Annaly(NLY) - 2023 Q3 - Quarterly Report

Economic Environment - The 10-year U.S. Treasury rate increased from 3.84% on June 30, 2023, to 4.57% on September 30, 2023, contributing to significant interest rate volatility [193]. - The economic return for the quarter was negative 8.8%, primarily due to rising term premiums and reduced demand for Agency MBS [183]. - The unemployment rate ended the quarter at 3.8%, slightly higher than the historically low level of 3.4% earlier in the year [190]. - Inflation, as measured by the PCE, rose to 3.4% year-over-year in September, up from 3.2% in June [191]. - The Federal Reserve raised the Federal Funds Target Rate by 25 basis points to the 5.25% - 5.50% range during the third quarter [192]. Financial Performance - Net income for the three months ended September 30, 2023 was ($569.1) million, or ($1.21) per share, compared to ($274.0) million, or ($0.70) per share for the same period in 2022 [204]. - Net interest income for the three months ended September 30, 2023 was ($45.3) million, a decrease from$278.0 million for the same period in 2022 [204]. - For the nine months ended September 30, 2023, net income was ($1.2) billion, or ($2.73) per share, compared to $2.6 billion, or$6.46 per share for the same period in 2022 [205]. - Net interest income for the nine months ended September 30, 2023 was ($57.8) million, down from$1.3 billion for the same period in 2022 [205]. - Earnings available for distribution for Q3 2023 were $362.0 million, or$0.66 per average common share, down from $480.7 million, or$1.06 per average common share in Q3 2022, representing a decrease of 24.6% in earnings per share [206]. - For the nine months ended September 30, 2023, earnings available for distribution were $1.2 billion, or$2.18 per average common share, compared to $1.4 billion, or$3.37 per average common share for the same period in 2022, reflecting a decline of 35.3% in earnings per share [207]. Portfolio and Asset Management - The Residential Credit portfolio market value increased to $5.3 billion, with$1.5 billion in expanded credit loans settled during the quarter [186]. - The MSR portfolio grew by $90 million in the third quarter, totaling$2.3 billion in market value and over $150 billion in unpaid principal balance [188]. - The investment portfolio at period-end was$85.34 billion, an increase from $79.31 billion year-over-year [201]. - Average total assets for the three months ended September 30, 2023 were$89.49 billion, compared to $79.52 billion for the same period in 2022 [201]. - The company’s correspondent channel expansion allowed for more than double the second quarter whole loan production while maintaining conservative lending standards [186]. Interest Rate and Economic Leverage - The economic leverage ratio as of September 30, 2023, was 6.4:1, down from 7.1:1 as of September 30, 2022, indicating a reduction in leverage [227]. - The company’s GAAP leverage ratio was 7.1:1 as of September 30, 2023, compared to 6.0:1 at December 31, 2022 [303]. - The economic capital ratio at period-end was 13.1$995,423,000, up from $633,074,000 for the same period in 2022, marking an increase of approximately 57.3$392.8 million for the three months ended September 30, 2023, primarily due to higher interest expense on repurchase agreements [247]. - The average economic cost of interest-bearing liabilities was 3.28% for the three months ended September 30, 2023, compared to 1.54% for the same period in 2022 [244]. Risk Management - The company actively monitors its REIT status and compliance with applicable laws and regulations to maintain its tax status as a REIT [349]. - Credit risk is managed through established policies and ongoing surveillance of investments, particularly in non-agency mortgage-backed securities [336]. - The company utilizes interest rate swaps linked to SOFR to manage interest rate risk effectively [333]. - The company manages operational risk through various tools including policies on business continuity, cybersecurity, and vendor management [344]. Market Conditions and Valuation - The market for mortgage servicing rights (MSR) is less active, requiring significant judgment in their valuation using discounted cash flow models [360]. - The company accounts for residential mortgage loans and securities at fair value, with valuations sensitive to changes in interest rates and prepayment speeds [356][359]. - The total estimated fair value of agency securities increased to $66,591,536 thousand as of September 30, 2023, compared to$62,274,895 thousand at December 31, 2022, representing a growth of approximately 5.3% [282]. Shareholder Actions - The company authorized a share repurchase program of up to $1.5 billion, which is set to expire on December 31, 2024, but no shares were purchased under this program during the three and nine months ended September 30, 2023 [296]. - Under the at-the-market sales program, the company issued 0.9 million and 26.2 million shares for proceeds of$17.8 million and $580.5 million, respectively, during the three and nine months ended September 30, 2023 [298].