ANNALY CAPITAL MANAGEMENT, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements contained in this quarterly report, and certain statements contained in our future filings with theSecurities and Exchange Commission (the "SEC" or the "Commission"), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "should," "estimate," "project," "believe," "expect," "anticipate," "continue," or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain); changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities, and related residential mortgage credit assets; risks related to investments in mortgage servicing rights ("MSR"); our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT forU.S. federal income tax purposes; and our ability to maintain our exemption from registration under the Investment Company Act. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in our most recent annual report on Form 10-K and Item 1A "Risk Factors" in this quarterly report on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to "Annaly," "we," "us," or "our" meanAnnaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled "Glossary of Terms" located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q. 38 --------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis INDEX TO ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 40 Reverse Stock Split 40 Business Environment 40 Economic Environment 41 London Interbank Offered Rate ("LIBOR") Transition 42 Income Tax Reform 42 Results of Operations 43 Net Income (Loss) Summary 44 Non-GAAP Financial Measures 46 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 46 Premium Amortization Expense 48 Economic Leverage and Economic Capital Ratios 48
Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA)
50
Experienced and Projected Long-term CPR 50
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 51
Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities
52
Other Income (Loss) 53
General and Administrative Expenses 55
Return on Average Equity 55
Unrealized Gains and Losses - Available-for-Sale Investments 55
Financial Condition 56
Residential Securities 56
Contractual Obligations 59
Off-Balance Sheet Arrangements 59
Capital Management 59
Stockholders' Equity 60
Capital Stock 60
Leverage and Capital 61
Risk Management 61
Risk Appetite 62
Governance 62
Description of Risks 63
Capital, Liquidity and Funding Risk Management 63
Funding 63
Excess Liquidity 65
Maturity Profile 66
Stress Testing 67
Liquidity Management Policies 67
Investment/Market Risk Management 67
Credit Risk Management 68
Counterparty Risk Management 69
Operational Risk Management 70
Compliance, Regulatory and Legal Risk Management 70
Critical Accounting Estimates 71
Valuation of Financial Instruments 71
Residential Securities 71
Residential Mortgage Loans 71
MSR 69
Interest Rate Swaps 72
Revenue Recognition 72
Consolidation of Variable Interest Entities 73
Use of Estimates 73
Glossary of Terms 74
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
Overview
We are a leading diversified capital manager with investment strategies across mortgage finance. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managedMaryland corporation founded in 1997 that has elected to be taxed as a REIT. Our common stock is listed on theNew York Stock Exchange under the symbol "NLY."
We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.
For a full discussion of our business, refer to the section titled "Business Overview" in our most recent Annual Report on Form 10-K.
Reverse Stock Split
OnSeptember 8, 2022 , we announced that our Board of Directors had unanimously approved a reverse stock split of our common stock at a ratio of 1-for-4 (the "Reverse Stock Split"). The Reverse Stock Split was effective following the close of business onSeptember 23, 2022 (the "Effective Time"). Accordingly, at the Effective Time, every four issued and outstanding shares of our common stock were converted into one share of our common stock. No fractional shares were issued in connection with the Reverse Stock Split. Instead, each stockholder that would have held fractional shares as a result of the Reverse Stock Split received cash in lieu of such fractional shares. The par value per share of our common stock remained unchanged at$0.01 per share after the Reverse Stock Split. Accordingly, for all historical periods presented, an amount equal to the par value of the reduced number of shares resulting from the Reverse Stock Split was reclassified from Common stock to Additional paid in capital in our Consolidated Statements of Financial Condition. All other references made to share or per share amounts in the accompanying consolidated financial statements and disclosures have also been retroactively adjusted, where applicable, to reflect the effects of the Reverse Stock Split.
Business Environment
As 2022 continues to be a historically challenging year, the third quarter ("Q3
2022") saw broader fixed income markets underperform and mortgage spreads widen
once again. Stubbornly elevated inflation readings, rapid Federal Reserve
("Fed") interest rate hikes, tightening financial conditions, high volatility,
geopolitical turmoil, and rising financial stability risks have weighed on
markets. The total return for the Bloomberg U.S. Aggregate Bond Market index was
negative 14.6% in the first three quarters of 2022, far worse than 1994 - the
prior worst year in the history of the index - when the total return was
negative 2.9%. In light of this difficult environment, we experienced a negative
economic return of 11.7% during Q3 2022.
The Fed has signaled it is determined to keep tightening monetary policy until
inflation returns to its target, a commitment that has been echoed by all Fed
officials since Fed Chair Jerome Powell's speech at the Federal Reserve Bank of
Kansas City's Economic Symposium in Jackson Hole, Wyoming at the end of August.
This has caused a meaningful repricing of the Federal Funds Target Rate
expectations. The repricing in monetary policy rates has led to a sharp selloff
in interest rates and high levels of volatility as surprises in economic data
have fueled expectations for an ever-higher monetary policy rate. In light of
this volatility and price action, investor demand for fixed income products has
been weak, particularly for Agency mortgage-backed securities ("Agency MBS"). Q3
2022 represents only the third quarter in the last ten years in which banks and
mutual funds, the two largest holders of mortgage securities and loans, have
reduced their Agency MBS holdings simultaneously.
In light of the sharp selloff in interest rates and widening in mortgage
spreads, the Freddie Mac national survey mortgage rate rose to 6.70% as of
September 30, 2022 , more than doubling in 2022 and contributing to a sharp
slowdown in housing market activity. Home price appreciation appears to have
peaked and has begun to reverse in several cities, if not nationwide. Given
significantly reduced mortgage affordability from high home prices and rapidly
rising mortgage rates, we now expect the housing market to correct downward,
potentially erasing the entire home price appreciation seen thus far this year
by early to mid 2023. Although prices could fall significantly from their recent
highs, we anticipate housing fundamentals could ultimately see help from the
structural tailwinds of strong demographics and a shortage in construction over
the last ten plus years. Slower housing activity should benefit the Agency MBS
market primarily by reducing net supply, although we believe it should not be
enough to have a material impact on our Residential Credit portfolio in the
near-term. Homeowners have built up meaningful equity cushions, mortgage lending
standards have been robust, and given low rates on existing mortgages, most
homeowners with steady incomes are unlikely to default unless labor markets
weaken considerably in coming months.
Despite the volatility in interest rate and mortgage markets, funding conditions
have been stable. Agency MBS repurchase agreements ("repo"), residential credit
financing, and MSR financing facilities remain readily available. Our financing
rates have risen sharply but have been thus far commensurate with other
short-term interest rates. While high volatility could drive an increase in repo
haircuts, we have seen limited evidence of such a dynamic thus far. The
favorable financing conditions
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
continue to be driven by the high balances of investor cash in short-term
interest rate products, best seen by the elevated bank reserve balances and the
near record Reverse Repo facility with the Fed. Notwithstanding the Fed balance
sheet runoff reaching its steady-state run rate of up to $95 billion per month,
financing conditions should remain accommodative as cash remains ample over the
medium-term.
For much of this challenging year, we have remained focused on prudently
managing our liquidity, leverage, and risk profile in the current environment.
We continue to position ourselves defensively given sustained volatility and
have robust liquidity with $6.1 billion in unencumbered assets, including $4.3
billion in cash and unencumbered Agency MBS. This represents over 50% of our
equity as of September 30, 2022 . During Q3 2022, we maintained our economic
leverage around 6.5x until mid-September. However, in light of the sharp market
selloff in the last two weeks of the Q3 2022, our leverage increased to end Q3
2022 at 7.1x. While we are comfortable with our current portfolio positioning,
we would expect our leverage range to trend lower over the long term, reflective
of our target capital allocation.
In terms of our portfolio mix, we modestly grew each of our three strategies
with our total portfolio assets increasing to $86.2 billion in market value, up
from $82.3 billion in the quarter prior. Starting with Agency, despite our
capital allocation decreasing to 67% from 71% in the prior quarter, our overall
Agency portfolio holdings grew by $3 billion in market value as we selectively
deployed capital from our accretive equity raises.
Meanwhile, Residential Credit portfolio growth was focused on opportunistic
additions of securities that are less susceptible to home price declines in
light of deteriorating housing market fundamentals. Although we believe that our
whole loan portfolio is well-positioned amidst further anticipated weakness in
the sector, we have begun tightening our already stringent credit standards and
expect the pace of securitizations to moderate in the near-term. Nevertheless,
we remained the largest nonbank issuer of prime-jumbo and expanded credit MBS
this quarter, pricing three residential whole loan securitizations totaling $1.1
billion in proceeds. This has largely been a result of our residential whole
loan correspondent channel, which recently achieved over $2 billion in
aggregated loans since its inception in April 2021 .
Finally, we have now further scaled our MSR platform, having more than tripled
our portfolio size year-over-year. The MSR portfolio benefits from stable cash
flows in the current environment of low prepayments and helps hedge the risks of
further slowdown in housing activity. We were active in the market during Q3
2022, growing our portfolio by nearly 10%. Though we were the second largest
purchaser of MSR year-to-date through September 30, 2022 , we expect to be
measured with respect to future growth considerate of the sector's relative
attractiveness and our risk parameters.
Overall, we expect market challenges will persist in the near-term and expect to
maintain a defensive posture until volatility subsides. While spreads across our
investment strategies are historically attractive, we are focused on liquidity
management and optionality in light of potential additional market turbulence in
the near-term. When the market outlook improves, we expect to be well-positioned
to take advantage of attractive opportunities across our three businesses.
Economic Environment
The pace of economic growth rebounded in Q3 2022 relative to the quarterly pace seen in the first half of 2022, withU.S. gross domestic product ("GDP") rising 2.6 percent on a seasonally adjusted annualized rate. Growth improved as consumption and investment activity, outside of residential investment, remained robust, while inventories and net exports provided less of a drag on economic activity than in the first six months of the year. According to theBureau of Labor Statistics , seasonally adjusted total non-farm payroll employment rose by an average 372 thousand workers during Q3 2022. This is slightly above the 349 thousand workers added during the second quarter 2022. Overall, employment gains remain strong as the unemployment rate fell to 3.5% during Q3 2022. Meanwhile,U.S. job openings remain above historical levels. Wage growth, as measured by the year-over-year change in private sector average hourly earnings, slowed somewhat during the quarter, reading 5.0% in September compared to 5.2% inJune 2022 . Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index ("PCE"), remained meaningfully above the Fed's 2% inflation target. The headline PCE measure increased by 6.2% year-over-year inSeptember 2022 . Meanwhile, the more stable core PCE measure, which excludes volatile food and energy prices, registered a 5.1% year-over-year increase. Prices remain meaningfully elevated, which is driven by continued strong demand for services, while goods prices have eased somewhat. Inflation pressures remain a major challenge forthe United States and the broader global economy as price pressures have failed to ease thus far. While forecasts continue to see a slowdown in coming months, the degree of the slowdown remains very uncertain. TheFederal Open Market Committee ("FOMC") conducts monetary policy with a dual mandate: to ensure full employment and stable prices. Given continued strong labor markets and significantly elevated inflation, theFOMC is aggressively tightening monetary policy in an attempt to meets its mandate. As such, theFOMC raised the Federal Funds Target Rate by 150 bps to the 3.00% - 3.25% range during the third quarter. It also signaled that additional rate increases of potentially similar magnitudes will be necessary in the coming months. Regarding its balance sheet, theFOMC transitioned to implement the full 41 --------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
aggregate pace of asset maturities of up to
During Q3 2022, the 10-yearU.S. Treasury rate continued to rise from 3.01% onJune 30, 2022 to 3.83% onSeptember 30, 2022 . The mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-yearU.S. Treasury rate, widened further over the course of Q3 2022 to 185 basis points onSeptember 30, 2022 and is now 137 basis points wider than at the end of the third quarter 2021. This widening continues to be driven by the meaningful tightening in monetary policy, elevated financial market volatility, and reduced investor demand for Agency MBS.
The following table below presents interest rates and spreads at each date presented:
September 30, 2022 December 31, 2021 September 30, 2021
30-Year mortgage current coupon 5.68% 2.07% 1.97%
Mortgage basis 185 bps 56 bps 48 bps
10-Year U.S. Treasury rate 3.83% 1.51% 1.49%
LIBOR
1-Month 3.14% 0.10% 0.08%
6-Month 4.23% 0.34% 0.16%
OIS SOFR Swaps
1-Month 3.05% 0.05% 0.05%
6-Month 4.00% 0.19% 0.05%
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 afterJune 30, 2023 . TheFCA's announcement coincided with the announcement of LIBOR's administrator, theICE 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 afterJune 30, 2023 , IBA would have to cease publication of such LIBOR tenors immediately after the last publication onJune 30, 2023 . These announcements mean that any of our LIBOR-based borrowings that extend beyondJune 30, 2023 will need to be converted to a replacement rate. The firm has a plan facilitating an orderly conversion to alternative reference rates. The plan included 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. TheU.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. Under the legislation, theBoard of Governors of theFederal Reserve is required to promulgate rules designating a SOFR-based rate and incorporating the statutory spread adjustments for each LIBOR tenor (which match the ARRC/ISDA spread adjustments, including the 1-year transition period for consumer loans) as the replacement rates for covered LIBOR contracts. TheFederal Reserve has proposed (i) SOFR compounded in arrears for derivatives, using the same methodology as the ISDA protocol, (ii) CME Term SOFR for all other covered non-GSE cash products and (iii) a 30-day compounded SOFR average for certain GSE contracts, but the proposed rules are not yet final. When final rules are released, we will evaluate the impact of the the final rules on assets and liabilities covered by the legislation and continue to consider all available options with respect to our preferred stock, which include liability management actions such as tenders, calls, exchange offers, language amendments, changing the calculation agent, and/or allowing fallbacks to trigger. Some of these options fall within the safe harbor of the federal legislation. As ofSeptember 30, 2022 , we had$1.5 billion of USD LIBOR-linked preferred stock that may remain outstanding beyond theJune 30, 2023 cessation date.
