-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EoXZMm/29enq9DnBUSlLRgRInv8psQgrlKE1lgSLBLZ0i9oW9XwG1qnIbegq4+hO QqKs1kQ1NJwt/RKv/3Im0w== 0000930413-05-003385.txt : 20050504 0000930413-05-003385.hdr.sgml : 20050504 20050504133408 ACCESSION NUMBER: 0000930413-05-003385 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050504 DATE AS OF CHANGE: 20050504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANNALY MORTGAGE MANAGEMENT INC CENTRAL INDEX KEY: 0001043219 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 223479661 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13447 FILM NUMBER: 05798146 BUSINESS ADDRESS: STREET 1: 1211 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 212 696 0100 MAIL ADDRESS: STREET 1: 1211 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 10-Q 1 c37286_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2005 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 incorporation (IRS Employer or organization) Identification No.) 1211 AVENUE OF THE AMERICAS, SUITE 2902 NEW YORK, NEW YORK (Address of principal executive offices) 10036 (Zip Code) (212) 696-0100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No___ ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2) of the Exchange Act: Yes X No___ ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: Class Outstanding at April 27, 2005 Common Stock, $.01 par value 121,277,698 ANNALY MORTGAGE MANAGEMENT, INC. FORM 10-Q INDEX Part I. FINANCIAL INFORMATION Item 1. Financial Statements: Statements of Financial Condition- March 31, 2005 (Unaudited) and December 31, 2004 1 Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the quarters ended March 31, 2005 and March 31, 2004 2 Statements of Stockholders' Equity (Unaudited) for the quarter ended March 31, 2005 3 Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2005 and March 31, 2004 4 Notes to Financial Statements (Unaudited) 5-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-29 Item 3. Quantitative and Qualitative Disclosures about Market Risk 30-31 Item 4. Controls and Procedures 31 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES CERTIFICATIONS
PART I. ITEM 1. FINANCIAL STATEMENTS ANNALY MORTGAGE MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
MARCH 31, 2005 DECEMBER 31, (UNAUDITED) 2004 ---------------------------------------- ASSETS Cash and cash equivalents $ 2,417 $ 5,853 Mortgage-Backed Securities, at fair value 18,702,470 19,038,386 Agency debentures, at fair value 388,593 390,509 Receivable for Mortgage-Backed Securities sold - 1,025 Accrued interest receivable 80,172 81,557 Receivable for advisory and service fees 2,883 2,359 Intangible for customer relationships 15,613 15,613 Goodwill 23,122 23,122 Other assets 1,873 1,875 ---------------------------------------- Total assets $19,217,143 $19,560,299 ======================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements $17,438,609 $16,707,879 Payable for Mortgage-Backed Securities purchased 75,165 1,044,683 Accrued interest payable 33,770 35,721 Dividends payable 54,575 60,632 Other liabilities 1,569 2,819 Accounts payable 4,079 8,095 ---------------------------------------- Total liabilities 17,607,767 17,859,829 ---------------------------------------- Stockholders' Equity: 7.875% Series A Cumulative Redeemable Preferred Stock: 8,000,000 177,077 177,077 authorized, 7,412,500, shares issued and outstanding Common stock: par value $.01 per share; 500,000,000 authorized, 121,277,698, and 121,263,000 shares issued and outstanding, respectively 1,213 1,213 Additional paid-in capital 1,638,911 1,638,635 Accumulated other comprehensive loss (213,280) (120,800) Retained earnings 5,455 4,345 ---------------------------------------- Total stockholders' equity 1,609,376 1,700,470 ---------------------------------------- Total liabilities and stockholders' equity $19,217,143 $19,560,299 ========================================
See notes to financial statements. 1 PART I. ITEM 1. FINANCIAL STATEMENTS ANNALY MORTGAGE MANAGEMENT, INC. STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE QUARTER ENDED FOR THE MARCH 31, 2005 QUARTER ENDED (CONSOLIDATED) MARCH 31, 2004 ------------------------------------- INTEREST INCOME $176,289 $114,341 INTEREST EXPENSE 113,993 50,303 ------------------------------------- NET INTEREST INCOME 62,296 64,038 ------------------------------------- OTHER INCOME: Investment advisory and service fees 6,309 - Gain on sale of mortgage-backed securities 580 595 ------------------------------------- TOTAL OTHER INCOME 6,889 595 ------------------------------------- EXPENSES: Distribution fees 1,610 - General and administrative expenses 6,664 5,365 ------------------------------------- TOTAL EXPENSES 8,274 5,365 ------------------------------------- INCOME BEFORE INCOME TAXES 60,911 59,268 INCOME TAXES 1,578 425 ------------------------------------- NET INCOME 59,333 58,843 DIVIDENDS ON PREFERRED STOCK 3,648 - ------------------------------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 55,685 $ 58,843 ===================================== NET INCOME PER COMMON SHARE Basic $0.46 $0.52 ===================================== Diluted $0.46 $0.52 ===================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING Basic 121,270,867 112,506,206 ===================================== Diluted 121,564,320 112,804,001 ===================================== NET INCOME $59,333 $ 58,843 ------------------------------------- COMPREHENSIVE INCOME (LOSS) Unrealized gain (loss) on available-for sale securities (91,900) 52,356 Less: reclassification adjustment for net gains (losses) included in net income (580) (595) ------------------------------------- Other comprehensive income (loss) (92,480) 51,761 ------------------------------------- COMPREHENSIVE INCOME (LOSS) ($33,147) $110,604 =====================================
See notes to financial statements. 2 PART I ITEM 1. FINANCIAL STATEMENTS ANNALY MORTGAGE MANAGEMENT, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE QUARTER ENDED MARCH 31, 2005 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
COMMON ADDITIONAL ACCUMULATED PREFERRED STOCK PAID-IN COMPREHENSIVE OTHER RETAINED STOCK PAR VALUE CAPITAL INCOME (LOSS) COMPREHENSIVE EARNINGS TOTAL INCOME (LOSS) ---------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 2005 $177,077 $1,213 $1,638,635 ($120,800) $4,345 $1,700,470 Net Income $59,333 59,333 Other comprehensive income: Unrealized net gain on securities, net of reclassification adjustment (92,480) (92,480) -------------- Comprehensive loss ($33,147) (33,147) ============== Exercise of stock options 99 99 Proceeds from direct purchase and dividend 177 177 reinvestment Preferred dividend declared for the quarter ended (3,648) (3,648) March 31, 2005, $0.492188 per share Common dividend declared for the quarter ended (54,575) (54,575) March 31, 2005, $0.45 per share ------------------------------------ ------------------------------------- BALANCE, MARCH 31, 2005 $177,077 $1,213 $1,638,911 ($213,280) $5,455 $1,609,376 ========================================================================================
See notes to financial statements. 3 PART I ITEM 1. FINANCIAL STATEMENTS ANNALY MORTGAGE MANAGEMENT, INC. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
FOR THE QUARTER FOR THE QUARTER ENDED MARCH 31, ENDED MARCH 31, 2005 2004 ------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: $59,333 $58,843 Net income Adjustments to reconcile net income to net cash provided by operating activities: Amortization of Mortgage- Backed Securities premiums and discounts, net 36,067 41,501 Amortization of intangibles 55 - Gain on sale of Mortgage-Backed Securities (580) (595) Stock option expense - 217 Market value adjustment on long-term repurchase agreement (1,250) 747 Decrease (increase) in accrued interest receivable, net of purchased interest 455 (17,703) Increase in other assets (54) (1,191) Increase in advisory and service fees receivable (524) - (Decrease) increase in accrued interest payable (1,951) 6,310 Decrease in accounts payable (4,016) (833) ------------------------------------------ Net cash provided by operating activities 87,535 87,296 ------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Mortgage-Backed Securities (2,361,872) (5,280,945) Purchase of Agency debentures - (150,000) Proceeds from sale of Mortgage-Backed Securities 85,946 24,159 Proceeds from called Agency debentures - 100,000 Principal payments on Mortgage-Backed Securities 1,518,228 1,204,219 ------------------------------------------ Net cash used in investing activities (757,698) (4,102,567) ------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from repurchase agreements 57,259,546 30,194,192 Principal payments on repurchase agreements (56,528,815) (26,517,895) Proceeds from exercise of stock options 99 243 Proceeds from direct purchase and dividend reinvestment 177 734 Net proceeds from follow-on offerings - 363,592 Net proceeds from equity shelf program - 20,051 Dividends paid (64,280) (45,155) ------------------------------------------ Net cash provided by financing activities 666,727 4,015,762 ------------------------------------------ Net (decrease) increase in cash and cash equivalents (3,436) 491 Cash and cash equivalents, beginning of period 5,853 247 ------------------------------------------ Cash and cash equivalents, end of period $2,417 $738 ========================================== Supplemental disclosure of cash flow information: Interest paid $115,944 $43,993 ========================================== Noncash financing activities: Net change in unrealized loss on available-for-sale, securities net of reclassification adjustment ($92,480) $51,761 ========================================== Dividends declared, not yet paid $54,575 $58,942 ==========================================
