Annaly Capital Management, Inc. (NLY)

FORM 10-Q | Quarterly Report
ANNALY CAPITAL MANAGEMENT INC (Form: 10-Q, Received: 05/03/2019 06:13:31)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED:  MARCH 31, 2019
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

NLY.JPGClick to enlarge
ANNALY CAPITAL MANAGEMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
MARYLAND
22-3479661
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
1211 AVENUE OF THE AMERICAS
 
NEW YORK, NEW YORK
10036
(Address of principal executive offices)
(Zip Code)
(212) 696-0100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated
 filer
Accelerated
filer
Non-accelerated
filer
Smaller reporting
company
Emerging growth
company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes     No 




Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
 
 
 
Common Stock, par value $0.01 per share
NLY
New York Stock Exchange
7.625% Series C Cumulative Redeemable Preferred Stock
NLY.C
New York Stock Exchange
7.50% Series D Cumulative Redeemable Preferred Stock
NLY.D
New York Stock Exchange
6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
NLY.F
New York Stock Exchange
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
NLY.G
New York Stock Exchange
8.125% Series H Cumulative Redeemable Preferred Stock
NLY.H
New York Stock Exchange

The number of shares of the registrant’s Common Stock outstanding on April 30, 2019 was 1,456,197,143 .




ANNALY CAPITAL MANAGEMENT, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
Page
 



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

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
 
March 31,
 
December 31,
 
2019
 
2018 (1)
 
(Unaudited)
 
 
Assets
 
 
 
Cash and cash equivalents (includes pledged assets of $1,338,507 and $1,581,775, respectively)  (2)
$
1,522,605

 
$
1,735,749

Securities (includes pledged assets of $95,845,559 and $87,193,316, respectively)  (3)
104,993,271

 
92,623,788

Loans, net (includes pledged assets of $2,243,369 and $2,997,051, respectively)  (4)
3,879,324

 
4,585,975

Mortgage servicing rights (includes pledged assets of $3,260 and $3,616, respectively)
500,745

 
557,813

Assets transferred or pledged to securitization vehicles
4,365,300

 
3,833,200

Real estate, net
734,239

 
739,473

Derivative assets
148,178

 
200,503

Reverse repurchase agreements
523,449

 
650,040

Receivable for unsettled trades
1,574,251

 
68,779

Interest receivable
390,930

 
357,365

Goodwill and intangible assets, net
98,551

 
100,854

Other assets
441,706

 
333,988

Total assets
$
119,172,549

 
$
105,787,527

Liabilities and stockholders’ equity
 

 
 

Liabilities
 

 
 

Repurchase agreements
$
88,554,170

 
$
81,115,874

Other secured financing
4,144,623

 
4,183,311

Debt issued by securitization vehicles
3,693,766

 
3,347,062

Mortgages payable
510,386

 
511,056

Derivative liabilities
775,980

 
889,750

Payable for unsettled trades
4,763,376

 
583,036

Interest payable
424,391

 
570,928

Dividends payable
434,431

 
394,129

Other liabilities
89,982

 
74,580

Total liabilities
103,391,105

 
91,669,726

Stockholders’ equity
 

 
 

Preferred stock, par value $0.01 per share, 75,950,000 authorized, 73,400,00 issued and outstanding
1,778,168

 
1,778,168

Common stock, par value $0.01 per share, 1,924,050,000 authorized, 1,448,103,248 and 1,313,763,450 issued and outstanding, respectively
14,481

 
13,138

Additional paid-in capital
20,112,875

 
18,794,331

Accumulated other comprehensive income (loss)
(319,376
)
 
(1,979,865
)
Accumulated deficit
(5,809,931
)
 
(4,493,660
)
Total stockholders’ equity
15,776,217

 
14,112,112

Noncontrolling interests
5,227

 
5,689

Total equity
15,781,444

 
14,117,801

Total liabilities and equity
$
119,172,549

 
$
105,787,527

(1)  
Derived from the audited consolidated financial statements at December 31, 2018 .
(2)  
Includes cash of consolidated Variable Interest Entities (“VIEs”) of $40.7 million and $30.4 million at March 31, 2019 and December 31, 2018 , respectively.
(3)  
Excludes $273.4 million and $83.6 million at March 31, 2019 and December 31, 2018 , respectively, of non-Agency mortgage-backed securities and $246.6 million and $224.3 million at March 31, 2019 and December 31, 2018 , respectively, of commercial mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition. 
(4)  
Includes $101.3 million and $97.5 million of residential mortgage loans held for sale, $42.0 million and $42.2 million of commercial mortgage loans held for sale and $44.5 million and $0 of corporate loans held for sale at March 31, 2019 and December 31, 2018 , respectively.

See notes to consolidated financial statements.

