Edgar Filing: ANNALY CAPITAL MANAGEMENT INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported)

February 14, 2011


	Annaly Capital Management, Inc.

(Exact Name of Registrant as Specified in its Charter)


Maryland	1-13447	22-3479661

State or Other Jurisdiction Of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

1211 Avenue of the Americas
Suite 2902
New York, New York		10036

(Address of Principal		(Zip Code)
Executive Offices)

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

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01. Other Events

The following is a summary of Annaly Capital Management, Inc.’s (the “Company”) Generally Accepted Accounting Principles (“GAAP”) earnings for the quarter and year ended December 31, 2010. The Company has not yet finalized its financial results for the fourth quarter and year ended December 31, 2010 and, accordingly, information regarding these periods is subject to adjustments that could be material.

Net income for the quarter ended December 31, 2010 of $1.2 billion or $1.94 per average share available to common stockholders, as compared to net income of $729.3 million or $1.31 per average share related to common stockholders for the quarter ended December 31, 2009, and net loss of $14.1 million or $0.03 per average share available to common stockholders for the quarter ended September 30, 2010.

Net income for the year ended December 31, 2010 of $1.3 billion or $2.12 per average share available to common stockholders, as compared to net income of $2.0 billion or $3.55 per average share available to common stockholders for the year ended December 31, 2009.

During the quarter ended December 31, 2010, the Company disposed of $3.1 billion of mortgage-backed securities and agency debentures, resulting in a realized gain of $33.8 million. During the quarter ended December 31, 2009, the Company disposed of $3.0 billion of mortgage-backed securities and agency debentures, resulting in a realized gain of $91.2 million. During the quarter ended September 30, 2010, the Company disposed of $3.1 billion of mortgage-backed securities and agency debentures, resulting in a realized gain of $62.0 million.

During the year ended December 31, 2010, the Company disposed of $10.6 billion of mortgage-backed securities and agency debentures, resulting in a realized gain of $181.8 million. During the year ended December 31, 2009, the Company disposed of $4.6 billion of mortgage-backed securities and agency debentures, resulting in a realized gain of $99.1 million.

Common dividends declared for the quarter ended December 31, 2010, were $0.64 per share as compared to $0.75 per share for the quarter ended December 31, 2009, and $0.68 per share for the quarter ended September 30, 2010. Common dividends declared for the year ended December 31, 2010, were $2.65 per share, as compared to $2.54 per share for the year ended December 31, 2009. The Company distributes dividends based on its current estimate of taxable earnings per common share, not GAAP earnings. Taxable and GAAP earnings will typically differ due to items such as non-taxable unrealized and realized gains and losses, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses.

The annualized dividend yield on the Company’s common stock for the quarter ended December 31, 2010, based on the December 31, 2010 closing price of $17.92, was 14.29%. The dividend yield on the Company’s common stock for the year ended December 31, 2010, based on the December 31, 2010 closing price of $17.92, was 14.79%.

On a GAAP basis, the Company provided an annualized return on average equity of 49.87% for the quarter ended December 31, 2010, as compared to an annualized return on average equity of 30.73% for the quarter ended December 31, 2009, and an annualized loss on average equity of 0.58% for the quarter ended September 30, 2010. Without the effect of the unrealized gains or losses on interest rate swaps, the Company provided an annualized return on average equity of 15.52% for the quarter ended December 31, 2010, as compared to an annualized return on average equity of 21.78% for the quarter ended December 31, 2009, and an annualized return on average equity of 17.96% for the quarter ended September 30, 2010. On a GAAP basis, the Company provided a return on average equity of 13.06% for the year ended December 31, 2010, as compared to a return on average equity of 22.69% for the year ended December 31, 2009. Without the effect of the unrealized gains or losses on interest rate swaps, the Company provided a return on average equity of 16.35% for the year ended

December 31, 2010, as compared to a return on average equity of 18.65% for the year ended December 31, 2009.

