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What changed in ANNALY CAPITAL MANAGEMENT INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of ANNALY CAPITAL MANAGEMENT INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+494 added−590 removedSource: 10-K (2024-02-15) vs 10-K (2023-02-16)

Top changes in ANNALY CAPITAL MANAGEMENT INC's 2023 10-K

494 paragraphs added · 590 removed · 357 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

49 edited+8 added−103 removed114 unchanged
Biggest changeOur application of GAAP may produce financial results that fluctuate from one period to another. • New laws may be passed affecting the relationship between Fannie Mae, Freddie Mac and the federal government. • We may be subject to liability for potential violations of truth-in-lending or other similar consumer protection laws and regulations. • We may not be able to maintain compliance with laws and regulations applicable to our Residential Credit and MSR businesses, including through the manner in which we oversee the compliance obligations of our third-party service providers. • Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business. • We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other investment accounts, including potential regulatory risks. • Loss of our Investment Company Act exemption from registration would adversely affect us.
Biggest changeOur application of GAAP may produce financial results that fluctuate from one period to another. • New laws may be passed affecting the relationship between Fannie Mae, Freddie Mac and the federal government. • We may be subject to liability for potential violations of truth-in-lending or other similar consumer protection laws and regulations. • We may not be able to maintain compliance with laws and regulations applicable to our Residential Credit and MSR businesses, including through the manner in which we oversee the compliance obligations of our third party service providers. • Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business. • The increased focus on ESG and climate change issues by investors, governmental bodies and other stakeholders, as well as existing and proposed laws and regulations related to these topics, may adversely affect our business and financial results and damage our reputation. • We are subject to complex and evolving laws, regulations, rules, standards and contractual obligations regarding data privacy and security, which could increase the cost of doing business, compliance risks and potential liability. • We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other investment accounts, including potential regulatory risks. • Loss of our Investment Company Act exemption from registration would adversely affect us.
This code is applicable to our directors, officers and employees. • We have adopted Corporate Governance Guidelines which, in conjunction with the charters of our Board committees, provide the framework for the governance of our company. • We have procedures by which any of our employees, officers or directors may raise concerns confidentially about our company’s conduct, accounting, internal controls or auditing matters with the Chair of the Board, the independent directors, or the Chair of the Audit Committee or through our whistleblower phone hotline or e-mail inbox. • We have an Insider Trading Policy that prohibits our directors, officers and employees, as well as those of our subsidiaries from buying or selling our securities on the basis of material nonpublic information and prohibits communicating material nonpublic information about our company to others.
This code is applicable to our directors, officers and employees. • We have adopted Corporate Governance Guidelines which, in conjunction with the charters of our Board committees, provide the framework for the governance of our company. • We have procedures by which any of our employees, officers or directors may raise concerns confidentially about our company’s conduct, accounting, internal controls or auditing matters with the Chair of the Board, the independent directors, or the Chair of the Audit Committee or through our whistleblower phone hotline or e-mail inbox. • We have adopted an Insider Trading Policy that prohibits our directors, officers and employees, as well as those of our subsidiaries from buying or selling our securities on the basis of material nonpublic information and prohibits communicating material nonpublic information about our company to others.
For any cleared swap, we bear the credit risk of both the DCO and the relevant FCM, in the form of potential late or unrecoverable payments, potential difficulty or delay in accessing collateral that we have posted, and potential loss of any positive market value of the swap 17 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors position.
For any cleared swap, we bear the credit risk of both the DCO and the relevant FCM, in the form of potential late or unrecoverable payments, potential difficulty 17 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors or delay in accessing collateral that we have posted, and potential loss of any positive market value of the swap position.
Risks Related to Our Taxation as a REIT • Our failure to maintain our qualification as a REIT would have adverse tax consequences. • Our distribution requirements could adversely affect our ability to execute our business plan. • Distributions to tax-exempt investors may be classified as unrelated business taxable income. • We may choose to pay dividends in our own stock. • Our TRSs cannot constitute more than 20% of our total assets. • TRSs are subject to tax at the regular corporate rates, are not required to distribute dividends, and the amount of dividends a TRS can pay to its parent REIT may be limited by REIT gross income tests. • If transactions between a REIT and a TRS are entered into on other than arm’s-length terms, the REIT may be subject to a penalty tax. • Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. • Complying with REIT requirements may cause us to forgo otherwise attractive opportunities and may force us to liquidate otherwise attractive investments. • Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us. 12 ANNALY CAPITAL MANAGEMENT, INC.
Risks Related to Our Taxation as a REIT • Our failure to maintain our qualification as a REIT would have adverse tax consequences. • Our distribution requirements could adversely affect our ability to execute our business plan. • Distributions to tax-exempt investors may be classified as unrelated business taxable income. • We may choose to pay dividends in our own stock. • Our TRSs cannot constitute more than 20% of our total assets. • TRSs are subject to tax at the regular corporate rates, are not required to distribute dividends, and the amount of dividends a TRS can pay to its parent REIT may be limited by REIT gross income tests. • If transactions between a REIT and a TRS are entered into on other than arm’s-length terms, the REIT may be subject to a penalty tax. • Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. • Complying with REIT requirements may cause us to forgo otherwise attractive opportunities and may force us to liquidate otherwise attractive investments. • Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us. 13 ANNALY CAPITAL MANAGEMENT, INC.
Risk Factors Summary of Risk Factors Risks Related to Our Liquidity and Funding • Our strategy involves the use of leverage, which increases the risk that we may incur substantial losses. • Our use of leverage may result in margin calls and defaults and force us to sell assets under adverse market conditions. • We may exceed our target leverage ratios. • We may not be able to achieve our optimal leverage. • Failure to procure or renew funding on favorable terms, or at all, would adversely affect our results and financial condition. • Failure to effectively manage our liquidity would adversely affect our results and financial condition. • Volatile market conditions for our assets can result in contraction in liquidity for those assets and the related financing. • An increase in the interest payments on our borrowings relative to the interest we earn on our interest earning assets may adversely affect our profitability. • Differences in timing of interest rate adjustments on our interest earning assets and our borrowings may adversely affect our profitability. • The discontinuation of LIBOR may affect our results. • It may be uneconomical to “roll” our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts. • Our use of derivatives may expose us to counterparty and liquidity risks. • Securitizations expose us to additional risks. • Our use of non-recourse securitizations may expose us to risks which could result in losses to us. • Counterparties may require us to enter into covenants that restrict our investment strategy. • We may be unable to profitably execute or participate in future securitization transactions.
Risk Factors Summary of Risk Factors Risks Related to Our Liquidity and Funding • Our strategy involves the use of leverage, which increases the risk that we may incur substantial losses. • Our use of leverage may result in margin calls and defaults and force us to sell assets under adverse market conditions. • We may exceed our target leverage ratios. • We may not be able to achieve our optimal leverage. • Failure to procure or renew funding on favorable terms, or at all, would adversely affect our results and financial condition. • Failure to effectively manage our liquidity would adversely affect our results and financial condition. • Volatile market conditions for our assets can result in contraction in liquidity for those assets and the related financing. • An increase in the interest payments on our borrowings relative to the interest we earn on our interest earning assets may adversely affect our profitability. • Differences in timing of interest rate adjustments on our interest earning assets and our borrowings may adversely affect our profitability. • It may be uneconomical to “roll” our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts. • Our use of derivatives may expose us to counterparty and liquidity risks. • Securitizations expose us to additional risks. • Our use of non-recourse securitizations may expose us to risks which could result in losses to us. • Counterparties may require us to enter into covenants that restrict our investment strategy. • We may be unable to profitably execute or participate in future securitization transactions.
Risk Factors • The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to remain qualified as a REIT. • Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities. • The failure of a mezzanine loan or similar debt to qualify as a real estate asset could adversely affect our ability to qualify as a REIT. • Qualifying as a REIT involves highly technical and complex provisions of the Code. • The tax on prohibited transactions limits our ability to engage in certain transactions. • Certain financing activities may subject us to U.S. federal income tax and could have negative tax consequences for our stockholders. • Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests. • Dividends payable by REITs generally receive different tax treatment than dividend income from regular corporations. • New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to remain qualified as a REIT.
Risk Factors • The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to remain qualified as a REIT. • Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities. • Qualifying as a REIT involves highly technical and complex provisions of the Code. • The tax on prohibited transactions limits our ability to engage in certain transactions. • Certain financing activities may subject us to U.S. federal income tax and could have negative tax consequences for our stockholders. • Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests. • Dividends payable by REITs generally receive different tax treatment than dividend income from regular corporations. • New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to remain qualified as a REIT.
Our Investor Relations Department can be contacted at: Annaly Capital Management, Inc. 1211 Avenue of the Americas New York, New York 10036 Attn: Investor Relations Telephone: 888-8ANNALY E-mail: investor@annaly.com The SEC also maintains a website that contains reports, proxy and information statements and other information we file with the SEC at www.sec.gov . 10 ANNALY CAPITAL MANAGEMENT, INC.
Our Investor Relations Department can be contacted at: Annaly Capital Management, Inc. 1211 Avenue of the Americas New York, New York 10036 Attn: Investor Relations Telephone: 888-8ANNALY E-mail: investor@annaly.com The SEC also maintains a website that contains reports, proxy and information statements and other information we file with the SEC at www.sec.gov . 11 ANNALY CAPITAL MANAGEMENT, INC.
However, we may not be able to achieve our desired leverage if we determine that the leverage would expose us to excessive risk; our lenders do not make funding available to us at acceptable rates; or our lenders require that we provide additional collateral to cover our borrowings. 14 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
However, we may not be able to achieve our desired leverage if we determine that the leverage would expose us to excessive risk; our lenders do not make funding available to us at acceptable rates; or our lenders require that we provide additional collateral to cover our borrowings. 15 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Risk Factors To maintain our qualification as a REIT for U.S. federal income tax purposes, not more than 50% in value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal tax laws to include certain entities).
To maintain our qualification as a REIT for U.S. federal income tax purposes, not more than 50% in value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal tax laws to include certain entities).
Periods of rising interest rates or a relatively flat or inverted yield curve could decrease or eliminate the spread between the interest payments we earn on our interest earning assets and the interest payments we must make on our borrowings. 15 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Periods of rising interest rates or a relatively flat or inverted yield curve could decrease or eliminate the spread between the interest payments we earn on our interest earning assets and the interest payments we must make on our borrowings. 16 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Our notable governance practices and policies include: • Our Board is composed of a majority of independent directors, and our Audit, Management Development and Compensation, and Nominating/Corporate Governance Committees are composed exclusively of independent directors. • We have separated the roles of Chair of the Board and Chief Executive Officer, and appointed an independent Chair of the Board. • All directors are elected on an annual basis. • We have adopted an enhanced director refreshment policy, which provides that an independent director may not stand for re-election at the next annual meeting of stockholders taking place at the end of his or her term following the earlier of his or her: (i) 15th anniversary of service on our Board or (ii) 73rd birthday. • We have adopted a Code of Business Conduct and Ethics, which sets forth the basic principles and guidelines for resolving various legal and ethical 9 ANNALY CAPITAL MANAGEMENT, INC.
Our notable governance practices and policies include: • Our Board is composed of a majority of independent directors, and our Audit, Management Development and Compensation, and Nominating/Corporate Governance Committees are composed exclusively of independent directors. • We have separated the roles of Chair of the Board and Chief Executive Officer, and appointed an independent Chair of the Board. • All directors are elected on an annual basis. • We have adopted an enhanced director refreshment policy, which provides that an independent director may not stand for re-election at the next annual meeting of stockholders taking place at the end of his or her term following the earlier of his or her: (i) 15th anniversary of service on our Board or (ii) 73rd birthday. • We have adopted a Code of Business Conduct and Ethics, which sets forth the basic principles and guidelines for resolving various legal and ethical questions that may arise in the workplace and in the conduct of our business.
Concerns over economic recession, COVID-19 or other pandemic diseases, geopolitical issues including events such as the war in Ukraine, trade wars, unemployment, inflation, rising interest rates, the availability and cost of financing, the mortgage market, the repurchase agreement market and a declining real estate market or prolonged government shutdown may contribute to increased volatility and diminished expectations for the economy and markets.
Concerns over economic recession, pandemic diseases, geopolitical issues including events such as the war in Ukraine, trade wars, unemployment, inflation, government actions to combat inflation, rising interest rates, the availability and cost of financing, the mortgage market, the repurchase agreement market and a declining real estate market or prolonged government shutdown may contribute to increased volatility and diminished expectations for the economy and markets.
Investment and Market Related Risks • We may experience declines in the market value of our assets. • Investments in MSR may expose us to additional risks. • A prolonged economic slowdown or declining real estate values could impair the assets we may own. • An increase in interest rates may adversely affect the market value of our interest earning assets and, therefore, also our book value. • Actions by the Federal Reserve may affect the price and returns of our assets. • We invest in securities that are subject to mortgage credit risk. • Geographic concentration exposes investors to greater risk of default and loss. • Inadequate property insurance coverage could have an adverse impact on our operating results. • Our assets may become non-performing or sub-performing assets in the future. • We may be required to repurchase residential mortgage loans or indemnify investors if we breach representations and warranties. • Our and our third party service providers’ and servicers’ due diligence of potential assets may not reveal all of the weaknesses in such assets. • When we foreclose on an asset, we may come to own the property securing the loan. • Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets. • Subordinated tranches of non-Agency mortgage-backed securities are subordinate in right of payment to more senior securities. • Our hedging strategies may be costly, and may not hedge our risks as intended. • We are subject to risks of loss from weather conditions, man-made or natural disasters and climate change.
Investment and Market Related Risks • We may experience declines in the market value of our assets. • Investments in MSR may expose us to additional risks. • A prolonged economic slowdown or declining real estate values could impair the assets we may own. • An increase in interest rates may adversely affect the market value of our interest earning assets and, therefore, also our book value. • Actions by the Federal Reserve may affect the price and returns of our assets. • We invest in securities that are subject to mortgage credit risk. • Our investments in real estate and other securities are subject to changes in credit spreads as well as available market liquidity, which could adversely affect our ability to realize gains on the sale of such investments. • Geographic concentration exposes investors to greater risk of default and loss. • Inadequate property insurance coverage could have an adverse impact on our operating results. • Our assets may become non-performing or sub-performing assets in the future. • We may be required to repurchase residential mortgage loans or indemnify investors if we breach representations and warranties. • Our and our third party service providers’ and servicers’ due diligence of potential assets may not reveal all of the weaknesses in such assets. • When we foreclose on an asset, we may come to own the property securing the loan. • Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets. • Subordinated tranches of non-Agency mortgage-backed securities are subordinate in right of payment to more senior securities. • Our hedging strategies may be costly, and may not hedge our risks as intended. • We are subject to risks of loss from weather conditions, man-made or natural disasters and the direct and indirect effects of climate change.
Therefore, in some situations a derivative position can be illiquid, forcing us to hold it to its maturity or scheduled termination date. It is possible that new regulations could be issued governing the derivatives market, or that additional types of derivatives switch to being executed on Swap Execution Facilities or cleared on a DCO.
Therefore, in some situations a derivative position can be illiquid, forcing us to hold it to its maturity or scheduled termination date. It is possible that new regulations could be issued governing the derivatives market, including requiring additional types of derivatives to be executed on Swap Execution Facilities or cleared through a DCO.
We also have a subsidiary that operates as a licensed mortgage aggregator and master servicer, which compels it to follow individual state licensing laws and subjects it to supervision and examination by federal authorities, including the CFPB, the U.S. Department of Housing and Urban Development (“HUD”), the SEC as well as various state licensing, supervisory and administrative agencies.
We also have a subsidiary that operates as a licensed mortgage aggregator and master servicer, which subjects it to individual state licensing laws and to supervision and examination by federal authorities, including the Consumer Financial Protection Bureau ("CFPB"), the U.S. Department of Housing and Urban Development (“HUD”), the SEC as well as various state licensing, supervisory and administrative agencies.
Therefore, we bear the credit risk of the dealer with which we executed the swaption. TBA contracts and swaps on CMBX indexes are also not cleared, and we bear the credit risk of the dealer. Derivative transactions are subject to margin requirements.
Therefore, we bear the credit risk of the dealer with which we executed the swaption or other uncleared transaction. TBA contracts and swaps on CMBX indexes are also not cleared, and we bear the credit risk of the dealer. Certain derivative transactions are subject to margin requirements.
Accordingly, in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjustable-rate interest earning assets. The discontinuation of LIBOR may affect our results.
Accordingly, in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjustable-rate interest earning assets.
The Maryland Control Share Acquisition Act provides that, subject to certain exceptions, holders of “control shares” (defined as voting shares that, when aggregated with all other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding shares owned by the acquirer, by our officers, or by our employees who are also directors of our company.
The Maryland Control Share Acquisition Act provides that, subject to certain exceptions, holders of “control shares” (defined as voting shares that, when aggregated with all other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding 20 ANNALY CAPITAL MANAGEMENT, INC.
A measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, as published by the Federal Reserve Bank of New York. • Term SOFR. A benchmark based on Secured Overnight Financing Rate futures, administered by CME Group. These indices generally reflect short-term interest rates. The interest rates on our borrowings similarly reflect short-term interest rates.
