<PAGE>
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: JUNE 30, 1999
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 (IRS Employer
jurisdiction of Identification No.)
incorporation or organization)
12 EAST 41ST STREET, SUITE 700
NEW YORK, NEW YORK
(Address of principal executive offices)
10017
(Zip Code)
(212) 696-0100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No____
------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the last practicable date:
Class Outstanding
Common Stock, $.01 par value 12,697,548
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets - June 30, 1999 (Unaudited) and December 31, 1998 1
Statements of Operations (Unaudited) for the quarters ended June 30, 1999 and 1998 2
Statements of Operations (Unaudited) for the six months ended June 30, 1999 and 1998 3
Statements of Stockholders' Equity (Unaudited) for the six months ended June 30, 1999 4
Statements of Cash Flows (Unaudited) for the quarters ended June 30, 1999 and 1998 5
Statements of Cash Flows (Unaudited) for the six months ended June 30, 1999 and 1998 6
Notes to Financial Statements (Unaudited) 7-14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15-26
Item 3. Quantitative and Qualitative Disclosure About Market Risk 27-28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
</TABLE>
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
<TABLE>
<CAPTION>
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------
June 30, 1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 52,402 $ 69,020
MORTGAGE-BACKED SECURITIES,
At fair value 1,474,103,767 1,520,288,762
ACCRUED INTEREST RECEIVABLE 7,402,365 6,782,043
OTHER ASSETS 403,165 212,214
--------------------------------
TOTAL ASSETS $1,481,961,699 $1,527,352,039
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Repurchase agreements $1,344,740,000 $1,280,510,000
Payable for Mortgage-Backed Securities purchased 9,987,500 111,921,205
Accrued interest payable 8,767,821 5,052,626
Dividends payable 4,444,142 3,857,663
Accounts payable 430,329 139,236
--------------------------------
Total liabilities 1,368,369,792 1,401,480,730
--------------------------------
STOCKHOLDERS' EQUITY:
Common stock: par value $.01 per share;
100,000,000 authorized; 12,807,148 and 12,758,024
shares issued and outstanding, respectively 128,071 127,580
Additional paid-in capital 132,966,180 132,770,175
Accumulated other comprehensive income (19,428,328) (6,404,275)
Treasury Stock at cost (109,600 shares) (903,163) (903,163)
Retained earnings 829,147 280,992
--------------------------------
Total stockholders' equity 113,591,907 125,871,309
--------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,481,961,699 $1,527,352,039
================================
</TABLE>
See notes to financial statements.
3
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
FOR THE FOR THE
QUARTER ENDED QUARTER ENDED
JUNE 30, 1999 JUNE 30, 1999
---------------------------------------------
<S> <C> <C>
INTEREST INCOME
Mortgage-Backed Securities $ 22,264,812 $ 23,761,946
Money market account 118 7
---------------------------------------------
Total interest income 22,264,930 23,761,953
INTEREST EXPENSE:
Repurchase agreements 16,865,824 20,177,580
---------------------------------------------
NET INTEREST INCOME 5,399,106 3,584,373
GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 25,853 295,875
GENERAL AND ADMINISTRATIVE EXPENSES 561,010 493,718
---------------------------------------------
NET INCOME 4,863,949 3,386,530
---------------------------------------------
OTHER COMPREHENSIVE INCOME
Unrealized (loss) gain on available-for-sale securities (13,419,555) 474,026
Less: reclassification adjustment for gains included in net income (25,853) (295,875)
---------------------------------------------
Other comprehensive (loss) gain (13,445,408) 178,151
---------------------------------------------
COMPREHENSIVE INCOME $ (8,581,459) $ 3,564,681
=============================================
NET INCOME PER SHARE:
Basic $0.38 $0.27
=============================================
Dilutive $0.37 $0.26
=============================================
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 12,697,338 12,757,674
=============================================
Diluted 13,110,275 12.959,771
=============================================
</TABLE>
See notes to financial statements.
4
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
- -------------------------------------------------------------------------------
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
--------------------------------
INTEREST INCOME:
Mortgage-Backed Securities $ 44,279,733 $ 43,840,637
Money market account 138 37
----------------------------------
Total interest income 44,279,871 43,840,674
INTEREST EXPENSE:
Repurchase agreements 34,016,865 36,491,054
----------------------------------
NET INTEREST INCOME 10,263,006 7,349,620
GAIN ON SALE OF MORTGAGE-BACKED SECURITIES 90,413 1,722,959
GENERAL AND ADMINISTRATIVE EXPENSES 1,171,014 977,899
----------------------------------
NET INCOME 9,182,405 8,094,680
----------------------------------
OTHER COMPREHENSIVE INCOME
Unrealized loss on available-for-sale
securities (12,933,640) (2,211,198)
Less: reclassification adjustment
for gains included in net income (90,413) (1,722,959)
-----------------------------------
Other comprehensive loss (13,024,053) (3,934,157)
-----------------------------------
COMPREHENSIVE INCOME $ (3,841,648) $ 4,160,523
===================================
NET INCOME PER SHARE:
Basic $0.72 $0.64
===================================
Dilutive $0.71 $0.63
===================================
AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 12,677,718 12,742,623
===================================
Dilutive 12,957,718 12,941,535
===================================
See notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
Common Additional Other
Stock Paid-in Treasury Comprehensive Retained Comprehensive
Par Value Capital Stock Income Earnings Income Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $127,580 $ 132,770,175 $ (903,163) $ 280,992 $ (6,404,275) $ 125,871,309
Net income $ 4,318,456 4,318,456
Other comprehensive income:
Unrealized net gains on
securities, net of re-
classification adjust-
ment 421,355 421,355
-------------
Comprehensive income $ 4,739,811 4,739,811
=============
Exercise of stock options 489 195,007 195,496
Dividends declared for the
quarter ended March 31,
1999, $0.33 per average
share (4,190,108) (4,190,108)
------------------------------------------- ------------------------------------------------
BALANCE, MARCH 31, 1999 $128,069 $ 132,965,182 $ (903,163) $ 409,340 $ (5,982,920) $ 126,616,508
Net income $ 4,863,949 4,863,949
Other comprehensive income:
Unrealized net losses on
securities, net of
reclassification adjust-
ment (13,445,408) (13,445,408)
-------------
Comprehensive income $ (8,581,459)
============= (8,581,459)
Exercise of stock options 2 998 1,000
Dividends declared for the
quarter ended June 30,
1999, $0.35 per average
share (4,444,142) (4,444,142)
------------------------------------------- ------------------------------------------------
BALANCE, JUNE 30, 1999 $128,071 $ 132,966,180 $ (903,163) $ 829,147 $(19,428,328) $ 113,591,907
=========================================== ================================================
Disclosure of
reclassification amount:
Unrealized holding losses
arising during period $ (12,933,640)
Less: reclassification
adjustment for gains
included in net income (90,413)
-------------
Net unrealized losses on
securities $ (13,024,053)
=============
</TABLE>
See notes to financial statements.
6
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
FOR THE QUARTER FOR THE QUARTER
ENDED JUNE 30, ENDED JUNE 30,
1999 1998
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,863,949 $ 3,386,530
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of mortgage premiums and
discounts, net 1,886,272 2,231,093
Gain on sale of Mortgage-Backed Securities (25,853) (295,875)
Decrease (Increase) in accrued interest
receivable 16,798 (61,897)
Increase in other assets (171,534) (71,197)
(Decrease) increase in accrued interest
payable (814,852) 842,703
Increase (Decrease) in accounts payable 100,425 (18,979)
---------------------------------
Net cash provided by operating activities 5,855,205 6,012,378
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (101,582,524) (276,140,645)
Proceeds from sale of Mortgage-Backed
Securities 16,443,000 81,156,935
Principal payments on Mortgage-Backed
Securities 110,312,494 137,913,458
---------------------------------
Net cash used in investing activities 25,172,970 (57,070,252)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 2,619,594,000 2,609,413,000
Principal payments on repurchase agreements (2,646,710,000) (22,554,215,000)
Proceeds from exercise of stock options 1,000
Dividends paid (4,190,108) (4,082,456)
---------------------------------
Net cash provided by financing activities (31,305,108) 51,115,544
---------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (276,932) 57,670
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 329,334 10,325
---------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,402 $ 67,995
=================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 17,680,676 $ 19,244,877
=================================
NONCASH FINANCING ACTIVITIES:
Net unrealized losses on available-for-sale
securities $ (13,445,408) $ (1,910,407)
=================================
Dividends declared, not yet paid $ 4,444,142 $ 4,082,456
=================================
See notes to financial statements.
