<PAGE>
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-13447
ANNALY MORTGAGE MANAGEMENT, INC.
(Exact name of Registrant as specified in its Charter)
MARYLAND 22-3479661
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 at November 10, 2000
Common Stock, $.01 par value 14,408,659
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC.
FORM 10-Q
INDEX
<TABLE>
<S> <C>
Item 1. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets - September 30, 2000 (Unaudited) and December 31, 1999 1
Statements of Operations (Unaudited) for the quarters and nine months ended
September 30, 2000 and 1999 2
Statement of Stockholders' Equity (Unaudited) for the nine months ended
September 30, 2000 3
Statements of Cash Flows (Unaudited) for the quarters and nine months ended
September 30, 2000 and 1999 4
Notes to Financial Statements (Unaudited) 5-9
Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations 10-22
Item 3. Quantitative and Qualitative Disclosure about Market Risk 23-24
PART II. OTHER INFORMATION 25
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES
</TABLE>
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 112,896 $ 71,918
Mortgage-Backed Securities, at fair value 1,664,136,333 1,437,792,631
Receivable for Mortgage-Backed Securities sold 94,931,243 46,402,360
Accrued interest receivable 10,066,568 6,857,683
Other assets 167,108 197,896
-------------- --------------
Total assets $1,769,414,148 $1,491,322,488
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements $1,530,945,500 $1,338,295,750
Payable for Mortgage-Backed Securities purchased 107,749,812 38,154,012
Accrued interest payable 8,078,937 6,682,687
Dividends payable 3,574,859 4,753,461
Accounts payable 357,693 164,100
-------------- --------------
Total liabilities 1,650,706,801 1,388,050,010
-------------- --------------
Stockholders' Equity:
Common stock: par value $.01 per share; 100,000,000
Authorized, 14,299,433 and 13,581,316 shares issued
and outstanding, respectively 142,994 135,813
Additional paid-in capital 146,069,666 140,262,657
Accumulated other comprehensive loss (27,739,094) (37,568,510)
Retained earnings 233,781 442,518
-------------- --------------
Total stockholders' equity 118,707,347 103,272,478
-------------- --------------
Total liabilities and stockholders' equity $1,769,414,148 $1,491,322,488
============== ==============
</TABLE>
See notes to financial statements
1
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE NINE FOR THE NINE
QUARTER ENDED QUARTER ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Mortgage-Backed Securities $28,236,577 $22,152,280 $78,584,509 $ 66,432,013
Other interest income 2,548 8,992 5,918 9,130
----------- ----------- ----------- ------------
Total interest income 28,239,125 22,161,272 78,590,427 66,441,143
INTEREST EXPENSE:
Repurchase agreements 24,779,096 17,232,085 65,525,066 51,248,950
----------- ----------- ----------- ------------
NET INTEREST INCOME 3,460,029 4,929,187 13,065,361 15,192,193
GAIN ON SALE OF MORTGAGE-BACKED
SECURITIES
872,949 97,656 1,044,576 188,069
GENERAL AND ADMINISTRATIVE
EXPENSES
526,881 513,599 1,616,522 1,684,613
----------- ----------- ----------- ------------
NET INCOME 3,806,097 4,513,244 12,493,415 13,695,649
----------- ----------- ----------- ------------
OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on available-
for-sale securities 8,141,933 (4,249,848) 10,873,992 (17,183,488)
Less: reclassification adjustment
for net gains included in net income (872,949) (97,656) (1,044,576) (188,069)
----------- ----------- ----------- ------------
Other comprehensive gain (loss) 7,268,984 (4,347,504) 9,829,416 (17,371,557)
----------- ----------- ----------- ------------
COMPREHENSIVE INCOME $11,075,081 $165,740 $22,322,831 ($3,675,908)
=========== =========== =========== ============
NET INCOME PER SHARE:
Basic $0.27 $0.35 $0.90 $1.08
=========== =========== =========== ============
Diluted $0.26 $0.35 $0.87 $1.05
=========== =========== =========== ============
AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 14,238,680 12,745,416 13,980,602 12,721,670
=========== =========== =========== ============
Diluted 14,529,142 13,025,096 14,274,552 13,004,490
=========== =========== =========== ============
</TABLE>
See notes to financial statements
2
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON ADDITIONAL
STOCK PAID-IN COMPREHENSIVE RETAINED
PAR VALUE CAPITAL INCOME EARNINGS
--------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 $135,813 $140,262,657 $ 442,518
Net Income $4,848,362 4,848,362
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 3,255,286
----------
Comprehensive income $8,103,648
==========
Exercise of stock options 346 138,150
Proceeds from direct purchase 2,838 2,313,779
Dividends declared for the quarter
ended March 31, 2000,
$0.35 per average share (4,864,891)
-------- ------------ -----------
BALANCE, MARCH 31, 2000 138,997 142,714,586 425,989
Net Income $3,838,956 3,838,956
Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment (694,854)
----------
Comprehensive income $3,144,102
==========
Exercise of stock options 10 8,115
Proceeds from direct purchase 3,073 2,580,400
Dividends declared for the quarter
ended June 30, 2000,
$0.30 per average share (4,262,402)
-------- ------------ -----------
BALANCE, JUNE 30, 2000 142,080 145,303,101 2,543
Net Income $3,806,097 3,806,097
Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment 7,268,984
-----------
Comprehensive income $11,075,081
===========
Proceeds from direct purchase 914 766,565
Dividends declared for the quarter
ended September 30, 2000,
$0.25 per average share (3,574,859)
-------- ------------ -----------
BALANCE, SEPTEMBER 30, 2000 $142,994 $146,069,666 $ 233,781
======== ============ ===========
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gains arising
during the period $10,873,992
Less: reclassification adjustment for
gains included in net income (1,044,576)
-----------
Net unrealized gains on securities $ 9,829,416
===========
<CAPTION>
OTHER
COMPREHENSIVE
INCOME TOTAL
-------------- ------------
BALANCE, DECEMBER 31, 1999 ($37,568,510) $103,272,478
Net Income
Other comprehensive income:
Unrealized net gains on securities,
net of reclassification adjustment 3,255,286
Comprehensive income 8,103,648
Exercise of stock options 138,496
Proceeds from direct purchase 2,316,617
Dividends declared for the quarter
ended March 31, 2000,
$0.35 per average share (4,864,891)
------------ ------------
BALANCE, MARCH 31, 2000 (34,313,224) 108,966,348
Net Income
Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment (694,854)
Comprehensive income 3,144,102
Exercise of stock options 8,125
Proceeds from direct purchase 2,583,473
Dividends declared for the quarter
ended June 30, 2000,
$0.30 per average share (4,262,402)
------------ ------------
BALANCE, JUNE 30, 2000 (35,008,078) 110,439,646
Net Income
Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment 7,268,984
Comprehensive income 11,075,081
Proceeds from direct purchase 767,479
Dividends declared for the quarter
ended September 30, 2000,
$0.25 per average share (3,574,859)
------------- ------------
BALANCE, SEPTEMBER 30, 2000 ($27,739,094) $118,707,347
============= =============
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gains arising
during the period
Less: reclassification adjustment for
gains included in net income
Net unrealized gains on securities
</TABLE>
See notes to financial statements
3
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE QUARTER FOR THE NINE FOR THE NINE
ENDED ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,806,097 $ 4,513,244 $ 12,493,415 $ 13,695,649
Adjustments to reconcile net income to net cash
Provided by operating activities:
Amortization of mortgage premiums and
discounts, net 826,937 1,271,863 1,821,548 5,322,779
Gain on sale of mortgage-backed securities (872,949) (97,656) (1,044,576) (188,069)
Decrease (increase) in accrued interest receivable (3,167,957) 671,840 (3,208,885) 51,518
Decrease (increase) in other assets 80,042 94,603 30,788 (96,348)
Increase (decrease) in accrued interest payable 1,960,976 (1,790,341) 1,396,250 1,924,854
