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: SEPTEMBER 30, 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
(State or other jurisdiction of
 incorporation or organization)
22-3479661
(IRS Employer Identification No.)
   
   
1211 AVENUE OF THE AMERICAS
NEW YORK, NY 10036
(Address of principal executive offices)
10036
(Zip Code)
 
 
(212) 696-0100
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
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 October 31, 2016 
Common Stock, $.01 par value  1,018,869,843 
   
   
                                                                                                  
 
 
ANNALY CAPITAL MANAGEMENT, INC.
FORM 10-Q
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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)
  
             
   
September 30,
    
December 31,
  
   
2016
    
2015 (1)
  
   
(Unaudited)
        
ASSETS
            
             
Cash and cash equivalents (including cash pledged as collateral of $2,271,856 and $1,584,686, respectively) (2)
  
$
2,382,188
    
$
1,769,258
  
Investments, at fair value:
                
Agency mortgage-backed securities (including pledged assets of $67,902,771 and $60,678,548, respectively)
    
73,476,105
      
65,718,224
  
Agency debentures
    
-
      
152,038
  
Credit risk transfer securities (including pledged assets of $446,529 and $184,160, respectively)
    
669,295
      
456,510
  
Non-Agency mortgage-backed securities (including pledged assets of $1,293,530 and $744,783, respectively) (3)
    
1,460,261
      
906,722
  
Residential mortgage loans (including pledged assets of $179,626 and $0, respectively) (4)
    
310,148
      
-
  
Mortgage servicing rights
    
492,169
      
-
  
Commercial real estate debt investments (including pledged assets of $4,319,077 and $2,911,828, respectively) (5)
    
4,319,077
      
2,911,828
  
Commercial real estate debt and preferred equity, held for investment (including pledged assets of $583,131 and
$578,820, respectively) (6)
    
1,070,197
      
1,348,817
  
Commercial loans held for sale, net
    
144,275
      
278,600
  
Investments in commercial real estate
    
500,027
      
535,946
  
Corporate debt (including pledged assets of $475,453 and $0, respectively)
    
716,831
      
488,508
  
Interest rate swaps, at fair value
    
113,253
      
19,642
  
Other derivatives, at fair value
    
87,921
      
22,066
  
Receivable for investments sold
    
493,839
      
121,625
  
Accrued interest and dividends receivable
    
260,583
      
231,336
  
Other assets
    
301,419
      
119,422
  
Goodwill
    
71,815
      
71,815
  
Intangible assets, net
    
39,903
      
38,536
  
Total assets
  
$
86,909,306
    
$
75,190,893
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                 
Liabilities:
                
Repurchase agreements
  
$
61,784,121
    
$
56,230,860
  
Other secured financing
    
3,804,742
      
1,845,048
  
Securitized debt of consolidated VIEs (7)
    
3,712,821
      
2,540,711
  
Participation sold
    
12,976
      
13,286
  
Mortgages payable
    
327,632
      
334,707
  
Interest rate swaps, at fair value
    
2,919,492
      
1,677,571
  
Other derivatives, at fair value
    
73,445
      
49,963
  
Dividends payable
    
269,111
      
280,779
  
Payable for investments purchased
    
454,237
      
107,115
  
Accrued interest payable
    
173,320
      
151,843
  
Accounts payable and other liabilities
    
115,606
      
53,088
  
Total liabilities
    
73,647,503
      
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
  
7.625% Series E Cumulative Redeemable Preferred Stock:
11,500,000 authorized, issued and outstanding
    
287,500
      
-
  
Common stock, par value $0.01 per share, 1,945,437,500 and 1,956,937,500 authorized,
1,018,857,866 and 935,929,561 issued and outstanding, respectively
    
10,189
      
9,359
  
Additional paid-in capital
    
15,578,677
      
14,675,768
  
Accumulated other comprehensive income (loss)
    
1,119,677
      
(377,596
)
Accumulated deficit
    
(4,655,440
)
    
(3,324,616
)
Total stockholders’ equity
    
13,253,662
      
11,895,974
  
Noncontrolling interest
    
8,141
      
9,948
  
Total equity
    
13,261,803
      
11,905,922
  
Total liabilities and equity
  
$
86,909,306
    
$
75,190,893
  
 
(1)
Derived from the audited consolidated financial statements at December 31, 2015.
(2)
Includes cash of consolidated VIEs of $31.3 million and $48.5 million at September 30, 2016 and December 31, 2015, respectively.
(3)
Includes $96.0 million and $0 at September 30, 2016 and December 31, 2015, respectively, of non-Agency mortgage-backed securities pledged as collateral in a consolidated VIE and eliminated from the Company’s Consolidated Statements of Financial Condition.
(4)
Includes securitized mortgage loans of a consolidated VIE carried at fair value of $176.7 million and $0 at September 30, 2016 and December 31, 2015, respectively.
(5)
Includes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $4.0 billion and $2.6 billion at September 30, 2016 and December 31, 2015, respectively. 
(6)
Includes senior securitized commercial mortgage loans of a consolidated VIE with a carrying value of $128.9 million and $262.7 million carried at amortized cost, net of an allowance for losses of $0, at September 30, 2016 and December 31, 2015, respectively. 
(7)
Includes securitized debt of consolidated VIEs carried at fair value of $3.7 billion and $2.4 billion at September 30, 2016 and December 31, 2015, respectively. 
 