7
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,182,405 $ 8,094,680
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net 4,050,915 3,853,436
Gain on sale of Mortgage-Backed Securities (90,413) (1,722,959)
Increase in accrued interest receivable (620,322) (2,240,482)
Increase in other assets (190,951) (133,344)
Increase in accrued interest payable 3,715,195 5,907,928
Increase (Decrease) in accounts payable 291,092 (75,544)
--------------------------------
Net cash provided by operating activities 16,337,921 13,683,715
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (356,751,056) (961,783,914)
Proceeds from sale of Mortgage-Backed Securities 48,212,366 224,939,508
Principal payments on Mortgage-Backed Securities 235,805,425 232,134,576
--------------------------------
Net cash used in investing activities (72,733,265) (504,709,830)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 5,272,183,000 5,241,533,000
Principal payments on repurchase agreements (5,207,953,000) (4,744,134,000)
Proceeds from exercise of stock options 196,496 193,700
Additional cost of initial public offering (130,248)
Dividends paid (8,047,771) (6,879,514)
---------------------------------
Net cash provided by financing activities 56,378,725 490,582,938
---------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (16,618) (443,177)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 69,020 511,172
----------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 52,402 $ 67,995
==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 30,241,491 $ 30,493,126
==================================
NONCASH FINANCING ACTIVITIES:
Net unrealized losses on available-for-sale
securities $ (13,024,053) $ (1,910,407)
=================================
Dividends declared, not yet paid $ 4,444,142 $ 4,082,456
=================================
</TABLE>
See notes to financial statements.
8
<PAGE>
Annaly Mortgage Management, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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. The
interim financial statements for the six month period are unaudited; however,
in the opinion of the Company's management, all adjustments, consisting only
of normal recurring accruals, necessary for a fair statement of the results
of operations have been included. These unaudited financials statements
should be read in conjunction with the audited financial statements included
in the Company's Annual Report on form 10-K for the year ended December 31,
1998. The nature of the Company's business is such that the results of any
interim period are not necessarily indicative of results for a full year.
Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand
and money market funds. The carrying amounts of cash equivalents
approximates their value.
Mortgage-Backed Securities - The Company invests primarily in mortgage pass-
through certificates, collateralized mortgage obligations and other mortgage-
backed securities representing interests in or obligations backed by pools of
mortgage loans (collectively, "Mortgage-Backed Securities").
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), requires the Company
to classify its investments as either trading investments, available-for-sale
investments or held-to-maturity investments. Although the Company generally
intends to hold most of its Mortgage-Backed Securities until maturity, it
may, from time to time, sell any of its Mortgage-Backed Securities as part of
its overall management of its balance sheet. Accordingly, this flexibility
requires the Company to classify all of its Mortgage-Backed Securities as
available-for-sale. All assets classified as available-for-sale are reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity.
Unrealized losses on Mortgage-Backed Securities that are considered other
than temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and
the cost basis of the Mortgage-Backed Securities is adjusted. There were no
such adjustments for the quarter ended June 30, 1999 and the year ended
December 31, 1998.
Interest income is accrued based on the outstanding principal amount of the
Mortgage-Backed Securities and their contractual terms. Premiums and
discounts associated with the purchase of the Mortgage-Backed Securities are
amortized into interest income over the lives of the securities using the
effective yield method.
Mortgage-Backed Securities transactions are recorded on the date the
securities are purchased or sold. Purchases of newly issued securities are
recorded when all significant uncertainties regarding the characteristics of
the securities are removed, generally shortly before settlement date.
Realized gains and losses on Mortgage-Backed Securities transactions are
determined on the specific identification basis.
9
<PAGE>
Credit Risk - At June 30, 1999 and December 31, 1998, the Company has limited
exposure to credit losses on its portfolio of Mortgage-Backed Securities by
only purchasing securities from Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA"), or Government
National Mortgage Association ("GNMA"). The payment of principal and
interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by
those respective agencies and the payment of principal and interest on the
GNMA Mortgage-Backed Securities are backed by the full-faith-and-credit of
the U.S. government. At June 30, 1999 and December 31, 1998, all of the
Company's Mortgage-Backed Securities have a "AAA" rating or an implied a
"AAA" rating.
Income Taxes - The Company has elected to be taxed as a Real Estate
Investment Trust ("REIT") and intends to comply with the provisions of the
Internal Revenue Code of 1986, as amended (the "Code") with respect thereto.
Accordingly, the Company will not be subjected to Federal income tax to the
extent of its distributions to shareholders and as long as certain asset,
income and stock ownership tests are met.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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.
10
<PAGE>
MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of June 30, 1999, which are carried at
their fair value:
<TABLE>
<CAPTION>
Federal
Home Federal Government
Loan National National Total
Mortgage Mortgage Mortgage Mortgage
Corporation Association Association Assets
<S> <C> <C> <C> <C>
Mortgage-Backed
Securities, gross $424,033,991 $938,104,181 $106,408,686 $1,468,546,858
Unamoritized discount (167,685) (867,438) (1,035,123)
Unamortized premium 8,489,757 15,666,584 1,864,019 26,020,360
--------------------------------------------------------------
Amortized cost 432,356,063 952,903,327 108,272,705 1,493,532,095
Gross unrealized gains 58,216 1,685,599 1,743,815
Gross unrealized losses (6,681,797) (12,136,017) (2,354,329) (21,172,143)
--------------------------------------------------------------
Estimated fair value $425,732,482 $942,452,909 $105,918,376 $1,474,103,767
==============================================================
</TABLE>
The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of December 31, 1998, which are carried at
their fair value:
<TABLE>
<CAPTION>
Federal
Home Federal Government
Loan National National Total
Mortgage Mortgage Mortgage Mortgage
Corporation Association Association Assets
<S> <C> <C> <C> <C>
Mortgage-Backed
Securities, gross $449,443,408 $955,650,670 $ 97,330,495 $1,502,414,573
Unamoritized discount (184,996) (423,583) -- (608,579)
Unamortized premium 8,852,370 14,264,277 1,770,397 24,887,044
--------------------------------------------------------------
Amortized cost 458,100,782 969,491,364 99,100,892 1,526,693,038
Gross unrealized gains 659,557 2,092,119 549,900 3,301,576
Gross unrealized losses (3,487,784) ( 5,692,759) ( 525,309) ( 9,705,852)
--------------------------------------------------------------
Estimated fair value $455,272,555 $965,890,724 $ 99,125,483 $1,520,288,762
==============================================================
</TABLE>
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. At June 30, 1999, the weighted average lifetime cap
was 9.55%. At December 31, 1998, the weighted average lifetime cap was 10.6%.
11
<PAGE>
During the six months ended June 30, 1999 and 1998 , the Company realized
$90,413 and $1,722,959 in gains from sales of Mortgage-Backed Securities,
respectively. During the year ended December 31, 1998, the Company realized
$3,344,070 in gains for sales of Mortgage-Backed Securities. There were no
losses on sales of Mortgage-Backed Securities for the six months ended June
30, 1999 and 1998. Losses totaled $9,964 for the year ended December 31,
1998.
3. REPURCHASE AGREEMENTS
As of June 30, 1999, the Company had outstanding $1,344,740,000 of repurchase
agreements with a weighted average borrowing rate of 4.87% and a weighted
average remaining maturity of 24 days. At June 30, 1999, Mortgage-Backed
Securities actually pledged had an estimated fair value of $1,419,675,628.
As of December 31, 1998, the Company had outstanding $1,280,510,000 of
repurchase agreements with a weighted average borrowing rate of 5.21% and a
weighted average remaining maturity of 29 days. At December 31, 1998,
Mortgage-Backed Securities actually pledged had an estimated fair value of
$1,458,669,078.