Income Tax Reform
OnAugust 16, 2022 , tax legislation, informally known as the Inflation Reduction Act (the "IRA"), was enacted, and included several changes impactingU.S. federal income tax laws applicable to corporations. The components most relevant to our business are the imposition of a 1% excise tax on stock repurchases by publicly-traded corporations and a 15% corporate minimum tax ("CMT") on GAAP financial statement income. However, the new legislation explicitly excludes REITs from the law and we do not expect the CMT to apply to our TRSs. In the event the application of the CMT were to be imposed on our 42 --------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
TRSs, we do not expect a material impact to our operations as it would simply affect the timing of the payment of income taxes already accrued.
While technical corrections or other amendments to the IRA or administrative guidance interpreting the IRA may be forthcoming, we continue to analyze the overall effects of the IRA to our operations, our industry and the economy in general. Results of Operations The results of our operations are affected by various factors, many of which are beyond our control. 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" of our most recent Annual Report on Form 10-K and in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance withU.S. generally accepted accounting principles ("GAAP") and non-GAAP measurements. 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.
Beginning with the quarter endedMarch 31, 2022 , in light of the continued growth of our mortgage servicing rights portfolio, we enhanced our financial disclosures by separately reporting servicing income and servicing expense in our Consolidated Statements of Comprehensive Income (Loss). Servicing income and servicing expense were previously included within Other income (loss). As a result of this change, prior periods have been adjusted to conform to the current presentation. In addition, beginning with the quarter endedMarch 31, 2022 , we consolidated certain line items in our Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation. Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives. Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings are combined into a single line item titled Net gains (losses) on investments and other. As a result of these changes, prior periods have been adjusted to conform to the current presentation. Earnings Available for Distribution ("EAD"), which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with GAAP, is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) net servicing income less realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment ("PAA") representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities.
Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income. Please refer to the "Non-GAAP Financial Measures" section for a detailed discussion of Earnings Available for Distribution.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. 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 three and nine months endedSeptember 30, 2022 and 2021. As of and for the Three Months Ended As of and for the Nine Months Ended September 30, September 30, 2022 2021 2022 2021 (dollars in thousands, except per share data) Interest income$ 678,488 $ 412,972 $ 1,979,953 $ 1,560,256 Interest expense 400,491 50,438 645,888 187,458 Net interest income 277,997 362,534 1,334,065 1,372,798 Servicing and related income 74,486 17,948 164,886 37,696 Servicing and related expense 7,780 3,012 17,486 7,912 Net servicing income 66,706 14,936 147,400 29,784 Other income (loss) (585,069) 181,179 1,297,150 718,597 Less: Total general and administrative expenses 37,922 43,882 119,724 145,313 Income (loss) before income taxes (278,288) 514,767 2,658,891 1,975,866 Income taxes (4,311) (6,767) 45,657 (1,954) Net income (loss) (273,977) 521,534 2,613,234 1,977,820 Less: Net income (loss) attributable to noncontrolling interests 1,287 2,290 (453) 3,405 Net income (loss) attributable to Annaly (275,264) 519,244 2,613,687 1,974,415 Less: Dividends on preferred stock 26,883 26,883 80,649 80,649 Net income (loss) available (related) to common stockholders$ (302,147) $ 492,361 $ 2,533,038 $ 1,893,766 Net income (loss) per share available (related) to common stockholders Basic$ (0.70) $ 1.36 $ 6.46 $ 5.34 Diluted$ (0.70) $ 1.36 $ 6.45 $ 5.34 Weighted average number of common shares outstanding Basic 429,858,876 361,328,979 392,172,655 354,606,052 Diluted 429,858,876 361,589,467 392,445,034 354,875,551 Other information Investment portfolio at period-end$ 79,309,699 $ 74,809,185 $ 79,309,699 $ 74,809,185 Average total assets$ 79,522,007 $ 79,519,369 $ 77,998,303 $ 83,215,858 Average equity$ 11,020,728 $ 13,678,522 $ 11,678,888 $ 13,861,609 GAAP leverage at period-end (1) 5.8:1 4.4:1 5.8:1 4.4:1 GAAP capital ratio at period-end (2) 12.8 % 17.9 % 12.8 % 17.9 % Annualized return on average total assets (1.38 %) 2.62 % 4.47 % 3.17 % Annualized return on average equity (9.94 %) 15.25 % 29.83 % 19.02 % Net interest margin (3) 1.42 % 2.01 % 2.39 % 2.38 % Average yield on interest earning assets (4) 3.47 % 2.29 % 3.55 % 2.70 %
Average GAAP cost of interest bearing liabilities (5) 2.38 %
0.32 % 1.36 % 0.37 %
Net interest spread 1.09 % 1.97 % 2.19 % 2.33 %
Weighted average experienced CPR for the period 9.8 % 23.1 % 13.8 % 24.5 %
Weighted average projected long-term CPR at
period-end 7.6 % 12.7 % 7.6 % 12.7 %
Common stock book value per share $ 19.94 $ 33.55 $ 19.94 $ 33.55
Non-GAAP metrics *
Interest income (excluding PAA) $ 633,074 $ 473,698 $ 1,627,502 $ 1,560,019
Economic interest expense (5) $ 259,381 $ 104,849 $ 566,327 $ 404,703 Economic net interest income (excluding PAA)
$ 368,849 $ 1,061,175 $ 1,155,316
Premium amortization adjustment cost (benefit)
$ 480,696 $ 437,471 $ 1,402,129 $ 1,328,348 Earnings available for distribution per average common share$ 1.06 $ 1.14 $ 3.37 $ 3.52
Annualized EAD return on average equity (excluding PAA)
17.57 % 12.81 % 16.09 % 12.79 %
Economic leverage at period-end (1) 7.1:1 5.8:1 7.1:1 5.8:1
Economic capital ratio at period-end (2) 11.8 % 14.2 % 11.8 % 14.2 %
Net interest margin (excluding PAA) (3) 1.98 % 2.04 % 2.07 % 2.01 %
Average yield on interest earning assets (excluding PAA) (4)
3.24 % 2.63 % 2.92 % 2.70 %
Average economic cost of interest bearing liabilities (5)
1.54 % 0.66 % 1.19 % 0.79 %
Net interest spread (excluding PAA) 1.70 % 1.97 % 1.73 % 1.91 %
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis * Represents a non-GAAP financial measure. 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. 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 the Company 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. 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 (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. (4) Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA). (5) Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. (6) Excludes dividends on preferred stock.
GAAP
Net income (loss) was($274.0) million , which includes$1.3 million attributable to noncontrolling interests, or ($0.70 ) per average basic common share, for the three months endedSeptember 30, 2022 compared to$521.5 million , which includes$2.3 million attributable to noncontrolling interests, or$1.36 per average basic common share, 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 investments and other and net interest income, partially offset by a favorable change in net gains (losses) on derivatives and net servicing income. Net gains (losses) on investments and other was($2.7) billion for the three months endedSeptember 30, 2022 compared to$102.8 million for the same period in 2021. Net interest income for the three months endedSeptember 30, 2022 was$278.0 million compared to$362.5 million for the same period in 2021. Net gains (losses) on derivatives was$2.1 billion for the three months endedSeptember 30, 2022 compared to$85.0 million for the same period in 2021. Net servicing income for the three months endedSeptember 30, 2022 was$66.7 million compared to$14.9 million for the same period in 2021. Refer to the section titled "Other income (loss)" located within this Item 2 for additional information related to these changes. Net income (loss) was$2.6 billion , which includes($0.5) million attributable to noncontrolling interests, or$6.46 per average basic common share, for the nine months endedSeptember 30, 2022 compared to$2.0 billion which includes$3.4 million attributable to noncontrolling interests, or$5.34 per average basic common share, for the same period in 2021. We attribute the majority of the change in net income (loss) to higher net gains (losses) on derivatives and lower business divestiture-related losses, partially offset by an unfavorable change in net gains (losses) on investments and other. Net gains on derivatives for the nine months endedSeptember 30, 2022 was$4.8 billion compared to$672.4 million for the same period in 2021. Business divestiture-related (losses) was($27.2) million for the nine months endedSeptember 30, 2022 compared to($262.0) million for the same period in 2021. Net gains (losses) on investments and other was($3.5) billion for the nine months endedSeptember 30, 2022 compared to$161.4 million for the same period in 2021. Refer to the section titled "Other income (loss)" located within this Item 2 for additional information related to these changes.
Non-GAAP
Earnings available for distribution were$480.7 million , or$1.06 per average common share, for the three months endedSeptember 30, 2022 , compared to$437.5 million , or$1.14 per average common share, for the same period in 2021. The change in earnings available for distribution during the three months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to lower premium amortization expense, excluding PAA, resulting from lower prepayment speed projections, a favorable change in the net interest component of interest rate swaps, and higher net servicing income, partially offset by higher interest expense from an increase in average borrowing rates and average interest bearing liabilities. Earnings available for distribution were$1.4 billion , or$3.37 per average common share, for the nine months endedSeptember 30, 2022 , compared to$1.3 billion , or$3.52 per average common share, for the same period in 2021. The change in earnings available for distribution during the nine months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to lower premium amortization expense, excluding PAA, resulting from lower prepayment speed projections, a favorable change in the net interest component of interest rate swaps, higher TBA dollar roll income and higher net servicing income, partially offset by higher interest expense from an increase in average borrowing rates. 45
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide the following non-GAAP financial measures:
•earnings available for distribution ("EAD");
•earnings available for distribution attributable to common stockholders;
•earnings available for distribution per average common share;
•annualized EAD return on average equity;
•economic leverage;
•economic capital ratio;
•interest income (excluding PAA);
•economic interest expense;
•economic net interest income (excluding PAA);
•average yield on interest earning assets (excluding PAA);
•average economic cost of interest bearing liabilities;
•net interest margin (excluding PAA); and
•net interest spread (excluding PAA).
These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations. For example, we may calculate our non-GAAP metrics, such as earnings available for distribution, or the PAA, differently than our peers making comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results. These non-GAAP measures provide additional detail 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. Additional information pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.
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
Our principal business objective is to generate net income for distribution to
our stockholders and optimize our returns through prudent management of our
diversified investment strategies. We generate net income by earning a net
interest spread on our investment portfolio, which is a function of interest
income from our investment portfolio less financing, hedging and operating
costs. Earnings available for distribution, which is defined as the sum of (a)
economic net interest income, (b) TBA dollar roll income and CMBX coupon income,
(c) net servicing income less realized amortization of MSR, (d) other income
(loss) (excluding depreciation and amortization expense on real estate and
related intangibles, non-EAD income allocated to equity method investments and
other non-EAD components of other income (loss)), (e) general and administrative
expenses (excluding transaction expenses and non-recurring items), and (f)
income taxes (excluding the income tax effect of non-EAD income (loss) items),
and excludes (g) the PAA representing the cumulative impact on prior periods,
but not the current period, of quarter-over-quarter changes in estimated
long-term prepayment speeds related to our Agency mortgage-backed securities, is
used by management and, we believe, used by analysts and investors to measure
our progress in achieving our principal business objective.
We seek to fulfill our principal business objective through a variety of factors
including portfolio construction, the degree of market risk exposure and related
hedge profile, and the use and forms of leverage, all while operating within the
parameters of our capital allocation policy and risk governance framework.
We believe these non-GAAP measures provide management and investors with
additional details regarding our underlying operating results and investment
portfolio trends by (i) making adjustments to account for the disparate
reporting of changes in fair value where certain instruments are reflected in
GAAP net income (loss) while others are reflected in other comprehensive income
(loss), and (ii) by excluding certain unrealized, non-cash or episodic
components of GAAP net income (loss) in order to provide additional transparency
into the operating performance of our portfolio. In addition, EAD serves as a
useful indicator for investors in evaluating the Company's 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.
