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: JUNE 30, 2003
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
--- ---
Indicate by check mark whether the Registrant is an accelerated filer ( as
defined in Rule 12b-2 of the Exchange Act):
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 August 13, 2003
Common Stock, $.01 par value 94,061,723
Annaly Mortgage Management, Inc.
FORM 10-Q
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statements of Financial Condition- June 30, 2003 (Unaudited) and December 31, 2002 1
Statements of Operations (Unaudited) for the quarters and six months ended June 30, 2003
and 2002 2
Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 2003 3
Statements of Cash Flows (Unaudited) for the quarters and six months ended June 30, 2003
and 2002 4
Notes to Financial Statements (Unaudited) 5-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 29
CERTIFICATIONS 30-33
PART 1.
ITEM 1. FINANCIAL STATEMENTS
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share amounts)
JUNE 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
----------------------- ------------------------
ASSETS
Cash and cash equivalents $ 304 $ 726
Mortgage-Backed Securities, at fair value 12,887,495 11,551,857
Agency Debentures, at fair value 1,375,980 -
Receivable for Mortgage-Backed Securities sold 387,218 55,954
Accrued interest receivable 58,026 49,707
Other assets 1,104 840
----------------------- ------------------------
Total assets $14,710,127 $11,659,084
======================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements $ 12,162,333 $10,163,174
Payable for investment securities purchased 1,306,238 338,691
Accrued interest payable 16,788 14,935
Dividends payable 56,420 57,499
Other liabilities 4,708 2,812
Accounts payable 2,202 1,907
----------------------- ------------------------
Total liabilities 13,548,689 10,579,018
----------------------- ------------------------
Commitments
Stockholders' Equity:
Common stock: par value $.01 per share; 500,000,000
Authorized, 94,030,753 and 84,569,206 shares issued
and outstanding, respectively 940 846
Additional paid-in capital 1,157,092 1,003,200
Accumulated other comprehensive income 1,190 75,511
Retained earnings 2,216 509
----------------------- ------------------------
Total stockholders' equity 1,161,438 1,080,066
----------------------- ------------------------
Total liabilities and stockholders' equity $14,710,127 $11,659,084
======================= ========================
See notes to financial statements.
1
PART 1.
ITEM 1. FINANCIAL STATEMENTS
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except per share amounts)
For the For the For the Six For the Six
Quarter Ended Quarter Ended Months Ended Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
---------------- ----------------- ---------------- -----------------
INTEREST INCOME $93,892 $109,423 $181,392 $202,322
INTEREST EXPENSE 51,770 47,860 95,818 87,872
---------------- ----------------- ---------------- -----------------
NET INTEREST INCOME 42,122 61,563 85,574 114,450
GAIN ON SALE OF MORTGAGE-BACKED SECURITIES
20,231 1,342 31,252 4,753
GENERAL AND ADMINISTRATIVE
EXPENSES 4,201 3,536 7,898 6,791
---------------- ----------------- ---------------- -----------------
NET INCOME 58,152 59,369 108,928 112,412
---------------- ----------------- ---------------- -----------------
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gain (loss) on available-
for-sale securities (49,579) 38,123 (43,069) 33,866
Less: reclassification adjustment
for net gains included in net income (20,231) (1,342) (31,252) (4,753)
----------------- ----------------- ---------------- ----------------
Other comprehensive income (loss) (69,810) 36,781 (74,321) 29,113
---------------- ----------------- ---------------- -----------------
COMPREHENSIVE INCOME (LOSS) $(11,658) $96,150 $34,607 $141,526
================ ================= ================ =================
NET INCOME PER SHARE:
Basic $0.62 $0.72 $1.22 $1.41
================ ================= ================ =================
Diluted $0.62 $0.71 $1.22 $1.40
================ ================= ================ =================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 93,384,128 82,910,206 89,019,821 79,954,529
================ ================= ================ =================
Diluted 93,588,024 83,186,865 89,231,272 80,245,372
================ ================= ================ =================
See notes to financial statements.
2
PART I
ITEM 1. FINANCIAL STATEMENTS
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(dollars in thousands, except per share amounts)
Accumulated
Common Additional Other
Stock Paid-In Comprehensive Retained Comprehensive
Par Value Capital Income Earnings Income Total
------------ ------------- ------------- ---------- --------------- ------------
BALANCE, DECEMBER 31, 2002 $846 $1,003,200 $509 $75,511 $1,080,066
Net income $50,775 50,775
Other comprehensive income:
Unrealized net gain on securities,
net of reclassification adjustment (4,511) (4,511)
-------------
Comprehensive income $46,264 46,264
=============
Exercise of stock options - 215 215
Proceeds from direct purchase and
dividend reinvestment - 955 955
Dividends declared for the quarter
ended March 31, 2003, $0.60 per share (50,788) (50,788)
---------- ------------- ---------- ------------- --------------
BALANCE, MARCH 31, 2003 $846 $1,004,370 $496 $71,000 $1,076,712
Net income $58,152 58,152
Other comprehensive income:
Unrealized net loss on securities,
net of reclassification adjustment (69,810) (69,810)
-------------
Comprehensive income $(11,658) (11,658)
=============
Exercise of stock options - 154 154
Proceeds from direct purchase and 1 1,346 1,347
dividend reinvestment
Proceeds from secondary offering 93 151,222 151,315
Dividends declared for the quarter
ended June 30, 2003,
$0.60 per share (56,432) (56,432)
---------- ------------- ---------- ------------- --------------
BALANCE, JUNE 30, 2003 $940 $1,157,092 $2,216 $1,190 $1,161,438
========== ============= ========== ============= ==============
See notes to financial statements.