At June 30, 1999 and December 31, 1998, the repurchase agreements had the
following remaining maturities:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------------
<S> <C> <C>
Within 30 days $ 57,545,000 $ 1,222,542,000
30 to 59 days 38,525,000 31,346,000
60 to 89 days 1,007,754,000 26,622,000
90 to 119 days 160,634,000
120 days and over 80,282,000
------------------------------------
$1,344,740,000 $ 1,280,510,000
------------------------------------
</TABLE>
4. COMMON STOCK
Options were exercised during the six month period ending June 30, 1999
increasing the total number of shares outstanding to 12,697,548. The number
of stock options exercised was 49,124, with an aggregate purchase price of
$196,496. During the year ended December 31, 1998, 44,124 options were
exercised at an aggregate price of $195,100. Stock buybacks during the year
ended December 31, 1999 totaled 109,600 shares at a cost of $903,163.
During the Company's six months ending June 30, 1999, the Company declared
dividends to shareholders totaling $8,634,250, or $0.68 per weighted average
share, of which $4,444,142 was paid on July 28, 1999. During the Company's
year ending December 31, 1998, the Company declared dividends to shareholders
totaling $15,437,554, or $1.22 per weighted average share, of which
$11,579,891 was paid during the period and $3,857,663 was paid on January 25,
1999. For Federal income tax purposes dividends paid for the year ended
December 31, 1998 are ordinary income to the Company stockholders.
5. EARNINGS PER SHARE (EPS)
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting No. 128, Earnings Per Share (SFAS No. 128),
which requires dual presentation of Basic EPS and Diluted EPS on the face of
the income statement for all entities with complex capital structures. SFAS
No. 128 also requires a reconciliation of the numerator and denominator of
Basic EPS and Diluted EPS computation. For the six months ended June 30,
1999 the reconciliation is as follows:
12
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 1999
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------------
<S> <C> <C> <C>
Net income $ 9,182,405
-----------
Basic EPS 9,182,405 12,677,718 $ 0.72
Effect of dilutive securities:
Dilutive stock options _ 280,000
-------------------------------------------
Diluted EPS $ 9,182,405 12,957,718 $ 0.71
===========================================
</TABLE>
Options to purchase 408,152 shares were outstanding during the quarter were
dilutive, as the exercise price (between $4.00 and $8.94) was less than the
average stock price for the six month period for the Company of $9.80.
Options to purchase 147,676 shares of stock were outstanding during the
period and are not considered dilutive. The exercise price (between $10.00
and $11.25) was greater than the average stock price for the six month period
of $9.80.
For the six months ended June 30, 1998, the reconciliation is as follows:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 1998
-------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------------
<S> <C> <C> <C>
Net income $ 8,094,680
-----------
Basic EPS 8,094,680 12,742,623 $ 0.64
Effect of dilutive securities:
Dilutive stock options _ 198,912
-------------------------------------------
Diluted EPS $ 8,094,680 12,941,535 $ 0.63
===========================================
</TABLE>
Options to purchase 312,226 shares were outstanding during the quarter and
were dilutive as the exercise price (between $4.00 and $10.00) was less than
the average stock price for the six month period for the Company of $10.66.
Options to purchase 2,426 shares of stock were outstanding and not considered
dilutive. The exercise price of $11.25 were greater than the average stock
price of for the quarter of $10.66.
6. COMPREHENSIVE INCOME
The Company adopted FASB Statement no. 130, Reporting Comprehensive Income,
Statement 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, 1999 and December 31, 1998 held
securities classified as available-for-sale. At June 30, 1999 and December
31, 1998, the net unrealized losses totaled $19,428,328 and $6,404,275,
respectively.
13
<PAGE>
7. LEASE COMMITMENTS
The Corporation has non-cancelable lease for office space, which commenced in
April 1998 and expires in December 2007.
The Corporation's aggregate future minimum lease payments are as follows:
<TABLE>
<S> <C>
1999 92,804
2000 95,299
2001 97,868
2002 100,515
2003 through 2007 582,406
---------
Total lease obligation $ 968,982
=========
</TABLE>
8. RELATED PARTY TRANSACTION
Included in "Other Assets" on the Balance sheet is an investment in Annaly
International Money Management, Inc. On June 24, 1998, the Company acquired
99,960 nonvoting shares, at a cost of $49,980. The officers and directors of
Annaly International Money Management Inc. are also officers and directors of
the Company.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Safe Harbor Statement
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Statements in this discussion regarding the Company and its business
which are not historical facts are "forward-looking statements" that involve
risks and uncertainties. For a discussion of such risks and uncertainties,
which could cause actual results to differ from those contained in the forward-
looking statements, see "Risk Factors" in the Company's Form 10-K for the year
ended December 31, 1998.
Overview
The Company is a real estate investment trust ("REIT") which acquires and
manages Mortgage-Backed Securities which can be readily financed. The Company
commenced operations on February 18, 1997 upon the closing of the Private
Placement. The Company's initial public offering was completed on October 14,
1997.
The Company's principal business objective is to generate net income for
distribution to stockholders from the spread between the interest income on its
Mortgage-Backed Securities and the costs of borrowing to finance its acquisition
of Mortgage-Backed Securities. The Company will seek to generate growth in
earnings and dividends per share in a variety of ways, including through (i)
issuing new Common Stock and increasing the size of the balance sheet when
opportunities in the market for Mortgage-Backed Securities are likely to allow
growth in earnings per share, (ii) continually reviewing the mix of Mortgage-
Backed Security types on the balance sheet in an effort to improve risk-adjusted
returns, and (iii) attempting to improve the efficiency of the Company's balance
sheet structure through the issuance of uncollateralized subordinated debt,
preferred stock and other forms of capital, to the extent management deems such
issuances appropriate.
Results of Operations: For the Quarter Ended June 30, 1999 and 1998
Net Income Summary
For the quarter ended June 30, 1999, net income, as calculated according to
Generally Accepted Accounting Principles ("GAAP"), was $4,863,949, or $.38 basic
earnings per share, as compared to the quarter ended June 30, 1998 of was
$3,386,530, or $0.27 basic earnings per share. Taxable earnings per share for
the quarter ended June 30, 1999 was approximately $5,095,224 or $0.40 per
average share. For the six months ended June 30, 1999, GAAP net income was
$9,182,405 or $0.72 basic per average share, as compared to the six months ended
June 30, 1998 of $8,094,680 or $0.64 basic per average share. Taxable income for
the six months ended June 30, 1999 was approximately $9,511,171, or $0.75 per
share. Net income per share is computed by dividing net income by the weighted
average number of shares of outstanding Common Stock during the six month
period, which was 12,677,718, and 12,697,338 for the quarter. Dividends per
weighted average number of shares outstanding for the quarter ended June 30,
1999 was $0.35 per share, $4,444,142 in total. Dividends per weighted average
number of shares outstanding for the quarter ended June 30, 1998 was $0.32 per
share, $4,082,456 in total. Return on average equity was 16.20% and 10.31% on
an annualized basis for the quarter ended June 30, 1999 and 1998, respectively.
15
<PAGE>
Net Income Summary
------------------
<TABLE>
<CAPTION>
Quarter Ended Six months Ended
June 30, 1999 June 30, 1999
(dollars in thousands, except (dollars in thousands, except
per share amounts) per share amounts)
-------------------------------- -----------------------------
<S> <C> <C>
Interest Income $ 22,264 $ 44,280
Interest Expense 16,865 34,017
-------------------------------- -----------------------------
Net Interest Income 5,399 10,263
Gain on Sale of Mortgage-Backed Securities 26 90
General and Administrative Expenses 561 1,171
-------------------------------- -----------------------------
Net Income $ 4,864 $ 9,182
================================ =============================
Average Number of Outstanding Shares 12,697,338 12,677,718
Basic Net Income Per Share $ 0.38 $ 0.72
Diluted Net Income Per Share $ 0.37 $ 0.71
Average Total Assets $ 1,496,793 $ 1,508,687
Average Equity $ 120,104 $ 123,112
Annualized Return on Average Assets 1.30% 1.22%
Annualized Return on Average Equity 16.20% 14.92%
</TABLE>
Taxable Income and GAAP Income
For the quarter ended June 30, 1999 and 1998, income as calculated for tax
purposes (taxable income) differed from income as calculated according to
generally accepted accounting principles (GAAP income). The differences were in
the calculations of premium and discount amortization, gains on sale of
Mortgage-Backed Securities, and general and administrative expenses.