See notes to financial statements. 4 ANNALY MORTGAGE MANAGEMENT, INC. NOTES TO FINANCIAL STATEMENTS FOR THE QUARTERS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Annaly Mortgage Management, Inc. (the "Company") was incorporated in Maryland on November 25, 1996. The Company commenced its operations of purchasing and managing an investment portfolio of mortgage-backed securities on February 18, 1997, upon receipt of the net proceeds from the private placement of equity capital. An initial public offering was completed on October 14, 1997. The Company acquired Fixed Income Discount Advisory Company ("FIDAC") on June 4, 2004 (See Note 2). FIDAC is a registered investment advisor and is a taxable REIT subsidiary of the Company. A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS: BASIS OF PRESENTATION - The accompanying unaudited financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP"). The interim financial statements are unaudited; however, in the opinion of the Company's management, all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the results of operations have been included. These unaudited financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004. 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. The consolidated financial statements subsequent to June 4, 2004 include the accounts of the Company and FIDAC. All material intercompany balances have been eliminated. Certain reclassifications have been made to prior year financial statements, where appropriate, to conform to the current year presentation. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and money market funds. MORTGAGE-BACKED SECURITIES AND AGENCY DEBENTURES - The Company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed Securities"). The Company also invests in agency debentures issued by Federal Home Loan Bank ("FHLB"), Federal Home Loan Mortgage Corporation ("FHLMC"), and Federal National Mortgage Association ("FNMA"). The Mortgage-Backed Securities and agency debentures are collectively referred to herein as "Investment Securities." Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," requires the Company to classify its Investment Securities as either trading investments, available-for-sale investments or held-to-maturity investments. Although the Company generally intends to hold most of its Investment Securities until maturity, it may, from time to time, sell any of its Investment Securities as part of its overall management of its portfolio. Accordingly, SFAS No. 115 requires the Company to classify all of its Investment Securities as available-for-sale. All assets classified as available-for-sale are reported at estimated fair value, based on market prices provided by certain dealers who make markets in these financial instruments, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Unrealized losses on Investment Securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognized in income and the cost basis of the Investment Securities is adjusted. There were no such adjustments for the quarters ended March 31, 2005 and 2004. 5 SFAS No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of mortgage-backed securities and agency debentures available-for-sale and futures contracts is equal to their carrying value presented in the balance sheet. The fair value of cash and cash equivalents, accrued interest receivable, receivable for mortgage-backed securities sold, receivable for advisory fees, repurchase agreements, and payable for mortgage-backed securities purchased, dividends payable, accounts payable, and accrued interest payable, generally approximates cost as of March 31, 2005 and December 31, 2004, due to the short term nature of these securities. Interest income is accrued based on the outstanding principal amount of the Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Investment Securities are amortized into interest income over the projected lives of the securities using the interest method. The Company's policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, street consensus prepayment speeds, and current market conditions. Investment Securities transactions are recorded on the trade date. Purchases of newly issued securities are recorded when all significant uncertainties regarding the characteristics of the securities are removed, generally shortly before settlement date. Realized gain and losses on sale of Investment Securities are determined on the specific identification basis. CREDIT RISK - The Company has limited its exposure to credit losses on its portfolio of Investment Securities by only purchasing securities issued by FHLMC, FNMA, Government National Mortgage Association ("GNMA"), or FHLB. 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. All of the Company's Investment Securities have an actual or implied "AAA" rating. REPURCHASE AGREEMENTS - The Company finances the acquisition of its Investment Securities through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Accrued interest is recorded as a separate line item on the Statements of Financial Condition. 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. The Company and FIDAC have made a joint election to treat FIDAC as a taxable REIT subsidiary. As such, FIDAC is taxable as a domestic corporation and subject to federal and state and local income taxes based upon its taxable income. USE OF ESTIMATES - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INTANGIBLE ASSETS - The Company's acquisition of FIDAC was accounted for using the purchase method. Under the purchase method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. In addition, the cost of FIDAC was allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of cost over the fair value of the net assets acquired was recognized as goodwill. RECENT ACCOUNTING PRONOUNCEMENTS - In March 2004, the Emerging Issues Task Force, or "EITF", reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. This Issue provides clarification with respect to the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115, and investments accounted for under the cost method or the equity method. Certain provisions of this Issue have been 6 deferred to a later date. This Issue is not expected to have a significant impact on the Company's financial statements when adopted. On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, (Revised 2004) - Share-Based Payment ("SFAS No. 123R"). SFAS 123R, which replaces SFAS No. 123, requires the Company to measure and recognize in the financial statements the compensation cost relating to share-based payment transactions. The compensation cost should be reassured based on the fair value of the equity instruments issued. SFAS No. 123R is effective for the Company on January 1, 2006. The adoption of SFAS No. 123R is not expected to have a significant impact on the Company's financial statements. 2. FIXED INCOME DISCOUNT ADVISORY COMPANY On December 31, 2003, the Company entered into a merger agreement with FIDAC. At the annual meeting of the Company's shareholders held on May 27, 2004, shareholders voted to approve the merger. The merger closed before the opening of business on June 4, 2004. The merger was accounted for using the purchase method of accounting in accordance with SFAS No. 141. Accordingly, the consolidated balance sheets as of March 31, 2005 and December 31, 2004 include the effects of the merger and the Company's application of the purchase method of accounting. Additionally, the consolidated statements of operations and of cash flows for the quarter ended March 31, 2005 include the results of the Company and FIDAC for the period from January 1, 2005 to March 31, 2005. Upon completion of the merger and pursuant to the merger agreement, FDC Merger Sub ("Merger Sub"), the Company's wholly-owned subsidiary created solely for the purpose of effectuating the merger, merged with and into FIDAC. As a result of the merger, Merger Sub ceased to exist, and FIDAC is the surviving corporation and operates as the Company's wholly-owned taxable REIT subsidiary. At the time of the merger, each FIDAC shareholder received approximately 2,935 shares of the Company's common stock for each share of FIDAC stock the shareholder owned and has the right to receive additional shares of the Company's common stock in the future, based on FIDAC achieving specific performance goals. FIDAC's shareholders may also receive additional shares of our common stock as an earn-out in 2005 and 2006 worth up to $49,500,000 if FIDAC meets specific performance goals under the merger agreement. We cannot calculate how many shares we will issue under the earn-out provisions since that will vary depending upon whether and the extent to which FIDAC achieves specific performance goals. Even if FIDAC achieves specific performance goals for a fiscal year, the number of additional shares to be issued to the FIDAC shareholders will vary depending on our average share price for the first 20 trading days of the following fiscal year. The value of the shares of the Company's common stock issued to the FIDAC shareholders immediately upon the consummation of the acquisition was fixed at $40,500,000 based upon the closing price of the Company's common stock on December 31, 2003, and was paid on June 4, 2004 by delivering 2,201,080 shares of the Company's common stock. The total amount of goodwill represents the purchase price in excess of the fair value of the net assets acquired. Under SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is not amortized, but tested at least annually for impairment. Customer relationships are deemed by the Company to have an indefinite life based on a lack of attrition history and management's expectation of continued service to FIDAC clients and, accordingly, are not being amortized. Instead, they are required to be tested at least annually for impairment. FIDAC trademark and non-compete agreements are considered intangible assets subject to amortization over their estimated life of three years and one year, respectively. For the quarter ended March 31, 2005, amortization expense related to these intangibles was $56,000. A deferred tax liability of $82,000 arising from the temporary difference between the book and tax basis relating to these amortizable intangible is included in "Other liabilities" in the Statements of Financial Condition as of March 31, 2005 and December 31, 2004, respectively. 7 A summary of the fair values of the net assets acquired is as follows:
(dollars in thousands) Cash and cash equivalents $2,526 Receivable for advisory fees and services 1,564 Other assets 591 Customer relationships 15,613 FIDAC trademark 250 Non-compete agreements 140 Goodwill 22,905 Accounts payable (748) ---------------------------- Total fair value of net assets, including acquisition cost $42,841 ============================
8 3. MORTGAGE-BACKED SECURITIES The following table pertains to the Company's Mortgage-Backed Securities classified as available-for-sale as of March 31, 2005 and December 31, 2004, which are carried at their fair value:
