LOANS

9 Months Ended

Sep. 30, 2019

SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract]

6. LOANS

The Company invests in residential, commercial and corporate loans. Loans are classified as either held for investment or held for sale. Loans are also eligible to be accounted for under the fair value option. Excluding loans transferred or pledged to securitization vehicles, as of September 30, 2019, the Company reported $1.2 billion of loans for which the fair value option was elected. If loans are held for investment and the fair value option has not been elected, they are accounted for at amortized cost less impairment. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis.

Nonaccrual Status – If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued, but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt, but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower.

Allowance for Losses – The Company evaluates the need for a loss reserve on its loans. A provision for loan losses may be established when it is probable the Company will not collect amounts contractually due or all amounts previously estimated to be collectible. Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment. Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date.

The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management.

Management generally reviews the most recent financial information produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the Company’s commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan, economic trends (both macro and those affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject property is located. Management monitors the financial condition and operating results of its borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations.

The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating categories include “Performing”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans are considered uncollectible.

For the three and nine months ended September 30, 2019, the Company recorded a loan loss provision of $3.5 million and $9.2 million, respectively.

As of September 30, 2019 and December 31, 2018, the Company’s loan loss provision was $12.7 million and $3.5 million, respectively. There was no provision for loan loss recorded as of and for the nine months ended September 30, 2018.

The following table presents the activity of the Company’s loan investments, including loans held for sale and excluding loans transferred or pledged to securitization vehicles, for the nine months ended September 30, 2019:



	Residential			Commercial			Corporate			Total
	(dollars in thousands)
Beginning balance January 1, 2019	$	1,359,806		$	1,338,987		$	1,887,182		$	4,585,975
Purchases	1,894,303			395,058			631,065			2,920,426
Sales and transfers⁽¹⁾	(1,878,218		)	(958,912		)	(268,403		)	(3,105,533		)
Principal payments	(156,579		)	(156,437		)	(143,284		)	(456,300		)
Gains / (losses)	1,671			(9,207		)	5,260			(2,276		)
(Amortization) / accretion	(1,581		)	1,940			3,963			4,322
Ending balance September 30, 2019	$	1,219,402		$	611,429		$	2,115,783		$	3,946,614

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

The carrying value of the Company’s residential loans held for sale was $76.3 million and $97.5 million at September 30, 2019 and December 31, 2018, respectively. The carrying value of the Company’s commercial loans held for sale was $0 and $42.2 million at September 30, 2019 and December 31, 2018, respectively.

Residential

The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. Additionally, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo residential mortgage loans. The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts.

The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles, at September 30, 2019 and December 31, 2018:



	September 30, 2019		December 31, 2018
	(dollars in thousands)
Fair value	$	3,596,133	$	2,454,637
Unpaid principal balance	$	3,475,799	$	2,425,657

The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018 for these investments:



	For the Three Months Ended						For the Nine Months Ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
	(dollars in thousands)
Interest income	$	37,673		$	16,423		$	102,689		$	45,702
Net gains (losses) on disposal of investments	(9,671		)	(2,975		)	(19,499		)	(7,924		)
Net unrealized gains (losses) on instruments measured at fair value through earnings	18,093			(3,633		)	61,805			(14,802		)
Total included in net income (loss)	$	46,095		$	9,815		$	144,995		$	22,976

The following table provides the geographic concentrations based on the unpaid principal balances at September 30, 2019 and December 31, 2018 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:



Geographic Concentrations of Residential Mortgage Loans
September 30, 2019		December 31, 2018
Property location	% of Balance	Property location	% of Balance
California	51.9%	California	53.7%
New York	10.4%	Florida	7.1%
Florida	5.7%	New York	6.6%
All other (none individually greater than 5%)	32.0%	All other (none individually greater than 5%)	32.6%
Total	100.0%		100.0%

The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at September 30, 2019 and December 31, 2018:



	September 30, 2019		December 31, 2018
	Portfolio Range	Portfolio Weighted Average	Portfolio Range	Portfolio Weighted Average
	(dollars in thousands)
Unpaid principal balance	$1 - $3,448	$463	$0 - $3,500	$457
Interest rate	2.00% - 9.25%	5.03%	2.00% - 7.75%	4.72%
Maturity	1/1/2028 - 9/1/2059	5/29/2047	1/1/2028 - 11/1/2058	1/11/2046
FICO score at loan origination	505 - 825	756	505 - 823	752
Loan-to-value ratio at loan origination	8% - 111%	67%	8% - 111%	68%

At September 30, 2019 and December 31, 2018, approximately 38% and 47%, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.