3
PART I
ITEM 1. FINANCIAL STATEMENTS
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
For the Quarter For the Quarter For the Six For the Six
Ended Ended Months Ended Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
--------------- -------------- --------------- ------------
Cash flows from operating activities:
Net income $ 58,152 $ 59,369 $ 108,928 $ 112,412
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of mortgage premiums and
discounts, net 57,614 19,797 106,133 37,688
Gain on sale of Mortgage-Backed Securities (20,231) (1,343) (31,252) (4,753)
Stock option expense 58 101 60 163
Market value adjustment on long-term
repurchase agreement 1,993 (406) 2,097 (369)
(Increase) decrease in accrued interest receivable (7,939) 449 (8,319) (4,049)
(Increase) in other assets (232) (850) (265) (1,046)
Increase (decrease) in accrued interest payable 873 (746) 1,853 4,667
Increase in accounts payable 1,169 763 295 851
------------ ------------ ------------ ------------
Net cash provided by operating activities 91,457 77,134 179,530 145,564
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of Mortgage-Backed Securities (4,920,184) (2,151,127) (7,217,253) (5,989,743)
Purchase of agency debentures (1,170,000) - (1,341,000) -
Proceeds from sale of Mortgage-Backed Securities 1,576,147 414,974 2,112,393 808,436
Proceeds from callable agency debentures 171,000 - 171,000 -
Principal payments of Mortgage-Backed
Securities 2,178,798 864,902 4,050,322 1,957,893
------------ ------------ ------------ ------------
Net cash used in investing activities (2,164,239) (871,251) (2,224,538) (3,223,414)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from repurchase agreements 31,387,072 22,122,302 55,682,830 41,949,911
Principal payments on repurchase agreements (29,416,888) (21,276,899) (53,683,870) (39,132,937)
Proceeds from exercise of stock options 94 265 309 485
Proceeds from direct purchase and dividend reinvestment 1,349 831 2,302 1,390
Net proceeds from secondary offerings 151,315 - 151,315 347,337
Dividends paid (50,801) (52,223) (108,300) (88,119)
------------ ------------ ------------ ------------
Net cash provided by financing activities 2,072,141 794,276 2,044,586 3,078,067
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (641) 159 (422) 217
Cash and cash equivalents, beginning of period 945 487 726 429
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 304 $ 646 $ 304 $ 646
============ ============ ============ =============
Supplemental disclosure of cash flow information:
Interest paid $ 50,897 $ 48,607 $ 93,965 $ 83,205
============ ============ ============ =============
Noncash financing activities:
Net change in unrealized gain (loss) on available-
for-sale securities net of reclassification
adjustment $ (69,810) $ 36,781 $ (74,321) $ 29,113
============ ============ ============ ============
Dividends declared, not yet paid $ 56,420 $ 56,404 $ 56,420 $ 56,404
============ ============ ============ ============
4
ANNALY MORTGAGE MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE QUARTERS ENDED JUNE 30, 2003 AND 2002
(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 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 financial 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, 2002. 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 and Agency Debentures - 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"). The Company also invests in Federal Home Loan Bank ("FHLB"),
Federal Home Loan Mortgage Corporation ("FHLMC"), and Federal National Mortgage
Association ("FNMA") debentures. The Mortgage-Backed Securities and agency
debentures are collectively referred to herein as "Investment 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 Investment Securities until maturity, it may, from
time to time, sell any of its Investment Securities as part of its overall
management of its statement of financial condition. Accordingly, this
flexibility requires the Company to classify all of its Investment 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 Investment 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 June 30, 2003 and 2002.
Interest income is accrued based on the outstanding principal amount of
the Investment 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.
Investment 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 such
transactions are determined on the specific identification basis.
5
Credit Risk - At June 30, 2003 and December 31, 2002, the Company has
limited its exposure to credit losses on its portfolio of Investment Securities
by only purchasing securities issued by Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), Government National
Mortgage Association ("GNMA"), or Federal Home Loan Bank ("FHLB"). The payment
of principal and interest on the FHLMC, FNMA, and FHLB Investment 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 June 30, 2003 and December 31,
2002 all of the Company's Investment Securities have an actual or implied "AAA"
rating.
Repurchase Agreements -The Company finances the acquisition of its
Investment Securities through the use of repurchase agreements. Repurchase
agreements are treated as collateralized financing transactions and are carried
at their contractual amounts, including accrued interest, as specified in the
respective agreements. Accrued interest is recorded as a separate line item.
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.
New Accounting Pronouncement - In December 2002, the FASB issued
Statement of Financial Accounting Standard (SFAS) No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosures, an Amendment of FASB
Statement No. 123" (SFAS No. 148). This Statement provides alternative methods
of transition for companies who voluntarily change to the fair value-based
method of accounting for stock-based employee compensation in accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No.
148 does not permit the use of the original SFAS No. 123 prospective method of
transition for changes to the fair value based method made in fiscal years
beginning after December 15, 2003. The Statement also requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. This Statement is effective upon issuance.
2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of June 30, 2003, which are carried
at their fair value:
Federal Home Federal National Government Total Mortgage-
Loan Mortgage Mortgage National Mortgage Backed
Corporation Association Association Securities
---------------------- --------------------- ---------------------- --------------------
(dollars in thousands)
Mortgage-Backed
Securities, gross $4,737,720 $7,464,489 $362,238 $12,564,447
Unamortized discount (21) (1,046) (14) (1,081)
Unamortized premium 102,262 214,700 6,957 323,919
---------------------- --------------------- ---------------------- --------------------
Amortized cost 4,839,961 7,678,143 369,181 12,887,285
Gross unrealized gains 17,863 30,105 1,687 49,655
Gross unrealized losses (25,017) (23,938) (490) (49,445)
---------------------- --------------------- ---------------------- --------------------
Estimated fair value $4,832,807 $7,684,310 $370,378 12,887,495
====================== ===================== ====================== ====================
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Gain Loss Value
---------------------- --------------------- ---------------------- --------------------
Adjustable rate 7,848,276 31,674 (28,510) 7,851,440
Fixed rate 5,039,009 17,981 (20,935) 5,036,055
---------------------- --------------------- ---------------------- --------------------
Total 12,887,285 49,655 (49,445) 12,887,495
====================== ===================== ====================== ====================
The following table pertains to the Company's Mortgage-Backed
Securities classified as available-for-sale as of December 31, 2002, which are
carried at their fair value:
Federal Home Federal National Government Total
Loan Mortgage Mortgage National Mortgage Mortgage-Backed
Corporation Association Association Securities
---------------------- --------------------- ---------------------- --------------------
(dollars in thousands)
Mortgage-Backed
Securities, gross $ 5,120,929 $5,860,987 $ 220,468 $11,202,384
Unamortized discount (544) (120) - (664)
Unamortized premium 105,872 164,071 4,684 274,627
---------------------- --------------------- ---------------------- --------------------
Amortized cost 5,226,257 6,024,938 225,152 11,476,347
Gross unrealized gains 31,731 58,239 537 90,507
Gross unrealized losses (9,554) (5,318) (125) (14,997)
---------------------- --------------------- ---------------------- --------------------
Estimated fair value $ 5,248,434 $ 6,077,859 $ 225,564 $11,551,857
====================== ===================== ====================== ====================
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Gain Loss Value
---------------------- --------------------- ---------------------- --------------------
Adjustable rate $ 7,144,741 $ 35,349 $ (12,424) $7,167,666
Fixed rate 4,331,606 55,158 (2,573) 4,384,191
---------------------- --------------------- ---------------------- --------------------
Total $11,476,347 $ 90,507 $ (14,997) $11,551,857
====================== ===================== ====================== ====================
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 10.1% at
June 30, 2003 and 8.8% at December 31, 2002.
During the six months ended June 30, 2003, the Company realized $31.3
million in gains from sales of Mortgage-Backed Securities. During the six months
ended June 30, 2002, the Company realized $4.8 million in gains from sales of
Mortgage-Backed Securities.