46
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
The following table presents a reconciliation of GAAP financial results to non-GAAP earnings available for distribution for the periods presented:
For the Three Months Ended September For the Nine Months Ended September
30, 30,
2022 2021 2022 2021
(dollars in thousands, except per share data) GAAP net income (loss)
$ (273,977) $ 521,534 $ 2,613,234 $ 1,977,820 Net income (loss) attributable to noncontrolling interests 1,287 2,290 (453) 3,405 Net income (loss) attributable to Annaly (275,264) 519,244 2,613,687 1,974,415
Adjustments to exclude reported realized and unrealized (gains) losses Net (gains) losses on investments and other
2,702,512 (102,819) 3,477,532 (161,431)
Net (gains) losses on derivatives (1) (1,976,130) (139,361) (4,695,350)
(889,616)
Loan loss provision (reversal) (2) (1,613) (6,771) (30,181) (150,563) Business divestiture-related (gains) losses 2,936 14,009 27,245 262,045
Other adjustments Depreciation expense related to commercial real estate and amortization of intangibles (3)
758 1,122 3,190 14,081
Non-EAD (income) loss allocated to equity method investments (4) (2,003)
(2,046) (15,193) (8,585)
Transaction expenses and non-recurring items (5) 1,712 2,201 6,813 4,046
Income tax effect of non-EAD income (loss) items (9,444) (6,536) 46,488 4,945
TBA dollar roll income and CMBX coupon income (6) 105,543 115,586 396,708 326,111
MSR amortization (7) (22,897) (17,884) (76,359) (46,863)
Plus:
Premium amortization adjustment cost (benefit) (45,414) 60,726 (352,451) (237) Earnings available for distribution * 480,696 437,471 1,402,129 1,328,348 Dividends on preferred stock 26,883 26,883 80,649 80,649
Earnings available for distribution attributable to common stockholders *
$ 453,813 $ 410,588 $ 1,321,480 $ 1,247,699 GAAP net income (loss) per average common share$ (0.70) $ 1.36 $ 6.46 $ 5.34
Earnings available for distribution per average common share *
$ 1.14 $ 3.37 $ 3.52 Annualized GAAP return (loss) on average equity (9.94 %) 15.25 % 29.83 % 19.02 % Annualized EAD return on average equity * 17.57 % 12.81 % 16.09 % 12.79 % * Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. (1) 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$141.1 million and($54.4) million for the three months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively and$79.6 million and($217.2) million for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. (2) Includes$0.0 million and($0.6) million for the three months endedSeptember 30, 2022 and 2021, respectively, and($2.3) million and($5.3) million for the nine months endedSeptember 30, 2022 and 2021, respectively, of loss provision (reversal) on unfunded loan commitments 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) The three and nine months endedSeptember 30, 2022 and 2021 includes 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). CMBX coupon income totaled$1.1 million and$1.2 million for the three months endedSeptember 30, 2022 and 2021, respectively and$3.2 million and$4.1 million for the nine months endedSeptember 30, 2022 and 2021, respectively. (7) MSR amortization utilizes purchase date cash flow assumptions and actual unpaid principal balances and is calculated as the difference between projected MSR yield income and net servicing income for the period. From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency MBS. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency MBS with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the "drop". The drop is a reflection of the expected net interest income from an investment in similar Agency MBS, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency MBS less an implied financing cost. 47
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. 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 derivatives in the 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. Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency MBS (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of commercial mortgage-backed securities and is structured as a "pay-as-you-go" contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur. We report income (expense) on CMBX positions in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in earnings available for distribution.
Premium Amortization Expense
In accordance with GAAP, we amortize or accrete premiums or discounts into
interest income for our Agency MBS, excluding interest-only securities,
multifamily and reverse mortgages, taking into account estimates of future
principal prepayments in the calculation of the effective yield. 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. 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. The adjustment to amortized cost is offset
with a charge or credit to interest income. Changes in interest rates and other
market factors will impact prepayment speed projections and the amount of
premium amortization recognized in any given period.
Our GAAP metrics include the unadjusted impact of amortization and accretion
associated with this method. 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:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(dollars in thousands)
Premium amortization expense $ 39,406 $ 233,429 $ 9,184 $ 541,646
Less: PAA cost (benefit) (45,414) 60,726 (352,451) (237)
Premium amortization expense (excluding PAA)
Economic Leverage and Economic Capital Ratios
We use capital coupled with borrowed funds to invest primarily in real estate
related investments, earning the spread between the yield on our assets and the
cost of our borrowings and hedging activities. Our capital structure is designed
to offer an efficient complement of funding sources to generate positive
risk-adjusted returns for our stockholders while maintaining appropriate
liquidity to support our business and meet our financial obligations under
periods of market stress. To maintain our desired capital profile, we utilize a
mix of debt and equity funding. Debt funding may include the use of repurchase
agreements, loans, securitizations, participations issued, lines of credit,
asset backed lending facilities, corporate bond issuance, convertible bonds,
mortgages payable or other liabilities. Equity capital primarily consists of
common and preferred stock.
48
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis 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 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: As ofSeptember 30, 2022 September 30, 2021 Economic leverage ratio reconciliation (dollars in
thousands)
Repurchase agreements $ 54,160,731$ 55,475,420 Other secured financing 250,000 729,555 Debt issued by securitization vehicles 7,844,518 3,935,410 Participations issued 745,729 641,006
Debt included in liabilities of disposal group held for sale
- 113,362
Total GAAP debt $ 63,000,978 $ 60,894,753
Less Non-Recourse Debt:
Credit facilities (1) $ - $ (729,555)
Debt issued by securitization vehicles (7,844,518) (3,935,410)
Participations issued (745,729) (641,006)
Non-recourse debt included in liabilities of
disposal group held for sale - (113,362)
Total recourse debt $ 54,410,731 $ 55,475,420
Plus / (Less):
Cost basis of TBA and CMBX derivatives 16,209,886 24,202,686
Payable for unsettled trades 9,333,646 571,540
Receivable for unsettled trades (2,153,895) (42,482)
Economic debt * $ 77,800,368 $ 80,207,164
Total equity $ 10,951,555 $ 13,717,867
Economic leverage ratio * 7.1:1 5.8:1
* Represents a non-GAAP financial measure. 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:
As of
September 30, 2022 September 30, 2021
Economic capital ratio reconciliation (dollars in thousands)
Total GAAP assets$ 85,406,764 $ 76,662,433 Less: Gross unrealized gains on TBA derivatives (1) (28,032) (1,776) Debt issued by securitization vehicles (7,844,518) (3,935,410)
Plus:
Implied market value of TBA derivatives 15,182,806 23,622,635 Total economic assets *$ 92,717,020 $ 96,347,882 Total equity$ 10,951,555 $ 13,717,867 Economic capital ratio * (2) 11.8% 14.2% * Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. (1) Included in Derivative assets in the Consolidated Statements of Financial Condition. (2) Economic capital ratio is computed as total equity divided by total economic assets. 49
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA)
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 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. 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 three and nine months ended September 30, 2022 .
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.
The following tables present a reconciliation of GAAP interest income and GAAP
interest expense to non-GAAP interest income (excluding PAA), economic interest
expense and economic net interest income (excluding PAA), respectively, for the
periods presented:
Interest Income (excluding PAA)
GAAP Interest Income PAA Cost Interest Income
(Benefit) (excluding PAA) *For the three months ended (dollars in thousands) September 30, 2022 $ 678,488$ (45,414) $ 633,074 September 30, 2021 $ 412,972$ 60,726 $ 473,698 For the nine months ended September 30, 2022 $ 1,979,953$ (352,451) $ 1,627,502 September 30, 2021 $ 1,560,256 $ (237)$ 1,560,019 * Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures. Economic Interest Expense and Economic Net Interest Income (excluding PAA) Less: Net Add: Net Interest Interest GAAP Component of Economic GAAP Net Component Economic Add: PAA Economic Net Interest Interest Rate Interest Interest of Interest Net Interest Cost Interest Income Expense Swaps Expense * Income Rate Swaps Income * (Benefit) (excluding PAA) * For the three months ended (dollars in thousands) September 30, 2022$ 400,491 $ (141,110) $
259,381
$ (45,414) $ 373,693 September 30, 2021$ 50,438 $ 54,411 $
104,849
$ 60,726 $ 368,849 For the nine months ended September 30, 2022$ 645,888 $ (79,561) $
566,327
$ (352,451) $ 1,061,175 September 30, 2021$ 187,458 $ 217,245 $
404,703
Experienced and Projected Long-Term CPR
Prepayment speeds, as reflected by the CPR and interest rates vary according to
the type of investment, conditions in financial markets, competition and other
factors, none of which can be predicted with any certainty. In general, as
prepayment speeds and expectations of prepayment speeds on our Agency MBS
portfolio increase, related purchase premium amortization increases,
50
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
thereby reducing the yield on such assets. The following table presents the weighted average experienced CPR and weighted average projected long-term CPR on our Agency MBS portfolio as of and for the periods presented.
Experienced CPR (1) Projected Long-term CPR (2)
For the three months ended
September 30, 2022 9.8 % 7.6 %
September 30, 2021 23.1 % 12.7 %
For the nine months ended
September 30, 2022 13.8 % 7.6 %
September 30, 2021 24.5 % 12.7 %
(1) For the three and nine months ended
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 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.
Net Interest Spread (excluding PAA)
Average Yield on Average Economic
Average Interest Interest Income Interest Earning Average Interest Economic Cost of Interest Economic Net Net Interest
Earning (excluding PAA) Assets (excluding Bearing Interest Bearing Liabilities Interest Income Spread (excluding
Assets (1) * PAA) * Liabilities (2) Expense * (2) * (2) (excluding PAA) * PAA) *
For the three months ended (dollars in thousands)
September 30, 2022 $ 78,143,337 $ 633,074 3.24 % $ 65,755,563 $ 259,381 1.54 % 373,693 1.70 %
September 30, 2021 $ 72,145,283 $ 473,698 2.63 % $ 62,614,042 104,849 0.66 % 368,849 1.97 %
For the nine months ended
September 30, 2022 $ 74,285,756 $ 1,627,502 2.92 % $ 62,689,128 $ 566,327 1.19 % 1,061,175 1.73 %
September 30, 2021 $ 77,061,130 $ 1,560,019 2.70 % $ 67,695,162 $ 404,703 0.79 % 1,155,316 1.91 %
* Represents a non-GAAP financial measure. Refer to the "Non-GAAP Financial Measures" section for additional information.
(1) Based on amortized cost.
(2) Average interest bearing liabilities reflects the average balances during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.
Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.
51
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis Net Interest Margin (excluding PAA) Interest Income TBA Dollar Roll Average TBA Net Interest (excluding PAA) and CMBX Coupon Economic Interest Average Interest Contract and CMBX Margin (excluding * Income (1) Expense * Subtotal Earnings Assets Balances Subtotal PAA) * For the three months ended (dollars in thousands)September 30, 2022 $ 633,074 105,543 (259,381)$ 479,236 $ 78,143,337 18,837,475$ 96,980,812 1.98 %September 30, 2021 $ 473,698 115,586 (104,849)$ 484,435 $ 72,145,283 22,739,226$ 94,884,509 2.04 % For the nine months endedSeptember 30, 2022 $ 1,627,502 396,708 (566,327)$ 1,457,883 $ 74,285,756 19,544,521$ 93,830,277 2.07 %September 30, 2021 $ 1,560,019 326,111 (404,703)$ 1,481,427 $ 77,061,130 21,122,086$ 98,183,216 2.01 %
* Represents a non-GAAP financial measure. Refer to the "Non-GAAP Financial Measures" section for additional information.
(1) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on derivatives. CMBX coupon income totaled
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.
Average Economic Cost of Interest Bearing Liabilities
Average Economic Average Economic
Cost Cost
of Interest of Interest
Average Economic Average Bearing Bearing
Cost of Average Average One-Month LIBOR Liabilities Liabilities
Average Interest Bearing Economic Interest One- Six- Relative to Relative to Relative to
Interest Bearing Liabilities at Interest Bearing Month Month Average Six- Average One- Average Six-Month
Liabilities Period End Expense * (1) Liabilities * LIBOR LIBOR Month LIBOR Month LIBOR LIBOR
For the three months endedSeptember 30, 2022 $ 65,755,563 $ 63,000,978 $ 259,381 1.54 % 2.47 % 3.56 % (1.09 %) (0.93 %) (2.02 %)September 30, 2021 $ 62,614,042 $ 60,781,391 $ 104,849 0.66 % 0.09 % 0.15 % (0.06 %) 0.57 % 0.51 % For the nine months endedSeptember 30, 2022 $ 62,689,128 $ 63,000,978 $ 566,327 1.19 % 1.25 % 2.17 % (0.92 %) (0.06 %) (0.98 %)September 30, 2021 $ 67,695,162 $ 60,781,391 $ 404,703 0.79 % 0.10 % 0.19 % (0.09 %) 0.69 % 0.60 % * Represents a non-GAAP financial measure. Refer to the "Non-GAAP Financial Measures" section for additional information. (1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. Economic interest expense increased by$154.5 million for the three months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates and higher average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was$141.1 million for the three months endedSeptember 30, 2022 compared to($54.4) million for the same period in 2021. Economic interest expense increased by$161.6 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021, 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$79.6 million for the nine months endedSeptember 30, 2022 compared to($217.2) million for the same period in 2021. We do not manage our portfolio to have a pre-designated amount of borrowings at quarter or year end. Our borrowings at period end are a snapshot of our borrowings as of a date, and this number may differ from average borrowings over the period for a number of reasons. The mortgage-backed securities we own pay principal and interest towards the end of each month and the mortgage-backed securities we purchase are typically settled during the beginning of the month. As a result, depending on the amount of mortgage-backed securities we have committed to purchase, we may retain the principal and interest we receive 52 --------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis in the prior month, or we may use it to pay down our borrowings. Moreover, we generally use interest rate swaps, swaptions and other derivative instruments to hedge our portfolio, and as we pledge or receive collateral under these agreements, our borrowings on any given day may be increased or decreased. Our average borrowings during a quarter may differ from period end borrowings as we implement our portfolio management strategies and risk management strategies over changing market conditions by increasing or decreasing leverage. Additionally, these numbers may differ during periods when we conduct equity capital raises, as in certain instances we may purchase additional assets and increase leverage in anticipation of an equity capital raise. Since our average borrowings and period end borrowings can be expected to differ, we believe our average borrowings during a period provide a more accurate representation of our exposure to the risks associated with leverage than our period end borrowings. AtSeptember 30, 2022 the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of ourResidential Securities , residential mortgage loans, and MSR. AtDecember 31, 2021 , the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of ourResidential Securities , residential mortgage loans, and corporate loans. All of ourResidential Securities are currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and maintain the liquidity and strength of our balance sheet.
