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, 2002
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 MORTGAGE MANAGEMENT, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 22-3479661
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1211 AVENUE OF THE AMERICAS, SUITE 2902
NEW YORK, NEW YORK
(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 X No____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the last practicable date:
Class Outstanding at November 12, 2002
Common Stock, $.01 par value 84,524,362
ANNALY MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statements of Financial Condition- September 30, 2002 (Unaudited)
and December 31, 2001 1
Statements of Operations (Unaudited) for the quarters and nine
months ended September 30, 2002 and 2001 2
Statements of Stockholders' Equity (Unaudited) for the nine
months ended September 30, 2002 3
Statements of Cash Flows (Unaudited) for the quarters and
nine months ended September 30, 2002 and 2001 4
Notes to Financial Statements (Unaudited) 5-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23-24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26-27
CERTIFICATIONS 28-32
PART I.
ITEM 1. FINANCIAL STATEMENTS
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------ -----------
(dollars in the thousands)
ASSETS
Cash and cash equivalents $2,002 $429
Mortgage-Backed Securities, at fair value 11,489,538 7,575,379
Receivable for Mortgage-Backed Securities sold 77,232 94,503
Accrued interest receivable 49,950 46,804
Other assets 1,260 199
------------ -----------
Total assets $11,619,982 $7,717,314
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements $ 9,809,968 $6,367,710
Payable for Mortgage-Backed Securities
purchased 634,598 627,064
Accrued interest payable 28,035 16,043
Dividends payable 57,465 35,896
Other liabilities 2,592 2,010
Accounts payable 2,319 1,234
------------ -----------
Total liabilities 10,534,977 7,049,957
------------ -----------
Stockholders' Equity:
Common stock: par value $.01 per share;
500,000,000
Authorized, 84,507,065 and 59,826,975
shares issued
and outstanding, respectively 845 598
Additional paid-in capital 1,002,197 623,986
Accumulated other comprehensive gain 74,382 38,169
Retained earnings 7,581 4,604
------------ -----------
Total stockholders' equity 1,085,005 667,357
------------ -----------
Total liabilities and stockholders' equity $11,619,982 $7,717,314
============ ===========
See notes to financial statements.
1
PART I.
ITEM 1. FINANCIAL STATEMENTS
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the For the For the For the
Quarter Quarter Nine Nine
Ended Ended months months
September September ended ended
30, 30, September September
2002 2001 30, 30,
2002 2001
----------------------- ----------- -----------
(dollars in the thousands)
INTEREST INCOME:
Mortgage-Backed
Securities
and cash
equivalents $109,201 $75,774 $311,524 $182,998
INTEREST EXPENSE:
Repurchase agreements 54,012 48,620 141,884 127,357
----------- ----------- ----------- -----------
NET INTEREST INCOME 55,189 27,154 169,640 55,641
GAIN ON SALE OF
MORTGAGE-BACKED
SECURITIES 4,747 1,184 9,500 1,936
GENERAL AND
ADMINISTRATIVE
EXPENSES 3,268 1,993 10,059 4,307
----------- ----------- ----------- -----------
NET INCOME 56,668 26,345 169,081 53,270
----------- ----------- ----------- -----------
OTHER COMPREHENSIVE
INCOME:
Unrealized gain on
available-
for-sale securities 11,846 53,001 45,713 71,657
Less:
reclassification
adjustment
for net gains
included in net
income (4,747) (1,184) (9,500) (1,936)
----------- ----------- ----------- -----------
Other comprehensive
income 7,099 51,817 36,213 69,721
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $63,767 $78,162 $205,294 $122,991
=========== =========== =========== ===========
NET INCOME PER SHARE:
Basic $0.68 $0.58 $2.08 $1.51
=========== =========== =========== ===========
Diluted $0.68 $0.57 $2.07 $1.49
=========== =========== =========== ===========
AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic 83,668,422 45,503,179 81,206,156 35,260,086
=========== =========== =========== ===========
Diluted 83,939,870 45,959,693 81,490,436 35,768,890
=========== =========== =========== ===========
See notes to financial statements.
2
PART I
ITEM 1. FINANCIAL STATEMENTS
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Common
Stock Additional Other
Par Paid-In Comprehensive Retained Comprehensive
Value Capital Income Earnings Income Total
-----------------------------------------------------------------
(dollars in thousands)
BALANCE, DECEMBER 31,
2001 $598 $623,986 $4,604 $38,169 $667,357
Net Income $53,043 53,043
Other comprehensive
income:
Unrealized net gain
on securities, net
of reclassification
adjustment (7,667) (7,667)
-------------
Comprehensive income $45,376 45,376
=============
Exercise of stock
options 282 282
Proceeds from direct
purchase 559 559
Proceeds from
secondary offering 231 347,106 347,337
Dividends declared
for the quarter
ended March 31,
2002, $0.63 per
average share (52,223) (52,223)
------------------ ----------------------------------
BALANCE, MARCH 31,
2002 $829 $971,933 $5,424 $30,502 $1,008,688
Net Income $59,369 59,369
Other comprehensive
income:
Unrealized net gain
on securities,
net of
reclassification
adjustment 36,781 36,781
-------------
Comprehensive income $96,150 96,150
=============
Exercise of stock
options 441 441
Shares exchanged upon
excise of stock
Options (76) (76)
Proceeds from direct
purchase 831 831
Dividends declared
for the quarter
ended June 30,
2002, $0.68 per
average share (56,403) (56,403)
----------------- ----------------------------------
BALANCE, JUNE 30, 2002 $829 $973,129 $8,390 $67,283 $1,049,631
Net Income $56,668 $56,668
Other comprehensive
income:
Unrealized net
gain on
securities, net of
reclassification
adjustment 7,099 7,099
-------------
Comprehensive income $63,767 63,767
=============
Exercise of stock
options 123 123
Proceeds from direct
purchase 1 857 858
Proceeds from equity
shelf program
offering 15 28,088 28,103
Dividends declared
for the quarter
ended September 30,
2002,
$0.68 per average
share (57,477) (57,477)
----------------- ----------------------------------
BALANCE, SEPTEMBER 30,
2002 $845 $1,002,197 $7,581 74,382 $1,085,005
================= ==================================
See notes to financial statements.
3
PART I
ITEM 1. FINANCIAL STATEMENTS
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the For the For the Nine For the Nine
Quarter Quarter months months
Ended Ended ended ended
September September September September
30, 30, 30, 30,
2002 2001 2002 2001
------------------------------------------------
(dollars in the thousands)
Cash flows from
operating activities:
Net income $56,668 $26,345 $169,081 $53,270
Adjustments to
reconcile net
income to net cash
Provided by
operating
activities:
Amortization of
mortgage
premiums and
discounts, net 28,229 8,685 65,917 17,623
Gain on sale of
Mortgage-Backed
Securities (4,747) (1,184) (9,500) (1,936)
Stock option
expense 163
Market value
adjustment on
long-term
repurchase
agreement 1,252 445 883 445
(Increase)
decrease in
accrued
interest
receivable 903 (4,390) (3,146) (25,078)
(Increase)
decrease in
other assets (15) (42) (1,061) 1
Increase in
accrued
interest
payable 7,325 1,558 11,992 11,470
Increase in
accounts
payable 233 687 1,084 1,209
------------------------------------------------
Net cash
provided by
operating
activities 89,848 32,104 235,413 57,004
------------------------------------------------
Cash flows from
investing activities:
Purchase of
Mortgage-Backed
Securities (2,021,616) (1,924,645) (8,011,359) (5,911,154)
Proceeds from sale
of Mortgage-
Backed Securities 321,237 183,408 1,129,673 532,091
Principal payments
of Mortgage-
Backed
Securities 1,014,235 506,301 2,972,127 982,052
------------------------------------------------
Net cash
used in
investing
activities (686,144) (1,234,936) (3,909,559) (4,397,011)
------------------------------------------------
Cash flows from
financing activities:
Proceeds from
repurchase
agreements 18,851,415 13,193,781 60,801,326 31,869,708
Principal payments
on repurchase
agreements (18,226,432)(12,153,169)(57,359,369)(27,975,639)
Proceeds from
exercise of stock
options 123 1,196 608 1,618
Proceeds from direct
purchase 859 2,249 52
Net proceeds from
offerings 28,102 179,629 375,439 474,216
Dividends paid (56,415) (17,871) (144,534) (29,212)
------------------------------------------------
Net cash
provided by
financing
activities 597,652 1,203,566 3,675,719 4,340,743
------------------------------------------------
Net increase in cash
and cash equivalents 1,356 734 1,573 736
Cash and cash
equivalents,
beginning of period 646 115 429 113
------------------------------------------------
Cash and cash
equivalents, end of
period $2,002 $849 $2,002 $849
================================================
Supplemental
disclosure of cash
flow information:
Interest paid $46,687 $47,062 $129,892 $115,888
================================================
Noncash financing
activities:
Net change in
unrealized gain on
available-
for-sale
securities $7,099 $51,817 $36,213 $69,721
================================================
Dividends declared,
not yet paid $57,465 $26,893 $57,465 $26,893
================================================
See notes to financial statements.
