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Item 7. Management’s Discussion and Analysis

2024-02-15 compared with 2023-02-16 · 204 added, 210 removed, 1378 unchanged (23% of the section changed)

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Refer to the “Non-GAAP Financial Measures” section for additional information.

(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable divided by total equity.

(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued, and U.S.

Treasury securities sold, not yet purchased divided by total equity.

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).

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.

Recourse debt consists of repurchase agreements, other secured financing (excluding certain non-recourse credit facilities), and U.S.

Treasury securities sold, not yet purchased.

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.

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(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.

Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

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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.

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.

Net gains (losses) on investments and other for the year ended December 31, 2022 was ($4.6) billion compared to $121.0 million for the same period in 2021.

Part of this unfavorable change is attributable to the change in fair value flowing through the income statement on Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities purchased in the second half of 2022.

Net interest income for the year ended December 31, 2022 was $1.5 billion compared to $1.7 billion for the same period in 2021.

Net gains (losses) on derivatives for the year ended December 31, 2022 was $4.9 billion compared to $807.7 million for the same period in 2021.

Business divestiture-related gains (losses) for the year ended December 31, 2022 was ($40.3) million compared to ($278.6) million for the same period in 2021.

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.

Net gains (losses) on derivatives for the year ended December 31, 2023 was $0.4 billion compared to $4.9 billion for the same period in 2022.

Net interest income for the year ended December 31, 2023 was ($111.4) million compared to $1.5 billion for the same period in 2022.

Net gains (losses) on investments and other for the year ended December 31, 2023 was ($2.1) billion compared to ($4.6) billion for the same period in 2022.

Net servicing income for the year ended December 31, 2023 was $326.5 million compared to $221.8 million for the same period in 2022.

Other, net for the year ended December 31, 2023 was $73.7 million compared to $6.7 million for the same period in 2022.

Business divestiture-related gains (losses) for the year ended December 31, 2023 was $0.0 million compared to ($40.3) million for the same period in 2022.

Refer to the section titled “Other income (loss)” located within this Item 7 for additional information related to these changes.

Earnings available for distribution were $1.6 billion, or $2.86 per average common share, for the year ended December 31, 2023, compared to $1.9 billion, or $4.23 per average common share, for the same period in 2022.

The change in earnings available for distribution for the year ended December 31, 2022 compared to the same period in 2021 was primarily due to a favorable change in the net interest component of interest rate swaps, lower premium amortization expense, excluding PAA, resulting from lower prepayment speed projections, higher net servicing income from an increase in average MSR balances, and higher coupon income from an increase in interest rates, partially offset by higher interest expense from an increase in average borrowing rates.

The change in earnings available for distribution for the year ended December 31, 2023 compared to the same period in 2022 was primarily due to an higher interest expense from an increase in average borrowing rates and average interest bearing balances, a decline in TBA dollar roll income on reduced specialness partially offset by a favorable change in the net interest component of interest rate swaps, higher coupon income and lower premium amortization expense, excluding PAA, resulting from an increase in interest rates, purchasing assets with lower cost bases, and lower prepayment speeds, combined with higher servicing income and other, net.

ANNALY CAPITAL MANAGEMENT, INC.

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GAAP net income (loss) $ (1,638,457) $ 1,726,420 $ 2,396,280

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)

Adjustments to exclude reported realized and unrealized (gains) losses

Net (gains) losses on investments and other (1)

2,137,538 4,602,456 (120,958)

Net (gains) losses on derivatives (2)

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Other adjustments

Depreciation expense related to commercial real estate and amortization of intangibles (3)

3,948 15,225 39,108

Amortization of intangibles 4,573 3,948 15,225

Non-EAD (income) loss allocated to equity method investments (4)

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(182,151) (114,992) (72,727)

EAD attributable to noncontrolling interests (14,639) (1,095) (6,384)

Premium amortization adjustment cost (benefit) 1,654 (360,587) 57,158

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Refer to the disclosure within this section above for additional information on non-GAAP financial measures.

(1) Includes write-downs or recoveries which are reported in Other, net in the Company's Consolidated Statement of Comprehensive Income (Loss).

(2) The adjustment to add back Net (gains) losses on derivatives does not include the net interest component of interest rate swaps which is reflected in earnings available for distribution.

The net interest component of interest rate swaps totaled $366.2 million, ($276.1) million and ($207.9) million for the years ended December 31, 2022, 2021 and 2020, respectively.

The net interest component of interest rate swaps totaled $1.6 billion, $366.2 million and ($276.1) million for the years ended December 31, 2023, 2022 and 2021, respectively.

(3) Includes $0.0 million, ($2.3) million, and $(3.6) million of loss provision (reversal) on unfunded loan commitments for the years ended December 31, 2023, 2022 and 2021, respectively, which is reported in Other, net in the Consolidated Statements of Comprehensive Income (Loss).

(3) Includes depreciation and amortization expense related to equity method investments.

(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.

The year ended December 31, 2020 also includes costs incurred in connection with the management internalization, the CEO search process and a securitization of Agency mortgage-backed securities.

(5) Represents costs incurred in connection with securitizations of residential whole loans.

(6) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).

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The fair value of TBA derivatives is based on methods similar to those used to value Agency MBS.

We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on

We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives.