See notes to consolidated financial statements.
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)      
(dollars in thousands, except per share data)          
(Unaudited)          
                         
   
Quarter Ended September 30,
    
Nine Months Ended September 30,
  
   
2016
    
2015
    
2016
    
2015
  
Net interest income:
                        
Interest income
  
$
558,668
    
$
450,726
    
$
1,403,929
    
$
1,594,117
  
Interest expense
    
174,154
      
110,297
      
474,356
      
352,789
  
Net interest income
    
384,514
      
340,429
      
929,573
      
1,241,328
  
                                 
Realized and unrealized gains (losses):
                                
Realized gains (losses) on interest rate swaps(1)
    
(124,572
)
    
(162,304
)
    
(402,809
)
    
(465,008
)
Realized gains (losses) on termination of interest rate swaps
    
1,337
      
-
      
(58,727
)
    
(226,462
)
Unrealized gains (losses) on interest rate swaps
    
256,462
      
(822,585
)
    
(1,148,478
)
    
(587,995
)
Subtotal
    
133,227
      
(984,889
)
    
(1,610,014
)
    
(1,279,465
)
Net gains (losses) on disposal of investments
    
14,447
      
(7,943
)
    
25,307
      
58,246
  
Net gains (losses) on trading assets
    
162,981
      
108,175
      
370,050
      
(12,961
)
Net unrealized gains (losses) on investments measured at fair value through earnings
    
29,675
      
(24,501
)
    
(24,351
)
    
(40,466
)
Bargain purchase gain
    
72,576
      
-
      
72,576
      
-
  
Impairment of goodwill
    
-
      
-
      
-
      
(22,966
)
Subtotal
    
279,679
      
75,731
      
443,582
      
(18,147
)
Total realized and unrealized gains (losses)
    
412,906
      
(909,158
)
    
(1,166,432
)
    
(1,297,612
)
                                 
Other income (loss):
                                
Investment advisory income
    
-
      
3,780
      
-
      
24,848
  
Dividend income from affiliate
    
-
      
-
      
-
      
8,636
  
Other income (loss)
    
29,271
      
(13,455
)
    
13,226
      
(36,754
)
Total other income (loss)
    
29,271
      
(9,675
)
    
13,226
      
(3,270
)
                                 
General and administrative expenses:
                                
Compensation and management fee
    
38,709
      
37,450
      
111,754
      
113,093
  
Other general and administrative expenses
    
59,028
      
12,007
      
83,149
      
39,311
  
Total general and administrative expenses
    
97,737
      
49,457
      
194,903
      
152,404
  
                                 
Income (loss) before income taxes
    
728,954
      
(627,861
)
    
(418,536
)
    
(211,958
)
                                 
Income taxes
    
(1,926
)
    
(370
)
    
(2,839
)
    
(8,039
)
                                 
Net income (loss)
    
730,880
      
(627,491
)
    
(415,697
)
    
(203,919
)
                                 
Net income (loss) attributable to noncontrolling interest
    
(336
)
    
(197
)
    
(883
)
    
(436
)
                                 
Net income (loss) attributable to Annaly
    
731,216
      
(627,294
)
    
(414,814
)
    
(203,483
)
                                 
Dividends on preferred stock
    
22,803
      
17,992
      
58,787
      
53,976
  
                                 
Net income (loss) available (related) to common stockholders
  
$
708,413
    
$
(645,286
)
  
$
(473,601
)
  
$
(257,459
)
                                 
Net income (loss) per share available (related) to common stockholders:
                                
Basic
  
$
0.70
    
$
(0.68
)
  
$
(0.50
)
  
$
(0.27
)
Diluted
  
$
0.70
    
$
(0.68
)
  
$
(0.50
)
  
$
(0.27
)
                                 
Weighted average number of common shares outstanding:
                                
Basic
    
1,007,607,893
      
947,795,500
      
953,301,855
      
947,732,735
  
Diluted
    
1,007,963,406
      
947,795,500
      
953,301,855
      
947,732,735
  
                                 
Dividends declared per share of common stock
  
$
0.30
    
$
0.30
    
$
0.90
    
$
0.90
  
                                 
Net income (loss)
  
$
730,880
    
$
(627,491
)
  
$
(415,697
)
  
$
(203,919
)
Other comprehensive income (loss):
                                