4
ANNALY MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Annaly Mortgage Management, Inc. (the "Company") was incorporated in
Maryland on November 25, 1996. The Company commenced its operations of
purchasing and managing an investment portfolio of Mortgage-Backed Securities
(as defined below) on February 18, 1997, upon receipt of the net proceeds from
the private placement of equity capital. An initial public offering was
completed on October 14, 1997.
A summary of the Company's significant accounting policies follows:
Basis of Presentation - The accompanying unaudited financial statements
have been prepared in conformity with the instructions to Form 10-Q and Article
10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America ("GAAP"). The
interim financial statements for the three month period are unaudited; however,
in the opinion of the Company's management, all adjustments, consisting only of
normal recurring accruals, necessary for a fair statement of the results of
operations have been included. These unaudited financials statements should be
read in conjunction with the audited financial statements included in the
Company's Annual Report on form 10-K for the year ended December 31, 2001. The
nature of the Company's business is such that the results of any interim period
are not necessarily indicative of results for a full year.
Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand
and money market funds. The carrying amounts of cash equivalents approximates
their value.
Mortgage-Backed Securities - The Company invests primarily in mortgage
pass-through certificates, collateralized mortgage obligations and other
mortgage-backed securities representing interests in or obligations backed by
pools of mortgage loans (collectively, "Mortgage-Backed Securities").
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires the Company to classify its
investments as either trading investments, available-for-sale investments or
held-to-maturity investments. Although the Company generally intends to hold
most of its Mortgage-Backed Securities until maturity, it may, from time to
time, sell any of its Mortgage-Backed Securities as part of its overall
management of its statement of financial condition. Accordingly, this
flexibility requires the Company to classify all of its Mortgage-Backed
Securities as available-for-sale. All assets classified as available-for-sale
are reported at fair value, based on market prices provided by certain dealers
who make markets in these financial instruments, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity.
Unrealized losses on Mortgage-Backed Securities that are considered other
than temporary, as measured by the amount of decline in fair value attributable
to factors other than temporary, are recognized in income and the cost basis of
the Mortgage-Backed Securities is adjusted. There were no such adjustments for
the quarters ended September 30, 2002 and 2001.
Interest income is accrued based on the outstanding principal amount of the
Mortgage-Backed Securities and their contractual terms. Premiums and discounts
associated with the purchase of the Mortgage-Backed Securities are amortized
into interest income over the lives of the securities using the interest method.
Mortgage-Backed Securities transactions are recorded on the trade date.
Purchases of newly issued securities are recorded when all significant
uncertainties regarding the characteristics of the securities are removed,
generally shortly before settlement date. Realized gains and losses on
Mortgage-Backed Securities transactions are determined on the specific
identification basis.
5
Credit Risk - At September 30, 2002 and December 31, 2001, the Company has
limited its exposure to credit losses on its portfolio of Mortgage-Backed
Securities by only purchasing securities issued by Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA"), or
Government National Mortgage Association ("GNMA"). The payment of principal and
interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by
those respective agencies and the payment of principal and interest on the GNMA
Mortgage-Backed Securities are backed by the full-faith-and-credit of the U.S.
government. At September 30, 2002 and December 31, 2001 all of the Company's
Mortgage-Backed Securities have an actual or implied "AAA" rating.
Income Taxes - The Company has elected to be taxed as a Real Estate
Investment Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") with respect thereto.
Accordingly, the Company will not be subjected to Federal income tax to the
extent of its distributions to shareholders and as long as certain asset, income
and stock ownership tests are met.
Use of Estimates - The preparation of 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.
2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of September 30, 2002, which are carried at
their fair value:
Federal Home Federal Government Total
Loan National National Mortgage-
Mortgage Mortgage Mortgage Backed
Corporation Association Association Securities
------------------------------------------------
(dollars in thousands)
Mortgage-Backed
Securities, gross $5,362,654 $5,614,358 $193,367 $11,170,379
Unamortized discount (967) (967)
Unamortized premium 99,536 142,861 3,347 245,744
------------------------------------------------
Amortized cost 5,461,223 5,757,219 196,714 11,415,156
Gross unrealized gains 36,284 56,773 197 93,254
Gross unrealized
losses (9,815) (8,697) (360) (18,872)
------------------------------------------------
Estimated fair value $5,487,692 $5,805,295 $196,551 $11,489,538
================================================
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
------------------------------------------------
(dollars in thousands)
Adjustable rate $7,723,158 $36,905 ($14,974) $7,745,089
Fixed rate 3,691,998 56,349 (3,898) 3,744,449
------------------------------------------------
Total $11,415,156 $93,254 ($18,872)$11,489,538
================================================
6
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of December 31, 2001, which are carried at
their fair value:
Federal Home Federal Government Total
Loan National National Mortgage-
Mortgage Mortgage Mortgage Backed
Corporation Association Association Securities
-----------------------------------------------
(dollars in thousands)
Mortgage-Backed
Securities, gross $4,426,195 $2,894,026 $79,720 $7,399,941
Unamortized discount (1,346) (755) - (2,101)
Unamortized premium 83,775 54,118 1,477 139,370
-----------------------------------------------
Amortized cost 4,508,624 2,947,389 81,197 7,537,210
Gross unrealized gains 32,636 21,224 75 53,935
Gross unrealized losses (7,986) (7,314) (466) (15,766)
-----------------------------------------------
Estimated fair value $4,533,274 $2,961,299 $80,806 $7,575,379
===============================================
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gain Loss Fair Value
-----------------------------------------------
(dollars in thousands)
Adjustable rate $5,908,236 $44,469 $(10,049)$5,942,656
Fixed rate 1,628,974 9,466 (5,717) 1,632,723
-----------------------------------------------
Total $7,537,210 $53,935 $(15,766)$7,575,379
===============================================
The adjustable rate Mortgage-Backed Securities are limited by periodic caps
(generally interest rate adjustments are limited to no more than 1% every six
months) and lifetime caps. The weighted average lifetime cap was 10.4% at
September 30, 2002 and 11.5% at December 31, 2001.
During the nine months ended September 30, 2002, the Company realized
$9,500,000 in gains from sales of Mortgage-Backed Securities. During the nine
months ended September 30, 2001, the Company realized $1,936,000 in gains from
sales of Mortgage-Backed Securities.
3. REPURCHASE AGREEMENTS
The Company had outstanding $9,809,968,000 and $6,367,710,000 of repurchase
agreements with a weighted average borrowing rate of 2.09% and 2.18% and a
weighted average remaining maturity of 137 days and 85 days as of September 30,
2002 and December 31, 2001, respectively.
At September 30, 2002 and December 31, 2001, the repurchase agreements had
the following remaining maturities:
September 30, December 31,
2002 2001
----------------------
(dollars in thousands)
Within 30 days $7,473,119 $5,380,006
30 to 59 days 873,185 206,947
60 to 89 days - 66,202
90 to 119 days - 65,037
Over 120 days $1,463,664 649,518
----------------------
Total $9,809,968 $6,367,710
======================
7
4. OTHER LIABILITIES
In July 2001, the Company entered into a repurchase agreement maturing in
July 2004 which grants the buyer the right to extend the agreement, in whole or
in part, in three-month increments up to July 2006. The repurchase agreement has
a principal value of $100,000,000. The Company accounts for the extension option
as a separate interest rate floor liability carried at fair value. The initial
fair value of $1,205,458 allocated to the interest rate floor resulted in a
similar discount on the repurchase agreement borrowings that is being amortized
over the initial term of 3 years using the effective yield method. At September
30, 2002, the fair value of this interest rate floor was a $2,592,000 and was
classified as other liabilities.
5. COMMON STOCK
During the nine months ended September 30, 2002, 77,032 options were
exercised under the long-term compensation plan at $846,000. Total shares
exchanged upon exercise of the stock options were 4,444 shares at a value of
$76,000. Also, 123,402 shares were purchased in the dividend reinvestment and
direct purchase program at $2,248,000. Also, under the equity shelf program,
1,484,100 shares were issued for net proceeds of $28.1 million. An offering for
23,000,000 shares was completed during the first quarter of 2002 for approximate
net proceeds of $347.3 million. During the nine months ending September 30,
2002, the Company declared dividends to shareholders totaling $166.1 million or
$1.99 per share, which $57.5 million was paid on October 29, 2002.