Increase in accounts payable 86,367 54,704 193,594 345,796
---------------- ---------------- --------------- ---------------
Net cash provided by operating activities 2,719,513 4,718,257 11,682,134 21,056,179
---------------- ---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (398,401,549) (89,718,550) (572,513,360) (446,469,606)
Proceeds from sale of Mortgage-Backed Securities 174,766,165 65,334,991 263,426,063 113,547,357
Principal payments of Mortgage-Backed
Securities 43,138,679 81,208,078 112,862,956 317,013,503
---------------- ---------------- --------------- ---------------
Net cash provided (used) in investing
activities (180,496,705) 56,824,519 (196,224,341) (15,908,746)
---------------- ---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 3,505,042,341 3,183,769,500 10,021,252,841 8,455,952,500
Principal payments on repurchase agreements (3,323,778,841) (3,244,747,500) (9,828,603,091) (8,452,700,500)
Proceeds from exercise of stock options 146,621 196,496
Proceeds from dividend reinvestment and share
purchase 767,479 3,904,065 5,667,569 3,904,065
Dividends paid (4,262,403) (4,444,142) (13,880,755) (12,491,913)
---------------- ---------------- --------------- ---------------
Net cash provided (used) by financing
activities 177,768,576 (61,518,077) 184,583,185 (5,139,352)
---------------- ---------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (8,616) 24,699 40,978 8,081
Cash and cash equivalents, beginning of period 121,512 52,402 71,918 69,020
---------------- ---------------- --------------- ---------------
Cash and cash equivalents, end of period $ 112,896 $ 77,101 $ 112,896 $ 77,101
================ ================ =============== ===============
Supplemental disclosure of cash flow Information:
Interest paid $22,818,120 $19,022,426 $64,128,816 $49,324,096
================ ================ =============== ===============
Noncash financing activities:
Net change in unrealized losses on available-for-
sale securities $7,268,984 ($4,347,504) $9,829,416 ($17,371,557)
================ ================ =============== ===============
Dividends declared, not yet paid $3,574,858 $4,587,243 $3,574,858 $4,587,243
================ ================ =============== ===============
</TABLE>
See notes to financial statements
4
<PAGE>
ANNALY MORTGAGE MANAGEMENT, INC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Annaly Mortgage Management, Inc. (the "Company") was incorporated in
Maryland on November 25, 1996. The Company commenced its operations of
purchasing and managing 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 three and six month periods 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, 1999. 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 include cash on
hand and money market funds. The carrying amounts of cash equivalents
approximate 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 nine months ended September 30, 2000 and the year ended
December 31, 1999.
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.
CREDIT RISK - At September 30, 2000 and December 31, 1999, 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 September 30, 2000 and December 31, 1999, all of the Company's
Mortgage-Backed Securities have a "AAA" rating or an implied a "AAA" rating.
5
<PAGE>
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.
2. MORTGAGE-BACKED SECURITIES
The following table pertains to the Company's Mortgage-Backed
Securities classified as available-for-sale as of September 30, 2000, which are
carried at their fair value:
<TABLE>
<CAPTION>
FEDERAL HOME FEDERAL NATIONAL GOVERNMENTAL TOTAL
LOAN MORTGAGE MORTGAGE NATIONAL MORTGAGE MORTGAGE-BACKED
CORPORATION ASSOCIATION ASSOCIATION SECURITIES
------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities, gross $805,150,364 $775,904,812 $88,941,552 $1,669,996,728
Unamortized discount (207,389) (816,237) (1,023,626)
Unamortized premium 10,586,388 10,717,877 1,598,059 22,902,324
------------ ------------ ----------- --------------
Amortized cost 815,529,363 785,806,452 90,539,611 1,691,875,426
Gross unrealized gains 1,673,879 246,521 1,920,400
Gross unrealized losses (9,328,072) (17,862,663) (2,468,758) (29,659,493)
------------ ------------ ----------- --------------
Estimated fair value $807,875,170 $768,190,310 $88,070,853 $1,664,136,333
============ ============ =========== ==============
</TABLE>
The following table pertains to the Company's Mortgage-Backed
Securities classified as available-for-sale as of December 31, 1999, which are
carried at their fair value:
<TABLE>
<CAPTION>
FEDERAL HOME FEDERAL NATIONAL GOVERNMENTAL TOTAL
LOAN MORTGAGE MORTGAGE NATIONAL MORTGAGE MORTGAGE-BACKED
CORPORATION ASSOCIATION ASSOCIATION SECURITIES
------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities, gross $454,711,462 $900,782,563 $97,423,038 $1,452,917,063
Unamortized discount (171,241) (964,133) (1,135,374)
Unamortized premium 8,454,547 13,359,448 1,765,457 23,579,452
------------ ------------ ----------- --------------
Amortized cost 462,994,768 913,177,878 99,188,495 1,475,361,141
Gross unrealized gains 359,888 1,171,250 1,531,138
Gross unrealized losses (12,091,145) (22,966,353) (4,042,150) (39,099,648)
------------ ------------ ----------- --------------
Estimated fair value $451,263,511 $891,382,775 $95,146,345 $1,437,792,631
============ ============ =========== ==============
</TABLE>
6
<PAGE>
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 September 30, 2000, and December 31, 1999, the
weighted average lifetime cap was 10.8% and 10.6% respectively.
During the nine months ended September 30, 2000 and 1999, the Company's
realized $1,044,576 and $97,656 in gains from sales of Mortgage-Backed
Securities, respectively. During the year ended December 31, 1999, the Company
realized $563,259 in gains for sales of Mortgage-Backed Securities. There were
no losses on sales of Mortgage-Backed Securities for the nine months ended
September 30, 2000. Losses totaled $108,477 for the year ended December 31,
1999.
3. REPURCHASE AGREEMENTS
As of September 30, 2000, the Company had outstanding $1,530,945,500 of
repurchase agreements with a weighted average borrowing rate of 6.57%. The
weighted average remaining maturity was 18 days and a weighted average original
term was 46 days. As of December 31, 1999, the Company had outstanding
$1,338,295,750 of repurchase agreements with a weighted average borrowing rate
of 5.26%. The weighted average remaining maturity was 20 days.
At September 30, 2000 and December 31, 1999, the repurchase agreements
had the following remaining maturities:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
Within 30 days $1,247,209,500 $1,197,416,250
30 to 59 days 216,041,000 25,767,000
60 to 89 days 67,695,000
90 to 119 days 115,112,500
-------------- --------------
$1,530,945,500 $1,338,295,750
============== ==============
4. COMMON STOCK
Options were exercised and the share purchase and dividend reinvestment
plan was in effect during the nine month period ending September 30, 2000
increasing the total number of shares outstanding to 14,299,433. The number of
stock options exercised was 35,624, with an aggregate purchase price of
$146,621. The number of shares issued in the direct purchase plan was 682,493
with an aggregate purchase price of $5,667,569. During the year ended December
31, 1999, 57,204 options were exercised at an aggregate price of $233,276. Also,
875,688 shares were purchased in direct offering, total $8,170,602.
During the nine months ending September 30, 2000, the Company declared
dividends to shareholders totaling $12,702,152 or $0.90 per weighted average
share, of which $3,574,858 was paid on October 30, 2000. During the Company's
year ending December 31, 1999, the Company declared dividends to shareholders
totaling $17,977,754, or $1.39 per weighted average share, of which $13,224,293
was paid during the period and $4,753,461 was paid on January 27, 2000. For
Federal income tax purposes dividends paid for the year ended December 31, 1999
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.