The distinction between taxable income and GAAP income is important to the
Company's stockholders because dividends are declared on the basis of taxable
income. While the Company does not pay taxes so long as it satisfies the
requirements for exemption from taxation pursuant to the REIT Provisions of the
Code, each year the Company completes a corporate tax form wherein taxable
income is calculated as if the Company were to be taxed. This taxable income
level determines the amount of dividends the Company can pay out over time.
The table below presents the major differences between GAAP and taxable income
for the Company for the quarter ended June 30, 1999, March 31, 1999, the year
ended December 31, 1998, and the four quarters in 1998.
Taxable Income
--------------
<TABLE>
<CAPTION>
GAAP Net Income Taxable General & Taxable Taxable Gain on Taxable Net Income
Administrative Mortgage Sale of Securities
Differences Amortization Differences
Differences
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the Quarter Ended
June 30, 1999 $ 4,864 $2 $ 230 ($1) $ 5,095
For the Quarter Ended
March 31, 1999 $ 4,318 - $ 98 - $ 4,416
For the Year Ended
December 31, 1998 $15,489 $6 $ 969 ($331) $16,133
For the Quarter Ended
December 31, 1998 $ 3,685 $3 $ 439 ($20) $ 4,107
For the Quarter Ended
September 30, 19 $ 3,709 - $ 228 $ 83 $ 4,020
For the Quarter Ended
June 30, 1998 $ 3,387 $2 $ 376 ($19) $ 3,746
For the Quarter Ended
March 31, 1998 $ 4,708 $1 ($74) ($375) $ 4,260
</TABLE>
16
<PAGE>
Interest Income and Average Earning Asset Yield
The Company had average earning assets of $1.5 billion for the quarter
ended June 30, 1999 and $1.6 billion for the quarter ended June 30, 1998. The
Company's primary source of income for the quarter ended June 30, 1999 and 1998
was interest income. A portion of income was generated by gains on sales of
Mortgage-Backed Securities. Interest income was $22.3 and $23.8 million for the
quarters ended June 30, 1999 and 1998, respectively. The yield on average
earning assets was 5.95% and 6.13% for the same respective periods. The average
asset balance decreased by $54.2 million for the quarter ended June 30, 1999 as
compared to the quarter ended June 30, 1998 and the yield decreased by 0.18%,
which resulted in a decrease in interest income. The table below shows the
Company's average balance of cash equivalents and Mortgage-Backed Securities,
the yields earned on each type of earning assets, the yield on average earning
assets and interest income for the quarter ended June 30, 1999, March 31, 1999,
the year ended December 31, 1998, and the four quarters in 1998.
Average Earning Asset Yield
---------------------------
<TABLE>
<CAPTION>
Average
Amortized
Cost of Yield on
Average Mortgage- Yield on Average Amortized
Cash Backed Average Earning Average Cash Cost of Mortgage-
Equivalents Securities Assets Equivalents Backed Securities
----------- ---------- ---------------- ------------ -----------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the Quarter Ended June 30, 1999 $2 $1,496,793 $1,496,795 4.30% 5.95%
For the Quarter Ended March 31, 1999 $2 $1,502,627 $1,502,629 4.01% 5.87%
- ------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1998 $2 $1,461,789 $1,461,791 4.32% 6.16%
For the Quarter Ended December 31, 1998 $2 $1,446,094 $1,446,096 4.28% 6.12%
For the Quarter Ended September 30, 1998 $2 $1,543,010 $1,543,012 4.20% 6.22%
For the Quarter Ended June 30, 1998 $2 $1,550,968 $1,568,024 4.35% 6.13%
For the Quarter Ended March 31, 1998 $2 $1,307,088 $1,307,090 4.45% 6.15%
<CAPTION>
Yield on
Average Earning Interest
Assets Income
---------------- --------
<S> <C> <C>
For the Quarter Ended June 30, 1999 5.95% $22,265
For the Quarter Ended March 31, 1999 5.87% $22,015
For the Year Ended December 31, 1998 6.16% $89,985
For the Quarter Ended December 31, 1998 6.12% $22,136
For the Quarter Ended September 30, 1998 6.22% $24,009
For the Quarter Ended June 30, 1998 6.13% $23,762
For the Quarter Ended March 31, 1998 6.15% $20,079
</TABLE>
The Constant Prepayment Rate (or "CPR") on the Company's portfolio of
Mortgage-Backed Securities for the quarters ended June 30, 1999 and June 30,
1998 was 21%. "CPR" means an assumed rate of prepayment for the Company's
Mortgage-Backed Securities, expressed as an annual rate of prepayment relative
to the outstanding principal balance of the Company's Mortgage-Backed
Securities. This CPR does not purport to be either a historical description of
the prepayment experience of the Company's Mortgage-Backed Securities or a
prediction of the anticipated rate of prepayment of the Company's Mortgage-
Backed Securities. Since a large portion of the Company's assets was purchased
at a premium to par value and only a small portion of the Company's assets was
purchased at a discount to par value, the premium balance in the Company's
portfolio is substantially higher than the discount balance.
Principal prepayments had a negative effect on the Company's earning asset yield
for the quarters ended June 30, 1999 and 1998 because the Company adjusts its
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
The Company anticipates that its largest expense will usually be the cost
of borrowed funds. The Company had average borrowed funds of $1.4 billion and
total interest expense of $16.9 million for the quarter ended June 30, 1999.
The Company had average borrowed funds of $1.4 billion and total interest
expense of $20.2 million for the quarter ended June 30, 1998. The average cost
of funds was 4.91% and 5.60% for the quarter ended June 30, 1999 and 1998,
respectively. The cost of funds rate declined 0.69% for the quarter ended June
30, 1999 when compared to the quarter ended June 30, 1998; consequently,
interest expense decreased by 16% for the same time period.
With the Company's current asset/liability management strategy, changes in
the Company's cost of funds are expected to be closely correlated with changes
in short-term LIBOR, although the Company may choose to extend the maturity of
its liabilities at any time. The Company's average cost of funds was 0.05% below
one-month LIBOR for the quarter ended June 30, 1998 and 0.06% for the quarter
ended June 30, 1998. The Company generally has structured its borrowings to
adjust with one-month LIBOR because the Company believes that one-month LIBOR
may continue to be lower than six-month LIBOR in the present interest rate
environment. During the quarter ended June 30, 1999, average one-month LIBOR,
which was 4.96%, was 0.23% lower than average six-month LIBOR, which was 5.19%.
During the quarter ended June 30, 1998, average one-month LIBOR, which was
5.66%, was 0.09% lower than average six-month LIBOR, which was 5.75%.
17
<PAGE>
The table below shows the Company's average borrowed funds and average cost
of funds as compared to average one- and average six-month LIBOR for the quarter
ended June 30, 1999, March 31, 1999, the year ended December 31, 1998, and the
four quarters in 1998.
<TABLE>
<CAPTION>
Average Cost of Funds
---------------------
Average One- Average Cost
Average Month LIBOR of Funds Average Cost of
Average Average One- Average Relative to Relative to Funds Relative
Borrowed Interest Cost of Month Six- Average Six- Average One- to Average Six-
Funds Expense Funds LIBOR Month LIBOR Month LIBOR Month LIBOR Month LIBOR
----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
June 30, 1999 $1,374,154 $16,865 4.91% 4.96% 5.19% (0.23%) (0.05%) (0.28%)
For the Quarter Ended
March 31, 1999 $1,381,663 $17,151 4.97% 4.96% 5.05% (0.09%) 0.01% (0.08%)
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1998 $1,360,040 $75,735 5.57% 5.57% 5.54% 0.03% - 0.03%
For the Quarter Ended
December 31, 1998 $1,371,240 $18,479 5.39% 5.36% 5.10% 0.26% 0.03% 0.29%
For the Quarter Ended
September 30, 1998 $1,460,612 $20,765 5.68% 5.62% 5.63% (0.01%) 0.06% 0.05%
For the Quarter Ended
June 30, 1998 $1,440,822 $20,178 5.60% 5.66% 5.75% (0.09%) (0.06%) (0.15%)
For the Quarter Ended
March 31, 1998 $1,167,483 $16,313 5.59% 5.64% 5.68% (0.04%) (0.05%) (0.09%)
</TABLE>
Net Interest Rate Agreement Expense
The Company has not entered into any interest rate agreements to date. As
part of its asset/liability management process, the Company may enter into
interest rate agreements such as interest rate caps, floors and swaps. These
agreements would be entered into to reduce interest rate or prepayment risk and
would be designed to provide income and capital appreciation to the Company in
the event of certain changes in interest rates. However, even after entering
into such agreements, the Company would still be exposed to interest rate and
prepayment risks. The Company reviews the need for interest rate agreements on
a regular basis consistent with its Capital Investment Policy.