1


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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share data)
(Unaudited)
 
For The Three Months Ended March 31,
 
2019
 
2018
Net interest income
 
 
 
Interest income
$
866,186

 
$
879,487

Interest expense
647,695

 
367,421

Net interest income
218,491

 
512,066

Realized and unrealized gains (losses)
 
 
 
Net interest component of interest rate swaps
134,035

 
(48,160
)
Realized gains (losses) on termination or maturity of interest rate swaps
(588,256
)
 
834

Unrealized gains (losses) on interest rate swaps
(390,556
)
 
977,285

Subtotal
(844,777
)
 
929,959

Net gains (losses) on disposal of investments
(93,916
)
 
13,468

Net gains (losses) on other derivatives
(115,159
)
 
(47,145
)
Net unrealized gains (losses) on instruments measured at fair value through earnings
47,629

 
(51,593
)
Loan loss provision
(5,703
)
 

Subtotal
(167,149
)
 
(85,270
)
Total realized and unrealized gains (losses)
(1,011,926
)
 
844,689

Other income (loss)
30,502

 
34,023

General and administrative expenses
 
 
 
Compensation and management fee
44,833

 
44,529

Other general and administrative expenses
38,904

 
17,981

Total general and administrative expenses
83,737

 
62,510

Income (loss) before income taxes
(846,670
)
 
1,328,268

Income taxes
2,581

 
564

Net income (loss)
(849,251
)
 
1,327,704

Net income (loss) attributable to noncontrolling interests
(101
)
 
(96
)
Net income (loss) attributable to Annaly
(849,150
)
 
1,327,800

Dividends on preferred stock
32,494

 
33,766

Net income (loss) available (related) to common stockholders
$
(881,644
)
 
$
1,294,034

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

Basic
$
(0.63
)
 
$
1.12

Diluted
$
(0.63
)
 
$
1.12

Weighted average number of common shares outstanding
 
 
 
Basic
1,398,614,205

 
1,159,617,848

Diluted
1,398,614,205

 
1,160,103,185

Other comprehensive income (loss)
 
 
 
Net income (loss)
$
(849,251
)
 
$
1,327,704

Unrealized gains (losses) on available-for-sale securities
1,599,398

 
(1,879,479
)
Reclassification adjustment for net (gains) losses included in net income (loss)
61,091

 
5,419

Other comprehensive income (loss)
1,660,489

 
(1,874,060
)
Comprehensive income (loss)
811,238

 
(546,356
)
Comprehensive income (loss) attributable to noncontrolling interests
(101
)
 
(96
)
Comprehensive income (loss) attributable to Annaly
811,339

 
(546,260
)
Dividends on preferred stock
32,494

 
33,766

Comprehensive income (loss) attributable to common stockholders
$
778,845

 
$
(580,026
)

See notes to consolidated financial statements.

2


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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
(Unaudited)
 
 
For The Three Months Ended March 31,
 
 
2019
 
2018
Preferred stock
 
 
 
 
Beginning of period
 
$
1,778,168

 
$
1,720,381

Issuance
 

 
411,335

Redemption
 

 
(408,548
)
End of period
 
$
1,778,168

 
$
1,723,168

Common stock
 
 
 
 
Beginning of period
 
$
13,138

 
$
11,596

Issuance
 
1,342

 

Direct purchase and dividend reinvestment
 
1

 
1

End of period
 
$
14,481

 
$
11,597

Additional paid-in capital
 
 
 
 
Beginning of period
 
$
18,794,331

 
$
17,221,265

Stock compensation expense
 
178

 
133

Issuance
 
1,317,475

 

Redemption of preferred stock
 

 
(3,952
)
Direct purchase and dividend reinvestment
 
891

 
745

End of period
 
$
20,112,875

 
$
17,218,191

Accumulated other comprehensive income (loss)
 
 
 
 
Beginning of period
 
$
(1,979,865
)
 
$
(1,126,020
)
Unrealized gains (losses) on available-for-sale securities
 
1,599,398

 
(1,879,479
)
Reclassification adjustment for net gains (losses) included in net income (loss)
 
61,091

 
5,419

End of period
 
$
(319,376
)
 
$
(3,000,080
)
Accumulated deficit
 
 
 
 
Beginning of period
 
$
(4,493,660
)
 
$
(2,961,749
)
Net income (loss) attributable to Annaly
 
(849,150
)
 
1,327,800

Dividends declared on preferred stock  (1)
 
(32,494
)
 
(33,766
)
Dividends and dividend equivalents declared on common stock and share-based awards  (1)
 
(434,627
)
 
(347,897
)
End of period
 
$
(5,809,931
)
 
$
(2,015,612
)
Total stockholder’s equity
 
$
15,776,217

 
$
13,937,264

Noncontrolling interests
 
 
 
 
Beginning of period
 
$
5,689

 
$
6,100

Net income (loss) attributable to noncontrolling interests
 
(101
)
 
(96
)
Equity contributions from (distributions to) noncontrolling interests
 
(361
)
 
(333
)
End of period
 
$
5,227

 
$
5,671

Total equity
 
$
15,781,444

 
$
13,942,935

(1)      See Note titled “Capital Stock” for dividends per share for each class of shares.

See notes to consolidated financial statements.