Treasury securities, as published by the Federal Reserve Bank of New York. • Term SOFR. A benchmark based on Secured Overnight Financing Rate futures, administered by CME Group. These indices generally reflect short-term interest rates. The interest rates on our borrowings similarly reflect short-term interest rates.
We regularly monitor our investments and the income from these investments and, to the extent we enter into hedging transactions, we monitor income from our hedging transactions as well, so as to ensure at all times that we maintain our qualification as a REIT and our exemption from registration under the Investment Company Act.
We regularly monitor our investments and the income from these investments and, to the extent we enter into hedging transactions, we monitor income from our hedging transactions as well, so as to ensure at all times that we maintain our qualification as a REIT, our exemption from registration under the Investment Company Act and our exemption from registration as a commodity pool operator ("CPO") with the U.S.
To the extent that we are not able to profitably execute future securitizations of residential mortgage loans or other assets, including for the reasons described above or for other reasons, it could have a material adverse impact on our business and financial results.
To the extent that we are not able to profitably execute future securitizations of residential mortgage loans or other assets, including for the reasons described above or for other reasons, it could have a material adverse impact on our business and financial results. 19 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Subject to the limitations of applicable securities and state corporation laws, we can return capital by making purchases of our own capital stock or through payment of dividends. Available Information Our website is www.annaly.com .
Subject to the limitations of applicable securities and state corporation laws, we can return capital by making purchases of our own capital stock or through payment of dividends. 10 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1. BUSINESS Available Information Our website is www.annaly.com .
Counterparty Risks • The soundness of our counterparties and other financial institutions could adversely affect us. • We are subject to counterparty risk and may be unable to seek indemnity or require counterparties to repurchase residential whole loans if they breach representations and warranties, which could cause us to suffer losses.
Counterparty Risks • The soundness of our counterparties and other financial institutions could adversely affect us. • We are subject to counterparty risk and may be unable to seek indemnity or require counterparties to repurchase residential whole loans if they breach representations and warranties, which could cause us to suffer losses. • Our rights under our repurchase and derivative agreements are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders.
The reasons our borrowing costs may increase or our ability to borrow may decline include, but are not limited to, the following: • short-term interest rates increase; • the market value of our investments available to collateralize borrowings decreases; • the “haircut” applied to our assets under the repurchase agreements or other secured financing arrangements increases; • interest rate volatility increases; • forced sales, particularly under adverse market conditions, such as those which occurred as a result of the COVID-19 pandemic; • disruption in the repo market generally or the infrastructure, including technology infrastructure, that supports it; or • the availability of financing in the market decreases.
The reasons our borrowing costs may increase or our ability to borrow may decline include, but are not limited to, the following: • short-term interest rates increase; • the market value of our investments available to collateralize borrowings decreases; • the “haircut” applied to our assets under the repurchase agreements or other secured financing arrangements increases; • interest rate volatility increases; • disruption in the repo market generally or the infrastructure, including technology infrastructure, that supports it; or • the availability of financing in the market decreases.
Operational and Cybersecurity Risks • Inaccurate models or the data used by models may expose us to risk. • We are highly dependent on information systems that may expose us to cybersecurity risks. • We depend on third-party service providers, including mortgage loan servicers and sub-servicers, for a variety of services related to our business. • Our investments in residential whole loans subject us to servicing-related risks. • The performance of loans underlying our MSR related assets may be adversely affected by the performance of the related mortgage servicer. • An increase or decrease in prepayment rates may adversely affect our profitability. • We are subject to reinvestment risk. • Competition may affect ability and pricing of our target assets. • We may enter into new lines of business, acquire other companies or engage in other strategic initiatives. • Some of our investments, including those related to non-prime loans, involve credit risk. • We face possible increased instances of business interruption associated with the effects of climate change and severe weather. • If we are unable to attract, motivate and retain qualified talent, including our key personnel, it could materially and adversely affect us.
Operational and Cybersecurity Risks • Inaccurate models or the data used by models may expose us to risk. • We are highly dependent on information systems and networks, many of which are operated by third parties, and any failure of these systems or networks could materially and adversely affect our business. • Cyberattacks or other information security breaches could adversely affect our business, reputation and financial condition. • We depend on third party service providers, including mortgage loan servicers and sub-servicers, for a variety of services related to our business. • Our investments in residential whole loans subject us to servicing-related risks. • The performance of loans underlying our MSR related assets may be adversely affected by the performance of the related mortgage servicer. • An increase or decrease in prepayment rates may adversely affect our profitability. • We are subject to reinvestment risk. • Competition may affect availability and pricing of our target assets. • We may enter into new lines of business, acquire other companies or engage in other strategic initiatives. • Some of our investments, including those related to non-prime loans, involve credit risk. • If we are unable to attract, motivate and retain qualified talent, including our key personnel, it could materially and adversely affect us.
We continue to bear risk of trade errors. Because the standardized swaps available on Swap Execution Facilities and cleared through DCOs are not as customizable as the swaps available before the implementation of Dodd-Frank Act, we may bear additional basis risk from hedge positions that do not exactly reflect the interest rate risk on the asset being hedged.
Because the standardized swaps available on Swap Execution Facilities and cleared through DCOs are not as customizable as uncleared swaps, we may bear additional basis risk from hedge positions that do not exactly reflect the interest rate risk on the asset being hedged.
Arcola consistently operates with capital in excess of its regulatory capital requirements as defined by SEC Rule 15c3-1. We have a subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act.
As a self-clearing, registered broker-dealer, Arcola is required to maintain minimum net capital by the SEC and FINRA. Arcola consistently operates with capital in excess of its regulatory capital requirements as defined by SEC Rule 15c3-1. We have a subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act.
We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected for the reasons described in this section.
This enables us to qualify for the tax benefits accorded to a REIT under the Code. We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected for the reasons described in this section.
This means that their interest rates may vary over time based upon changes in an objective index, such as: • LIBOR. The rate banks charge each other for short-term Eurodollar loans. • Treasury Rate. A monthly or weekly average yield of benchmark U.S. Treasury securities, as published by the Federal Reserve Board. • Secured Overnight Financing Rate.
This means that their interest rates may vary over time based upon changes in an objective index, such as: • Treasury Rate. A monthly or weekly average yield of benchmark U.S. Treasury securities, as published by the Federal Reserve Board. • Secured Overnight Financing Rate. A measure of the cost of borrowing cash overnight collateralized by U.S.
Our Insider Trading Policy prohibits our directors, officers and employees, from (1) holding our stock in a margin account as eligible collateral, or otherwise pledging our stock as collateral for a loan, or (2) engaging in any hedging transactions with respect to our equity securities held by them. • Our executive officers are subject to a robust clawback policy, which includes triggers for financial restatements and misconduct. • Our executive officers are subject to stock ownership guidelines and holding restrictions. • In February 2022, we amended our bylaws to allow stockholders holding 25% of our common stock to call a special meeting, reducing the previous majority threshold.
Our Insider Trading Policy prohibits our directors, officers and employees, from (1) holding our stock in a margin account as eligible collateral, or otherwise pledging our stock as collateral for a loan, or (2) engaging in any hedging transactions with respect to our equity securities held by them. • Our executive officers are subject to two clawback policies, one that covers financial restatements and a second for misconduct. • Our executive officers are subject to stock ownership guidelines and holding restrictions. • Stockholders holding 25% of our common stock have the right to call a special meeting.
In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship of the FHFA, their federal regulator, pursuant to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a part of the Housing and Economic Recovery Act of 2008. In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S.
In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship of the FHFA, their federal regulator, pursuant to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a part of the Housing and 21 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
We may exceed our target leverage ratios. We generally expect to maintain an economic leverage ratio of less than 10:1. However, we are not required to stay below this economic leverage ratio. We may exceed this ratio by incurring additional debt without increasing the amount of equity we have.
However, we are not required to stay below this economic leverage ratio. We may exceed this ratio by incurring additional debt without increasing the amount of equity we have.
Arcola is a member of FINRA and is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. As a self-clearing, registered broker dealer, Arcola is required to maintain minimum net capital by FINRA.
Commodity Futures Trading Commission ("CFTC"). Arcola is a member of FINRA, an SEC registered broker-dealer and is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees.
These laws and regulations, which are frequently amended and adjusted, have, in recent years, led to an increase in both the scope of the requirements and the intensity of the supervision to which we are subject. The financial services industry is subject to extensive regulation and supervision in the U.S.
These laws and regulations, which are frequently amended and adjusted, have, in recent years, led to an increase in both the scope of the requirements and the intensity of the supervision to which we are subject. The CFTC has jurisdiction over the regulation of swaps.
Other Risks • The market price and trading volume of our shares of common stock may be volatile. • We may change our policies without stockholder approval. • COVID-19 has affected the U.S. economy and our business. 13 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Other Risks • The market price and trading volume of our shares of common stock may be volatile. • We may change our policies without stockholder approv al. 14 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Risks of Ownership of Our Common Stock Our charter does not permit ownership of over 9.8% in number of shares or value of our common stock or any class of our preferred stock. 19 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Risk Factors Risks of Ownership of Our Common Stock Our charter does not permit ownership of over 9.8% in number of shares or value of our common stock or any class of our preferred stock.
RISK FACTORS Page Summary of Risk Factors 12 Risks Related to Our Liquidity and Funding 14 Risks of Ownership of Our Common Stock 19 Compliance, Regulatory & Legal Risks 21 Risks Related to Our Taxation as a REIT 25 Counterparty Risks 31 Investment and Market Related Risks 31 Operational a nd Cyb ersecurit y Risks 35 Other Risks 40 11 ANNALY CAPITAL MANAGEMENT, INC.
RISK FACTORS Page Summary of Risk Factors 13 Risks Related to Our Liquidity and Funding 15 Risks of Ownership of Our Common Stock 20 Compliance, Regulatory & Legal Risks 21 Risks Related to Our Taxation as a REIT 26 Counterparty Risks 31 Investment and Market Related Risks 32 Operational and Cybersecurity Risks 36 Other Risks 41 12 ANNALY CAPITAL MANAGEMENT, INC.
Margin calls are most likely in market conditions in which the unencumbered assets that we would use to meet the margin calls have also decreased in value. The risks associated with margin calls are more acute during periods of economic slowdown or recession. We experienced margin calls much higher than historical norms during the onset of COVID-19.
Margin calls are most likely in market conditions in which the unencumbered assets that we would use to meet the margin calls have also decreased in value. The risks associated with margin calls are more acute during periods of economic slowdown or recession. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral.
We are currently subject to the Maryland Control Share Acquisition Act. • Title 3, Subtitle 8 of the MGCL: These provisions of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement 20 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
We are currently subject to the Maryland Control Share Acquisition Act. • Title 3, Subtitle 8 of the MGCL: These provisions of the MGCL permit our Board of Directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a director.
In the event of a default by the DCO or FCM, we also bear market risk, because the asset or liability being hedged is no longer effectively hedged. Most swaps must be or are traded on a Swap Execution Facility. We bear additional fees for use of the DCO. We also bear fees for use of the Swap Execution Facility.
In the event of a default by the DCO or FCM, we also bear market risk, if the asset or liability being hedged is no longer effectively hedged. We also bear fees for use of the DCO and Swap Execution Facility, as well as risks associated with trade errors.
We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year (subject to certain adjustments) is distributed. This enables us to qualify for the tax benefits accorded to a REIT under the Code.
We have not established a minimum dividend payment level and cannot assure stockholders of our ability to pay dividends in the future. We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year (subject to certain adjustments) is distributed.
Regulatory Requirements We have elected, organized and operated in a manner that qualifies us to be taxed as a REIT under the Internal Revenue Code of 1986, as amended and regulations promulgated thereunder (the “Code”). So long as we qualify for taxation as a REIT, we 8 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1.
We continue to assess our business, risk management and compliance practices to conform to developments in the regulatory environment. We have elected, organized and operated in a manner that qualifies us to be taxed as a REIT under the Internal Revenue Code of 1986, as amended and regulations promulgated thereunder (the “Code”).
“Risk Factors.” Corporate Governance We strive to conduct our business in accordance with the highest ethical standards and in compliance with applicable governmental laws, rules and regulations.
For a full discussion of the risks associated with competition see the “Risks Related to Our Investing, Portfolio Management and Financing Activities” section in Item 1A. “Risk Factors.” Corporate Governance We strive to conduct our business in accordance with the highest ethical standards and in compliance with applicable governmental laws, rules and regulations.
BUSINESS generally will not be subject to U.S. federal income tax on our taxable income that is distributed to our stockholders. Furthermore, substantially all of our assets, other than our taxable REIT subsidiaries (“TRSs”), consists of qualified REIT real estate assets (of the type described in Section 856(c)(5) of the Code).
Furthermore, substantially all of our assets, other than our taxable REIT subsidiaries (“TRSs”), consist of qualified REIT real estate assets (of the type described in Section 856(c)(5) of the Code).
If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. This could force us to sell our interest earning assets under adverse market conditions, or allow lenders to sell those assets on our behalf at prices that could be below our estimation of their value.
This could force us to sell our interest earning assets under adverse market conditions, or allow lenders to sell those assets on our behalf at prices that could be below our estimation of their value. Additionally, in the event of our bankruptcy, our borrowings, which are generally made under repurchase agreements, may qualify for special treatment under the U.S.
We will continue to assess our business, risk management and compliance practices to conform to developments in the regulatory environment. Competition We operate in a highly competitive market for investment opportunities. Competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these investments.
AND SUBSIDIARIES ITEM 1. BUSINESS Competition We operate in a highly competitive market for investment opportunities. Competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these investments. In acquiring our target assets, we will compete with financial institutions, institutional investors, other lenders, government entities and certain other REITs.
Additionally, in the event of our bankruptcy, our borrowings, which are generally made under repurchase agreements, may qualify for special treatment under the U.S. Bankruptcy Code. This special treatment would allow the lenders under these agreements to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to liquidate the collateral under these agreements without delay.
Bankruptcy Code. This special treatment would allow the lenders under these agreements to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to liquidate the collateral under these agreements without delay. We may exceed our target leverage ratios. We generally expect to maintain an economic leverage ratio of less than 10:1.
Our use of derivatives may expose us to counterparty and liquidity risks. Most swaps that we enter into must be cleared by a Derivatives Clearing Organization (“DCO”). DCOs are subject to regulatory oversight, use extensive risk management processes, and might receive “too big to fail” support from the government in the case of insolvency.
Our use of derivatives may expose us to counterparty and liquidity risks. Most swaps that we enter into must be executed on a Swap Extension Facility and/or be cleared by a Derivatives Clearing Organization (“DCO”), both of which are regulated by the CFTC.
Annaly and our employees endeavor to meaningfully contribute to the communities where we live, work, and invest by partnering with well-established non-profit organizations and through Annaly’s corporate giving, employee volunteerism and our employee charity match program.
ITEM 1. BUSINESS partnering with well-established non-profit organizations and through Annaly’s corporate giving, employee volunteerism and our employee charity match program. Regulatory Requirements The financial services industry is subject to extensive regulation and supervision, and changes to regulations and supervisory practices are continuously being considered by regulators and policy makers worldwide.
Removed
ITEM 1. BUSINESS costs, all in an effort to generate attractive risk adjusted returns for our shareholders. Additionally, we have attracted capital partners to our business, augmenting our public capital markets efforts, which has resulted in increased scale without sacrificing balance sheet liquidity. Certain of our strategic relationships also afford us the opportunity to support communities through socially responsible investing.
Added
So long as we qualify for taxation as a REIT, we generally will not be subject to U.S. federal income tax on our taxable income that is distributed to our stockholders.
Removed
We have created multiple strategic and capital partnerships across our investment groups including the following: – Annaly Residential Credit Group has established relationships with key mortgage loan originators and aggregators including well-known money center banks, allowing us to efficiently source proprietary originations suited to our risk parameters. – We have partnered with GIC Private Limited (“GIC”), a leading Sovereign Wealth Fund, through the creation of a joint venture with the purpose of investing in residential credit assets, including newly-originated residential loans and securities issued by our subsidiaries. – We have partnered with Capital Impact Partners, a national community development financial institution, to create a social impact joint venture supporting projects in underserved communities across the country. – We have partnered with Fifth Wall Ventures, the largest venture capital firm focused on technology for the real estate industry, through a commitment to invest in their funds that target investments in North American early- and late-stage real estate software and marketplace companies.
Added
The CFTC has asserted that this causes the operators of mortgage REITs that use swaps as part of their business model to fall within the statutory definition of CPO, and absent relief from the Market Participants Division of the CFTC, such operators generally much register as CPOs or qualify for an exemption from registration.
Removed
The partnership aims to identify innovative platforms and services that provide efficiencies across our core investment strategies. Our Portfolio and Capital Allocation Policy Under our capital allocation policy and subject to oversight by our Board of Directors (“Board”), we may allocate our investments within our target asset classes as we determine to be appropriate from time to time.
Added
On December 7, 2012, as a result of numerous requests for no-action relief from the CPO registration requirement for operators of mortgage REITs, the Division of Swap Dealer and Intermediary Oversight (the predecessor to the Market Participants Division) of the CFTC issued no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” that permits a CPO to receive relief from the requirement to register by filing a claim to perfect the use of the relief.