During the year ended December 31, 2001, 274,231 options were exercised at
$2,975,000. Total shares exchanged upon exercise of the stock options were
41,620 at a value of $588,000. Also, 10,856 shares were purchased in the
dividend reinvestment and share purchase plan, totaling $142,000. The Company
completed an offering of common stock in the third quarter issuing 14,991,600
shares, with aggregate net proceeds of $179.6 million. An offering of common
stock during the second quarter of 2001 was completed issuing 18,918,500 shares,
with aggregate net proceeds of $195.3 million. Additional offerings for
11,150,000 shares were completed during the first quarter of 2001 for aggregate
net proceeds of $99.3 million. During the year ended December 31, 2001, the
Company declared dividends to shareholders totaling $88.4 million, or $1.75 per
share, of which $52.5 million was paid during the year and $35.9 million was
paid on January 30, 2002.
6. EARNINGS PER SHARE (EPS)
For the quarter ended September 30, 2002, the reconciliation is as follows:
For the Quarter Ended
September 30, 2002
(in thousands, except
per share data)
----------------------------------
Per-
Income Shares Share
(Numerator)(Denominator) Amount
----------------------------------
Net income $56,668
-----------
Basic earnings per share $56,668 83,668 $0.68
===========
Effect of dilutive securities:
Dilutive stock options 271
-----------------------
Diluted earnings per share $56,668 83,939 $0.68
==================================
8
For the nine months ended September 30, 2002, the reconciliation is as
follows:
For the Nine months ended
September 30, 2002
(in thousands, except
per share data)
----------------------------------
Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------------------------------
Net income $169,081
-----------
Basic earnings per share $169,081 81,206 $2.08
=========
Effect of dilutive securities:
Dilutive stock options 284
-----------------------
Diluted earnings per share $169,081 81,490 $2.07
==================================
Options to purchase 601,677 shares were outstanding during the quarter
ended September 30, 2002 and were dilutive as the exercise price of between
$7.94 and $13.69 was less than the average stock price for the quarter of
$18.83. Options to purchase 6,250 shares of stock were outstanding and not
considered dilutive. The exercise price of $20.35 was greater than the average
stock price for the quarter of $18.83. Options to purchase, 601,677 shares were
outstanding during the nine months ended September 30, 2002 and were dilutive as
the exercise price of between $7.94 and $13.69 was less than the average stock
price for the nine months of $17.98. Options to purchase 6,250 shares of stock
were outstanding and not considered dilutive. The exercise price of $20.35 was
greater than the average stock price for the nine months of $17.98. For the
quarter ended September 30, 2001, the reconciliation is as follows:
For the Quarter Ended September
30, 2001
----------------------------------
(in thousands, except per share
data)
----------------------------------
Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------------------------------
Net income $26,345
-----------
Basic earnings per share $26,345 45,503 $0.58
===========
Effect of dilutive securities:
Dilutive stock options 457
-----------------------
Diluted earnings per share $26,345 45,960 $0.57
==================================
For the nine months ended September 30, 2001, the reconciliation is as
follows:
For the Nine months ended
September 30, 2001
-------------------------------
(in thousands, except per share
data)
-------------------------------
Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------------------------------
Net income $53,270
-----------
Basic earnings per share 53,270 35,260 $1.51
===========
Effect of dilutive securities:
Dilutive stock options 509
-----------------------
Diluted earnings per share $53,270 35,769 $1.49
==================================
9
Options to purchase 735,485 shares were outstanding during the quarter
ended September 30, 2001 and were dilutive as the exercise price of between
$4.00 and $13.69 was less than the average stock price for the quarter of
$13.75. Options to purchase 729,235 shares were outstanding during the nine
months ended September 30, 2001 and were dilutive as the exercise price of
between $4.00 and $11.25 was less than the average stock price for the nine
months of $12.18. Options to purchase 6,250 shares of stock were outstanding and
not considered dilutive. The exercise price of $13.69 was greater than the
average stock price for the nine months of $12.18.
7. COMPREHENSIVE INCOME
Comprehensive income is a more inclusive financial reporting methodology
that includes disclosure of certain financial information that historically has
not been recognized in the calculation of net income. The Company at September
30, 2002 and December 31, 2001 held securities classified as available-for-sale.
Net unrealized gains and losses are included in comprehensive income, and not
net income. At September 30, 2002, the net unrealized gain totaled $74,382,000
and at December 31, 2001, the net unrealized gains totaled $38,169,000.
8. LEASE COMMITMENTS
The Corporation has a noncancelable lease for office space, which commenced
in May 2002 and expires in December 2009.
The Corporation's aggregate future minimum lease payments are as follows:
2002 $250
2003 500
2004 500
2005 500
2006 530
2007 532
2008 532
2009 532
-------
Total remaining lease payments $3,876
=======
9. RELATED PARTY TRANSACTION
Included in "Other Assets" on the Balance sheet as of December 31, 2001 is
an investment in Annaly International Money Management, Inc. On June 24, 1998,
the Company acquired 99,960 nonvoting shares, at a cost of $49,980. Annaly
International Money Management, Inc. was liquidated during the quarter,
resulting in a $44,000 loss, which is included, as a partial offset, in "Gain on
Sale of Securities," on the face of the income statement. The officers and
directors of Annaly International Money Management Inc. are also officers and
directors of the Company. Officers and employees of the Company are actively
involved in managing Mortgage-Backed Securities and other fixed income assets
for institutional clients through Fixed Income Discount Advisory Company
("FIDAC"). FIDAC is a registered investment adviser, which is owned 100% by the
Chief Executive Officer of Annaly Mortgage Management, Inc. Our management
currently allocates rent and other general and administrative expenses 90% to
Annaly and 10% to FIDAC.
10. INTEREST RATE RISK
The primary market risk to the Company is interest rate risk. Interest
rates are highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political considerations
and other factors beyond the Company's control. Changes in the general level of
interest rates can affect net interest income, which is the difference between
the interest income earned on interest-earning assets and the interest expense
incurred in connection with the interest-bearing liabilities, by affecting the
spread between the interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect the value of the
Mortgage-Backed Securities and the Company's ability to realize gains from the
sale of these assets.
10
The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although the Company has not done so to
date, the Company may seek to mitigate the potential impact on net income of
periodic and lifetime coupon adjustment restrictions in the portfolio of
Mortgage-Backed Securities by entering into interest rate agreements such as
interest rate caps and interest rate swaps.
Changes in interest rates may also have an effect on the rate of mortgage
principal prepayments and, as a result, prepayments on Mortgage-Backed
Securities. The Company will seek to mitigate the effect of changes in the
mortgage principal repayment rate by balancing assets purchased at a premium
with assets purchased at a discount. To date, the aggregate premium exceeds the
aggregate discount on the Mortgage-Backed Securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce net income
compared to what net income would be absent such prepayments.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Annaly Mortgage Management, Inc. ("we" or "us") are a real estate
investment trust that owns and manages a portfolio of Mortgage-Backed
Securities. Our principal business objective is to generate net income for
distribution to our stockholders from the spread between the interest income on
our Mortgage-Backed Securities and the costs of borrowing to finance our
acquisition of Mortgage-Backed Securities.
Special Note Regarding Forward-Looking Statements
Certain statements contained in this quarterly report, and certain
statements contained in our future filings with the Securities and Exchange
Commission (the "SEC" or the "Commission"), in our press releases or in our
other public or shareholder communications may not be, based on historical facts
and are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements which are
based on various assumptions, (some of which are beyond our control) may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"anticipate," "continue," or similar terms or variations on those terms, or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, changes in interest rates, changes in yield curve, changes in
prepayment rates, the availability of mortgage backed securities for purchase,
the availability of financing and, if available, the terms of any financing. For
a discussion of the risks and uncertainties which could cause actual results to
differ from those contained in the forward-looking statements, see our Form 10-K
for the year ended December 31, 2001. We do not undertake, and specifically
disclaim any obligation, to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
Results of Operations: For the Quarters and Nine months ended September 30,
2002 and 2001
Net Income Summary
For the quarter ended September 30, 2002, our GAAP net income was $56.7
million, or $0.68 basic earnings per average share, as compared to $26.3
million, or $0.58 basic earnings per average share, for the quarter ended
September 30, 2001. We compute our GAAP net income per share by dividing net
income by the weighted average number of shares of outstanding common stock
during the period, which was 83,668,422 for the quarter ended September 30, 2002
and 45,503,179 for the quarter ended September 30, 2001. Dividends per actual
shares outstanding for the quarter ended September 30, 2002 was $0.68 per share,
or $57.5 million in total. Dividends per actual shares outstanding for the
quarter ended September 30, 2001 was $0.45 per share, or $26.9 million in total.
Our return on average equity was 21.24 % for the quarter ended September 30,
2002 and 23.26% for the quarter ended September 30, 2001.