For the quarter ended December 31, 2010, the annualized yield on average interest-earning assets was 3.65% and the annualized cost of funds on average interest-bearing liabilities was 1.80%, which resulted in an average interest rate spread of 1.85%. This was a 94 basis point decrease from the 2.79% annualized interest rate spread for the quarter ended December 31, 2009, and a 26 basis point decrease from the 2.11% average interest rate spread for the quarter ended September 30, 2010. At December 31, 2010, the weighted average yield on interest-earning assets was 3.80% and the weighted average cost of funds on interest-bearing liabilities, including the effect of interest rate swaps, was 1.84%, which resulted in an interest rate spread of 1.96%. Leverage at December 31, 2010, was 6.7:1 compared to 5.7:1 at December 31, 2009, and 6.4:1 at September 30, 2010.

Fixed-rate mortgage-backed securities and agency debentures comprised 86% of the Company’s portfolio at December 31, 2010. The balance of the mortgage-backed securities and agency debentures was comprised of 13% adjustable-rate mortgage-backed securities and 1% LIBOR floating-rate collateralized mortgage obligations. At December 31, 2010, the Company had entered into interest rate swaps with a notional amount of $27.1 billion, or 36% of the mortgage-backed securities and agency debentures portfolio. Changes in the unrealized gains or losses on the interest rate swaps are reflected in the Company’s consolidated statement of operations. The purpose of the swaps is to mitigate the risk of rising interest rates that affect the Company’s cost of funds. Since the Company receives a floating rate on the notional amount of the swaps, the effect of the swaps is to lock in a spread relative to the cost of financing. As of December 31, 2010, substantially all of the Company’s Investment Securities were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities and agency debentures, which carry an actual or implied “AAA” rating.

The following table summarizes portfolio information for the Company:


	December 31, 2010		December 31, 2009		September 30, 2010

Leverage at period-end	6.7:1		5.7:1		6.4:1
Fixed-rate mortgage-backed securities and agency debentures as a percentage of portfolio	86	%	74	%	84	%
Adjustable-rate mortgage-backed securities and agency debentures as a percentage of portfolio	13	%	21	%	14	%
Floating-rate mortgage-backed securities and agency debentures as a percentage of portfolio	1	%	5	%	2	%
Notional amount of interest rate swaps as a percentage of mortgage-backed securities and agency debentures	36	%	34	%	35	%
Annualized yield on average interest-earning assets during the quarter	3.65	%	4.84	%	4.06	%
Annualized cost of funds on average interest-bearing liabilities during the quarter	1.80	%	2.05	%	1.95	%
Annualized interest rate spread during the quarter	1.85	%	2.79	%	2.11	%
Weighted average yield on interest-earning assets at period-end	3.80	%	4.51	%	3.86	%
Weighted average cost of funds on interest-bearing liabilities at period-end	1.84	%	2.11	%	1.94	%
Interest rate spread at period-end	1.96	%	2.40	%	1.92	%
Weighted average receive rate on interest rate swaps at period-end	0.28	%	0.25	%	0.31	%
Weighted average pay rate on interest rate swaps at period-end	3.21	%	3.85	%	3.34	%

The Constant Prepayment Rate was 23% during the fourth quarter of 2010, as compared to 19% during the fourth quarter of 2009, and 20% during the third quarter of 2010. The weighted average purchase price of the Company’s mortgage-backed securities and agency debentures was 102.1% at December 31, 2010. The net amortization of premiums and accretion of discounts on mortgage-backed securities and agency debentures for the quarters ended December 31, 2010, December 31, 2009, and September 30, 2010 was $207.4 million, $79.2

million, and $155.9 million, respectively. The total net premium and discount balance at December 31, 2010, December 31, 2009, and September 30, 2010, was $2.3 billion, $1.2 billion, and $2.3 billion, respectively.