Removed
Our Board may adopt changes to our capital allocation policy and targeted assets at its discretion. The nature of our assets and our operations are intended to meet our REIT qualification requirements and our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”).
Added
A claim submitted by a CPO will be effective upon filing, so long as the claim is materially complete.
Removed
Our portfolio composition and capital allocation at December 31, 2022 and 2021 were as follows: December 31, 2022 December 31, 2021 Asset Classes Percentage of Portfolio Capital Allocation (1)(3) Percentage of Portfolio Capital Allocation (1)(3) Agency (2)(3) 90% 66% 91% 63% Residential Credit (3) 7% 19% 5% 24% MSR 2% 14% 1% 5% Commercial Real Estate (4) 1% 1% 1% —% Corporate Debt (5) —% —% 2% 8% (1) Capital allocation for each of the investment strategies is calculated as the difference between each of the investment strategy’s allocated assets and liabilities.
Added
The conditions that must be met relate to initial margin and premiums requirements, net income derived annually from commodity interest positions that are not qualifying hedging transactions, marketing of interests in the mortgage REIT to the public and identification of the entity as a mortgage real estate investment trust in its federal tax filings with the IRS.
Removed
It represents the percentage of equity allocated to each category. Dedicated capital allocations as of December 31, 2021 assume capital related to held for sale assets will be redeployed with the Agency business. Dedicated capital allocations as of December 31, 2021 exclude commercial real estate assets. (2) Includes to-be-announced forward contracts (“TBAs”).
Added
We have submitted a claim for the relief set forth in the no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” and believe we meet the criteria for such relief set forth therein. 9 ANNALY CAPITAL MANAGEMENT, INC.
Removed
(3) Assets exclude assets transferred or pledged to securitization vehicles, include TBA purchase contracts (market value), unsettled MSR commitments, CMBX derivatives (market value), and retained securities that are eliminated in consolidation and are shown net of participations issued.
Added
DCOs are subject to regulatory oversight and use extensive risk management processes, which result in additional expenses and collateral requirements for our swaps relative to uncleared swaps. We access the DCO through several Futures Commission Merchants (“FCMs”).
Removed
(4) During the year ended December 31, 2021, a significant majority of assets were transferred in connection with a definitive agreement to sell and exit our CRE business. During the year ended December 31, 2022, the remaining CRE assets and liabilities were transferred.
Added
AND SUBSIDIARIES Item 1A. Risk Factors shares owned by the acquirer, by our officers, or by our employees who are also directors of our company.
Removed
(5) During the year ended December 31, 2022, we sold all of the assets that comprised the MML portfolio. Risk Appetite We maintain a firm-wide risk appetite statement which defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy.
Removed
We engage in risk activities based on our core expertise that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive portfolio management, supported by a conservative liquidity and leverage posture. The risk appetite statement asserts the following key risk parameters to guide our investment management activities: 3 ANNALY CAPITAL MANAGEMENT, INC.
Removed
AND SUBSIDIARIES ITEM 1. BUSINESS Risk Parameter Description Portfolio Composition We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy. Leverage We generally expect to maintain an economic leverage ratio no greater than 10:1 considerate of our overall capital allocation framework.
Removed
Liquidity Risk We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions. Interest Rate Risk We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation.
Removed
Credit Risk We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns. Capital Preservation We will seek to protect our capital base through disciplined risk management practices.
Removed
Operational Risk We will seek to limit impacts to our business through disciplined operational risk management practices addressing areas including but not limited to, management of key third party relationships (i.e. originators, sub-servicers), human capital management, cybersecurity and technology related matters, business continuity and financial reporting risk.
Removed
Compliance, Regulatory and Legal We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act and the licenses and approvals of our regulated and licensed subsidiaries.
Removed
Our Board has reviewed and approved the investment and operating policies and strategies that support our risk appetite statement set forth in this Form 10-K. Our Board has the power to modify or waive these policies and strategies to the extent that our Board, in its discretion, determines that the modification or waiver is in our best interests.
Removed
Among other factors, market developments that affect our policies and strategies or that change our assessment of the market may cause our Board to revise our policies and strategies.
Removed
We may seek to expand our capital base in order to further increase our ability to acquire new and different types of assets when the potential returns from new investments appear attractive relative to the targeted risk-adjusted returns. We may in the future acquire assets or companies by offering our debt or equity securities in exchange for such opportunities.
Removed
Target Assets Within the confines of the risk appetite statement, we seek to generate the highest risk-adjusted returns on capital invested, after consideration of the following: • The amount, nature and variability of anticipated cash flows from the asset across a variety of interest rate, yield, spread, financing cost, credit loss and prepayment scenarios; • The liquidity of the asset; • The ability to pledge the asset to secure collateralized borrowings; • When applicable, the credit of the underlying borrower; • The costs of financing, hedging and managing the asset; • The impact of the asset to our REIT compliance and our exemption from registration under the Investment Company Act; and • The capital and operational requirements associated with the purchase and financing of the asset.
Removed
We target the purchase and sale of the assets listed below as part of our investment strategy. Our targeted assets and asset acquisition strategy may change over time as market conditions change and as our business evolves. 4 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1.
Removed
BUSINESS Investment Group Targeted Asset Class Description Annaly Agency Group Agency mortgage-backed securities Agency pass-through certificates issued or guaranteed by Agencies.
Removed
Other Agency MBS include collateralized mortgage obligations (“CMOs”), interest-only securities and inverse floaters To-be-announced forward contracts (“TBAs”) Forward contracts for Agency pass-through certificates Agency commercial mortgage-backed securities Pass-through certificates collateralized by commercial mortgages guaranteed by the Agencies Annaly Residential Credit Group Residential mortgage loans Residential mortgage loans that are not guaranteed by the Agencies Residential mortgage-backed securities Securities collateralized by pools of residential loans that are not guaranteed by one of the Agencies Agency or private label credit risk transfer securities (“CRT”) Risk sharing transactions issued by Freddie Mac and Fannie Mae and similarly structured transactions arranged by third party market participants, designed to synthetically transfer mortgage credit risk to private investors Annaly Mortgage Servicing Rights Group Mortgage Servicing Rights (“MSR”) Rights to service a pool of residential mortgage loans in exchange for a portion of the interest payments made on the loans We believe that future interest rates and mortgage prepayment rates are very difficult to predict.
Removed
Therefore, we seek to acquire assets which we believe will provide attractive returns over a broad range of interest rate and prepayment scenarios.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

90 edited+61 added−48 removed211 unchanged
Biggest changeSome of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our shares of common stock include those set forth under “Special Note Regarding Forward-Looking Statements” as well as: • actual or anticipated variations in our quarterly operating results or business prospects; • changes in our earnings estimates or publication of research reports about us or the real estate industry; • an inability to meet or exceed securities analysts’ estimates or expectations; • increases in market interest rates; • hedging or arbitrage trading activity in our shares of common stock; 40 ANNALY CAPITAL MANAGEMENT, INC.
Biggest changeRisk Factors the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our shares of common stock include those set forth under “Special Note Regarding Forward-Looking Statements” as well as: • actual or anticipated variations in our quarterly operating results or business prospects; • changes in our earnings estimates or publication of research reports about us or the real estate industry; • an inability to meet or exceed securities analysts’ estimates or expectations; • increases in market interest rates; • hedging or arbitrage trading activity in our shares of common stock; • capital commitments; • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we incur in the future; • additions or departures of management personnel; • actions by institutional stockholders or activist investors; • speculation in the press or investment community; • changes in our distribution policy; • government action or regulation; • general market and economic conditions; and • future sales of our shares of common stock or securities convertible into, or exchangeable or exercisable for, our shares of common stock.
In light of the current regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers for any failure to service the loans to the required standard.
In light of the current regulatory environment, such exposure could be significant even though we might have contractual claims against our servicers for any failure to service the loans to the required standard.
A default by the mortgage servicer in its capacity as servicer and/or failure of the mortgage servicer to perform its obligations related to any MSR could result in a loss of value of servicing fees and/or excess servicing spread.
A default by the mortgage servicer in its capacity as servicer and/or failure of the mortgage servicer to perform its obligations related to any MSR could result in a loss of value of servicing fees and/or excess servicing spread.
Mortgage servicers are subject to extensive federal, state and local laws, regulations and administrative decisions and failure to comply with such regulations can expose the servicer to fines, damages and losses.
Mortgage servicers are subject to extensive federal, state and local laws, regulations and administrative decisions and failure to comply with such regulations can expose the servicer to fines, damages and losses.
To the extent we pursue strategic investments or acquisitions, undertake other strategic initiatives or consider new lines of business, we will face numerous risks and uncertainties, including risks associated with: • the availability of suitable opportunities; • the level of competition from other companies that may have greater financial resources; • our ability to assess the value, strengths, weaknesses, liabilities and potential profitability of potential acquisition opportunities accurately and negotiate acceptable terms for those opportunities; • the required investment of capital and other resources; • the lack of availability of financing and, if available, the terms of any financings; • the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk; • the diversion of management’s attention from our core businesses; • the potential loss of key personnel of an acquired business; • assumption of liabilities in any acquired business; • the disruption of our ongoing businesses; • the increasing demands on or issues related to the combining or integrating operational and management systems and controls; • compliance with additional regulatory requirements; • costs associated with integrating and overseeing the operations of the new businesses; • failure to realize the full benefits of an acquisition, including expected synergies, cost savings, or growth opportunities, within the anticipated timeframe or at all; and • post-acquisition deterioration in an acquired business that could result in lower or negative earnings contribution and/or goodwill impairment charges.
To the extent we pursue strategic investments or acquisitions, undertake other strategic initiatives or consider new lines of business, we will face numerous risks and uncertainties, including risks associated with: • the availability of suitable opportunities; • the level of competition from other companies that may have greater financial resources; • our ability to assess the value, strengths, weaknesses, liabilities and potential profitability of potential acquisition opportunities accurately and negotiate acceptable terms for those opportunities; • the required investment of capital and other resources; • the lack of availability of financing and, if available, the terms of any financings; • the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk; • the diversion of management’s attention from our core businesses; • the potential loss of key personnel of an acquired business; • assumption of liabilities in any acquired business; • the disruption of our ongoing businesses; • the increasing demands on or issues related to the combining or integrating operational and management systems and controls; • compliance with additional regulatory requirements; • costs associated with integrating and overseeing the operations of the new businesses; • failure to realize the full benefits of an acquisition, including expected synergies, cost savings, or growth opportunities, within the anticipated timeframe or at all; and • post-acquisition deterioration in an acquired business that could result in lower or negative earnings contribution and/or goodwill impairment charges. 40 ANNALY CAPITAL MANAGEMENT, INC.
Certain third parties provide information needed for our financial statements that we cannot obtain or verify from other sources. If one of those third parties experiences a system failure or cybersecurity incident, we may not have access to that information or may not have confidence in its accuracy.
Certain third parties provide information needed for our financial statements that we cannot obtain or verify from other sources. If one of those third parties experiences a system or network failure or cybersecurity incident, we may not have access to that information or may not have confidence in its accuracy.
In its capacity as servicer, mortgage servicers operate in a highly litigious industry that subject it to potential lawsuits related to billing and collections practices, modification protocols or foreclosure practices. When a residential whole loan we own is foreclosed upon, title to the underlying property would be taken by one of our subsidiaries.
In the capacity of servicer, mortgage servicers operate in a highly litigious industry that subject it to potential lawsuits related to billing and collections practices, modification protocols or foreclosure practices. When a residential whole loan we own is foreclosed upon, title to the underlying property would be taken by one of our subsidiaries.
In its capacity as servicer, mortgage servicers operate in a highly litigious industry that subject them to potential lawsuits related to billing and collections practices, modification protocols or foreclosure practices. An increase or decrease in prepayment rates may adversely affect our profitability. The mortgage-backed securities we acquire are backed by pools of mortgage loans.
In the capacity of servicer, mortgage servicers operate in a highly litigious industry that subject them to potential lawsuits related to billing and collections practices, modification protocols or foreclosure practices. An increase or decrease in prepayment rates may adversely affect our profitability. The mortgage-backed securities we acquire are backed by pools of mortgage loans.
In particular: • part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if shares of our stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income; • part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the stock; • part or all of the income or gain recognized with respect to our stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from U.S. federal income taxation under the Code may be treated as unrelated business taxable income; • to the extent that we (or a part of us, or a disregarded subsidiary of ours) are a “taxable mortgage pool,” or if we hold residual interests in a real estate mortgage investment conduit or a CLO; • a portion of the distributions paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income. 26 ANNALY CAPITAL MANAGEMENT, INC.
In particular: • part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if shares of our stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income; • part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the stock; • part or all of the income or gain recognized with respect to our stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from U.S. federal income taxation under the Code may be treated as unrelated business taxable income; • to the extent that we (or a part of us, or a disregarded subsidiary of ours) are a “taxable mortgage pool,” or if we hold residual interests in a real estate mortgage investment conduit or a CLO; • a portion of the distributions paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.
Investments in MSR may expose us to additional risks. We invest in MSR and financial instruments whose cash flows are considered to be largely dependent on underlying MSR that either directly or indirectly act as collateral for the investment. We expect to increase our exposure to MSR-related investments in 2023.
Investments in MSR may expose us to additional risks. We invest in MSR and financial instruments whose cash flows are considered to be largely dependent on underlying MSR that either directly or indirectly act as collateral for the investment. We expect to increase our exposure to MSR-related investments in 2024.
Risk Factors Our distribution requirements could adversely affect our ability to execute our business plan. As a REIT, 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).
Our distribution requirements could adversely affect our ability to execute our business plan. As a REIT, 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).
Risk Factors Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets. Local governments have taken steps to consider how the power of eminent domain could be used to acquire residential mortgage loans.
Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets. Local governments have taken steps to consider how the power of eminent domain could be used to acquire residential mortgage loans.
Risk Factors The performance of loans underlying our MSR related assets may be adversely affected by the performance of the related mortgage servicer. The performance of the loans underlying our MSR related assets is subject to risks associated with inadequate or untimely servicing.
The performance of loans underlying our MSR related assets may be adversely affected by the performance of the related mortgage servicer. The performance of the loans underlying our MSR related assets is subject to risks associated with inadequate or untimely servicing.
Generally, we have the right to receive certain cash flows from the owner of the MSR that are generated from the servicing fees and/or excess servicing spread associated with the MSR.
Generally, we have the right to receive certain cash flows from the MSR that are generated from the servicing fees and/or excess servicing spread associated with the MSR.
These requirements can and do change as statutes and regulations are enacted, promulgated, amended, and interpreted, and the recent trends among federal and state lawmakers and regulators have been toward increasing laws, regulations, and investigative procedures concerning the mortgage industry generally.
These requirements can and do change as statutes and regulations are enacted, promulgated, amended, and interpreted, and the recent trends among federal and state lawmakers and regulators have been toward increasing compliance obligations in laws, regulations, and investigative procedures concerning the mortgage industry generally.
In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third parties with which we do business or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securities transactions, if their respective systems experience failure, interruption, cyber-attacks, or security breaches.
In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third parties with which we do business or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securities transactions, if their respective systems experience failure, interruption, cyberattacks, or other information security breaches.
Additionally, the legal and regulatory environment surrounding information privacy and security in the U.S. and international jurisdictions is constantly evolving. New business initiatives have increased, and may continue to increase, the extent to which we are subject to such U.S. and international information privacy and security regulations.
The legal and regulatory environment surrounding data privacy and security in the U.S. and international jurisdictions is constantly evolving. New business initiatives have increased, and may continue to increase, the extent to which we are subject to such U.S. and international data privacy and security regulations.
In addition, in order to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through our TRSs or other subsidiary corporations that will be subject to corporate level income tax at regular rates.
In addition, in order to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through our TRSs or other subsidiary corporations that will be subject to corporate level income tax at regular rates. 28 ANNALY CAPITAL MANAGEMENT, INC.
Actions by the Federal Reserve may affect the price and returns of our assets. The Federal Reserve (the “Fed”) owns approximately $2.6 trillion of Agency mortgage-backed securities as of December 31, 2022. Certain actions taken by the U.S. government, including the Fed, may have a negative a impact on our results.
Actions by the Federal Reserve may affect the price and returns of our assets. The Federal Reserve (the “Fed”) owns approximately $2.4 trillion of Agency mortgage-backed securities as of December 31, 2023. Certain actions taken by the U.S. government, including the Fed, may have a negative a impact on our results.
Risk Factors Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
It is impossible to assure you that the market prices of our shares of common stock will not fall in the future. Under our charter, we have 3,000,000,000 authorized shares of capital stock, par value of $0.01 per share.
It is impossible to assure you that the market prices of our shares of common stock will not fall in the future. Under our charter, we have 1,531,750,000 authorized shares of capital stock, par value of $0.01 per share.
Therefore, damage to a collateral property caused by acts of terror may not be covered by insurance and may result in substantial losses to us. Our assets may become non-performing or sub-performing assets in the future.
Therefore, damage to a collateral property that is not adequately insured or damage to a collateral property caused by acts of terror may not be covered by insurance and may result in substantial losses to us. Our assets may become non-performing or sub-performing assets in the future.
Risk Factors we could be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool, referred to as “excess inclusion income,” that is allocable to the percentage of our shares held in record name by disqualified organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state pension plans and charitable remainder trusts and government entities).
