage-backed securities are classified as available-for-sale and reported at fair value with unrealized gains and losses reported as a component of other comprehensive income (loss). Management evaluates commercial mortgage-backed securities for other-than-temporary impairment at least quarterly.  See the “Commercial Real Estate Investments” footnote for additional information regarding the consolidated collateralized financing entities.

Commercial Real Estate Loans – The Company's commercial real estate loans are comprised of fixed-rate and adjustable-rate loans. The Company designates loans as held for investment if it has the intent and ability to hold the loans until maturity or payoff. The difference between the principal amount of a loan and proceeds at acquisition is recorded as either a discount or premium. If the Company intends to sell or securitize the loans and the financing vehicle is not expected to be consolidated, they are classified as held for sale. Commercial real estate loans that are designated as held for sale are carried at the lower of amortized cost or fair value and recorded as Loans held for sale in the accompanying Consolidated Statements of Financial Condition. Any deferred origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of commercial real estate loans held for sale on an individual loan basis. Commercial real estate loans that are designated as held for investment and are originated or purchased by the Company are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less a reserve for estimated losses if necessary. The Company has elected the fair value option for multi-family mortgage loans held in securitization trusts that it was required to consolidate. Preferred equity interests are designated as held for investment and are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less a reserve for estimated losses if necessary. See “Commercial Real Estate Investments” footnote for additional information.
Investments in Commercial Real Estate – Investments in commercial real estate are carried at historical cost less accumulated depreciation. Historical cost includes all costs necessary to bring the asset to the condition and location necessary for its intended use, including financing during the construction period.  Costs directly related to acquisitions deemed to be business combinations are expensed. Ordinary repairs and maintenance which are not reimbursed by tenants are expensed as incurred. Major replacements and
 
10
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
improvements that extend the useful life of the asset are capitalized and depreciated over their useful life.

Investments in commercial real estate are depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:
 
Category
 
Term
Building
30 - 40 years
Site improvements
1 - 28 years

The Company follows the acquisition method of accounting for acquisitions of operating real estate held for investment, where the purchase price of operating real estate is allocated to tangible assets such as land, building, site improvements and other identified intangibles such as above/below market and in-place leases.

The Company applies the equity method of accounting for its investments in joint ventures where it is not considered to have a controlling financial interest.    Under 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.

The Company evaluates whether real estate acquired in connection with a foreclosure (“REO”) or UCC/deed in lieu of foreclosure (herein collectively referred to as a foreclosure) constitutes a business and whether business combination accounting is applicable. Upon foreclosure of a property, the excess of the carrying value of a loan, if any, over the estimated fair value of the property, less estimated costs to sell, is charged to provision for loan losses.

Investments in commercial real estate, including REO, that do not meet the criteria to be classified as held for sale are separately presented in the Consolidated Statements of Financial Condition as held for investment. Real estate held for sale is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Once a property is determined to be held for sale, depreciation is no longer recorded.

The Company's real estate portfolio (REO and real estate held for investment) is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property's value is considered impaired if the Company's estimate of the aggregate future undiscounted cash flows to be generated by the property
is less than the carrying value of the property. In conducting this review, the Company considers U.S. macroeconomic factors, including real estate sector conditions, together with asset specific and other factors. To the extent impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.