7
<PAGE>
For the quarter ended September 30, 2000 the reconciliation is as
follows:
FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Net income $3,806,097
----------
Basic Earnings Per Share 3,806,097 14,238,680 $0.27
=====
Effect of dilutive securities:
Dilutive stock options 290,462
---------- ---------- -----
Dilutive Earnings Per Share $3,806,097 14,529,142 $0.26
========== ========== =====
For the nine months ended September 30, 2000 the reconciliation is as
follows:
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Net income $12,493,415
-----------
Basic Earnings Per Share 12,493,415 13,980,602 $0.90
=====
Effect of dilutive securities:
Dilutive stock options 293,950
----------- ---------- -----
Dilutive Earnings Per Share $ 8,687,318 14,274,552 $0.87
=========== ========== =====
Options to purchase 346,756 shares were outstanding during the quarter
ended September 30, 2000 and dilutive, as the exercise price (between $4.00 and
$8.125) was less than the average stock price for the three month period for the
Company of $8.62. Options to purchase 452,676 shares of stock were outstanding
during the period and are not considered dilutive. The exercise price (between
$8.94 and $11.25) was greater than the average stock price for the three month
period of $8.62.
Options to purchase 346,756 shares were outstanding during the nine
months ended September 30, 2000 and dilutive, as the exercise price (between
$4.00 and $8.125) was less than the average stock price for the nine month
period for the Company of $8.51. Options to purchase 452,676 shares of stock
were outstanding during the period and are not considered dilutive. The exercise
price (between $8.63 and $11.25) was greater than the average stock price for
the three month period of $8.51.
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 September 30, 2000 and December 31, 1999 held securities
classified as available-for-sale. At September 30, 2000 and December 31, 1999,
the net unrealized losses totaled $27,739,094 and $37,568,510, respectively.
8
<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 minimum lease payments are as follows:
2001 $ 97,868
2002 100,515
2003 110,261
2004 through 2007 472,145
--------
Total lease obligation $780,789
========
8. RELATED PARTY TRANSACTIONS
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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a real estate investment trust that owns and manages a portfolio
of mortgage-backed securities. Our principal business objective is to generate
net income for distribution to our stockholders from the spread between the
interest income on our mortgage-backed securities and the costs of borrowing to
finance our acquisition of mortgage-backed securities. We commenced operations
on February 18, 1997 upon the consummation of a private placement. We completed
our initial public offering on October 14, 1997
RESULTS OF OPERATIONS: FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
NET INCOME SUMMARY
For the quarter ended September 30, 2000, our GAAP net income was $3.8
million, or $0.27 basic earnings per average share, as compared to $4.5 million,
or $.35 basic earnings per average share, for the quarter ended September 30,
1999. We compute our GAAP net income per share by dividing net income by the
weighted average number of shares of outstanding common stock during the period,
which was 14,238,680 for the quarter ended September 30, 2000 and 12,745,416 for
the quarter ended September 30, 1999. Dividends per weighted average number of
shares outstanding for the quarter ended September 30, 2000 was $0.28 per share,
or $3.6 million in total. Dividends per weighted average number of shares
outstanding for the quarter ended September 30, 1999 was $.35 per share, or $4.6
million in total. Our annualized return on average equity was 13.29% for the
quarter ended September 30, 2000 and 15.93% for the quarter ended September 30,
1999.
For the nine months ended September 30, 2000, our GAAP net income was
$12.5 million, or $0.90 basic earnings per average share, as compared to $13.7
million, or $1.08 basic earnings per average share, for the nine months ended
September 30, 1999. Weighted average number of shares of outstanding common
stock was 13,980,602 for the nine months ended September 30, 2000 and 12,721,670
for the nine months ended September 30, 1999. Our annualized return on average
equity was 14.91% for the nine months ended September 30, 2000 and 14.67% for
the nine months ended September 30, 1999.
NET INCOME SUMMARY
------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
QUARTER ENDED QUARTER ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest Income $28,239 $22,161 $78,590 $66,441
Interest Expense 24,779 17,232 65,525 51,249
---------- ---------- ---------- ----------
Net Interest Income 3,460 4,929 13,065 15,192
Gain on Sale of Mortgage-Backed Securities 873 98 1,045 188
General and Administrative Expenses 527 513 1,617 1,685
---------- ---------- ---------- ----------
Net Income $3,806 $4,513 $12,493 $13,695
========== ========== ========== ==========
Average Number of Basic Shares Outstanding 14,238,680 12,745,416 13,980,602 12,721,670
Average Number of Diluted Shares Outstanding 14,529,142 13,025,096 14,274,552 13,004,490
Basic Net Income Per Share $0.27 $0.35 $0.90 $1.08
Diluted Net Income Per Share $0.26 $0.35 $0.87 $1.05
Average Total Assets $1,620,094 $1,427,502 $1,569,205 $1,482,149
Average Equity $114,573 $113,333 $111,755 $124,428
Annualized Return on Average Assets 0.94% 1.26% 1.06% 1.26%
Annualized Return on Average Equity 13.29% 15.93% 14.91% 14.67%
</TABLE>
10
<PAGE>
TAXABLE INCOME AND GAAP INCOME
For the quarter ended September 30, 2000 and 1999, our income as
calculated for tax purposes (taxable income) differed from income as calculated
according to GAAP (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. Our taxable income for the quarter
ended September 30, 2000 was approximately $3.4 million, or $0.24 per share, as
compared to taxable income of $4.3 million, or $0.34 per share, for the quarter
ended September 30, 1999. Our taxable income for the nine months ended September
30, 2000 was approximately $11.5 million, or $0.79 per share, as compared to
taxable income of $14.3 million, or $1.12 per share, for the nine months ended
September 30, 1999.
The distinction between taxable income and GAAP income is important to
our stockholders because dividends are declared on the basis of taxable income.
While we do not pay taxes so long as we satisfy the requirements for exemption
from taxation pursuant to the REIT provisions of the Internal Revenue Code, each
year we complete a corporate tax form on which taxable income is calculated as
if we were to be taxed. This taxable income level determines the amount of
dividends we can pay out over time. The table below presents the major
differences between our GAAP and taxable income for the quarters ended September
30, 2000, June 30, 2000, and March 31, 2000, the year ended December 31, 1999,
and the four quarters in 1999
TAXABLE INCOME
--------------
<TABLE>
<CAPTION>
Taxable General Taxable Taxable Gain
& Mortgage on Sale of
GAAP Net Administrative Amortization Securities Taxable Net
Income Differences Differences Differences Income
------ ----------- ----------- ----------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the Quarter Ended
September 30, 2000 $3,806 $6 ($154) ($283) $3,375
For the Quarter Ended
June 30, 2000 $3,839 $1 ($195) ($79) $3,566
For the Quarter Ended
March 31, 2000 $4,848 $1 ($324) $2 $4,527
--------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1999 $18,139 $9 $814 ($525) $18,437
For the Quarter Ended
December 31, 1999 $4,444 $2 $21 ($288) $4,179
For the Quarter Ended
September 30, 1999 $4,513 $5 ($14) ($235) $4,269
For the Quarter Ended
June 30, 1999 $4,864 $2 $363 - $5,229
For the Quarter Ended
March 31, 1999 $4,318 - $444 ($2) $4,760
</TABLE>
INTEREST INCOME AND AVERAGE EARNING ASSET YIELD
We had average earning assets of $1.6 billion for the quarter ended
September 30, 2000 and $1.4 billion for the quarter ended September 30, 1999.
Our primary source of income for the quarters ended September 30, 2000 and 1999
was interest income. A portion of our income was generated by gains on the sales
of our mortgage-backed securities. Our interest income was $28.2 million for the
quarter ended September 30, 2000 and $22.2 million for the quarter ended
September 30, 1999. Our yield on average earning assets was 7.10% and 6.26% for
the same respective periods. Our average earning asset balance increased by
$174.0 million for the quarter ended September 30, 2000 as compared to the
quarter ended September 30, 1999. Interest income increased by $6.1 million for
the quarter ended September 30, 2000 over the quarter ended September 30, 1999,
due to the increase in both the yield and the average interest earning asset
balance. The yield increased as coupons repriced in the higher interest rate
environment and the CPR rate declined to 12% for the quarter ended September 30,
2000, as compared to 18% for the quarter ended September 30, 1999.