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Management’s Discussion and Analysis

derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract.

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We recalculate the effective yield as differences between anticipated and actual prepayments occur.

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.

The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date.

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Certain of our non-GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term Constant Prepayment Rate (“CPR”).

The following table illustrates the impact of the PAA on premium amortization expense for our Residential Securities portfolio and residential securities transferred or pledged to securitization vehicles, for the periods presented:

The following table illustrates the impact of the PAA on premium amortization expense for our Residential Securities portfolio for the periods presented:

For the Years Ended December 31,

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Our economic leverage ratio 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.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

Certain credit facilities (included within other secured

Recourse debt consists of repurchase agreements, other secured financing (excluding certain non-recourse credit facilities), and U.S.

Treasury securities sold, not yet purchased.

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.

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Management’s Discussion and Analysis

financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to us and are excluded from economic leverage.

The following table presents a reconciliation of GAAP debt to economic debt for purposes of calculating our economic leverage ratio for the periods presented:

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1,103,835 800,849

Debt included in liabilities of disposal group held for sale — 112,144

Treasury securities sold, not yet purchased 2,132,751 —

Total GAAP debt

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Less Non-Recourse Debt:

Credit facilities (1)

Debt issued by securitization vehicles

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(1,103,835) (800,849)

Non-recourse debt included in liabilities of disposal group held for sale — (112,144)

Total recourse debt $ 64,834,294 $ 59,762,597

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Refer to the disclosure within this section above for additional information on non-GAAP financial measures.

(1) Included in Other secured financing in the Consolidated Statements of Financial Condition.

The following table presents a reconciliation of GAAP total assets to economic total assets for purposes of calculating our economic capital ratio for the periods presented:

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Interest income (excluding PAA) represents interest income excluding the effect of the premium amortization adjustment, and serves as the basis for deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below.

We believe this measure provides management and investors with additional detail to enhance their understanding of our operating results and trends by excluding the component

We believe this measure provides management and investors with additional detail to enhance their understanding of our operating results and trends by excluding the component of premium amortization expense representing the cumulative effect of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency MBS (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.

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

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Management’s Discussion and Analysis

of premium amortization expense representing the cumulative effect of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency MBS (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.

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 expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of our financing strategy.

expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of our financing strategy.

We may use market agreed coupon (“MAC”) interest rate swaps in which we may receive or make a payment at the time of entering into such interest rate swap to compensate for the off-market nature of such interest rate swap.

In accordance with GAAP, upfront payments associated with MAC interest rate swaps are not reflected in the net interest component of interest rate swaps, which is presented in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).

We did not enter into any MAC interest rate swaps during the years ended December 31, 2022 and December 31, 2021.

Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.

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(2) At December 31, 2023, 2022 and 2021, respectively.

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

Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense divided by average interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and

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Management’s Discussion and Analysis

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

CMBX balances, provide management with additional measures of our profitability that management relies upon in monitoring the performance of the business.

Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates our performance.

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CMBX coupon income totaled $1.5 million, $4.4 million and $5.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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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.

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.

Average Economic Cost of Interest Bearing Liabilities

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Liabilities * Average

LIBOR Average

One-Month LIBOR

Month LIBOR Average Economic Cost

Average Six-Month LIBOR

Term SOFR Average

One-Month Term SOFR

Month Term SOFR Average Economic Cost

Average Six-Month Term SOFR

For the years ended (dollars in thousands)

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(1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

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Management’s Discussion and Analysis

2023 Compared with 2022

Economic interest expense increased by $418.2 million for the year ended December 31, 2022 compared to the same period in 2021.

The change was primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates, partially offset by lower average interest bearing liabilities and the change in the net interest component of interest rate swaps, which was $366.2 million for the year ended December 31, 2022 compared to ($276.1) million for the same period in 2021.

Economic interest expense increased by $1.3 billion for the year ended December 31, 2023 compared to the same period in 2022.

The change was primarily due to higher average interest bearing liabilities from an increase in repurchase agreement balances and higher borrowing rates.

This was partially offset by the change in the net interest component of interest rate swaps, which was $1.6 billion for the year ended December 31, 2023 compared to $366.2 million for the same period in 2022.

We do not manage our portfolio to have a pre-designated amount of borrowings at quarter or year end.

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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, 2021, 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 corporate loans.

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.

All of our Residential Securities are currently accepted as collateral for these borrowings.

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Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments and other was ($3.5) billion for the year ended December 31, 2022 compared with ($62.7) million for the same period in 2021.

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 2021, we disposed of Residential Securities with a carrying value of $11.5 billion for an aggregate net loss of ($3.1) million.

Net gains (losses) on disposal of investments and other was ($2.9) billion for the year ended December 31, 2023 compared with ($3.5) billion for the same period in 2022.

For the year ended December 31, 2023, we disposed of Residential Securities with a carrying value of $36.4 billion for an aggregate net loss of ($2.9) billion.