Revenue Recognition – Commercial Real Estate Investments - Interest income is accrued based on the outstanding principal amount of the commercial real estate loans and preferred equity interests held for investment (collectively referred to as “CRE Debt and Preferred Equity Investments”) and their contractual terms. Premiums and discounts associated with the purchase of CRE Debt and Preferred Equity Investments are amortized or accreted into interest income over the projected lives of the CRE Debt and Preferred Equity Investments using the interest method.
Corporate Debt
Corporate Loans – The Company’s investments in corporate debt that are loans are designated as held for investment when the Company has the intent and ability to hold the investment until maturity or payoff. These investments are carried at their principal balance outstanding plus any premiums or discounts less allowances for loan losses. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the interest method. These investments typically take the form of senior secured loans primarily in first lien and second lien loans. The Company’s senior secured loans generally have stated maturities of three to eight years. In connection with these senior secured loans the Company receives a security interest in certain of the assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to the least amount of credit risk given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. To date, the majority of the Company’s investments have been funded term loans versus debt securities.
Corporate Debt Securities – The Company’s investments in corporate debt securities are designated as held-to-maturity when the Company has the intent and ability to hold the investments until maturity. These investments are carried at their principal balance outstanding plus any premiums or discounts less other-than-temporary impairment. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
and discounts are amortized or accreted into interest income using the interest method.
Other-Than-Temporary Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss), while the balance of losses related to other factors will be recognized as a component of other comprehensive income (loss). If the fair value is less than the cost of a held-to-maturity security, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. There was no other-than-temporary impairment recognized for the quarters ended March 31, 2016 and 2015.
Allowance for Losses – The Company evaluates the need for a loss reserve on its CRE Debt and Preferred Equity Investments and its corporate loans. A provision for losses related to CRE Debt and Preferred Equity Investments and corporate loans, including those accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, may be established when it is probable the Company will not collect amounts contractually due or all amounts previously estimated to be collectable. Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the CRE Debt and Preferred Equity Investments as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages if applicable and analyzes current results relative to budgets and sensitivities performed at inception of the investment. Because these determinations are based upon projections of future
economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date.
The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies. Management reviews loan-to-value metrics upon either the origination or the acquisition of a new investment but generally does not update the loan-to-value metrics in the course of quarterly surveillance. Management generally reviews the most recent financial information produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the Company’s CRE Debt and Preferred Equity Investments, and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan. Management also reviews economic trends, both macro and those affecting the property specifically, and the supply and demand of competing projects in the sub-market in which each subject property is located. Management monitors the financial condition and operating results of its corporate borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations.
In connection with the quarterly surveillance review process, loans are assigned an internal risk rating. Effective December 31, 2015, the loan risk ratings were enhanced and considered guidance provided by the Office of the Controller of the Currency for commercial real estate lending. The initial internal risk ratings (“Initial Ratings”) are based on loan-to-values and the NOI debt yields of the underlying collateral of the Company’s CRE Debt and Preferred Equity Investments and based upon leverage and cash flow coverages of the borrowers’ debt and operating obligations. The final  internal risk ratings are influenced by other quantitative and qualitative factors that can result in an adjustment to the Initial Ratings, subject to review and approval by the respective committee. The internal risk rating categories include “Performing”, “Closely Monitored”, “Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations.
 
12
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
Closely Monitored loans are transitional or could be exhibiting some weakness in both leverage and liquidity, which if not corrected, could jeopardize timely repayment. Special Mention loans exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans are considered uncollectible. The presentation of prior period internal risk ratings have been revised to conform to the current period presentation.
No allowance for loan losses was deemed necessary as of March 31, 2016 and December 31, 2015.
Broker Dealer Activities

In January 2014, RCap ceased its trading activity in U.S. Treasury securities, derivatives and securities borrowed and loaned transactions.

Reverse Repurchase Agreements – RCap enters into reverse repurchase agreements and repurchase
agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contract amount and are collateralized by mortgage-backed or other securities. Margin calls are made by RCap as necessary based on the daily valuation of the underlying collateral as compared to the contract price. RCap generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. RCap’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and RCap requires counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements that give RCap the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty. Substantially all of RCap's repurchase and reverse repurchase activity is with affiliated entities.
Recent Accounting Pronouncements

The following table provides a brief description of recent accounting pronouncements that could potentially impact the Company’s consolidated financial statements:
 
13
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
Standard
  
Description
  
Date of Adoption
  
Effect on the financial statements
or other significant matters
Standards that are not yet adopted
            
ASU 2016-02 Leases (Topic 842)
  
The amendments require lessees to recognize a right-of-use asset and a liability to make lease payments in the statement of financial position for most leases.  The accounting for lessors is largely unchanged.
  
January 1, 2019 (early adoption permitted)
  
Not expected to have a significant impact on the consolidated financial statements.
ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities
  
The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
  
January 1, 2018 (early adoption permitted for a provision related presentation of instrument-specific credit risk of liabilities accounted for under the fair value option)
  
Expected to impact disclosures only and not have a significant impact on the consolidated finanical statements.
ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-04) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
  
This ASU requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.
  
January 1, 2017 (early adoption permitted)
  
Not expected to have an impact on the consolidated financial statements.
ASU 2014-09, Revenue from Contracts with Customers
  
This guidance applies to contracts with customers to transfer goods or services and contracts to transfer nonfinancial assets unless those contracts are within the scope of other standards (for example, lease transactions).
   January 1, 2018  
Not expected to have a significant impact on the consolidated financial statements.
             