For the nine months ended September 30, 2002, our GAAP net income was
$169.1 million, or $2.08 basic earnings per average share, as compared to $53.3
million, or $1.51 basic earnings per average share, for the nine months ended
September 30, 2001. We compute our GAAP net income per share by dividing net
income by the weighted average number of shares of outstanding common stock
during the period, which was 81,206,156 for the nine months ended September 30,
2002 and 35,260,086 for the nine months ended September 30, 2001. Dividends per
actual shares outstanding for the nine months ended September 30, 2002 was $1.99
per share, or $166.1 million in total. Dividends per actual shares outstanding
for the nine months ended September 30, 2001 was $1.15 per share, or $52.5
million in total. Our annualized return on average equity was 23.67% for the
nine months ended September 30, 2002 and 18.78% for the nine months ended
September 30, 2001.
12
Net Income Summary
(dollars in the thousands, except for per-share data)
Quarter Quarter Nine months Nine months
Ended Ended ended ended
September 30, September 30, September 30, September 30,
2001 2002 2001 2002
----------------------------------------------
Interest Income $109,201 $75,774 $311,524 $182,998
Interest Expense 54,012 48,620 141,884 127,357
----------------------------------------------
Net Interest Income 55,189 27,154 169,640 55,641
Gain on Sale of
Mortgage-Backed
Securities 4,747 1,184 9,500 1,936
General and
Administrative Expenses 3,268 1,993 10,059 4,307
----------------------------------------------
Net Income 56,668 $26,345 169,081 $53,270
==============================================
Average Number of Basic
Shares Outstanding 83,668,422 45,503,179 81,206,156 35,260,086
Average Number of
Diluted Shares
Outstanding 83,939,870 45,959,693 81,490,436 35,768,890
Basic Net Income Per
Share 0.68 $0.58 $2.08 $1.51
Diluted Net Income Per
Share 0.68 $0.57 $2.07 $1.49
Average Total Assets $11,398,653 $6,069,419 $10,193,258 $4,424,237
Average Equity $1,067,212 $453,104 $952,617 $378,179
Annualized Return on
Average Assets 1.99% 1.74% 2.21% 1.61%
Annualized Return on
Average Equity 21.24% 23.26% 23.67% 18.78%
Interest Income and Average Earning Asset Yield
We had average earning assets of $10.7 billion and $5.3 billion for the
quarters ended September 30, 2002 and 2001, respectively. Our primary source of
income for the quarters ended September 30, 2002 and 2001 was interest income. A
portion of our income was generated by gains on the sales of our Mortgage-Backed
Securities. Our interest income was $109.2 million for the quarter ended
September 30, 2002 and $75.8 million for the quarter ended September 30, 2001.
Our yield on average earning assets was 4.10% and 5.76% for the same respective
periods. Our average earning asset balance increased by $5.4 billion and
interest income increased by $33.4 million for the quarter ended September 30,
2002 as compared to the quarter ended September 30, 2001, due to the substantial
increase in the asset base resulting from the inflow of capital in the third
quarter 2001 and the first quarter 2002 offerings and the equity shelf program
in the third quarter of 2002.
We had average earning assets of $9.3 billion and $4.0 billion for the nine
months ended September 30, 2002 and 2001, respectively. Our interest income was
$311.5 million for the nine months ended September 30, 2002 and $183.0 million
for the nine months ended September 30, 2001. Our yield on average earning
assets was 4.47 % and 6.09% for the same respective periods. Our average earning
asset balance increased by $5.3 billion and interest income increased by $128.5
million for the nine months ended September 30, 2002 as compared to the nine
months ended September 30, 2001, due to equity offerings in the first quarter of
2002 and the equity shelf program in the third quarter of 2002. The table below
shows our average balance of cash equivalents and Mortgage-Backed Securities,
the yields we earned on each type of earning asset, our yield on average earning
assets and our interest income for the quarter ended September 30, 2002, June
30, 2002 March 31, 2002, the year ended December 31, 2001 and the four quarters
in 2001.
13
Average Earning Asset Yield
Yield on Yield on
Average Yield on Average Average
Average Mortgage- Average Average Mortgage- Interest
Cash Backed Earning Cash Backed Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
----------------------------------------------------------------------
(dollars in thousands)
For the
Quarter
Ended
September
30, 2002 $2 $10,661,228 $10,661,230 1.14% 4.10% 4.10% $109,201
For the
Quarter
Ended
June 30,
2002 $2 $9,629,332 $9,629,334 1.23% 4.55% 4.55% $109,423
For the
Quarter
Ended
March 31,
2002 $2 $7,610,006 $7,610,008 1.29% 4.88% 4.88% $92,900
- --------------------------------------------------------------------------------
For the
Year
Ended
December
31, 2001 $2 $4,682,778 $4,682,780 3.25% 5.62% 5.62% $263,058
For the
Quarter
Ended
December
31, 2001 $2 $6,708,928 $6,708,930 1.56% 4.77% 4.77% $80,060
For the
Quarter
Ended
September
30, 2001 $2 $5,263,231 $5,263,233 2.77% 5.76% 5.76% $75,774
For the
Quarter
Ended
June 30,
2001 $2 $4,256,864 $4,256,866 3.72% 6.09% 6.09% $64,790
For the
Quarter
Ended
March 31,
2001 $2 $2,502,088 $2,502,090 4.93% 6.78% 6.78% $42,434
The constant prepayment rate ("CPR") on our Mortgage-Backed Securities for
the quarters ended September 30, 2002 and 2001 was 34% and 25% respectively. CPR
is an assumed rate of prepayment for our Mortgage-Backed Securities, expressed
as an annual rate of prepayment relative to the outstanding principal balance of
our Mortgage-Backed Securities. CPR does not purport to be either a historical
description of the prepayment experience of our Mortgage-Backed Securities or a
prediction of the anticipated rate of prepayment of our Mortgage-Backed
Securities.
Principal prepayments had a negative effect on our earning asset yield for
the quarters ended September 30, 2002 and 2001 because we adjust our rates of
premium amortization and discount accretion monthly based upon the effective
yield method, which takes into consideration changes in prepayment speeds.
Interest Expense and the Cost of Funds
We anticipate that our largest expense will be the cost of borrowed funds.
We had average borrowed funds of $10.1 billion and total interest expense of
$54.0 million for the quarter ended September 30, 2002. We had average borrowed
funds of $5.0 billion and total interest expense of $48.6 million for the
quarter ended September 30, 2001. Our average cost of funds was 2.13 % for the
quarter ended September 30, 2002 and 3.89% for the quarter ended September 30,
2001. The cost of funds rate decreased 1.76 % and the average borrowed funds
increased by $5.1 billion for the quarter ended September 30, 2002 when compared
to the quarter ended September 30, 2001. Interest expense for the quarter
increased 11% due to the large increase in the average repurchase balance,
resulting from deployment of the Company's strategy after the capital raises in
January 2002 and the deployment of capital raised in the equity shelf program.
We had average borrowed funds of $8.8 billion and total interest expense of
$141.9 million for the nine months ended September 30, 2002. We had average
borrowed funds of $3.8 billion and total interest expense of $127.4 million for
the nine months ended September 30, 2001. Our average cost of funds was 2.15 %
for the nine months ended September 30, 2002 and 4.47% for the nine months ended
September 30, 2001. The cost of funds rate decreased 2.32% and the average
borrowed funds increased by $5.0 billion for the nine months ended September 30,
2002 when compared to the nine months ended September 30, 2001.
With our current asset/liability management strategy, changes in our cost
of funds are expected to be closely correlated with changes in short-term London
Interbank Offered Rate ("LIBOR"), although we have choosen to extend the
maturity of our liabilities. Our average cost of funds was 0.31% above average
one-month LIBOR and 0.31% above average six-month LIBOR for the quarter ended
September 30, 2002. Our average cost of funds was 0.34% above average one-month
LIBOR and 0.42% above average six-month LIBOR for the quarter ended September
30, 2001.
The table below shows our average borrowed funds and average cost of funds
as compared to average one-month and average six-month LIBOR for the quarters
ended September 30, 2002, June 30, 2002, March 31, 2002, the year ended December
31, 2001 and the four quarters in 2001.
