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 Interest Income/ Average Equity (1) Net Servicing Income/Average Equity Other Income (Loss)/Average Equity (2) G&A Expenses/ Average Equity Income Taxes/ Average Equity Return on Average Equity For the years ended December 31, 2023 12.88 % 2.85% (28.30)% (1.42%) (0.34%) (14.33%) December 31, 2022 15.80 % 1.91% (1.06) % (1.40%) (0.39%) 14.86% December 31, 2021 10.62 % 0.41% 7.81% (1.35%) (0.04%) 17.45% (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 The unrealized fluctuations in market values of our available-for-sale Agency MBS, for which the fair value option is not elected, do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss). As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting. As a result, comparisons with companies that use amortized cost accounting for some or all of their balance sheet may not be meaningful. The following table shows cumulative unrealized gains and losses on our available-for-sale investments reflected in the Consolidated Statements of Financial Condition. December 31, 2023 December 31, 2022 (dollars in thousands) Unrealized gain $ 5,051 $ 5,910 Unrealized loss (1,340,451) (3,714,806) Accumulated other comprehensive income (loss) $ (1,335,400) $ (3,708,896) 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-sale Residential 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 at December 31, 2023 is solely due to market conditions and not the quality of the assets. Substantially all of the Agency MBS have an actual or implied credit rating that is the same as that of the U.S. government. 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. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis 62
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