11
<PAGE>
We had average earning assets of $1.5 billion for the nine months ended
September 30, 2000 and 1999. Our interest income was $78.6 million for the nine
months ended September 30, 2000 and $66.4 million for the nine months ended
September 30, 1999. Our yield on average earning assets was 6.96% and 6.02% for
the same respective periods. Our average earning asset balance decreased by
$33.0 million for the nine months ended September 30, 2000 as compared to the
nine months ended September 30, 1999. Interest income increased by $12.4 million
for the nine months ended September 30, 2000 over the nine months ended
September 30, 1999, due to the decline in the portfolio CPR, an increase in the
coupons on adjustable rate securities, and an increase in the average interest
earning asset balance.
The table below shows our average balance of cash equivalents and
mortgage-backed securities, the yields we earned on each type of earning assets,
our yield on average earning assets and our interest income for the quarters
ended September 30, 2000, June 30, 2000, and March 31, 2000, the year ended
December 31, 1999, and the four quarters in 1999.
AVERAGE EARNING ASSET YIELD
---------------------------
<TABLE>
<CAPTION>
Yield on
Average Yield on Average Yield on
Average Mortgage- Average Average Mortgage- Average
Cash Backed Earning Cash Backed Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
----------- ---------- ------- ----------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter ended
Septembr 30, 2000 $188 $1,590,497 $1,590,685 5.43% 7.10% 7.10% $28,239
For the Quarter ended June 30, 2000 $243 $1,476,283 $1,476,526 3.29% 6.97% 6.97% $25,735
For the Quarter ended March 31, 2000 $226 $1,448,148 $1,448,374 1.79% 6.80% 6.80% $24,617
--------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 $221 $1,461,033 $1,461,254 4.10% 6.15% 6.15% $89,812
For the Quarter Ended
December 31, 1999 $2 $1,420,308 $1,420,310 4.05% 6.58% 6.58% $23,371
For the Quarter Ended
September 30, 1999 $877 $1,416,525 $1,417,404 4.10% 6.26% 6.25% $22,161
For the Quarter Ended June 30, 1999 $2 $1,496,793 $1,496,795 4.30% 5.95% 5.95% $22,265
For the Quarter Ended March 31, 1999 $2 $1,502,627 $1,502,629 4.01% 5.87% 5.87% $22,015
</TABLE>
The constant prepayment rate (or CPR) on our mortgage-backed securities
for the quarter ended September 30, 2000 was 12% and for the quarter ended
September 30, 1999 was 18%. CPR is an assumed rate of prepayment for our
mortgage-backed securities, expressed as an annual rate of prepayment relative
to the outstanding principal balance of our mortgage-backed securities. CPR does
not purport to be either a historical description of the prepayment experience
of our mortgage-backed securities or a prediction of the anticipated rate of
prepayment of our mortgage-backed securities.
Principal prepayments had a negative effect on our earning asset yield
for the quarters ended September 30, 2000 and 1999 because we adjust our rates
of premium amortization and discount accretion monthly based upon the effective
yield method, which takes into consideration changes in prepayment speeds.
INTEREST EXPENSE AND THE COST OF FUNDS
We anticipate that our largest expense will be the cost of borrowed
funds. We had average borrowed funds of $1.5 billion and total interest expense
of $24.8 million for the quarter ended September 30, 2000. We had average
borrowed funds of $1.3 billion and total interest expense of $17.2 million for
the quarter ended September 30, 1999. Our average cost of funds of 6.71% for the
quarter ended September 30, 2000 was 149 basis points greater than the 5.22%
cost of funds for the quarter ended September 30, 1999. The cost of funds rate
increased 29% and the average borrowed funds increased by $156.3 million for the
quarter ended September 30, 2000 when compared to the third quarter 1999;
consequently, interest expense increased by 44% because of the increased amount
of funding and the increase in current short-term market rates. With our current
asset/liability management strategy, changes in our cost of funds are expected
to be closely correlated with changes in short-term LIBOR, although we may
choose to extend the maturity of our liabilities at any time. Our average cost
of funds was 0.09% above one-month LIBOR for the quarter ended September 30,
2000 and 0.06% below average one-month LIBOR for the quarter ended September 30,
2000. We generally have structured our borrowings to adjust with one-month LIBOR
because we believe that one-month LIBOR may continue to be lower than six-month
LIBOR in the present interest rate environment. During the quarter ended
September 30, 2000, average one-month LIBOR, was 6.62%, which was 0.22% lower
than average six-month LIBOR, which was 6.84%. During the quarter ended
September 30, 1999, average one-month LIBOR, was 5.28%, 0.52% lower than average
six-month LIBOR, which was 5.80%.
12
<PAGE>
We had average borrowed funds of $1.4 billion and total interest
expense of $65.5 million for the nine months ended September 30, 2000. We had
average borrowed funds of $1.4 billion and total interest expense of $51.2
million for the nine months ended September 30, 1999. Our average cost of funds
of 6.29% for the nine months ended September 30, 2000 was 107 basis points
greater than the 5.02% cost of funds for the nine months ended September 30,
1999. The cost of funds rate increased 25% and the average funding balance
increased by $30.3 million for the nine months ended September 30, 2000 when
compared to the quarter ended September 30, 1999; consequently, interest expense
increased by 28%. The increase in interest expense for the nine month period is
not as dramatic as the increase for the third quarter because the change in rate
and average balance was greater in the third quarter of 2000.
The table below shows our average borrowed funds and average cost of
funds as compared to average one-month and average six-month LIBOR for the
quarters ended September 30, 2000, June 30, 2000, and March 31, 2000, the year
ended December 31, 1999 and the four quarters in 1999.
AVERAGE COST OF FUNDS
---------------------
<TABLE>
<CAPTION>
Average
One-Month Average Cost Average Cost
LIBOR of Funds of Funds
Relative to Relative to Relative to
Average Average Average Average Average Average Average
Borrowed Interest Cost of One-Month Six-Month Six-Month One-Month Six-Month
Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR
----- ------- ----- ----- ----- ----- ----- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
September 30, 2000 $1,477,112 $24,779 6.71% 6.62% 6.84% (0.22%) 0.09% (0.13%)
For the Quarter Ended
June 30, 2000 $1,360,419 $21,453 6.30% 6.46% 6.84% (0.38%) (0.16%) (0.54%)
For the Quarter Ended
March 31, 2000 $1,329,900 $19,293 5.80% 5.92% 6.32% (0.40%) (0.12%) (0.52%)
------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1999 $1,350,230 $69,846 5.17% 5.25% 5.53% (0.28%) (0.08%) (0.36%)
For the Quarter Ended
December 31, 1999 $1,324,326 $18,597 5.61% 5.78% 6.08% (0.30%) (0.17%) (0.47%)
For the Quarter Ended
September 30, 1999 $1,320,776 $17,232 5.22% 5.28% 5.80% (0.52%) (0.06%) (0.58%)
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%)
</TABLE>
NET INTEREST RATE AGREEMENT EXPENSE
We have not entered into any interest rate agreements to date. As part
of our asset/liability management process, we may enter into interest rate
agreements such as interest rate caps, floors or swaps. These agreements would
be entered into with the intent to reduce interest rate or prepayment risk and
would be designed to provide us income and capital appreciation in the event of
certain changes in interest rates. However, even after entering into these
agreements, we would still be exposed to interest rate and prepayment risks. We
review the need for interest rate agreements on a regular basis consistent with
our capital investment policy.