Net Interest Income
Net interest income, which equals interest income less interest expense,
totaled $5.4 million for the quarter ended June 30, 1999 and $3.6 million for
the quarter ended June 30, 1998. Net interest spread, which equals the yield on
the Company's average assets for the period less the average cost of funds for
the period, was 1.04% for the quarter ended June 30, 1999 compared to 0.53% for
the quarter ended June 30, 1998. This 0.56% increase in spread income is
reflected in the $1.8 million increase in net interest income. Net interest
margin, which equals net interest income divided by average total assets, was
1.44% and 0.99% on an annualized basis for the quarter ended June 30, 1999 and
1998, respectively. Income for the first six months of 1999 reflects a greater
emphasis on net interest income and less dependence on gains on disposition of
assets, when compared to the first six months of 1998. Net interest income
increased because of lower funding cost for the period. This increase was
partially offset by lower yields on assets. Taxable net interest income was
approximately $230,405 more than GAAP net interest income because of differing
premium amortization, for the quarter ended June 30, 1999. Taxable net interest
income was $376,436 greater than GAAP net interest income because of differing
premium and discount amortization, for the quarter ended June 30, 1998. The
principal reason that annualized net interest margin exceeded net interest
spread is that average assets exceeded average liabilities. A portion of the
Company's assets are funded with equity rather than borrowings. The Company did
not have any interest rate agreement expenses for the quarter ended June 30,
1999 and 1998.
The table below shows interest income by earning asset type, average
earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
quarter ended June 30, 1999, March 31, 1999 , the year ended December 31, 1998,
and the four quarter in 1998.
18
<PAGE>
GAAP Net Interest Income
------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
Average Yield on
Amortized Cost Interest Interest Average Average
of Income on Average Income on Total Interest Balance of
Mortgage-Backed Mortgage-Backed Cash Cash Interest Earning Repurchase
Securities Held Securities Equivalents Equivalents Income Assets Agreements
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
June 30, 1999 $1,493,532 $22,265 $2 - $22,265 5.95% $1,374,154
For the Quarter Ended
March 31, 1999 $1,502,629 $22,015 $2 - $22,015 5.87% $1,381,663
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1998 $1,461,790 $89,986 $2 - $89,986 6.16% $1,360,040
For the Quarter Ended
December 31, 1998 $1,446,094 $22,136 $2 - $22,136 6.12% $1,371,240
For the Quarter Ended
September 30, 1998 $1,543,010 $24,009 $2 - $24,009 6.22% $1,460,612
For the Quarter Ended
June 30, 1998 $1,550,968 $23,762 $2 - $23,762 6.13% $1,440,822
For the Quarter Ended
March 31, 1998 $1,307,088 $20,079 $2 - $20,079 6.15% $1,167,483
<CAPTION>
Average Net
Interest Cost of Interest
Expense Funds Income
-------------------------------------
<S> <C> <C> <C>
For the Quarter Ended
June 30, 1999 $16,865 4.91% $ 5,399
For the Quarter Ended
March 31, 1999 $17,151 4.97% $ 4,864
- ---------------------------------------------------------------
For the Year Ended
December 31, 1998 $75,735 5.57% $14,250
For the Quarter Ended
December 31, 1998 $18,479 5.39% $ 3,657
For the Quarter Ended
September 30, 1998 $20,765 5.68% $ 3,244
For the Quarter Ended
June 30, 1998 $20,178 5.60% $ 3,584
For the Quarter Ended
March 31, 1998 $16,313 5.59% $ 3,765
</TABLE>
Gains and Losses on Sales of Mortgage-Backed Securities
For the quarter ended June 30, 1999, the Company sold Mortgage-Backed
Securities with an aggregate historical amortized cost of $16.4 million for an
aggregate gain of $25,853. During the quarter ended June 30, 1998, the Company
sold Mortgage-Backed Securities with an aggregate historical amortized cost of
$80.9 million for an aggregate gain of $295,875 million. As stated above, the
gain on the sale of assets declined substantially. For the quarter ended June
30, 1999, there was a greater emphasis on spread income and not gains. Taxable
gains were approximately $1,330 less than GAAP gains on sale of securities for
the quarter ended June 30, 1999. Taxable gains were approximately $18,948 less
than GAAP gains on sale of securities for the quarter ended June 30, 1999. The
difference between the sale price and the historical amortized cost of the
Mortgage-Backed Securities is a realized gain and increased income accordingly.
The Company does not expect to sell assets on a frequent basis, but may from
time to time sell existing assets to move into new assets which management
believes might have higher risk-adjusted returns or to manage its balance sheet
as part of management's asset/liability management strategy.
Credit Expenses
The Company has not experienced credit losses on its portfolio of Mortgage-
Backed Securities to date, but losses may be experienced in the future. To
date, the Company had limited its exposure to credit losses on its portfolio of
Mortgage-Backed Securities by purchasing only securities, issued or guaranteed
by FNMA, FHLMC or GNMA ("Agency certificates"), which, although not rated, carry
an implied "AAA" rating.
General and Administrative Expenses
General and administrative expenses ("operating expense" or "G&A expense")
were $561,010 for the quarter ended June 30, 1999 and $493,718 for the quarter
ended June 30, 1998. Taxable G&A expenses were approximately $2,100 and $2,200
less than for GAAP purposes for the quarters ended June 30, 1999 and 1998,
respectively. G&A expense increased as a percentage of assets to 0.15% for the
quarter ended June 30, 1999 compared to 0.13% for the same quarter in the
previous year. The Company experienced economies of scale with the increasing
asset base and because it is internally managed. Also, it intends to continue
to be a low cost provider.
19
<PAGE>
GAAP G&A Expense and Operating Expense Ratios
---------------------------------------------
<TABLE>
<CAPTION>
Total G&A Total G&A
Cash Comp and Expense/Average Expense/Average
Benefits Other G&A Total G&A Assets Equity
Expense Expense Expense (annualized) (annualized)
---------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the Quarter Ended $ 338 $223 $ 561 0.15% 1.44%
June 30, 1999
For the Quarter Ended $ 333 $277 $ 610 0.16% 1.93%
March 31, 1999
- --------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1998 $1,210 $896 $2,106 0.14% 1.60%
For the Quarter Ended
December 31, 1998 $ 380 $219 $ 599 0.15% 1.90%
For the Quarter Ended
September 30, 1998 $ 318 $210 $ 528 0.13% 1.61%
For the Quarter Ended
June 30, 1998 $ 252 $242 $ 494 0.13% 1.50%
For the Quarter Ended
March 31, 1998 $ 259 $225 $ 484 0.15% 1.44%
</TABLE>
Net Income and Return on Average Equity
Net income was $4.9 million in the quarter ended June 30, 1999 and $3.4
million for the quarter ended June 30, 1998. Return on average equity was
16.20% on an annualized basis for the quarter ended June 30, 1999 and 10.31% on
an annualized basis for the quarter ended June 30, 1998. The increase in net
income is a direct result of an increase in spread income. As previously
mentioned, the substantial decline in interest expense was the primary factor of
increased earnings. The table below shows the Company's net interest income,
gain on sale of Mortgage-Backed Securities and G&A expense each as a percentage
of average equity, and the return on average equity for the quarter ended June
30, 1999, March 31, 1999, the year ended December 31, 1998 and the four quarters
in 1998.