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.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $797.6 million for the year ended December 31, 2023 compared to ($1.1) billion for the same period in 2022, primarily due to favorable changes in unrealized gains (losses) on securitized residential whole loans of consolidated VIEs of $1.5 billion, Agency MBS of $1.5 billion, non-Agency MBS of $334.1 million, residential whole loans of $252.2 million, and CRT securities of $95.7 million partially offset by unfavorable changes in residential securitized debt of consolidated VIEs of ($1.5) billion, MSR of ($134.9) million and participations issued of ($123.5) million.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the year ended December 31, 2023 was $0.7 billion compared to $3.6 billion for the same period in 2022, attributable to unfavorable changes in unrealized gains (losses) on interest rate swaps, partially offset by the changes in net interest component of interest rate swaps and realized gains (losses) on termination or maturity of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was ($815.6) million for the year ended December 31, 2023, reflecting quarters of rate rallies and sell-offs in forward interest rates during the current period, compared to $3.5 billion for the same period in 2022, reflecting a sharper rise in forward interest rates during the prior period.

Realized gains (losses) on termination or maturity of interest rate swaps was ($74.8) million resulting from the termination or maturity of interest rate swaps with a notional amount of $12.7 billion for the year ended December 31, 2023 compared to ($266.4) million resulting from the termination or maturity of interest rate swaps with a notional amount of $21.3 billion for the same period in 2022.

Net interest component of interest rate swaps was $1.6 billion for the year ended December 31, 2023 compared to $366.2 million for the same period in 2022 due to an increase in average notional complemented by a full year of net receive rates.

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Management’s Discussion and Analysis

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($1.1) billion for the year ended December 31, 2022 compared to $183.7 million for the same period in 2021, primarily due to unfavorable changes in unrealized gains (losses) on securitized residential whole loans of consolidated VIEs of ($1.3) billion, Agency MBS of ($743.9) million, non-Agency MBS of ($213.3) million, residential whole loans of ($123.9) million, and CRT securities of ($41.7) million partially offset by favorable changes in residential securitized debt of consolidated VIEs of $1.1 billion and MSR of $89.7 million.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the year ended December 31, 2022 was $3.6 billion compared to $686.0 million for the same period in 2021, attributable to favorable changes in unrealized gains (losses) on interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps, and net interest component of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $3.5 billion for the year ended December 31, 2022, reflecting a rise in forward interest rates during the period, compared to $2.2 billion for the same period in 2021.

Realized gains (losses) on termination or maturity of interest rate swaps was ($266.4) million resulting from the termination or maturity of interest rate swaps with a notional amount of $21.3 billion for the year ended December 31, 2022 compared to ($1.2) billion resulting from the termination or maturity of interest rate swaps with a notional amount of $30.9 billion for the same period in 2021.

Net interest component of interest rate swaps was $366.2 million for the year ended December 31, 2022 compared to ($276.1) million for the same period in 2021 as the swaps portfolio changed from a net pay to a net receive position as the floating receive leg reflected the rise in interest rates.

Net gains (losses) on other derivatives was $1.3 billion for the year ended December 31, 2022 compared to $121.7 million for the same period in 2021.

The change in net gains (losses) on other derivatives was primarily due to favorable changes in net gains (losses) on futures contracts, which was $4.0 billion for the year ended December 31, 2022 compared to $582.3 million for the same period in 2021 and net gains (losses) on interest rate swaptions, which was $152.0 million for the year ended December 31, 2022 compared to ($76.0) million for the same period in 2021, partially offset by an unfavorable change in net gains (losses) on TBA derivatives, which was ($2.8) billion for the year ended December 31, 2022 compared to ($401.7) million for the same period in 2021.

Net gains (losses) on other derivatives was ($294.6) million for the year ended December 31, 2023 compared to $1.3 billion for the same period in 2022.

The change in net gains (losses) on other derivatives was primarily due to unfavorable changes in net gains (losses) on futures contracts, which was ($6.8) million for the year ended December 31, 2023 compared to $4.0 billion for the same period in 2022 and net gains (losses) on interest rate swaptions, which was ($148.8) million for the year ended December 31, 2023 compared to $152.0 million for the same period in 2022, partially offset by a favorable change in net gains (losses) on TBA derivatives, which was ($140.8) million for the year ended December 31, 2023 compared to ($2.8) billion for the same period in 2022.

Loan Loss (Provision) Reversal

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Business Divestiture-Related Gains (Losses)

For the year ended December 31, 2022, the majority of business divestiture-related gains (losses) were associated with the sale of our corporate loan interests.

Refer to the “Sale of Middle Market Lending Portfolio” Note located within Item 15 for additional information related to to the transaction.

For the year ended December 31, 2021, business divestiture-related gain (losses) were associated with the sale of our commercial real estate business.

Refer to the “Sale of Commercial Real Estate Business” Note located within Item 15 for additional information related to to the transaction.

Other, net includes brokerage and commission fees, due diligence costs, securitization expenses and certain revenues and costs associated with our investments in commercial real estate, including rental income and recoveries, operating costs as well as depreciation and amortization expense.

For the year ended December 31, 2023, there were no business divestiture-related gains (losses).

For the year ended December 31, 2022, the majority of business divestiture-related gain (losses) were associated with the sale of our corporate loan interests.

Refer to the “Sale of Middle Market Lending Portfolio” Note located within Item 15 for additional information related to the transaction.

Other, net includes brokerage and commission fees, due diligence costs, securitization expenses, and interest on custodial balances.

We also report in Other, net items whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements.

Given the nature of certain components of this line item, balances may fluctuate from period to period.