Unrealized gains (losses) on available-for-sale securities
    
18,237
      
609,725
      
1,519,874
      
116,154
  
Reclassification adjustment for net (gains) losses included in net income (loss)
    
(15,606
)
    
8,095
      
(22,601
)
    
(58,182
)
Other comprehensive income (loss)
    
2,631
      
617,820
      
1,497,273
      
57,972
  
Comprehensive income (loss)
  
$
733,511
    
$
(9,671
)
  
$
1,081,576
    
$
(145,947
)
Comprehensive income (loss) attributable to noncontrolling interest
    
(336
)
    
(197
)
    
(883
)
    
(436
)
Comprehensive income (loss) attributable to Annaly
    
733,847
      
(9,474
)
    
1,082,459
      
(145,511
)
Dividends on preferred stock
    
22,803
      
17,992
      
58,787
      
53,976
  
Comprehensive income (loss) attibutable to common stockholders
  
$
711,044
    
$
(27,466
)
  
$
1,023,672
    
$
(199,487
)
 
(1)
Consists of interest expense on interest rate swaps. 


See notes to consolidated financial statements.
2
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
    
7.625% Series E 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
    
-
      
-
      
-
              
-
      
-
      
-
      
(203,483
)
    
(203,483
)
    
-
      
(203,483
)
Net income (loss) attributable to noncontrolling interest
    
-
      
-
      
-
              
-
      
-
      
-
      
-
      
-
      
(436
)
    
(436
)
Unrealized gains (losses) on available-for-sale securities
    
-
      
-
      
-
              
-
      
-
      
116,154
      
-
      
116,154
      
-
      
116,154
  
Reclassification adjustment for net (gains) losses included in net income (loss)
    
-
      
-
      
-
              
-
      
-
      
(58,182
)
    
-
      
(58,182
)
    
-
      
(58,182
)
Stock compensation expense
    
-
      
-
      
-
              
-
      
1,089
      
-
      
-
      
1,089
      
-
      
1,089
  
Net proceeds from direct purchase and dividend reinvestment
    
-
      
-
      
-
              
2
      
1,722
      
-
      
-
      
1,724
      
-
      
1,724
  
Equity contributions from (distributions to) noncontrolling interest
    
-
      
-
      
-
              
-
      
-
      
-
      
-
      
-
      
651
      
651
  
Preferred Series A dividends, declared $1.477 per share
    
-
      
-
      
-
              
-
      
-
      
-
      
(10,944
)
    
(10,944
)
    
-
      
(10,944
)
Preferred Series C dividends, declared $1.430 per share
    
-
      
-
      
-
              
-
      
-
      
-
      
(17,157
)
    
(17,157
)
    
-
      
(17,157
)
Preferred Series D dividends, declared $1.406 per share
    
-
      
-
      
-
              
-
      
-
      
-
      
(25,875
)
    
(25,875
)
    
-
      
(25,875
)
Common dividends declared, $0.90 per share
    
-
      
-
      
-
              
-
      
-
      
-
      
(852,989
)
    
(852,989
)
    
-
      
(852,989
)
BALANCE, September 30, 2015
  
$
177,088
    
$
290,514
    
$
445,457
    
$
-
    
$
9,478
    
$
14,789,320
    
$
262,855
    
$
(3,695,884
)
  
$
12,278,828
    
$
5,505
    
$
12,284,333
  
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
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(414,814
)
    
(414,814
)
    
-
      
(414,814
)
Net income (loss) attributable to noncontrolling interest
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(883
)
    
(883
)
Unrealized gains (losses) on available-for-sale securities
    
-
      
-
      
-
      
-
      
-
      
-
      
1,519,874
      
-
      
1,519,874
      
-
      
1,519,874
  
Reclassification adjustment for net (gains) losses included in net income (loss)
    
-
      
-
      
-
      
-
      
-
      
-
      
(22,601
)
    
-
      
(22,601
)
    
-
      
(22,601
)
Stock compensation expense
    
-
      
-
      
-
      
-
      
-
      
6,949
      
-
      
-
      
6,949
      
-
      
6,949
  
Net proceeds from direct purchase and dividend reinvestment
    
-
      
-
      
-
      
-
      
2
      
1,793
      
-
      
-
      
1,795
      
-
      
1,795
  
Buyback of common stock
    
-
      
-
      
-
      
-
      
(111
)
    
(102,601
)
    
-
      
-
      
(102,712
)
    
-
      
(102,712
)
Acquisition of subsidiary
    
-
      
-
      
-
      
287,500
      
939
      
996,768
      
-
      
-
      
1,285,207
              
1,285,207
  
Equity contributions from (distributions to) noncontrolling interest
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(924
)
    
(924
)
Preferred Series A dividends, declared $1.477 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(10,944
)
    
(10,944
)
    