3. AGENCY DEBENTURES
At June 30, 2003, the Company owned callable agency debentures totaling
$1.4 billion. FHLMC, FNMA, and FHLB are the issuers of the debentures. All of
the Company's agency debentures are classified as available-for-sale. The
unrealized gain on the Company's agency debentures at June 30, 2003 was
$980,000. The Company's agency debentures are adjustable rate and fixed rate
with a weighted average lifetime cap of 6.56%.
7
4. REPURCHASE AGREEMENTS
The Company had outstanding $12,162,333,000 and $10,163,174,000 of
repurchase agreements with a weighted average borrowing rate of 1.50% and 1.72%
and a weighted average remaining maturity of 93 days and 124 days as of June 30,
2003 and December 31, 2002, respectively.
At June 30, 2003 and December 31, 2002, the repurchase agreements had the
following remaining maturities:
June 30, 2003 December 31, 2002
---------------------------------- ---------------------------------
(dollars in thousands)
Within 30 days $6,663,647 $ 7,778,003
30 to 59 days 3,923,662 816,906
60 to 89 days - 104,500
90 to 119 days 111,060 -
Over 120 days 1,463,964 1,463,765
---------------------------------- ---------------------------------
Total $12,162,333 $10,163,174
================================== =================================
5. 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 $1,205,000 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
June 30, 2003, the fair value of this interest rate floor was a $4,708,000 and
was classified as other liabilities.
6. COMMON STOCK
During the six months ended June 30, 2003, the Company declared
dividends to shareholders totaling $107,220,000 or $1.20 per share, which
$56,420,000 was paid on July 31, 2003.
On April 1, 2003, the Company entered into an underwriting agreement
pursuant to which the Company raised approximately net proceeds of approximately
$151.3 million in equity in a secondary offering of 9,300,700 shares of common
stock.
During the six months ended June 30, 2003, 35,622 options were
exercised under the long-term compensation plan at $369,000. Also, 125,225
shares were purchased in the dividend reinvestment and direct purchase program
at $2,302,000.
During the Company's year ended December 31, 2002, the Company declared
dividends to shareholders totaling $223,602,000, or $2.67 per share, of which
$166,102,000 was paid during the year and $57,499,000 was paid on January 29,
2003.
During the year ended December 31, 2002, the Company completed an
offering of common stock in the first quarter issuing 23,000,000 shares, with
aggregate net proceeds of approximately $347,337,000. Through the Equity Shelf
Program, the Company raised $28,103,000 in net proceeds and issued 1,484,100
shares.
During the year ended December 31, 2002, 97,095 options were exercised
at $1,090,000. Total shares exchanged upon exercise of the stock options were
4,444 at a value of $76,000. Also, 165,480 shares were purchased in dividend
reinvestment and share purchase plan, totaling $3,009,000.
8
7. EARNINGS PER SHARE (EPS)
For the quarter ended June 30, 2003, the reconciliation is as follows:
For the Quarter Ended June 30, 2003
(dollars in thousands, except per share amounts)
----------------------- ----------------------- ------------------------
Income Weighted Average Shares Per-Share
(Numerator) (Denominator) Amount
----------------------- ----------------------- ------------------------
Net income $58,152
-----------------------
Basic earnings per share $58,152 93,384,128 $0.62
========================
Effect of dilutive securities:
Dilutive stock options 203,896
----------------------- -----------------------
Diluted earnings per share $58,152 93,588,024 $0.62
======================= ======================= ========================
Options to purchase 12,500 shares of stock were outstanding and
considered anti-dilutive as their exercise price exceeded the average stock
price for the quarter.
For the quarter ended June 30, 2002, the reconciliation is as follows:
For the Quarter Ended June 30, 2002
(dollars in thousands, except per share amounts)
----------------------- ----------------------- ------------------------
Income Weighted Average Shares Per-Share
(Numerator) (Denominator) Amount
----------------------- ----------------------- ------------------------
Net income $59,369
-----------------------
Basic earnings per share $59,369 82,910,206 $0.72
========================
Effect of dilutive securities:
Dilutive stock options 276,659
----------------------- -----------------------
Diluted earnings per share $59,369 83,186,865 $0.71
======================= ======================= ========================
Options to purchase 6,250 shares of stock were outstanding and
considered anti-dilutive as their exercise price exceeded the average stock
price for the quarter.
9
For the six months ended June 30, 2003, the reconciliation is as
follows:
For the Six Months Ended June 30, 2003
(dollars in thousands, except per share amounts)
------------------------------------------------------------------------
Income Weighted Average Shares Per-Share
(Numerator) (Denominator) Amount
----------------------- ----------------------- ------------------------
Net income $108,928
-----------------------
Basic earnings per share 108,928 89,019,821 $1.22
========================
Effect of dilutive securities:
Dilutive stock options 211,451
----------------------- -----------------------
Diluted earnings per share $108,928 89,231,272 $1.22
======================= ======================= ========================
Options to purchase 12,500 shares of stock were outstanding and
considered anti-dilutive as their exercise price exceeded the average stock
price for the six months ended June 30, 2003.
For the six months ended June 30, 2002, the reconciliation is as
follows:
For the Six Months Ended June 30, 2002
(dollars in thousands, except per share amounts)
------------------------------------------------------------------------
Income Weighted Average Shares Per-Share
(Numerator) (Denominator) Amount
----------------------- ----------------------- ------------------------
Net income $112,412
-----------------------
Basic earnings per share 112,412 79,954,529 $1.41
========================
Effect of dilutive securities:
Dilutive stock options 290,843
----------------------- -----------------------
Diluted earnings per share $112,412 80,245,372 $1.40
======================= ======================= ========================
Options to purchase 6,250 shares of stock were outstanding and
considered anti-dilutive as their exercise price exceeded the average stock
price for the six months ended June 30, 2003.
8. LONG-TERM STOCK INCENTIVE PLAN
The Company has adopted a long term stock incentive plan for executive
officers, key employees and nonemployee directors (the "Incentive Plan"). The
Incentive Plan authorizes the Compensation Committee of the board of directors
to grant awards, including incentive stock options as defined under Section 422
of the Code ("ISOs") and options not so qualified ("NQSOs"). The Incentive Plan
authorizes the granting of options or other awards for an aggregate of the
greater of 500,000 shares or 9.5% of the fully diluted outstanding shares of the
Company's common stock.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, as amended by
SFAS No. 148, requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
10
There were 6,250 stock options granted during the quarters ended June
30, 2003 and 2002. The fair value at date of grant for stock options granted
during six months ended June 30, 2003 and 2002 was $0.69 and $0.83 per option,
respectively. The fair value of stock options at date of grant was estimated
using the Black-Scholes option pricing model utilizing the following weighted
average assumptions:
For the Year Ended December 31,
2002 2001
-------------------------------
Risk-free interest rate 2.49% 4.02%
Expected option life in years 5 5
Expected stock price volatility 22% 26%
Expected dividend yield 11.28% 13.57%
Because the Company's employee stock options have characteristics
significantly different from those of traded options and changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of its employee stock options. The Black-Scholes
option pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are freely transferable.