Other, net was $73.7 million for the year ended December 31, 2023 compared to $6.7 million for the same period in 2022, primarily attributable to an increase in interest on custodial balances, partially offset by an increase in MSR financing expenses.

General and Administrative Expenses

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The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented.

Prior to the closing of the management internalization transaction (the "Internalization") on June 30, 2020, G&A also consisted of management fees paid to Annaly Management Company LLC (our “Former Manager”).

Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees,

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Management’s Discussion and Analysis

due diligence costs and securitization expenses) as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items.

As such, prior periods have been conformed to the current presentation with Other general and administrative expenses for the three months ended March 31, 2021 adjusted downward by $1.8 million and for the year ended December 31, 2020 adjusted downward by $17.0 million.

The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented.

G&A Expenses and Operating Expense Ratios

Total G&A Expenses/Average Assets (1)

Total G&A Expenses/Average Equity (1)

Expenses Total G&A Expenses/Average Assets Total G&A Expenses/Average Equity

For the years ended (dollars in thousands)

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December 31, 2021 $ 186,014 0.23 % 1.35 %

(1) Includes $2.9 million of costs incurred in connection with the management internalization and costs incurred in connection with the CEO search process for the year ended December 31, 2020.

Excluding these transaction costs, G&A expenses as a percentage of average total assets and as a percentage of average equity were 0.22% and 1.55%, respectively, for the year ended December 31, 2020.

2023 Compared with 2022

G&A expenses decreased $0.2 million to $162.6 million for the year ended December 31, 2023 compared to the same period in 2022.

The change was primarily due to lower expenses on our commercial portfolio, as a result of the sale of our commercial real estate business which was announced in the first quarter of 2021, as well as lower expenses resulting from the divestiture of our MML assets, which was announced in the second quarter of 2022, during the year ended December 31, 2022 compared with the same period in 2021.

The increase in compensation expense was almost fully offset by the decrease in other general and administrative expense due to lower expenses resulting from the divestiture of our MML assets, which was announced in the second quarter of 2022.

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Management’s Discussion and Analysis

Return on Average Equity

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Unrealized Gains and Losses - Available-for-Sale Investments

With our available-for-sale accounting treatment on our Agency MBS, which represent the largest portion of assets on balance sheet, unrealized fluctuations in market values of assets do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss).

The unrealized fluctuations in market values of our available-for-sale Agency MBS, for which the fair value option is not elected, do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss).

As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting.

As a result, comparisons with companies that use amortized cost accounting for some or all of their balance sheet may not be meaningful.

The table below shows cumulative unrealized gains and losses on our available-for-sale investments reflected in the Consolidated Statements of Financial Condition.

The following table shows cumulative unrealized gains and losses on our available-for-sale investments reflected in the Consolidated Statements of Financial Condition.

December 31, 2023 December 31, 2022

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Accumulated other comprehensive income (loss) $ (1,335,400) $ (3,708,896)

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Management’s Discussion and Analysis

Unrealized changes in the estimated fair value of available-for-sale investments may have a direct effect on our potential earnings and dividends:

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Also, we are guaranteed payment of the principal and interest amounts of the securities by the respective issuing Agency.

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Management’s Discussion and Analysis

Financial Condition

Total assets were $93.2 billion and $81.9 billion at December 31, 2023 and 2022, respectively.

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.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at December 31, 2023:

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Assets (dollars in thousands)

Fair value/carrying value $ 62,274,895 $ 1,748,209 $ 13,920,447 $ 526,309 $ 78,469,860

Fair value $ 66,308,788 $ 2,122,196 $ 18,743,039 $ 222,444 $ 87,396,467

Implied market value of derivatives (2)

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Participations issued — — 1,103,835 — 1,103,835

Treasury securities sold, not yet purchased 1,973,568 (5,683) 163,855 1,011 2,132,751

Net forward purchases 523,543 15,612 10 — 539,165

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8.4:1 0.3:1 7.0:1 2.2:1 6.8:1

(1) Fair value/carrying includes residential loans held for sale, and assets and liabilities associated with non-controlling interests.

(2) Derivatives include TBA contracts under Agency MBS and CMBX balances under Commercial.

(1) Fair value includes residential loans held for sale, and assets and liabilities associated with non-controlling interests.

(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.

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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.

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.

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.

We carry all of our Agency MBS at fair value on the Consolidated Statements of Financial Condition.

We accrete discount balances as an increase to interest income over the expected life of the related interest earning assets and we amortize premium balances as a decrease to interest income over the expected life of the related interest earning assets.

At December 31, 2022 and December 31, 2021 we had on our Consolidated Statements of Financial Condition a total of $1.1 billion and $77.7 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $2.9 billion and $3.8 billion, respectively, of unamortized premium

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Management’s Discussion and Analysis

(which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

At December 31, 2023 and December 31, 2022 we had on our Consolidated Statements of Financial Condition a total of $1.4 billion and $1.1 billion, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities acquired at a price below principal value) and a total of $2.4 billion and $2.9 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the years ended December 31, 2023 and 2022 was 6.5% and 12.2%, respectively.

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Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period.

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at December 31, 2022 and December 31, 2021.

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Management’s Discussion and Analysis

The following table presents our Residential Securities that were carried at fair value at December 31, 2023 and December 31, 2022.