-
      
(10,944
)
Preferred Series C dividends, declared $1.430 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(17,157
)
    
(17,157
)
    
-
      
(17,157
)
Preferred Series D dividends, declared $1.406 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(25,875
)
    
(25,875
)
    
-
      
(25,875
)
Preferred Series E dividends, declared $0.477 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(4,811
)
    
(4,811
)
            
(4,811
)
Common dividends declared, $0.90 per share
    
-
      
-
      
-
      
-
      
-
      
-
      
-
      
(857,223
)
    
(857,223
)
    
-
      
(857,223
)
BALANCE, September 30, 2016
  
$
177,088
    
$
290,514
    
$
445,457
    
$
287,500
    
$
10,189
    
$
15,578,677
    
$
1,119,677
    
$
(4,655,440
)
  
$
13,253,662
    
$
8,141
    
$
13,261,803
  
 
See notes to consolidated financial statements
3
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
   
Nine Months Ended September 30,
  
   
2016
    
2015
  
Cash flows from operating activities:
            
Net income (loss)
  
$
(415,697
)
  
$
(203,919
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating  activities:
                
Amortization of Residential Investment Securities premiums and discounts, net
    
834,257
      
633,937
  
Amortization of commercial real estate investment premiums and discounts, net
    
(2,393
)
    
(1,080
)
Amortization of intangibles
    
10,446
      
5,095
  
Amortization of deferred financing costs
    
1,315
      
5,192
  
Amortization of net origination fees and costs, net
    
(3,925
)
    
(3,350
)
Amortization of contingent beneficial conversion feature and equity component of Convertible Senior Notes
    
-
      
12,246
  
Depreciation expense
    
16,511
      
8,773
  
Bargain purchase gain
    
(72,576
)
    
-
  
Net gain on sale of commercial real estate
    
(821
)
    
-
  
Net gain on sale of commercial loans held for sale
    
72
      
100
  
Net (gains) losses on sales of Residential Investment Securities
    
(24,941
)
    
(70,796
)
Net (gains) losses on sale of residential mortgage loans       383        -  
Net (gain) loss on sale of investment in affiliate
    
-
      
12,450
  
Stock compensation expense
    
6,949
      
1,089
  
Impairment of goodwill
    
-
      
22,966
  
Unrealized (gains) losses on interest rate swaps
    
1,148,478
      
587,995
  
Net unrealized (gains) losses on investments measured at fair value through earnings
    
24,351
      
40,466
  
Equity in net income from unconsolidated joint ventures
    
5,344
      
414
  
Net (gains) losses on trading assets
    
(370,050
)
    
12,961
  
Originations of commercial loans held for sale, net
    
-
      
(476,400
)
Proceeds from sale of commercial loans held for sale
    
134,253
      
-
  
Payments on purchase of residential mortgage loans
    
(73,370
)
    
-
  
Proceeds from repayments from residential mortgage loans
    
107,648
      
-
  
Proceeds from repurchase agreements of RCap
    
1,661,650,000
      
1,447,650,000
  
Payments on repurchase agreements of RCap
    
(1,662,100,000
)
    
(1,452,000,000
)
Proceeds from reverse repurchase agreements of RCap
    
48,390,000
      
39,875,000
  
Payments on reverse repurchase agreements of RCap
    
(48,390,000
)
    
(39,775,000
)
Net payments on derivatives
    
23,168
      
7,288
  
Net change in:
                
Other assets
    
(72,800
)
    
(29,324
)
Accrued interest and dividends receivable
    
13,970
      
52,057
  
Receivable for investment advisory income
    
-
      
6,410
  
Accrued interest payable
    
15,729
      
(34,947
)
Accounts payable and other liabilities
    
(23,162
)
    
17,417
  
Net cash provided by (used in) operating activities
  
$
833,139
    
$
(3,642,960
)
                 
Cash flows from investing activities:
                
Payments on purchases of Residential Investment Securities
    
(13,628,516
)
    
(13,172,943
)
Proceeds from sales of Residential Investment Securities
    
8,729,912
      
22,081,011
  
Principal payments on Agency mortgage-backed securities
    
8,580,353
      
7,811,368
  
Purchase of MSRs
    
(127,489
)
    
-
  
Proceeds from sale of investment in affiliate
    
-
      
126,402
  
Payments on purchases of corporate debt
    
(324,863
)
    
(301,739
)
Principal payments on corporate debt
    
98,542
      
43,846
  
Purchases of commercial real estate debt investments
    
(76,862
)
    
(368,511
)
Sales of commercial real estate debt investments
    
-
      
41,016
  
Purchase of securitized loans at fair value
    
(1,489,268
)
    
(2,574,353
)
Origination of commercial real estate investments, net
    
(204,184
)
    