All available option pricing models require the input of highly subjective
assumptions including the expected stock price volatility.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
For the Quarter Ended For the Six months Ended
June 30, June 30,
2003 2002 2003 2002
--------------- --------------- ----------------- ----------------
Net income, as reported $58,152 $59,369 $108,928 $112,412
Deduct: Total stock-based employee compensation
expense determined under fair value based method
(4) (5) (9) (10)
--------------- --------------- ----------------- ----------------
Pro-forma net income $58,148 $59,364 $108,919 $112,402
=============== =============== ================= ================
Net income per share, as reported
Basic $0.62 $0.72 $1.22 $1.41
Diluted $0.62 $0.71 $1.22 $1.40
Pro-forma net income per share
Basic $0.62 $0.72 $1.22 $1.41
Diluted $0.62 $0.71 $1.22 $1.40
9. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, (SFAS No. 130). SFAS No. 130 requires the
reporting of comprehensive income in addition to net income from operations.
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 June 30, 2003
and December 31, 2002 held securities classified as available-for-sale. At June
30, 2003, the net unrealized gain totaled $1.2 million and at December 31, 2002,
the net unrealized gain totaled $75.5 million.
10. LEASE COMMITMENTS
The Company has a noncancelable lease for office space, which commenced
in May 2002 and expires in December 2009.
The Company's aggregate future minimum lease payments are as follows:
(dollars in thousands)
2003 500
2004 500
2005 500
2006 530
2007 532
Thereafter 1,064
---------------------------
Total remaining lease payments $3,626
===========================
11
11. RELATED PARTY TRANSACTION
Mr. Farrell, on behalf of FIDAC, has approached us about the
possibility of us acquiring FIDAC. Our board of directors has formed a special
committee of independent directors to consider this matter and the special
committee has retained independent counsel and an independent financial adviser
to assist it. If our board of directors, based upon a favorable recommendation
of the special committee, with Mr. Farrell and Ms. Denahan abstaining,
determines that we should acquire FIDAC, we expect that such proposed
acquisition will be submitted to a vote of our stockholders. We have not decided
whether we will pursue this opportunity and either party may at any time
determine not to proceed with this proposed acquisition without any further
obligation.
Michael A.J. Farrell, our Chairman of the Board, Chief Executive
Officer and President, Wellington J. Denahan, our Vice Chairman and Chief
Investment Officer, Kathryn F. Fagan, our Chief Financial Officer and Treasurer,
Jennifer A. Stephens, our Executive Vice President and Secretary, and other of
our officers and employees are the shareholders of Fixed Income Discount
Advisory Company (or FIDAC). Mr. Farrell, Ms. Denahan and other officers and
employees are actively involved in managing mortgage-backed securities and other
fixed income assets on behalf of FIDAC.
Mr. Farrell, on behalf of FIDAC, has approached us about the
possibility of us acquiring FIDAC. Our board of directors formed a special
committee of independent directors to consider this matter and the special
committee retained independent counsel and an independent financial adviser to
assist it. The special committee has determined that we should make an offer to
acquire FIDAC. We expect that based upon that determination, our board of
directors, with Mr. Farrell and Ms. Denahan abstaining, will approve our making
of an offer to acquire FIDAC.
The price and terms of our offer to acquire FIDAC have not yet been
determined. We believe, however, that the purchase price will be payable in
shares of our common stock.
No assurances can be made as to when or whether we will acquire FIDAC.
We cannot predict the terms and conditions of the proposed acquisition. We
cannot be sure whether FIDAC will agree to the terms and conditions of our
offer. Either party may at any time determine not to proceed with this proposed
acquisition without any further obligation. In addition, we cannot be sure of
the potential consequences of us acquiring or not acquiring FIDAC.
If we are able to reach an agreement to acquire FIDAC, we expect that
the proposed acquisition will be submitted to a vote of our stockholders.
Our management currently allocates rent and other general and
administrative expenses in the amounts of 90% and 10% to the Company and FIDAC,
respectively.
12. 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.
12
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 2002 Form
10-K. 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.
Overview
Annaly Mortgage Management, Inc. ("we" or "us") are a real estate
investment trust that owns and manages a portfolio of Investment Securities
which consist of Mortgage-Backed Securities and agency debentures. Our principal
business objective is to generate net income for distribution to our
stockholders from the spread between the interest income on our Investment
Securities and the costs of borrowing to finance our acquisition of Investment
Securities.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results
of operations is based on the amounts reported in our financial statements.
These financial statements are prepared in conformity with GAAP. In preparing
the financial statements, management is required to make various judgments,
estimates and assumptions that affect the reported amounts. Changes in these
estimates and assumptions could have a material effect our financial statements.
The following is a summary our policies that is most affected by management's
judgments, estimates and assumptions.
Market Valuation of Securities: All assets classified as
available-for-sale are reported at fair value, based on market prices. Our
policy is to obtain market values from three independent sources and record the
market value of the securities based on the average of the three.
Amortization of premiums and accretion of discounts: Premiums and
discounts associated with the purchase of the Investment Securities are
amortized into interest income over the lives of the securities using the
interest method. Our policy for estimating prepayment speeds for calculating the
effective yield is to evaluate historical performance, street consensus
prepayment speeds, and current market conditions.
Results of Operations: For the Quarters and Six Months Ended June 30, 2003
and 2002
Net Income Summary
For the quarter ended June 30, 2003, our net income was $58.2 million,
or $0.62 basic earnings per average share, as compared to $59.4 million, or
$0.72 basic earnings per average share, for the quarter ended June 30, 2002. We
attribute the decrease in net income for the quarter ended June 30, 2003, over
the quarter ended June 30, 2002, to the decline in the interest rate spread
between the rate on interest-earning assets and the cost of funds for
interest-bearing liabilities. We compute our net income per share by dividing
14
net income by the weighted average number of shares of outstanding common stock
during the period, which was 93,384,128 for the quarter ended June 30, 2003 and
82,910,206 for the quarter ended June 30, 2002. Dividends per shares outstanding
for the quarter ended June 30, 2003 was $0.60 per share, or $56.4 million in
total. Dividends per shares outstanding for the quarter ended June 30, 2002 was
$0.68 per share, or $56.4 million in total. Our return on average equity was
20.79% for the quarter ended June 30, 2003 and 23.08% for the quarter ended June
30, 2002. The decline in the return on average equity resulted from the
declining interest rate spread.