3


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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 
For The Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net income (loss)
$
(849,251
)
 
$
1,327,704

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Amortization of premiums and discounts of investments, net
246,150

 
92,976

Amortization of securitized debt premiums and discounts and deferred financing costs
(3,627
)
 
408

Depreciation, amortization and other noncash expenses
7,072

 
5,822

Net (gains) losses on disposals of investments
93,916

 
(13,468
)
Net (gains) losses on investments and derivatives
458,086

 
(878,547
)
Income from unconsolidated joint ventures
1,960

 
618

Loan loss provision
5,703

 

Payments on purchases of loans held for sale
(49,070
)
 
(37,190
)
Proceeds from sales and repayments of loans held for sale
44,817

 
30,178

Net receipts (payments) on derivatives
(633,221
)
 
951,021

Net change in
 
 
 
Other assets
(107,040
)
 
(42,361
)
Interest receivable
(29,491
)
 
(2,963
)
Interest payable
(146,537
)
 
31,628

Other liabilities
18,436

 
(132,910
)
Net cash provided by (used in) operating activities
(942,097
)
 
1,332,916

Cash flows from investing activities
 
 
 
Payments on purchases of residential securities
(18,374,100
)
 
(3,718,947
)
Proceeds from sales of residential securities
7,822,334

 
463,214

Principal payments on residential securities
2,343,383

 
2,696,245

Payments on purchases of MSRs

 
(249
)
Payments on purchases of corporate debt
(125,351
)
 
(230,103
)
Proceeds from sales of corporate debt
179,112

 

Principal payments on corporate debt
33,545

 
92,820

Originations and purchases of commercial real estate investments
(269,489
)
 
(91,647
)
Proceeds from sales of commercial real estate investments
41,013

 
9,556

Principal repayments on commercial real estate investments
578,031

 
130,555

Proceeds from sales of real estate
6,661

 

Proceeds from reverse repurchase agreements
28,107,306

 
20,050,112

Payments on reverse repurchase agreements
(27,980,715
)
 
(20,250,571
)
Distributions in excess of cumulative earnings from unconsolidated joint ventures
241

 
2,813

Payments on purchases of residential mortgage loans held for investment
(373,745
)
 
(167,124
)
Proceeds from repayments of residential mortgage loans held for investment
107,783

 
67,384

Net cash provided by (used in) investing activities
(7,903,991
)
 
(945,942
)
Cash flows from financing activities
 
 
 
Proceeds from repurchase agreements and other secured financing
1,411,469,975

 
1,299,589,620

Principal payments on repurchase agreements and other secured financing
(1,404,070,367
)
 
(1,299,277,944
)
Proceeds from issuances of securitized debt
905,265

 
279,203

Principal repayments on securitized debt
(561,955
)
 
(317,773
)
Payment of deferred financing cost
(1,781
)
 

Net proceeds from stock offerings, direct purchases and dividend reinvestments
1,319,709

 
412,081

Redemptions of preferred stock

 
(412,500
)
Principal payments on mortgages payable
(722
)
 

Net contributions (distributions) from (to) noncontrolling interests
(361
)
 
(333
)
Dividends paid
(426,819
)
 
(381,642
)
Net cash provided by (used in) financing activities
8,632,944

 
(109,288
)
Net (decrease) increase in cash and cash equivalents
$
(213,144
)
 
$
277,686

Cash and cash equivalents including cash pledged as collateral, beginning of period
1,735,749

 
706,589

Cash and cash equivalents including cash pledged as collateral, end of period
$
1,522,605

 
$
984,275

Supplemental disclosure of cash flow information
 

 
 

Interest received
$
1,079,294

 
$
1,017,534

Dividends received
$
2,116

 
$
1,650

Interest paid (excluding interest paid on interest rate swaps)
$
633,805

 
$
320,988

Net interest paid on interest rate swaps
$
34,663

 
$
39,206

Taxes received (paid)
$
(30
)
 
$
2

Noncash investing activities
 

 
 

Receivable for unsettled trades
$
1,574,251

 
$
45,126

Payable for unsettled trades
$
4,763,376

 
$
91,327

Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment
$
1,660,489

 
$
(1,874,060
)
Noncash financing activities
 

 
 

Dividends declared, not yet paid
$
434,431

 
$
347,897

See notes to consolidated financial statements.

4


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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1. DESCRIPTION OF BUSINESS
 
Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997.  The Company is a leading diversified capital manager that invests in and finances residential and commercial assets. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, residential mortgage loans, mortgage servicing rights (“MSRs”), commercial real estate assets and corporate debt. The Company’s principal business objective is to generate net income for distribution to its stockholders and to preserve capital through prudent selection of investments and continuous management of its portfolio. The Company is externally managed by Annaly Management Company LLC (the “Manager”).
The Company’s four investment groups are primarily comprised of the following:
Investment Groups
Description
Annaly Agency Group
Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.
Annaly Residential Credit Group
Invests primarily in non-Agency residential mortgage assets within securitized products and residential mortgage loan markets.
Annaly Commercial Real Estate Group
Originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity investments.
Annaly Middle Market Lending Group
Provides financing to private equity-backed middle market businesses across the capital structure.
The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).

2. BASIS OF PRESENTATION
 
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
The accompanying consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Form 10-K”). The consolidated financial information as of December 31, 2018 has been derived from audited consolidated financial statements included in the Company’s 2018 Form 10-K.
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
In the opinion of management, all normal, recurring adjustments have been included for a fair presentation of this interim financial information. Interim period operating results may not be indicative of the operating results for a full year.