FEDERAL HOME FEDERAL NATIONAL GOVERNMENT TOTAL LOAN MORTGAGE MORTGAGE NATIONAL MORTGAGE MORTGAGE-BACKED MARCH 31, 2005 CORPORATION ASSOCIATION ASSOCIATION SECURITIES --------------------------------------------------------------------------------- (dollars in thousands) Mortgage-Backed Securities, gross $6,068,393 $11,883,068 $541,339 $18,492,800 Unamortized discount (154) (682) (89) (925) Unamortized premium 129,187 280,467 7,813 417,467 --------------------------------------------------------------------------------- Amortized cost 6,197,426 12,162,853 549,063 18,909,342 Gross unrealized gains 13,817 7,978 1,888 23,683 Gross unrealized losses (63,659) (162,831) (4,065) (230,555) --------------------------------------------------------------------------------- Estimated fair value $6,147,584 $12,008,000 $546,886 $18,702,470 =================================================================================
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR AMORTIZED COST GAIN LOSS VALUE --------------------------------------------------------------------------------- (dollars in thousands) Adjustable rate $13,514,252 $22,932 ($137,686) $13,399,498 Fixed rate 5,395,090 751 (92,869) 5,302,972 --------------------------------------------------------------------------------- Total $18,909,342 $23,683 ($230,555) 18,702,470 =================================================================================
FEDERAL HOME FEDERAL NATIONAL GOVERNMENT TOTAL LOAN MORTGAGE MORTGAGE NATIONAL MORTGAGE MORTGAGE-BACKED DECEMBER 31, 2004 CORPORATION ASSOCIATION ASSOCIATION SECURITIES --------------------------------------------------------------------------------- (dollars in thousands) Mortgage-Backed Securities, gross $6,063,131 $12,061,462 $604,310 $18,728,903 Unamortized discount (171) (843) (109) (1,123) Unamortized premium 130,211 288,217 8,528 426,956 --------------------------------------------------------------------------------- 6,193,171 12,348,836 612,729 19,154,736 Amortized cost Gross unrealized gains 11,534 9,905 1,582 23,021 Gross unrealized losses (39,429) (97,890) (2,052) (139,371) --------------------------------------------------------------------------------- Estimated fair value $6,165,276 $12,260,851 $612,259 $19,038,386 =================================================================================
GROSS UNREALIZED GROSS UNREALIZED ESTIMATED FAIR AMORTIZED COST GAIN LOSS VALUE --------------------------------------------------------------------------------- (dollars in thousands) Adjustable rate $13,833,122 $20,713 ($93,796) $13,760,039 Fixed rate 5,321,614 2,308 (45,575) 5,278,347 --------------------------------------------------------------------------------- Total $19,154,736 $23,021 ($139,371) $19,038,386 =================================================================================
9 Actual maturities of mortgage-backed securities are generally shorter than stated contractual maturities. Actual maturities of the Company's mortgage-backed securities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. The following table summarizes the Company's mortgage-backed securities on March 31, 2005 and December 31, 2004 according to their estimated weighted-average life classifications:
March 31, 2005 December 31, 2004 Amortized Amortized Weighted-Average Life Fair Value Cost Fair Value Cost (dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------- Less than one year $ 206,076 $ 208,183 $ 357,135 $ 359,433 Greater than one year and less than five years 14,098,457 14,254,193 14,623,143 14,705,212 Greater than or equal to five years 4,397,937 4,446,966 4,058,108 4,090,091 --------------------------------------------------------------------- Total $18,702,470 $18,909,342 $19,038,386 $19,154,736 =====================================================================
The weighted-average lives of the mortgage-backed securities at March 31, 2005 and December 31, 2004 in the table above are based upon data provided through subscription-based financial information services, assuming constant principal prepayment rates to the reset date of each security. The prepayment model considers current yield, forward yield, steepness of the yield curve, current mortgage rates, mortgage rates of the outstanding loans, loan age, margin and volatility. Mortgage-Backed Securities with a carrying value of $3.7 billion were in a continuous unrealized loss position over 12 months at March 31, 2005 in the amount of $84.8 million. Mortgage-Backed Securities with a carrying value of $12.4 billion were in a continuous unrealized loss position for less than 12 months at March 31, 2005 in the amount of $145.8 million. Mortgage-Backed Securities with a carrying value of $2.2 billion were in a continuous unrealized loss position over 12 months at December 31, 2004 in the amount of $34.1 million. Mortgage-Backed Securities with a carrying value of $13.1 billion were in a continuous unrealized loss position for less than 12 months at December 31, 2004 in the amount of $105.3 million. The decline in value of these securities is solely due to increases in interest rates. All of the Mortgage-Backed Securities are "AAA" rated or carry an implied "AAA" rating. These investments are not considered other-than-temporarily impaired since the Company has the ability and intent to hold the investments for a period of time, to maturity, if necessary, sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment on the par value of the securities. The adjustable rate Mortgage-Backed Securities are limited by periodic caps (generally interest rate adjustments are limited to no more than 1% every nine months) and lifetime caps. The weighted average lifetime cap was 10.1% at March 31, 2005 and December 31, 2004. During the quarter ended March 31, 2005, the Company realized $580,000 in net gains from sales of Mortgage-Backed Securities. During the quarter ended March 31, 2004, the Company realized $595,000 in net gains from sales of Mortgage-Backed Securities. 10 4. AGENCY DEBENTURES The Company owns callable agency debentures totaling $395.0 million par value, which were issued by FHLMC, FNMA, and FHLB. All of the Company's agency debentures are classified as available-for-sale. The agency debentures had carrying values of $388.6 million and $390.5 million at March 31, 2005 and December 31, 2004, respectively. The agency debentures with a carrying value of $388.6 million have been in a continuous unrealized loss position over 12 months at March 31, 2005 in the amount of $6.4 million. The debentures with a carrying value of $390.5 million were in a continuous unrealized loss position for less than 12 months at December 31, 2004 in the amount of $4.5 million. The Company's agency debentures are adjustable rate and fixed rate with a weighted average lifetime cap of 5.1% at March 31, 2005 and 3.7% at December 31, 2004. All of the agency debentures carry an implied "AAA" rating. These investments are not considered other-than-temporarily impaired since the Company has the ability and intent to hold the investments for a period of time, to maturity, if necessary, sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment on the par value of the agency debentures. 5. REPURCHASE AGREEMENTS The Company had outstanding $17.4 billion and $16.7 billion of repurchase agreements with weighted average borrowing rates of 2.78% and 2.46%, and weighted average remaining maturities of 94 days and 111 days as of March 31, 2005 and December 31, 2004, respectively. Investment securities pledged as collateral under these repurchase agreements had an estimated fair value of $18.1 billion and $17.4 billion at March 31, 2005 and December 31, 2005, respectively. At March 31, 2005 and December 31, 2004, the repurchase agreements had the following remaining maturities: MARCH 31, 2005 DECEMBER 31, 2004 (dollars in thousands) ------------------------------------------------- Within 30 days $15,388,609 $13,059,810 30 to 59 days - 1,598,069 60 to 89 days - - 90 to 119 days - - Over 120 days 2,050,000 2,050,000 ------------------------------------------------- Total $17,438,609 $16,707,879 ================================================= 6. OTHER LIABILITIES In 2001, the Company entered into a repurchase agreement maturing in July 2004. This repurchase agreement provided the buyer the right to extend its maturity date, in whole or in part, in three-month increments up to July 2006. The buyer has continuously exercised its right to extend the maturity date, and the agreement is currently set to mature in July 2005. The repurchase agreement has a principal amount of $100,000,000, and is included in repurchase agreements contained in the statements of financial condition. The Company accounts for the extension option as a separate interest rate floor liability carried at fair value. The initial fair value of $1.2 million allocated to the extension option resulted in a similar discount on the repurchase agreement borrowings that is being amortized over the initial term of three years using the effective yield method. At March 31, 2005 and December 31, 2004, the fair value of this interest rate floor was $1.4 million and $2.7 million, respectively, and is included in other liabilities in the Statements of Financial Condition. 7. PREFERRED STOCK AND COMMON STOCK During the quarter ended March 31, 2005, the Company declared dividends to common shareholders totaling $54.6 million or $0.45 per share, which were paid on April 27, 2005. During the quarter ended March 31, 2005, the Company declared dividends to preferred shareholders totaling $3.6 million or $0.492188 per share, which were paid on March 31, 2005. During the quarter ended March 31, 2005, 5,500 options were exercised under the long-term compensation plan for an aggregate exercise price of $99,000. Also, 9,198 common shares were sold through the dividend reinvestment and direct purchase program for $178,000 during the quarter ended March 31, 2005. 11 During the quarter ending March 31, 2004, the Company declared dividends to shareholders totaling $58.9 million or $0.50 per share, which was paid on April 28, 2004. On January 21, 2004 the Company entered into an underwriting agreement pursuant to which the Company raised net proceeds of approximately $363.6 million in equity in an offering of 20,700,000 shares of common stock. On March 31, 2004, the Company raised approximately $102.9 million in net proceeds through an offering of 4,250,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock, which settled on April 5, 2004. During the quarter ended March 31, 2004, 1,027,400 shares were issued through the Equity Shelf Program, totaling net proceeds of $20.0 million. During the quarter ended March 31, 2004, 28,500 options were exercised under the long-term compensation plan at $459,000. Also, 36,936 shares were purchased in the dividend reinvestment and direct purchase program at $734,000. 8. NET INCOME PER COMMON SHARE The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS for the quarters March 31, 2005 and 2004.