Standard
  
Description
  
Date of Adoption
  
Effect on the financial statements
or other significant matters
Standards that were adopted
            
ASU 2015-16 Business Combinations (Topic 805) Simplifying the Accounting Measurement-Period Adjustments
 
  
This amendment removed the requirement to present adjustments to provisional amounts retrospectively.  The update required that an acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to provisional amounts.
  
January 1, 2016 (early adoption permitted)
  
Did not have a significant impact on the consolidated financial statements.
ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update)
  
This amendment provided SEC guidance that it would not object to filers presenting debt issue costs related to line-of-credit arrangements as an asset and ratably amortizing the costs over the term of the arrangement.
 
  
June 18, 2015 (early adoption permitted)
  
Did not have an impact on the consolidated financial statements.
ASU 2015-10, Technical Corrections and Improvements
  
This perpetual project updated the codification for technical corrections and improvements.
  
January 1, 2016 (early adoption permitted), for amendments subject to transition guidance
  
Did not have a significant impact on the consolidated financial statements.
ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent)
  
This update removed the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and also removes certain disclosure requirements for these investments.
  
January 1, 2016 (early adoption permitted)
  
Did not have an impact on the consolidated financial statements.
 
14
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
  
This update clarified that customers should determine whether a cloud computing arrangement includes the license of software by applying the same guidance cloud service providers use.  The guidance also eliminated the current requirement that customers analogize to the leasing standard when determining the asset acquired in a software licensing arrangement.
  
January 1, 2016 (early adoption permitted)
  
Did not have a significant impact on the consolidated financial statements.
ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs
  
This ASU required that debt issue costs are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability.  The recognition and measurement of debt issue costs were not affected.
  
January 1, 2016 (early adoption permitted)
  
Impacted presentation only and did not have a significant impact on the consolidated financial statements.
ASU 2015-02, Consolidation (Topic 810) Amendments to the Consolidation Analysis
  
This update affected the following areas of the consolidation analysis:  limited partnerships and similar entities, evaluation of fees paid to a decision maker or service provider as a variable interest and in determination of the primary beneficiary, effect of related parties on the primary beneficiary determination and for certain investment funds.
  
January 1, 2016 (early adoption permitted)
  
Did not have a significant impact on the consolidated financial statements.
ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)
  
This update eliminated from GAAP the concept of extraordinary items.
  
January 1, 2016 (early adoption permitted)
  
Did not have an impact on the consolidated financial statements.
ASU 2014-16, Derivatives and Hedging (Topic 815) Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or Equity
  
This ASU provided additional guidance for evaluating whether conversion rights, redemption rights, voting rights, liquidation rights and dividend payment preferences and other features embedded in a share, including preferred stock, contain embedded derivatives requiring bifurcation.  The update requires that an entity determine the nature of the host contract by considering all stated and implied terms and features in a hybrid instrument.
  
January 1, 2016 (early adoption permitted)
  
Did not have a significant impact on the consolidated financial statements.
ASU 2014-13, Consolidation (Topic 810) Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity
  
This update provided a practical expedient to measure the fair value of the financial assets and financial liabilities of a consolidated collateralized financing entity, which the reporting entity has elected to or is required to measure on a fair value basis.
  
January 1, 2016 (early adoption permitted)
  
The Company adopted this ASU and applied the guidance to commercial mortgage backed securitization transactions.  See "Commercial Real Estate Investments" footnote for further disclosure.
ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosure
  
This update made limited amendments to the guidance in ASC 860 on accounting for certain repurchase agreements.
   January 1, 2015  
Impacted disclosures only and did not have a significant impact on the consolidated financial statements.
ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
  
This ASU raised the threshold for a disposal to be treated as discontinued operations.
  
April 1, 2015
  
Did not have a significant impact on the consolidated financial statements.
ASU 2014-04  Receivables–Troubled Debt Restructurings by Creditors, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure
  
This update clarified that an in-substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, when the creditor obtains legal title to the property upon completion of a foreclosure or the borrower conveys all interest in the property to the creditor through a deed in lieu of foreclosure or similar arrangement.
  
January 1, 2015
  
Did not have a significant impact on the consolidated financial statements.
 