If we enter into such a transaction in the future, we could be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool, referred to as “excess inclusion income,” that is allocable to the percentage of our shares held in record name by disqualified organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state pension plans and charitable remainder trusts and government entities).
We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other investment accounts, including potential regulatory risks. We have, and may in the future, sponsor, manage and serve as general partner and/or manager of new funds or investment accounts.
AND SUBSIDIARIES Item 1A. Risk Factors We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other investment accounts, including potential regulatory risks. We have, and may in the future, sponsor, manage and serve as general partner and/or manager of new funds or investment accounts.
The Dodd-Frank Act grants enforcement authority and broad discretionary regulatory authority to the CFPB to prohibit or condition terms, acts or practices relating to residential mortgage loans that the CFPB finds abusive, unfair, deceptive or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure responsible affordable mortgage credit remains available to consumers.
Additionally, the CFPB has enforcement authority and broad discretionary regulatory authority to prohibit or condition terms, acts or practices relating to residential mortgage loans that the CFPB finds abusive, unfair, deceptive, or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure responsible affordable mortgage credit remains available to consumers.
As a result, we are unable to fully predict at this time how the Dodd-Frank Act, as well as other laws or regulations that may be adopted in the future, will affect our business, results of operations and financial condition, or the environment for repurchase financing and other forms of borrowing, the investing environment for Agency MBS, non-Agency mortgage-backed securities and/or residential mortgage and MSR.
As a result, we are unable to fully predict how laws or regulations that may be adopted in the future, will affect our business, results of operations and financial condition, or the environment for repurchase financing and other forms of borrowing, the investing environment for Agency MBS, non-Agency mortgage-backed securities and/or residential mortgage, and MSR.
For example, the federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”) which was expanded under the Dodd Frank Act, prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination.
For example, the federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”), prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination.
A disruption or breach could also lead to unauthorized access to and release, misuse, loss or destruction of our confidential information or personal or confidential information of our employees or third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial losses, litigation and increased difficulty doing business with third parties that rely on us to meet their own data protection requirements.
A cyberattack or other information security breach of such systems could lead to unauthorized access to and release, misuse, loss or destruction of our confidential information or personal or confidential information of our clients, employees or third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial losses, litigation and increased difficulty doing business with third parties that rely on us to meet their own data protection requirements.
These laws and regulations, as well as their interpretation, may be changed from time to time and result in enhanced disclosure obligations, including with respect to climate change or other environmental, social, or governance (“ESG”) topics, increasing our regulatory burden. Moreover, government efforts to address climate change may impact our business.
These laws and regulations, as well as their interpretation, may be changed from time to time and result in enhanced disclosure obligations, including with respect to climate change or other environmental, social, or governance (“ESG”) topics, increasing our regulatory burden.
We may also purchase or sell TBAs on Agency mortgage-backed securities, purchase or write put or call options on TBAs and invest in other types of mortgage derivatives, such as interest-only securities. No hedging strategy can protect us completely.
We may also purchase or sell TBAs on Agency mortgage-backed securities, purchase or write put or call options on TBAs, invest in other types of mortgage derivatives, such as interest-only securities, and hold short positions in U.S. Treasury securities. No hedging strategy can protect us completely.
Furthermore, since predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data and the ability of these historical models to accurately reflect future periods.
Furthermore, since predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data and the ability of these historical models to accurately reflect future periods. All valuation models rely on correct market data inputs.
Item 1A. Risk Factors September 2019, FHFA and the U.S. Treasury Department agreed to modifications to the Preferred Stock Purchase Agreements that will permit Fannie Mae and Freddie Mac to maintain capital reserves of $25 billion and $20 billion, respectively. Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S.
Treasury Department agreed to modifications to the Preferred Stock Purchase Agreements that will permit Fannie Mae and Freddie Mac to maintain capital reserves of $25 billion and $20 billion, respectively. Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S.
In addition, we may end up owning a property that we would not otherwise have decided to acquire directly at the price of our original investment or at all. If we foreclose on and come to own property, our financial performance and returns to investors could suffer. 34 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
In addition, we may end up owning a property that we would not otherwise have decided to acquire directly at the price of our original investment or at all. If we foreclose on and come to own property, our financial performance and returns to investors could suffer.
In addition, the Code provides relief for failures of other tests imposed as a condition of REIT qualification, as long as the failures are attributable to reasonable cause and not willful neglect. A REIT would be required to pay a penalty of $50,000, however, in the case of each failure. 25 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
In addition, the Code provides relief for failures of other tests imposed as a condition of REIT qualification, as long as the failures are attributable to reasonable cause and not willful neglect. A REIT would be required to pay a penalty of $50,000, however, in the case of each failure.
Other regional factors – e.g., rising sea levels, earthquakes, floods, forest fires, hurricanes or changes in governmental rules (including rules related to the COVID-19 pandemic) or fiscal policies – also may adversely affect the mortgaged properties.
Other regional factors – e.g., rising sea levels, earthquakes, floods, forest fires, hurricanes or changes in governmental rules or fiscal policies – also may adversely affect the mortgaged properties.
Finally, at such time as title is taken to a foreclosed property, it may require more extensive rehabilitation than we estimated at acquisition or a previously unknown environmental liability may be discovered that would require expensive and time-consuming remediation. 37 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Finally, at such time as title is taken to a foreclosed property, it may require more extensive rehabilitation than we estimated at acquisition or a previously unknown environmental liability may be discovered that would require expensive and time-consuming remediation.
AND SUBSIDIARIES Item 1A. Risk Factors We may choose to pay dividends in our own stock. We may in the future distribute taxable dividends that are payable in cash or shares of our stock at the election of each stockholder.
We may choose to pay dividends in our own stock. We may in the future distribute taxable dividends that are payable in cash or shares of our stock at the election of each stockholder.
There is also no certainty as to whether any such action without the consent of investors would face legal challenge, and, if so, the outcome of any such challenge. Subordinated tranches of non-Agency mortgage-backed securities are subordinate in right of payment to more senior securities.
There is also no certainty as to whether any such action without the consent of investors would face legal challenge, and, if so, the outcome of any such challenge. 35 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors Subordinated tranches of non-Agency mortgage-backed securities are subordinate in right of payment to more senior securities.
Failure of residential mortgage loan originators or servicers to comply with federal consumer protection laws and regulations could subject us, as an assignee or purchaser of these loans (or as an investor in securities backed by these loans), to monetary penalties and defenses to foreclosure, including by recoupment or setoff of damages and costs, which for some violations included the sum of all finance charges and fees paid by the consumer, and could result in rescission of the affected residential mortgage loans, which could adversely impact our business and financial results.
Failure of residential mortgage loan originators or servicers to comply with federal consumer protection laws and regulations could subject us, as an assignee or purchaser of these loans (or as an investor in securities backed by these loans), to monetary penalties and defenses to foreclosure, including by recoupment or setoff of damages and costs, which for some violations included the sum of all finance charges and fees paid by the consumer, 22 ANNALY CAPITAL MANAGEMENT, INC.
In some states, foreclosure actions can take several years or more to litigate. At 33 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the resolution of our claims.
In some states, foreclosure actions can take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the resolution of our claims.
From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur.
We intend to make distributions to our stockholders to comply with the REIT qualification requirements of the Code. From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur.
While we will scrutinize all of our transactions with our TRSs in an effort to ensure that we do not become subject to these taxes, there is no assurance that we will be successful. We may not be able to avoid application of these taxes. 27 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
While we will scrutinize all of our transactions with our TRSs in an effort to ensure that we do not become subject to these taxes, there is no assurance that we will be successful. We may not be able to avoid application of these taxes.
Investments in securities in the CRT sector could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are 32 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors defaults of principal and/or interest on the pool of mortgages referenced in the transaction.
Investments in securities in the CRT sector could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are defaults of principal and/or interest on the pool of mortgages referenced in the transaction.
From time to time, regions of the United States experience significant real estate downturns when others do not. Regional economic declines or conditions in regional real estate markets could adversely affect the income from, and market value of, the mortgaged properties.
From time to time, regions of the United States experience significant real estate downturns when 33 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors others do not. Regional economic declines or conditions in regional real estate markets could adversely affect the income from, and market value of, the mortgaged properties.
Risk Factors based on simplifying assumptions that lead to errors; (ii) information about collateral may be incorrect, incomplete, or misleading; (iii) collateral or bond historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation (e.g., different issuers may report delinquency statistics based on different definitions of what constitutes a delinquent loan); or (iv) collateral or bond information may be outdated, in which case the models may contain incorrect assumptions as to what has occurred since the date information was last updated.
These risks include, but are not limited to, the following: (i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors; (ii) information about collateral may be incorrect, incomplete, or misleading; (iii) collateral or bond historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation (e.g., different issuers may report delinquency statistics based on different definitions of what constitutes a delinquent loan); or (iv) collateral or bond information may be outdated, in which case the models may contain incorrect assumptions as to what has occurred since the date information was last updated.
The net effect of these factors will be to lower our net interest income, which could negatively affect the market price of shares of our capital stock and our ability to distribute dividends.
The net effect of these 25 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors factors will be to lower our net interest income, which could negatively affect the market price of shares of our capital stock and our ability to distribute dividends.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities and may force us to liquidate otherwise attractive investments.
AND SUBSIDIARIES Item 1A. Risk Factors Complying with REIT requirements may cause us to forgo otherwise attractive opportunities and may force us to liquidate otherwise attractive investments.
Future revisions in federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us. 30 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors Counterparty Risks The soundness of our counterparties and other financial institutions could adversely affect us.
Future revisions in federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us. Counterparty Risks The soundness of our counterparties and other financial institutions could adversely affect us.
Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat our TBAs as qualifying assets for purposes of the REIT asset tests, and we treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of counsel substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of real estate assets, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of an interest in mortgages on real property.
Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat our TBAs as qualifying assets for purposes of the REIT asset tests, and we treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of counsel substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of real estate assets, 30 ANNALY CAPITAL MANAGEMENT, INC.
Operational and Cybersecurity Risks Inaccurate models or the data used by models may expose us to risk. Given our strategies and the complexity of the valuation of our assets, we must rely heavily on analytical models (both proprietary models developed by us and those supplied by third parties) and information and data supplied by our third party vendors and servicers.
Given our strategies and the complexity of the valuation of our assets, we must rely heavily on analytical models (both proprietary models developed by us and those supplied by third parties) and information and data supplied by our third party vendors and servicers.
In addition, the predictive models used by us may differ substantially from those models used by other market participants, with the result that valuations based on these predictive models may be substantially higher or lower for certain assets than actual market prices.
In addition, the predictive models used by us may differ substantially from those models used by other market participants, with the result that valuations based on these 36 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors predictive models may be substantially higher or lower for certain assets than actual market prices.
Conversely, a decline in prepayment rates on our investments will reduce the amount of principal we receive and therefore reduce the amount of cash we otherwise could have reinvested in higher yielding assets at that time, which could negatively impact our future operating results. We are subject to reinvestment risk.
Conversely, a decline in prepayment rates on our investments will reduce the amount of principal we receive and therefore reduce the amount of cash we otherwise could have reinvested in higher yielding assets at that time, which could negatively impact our future operating results. 39 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect to all or a portion of such dividend that is payable in stock.
Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to 27 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors such dividends, including in respect to all or a portion of such dividend that is payable in stock.
They may amend or revise these policies at any time without a vote of our stockholders, or otherwise initiate a change in asset allocation. Policy changes could adversely affect our financial condition, results of operations, the market price of our common stock or our ability to pay dividends or distributions. COVID-19 has affected the U.S. economy and our business.
They may amend or revise these policies at any time without a vote of our stockholders, or otherwise initiate a change in asset allocation. Policy changes could adversely affect our financial condition, results of operations, the market price of our common stock or our ability to pay dividends or distributions. 42 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1B.
We are subject to reinvestment risk as a result of changes in interest rates. Declines in interest rates are generally accompanied by increased prepayments of mortgage loans, which in turn results in a prepayment of the related mortgage-backed securities. An increase in prepayments could result in the reinvestment of the proceeds we receive from such prepayments into lower yielding assets.
Risk Factors We are subject to reinvestment risk. We are subject to reinvestment risk as a result of changes in interest rates. Declines in interest rates are generally accompanied by increased prepayments of mortgage loans, which in turn results in a prepayment of the related mortgage-backed securities.
Higher-than-expected rates of default and/or higher-than-expected loss severities on the mortgages underlying our non-Agency mortgage-backed securities, MSR or on our residential whole loan investments may adversely affect the value of those assets.
Non-investment grade, non-Agency securities tend to be less liquid, may have a higher risk of default and may be more difficult to value than investment grade bonds. Higher-than-expected rates of default and/or higher-than-expected loss severities on the mortgages underlying our non-Agency mortgage-backed securities, MSR or on our residential whole loan investments may adversely affect the value of those assets.
The inability to obtain or enforce an indemnity or require repurchase of a significant number of loans could adversely affect our results of operations, financial condition and business. Investment and Market Related Risks We may experience declines in the market value of our assets.
The inability to obtain or enforce an indemnity or require repurchase of a significant number of loans could adversely affect our results of operations, financial condition and business.
Whether or not we have participated in the negotiation of the terms of a loan, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests.
Whether or not we have participated in the negotiation of the terms of a loan, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated 34 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
We cannot assure you that the market price of our shares of common stock will not fluctuate or decline significantly in the future.
We cannot assure you that the market price of our shares of common stock will not fluctuate or decline significantly in the future. Some of 41 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
In addition, if a new or acquired business generates insufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected.
The decision to increase or decrease investments within a line of business may lead to additional risks and uncertainties. In addition, if a new or acquired business generates insufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be adversely affected.
Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. The decision to increase or decrease investments within a line of business may lead to additional risks and uncertainties.
AND SUBSIDIARIES Item 1A. Risk Factors Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk.
To the extent that climate change impacts changes in weather patterns, assets in which we hold a direct or indirect interest could experience severe weather, including hurricanes, severe winter storms, and flooding due to increases in storm intensity and rising sea levels, among other effects that could impact house prices and housing-related costs and/or disrupt borrowers’ ability to pay their mortgage and or loan.
Assets in which we hold a direct or indirect interest could experience severe weather, including hurricanes, severe winter storms, and flooding (including as a result of sea level rise), all of which may become more severe as a result of climate change, which among other effects could impact house prices and housing-related costs and/or disrupt borrowers’ ability to pay their mortgage and or loan.
Under our investment policy, we have the ability to acquire non-Agency mortgage-backed securities, residential whole loans, MSR and other investment assets of lower credit quality. In general, non-Agency mortgage-backed securities carry greater investment risk than Agency mortgage-backed securities because they are not guaranteed as to 39 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A.
Under our investment policy, we have the ability to acquire non-Agency mortgage-backed securities, residential whole loans, MSR and other investment assets of lower credit quality. In general, non-Agency mortgage-backed securities carry greater investment risk than Agency mortgage-backed securities because they are not guaranteed as to principal or interest by the U.S. Government, any federal agency or any federally chartered corporation.
Conversely, increases in interest rates are generally accompanied by decreased prepayments of mortgage loans, which could reduce our capital available to reinvest into higher-yielding assets. Competition may affect ability and pricing of our target assets. We operate in a highly competitive market for investment opportunities.
An increase in prepayments could result in the reinvestment of the proceeds we receive from such prepayments into lower yielding assets. Conversely, increases in interest rates are generally accompanied by decreased prepayments of mortgage loans, which could reduce our capital available to reinvest into higher-yielding assets. Competition may affect ability and pricing of our target assets.
Qualifying as a REIT involves highly technical and complex provisions of the Code. Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our continued qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.
Our success and our ability to manage anticipated future growth depend, in large part, upon the efforts of our highly-skilled employees, and particularly on our key personnel, including our executive officers.
If we are unable to attract, motivate and retain qualified talent, including our key personnel, it could materially and adversely affect us. Our success and our ability to manage anticipated future growth depend, in large part, upon the efforts of our highly skilled employees, and particularly on our key personnel, including our executive officers.
To manage this risk, we have a robust oversight process that monitors the activities of the third-party servicers. This oversight process is also subject to regulatory requirements and expectations that we are expected to meet.
To manage this risk, we have a robust oversight process that monitors the activities of the third party servicers. This oversight process is also subject to regulatory requirements and expectations that we are expected to meet. Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may adversely affect our business.
Moreover, long term climate change could trigger extreme weather conditions that result in macroeconomic and demographic shifts. Over time, these conditions could result in repricing of the assets (land, property, securities) that we hold. There can be no assurance that climate change and severe weather will not have a material adverse effect on our financial performance.
Over time, these conditions could result in repricing of the assets (land, property, securities) that we hold. There can be no assurance that climate change and severe weather will not have a material adverse effect on our financial performance. Operational and Cybersecurity Risks Inaccurate models or the data used by models may expose us to risk.
In addition, we will be subject to a non-deductible 4% excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our stockholders to comply with the REIT qualification requirements of the Code.
In addition, we will be subject to a non-deductible 4% excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum 26 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors amount specified under U.S. federal tax laws.