NET INTEREST INCOME
Our net interest income, which equals interest income less interest
expense, totaled $3.5 million for the quarter ended September 30, 2000 and $4.9
million for the quarter ended September 30, 1999. Our net interest income
decreased by 30% because of the increase in asset yields of 0.84% was not as
great as the increase of 1.49% in funding cost. Our net interest spread, which
equals the yield on our average assets for the period less the average cost of
funds for the period, was 0.39% for the quarter ended September 30, 2000 as
compared to 1.04% for the quarter ended September 30, 1999. This .65% decrease
in spread income is reflected in the $1.5 million decline in net interest
income. Net interest margin, which equals net interest income divided by average
total assets, was 0.85% on an annualized basis for the quarter ended September
30, 2000 and 1.38% for the quarter ended September 30, 1999. The principal
reason that net interest margin exceeded net interest spread is that average
interest earning assets exceeded average interest bearing liabilities. A portion
of our assets is funded with equity rather than borrowings. We did not have any
interest rate agreement expenses to date.
13
<PAGE>
Our net interest income totaled $13.1 million for the nine months ended
September 30, 2000 and $15.2 million for the nine months ended September 30,
1999. Our net interest income decreased because the increase in asset yields to
6.94% for the nine months ended September 30, 2000 was not as great as the
increase in funding cost. The cost of funds increased to 6.29% for the nine
months ended September 30, 2000 from 5.03% for the nine months ended September
30, 1999. Our net interest spread was 0.65% for the nine months ended September
30, 2000 as compared to 1.00% for the nine months ended September 30, 1999. This
35% decrease in spread income is reflected in the $1.5 million decline in net
interest income.
The table below shows our interest income by earning asset type,
average earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
quarters ended September 30, 2000, June 30, 2000, and March 31, 2000, the year
ended December 31, 1999, and the four quarters in 1999.
GAAP NET INTEREST INCOME
------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Amortized
Cost of Yield
Average Interest on Average
Mortgage- Income on Average Balance
Backed Mortgage- Average Total Interest of Average Net
Securities Backed Cash Interest Earning Repurchase Interest Cost of Interest
Held Securities Equivalents Income Assets Agreements Expense Funds Income
---------- ---------- ----------- -------- -------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
For the Quarter
Ended September
30, 2000 $1,590,497 $28,237 $188 $28,239 7.10% $1,447,112 $24,779 6.71% $3,460
For the Quarter
Ended June 30, 2000 $1,476,283 $25,732 $243 $25,735 6.97% $1,360,419 $21,453 6.30% $4,282
For the Quarter
Ended March 31,
2000 $1,448,148 $24,616 $226 $24,617 6.80% $1,329,900 $19,293 5.80% $4,848
----------------------------------------------------------------------------------------------------------------------
For the Year
Ended December 31,
1999 $1,461,033 $89,801 $221 $89,812 6.15% $1,350,230 $69,846 5.17% $19,966
For the Quarter
Ended December 31,
1999 $1,420,308 $23,372 $2 $23,372 6.58% $1,324,326 $18,597 5.61% $4,774
For the Quarter
Ended September
30, 1999 $1,416,525 $22,151 $877 $22,160 6.26% $1,320,776 $17,232 5.22% $4,929
For the Quarter
Ended June 30,
1999 $1,493,532 $22,265 $2 $22,265 5.95% $1,374,154 $16,865 4.91% $5,399
For the Quarter
Ended March 31,
1999 $1,502,629 $22,015 $2 $22,015 5.87% $1,381,663 $17,151 4.97% $4,864
</TABLE>
GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES
For the quarter ended September 30, 2000, we sold mortgage-backed
securities with an aggregate historical amortized cost of $173.9 million for an
aggregate gain of $872,949. During the quarter ended September 30, 2000, the
Company was able to take advantage of the appreciation in assets. As a result,
gains were taken on the liquidation of assets. For the quarter ended September
30, 1999, we sold mortgage-backed securities with an aggregate historical
amortized cost of $65.2 million for an aggregate gain of $97,656. During the
quarter ended September 30, 2000, Annaly was able to take advantage of the
change in the near term interest outlook by re-positioning the portfolio to
generate more sustainable earnings going forward.
For the nine months ended September 30, 2000, we sold mortgage-backed
securities with an aggregate historical amortized cost of $262.4 million for an
aggregate gain of $1.0 million. For the nine months ended September 30, 1999, we
sold mortgage-backed securities with an aggregate historical amortized cost of
$113.3 million for an aggregate gain of $188,069. Obviously, there was a greater
dependence on gains for the nine months ended September 30, 2000 than the nine
months ended September 30, 1999.
14
<PAGE>
The difference between the sale price and the historical amortized
cost of our mortgage-backed securities is a realized gain and increases income
accordingly. We do not expect to sell assets on a frequent basis, but may from
time to time sell existing assets to move into new assets, which our management
believes might have higher risk-adjusted returns, or to manage our balance sheet
as part of our asset/liability management strategy.
CREDIT LOSSES
We have not experienced credit losses on our mortgage-backed securities
to date. We have limited our exposure to credit losses on our mortgage-backed
securities by purchasing only securities, issued or guaranteed by FNMA, FHLMC or
GNMA, which, although not rated, carry an implied "AAA" rating.
GENERAL AND ADMINISTRATIVE EXPENSES
G&A expenses were $526,881 for the quarter ended September 30, 2000 and
$513,599 for the quarter ended September 30, 1999. G&A expenses as a percentage
of average assets was 0.13% and 0.14% for the quarters ended September 30, 2000
and 1999, respectively. The Company is internally managed and continues to be a
low cost provider. G&A expenses decreased by $13,282 for the quarter ended
September 30, 2000, when compared to the quarter ended September 30, 1999.
G&A expenses were $1.6 million and $1.7 million for the nine months
ended September 30, 2000 and 1999, respectively. G&A expenses as a percentage of
average assets were 0.14% and 0.15% for the nine months ended September 30, 2000
and 1999, respectively.
GAAP G&A EXPENSES AND OPERATING EXPENSE RATIOS
----------------------------------------------
<TABLE>
<CAPTION>
Total G&A Total G&A
Expenses/Average Expenses/Average
Total G&A Expenses Assets (annualized) Equity (annualized)
------------------ ------------------- -------------------
<S> <C> <C> <C>
For the Quarter Ended September 30, 2000 $527 0.13% 1.84%
For the Quarter Ended June 30, 2000 $507 0.15% 1.85%
For the Quarter Ended March 31, 2000 $582 0.16% 2.19%
-------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 $2,281 0.15% 1.94%
For the Quarter Ended December 31, 1999 $596 0.16% 2.21%
For the Quarter Ended September 30, 1999 $514 0.14% 1.81%
For the Quarter Ended June 30, 1999 $561 0.15% 1.44%
For the Quarter Ended March 31, 1999 $610 0.16% 1.93%
</TABLE>
NET INCOME AND RETURN ON AVERAGE EQUITY
Our net income was $3.8 million for the quarter ended September 30,
2000 and $4.5 million for the quarter ended September 30, 1999. Our return on
average equity was 13.29% for the quarter ended September 30, 2000 and 15.93%
for the quarter ended September 30, 1999. The decrease in net income is a direct
result of a decrease in spread income. As previously mentioned, the substantial
increases in funding cost were only partially offset by an increase in the yield
on assets.
Our net income was $12.5 million for the nine months ended September
30, 2000 and $13.7 million for the nine months ended September 30, 1999. Our
return on average equity was 14.91% for the nine months ended September 30, 2000
and 14.67% for the nine months ended September 30, 1999.
The table below shows our net interest income, gain on sale of
mortgage-backed securities and G&A expenses each as a percentage of average
equity, and the return on average equity for the quarters ended September 30,
2000, June 30, 2000, and March 31, 2000, the year ended December 31, 1999, and
for the four quarters in 1999.