December 31, 2023 December 31, 2022

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Total Residential Securities $ 69,391,121 $ 65,263,598

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Management’s Discussion and Analysis

The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at December 31, 2022 and December 31, 2021.

December 31, 2023 December 31, 2022

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NM Not meaningful.

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Management’s Discussion and Analysis

The following tables summarize certain characteristics of our Residential Credit portfolio at December 31, 2023.

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Total/weighted average $ 3,082,333 $ 1,023,070 $ 2,059,263 6.35 % 16.86 % 14.97 % 5.79 %

$ 2,988,703 $ 1,097,565 $ 1,891,138 5.62 % 16.90 % 22.46 % 5.99 %

(1) Represents the 3 month voluntary prepayment rate (“VPR”) and excludes the impact of interest-only securities.

(2) Total investment characteristics exclude the impact of interest-only securities.

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Management’s Discussion and Analysis

(1) Investment characteristics exclude the impact of interest-only securities.

(2) Represents the 3 month voluntary prepayment rate (“VPR”).

Product ARM Fixed Floater Interest-Only Estimated Fair Value

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During the year ended December 31, 2022, we received $9.5 billion from principal repayments and $25.0 billion in cash from disposal of Securities.

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Management’s Discussion and Analysis

Commitments and Contractual Obligations with Unconsolidated Entities

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Our capital policy defines the parameters and principles supporting a comprehensive capital management practice.

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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.

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.

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During the years ended December 31, 2023 and 2022, no shares were repurchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

During the year ended December 31, 2022, we closed two public offerings for an aggregate original issuance of 50 million shares of common stock for aggregate proceeds of $1.31 billion before deducting offering expenses.

In connection with each offering, we granted the underwriters a thirty-day option to purchase up to an additional 3.75 million shares of common stock, which the underwriters exercised in full in both instances, resulting in an additional $196.5 million in proceeds before deducting offering expenses for the year ended December 31, 2022.

The stock offerings conducted during the year ended December 31, 2022 were completed prior to the Reverse Stock Split and the foregoing share amounts have been retroactively adjusted to reflect the effects thereof.

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.

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.

LLC, Keefe, Bruyette & Woods, Inc., J.P.

Morgan Securities LLC, UBS Securities LLC and Wells Fargo Securities, LLC (collectively, the “Sales Agents”).

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”).

Morgan Securities LLC, RBC Capital Markets, LLC, UBS Securities LLC and Wells Fargo Securities, LLC (collectively, the “Sales Agents”).

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”).

During the year ended December 31, 2023, under the at-the-market sales program, we issued 31.4 million shares for proceeds of $0.7 billion, net of commissions and fees.

During the year ended December 31, 2021, under the at-the-market sales program, we issued 15.2 million shares for proceeds of $552.4 million, net of commissions and fees.

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”).

Under the terms of the plan, we are authorized to repurchase up to an

During the year ended December 31, 2022, under the at-the-market sales program,

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Management’s Discussion and Analysis

aggregate of 63,500,000 shares of Preferred Stock, comprised of up to (i) 28,800,000 shares of our 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”), (ii) 17,000,000 shares of our 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series G Preferred Stock”), and (iii) 17,700,000 shares of our 6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series I Preferred Stock”, and together with Series F Preferred Stock and Series G Preferred Stock, the “Preferred Stock”).

we issued 45.7 million shares for proceeds of $1.1 billion, net of commissions and fees.

The foregoing share amounts have been retroactively adjusted to reflect the effects of the Reverse Stock Split.

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”).

Under the terms of the plan, we are authorized to repurchase up to an aggregate of 63,500,000 shares of Preferred Stock, comprised of up to (i) 28,800,000 shares of our 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”), (ii) 17,000,000 shares of our 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series G Preferred Stock”), and (iii) 17,700,000 shares of our 6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series I Preferred Stock”, and together with Series F Preferred Stock and Series G Preferred Stock, the “Preferred Stock”).

The aggregate liquidation value of the Preferred Stock that may be repurchased by us pursuant to the Preferred Stock Repurchase Program, as of November 3, 2022, was approximately $1.6 billion.

The Preferred Stock Repurchase Program became effective on November 3, 2022, and shall expire on December 31, 2024.

No shares were repurchased to with respect to the Preferred Stock Repurchase Program during the year ended December 31, 2022.

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.

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Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility.

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Management’s Discussion and Analysis

Risk Appetite

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The risk appetite statement asserts the following key risk parameters to guide our investment management activities:

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Risk Parameter Description

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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.

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.

Credit Risk We will seek to manage credit risk by making investments which conform to 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.

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Risk management begins with our Board, through the review and oversight of the risk management framework, and executive management, through the ongoing formulation of risk management practices and related execution in managing risk.

The Board exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”) with support from the other Board Committees.

The BRC is responsible for oversight of our risk governance structure, risk management (operational and market risk) and risk assessment guidelines and policies and our risk appetite.

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 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 Board exercises its oversight of risk management primarily through the Risk Committee and Audit Committee with support from the other Board Committees.

The Risk Committee is responsible for oversight of our risk governance structure, risk management (operational and market risk) and risk assessment guidelines and policies and our risk appetite.

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 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.

The Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board, and the Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or ESG risk to us.

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.

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Three primary management committees have been established to provide a comprehensive framework for risk management.