3. SIGNIFICANT ACCOUNTING POLICIES
 
The Company’s significant accounting policies are described below or are included elsewhere in these notes to the Consolidated Financial Statements.
Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation.
Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE.

5


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

Variable Interest Entities – A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion to change. Refer to the “Variable Interest Entities” Note for further information.
Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of joint ventures accounted for under the equity method. These investments are included in Real estate, net and Other assets with income or loss included in Other income (loss).
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled $1.3 billion and $1.6 billion at March 31, 2019 and December 31, 2018 .
Equity Securities – The Company may invest in equity securities that are not accounted for under the equity method or do not result in consolidation. These equity securities are required to be reported at fair value with unrealized gains and losses reported in the Consolidated Statements of Comprehensive Income (Loss) as Net unrealized gains (losses) on instruments measured at fair value through earnings, unless the securities do not have readily determinable fair values.  For such equity securities without readily determinable fair values, the Company has elected to carry the securities at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. For equity securities carried at fair value through earnings, dividends are recorded in earnings on the declaration date. Dividends from equity securities without readily determinable fair values are recognized as income when received to the extent they are distributed from net accumulated earnings.
Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the fair value option in order to simplify the accounting treatment for certain financial instruments. If an item is accounted for at fair value, including financial instruments elected under the FVO, it is presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the fair value option see the table in the “Financial Instruments” Note.
Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments.
Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they are subject to netting agreements and they meet the offsetting criteria. Please see below and refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements.
Derivative Instruments – Derivatives are accounted for in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging , which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. Refer to the “Derivative Instruments” Note for further discussion.
Stock Based Compensation – The Company is required to measure and recognize in the consolidated financial statements the compensation cost relating to share-based payment transactions. The Company recognizes compensation expense ratably over the requisite service period for the entire award.
Interest Income - The Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than multifamily securities), taking into account

6


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

estimates of future principal prepayments in the calculation of the effective yield.  The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third-party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.
Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis.
Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans.  Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income.
Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“TRSs”).  As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes.

Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”).  ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption.

7


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

Standard
Description
Effective Date
Effect on the Financial Statements or Other Significant Matters
Standards that are not yet adopted
ASU 2016-13 Financial instruments - Credit losses (Topic 326): Measurement of credit losses on financial instruments

This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings.  The amendments affect certain loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope.  There are also limited amendments to the impairment model for available-for-sale debt securities.
January 1, 2020 (early adoption permitted)
The Company plans to adopt the new standard on its effective date. While the Company is continuing to assess the impact the ASU will have on the consolidated financial statements, the measurement of expected credit losses under the CECL model will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts of the financial assets in scope of the model. The Company has decided to apply a probability of default methodology to loans that will be impacted by the adoption and is continuing to assess the impact on the consolidated financial statements and determine appropriate internal controls and financial statement disclosures. Further, based on the amended guidance for available-for-sale debt securities, the Company:
will be required to use an allowance approach to recognize credit impairment, with the allowance to be limited to the amount by which the security’s fair value is less than its amortized cost basis;
may not consider the length of time fair value has been below amortized cost, and
may not consider recoveries of fair value after the balance sheet date when assessing whether a credit loss exists.
 
 
 
 
 
Standard
Description
Effective Date
Effect on the Financial Statements or Other Significant Matters
Standards that were adopted
ASU 2017-01 Business combinations (Topic 805): Clarifying the definition of a business
This update provides a screen to determine and a framework to evaluate when a set of assets and activities is a business.
January 1, 2018
The amendments are expected to result in fewer transactions being accounted for as business combinations.
ASU 2016-15 Statement of cash flows (Topic 230): Classification of certain cash receipts and cash payments

This update provides specific guidance on certain cash flow classification issues, including classification of cash receipts and payments that have aspects of more than one class of cash flows. If cash flows cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows.
January 1, 2018
As a result of adopting this standard, the Company reclassified its cash flows on reverse repurchase and repurchase agreements entered into by Arcola Securities, Inc. (“Arcola”) from operating activities to investing and financing activities, respectively, in the Consolidated Statements of Cash Flows. The Company applied the retrospective transition method, which resulted in reclassification of comparative periods.

8


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

4. FINANCIAL INSTRUMENTS
 
The following table presents characteristics for certain of the Company’s financial instruments at March 31, 2019 and December 31, 2018 .
Financial Instruments (1)
Balance Sheet Line Item
Type / Form
Measurement Basis
March 31, 2019
 
December 31, 2018
 
Assets
(dollars in thousands)
 
 
 
Securities
Agency mortgage-backed securities  (2)
Fair value, with unrealized gains (losses) through other comprehensive income
$
102,222,237

 
$
89,840,322

Securities
Agency mortgage-backed securities  (3)
Fair value, with unrealized gains (losses) through earnings
871,289

 
912,673

Securities
Credit risk transfer securities
Fair value, with unrealized gains (losses) through earnings
607,945

 
552,097

Securities
Non-agency mortgage-backed securities
Fair value, with unrealized gains (losses) through earnings
1,116,569

 
1,161,938

Securities
Commercial real estate debt investments - CMBS
Fair value, with unrealized gains (losses) through other comprehensive income
96,566