15
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
4.            RESIDENTIAL INVESTMENT SECURITIES
 
The following tables present the Company’s Residential Investment Securities portfolio carried at fair value as of March 31, 2016 and December 31, 2015:
 
   
March 31, 2016
  
 
  
Principal / Notional
    
Remaining Premium
    
Remaining Discount
    
Amortized Cost
    
Unrealized
Gains(1)
    
Unrealized Losses(1)
    
Estimated Fair Value
  
Agency 
  
(dollars in thousands)
  
Fixed-rate pass-through
  
$
56,120,429
    
$
3,093,155
    
$
(2,392
)
  
$
59,211,192
    
$
765,776
    
$
(204,912
)
  
$
59,772,056
  
Adjustable-rate pass-through
    
3,064,341
      
68,241
      
(6,974
)
    
3,125,608
      
70,485
      
(220
)
    
3,195,873
  
CMO
    
922,196
      
24,962
      
(387
)
    
946,771
      
16,943
      
(4,417
)
    
959,297
  
Debentures
    
158,803
      
-
      
(638
)
    
158,165
      
-
      
(1,130
)
    
157,035
  
Interest-only
    
9,362,596
      
1,614,332
      
-
      
1,614,332
      
33,802
      
(135,536
)
    
1,512,598
  
Total Agency investments
  
$
69,628,365
    
$
4,800,690
    
$
(10,391
)
  
$
65,056,068
    
$
887,006
    
$
(346,215
)
  
$
65,596,859
  
                                                         
Residential Credit
                                                        
CRT
  
$
517,207
    
$
1,586
    
$
(14,763
)
  
$
504,030
    
$
3,138
    
$
(6,001
)
  
$
501,167
  
Legacy(2)
    
484,784
      
879
      
(52,182
)
    
433,481
      
1,251
      
(4,306
)
    
430,426
  
NPL/RPL
    
428,656
      
50
      
(1,579
)
    
427,127
      
153
      
(941
)
    
426,339
  
New issue
    
280,060
      
1,233
      
(1,446
)
    
279,847
      
3,713
      
-
      
283,560
  
New issue interest-only
    
1,114,234
      
17,823
      
-
      
17,823
      
324
      
(965
)
    
17,182
  
Total residential credit securities
  
$
2,824,941
    
$
21,571
    
$
(69,970
)
  
$
1,662,308
    
$
8,579
    
$
(12,213
)
  
$
1,658,674
  
                                                         
Total Residential Investment Securities
  
$
72,453,306
    
$
4,822,261
    
$
(80,361
)
  
$
66,718,376
    
$
895,585
    
$
(358,428
)
  
$
67,255,533
  
 
 
   
December 31, 2015
  
 
  
Principal / Notional
    
Remaining Premium
    
Remaining Discount
    
Amortized Cost
    
Unrealized
Gains(1)
    
Unrealized Losses(1)
    
Estimated Fair Value
  
Agency 
  
(dollars in thousands)
  
Fixed-rate pass-through
  
$
57,339,705
    
$
3,270,521
    
$
(2,832
)
  
$
60,607,394
    
$
400,350
    
$
(824,862
)
  
$
60,182,882
  
Adjustable-rate pass-through
    
2,894,192
      
61,781
      
(6,427
)
    
2,949,546
      
70,849
      
(10,317
)
    
3,010,078
  
CMO
    
964,095
      
27,269
      
(477
)
    
990,887
      
9,137
      
(12,945
)
    
987,079
  
Debentures
    
158,802
      
-
      
(648
)
    
158,154
      
-
      
(6,116
)
    
152,038
  
Interest-only
    
9,499,332
      
1,634,312
      
-
      
1,634,312
      
18,699
      
(114,826
)
    
1,538,185
  
Total Agency investments
  
$
70,856,126
    
$
4,993,883
    
$
(10,384
)
  
$
66,340,293
    
$
499,035
    
$
(969,066
)
  
$
65,870,262
  
                                                         
Residential Credit
                                                        
CRT
  
$
476,084
    
$
2,225
    
$
(12,840
)
  
$
465,469
    
$
250
    
$
(9,209
)
  
$
456,510
  
Legacy(2)
    
378,527
      
773
      
(37,150
)
    
342,150
      
698
      
(1,140
)
    
341,708
  
NPL/RPL
    
354,945
      
19
      
(1,270
)
    
353,694
      
19
      
(1,172
)
    
352,541
  
New issue
    
197,695
      
566
      
-
      
198,261
      
-
      
(1,060
)
    