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”).

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.

Audit Services is an independent function with reporting lines to the BAC.

Audit Services is an independent function with reporting lines to the Audit Committee.

Audit Services is responsible for performing our internal audit activities, which includes independently assessing and validating key controls within the risk management framework.

Our compliance group is responsible for oversight of our regulatory compliance.

Our Chief Compliance Officer has reporting lines to the BAC.

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Management’s Discussion and Analysis

Our compliance group is responsible for oversight of our regulatory compliance.

Our Chief Compliance Officer has reporting lines to the Audit Committee.

Description of Risks

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Risk Description

Capital, Liquidity and Funding Risk Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding.

Liquidity and Funding Risk Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding.

Investment/Market Risk Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused by changes in market variables, such as interest rates, which affect the values of investment securities and other investment instruments.

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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.

Our capital, liquidity and funding risk management practices consist of the following primary elements:

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.

Our liquidity and funding risk management practices consist of the following primary elements:

Element Description

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We seek to conservatively manage our repurchase agreement funding position through a variety of methods including diversity, breadth and depth of counterparties and maintaining a staggered maturity profile.

Our wholly-owned subsidiary, Arcola, provides direct access to third party funding as a FINRA member broker-dealer.

Arcola, provides direct access to third party funding as a FINRA member broker-dealer.

Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central counterparty.

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We also finance our investments in residential mortgage loans through the issuance of securitization transactions sponsored by our wholly-owned subsidiary Onslow Bay Financial LLC (“Onslow Bay”) under the Onslow Bay private-label securitization program.

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at December 31, 2022:

The following table presents our outstanding debt balances and associated weighted average rates and days to maturity at December 31, 2023:

Weighted Average Rate

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The composition of our liquid assets is also considered and is subject to certain parameters.

The composition is monitored for concentration risk and asset type.

The composition is monitored for concentration risk, including in respect of our deposits of our cash and cash equivalents, and asset type.

We believe the assets we consider liquid can be readily converted into cash, through liquidation or by being used as collateral in financing arrangements (including as additional collateral to support existing financial arrangements).

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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 gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of

Unlike the calculation of maturity gap, interest rate sensitivity gap includes the effect of our

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Management’s Discussion and Analysis

interest-rate sensitive liabilities.

interest rate swaps.

A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities.

A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets.

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Repurchase agreements $ 58,629,278 $ 3,572,265 $ — $ — $ 62,201,543

Other secured financing — — 250,000 — 250,000

Debt issued by securitization vehicles (principal) — — — 12,623,492 12,623,492

Participations issued (principal) — — — 1,086,538 1,086,538

Treasury securities sold, not yet purchased 2,132,751 — — — 2,132,751

Total financial liabilities - maturity 60,762,029 3,572,265 — 13,710,030 78,044,324

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We may utilize a variety of financial instruments, including interest rate swaps, swaptions, options, futures and other hedges, in order to limit the adverse effects of interest rates on our results.

In the case of interest rate swaps, we utilize contracts linked to LIBOR but may also enter into interest rate swaps where the floating leg is linked to the overnight index swap rate or another index, particularly in light of the scheduled cessation of LIBOR.

In the case of interest rate swaps, we utilize contracts linked to SOFR but may also enter into interest rate swaps where the floating leg is linked to the overnight index swap rate or another index.

In addition, we may use MAC interest rate swaps in which we may receive or make a payment at the time of entering such interest rate swap to compensate for the off-market nature of such interest rate swap.

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Change in Interest Rate (1)

Projected Percentage Change in Economic Net Interest Income (2)

Estimated Percentage Change in Portfolio Value (2)

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% on NAV (2)(3)

Projected Percentage Change in Economic Net Interest Income (4)

-75 Basis points (0.3%) (2.2%) 8.1%

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Estimated Change in

Portfolio Market Value Estimated Change as a %

Portfolio Market Value (2)

Estimated Change as a %

on NAV (2)(3)

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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.

(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.

Credit Risk Management

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We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure.

We will originate or purchase commercial investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee.

In the case of residential mortgage loans and MSR, we may engage a third party to perform due diligence on a sample of loans that we believe sufficiently represents the entire pool.

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Agency mortgage-backed securities 75.9 % 79.4 %

79.4 % 81.9 %

Credit risk transfer securities 1.1 % 1.3 %

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Mortgage servicing rights 2.4 % 2.2 %

Interests in MSR — % 0.1 %

Commercial real estate (1)

Corporate debt — % 2.7 %

(1) Includes assets transferred or pledged to securitization vehicles.

(2) Excludes commercial real estate assets held for sale as of December 31, 2021.

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Management’s Discussion and Analysis

Counterparty Risk Management

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In the event of default by a counterparty, we could have difficulty obtaining our assets pledged as collateral.

A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities as collateral to the applicable lender.

A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities as collateral to the

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

applicable lender.

The collateral we pledge generally exceeds the amount of the borrowings under each agreement.

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Europe 10 10,403,461 (26,957) 803,497

Asia (non-Japan) 1 447,776 — 16,234

Japan 4 3,807,391 — 310,799

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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.

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.

Other tools include Risk and Control Self Assessment (“RCSA”) testing, including disaster recovery/testing;

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and monitoring, which includes the use of key risk indicators.