14
Average Cost of Funds
Average
One- Average Average
Month Cost of Cost of
LIBOR Funds Funds
Relative Relative Relative
to to to
Average Average Average Average Average Average
Average Cost One- Six- Six- One- Six-
Borrowed Interest of Month Month Month Month Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
-------------------------------------------------------------------------------
(dollars in thousands)
For the
Quarter
Ended
September
30, 2002 $10,122,840 $ 54,012 2.13% 1.82% 1.82% - 0.31% 0.31%
For the
Quarter
Ended
June 30,
2002 $ 9,102,992 $ 47,860 2.10% 1.85% 2.11% (0.26%) 0.25% (0.01%)
For the
Quarter
Ended
March 31,
2002 $ 7,192,222 $ 40,012 2.23% 1.85% 2.06% (0.21%) 0.38% 0.17%
- --------------------------------------------------------------------------------
For the Year
Ended
December
31, 2001 $4,388,900 $168,055 3.83% 3.88% 3.73% 0.15% (0.05%) 0.10%
For the
Quarter
Ended
December
31, 2001 $6,166,998 $40,698 2.64% 2.20% 2.16% 0.04% 0.44% 0.48%
For the
Quarter
Ended
September
30, 2001 $ 4,997,922 $ 48,620 3.89% 3.55% 3.47% 0.08% 0.34% 0.42%
For the
Quarter
Ended
June 30,
2001 $ 4,035,022 $ 45,254 4.49% 4.27% 4.12% 0.15% 0.22% 0.37%
For the
Quarter
Ended
March 31,
2001 $ 2,355,658 $ 33,453 5.68% 5.51% 5.18% 0.33% 0.17% 0.50%
Net Interest Rate Agreement Expense
We have not entered into any interest rate agreements to date. As part
of our asset/liability management process, we may enter into interest rate
agreements such as interest rate caps, floors or swaps. These agreements would
be entered into with the intent to reduce interest rate or prepayment risk and
would be designed to provide us income and capital appreciation in the event of
certain changes in interest rates. However, even after entering into these
agreements, we would still be exposed to interest rate and prepayment risks. We
review the need for interest rate agreements on a regular basis consistent with
our capital investment policy.
Net Interest Income
Our net interest income, which equals interest income less interest
expense, totaled $55.2 million for the quarter ended September 30, 2002 and
$27.2 million for the quarter ended September 30, 2001. Our net interest income
increased because of the increased asset size of the company and the increase in
the interest rate spread. Our net interest spread, which equals the yield on our
average assets for the period less the average cost of funds for the period, was
1.97% for the quarter ended September 30, 2002 as compared to 1.87% for the
quarter ended September 30, 2001. This 10 basis point increase in spread income
is reflected in the increase in net interest income.
Our net interest income, which equals interest income less interest
expense, totaled $169.6 million for the nine months ended September 30, 2002 and
$55.6 million for the nine months ended September 30, 2001. Our net interest
income increased as a direct result of the equity offerings during the third
quarter of 2001, the first quarter of 2002 and the equity shelf program during
the third quarter of 2002. Our net interest spread, which equals the yield on
our average assets for the period less the average cost of funds for the period,
was 2.32% for the nine months ended September 30, 2002 as compared to 1.62% for
the nine months ended September 30, 2001. This 70 basis point increase in spread
income is reflected in the increase in net interest income.
The table below shows our interest income by earning asset type, average
earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
quarters ended September 30, 2002, June 30, 2002, March 31, 2002, the year ended
December 31, 2001, and the four quarters in 2001.
15
GAAP Net Interest Income
Average Interest Yield on
Mortgage- Income on Average Average Average
Backed Mortgage- Average Total Interest Balance of Cost Net
Securities Backed Cash Interest Earning Repurchase Interest of Interest
Held Securities Equivalents Income Assets Agreements Expense Funds Income
-----------------------------------------------------------------------------------------
(dollars in thousands)
For the
Quarter
Ended
September
30, 2002 $10,661,228 $109,201 $2 $109,201 4.10% $10,122,840 $54,012 2.13% $55,189
For the
Quarter
Ended
June 30,
2002 $9,629,332 $109,423 $2 $109,423 4.55% $9,102,992 $47,860 2.10% $61,563
For the
Quarter
Ended
March 31,
2002 $7,610,006 $92,900 $2 $92,900 4.88% $7,192,222 $40,012 2.23% $52,888
- ----------------------------------------------------------------------------------------------------
For the Year
Ended
December
31, 2001 $4,682,778 $263,058 $2 $263,058 5.62% $4,388,900 $168,055 3.83% $95,003
For the
Quarter
Ended
December
31, 2001 $6,708,928 $80,060 $2 $80,060 4.77% $6,166,998 $40,698 2.64% $39,361
For the
Quarter
Ended
September
30, 2001 $5,263,231 $75,774 $2 $75,774 5.76% $4,997,922 $48,620 3.89% $27,154
For the
Quarter
Ended
June 30,
2001 $4,256,864 $64,790 $2 $64,790 6.09% $4,035,022 $45,284 4.49% $19,506
For the
Quarter
Ended
March 31,
2001 $2,502,088 $42,434 $2 $42,434 6.78% $2,355,658 $33,453 5.68% $8,981
Gains and Losses on Sales of Mortgage-Backed Securities
For the quarter ended September 30, 2002, we sold Mortgage-Backed
Securities with an aggregate historical amortized cost of $393.7 million for an
aggregate gain of $4.7 million. For the quarter ended September 30, 2001, we
sold Mortgage-Backed Securities with an aggregate historical amortized cost of
$182.2 million for an aggregate gain of $1.2 million. The difference between the
sale price and the historical amortized cost of our Mortgage-Backed Securities
is a realized gain and increases income accordingly. We do not expect to sell
assets on a frequent basis, but may from time to time sell existing assets to
move into new assets, which our management believes might have higher
risk-adjusted returns, or to manage our balance sheet as part of our
asset/liability management strategy.
For the nine months ended September 30, 2002, we sold Mortgage-Backed
Securities with an aggregate historical amortized cost of $1.1 billion for an
aggregate gain of $9.5 million. For the nine months ended September 30, 2001, we
sold Mortgage-Backed Securities with an aggregate historical amortized cost of
$530.1 million for an aggregate gain of $1.9 million. The difference between the
sale price and the historical amortized cost of our Mortgage-Backed Securities
is a realized gain and increases income accordingly.
Credit Losses
We have not experienced credit losses on our Mortgage-Backed Securities to
date. We have limited our exposure to credit losses on our Mortgage-Backed
Securities by purchasing only securities issued or guaranteed by FNMA, FHLMC or
GNMA which, although not rated, carry an implied "AAA" rating.
General and Administrative Expense
General and administrative ("G&A") expenses were $3.3 million for the
quarter ended September 30, 2002 and $2.0 million for the quarter ended
September 30, 2001. G&A expenses as a percentage of average assets was 0.12% and
0.13% on an annualized basis for the quarters ended September 30, 2002 and 2001,
respectively. The Company is internally managed and continues to be a low-cost
provider. Even though G&A expenses increased by $1.3 million for the quarter
ended September 30, 2002, when compared to the quarter ended September 30, 2001,
G&A as a percentage of average assets decreased.
16
GAAP G&A Expenses and Operating Expense Ratios
Total G&A Total G&A
Expenses/Average Expenses/Average
Total G&A Assets Equity
Expenses (annualized) (annualized)
-------------------------------------------
(dollars in thousands)
For the Quarter Ended
September 30, 2002 $3,268 0.12% 1.22%
For the Quarter Ended June
30, 2002 $3,536 0.13% 1.37%
For the Quarter Ended March
31, 2002 $3,255 0.14% 1.55%
- ----------------------------------------------------------------------
For the Year Ended December
31, 2001 $7,311 0.14% 1.67%
For the Quarter Ended
December 31, 2001 $3,004 0.17% 1.78%
For the Quarter Ended
September 30, 2001 $1,993 0.13% 1.76%
For the Quarter Ended June
30, 2001 $1,393 0.12% 1.45%
For the Quarter Ended March
31, 2001 $921 0.13% 1.90%
Net Income and Return on Average Equity
Our net income was $56.7 million for the quarter ended September 30, 2002
and $26.3 million for the quarter ended September 30, 2001. Our return on
average equity was 21.24 % for the quarter ended September 30, 2002 and 23.3%
for the quarter ended September 30, 2001. The increase in net income is a direct
result of equity offerings during the third quarter of 2001, the first quarter
of 2002 and the equity shelf program during the third quarter of 2002. As
previously mentioned, the new capital allowed us to grow the balance sheet and
ultimately grow earnings. The table below shows our net interest income, gain on
sale of Mortgage-Backed Securities and G&A expenses each as a percentage of
average equity, and the return on average equity for the quarters ended
September 30, 2002, June 30, 2002, March 31, 2002, the year ended December 31,
2001, and for the four quarters in 2001.