197,201
  
New issue interest-only
    
811,245
      
15,430
      
-
      
15,430
      
-
      
(158
)
    
15,272
  
Total residential credit securities
  
$
2,218,496
    
$
19,013
    
$
(51,260
)
  
$
1,375,004
    
$
967
    
$
(12,739
)
  
$
1,363,232
  
                                                         
Total Residential Investment Securities
  
$
73,074,622
    
$
5,012,896
    
$
(61,644
)
  
$
67,715,297
    
$
500,002
    
$
(981,805
)
  
$
67,233,494
  
 
 
(1) Unrealized gains and losses on Agency investments, excluding interest-only investments, are reported as a component of other comprehensive income (loss). Unrealized gains and losses on residential credit securities and Agency interest-only investments are generally reported in Net unrealized gains (losses) on financial instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss).
(2) Legacy residential credit refers to securities whose underlying collateral was securitized prior to 2009.
 
 
The following tables present the Company’s Agency mortgage-backed securities portfolio by issuing Agency concentration as of March 31, 2016 and December 31, 2015:
Investment Type
  
March 31, 2016
    
December 31, 2015
  
   
(dollars in thousands)
  
Fannie Mae
  
$
41,990,479
    
$
42,647,075
  
Freddie Mac
    
23,341,571
      
22,960,595
  
Ginnie Mae
    
107,774
      
110,554
  
Total
  
$
65,439,824
    
$
65,718,224
  
 
16
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
Actual maturities of the Company’s Residential Investment Securities portfolio are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on underlying mortgages.  The
following table summarizes the Company’s available-for-sale Residential Investment Securities as of March 31, 2016 and December 31, 2015, according to their estimated weighted average life classifications:
 
   
March 31, 2016
    
December 31, 2015
  
Weighted Average Life
  
Estimated Fair Value
    
Amortized
Cost
    
Estimated Fair Value
    
Amortized
Cost
  
   
(dollars in thousands)
  
Less than one year
  
$
72,348
    
$
73,220
    
$
37,862
    
$
37,850
  
Greater than one year through five years
    
46,745,799
      
46,268,066
      
20,278,111
      
20,066,435
  
Greater than five years through ten years
    
20,238,032
      
20,176,740
      
46,473,701
      
47,174,319
  
Greater than ten years
    
199,354
      
200,350
      
443,820
      
436,693
  
Total
  
$
67,255,533
    
$
66,718,376
    
$
67,233,494
    
$
67,715,297
  
 
The weighted average lives of the Agency mortgage-backed securities at March 31, 2016 and December 31, 2015 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Agency mortgage-backed securities could be materially 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 by length of time that such securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015.
 
   
March 31, 2016
    
December 31, 2015
  
   
Estimated Fair Value(1)
    
Gross Unrealized Losses(1)
    
Number of Securities(1)
    
Estimated Fair Value(1)
    
Gross Unrealized Losses(1)
    
Number of Securities(1)
  
   
(dollars in thousands)
  
Less than 12 Months
  
$
2,633,437
    
$
(7,176
)
    
67
    
$
20,072,072
    
$
(164,259
)
    
463
  
12 Months or More
    
20,732,579
      
(203,503
)
    
188
      
21,705,764
      
(689,981
)
    
189
  
Total
  
$
23,366,016
    
$
(210,679
)
    
255
    
$
41,777,836
    
$
(854,240
)
    
652
  
 
(1)
Excludes interest-only mortgage-backed securities.
 
 
The decline in value of these securities is solely due to market conditions and not the quality of the assets.  Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating.  The investments are not considered to be other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity.  Also, the Company
is guaranteed payment of the principal amount of the securities by the respective issuing government agency.

During the quarter ended March 31, 2016, the Company disposed of $3.5 billion of Residential Investment Securities, resulting in a net realized loss of ($1.7) million.

During the quarter ended March 31, 2015, the Company disposed of $14.9 billion of Residential Investment Securities, resulting in a net realized gain of $62.3 million.
 
17
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
5.            COMMERCIAL REAL ESTATE INVESTMENTS
On December 11, 2015, the Company originated a $335.0 million recapitalization financing with respect to eight class A/B office properties in Orange County, California.  As of March 31, 2016, such financing is comprised of a $280.0 million senior mortgage loan ($278.6 million, net of origination fees), and mezzanine loan with an initial principal balance of $55.0 million ($52.7 million, net of origination) and a future funding component of $30.0 million. The senior mortgage loan was held for sale as of March 31, 2016
and December 31, 2015. In April 2016, the Company sold $115.0 million of the senior loan to an unrelated third party at carrying value, accordingly, no gain or loss was recorded in connection with the sale. The balance of the senior loan of $165.0 million remains held for sale.