(350,477
)
Proceeds from sale of commercial real estate investments
    
12,750
      
227,450
  
Principal payments on commercial real estate debt investments
    
71,116
      
10,170
  
Principal payments on securitized loans at fair value
    
106,786
      
-
  
Principal payments on commercial real estate investments
    
486,435
      
327,936
  
Purchase of investments in real estate
    
(2,043
)
    
(29,900
)
Investment in unconsolidated joint venture
    
(3,109
)
    
(70,602
)
Distributions in excess of cumulative earnings from unconsolidated joint ventures
    
4,155
      
-
  
Payments on purchase of residential mortgage loans held for investment
    
(8,022
)
    
-
  
Proceeds from repayments from residential mortgage loans held for investment
    
11,771
      
-
  
Purchase of equity securities
    
(88,062
)
    
(27,519
)
Proceeds from sales of equity securities
    
16,112
      
13,119
  
Cash acquired in business combination
    
41,697
      
-
  
Net cash provided by (used in) investing activities
  
$
2,207,211
    
$
13,786,274
  
                 
Cash flows from financing activities:
                
Proceeds from repurchase agreements
    
128,601,867
      
156,196,644
  
Principal payments on repurchase agreements
    
(133,021,365
)
    
(166,759,206
)
Payments on maturity of convertible senior notes
    
-
      
(857,541
)
Proceeds from other secured financing
    
2,358,314
      
687,935
  
Payments on other secured financing
    
(434,458
)
    
(327,965
)
Proceeds from issuance of securitized debt
    
1,381,640
      
2,382,810
  
Principal repayments on securitized debt
    
(273,091
)
    
(84,560
)
Principal repayments on securitized loans
    
-
      
201
  
Payment of deferred financing cost
    
(3,076
)
    
(886
)
Net proceeds from direct purchases and dividend reinvestments
    
1,795
      
1,724
  
Proceeds from mortgages payable
    
-
      
20,450
  
Principal payments on participation sold
    
(230
)
    
(220
)
Principal payments on mortgages payable
    
(7,500
)
    
(262
)
Contributions from noncontrolling interests
    
-
      
1,107
  
Distributions to noncontrolling interests
    
(926
)
    
(456
)
Net payment on share repurchase
    
(102,712
)
    
-
  
Dividends paid
    
(927,678
)
    
(906,910
)
Net cash provided by (used in) financing activities
  
$
(2,427,420
)
  
$
(9,647,135
)
                 
Net (decrease) increase in cash and cash equivalents
  
$
612,930
    
$
496,179
  
                 
Cash and cash equivalents, beginning of period
    
1,769,258
      
1,741,244
  
                 
Cash and cash equivalents, end of period
  
$
2,382,188
    
$
2,237,423
  
     
 
      
 
  
Supplemental disclosure of cash flow information:
                
Interest received
  
$
2,197,880
    
$
2,241,301
  
Dividends received
  
$
1,253
    
$
12,684
  
Fees received    $   4,266     $  -  
Investment advisory income received
  
$
-
    
$
31,258
  
Interest paid (excluding interest paid on interest rate swaps)
  
$
441,121
    
$
314,568
  
Net interest paid on interest rate swaps
  
$
415,223
    
$
450,750
  
Taxes paid
  
$
858
    
$
1,926
  
   
 
 
    
 
 
  
Noncash investing activities:
                
Receivable for investments sold
  
$
493,839
    
$
127,571
  
Payable for investments purchased
  
$
454,237
    
$
744,378
  
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment
  
$
1,497,273
    
$
57,972
  
   
 
 
    
 
 
  
Noncash financing activities:
                
Dividends declared, not yet paid
  
$
269,111
    
$
284,348
  
Decrease in securitized debt    $   16,663     $   -  
 
See notes to consolidated financial statements.
4
 
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, residential mortgage loans, mortgage servicing rights, 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.
·
Hatteras Financial Corp. (“Hatteras”), a wholly-owned subsidiary that was acquired during the third quarter of 2016 which, through its wholly-owned subsidiaries, primarily engages in acquiring, investing in, securitizing and managing residential whole mortgage loans and investing in and managing mortgage servicing rights.
·
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.
 
5
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 apply 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 $2.3 billion and $1.6 billion at September 30, 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 in other comprehensive income (loss) unless
 
6
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
the Company has elected the fair value option, where the unrealized gains and losses on these financial instruments are recorded through earnings (e.g., interest-only securities). 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. Gains and losses on sales of Residential Investment Securities are recorded on trade date based on the specific identification method.
The Company elected the fair value option for interest-only mortgage-backed securities, non-Agency mortgage-backed securities and CRT securities as this election simplifies the accounting. 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 CRT securities are measured at fair value with changes in fair value recorded as Net unrealized gains (losses) on investments 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.

The Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the Residential Investment Securities and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities), considering estimates of future principal prepayment in the calculation of the effective yield because they are probable and the timing and amount of prepayments can be reasonably estimated.  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 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 amortization recognized in any given period.
Premiums or discounts associated with the purchase of Agency interest-only securities and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis.
Interest income for Agency debentures is recognized by applying the interest method using contractual cash flows without estimating prepayments.
The table below summarizes the interest income recognition methodology for Residential Investment Securities:
 
 
Interest Income
Methodology
Agency
  
Fixed-rate pass-through(1)
Effective yield(3)
Adjustable-rate pass-through(1)
Effective yield(3)
Collateralized Mortgage Obligation (“CMO”)(1)
Effective yield(3)
Debentures(1)
Contractual Cash Flows
Interest-only(2)
Prospective
   
Residential Credit
  
CRT(2)
Prospective
Legacy (2)
Prospective
NPL/RPL (2)
Prospective
New issue (2)
Prospective
New issue interest-only (2)
Prospective
   
(1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss).
(2) Changes in fair value are recognized in Net unrealized gains (losses) on investments measured at fair value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss).
(3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception.
Residential Mortgage Loans – The Company’s residential mortgage loans are primarily comprised of prime jumbo adjustable-rate whole mortgage loans acquired in connection with the Company’s acquisition of Hatteras (“Hatteras Acquisition”) and subsequent purchases. Additionally, pursuant to the Hatteras Acquisition, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo whole mortgage loans. The Company made elections to account for the investments in residential mortgage loans held in its portfolio and in the securitization trust at fair value as these elections simplify the accounting. Residential mortgage loans are recognized at fair value on the
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
accompanying Consolidated Statements of Financial Condition. Changes in the estimated fair value are presented in Net unrealized gains (losses) on investments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss).

Premiums and discounts associated with the purchase of residential mortgage loans and with those held in the securitization trust are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans.  Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss).

There was no real estate acquired in settlement of residential mortgage loans as of September 30, 2016 or December 31, 2015. The Company would be considered to have received physical possession of residential real estate property collateralizing a residential mortgage loan, so that the loan is derecognized and the real estate property would be recognized, if either (i) the Company obtains legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveys all interest in the residential real estate property to the Company to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.

Mortgage Servicing Rights (“MSRs”) – MSRs represent the rights associated with servicing contracts obtained in connection with the Hatteras Acquisition or through the subsequent purchase of such rights from third parties with the intention of holding them as investments. The Company and its subsidiaries do not originate or directly service mortgage loans. Rather, the Company utilizes duly licensed subservicers to perform substantially all servicing functions for the loans underlying the MSRs. The Company elected to account for all of its investments in MSRs at fair value; as such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net unrealized gains (losses) on investments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Servicing income, net of servicing expenses, is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

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”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments.  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 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,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
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 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 methods similar to those 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 fair valued based on exchange pricing with gains and losses recorded in Net gains (losses) on trading assets in the Consolidated Statements of Comprehensive Income (Loss).
Forward purchase commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to
purchasing mortgage loans at a particular price, provided the mortgage loans close with the counterparties. Gains and losses are 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
9
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
Finite life intangible assets 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 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 and Hatteras, 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 September 30, 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” Note 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. 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.
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 Commercial Loans held for sale in the accompanying Consolidated Statements of Financial Condition. Any 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. 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” Note for additional information.
 
10
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
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 that are not reimbursed by tenants are expensed as incurred. Major replacements and 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 Uniform Commercial Code (“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 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.
 
11
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
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 and discounts are amortized or accreted into interest income using the interest method.
Impairment of Securities and Loans
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 available-for-sale 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 September 30, 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 its 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.
 
12
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
In connection with the quarterly surveillance review process, CRE Debt and Preferred Equity Investments are assigned an internal risk rating. Effective December 31, 2015, the loan risk ratings were enhanced to reflect guidance provided by the Office of the Comptroller 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”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but exhibit potential weakness that deserve 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.
Nonaccrual Status – If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued, but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt, but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment
within a reasonable period of time and there is a sustained period of repayment performance by the borrower.
The Company did not have any impaired loans, nonaccrual loans, or loans in default as all of the loans were performing as of September 30, 2016 and December 31, 2015. Accordingly, no allowance for loan losses was deemed necessary as of September 30, 2016 and December 31, 2015.

Broker Dealer Activities

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 contractual 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 reverse repurchase activity is with affiliated entities.

Recent Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below were determined to be either not applicable, are not expected to have a significant impact on our consolidated financial statements when adopted, or did not have a significant impact on our consolidated financial statements upon adoption.
 