Commercial

The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. The difference between the principal amount of a loan and proceeds at acquisition is recorded as either a discount or premium. Commercial real estate loans that are designated as held for investment and are originated or purchased by the Company are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less an allowance for losses, if necessary. Origination fees and costs, premiums or discounts are amortized into interest income over the life of the loan.

Preferred equity interests are designated as held for investment and are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less a reserve for estimated losses, if necessary.

At September 30, 2019 and December 31, 2018, approximately 91% and 88%, respectively, of the carrying value of the Company’s CRE Debt and Preferred Equity Investments, including loans transferred or pledged to securitization vehicles and excluding commercial loans held for sale, were adjustable-rate.

At September 30, 2019 and December 31, 2018, commercial real estate investments held for investment were comprised of the following:



	September 30, 2019						December 31, 2018
	Outstanding Principal		Carrying Value ⁽¹⁾		Percentage of Loan Portfolio ⁽²⁾		Outstanding Principal		Carrying Value ⁽¹⁾		Percentage of Loan Portfolio ⁽²⁾
	(dollars in thousands)
Senior mortgages	$	434,949	$	432,460	30.2	%	$	988,248	$	981,202	75.6	%
Senior securitized mortgages ⁽³⁾	814,423		810,005		56.5	%	—		—		—	%
Mezzanine loans	192,065		178,969		13.3	%	319,663		315,601		24.4	%
Total	$	1,441,437	$	1,421,434	100.0	%	$	1,307,911	$	1,296,803	100.0	%


⁽¹⁾	Carrying value includes unamortized origination fees of $7.3 million and $7.6 million at September 30, 2019 and December 31, 2018, respectively.


⁽²⁾	Based on outstanding principal.


⁽³⁾	Assets of a consolidated VIE.

The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for investment at September 30, 2019 and December 31, 2018:



September 30, 2019
	Senior Mortgages			Senior Securitized Mortgages ⁽¹⁾			Mezzanine Loans			Total
	(dollars in thousands)
Net carrying value (January 1, 2019)	$	981,202		$	—		$	315,601		$	1,296,803
Originations & advances (principal)	376,651			964,473			21,032			1,362,156
Principal payments	(16,099		)	(150,050		)	(139,955		)	(306,104		)
Transfers	(913,849		)	—			(8,675		)	(922,524		)
Net (increase) decrease in origination fees	2,972			(6,999		)	(184		)	(4,211		)
Amortization of net origination fees	1,583			2,581			357			4,521
Allowance for loan losses	—			—			(9,207		)	(9,207		)
Net carrying value (September 30, 2019)	$	432,460		$	810,005		$	178,969		$	1,421,434



December 31, 2018
	Senior Mortgages			Mezzanine Loans			Preferred Equity			Total
	(dollars in thousands)
Net carrying value (January 1, 2018)	$	625,900		$	394,442		$	8,985		$	1,029,327
Originations & advances (principal)	575,953			52,224			—			628,177
Principal payments	(216,849		)	(127,575		)	(9,000		)	(353,424		)
Net (increase) decrease in origination fees	(6,624		)	(370		)	—			(6,994		)
Amortization of net origination fees	2,822			376			15			3,213
Allowance for loan losses	—			(3,496		)	—			(3,496		)
Net carrying value (December 31, 2018)	$	981,202		$	315,601		$	—		$	1,296,803

⁽¹⁾Assets of a consolidated VIE.

The following table provides the internal loan risk ratings of commercial real estate investments held for investment as of September 30, 2019 and December 31, 2018.



September 30, 2019
					Internal Ratings
Investment Type	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		Performing		Performing - Closely Monitored		Performing - Special Mention		Substandard ⁽¹⁾		Doubtful ⁽²⁾		Loss ⁽³⁾		Total
(dollars in thousands)
Senior mortgages	$	434,949	30.2	%	$	141,505	$	185,954	$	64,390	$	43,100	$	—	$	—	$	434,949
Senior securitized mortgages⁽⁴⁾	814,423		56.5	%	322,193		316,710		125,520		50,000		—		—		814,423
Mezzanine loans	192,065		13.3	%	61,063		70,299		—		17,100		36,603		7,000		192,065
Total	$	1,441,437	100.0	%	$	524,761	$	572,963	$	189,910	$	110,200	$	36,603	7,000		$	1,441,437



December 31, 2018
					Internal Ratings
Investment Type	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		Performing		Performing - Closely Monitored		Performing - Special Mention		Substandard ⁽¹⁾		Doubtful ⁽²⁾		Loss		Total
(dollars in thousands)
Senior mortgages	$	988,248	75.6	%	$	653,066	$	215,792	$	55,000	$	64,390	$	—	$	—	$	988,248
Mezzanine loans	319,663		24.4	%	140,776		38,884		96,400		36,603		7,000		—		319,663
Total	$	1,307,911	100.0	%	$	793,842	$	254,676	$	151,400	$	100,993	$	7,000	$	—	$	1,307,911


⁽¹⁾	The Company rated three loans as of September 30, 2019 and two loans as of December 31, 2018 as Substandard. The Company evaluated whether an impairment exists and determined in each case that, based on quantitative and qualitative factors, the Company expects repayment of contractual amounts due.


