2023 Compared with 2022 Economic interest expense increased by $1.3 billion for the year ended December 31, 2023 compared to the same period in 2022. The change was primarily due to higher average interest bearing liabilities from an increase in repurchase agreement balances and higher borrowing rates. This was partially offset by the change in the net interest component of interest rate swaps, which was $1.6 billion for the year ended December 31, 2023 compared to $366.2 million for the same period in 2022. We do not manage our portfolio to have a pre-designated amount of borrowings at quarter or year end. 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 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. At December 31, 2023 the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and MSR. At December 31, 2022, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and MSR. All of our Residential 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) 2023 Compared with 2022 Net Gains (Losses) on Investments and Other Net gains (losses) on disposal of investments and other was ($2.9) billion for the year ended December 31, 2023 compared with ($3.5) billion for the same period in 2022. For the year ended December 31, 2023, we disposed of Residential Securities with a carrying value of $36.4 billion for an aggregate net loss of ($2.9) billion. For the same period in 2022, we disposed of Residential Securities with a carrying value of $28.9 billion for an aggregate net loss of ($3.6) billion and we recognized a realized gain of $33.4 million as a result of deconsolidating a multifamily VIE. Net unrealized gains (losses) on instruments measured at fair value through earnings was $797.6 million for the year ended December 31, 2023 compared to ($1.1) billion for the same period in 2022, primarily due to favorable changes in unrealized gains (losses) on securitized residential whole loans of consolidated VIEs of $1.5 billion, Agency MBS of $1.5 billion, nonAgency MBS of $334.1 million, residential whole loans of $252.2 million, and CRT securities of $95.7 million partially offset by unfavorable changes in residential securitized debt of consolidated VIEs of ($1.5) billion, MSR of ($134.9) million and participations issued of ($123.5) million. Net Gains (Losses) on Derivatives Net gains (losses) on interest rate swaps for the year ended December 31, 2023 was $0.7 billion compared to $3.6 billion for the same period in 2022, attributable to unfavorable changes in unrealized gains (losses) on interest rate swaps, partially offset by the changes in net interest component of interest rate swaps and realized gains (losses) on termination or maturity of interest rate swaps. Unrealized gains (losses) on interest rate swaps was ($815.6) million for the year ended December 31, 2023, reflecting quarters of rate rallies and sell-offs in forward interest rates during the current period, compared to $3.5 billion for the same period in 2022, reflecting a sharper rise in forward interest rates during the prior period. Realized gains (losses) on termination or maturity of interest rate swaps was ($74.8) million resulting from the termination or maturity of interest rate swaps with a notional amount of $12.7 billion for the year ended December 31, 2023 compared to ($266.4) million resulting from the termination or maturity of interest rate swaps with a notional amount of $21.3 billion for the same period in 2022. Net interest component of interest rate swaps was $1.6 billion for the year ended December 31, 2023 compared to $366.2 million for the same period in 2022 due to an increase in average notional complemented by a full year of net receive rates. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis 60
RkJQdWJsaXNoZXIy NDQ4NTc1