Other Income (Loss)
For the Three Months Ended
Net gains (losses) on disposal of investments was($1.5) billion for the three months endedSeptember 30, 2022 compared to$12.0 million for the same period in 2021. For the three months endedSeptember 30, 2022 , we disposed ofResidential Securities with a carrying value of$11.6 billion for an aggregate net loss of($1.5) billion . For the same period in 2021, we disposed ofResidential Securities with a carrying value of$4.8 billion for an aggregate net gain of$26.7 million .
Net unrealized gains (losses) on instruments measured at fair value through
earnings was
Net gains (losses) on interest rate swaps for the three months endedSeptember 30, 2022 was$1.3 billion compared to$130.1 million for the same period in 2021, primarily attributable to the change in realized gains (losses) on termination of interest rate swaps. Realized gains (losses) on termination of interest rate swaps was($83.4) million for the three months endedSeptember 30, 2022 compared to($1.2) billion for 2021 as in in the current period we terminated fixed-receiver interest rate swaps with a notional amount of$10.0 billion compared to the same period in 2021 when we repositioned our swap portfolio to reduce our exposure to LIBOR and terminated fixed-rate payer and receiver interest rate swaps with notional amounts of$14.7 billion and$14.8 billion , respectively. Net gains (losses) on other derivatives was$808.2 million for the three months endedSeptember 30, 2022 compared to($45.2) 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, which was$1.8 billion for the three months endedSeptember 30, 2022 compared to$49.8 million for the same period in 2021, and net gains (losses) on interest rate swaptions, which was$11.7 million for the three months endedSeptember 30, 2022 compared to($68.9) million for the same period in 2021, partially offset by an unfavorable change in net gains (losses) on TBA derivatives, which was($1.0) billion for the three months endedSeptember 30, 2022 compared to($27.3) million for the same period in 2021.
Loan Loss (Provision) Reversal
For the three months ended
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
Business Divestiture-Related Gains (Losses)
For the three months endedSeptember 30, 2022 , the majority of business divestiture-related gains (losses) was associated with the sale of our corporate loan interests, in connection with the announcement of the sale of our MML Portfolio. Refer to the "Sale of Middle Market Lending Portfolio" Note and the "Loans" Note located within Item 1 for additional information related to the transaction. For the three months endedSeptember 30, 2021 , the majority of business divestiture-related gains (losses) was associated with the sale of our commercial real estate business. Refer to the "Sale ofCommercial Real Estate Business" Note located within Item 1 for additional information related to the transaction. Other, Net 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. 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.
For the Nine Months Ended
Net gains (losses) on disposal of investments and other was($2.3) billion for the nine months endedSeptember 30, 2022 compared to($37.6) million for the same period in 2021. For the nine months endedSeptember 30, 2022 , we disposed ofResidential Securities with a carrying value of$21.0 billion for an aggregate net loss of($2.3) billion . For the same period in 2021, we disposed ofResidential Securities with a carrying value of$11.1 billion for an aggregate net loss of$0.8 million . Net unrealized gains (losses) on instruments measured at fair value through earnings was($1.2) billion for the nine months endedSeptember 30, 2022 compared to$199.0 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($1.2) billion , Agency MBS of($1.0) billion , non-Agency MBS of($170.2) million , residential whole loans of($123.7) million , CRT securities of($72.5) million , partially offset by favorable changes on residential securitized debt of consolidated VIEs of$1.0 billion , and MSR of$185.5 million .
Net gains (losses) on interest rate swaps for the nine months endedSeptember 30, 2022 was$3.5 billion compared to$598.5 million for the same period in 2021, attributable to favorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination of interest rate swaps. Unrealized gains (losses) on interest rate swaps was$3.5 billion for the nine months endedSeptember 30, 2022 compared to$2.0 billion for the same period in 2021, reflecting a sharper rise in forward interest rates during the current period. Realized gains (losses) on termination of interest rate swaps was($83.4) million for the nine months endedSeptember 30, 2022 compared to($1.2) billion for the same period in 2021 as in the current period we terminated fixed-receiver interest rate swaps with a notional amount of$10.0 billion compared to the same period in 2021 when we repositioned our swap portfolio to reduce our exposure to LIBOR and terminated fixed-rate payer and receiver interest rate swaps with notional amounts of$14.7 billion and$14.8 billion , respectively. Net gains (losses) on other derivatives was$1.3 billion for the nine months endedSeptember 30, 2022 compared to$73.9 million for the same period in 2021. The change in net gains (losses) on other derivatives was primarily due to the favorable changes in net gains (losses) on futures derivatives, which was$4.0 billion for the nine months endedSeptember 30, 2022 compared to$468.5 million for the same period in 2021, and net gains (losses) on interest rate swaptions, which was$239.3 million for the nine months endedSeptember 30, 2022 compared to($40.7) million for the same period in 2021, partially offset by an unfavorable change in TBA derivatives, which was($2.9) billion for the nine months endedSeptember 30, 2022 compared to($372.1) million million for the same period in 2021.
Loan Loss (Provision) Reversal
For the nine months endedSeptember 30, 2022 and 2021, net loan loss reversals of$27.9 million on corporate loans and$145.3 million on commercial mortgage and corporate loans, respectively. Refer to the "Loans" Note located within Item 1 for additional information related to these loan loss provisions. 54 --------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
Business Divestiture-Related Gains (Losses)
For the nine months endedSeptember 30, 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 and located within Item 1 for additional information related to the transaction. For the nine months endedSeptember 30, 2021 , business divestiture-related gains (losses) were associated with the sale of our commercial real estate business. Refer to the "Sale ofCommercial Real Estate Business" Note located within Item 1 for additional information related to the transaction.
General and Administrative Expenses
General and administrative ("G&A") expenses consist of compensation and other expenses. 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 Total G&A Expenses/Average Assets Total G&A Expenses/Average Equity
For the three months ended (dollars in thousands)
September 30, 2022 $ 37,922 0.19 % 1.38 %
September 30, 2021 $ 43,882 0.22 % 1.28 %
For the nine months ended
September 30, 2022 $ 119,724 0.20 % 1.37 %
September 30, 2021 $ 145,313 0.23 % 1.40 %
G&A expenses were $37.9 million for the three months ended September 30, 2022 , a
decrease of $6.0 million compared to the same period in 2021. G&A expenses were
$119.7 million for the nine months ended September 30, 2022 , a decrease of $25.6
million compared to the same period in 2021. The change in each period 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 three
and nine months ended September 30, 2022 compared with the same periods in 2021.
Return on Average Equity
The following table shows the components of our annualized return on average equity for the periods presented.
Components of Annualized Return on Average Equity
Economic Net Other Income Income
Interest Income/ Net Servicing (Loss)/Average Equity G&A Expenses/ Taxes/ Average Return on
Average Equity (1) Income/Average Equity (2) Average Equity Equity Average Equity
For the three months
ended
September 30, 2022 15.21 % 2.42 % (26.35 %) (1.38 %) 0.16 % (9.94 %)
September 30, 2021 9.01 % 0.44 % 6.88 % (1.28 %) 0.20 % 15.25 %
For the nine months
ended
September 30, 2022 16.14 % 1.68 % 13.90 % (1.37 %) (0.52 %) 29.83 %
September 30, 2021 11.12 % 0.29 % 8.99 % (1.40 %) 0.02 % 19.02 %(1) Economic net interest income includes the net interest component of interest rate swaps. (2) Other income (loss) excludes the net interest component of interest rate swaps.
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). 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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
The table below shows cumulative unrealized gains and losses on our available-for-sale investments reflected in the Consolidated Statements of Financial Condition.
September 30, 2022 December 31, 2021
(dollars in thousands)
Unrealized gain $ 8,052 $ 1,444,434
Unrealized loss (5,439,488) (486,024)
Accumulated other comprehensive income (loss) $ (5,431,436) $ 958,410
Unrealized changes in the estimated fair value of available-for-sale investments may have a direct effect on our potential earnings and dividends: positive changes will increase our equity base and allow us to increase our borrowing capacity while negative changes tend to reduce borrowing capacity. A very large negative change in the net fair value of our available-for-saleResidential Securities might impair our liquidity position, requiring us to sell assets with the potential result of realized losses upon sale. The fair value of these securities being less than amortized cost atSeptember 30, 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 theU.S. government. The investments do not require an allowance for credit losses because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. Also, we are guaranteed payment of the principal and interest amounts of the securities by the respective issuing Agency.
Financial Condition
Total assets were$85.4 billion and$76.8 billion atSeptember 30, 2022 andDecember 31, 2021 , respectively. The change was primarily due to increases in Agency MBS of$2.5 billion , residential mortgage loans, including assets transferred or pledged to securitization vehicles, of$2.6 billion , MSR of$1.2 billion , derivative assets of$1.8 billion , and receivable for unsettled trades of$2.2 billion , partially offset by decreases in corporate loans of$2.0 billion . Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows atSeptember 30, 2022 : Residential Commercial Residential Commercial Agency MBS MSR Credit (1) Real Estate Total Assets (dollars in thousands) Fair value/carrying value$ 63,468,629 $ 1,705,254 $ 13,535,945 $ 588,500 $ 79,298,328 Implied market value of derivatives (2) 15,182,806 - - 404,619 15,587,425 Debt Repurchase agreements 50,113,402 - 3,512,276 535,053 54,160,731 Implied cost basis of derivatives (2) 15,790,425 - - 419,461 16,209,886 Other secured financing - 250,000 - - 250,000 Debt issued by securitization vehicles 398,762 - 7,445,756 - 7,844,518 Participations issued - - 745,729 - 745,729 Net forward purchases 7,134,813 44,459 479 - 7,179,751 Other Other assets / liabilities (3) 2,028,195 250,991 78,534 98,697 2,456,417 Net equity allocated$ 7,242,228 $ 1,661,786 $ 1,910,239 $ 137,302 $ 10,951,555 Net equity allocated (%) 66 % 15 % 18 % 1 % 100 % Debt/net equity ratio 7.0:1 0.2:1 6.1:1 3.9:1 5.8:1 (4) (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 underCommercial Real Estate . (3) Dedicated capital allocations assume capital related to held for sale assets will be redeployed within the Agency business line. (4) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition.
Substantially all of our Agency MBS atSeptember 30, 2022 andDecember 31, 2021 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 56
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
securities were largely Freddie Mac, Fannie Mae or
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. AtSeptember 30, 2022 andDecember 31, 2021 we had on our Consolidated Statements of Financial Condition a total of$843.0 million and$77.7 million , respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of ourResidential Securities , excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of$3.3 billion and$3.8 billion , respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of ourResidential Securities , excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value). The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months endedSeptember 30, 2022 and 2021 was 9.8% and 23.1%, respectively. The weighted average projected long-term prepayment speed on our Agency MBS portfolio as ofSeptember 30, 2022 and 2021 was 7.6% and 12.7%, respectively. Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period. The following tables present ourResidential Securities , excluding securities transferred or pledged to securitization vehicles, that were carried at fair value atSeptember 30, 2022 andDecember 31, 2021 . September 30, 2022 December 31, 2021 Estimated Fair Value Agency Fixed-rate pass-through$ 60,981,115 $ 58,296,605 Adjustable-rate pass-through 249,504 321,273 CMO 92,320 121,698 Interest-only 172,845 293,914 Multifamily 1,512,100 1,452,713 Reverse mortgages 29,357 39,402 Total agency securities$ 63,037,241 $ 60,525,605 Residential credit Credit risk transfer $ 1,056,906 $ 936,228 Alt-A 117,844 69,487 Prime 262,835 275,441 Subprime 177,819 163,076 NPL/RPL 1,383,488 983,438
Prime jumbo (>= 2010 vintage) 214,720 171,894
Total residential credit securities $ 3,213,612
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
The following table summarizes certain characteristics of our
September 30, 2022 December 31, 2021
Residential Securities (1) (dollars in thousands)
Principal amount $ 70,648,252 $ 58,676,833
Net premium 1,761,912 2,973,471
Amortized cost 72,410,164 61,650,304
Amortized cost / principal amount 102.49 % 105.07 %
Carrying value 65,790,750 62,577,398
Carrying value / principal amount 93.12 % 106.65 %
Weighted average coupon rate 3.89 % 3.35 %
Weighted average yield 3.46 % 2.69 %
Adjustable-rate Residential Securities (1)
Principal amount $ 1,549,131 $ 1,476,250
Weighted average coupon rate 5.82 % 2.81 %
Weighted average yield 5.99 % 6.57 %
Weighted average term to next adjustment (2) 9 Months 11 Months
Weighted average lifetime cap (3) 9.31 % 0.18 %
Principal amount at period end as % of total residential securities
2.19 % 2.52 %
Fixed-rate Residential Securities (1)
Principal amount $ 69,099,121 $ 57,200,583
Weighted average coupon rate 3.84 % 3.36 %
Weighted average yield 3.41 % 2.60 %
Principal amount at period end as % of total residential securities
97.81 % 97.48 %
Interest-only Residential Securities
Notional amount $ 12,458,509 $ 6,583,768
Net premium 725,931 720,235
Amortized cost 725,931 720,235
Amortized cost / notional amount 5.83 % 10.94 %
Carrying value 460,103 547,771
Carrying value / notional amount 3.69 % 8.32 %
Weighted average coupon rate 0.85 % 2.01 %
Weighted average yield NM NM
(1) Excludes interest-only MBS.