 
138,242

Securities
Commercial real estate debt investments - CMBS (4)
Fair value, with unrealized gains (losses) through earnings
78,665

 
18,516

Total securities
 
 
104,993,271

 
92,623,788

Loans, net
Residential mortgage loans
Fair value, with unrealized gains (losses) through earnings
1,311,720

 
1,359,806

Loans, net
Commercial real estate debt and preferred equity, held for investment
Amortized cost
722,962

 
1,296,803

Loans, net
Commercial loans held for sale, net
Lower of amortized cost or fair value
42,035

 
42,184

Loans, net
Corporate debt
Amortized cost
1,758,082

 
1,887,182

Loans, net
Corporate debt held for sale, net
Lower of amortized cost or fair value
44,525

 

Total loans, net
 
 
3,879,324

 
4,585,975

Assets transferred or pledged to securitization vehicles
Residential mortgage loans
Fair value, with unrealized gains (losses) through earnings
1,425,668

 
1,094,831

Assets transferred or pledged to securitization vehicles
Commercial mortgage loans
Fair value, with unrealized gains (losses) through earnings
2,939,632

 
2,738,369

Total assets transferred or pledged to securitization vehicles
 
4,365,300

 
3,833,200

Reverse repurchase agreements
Reverse repurchase agreements
Amortized cost
523,449

 
650,040

 
Liabilities
 
 
 
 
Repurchase agreements
Repurchase agreements
Amortized cost
88,554,170

 
81,115,874

Other secured financing
Loans
Amortized cost
4,144,623

 
4,183,311

Debt issued by securitization vehicles
Securities
Fair value, with unrealized gains (losses) through earnings
3,693,766

 
3,347,062

Mortgages payable
Loans
Amortized cost
510,386

 
511,056

(1)      Receivable for unsettled trades, Interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost.
(2)      Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities.
(3)      Includes interest-only securities and reverse mortgages.
(4)      Includes conduit CMBS.

5. SECURITIES
 
The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Transactions for securities are recorded on trade date, including TBA securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method.

9


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

Other-Than-Temporary Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. 
When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security.  Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss), while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss).  When the fair value of a held-to-maturity security is less than the cost, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. There was no other-than-temporary impairment recognized for the three months ended March 31, 2019 and 2018 .
Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”). 
Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis (“TBA securities”). TBA securities without intent to accept delivery (“TBA derivatives”), are accounted for as derivatives as discussed in the “Derivative Instruments” Note.
CRT Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors.
Non-Agency Mortgage-Backed Securities - The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Agency mortgage-backed securities, non-Agency mortgage-backed securities and CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio.
Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities are classified as available-for-sale and reported at fair value with unrealized gains and losses reported as a component of Other comprehensive income (loss). Management evaluates such Commercial Securities for other-than-temporary impairment at least quarterly. The Company elected the fair value option on certain Commercial Securities, including conduit commercial mortgage-backed securities, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through earnings.
The following represents a rollforward of the activity for the Company’s securities:
March 31, 2019
 
Residential Securities
 
Commercial Securities
 
Total
 
(dollars in thousands)
Beginning balance January 1
$
92,467,030

 
$
156,758

 
$
92,623,788

Purchases
23,649,271

 
98,633

 
23,747,904

Sales
(10,456,466
)
 
(39,834
)
 
(10,496,300
)
Principal paydowns
(2,343,260
)
 
(42,859
)
 
(2,386,119
)
Amortization / accretion
(247,447
)
 
78

 
(247,369
)
Fair value adjustment
1,748,912

 
2,455

 
1,751,367

Ending balance March 31
$
104,818,040

 
$
175,231

 
$
104,993,271


10


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

The following tables present the Company’s Residential Investment Securities portfolio that was carried at their fair value at March 31, 2019 and December 31, 2018 :
 
March 31, 2019
 
Principal /
Notional
 
Remaining Premium
 
Remaining Discount
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated Fair Value
Agency
(dollars in thousands)
Fixed-rate pass-through
$
92,064,633

 
$
4,060,260

 
$
(41,614
)
 
$
96,083,279

 
$
789,557

 
$
(1,118,629
)
 
$
95,754,207

Adjustable-rate pass-through
4,046,258

 
204,672

 
(1,317
)
 
4,249,613

 
7,395

 
(104,972
)
 
4,152,036

CMO
10,699

 
50

 

 
10,749

 
199

 

 
10,948

Interest-only
5,522,373

 
1,070,160

 

 
1,070,160

 
1,900

 
(239,282
)
 
832,778

Multifamily
2,186,848

 
18,783

 
(5,249
)
 
2,200,382

 
104,664

 

 
2,305,046

Reverse mortgages
34,415

 
4,031

 

 
38,446

 
68

 
(3
)
 
38,511

Total agency securities
$
103,865,226

 
$
5,357,956

 
$
(48,180
)
 
$
103,652,629

 
$
903,783

 
$
(1,462,886
)
 
$
103,093,526

Residential credit
 

 
 

 
 

 
 

 
 

 
 

 
 

CRT
$
593,949

 
$
24,891

 
$
(16,883
)
 