Components of Return on Average Equity
--------------------------------------
<TABLE>
<CAPTION>
Gain on Sale of
Mortgage-Backed
Net Interest Securities/
Income/Average Average G&A Expense/Average Return on Average
Equity Equity Equity Equity
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For the Quarter Ended June 30, 1999
(on an annualized basis) 17.99% 0.08% 1.87% 16.20%
For the Quarter Ended March 31, 1999
(on an annualized basis) 15.43% 0.20% 1.93% 13.70%
- ----------------------------------------------------------------------------------------------------------------------------------
For the Year ended December 31, 1998 10.85% 2.55% 1.60% 11.80%
For the Quarter Ended December 31, 1998
(on an annualized basis) 11.45% 1.97% 1.90% 11.71%
For the Quarter Ended September 30, 1998
(on an annualized basis) 9.89% 3.03% 1.61% 11.31%
For the Quarter Ended June 30, 1998
(on an annualized basis) 10.92% 1.90% 1.50% 10.31%
For the Quarter March 31, 1998
(on an annualized basis) 11.18% 4.23% 1.44% 13.97%
</TABLE>
20
<PAGE>
Dividends and Taxable Income
The Company has elected to be taxed as a REIT under the Code. Accordingly,
the Company intends to distribute substantially all of its taxable income for
each year to stockholders, including income resulting from gains on sales of
Mortgage-Backed Securities. Through June 30, 1999, earned taxable income
exceeded dividend declarations by $1.2 million, or $0.10 per share, based on the
number of shares of Common Stock outstanding at period end.
Dividend Summary
----------------
<TABLE>
<CAPTION>
Weighted Cumulative
Taxable Average Common Taxable Net Dividends Dividend Undistributed
Net Shares Income Declared Total Pay-out Taxable
Income Outstanding Per Share Per Share Dividends Ratio Income
---------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
June 30, 1999 $ 5,095 12,697,338 $0.40 $ 0.35 $ 4,444 87.1% $1,219
For the Quarter Ended
March 31, 1999 $ 4,416 12,657,884 $0.35 $ 0.33 $ 4,190 94.9% $1,115
- -----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1998 $16,133 12,709,116 $1.27 $1.215 $15,437 95.7% $ 889
For the Quarter Ended
December 31, 1998 $ 4,107 12,648,116 $0.32 $0.315 $ 3,859 93.96% $ 889
For the Quarter Ended
September 30, 1998 $ 4,020 12,704,194 $0.32 $ 0.27 $ 3,415 83.74% $ 641
For the Quarter Ended
June 30, 1998 $ 3,746 12,757,674 $0.29 $ 0.32 $ 4,082 108.39% $ 36
For the Quarter Ended
March 31, 1998 $ 4,260 12,727,405 $0.33 $ 0.32 $ 4,082 88.07% $ 372
</TABLE>
Financial Condition
Mortgage-Backed Securities
All of the Company's Mortgage-Backed Securities at June 30, 1999 were
adjustable-rate or fixed-rate Mortgage-Backed Securities backed by Single-Family
Mortgage Loans. All of the mortgage assets underlying such Mortgage-Backed
Securities were secured with a first lien position with respect to the
underlying single-family properties. All the Company's Mortgage-Backed
Securities were Agency Certificates, which carry a S&P "AAA" rating or an
implied "AAA" rating. All of the Company's earning assets are marked-to-market
at liquidation value.
Discount balances are accreted as an increase in interest income over the
life of discount Mortgage-Backed Securities and premium balances are amortized
as a decrease in interest income over the life of premium Mortgage-Backed
Securities. At June 30, 1999 and 1998, the Company had on its balance sheet a
total of $1.0 million and $648,066, respectively, of unamortized discount (which
is the difference between the remaining principal value and current historical
amortized cost of Mortgage-Backed Securities acquired at a price below principal
value) and a total of $26.0 million and $27.2 million, respectively, of
unamortized premium (which is the difference between the remaining principal
value and the current historical amortized cost of Mortgage-Backed Securities
acquired at a price above principal value).
Mortgage principal repayments received were $110.3 million and $137.9
million for the quarter ended June 30, 1999 and 1998, respectively. Given the
Company's current portfolio composition, if mortgage principal prepayment rates
increase over the life of the Mortgage-Backed Securities comprising the current
portfolio, all other factors being equal, the Company's net interest income
should decrease during the life of such Mortgage-Backed Securities as the
Company will be required to amortize its net premium balance into income over a
shorter time period. Similarly, if mortgage principal prepayment rates decrease
over the life of such Mortgage-Backed Securities, all other factors being equal,
the Company's net interest income should increase during the life of such
Mortgage-Backed Securities as the Company will amortize its net premium balance
over a longer time period.
21
<PAGE>
The table below summarizes the Company's Mortgage-Backed Securities at June
30, 1999, March 31, 1999 and the four quarters in the year ended December 31,
1998.
Mortgage-Backed Securities
---------------------------
<TABLE>
<CAPTION>
Estimated Fair
Amortized Estimated Value/ Weighted
Net Amortized Cost/Principal Fair Principal Average
Principal Value Premium Cost Value Value Value Yield
-----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
At June 30, 1999 $1,468,547 $24,985 $1,493,532 101.70% $1,474,104 100.38% 6.21%
At March 31, 1999 $1,527,530 $26,071 $1,553,601 101.71% $1,547,618 101.32% 5.94%
- ---------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 $1,502,414 $24,278 $1,526,692 101.62% $1,520,289 101.19% 6.43%
At September 30, 1998 $1,461,056 $24,244 $1,485,300 101.66% $1,483,195 101.52% 6.49%
At June 30, 1998 $1,541,520 $26,532 $1,568,052 101.72% $1,566,188 101.60% 6.50%
At March 31, 1998 $1,495,670 $25,265 $1,520,935 101.70% $1,518,847 101.55% 6.51%
</TABLE>
The tables below set forth certain characteristics of the Company's
Mortgage-Backed Securities. The index level for adjustable-rate Mortgage-Backed
Securities is the weighted average rate of the various short-term interest rate
indices which determine the coupon rate.
Adjustable-Rate Mortgage-Backed Security Characteristics
--------------------------------------------------------
<TABLE>
<CAPTION>
Weighted Weighted Weighted Weighted Principal Value at
Average Average Average Average Term Weighted Weighted Period End as % of
Principal Coupon Index Net to Next Average Average Asset Mortgage-
Value Rate Level Margin Adjustment Lifetime Cap Yield Backed Securities
-------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At June 30, 1999 $ 941,559 6.67% 4.96% 1.71% 11 months 11.00% 5.84% 64.12%
At March 31, 1999 $1,036,947 6.63% 4.97% 1.66% 11 months 11.01% 5.64% 67.88%
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 $1,030,654 6.84% 5.18% 1.66% 12 months 10.63% 6.42% 68.60%
At September 30, 1998 $1,050,177 6.78% 5.20% 1.68% 13 months 10.42% 6.51% 71.88%
At June 30, 1998 $1,140,518 6.86% 5.20% 1.66% 15 months 10.42% 6.46% 73.98%
At March 31, 1998 $1,176,716 6.89% 5.45% 1.61% 12 months 10.00% 6.46% 78.68%
</TABLE>
Fixed-Rate Mortgage-Backed Security Characteristics
---------------------------------------------------
<TABLE>
<CAPTION>
Principal Value as %
Weighted Average Weighted Average of Mortgage-Backed
Principal Value Coupon Rate Asset Yield Securities
-----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
At June 30, 1999 $526,988 6.58% 6.88% 35.88%
At March 31, 1999 $490,583 6.54% 6.37% 32.12%
- ----------------------------------------------------------------------------------------------------------------
At December 31, 1998 $471,760 6.55% 6.47% 31.40%
At September 30, 1998 $410,879 6.69% 6.47% 28.12%
At June 30, 1998 $401,002 6.82% 6.65% 26.02%
At March 31, 1998 $318,954 6.85% 6.70% 21.32%
</TABLE>
At June 30, 1999, the Company held Mortgage-Backed Securities with coupons
linked to the one-year and three-year and five-year Treasury Indices, one-month
LIBOR and the six-month CD rate. The table below segments the Company's
22
<PAGE>
adjustable-rate Mortgage-Backed Securities by type of adjustment index, coupon
adjustment frequency and annual and lifetime cap adjustment.