Components of Return on Average Equity
(Ratios for all Quarters are annualized)
Gain on Sale of Return
Net Interest Mortgage-Backed G&A on
Income/Average Securities/Average Expenses/Average Average
Equity Equity Equity Equity
-----------------------------------------------------------
For the
Quarter
Ended
September
30, 2002 20.68% 1.78% 1.22% 21.24%
For the
Quarter
Ended June
30, 2002 23.93% 0.52% 1.37% 23.08%
For the
Quarter
Ended
March 31,
2002 25.24% 1.63% 1.55% 25.32%
- ----------------------------------------------------------------------
For the
Year Ended
December
31, 2001 21.72% 1.05% 1.67% 21.10%
For the
Quarter
Ended
December
31, 2001 23.34% 1.57% 1.78% 23.13%
For the
Quarter
Ended
September
30, 2001 23.97% 1.05% 1.76% 23.26%
For the
Quarter
Ended June
30, 2001 20.37% 0.50% 1.44% 19.42%
For the
Quarter
Ended
March 31,
2001 18.54% 0.56% 1.90% 17.20%
Financial Condition
Mortgage-Backed Securities
All of our Mortgage-Backed Securities at September 30, 2002 were
adjustable-rate or fixed-rate Mortgage-Backed Securities backed by single-family
mortgage loans. All of the mortgage assets underlying these Mortgage-Backed
Securities were secured with a first lien position on the underlying
single-family properties. All our Mortgage-Backed Securities were FHLMC, FNMA or
GNMA mortgage pass-through certificates or collateralized mortgage obligations
("CMOs"), which carry an actual or implied "AAA" rating. We mark-to-market all
of our earning assets at liquidation value.
We accrete discount balances as an increase in interest income over the
life of discount Mortgage-Backed Securities and we amortize premium balances as
a decrease in interest income over the life of premium Mortgage-Backed
Securities. At September 30, 2002 and December 31, 2001, we had on our balance
sheet a total of $1.0 million and $2.1 million respectively, of unamortized
discount (which is the difference between the remaining principal value and
current historical amortized cost of our Mortgage-Backed Securities acquired at
a price below principal value) and a total of $245.7 million and $139.4 million,
respectively, of unamortized premium (which is the difference between the
remaining principal value and the current historical amortized cost of our
Mortgage-Backed Securities acquired at a price above principal value).
17
We received mortgage principal repayments of $1.0 billion for the quarter
ended September 30, 2002 and $506.3 million for the quarter ended September 30,
2001. Given our current portfolio composition, if mortgage principal prepayment
rates were to increase over the life of our Mortgage-Backed Securities, all
other factors being equal, our net interest income would decrease during the
life of these Mortgage-Backed Securities as we would be required to amortize our
net premium balance into income over a shorter time period. Similarly, if
mortgage principal prepayment rates were to decrease over the life of our
Mortgage-Backed Securities, all other factors being equal, our net interest
income would increase during the life of these Mortgage-Backed Securities, as we
would amortize our net premium balance over a longer time period.
The table below summarizes our Mortgage-Backed Securities at September 30,
2002, June 30, 2002, March 31, 2002, December 31, 2001, September 30, 2001, June
30, 2001, and March 31, 2001.
Mortgage-Backed Securities
Amortized Estimated Estimated Fair Weighted
Principal Net Amortized Cost/Principal Fair Value/Principal Average
Value Premium Cost Value Value Value Yield
--------------------------------------------------------------------------------
(dollars in thousands)
At
September
30, 2002 $11,170,379 $244,777 $11,415,156 102.19% $11,489,538 102.86% 3.67%
At June
30, 2002 $10,833,374 $224,114 $11,057,488 102.07% $11,124,771 102.69% 3.90%
At March
31, 2002 $9,982,678 $193,048 $10,175,726 101.93% $10,206,228 102.24% 4.31%
- ------------------------------------------------------------------------------------------
At
December
31, 2001 $7,399,941 $137,269 $7,537,210 101.86% $7,575,379 102.37% 4.41%
At
September
30, 2001 $6,275,501 $96,674 $6,372,175 101.54% $6,428,853 102.44% 5.17%
At June
30, 2001 $5,498,235 $69,193 $5,567,428 101.26% $5,572,288 101.34% 5.75%
At March
31, 2001 $3,455,436 $42,023 $3,497,459 101.22% $3,500,610 101.31% 6.43%
The tables below set forth certain characteristics of our Mortgage-Backed
Securities. The index level for adjustable-rate Mortgage-Backed Securities is
the weighted average rate of the various short-term interest rate indices, which
determine the coupon rate.
Adjustable-Rate Mortgage-Backed Security Characteristics
Principal
Value at
Period End
Weighted as % of
Weighted Weighted Weighted Average Weighted Weighted Total
Average Average Average Term to Average Average Mortgage-
Principal Coupon Index Net Next Lifetime Asset Backed
Value Rate Level Margin Adjustment Cap Yield Securities
--------------------------------------------------------------------------
(dollars in thousands)
At
September
30, 2002 $7,583,147 4.37% 2.80% 1.57% 10 months 10.36% 2.90% 67.89%
At June
30, 2002 $7,939,126 4.57% 2.96% 1.61% 12 months 10.46% 3.17% 73.28%
At March
31, 2002 $7,248,832 4.94% 3.25% 1.69% 16 months 10.73% 3.52% 72.61%
- ------------------------------------------------------------------------------------
At
December
31, 2001 $5,793,250 5.90% 3.95% 1.95% 24 months 11.49% 3.87% 78.29%
At
September
30, 2001 $4,789,570 6.24% 4.31% 1.93% 27 months 11.46% 4.76% 76.32%
At June
30, 2001 $3,997,580 6.47% 4.60% 1.87% 26 months 11.37% 5.38% 72.71%
At March
31, 2001 $2,495,296 7.01% 5.14% 1.87% 26 months 11.57% 6.35% 72.21%
18
Fixed-Rate Mortgage-Backed Security Characteristics
Principal
Value at
Period End
as % of
Weighted Weighted Total
Average Average Mortgage-
Principal Coupon Asset Backed
Value Rate Yield Securities
--------------------------------------
(dollars in thousands)
At September 30, 2002 $3,587,232 6.95% 5.29% 32.11%
At June 30, 2002 $2,894,248 7.09% 5.91% 26.72%
At March 31, 2002 $2,733,846 7.01% 6.40% 27.39%
- ----------------------------------------------------------------------
At December 31, 2001 $1,606,691 6.92% 6.33% 21.71%
At September 30, 2001 $1,485,931 6.88% 6.48% 23.68%
At June 30, 2001 $1,500,655 6.83% 6.71% 27.29%
At March 31, 2001 $960,140 6.79% 6.69% 27.79%
At September 30, 2002 and December 31, 2001 we held Mortgage-Backed
Securities with coupons linked to the one-month and six month LIBOR, six month
average auction, 12-month cumulative average, six-month CD rate, one-year,
two-year, three-year, and five-year Treasury indices.
Adjustable-Rate Mortgage-Backed Securities by Index
September 30, 2002
Six- 12-Month Six- 2-Year
One- Month Moving Month 1-Year Treasury 3-Year 5-Year
Month Auction Average CD Treasury Index Treasury Treasury
LIBOR Average Rate Index Index Index
---------------------------------------------------------------
Weighted
Average
Adjustment
Frequency 1mo. 6 mo. 1 mo. 6 mo. 12 mo. 24 mo. 36 mo. 60 mo.
Weighted
Average Term
to Next
Adjustment 1mo. 3 mo. 1 mo. 1 mo. 24 mo. 13 mo. 20 mo. 32 mo.
Weighted
Average
Annual
Period Cap None 1.00% None 1.00% 1.91% 2.00% 2.00% 2.00%
Weighted
Average
Lifetime
Cap at
September
30, 2002 9.02% 12.67% 10.37% 10.81% 12.06% 11.88% 12.81% 12.61%
Mortgage
Principal
Value as
Percentage
of Mortgage-
Backed
Securities
at September
30, 2002 38.13% 0.10% 0.62% 0.08% 27.32% 0.03% 1.06% 0.55%
Adjustable-Rate Mortgage-Backed Securities by Index
December 31, 2001
Six- 12-Month Six-
One- Six- Month Moving Month 1-Year 3-Year 5-Year
Month Month Auction Average CD Treasury Treasury Treasury
LIBOR LIBOR Average Rate Index Index Index
---------------------------------------------------------------
Weighted
Average
Adjustment
Frequency 1mo. 6 mo. 6 mo. 12 mo. 6 mo. 12 mo. 36 mo. 60 mo.
Weighted
Average Term
to Next
Adjustment 1mo. 55 mo. 2 mo. 11 mo. 2 mo. 33 mo. 16 mo. 33 mo.
Weighted
Average
Annual Period
Cap None 2.00% 0.50% None 1.00% 1.98% 2.00% 1.96%
Weighted
Average
Lifetime
Cap at
December
31, 2001 9.09% 11.50% 12.53% 10.63% 11.40% 12.22% 13.08% 12.92%
Mortgage
Principal
Value as
Percentage
of Mortgage-
Backed
Securities at
December
31, 2001 18.32% 0.13% 0.12% 1.06% 0.22% 56.20% 1.35% 0.89%
19
Interest Rate Agreements
Interest rate agreements are assets that are carried on a balance sheet at
estimated liquidation value. We have not entered into any interest rate
agreements since our inception.