For the six months ended June 30, 2003, our net income was $108.9
million, or $1.22 basic earnings per average share, as compared to $112.4
million, or $1.41 basic earnings per average share, for the six months ended
June 30, 2002. We attribute the decrease in net income for the six month period
ended June 30, 2003, over the six month period ended June 30, 2002, to the
decline in the interest rate spread between the rate on interest-earning assets
and the cost of funds for interest-bearing liabilities. We compute our net
income per share by dividing net income by the weighted average number of shares
of outstanding common stock during the period, which was 89,019,821 for the six
months ended June 30, 2003 and 79,954,529 for the six months ended June 30,
2002. Dividends per shares outstanding for the six months ended June 30, 2003
was $1.20 per share, or $107.2 million in total. Dividends per shares
outstanding for the six months ended June 30, 2002 was $1.31 per share, or
$108.6 million in total. Our annualized return on average equity was 19.70% for
the six months ended June 30, 2003 and 24.75% for the six months ended June 30,
2002.
Net Income Summary
(dollars in the thousands, except for per-share amounts)
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-------------- ---------------- -------------- ---------------
Interest Income $93,892 $109,423 $181,392 $202,322
Interest Expense 51,770 47,860 95,818 87,872
-------------- ---------------- -------------- ---------------
Net Interest Income 42,122 61,563 85,574 114,450
Gain on Sale of Investment Securities 20,231 1,342 31252 4,752
General and Administrative Expenses 4,201 3,536 7,898 6,791
-------------- ---------------- -------------- ---------------
Net Income $58,152 $59,369 $108,928 $112,412
============== ================ ============== ===============
Weighted Average Number of Basic Shares 93,384,128 82,910,206 89,019,821 79,954,529
Outstanding
Weighted Average Number of Diluted Shares 93,588,024 83,186,865 89,231,272 80,245,372
Outstanding
Basic Net Income Per Share $0.62 $0.72 $1.22 $1.41
Diluted Net Income Per Share $0.62 $0.71 $1.22 $1.40
Average Total Assets $13,692,434 $10,717,867 $13,014,651 $9,717,683
Average Equity $1,119,075 $1,029,064 $1,106,072 $908,495
Annualized Return on Average Assets 1.70% 2.22% 1.67% 2.31%
Annualized Return on Average Equity 20.79% 23.08% 19.70% 24.75%
Interest Income and Average Earning Asset Yield
We had average earning assets of $12.8 billion and $9.6 billion for the
quarters ended June 30, 2003 and 2002, respectively. Our primary source of
income for the quarters ended June 30, 2003 and 2002 was interest income. A
portion of our income was generated by gains on the sales of our Investment
Securities. Our interest income was $93.9 million for the quarter ended June 30,
2003 and $109.4 million for the quarter ended June 30, 2002. Our yield on
average earning assets was 2.93% and 4.55% for the same respective periods. Our
average earning asset balance increased by $3.2 billion and interest income
decreased by $15.5 million for the quarter ended June 30, 2003 as compared to
the quarter ended June 30, 2002, due to the substantial decline in the yield on
interest-earning assets. The decline in the yield was the result of increased
prepayment speeds and reduced coupons.
15
We had average earning assets of $11.8 billion and $8.6 billion for the
six months ended June 30, 2003 and 2002, respectively. Our interest income was
$181.4 million for the six months ended June 30, 2003 and $202.3 million for the
six months ended June 30, 2002. Our yield on average earning assets was 3.07%
and 4.69% for the same respective periods. Our average earning asset balance
increased by $3.2 billion and interest income decreased by $20.9 million for the
six months ended June 30, 2003 as compared to the six months ended June 30,
2002. Average earning asset increased due to the increased equity base from the
equity offering in the 2nd quarter of 2003. The table below shows our average
balance of cash equivalents and Investment 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 June 30, 2003, March 31, 2003, the year ended
December 31, 2002 and each of the four quarters in 2002.
Average Earning Asset Yield
---------------------------
(dollars in thousands)
----------------------
(ratios for the quarters have been annualized)
----------------------------------------------
Yield on
Yield on Average
Average Average Average Average Yield on Interest
Cash Investment Earning Cash Investment Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
---------- ---------- ------- ----------- ---------- ------- ---------
For the Quarter Ended June 30, 2003 - $12,815,290 $12,815,290 - 2.93% 2.93% $93,892
For the Quarter Ended March 31, 2003 - $10,837,147 $10,837,147 - 3.23% 3.23% $87,500
- -----------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 $2 $9,575,365 $9,575,367 1.14% 4.22% 4.22% $404,165
For the Quarter Ended December 31, 2002 $2 $10,400,894 $10,400,896 0.88% 3.56% 3.56% $92,641
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
The constant prepayment rate ("CPR") on our Mortgage-Backed Securities
for the quarters ended June 30, 2003 and 2002 was 44% 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 June 30, 2003 and 2002 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 had average borrowed funds of $12.3 billion and total interest
expense of $51.8 million for the quarter ended June 30, 2003. We had average
borrowed funds of $9.1 billion and total interest expense of $47.9 million for
the quarter ended June 30, 2002. Our average cost of funds was 1.68% for the
quarter ended June 30, 2003 and 2.10% for the quarter ended June 30, 2002. The
cost of funds rate decreased 0.42% and the average borrowed funds increased by
$3.2 billion for the quarter ended June 30, 2003 when compared to the quarter
ended June 30, 2002. Interest expense for the quarter increased 8% due to the
large increase in the average repurchase balance.
We had average borrowed funds of $11.4 billion and total interest
expense of $95.8 million for the six months ended June 30, 2003. We had average
borrowed funds of $8.1 billion and total interest expense of $87.9 million for
the six months ended June 30, 2002. Our average cost of funds was 1.68% for the
six months ended June 30, 2003 and 2.16% for the six months ended June 30, 2002.
The cost of funds rate decreased 0.48% and the average borrowed funds increased
by $3.3 billion for the six months ended June 30, 2003 when compared to the six
months ended June 30, 2002.
16
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 June 30, 2003, March 31, 2003, the year ended December 31, 2002
and each of the four quarters in 2002.
Average Cost of Funds
---------------------
(dollars in thousands)
----------------------
(ratios for the quarters have been annualized)
----------------------------------------------
Average
One-Month Average Cost Average Cost
LIBOR Less of Funds of Funds Less
Average Average Average Average Average Less Average Average
Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
For the Quarter Ended
June 30, 2003 $12,311,329 $51,770 1.68% 1.26% 1.20% 0.06% 0.42% 0.48%
For the Quarter Ended
March 31, 2003 $10,463,252 $44,048 1.68% 1.34% 1.33% 0.01% 0.34% 0.35%
- --------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2002 $9,128,933 $191,758 2.10% 1.77% 1.88% (0.11%) 0.33% 0.22%
For the Quarter Ended
December 31, 2002 $10,097,676 $49,874 1.98% 1.57% 1.55% 0.02% 0.41% 0.43%
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%
Our net interest income, which equals interest income less interest
expense, totaled $42.1 million for the quarter ended June 30, 2003 and $61.6
million for the quarter ended June 30, 2002. Our net interest income decreased
because of the decline in net interest spread. This decline in spread is the
direct result of the low interest rate environment and the high prepayment
speeds. 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 1.25% for the
quarter ended June 30, 2003 as compared to 2.45% for the quarter ended June 30,
2002. This 120 basis point decrease in spread income is reflected in the
decrease in net interest income.