General and administrative expenses as a percentage of average assets were 0.22%, 0.21% and 0.22% for the quarters ended December 31, 2010, December 31, 2009, and September 30, 2010, respectively. At December 31, 2010, December 31, 2009, and September 30, 2010, the Company had a common stock book value per share of $15.34, $16.95 and $15.16, respectively.

At December 31, 2010, Annaly’s wholly-owned registered investment advisors had under management approximately $12.4 billion in net assets and $20.1 billion in gross assets, as compared to $11.5 billion in net assets and $19.1 billion in gross assets at December 31, 2009 and $12.1 billion in net assets and $19.8 billion in gross assets at September 30, 2010. For the quarter ended December 31, 2010, the investment advisors earned investment advisory and service fees, net of fees paid to distributors, of $16.3 million, as compared to $14.4 million for the quarter ended December 31, 2009 and $15.3 million for the quarter ended September 30, 2010.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands)


	December 31, 2010 (Unaudited)			September 30, 2010 (Unaudited)			June 30, 2010 (Unaudited)			March 31, 2010 (Unaudited)			December 31, 2009(1)

ASSETS

Cash and cash equivalents	$	282,626		$	289,486		$	327,979		$	905,955		$	1,504,568
U.S. Treasury Securities, at fair value		1,100,447			754,993			87,352			—			—
Reverse repurchase agreements with affiliate		—			—			82,678			255,580			328,757
Reverse repurchase agreements		1,006,163			757,722			226,098			276,586			425,000
Securities borrowed		216,676			251,242			242,242			60,132			29,077
Mortgage-Backed Securities, at fair value		78,440,330			76,174,141			69,422,400			67,239,930			64,805,725
Agency debentures, at fair value		1,108,261			2,046,371			2,390,429			2,931,945			915,752
Corporate debt		21,683			—			—			—			—
Investments with affiliates		252,863			245,659			230,268			242,788			242,198
Receivable for Mortgage-Backed Securities sold		151,460			1,637,542			78,581			359,636			732,134
Accrued interest and dividends receivable		345,250			345,153			322,853			327,666			318,919
Receivable from Prime Broker		3,272			3,272			3,272			3,272			3,272
Receivable for advisory and service fees		16,172			15,138			13,359			11,714			12,566
Intangible for customer relationships, net		9,290			9,590			9,891			10,191			10,491
Goodwill		42,030			27,917			27,917			27,917			27,917
Interest rate swaps, at fair value		2,561			—			—			—			5,417
Other derivative contracts, at fair value		2,607			186			—			—			—
Other assets		24,899			26,351			42,665			65,850			14,397


Total assets	$	83,026,590		$	82,584,763		$	73,507,984		$	72,719,162		$	69,376,190


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
U.S. Treasury Securities sold, not yet purchased, at fair value	$	909,462		$	691,593		$	26,207		$	—		$	—
Repurchase agreements		65,533,537			61,040,668			56,386,835			53,784,480			54,598,129
Securities loaned		217,841			251,332			242,242			60,377			29,057
Payable for Mortgage-Backed Securities and agency debentures purchased		4,575,026			8,165,941			4,867,945			7,498,712			4,083,786
Convertible Senior Notes		600,000			600,000			600,000			600,000			—
Accrued interest payable		115,766			113,837			99,366			88,346			89,460
Dividends payable		404,220			422,036			380,636			363,785			414,851
Accounts payable and other liabilities		8,921			51,440			33,815			70,290			10,005
Interest rate swaps, at fair value		754,439			1,604,639			1,174,788			608,688			533,362
Other derivative contracts, at fair value		2,446			—			216			—			—


Total liabilities		73,121,658			72,941,486			63,812,050			63,074,678			59,758,650


6.00% Series B Cumulative Convertible Preferred Stock: 4,600,000 shares authorized, 1,652,047, 2,306,537, 2,603,969, 2,603,969, and 2,604,614 shares issued and outstanding, respectively		40,032			55,891			63,098			63,098			63,114