However, we also acquire CRTs, non-Agency mortgage-backed securities and residential loans, which are backed by residential real property but, in contrast to Agency mortgage-backed securities, the principal and interest payments are not guaranteed by GSEs or the U.S. Government. Our CRT, non-Agency mortgage-backed securities and residential loan investments are therefore particularly sensitive to recessions and declining real estate values.
However, we also acquire CRTs, non-Agency mortgage-backed securities and residential loans, which are backed by residential real property but, in contrast to Agency 32 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors mortgage-backed securities, the principal and interest payments are not guaranteed by GSEs or the U.S. Government.
Risk Factors made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute “gross income” for purposes of the 75% or 95% gross income tests.
Any income from a properly designated hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute “gross income” for purposes of the 75% or 95% gross income tests.
Any costs or delays involved in the effectuation of a foreclosure of the loan or a liquidation of the underlying property will further reduce the proceeds and increase our loss.
The liquidation proceeds upon sale of that real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Any costs or delays involved in the effectuation of a foreclosure of the loan or a liquidation of the underlying property will further reduce the proceeds and increase our loss.
We may not be able to maintain compliance with laws and regulations applicable to our Residential Credit or MSR businesses, including through the manner in which we oversee the compliance obligations of our third-party service providers.
The cost of whole loans and the servicing income derived from owning MSR could be affected by the CFPB categorizing any currently permissible fee or charge as “junk.” We may not be able to maintain compliance with laws and regulations applicable to our Residential Credit or MSR businesses, including through the manner in which we oversee the compliance obligations of our third party service providers.
Accordingly, an increase in prepayments can result in a reduction in the value and income we may earn of our MSR related assets and negatively affect our profitability. • While we have executed recapture agreements with our subservicers to attempt to retain the MSR investment resulting from a refinance transaction, the effectiveness of these efforts is impacted by borrower, subservicer, and unaffiliated lender behavior. 31 ANNALY CAPITAL MANAGEMENT, INC.
Accordingly, an increase in prepayments can result in a reduction in the value and income we may earn of our MSR related assets and negatively affect our profitability. • While we have executed recapture agreements with our subservicers to attempt to retain the MSR investment resulting from a refinance transaction, the effectiveness of these efforts is impacted by borrower, subservicer, and unaffiliated lender behavior. • Servicers are responsible for advancing the payment of principal, interest, and escrow items on mortgage loans when those payments are not timely made by the borrower (including during periods of forbearance) and the timing and amount of recovery of those advances is unpredictable.
We may face increased costs as we continue to evolve our cyber defenses in order to contend with changing risks, and possible increased costs of complying with cyber laws and regulations. These costs and losses associated with these risks are difficult to predict and quantify, but could have a significant adverse effect on our operating results.
We may face increased costs as we continue to evolve our cyber defenses in order to contend with changing risks, and possible increased costs of complying with cybersecurity laws and regulations.
The expected transition from LIBOR to alternative reference rates adds additional complication to our hedging strategies. We are subject to risks of loss from weather conditions, man-made or natural disasters and climate change.
We are subject to risks of loss from weather conditions, man-made or natural disasters and the direct and indirect effects of climate change.
Computer malware, viruses, computer hacking and phishing attacks have become more prevalent in our industry and we are subject to such attempted attacks. We rely heavily on our financial, accounting and other data processing systems.
Computer malware, ransomware, viruses, computer hacking, denial-of-service attacks, and social engineering attacks (including phishing attacks) have become more prevalent in our industry and we are subject to such attempted attacks.
We cannot provide assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
Furthermore, competition for investments in our target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot provide assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.
We are highly dependent on information systems that may expose us to cybersecurity risks. Our business is highly dependent on communications and information systems. Any failure or interruption of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading activities, including mortgage-backed securities trading activities.
Any failure or interruption of our systems or networks or cyberattacks or other information security breaches of our networks or systems could cause delays or other problems in our securities trading activities, including mortgage-backed securities trading activities.
Furthermore, claims may be asserted that might interfere with enforcement of our rights. In the event of a foreclosure, we may assume direct ownership of the underlying real estate. The liquidation proceeds upon sale of that real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us.
Risk Factors priority and perfection of the applicable security interests. Furthermore, claims may be asserted that might interfere with enforcement of our rights. In the event of a foreclosure, we may assume direct ownership of the underlying real estate.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. As of December 31, 2022, we were not party to any pending material legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES None. 43 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 5.
Biggest changeITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. As of December 31, 2023, we were not party to any pending material legal proceedings and we are not aware of any contemplated material proceedings by governmental authorities. ITEM 4.
The comparison is for the five-year period ended December 31, 2022 and assumes the reinvestment of dividends. The graph and table assume that $100 was invested in our common stock and the two other indices on the last trading day of the initial year shown in the graph.
The comparison is for the five-year period ended December 31, 2023 and assumes the reinvestment of dividends. The graph and table assume that $100 was invested in our common stock and the two other indices on the last trading day of the initial year shown in the graph.
“Risk Factors.” No dividends can be paid on our common stock unless we have paid full cumulative dividends on our preferred stock. From the date of issuance of our preferred stock through December 31, 2022, we have paid full cumulative dividends on our preferred stock.
“Risk Factors.” No dividends can be paid on our common stock unless we have paid full cumulative dividends on our preferred stock. From the date of issuance of our preferred stock through December 31, 2023, we have paid full cumulative dividends on our preferred stock.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under the trading symbol “NLY.” As of January 31, 2023, we had 493,615,144 shares of common stock issued and outstanding which were held by approxima tely 566,479 beneficial holders.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under the trading symbol “NLY.” As of January 31, 2024, we had 500,080,287 shares of common stock issued and outstanding which were held by approxima tely 480,324 beneficial holders.
Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities PART II ITEM 5.
MINE SAFETY DISCLOSURES None. 43 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities PART II ITEM 5.

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 43 PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 44 Item 6. Reserved 46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 47 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 90 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 43 PART II Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 44 Item 6. Reserved 46 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 47 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 88 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeMarket for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Annaly Capital Management, Inc. 100 93 99 102 104 82 S&P 500 Index 100 96 126 149 191 157 BBG REIT Index 100 97 120 93 110 83 The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither the accuracy nor completeness can be guaranteed.
Biggest changeMarket for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Annaly Capital Management, Inc. 100 107 110 113 89 93 S&P 500 Index 100 131 156 200 164 207 BBG REIT Index 100 124 96 113 86 98 The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither the accuracy nor completeness can be guaranteed.
No shares were repurchased to with respect to the Preferred Stock Repurchase Program during the year ended December 31, 2022. As of December 31, 2022, the maximum dollar value of shares that may yet be purchased under this plan was $1.6 billion.
No shares were repurchased to with respect to the Preferred Stock Repurchase Program during the year ended December 31, 2023. As of December 31, 2023, the maximum dollar value of shares that may yet be purchased under this plan was $1.6 billion.
No shares were repurchased with respect to this share repurchase program during the year ended December 31, 2022. As of December 31, 2022, the maximum dollar value of shares that may yet be purchased under this plan was $1.5 billion.
No shares were repurchased with respect to this share repurchase program during the year ended December 31, 2023. As of December 31, 2023, the maximum dollar value of shares that may yet be purchased under this program was $1.5 billion.

Item 6. [Reserved]

Selected Financial Data — reserved (removed by SEC in 2021)

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Biggest changeMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 49 Reverse Stock Split 49 Business Environment 49 Economic Environment 50 London Interbank Offered Rate (“LIBOR”) Transition 51 Income Tax Reform 51 Results of Operations 52 Net Income (Loss) Summary 53 Non-GAAP Financial Measures 54 Earnings Available for Distribution, Earnings Available for Distribution Attributable to Common Stockholders, Earnings Available for Distribution per Average Common Share and Annualized EAD Return on Average Equity 54 Premium Amortization Expense 56 Economic Leverage and Economic Capital Ratios 56 Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA) 57 Experienced and Projected Long-term CPR 58 Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA) and Average Economic Cost of Interest Bearing Liabilities 59 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 60 Other Income (Loss) 60 General and Administrative Expenses 61 Return on Average Equity 62 Unrealized Gains and Losses - Available-for-Sale Investments 62 Financial Condition 63 Residential Securities 63 Contractual Obligations 66 Commitments and Contractual Obligations with Unconsolidated Entities 66 Capital Management 66 Stockholders’ Equity 67 Capital Stock 67 Leverage and Capital 68 Risk Management 68 Risk Appetite 68 Governance 69 Description of Risks 70 Capital, Liquidity and Funding Risk Management 71 Funding 71 Excess Liquidity 72 Maturity Profile 73 Stress Testing 74 Liquidity Management Policies 75 Investment/Market Risk Management 75 Credit Risk Management 76 Counterparty Risk Management 77 Operational Risk Management 77 Compliance, Regulatory and Legal Risk Management 78 Critical Accounting Estimates 79 Valuation of Financial Instruments 79 Residential Securities 79 Residential Mortgage Loans 79 MSR 79 Interest Rate Swaps 80 Revenue Recognition 80 Consolidation of Variable Interest Entities 80 Use of Estimates 80 Glossary of Terms 81 48 ANNALY CAPITAL MANAGEMENT, INC.
Biggest changeMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 49 Reverse Stock Split 49 Business Environment 49 Economic Environment 50 London Interbank Offered Rate (“LIBOR”) Transition 51 Results of Operations 51 Net Income (Loss) Summary 52 Non-GAAP Financial Measures 53 Earnings Available for Distribution, Earnings Available for Distribution Attributable to Common Stockholders, Earnings Available for Distribution P er Average Common Share and Annualized EAD Return on Average Equity 53 Premium Amortization Expense 55 Economic Leverage and Economic Capital Ratios 55 Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA) 56 Experienced and Projected Long-term CPR 57 Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA) , and Average Economic Cost of Interest Bearing Liabilities 57 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 58 Other Income (Loss) 59 General and Administrative Expenses 60 Return on Average Equity 61 Unrealized Gains and Losses - Available-for-Sale Investments 61 Financial Condition 62 Residential Securities 62 Contractual Obligations 64 Commitments and Contractual Obligations with Unconsolidated Entities 65 Capital Management 65 Stockholders’ Equity 65 Capital Stock 65 Leverage and Capital 66 Risk Management 66 Risk Appetite 67 Governance 67 Description of Risks 68 Liquidity and Funding Risk Management 69 Funding 69 Excess Liquidity 70 Maturity Profile 71 Stress Testing 72 Liquidity Management Policies 73 Investment/Market Risk Management 73 Credit Risk Management 74 Counterparty Risk Management 74 Operational Risk Management 75 Compliance, Regulatory and Legal Risk Management 76 Critical Accounting Estimates 77 Valuation of Financial Instruments 77 Residential Securities 77 Residential Mortgage Loans 77 MSR 77 Interest Rate Swaps 78 Revenue Recognition 78 Consolidation of Variable Interest Entities 78 Use of Estimates 78 Glossary of Terms 79 48 ANNALY CAPITAL MANAGEMENT, INC.
All references made to share or per share amounts in the accompanying consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the Reverse Stock Split.
All references made to share or per share amounts in the accompanying consolidated financial statements and disclosures have been retroactively adjusted, where applicable, to reflect the effects of the Reverse Stock Split.
Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2021. 47 ANNALY CAPITAL MANAGEMENT, INC.
Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2022. 47 ANNALY CAPITAL MANAGEMENT, INC.
Refer to the section titled “Glossary of Terms” located at the end of this Item 7 for definitions of commonly used terms in this annual report on Form 10-K. This section of our Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
Refer to the section titled “Glossary of Terms” located at the end of this Item 7 for definitions of commonly used terms in this annual report on Form 10-K. This section of our Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers. Refer to the “Non-GAAP Financial Measures” section for additional information.
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers. Refer to the “Non-GAAP Financial Measures” section for additional information. 51 ANNALY CAPITAL MANAGEMENT, INC.
The following table below presents interest rates and spreads at each date presented: As of December 31, 2022 2021 2020 30-Year mortgage current coupon 5.39% 2.07% 1.34% Mortgage basis 152 bps 56 bps 43 bps 10-Year U.S.
Treasury rate, tightened slightly, ending the year 12 basis points tighter than December 2022. The following table below presents interest rates and spreads at each date presented: As of December 31, 2023 2022 2021 30-Year mortgage current coupon 5.25% 5.39% 2.07% Mortgage basis 137 bps 152 bps 56 bps 10-Year U.S.
This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements.
Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A. “Risk Factors”. This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements.
Treasury rate 3.87% 1.51% 0.91% LIBOR 1-Month 4.39% 0.10% 0.14% 6-Month 5.14% 0.34% 0.26% OIS SOFR Swaps 1-Month 4.36% 0.05% 0.07% 6-Month 4.80% 0.19% 0.06% London Interbank Offered Rate (“LIBOR”) Transition The United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023.
Treasury rate 3.88% 3.87% 1.51% OIS SOFR Swaps 1-Month 5.35% 4.36% 0.05% 6-Month 5.15% 4.80% 0.19% London Interbank Offered Rate (“LIBOR”) Transition All LIBOR tenors relevant to us either are no longer published or are no longer representative.
Economic Environment U.S. real economic growth slowed in 2022, with U.S. gross domestic product (“GDP”) rising 2.1% on a year-over-year basis, well below the 5.9% recorded for 2021.
Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to its most directly comparable GAAP results. Economic Environment U.S. real economic growth accelerated in 2023, with U.S. gross domestic product (“GDP”) rising 2.5% on a year-over-year basis, above the 1.9% recorded for 2022. Economic activity continued to strengthen throughout the year, led by sizeable increases in consumption.
The Federal Reserve’s preferred inflation gauge, the headline Personal Consumption Expenditure Chain Price Index (“PCE”), measured 5.0% in December 2022, after peaking at 6.7% on a year-over-year basis in June 2022. The core measure, which does not include price changes in food and energy sectors, measured 4.4%, after peaking at 5.4% in February 2022.
Management’s Discussion and Analysis Price pressures remained at elevated levels throughout the year although they have shown notable signs of progress toward the Fed’s 2% target. The headline Personal Consumption Expenditure Chain Price Index (“PCE”), the Fed’s preferred inflation gauge, measured 2.6% in December 2023, after peaking at 7.0% on a year-over-year basis in June 2022.
The asset side of the balance sheet continues to decline at a pace of 50 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis $95 billion per month across U.S. Treasuries and Agency MBS, almost twice the runoff rate of the prior quantitative tightening period between 2017 and 2019.
The amount of quantitative tightening – the process in which the Federal Reserve lets securities in its portfolio mature, thereby lowering bank reserves and other liquidity in the financial system – continues at $95 billion per month across U.S. Treasuries and Agency MBS, almost twice the runoff rate of the prior quantitative tightening period between 2017 and 2019.
The unemployment rate ended the year at a historic low of 3.5%, declining 0.4 percentage points from 3.9% in December 2021. Additionally, job openings remain elevated relative to pre-pandemic averages as labor demand far exceeded labor supply.
The unemployment rate ended the year at 3.7%, increasing 0.2 percentage points from the historic low of 3.5% reported in December 2022. Total nonfarm payroll employment expanded at a slower pace in 2023, totaling 3.1 million added jobs, relative to 4.5 million added jobs seen in 2022.
In Residential Credit, our portfolio ended the year at $5.0 billion in market value, up roughly $400 million year-over-year, and currently represents 19% of the firm’s capital.
The residential credit sector benefited from the strong economic environment and the resilience of the housing market, enabling us to continue to achieve progress in building out the business. Our Residential Credit portfolio ended the year at $5.7 billion market value, having grown 14% year over year, and representing 20% of the firm’s capital.
The Fed conducts monetary policy with a dual mandate: full employment and price stability. Given the strength of the labor market and the broadening inflation pressures, the Fed embarked on an aggressive tightening campaign in 2022.
The disinflationary pressures are mostly attributed to lower goods prices, while the service sector remains elevated, particularly in measures such as shelter inflation. The Fed conducts monetary policy with a dual mandate: full employment and price stability.
The target range for the Federal Funds rate increased 425 bps from 0.0% - 0.25% in December 2021 to 4.25% - 4.50% by the end of 2022. At the same time, the Fed transitioned from expanding their balance sheet through asset purchases in 2021 to contracting their balance sheet in 2022 by allowing assets to mature.
Given the easing of inflation pressures, the Fed slowed its tightening campaign at the beginning of 2023 and remained on pause in the second half of the year. The target range for the Federal Funds rate increased 100 basis points from 4.25% - 4.50% in December 2022 to 5.25% - 5.50% by the end of 2023.
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Business Environment Financial markets saw meaningful volatility in 2022 as high inflation readings led the Federal Reserve to conduct the most notable tightening in monetary policy in over 40 years. The Federal Open Market Committee (“FOMC”) raised the Federal Funds Target Rate by 4.25 percentage points between March and December 2022.
Added
Business Environment Financial markets saw meaningful volatility in 2023, marking a second consecutive year in which fixed income markets were more broadly impacted by elevated uncertainty around the outlook for the economy and the macroeconomic landscape.
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In addition, the FOMC announced runoff of its balance sheet, opting to allow up to $95 billion in Treasury and Agency mortgage-backed securities mature on a monthly basis.
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The volatility was driven by a combination of factors, including bank earnings and liquidity pressures that emerged in March 2023 following the sudden failure of Silicon Valley Bank. Fears over the health of the broader banking system ultimately proved disproportionate, evidenced by a normalization in interest rates as the economy remained robust.