Our net interest income, which equals interest income less interest
expense, totaled $85.6 million for the six months ended June 30, 2003 and $114.5
million for the six months ended June 30, 2002. Our net interest income declined
for the six month period due to the large amount of prepayments and the lower
interest rate environment. 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 1.38% for the six months ended June 30, 2003 as compared to 2.54% for the
six months ended June 30, 2002. This 116 basis point increase in spread income
is reflected in the increase in net interest income.
The table below shows our average investment securities and cash
equivalents, total interest income, interest expense, average repurchase
agreements, average cost of funds, and net interest income for the quarters
ended June 30, 2003, March 31, 2003, the year ended December 31, 2002, and each
of the four quarters in 2002.
17
Net Interest Income
(dollars in thousands)
(ratios for the quarters have been annualized)
Yield on Average
Average Interest Average Balance
Investment Income on Total Interest of Average Net
Securities Investment Average Cash Interest Earning Repurchase Interest Cost of Interest
Held Securities Equivalents Income Assets Agreements Expense Funds Income
----------- ---------- ------------ ------- -------- ---------- ---------- ------- ----------
For the Quarter $12,815,290 $93,892 - $93,892 2.93% $12,311,329 $51,770 1.68% $42,122
Ended June
30, 2003
For the Quarter
Ended March
31, 2003 $10,837,147 $87,500 - $87,500 3.23% $10,463,251 $44,048 1.68% $43,452
---------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2002 $9,575,365 $404,165 $2 $404,165 4.22% $9,128,933 $191,758 2.10% $212,407
For the Quarter
Ended December
31, 2002 $10,400,894 $92,641 $2 $92,641 3.56% $10,097,676 $49,874 1.98% $42,767
For the Quarter
Ended September $10,661,228 $109,201 $2 $109,201 4.10% $10,122,840 $54,012 2.13% $55,189
30, 2002
For the Quarter
Ended June 30, $9,629,332 $109,423 $2 $109,423 4.55% $9,102,992 $47,860 2.10% $61,563
2002
For the Quarter
Ended March 31, $7,610,006 $92,900 $2 $92,900 4.88% $7,192,222 $40,012 2.23% $52,888
2002
Gains and Losses on Sales of Investment Securities
For the quarter ended June 30, 2003, we sold Mortgage-Backed Securities
with an aggregate historical amortized cost of $1.6 billion for an aggregate
gain of $20.2 million. For the quarter ended June 30, 2002, we sold
Mortgage-Backed Securities with an aggregate historical amortized cost of $413.6
million for an aggregate gain of $1.3 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.
During the quarter ended June 30, 2003, we had $171.0 million of
callable agency debentures called at par. There was no gain or loss associated
with the call on the securities.
For the six months ended June 30, 2003, we sold Mortgage-Backed
Securities with an aggregate historical amortized cost of $2.4 billion for an
aggregate gain of $31.3 million. For the six months ended June 30, 2002, we sold
Mortgage-Backed Securities with an aggregate historical amortized cost of $803.7
million for an aggregate gain of $4.8 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 Investment Securities to
date. We have limited our exposure to credit losses on our Investment Securities
by purchasing only securities issued or guaranteed by FNMA, FHLMC, GNMA and FHLB
which, although not rated, carry an implied "AAA" rating.
General and Administrative Expense
General and administrative ("G&A") expenses were $4.2 million for the
quarter ended June 30, 2003 and $3.5 million for the quarter ended June 30,
2002. G&A expenses as a percentage of average assets was 0.12% for the quarter
ended June 30, 2003 and 0.13% for the quarter ended June 30, 2002, on an
annualized basis. G&A expenses as a percentage of average equity was 1.50% and
1.37% on an annualized basis for the quarters ended June 30, 2003 and 2002,
respectively. The Company is internally managed and continues to be a low-cost
provider. Even though G&A expenses increased by $665,000 for the quarter ended
June 30, 2003, when compared to the quarter ended June 30, 2002, G&A as a
percentage of average assets decreased by one basis point.
18
G&A Expenses and Operating Expense Ratios
-----------------------------------------
(dollars in thousands)
----------------------
Total G&A Total G&A
Total G&A Expenses/Average Expenses/Average
Expenses Assets (annualized) Equity (annualized)
--------- ---------------------- ---------------------
For the Quarter Ended June 30, 2003 $4,201 0.12% 1.50%
For the Quarter Ended March 31, 2003 $3,697 0.12% 1.37%
- ------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 $13,963 0.13% 1.43%
For the Quarter Ended December 31, 2002 $3,904 0.13% 1.44%
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%
Net Income and Return on Average Equity
Our net income was $58.2 million for the quarter ended June 30, 2003
and $59.4 million for the quarter ended June 30, 2002. Our return on average
equity was 20.79% for the quarter ended June 30, 2003 and 23.08% for the quarter
ended June 30, 2002. Our net income was $108.9 million for the six months ended
June 30, 2003 and $112.4 million for the six months ended June 30, 2002. The
decline in net interest income was only partially offset by the increase in gain
on sale of securities. 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 June 30,
2003, March 31, 2003, the year ended December 31, 2002, and for each of the four
quarters in 2002.
Components of Return on Average Equity
--------------------------------------
(Ratios for all quarters are annualized)
----------------------------------------
Gain on Sale of
Net Interest Mortgage-Backed G&A Return on
Income/Average Securities/Average Expenses/Average Average
Equity Equity Equity Equity
For the Quarter Ended June 30, 2003 15.06% 7.23% 1.50% 20.79%
For the Quarter Ended March 31, 2003 16.11% 4.09% 1.37% 18.83%
- -------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2002 21.72% 2.15% 1.43% 22.44%
For the Quarter Ended December 31, 2002 15.80% 4.27% 1.44% 18.63%
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%
Financial Condition
Investment Securities
All of our Mortgage-Backed Securities at June 30, 2003 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 fair value.
All of our Federal Home Loan Bank Debentures are adjustable rate
in nature, which carry an implied "AAA" rating. We mark-to-market all of our
Federal Home Loan Bank Debentures at fair value.