13
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
Standard
Description
Effective Date
Effect on the financial statements or other significant matters
Standards that are not yet adopted
      
ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
This ASU updates the existing incurred loss model to a current expected credit loss model for financial assets and net investments in leases that are not accounted for at fair value through earnings.  The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures and any other financial assets not excluded from the scope.  There are also changes to the accounting for available for sale debt securities.
   January 1, 2020 (early adoption permitted) 
The Company is assessing the impact to the consolidated financial statements.
Standard
Description
Effective Date
Effect on the financial statements or other significant matters
Standards that were adopted
      
ASU 2014-13, Consolidation (Topic 810) Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity
This update provides 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 early adopted this ASU in the first quarter of 2015 and applied the guidance to commercial mortgage backed securitization transactions.  See "Variable Interest Entity" footnote for further disclosure.
       
 
 
4.            ACQUISITION OF HATTERAS

As previously disclosed in the Company’s filings with the SEC, on July 12, 2016 the Company completed its acquisition of Hatteras, an externally managed mortgage REIT that invested primarily in single-family residential mortgage real estate assets, for aggregate consideration to Hatteras common shareholders of $1.5 billion, consisting of $1.0 billion in equity consideration and $521.1 million in cash consideration. The Company issued 93.9 million shares of common shares as part of the consideration for the Hatteras Acquisition, which includes replacement share-based payment awards.

In addition, as part of the Hatteras Acquisition, each share of Hatteras 7.625% Series A Cumulative Redeemable Preferred Stock, par value $0.001 per share (“Hatteras Preferred Share”), that was outstanding as of immediately prior to the completion of the Hatteras Acquisition was converted into one share of a newly-designated series of the Company’s preferred stock, par value $0.01 per share, which the Company classified and designated as 7.625% Series E Cumulative Redeemable Preferred Stock, and which has rights, preferences, privileges and voting powers substantially the same as a Hatteras Preferred Share.
Hatteras’ portfolio of adjustable rate mortgage-backed securities is believed to be complementary to the Company’s existing portfolio. The combined capital base is believed to support continued growth of the Company’s businesses and the acquisition is believed to create efficiency and growth opportunities.

The following table summarizes the aggregate consideration and preliminary fair value of the assets acquired and liabilities assumed recognized at the acquisition date, which is subject to change if new information becomes available:

 
14
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
Purchase Price Allocation (dollars in thousands)
      
       
Consideration transferred:
      
Cash
  
$
521,082
  
Common Equity
    
997,707
  
         
Preferred Shares:
        
Exchange of Hatteras preferred stock for Annaly preferred stock
    
278,252
  
Preferred stock fair value adjustment
    
9,248
  
Preferred Shares
    
287,500
  
         
Total Consideration
  
$
1,806,289
  
         
Net Assets:
        
Cash
  
$
562,780
  
Agency mortgage-backed securities, at fair value
    
10,863,070
  
Credit risk transfer securities, at fair value
    
116,770
  
Residential mortgage loans
    
360,447
  
Mortgage servicing rights
    
355,820
  
Other derivatives, at fair value
    
8,677
  
Principal receivable
    
438,005
  
Accrued interest and dividend receivable
    
83,814
  
Other assets
    
57,250
  
Total Assets Acquired
  
$
12,846,633
  
         
Repurchase agreements
  
$
10,422,757
  
Other secured financing
    
35,769
  
Securitized debt of consolidated VIEs
    
54,135
  
Other derivatives, at fair value
    
349,922
  
Dividends payable
    
670
  
Payable for investments purchased
    
2,643
  
Accrued interest payable
    
4,833
  
Accounts payable and other liabilities
    
97,039
  
Total Liabilities Assumed
    
10,967,768
  
Net Assets Acquired
  
$
1,878,865
  
         
Bargain Purchase Gain
  
$
72,576
  
For time-based restricted stock awards granted by Hatteras that fully vested as of the Hatteras Acquisition closing date, the fair value of the Company’s common stock issued in the satisfaction of these awards was included in equity consideration transferred as no post acquisition service was required. For time-based restricted stock awards granted by Hatteras that did not fully vest as of the acquisition date and require post-acquisition service, the fair value of the Company’s common stock issued as replacement awards has been allocated between the pre- and post-acquisition service period, with the amount allocated to the pre-acquisition period included in the equity consideration transferred. The amount allocated to the post-acquisition service period for the time-based restricted stock awards was $5.8 million and expensed during the third quarter of 2016 in Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss). Also, in connection with the Hatteras Acquisition, the Company entered into consulting agreements with certain former employees of Hatteras. During the third quarter of 2016, the Company recognized the full amount of the fees related to the consulting agreements totaling $19.9 million in Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss).
 
Under the acquisition method of accounting, merger-related transaction costs (such as advisory, legal, valuation, consulting and other professional fees) are not included as components of consideration transferred but are expensed in the periods in which the costs are incurred. Transaction costs of $48.9 million were incurred during the nine months ended September 30, 2016 and were included in Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss).
The fair value and unpaid principal balance of residential mortgage loans acquired in connection with the Hatteras acquisition were $360.4 million and $350.5 million, respectively.