For the Quarters Ended March 31, 2005 March 31, 2004 (dollars in thousands) ------------------------------------ Net income $59,333 $58,843 Less: Preferred stock dividend 3,648 - ------------------------------------ Net income available to common shareholders $55,685 $58,843 ------------------------------------ Weighted average shares of common stock outstanding-basic 121,271 112,506 Add: Effect of dilutive stock options 293 298 ------------------------------------ Weighted average shares of common stock outstanding-diluted 121,564 112,804 ====================================
Options to purchase 12,500 shares of common stock were outstanding and considered anti-dilutive as their exercise price exceeded the average stock price for each of the quarters ended March 31, 2005 and 2004. 9. LONG-TERM STOCK INCENTIVE PLAN The Company has adopted a long term stock incentive plan for executive officers, key employees and non-employee directors (the "Incentive Plan"). The Incentive Plan authorizes the Compensation Committee of the board of directors to grant awards, including non-qualified options as well as incentive stock options as defined under Section 422 of the Code . The Incentive Plan authorizes the granting of options or other awards for an aggregate of the greater of 500,000 shares or 9.5% of the diluted outstanding shares of the Company's common stock. The following table sets forth activity relating to the Company's stock options awards:
For the Quarters Ended 2005 2004 ------------------------------------------------------------------- Weighted Weighted Number of Average Number of Average Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------ Options outstanding at the beginning of period 1,645,721 $15.66 1,063,259 $14.28 Granted - - - - Exercised (5,500) 17.97 (28,500) 8.52 Expired - - - - ------------------------------------------------------------------- Options outstanding at the end of period. 1,640,221 $15.65 1,034,759 $14.44 ===================================================================
12 The following table summarizes information about stock options outstanding at March 31, 2005:
Weighted Average Weighted Average Remaining Contractual Range of Exercise Prices Options Outstanding Exercise Price Life (Years) - ------------------------------------------------------------------------------------------------------------ $7.94-$19.99 1,627,721 $15.62 7.7 $20.00-$29.99 12,500 20.53 2.7 ---------------------------------------------------------------------------- 1,640,221 $15.65 7.7 ============================================================================
The Company accounts for the Incentive Plan under the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:
For the Quarter Ended (dollars in thousands, except per share data) ------------------------------- March 31, March 31, 2005 2004 ------------------------------- Net income available to common shareholders, as reported $55,685 $58,843 Deduct: Total stock-based employee compensation expense determined under fair value based method (36) (28) ------------------------------- Pro-forma net income available to common shareholers $55,649 $58,815 =============================== Net income per share available to common shareholders, as reported: Basic $0.46 $0.52 =============================== Diluted $0.46 $0.52 =============================== Pro-forma net income per share available to common shareholders: Basic $0.46 $0.52 =============================== Diluted $0.46 $0.52 ===============================
10. INCOME TAXES The Company has elected to be taxed as a REIT under the Code. In connection with the Company's merger with FIDAC effective June 4, 2004, the Company and FIDAC made a joint election to treat FIDAC as a taxable REIT subsidiary under the Code. As a REIT, the Company is not subject to Federal income tax on earnings distributed to its shareholders. Most states recognize REIT status as well. The Company has decided to distribute the majority of its income and retain a portion of the permanent difference between book and taxable income arising from Section 162(m) of the Code pertaining to employee remuneration. During the quarter ended March 31, 2005, the Company recorded $1.6 million of income tax expense for income attributable to FIDAC, its taxable REIT subsidiary, and the portion of earnings retained based on Code Section 162(m) limitations. During the quarter ended March 31, 2004, the Company recorded $425,000 of income tax expense for a portion of earnings retained based on Section 162(m) limitations. 13 11. LEASE COMMITMENTS The Company has a noncancelable lease for office space, which commenced in May 2002 and expires in December 2009. The Company's aggregate future minimum lease payments are as follows: Total per Year (dollars in thousands) ------------------------ 2005 375 2006 530 2007 532 2008 532 2009 532 ------------------------ Total remaining lease payments $2,501 ======================== 12. INTEREST RATE RISK The primary market risk to the Company is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company's control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with the interest-bearing liabilities, by affecting the spread between the interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of the Investment Securities and the Company's ability to realize gains from the sale of these assets. A decline in the value of the Investment Securities pledged as collateral for borrowings under repurchase agreements could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels. The Company seeks to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable-rate assets with variable-rate borrowings. In addition, although the Company has not done so to date, the Company may seek to mitigate the potential impact on net income of periodic and lifetime coupon adjustment restrictions in the portfolio of Investment Securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on Mortgage-Backed Securities. The Company will seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets purchased at a premium with assets purchased at a discount. To date, the aggregate premium exceeds the aggregate discount on the Mortgage-Backed Securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce net income compared to what net income would be absent such prepayments. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the "SEC" or the "Commission"), in our press releases or in our other public or shareholder communications may not be based on historical facts and are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements which are based on various assumptions, (some of which are beyond our control) may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms, or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates, changes in yield curve, changes in prepayment rates, the availability of mortgage backed securities for purchase, the availability of financing and, if available, the terms of any financing, and risks associated with the investment advisory business of FIDAC, including the removal by FIDAC's clients of assets FIDAC manages, FIDAC's regulatory requirements, and competition in the investment advisory business. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see our 2004 Form 10-K. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. OVERVIEW We are a real estate investment trust that owns and manages a portfolio of mortgage-backed securities and agency debentures. Our principal business objective is to generate net income for distribution to our stockholders from the spread between the interest income on our investment securities and the costs of borrowing to finance our acquisition of investment securities and from dividends we receive from FIDAC, which earns investment advisory fee income. FIDAC is our wholly-owned subsidiary, and is a registered investment advisor that generates advisory and service fee income. We are primarily engaged in the business of investing, on a leveraged basis, 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"). We also invest in Federal Home Loan Bank ("FHLB"), Federal Home Loan Mortgage Corporation ("FHLMC"), and Federal National Mortgage Association ("FNMA") debentures. The Mortgage-Backed Securities and agency debentures are collectively referred to herein as "Investment Securities." Under our capital investment policy, at least 75% of our total assets must be comprised of high-quality mortgage-backed securities and short-term investments. High quality securities means securities that (1) are rated within one of the two highest rating categories by at least one of the nationally recognized rating agencies, (2) are unrated but are guaranteed by the United States government or an agency of the United States government, or (3) are unrated but are determined by us to be of comparable quality to rated high-quality Mortgage-Backed Securities. The remainder of our assets, comprising not more than 25% of our total assets, may consist of other qualified REIT real estate assets which are unrated or rated less than high quality, but which are at least "investment grade" (rated "BBB" or better by Standard & Poor's Corporation ("S&P") or the equivalent by another nationally recognized rating agency) or, if not rated, determined by us to be of comparable credit quality to an investment which is rated "BBB" or better. We may acquire Mortgage-Backed Securities backed by single-family residential mortgage loans as well as securities backed by loans on multi-family, commercial or other real estate-related properties. To date, all of the Mortgage-Backed Securities that we have acquired have been backed by single-family residential mortgage loans. 15 We have elected to be taxed as a REIT for federal income tax purposes. Pursuant to the current federal tax regulations, one of the requirements of maintaining our status as a REIT is that we must distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain) to our stockholders, subject to certain adjustments. The results of our operations are affected by various factors, many of which are beyond our control. The results of our operations primarily depend on, among other things, the amount of our net interest income, the market value of our assets and the supply of and demand for such assets. Our net interest income, which includes the amortization of purchase premiums, varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. Prepayment speeds, as reflected by the Constant Prepayment Rate, or CPR, and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds on our Mortgage-Backed Securities portfolio increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. Since changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to effectively manage interest rate risks and prepayment risks while maintaining our status as a REIT. The following table presents the CPR experienced on our Mortgage-Backed Securities portfolio, on an annualized basis, for the following quarterly periods : Quarter Ended CPR - ------------- --- March 31, 2005 25% December 31, 2004 27% September 30, 2004 25% June 30, 2004 33% March 31, 2004 31% We believe that the CPR in future periods will depend, in part, on changes in and the level of market interest rates across the yield curve, with higher CPRs expected during periods of declining interest rates and lower CPRs expected during periods of rising interest rates. We have reduced contractual maturities on borrowings, such that our weighted average contractual maturity on our repurchase agreements was 159 days at March 31, 2005, as compared to 211 days at December 31, 2004. The table below provides quarterly information regarding our average balances, interest income, interest expense, yield on assets, cost of funds and net interest income for the following quarterly periods presented.