Our Operational Risk team conducts a disaster recovery exercise on an annual basis.

Cyber security-related threats are addressed in tabletop exercises managed by the Cybersecurity Committee and business disruption events are addressed in tabletop exercises managed by the Operational Risk team.

The results of these tabletop exercises are reported to management.

Our Operational Risk Management team conducts a disaster recovery exercise on an annual basis and periodically conducts other operational risk tabletop exercises.

Employee-level lines of defense against operational risk include proper segregation of incompatible duties, activity-level internal controls over financial reporting, the empowerment of business units to identify and mitigate operational risk sources, testing by our internal audit staff, and our overall governance framework.

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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.

Members of the Operational Risk Management team participate in the Cybersecurity Committee established to help mitigate cybersecurity risks.

The role of the committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee our Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing.

The Head of Information Technology Infrastructure is responsible for continuously reporting to the Cybersecurity Committee throughout the year regarding cybersecurity and related risks.

Our Chief Technology Officer and

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.

Processes for assessing, identifying, and managing cybersecurity risks include cybersecurity risk assessments, use of key risk indicators, vendor cybersecurity risk management, employee training, including phishing exercises and cybersecurity awareness training, penetration testing, evaluation of cybersecurity insurance and periodic engagements by our internal audit department, which determines whether our cybersecurity program and information security practices align with relevant parts of the National Institute of Standards and Technology (“NIST”) framework.

We periodically engage penetration testing companies and law firms to assist in these processes.

When we do so, we hire reputable companies, limit their access to only information necessary for the specific purpose and maintain security controls around confidential information, including personal information.

We also maintain a Cybersecurity Incident Response Plan (“Response Plan”) with processes to identify, contain, mitigate and escalate cybersecurity incidents, utilizing cross-functional expertise and external resources as needed.

We conduct tabletop exercises to test our Response Plan and our reaction to various business disruption events, and the results of these tabletop exercises are reported to the Cybersecurity Committee and the ERC.

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Management’s Discussion and Analysis

Head of Information Technology Infrastructure are members of multiple industry associations that discuss industry threats, challenges and solutions to cybersecurity issues.

Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems.

The Cybersecurity Committee periodically reports to the ERC and the relevant Board committees.

Our internal audit department determines whether our cybersecurity program and information security practices align with relevant portions of the National Institute of Standards and Technology (“NIST”) framework.

There is no assurance that our efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

We currently maintain cybersecurity insurance, however, there is no assurance that our current policy will cover all cybersecurity breaches or our related losses, or that we will be able to continue to maintain cybersecurity insurance in the future.

We depend on third party service providers to perform various business processes related to our operations, including mortgage loan servicers and sub-servicers.

We also have processes in place to oversee and identify material risks from cybersecurity threats associated with our use of third party service providers, including mortgage loan servicers and sub-servicers, upon which we depend on to perform various business processes related to our operations.

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.

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.

We also have processes to evaluate and classify cybersecurity risk related to sensitive data held by key third party service providers on their systems.

The Cybersecurity Committee has primary responsibility for these processes to manage cybersecurity risks, under the oversight of the ERC.

Daily monitoring of cybersecurity defenses is performed by the IT Infrastructure Team and any issues are escalated to the Cybersecurity Committee as needed.

The Cybersecurity Committee regularly meets to discuss both routine oversight of cybersecurity processes, policies and procedures and management of any cyber-specific events, including escalation to the ERC, the executive leadership team and/or the Board as appropriate.

The Cybersecurity Committee includes representatives from Operational Risk Management, Information Technology, Legal, Mortgage Operations and Internal Control.

Certain members of the Cybersecurity Committee have relevant qualifications such as extensive work experience implementing data security measures, developing cybersecurity policies and procedures, and assessing, managing and reporting cybersecurity risk.

Members also participate in cybersecurity-related professional organizations that discuss industry threats, challenges and solutions to cybersecurity issues.

Our Head of IT Infrastructure has completed the "Cybersecurity:

Managing Risk in the Information Age" certificate program from Harvard University.

The Cybersecurity Committee regularly discusses cybersecurity risk management and best practices with the ERC and with the Audit and Risk Committees of our Board.

The Audit and Risk Committees jointly oversee processes, practices and policies related to cybersecurity and receive joint and individual presentations from management and external experts on cyber and technology-related risks.

Two members of our Board have completed the Carnegie Mellon/NACD Cyber-Risk Oversight Program and earned the CERT Certificate in Cybersecurity Oversight and one member of our Board has completed the NACD Master Class:

Cyber-Risk Oversight Program.

To date, we have not detected any risks from cybersecurity threats that have materially affected us.

However, even though we take steps to employ reasonable cybersecurity efforts, not every cybersecurity incident can be prevented or detected.

We also may be held responsible for cybersecurity threats affecting our third party service providers, including mortgage sub-servicers.

Therefore, while we believe there are currently no risks from any potential cybersecurity threat or cybersecurity incident that are reasonably likely to have a material effect on our business strategy, results of operations or financial condition, the likelihood or severity of such risks are difficult to predict.

For further discussion, please see the risk factors titled "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" and "Cyberattacks or other information security breaches could adversely affect our business, reputation and financial condition" in Part I, Item 1A.