Borrowings
To date, our debt has consisted entirely of borrowings collateralized by a
pledge of our Mortgage-Backed Securities. These borrowings appear on our balance
sheet as repurchase agreements. At September 30, 2002, we had established
uncommitted borrowing facilities in this market with twenty-four lenders in
amounts, which we believe, are in excess of our needs. All of our
Mortgage-Backed Securities are currently accepted as collateral for these
borrowings. However, we limit our borrowings, and thus our potential asset
growth, in order to maintain unused borrowing capacity and thus increase the
liquidity and strength of our balance sheet.
For the quarter ended September 30, 2002 the term to maturity of our
borrowings ranged from one day to three years, with a weighted average original
term to maturity of 218 days. For the quarter ended September 30, 2001, the term
to maturity of our borrowings ranged from one day to three years, with a
weighted average original term to maturity of 112 days. At September 30, 2002,
the weighted average cost of funds for all of our borrowings was 2.09% and the
weighted average term to next rate adjustment was 139 days. At September 30,
2001, the weighted average cost of funds for all of our borrowings was 3.44% and
the weighted average term to next rate adjustment was 74 days.
Liquidity
Liquidity, which is our ability to turn non-cash assets into cash, allows
us to purchase additional Mortgage-Backed Securities and to pledge additional
assets to secure existing borrowings should the value of our pledged assets
decline. Potential immediate sources of liquidity for us include cash balances
and unused borrowing capacity. Unused borrowing capacity will vary over time as
the market value of our Mortgage-Backed Securities varies. Our balance sheet
also generates liquidity on an on-going basis through mortgage principal
repayments and net earnings held prior to payment as dividends. Should our needs
ever exceed these on-going sources of liquidity plus the immediate sources of
liquidity discussed above, we believe that our Mortgage-Backed Securities could
in most circumstances be sold to raise cash. The maintenance of liquidity is one
of the goals of our capital investment policy. Under this policy, we limit asset
growth in order to preserve unused borrowing capacity for liquidity management
purposes.
Stockholders' Equity
We use "available-for-sale" treatment for our Mortgage-Backed Securities;
we carry these assets on our balance sheet at estimated market value rather than
historical amortized cost. Based upon this "available-for-sale" treatment, our
equity base at September 30, 2002 was $1.1 billion, or $12.84 per share. If we
had used historical amortized cost accounting, our equity base at September 30,
2002 would have been $1.0 billion, or $11.96 per share. During the quarter ended
September 30, 2002, we raised $28.1 million in equity using the equity shelf
program. Our equity base at September 30, 2001 was $682.0 million, or $11.41 per
share. If we had used historical amortized cost accounting, our equity base at
September 30, 2001 would have been $625.4 million, or $10.47 per share. During
the quarter ended September 30, 2001, the Company raised additional capital in
the amount of $179.6 million in a secondary offering.
With our "available-for-sale" accounting treatment, unrealized fluctuations
in market values of assets do not impact our GAAP or taxable income but rather
are reflected on our balance sheet by changing the carrying value of the asset
and stockholders' equity under "Accumulated Other Comprehensive Income (Loss)."
By accounting for our assets in this manner, we hope to provide useful
information to stockholders and creditors and to preserve flexibility to sell
assets in the future without having to change accounting methods.
As a result of this mark-to-market accounting treatment, our book value and
book value per share are likely to fluctuate far more than if we used historical
amortized cost accounting. As a result, comparisons with companies that use
historical cost accounting for some or all of their balance sheet may not be
meaningful. The table below shows unrealized gains and losses on the
Mortgage-Backed Securities in our portfolio.
20
Unrealized Gains and Losses
(dollars in thousands)
At At At At At At At
Sept. June 30, March Dec. 31, Sept. June 30, March
30, 31, 30, 31,
2002 2002 2002 2001 2001 2001 2001
--------------------------------------------------------
Unrealized
Gain $93,254 $75,832 $46,894 $53,935 $67,459 $19,322 $12,606
Unrealized
Loss (18,872) (8,549)(16,392)(15,766)(10,782)(14,462) (9,455)
--------------------------------------------------------
Net Unrealized
Gain $74,382 $67,283 $30,502 $38,169 $56,677 $4,860 $3,151
========================================================
Net Unrealized
Gain as % of
Mortgage-
Backed
Securities
Principal
Value 0.67% 0.62% 0.31% 0.52% 0.90% 0.08% 0.09%
Net Unrealized
Gain as % of
Mortgage-
Backed
Securities
Amortized
Cost 0.65% 0.61% 0.30% 0.51% 0.90% 0.08% 0.09%
Unrealized changes in the estimated net market value of Mortgage-Backed
Securities have one direct effect on our potential earnings and dividends:
positive mark-to-market changes increase our equity base and allow us to
increase our borrowing capacity while negative changes decrease our equity base
and tend to limit borrowing capacity under our capital investment policy. A very
large negative change in the net market value of our Mortgage-Backed Securities
might impair our liquidity position, requiring us to sell assets with the likely
result of realized losses upon sale. "Unrealized Net Gains on Available for Sale
Securities" was $74.4 million, or 0.67% of the amortized cost of our
Mortgage-Backed Securities at September 30, 2002. "Unrealized Net Gains on
Available for Sale Securities" was $38.2 million or 0.51% of the amortized cost
of our Mortgage-Backed Securities at December 31, 2001.
The table below shows our equity capital base as reported and on a
historical amortized cost basis at September 30, 2002, June 30, 2002, March 31,
2002, December 31, 2001, September 30, 2001, June 30, 2001 and March 31, 2001.
Issuances of common stock, the level of GAAP earnings as compared to dividends
declared, and other factors influence our historical cost equity capital base.
The GAAP reported equity capital base is influenced by these factors plus
changes in the "Unrealized Net Losses on Assets Available for Sale" account.
Stockholders' Equity
Net GAAP
Unrealized Reported
Historical Gains GAAP Historical Equity
Amortized (Losses) Reported Amortized (Book
Cost on Assets Equity Cost Value)
Equity Available Base (Book Equity Per
Base for Sale Value) Per Share Share
----------------------------------------------------
(dollars in thousands, except per-share data)
At September 30,
2002 $1,010,623 $74,382 $1,085,005 $11.96 $12.84
At June 30, 2002 $982,348 $67,283 $1,049,631 $11.84 $12.65
At March 31, 2002 $978,186 $30,502 $1,008,688 $11.80 $12.17
- ----------------------------------------------------------------------
At December 31,
2001 $629,188 $38,169 $667,357 $10.52 $11.15
At September 30,
2001 $625,368 $56,677 $682,045 $10.47 $11.41
At June 30, 2001 $445,091 $4,860 $449,951 $9.96 $10.07
At March 31, 2001 $248,732 $3,151 $251,883 $9.67 $9.80
Leverage
Our debt-to-GAAP reported equity ratio at September 30, 2002 and September
30, 2001 was 9.0:1 and 8.1:1 respectively. We generally expect to maintain a
ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary
from this range from time to time based upon various factors, including our
management's opinion of the level of risk of our assets and liabilities, our
liquidity position, our level of unused borrowing capacity and
over-collateralization levels required by lenders when we pledge assets to
secure borrowings.
21
Our target debt-to-GAAP reported equity ratio is determined under our
capital investment policy. Should our actual debt-to-equity ratio increase above
the target level due to asset acquisition or market value fluctuations in
assets, we will cease to acquire new assets. Our management will, at that time,
present a plan to our board of directors to bring us back to our target
debt-to-equity ratio; in many circumstances, this would be accomplished in time
by the monthly reduction of the balance of our Mortgage-Backed Securities
through principal repayments.
Asset/Liability Management and Effect of Changes in Interest Rates
We continually review our asset/liability management strategy with respect
to interest rate risk, mortgage prepayment risk, credit risk and the related
issues of capital adequacy and liquidity. We seek attractive risk-adjusted
stockholder returns while maintaining a strong balance sheet.
We seek to manage the extent to which our net income changes as a function
of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although we have not done so to date, we
may seek to mitigate the potential impact on net income of periodic and lifetime
coupon adjustment restrictions in our portfolio of Mortgage-Backed Securities by
entering into interest rate agreements such as interest rate caps and interest
rate swaps.
Changes in interest rates may also have an effect on the rate of mortgage
principal prepayments and, as a result, prepayments on Mortgage-Backed
Securities. We will seek to mitigate the effect of changes in the mortgage
principal repayment rate by balancing assets we purchase at a premium with
assets we purchase at a discount. To date, the aggregate premium exceeds the
aggregate discount on our Mortgage-Backed Securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce our net income
compared to what net income would be absent such prepayments.
Inflation
Virtually all of our assets and liabilities are financial in nature. As a
result, interest rates and other factors drive our performance far more than
does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our dividends based upon our net income as
calculated for tax purposes; in each case, our activities and balance sheet are
measured with reference to historical cost or fair market value without
considering inflation.