Yield on Average Average Average Average Investment Total Interest Balance of Total Cost Net Securities Interest Earning Repurchase Interest of Interest Held (1) Income Assets Agreements Expense Funds Income ------------ --------- ---------- ----------- ---------- ------- ---------- (ratios for the quarters have been annualized, dollars in thousands) Quarter Ended March 31, 2005 $18,798,200 $176,289 3.75% $17,756,241 $113,993 2.57% $62,296 Quarter Ended December 31, 2004 $17,932,449 $156,783 3.50% $16,896,216 $93,992 2.23% $62,791 Quarter Ended September 30, 2004 $16,562,971 $138,970 3.36% $15,568,691 $70,173 1.80% $68,797 Quarter Ended June 30, 2004 $16,649,072 $122,234 2.94% $15,880,353 $55,648 1.40% $66,586 Quarter Ended March 31, 2004 $14,452,245 $114,341 3.16% $13,587,211 $50,303 1.48% $64,038
(1) Does not reflect unrealized gains/(losses). 16 We continue to explore alternative business strategies, alternative investments and other strategic initiatives to complement our core business strategy of investing, on a leveraged basis, in high quality Investment Securities. No assurance, however, can be provided that any such strategic initiative will or will not be implemented in the future. CRITICAL ACCOUNTING POLICIES Management's discussion and analysis of financial condition and results of operations is based on the amounts reported in our financial statements. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make various judgments, estimates and assumptions that affect the reported amounts. Changes in these estimates and assumptions could have a material effect on our financial statements. The following is a summary of our policies most affected by management's judgments, estimates and assumptions. These policies have not changed during 2005. MARKET VALUATION OF INVESTMENT SECURITIES: All assets classified as available-for-sale are reported at fair value, based on market prices. Although we generally intend to hold most of our Investment Securities until maturity, we may, from time to time, sell any of our Investment Securities as part our overall management of our portfolio. Accordingly, we are required to classify all of our Investment Securities as available-for-sale. Our policy is to obtain market values from at least three independent sources and record the market value of the securities based on the average of the three. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The investments with unrealized losses are not considered other-than-temporarily impaired since the Company has the ability and intent to hold the investments for a period of time, to maturity if necessary, sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Unrealized losses on Investment Securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognized in income and the cost basis of the Investment Securities is adjusted. There were no such adjustments for the quarters ended March 31, 2005 and 2004. If in the future, management determines an impairment to be other-than-temporary we may need to realize a loss that would have an impact on future income. INTEREST INCOME: Interest income is accrued based on the outstanding principal amount of the outstanding principal amount of the Investment Securities and their contractual terms. Premiums and discounts associated with the purchase of the Investment Securities are amortized into interest income over the projected lives of the securities using the interest method. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, street consensus prepayment speeds, and current market conditions. If our estimate of prepayments is incorrect, we may be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income. REPURCHASE AGREEMENTS: We finance the acquisition of our Investment Securities through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Accrued interest is recorded as a separate line item on the statements of financial condition. INCOME TAXES: We have elected to be taxed as a Real Estate Investment Trust ("REIT") and intend 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. The Company and FIDAC have made a joint election to treat FIDAC as a taxable REIT subsidiary. As such, FIDAC is taxable as a domestic C corporation and subject to federal and state and local income taxes based upon its taxable income. 17 RESULTS OF OPERATIONS: FOR THE QUARTERS ENDED MARCH 31, 2005 AND 2004 NET INCOME SUMMARY For the quarter ended March 31, 2005, our net income was $59.3 million, or $0.46 basic earnings per share available for common shareholders, as compared to $58.8 million, or $0.52 basic earnings per average share, for the quarter ended March 31, 2004. We attribute the increase in total net income for the quarter ended March 31, 2005, over the quarter ended March 31, 2004 to the increased asset base. The increased asset base was the result of deploying additional capital of approximately $134.4 million from March 31, 2004 to March 31, 2005. The decrease in net income per common share was primarily due to the decline in the interest rate spread from 1.68% to 1.18%. For the quarter ended March 31, 2005, gain on sale of Mortgage-Backed Securities was $580,000 as compared to $595,000 for the quarter ended March 31, 2004. Dividends for the quarter ended March 31, 2005, were $0.45 per share of common stock, or $54.6 million in total, and $0.492218 per share of preferred stock, or $3.6 million in total. Dividends per share for the quarter ended March 31, 2004 were $0.50 per share of common stock, or $58.9 million in total. Our return on average equity was 14.34% for the quarter ended March 31, 2005 and 16.59% for the quarter ended March 31, 2004. The decrease in return on average equity resulted primarily from the decrease in net interest spread primarily from the increase in the weighted average cost of funds rate from 1.48% for the quarter ended March 31, 2004 to 2.57% for the quarter ended March 31, 2005, which was only partially offset by the increase in yield from 3.16% to 3.75%. NET INCOME SUMMARY (RATIOS FOR THE QUARTER HAVE BEEN ANNUALIZED, DOLLARS IN THE THOUSANDS, EXCEPT FOR PER SHARE DATA)
Quarter ended March 31, Quarter 2005 ended (Consolidated) March 31, 2004 ---------------------------------- Interest income $176,289 $114,341 Interest expense 113,993 50,303 ---------------------------------- Net interest income 62,296 64,038 Gain on sale of Mortgage Backed Securities 580 595 Investment advisory and service fees 6,309 - Distribution fees (1,610) - General and administrative expenses (6,664) (5,790) ---------------------------------- Income before income taxes 60,911 58,843 Income taxes 1,578 - ---------------------------------- Net income 59,333 58,843 Dividends on preferred stock 3,648 - ---------------------------------- Net income available to common shareholders $55,685 $58,843 ================================== Weighted average number of basic common shares outstanding 121,270,867 112,506,206 Weighted average number of diluted common shares outstanding 121,564,320 113,259,307 Basic net income per common share $0.46 $0.52 Diluted net income per common share $0.46 $0.52 Average total assets $19,388,721 $15,644,490 Average total equity $1,654,923 $1,418,904 Annualized return on average assets 1.22% 1.50% Annualized return on average equity 14.34% 16.59%
18 INTEREST INCOME AND AVERAGE EARNING ASSET YIELD We had average earning assets of $18.8 billion and $14.5 billion for the quarters ended March 31, 2005 and 2004, respectively. Our primary source of income for the quarters ended March 31, 2005 and 2004 was interest income. A portion of our income was generated by gains on the sales of our Mortgage-Backed Securities. Our interest income was $176.3 million for the quarter ended March 31, 2005 and $114.3 million for the quarter ended March 31, 2004. The yield on average investment securities increased from 3.16% for the quarter ended March 31, 2004 to 3.75% for the quarter ended March 31, 2005. Our average earning asset balance increased by $4.3 billion and interest income increased by $62.0 million for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004. The increase was the direct result of the increased asset base and increase in weighted average yield. The yield increased for the comparable periods. The average coupon rate at March 31, 2005 was 4.58%, as compared to 4.33% at March 31, 2004. The prepayment speeds decreased to 25% CPR for the quarter ended March 31, 2005 from 31% CPR for the quarter ended March 31, 2004. The increase in coupon, in conjunction with lower prepayment speeds, resulted in an increase in yield of 59 basis points. The table below shows our average balance of interest earning assets, our yield on average earning assets and our interest income for the quarter ended March 31,2005, the year ended December 31, 2004, and the four quarters in 2004. AVERAGE EARNING ASSET YIELD (RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED, DOLLARS IN THOUSANDS)
Average Average Yield on Constant Investment Investment Prepayment Interest Securities Securities Rate Income - -------------------------------------------------------------------------------------- Quarter Ended March 31, 2005 $18,798,200 3.75% 25% $176,289 - -------------------------------------------------------------------------------------- Year Ended December 31, 2004 $16,399,184 3.25% 29% $532,328 Quarter Ended December 31, 2004 $17,932,449 3.50% 27% $156,783 Quarter Ended September 30, 2004 $16,562,971 3.36% 25% $138,970 Quarter Ended June 30, 2004 $16,649,072 2.94% 33% $122,234 Quarter Ended March 31, 2004 $14,452,245 3.16% 31% $114,341 - --------------------------------------------------------------------------------------
The Constant Prepayment Rate decreased to 25% for the quarter ended March 31, 2005, as compared to 31% for the quarter ended March 31, 2004. The total amortization of premium and discount on Investment Securities for the quarters ended March 31, 2005 and 2004 was $36.1 million and $41.5 million, respectively. 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 $17.8 billion and total interest expense of $114.0 million for the quarter ended March 31, 2005. We had average borrowed funds of $13.6 billion and total interest expense of $50.3 million for the quarter ended March 31, 2004. Our average cost of funds was 2.57% for the quarter ended March 31, 2005 and 1.48% for the quarter ended March 31, 2004. The cost of funds rate increased by 109 basis points and the average borrowed funds increased by $4.2 billion for the quarter ended March 31, 2005 when compared to the quarter ended March 31, 2004. Interest expense for the quarter increased by $63.7 million due to the substantial increase in the average repurchase balance and weighted average cost of funds rate. Our average cost of funds was 0.01% below average one-month LIBOR and 0.45% below average six-month LIBOR for the quarter ended March 31, 2005. Our average cost of funds was 0.38% above average one-month LIBOR and 0.30% above average six-month LIBOR for the quarter ended March 31, 2004. 19 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 quarter ended March 31, 2005, the year ended December 31, 2004 and the four quarters in 2004. AVERAGE COST OF FUNDS (RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED, DOLLARS IN THOUSANDS)