Adjustable-Rate Mortgage-Backed Securities by Index
---------------------------------------------------
June 30, 1999
-------------
<TABLE>
<CAPTION>
1-Year 3-Year 5-Year
One-Month Six-Month Treasury Treasury Treasury
LIBOR CD Rate Index Index Index
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted Average Adjustment Frequency 1 mo. 6 mo. 43 mo. 36 mo. 60 mo.
Weighted Average Term to Next Adjustment 1 mo. 3 mo. 19 mo. 16 mo. 14 mo.
Weighted Average Annual Period Cap None 1.00% 1.75% 1.79% 1.33%
Weighted Average Lifetime Cap at
June 30, 1999 9.13% 10.68% 12.02% 13.17% 11.62%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
June 30, 1999 23.85% 2.66% 28.39% 0.08% 0.01%
</TABLE>
At December 31, 1998, the Company held Mortgage-Backed Securities with
coupons linked to the one-year and three-year Treasury indices, one-month LIBOR,
and the six-month CD rate. The table below segments the Company's adjustable-
rate Mortgage Backed Securities by type of adjustment index, coupon adjustment
frequency, and annual and lifetime cap adjustment.
Adjustable-Rate Mortgage-Backed Securities by Index
---------------------------------------------------
December 31, 1998
-----------------
<TABLE>
<CAPTION>
1-Year 3-Year 5-Year
One-Month Six-Month Treasury Treasury Treasury
LIBOR CD Rate Index Index Index
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted Average Adjustment Frequency 1 mo. 6 mo. 32 mo. 36 mo. 60 mo.
Weighted Average Term to Next Adjustment 1 mo. 3 mo. 23 mo. 9 mo. 2 mo.
Weighted Average Annual Period Cap None 1.00% 1.83% 2.00% 2.00%
Weighted Average Lifetime Cap at
December 31, 1998 9.16% 11.04% 11.76% 13.07% 11.57%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
December 31, 1998 29.60% 3.73% 33.33% 1.62% 0.32%
</TABLE>
The table below shows unrealized gains and losses on the Mortgage-Backed
Securities in the Company's portfolio.
Unrealized Gains and Losses
---------------------------
(dollars in the thousands)
<TABLE>
<CAPTION>
At June 30, At March 31, At December 31, At September 30, At June 30,
1999 1999 1999 1998 1998
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unrealized Gain $ 1,744 $ 2,801 $ 3,302 $ 7,060 $ 2,826
Unrealized Loss (21,172) (8,784) (9,706) (9,164) (4,736)
-------------------------------------------------------------------------
Net Unrealized Loss (19,428) (5,983) (6,404) (2,104) (1,910)
=========================================================================
Net Unrealized Loss as % of Mortgage-Backed
Securities Principal Value (1.32%) (0.39%) (0.43%) (0.18%) (0.12%)
Net Unrealized Loss as % of
Mortgage-Backed Securities Amortized Cost (1.30%) (0.39%) (0.42%) (0.17%) (0.12%)
</TABLE>
23
<PAGE>
Interest Rate Agreements
Interest rate agreements are assets that are carried on a balance sheet at
estimated liquidation value. At June 30, 1999 and December 31, 1998, there were
no interest rate agreements on the Company's balance sheet. No interest rate
agreements have been entered into since inception of the Company.
Borrowings
To date, the Company's debt has consisted entirely of borrowings
collateralized by a pledge of the Company's Mortgage-Backed Securities. These
borrowings appear on the balance sheet as repurchase agreements. At June 30,
1999, the Company had established uncommitted borrowing facilities in this
market with twenty-four lenders in amounts which the Company believes are in
excess of its needs. All of the Company's Mortgage-Backed Securities are
currently accepted as collateral for such borrowings. The Company, however,
limits its borrowings, and thus its potential asset growth, in order to maintain
unused borrowing capacity and thus increase the liquidity and strength of its
balance sheet.
For the quarter ended June 30, 1999 and 1998, the term to maturity of the
Company's borrowings has ranged from one day to one year, with a weighted
average original term to maturity of 72 days and 90 days, respectively. The
weighted average remaining maturity was 24 days and 42 days at June 30, 1999 and
1998, respectively. At June 30, 1999, the weighted average cost of funds for
all of the Company's borrowings was 4.87% and the weighted average term to next
rate adjustment was 24 days. At June 30, 1998, the weighted average cost of
funds for all of the Company's borrowings was 5.58% and the weighted average
term to next rate adjustment was 42 days.
Liquidity
Liquidity, which is the Company's ability to turn non-cash assets into
cash, allows the Company to purchase additional Mortgage-Backed Securities and
to pledge additional assets to secure existing borrowings should the value of
pledged assets decline. Potential immediate sources of liquidity for the
Company include cash balances and unused borrowing capacity. Unused borrowing
capacity will vary over time as the market value of the Company's Mortgage-
Backed Securities varies. The Company's balance sheet also generates liquidity
on an on-going basis through mortgage principal repayments and net earnings held
prior to payment as dividends. Should the Company's needs ever exceed these on-
going sources of liquidity plus the immediate sources of liquidity discussed
above, management believes that the Company's Mortgage-Backed Securities could
in most circumstances be sold to raise cash. The maintenance of liquidity is
one of the goals of the Company's Capital Investment Policy. Under this policy,
asset growth is limited in order to preserve unused borrowing capacity for
liquidity management purposes.
Stockholders' Equity
The Company uses "available-for-sale" treatment for its Mortgage-Backed
Securities; these assets are carried on the balance sheet at estimated market
value rather than historical amortized cost. Based upon such "available-for-
sale" treatment, the Company's equity base at June 30, 1999 was $113.6 million,
or $8.95 per share. If the Company had used historical amortized cost
accounting, the Company's equity base at June 30, 1999 would have been $133.0
million, or $10.48 per share. The Company's equity base at June 30, 1998 was
$131.1 million, or $10.28 per share. If the Company had used historical
amortized cost accounting, the Company's equity base at June 30, 1998 would have
been $133.0 million, or $10.43 per share.
With the Company's "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact GAAP or taxable income but
rather are reflected on the balance sheet by changing the carrying value of the
asset and reflecting the change in stockholders' equity under "Accumulated Other
Comprehensive Income." By accounting for its assets in this manner, the Company
hopes 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, the book value and
book value per share of the Company are likely to fluctuate far more than if the
Company 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 be misleading.
Unrealized changes in the estimated net market value of Mortgage-Backed
Securities have one direct effect on the Company's potential earnings and
dividends: positive market-to-market changes will increase the Company's equity
base and allow the Company to increase its borrowing capacity while negative
changes will tend to limit borrowing capacity under the Company's Capital
Investment Policy. A very large negative change in the net market value of the
Company's Mortgage-Backed Securities might impair the Company's liquidity
position, requiring the Company to sell assets with the likely result of
realized losses upon sale. "Net Unrealized Losses on Assets Available for Sale"
was $19.4 million, or 1.30% of the amortized cost of
24
<PAGE>
Mortgage-Backed Securities at June 30, 1999. "Net Unrealized Losses on Assets
Available for Sale" was $1.9 million, or 0.12% of the amortized cost of
Mortgage-Backed Securities at June 30, 1998.
The table below shows the Company's equity capital base as reported and on
a historical amortized cost basis at June 30, 1999, March 31, 1998, December 31,
1998, September 30, 1998, June 30, 1998, and March 31, 1998. Issuances of
Common Stock, the level of GAAP earnings as compared to dividends declared, and
other factors influence the historical cost equity capital base. The GAAP
reported equity capital base is influenced by these factors plus changes in the
"Net Unrealized Losses on Assets Available for Sale" account.