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The meaningful increase in policy rates, which was emulated by many developed market central banks globally, led to sharp underperformance in fixed income assets, best seen by the negative 13% total return for the Bloomberg Aggregate Fixed Income Index in 2022, underperforming the second worst year in index history by more than four-fold.
Added
However, interest rates then rose sharply between August and October with the ten-year Treasury note reaching the 5% yield mark as market participants appeared increasingly concerned about the outlook for the fiscal trajectory. The total deficit reached $1.78 trillion for the full calendar year, representing another year of large fiscal deficits despite healthy economic growth.
Removed
With respect to the housing market, activity slowed meaningfully over the course of 2022 given the upward shock in mortgage rates and the resulting reduced affordability. Existing home sales, for example, are now one-third lower than at the end of 2021. However, the slowdown in activity has also coincided with a reduction in available inventories.
Added
The broader economy continued to expand, labor markets remained robust and inflation moderated throughout the year.
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According to data from the real estate brokerage Redfin, new home listings have declined 18% year-over-year as borrowers opt to stay in their homes in the current higher rate environment. As long as the labor market remains robust, we foresee few forced sellers, keeping inventories below historical averages.
Added
While many observers had expected the economy to enter into a recession in 2023, data thus far has suggested that inflation moderated without a meaningful deterioration in economic activity, setting up a scenario in which parts of the economy moved into better balances without a sharp contraction in economic output or a significantly weaker labor market (a so-called “soft landing”).
Removed
Home prices have been slower to decline than initially anticipated with the Case-Shiller National Home Price index falling 3.6% from its peak level in June through November 2022, the last month for which data is available.
Added
The increased likelihood of a soft landing appears to have been driven by numerous factors, including fewer price pressures on the supply side of the economy as shipping of goods normalized following earlier disruptions from the pandemic and the Russian invasion of the Ukraine.
Removed
Despite the weaker activity, the state of the housing market remains relatively robust as consumer balance sheets and lending standards are sound, and the shortage of supply supports prices all else equal. In light of the extremely turbulent year in financial markets, Annaly delivered an economic return of negative 23.7% for the full year.
Added
In addition, U.S. consumers continue to find employment and enjoy healthy balance sheets, while growing wages afford them the ability to continue to spend on goods and services, thereby supporting broader economic growth. Private sector investment activity rebounded somewhat in 2023 relative to 2022, while government spending and investment incentives created by federal legislation supported economic growth as well.
Removed
Of note, the fourth quarter saw a meaningful slowdown in inflation data and a subsequent decline in interest rate volatility that resulted in a strong finish to the year, generating an 8.7% economic return in the final quarter.
Added
Following the rapid tightening in monetary policy in 2022, the Federal Reserve (the “Fed”) raised interest rates an additional one percentage point in 2023 and ultimately kept the Federal Funds Target Rate at 5.25% – 5.50% since late July.
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While 2022 was particularly challenging, we are proud of a number of key strategic accomplishments throughout the year, including: the accretive disposition of our Middle Market Lending portfolio, the successful continued expansion of our Residential Credit and Mortgage Servicing Rights platforms, inclusion in the S&P MidCap 400 Index, and the 25th anniversary of our initial public offering.
Added
Meanwhile, the Fed maintained the pace it set in 2022 in the reduction of its balance sheet throughout the year, effectively letting up to $60 billion in Treasury and up to $35 billion in Agency MBS runoff per month in 2023.
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In the fourth quarter of 2022, we generated GAAP net income (loss) of ($1.96) per share and earnings available for distribution of $0.89 per share compared to GAAP net income (loss) of ($0.70) per share and earnings available for distribution of $1.06 per share for the prior quarter.
Added
Driven by the continued maturities, the Federal Reserve’s balance sheet declined by $838 billion to $7.7 trillion over the course of the year. In this environment, home prices outperformed the market’s expectations despite mortgage rates reaching 20-year highs, resulting in historically low affordability for prospective homeowners.
Removed
While earnings available for distribution covered our common stock dividend of $0.88 per share for the fourth quarter of 2022, given the moderation in earnings available for distribution and anticipated further pressure on this measure, we expect to reduce the common stock dividend for the first quarter of 2023 to a level closer to our historical yield on book value of 11 – 12%.
Added
Home prices have continued to benefit from existing homeowners’ inability to move homes absent a meaningful increase in housing costs (the so called “lock in effect”), resulting in low availability of inventory for sale as borrowers locked into below-market mortgage rates are less willing to move or trade up.
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We believe that this would set the dividend at a level that is more sustainable in the prevailing environment given current new money returns. Shifting to portfolio activity, we continued to rotate the Agency MBS portfolio up in coupon to take advantage of wider spreads and improved carry in production coupons.
Added
Housing activity remains depressed, although we have seen modest signs of an uptick in demand following the recent decline in mortgage rates. Ultimately, we are constructive on the housing market outlook should the labor market and consumers remain resilient in line with a “soft landing” economic scenario. 49 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Removed
We grew our allocation to 4.5% coupons and higher, which now represent over 50% of our portfolio, up from 12% at the end of 2021. We believe historically wide nominal spreads in these coupons provide more 49 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Added
Management’s Discussion and Analysis Over the course of the year, we generated a +6.0% economic return, which demonstrates the efficacy of our diversified housing finance model, as well as our disciplined portfolio and risk management.
Removed
Management’s Discussion and Analysis than adequate compensation for taking on the incremental convexity exposure relative to lower coupons. In addition, we lowered our exposure to TBAs, as roll specialness dissipated over the course of 2022, and we are likely to continue favoring pools over TBAs going forward given their superior return profile.
Added
In light of the volatile environment, we continued to proactively manage our leverage profile throughout the year, in turn reducing our economic leverage from 6.3x at the end of the 2022 to 5.7x at the end of 2023.
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In the current decelerating housing market, our loan business represents our preferred approach to investing in the residential credit market given our ability to control our credit strategy, partners, the diligence process, and pricing. We continue to focus on preserving the credit quality of our portfolio, with fourth quarter whole loan acquisitions exhibiting strong underlying borrower fundamentals.
Added
A part of the reduced leverage is driven by further diversification into our Residential Credit and MSR businesses, which are less levered than Agency MBS. Of note, the combined capital allocation to the two businesses increased by five percentage points to 38% at the end of 2023.
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Our OBX securitization platform had a record year of issuance supported by our correspondent channel, which acquired nearly $2 billion in loans during the year. Since the beginning of 2022, we closed 17 securitizations totaling $6.6 billion and generated $760 million of proprietary assets with a low to mid double-digit return profile utilizing minimal recourse leverage.
Added
Turning to the Agency MBS portfolio, our aggregate portfolio declined modestly, falling from $72.9 billion in assets at the end of 2022 to $65.7 billion at the end of 2023.
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In our MSR business line, we had significant growth in the strategy in 2022, increasing our portfolio by nearly three times to $1.8 billion in market value and ending the year as the third largest buyer of bulk MSR in the market.
Added
The lower portfolio balance is largely driven by asset sales throughout the year to accommodate the shift in capital allocation, as well as a somewhat lower leverage in the strategy as interest rate markets and mortgage spreads remained very volatile throughout most of the year.
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We added new originator partners, expanded relationships with subservicers, and put in place new dedicated financing as an additional source of liquidity to support future growth. Our focus on very high credit quality, low loan rate MSR has proven to be valuable.
Added
In addition to somewhat lower aggregate holdings, we focused on shifting the coupon distribution higher throughout the year, bringing the share of 5.0% coupons or higher to 48%, up 17 percentage points from the 2022 year-end levels.
Removed
The portfolio paid three CPR in the fourth quarter and experienced minimal delinquencies, generating stable cash flows while providing a hedge to current dynamics in the housing market. Earnings available for distribution is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to its most directly comparable GAAP results.
Added
In addition, we rotated out of “to be announced” (“TBA”) security holdings, in turn reducing our holdings from $10.6 billion at the end of 2022 to ($0.6) billion at the end of 2023.
Removed
The relative slowdown was mostly a result of weaker growth reported in the first half of the year, as the economy contracted on a seasonally adjusted annualized basis in both Q1 and Q2.
Added
This reduction was driven by the combination of reduced advantageous financing of TBA securities relative to specified pool ownership and the desire to add prepayment protection in higher coupon purchases.
Removed
In the second half of the year, economic activity proved more resilient considering the higher interest rate backdrop as GDP rose 3.2% on a seasonally adjusted annualized basis in Q3 and 2.9% in Q4. Driving the increase in economic activity was strong consumption, inventory rebuilds, and net export growth.
Added
Finally, given attractive relative value opportunities with respect to Agency MBS, we increased our portfolio of Agency CMBS to $3.5 billion market value, as the asset class offered an attractive stable cash flow in volatile interest rate markets.
Removed
Heading into 2023, however, recession risks are elevated as the impact of the Federal Reserve’s monetary policy tightening flows through to the real economy. Residential investment continues to contract sharply, given the affordability challenges of a much higher average mortgage rate, while business fixed investments and manufacturing output have weakened.
Added
The business growth continued to be driven by our residential whole loan acquisition strategy, through which our Residential Credit business acquired $4.7 billion in loans, with a vast majority coming through our correspondent channel, which allows us to control all aspects of the loan making process, including asset selection, counterparties and loss mitigation.
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Meanwhile, total employment growth in 2022 registered as the second strongest year on record since 1950, behind only the robust hiring seen in 2021. In the fourth quarter alone, the labor market continued to expand at a solid pace as total nonfarm payroll employment rose by an average 274 thousand workers per month.
Added
Finally, we also continued to grow our MSR portfolio, further increasing assets through purchases predominantly of low-coupon bulk MSR packages, in turn growing the portfolio by 50% throughout 2023, to $2.7 billion market value.
Removed
As a result of the strong labor demand, wage growth remained elevated all year and above levels consistent with the Federal Reserve’s 2% inflation target. Average hourly earnings rose 4.6% over the 12 months ending in December. However, there are some signs of labor market softening at the margin.
Added
Similar to 2022, bulk trading activity of MSR packages remained at historically elevated levels as mortgage originators looked to monetize MSR holdings to offset low profit margins in their mortgage origination businesses.
Removed
The average workweek declined in the fourth quarter and the pace of wage gains slowed, both suggesting employers are moderating their demand for workers. The Employment Cost Index decelerated from a pace of 1.2% quarter-over-quarter in Q3 to 1.0% in Q4.
Added
Meanwhile, demand for MSR also remained strong, as a broad investor base sought MSR as purely financial investments or to acquire escrow deposits and customers that can later be refinanced. We opportunistically bought MSR packages as a strategic partner to originators given our complementary business strategy as a financial investor.
Removed
The slowdown in economic growth and moderation in labor demand has led to a modest decline in broader inflation, although price pressures remained at elevated levels throughout the year and broadened beyond the initial pandemic-driven dislocations.
Added
Our MSR portfolio continued to consist predominantly of low coupon, high quality conventional MSR, which at the weighted average coupon of 3.06% at the end of 2023, remained far from having a refinancing incentive considering prevailing mortgage rates. Economic leverage is a non-GAAP financial measure.
Removed
Price pressures were driven by the service sector as providers enjoyed peak pricing power in high-demand services and higher rent and home valuations led to an increase in shelter prices. Meanwhile, goods inflation, which accelerated in 2021 because of healthy household consumption during the depths of the pandemic, subsequently eased throughout 2022 as consumption was focused on services.
Added
Consumer balance sheets remained healthy and benefited from further income growth, leading retail sales data to notably increase in the fourth quarter. Increased government spending spread across state, local and federal levels, as well as higher exports, also boosted the GDP.
Removed
During the year ended December 31, 2022, yields on the 10-year U.S. Treasury note rose by 236 bps as market participants assessed the path of the Federal Funds rate. The 10-year Treasury Inflation Protected Security (“TIPS”), which subtracts the expected inflation rate from the bond’s nominal yield, rose 267 bps, while longer-term inflation expectations declined slightly.
Added
Meanwhile, fixed business investment was more muted throughout the year, while residential housing started to move sideways and home sales continued to fall in light of higher mortgage rates.
Removed
Meanwhile, the mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, widened significantly, ending the year 96 bps wider than December 2021.
Added
Heading into 2024, recession risks appear relatively low given the upbeat picture of consumer and business spending, although the impact of the Fed’s monetary policy tightening continues to flow through to the real economy and credit conditions have tightened. Meanwhile, the supply and demand for labor moved into better balance by the end of 2023.
Removed
The FCA's announcement coincided with the announcement of LIBOR's administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023.
Added
Strong job creation was accompanied by an increase in the supply of workers, as the labor force participation rate increased gradually throughout the year and the employment-to-population ratio rose slightly. At the same time, job openings trended lower, although they remained elevated relative to pre-pandemic averages.
Removed
These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate. The firm has a plan to facilitate an orderly conversion to alternative reference rates.
Added
As a result of the more balanced labor market, wage growth slowed as the Employment Cost Index wages rose 4.3% over the 12 months ending in December, well below the 5.1% shown by the same metric a year earlier. 50 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Removed
The plan includes steps to evaluate exposure; review contracts; assess impact to our business; process and technology and outline a communication strategy with shareholders; regulators and other stakeholders. As LIBOR cessation enters its final stages, we continue to remain on track with our transition plan, which requires different solutions depending on the underlying asset or liability.
Added
The core measure, which does not include price changes in food and energy sectors, measured 2.9% year-over year, the first time that the core PCE has been below 3.0% on a year-over-year basis since March 2021. Additionally, recent survey measures of short-run inflation expectations have declined meaningfully and longer-term inflation expectations appear well anchored.
Removed
The U.S. federal government enacted a legislative solution for certain LIBOR contracts, which in some cases inserts fallback language into the contract or provides a determining party with a safe harbor from litigation. The Board of Governors of the Federal Reserve promulgated rules required by this legislation.

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Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

194 edited+31 added−37 removed213 unchanged
Biggest changeAs of and for the Years Ended December 31, 2022 2021 2020 (dollars in thousands, except per share data) Interest income $ 2,778,887 $ 1,983,036 $ 2,229,625 Interest expense 1,309,735 249,243 899,112 Net interest income 1,469,152 1,733,793 1,330,513 Servicing and related income 246,926 69,018 94,190 Servicing and related expense 25,145 12,202 26,437 Net servicing income 221,781 56,816 67,753 Other income (loss) 243,787 796,360 (2,094,266) Less: Total general and administrative expenses 162,729 186,014 222,195 Income (loss) before income taxes 1,771,991 2,400,955 (918,195) Income taxes 45,571 4,675 (28,423) Net income (loss) 1,726,420 2,396,280 (889,772) Less: Net income (loss) attributable to noncontrolling interests 1,095 6,384 1,391 Net income (loss) attributable to Annaly 1,725,325 2,389,896 (891,163) Less: Dividends on preferred stock 110,623 107,532 142,036 Net income (loss) available (related) to common stockholders $ 1,614,702 $ 2,282,364 $ (1,033,199) Net income (loss) per share available (related) to common stockholders Basic $ 3.93 $ 6.40 $ (2.92) Diluted $ 3.92 $ 6.39 $ (2.92) Weighted average number of common shares outstanding Basic 411,348,484 356,856,520 353,664,860 Diluted 411,621,758 357,142,251 353,664,860 Other information Investment portfolio at period-end $ 78,469,860 $ 74,792,041 $ 86,403,446 Average total assets $ 78,768,785 $ 81,925,499 $ 99,663,704 Average equity $ 11,616,995 $ 13,728,352 $ 14,103,589 GAAP leverage at period-end (1) 6.0:1 4.7:1 5.1:1 GAAP capital ratio at period-end (2) 13.9 % 17.2 % 15.9 % Annualized return on average total assets 2.19 % 2.92 % (0.89) % Annualized return on average equity 14.86 % 17.45 % (6.31) % Net interest margin (3) 1.92 % 2.28 % 1.46 % Average yield on interest earning assets (4) 3.64 % 2.61 % 2.44 % Average GAAP cost of interest bearing liabilities (5) 2.03 % 0.37 % 1.09 % Net interest spread 1.61 % 2.24 % 1.35 % Weighted average experienced CPR for the period 12.2 % 23.7 % 20.2 % Weighted average projected long-term CPR at period-end 7.8 % 12.7 % 16.4 % Common stock book value per share $ 20.79 $ 31.88 $ 35.68 Non-GAAP metrics * Interest income (excluding PAA) $ 2,418,300 $ 2,040,194 $ 2,645,069 Economic interest expense (5) $ 943,574 $ 525,385 $ 1,106,989 Economic net interest income (excluding PAA) $ 1,474,726 $ 1,514,809 $ 1,538,080 Premium amortization adjustment cost (benefit) $ (360,587) $ 57,158 $ 415,444 Earnings available for distribution (6) $ 1,850,138 $ 1,768,391 $ 1,696,167 Earnings available for distribution per average common share $ 4.23 $ 4.65 $ 4.39 Annualized EAD return on average equity (excluding PAA) 16.02 % 12.90 % 12.03 % Economic leverage at period-end (1) 6.3:1 5.7:1 6.2:1 Economic capital ratio at period-end (2) 13.4 % 14.4 % 13.6 % Net interest margin (excluding PAA) (3) 2.03 % 2.02 % 1.74 % Average yield on interest earning assets (excluding PAA) (4) 3.16 % 2.68 % 2.90 % Average economic cost of interest bearing liabilities (5) 1.46 % 0.79 % 1.34 % Net interest spread (excluding PAA) 1.70 % 1.89 % 1.56 % * Represents a non-GAAP financial measure.