(2) Excludes non-Agency MBS and CRT securities.
(3) Excludes non-Agency MBS and CRT securities as this attribute is not applicable to these asset classes.
NM Not meaningful.
The following tables summarize certain characteristics of our Residential Credit
portfolio at
Payment Structure Investment Characteristics
60+
Product Total Senior Subordinate Coupon Credit Enhancement Delinquencies 3M VPR (1)
(dollars in thousands)
Credit risk transfer $ 1,056,906 $ - $ 1,056,906 6.77 % 1.98 % 0.94 % 9.49 %
Alt-A 117,844 69,693 48,151 4.15 % 13.30 % 5.46 % 10.17 %
Prime 262,835 50,206 212,629 4.78 % 8.96 % 2.14 % 8.03 %
Subprime 177,819 65,282 112,537 4.68 % 18.76 % 7.70 % 11.21 %
Re-performing loan securitizations 885,654 493,083 392,571 3.89 % 28.07 % 25.10 % 8.94 %
Non-performing loan securitizations 497,834 470,343 27,491 3.56 % 36.20 % 77.41 % 13.65 %
Prime jumbo (>=2010 vintage) 214,720 14,218 200,502 4.81 % 2.96 % 1.58 % 5.57 %
Total/weighted average (2) $ 3,213,612 $ 1,162,825 $ 2,050,787 4.96 % 16.27 % 19.65 % 9.25 %
(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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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
Bond Coupon
Estimated Fair
Product ARM Fixed Floater Interest-Only Value
(dollars in thousands)
Credit risk transfer $ - $ - $ 1,056,906 $ - $ 1,056,906
Alt-A 4,216 106,443 7,185 - 117,844
Prime 24,859 219,792 4,457 13,727 262,835
Subprime - 110,618 67,066 135 177,819
Re-performing loan securitizations - 885,654 - - 885,654
Non-performing loan securitizations - 497,834 - - 497,834
Prime jumbo (>=2010 vintage) - 167,144 33,358 14,218 214,720
Total $ 29,075 $ 1,987,485 $ 1,168,972 $ 28,080 $ 3,213,612
Contractual Obligations
The following table summarizes the effect on our liquidity and cash flows from
contractual obligations at September 30, 2022 . 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 September 30, 2022 , the interest rate swaps had a net fair value of ($71.2)
million .
Within One One to Three Three to Five More than
Year Years Years Five Years Total
(dollars in thousands)
Repurchase agreements $ 53,955,136 $ 205,595 $ - $ - $ 54,160,731
Interest expense on repurchase agreements (1) 273,695 1,661 - - 275,356
Other secured financing - 250,000 - - 250,000
Interest expense on other secured financing
(1) 14,736 11,022 - - 25,758
Debt issued by securitization vehicles
(principal) - - - 9,018,805 9,018,805
Interest expense on debt issued by
securitization vehicles 280,122 560,244 560,244 8,071,458 9,472,068
Participations issued (principal) - - - 789,498 789,498
Interest expense on participations issued 44,090 88,181 88,181 1,118,257 1,338,709
Long-term operating lease obligations 4,001 8,219 525 90 12,835
Total $ 54,571,780 $ 1,124,922 $ 648,950 $ 18,998,108 $ 75,343,760 (1) Interest expense on repurchase agreements and other secured financing calculated based on rates at
In the coming periods, we expect to continue to finance ourResidential Securities in a manner that is largely consistent with our current operations via repurchase agreements. We may use securitization structures, credit facilities, or other term financing structures to finance certain of our assets. During the nine months endedSeptember 30, 2022 , we received$7.9 billion from principal repayments and$16.7 billion in cash from disposal of Residential securities. During the nine months endedSeptember 30, 2021 , we received$14.6 billion from principal repayments and$11.1 billion in cash from disposal ofResidential Securities .
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships which would have been established for the sole purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
We have limited future funding commitments related to certain of our unconsolidated joint ventures. In addition, we have provided customary non-recourse carve-out and environmental guarantees (or underlying indemnities with respect thereto) with respect to mortgage loans held by subsidiaries of these unconsolidated joint ventures. We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability atSeptember 30, 2022 .
Capital Management
Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of critical importance to our business strategy. A strong and robust capital position is essential to executing our investment strategy. Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
regardless of the market environment. Our capital policy defines the parameters and principles supporting a comprehensive capital management practice.
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" in our most recent Annual Report on Form 10-K and in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q. Capital requirements are based on maintaining levels above approved thresholds, ensuring the quality of our capital appropriately reflects our asset mix, market and funding structure. In the event we fall short of our internal thresholds, we will consider appropriate actions which may include asset sales, changes in asset mix, reductions in asset purchases or originations, issuance of capital or other capital enhancing or risk reduction strategies.
Stockholders' Equity
The following table provides a summary of total stockholders' equity at
2022 December 31, 2021
Stockholders' equity (dollars in thousands)
6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock
696,910 696,910
6.50% Series G fixed-to-floating rate cumulative redeemable preferred stock
411,335 411,335
6.75% Series I fixed-to-floating rate cumulative redeemable preferred
stock 428,324 428,324
Common stock 4,679 3,649
Additional paid-in capital 22,967,665 20,324,780
Accumulated other comprehensive income (loss) (5,431,436) 958,410
Accumulated deficit (8,211,358) (9,653,582)
Total stockholders' equity $ 10,866,119 $ 13,169,826
Capital Stock
Common Stock
In December 2020 , we announced that our Board authorized the repurchase of up to
$1.5 billion of our outstanding common shares, which expired on December 31,
2021 (the "Prior Share Repurchase Program"). In January 2022 , we announced that
our Board authorized the repurchase of up to $1.5 billion of our outstanding
shares of common stock through December 31, 2024 (the "Current Share Repurchase
Program"). The Current Share Repurchase Program replaced the Prior Share
Repurchase Program. During the three and nine months ended September 30, 2022
and 2021, no shares were purchased under the Current Share Repurchase Program or
Prior Share Repurchase Program.
During the three months ended September 30, 2022 , we closed the public offering
of an original issuance of 25 million shares of common stock for proceeds of
$665.0 million before deducting offering expenses. During the the nine months
ended September 30, 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 $99.8 million and
$196.5 million in proceeds before deducting offering expenses for the three and
nine months ended September 30, 2022 respectively. The stock offerings conducted
during the three and nine months ended September 30, 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 , 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. 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 its 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 three and nine months ended
60
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
issued 1.4 million and 12.8 million shares for proceeds of $49.0 million and
$469.5 million , respectively, each net of commissions and fees. Refer to the
"Capital Stock" Note located within Item 1 for additional information related to
the at-the-market sales program. The foregoing share amounts have been
retroactively adjusted to reflect the effects of the Reverse Stock Split.
On November 3, 2022 , we entered into Amendment No. 2 to the Sales Agreements
with each of the Sales Agents to increase the available amount of shares of our
common stock that we may sell through the Sales Agents. Refer to Item 5 for
additional information related to this increase to the at-the-market sales
program.
Preferred Stock
OnNovember 3, 2022 , our Board of Directors 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 ofNovember 3, 2022 , was approximately$1.6 billion . The Preferred Stock Repurchase Program became effective onNovember 3, 2022 , and shall expire onDecember 31, 2024 . 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. The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate us to acquire any particular amount of Preferred Stock and the program may be suspended or discontinued at our discretion without prior notice.
Leverage and Capital
We believe that it is prudent to maintain conservative GAAP leverage ratios and economic leverage ratios as there may be continued volatility in the mortgage and credit markets. Our capital policy governs our capital and leverage position including setting limits. Based on the guidelines, we generally expect to maintain an economic leverage ratio of less than 10:1. Our actual economic leverage ratio varies from time to time based upon various factors, including our management's opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions. Our GAAP leverage ratio atSeptember 30, 2022 andDecember 31, 2021 was 5.8:1 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 7.1:1 and 5.7:1, atSeptember 30, 2022 andDecember 31, 2021 , respectively. Our GAAP capital ratio atSeptember 30, 2022 andDecember 31, 2021 was 12.8% 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 11.8% and 14.4% atSeptember 30, 2022 andDecember 31, 2021 , respectively. Economic leverage ratio and economic capital ratio are non-GAAP financial measures. Refer to the "Non-GAAP Financial Measures" section for additional information, including reconciliations to their most directly comparable GAAP results. Risk Management We are subject to a variety of risks in the ordinary conduct of our business. The effective management of these risks is of critical importance to the overall success of Annaly. The objective of our risk management framework is to identify, measure and monitor these risks. Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk. 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. 61
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. 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. 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:
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 economicleverage ratio no greater than
10:1 considerate of our overall capital allocation framework.
Liquidity Risk We will seek to maintain an unencumbered asset portfolio sufficient to
meet our liquidity needs under adverse market conditions.
We will seek to manage interest rate risk toprotect the portfolio from Interest Rate Risk adverse rate movements utilizing derivative instruments targeting both
income and capital preservation.
We will seek to manage credit risk by making investments which conform
Credit Risk 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.
We will seek to limit impacts to our business through disciplined
operational risk management practices addressing areas including but not
Operational limited to, management of key third partyrelationships (i.e. originators,
sub-servicers), human capital management, cybersecurity and technology
related matters, business continuity and financial reporting risk.
We will seek to comply with regulatory requirements needed to maintain our
Compliance, Regulatory REIT status and our exemption from registration under the Investment
and Legal Company Act and the licenses and approvals of our regulated and licensed
subsidiaries.
Governance
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
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 Corporate Responsibility
Committee assists the Board in its oversight of any matters that may present
reputational or Environment, Social, and Governance risk to us, and the
Nominating/Corporate Governance Committee assists the Board in its oversight of
our corporate governance framework and the annual self-evaluation of the Board.
Risk assessment and risk management are the responsibility of our management. A
series of management committees has oversight or decision-making
responsibilities for risk management activities. Membership of these committees
is reviewed regularly to ensure the appropriate personnel are engaged in the
risk management process. 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"). 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 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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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
Description of Risks
We are subject to a variety of risks due to the business we operate. Risk categories are an important component of a robust enterprise wide risk management framework.
We have identified the following primary categories that we utilize to identify, assess, measure and monitor risk.
Risk Description
Risk to earnings, capital or business resulting from our
Capital, Liquidity and Funding Risk inability to meet our obligations when they come due without
incurring unacceptable losses because of inability to
liquidate assets or obtain adequate funding.
Risk to earnings, capital or business resulting in the decline
in value of our assets or an increase in the costs of
Investment/Market Risk financing caused by changes in market variables, such as
interest rates, which affect the values of investment
securities and other investment instruments.
Risk to earnings, capital or business resulting from an
Credit Risk obligor's failure to meet the terms of any contract or
otherwise failure to perform as agreed. This risk is present
in lending and investing activities.
Risk to earnings, capital or business resulting from a
Counterparty Risk counterparty's failure to meet the terms of any contract or
otherwise failure to perform as agreed. This risk is present
in funding, hedging and investing activities.
Risk to earnings, capital, reputation or business arising from
inadequate or failed internalprocesses or systems (including
business continuity planning), human factors or external
Operational Risk events. This risk also applies to our use of proprietary and
third party models, software vendors and data providers, and
oversight of third-party service providers such as
sub-servicers, due diligence firms etc.
Risk to earnings, capital, reputation or conduct of business
arising from violations of, or nonconformance with internal
Compliance, Regulatory and Legal Risk 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.
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:
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.
Stress Testing Scenario modeling to measure the resiliency of our liquidity
position.Liquidity Management Policies Comprehensive policies including monitoring, risk limits and an
escalation protocol.
Funding
Our primary financing sources are repurchase agreements provided through
counterparty arrangements and through Arcola , other secured financing, debt
issued by securitization vehicles, mortgages, credit facilities, note sales and
various forms of equity. We maintain excess liquidity by holding unencumbered
liquid assets that could be either used to collateralize additional borrowings
or sold.