15
<PAGE>
COMPONENTS OF RETURN ON AVERAGE EQUITY
--------------------------------------
(RATIOS FOR ALL QUARTERS ARE ANNUALIZED)
<TABLE>
<CAPTION>
Gain on Sale of
Net Interest Mortgage-Backed G&A Return on
Income/Average Securities/Average Expenses/Average Average
Equity Equity Equity Equity
-------------- ------------------ ---------------- ---------
<S> <C> <C> <C> <C>
For the Quarter Ended September 30, 2000 12.08% 3.05% 1.84% 13.29%
For the Quarter Ended June 30, 2000 15.61% 0.24% 1.85% 14.00%
For the Quarter Ended March 31, 2000 20.07% 0.40% 2.19% 18.28%
----------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999 16.97% 0.38% 1.94% 15.41%
For the Quarter Ended December 31, 1999 17.65% 0.99% 2.21% 16.43%
For the Quarter Ended September 30, 1999 17.40% 0.34% 1.81% 15.93%
For the Quarter Ended June 30, 1999 17.99% 0.08% 1.87% 16.20%
For the Quarter Ended March 31, 1999 15.43% 0.20% 1.93% 13.70%
</TABLE>
DIVIDENDS AND TAXABLE INCOME
We have elected to be taxed as a REIT under the Internal Revenue Code.
Accordingly, we have distributed substantially all of our taxable income for
each year since inception to our stockholders, including income resulting from
gains on sales of our mortgage-backed securities. From inception through
September 30, 2000, approximate taxable income exceeded dividend declarations by
$464,000.
DIVIDEND SUMMARY
----------------
<TABLE>
<CAPTION>
Weighted
Average
Taxable Common Taxable Net Dividends Dividend Cumulative
Net Shares Income Per Declared Total Pay-out Undistributed
Income Outstanding Share Per Share Dividends Ratio Taxable Income
------ ----------- ----------- --------- --------- -------- --------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
For the Quarter Ended
September 30, 2000 $3,375 14,238,680 $0.24 $0.25 $3,575 105.9% $464
For the Quarter Ended
June 30, 2000 $3,3566 14,039,741 $0.25 $0.30 $4,262 119.5% $664
For the Quarter Ended
March 31, 2000 $4,527 13,660,539 $0.33 $0.35 $4,864 107.4% $1,360
--------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 1999 $18,437 12,889,510 $1.43 $1.39 $17,978 97.5% $1,697
For the Quarter Ended
December 31, 1999 $4,179 13,383,426 $0.31 $0.35 $4,754 113.74% $1,697
For the Quarter Ended
September 30, 1999 $4,269 12,745,416 $0.34 $0.35 $4,588 91.1% $2,271
For the Quarter Ended
June 30, 1999 $5,229 12,697,338 $0.41 $0.35 $4,444 87.1% $2,589
For the Quarter Ended
March 31, 1999 $4,760 12,657,884 $0.37 $0.33 $4,190 94.9% $1,804
</TABLE>
16
<PAGE>
FINANCIAL CONDITION
MORTGAGE-BACKED SECURITIES
All of our mortgage-backed securities at September 30, 2000 were
adjustable-rate or fixed-rate mortgage-backed securities backed by single-family
mortgage loans. All of the mortgage assets underlying these mortgage-backed
securities were secured with a first lien position on the underlying
single-family properties. All our mortgage-backed securities were FHLMC, FNMA or
GNMA mortgage pass-through certificates or CMOs, which carry an implied "AAA"
rating. We mark-to-market all of our earning assets at liquidation value.
We accrete discount balances as an increase in interest income over the
life of discount mortgage-backed securities and we amortize premium balances as
a decrease in interest income over the life of premium mortgage-backed
securities. At September 30, 2000 and 1999, we had on our balance sheet a total
of $1.0 million and $1.1 million respectively, of unamortized discount (which is
the difference between the remaining principal value and current historical
amortized cost of our mortgage-backed securities acquired at a price below
principal value) and a total of $22.9 million and $24.1 million, respectively,
of unamortized premium (which is the difference between the remaining principal
value and the current historical amortized cost of our mortgage-backed
securities acquired at a price above principal value).
We received mortgage principal repayments of $43.1 million for the
quarter ended September 30, 2000 and $81.2 million for the quarter ended
September 30, 1999. Given our current portfolio composition, if mortgage
principal prepayment rates were to increase over the life of our mortgage-backed
securities, all other factors being equal, our net interest income would
decrease during the life of these mortgage-backed securities as we would be
required to amortize our net premium balance into income over a shorter time
period. Similarly, if mortgage principal prepayment rates were to decrease over
the life of our mortgage-backed securities, all other factors being equal, our
net interest income would increase during the life of these mortgage-backed
securities, as we would amortize our net premium balance over a longer time
period.
The table below summarizes our mortgage-backed securities at September
30, 2000, June 30, 2000, March 31, 2000, December 31, 1999, September 30, 1999,
June 30, 1999, and March 31, 1999.
MORTGAGE-BACKED SECURITIES
--------------------------
<TABLE>
<CAPTION>
Estimated
Amortized Fair Weighted
Net Amortized Cost/Principal Estimated Value/Principal Average
Principal Value Premium Cost Value Fair Value Value Yield
--------------- ------- --------- -------------- ---------- --------------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
At September 30, 2000 $1,669,997 $21,878 $1,691,875 101.31% $1,664,136 99.65% 7.23%
At June 30, 2000 $1,464,968 $20,893 $1,485,861 101.43% $1,450,853 99.04% 7.32%
At March 31, 2000 $1,448,875 $21,826 $1,470,701 101.51% $1,436,389 99.14% 7.02%
-----------------------------------------------------------------------------------------------------------------------
At December 31, 1999 $1,452,917 $22,444 $1,475,361 101.54% $1,437,793 98.96% 6.77%
At September 30, 1999 $1,402,565 $22,981 $1,425,546 101.64% $1,401,770 99.94% 6.41%
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%
</TABLE>
The tables below set forth certain characteristics of our
mortgage-backed securities. The index level for adjustable-rate mortgage-backed
securities is the weighted average rate of the various short-term interest rate
indices, which determine the coupon rate.
17
<PAGE>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
<TABLE>
<CAPTION>
Weighted Principal Value
Weighted Average Weighted at Period End
Average Weighted Weighted Term to Weighted Average as % of Total
Principal Coupon Average Average Net Next Average Asset Mortgage-Backed
Value Rate Index Level Margin Adjustment Lifetime Cap Yield Securities
--------- ------- ----------- ----------- ---------- ------------ -------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At September 30, 2000 $1,203,268 7.64% 5.93% 1.71% 13 months 11.01% 7.36% 72.05%
At June 30, 2000 $986,046 7.53% 6.02% 1.51% 9 months 10.41% 7.46% 67.31%
At March 31, 2000 $957,419 7.18% 5.63% 1.55% 10 months 10.59% 7.006% 66.08%
-----------------------------------------------------------------------------------------------------------------------------
At December 31, 1999 $951,839 7.33% 5.84% 1.49% 11 months 10.30% 7.64% 65.51%
At September 30, 1999 $889,293 6.76% 5.13% 1.63% 9 months 10.82% 6.14% 63.40%
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%
</TABLE>
FIXED-RATE MORTGAGE-BACKED SECURITY CHARACTERISTICS
---------------------------------------------------
<TABLE>
<CAPTION>
Principal Value
Weighted Weighted as % of Total
Average Average Mortgage-Backed
Principal Value Coupon Rate Asset Yield Securities
--------------- ----------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
At September 30, 2000 $466,729 6.58% 6.92% 27.95%
At June 30, 2000 $478,922 6.58% 7.05% 32.69%
At March 31, 2000 $491,456 6.58% 7.04% 33.92%
---------------------------------------------------------------------------------------------
At December 31, 1999 $501,078 6.58% 7.01% 34.49%
At September 30, 1999 $513,272 6.58% 6.91% 36.60%
At June 30, 1999 $526,988 6.58% 6.88% 35.88%
At March 31, 1999 $490,583 6.54% 6.37% 32.12%
</TABLE>
At September 30, 2000 and December 31, 1999 we held mortgage-backed
securities with coupons linked to the one-year, three-year, and five-year
Treasury indices, one-month LIBOR and the six-month CD rate.