Stockholders’ Equity:
7.875% Series A Cumulative Redeemable Preferred Stock: 7,412,500 authorized, 7,412,500 shares issued and outstanding		177,088			177,088			177,088			177,088			177,088
Common stock, par value $.01 per share, 987,987,500 authorized, 631,594,205, 620,640,708, 559,763,825, 559,668,624, and 553,134,877 issued and outstanding, respectively		6,316			6,206			5,598			5,597			5,531
Additional paid-in capital		9,175,245			8,994,954			7,937,738			7,935,151			7,817,454
Accumulated other comprehensive income		1,164,642			1,877,537			2,540,201			1,887,852			1,891,317
Accumulated deficit		(658,391	)		(1,468,399	)		(1,027,789	)		(424,302	)		(336,964	)


Total stockholders’ equity		9,864,900			9,587,386			9,632,836			9,581,386			9,554,426

Total liabilities, Series B Cumulative Convertible Preferred Stock and stockholders’ equity	$	83,026,590		$	82,584,763		$	73,507,984		$	72,719,162		$	69,376,190


	(1)	Derived from the audited financial statements at December 31, 2009.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
(dollars in thousands, except per share data)


	For the quarters ended
	December 31, 2010			September 30, 2010			June 30, 2010			March 31, 2010			December 31, 2009

Interest income:
Investment securities	$	678,626		$	700,964		$	642,782		$	653,935		$	751,560
Securities loaned		1,422			1,261			860			454			103
U.S. Treasury Securities		2,039			751			40			—			—

Total interest income		682,087			702,976			643,682			654,389			751,663


Interest expense:
Repurchase agreements		103,514			105,393			96,975			92,089			101,632
Interest rate swaps		190,098			188,636			175,535			180,838			185,040
Convertible Senior Notes		7,034			7,033			6,966			3,195			—
Securities borrowed		1,201			1,047			742			387			92
U.S. Treasury Securities sold, not yet purchased		2,166			459			24			—			—

Total interest expense		304,013			302,568			280,242			276,509			286,764


Net interest income		378,074			400,408			363,440			377,880			464,899


Other income (loss)
Investment advisory and service fees		16,321			15,343			13,863			12,546			14,835
Gain on sale of Mortgage-Backed Securities and agency debentures		33,802			61,986			39,041			46,962			91,150
Dividend income		7,647			8,097			7,330			7,964			7,647
Loss on receivable from Prime Broker⁽¹⁾		—			—			—			—			(13,613	)
Unrealized gain (loss) on interest rate swaps		839,191			(448,253	)		(593,038	)		(116,732	)		212,456
Net (loss) gain on trading securities		(3,510	)		1,082			77			—			—
Income from underwriting		680			915			500			—			—

Total other income (loss)		894,131			(360,830	)		(532,227	)		(49,260	)		312,475


Expenses
Distribution fees		—			—			—			360			418
General and administrative expenses		46,496			43,430			41,540			40,021			36,880

Total expenses		46,496			43,430			41,540			40,381			37,298


Income (loss) before income (loss) from equity method investment and income taxes		1,225,709			(3,852	)		(210,327	)		288,239			740,076

Income (loss) from equity method investment		1,002			868			935			140			(252	)

Income taxes		(8,207	)		(11,076	)		(8,837	)		(7,314	)		(10,489	)


Net income (loss)		1,218,504			(14,060	)		(218,229	)		281,065			729,335

Dividends on preferred stock		4,268			4,515			4,625			4,625			4,625


Net income (loss) available (related) to common shareholders		$1,214,236			($18,575	)		($222,854	)		$276,440			$724,710


Net income (loss) available (related) per share to common shareholders:
Basic		$1.94			($0.03	)		($0.40	)		$0.50			$1.31

Diluted		$1.84			($0.03	)		($0.40	)		$0.49			$1.30

Weighted average number of common shares outstanding:
Basic		625,138,510			611,904,518			559,700,836			554,995,092			552,917,499