$
601,957

 
$
9,488

 
$
(3,500
)
 
$
607,945

Alt-A
215,630

 
374

 
(30,467
)
 
185,537

 
12,926

 
(95
)
 
198,368

Prime
312,534

 
2,205

 
(21,319
)
 
293,420

 
16,786

 
(179
)
 
310,027

Subprime
393,362

 
1,480

 
(61,911
)
 
332,931

 
38,800

 
(446
)
 
371,285

NPL/RPL
3,431

 

 
(22
)
 
3,409

 
27

 

 
3,436

Prime jumbo (>=2010 vintage)
220,289

 
1,070

 
(4,626
)
 
216,733

 
3,004

 
(915
)
 
218,822

Prime jumbo (>=2010 vintage) Interest-only
837,030

 
12,445

 

 
12,445

 
2,517

 
(331
)
 
14,631

Total residential credit securities
$
2,576,225

 
$
42,465

 
$
(135,228
)
 
$
1,646,432

 
$
83,548

 
$
(5,466
)
 
$
1,724,514

Total residential securities
$
106,441,451

 
$
5,400,421

 
$
(183,408
)
 
$
105,299,061

 
$
987,331

 
$
(1,468,352
)
 
$
104,818,040

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial securities
$
180,992

 
$
497

 
$
(9,513
)
 
$
171,976

 
$
3,546

 
$
(291
)
 
$
175,231

Total securities
$
106,622,443

 
$
5,400,918

 
$
(192,921
)
 
$
105,471,037

 
$
990,877

 
$
(1,468,643
)
 
$
104,993,271

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
Principal /
Notional
 
Remaining Premium
 
Remaining Discount
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Estimated Fair Value
Agency
(dollars in thousands)
Fixed-rate pass-through
$
81,144,650

 
$
3,810,808

 
$
(36,987
)
 
$
84,918,471

 
$
264,443

 
$
(2,130,362
)
 
$
83,052,552

Adjustable-rate pass-through
4,835,983

 
247,981

 
(1,337
)
 
5,082,627

 
7,127

 
(151,770
)
 
4,937,984

CMO
11,113

 
53

 

 
11,166

 
55

 

 
11,221

Interest-only
6,007,008

 
1,179,855

 

 
1,179,855

 
1,446

 
(307,412
)
 
873,889

Multifamily
1,802,292

 
12,329

 
(5,332
)
 
1,809,289

 
32,753

 
(3,477
)
 
1,838,565

Reverse mortgages
34,650

 
4,175

 

 
38,825

 
69

 
(110
)
 
38,784

Total agency investments
$
93,835,696

 
$
5,255,201

 
$
(43,656
)
 
$
93,040,233

 
$
305,893

 
$
(2,593,131
)
 
$
90,752,995

Residential credit
 

 
 

 
 

 
 

 
 

 
 

 
 

CRT
$
542,374

 
$
28,444

 
$
(15,466
)
 
$
555,352

 
$
7,879

 
$
(11,134
)
 
$
552,097

Alt-A
202,889

 
349

 
(31,238
)
 
172,000

 
10,559

 
(198
)
 
182,361

Prime
353,108

 
2,040

 
(23,153
)
 
331,995

 
12,821

 
(830
)
 
343,986

Subprime
423,166

 
1,776

 
(65,005
)
 
359,937

 
35,278

 
(594
)
 
394,621

NPL/RPL
3,431

 

 
(30
)
 
3,401

 
37

 

 
3,438

Prime jumbo (>=2010 vintage)
225,567

 
1,087

 
(4,691
)
 
221,963

 
1,439

 
(2,744
)
 
220,658

Prime jumbo (>=2010 vintage) Interest-only
860,085

 
12,820

 

 
12,820

 
4,054

 

 
16,874

Total residential credit securities
$
2,610,620

 
$
46,516

 
$
(139,583
)
 
$
1,657,468

 
$
72,067

 
$
(15,500
)
 
$
1,714,035

Total residential securities
$
96,446,316

 
$
5,301,717

 
$
(183,239
)
 
$
94,697,701

 
$
377,960

 
$
(2,608,631
)
 
$
92,467,030

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial securities
$
155,921

 
$
9,778

 
$
(9,740
)
 
$
155,959

 
$
1,659

 
$
(860
)
 
$
156,758

Total securities
$
96,602,237

 
$
5,311,495

 
$
(192,979
)
 
$
94,853,660

 
$
379,619

 
$
(2,609,491
)
 
$
92,623,788





11


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

The following table presents the Company’s Agency mortgage-backed securities portfolio by issuing Agency concentration at March 31, 2019 and December 31, 2018 :
 
 
March 31, 2019
 
December 31, 2018
Investment Type
(dollars in thousands)
Fannie Mae
$
66,385,692

 
$
60,270,432

Freddie Mac
36,564,254

 
30,397,556

Ginnie Mae
143,580

 
85,007

Total
$
103,093,526

 
$
90,752,995

Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are generally affected by periodic payments and prepayments of principal on the underlying mortgages.
The following table summarizes the Company’s Residential Securities at March 31, 2019 and December 31, 2018 , according to their estimated weighted average life classifications:
 
March 31, 2019
 
December 31, 2018
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
Estimated weighted average life
(dollars in thousands)
Less than one year
$
13,863

 
$
14,032

 
$
13,447

 
$
13,670

Greater than one year through five years
16,081,685

 
16,091,945

 
11,710,172

 
11,928,973

Greater than five years through ten years
87,693,108

 
88,181,059

 
80,202,479

 
82,218,464

Greater than ten years
1,029,384

 
1,012,025

 
540,932

 
536,594

Total
$
104,818,040

 
$
105,299,061

 
$
92,467,030

 
$
94,697,701

The estimated weighted average lives of the Residential Securities at March 31, 2019 and December 31, 2018 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected.
The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018 .
 