19
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 June 30, 2003 and December 31, 2002, we had on our Statement of
Financial Condition a total of $1.1 million and $664,000 respectively, of
unamortized discount (which is the difference between the remaining principal
value and current amortized cost of our Mortgage-Backed Securities acquired at a
price below principal value) and a total of $323.9 million and $274.6 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).
We received mortgage principal repayments of $2.2 billion for the
quarter ended June 30, 2003 and $864.9 million for the quarter ended June 30,
2002. 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 Investment Securities at June 30, 2003,
March 31, 2003, December 31, 2002, September 30, 2002, June 30, 2002, and March
31, 2002.
Investment Securities
(dollars in thousands)
Estimated
Amortized Fair Weighted
Net Amortized Cost/Principal Estimated Value/Principal Average
Principal Value Premium Cost Value Fair Value Value Yield
--------------- -------- ----------- ------------- ----------- --------------- ----------
At June 30, 2003 $13,939,447 $322,838 $14,262,285 102.32% $14,263,475 102.32% 2.87%
At March 31, 2003 $11,957,710 $289,360 $12,247,070 102.42% $12,318,070 103.01% 2.83%
- ------------------------------------------------------------------------------------------------------------------------
At December 31, 2002 $11,202,384 $273,963 $11,476,347 102.45% $11,551,857 103.12% 3.25%
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%
The tables below set forth certain characteristics of our Investment
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 Investment Security Characteristics
(dollars in thousands)
Weighted Principal Value
Weighted Weighted Weighted Average Weighted at Period End as
Average Average Average Term to Weighted Average % of Total
Principal Coupon Index Net Next Average Asset Investment
Value Rate Level Margin Adjustment Lifetime Cap Yield Securities
---------- -------- -------- -------- ----------- ------------ --------- -----------------
At June 30, 2003 $8,889,012 3.69% 2.18% 1.51% 18 months 9.70% 2.47% 63.77%
At March 31, 2003 $7,716,248 3.93% 2.31% 1.62% 13 months 10.04% 2.20% 64.53%
- -----------------------------------------------------------------------------------------------------------------------
At December 31, 2002 $7,007,062 4.10% 2.51% 1.59% 11 months 10.37% 2.33% 62.55%
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%
19
Fixed-Rate Investment Security Characteristics
----------------------------------------------
(dollars in thousands)
----------------------
Principal Value
at Period End as
Weighted Weighted % of Total
Average Coupon Average Investment
Principal Value Rate Asset Yield Securities
--------------- ---------------- -------------- ------------------
At June 30, 2003 $5,050,434 5.97% 3.58% 36.23%
At March 31, 2003 $4,241,462 6.53% 3.98% 35.47%
- ---------------------------------------------------------------------------------------------
At December 31, 2002 $4,195,322 6.76% 4.78% 37.45%
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 June 30, 2003 and December 31, 2002 we held Mortgage-Backed
Securities with coupons linked to the one-month , six-month and 12-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
---------------------------------------------------
June 30, 2003
-------------
Twelve Six-Month 12-Month 1-Year 2-Year 3-Year 5-Year
One-Month Six-Month Month Auction Moving Six-Month Treasury Treasury Treasury Treasury
LIBOR Libor Libor Average Average CD Rate Index Index Index Index
-----------------------------------------------------------------------------------------------
Weighted Average Term to
Next Adjustment 1mo. 31 mo. 34 mo 2mo. 1 mo 3 mo. 23 mo. 5 mo. 18 mo. 26 mo.
Weighted Average Annual
Period Cap 8.86% 2.00% 2.00% 1.00% None 1.00% 1.89% 2.00% 2.00% 2.00%
Weighted Average Lifetime
Cap at June 30, 2003 7.96% 9.74% 10.28% 13.00% 10.75% 10.75% 10.50% 11.91% 12.89% 12.58%
Mortgage Principal Value
as Percentage of
Mortgage-Backed
Securities at
June 30, 2003 21.95% 1.24% 6.82% 0.02% 0.62% 0.05% 28.46% 0.02% 0.55% 0.24%
Adjustable-Rate Mortgage-Backed Securities by Index
---------------------------------------------------
December 31, 2002
-----------------
Six-Month 12-Month 1-Year 2-Year 3-Year 5-Year
One-Month Six-Month Auction Moving Six-Month Treasury Treasury Treasury Treasury
LIBOR LIBOR Average Average CD Rate Index Index Index Index
--------------------------------------------------------------------------------------------
Weighted Average Term to
Next Adjustment 1 mo. 41 mo. 2 mo. 1 mo. 2 mo. 22 mo. 10 mo. 20 mo. 31 mo.
Weighted Average Annual
Period Cap None 2.00% 2.00% None 1.00% 1.93% 2.00% 2.00% 2.00%
Weighted Average Lifetime
Cap at December 31, 2002 9.01% 11.31% 13.00% 10.37% 11.60% 11.83% 11.93% 12.83% 12.57%
Mortgage Principal Value as
Percentage of Mortgage-
Backed Securities at
December 31, 2002 32.43% 0.33% 0.03% 0.58% 0.14% 27.67% 0.03% 0.92% 0.42%
21
Borrowings
To date, our debt has consisted entirely of borrowings collateralized
by a pledge of our Investment Securities. These borrowings appear on our
statement of financial condition as repurchase agreements. At June 30, 2003, 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
Investment 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 June 30, 2003, the term to maturity of our
borrowings ranged from one day to three years, with a weighted average original
term to maturity of 128 days. For the quarter ended June 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 181 days. At June 30, 2003, the weighted
average cost of funds for all of our borrowings was 1.50% and the weighted
average term to next rate adjustment was 93 days. At June 30, 2002, the weighted
average cost of funds for all of our borrowings was 2.10% and the weighted
average term to next rate adjustment was 139 days.
Liquidity
Liquidity, which is our ability to turn non-cash assets into cash,
allows us to purchase additional Investment 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 Investment Securities varies. Our Statement of Financial
Condidtion 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 Investment 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 Investment Securities; we
carry these assets on our Statement of Financial Condition at estimated fair
value rather than historical amortized cost. Based upon this
"available-for-sale" treatment, our equity base at June 30, 2003 was $1.2
billion, or $12.35 per share. If we had used historical amortized cost
accounting, our equity base at June 30, 2003 would have been $1.2 billion, or
$12.34 per share. Our equity base at June 30, 2002 was $1.0 billion, or $12.65
per share. If we had used historical amortized cost accounting, our equity base
at June 30, 2002 would have been $982.3 million, or $11.84 per share per share.
During the second quarter ended June 30, 2003, the Company raised additional
capital in the amount of approximately $151.3 million in a secondary offering.
With our "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact our taxable income but
rather are reflected on our Statement of Financial Condition 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
Investment Securities in our portfolio.