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
To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements. AtSeptember 30, 2022 andDecember 31, 2021 , the weighted average days to maturity was 57 days and 52 days, respectively. 63 --------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made. Should prepayment speeds on the mortgages underlying our Agency and Residential mortgage-backed securities and/or market interest rates or other factors move suddenly and cause declines in the market value of assets posted as collateral, resulting margin calls may cause an adverse change in our liquidity position. AtSeptember 30, 2022 , we had total financial assets and cash pledged against existing liabilities of$57.6 billion . The weighted average haircut was approximately 4% on repurchase agreements, primarily attributable to Agency MBS. The quality and character of theResidential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change atSeptember 30, 2022 compared to the same period in 2021, and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the three months endedSeptember 30, 2022 . The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement balances outstanding for the periods presented: Repurchase Agreements Reverse Repurchase Agreements Average Daily Average Daily Amount Ending Amount Amount Ending Amount Outstanding Outstanding Outstanding Outstanding For the three months ended (dollars in thousands) September 30, 2022$ 56,354,310 $ 54,160,731 $ 139,991 $ - June 30, 2022 51,606,720 51,364,097 117,903 - March 31, 2022 53,961,689 52,626,503 39,535 - December 31, 2021 56,977,019 54,769,643 39,247 - September 30, 2021 57,504,986 55,475,420 44,964 - June 30, 2021 62,440,803 60,221,067 42,581 - March 31, 2021 65,461,539 61,202,477 143,395 - December 31, 2020 65,528,297 64,825,239 210,484 - September 30, 2020 67,542,187 64,633,447 286,792 - The following table provides information on our repurchase agreements and other secured financing by maturity date atSeptember 30, 2022 . The weighted average remaining maturity on our repurchase agreements and other secured financing was 59 days atSeptember 30, 2022 : September 30, 2022 Principal Weighted Balance Average Rate % of Total (dollars in thousands) 1 day $ - - % - % 2 to 29 days 23,789,105 2.95 % 43.6 % 30 to 59 days 13,141,434 3.04 % 24.2 % 60 to 89 days 1,097,481 3.72 % 2.0 % 90 to 119 days 3,292,070 3.12 % 6.1 % Over 120 days (1) 13,090,641 3.29 % 24.1 % Total$ 54,410,731 3.08 % 100.0 %
(1) Approximately 0% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
The table below presents our outstanding debt balances and associated weighted
average rates and days to maturity at
Weighted Average Rate
Weighted Average
Principal Balance As of Period End For the Quarter Days to Maturity (1)
(dollars in thousands)
Repurchase agreements $ 54,160,731 3.13 % 2.25 % 57
Other secured financing 250,000 5.81 % 7.15 % 638
Debt issued by securitization vehicles
(2) 9,018,805 3.07 % 2.99 % 12,042
Participations issued (2) 789,498 5.58 % 4.48 % 11,082
Total indebtedness $ 64,219,034 (1) Determined based on estimated weighted-average lives of the underlying debt instruments. (2) Non-recourse to Annaly.
Excess Liquidity Our primary source of liquidity is the availability of unencumbered assets which may be provided as collateral to support additional funding needs. We target minimum thresholds of available, unencumbered assets to maintain excess liquidity. The following table illustrates our asset portfolio available to support potential collateral obligations and funding needs. 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 atSeptember 30, 2022 : Unencumbered Encumbered Assets Assets Total Financial assets (dollars in thousands) Cash and cash equivalents$ 1,169,631 $ 296,540 $ 1,466,171 Investments, at carrying value (1) Agency mortgage-backed securities (2) 52,757,032 4,049,168 56,806,200 Credit risk transfer securities 988,641 68,265 1,056,906 Non-agency mortgage-backed securities 1,990,590 166,116 2,156,706 Commercial mortgage-backed securities 584,163 4,337 588,500 Residential mortgage loans (2) 9,861,111 461,152 10,322,263 MSR 727,927 977,327 1,705,254 Assets of disposal group held for sale (3) 11,371 - 11,371 Other assets (4) - 92,245 92,245 Total financial assets$ 68,090,466 $ 6,115,150 $ 74,205,616 (1) 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. (2) Includes assets transferred or pledged to securitization vehicles. (3) Comprised of corporate loans held for sale (4) Includes commercial real estate investments and interests in certain joint ventures. We maintain liquid assets in order to satisfy our current and future obligations in normal and stressed operating environments. These are held as the primary means of liquidity risk mitigation. 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. 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). Our balance sheet also generates liquidity on an on-going basis through mortgage principal and interest repayments and net earnings held prior to payment of dividends. The following table presents our liquid assets as a percentage of total assets atSeptember 30, 2022 : 65
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis Carrying Value (1) (dollars in Liquid assets thousands) Cash and cash equivalents$ 1,466,171 Residential Securities (2) (3)
59,588,289
Commercial mortgage-backed securities
588,500
Residential mortgage loans (4)
1,551,637
Total liquid assets $
63,194,597
Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (5)
97.28 %
(1) Carrying value approximates the market value of assets. The assets listed in this table
include $57.6 billion of assets that have been pledged as collateral against existing
liabilities at September 30, 2022 . Please refer to the Encumbered and Unencumbered Assets
table for related information.
(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 Agency MBS of consolidated VIEs carried at fair value of $0.4
billion .
(4) Excludes securitized residential mortgage loans transferred or pledged to consolidated
VIEs carried at fair value of $8.8 billion .
(5) 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 .
Maturity Profile
We consider the profile of our assets, liabilities and derivatives when managing
both liquidity risk as well as investment/market risk employing a measurement of
both the maturity gap and interest rate sensitivity gap. We determine the amount
of liquid assets that are required to be held by monitoring several liquidity
metrics. We utilize several modeling techniques to analyze our current and
potential obligations including the expected cash flows from our assets,
liabilities and derivatives. The following table illustrates the expected final
maturities and cash flows of our assets, liabilities and derivatives. The table
is based on a static portfolio and assumes no reinvestment of asset cash flows
and no future liabilities are entered into. In assessing the maturity of our
assets, liabilities and off balance sheet obligations, we use the stated
maturities, or our prepayment expectations for assets and liabilities that
exhibit prepayment characteristics. Cash and cash equivalents are included in
the 'Less than 3 Months' maturity bucket, as they are typically held for a short
period of time.
With respect to each maturity bucket, our maturity gap is considered negative
when the amount of maturing liabilities exceeds the amount of maturing assets. 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 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. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if assets and liabilities were perfectly matched in each
maturity category. The amount of assets and liabilities utilized to compute our
interest rate sensitivity gap was determined in accordance with the contractual
terms of the assets and liabilities, except that adjustable-rate loans and
securities are included in the period in which their interest rates are first
scheduled to adjust and not in the period in which they mature. The effects of
interest rate swaps, whereby we generally pay a fixed rate and receive a
floating rate and effectively lock in our financing costs for a longer term, are
also reflected in our interest rate sensitivity gap.
The interest rate sensitivity of our assets and liabilities in the following
table at September 30, 2022 could vary substantially based on actual prepayment
experience.
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis Less than 3 3-12 More than 1 Year Months Months to 3 Years 3 Years and Over Total Financial assets (dollars in thousands) Cash and cash equivalents$ 1,466,171 $ - $ - $ - $
1,466,171
Agency mortgage-backed securities (principal) 182 741 672,443 66,495,733
67,169,099
Residential credit risk transfer securities (principal) 1,217 8,484 65,317 1,025,926
1,100,944
Non-agency mortgage-backed securities (principal) 56,883 223,153 1,276,274 821,899
2,378,209
Commercial mortgage-backed securities (principal) - 6,409 561,202 43,970 611,581 Total securities 58,282 238,787 2,575,236 68,387,528 71,259,833 Residential mortgage loans (principal) - - - 1,638,823 1,638,823 Total loans - - - 1,638,823 1,638,823 Assets transferred or pledged to securitization vehicles (principal) - - - 10,285,537
10,285,537
Total financial assets - maturity 1,524,453 238,787 2,575,236 80,311,888
84,650,364
Effect of utilizing reset dates (1) 12,268,603 355,912 (468,669) (12,155,846)
-
Total financial assets - interest rate sensitive$ 13,793,056 $ 594,699 $ 2,106,567 $ 68,156,042 $ 84,650,364 Financial liabilities Repurchase agreements$ 38,028,019 $ 15,927,117 $ 205,595 $ -$ 54,160,731 Other secured financing -
- 250,000 - 250,000
Debt issued by securitization vehicles (principal) - - - 9,018,805
9,018,805
Participations issued (principal) - - - 789,498
789,498
Total financial liabilities - maturity 38,028,019 15,927,117 455,595 9,808,303
64,219,034
Effect of utilizing reset dates (1)(2) (39,242,366) 13,590,200 7,459,600 18,192,566
-
Total financial liabilities - interest rate sensitive$ (1,214,347) $ 29,517,317 $ 7,915,195 $ 28,000,869 $ 64,219,034 Maturity gap$ (36,503,566) $ (15,688,330) $ 2,119,641 $ 70,503,585 $ 20,431,330 Cumulative maturity gap$ (36,503,566) $ (52,191,896) $ (50,072,255) $ 20,431,330 Interest rate sensitivity gap$ 15,007,403 $
(28,922,618)
Cumulative rate sensitivity gap$ 15,007,403 $
(13,915,215)
(1)Maturity gap utilizes stated maturities, or prepayment expectations for assets that exhibit prepayment characteristics, while interest rate sensitivity gap utilizes reset dates, if applicable. (2)Includes effect of interest rate swaps.
The methodologies we employ for evaluating interest rate risk include an analysis of our interest rate "gap," measurement of the duration and convexity of our portfolio and sensitivities to interest rates and spreads.
Stress Testing
We utilize liquidity stress testing to ensure we have sufficient liquidity under a variety of scenarios and stresses. 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.
Liquidity Management Policies
We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and measurement, along with well-defined key risk indicators. Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as the sustainability of the funding composition under stress conditions. We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-specific and market conditions. The metrics assist in assessing our liquidity conditions and are integrated into our escalation protocol.
Investment/Market Risk Management
One of the primary risks we are subject to is investment/market risk. Changes in
the level of interest rates can affect our net interest income, which is the
difference between the income we earn on our interest earning assets and the
interest expense
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis incurred from interest bearing liabilities and derivatives. Changes in the level of interest rates and spreads can also affect the value of our assets and potential realization of gains or losses from the sale of these assets. 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 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. MAC interest rate swaps offer price transparency, flexibility and more efficient portfolio administration through compression which is the process of reducing the number of unique interest rate swap contracts and replacing them with fewer contracts containing market defined terms. Our portfolio and the value of our portfolio, including derivatives, may be adversely affected as a result of changing interest rates and spreads. We simulate a wide variety of interest rate scenarios in evaluating our risk. Scenarios are run to capture our sensitivity to changes in interest rates, spreads and the shape of the yield curve. We also consider the assumptions affecting our analysis such as those related to prepayments. In addition to predefined interest rate scenarios, we utilize Value-at-Risk measures to estimate potential losses in the portfolio over various time horizons utilizing various confidence levels. The following tables estimate the potential changes in economic net interest income over a twelve month period and the immediate effect on our portfolio market value (inclusive of derivative instruments), should interest rates instantaneously increase or decrease by 25, 50 or 75 basis points, and the effect of portfolio market value if mortgage option-adjusted spreads instantaneously increase or decrease by 5, 15 or 25 basis points (assuming shocks are parallel and instantaneous). All changes to income and portfolio market value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The net interest income simulations incorporate the interest expense effect of rate resets on liabilities and derivatives as well as the amortization expense and reinvestment of principal based on the prepayments on our securities, which varies based on the level of rates. The results assume no management actions in response to the rate or spread changes. The following table presents estimates atSeptember 30, 2022 . Actual results could differ materially from these estimates. Projected Percentage Change Change in Interest Rate in Economic Net Interest Estimated Percentage Change Estimated Change as a (1) Income (2) in Portfolio Value (3) % on NAV (3)(4) -75 Basis points 4.3% 0.5% 3.7% -50 Basis points 2.9% 0.4% 2.9% -25 Basis points 1.5% 0.2% 1.7% +25 Basis points (1.5%) (0.3%) (2.1%) +50 Basis points (3.0%) (0.6%) (4.5%) +75 Basis points (4.6%) (0.9%) (7.1%) Estimated Change in Estimated Change as a MBS Spread Shock (1) Portfolio Market Value % on NAV (3)(4) -25 Basis points 1.7% 14.1% -15 Basis points 1.0% 8.4% -5 Basis points 0.3% 2.8% +5 Basis points (0.3%) (2.8%) +15 Basis points (1.0%) (8.3%) +25 Basis points (1.7%) (13.7%) (1) Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment professionals. 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.
Credit Risk Management
Key risk parameters have been established to specify our credit risk appetite.
We seek to manage credit risk by making investments which conform to the firm's
specific investment policy parameters and optimize risk-return attributes.
While we do not expect to encounter credit risk in our Agency mortgage-backed
securities, we face credit risk on the non-Agency mortgage-backed securities and
CRT securities in our portfolio. In addition, we are also exposed to credit risk
on residential mortgage loans and commercial real estate investments. MSR values
may also be impacted through reduced servicing fees and higher costs to service
the underlying mortgage loans due to borrower performance. Generally, we are
subject to risk of loss if an issuer or borrower fails to perform its
contractual obligations. We have established policies and
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
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. Once an
investment is made, our ongoing surveillance process includes regular reviews,
analysis and oversight of investments by our investment personnel and
appropriate committee. We review credit and other risks of loss associated with
each investment. Our management monitors the overall portfolio risk and
determines estimates of provision for loss. Additionally, ALCO has oversight of
our credit risk exposure. Our portfolio composition, based on balance sheet
values, at September 30, 2022 and December 31, 2021 was as follows:
September 30, 2022 December 31, 2021 Category
Agency mortgage-backed securities (1) 80.0 % 81.9 % Credit risk transfer securities 1.3 % 1.3 % Non-agency mortgage-backed securities 2.7 % 2.2 % Residential mortgage loans (1) 13.0 % 10.4 % Mortgage servicing rights 2.2 % 0.7 % Interests in MSR - % 0.1 % Commercial real estate (2) 0.8 % 0.7 % Corporate debt (3) - % 2.7 %
(1) Includes assets transferred or pledged to securitization vehicles.