The following tables present commercial real estate investments held for investment at March 31, 2016 and December 31, 2015.
 
 
 
 
 
CRE Debt and Preferred Equity Investments
 
   
March 31, 2016
    
December 31, 2015
  
   
Outstanding Principal
    
Carrying
Value(1)
    
Percentage
of Loan
Portfolio(2)
    
Outstanding Principal
    
Carrying
Value(1)
    
Percentage
of Loan
Portfolio(2)
  
   
(dollars in thousands)
  
Senior mortgages
  
$
477,302
    
$
474,559
      
40.3
%
  
$
387,314
    
$
385,838
      
28.6
%
Senior securitized mortgages(3)
    
212,072
      
211,855
      
17.9
%
    
263,072
      
262,703
      
19.4
%
Mezzanine loans
    
486,081
      
482,101
      
41.0
%
    
582,592
      
578,503
      
43.0
%
Preferred equity
    
9,000
      
8,953
      
0.8
%
    
122,444
      
121,773
      
9.0
%
Total (4)
  
$
1,184,455
    
$
1,177,468
      
100.0
%
  
$
1,355,422
    
$
1,348,817
      
100.0
%
 
(1)
Carrying value includes unamortized origination fees of $7.1 million and $6.9 million as of March 31, 2016 and December 31, 2015, respectively.
(2) Based on outstanding principal.
(3)  Assets of consolidated VIEs.
(4) Excludes Loans held for sale.
 
 
   
March 31, 2016
  
   
Senior Mortgages
    
Senior Securitized Mortgages(1)
    
Mezzanine Loans
    
Preferred
Equity
    
Total
  
   
(dollars in thousands)
  
Beginning balance
  
$
385,838
    
$
262,703
    
$
578,503
    
$
121,773
    
$
1,348,817
  
Originations & advances (principal)
    
155,065
      
-
      
25,897
      
-
      
180,962
  
Principal payments
    
(65,077
)
    
(51,000
)
    
(122,408
)
    
(113,445
)
    
(351,930
)
Sales (principal)
    
-
      
-
      
-
      
-
      
-
  
Amortization & accretion of (premium) discounts
    
(34
)
    
-
      
(221
)
    
-
      
(255
)
Net (increase) decrease in origination fees
    
(1,578
)
    
-
      
(285
)
    
-
      
(1,863
)
Amortization of net origination fees
    
345
      
152
      
615
      
625
      
1,737
  
Transfers
    
-
      
-
      
-
      
-
      
-
  
Allowance for loan losses
    
-
      
-
      
-
      
-
      
-
  
Net carrying value (2)
  
$
474,559
    
$
211,855
    
$
482,101
    
$
8,953
    
$
1,177,468
  
 
(1) Assets of consolidated VIE.
(2) Excludes Loans held for sale.
 
18
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
 
  
December 31, 2015
  
   
Senior Mortgages
    
Senior Securitized Mortgages(1)
    
Mezzanine Loans
    
Preferred Equity
    
Total
  
   
(dollars in thousands)
  
Beginning balance
  
$
383,895
    
$
398,634
    
$
522,731
    
$
212,905
    
$
1,518,165
  
Originations & advances (principal)
    
293,925
      
-
      
195,312
      
-
      
489,237
  
Principal payments
    
(243,270
)
    
(136,469
)
    
(153,693
)
    
(92,210
)
    
(625,642
)
Sales (principal)
    
(46,945
)
    
-
      
-
      
-
      
(46,945
)
Amortization & accretion of (premium) discounts
    
(142
)
    
-
      
(232
)
    
517
      
143
  
Net (increase) decrease in origination fees
    
(3,702
)
    
(279
)
    
(4,806
)
    
-
      
(8,787
)
Amortization of net origination fees
    
2,077
      
817
      
691
      
561
      
4,146
  
Transfers
    
-
      
-
      
18,500
      
-
      
18,500
  
Allowance for loan losses
    
-
      
-
      
-
      
-
      
-
  
Net carrying value (2)
  
$
385,838
    
$
262,703
    
$
578,503
    
$
121,773
    
$