22
Unrealized Gains and Losses
---------------------------
(dollars in thousands)
At At At At At At
June 30, March 31, December 31, September 30, June 30, March 31,
2003 2003 2002 2002 2002 2002
-------------- -------------- ------------------ ---------------- -------------- -------------
Unrealized Gain $51,208 $98,768 $90,507 $93,254 $75,832 $46,894
Unrealized Loss (50,018) (27,768) (14,997) (18,872) (8,549) (16,392)
-------------- -------------- ------------------ ---------------- -------------- -------------
Net Unrealized Gain $1,190 $71,000 $75,510 $74,382 $67,283 $30,502
============== ============== ================== ================ ============== =============
Net Unrealized Gain as % of
Investment Securities
Principal Value 0.01% 0.59% 0.67% 0.67% 0.62% 0.31%
Net Unrealized Gain as % of
Investment Securities
Amortized Cost 0.01% 0.59% 0.67% 0.65% 0.61% 0.30%
Unrealized changes in the estimated net market value of Investment
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 Investment 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 $1.2 million, or 0.01% of the amortized cost of our Investment
Securities at June 30, 2003. "Unrealized Net Gains on Available for Sale
Securities" was $75.5 million or 0.67% of the amortized cost of our Investment
Securities at December 31, 2002.
The table below shows our equity capital base as reported and on a
historical amortized cost basis at June 30, 2003, March 31, 2003, December 31,
2002, September 30, 2002, June 30, 2002 and March 31, 2002. Issuances of common
stock, the level of earnings as compared to dividends declared, and other
factors influence our historical cost equity capital base. The reported equity
capital base is influenced by these factors plus changes in the "Unrealized Net
Gains (Losses) on Assets Available for Sale" account.
Stockholders' Equity
(dollars in thousands, except per share amounts)
Net Unrealized Historical
Historical Gains (Losses) on Reported Amortized Cost Reported Equity
Amortized Cost Assets Available Equity Base Equity Per (Book Value) Per
Equity Base for Sale (Book Value) Share Share
-------------- ----------------- ------------- -------------- -----------------
At June 30, 2003 $1,160,248 $1,190 $1,161,438 $12.34 $12.35
At March 31, 2003 $1,005,712 $71,000 $1,076,712 $11.88 $12.72
- ------------------------------------------------------------------------------------------------------------
At December 31, 2002 $1,004,555 $75,511 $1,080,066 $11.88 $12.77
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
Leverage
Our debt-to-equity ratio at June 30, 2003 and June 30, 2002 was 10:5:1
and 8.8:1, respectively. We generally expect to maintain a ratio of
debt-to-equity of between 12:1 and 8:1, 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.
23
Our target debt-to-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 Investment 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 Investment 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 conformity 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 June 30, 2003 and 2002,
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 June 30, 2003 and 2002. We also met all REIT requirements
regarding the ownership of our common stock and the distribution of our net
income. Therefore, as of June 30, 2003 and 2002, 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. If we were
to become regulated as an investment company, then our use of leverage would be
substantially reduced. The Investment Company Act 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 June 30,
2003 and 2002 we were in compliance with this requirement.
24
ITEM. 3 QUANTITATIVE AND QUALITIATIVE 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 Investment
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 25, 50, and 75 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 June 30, 2003 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 Percentage Change in Projected Percentage Change in
Change in Interest Rate Net Interest Income Portfolio Value
- --------------------------------- ------------------------------ ------------------------------
- -75 Basis Points (3%) 1%
- -50 Basis Points (7%) 1%
- -25 Basis Points (3%) 1%
Base Interest Rate
+25 Basis Points 3% (1%)
+50 Basis Points 4% (1%)
+75 Basis Points 10% (2%)
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 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.
25
The following table sets forth the estimated maturity or repricing of
our interest-earning assets and interest-bearing liabilities at June 30, 2003.
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:
Investment Securities $3,338,475 $1,156,597 $3,117,542 $6,326,833 $13,939,447
Rate Sensitive Liabilities:
Repurchase Agreements 10,587,309 335,447 1,239,577 - 12,162,333
---------------- ----------------- ---------------- ---------------- --------------
Interest rate sensitivity gap ($7,248,834) $821,150 $1,877,965 $6,326,833 $1,777,114
================ ================= ================ ================ ==============
Cumulative rate sensitivity gap ($7,248,834) ($6,427,684) ($4,549,719) $1,777,114
================ ================= ================ ================
Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets (52%) (46%) (33%) 13%
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 June 30, 2003, an evaluation was performed under the supervision
and with the participation of our management, including our Chairman of the
board of directors, Chief Executive Officer and President and our Chief
Financial Officer and Treasurer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation,
our management, including our Chairman of the board of directors, Chief
Executive Officer and President and our Chief Financial Officer and Treasurer,
concluded that our disclosure controls and procedures were effective as of June
30, 2003. There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
June 30, 2003.
26
PART II. OTHER INFORMATION
Item 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders of Annaly Mortgage Management, Inc.
was held on May 15, 2003.
(b) All Class I director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast with the
respect to such matters are as follows:
Proposals and Vote Tabulations
Broker Non-
Director Votes Received Votes Withheld Votes
----------------------------- --------------------- ---------------------- -------------------
Spencer I. Browne 79,488,752 685,637 0
Wellington J. Denahan 79,439,645 734,744 0
The continuing directors of the Company are Kevin P. Brady, Michael A.J.
Farrell, Jonathan D. Green, John A. Lambiase, and Donnell A. Segalas.
Management Proposals
Votes Cast
-----------------------------------
Broker
For Against Abstain Non-votes
Approval of the appointment of independent
auditors for 2003 79,684,382 272,503 217,504 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
Exhibit Number Exhibit Description
31.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Chief Executive Officer, 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer, 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
27
(b) Reports of Form 8-K
We filed a Form 8-K on April 4, 2003 with respect to our entering into
a Underwriting Agreement with UBS Warburg LLC, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, and U.S. Bancorp Piper Jaffray Inc. as representatives of
the several underwriters (collectively, the "Underwriters"), relating to the
sale of 8,200,000 shares of common stock, par value $0.01 per share (the "Common
Stock"), and the granting of an over-allotment option for an additional
1,100,700 shares of Common Stock to the Underwriters to fulfill over-allotments.
We filed a Form 8-K on April 29, 2003 for our press release dated April
25, 2003.
The following current report on Form 8-K was filed by the Company
subsequent to the second quarter of 2003:
We filed a Form 8-K on July 28, 2003 for our press release dated July
28, 2003.
28
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: August 14, 2003 By:/s/ Michael A.J. Farrell
-------------------------
Michael A.J. Farrell
Chairman of the Board and Chief Executive Officer
(authorized officer of registrant)
Dated: August 14, 2003 By:/s/ Kathryn F. Fagan
---------------------
Kathryn F. Fagan
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
29