Stockholders' Equity
--------------------
<TABLE>
<CAPTION>
GAAP
Historical Net Unrealized Gains Reported Historical GAAP Reported
Amortized Cost on Assets Available Equity Base Amortized Cost Equity (Book Value)
Equity Base for Sale (Book Value) Equity Per Share Per Share
-------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
At June 30, 1999 $133,020 ($19,428) $113,592 $10.48 $ 8.95
At March 31, 1999 $132,599 ($5,983) $126,617 $10.44 $ 9.97
- --------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 $132,275 ($6,404) $125,871 $10.46 $ 9.95
At September 30, 1998 $132,446 ($2,105) $130,342 $10.47 $10.30
At June 30, 1998 $133,055 ($1,910) $131,145 $10.43 $10.28
At March 31, 1998 $133,751 ($2,088) $131,663 $10.48 $10.32
</TABLE>
Leverage
The Company's debt-to-GAAP reported equity ratio at June 30, 1999 and June
30, 1998 was 11.8:1 and 10.8:1, respectively. The Company generally expects to
maintain a ratio of debt-to-equity of between 8:1 and 12:1, although the ratio
may vary from time to time based upon various factors, including management's
opinion of the level of risk of its assets and liabilities, the Company's
liquidity position, the level of unused borrowing capacity and over-
collateralization levels required by lenders when the Company pledges assets to
secure borrowings.
The target debt-to-GAAP reported equity ratio is determined under the
Company's Capital Investment Policy. Should the actual debt-to-equity ratio of
the Company increase above the target level due to asset acquisition and/or
market value fluctuations in assets, management will cease to acquire new
assets. Management will, at such time, present a plan to its Board of Directors
to bring the Company back to its target debt-to-equity ratio; in many
circumstances, this would be accomplished in time by the monthly reduction of
the balance of Mortgage-Backed Securities through principal repayments.
Asset/Liability Management and Effect of Changes in Interest Rates
Management continually reviews the Company's asset/liability management
strategy with respect to interest rate risk, mortgage prepayment risk, credit
risk and the related issues of capital adequacy and liquidity. The Company
seeks attractive risk-adjusted stockholder returns while maintaining a strong
balance sheet.
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 it 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 its 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 from an economic point of view by balancing
assets purchased at a premium with assets purchased at a discount. To date, the
aggregate premium exceeds the aggregate discount on Mortgage-Backed Securities
in the Company's portfolio. As a result, prepayments, which result in the
expensing of unamortized premium, will reduce the Company's net income compared
to what net income would be absent such prepayments.
25
<PAGE>
Status of Year 2000 Compliance
The company has made an ongoing effort to stay abreast of the year 2000
compliance issue. Hardware and software was checked for compliance and necessary
upgrades were completed. In consideration of the Year 2000 issues, the Company
has reviewed the ability of its own computers and computer programs to properly
recognize and handle dates in the Year 2000. Through the normal upgrading of
computer equipment, the Company has already replaced all computers that were not
Year 2000 compliant. The Company has also reviewed all the date fields embedded
in its internally developed spreadsheets, databases and other programs and has
determined that all such programs are using four-digit years in references to
dates. Therefore, the Company believes that all of its equipment and internal
systems are ready for the Year 2000. To date, the Company has incurred minimal
costs in order to be Year 2000 compliant.
The Company believes that most of its exposure to Year 2000 issues involves
the readiness of third parties. Each third party is subject to the Year 2000
issue. The Company is in the process of surveying pertinent third parties for
their compliance. As a result of communications with such third parties, the
Company believes that they are spending the appropriate and necessary resources
to try to identify Year 2000 issues and to resolve them or to mitigate the
impact of them to the best of their ability as they are identified.
Inflation
Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates and other factors drive the Company's
performance far more than does inflation. Changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates. The
Company's financial statements are prepared in accordance with GAAP and the
Company's dividends are determined by the Company's net income as calculated for
tax purposes; in each case, the Company's activities and balance sheet are
measured with reference to historical cost or fair market value without
considering inflation.
Other Matters
The Company calculated its qualified REIT Assets, as defined in the
Internal Revenue Code of 1986, as amended (the "Code"), to be 99.5% of its total
assets at June 30, 1999 and 1998, as compared to the Code requirement that at
least 75% of its total assets must be qualified REIT Assets. The Company also
calculates that 100% and 98.8% of its revenue qualifies for the 75% source of
income test and 100% of its revenue qualifies for the 95% source of income test
under the REIT rules for the quarter ended June 30, 1999 and 1998, respectively.
The Company also met all REIT requirements regarding the ownership of its Common
Stock and the distributions of its net income. Therefore, as of June 30, 1999
and 1998, the Company believes that it qualified as a REIT under the provisions
of the Code.
The Company at all times intends to conduct its business so as not to
become regulated as an investment company under the Investment Company Act of
1940. If the Company were to become regulated as an investment company, then
the Company's 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 Commission, in order to qualify for this exemption, the Company
must maintain at least 55% of its assets directly in Qualifying Interests. In
addition, unless certain mortgage securitites represent all the certificates
issued with respect to an underlying pool of mortgages, such mortgage 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. As of June 30, 1999 and 1998, the Company calculates that it is in
compliance with this requirement.
26
<PAGE>
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 the Company is 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 the control of the Company. Changes in the general level of
interest rates can affect the Company's net interest income, which is the
difference between the interest income earned on interest-earning assets and the
interest expense incurred in connection with its interest-bearing liabilities,
by affecting the spread between the Company's interest-earning assets and
interest-bearing liabilities. Changes in the level of interest rates also can
affect the value of the Company's Mortgage-Backed Securities and its ability to
realize gains from the sale of such assets. The Company 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 its operations. The use of these types of derivatives to hedge
interest-earning assets and/or interest-bearing liabilities carries certain
risks, including the risk that losses on a hedge position will reduce the funds
available for payments to holders of securities and, indeed, that such losses
may exceed the amount invested in such instruments. Currently, the Company has
not purchased hedging instruments. The profitability of the Company 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 300 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, 1999 and various estimates regarding prepayment and all activities
are made at each level of rate shock. Actual results could differ significantly
from these estimates.
<TABLE>
<CAPTION>
Projected Percentage Change in Projected Percentage Change in
Change in Interest Rate Net Interest Income Portfolio Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- -300 Basis Points 166% 2%
- -200 Basis Points 35% 2%
- -100 Basis Points 13% 1%
Base Interest Rate
+100 Basis Points (50%) (2%)
+200 Basis Points (80%) (5%)
+300 Basis Points (130%) (7%)
</TABLE>
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. It is the objective of the Company
to attempt to control risks associated with interest rate movements. Methods
for evaluating interest rate risk include an analysis of the Company's interest
rate sensitivity "gap", which is defined as 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.
The following table sets forth the estimated maturity or repricing of the
Company's interest-earning assets and interest-bearing liabilities at June 30,
1999. 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, which were estimated based on analyses of broker estimates, the
results of a prepayment model utilized by the Company and empirical data.
Management believes that these assumptions approximate actual experience and
27
<PAGE>
considers them reasonable; however, the interest rate sensitivity of the
Company's 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.
<TABLE>
<CAPTION>
More than 1 Year
Within 3 Months 4-12 Months to 3 Years 3 Years and Over Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Mortgage-Backed Securities 393,617 314,098 153,022 607,808 1,468,545
Rate Sensitive Liabilities:
Repurchase Agreements 1,3744,740 1,344,740
-------------------------------------------------------------------------------------
Interest rate sensitivity gap (951,123) 314,098 153,022 607,808
Cumulative rate sensitivity gap (951,123) (637,025) (484,003) 123,805
Cumulative interest rate
sensitivity gap as a
percentage of total (65%) (43%) (33%) 8%
rate-sensitive assets
</TABLE>
28
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 1 - Financial Data Schedule
(b) Reports
None
29
<PAGE>
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 11, 1999 By: /s/ Michael A.J. Farrell
-------------------------
Michael A.J. Farrell
Chairman of the Board and Chief Executive
Officer
(authorized officer of registrant)
Dated: August 11, 1999 By: /s/ Kathryn F. Fagan
---------------------
Kathryn F. Fagan
Chief Financial Officer and Treasurer
(principal accounting officer)
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1999 QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIERETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 52
<SECURITIES> 1,474,104
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,481,863
<PP&E> 78
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,481,962
<CURRENT-LIABILITIES> 1,368,370
<BONDS> 0
0
0
<COMMON> 133,094
<OTHER-SE> (19,502)
<TOTAL-LIABILITY-AND-EQUITY> 113,591
<SALES> 0
<TOTAL-REVENUES> 22,291
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 561
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,865
<INCOME-PRETAX> 4,864
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,864
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,864
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.37
</TABLE>