Biggest changeAs of and for the Years Ended December 31, 2023 2022 2021 (dollars in thousands, except per share data) Interest income $ 3,731,581 $ 2,778,887 $ 1,983,036 Interest expense 3,842,965 1,309,735 249,243 Net interest income (111,384) 1,469,152 1,733,793 Servicing and related income 364,157 246,926 69,018 Servicing and related expense 37,652 25,145 12,202 Net servicing income 326,505 221,781 56,816 Other income (loss) (1,651,591) 243,787 796,360 Less: Total general and administrative expenses 162,553 162,729 186,014 Income (loss) before income taxes (1,599,023) 1,771,991 2,400,955 Income taxes 39,434 45,571 4,675 Net income (loss) (1,638,457) 1,726,420 2,396,280 Less: Net income (loss) attributable to noncontrolling interests 4,714 1,095 6,384 Net income (loss) attributable to Annaly (1,643,171) 1,725,325 2,389,896 Less: Dividends on preferred stock 141,676 110,623 107,532 Net income (loss) available (related) to common stockholders $ (1,784,847) $ 1,614,702 $ 2,282,364 Net income (loss) per share available (related) to common stockholders Basic $ (3.61) $ 3.93 $ 6.40 Diluted $ (3.61) $ 3.92 $ 6.39 Weighted average number of common shares outstanding Basic 494,541,323 411,348,484 356,856,520 Diluted 494,541,323 411,621,758 357,142,251 Other information Investment portfolio at period-end $ 87,396,467 $ 78,469,860 $ 74,792,041 Average total assets $ 88,177,773 $ 78,768,785 $ 81,925,499 Average equity $ 11,437,590 $ 11,616,995 $ 13,728,352 GAAP leverage at period-end (1) 6.8:1 6.0:1 4.7:1 GAAP capital ratio at period-end (2) 12.2 % 13.9 % 17.2 % Annualized return on average total assets (1.86) % 2.19 % 2.92 % Annualized return on average equity (14.33) % 14.86 % 17.45 % Net interest margin (3) (0.13) % 1.92 % 2.28 % Average yield on interest earning assets (4) 4.32 % 3.64 % 2.61 % Average GAAP cost of interest bearing liabilities (5) 5.13 % 2.03 % 0.37 % Net interest spread (0.81) % 1.61 % 2.24 % Weighted average experienced CPR for the period 6.5 % 12.2 % 23.7 % Weighted average projected long-term CPR at period-end 9.4 % 7.8 % 12.7 % Common stock book value per share $ 19.44 $ 20.79 $ 31.88 Non-GAAP metrics * Interest income (excluding PAA) $ 3,733,235 $ 2,418,300 $ 2,040,194 Economic interest expense (5) $ 2,257,912 $ 943,574 $ 525,385 Economic net interest income (excluding PAA) $ 1,475,323 $ 1,474,726 $ 1,514,809 Premium amortization adjustment cost (benefit) $ 1,654 $ (360,587) $ 57,158 Earnings available for distribution (6) $ 1,554,014 $ 1,850,138 $ 1,768,391 Earnings available for distribution per average common share $ 2.86 $ 4.23 $ 4.65 Annualized EAD return on average equity (excluding PAA) 13.71 % 16.02 % 12.90 % Economic leverage at period-end (1) 5.7:1 6.3:1 5.7:1 Economic capital ratio at period-end (2) 14.0 % 13.4 % 14.4 % Net interest margin (excluding PAA) (3) 1.62 % 2.03 % 2.02 % Average yield on interest earning assets (excluding PAA) (4) 4.33 % 3.16 % 2.68 % Average economic cost of interest bearing liabilities (5) 3.01 % 1.46 % 0.79 % Net interest spread (excluding PAA) 1.32 % 1.70 % 1.89 % * Represents a non-GAAP financial measure.
We attribute the majority of the change in net income (loss) to an unfavorable change in net gains (losses) on investments and other and net interest income, partially offset by favorable changes in net gains (losses) on derivatives, lower business divestiture-related losses, and higher net servicing income.
We attribute the majority of the change in net income (loss) to an unfavorable change in net gains (losses) on derivatives and net interest income, partially offset by favorable changes in net gains (losses) on investments and other, higher net servicing income, higher other, net and lower business divestiture-related losses.
Our mortgage-backed securities were largely Freddie Mac, Fannie Mae or Ginnie Mae pass through certificates or CMOs, which have an actual or implied credit rating that is the same as that of the U.S. government. We carry all of our Agency MBS at fair value on the Consolidated Statements of Financial Condition.
Our mortgage-backed securities were largely Fannie Mae, Freddie Mac or Ginnie Mae pass through certificates or CMOs, which have an actual or implied credit rating that is the same as that of the U.S. government. We carry all of our Agency MBS at fair value on the Consolidated Statements of Financial Condition.
The management committees responsible for our risk management include the Enterprise Risk Committee (“ERC”), Asset and Liability Committee (“ALCO”) and the Financial Reporting and Disclosure Committee (“FRDC”). Each of these committees reports to our management Operating Committee which is responsible for oversight and management of our operations, including oversight and approval authority over all aspects of our enterprise risk management.
The management committees responsible for our risk management include the Enterprise Risk Committee (“ERC”), Asset / Liability Committee (“ALCO”) and the Financial Reporting and Disclosure Committee (“FRDC”). Each of these committees reports to our management Operating Committee, which is responsible for oversight and management of our operations, including oversight and approval authority over all aspects of our enterprise risk management.
Actual results could differ materially from these estimates. (2) Scenarios include securities, residential mortgage loans, repurchase agreements, other secured financing and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps. (3) Scenarios include securities, residential mortgage loans, MSR and derivative instruments. (4) NAV represents book value of equity.
Actual results could differ materially from these estimates. (2) Scenarios include securities, residential mortgage loans, MSR and derivative instruments. (3) NAV represents book value of equity. (4) Scenarios include securities, residential mortgage loans, repurchase agreements, other secured financing and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps.
We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola, and our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act and our subsidiary that operates as a licensed mortgage aggregator and master servicer.
We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola, our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act and our subsidiary that operates as a licensed mortgage aggregator and master servicer.
We proactively monitor the potential impact regulation may have both directly and indirectly on us. We maintain a process to actively monitor both actual and potential legal action that may affect us. Our risk management framework is designed to identify, measure and monitor these risks under the oversight of the ERC.
We proactively monitor the potential impact regulation may have both directly and indirectly on us. We maintain a process to actively monitor both actual and potential legal action that may affect us. Our risk management framework is designed to identify, measure and monitor these risks under oversight of the ERC.
Operational risk may arise from internal or external sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events. We manage operational risk through a variety of tools including policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor management.
Operational risk may arise from internal or external sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events. We manage operational risk through a variety of tools including processes, policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor management.
Our capital, liquidity and funding risk management practices consist of the following primary elements: Element Description Funding Availability of diverse and stable sources of funds. Excess Liquidity Excess liquidity primarily in the form of unencumbered assets and cash. Maturity Profile Diversity and tenor of liabilities and modest use of leverage.
Our liquidity and funding risk management practices consist of the following primary elements: Element Description Funding Availability of diverse and stable sources of funds. Excess Liquidity Excess liquidity primarily in the form of unencumbered assets and cash. Maturity Profile Diversity and tenor of liabilities and modest use of leverage.
(4) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR, which is a component of Other, net in the Consolidated Statements of Comprehensive Income (Loss). (5) Includes costs incurred in connection with securitizations of residential whole loans.
(4) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR, which is a component of Other, net in the Consolidated Statements of Comprehensive Income (Loss). (5) Represents costs incurred in connection with securitizations of residential whole loans.
The foregoing share amounts have been retroactively adjusted to reflect the effects of the Reverse Stock Split. Preferred Stock On November 3, 2022, our Board approved a repurchase plan for all of our existing outstanding Preferred Stock (as defined below, the “Preferred Stock Repurchase Program”).
The 2022 share amounts have been retroactively adjusted to reflect the effects of the Reverse Stock Split. Preferred Stock On November 3, 2022, our Board approved a repurchase plan for all of our existing outstanding Preferred Stock (as defined below, the “Preferred Stock Repurchase Program”).
The Corporate Responsibility Committee shares oversight of specific ESG-related matters with other Board Committees and meets jointly with the Management Development and Compensation Committee on the Company's human capital management and culture and with the BRC on ESG-related regulatory and policy risks. Risk assessment and risk management are the responsibility of our management.
The Corporate Responsibility Committee shares oversight of specific ESG-related matters with other Board Committees and meets jointly with the Management Development and Compensation Committee on the Company's human capital management and culture and with the Risk Committee on ESG-related regulatory and policy risks. Risk assessment and risk management are the responsibility of our management.
Pursuant to the Sales Agreements, we may offer and sell shares of our common stock, having an aggregate offering price of up to $1.5 billion, from time to time through any of the Sales Agents (the “at-the-market sales program”).
Pursuant to the Sales Agreements, we may offer and sell shares of common stock, having an aggregate offering price of up to $1.5 billion, from time to time through any of the Sales Agents (the “at-the-market sales program”).
Management’s Discussion and Analysis Capital, Liquidity and Funding Risk Management Our capital, liquidity and funding risk management strategy is designed to ensure the availability of sufficient resources to support our business and meet our financial obligations under both normal and adverse market and business environments.
Management’s Discussion and Analysis Liquidity and Funding Risk Management Our liquidity and funding risk management strategy is designed to ensure the availability of sufficient resources to support our business and meet our financial obligations under both normal and adverse market and business environments.
At December 31, 2022 the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and MSR.
At December 31, 2023 the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and MSR. At December 31, 2022, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and MSR.
Pass-Through Security A securitization structure where a GSE or other entity “passes” the amount collected from the borrowers every month to the investor, after deducting fees and expenses. 86 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Pool A collection of mortgage loans assembled by an originator or master servicer as the basis for a security.
Pass-Through Security A securitization structure where a GSE or other entity “passes” the amount collected from the borrowers every month to the investor, after deducting fees and expenses. 84 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Pool A collection of mortgage loans assembled by an originator or master servicer as the basis for a security.
Actual results could differ materially from those estimates. 80 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Glossary of Terms A Adjustable-Rate Loan / Security A loan / security on which interest rates are adjusted at regular intervals according to predetermined criteria. The adjustable interest rate is tied to an objective, published interest rate index.
Actual results could differ materially from those estimates. 78 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Glossary of Terms A Adjustable-Rate Loan / Security A loan / security on which interest rates are adjusted at regular intervals according to predetermined criteria. The adjustable interest rate is tied to an objective, published interest rate index.
Capital Ratio (GAAP Capital Ratio) Calculated as total stockholders’ equity divided by total assets. 81 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Carry The amount an asset earns over its hedging and financing costs. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed.
Capital Ratio (GAAP Capital Ratio) Calculated as total stockholders’ equity divided by total assets. 79 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Carry The amount an asset earns over its hedging and financing costs. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed.
Y Yield-to-Maturity The expected rate of return of a bond if it is held to its maturity date; calculated by taking into account the current market price, stated redemption value, coupon payments and time to maturity and assuming all coupons are reinvested at the same rate; equivalent to the internal rate of return. 89 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Y Yield-to-Maturity The expected rate of return of a bond if it is held to its maturity date; calculated by taking into account the current market price, stated redemption value, coupon payments and time to maturity and assuming all coupons are reinvested at the same rate; equivalent to the internal rate of return. 87 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Interest-Only (IO) Bond The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments. 84 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Interests in MSR Represents agreements to purchase all, or a component of, net servicing cash flows.
Interest-Only (IO) Bond The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments. 82 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Interests in MSR Represents agreements to purchase all, or a component of, net servicing cash flows.
In addition, EAD serves as a useful indicator for investors in evaluating our performance and ability to pay dividends. Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by our invested equity capital. 54 ANNALY CAPITAL MANAGEMENT, INC.
In addition, EAD serves as a useful indicator for investors in evaluating our performance and ability to pay dividends. Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by our invested equity capital. 53 ANNALY CAPITAL MANAGEMENT, INC.
Compliance, Regulatory and Legal Risk Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model. 70 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Compliance, Regulatory and Legal Risk Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model. 68 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
The quality and character of the Residential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at December 31, 2022 compared to the same period in 2021, and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the year ended December 31, 2022.
The quality and character of the Residential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at December 31, 2023 compared to the same period in 2022, and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the year ended December 31, 2023.
Risk Appetite Statement Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. 87 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis S Secondary Market Ongoing market for bonds previously offered or sold in the primary market.
Risk Appetite Statement Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. 85 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis S Secondary Market Ongoing market for bonds previously offered or sold in the primary market.
The fair value of these securities being less than amortized cost at December 31, 2022 is solely due to market conditions and not the quality of the assets. Substantially all of the Agency MBS have an actual or implied credit rating that is the same as that of the U.S. government.
The fair value of these securities being less than amortized cost at December 31, 2023 is solely due to market conditions and not the quality of the assets. Substantially all of the Agency MBS have an actual or implied credit rating that is the same as that of the U.S. government.
No shares were repurchased to with respect to the Preferred Stock Repurchase Program during the year ended December 31, 2022. Purchases made pursuant to the Preferred Stock Repurchase Program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements.
No shares were repurchased with respect to the Preferred Stock Repurchase Program during the year ended December 31, 2023. Purchases made pursuant to the Preferred Stock Repurchase Program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements.
For more information on these critical accounting policies and other significant accounting policies, see the Note titled “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 15. “Exhibits, Financial Statement Schedules.” Valuation of Financial Instruments Residential Securities Description: We carry residential securities at estimated fair value.
For more information on these critical accounting policies and other significant accounting policies, refer to the Note titled “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 15. “Exhibits, Financial Statement Schedules.” Valuation of Financial Instruments Residential Securities Description: We carry residential securities at estimated fair value.
International Swaps and Derivatives Association (“ISDA”) Master Agreement Standardized contract developed by ISDA used as an umbrella under which bilateral derivatives contracts are entered into. Inverse IO Bond An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as LIBOR.
International Swaps and Derivatives Association (“ISDA”) Master Agreement Standardized contract developed by ISDA used as an umbrella under which bilateral derivatives contracts are entered into. Inverse IO Bond An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as SOFR.
Management’s Discussion and Analysis The major risks impacting capital are capital, liquidity and funding risk, investment/market risk, credit risk, counterparty risk, operational risk and compliance, regulatory and legal risk. For further discussion of the risks we are subject to, please see Part I, Item 1A. “Risk Factors” of this annual report on Form 10-K.
The major risks impacting capital are liquidity and funding risk, investment/market risk, credit risk, counterparty risk, operational risk and compliance, regulatory and legal risk. For further discussion of the risks we are subject to, please see Part I, Item 1A. “Risk Factors” of this annual report on Form 10-K.
Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition.
Using third party models and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition.
Management’s Discussion and Analysis Change in Interest Rate (1) Projected Percentage Change in Economic Net Interest Income (2) Estimated Percentage Change in Portfolio Value (3) Estimated Change as a % on NAV (3)(4) -75 Basis points 11.4% 0.4% 2.9% -50 Basis points 7.6% 0.3% 2.5% -25 Basis points 3.8% 0.2% 1.5% +25 Basis points (3.8%) (0.3%) (1.9%) +50 Basis points (7.8%) (0.6%) (4.3%) +75 Basis points (11.7%) (0.9%) (6.9%) MBS Spread Shock (1) Estimated Change in Portfolio Market Value Estimated Change as a % on NAV (3)(4) -25 Basis points 1.6% 12.1% -15 Basis points 1.0% 7.2% -5 Basis points 0.3% 2.4% +5 Basis points (0.3%) (2.4%) +15 Basis points (0.9%) (7.1%) +25 Basis points (1.6%) (11.8%) (1) Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment professionals.
Management’s Discussion and Analysis Change in Interest Rate (1) Estimated Percentage Change in Portfolio Value (2) Estimated Change as a % on NAV (2)(3) Projected Percentage Change in Economic Net Interest Income (4) -75 Basis points (0.3%) (2.2%) 8.1% -50 Basis points (0.1)% (0.9)% 5.7% -25 Basis points —% (0.2)% 3.0% +25 Basis points —% (0.4%) (3.2%) +50 Basis points (0.1%) (1.2%) (6.7%) +75 Basis points (0.3%) (2.4%) (10.5%) MBS Spread Shock (1) Estimated Change in Portfolio Market Value (2) Estimated Change as a % on NAV (2)(3) -25 Basis points 1.3% 10.1% -15 Basis points 0.8% 6.0% -5 Basis points 0.3% 2.0% +5 Basis points (0.3%) (2.0%) +15 Basis points (0.7%) (6.0%) +25 Basis points (1.2%) (9.9%) (1) Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment professionals.
See Experienced and Projected Long-Term CPR, Financial Condition – Residential Securities and the interest rate sensitivity and interest rate and MBS spread shock analysis and discussions within this Item 7. for further information. Residential Mortgage Loans Description: We elected to account for Residential Mortgage Loans at fair value.