(2) Excludes commercial real estate assets held for sale as of
Counterparty Risk Management
Our use of repurchase and derivative agreements and trading activities create exposure to counterparty risk relating to potential losses that could be recognized if the counterparties to these agreements fail to perform their obligations under the contracts. 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 ourResidential Securities as collateral to the applicable lender. The collateral we pledge generally exceeds the amount of the borrowings under each agreement. If the counterparty to the repurchase agreement defaults on its obligations and we are not able to recover our pledged asset, we are at risk of losing the over-collateralization or haircut. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral. We also use interest rate swaps and other derivatives to manage interest rate risk. Under these agreements, we pledge securities and cash as collateral or settle variation margin payments as part of a margin arrangement. If a counterparty were to default on its obligations, we would be exposed to a loss to a derivative counterparty to the extent that the amount of our securities or cash pledged exceeded the unrealized loss on the associated derivative and we were not able to recover the excess collateral. Additionally, we would be exposed to a loss to a derivative counterparty to the extent that our unrealized gains on derivative instruments exceeded the amount of the counterparty's securities or cash pledged to us. We monitor our exposure to counterparties across several dimensions including by type of arrangement, collateral type, counterparty type, ratings and geography. Additionally, ALCO has oversight of our counterparty exposure. The following table summarizes our exposure to counterparties by geography atSeptember 30, 2022 : Secured Financing Interest Rate Swaps Number of Counterparties (1) at Fair Value Exposure (2) Geography (dollars in thousands) North America 22$ 43,904,932 $ (24,716) $ 3,582,109 Europe 10 7,345,431 (46,494) 1,442,477 Japan 4 3,160,368 - 170,961 Total 36$ 54,410,731 $ (71,210) $ 5,195,547
(1) Represents repurchase agreements and other secured financing. (2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured financing and derivatives for each counterparty.
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
Operational Risk Management
We are subject to operational risk in each of our business and support functions. Operational risk may arise from internal or external sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events. Model risk considers potential errors with a model's results due to uncertainty in model parameters and inappropriate methodologies used. The result of these risks may include financial loss and reputational damage. 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. Other tools include testing, including disaster recovery testing; systems controls, including access controls; training, including cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. 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. We have established a Cybersecurity Committee 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. 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. There is no assurance that these 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. 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.
Compliance, Regulatory and Legal Risk Management
Our business is organized as a REIT, and we seek to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT requires an analysis of various factual matters and circumstances. 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 theSEC 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. Our investments in residential whole loans and MSR require us to comply with applicable state and federal laws and regulations and maintain appropriate governmental licenses, approvals and exemptions. 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 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. The determination that we qualify for this exemption from registration depends on various factual matters and circumstances. 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. 70
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis As a result of the Dodd-Frank Act, theU.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 theDivision of Swap Dealer and Intermediary Oversight or the CFTC, to register as CPOs. OnDecember 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, theDivision of Swap Dealer and Intermediary Oversight of the CFTC issued no-action relief entitled "No-Action Relief from the Commodity Pool Operator Registration Requirement forCommodity 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.
Critical Accounting Estimates
The preparation of our consolidated financial statement in accordance with generally accepted accounting principles inthe United States requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ materially from these estimates and changes in assumptions could have a significant effect on the consolidated financial statements. 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 1. "Financial Statements."
Valuation of Financial Instruments
Description: We carry residential securities at estimated fair value. There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities. Judgments and Uncertainties: Since we primarily invest in securities that can be valued using quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value. Internal fair values are determined using quoted prices from the TBA securities market, theTreasury curve and the underlying characteristics of the individual securities, which may include coupon, periodic and life caps, reset dates and the expected life of the security. While prepayment rates may be difficult to predict and require estimation and judgment in the valuation of Agency mortgage-backed securities, we use several third party models to validate prepayment speeds used in fair value measurements of residential securities. All internal fair values are compared to external pricing sources and/or dealer quotes to determine reasonableness. Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing. Sensitivity of Estimates to Change: Changes in underlying assumptions used in estimating fair value impact the carrying value of the residential securities as well as their yield. For example, an increase in CPR would decrease the carrying value and yield of our Agency mortgage-backed securities. 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 2. for further information. Residential Mortgage Loans
Description: We elected to account for Residential Mortgage Loans at fair value. There is an active market for the residential whole loans in which we invest.
Judgments and Uncertainties: Since we primarily invest in residential loans that
can be valued using actively quoted prices for similar assets, there are
observable inputs in measuring fair value. Internal fair values are determined
using quoted prices for
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis similar market transactions, the swap curve and the underlying characteristics of the individual loans, which may include loan term, coupon, and reset dates. While prepayment rates may be difficult to predict and are a significant estimate requiring judgment in the valuation of residential whole loans, we validate prepayment speeds against those provided by independent pricing analytic providers specializing in residential mortgage loans. Internal fair values are generally compared to external pricing sources to determine reasonableness. Sensitivity of Estimates to Change: Changes to model assumptions, including prepayment speeds may significantly impact the fair value estimate of residential mortgage loans as well as unrealized gains and losses and yield on these assets. 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 2. for further information. MSR Description: We elected to account for MSR at fair value. The market for mortgage servicing rights is considered less active and transparent compared to securities. As such fair value estimates for our investment in MSR are obtained from models, which use significant unobservable inputs in their valuations. Judgments and Uncertainties: These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR requires significant judgment by management and the third party pricing providers. Sensitivity of Estimates to Change: 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 1. "Financial Statements." Interest Rate Swaps Description: We are required to account for derivative assets and liabilities at fair value, which may or may not be cleared through a derivative clearing organization. We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization. Judgments and Uncertainties: We use the overnight indexed swap ("OIS") curve as an input to value substantially all of our uncleared interest rate swaps. We believe using the OIS curve, which reflects the interest rate typically paid on cash collateral, enables us to most accurately determine the fair value of uncleared interest rate swaps. Consistent with market practice, we exchange collateral (also called margin) based on the fair values of our interest rate swaps. Through this margining process, we may be able to compare our recorded fair value with the fair value calculated by the counterparty or derivatives clearing organization, providing additional verification of our recorded fair value of the uncleared interest rate swaps. Sensitivity of Estimates to Change: Changes in the OIS curve will impact the carrying value of our interest rate swap assets and liabilities. 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 2 for further information.
Revenue Recognition
Description: Interest income from coupon payments is accrued based on the outstanding principal amounts of theResidential Securities and their contractual terms. Premiums and discounts associated with the purchase of theResidential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. Gains or losses on sales ofResidential Securities are recorded on trade date based on the specific identification method. Judgments and Uncertainties: To aid in determining projected lives of the securities, we use third party model and market information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (i.e., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts and expert judgment. Prepayment speeds vary according to the type of investment, conditions in the financial markets and other factors and cannot be predicted with any certainty. Sensitivity of Estimates to Change: Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Adjustments are made for actual prepayment activity as it 72
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
relates to calculating the effective yield. The sensitivity of changes in interest rates to our economic net interest income is included in the interest rate shock analysis and discussions within this Item 2 for further information.
Consolidation of Variable Interest Entities
Description: We are required to determine if it is required to consolidate entities in which it holds a variable interest.
Judgments and Uncertainties: Determining whether an entity has a controlling financial interest in a VIE requires significant judgment related to assessing the purpose and design of the VIE and determination of the activities that most significantly impact its economic performance. We must also identify explicit and implicit variable interests in the entity and consider our involvement in both the design of the VIE and its ongoing activities. To determine whether consolidation of the VIE is required, we must apply judgment to assess whether we have the power to direct the most significant activities of the VIE and whether we have either the rights to receive benefits or the obligation to absorb losses that could be potentially significant to the VIE.
Use of Estimates
The use of GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. 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.
Agency
Refers to a federally chartered corporation, such as the Federal National
Mortgage Association, or the Federal Home Loan Mortgage Corporation, or an
agency of the
Agency Mortgage-Backed Securities Refers to residential mortgage-backed securities that are issued or guaranteed by an Agency.
Amortization
Liquidation of a debt through installment payments. Amortization also refers to
the process of systematically reducing a recognized asset or liability (e.g., a
purchase premium or discount for a debt security) with an offset to earnings.
Average GAAP Cost of Interest Bearing Liabilities and Average Economic Cost of
Interest Bearing Liabilities
Average GAAP cost of interest bearing liabilities represents annualized interest
expense divided by average interest bearing liabilities. Average interest
bearing liabilities is a non-GAAP financial measure that reflects the average
balances during the period. Average economic cost of interest bearing
liabilities represents annualized economic interest expense divided by average
interest bearing liabilities.
Average Life
On a mortgage-backed security, the average time to receipt of each dollar of
principal, weighted by the amount of each principal prepayment, based on
prepayment assumptions.
Average Yield on Interest Earnings Assets and Average Yield on Interest Earnings
Assets (excluding PAA)
Average yield on interest earning assets represents annualized interest income
divided by average interest earning assets. Average interest earning assets
reflects the average amortized cost of our investments during the period.
Average yield on interest earning assets (excluding PAA) is a non-GAAP financial
measure that is calculated using annualized interest income (excluding PAA).
B
Basis Point ("bp" or "bps")
One hundredth of one percent, used in expressing differences in interest rates.
One basis point is 0.01% of yield. For example, a bond's yield that changed from
3.00% to 3.50% would be said to have moved 50 basis points.
Benchmark
A bond or an index referencing a basket of bonds whose terms are used for
comparison with other bonds of similar maturity. The global financial market
typically looks to
Beneficial Owner One who benefits from owning a security, even if the security's title of ownership is in the name of a broker or bank.
Board
Refers to the board of directors of Annaly.
Bond
The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation a fixed sum of money plus interest (usually represented by interest coupons attached to the bond) is payable to the holder or owner. Bonds are long-term securities with an original maturity of greater than one year.
Book Value Per Share Calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit and dividing that number by the total common shares outstanding.
Broker
Generic name for a securities firm engaged in both buying and selling securities on behalf of customers or its own account.
C
Capital Buffer
Includes unencumbered financial assets which can be either sold or utilized as
collateral to meet liquidity needs.
Capital Ratio (GAAP Capital Ratio)
Calculated as total stockholders' equity divided by total assets.
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. 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. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.
CMBX
The CMBX index is a synthetic tradable index referencing a basket of 25 CMBS of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of CMBS securities and is structured as a "pay-as-you-go" contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying CMBS securities as they occur.
Collateral
Securities, cash or property pledged by a borrower or party to a derivative
contract to secure payment of a loan or derivative. If the borrower fails to
repay the loan or defaults under the derivative contract, the secured party may
take ownership of the collateral.
Collateralized Loan Obligation ("CLO")
A securitization collateralized by loans and other debt instruments.
Collateralized Mortgage Obligation ("CMO") A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans.
Commodity Futures Trading Commission ("CFTC") An independentU.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The CFTC regulates the swaps, commodity futures and options markets. Its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices and fraud. Commercial Mortgage-Backed Security ("CMBS" or "Commercial Securities ") Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner. Constant Prepayment Rate ("CPR") The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month.
Convexity
A measure of the change in a security's duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes.
Corporate Debt Non-government debt instruments issued by corporations. Long-term corporate debt can be issued as bonds or loans.
Counterparty
One of two entities in a transaction. For example, in the bond market a counterparty can be a state or local government, a broker-dealer or a corporation.
Coupon
The interest rate on a bond that is used to compute the amount of interest due on a periodic basis.
Credit and Counterparty Risk
Risk to earnings, capital or business, resulting from an obligor's or
counterparty's failure to meet the terms of any contract or otherwise failure to
perform as agreed. Credit and counterparty risk is present in lending,
investing, funding and hedging activities.
Credit Derivatives
Derivative instruments that have one or more underlyings related to the credit
risk of a specified entity (or group of entities) or an index that exposes the
seller to potential loss from specified credit-risk related events. An example
is credit derivatives referencing the commercial mortgage-backed securities
index.
Credit Risk Transfer ("CRT") Securities
Credit Risk Transfer securities are risk sharing transactions issued by Fannie
Mae and Freddie Mac and similarly structured transactions arranged by third
party market participants. The securities issued in the CRT sector are designed
to synthetically transfer mortgage credit risk from Fannie Mae, Freddie Mac
and/or third parties to private investors.
Current Face
The current remaining monthly principal on a mortgage security. Current face is
computed by multiplying the original face value of the security by the current
principal balance factor.
D
DealerPerson or organization that underwrites, trades and sells securities, e.g., a principal market-maker in securities.
Default Risk Possibility that a bond issuer will fail to pay principal or interest when due.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
Derivative
A financial product that derives its value from the price, price fluctuations and price expectations of an underlying instrument, index or reference pool (e.g. futures contracts, options, interest rate swaps, interest rate swaptions and certain to-be-announced securities).
Discount Price When the dollar price is below face value, it is said to be selling at a discount.
Duration
The weighted maturity of a fixed-income investment's cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.