Average Average Average Cost of One-Month Cost of Funds LIBOR Funds Relative Average Relative Relative to Average Average One- Average to Average to Average Average Borrowed Interest Cost of Month Six-Month Six-Month One-Month Six-Month Funds Expense Funds LIBOR LIBOR LIBOR LIBOR LIBOR ------------- ---------- -------- -------- ----------- ------------ ---------- ----------- Quarter Ended March 31, 2005 $17,756,241 $113,993 2.57% 2.58% 3.02% (0.44%) (0.01%) (0.45%) - -------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2004 $15,483,118 $270,116 1.74% 1.50% 1.80% (0.30%) 0.24% (0.06%) Quarter Ended December 31, 2004 $16,896,216 $93,992 2.23% 2.14% 2.48% (0.34%) 0.09% (0.25%) Quarter Ended September 30, 2004 $15,568,691 $70,173 1.80% 1.59% 1.97% (0.38%) 0.21% (0.17%) Quarter Ended June 30, 2004 $15,880,353 $55,648 1.40% 1.15% 1.54% (0.39%) 0.25% (0.14%) Quarter Ended March 31, 2004 $13,587,211 $50,303 1.48% 1.10% 1.18% (0.08%) 0.38% 0.30%
NET INTEREST INCOME Our net interest income, which equals interest income less interest expense, totaled $62.3 million for the quarter ended March 31, 2005 and $64.0 million for the quarter ended March 31, 2004. Our net interest income decreased because of the interest rate spread decreased, even though our asset base increased. Our net interest spread, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.18% for the quarter ended March 31, 2005 as compared to 1.68 % for the quarter ended March 31, 2004. This 50 basis point decrease was a result of the increase in the cost of funding for the quarter ended March 31, 2005 to 2.57% from 1.48% for the quarter ended March 31, 2004. The increase in cost of funds was only partially offset by the increase in yield on assets, which increased to 3.75% for the quarter ended March 31, 2005, as compared to 3.16% for the quarter ended March 31, 2004. 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 quarter ended March 31, 2005, the year ended December 31, 2004, and the four quarters in 2004. NET INTEREST INCOME (RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED, DOLLARS IN THOUSANDS)
Yield on Average Average Average Net Investment Total Interest Balance of Average Net Interest Securities Interest Earning Repurchase Interest Cost of Interest Rate Held Income Assets Agreements Expense Funds Income Spread ------------- ----------- --------- -------------- ----------- -------- --------- ---------- Quarter Ended March 31, 2005 $18,798,200 $176,289 3.75% $17,756,241 $113,993 2.57% $62,296 1.18% - ------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2004 $16,399,184 $532,328 3.25% $15,483,118 $270,116 1.74% $262,212 1.51% Quarter Ended December 31, 2004 $17,932,449 $156,783 3.50% $16,896,216 $93,992 2.23% $62,791 1.27% Quarter Ended September 30, 2004 $16,562,971 $138,970 3.36% $15,568,691 $70,173 1.80% $68,797 1.56% Quarter Ended June 30, 2004 $16,649,072 $122,234 2.94% $15,880,353 $55,648 1.40% $66,586 1.54% Quarter Ended March 31, 2004 $14,452,245 $114,341 3.16% $13,587,211 $50,303 1.48% $64,038 1.68%
INVESTMENT ADVISORY AND SERVICE FEES FIDAC is a registered investment advisor which generally receives annual net investment advisory fees of approximately 10 to 20 basis points of the gross assets it manages, assists in managing or supervises. At March 31, 2005, FIDAC had under management approximately $2.3 billion in net assets and $18.6 billion in gross assets, compared to $1.9 billion in net assets and $15.9 billion in gross assets at December 31, 2004. Investment advisory and service fees for the quarter ended March 31, 2005 totaled $4.7 million, net of fees paid to third parties pursuant to distribution service agreements for facilitating and promoting distribution of shares of FIDAC's clients. FIDAC's net advisory and service fees were included in the consolidated statement of operations and comprehensive income (loss) post the merger date, June 4, 2004. 20 GAINS AND LOSSES ON SALES OF MORTGAGE-BACKED SECURITIES For the quarter ended March 31, 2005, we sold Mortgage-Backed Securities with an aggregate historical amortized cost of $85.4 million for an aggregate gain of $580,000. For the quarter ended March 31, 2004 we sold Mortgage-Backed Securities with an aggregate historical amortized cost of $73.6 million for an aggregate gain of $595,000. 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 acquire assets, which our management believes might have higher risk-adjusted returns as part of our asset/liability management strategy. There has been an insignificant gross loss from the sale of securities during the periods. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative ("G&A") expenses were $6.7 million for the quarter ended March 31, 2005 and $5.4 million for the quarter ended March 31, 2004. G&A expenses as a percentage of average assets were 0.14% and 0.15% for the quarters ended March 31, 2005 and March 31, 2004 respectively. G&A expenses as a percentage of average equity were 1.61% and 1.63% on an annualized basis for the quarters ended March 31, 2005 and March 31, 2004, respectively. The increase in G&A expenses of $1.3 million for the quarter ended March 31, 2005, was primarily the result of increased salaries, directors and officers' insurance and additional costs related to FIDAC business. G&A expense has increased proportionately with our increased capital base and the growth in staff from 23 at the end March 31, 2004 to 30 at March 31, 2005. Even with the increased asset base, G&A expense as a percentage of average assets declined. The table below shows our total G&A expenses as compared to average total assets and average equity for the quarter ended March 31 2005, the year ended December 31, 2004, and the four quarters in 2004. G&A EXPENSES AND OPERATING EXPENSE RATIOS (RATIOS FOR THE QUARTERS HAVE BEEN ANNUALIZED, DOLLARS IN THOUSANDS)
Total G&A Total G&A Total G&A Expenses/Average Expenses/Average Expenses Assets (annualized) Equity (annualized) ------------------ ----------------------- --------------------- Quarter Ended March 31, 2005 $6,664 0.14% 1.61% ---------------------------------------------------------------------------------------------------------- Year Ended December 31, 2004 $24,029 0.14% 1.55% Quarter Ended December 31, 2004 $6,862 0.14% 1.63% Quarter Ended September 30, 2004 $6,159 0.14% 1.53% Quarter Ended June 30, 2004 $5,643 0.13% 1.39% Quarter Ended March 31, 2004 $5,365 0.15% 1.63%
NET INCOME AND RETURN ON AVERAGE EQUITY Our net income was $59.3 million for the quarter ended March 31, 2005 and $58.8 million for the quarter ended March 31, 2004. Our annualized return on average equity was 14.34% for the quarter ended March 31, 2005 and 16.59% for the quarter ended March 31, 2004. We attribute the increase in net income to the increased asset base and the addition of FIDAC net advisory and service fees. Primarily due to the decline in net interest spread, the return on average equity declined. The table below shows our net interest income, investment advisory and service fees, gain on sale of Mortgage-Backed Securities, G&A expenses, and income taxes each as a percentage of average equity, and the return on average equity for the quarter ended March 31, 2005, the year ended December 31, 2004, and the four quarters in 2004. COMPONENTS OF RETURN ON AVERAGE EQUITY (RATIOS FOR ALL QUARTERS ARE ANNUALIZED)
Net Investment Advisory and Service Gain on Sale of Net Interest Fees/ Mortgage-Backed G&A Income Return on Income/Average Average Securities/Average Expenses/Average Taxes/Average Average Equity Equity Equity Equity Equity Equity --------------- ------------- ------------------ ---------------- ------------- --------- Quarter Ended March 31, 2005 15.06% 1.13% 0.14% 1.61% 0.38% 14.34% ---------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2004 16.92% 0.62% 0.34% 1.55% 0.29% 16.04% Quarter Ended December 31, 2004 14.95% 1.10% 0.27% 1.63% 0.57% 14.12% Quarter Ended September 30, 2004 17.13% 0.94% 0.34% 1.53% 0.29% 16.59% Quarter Ended June 30, 2004 16.44% 0.31% 0.52% 1.39% 0.12% 15.76% Quarter Ended March 31, 2004 18.05% - 0.17% 1.63% - 16.59%
21 FINANCIAL CONDITION INVESTMENT SECURITIES All of our Mortgage-Backed Securities at March 31, 2005 were adjustable-rate or fixed-rate Mortgage-Backed Securities backed by single-family mortgage loans. All of the mortgage assets underlying these Mortgage-Backed Securities were secured with a first lien position on the underlying single-family properties. All our Mortgage-Backed Securities were FHLMC, FNMA or GNMA mortgage pass-through certificates or collateralized mortgage obligations, which carry an actual or implied "AAA" rating. We mark-to-market all of our Mortgage Backed Securities to fair value. All of our agency debentures are callable and carry an implied "AAA" rating. We mark-to-market all of our agency debentures to fair value. We accrete discount balances as an increase in interest income over the life of discount Investment Securities and we amortize premium balances as a decrease in interest income over the life of premium Investment Securities. At March 31, 2005 and December 31, 2004, we had on our statement of financial condition a total of $925,000 and $1.1 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current historical amortized cost of our Investment Securities acquired at a price below principal value) and a total of $417.5 million and $427.0 million, respectively, of unamortized premium (which is the difference between the remaining principal value and the current historical amortized cost of our Investment Securities acquired at a price above principal value). We received mortgage principal repayments of $1.5 billion for the quarter ended March 31, 2005 and $1.2 billion for the quarter ended March 31, 2004. The overall prepayment speed for the year quarter March 31, 2005 declined to 25%, as compared to 31%, due to a decline in refinancing activity. 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 over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life of our Mortgage-Backed Securities, all other factors being equal, our net interest income would increase during the life of these Mortgage-Backed Securities, as we would amortize our net premium balance over a longer time period. The table below summarizes our Investment Securities at March 31, 2005, December 31, 2004, September 30, 2004, June 30, 2004, and March 31, 2004. INVESTMENT SECURITIES (DOLLARS IN THOUSANDS)
Estimated Amortized Fair Weighted Principal Net Amortized Cost/Principal Estimated Value/Principal Average Amount Premium Cost Amount Fair Value Amount Yield -------------- ---------- ------------ -------------- ------------- --------------- -------- At March 31, 2005 $18,887,801 $416,542 $19,304,343 102.21% $19,091,063 101.08% 3.61% - ---------------------------------------------------------------------------------------------------------------------------- At December 31, 2004 $19,123,902 $425,792 $19,549,694 102.23% $19,428,895 101.59% 3.43% At September 30, 2004 $17,893,902 $409,115 $18,303,017 102.29% $18,211,030 101.77% 3.36% At June 30, 2004 $16,914,635 $384,648 $17,299,283 102.27% $17,121,795 101.22% 3.04% At March 31, 2004 $17,662,596 $412,563 $18,075,159 102.34% $18,079,598 102.36% 2.72%
The tables below set forth certain characteristics of our Investment Securities. The index level for adjustable-rate Investment Securities is the weighted average rate of the various short-term interest rate indices, which determine the coupon rate. 22 ADJUSTABLE-RATE INVESTMENT SECURITIES CHARACTERISTICS (DOLLARS IN THOUSANDS)
