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No. of Recommendations: 14
Taxable (not GAAP) income is what the divvy distribution is based on.

Without the effect of the unrealized gains or losses on interest rate swaps and Agency interest-only mortgage-backed securities and net loss on extinguishment of 4% Convertible Senior Notes due 2015 (the “4% Convertible Notes”), net income for the quarter ended December 31, 2012, was $465.1 million or $0.46 per average common share as compared to $525.3 million or $0.54 per average common share for the quarter ended December 31, 2011, and $449.8 million or $0.45 per average common share for the quarter ended September 30, 2012.

They reduced share count and obligations for issuing more shares through repurchases. Looks like the average buy-back price is around $14.28 for the quarter.

During the quarter and year ended December 31, 2012, the Company repurchased approximately $211.8 million and $492.5 million of the outstanding 4% Convertible Notes for $260.3 million and $617.5 million, respectively. The 4% Convertible Notes are convertible into shares of common stock at a conversion rate that increases as the Company pays dividends. As a result, these repurchases will reduce future dilution to common shareholders.

During the quarter and year ended December 31, 2012, the Company repurchased approximately 27.8 million shares of its outstanding common stock for $397.1 million.


The average net yield decreased, as we knew, but leverage increased YoY and QoQ. With net yield spread widening in 2013, this should result in higher net income, depending what they do with leverage.

For the quarter ended December 31, 2012, the annualized yield on average interest-earning assets was 2.45% and the annualized cost of funds on average interest-bearing liabilities, including the net interest payments on interest rate swaps, was 1.50%, which resulted in an average interest rate spread of 0.95%. This was a 76 basis point decrease from the 1.71% annualized interest rate spread for the quarter ended December 31, 2011, and a 7 basis point decrease from the 1.02% average interest rate spread for the quarter ended September 30, 2012. At December 31, 2012, the weighted average yield on investment securities was 2.75% and the weighted average cost of funds on borrowings, including the net interest payments on interest rate swaps, was 1.55%, which resulted in an interest rate spread of 1.20%. Leverage at December 31, 2012, December 31, 2011, and September 30, 2012 was 6.5:1, 5.4:1 and 6.0:1, respectively.

Looks as though CPR might be slowing, at least that's the trend. Given mortgage rates have been creeping up in 2013, this should be continuing into this quarter.

The Constant Prepayment Rate for the quarters ended December 31, 2012, December 31, 2011, and September 30, 2012 was 19%, 22% and 20%, respectively.

As was her predecessor, CEO Denahan sounds clear-eyed and will continue to steer the ship in the manner to which we've become accustomed.

Wellington J. Denahan, Chairman and Chief Executive Officer of Annaly, commented on the Company’s results. “In our market, indeed every market, decisions made by policymakers continue to have exceptional influence on pricing and behavior. Nevertheless, as our results demonstrate, we continue to navigate through these uncertain waters to identify attractive relative value opportunities on both sides of our balance sheet. These market conditions are likely to persist, however, as structural imbalances here and abroad continue to affect economic activity. In this environment, we believe that remaining conservative in our management approach is in the best long-term interests of shareholders.”

All-in-all, I think Annaly is performing just as we would expect and will provide excellent total returns. I wouldn't be surprised to see a divvy increase from here, even, given what the yield spread has done since year-end. Certainly, I'd guess we've probably seen a floor to the stock price last quarter.

Best,
Arch
who loves to utter famous last words!
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