E
Earnings available for distribution ("EAD") and Earnings available for
distribution Per Average Common Share
Non-GAAP financial measure defined as the sum of (a) economic net interest
income, (b) TBA dollar roll income and CMBX coupon income, (c) net servicing
income less realized amortization of MSR, (d) other income (loss) (excluding
depreciation expense related to commercial real estate and amortization of
intangibles, non-EAD income allocated to equity method investments and other
non-EAD components of other income (loss)), (e) general and administrative
expenses (excluding transaction expenses and non-recurring items), and (f)
income taxes (excluding the income tax effect of non-EAD income (loss) items)
and excludes (g) the premium amortization adjustment representing the cumulative
impact on prior periods, but not the current period, of quarter-over-quarter
changes in estimated long-term prepayment speeds related to our Agency
mortgage-backed securities. Earnings available for distribution per average
common share is a non-GAAP financial measure calculated by dividing earnings
available for distribution by average basic common shares for the period.
This metric was previously labeled Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share). The definition of EAD is identical to the definition of Core Earnings (excluding PAA) from prior reporting periods.
Economic Capital A measure of the risk a firm is subject to. It is the amount of capital a firm needs as a buffer to protect against risk. It is a probabilistic measure of potential future losses at a given confidence level over a given time horizon. Economic Capital Ratio Non-GAAP financial measure that is calculated as total stockholders' equity divided by total economic assets. Total economic assets includes the implied market value of TBA derivatives and are net of debt issued by securitization vehicles. Economic Interest Expense Non-GAAP financial measure that is comprised of GAAP interest expense and the net interest component of interest rate swaps. Economic Leverage Ratio (Economic Debt-to-Equity Ratio) 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). 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. Economic Net Interest Income Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense. Economic Return Refers to the Company's change in book value plus dividends declared divided by the prior period's book value.
Encumbered Assets Assets on the company's balance sheet which have been pledged as collateral against a liability.
Eurodollar
A
F
Face Amount
The par value (i.e., principal or maturity value) of a security appearing on the
face of the instrument.
Factor
A decimal value reflecting the proportion of the outstanding principal balance
of a mortgage security, which changes over time, in relation to its original
principal value.
Fannie Mae
Federal National Mortgage Association.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
Federal Deposit Insurance Corporation ("FDIC")
An independent agency created by the U.S. Congress to maintain stability and
public confidence in the nation's financial system by insuring deposits,
examining and supervising financial institutions for safety and soundness and
consumer protection, and managing receiverships.
Federal Funds Rate
The interest rate charged by banks on overnight loans of their excess reserve
funds to other banks.
Federal Housing Financing Agency ("FHFA")
The FHFA is an independent regulatory agency that oversees vital components of
the secondary mortgage market including Fannie Mae, Freddie Mac and the Federal
Home Loan Banks.
Fixed-Rate Mortgage A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.Fixed Income Clearing Corporation ("FICC") The FICC is an agency that deals with the confirmation, settlement and delivery of fixed-income assets in theU.S. The agency ensures the systematic and efficient settlement ofU.S. Government securities and mortgage-backed security transactions in the market.
Floating Rate Bond A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.
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.
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. A
futures contract differs from an option in that an option gives one of the
counterparties a right and the other an obligation to buy or sell, while a
futures contract represents an obligation of both counterparties, one to deliver
and the other to accept delivery. A futures contract is part of a class of
financial instruments called derivatives.
G
GAAPGinnie Mae Government National Mortgage Association . H Hedge
An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices.
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. Average interest bearing liabilities is based on daily balances.
Interest Earning Assets Refers toResidential 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. 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. 77
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis Interests in MSR Represents agreements to purchase all, or a component of, net servicing cash flows. Interest Rate Risk The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. As market interest rates rise, the value of current fixed income investment holdings declines. Diversifying, deleveraging and hedging techniques are utilized to mitigate this risk. Interest rate risk is a form of market risk. Interest Rate Swap A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive a variable rate. Interest Rate Swaption Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement at some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer.
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. As the benchmark rate changes, the IO coupon adjusts in the opposite direction. When the benchmark rate is relatively low, the IO pays a relatively high coupon payment, and vice versa. Investment/Market Risk Risk to earnings, capital or business resulting in the decline in value of our assets caused from changes in market variables, such as interest rates, which affect the values ofResidential Securities and other investment instruments. Investment Advisers Act Refers to the Investment Advisers Act of 1940, as amended. Investment Company Act Refers to the Investment Company Act of 1940, as amended. L
Leverage
The use of borrowed money to increase investing power and economic returns.
Leverage Ratio (GAAP Leverage Ratio or Debt-to-Equity Ratio) 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. 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 afterJune 30, 2023 . Liquidity Risk Risk to earnings, capital or business arising 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. Long-Term CPR Our projected prepayment speeds for certain Agency mortgage-backed securities using third party model and market information. Our prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Long-Term Debt Debt which matures in more than one year. M Market Agreed Coupon ("MAC") Interest Rate Swap An interest rate swap contract structure with pre-defined, market agreed terms, developed bySIFMA and ISDA with the purpose of promoting liquidity and simplified administration. 78
--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis Monetary Policy Action taken by theFederal Open Market Committee of theFederal Reserve System to influence the money supply or interest rates. Mortgage-Backed Security ("MBS") A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and "passes through" the principal and interest to the security holders on a pro rata basis. Mortgage Loan A mortgage loan granted by a bank, thrift or other financial institution that is based solely on real estate as security and is not insured or guaranteed by a government agency. Mortgage Servicing Rights ("MSR") Contractual agreements constituting the right to service an existing mortgage where the holder receives the benefits and bears the costs and risks of servicing the mortgage. N NAV Net asset value. Net Interest Income Represents interest income earned on our portfolio investments, less interest expense paid for borrowings. Net Interest Margin and Net Interest Margin (excluding PAA) Net interest margin represents our interest income less interest expense divided by average interest earning assets. Net interest margin (excluding PAA) is a non-GAAP financial measure that 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. Net Interest Spread and Net Interest Spread (excluding PAA) Net interest spread represents the average yield on interest earning assets less the average GAAP cost of interest bearing liabilities. Net interest spread (excluding PAA) is a non-GAAP financial measure that represents the average yield on interest earning assets (excluding PAA) less the average economic cost of interest bearing liabilities. Non-Performing Loan ("NPL") A loan that is close to defaulting or is in default.
Notional Amount A stated principal amount in a derivative contract on which the contract is based.
O
Operational Risk
Risk to earnings, capital, reputation or business arising from inadequate or
failed internal processes or systems, human factors or external events.
Option Contract
A contract in which the buyer has the right, but not the obligation, to buy or
sell an asset at a set price on or before a given date. Buyers of call options
bet that a security will be worth more than the price set by the option (the
strike price), plus the price they pay for the option itself. Buyers of put
options bet that the security's price will drop below the price set by the
option. An option is part of a class of financial instruments called
derivatives, which means these financial instruments derive their value from the
worth of an underlying investment.
Original Face The face value or original principal amount of a security on its issue date.
Out-of-the-Money
Description for an option that has no intrinsic value and would be worthless if it expired today; for a call option, this situation occurs when the strike price is higher than the market price of the underlying security; for a put option, this situation occurs when the strike price is less than the market price of the underlying security.
Overnight Index Swaps ("OIS") An interest rate swap in which a fixed rate is exchanged for an overnight floating rate.
Over-The-Counter ("OTC") Market
A securities market that is conducted by dealers throughout the country through
negotiation of price rather than through the use of an auction system as
represented by a stock exchange.
P
ParPrice equal to the face amount of a security; 100%.
Par Amount The principal amount of a bond or note due at maturity. Also known as par value.
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.
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--------------------------------------------------------------------------------ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management's Discussion and Analysis
Pool
A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case ofGinnie Mae , Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.
Premium
The amount by which the price of a security exceeds its principal amount. When
the dollar price of a bond is above its face value, it is said to be selling at
a premium.
Premium Amortization Adjustment ("PAA")
The cumulative impact on prior periods, but not the current period, of
quarter-over-quarter changes in estimated long-term prepayment speeds related to
our Agency mortgage-backed securities.
Prepayment
The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due.
Prepayment Risk The risk that falling interest rates will lead to increased prepayments of mortgage or other loans, forcing the investor to reinvest at lower prevailing rates. Prepayment Speed The estimated rate at which mortgage borrowers will pay off the mortgages that underlie an MBS. Primary Market Market for offers or sales of new bonds by the issuer. Prime Rate The indicative interest rate on loans that banks quote to their best commercial customers.
Principal and Interest The term used to refer to regularly scheduled payments or prepayments of principal and payments of interest on a mortgage or other security.
R
Rate Reset
The adjustment of the interest rate on a floating-rate security according to a
prescribed formula.
Real Estate Investment Trust ("REIT")
A special purpose investment vehicle that provides investors with the ability to
participate directly in the ownership or financing of real-estate related assets
by pooling their capital to purchase and manage mortgage loans and/or income
property.
Recourse Debt
Debt on which the economic borrower is obligated to repay the entire balance
regardless of the value of the pledged collateral. 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.
Reinvestment Risk
The risk that interest income or principal repayments will have to be reinvested
at lower rates in a declining rate environment.
Re-Performing Loan ("RPL")
A type of loan in which payments were previously delinquent by at least 90 days
but have resumed.
Repurchase Agreement
The sale of securities to investors with the agreement to buy them back at a
higher price after a specified time period; a form of short-term borrowing. For
the party on the other end of the transaction (buying the security and agreeing
to sell in the future) it is a reverse repurchase agreement.
Residential Securities Refers to Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities.
Residual
In securitizations, the residual is the tranche that collects any cash flow from
the collateral that remains after obligations to the other tranches have been
met.
Return on Average Equity
Calculated by taking earnings divided by average stockholders' equity.
Reverse Repurchase Agreement
Refer to Repurchase Agreement. The buyer of securities effectively provides a
collateralized loan to the seller.
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.
S
Secondary Market
Ongoing market for bonds previously offered or sold in the primary market.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
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.
Short-Term Debt Generally, debt which matures in one year or less. However, certain securities that mature in up to three years may be considered short-term debt.
Spread
When buying or selling a bond through a brokerage firm, investors will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee. Spreads differ based on several factors including liquidity.
T
Target Assets
Includes Agency mortgage-backed securities, to-be-announced forward contracts,
CRT securities, MSR, non-Agency mortgage-backed securities, residential mortgage
loans, and commercial real estate investments.
Tangible Economic Return
Refers to the Company's change in tangible book value (calculated by summing
common stock, additional paid-in capital, accumulated other comprehensive income
(loss) and accumulated deficit less intangible assets) plus dividends declared
divided by the prior period's tangible book value.
Taxable REIT Subsidiary ("TRS")
An entity that is owned directly or indirectly by a REIT and has jointly elected
with the REIT to be treated as a TRS for tax purposes. Annaly and certain of its
direct and indirect subsidiaries have made separate joint elections to treat
these subsidiaries as TRSs.
To-Be-Announced ("TBA") Securities
A contract for the purchase or sale of a mortgage-backed security to be
delivered at a predetermined price, face amount, issuer, coupon and stated
maturity on an agreed-upon future date but does not include a specified pool
number and number of pools.
TBA Dollar Roll Income
TBA dollar roll income is defined as the difference in price between two TBA
contracts with the same terms but different settlement dates. The TBA contract
settling in the later month typically prices at a discount to the earlier month
contract with the difference in price commonly referred to as the "drop". TBA
dollar roll income represents the equivalent of interest income on the
underlying security less an implied cost of financing.
Total Return
Investment performance measure over a stated time period which includes coupon
interest, interest on interest, and any realized and unrealized gains or losses.
Total Return Swap
A derivative instrument where one party makes payments at a predetermined rate
(either fixed or variable) while receiving a return on a specific asset
(generally an equity index, loan or bond) held by the counterparty.
U
Unencumbered Assets
Assets on our balance sheet which have not been pledged as collateral against an
existing liability.
U.S. Government-Sponsored Enterprise ("GSE") Obligations
Obligations of Agencies originally established or chartered by the U.S.
government to serve public purposes as specified by the U.S. Congress , such as
Fannie Mae and Freddie Mac; these obligations are not explicitly guaranteed as
to the timely payment of principal and interest by the full faith and credit of
the U.S. government.
V
Value-at-Risk ("VaR")
A statistical technique which measures the potential loss in value of an asset
or portfolio over a defined period for a given confidence interval.
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.
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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
Volatility
A statistical measure of the variance of price or yield over time. Volatility is
low if the price does not change very much over a short period of time, and high
if there is a greater change.
Voting Interest Entity ("VOE")
An entity that has sufficient equity to finance its activities without
additional subordinated financial support from other parties and in which equity
investors have a controlling financial interest.
W
Warehouse Lending
A line of credit extended to a loan originator to fund mortgages extended by the
loan originators to property purchasers. The loan typically lasts from the time
the mortgage is originated to when the mortgage is sold into the secondary
market, whether directly or through a securitization. Warehouse lending can
provide liquidity to the loan origination market.
Weighted Average Coupon
The weighted average interest rate of the underlying mortgage loans or pools
that serve as collateral for a security, weighted by the size of the principal
loan balances.
Weighted Average Life ("WAL")
The assumed weighted average amount of time that will elapse from the date of a
security's issuance until each dollar of principal is repaid to the investor.
The WAL will change as the security ages and depending on the actual realized
rate at which principal, scheduled and unscheduled, is paid on the loans
underlying the MBS.
Y
Yield-to-MaturityThe 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.
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