Weighted Weighted Principal Amount Weighted Weighted Weighted Average Average at Period End as Average Average Average Term to Weighted Asset % of Total Principal Coupon Index Net Next Average Yield Investment Amount Rate Level Margin Adjustment Lifetime Cap (annualized) Securities ------------- ---------- ---------- ---------- ------------ -------------- ------------ ---------------- At March 31, 2005 $13,464,087 4.29% 2.50% 1.79% 22 months 10.06% 3.46% 71.28% - -------------------------------------------------------------------------------------------------------------------------------- At December 31, 2004 $13,544,872 4.23% 2.45% 1.78% 24 months 10.12% 3.24% 70.83% At September 30, 2004 $12,645,118 4.12% 2.34% 1.78% 25 months 10.12% 3.06% 70.67% At June 30, 2004 $11,806,171 3.95% 2.19% 1.76% 29 months 10.07% 2.73% 69.80% At March 31, 2004 $13,059,967 3.90% 2.20% 1.70% 30 months 9.77% 2.91% 73.94%
FIXED-RATE INVESTMENT SECURITIES CHARACTERISTICS (DOLLARS IN THOUSANDS)
Principal Amount at Weighted Weighted Period End as % Average Coupon Average of Total Principal Rate Asset Yield Investment Amount (annualized) (annualized) Securities ---------------- ---------------- -------------- ------------------ At March 31, 2005 $5,423,714 5.31% 3.99% 28.72% - --------------------------------------------------------------------------------------------- At December 31, 2004 $5,579,030 5.24% 3.89% 29.17% At September 30, 2004 $5,248,784 5.19% 4.08% 29.33% At June 30, 2004 $5,108,464 5.15% 3.77% 30.20% At March 31, 2004 $4,602,629 5.53% 3.41% 26.06%
The following tables provide information on adjustable-rate investment securities by index at March 31, 2005 and December 31, 2004. ADJUSTABLE-RATE INVESTMENT SECURITIES BY INDEX MARCH 31, 2005
National Six- 12- 11- Financial Six- Monthly One- Six- Twelve Month Month District Average Month 1-Year 2-Year 3-Year 5-Year Federal Month Month Month Auction Moving Cost of Mortgage CD Treasury Treasury Treasury Treasury Cost of Libor Libor Libor Average Average Funds Rate Rate Index Index Index Index Funds ------ ------- ------- --------- ------- -------- --------- ------ -------- -------- -------- -------- ------- Weighted Average Term to Next Adjustment 1mo. 25 mo. 32 mo. 5 mo. 1 mo. 1 mo. 4 mo. 3 mo. 21 mo. 16 mo. 19 mo. 33 mo. 1 mo. Weighted Average Annual Period Cap 8.02% 0.99% 2.23% 1.00% 0.18% 0.83% 2.00% 1.00% 1.99% 2.00% 2.00% 2.00% 2.00 Weighted Average Lifetime Cap at March 31, 2005 8.90% 9.89% 10.11% 13.03% 10.66% 12.12% 10.58% 11.71% 10.16% 11.92% 12.96% 12.58% 13.38% Investment Principal Amount as Percentage of Investment Securities at March 31, 2005 8.21% 2.42% 23.39% 0.01% 0.21% 0.94% 0.01% 0.04% 35.01% 0.01% 0.24% 0.06% 0.73%
23 ADJUSTABLE-RATE INVESTMENT SECURITIES BY INDEX DECEMBER 31, 2004
National Six- 12- 11- Financial Six- Monthly One- Six- Twelve Month Month District Average Month 1-Year 2-Year 3-Year 5-Year Federal Month Month Month Auction Moving Cost of Mortgage CD Treasury Treasury Treasury Treasury Cost of Libor Libor Libor Average Average Funds Rate Rate Index Index Index Index Funds ------ ------- ------- --------- ------- -------- --------- ------ -------- -------- -------- -------- ------- Weighted Average Term to Next Adjustment 1 mo. 27 mo. 34 mo. 2 mo. 1 mo. 0 mo. 5 mo. 3 mo. 25 mo. 10 mo. 17 mo. 31 mo. 0 mo. Weighted Average Annual Period Cap 8.01% 1.07% 2.18% 1.00% 0.17% 0.82% 2.00% 1.00% 1.86% 2.00% 2.00% 2.00% 2.00% Weighted Average Lifetime Cap at December 31, 2004 8.88% 9.86% 10.08% 13.03% 10.65% 12.13% 10.58% 11.66% 10.31% 11.92% 12.96% 12.59% 13.39% Investment Principal Value as Percentage of Investment Securities at December 31, 2004 8.67% 2.50% 22.96% 0.01% 0.22% 0.98% 0.01% 0.05% 34.31% 0.01% 0.25% 0.07% 0.79%
BORROWINGS To date, our debt has consisted entirely of borrowings collateralized by a pledge of our Investment Securities. These borrowings appear on our balance sheet as repurchase agreements. At March 31, 2005, we had established uncommitted borrowing facilities in this market with 32 lenders in amounts, which we believe are in excess of our needs. All of our Investment Securities are currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and thus increase the liquidity and strength of our statement of financial condition. For the quarter ended March 31, 2005, the term to maturity of our borrowings ranged from one day to three years, with a weighted average original term to maturity of 159 days. For the quarter ended March 31, 2004, the term to maturity of our borrowings ranged from one day to three years, with a weighted average original term to maturity of 211 days. At March 31, 2005, the weighted average cost of funds for all of our borrowings was 2.78% and the weighted average term to next rate adjustment was 94 days. At March 31, 2004, the weighted average cost of funds for all of our borrowings was 1.44% and the weighted average term to next rate adjustment was 102 days. LIQUIDITY Liquidity, which is our ability to turn non-cash assets into cash, allows us to purchase additional investment securities and to pledge additional assets to secure existing borrowings should the value of our pledged assets decline. Our potential immediate sources of liquidity include cash balances and unused borrowing capacity. Unused borrowing capacity will vary over time as the market value of our investment securities varies. Liquidity is also generated on an on-going basis through mortgage principal repayments and net earnings retained 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 in most circumstances our investment securities could 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. Borrowings under our repurchase agreements increased by $2.7 million to $17.4 billion at March 31, 2005, from $14.7 billion at March 31, 2004. This increase in leverage was facilitated by the increase in our equity capital as a result of the issuance of common stock primarily through public offerings during 2004. We anticipate that, upon repayment of each borrowing under a repurchase agreement, we will use the collateral immediately for borrowing under a new repurchase agreement. We have not at the present time entered 24 into any commitment agreements under which the lender would be required to enter into new repurchase agreement during a specified period of time, nor do we presently plan to have liquidity facilities with commercial banks. Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties (i.e., lenders) in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (a "margin call"), which may take the form of additional securities or cash. Specifically, margin calls result from a decline in the value of the Mortgage-Backed Securities securing our repurchase agreements, prepayments on the mortgages securing such Mortgage-Backed Securities and to changes in the estimated fair value of such Mortgage-Backed Securities generally due to principal reduction of such Mortgage-Backed Securities from scheduled amortization and resulting from changes in market interest rates and other market factors. Through March 31, 2005, we did not have any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral. However, should prepayment speeds on the mortgages underlying our Mortgage-Backed Securities and/or market interest rates suddenly increase, margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position. The following table summarizes the effect on our liquidity and cash flows from contractual obligations at March 31, 2005.
(dollars in thousands) ---------------------- Within One One to Three to More Than Total Year Three Years Five Years Five Years --------------- ------------ ------------- ------------ -------------- Repurchase agreements $15,588,609 $1,850,000 - - $17,438,609 Long-term operating lease obligations 375 1,062 1,064 - 2,501 Employment contracts 6,324 - - - 6,324 --------------- ------------ ------------- ------------ -------------- Total $15,595,308 $1,851,062 $1,064 - $17,447,434 =============== ============ ============= ============ ==============
STOCKHOLDERS' EQUITY During the quarter ended March 31, 2005, the Company declared dividends to common shareholders totaling $54.6 million or $0.45 per share, which were paid on April 27, 2005. During the quarter ended March 31, 2005, the Company declared dividends to preferred shareholders totaling $3.6 million or $0.492218 per share, which were paid on March 31, 2005. During quarter ended March 31, 2005, 5,500 options were exercised under the long-term compensation plan for an aggregate exercise price of $98,835. Also, 9,198 common shares were sold through the dividend reinvestment and direct purchase program for $177,613 during the quarter ended March 31, 2005. During the quarter ending March 31, 2004, the Company declared dividends to shareholders totaling $58.9 million or $0.50 per share, which was paid on April 28, 2004. On January 21, 2004 the Company entered into an underwriting agreement pursuant to which the Company raised net proceeds of approximately $363.6 million in equity in an offering of 20,700,000 shares of common stock. On March 31, 2004, the Company raised approximately $102.9 million in net proceeds through an offering of 4,250,000 shares of 7.875% Series A Cumulative Redeemable Preferred Stock, which settled on April 5, 2004. During the quarter ended March 31, 2004, 1,027,400 shares were issued through the Equity Shelf Program, totaling net proceeds of $20.0 million. During the quarter ended March 31, 2004, 28,500 options were exercised under the long-term compensation plan at $459,000. Also, 36,936 shares were purchased in the dividend reinvestment and direct purchase program at $734,000. The FIDAC acquisition was completed on June 4, 2004. We issued 2,201,080 common shares to the shareholders of FIDAC, based on the December 31, 2003 closing price of $18.40. We continue to operate as a self-managed and self-advised real estate investment trust, with FIDAC operating as our wholly-owned taxable REIT subsidiary, FIDAC's shareholders may also receive additional shares of our common stock as an earn-out in 2005and 2006 worth up to $49,500,000 if FIDAC meets specific performance goals under the merger agreement. We cannot calculate how many shares we will issue under the earn-out provisions since that will vary depending upon whether and the extent to which FIDAC achieves specific performance goals. Even if FIDAC achieves 25 specific performance goals for a fiscal year, the number of additional shares to be issued to the FIDAC shareholders will vary depending on our average share price for the first 20 trading days of the following fiscal year. 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)." As a result of this mark-to-market accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used historical amortized cost accounting. As a result, comparisons with companies that use historical cost accounting for some or all of their balance sheet may not be meaningful. The table below shows unrealized gains and losses on the Investment Securities in our portfolio. UNREALIZED GAINS AND LOSSES (dollars in thousands)
AT AT AT AT AT MARCH 31, DECEMBER 31, SEPTEMBER 30 JUNE 30 MARCH 31, 2005 2004 2004 2004 2004 -------------- -------------- --------------- ----------- ------------ Unrealized Gain $ 23,683 $23,021 $24,788 $ 27,603 $53,912 Unrealized Loss (236,963) (143,821) (116,775) (205,092) (49,412) -------------- -------------- --------------- ----------- ------------ Net Unrealized Gain (Loss) ($213,280) ($120,800) (91,987) ($177,489) $4,500 ============== ============== =============== =========== ============ Net Unrealized Gain (Loss) as % of Investment Securities' Principal Amount (1.13%) (0.63%) (0.51%) (1.05%) 0.03% Net Unrealized Gain (Loss) as % of Investment Securities' Amortized Cost (1.11%) (0.62%) (0.50%) (1.03%) 0.03%