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
SEPTEMBER 30, 2000
------------------
<TABLE>
<CAPTION>
3-Year
One-Month Six-Month 1-Year Treasury 5-Year
LIBOR CD Rate Treasury Index Index Treasury Index
----- ------- -------------- ----- --------------
<S> <C> <C> <C> <C> <C>
Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo. 60 mo.
Weighted Average Term to Next Adjustment 1 mo. 3 mo. 23 mo. 20 mo. 31 mo.
Weighted Average Annual Period Cap None 1.00% 1.97% 2% 1.34%
Weighted Average Lifetime Cap at
September 30, 2000 9.13% 11.36% 12.39% 13.23% 11.74%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
September 30, 2000 30.98% 1.52% 35.27% 3.78% 0.50%
</TABLE>
18
<PAGE>
ADJUSTABLE-RATE MORTGAGE-BACKED SECURITIES BY INDEX
---------------------------------------------------
DECEMBER 31, 1999
-----------------
<TABLE>
<CAPTION>
1-Year 3-Year
One-Month Six-Month Treasury Treasury 5-Year
LIBOR CD Rate Index Index Treasury Index
----- ------- ----- ----- --------------
<S> <C> <C> <C> <C> <C>
Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo. 60 mo.
Weighted Average Term to Next Adjustment 1 mo. 2 mo. 25 mo. 16 mo. 36 mo.
Weighted Average Annual Period Cap None 1.00% 1.93% 1.57% 1.35%
Weighted Average Lifetime Cap at
December 31, 1999 9.20% 11.36% 11.19% 13.23% 11.68%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at
December 31, 1999 34.89% 2.12% 22.62% 5.22% 0.66%
</TABLE>
INTEREST RATE AGREEMENTS
Interest rate agreements are assets that are carried on a balance sheet
at estimated liquidation value. We have not entered into any interest rate
agreements since our inception.
BORROWINGS
To date, our debt has consisted entirely of borrowings collateralized
by a pledge of our mortgage-backed securities. These borrowings appear on our
balance sheet as repurchase agreements. At September 30, 2000, we had
established uncommitted borrowing facilities in this market with twenty lenders
in amounts, which we believe, are in excess of our needs. All of our
mortgage-backed securities are currently accepted as collateral for these
borrowings. However, we limit our borrowings, and thus our potential asset
growth, in order to maintain unused borrowing capacity and thus increase the
liquidity and strength of our balance sheet.
For the quarters ended September 30, 2000 and 1999, the term to
maturity of our borrowings ranged from one day to 3 months, with a weighted
average original term to maturity of 46 days at September 30, 2000. At September
30, 2000, the weighted average cost of funds for all of our borrowings was 6.57%
and the weighted average term to next rate adjustment was 18 days. At September
30, 1999, the term to maturity ranged from one day to one year, with a weighted
average original term of 63 days. The weighted average cost of funds for all of
our borrowings was 5.31% and weighted average term to the next adjustment was 24
days.
LIQUIDITY
Liquidity, which is our ability to turn non-cash assets into cash,
allows us to purchase additional mortgage-backed securities and to pledge
additional assets to secure existing borrowings should the value of our pledged
assets decline. Potential immediate sources of liquidity for us include cash
balances and unused borrowing capacity. Unused borrowing capacity will vary over
time as the market value of our mortgage-backed securities varies. Our balance
sheet also generates liquidity on an on-going basis through mortgage principal
repayments and net earnings held prior to payment as dividends. Should our needs
ever exceed these on-going sources of liquidity plus the immediate sources of
liquidity discussed above, we believe that our mortgage-backed securities could
in most circumstances be sold to raise cash. The maintenance of liquidity is one
of the goals of our capital investment policy. Under this policy, we limit asset
growth in order to preserve unused borrowing capacity for liquidity management
purposes.
STOCKHOLDERS' EQUITY
We use "available-for-sale" treatment for our mortgage-backed
securities; we carry these assets on our balance sheet at estimated market value
rather than historical amortized cost. Based upon this "available-for-sale"
treatment, our equity base at September 30, 2000 was $118.7 million, or $8.30
per share. If we had used historical amortized cost accounting, our equity base
at September 30, 2000 would have been $146.4 million, or $10.24 per share. Our
equity base at September 30, 1999 was $113.0 million, or $8.63 per share. If we
had used historical amortized cost accounting, our equity base at September 30,
1999 would have been $136.9 million, or $10.44 per share. During the quarter
ended September 30, 2000, the Company raised additional capital in the amount of
$767,479 through its share purchase and dividend reinvestment plan.
19
<PAGE>
With our "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact our GAAP or taxable income
but rather are reflected on our balance sheet by changing the carrying value of
the asset and stockholders' equity under "Accumulated Other Comprehensive Income
(Loss)." By accounting for our assets in this manner, we hope to provide useful
information to stockholders and creditors and to preserve flexibility to sell
assets in the future without having to change accounting methods.
As a result of this mark-to-market accounting treatment, our book value
and book value per share are likely to fluctuate far more than if we used
historical amortized cost accounting. As a result, comparisons with companies
that use historical cost accounting for some or all of their balance sheet may
not be meaningful.
The table below shows unrealized gains and losses on the
mortgage-backed securities in our portfolio.
UNREALIZED GAINS AND LOSSES
---------------------------
(dollars in thousands)
<TABLE>
<CAPTION>
At At At At At At At
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2000 2000 2000 1999 1999 1999 1999
---------- --------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Unrealized Gain $1,920 $ 864 $ 1,320 $ 1,531 $ 998 $ 1,744 $ 2,801
Unrealized Loss (29,659) (35,872) (35,633) (39,100) (24,773) (21,172) (8,784)
-------- -------- -------- -------- -------- -------- -------
Net Unrealized Loss ($27,739) ($35,008) ($34,313) ($37,569) ($23,775) ($19,428) ($5,983)
======== ======== ======== ======== ======== ======== =======
Net Unrealized Loss as % of
Mortgage-Backed Securities
Principal Value (1.66%) (2.39%) ( 2.37%) (2.59%) (1.70%) (1.32%) (0.39%)
Net Unrealized Loss as % of
Mortgage-Backed Securities
Amortized Cost (1.64%) (2.36%) (2.33%) (2.54%) (1.68%) (1.30%) (0.39%)
</TABLE>
Unrealized changes in the estimated net market value of mortgage-backed
securities have one direct effect on our potential earnings and dividends:
positive market-to-market changes increase our equity base and allow us to
increase our borrowing capacity while negative changes tend to limit borrowing
capacity under our capital investment policy. A very large negative change in
the net market value of our mortgage-backed securities might impair our
liquidity position, requiring us to sell assets with the likely result of
realized losses upon sale. "Unrealized Losses on Available for Sale Securities"
was $27.7 million, or 1.64% of the amortized cost of our mortgage-backed
securities at September 30, 2000. "Unrealized Losses on Available for Sale
Securities" was $23.8 million or 1.68% of the amortized cost of our
mortgage-backed securities at September 30, 1999.
The table below shows our equity capital base as reported and on a
historical amortized cost basis at September 30, June 30, 2000, March 31, 2000,
December 31,1999, September 30, 1999, June 30, 1999 and March 31,1999. Issuances
of common stock, the level of GAAP earnings as compared to dividends declared,
and other factors influence our historical cost equity capital base. The GAAP
reported equity capital base is influenced by these factors plus changes in the
"Net Unrealized Losses on Assets Available for Sale" account.