March 31, 2019
 
December 31, 2018
 
Estimated Fair Value (1)
 
Gross Unrealized Losses (1)
 
Number of Securities (1)
 
Estimated Fair Value (1)
 
Gross Unrealized Losses (1)
 
Number of Securities (1)
 
(dollars in thousands)
Less than 12 months
$
12,188,284

 
$
(197,039
)
 
89

 
$
22,418,036

 
$
(432,352
)
 
713

12 Months or more
42,463,903

 
(1,026,562
)
 
1,513

 
43,134,843

 
(1,853,257
)
 
1,476

Total
$
54,652,187

 
$
(1,223,601
)
 
1,602

 
$
65,552,879

 
$
(2,285,609
)
 
2,189

(1)      Excludes interest-only mortgage-backed securities and reverse mortgages.

The decline in value of these securities is solely due to market conditions and not the quality of the assets.  Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating.  The investments are not considered to be other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. 
During the three months ended March 31, 2019 and 2018 , the Company disposed of $10.5 billion and $463.4 million of Residential Securities, resulting in net realized gains (losses) of ($92.5) million and $13.0 million , respectively.


12


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

6. LOANS
 
The Company invests in residential, commercial and corporate loans. Loans are classified as either held for investment or held for sale. Loans are also eligible to be accounted for under the fair value option. Excluding loans transferred or pledged to securitization vehicles, as of March 31, 2019 , the Company reported $1.3 billion of loans for which the fair value option was elected. If loans are held for investment and the fair value option has not been elected, they are accounted for at amortized cost less impairment. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis.
Nonaccrual Status – If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued, but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt, but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower.
Allowance for Losses – The Company evaluates the need for a loss reserve on its loans. A provision for loan losses may be established when it is probable the Company will not collect amounts contractually due or all amounts previously estimated to be collectible. Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment.  Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date.
The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment.  The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies.  Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management.
Management generally reviews the most recent financial information produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the Company’s commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan, economic trends (both macro and those affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject property is located.  Management monitors the financial condition and operating results of its borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations.
The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating categories include “Performing”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans are considered uncollectible.
For the three months ended March 31, 2019 , the Company recorded a loan loss provision of $5.7 million .

13


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

As of March 31, 2019 and December 31, 2018 , the Company’s loan loss provision was $9.2 million and $3.5 million , respectively. There was no provision for loan loss recorded as of and for three months ended March 31, 2018 .
The following table presents the activity of the Company’s loan investments, including loans held for sale, for the three months ended March 31, 2019 :
 
Residential
 
Commercial
 
Corporate
 
Total
 
(dollars in thousands)
Beginning balance January 1, 2019
$
1,359,806

 
$
1,338,987

 
$
1,887,182

 
$
4,585,975

Purchases
425,488

 
165,258

 
125,351

 
716,097

Sales and transfers  (1)
(444,963
)
 
(733,922
)
 
(179,112
)
 
(1,357,997
)
Principal Payments
(32,676
)
 
(534
)
 
(33,545
)
 
(66,755
)
Gains / (losses)
4,460

 
(5,703
)
 

 
(1,243
)
Amortization / accretion
(395
)
 
911

 
2,731

 
3,247

Ending balance March 31, 2019
$
1,311,720

 
$
764,997

 
$
1,802,607

 
$
3,879,324

(1)      Includes securitizations, syndications and transfers to securitization vehicles.

The carrying value of the Company’s residential loans held for sale was $101.3 million and $97.5 million at March 31, 2019 and December 31, 2018 , respectively. The carrying value of the Company’s commercial loans held for sale was $42.0 million and $42.2 million at March 31, 2019 and December 31, 2018 , respectively. The carrying value of the Company’s corporate loans held for sale was $44.5 million at March 31, 2019 .