Refer to the Experienced and Projected Long-Term CPR, Financial Condition – Residential Securities and the interest rate sensitivity and interest rate and MBS spread shock analysis and discussions within this Item 7. for further information. Residential Mortgage Loans Description: We elected to account for Residential Mortgage Loans at fair value.
Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to us and are excluded from economic leverage. (2) GAAP capital ratio is computed as total equity divided by total assets. Economic capital ratio is computed as total equity divided by total economic assets.
Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, and participations issued are non-recourse to us and are excluded from economic leverage. (2) GAAP capital ratio is computed as total equity divided by total assets. Economic capital ratio is computed as total equity divided by total economic assets.
Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from 79 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis third party pricing providers and uses them as a point of comparison to modeled values.
Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from 77 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis third party pricing providers and uses them as a point of comparison to modeled values.
See the interest rate sensitivity and interest rate shock analysis and discussions within this Item 7. for further information. MSR Description: We elected to account for MSR at fair value. The market for MSR is considered less active and transparent compared to securities.
Refer to the interest rate sensitivity and interest rate shock analysis and discussions within this Item 7. for further information. MSR Description: We elected to account for MSR at fair value. The market for MSR is considered less active and transparent compared to securities.
These stress tests assist with the management of our pool of liquid assets and influence our current and future funding plans. The stresses applied include market-wide and firm-specific stresses. 74 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
These stress tests assist with the management of our pool of liquid assets and influence our current and future funding plans. The stresses applied include market-wide and firm-specific stresses. 72 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Item 7. Management’s Discussion and Analysis Net Income (Loss) Summary The following table presents financial information related to our results of operations as of and for the years ended December 31, 2022, 2021 and 2020.
Item 7. Management’s Discussion and Analysis Net Income (Loss) Summary The following table presents financial information related to our results of operations as of and for the years ended December 31, 2023, 2022 and 2021.
Residential Securities Substantially all of our Agency MBS at December 31, 2022 and December 31, 2021 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.
Residential Securities Substantially all of our Agency MBS at December 31, 2023 and December 31, 2022 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.
The change was primarily due to increases in Agency MBS of $1.7 billion, residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $3.2 billion, MSR of $1.2 billion, receivable for unsettled trades of $0.6 billion, and principal and interest receivable of $0.4 billion, partially offset by decreases in corporate loans of $2.0 billion.
The change was primarily due to increases in Agency MBS of $4.0 billion, residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $4.7 billion, MSR of $0.4 billion, receivable for unsettled trades of $2.1 billion, and principal and interest receivable of $0.6 billion, partially offset by decreases in CMBS of $0.3 billion and derivative assets of $0.2 billion.
(2) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. (3) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $9.1 billion.
(2) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. (3) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $13.3 billion.
Risk Appetite We maintain a firm-wide risk appetite statement which defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. We engage in risk activities based on our core expertise that aim to enhance value for our stockholders.
Management’s Discussion and Analysis Risk Appetite We maintain a firm-wide risk appetite statement which defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. We engage in risk activities based on our core expertise that aim to enhance value for our stockholders.
Other tools include Risk and Control Self Assessment (“RCSA”) testing, including disaster recovery/testing; systems controls, including access controls; training, including phishing exercises and cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. Our Operational Risk team conducts a disaster recovery exercise on an annual basis.
Other tools include Risk and Control Self Assessment (“RCSA”) testing, including disaster recovery/testing; systems controls, including access controls; training, including phishing exercises and cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. Our Operational Risk Management team conducts a disaster recovery exercise on an annual basis and periodically conducts other operational risk tabletop exercises.
Secured Overnight Financing Rate (“SOFR”) Broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and was chosen by the Alternative Reference Rate Committee as the preferred benchmark rate to replace dollar LIBOR in coming years. Settlement Date The date securities must be delivered and paid for to complete a transaction.
Secured Overnight Financing Rate (“SOFR”) Broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and was chosen by the Alternative Reference Rate Committee as the preferred benchmark rate to replace dollar LIBOR. Settlement Date The date securities must be delivered and paid for to complete a transaction.
Commitments and Contractual Obligations with Unconsolidated Entities We do not have any commitments or contractual obligations arising from arrangements with unconsolidated entities that have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
Management’s Discussion and Analysis Commitments and Contractual Obligations with Unconsolidated Entities We do not have any commitments or contractual obligations arising from arrangements with unconsolidated entities that have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.
AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis The following table provides information on our repurchase agreements and other secured financing by maturity date at December 31, 2022.
AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis The following table provides information on our repurchase agreements and other secured financing by maturity date at December 31, 2023.
The BAC is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor selection, evaluation and review, and oversight of the internal audit function.
The Audit Committee is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor selection, evaluation and review, and oversight of the internal audit function.
The BRC and the BAC jointly oversee practices and policies related to cybersecurity and receive regular reports from management throughout the year on cybersecurity and related risks. The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices and other human capital matters such as succession and culture.
The Risk Committee and the Audit Committee jointly oversee practices and policies related to cybersecurity and receive regular reports from management throughout the year on cybersecurity and related risks. The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices and other human capital matters such as succession and culture.
AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Critical Accounting Estimates The preparation of our consolidated financial statement in accordance with generally accepted accounting principles in the United States requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
Management’s Discussion and Analysis Critical Accounting Estimates The preparation of our consolidated financial statement in accordance with generally accepted accounting principles in the United States requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.
Default Risk Possibility that a bond issuer will fail to pay principal or interest when due. 82 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Default Risk Possibility that a bond issuer will fail to pay principal or interest when due. 80 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Assets are considered encumbered if pledged as collateral against an existing liability, and therefore are no longer available to support additional funding. An asset is considered unencumbered if it has not been pledged or securitized. The following table also provides the carrying amount of our encumbered and unencumbered financial assets at December 31, 2022: 72 ANNALY CAPITAL MANAGEMENT, INC.
Assets are considered encumbered if pledged as collateral against an existing liability, and therefore are no longer available to support additional funding. An asset is considered unencumbered if it has not been pledged or securitized. The following table also provides the carrying amount of our encumbered and unencumbered financial assets at December 31, 2023: 70 ANNALY CAPITAL MANAGEMENT, INC.
The interest rate sensitivity of our assets and liabilities in the following table at December 31, 2022 could vary substantially based on actual prepayment experience.
The interest rate sensitivity of our assets and liabilities in the following table at December 31, 2023 could vary substantially based on actual prepayment experience.
For further discussion of the sensitivity of the model inputs see the Note titled “Fair Value Measurements” in the Notes to the Consolidated Financial Statements included in Item 15.
For further discussion of the sensitivity of the model inputs refer to the Note titled “Fair Value Measurements” in the Notes to the Consolidated Financial Statements included in Item 15.
I In-the-Money Description for an option that has intrinsic value and can be sold or exercised for a profit; a call option is in-the-money when the strike price (execution price) is below the market price of the underlying security. Interest Bearing Liabilities Refers to repurchase agreements, debt issued by securitization vehicles and credit facilities.
I In-the-Money Description for an option that has intrinsic value and can be sold or exercised for a profit; a call option is in-the-money when the strike price (execution price) is below the market price of the underlying security. Interest Bearing Liabilities Refers to repurchase agreements, debt issued by securitization vehicles, U.S.
Our GAAP leverage ratio at December 31, 2022 and 2021 was 6.0:1 and 4.7:1, respectively. Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 6.3:1 and 5.7:1, at December 31, 2022 and 2021, respectively.
Our GAAP leverage ratio at December 31, 2023 and 2022 was 6.8:1 and 6.0:1, respectively. Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 5.7:1 and 6.3:1, at December 31, 2023 and 2022, respectively.
Our vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third party vendors. These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.
Our vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third party vendors. For mortgage loan servicers and sub-servicers, these procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.
The ERC is responsible for supporting the Operating Committee in the implementation, ongoing monitoring, and evaluation of the effectiveness of the enterprise-wide risk management framework. This oversight authority includes review of the strategies, policies, and practices established by management to identify, assess, measure, and manage enterprise-wide risk.
The ERC is responsible for supporting the Operating Committee in the implementation, ongoing monitoring, and evaluation of the effectiveness of the enterprise-wide risk management framework. This oversight authority includes review of the strategies, processes, policies, and practices established by management to identify, assess, measure, and manage enterprise-wide risk. Cybersecurity is part of our enterprise-wide risk management framework.
On August 6, 2020, we entered into separate Amended and Restated Distribution Agency Agreements (as amended by Amendment No. 1 to the Amended and Restated Distribution Agency Agreements on August 6, 2021, and Amendment No. 2 to the Amended and Restated Distribution Agency Agreements on November 3, 2022, collectively, the “Sales Agreements”) with each of RBC Capital Markets, LLC, Barclays Capital Inc., BofA Securities, Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.
On August 6, 2020, we entered into separate Amended and Restated Distribution Agency Agreements (as amended by Amendment No. 1 to the Amended and Restated Distribution Agency Agreements on August 6, 2021, and Amendment No. 2 to the Amended and Restated Distribution Agency Agreements on November 3, 2022, collectively, the “Sales Agreements”) with each of Barclays Capital Inc., BofA Securities, Inc., Citigroup Global Markets Inc., Goldman Sachs & Co.
The table does not include the effect of net interest rate payments on our interest rate swap agreements. The net swap payments will fluctuate based on monthly changes in the receive rate. At December 31, 2022, the interest rate swaps had a net fair value of ($75.7) million.
The table does not include the effect of net interest rate payments on our interest rate swap agreements. The net swap payments will fluctuate based on monthly changes in the receive rate. At December 31, 2023, the interest rate swaps had a net fair value of ($56.7) million.
Our GAAP capital ratio at December 31, 2022 and 2021 was 13.9% and 17.2%, respectively. Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 13.4% and 14.4% at December 31, 2022 and 2021, respectively.
Our GAAP capital ratio at December 31, 2023 and 2022 was 12.2% and 13.9%, respectively. Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 14.0% and 13.4% at December 31, 2023 and 2022, respectively.
GAAP Net income (loss) was $1.7 billion, which includes $1.1 million attributable to noncontrolling interests, or $3.93 per average basic common share, for the year ended December 31, 2022 compared to $2.4 billion, which includes $6.4 million attributable to noncontrolling interests, or $6.40 per average basic common share, for the same period in 2021.
GAAP Net income (loss) was ($1.6) billion, which includes $4.7 million attributable to noncontrolling interests, or $(3.61) per average basic common share, for the year ended December 31, 2023 compared to $1.7 billion, which includes $1.1 million attributable to noncontrolling interests, or $3.93 per average basic common share, for the same period in 2022.
Loan Loss (Provision) Reversal For the year ended December 31, 2022, a loan loss (provision) reversal of $20.7 million was recorded on commercial mortgage and corporate loans compared to $145.1 million for the same period in 2021. Refer to the “Loans” Note located within Item 15 for additional information related to these loan loss provisions.
Loan Loss (Provision) Reversal For the year ended December 31, 2023, a loan loss (provision) reversal of $0.2 million was recorded on commercial mortgage and corporate loans compared to $20.7 million for the same period in 2022. Refer to the “Loans” Note located within Item 15 for additional information related to these loan loss provisions.
A negative gap increases our liquidity risk as we must enter into future liabilities. Our interest rate sensitivity gap is the difference between interest earning assets and interest bearing liabilities maturing or re-pricing within a given time period. Unlike the calculation of maturity gap, interest rate sensitivity gap includes the effect of our interest rate swaps.
A negative gap increases our liquidity risk as we must enter into future liabilities. Our interest rate sensitivity gap is the difference between interest earning assets and interest bearing liabilities maturing or re-pricing within a given time period. Unlike the calculation of maturity gap, interest rate sensitivity gap includes the effect of our 71 ANNALY CAPITAL MANAGEMENT, INC.
(2) Derivatives include TBA contracts under Agency MBS and CMBX balances under Commercial. (3) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition.
(2) Derivatives include TBA contracts under Agency MBS. (3) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition.
Management’s Discussion and Analysis Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps.
Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps.
We believe we have built a strong and collaborative risk management culture throughout Annaly focused on awareness which supports appropriate understanding and management of our key risks. Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility.
We believe we have built a strong and collaborative risk management culture throughout Annaly focused on awareness which supports appropriate understanding and management of our key risks. Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility. 66 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Total economic assets include the implied market value of TBA derivatives and net of debt issued by securitization vehicles. (3) Net interest margin represents our interest income less interest expense divided by the average interest earning assets.
Total economic assets include the implied market value of TBA derivatives and net of debt issued by securitization vehicles. (3) Net interest margin represents our interest income less interest expense divided by the average interest earning assets. Net interest margin does not include net interest component of interest rate swaps.
(4) Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles, of $9.2 billion.
(4) Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles, of $13.3 billion.
The following table presents estimates at December 31, 2022. Actual results could differ materially from these estimates. 75 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
The following table presents estimates at December 31, 2023. Actual results could differ materially from these estimates. 73 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
LLC, Keefe, Bruyette & Woods, Inc., J.P. Morgan Securities LLC, UBS Securities LLC and Wells Fargo Securities, LLC (collectively, the “Sales Agents”).
LLC, Keefe, Bruyette & Woods, Inc., J.P. Morgan Securities LLC, RBC Capital Markets, LLC, UBS Securities LLC and Wells Fargo Securities, LLC (collectively, the “Sales Agents”).
Futures Contract A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity.
Freddie Mac Federal Home Loan Mortgage Corporation. Futures Contract A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity.
Average interest bearing liabilities is based on daily balances. Interest Earning Assets Refers to Residential Securities, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt and preferred equity interests, residential mortgage loans and corporate debt. Average interest earning assets is based on daily balances.
Treasury securities sold, not yet purchased, and credit facilities. Average interest bearing liabilities is based on daily balances. Interest Earning Assets Refers to Residential Securities, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt and preferred equity interests, residential mortgage loans and corporate debt. Average interest earning assets is based on daily balances.
The table below shows our average interest bearing liabilities and average economic cost of interest bearing liabilities as compared to average one-month and average six-month LIBOR for the periods presented.
The following table shows our average interest bearing liabilities and average economic cost of interest bearing liabilities as compared to average one-month and average six-month SOFR for the periods presented.
Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).
Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements, other secured financing (excluding certain non-recourse credit facilities), and U.S. Treasury securities sold, not yet purchased.
The assets listed in this table include $62.9 billion of assets that have been pledged as collateral against existing liabilities at December 31, 2022. Please refer to the Encumbered and Unencumbered Assets table for related information.
The assets listed in this table include $67.5 billion of assets that have been pledged as collateral against existing liabilities at December 31, 2023. Please refer to the Encumbered and Unencumbered Assets table for related information.
Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy regardless of the market environment. Our capital policy defines the parameters and principles supporting a comprehensive capital management practice. 66 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy regardless of the market environment. Our capital policy defines the parameters and principles supporting a comprehensive capital management practice.
Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. We use interest rate swaps to manage our exposure to changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings.
Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. We use interest rate swaps to manage our exposure to changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings. Accordingly, adding the net interest component of interest rate swaps to interest 56 ANNALY CAPITAL MANAGEMENT, INC.
For the year ended December 31, 2022, we disposed of Residential Securities with a carrying value of $28.9 billion for an aggregate net loss of ($3.6) billion and we recognized a realized gain of $33.4 million as a result of deconsolidating a multifamily VIE.
For the same period in 2022, we disposed of Residential Securities with a carrying value of $28.9 billion for an aggregate net loss of ($3.6) billion and we recognized a realized gain of $33.4 million as a result of deconsolidating a multifamily VIE.
Variable Interest Entity (“VIE”) An entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
Variable Interest Entity (“VIE”) An entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. 86 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7.
Our portfolio composition, based on balance sheet values, at December 31, 2022 and 2021 was as follows: December 31, 2022 December 31, 2021 Category Agency mortgage-backed securities (1) 79.4 % 81.9 % Credit risk transfer securities 1.3 % 1.3 % Non-agency mortgage-backed securities 2.5 % 2.2 % Residential mortgage loans (1) 13.9 % 10.4 % Mortgage servicing rights 2.2 % 0.7 % Interests in MSR — % 0.1 % Commercial real estate (1) (2) 0.7 % 0.7 % Corporate debt — % 2.7 % (1) Includes assets transferred or pledged to securitization vehicles.
Our portfolio composition, based on balance sheet values, at December 31, 2023 and 2022 was as follows: December 31, 2023 December 31, 2022 Category Agency mortgage-backed securities 75.9 % 79.4 % Credit risk transfer securities 1.1 % 1.3 % Non-agency mortgage-backed securities 2.4 % 2.5 % Residential mortgage loans (1) 17.9 % 13.9 % Mortgage servicing rights 2.4 % 2.2 % Commercial real estate (1) 0.3 % 0.7 % (1) Includes assets transferred or pledged to securitization vehicles.
At December 31, 2022, we had total financial assets and cash pledged against existing liabilities of $62.9 billion. The weighted average haircut was approximately 3% on repurchase agreements.
At December 31, 2023, we had total financial assets and cash pledged against existing liabilities of $67.5 billion. The weighted average haircut was approximately 3% on repurchase agreements.

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