Other Matters
We calculate that our qualified REIT assets, as defined in the Internal
Revenue Code, are 100% and 100% of our total assets at September 30, 2002 and
2001, as compared to the Internal Revenue Code requirement that at least 75% of
our total assets be qualified REIT assets. We also calculate that 100% of our
revenue qualifies for the 75% source of income test, and 100% of our revenue
qualifies for the 95% source of income test, under the REIT rules for the
quarters ended September 30, 2002 and 2001. We also met all REIT requirements
regarding the ownership of our common stock and the distribution of our net
income. Therefore, as of September 30, 2002 and 2001, we believe that we
qualified as a REIT under the Internal Revenue Code.
We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act of 1940, as
amended. If we were to become regulated as an investment company, then our use
of leverage would be substantially reduced. The Investment Company Act of 1940,
as amended, exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" (qualifying interests). Under current interpretation of the staff
of the SEC, in order to qualify for this exemption, we must maintain at least
55% of our assets directly in qualifying interests. In addition, unless certain
mortgage securitites represent all the certificates issued with respect to an
underlying pool of mortgages, the Mortgage-Backed Securities may be treated as
securities separate from the underlying mortgage loans and, thus, may not be
considered qualifying interests for purposes of the 55% requirement. We
calculate that as of September 30, 2002 and 2001 we were in compliance with this
requirement.
In July 2002, the Company entered into a sales agency agreement to sell up
to 8,254,598 shares of common stock from time to time through an equity shelf
program. Sales of the shares have been and will be made by means of ordinary
brokers' transactions on the New York Stock Exchange at market prices. The
Company intends to make such sales when it believes the issuance of stock would
be accretive to shareholders. The sales agent for the equity shelf program is
UBS Warburg LLC. The Company sold 1,484,100 shares during the three months ended
September 30, 2002 under the equity shelf program, which provided net proceeds
of approximately $28.1 million. The sales agent received an aggregate of a
$872,321, which represents commission of 3% on the gross sales price per share
of the sales under the sales agency agreement, during the quarter ended
September 30, 2002.
22
ITEM. 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond our control. Changes in the general level of interest rates
can affect our net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with our interest-bearing liabilities, by affecting the spread
between our interest-earning assets and interest-bearing liabilities. Changes in
the level of interest rates also can affect the value of our Mortgage-Backed
Securities and our ability to realize gains from the sale of these assets. We
may utilize a variety of financial instruments, including interest rate swaps,
caps, floors and other interest rate exchange contracts, in order to limit the
effects of interest rates on our operations. If we use these types of
derivatives to hedge the risk of interest-earning assets or interest-bearing
liabilities, we may be subject to certain risks, including the risk that losses
on a hedge position will reduce the funds available for payments to holders of
securities and that the losses may exceed the amount we invested in the
instruments. To date, we have not purchased any hedging instruments.
Our profitability and the value of our portfolio may be adversely affected
during any period as a result of changing interest rates. The following table
quantifies the potential changes in net interest income and portfolio value
should interest rates go up or down 50, 100, and 200 basis points, assuming the
yield curves of the rate shocks will be parallel to each other and the current
yield curve. All changes in income and value are measured as percentage changes
from the projected net interest income and portfolio value at the base interest
rate scenario. The base interest rate scenario assumes interest rates at
September 30, 2002 and various estimates regarding prepayment and all activities
are made at each level of rate shock. Actual results could differ significantly
from these estimates.
Projected Projected
Change in Interest Rate Percentage Percentage
Change in Change in
Net Portfolio
Interest Value
Income
- ---------------------------------------------------------------------
- -200 Basis Points 9% 2%
- -100 Basis Points 1% 1%
- -50 Basis Points 0% 1%
Base Interest Rate
+50 Basis Points 0% (1%)
+100 Basis Points (1%) (2%)
+200 Basis Points (9%) (6%)
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. We attempt to control risks
associated with interest rate movements. Methods for evaluating interest rate
risk include an analysis of our interest rate sensitivity "gap", which is the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to affect net
interest income adversely. Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly matched in
each maturity category.
23
The following table sets forth the estimated maturity or repricing of our
interest-earning assets and interest-bearing liabilities at September 30, 2002.
The amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature. Mortgage-Backed Securities reflect estimated
prepayments that were estimated based on analyses of broker estimates, the
results of a prepayment model that we utilized and empirical data. Our
management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of our assets
and liabilities in the table could vary substantially if different assumptions
were used or actual experience differs from the historical experience on which
the assumptions are based.
More than 1
Within 3 Year to 3 3 Years and
Months 4-12 Months Years Over Total
-----------------------------------------------------------
(dollars in thousands)
Rate
Sensitive
Assets:
Mortgage-
Backed
Securities $4,349,662 $1,027,985 $1,561,574 $4,231,158 $11,170,379
Rate
Sensitive
Liabilities:
Repurchase
Agreements 8,346,304 1,463,664 9,809,968
------------------------------------------------------------
Interest rate
sensitivity
gap ($3,996,642) $1,027,985 $97,910 $4,231,158 $1,360,411
============================================================
Cumulative
rate
sensitivity
gap ($3,996,642)($2,968,657)($2,870,747) $1,360,411
============================================================
Cumulative
interest
rate
sensitivity
gap as a
percentage
of total
rate-
sensitive
assets (36%) (27%) (26%) 12%
Our analysis of risks is based on management's experience, estimates,
models and assumptions. These analyses rely on models which utilize estimates of
fair value and interest rate sensitivity. Actual economic conditions or
implementation of investment decisions by our management may produce results
that differ significantly from the estimates and assumptions used in our models
and the projected results shown in the above tables and in this report. These
analyses contain certain forward-looking statements and are subject to the safe
harbor statement set forth under the heading, "Special Note Regarding
Forward-Looking Statements."
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chairman
of the board of directors, Chief Executive Officer and President and the Chief
Financial Officer and Treasurer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the Chairman of the board of
directors, Chief Executive Officer and President and the Chief Financial Officer
and Treasurer, concluded that the Company's disclosure controls and procedures
were effective as of September 30, 2002. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to September 30, 2002.
24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit Exhibit Description
Number
99.1 Certification of Chief Executive Officer regarding Periodic Report
containing Financial Statements.
99.2 Certification of Chief Financial Officer regarding Periodic Report
containing Financial Statements.
(b) Reports of Form 8-K
We filed a Form 8-K on July 8, 2002 with respect to our entering into a
Sales Agency Agreement with UBS Warburg LLC.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ANNALY MORTGAGE MANAGEMENT, INC.
Dated: November 12, 2002 By:/s/ Michael A.J. Farrell
Michael A.J. Farrell
(Chairman of the Board, Chief Executive
Officer, President and authorized officer
of registrant)
Dated: November 12, 2002 By:/s/ Kathryn F. Fagan
Kathryn F. Fagan
Chief Financial Officer and Treasurer
(principal financial and chief accounting
officer)
I, Michael A.J. Farrell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Annaly Mortgage
Management, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
26
Date: November 12, 2002
/s/ Michael A.J. Farrell
Michael A.J. Farrell
Chairman of the Board of Directors, Chief
Executive Officer, President and
principal executive officer
I, Kathryn F. Fagan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Annaly Mortgage
Management, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Kathryn F. Fagan
Kathryn F. Fagan
Chief Financial Officer, Treasurer and
principal financial officer
27
EXHIBIT 99.1
ANNALY MORTGAGE MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
SUITE 2902
NEW YORK, NEW YORK 10036
CERTIFICATION OF CHIEF EXECUTIVE
OFFICER REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS
I, Michael A.J. Farrell, the Chairman of the Board of Directors, Chief
Executive Officer, and President of Annaly Mortgage Management, Inc. (the
"Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the
Company's Quarterly Report on Form 10-Q for the period ended September 30, 2002
(the "Report") filed with the Securities and Exchange Commission:
- -- fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
- -- the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Michael A.J. Farrell
Michael A.J. Farrell
Chairman of the Board of Directors, Chief
Executive Officer, and President
November 12, 2002
28
EXHIBIT 99.2
ANNALY MORTGAGE MANAGEMENT, INC.
1211 AVENUE OF THE AMERICAS
SUITE 2902
NEW YORK, NEW YORK 10036
CERTIFICATION OF CHIEF FINANCIAL
OFFICER REGARDING PERIODIC REPORT CONTAINING
FINANCIAL STATEMENTS
I, Kathryn F. Fagan, the Chief Financial Officer and Treasurer of Annaly
Mortgage Management, Inc. (the "Company") in compliance with 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
hereby certify that, the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 2002 (the "Report") filed with the Securities and Exchange
Commission:
- -- fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
- -- the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Kathryn F. Fagan
Kathryn F. Fagan
Chief Financial Officer and Treasurer
November 12, 2002
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