Residential
The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. Additionally, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo residential mortgage loans. The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Please refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated Residential Mortgage Loan Trusts.
The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles, at March 31, 2019 and December 31, 2018 :
 
March 31, 2019
December 31, 2018
 
(dollars in thousands)
Fair value
$
2,737,388

$
2,454,637

Unpaid principal balance
$
2,686,557

$
2,425,657

 
The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (loss) for the three months ended March 31, 2019 and 2018 for these investments:
 
For the Three Months Ended
 
March 31, 2019
 
March 31, 2018
 
(dollars in thousands)
Interest income
$
29,991

 
$
13,495

Net gains (losses) on disposal of investments
(5,223
)
 
(1,758
)
Net unrealized gains (losses) on instruments measured at fair value through earnings
17,821

 
(9,864
)
Total included in net income (loss)
$
42,589

 
$
1,873



14


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

The following table provides the geographic concentrations based on the unpaid principal balances at March 31, 2019 and December 31, 2018 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:
 
Geographic Concentrations of Residential Mortgage Loans
March 31, 2019
 
December 31, 2018
Property location
% of Balance
 
Property location
% of Balance
California
54.2%
 
California
53.7%
Florida
6.7%
 
Florida
7.1%
New York
6.1%
 
New York
6.6%
All other (none individually greater than 5%)
33.0%
 
All other (none individually greater than 5%)
32.6%
Total
100.0%
 
 
100.0%
The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at March 31, 2019 and December 31, 2018 :
 
March 31, 2019
 
December 31, 2018
 
Portfolio
Range
Portfolio Weighted
Average
 
Portfolio
Range
Portfolio Weighted Average
 
(dollars in thousands)
Unpaid principal balance
$1 - $3,448
 
$457
 
$0 - $3,500
 
$457
Interest rate
2.00% - 9.25%
 
4.85%
 
2.00% - 7.75%
 
4.72%
Maturity
1/1/2028 - 1/1/2059
 
6/24/2046
 
1/1/2028 - 11/1/2058
 
1/11/2046
FICO score at loan origination
 505 - 823
 
752
 
505 - 823
 
752
Loan-to-value ratio at loan origination
8% - 111%
 
68%
 
8% - 111%
 
68%
At March 31, 2019 and December 31, 2018 , approximately 45% and 47% , respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.

Commercial
The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. The difference between the principal amount of a loan and proceeds at acquisition is recorded as either a discount or premium. Commercial real estate loans that are designated as held for investment and are originated or purchased by the Company are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less an allowance for losses, if necessary. Origination fees and costs, premiums or discounts are amortized into interest income over the life of the loan.
Preferred equity interests are designated as held for investment and are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less a reserve for estimated losses, if necessary. 
At March 31, 2019 , and December 31, 2018 , approximately 90% and 88% , respectively, of the carrying value of the Company’s CRE Debt and Preferred Equity Investments, including loans transferred or pledged to securitization vehicles and excluding commercial loans held for sale, were adjustable-rate.
At March 31, 2019 and December 31, 2018 , commercial real estate investments held for investment were comprised of the following:
 
March 31, 2019
 
December 31, 2018
 
Outstanding Principal
 
Carrying
Value
(1)
 
Percentage
of Loan
Portfolio
(2)
 
Outstanding Principal
 
Carrying
Value
(1)
 
Percentage
of Loan
Portfolio
(2)
 
(dollars in thousands)
Senior mortgages
$
405,968

 
$
403,497

 
27.6
%
 
$
988,248

 
$
981,202

 
75.6
%
Senior securitized mortgages (3)
739,058

 
733,864

 
50.1
%
 

 

 
%
Mezzanine loans
329,262

 
319,465

 
22.3
%
 
319,663

 
315,601

 
24.4
%
Total
$
1,474,288

 
$
1,456,826

 
100.0
%
 
$
1,307,911

 
$
1,296,803

 
100.0
%
(1)
Carrying value includes unamortized origination fees of $8.3 million and $7.6 million at March 31, 2019 and December 31, 2018 , respectively.
(2)  
Based on outstanding principal.
(3)  
Assets of consolidated VIEs.

15


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


The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for investment at March 31, 2019 and December 31, 2018 :
March 31, 2019
 
Senior
Mortgages
 
Senior
Securitized Mortgages
(1)
 
Mezzanine
Loans
 
Total
 
(dollars in thousands)
Net carrying value (January 1, 2019)
$
981,202

 
$

 
$
315,601

 
$
1,296,803

Originations & advances (principal)
148,341

 
739,058

 
18,274

 
905,673

Principal payments
(385
)
 

 

 
(385
)
Transfers
(730,235
)
 

 
(8,675
)
 
(738,910
)
Net (increase) decrease in origination fees
3,815

 
(5,488
)
 
(184
)
 
(1,857
)
Amortization of net origination fees
759

 
294

 
152

 
1,205

Allowance for loan losses

 

 
(5,703
)
 
(5,703
)
Net carrying value (March 31, 2019)
$
403,497

 
$
733,864

 
$
319,465

 
$
1,456,826

December 31, 2018
 
Senior
Mortgages
 
Mezzanine
Loans
 
Preferred
Equity
 
Total
 
(dollars in thousands)
Net carrying value (January 1, 2018)
$
625,900

 
$
394,442

 
$
8,985

 
$
1,029,327

Originations & advances (principal)
575,953

 
52,224

 

 
628,177

Principal payments
(216,849
)
 
(127,575
)
 
(9,000
)
 
(353,424
)
Net (increase) decrease in origination fees
(6,624
)
 
(370
)
 

 
(6,994
)
Amortization of net origination fees
2,822

 
376

 
15

 
3,213

Allowance for loan losses

 
(3,496
)
 

 
(3,496
)
Net carrying value (December 31, 2018)
$
981,202

 
$