⁽²⁾	The Company rated one loan as Doubtful and evaluated for impairment as of September 30, 2019. The Company rated one loan as Doubtful and evaluated for impairment as of December 31, 2018. The allowance for loan losses for Doubtful loans was $5.7 million and $3.5 million as of September 30, 2019 and December 31, 2018, respectively.

⁽³⁾ The Company transferred a loan from Doubtful to Loss during the three months ended September 30, 2019.


⁽⁴⁾	Assets of a consolidated VIE.

Corporate Debt

The Company’s investments in corporate loans typically take the form of senior secured loans primarily in first or second lien positions. The Company’s senior secured loans generally have stated maturities of five to seven years. In connection with these senior secured loans the Company receives a security interest in certain assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the effective interest method.

The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at September 30, 2019 and December 31, 2018 are as follows:



	Industry Dispersion
	September 30, 2019						December 31, 2018
	Fixed Rate		Floating Rate		Total		Fixed Rate		Floating Rate		Total
	(dollars in thousands)
Aircraft and Parts	$	—	$	41,064	$	41,064	$	—	$	41,342	$	41,342
Arrangement of Transportation of Freight & Cargo	—		—		—		—		21,632		21,632
Coating, Engraving & Allied Services	—		49,767		49,767		—		57,223		57,223
Commercial Fishing	—		—		—		—		242,185		242,185
Computer Programming, Data Processing & Other Computer Related Services	—		347,287		347,287		—		—		—
Drugs	—		35,918		35,918		—		35,882		35,882
Electrical Work	—		42,372		42,372		—		41,760		41,760
Electronic Components & Accessories	—		24,000		24,000		—		24,059		24,059
Engineering, Architectural, and Surveying	—		77,284		77,284		—		80,748		80,748
Grocery Stores	—		23,292		23,292		—		23,431		23,431
Home Health Care Services	—		29,391		29,391		—		—		—
Insurance Agents, Brokers and Service	—		76,444		76,444		—		48,942		48,942
Mailing, Reproduction, Commercial Art and Photography, and Stenographic	—		14,770		14,770		—		14,843		14,843
Management & Public Relations Services	—		339,319		339,319		—		487,046		487,046
Medical & Dental Laboratories	—		41,467		41,467		—		26,858		26,858
Metal Cans & Shipping Containers	—		118,420		118,420		—		118,248		118,248
Miscellaneous Business Services	—		215,709		215,709		—		19,622		19,622
Miscellaneous Equipment Rental & Leasing	—		49,732		49,732		—		49,552		49,552
Miscellaneous Health & Allied Services, not elsewhere classified	—		77,551		77,551		—		56,003		56,003
Miscellaneous Plastic Products	—		10,000		10,000		—		9,953		9,953
Motor Vehicles and Motor Vehicle Equipment	—		—		—		—		16,563		16,563
Motor Vehicles and Motor Vehicle Parts & Supplies	—		28,877		28,877		—		29,046		29,046
Nonferrous Foundries (Castings)	—		12,918		12,918		—		12,948		12,948
Offices & Clinics of Doctors of Medicine	—		107,066		107,066		—		97,877		97,877
Offices & Clinics of other Health Practitioners	—		10,123		10,123		—		21,100		21,100
Petroleum and Petroleum Products	—		24,957		24,957		—		—		—
Public Warehousing & Storage	—		94,877		94,877		—		84,278		84,278
Research, Development & Testing Services	—		45,610		45,610		—		33,381		33,381
Schools & Educational Services, not elsewhere classified	—		19,635		19,635		—		19,805		19,805
Services Allied with the Exchange of Securities	—		—		—		—		14,877		14,877
Surgical, Medical & Dental Instruments & Supplies	—		96,702		96,702		—		96,607		96,607
Telephone Communications	—		61,231		61,231		—		61,371		61,371
Total	$	—	$	2,115,783	$	2,115,783	$	—	$	1,887,182	$	1,887,182

The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at September 30, 2019 and December 31, 2018.



	September 30, 2019		December 31, 2018
	(dollars in thousands)
First lien loans	$	1,305,810	$	1,346,356
Second lien loans	809,973		540,826
Total	$	2,115,783	$	1,887,182