The bargain purchase gain is the result of the mortgage REIT sector facing significant headwinds for a variety of reasons, including uncertainty regarding the outlook for interest rates and the financial markets generally.  Consequently, in recent years, the price per share of Hatteras common stock has traded at a substantial discount to Hatteras’ book value per share, which made raising equity capital to fund new investments dilutive to stockholders.  Because of these circumstances, Hatteras was unable to raise equity capital on acceptable terms and significantly increase its size and scale through capital market transactions.   The bargain purchase is recognized in Realized and unrealized gains (losses) in the Consolidated Statements of Comprehensive Income (Loss).
 
15
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
The Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 includes Net interest income and Net income (loss) of $35.5 million and $86.7 million, respectively, attributable to the Hatteras Acquisition. The following unaudited pro forma summary presents consolidated information of the Company, assuming the Hatteras Acquisition had occurred as of January 1, 2015 for purposes of the 2016 and 2015 pro forma disclosures presented. They include certain adjustments for the
periods presented to exclude deferred swap net losses of Hatteras from net interest expense to conform to the Company’s presentation, recalculate the management fee based upon pro forma stockholders’ equity and the Company’s management fee rate, eliminate Hatteras common stock outstanding and record the issuance of the Company’s common stock to Hatteras stockholders and reflect direct costs incurred by the Company and the bargain purchase gain as if the Hatteras Acquisition occured as of January 1, 2015. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the Hatteras Acquisition occurred on January 1, 2015 and may not be indicative of future operating results:
 
 
 
 
 
 
 
 
 
 
 
   
For the Quarters Ended
    
For the Nine Months Ended
  
   
September 30, 2016
    
September 30, 2015
    
September 30, 2015
    
September 30, 2015
  
   
(dollars in thousands, except per share data)
  
Net interest income
  
$
395,396
    
$
397,602
    
$
1,027,202
    
$
1,434,947
  
Net income (loss)
  
$
708,191
    
$
(710,720
)
  
$
(520,830
)
  
$
(272,007
)
Basic earnings per common share
  
$
0.67
    
$
(0.70
)
  
$
(0.58
)
  
$
(0.33
)
Diluted earnings per common share
  
$
0.67
    
$
(0.70
)
  
$
(0.58
)
  
$
(0.33
)
 
 
For additional details regarding the terms and conditions of the Hatteras Acquisition and related matters, please refer to the Company’s other filings with the SEC that were made in connection with the Hatteras Acquisition,
including the Prospectus/Offer to Exchange filed with the SEC pursuant to Rule 424(b)(3) on July 8, 2016 and the Current Report on Form 8-K filed with the SEC on July 12, 2016.
 
 
 
 
16
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 
5.            RESIDENTIAL INVESTMENT SECURITIES

The following tables present the Company’s Residential Investment Securities portfolio carried at fair value as of September 30, 2016 and December 31, 2015:
 
   
September 30, 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
  
$
55,713,247
    
$
3,174,800
    
$
(1,828
)
  
$
58,886,219
    
$
1,102,609
    
$
(46,259
)
  
$
59,942,569
  
Adjustable-rate pass-through
    
11,760,633
      
409,677
      
(4,399
)
    
12,165,911
      
77,056
      
(14,340
)
    
12,228,627
  
Interest-only
    
8,562,837
      
1,498,193
      
-
      
1,498,193
      
13,145
      
(206,429
)
    
1,304,909
  
Total Agency investments
  
$
76,036,717
    
$
5,082,670
    
$
(6,227
)
  
$
72,550,323
    
$
1,192,810
    
$
(267,028
)
  
$
73,476,105
  
                                                         
Residential Credit
                                                        
CRT
  
$
641,531
    
$
7,333
    
$
(11,742
)
  
$
637,122
    
$
32,188
    
$
(15
)
  
$
669,295
  
Legacy(2)
    
1,075,956
      
1,634
      
(169,677
)
    
907,913
      
26,767
      
(513
)
    
934,167
  
NPL/RPL
    
347,105
      
434
      
(877
)
    
346,662
      
2,037
      
(264
)
    
348,435
  
New issue
    
161,275
      
946
      
(359
)
    
161,862
      
4,484
      
(16
)
    
166,330
  
New issue interest-only
    
935,395
      
16,615
      
-
      
16,615
      
-
      
(5,286
)
    
11,329
  
Total residential credit investments
  
$
3,161,262
    
$
26,962
    
$
(182,655
)
  
$
2,070,174
    
$
65,476
    
$
(6,094
)
  
$
2,129,556
  
                                                         
Total Residential Investment Securities
  
$
79,197,979
    
$
5,109,632
    
$
(188,882
)
  
$
74,620,497
    
$
1,258,286
    
$
(273,122
)
  
$
75,605,661
  
                                                         
                                                         
   
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