Diluted		662,476,638			611,904,518			559,700,836			575,859,564			559,336,066


Net income (loss)		$1,218,504			($14,060	)		($218,229	)		$281,065			$729,335

Other comprehensive (loss) income:
Unrealized (loss) gain on available-for-sale securities		(692,663	)		(619,080	)		664,544			7,416			(25,190	)
Unrealized gain on interest rate swaps		13,570			18,402			26,846			36,081			47,663
Reclassification adjustment for gains included in net income		(33,802	)		(61,986	)		(39,041	)		(46,962	)		(91,150	)

Other comprehensive (loss) income		(712,895	)		(662,664	)		652,349			(3,465	)		(68,677	)

Comprehensive income (loss)		$505,609			($676,724	)		$434,120			$277,600			$660,658

(1)

The Company invested $45,000,000 in an equity fund and has redeemed $56,000,000. Assets of the fund still remain at the prime broker, Lehman Brothers International (Europe) (in administration) (“LBIE”), which is in bankruptcy and the ultimate recovery of such amount remains uncertain. The Company has entered into the Claims Resolution Agreement between Lehman Brothers International (Europe) (in administration) and certain eligible offerees effective December 29, 2009 with respect to these assets (the “CRA”). Given the great degree of uncertainty as to the status of the Company’s assets, other than specific assets that remain directly in the control of LBIE that the Company has valued in accordance with the CRA, the Company has valued the assets at an 80% discount.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(dollars in thousands, except per share data)


	For the years ended
	December 31, 2010			December 31, 2009

Interest income
Investment securities	$	2,676,307		$	2,922,499
Securities loaned		3,997			103
U.S. Treasury Securities		2,830			—

Total interest income		2,683,134			2,922,602

Interest expense
Repurchase agreements		397,971			575,867
Interest rate swaps		735,107			719,803
Convertible Senior Notes		24,228			—
Securities borrowed		3,377			92
U.S. Treasury Securities sold, not yet purchased		2,649			—

Total interest expense		1,163,332			1,295,762


Net interest income		1,519,802			1,626,840

Other (loss) income
Investment advisory and service fees		58,073			48,952
Gain on sale of Mortgage-Backed Securities and agency debentures		181,791			99,128
Dividend income		31,038			17,184
Loss on Receivable from Prime Broker		—			(13,613	)
Unrealized (loss) gain on interest rate swaps		(318,832	)		349,521
Net loss on trading securities		(2,351	)		—
Income from underwriting		2,095			—

Total other (loss) income		(48,186	)		501,172

Expenses
Distribution fees		360			1,756
General and administrative expenses		171,487			130,152

Total expenses		171,847			131,908


Income before income from equity method investment and income taxes		1,299,769			1,996,104

Income (loss) from equity method investment		2,945			(252	)

Income taxes		(35,434	)		(34,381	)


Net income		1,267,280			1,961,471

Dividend on preferred stock		18,033			18,501


Net income available to common shareholders	$	1,249,247		$	1,942,970

Net income available per share to common shareholders:
Basic	$	2.12		$	3.55

Diluted	$	2.04		$	3.52

Weighted average number of common shares outstanding:
Basic		588,192,659			546,973,036

Diluted		625,307,174			553,130,643


Net income	$	1,267,280		$	1,961,471

Other comprehensive (loss) income:
Unrealized (loss) gain on available-for-sale securities		(639,783	)		1,513,397
Unrealized gain on interest rate swaps		94,899			224,818
Reclassification adjustment for gains included in net income		(181,791	)		(99,128	)

Other comprehensive (loss) income		(726,675	)		1,639,087

Comprehensive income	$	540,605		$	3,600,558

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 hereunto duly authorized.


	ANNALY CAPITAL MANAGEMENT, INC.

	By:	/s/ Kathryn Fagan

		Name: Kathryn Fagan
		Title: Chief Financial Officer

Dated: February 14, 2011