Mortgage-Backed Securities with a carrying value of $3.7 billion were in a continuous unrealized loss position over 12 months at March 31, 2005 in the amount of $84.8 million. Mortgage-Backed Securities with a carrying value of $12.4 billion were in a continuous unrealized loss position for less than 12 months at March 31, 2005 in the amount of $145.8 million. Mortgage-Backed Securities with a carrying value of $2.2 billion were in a continuous unrealized loss position over 12 months at December 31, 2004 in the amount of $34.1 million. Mortgage-Backed Securities with a carrying value of $13.1 billion were in a continuous unrealized loss position for less than 12 months at December 31, 2004 in the amount of $105.3 million. The decline in value of these securities is solely due to increases in interest rates. All of the Mortgage-Backed Securities are "AAA" rated or carry an implied "AAA" rating. These investments are not considered other-than-temporarily impaired since the Company has the ability and intent to hold the investments for a period of time, to maturity, if necessary, sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment on the par value of the securities. As discussed above, because we use "available-for-sale" treatment for our Investment 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 common equity base at March 31, 2005 was $1.6 billion, or a book value of $11.81 per common share. If we had used historical amortized cost accounting, our common equity base at March 31, 2005 would have been $1.6 billion, or $13.57 per common share. Our equity base at December 31, 2004 was $1.7 billion, or $12.56 per share. If we had used historical amortized cost accounting, our equity base at December 31, 2004 would have been $1.8 billion, or $13.56 per share. The table below shows our equity capital base as reported and on a historical amortized cost basis at March 31, 2005, December 31, 2004, September 30, 2004, June 30, 2004 and March 31,2004. Issuances of common stock, the level of earnings as compared to dividends declared, and other factors influence our historical cost equity capital base. The reported equity capital base is influenced by these factors plus changes in the "Unrealized Net Gains (Losses) on Assets Available for Sale" account. 26 STOCKHOLDERS' EQUITY
Net Unrealized 7.875% Series Gains (Losses) Reported Reported Common A Cumulative Historical on Assets Common Stock Historical Stock Equity Redeemable Common Stock Available for Equity Base Common Stock (Book Value) Per Preferred Stock Equity Base Sale (Book Value) Equity Per Share Share -------------------------------------------------------------------------------------------------------- (dollars in thousands, except per share data) At March 31, 2005 $177,077 $1,645,579 ($213,280) $1,432,299 $13.57 $11.81 - ------------------------------------------------------------------------------------------------------------------------------ At December 31, 2004 $177,077 $1,821,270 ($120,800) $1,700,470 $13.56 $12.56 At September 30, 2004 $102,708 $1,648,869 ($91,987) $1,556,882 $13.60 $12.84 At June 30, 2004 $102,708 $1,627,292 ($177,489) $1,449,803 $13.54 $12.07 At March 31, 2004 $102,870 $1,581,218 $4,500 $1,585,718 $13.42 $13.45
LEVERAGE Our debt-to-reported equity ratio at March 31, 2005 and March 31, 2004 was 10.8:1 and 8.7:1, 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-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 over 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 Investment Securities by entering into interest rate agreements such as interest rate caps and interest rate swaps. Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on Mortgage-Backed Securities. We will seek to mitigate the effect of changes in the mortgage principal repayment rate by balancing assets we purchase at a premium with assets we purchase at a discount. To date, the aggregate premium exceeds the aggregate discount on our Mortgage-Backed Securities. As a result, prepayments, which result in the expensing of unamortized premium, will reduce our net income compared to what net income would be absent such prepayments. OFF-BALANCE SHEET ARRANGEMENTS The Company has not had, and at March 31, 2005 does not have, any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 27 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. CAPITAL RESOURCES At March 31, 2005, we had no material commitments for capital expenditures. OTHER MATTERS We calculate that our qualified REIT assets, as defined in the Code, were 100% of our total assets at March 31, 2005 and December 31, 2004, as compared to the Code requirement that at least 75% of our total assets be qualified REIT assets. We also calculate that 97% and 94% of our revenue qualifies for the 75% source of income test, and 99 % and 100% of our revenue qualifies for the 95% source of income test, under the REIT rules for the quarters ended March 31, 2005 and March 31, 2004 respectively. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, as of March 31, 2005 and December 31, 2004, we believe that we qualified as a REIT under the 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 March 31, 2005 and December 31, 2004 we were in compliance with this requirement. 28 ITEM. 3 QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates also can affect the value of our 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 25, 50, and 100 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 March 31, 2005 and various estimates regarding prepayment and all activities are made at each level of rate shock. Actual results could differ significantly from these estimates.
Projected Percentage Change in Projected Percentage Change in Change in Interest Rate Net Interest Income Portfolio Value - --------------------------------------------------------------------------------------------------------- - -100 Basis Points (9.04%) 2.37% - -75 Basis Points (6.57%) 2.17% - -50 Basis Points (4.26%) 1.86% - -25 Basis Points (2.06%) 1.38% Base Interest Rate - - +25 Basis Points 1.95% (0.75%) +50 Basis Points 3.78% (1.63%) +75 Basis Points 5.55% (2.63%) +100 Basis Points 7.27% (3.71%)
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 29 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 March 31, 2005. 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. The interest rate sensitivity of our assets and liabilities in the table could vary substantially if based on actual prepayment experience.
More than 1 3 Years and Within 3 Months 4-12 Months Year to 3 Years Over Total ---------------- ----------------- ---------------- ---------------- -------------- (dollars in thousands) Rate Sensitive Assets: Investment Securities $ 2,552,440 $2,125,572 $6,501,643 $7,708,146 $18,887,801 Rate Sensitive Liabilities: Repurchase Agreements 15,388,609 2000,000 1,850,000 - 17,438,609 ----------------------------------------------------------------------------------- Interest rate sensitivity gap ($12,836,169) $1,925,572 $4,651,643 $7,708,146 $1,449,192 =================================================================================== Cumulative rate sensitivity gap ($12,836,169) ($10,710,792) ($6,059149) $1,449,192 =================================================================================== Cumulative interest rate sensitivity gap as a percentage of (68%) (57%) (32%) 8% total rate-sensitive assets
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." ITEM 4. CONTROLS AND PROCEDURES Our management, including our Chief Executive Officer (the "CEO") and Chief Financial Officer (the "CFO"), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, (1) were structured to ensure that material information regarding Annaly and its sole subsidiary is made known to our management, including our CEO and CFO, by our employees and (2) were effective in providing reasonable assurance that information the Company must disclose in its periodic reports under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC's rules and forms. There have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, we have taken no corrective measures. During the three months ended March 31, 2005, no change occurred in our internal control over financial reporting that materially effected, or is likely to materially effect, our internal control over financial reporting. 30 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits The exhibits required by this item are set forth on the Exhibit Index attached hereto. Exhibit Number Exhibit Description 31.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 31 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: May 2, 2005 By: /s/ MICHAEL A.J. FARRELL ------------------------- Michael A.J. Farrell (Chairman of the Board, Chief Executive Officer, President and authorized officer of registrant) Dated: May 2, 2005 By: /s/ KATHRYN F. FAGAN --------------------- Kathryn F. Fagan (Chief Financial Officer and Treasurer and principal financial and chief accounting officer) 32 EX-31.1 2 c37286_ex31-1.txt EXHIBIT 31.1 I, Michael A.J. Farrell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Annaly Mortgage Management, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 2, 2005 /s/ MICHAEL A.J. FARRELL ------------------------ Michael A.J. Farrell Chairman of the Board of Directors, Chief Executive Officer, President and principal executive officer EX-31.2 3 c37286_ex31-2.txt EXHIBIT 31.2 I, Kathryn F. Fagan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Annaly Mortgage Management, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 2, 2005 /s/ KATHRYN F. FAGAN -------------------- Kathryn F. Fagan Chief Financial Officer, Treasurer and principal financial officer EX-32.1 4 c37286_ex32-1.txt EXHIBIT 32.1 ANNALY MORTGAGE MANAGEMENT, INC. 1211 AVENUE OF THE AMERICAS SUITE 2902 NEW YORK, NEW YORK 10036 CERTIFICATION OF CHIEF EXECUTIVE OFFICER REGARDING PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS I, Michael A.J. Farrell, the Chairman of the Board of Directors, Chief Executive Officer, and President of Annaly Mortgage Management, Inc. (the "Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2005 (the "Report") filed with the Securities and Exchange Commission: o fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and o the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Michael A.J. Farrell ------------------------ Michael A.J. Farrell Chairman of the Board of Directors, Chief Executive Officer, and President May 2, 2005 EX-32.2 5 c37286_ex32-2.txt EXHIBIT 32.2 ANNALY MORTGAGE MANAGEMENT, INC. 1211 AVENUE OF THE AMERICAS SUITE 2902 NEW YORK, NEW YORK 10036 CERTIFICATION OF CHIEF FINANCIAL OFFICER REGARDING PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS I, Kathryn F. Fagan, the Chief Financial Officer and Treasurer of Annaly Mortgage Management, Inc. (the "Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2005 (the "Report") filed with the Securities and Exchange Commission: o fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and o the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Kathryn F. Fagan -------------------- Kathryn F. Fagan Chief Financial Officer and Treasurer May 2, 2005 -----END PRIVACY-ENHANCED MESSAGE-----