20
<PAGE>
STOCKHOLDERS' EQUITY
--------------------
<TABLE>
<CAPTION>
Historical
Historical Net Unrealized GAAP Reported Amortized Cost GAAP Reported
Amortized Cost Gains on Assets Equity Base Equity Per Equity (Book
Equity Base Available for Sale (Book Value) Share Value) Per Share
----------- ------------------ ------------ -------------- ----------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
At September 30, 2000 $146,446 ($27,739) $118,707 $10.24 $8.30
At June 30, 2000 $145,448 ($35,008) $110,440 $10.24 $7.77
At March 31, 2000 $143,279 ($34,313) $108,966 $10.31 $7.84
------------------------------------------------------------------------------------------------------------
At December 31, 1999 $140,841 ($37,569) $103,272 $10.37 $7.60
At September 30, 1999 $136,850 ($23,776) $113,074 $10.44 $8.63
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
</TABLE>
LEVERAGE
Our debt-to-GAAP reported equity ratio at September 30, 2000 and, 1999
was 12.9:1 and 11.3:1, respectively. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this
range from time to time based upon various factors, including our management's
opinion of the level of risk of our assets and liabilities, our liquidity
position, our level of unused borrowing capacity and over-collateralization
levels required by lenders when we pledge assets to secure borrowings.
Our target debt-to-GAAP reported equity ratio is determined under our
capital investment policy. Should our actual debt-to-equity ratio increase above
the target level due to asset acquisition or market value fluctuations in
assets, we will cease to acquire new assets. Our management will, at that time,
present a plan to our Board of Directors to bring us back to our target
debt-to-equity ratio; in many circumstances, this would be accomplished in time
by the monthly reduction of the balance of our mortgage-backed securities
through principal repayments.
ASSET/LIABILITY MANAGEMENT AND EFFECT OF CHANGES IN INTEREST RATES
We continually review our asset/liability management strategy with
respect to interest rate risk, mortgage prepayment risk, credit risk and the
related issues of capital adequacy and liquidity. We seek attractive
risk-adjusted stockholder returns while maintaining a strong balance sheet.
We seek to manage the extent to which our net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although we have not done so to date, we
may seek to mitigate the potential impact on net income of periodic and lifetime
coupon adjustment restrictions in our portfolio of mortgage-backed securities by
entering into interest rate agreements such as interest rate caps and interest
rate swaps.
Changes in interest rates may also have an effect on the rate of
mortgage principal prepayments and, as a result, prepayments on mortgage-backed
securities. We will seek to mitigate the effect of changes in the mortgage
principal repayment rate by balancing assets we purchase at a premium with
assets we purchase at a discount. To date, the aggregate premium exceeds the
aggregate discount on our mortgage-backed securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce our net income
compared to what net income would be absent such prepayments.
INFLATION
Virtually all of our assets and liabilities are financial in nature. As
a result, interest rates and other factors drive our performance far more than
does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our dividends based upon our net income as
calculated for tax purposes; in each case, our activities and balance sheet are
measured with reference to historical cost or fair market value without
considering inflation.
21
<PAGE>
OTHER MATTERS
We calculate that our qualified REIT assets, as defined in the Internal
Revenue Code, are 99.4% and 99.5% of our total assets at September 30, 2000 and
1999, as compared to the Internal Revenue Code requirement that at least 75% of
our total assets be qualified REIT assets. We also calculate that 97.0% and
99.6% of our 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 quarters ended September 30, 2000 and 1999, respectively. We also met
all REIT requirements regarding the ownership of our common stock and the
distribution of our net income. Therefore, as of September 30, 2000 and 1999, we
believe that we qualified as a REIT under the Internal Revenue Code.
We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act. If we were
to become regulated as an investment company, then our use of leverage would be
substantially reduced. The Investment Company Act exempts entities that are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" (qualifying
interests). Under current interpretation of the staff of the SEC, in order to
qualify for this exemption, we must maintain at least 55% of our assets directly
in qualifying interests. In addition, unless certain mortgage securitites
represent all the certificates issued with respect to an underlying pool of
mortgages, the mortgage-backed securities may be treated as securities separate
from the underlying mortgage loans and, thus, may not be considered qualifying
interests for purposes of the 55% requirement. We calculate that as of September
30, 2000 and 1999 we were in compliance with this requirement.
22
<PAGE>
ITEM. 2 QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond our control. Changes in the general level of interest rates
can affect our net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with our interest-bearing liabilities, by affecting the spread
between our interest-earning assets and interest-bearing liabilities. Changes in
the level of interest rates also can affect the value of our mortgage-backed
securities and our ability to realize gains from the sale of these assets. We
may utilize a variety of financial instruments, including interest rate swaps,
caps, floors and other interest rate exchange contracts, in order to limit the
effects of interest rates on our operations. If we use these types of
derivatives to hedge the risk of interest-earning assets or interest-bearing
liabilities, we may be subject to certain risks, including the risk that losses
on a hedge position will reduce the funds available for payments to holders of
securities and that the losses may exceed the amount we invested in the
instruments. To date, we have not purchased any hedging instruments.
Our profitability and the value of our portfolio may be adversely
affected during any period as a result of changing interest rates. The following
table quantifies the potential changes in net interest income and portfolio
value should interest rates go up or down 200 basis points, assuming the yield
curves of the rate shocks will be parallel to each other and the current yield
curve. All changes in income and value are measured as percentage changes from
the projected net interest income and portfolio value at the base interest rate
scenario. The base interest rate scenario assumes interest rates at September
30, 2000 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>
-200 Basis Points 67% 4%
-100 Basis Points 27% 2%
-50 Basis Points 8% 2%
Base Interest Rate
+50 Basis Points (36%) (0%)
+100 Basis Points (54%) (1%)
+200 Basis Points (103%) (3%)
</TABLE>
ASSET AND LIABILITY MANAGEMENT
Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. We attempt to control
risks associated with interest rate movements. Methods for evaluating interest
rate risk include an analysis of our interest rate sensitivity "gap", which is
the difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
The following table sets forth the estimated maturity or repricing of
our interest-earning assets and interest-bearing liabilities at September 30,
2000. 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-
23
<PAGE>
backed securities reflect estimated prepayments that were estimated based on
analyses of broker estimates, the results of a prepayment model that we utilized
and empirical data. Our management believes that these assumptions approximate
actual experience and considers them reasonable; however, the interest rate
sensitivity of our assets and liabilities in the table could vary substantially
if different assumptions were used or actual experience differs from the
historical experience on which the assumptions are based.
<TABLE>
<CAPTION>
(IN THOUSANDS)
More than 1
Within 3 Year to 3 3 Years and
Months 4-12 Months Years Over Total
-------- ----------- ----------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
Mortgage-Backed Securities $546,507 $ 264,238 $254,860 $604,392 $1,669,997
Rate Sensitive Liabilities:
Repurchase Agreements 1,593,946 $1,593,946
------------ ---------- -------- -------- ----------
Interest rate sensitivity gap ($1,047,439) $264,238 $254,860 $604,392 $ 76,051
=========== ========== ======== ======== ==========
Cumulative rate sensitivity gap ($1,047,439) ($783,201) ($528,341) $ 76,051
=========== ========== ======== ========
Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets (63%) (47%) (32%) 5%
</TABLE>
Our analysis of risks is based on management's experience, estimates, models and
assumptions. These analyses rely on models, which utilize estimates of fair
value and interest rate sensitivity. Actual economic conditions or
implementation of investment decisions by our management may produce results
that differ significantly form the estimates and assumptions used in our models
and the projected results shown in the above tables and in this report. These
analyses contain certain forward-looking statements and are subject to the safe
harbor statement set forth under the heading, "Special Note Regarding
Forward-Looking Statements."
24
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 1 - Financial Data Schedule
(b) Reports
None
25
<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: November 13, 2000 By:/s/ Michael A.J. Farrell
-------------------------
Michael A.J. Farrell
Chairman of the Board and Chief Executive Officer
(authorized officer of registrant)
Dated: November 13, 2000 By:/s/ Kathryn F. Fagan
---------------------
Kathryn F. Fagan
Chief Financial Officer and Treasurer
(principal accounting officer)
26