“Risk Factors” in this Annual Report on Form 10-K.

Compliance, Regulatory and Legal Risk Management

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Accordingly, we closely monitor our REIT status within our risk management program.

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.

The financial services industry is highly regulated and receives significant attention from regulators, which may impact both our company and our business strategy.

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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.

Our risk management framework is designed to identify, measure and monitor these risks under oversight of the ERC.

We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we seek to continue to meet the requirements for this exemption from registration.

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Accordingly, in conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program.

The monitoring of this risk is also under the oversight of the ERC.

As a result of the Dodd-Frank Act, the U.S.

Commodity Futures Trading Commission (“CFTC”) gained jurisdiction over the regulation of interest rate swaps.

The CFTC has asserted that this causes the operators of mortgage real estate investment trusts that use swaps as part of their business model to fall within the statutory definition of Commodity Pool Operator (“CPO”), and, absent relief from the Division of Swap Dealer and Intermediary Oversight or the CFTC, to register as CPOs.

On December 7, 2012, as a result of numerous requests for no-action relief from the CPO registration requirement for operators of mortgage real estate investment trusts, the Division of Swap Dealer and Intermediary Oversight 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 by filing a claim to perfect the use of the relief.

A claim submitted by a CPO will be effective upon filing, so long as the claim is materially complete.

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 real estate investment trust to the public, and identification of the entity as a mortgage real estate investment trust in its federal tax filings with the Internal Revenue Service.

While we disagree with the CFTC’s position that mortgage REITs that use swaps as part of their business model fall within the statutory definition of a CPO, 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.

Compliance with Section 3(c)(5)(C) of the Investment Company Act is monitored by the FRDC under the oversight of the ERC.

ANNALY CAPITAL MANAGEMENT, INC.

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Our critical accounting policies that require us to make significant judgments or estimates are described below.

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.

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.”

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Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds.

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.

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.

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Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds.

See the interest rate sensitivity and interest rate shock analysis and discussions within this Item 7.

Refer to the interest rate sensitivity and interest rate shock analysis and discussions within this Item 7.

for further information.

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Changes in the underlying assumptions used to estimate the fair value of MSR impact the carrying value as well as the related unrealized gains and losses recognized.

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.

“Exhibits, Financial Statement Schedules.”

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Non-GAAP financial measure that is calculated 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.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

Recourse debt consists of repurchase agreements, other secured financing and U.S.

Treasury securities sold, not yet purchased.

Debt issued by securitization vehicles and participations issued, are non-recourse to us and are excluded from this measure.

Economic Net Interest Income

Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense.

Non-GAAP financial measure that is composed of GAAP interest income less Economic Interest Expense.

Economic Return

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Assets on the company’s balance sheet which have been pledged as collateral against a liability.

dollar deposit held in Europe or elsewhere outside the United States.

Environmental, social, and governance.

The par value (i.e., principal or maturity value) of a security appearing on the face of the instrument.

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Floating Rate CMO

A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the LIBOR, the Constant Maturity Treasury or the Cost of Funds Index.

A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the SOFR, the Constant Maturity Treasury or the Cost of Funds Index.

Federal Home Loan Mortgage Corporation.

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Interest Bearing Liabilities

Refers to repurchase agreements, debt issued by securitization vehicles and credit facilities.

Refers to repurchase agreements, debt issued by securitization vehicles, U.S.

Treasury securities sold, not yet purchased, and credit facilities.

Average interest bearing liabilities is based on daily balances.

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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.

An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as SOFR.

As the benchmark rate changes, the IO coupon adjusts in the opposite direction.

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Calculated as total debt to total stockholders’ equity.

For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable.

Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us.

For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued, and U.S.

Treasury securities sold, not yet purchased.

Debt issued by securitization vehicles and participations issued and mortgages payable are non-recourse to us.

LIBOR (London Interbank Offered Rate)

The rate banks charge each other for short-term Eurodollar loans.

LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floating-rate legs of interest rate swaps.

The United Kingdom Financial Conduct Authority, 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.

A rate previously used as a benchmark for financial transactions.

All tenors of LIBOR relevant to us are either no longer published or are no longer representative.

Liquidity Risk

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An interest rate swap contract structure with pre-defined, market agreed terms, developed by SIFMA and ISDA with the purpose of promoting liquidity and simplified administration.

Monetary Policy

Action taken by the Federal Open Market Committee of the Federal Reserve System to influence the money supply or interest rates.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Monetary Policy

Action taken by the Federal Open Market Committee of the Federal Reserve System to influence the money supply or interest rates.

Mortgage-Backed Security (“MBS”)

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By contrast, the economic borrower’s obligation to repay non-recourse debt is limited to the value of the pledged collateral.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

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 this measure.

Recourse debt consists of repurchase agreements, other secured financing and U.S.

Treasury securities sold, not yet purchased.

Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from this measure.

Reinvestment Risk

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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

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Annaly and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs.

The term secured overnight financing rate published by the Chicago Mercantile Exchange, which is used as a benchmark for financial transactions.

To-Be-Announced (“TBA”) Securities

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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.

Variation Margin

Cash or securities provided by a party to collateralize its obligations under a transaction as a result of a change in value of such transaction since the trade was executed or the last time collateral was provided.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Variation Margin

A statistical measure of the variance of price or yield over time.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis