NLY filing — read by section

Item 1. Financial Statements

Item 1. Financial Statements 

 The following tables present the Company’s securities portfolio, excluding securities transferred or pledged to securitization vehicles, that was carried at their fair value at June 30, 2020 and December 31, 2019 : 
 
 June 30, 2020 
 
 Principal /
Notional 
 
 Remaining Premium 
 
 Remaining Discount 
 
 Amortized
Cost 
 
 Unrealized
Gains 
 
 Unrealized
Losses 
 
 Estimated Fair Value 
 
 Agency 
 (dollars in thousands) 
 
 Fixed-rate pass-through 
 $ 
 67,681,807 
 
 $ 
 3,078,694 
 
 $ 
 ( 25,303 
 ) 
 
 $ 
 70,735,198 
 
 $ 
 3,479,647 
 
 $ 
 ( 214 
 ) 
 
 $ 
 74,214,631 
 
 Adjustable-rate pass-through 
 560,942 
 
 5,136 
 
 ( 3,063 
 ) 
 
 563,015 
 
 26,130 
 
 ( 5 
 ) 
 
 589,140 
 
 CMO 
 149,798 
 
 2,334 
 
 — 
 
 152,132 
 
 10,542 
 
 — 
 
 162,674 
 
 Interest-only 
 3,363,096 
 
 640,320 
 
 — 
 
 640,320 
 
 12,892 
 
 ( 130,278 
 ) 
 
 522,934 
 
 Multifamily 
 1,144,549 
 
 14,609 
 
 ( 1,108 
 ) 
 
 1,158,050 
 
 55,226 
 
 ( 70 
 ) 
 
 1,213,206 
 
 Reverse mortgages 
 53,931 
 
 4,622 
 
 — 
 
 58,553 
 
 701 
 
 ( 39 
 ) 
 
 59,215 
 
 Total agency securities 
 $ 
 72,954,123 
 
 $ 
 3,745,715 
 
 $ 
 ( 29,474 
 ) 
 
 $ 
 73,307,268 
 
 $ 
 3,585,138 
 
 $ 
 ( 130,606 
 ) 
 
 $ 
 76,761,800 
 
 Residential credit 
 
 CRT (1) 
 $ 
 423,284 
 
 $ 
 10,439 
 
 $ 
 ( 1,144 
 ) 
 
 $ 
 419,428 
 
 $ 
 112 
 
 $ 
 ( 56,639 
 ) 
 
 $ 
 362,901 
 
 Alt-A 
 106,758 
 
 52 
 
 ( 20,570 
 ) 
 
 86,240 
 
 5,093 
 
 ( 681 
 ) 
 
 90,652 
 
 Prime 
 179,368 
 
 4,320 
 
 ( 14,649 
 ) 
 
 169,039 
 
 9,544 
 
 ( 1,538 
 ) 
 
 177,045 
 
 Prime interest-only 
 280,259 
 
 2,906 
 
 — 
 
 2,906 
 
 — 
 
 ( 974 
 ) 
 
 1,932 
 
 Subprime 
 135,160 
 
 — 
 
 ( 20,853 
 ) 
 
 114,307 
 
 6,396 
 
 ( 16 
 ) 
 
 120,687 
 
 NPL/RPL 
 191,529 
 
 791 
 
 ( 1,423 
 ) 
 
 190,897 
 
 1,644 
 
 ( 2,026 
 ) 
 
 190,515 
 
 Prime jumbo (>=2010 vintage) 
 39,977 
 
 — 
 
 ( 4,656 
 ) 
 
 35,321 
 
 666 
 
 ( 400 
 ) 
 
 35,587 
 
 Prime jumbo (>=2010 vintage) Interest-only 
 448,980 
 
 8,185 
 
 — 
 
 8,185 
 
 — 
 
 ( 4,763 
 ) 
 
 3,422 
 
 Total residential credit securities 
 $ 
 1,805,315 
 
 $ 
 26,693 
 
 $ 
 ( 63,295 
 ) 
 
 $ 
 1,026,323 
 
 $ 
 23,455 
 
 $ 
 ( 67,037 
 ) 
 
 $ 
 982,741 
 
 Total Residential Securities 
 $ 
 74,759,438 
 
 $ 
 3,772,408 
 
 $ 
 ( 92,769 
 ) 
 
 $ 
 74,333,591 
 
 $ 
 3,608,593 
 
 $ 
 ( 197,643 
 ) 
 
 $ 
 77,744,541 
 
 Commercial 
 
 Commercial Securities 
 $ 
 74,458 
 
 $ 
 66 
 
 $ 
 ( 7,692 
 ) 
 
 $ 
 66,832 
 
 $ 
 — 
 
 $ 
 ( 5,630 
 ) 
 
 $ 
 61,202 
 
 Total securities 
 $ 
 74,833,896 
 
 $ 
 3,772,474 
 
 $ 
 ( 100,461 
 ) 
 
 $ 
 74,400,423 
 
 $ 
 3,608,593 
 
 $ 
 ( 203,273 
 ) 
 
 $ 
 77,805,743 
 
 December 31, 2019 
 
 Principal /
Notional 
 
 Remaining Premium 
 
 Remaining Discount 
 
 Amortized
Cost 
 
 Unrealized
Gains 
 
 Unrealized
Losses 
 
 Estimated Fair Value 
 
 Agency 
 (dollars in thousands) 
 
 Fixed-rate pass-through 
 $ 
 102,448,565 
 
 $ 
 4,345,053 
 
 $ 
 ( 46,614 
 ) 
 
 $ 
 106,747,004 
 
 $ 
 2,071,583 
 
 $ 
 ( 95,173 
 ) 
 
 $ 
 108,723,414 
 
 Adjustable-rate pass-through 
 1,474,818 
 
 72,245 
 
 ( 1,400 
 ) 
 
 1,545,663 
 
 10,184 
 
 ( 31,516 
 ) 
 
 1,524,331 
 
 CMO 
 156,937 
 
 2,534 
 
 — 
 
 159,471 
 
 545 
 
 — 
 
 160,016 
 
 Interest-only 
 4,486,845 
 
 862,905 
 
 — 
 
 862,905 
 
 2,787 
 
 ( 157,130 
 ) 
 
 708,562 
 
 Multifamily 
 1,619,900 
 
 19,981 
 
 ( 2,280 
 ) 
 
 1,637,601 
 
 82,292 
 
 ( 2,696 
 ) 
 
 1,717,197 
 
 Reverse mortgages 
 54,553 
 
 5,053 
 
 — 
 
 59,606 
 
 550 
 
 ( 309 
 ) 
 
 59,847 
 
 Total agency investments 
 $ 
 110,241,618 
 
 $ 
 5,307,771 
 
 $ 
 ( 50,294 
 ) 
 
 $ 
 111,012,250 
 
 $ 
 2,167,941 
 
 $ 
 ( 286,824 
 ) 
 
 $ 
 112,893,367 
 
 Residential credit 
 
 CRT (1) 
 $ 
 517,110 
 
 $ 
 15,850 
 
 $ 
 ( 2,085 
 ) 
 
 $ 
 515,950 
 
 $ 
 16,605 
 
 $ 
 ( 1,233 
 ) 
 
 $ 
 531,322 
 
 Alt-A 
 160,957 
 
 250 
 
 ( 22,306 
 ) 
 
 138,901 
 
 12,482 
 
 — 
 
 151,383 
 
 Prime 
 277,076 
 
 3,362 
 
 ( 17,794 
 ) 
 
 262,644 
 
 14,142 
 
 ( 529 
 ) 
 
 276,257 
 
 Prime interest-only 
 391,234 
 
 3,757 
 
 — 
 
 3,757 
 
 — 
 
 ( 590 
 ) 
 
 3,167 
 
 Subprime 
 370,263 
 
 1,356 
 
 ( 59,727 
 ) 
 
 311,892 
 
 37,205 
 
 ( 118 
 ) 
 
 348,979 
 
 NPL/RPL 
 164,180 
 
 351 
 
 ( 440 
 ) 
 
 164,091 
 
 191 
 
 ( 14 
 ) 
 
 164,268 
 
 Prime jumbo (>=2010 vintage) 
 182,709 
 
 1,026 
 
 ( 4,281 
 ) 
 
 179,454 
 
 5,360 
 
 ( 150 
 ) 
 
 184,664 
 
 Prime jumbo (>=2010 vintage) Interest-only 
 554,189 
 
 9,001 
 
 — 
 
 9,001 
 
 — 
 
 ( 1,851 
 ) 
 
 7,150 
 
 Total residential credit securities 
 $ 
 2,617,718 
 
 $ 
 34,953 
 
 $ 
 ( 106,633 
 ) 
 
 $ 
 1,585,690 
 
 $ 
 85,985 
 
 $ 
 ( 4,485 
 ) 
 
 $ 
 1,667,190 
 
 Total Residential Securities 
 $ 
 112,859,336 
 
 $ 
 5,342,724 
 
 $ 
 ( 156,927 
 ) 
 
 $ 
 112,597,940 
 
 $ 
 2,253,926 
 
 $ 
 ( 291,309 
 ) 
 
 $ 
 114,560,557 
 
 Commercial 
 
 Commercial Securities 
 $ 
 263,965 
 
 $ 
 10,873 
 
 $ 
 ( 9,393 
 ) 
 
 $ 
 265,445 
 
 $ 
 7,710 
 
 $ 
 ( 132 
 ) 
 
 $ 
 273,023 
 
 Total securities 
 $ 
 113,123,301 
 
 $ 
 5,353,597 
 
 $ 
 ( 166,320 
 ) 
 
 $ 
 112,863,385 
 
 $ 
 2,261,636 
 
 $ 
 ( 291,441 
 ) 
 
 $ 
 114,833,580 
 
 (1) 
 Principal/Notional amount includes $ 13.2 million and $ 14.9 million of a CRT interest-only security as of June 30, 2020 and December 31, 2019 , respectively. 
 
 11 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferred or pledged to securitization vehicles, by issuing Agency at June 30, 2020 and December 31, 2019 : 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Investment Type 
 (dollars in thousands) 
 
 Fannie Mae 
 $ 
 54,418,283 
 
 $ 
 76,656,831 
 
 Freddie Mac 
 22,206,471 
 
 36,087,100 
 
 Ginnie Mae 
 137,046 
 
 149,436 
 
 Total 
 $ 
 76,761,800 
 
 $ 
 112,893,367 
 
 Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages. 
 The following table summarizes the Company’s Residential Securities, excluding securities transferred or pledged to securitization vehicles, at June 30, 2020 and December 31, 2019 , according to their estimated weighted average life classifications: 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Estimated Fair Value 
 
 Amortized
Cost 
 
 Estimated Fair Value 
 
 Amortized
Cost 
 
 Estimated weighted average life 
 (dollars in thousands) 
 
 Less than one year 
 $ 
 1,209,988 
 
 $ 
 1,206,144 
 
 $ 
 3,997 
 
 $ 
 4,543 
 
 Greater than one year through five years 
 56,873,831 
 
 54,319,935 
 
 36,290,254 
 
 35,581,833 
 
 Greater than five years through ten years 
 18,855,032 
 
 18,027,945 
 
 77,732,756 
 
 76,504,845 
 
 Greater than ten years 
 805,690 
 
 779,567 
 
 533,550 
 
 506,719 
 
 Total 
 $ 
 77,744,541 
 
 $ 
 74,333,591 
 
 $ 
 114,560,557 
 
 $ 
 112,597,940 
 
 The estimated weighted average lives of the Residential Securities at June 30, 2020 and December 31, 2019 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected. 
 The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at June 30, 2020 and December 31, 2019 . 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Estimated Fair Value (1) 
 
 Gross Unrealized Losses (1) 
 
 Number of Securities (1) 
 
 Estimated Fair Value (1) 
 
 Gross Unrealized Losses (1) 
 
 Number of Securities (1) 
 
 (dollars in thousands) 
 
 Less than 12 months 
 $ 
 312,936 
 
 $ 
 ( 284 
 ) 
 
 7 
 
 $ 
 7,388,239 
 
 $ 
 ( 24,056 
 ) 
 
 139 
 
 12 Months or more 
 1,563 
 
 ( 5 
 ) 
 
 2 
 
 11,619,280 
 
 ( 105,329 
 ) 
 
 352 
 
 Total 
 $ 
 314,499 
 
 $ 
 ( 289 
 ) 
 
 9 
 
 $ 
 19,007,519 
 
 $ 
 ( 129,385 
 ) 
 
 491 
 
 (1) Excludes interest-only mortgage-backed securities and reverse mortgages. 
 
 The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating. The investments are not considered to be impaired because the Company currently has 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 the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. 
 
 12 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 During the three and six months ended June 30, 2020 , the Company disposed of $ 5.5 billion and $ 47.4 billion of Residential Securities, respectively. During the three and six months ended June 30, 2019 , the Company disposed of $ 9.1 billion and $ 19.5 billion of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three and six months ended June 30, 2020 and 2019. 
 
 Gross Realized Gains 
 
 Gross Realized Losses 
 
 Net Realized Gains (Losses) 
 
 For the three months ended 
 (dollars in thousands) 
 
 June 30, 2020 
 $ 
 272,382 
 
 $ 
 ( 12,496 
 ) 
 
 $ 
 259,886 
 
 June 30, 2019 
 $ 
 21,017 
 
 $ 
 ( 55,316 
 ) 
 
 $ 
 ( 34,299 
 ) 
 
 For the six months ended 
 
 June 30, 2020 
 $ 
 811,637 
 
 $ 
 ( 284,494 
 ) 
 
 $ 
 527,143 
 
 June 30, 2019 
 $ 
 23,543 
 
 $ 
 ( 150,356 
 ) 
 
 $ 
 ( 126,813 
 ) 
 
 6. LOANS 
 
 The Company invests in residential, commercial and corporate loans. Loans are classified as either held for investment or held for sale. Loans are also eligible to be accounted for under the fair value option. Excluding loans transferred or pledged to securitization vehicles, as of June 30, 2020 and December 31, 2019 , the Company reported $ 1.2 billion and $ 1.6 billion , respectively, of loans for which the fair value option was elected. If loans are held for investment and the fair value option has not been elected, they are accounted for at amortized cost less impairment. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. 
 Allowance for Losses – The Company evaluates the need for a loss reserve on each of its loans classified as held-for-investment where the fair value option is not elected. Allowance for loan losses are written off in the period the loans are deemed uncollectible. 
 Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each individual loan held-for-investment. A provision is established at origination or acquisition that reflects management’s estimate of the total expected credit loss over the expected life of the loan. In estimating the lifetime expected credit losses, management utilizes a probability of default and loss given default methodology (“Loss given default methodology”), which considers projected economic conditions over the reasonable and supportable forecast period. The forecast incorporates primarily market-based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced from third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable period, the Company reverts to historical losses on a straight-line basis. Management uses third-party vendors’ loan pool data for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s loan portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss provision in the Consolidated Statements of Comprehensive Income (Loss). 
 For loans experiencing credit deterioration, the Company may use a different methodology to determine the expected credit losses such as a discounted cash flow analysis. For collateral-dependent loans, if foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for any selling costs, if applicable. Additionally, the Company may elect the practical expedient for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty by measuring the allowance as the difference between the fair value of the collateral, less costs to sell, if applicable, and the amortized cost basis of the financial asset at the reporting date. The Company’s commercial loans are collateralized by commercial real estate including, but not limited to, multifamily real estate, office and retail space, hotels and industrial space. At origination, the fair value of the collateral generally exceeds the principal loan balance. 
 Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment. Because these determinations 
 
 13 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date. 
 The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management. 
 The Company recorded loan loss provisions of $ 68.8 million and $ 168.1 million for the three and six months ended June 30, 2020 , respectively. The Company recorded loan loss provisions of $ 0.0 and $ 5.7 million for the three and six months ended June 30, 2019 , respectively. As of June 30, 2020 and December 31, 2019 , the Company’s loan loss provision was $ 206.7 million and $ 20.1 million , respectively. 
 The following table presents the activity of the Company’s loan investments, including loans held for sale and excluding loans transferred or pledged to securitization vehicles, for the six months ended June 30, 2020 : 
 
 Residential 
 
 Commercial 
 
 Corporate Debt 
 
 Total 
 
 (dollars in thousands) 
 
 Beginning balance January 1, 2020 
 $ 
 1,647,787 
 
 $ 
 669,713 
 
 $ 
 2,144,850 
 
 $ 
 4,462,350 
 
 Impact of adopting CECL 
 
 — 
 
 ( 3,600 
 ) 
 
 ( 29,653 
 ) 
 
 ( 33,253 
 ) 
 
 Purchases / originations 
 841,507 
 
 187,195 
 
 663,396 
 
 1,692,098 
 
 Sales and transfers (1) 
 ( 1,184,947 
 ) 
 
 ( 97,623 
 ) 
 
 ( 299,628 
 ) 
 
 ( 1,582,198 
 ) 
 
 Principal payments 
 ( 98,636 
 ) 
 
 ( 59,675 
 ) 
 
 ( 273,556 
 ) 
 
 ( 431,867 
 ) 
 
 Gains / (losses) (2) 
 ( 33,035 
 ) 
 
 ( 78,648 
 ) 
 
 ( 26,917 
 ) 
 
 ( 138,600 
 ) 
 
 (Amortization) / accretion 
 ( 4,155 
 ) 
 
 1,524 
 
 6,772 
 
 4,141 
 
 Ending balance June 30, 2020 
 $ 
 1,168,521 
 
 $ 
 618,886 
 
 $ 
 2,185,264 
 
 $ 
 3,972,671 
 
 (1) Includes securitizations, syndications and transfers to securitization vehicles. 
 
 (2) Includes loan loss allowances. 
 
 The carrying value of the Company’s residential loans held for sale was $ 61.1 million and $ 66.7 million at June 30, 2020 and December 31, 2019 , respectively. There were no commercial loans held for sale at June 30, 2020 and December 31, 2019 . 
 
 The Company also has off-balance-sheet credit exposures related to unfunded loan commitments, including revolvers, delayed draw term loans and future funding commitments that are not unconditionally cancelable by the Company. The Company utilizes the same methodology in calculating the liability related to the expected credit losses on these exposures as it does for the calculation of the allowance for loan losses. In determining the estimate of credit losses for off-balance-sheet credit exposures, the Company will consider the contractual period in which the entity is exposed to credit risk and the likelihood that funding will occur, if material. Estimated credit losses for off-balance-sheet credit exposures are included in Other liabilities on the Company’s Consolidated Statements of Financial Condition. 
 
 Residential 
 The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Statements of Comprehensive Income. Additionally, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo residential mortgage loans. The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts. 
 The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles, at June 30, 2020 and December 31, 2019 : 
 
 14 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 June 30, 2020 
 December 31, 2019 
 
 (dollars in thousands) 
 
 Fair value 
 $ 
 4,001,023 
 
 $ 
 4,246,161 
 
 Unpaid principal balance 
 $ 
 3,989,923 
 
 $ 
 4,133,149 
 
 The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019 for these investments: 
 
 For the Three Months Ended 
 
 For the Six Months Ended 
 
 June 30, 2020 
 
 June 30, 2019 
 
 June 30, 2020 
 
 June 30, 2019 
 
 (dollars in thousands) 
 
 Interest income 
 $ 
 42,872 
 
 $ 
 35,025 
 
 $ 
 90,429 
 
 $ 
 65,016 
 
 Net gains (losses) on disposal of investments and other 
 ( 5,376 
 ) 
 
 ( 4,605 
 ) 
 
 ( 17,376 
 ) 
 
 ( 9,828 
 ) 
 
 Net unrealized gains (losses) on instruments measured at fair value through earnings 
 110,545 
 
 25,891 
 
 ( 82,218 
 ) 
 
 43,712 
 
 Total included in net income (loss) 
 $ 
 148,041 
 
 $ 
 56,311 
 
 $ 
 ( 9,165 
 ) 
 
 $ 
 98,900 
 
 The following table provides the geographic concentrations based on the unpaid principal balances at June 30, 2020 and December 31, 2019 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles: 
 
 Geographic Concentrations of Residential Mortgage Loans 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Property location 
 % of Balance 
 
 Property location 
 % of Balance 
 
 California 
 51.1 % 
 
 California 
 52.1 % 
 
 New York 
 11.4 % 
 
 New York 
 10.5 % 
 
 Florida 
 5.7 % 
 
 Florida 
 5.3 % 
 
 All other (none individually greater than 5%) 
 31.8 % 
 
 All other (none individually greater than 5%) 
 32.1 % 
 
 Total 
 100.0 % 
 
 100.0 % 
 
 The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at June 30, 2020 and December 31, 2019 : 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Portfolio 
 Range 
 Portfolio Weighted
Average 
 
 Portfolio 
 Range 
 Portfolio Weighted Average 
 
 (dollars in thousands) 
 
 Unpaid principal balance 
 $1 - $3,448 
 
 $ 433 
 
 $1 - $3,448 
 
 $ 459 
 
 Interest rate 
 0.88% - 9.24% 
 
 4.90 % 
 
 2.00% - 8.38% 
 
 4.94 % 
 
 Maturity 
 7/1/2029 - 4/1/2060 
 
 4/15/2048 
 
 1/1/2028 - 12/1/2059 
 
 12/29/2047 
 
 FICO score at loan origination 
 505 - 829 
 
 757 
 
 505 - 829 
 
 758 
 
 Loan-to-value ratio at loan origination 
 8% - 105% 
 
 67 % 
 
 8% - 105% 
 
 67 % 
 
 At June 30, 2020 and December 31, 2019 , approximately 34 % and 36 % , respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate. 
 Commercial 
 The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. The difference between the principal amount of a loan and proceeds at acquisition is recorded as either a discount or premium. Commercial real estate loans and preferred equity interests that are designated as held for investment and are originated or purchased by the Company are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less an allowance for losses, if necessary. Origination fees and costs, premiums or discounts are amortized into interest income over the life of the loan. 
 Management generally reviews the most recent financial information produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the Company’s commercial real estate loans 
 
 15 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan, economic trends (both macro and those affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject property is located. Management monitors the financial condition and operating results of its borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations. 
 The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating rubric for commercial loans has nine categories as depicted below: 
 
 Risk Rating - Commercial Loans 
 Description 
 
 1-4 / Performing 
 Meets all present contractual obligations. 
 
 5 / Performing - Closely Monitored 
 Meets all present contractual obligations, but are transitional or could be exhibiting some weaknesses in both leverage and liquidity. 
 
 6 / Performing - Special Mention 
 Meets all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and, if uncorrected, may result in deterioration of repayment prospects. 
 
 7 / Substandard 
 Inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. 
 
 8 / Doubtful 
 Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. 
 
 9 / Loss 
 Considered uncollectible. 
 
 Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s commercial loans by year of origination and internal risk rating. 
 For the three months ended June 30, 2020 , the Company recorded a loan loss provision on impaired collateral dependent commercial loans of $ 22.0 million with a principal balance and carrying value, net of allowances of $ 96.9 million and $ 57.8 million , respectively, based upon the fair value of the underlying collateral. There was no provision for loan loss recorded for the three months ended June 30, 2019 . For the six months ended June 30, 2020 , the Company recorded a loan loss provision on impaired collateral dependent commercial loans of $ 74.1 million with a principal balance and carrying value, net of allowances of $ 175.1 million and $ 95.2 million , respectively, based upon the fair value of the underlying collateral. The Company uses a discounted cash flow or market based valuation technique based upon the underlying property to project property cash flows. In projecting these cash flows, the Company reviewed the borrower financial statements, rent rolls, economic trends and other factors management deems important. These nonrecurring fair value measurements are considered to be in level three of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value. 
 For the six months ended June 30, 2019 , the Company recorded a loan loss provision of $ 5.7 million on commercial loans with a principal balance and carrying value, net of allowances of $ 36.6 million and $ 30.9 million , respectively. 
 As a result of the implementation of the Loss given default methodology under the modified retrospective method, a cumulative effect loan loss allowance of $ 7.8 million was recorded on January 1, 2020. For the three and six months ended June 30, 2020, the Company recorded a loan loss allowance of $ 39.1 million and $ 62.3 million , respectively, based upon its Loss given default methodology. 
 At June 30, 2020 and December 31, 2019 , the amortized cost basis of commercial loans on nonaccrual status was $ 101.0 million and $ 175.2 million , respectively. 
 At June 30, 2020 and December 31, 2019 , the Company had unfunded commercial real estate loan commitments of $ 129.6 million and $ 181.4 million , respectively. At June 30, 2020 , the liability related to the expected credit losses on the unfunded commercial loan commitments was $ 5.9 million . 
 At June 30, 2020 and December 31, 2019 , approximately 94 % and 92 % , respectively, of the carrying value, net of allowances of the Company’s CRE Debt and Preferred Equity Investments, including loans transferred or pledged to securitization vehicles and excluding commercial loans held for sale, were adjustable-rate. 
 
 16 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The sector attributes of the Company’s commercial real estate investments held for investment at June 30, 2020 and December 31, 2019 were as follows: 
 
 Sector Dispersion 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Carrying Value 
 
 % of Loan Portfolio 
 
 Carrying Value 
 
 % of Loan Portfolio 
 
 (dollars in thousands) 
 
 Office 
 $ 
 660,994 
 
 44.2 
 % 
 
 $ 
 681,129 
 
 42.4 
 % 
 
 Retail 
 326,695 
 
 21.9 
 % 
 
 389,076 
 
 24.2 
 % 
 
 Multifamily 
 279,943 
 
 18.7 
 % 
 
 262,302 
 
 16.3 
 % 
 
 Hotel 
 116,053 
 
 7.8 
 % 
 
 135,681 
 
 8.4 
 % 
 
 Industrial 
 59,137 
 
 4.0 
 % 
 
 82,441 
 
 5.1 
 % 
 
 Other 
 31,637 
 
 2.1 
 % 
 
 36,589 
 
 2.3 
 % 
 
 Healthcare 
 19,045 
 
 1.3 
 % 
 
 18,873 
 
 1.3 
 % 
 
 Total 
 $ 
 1,493,504 
 
 100.0 
 % 
 
 $ 
 1,606,091 
 
 100.0 
 % 
 
 At June 30, 2020 and December 31, 2019 , commercial real estate investments held for investment were comprised of the following: 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Outstanding Principal 
 
 Carrying
Value (1) 
 
 Percentage
of Loan
Portfolio (2) 
 
 Outstanding Principal 
 
 Carrying
Value (1) 
 
 Percentage
of Loan
Portfolio (2) 
 
 (dollars in thousands) 
 
 Senior mortgages 
 $ 
 512,278 
 
 $ 
 496,765 
 
 31.0 
 % 
 
 $ 
 503,499 
 
 $ 
 499,690 
 
 30.9 
 % 
 
 Senior securitized mortgages (3) 
 939,951 
 
 874,618 
 
 57.0 
 % 
 
 940,546 
 
 936,378 
 
 57.8 
 % 
 
 Mezzanine loans 
 198,075 
 
 122,121 
 
 12.0 
 % 
 
 183,064 
 
 170,023 
 
 11.3 
 % 
 
 Total 
 $ 
 1,650,304 
 
 $ 
 1,493,504 
 
 100.0 
 % 
 
 $ 
 1,627,109 
 
 $ 
 1,606,091 
 
 100.0 
 % 
 
 (1) 
 Carrying value includes unamortized origination fees of $ 6.9 million and $ 8.3 million at June 30, 2020 and December 31, 2019 , respectively. 
 
 (2) 
 Based on outstanding principal. 
 
 (3) 
 Represents assets of consolidated VIEs. 
 
 The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for investment at June 30, 2020 and December 31, 2019 : 
 
 17 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 June 30, 2020 
 
 Senior
Mortgages 
 
 Senior
Securitized Mortgages (1) 
 
 Mezzanine
Loans 
 
 Total 
 
 (dollars in thousands) 
 
 Beginning balance (January 1, 2020) (2) 
 $ 
 499,690 
 
 $ 
 936,378 
 
 $ 
 182,726 
 
 $ 
 1,618,794 
 
 Originations & advances (principal) 
 176,077 
 
 — 
 
 12,010 
 
 188,087 
 
 Principal payments 
 ( 59,675 
 ) 
 
 ( 55,719 
 ) 
 
 — 
 
 ( 115,394 
 ) 
 
 Principal write off 
 — 
 
 — 
 
 ( 7,000 
 ) 
 
 ( 7,000 
 ) 
 
 Transfers 
 ( 107,623 
 ) 
 
 54,472 
 
 10,000 
 
 ( 43,151 
 ) 
 
 Net (increase) decrease in origination fees 
 ( 812 
 ) 
 
 — 
 
 ( 80 
 ) 
 
 ( 892 
 ) 
 
 Realized gain 
 204 
 
 — 
 
 — 
 
 204 
 
 Amortization of net origination fees 
 1,430 
 
 1,211 
 
 94 
 
 2,735 
 
 Allowance for loan losses 
 
 Beginning allowance, prior to CECL adoption 
 — 
 
 — 
 
 ( 12,703 
 ) 
 
 ( 12,703 
 ) 
 
 Impact of adopting CECL 
 ( 2,264 
 ) 
 
 ( 4,166 
 ) 
 
 ( 1,336 
 ) 
 
 ( 7,766 
 ) 
 
 Current period allowance 
 ( 10,262 
 ) 
 
 ( 57,558 
 ) 
 
 ( 68,590 
 ) 
 
 ( 136,410 
 ) 
 
 Write offs 
 — 
 
 — 
 
 7,000 
 
 7,000 
 
 Ending allowance 
 ( 12,526 
 ) 
 
 ( 61,724 
 ) 
 
 ( 75,629 
 ) 
 
 ( 149,879 
 ) 
 
 Net carrying value (June 30, 2020) 
 $ 
 496,765 
 
 $ 
 874,618 
 
 $ 
 122,121 
 
 $ 
 1,493,504 
 
 December 31, 2019 
 
 Senior
Mortgages 
 
 Senior
Securitized Mortgages (1) 
 
 Mezzanine
Loans 
 
 Total 
 
 (dollars in thousands) 
 
 Net carrying value (January 1, 2019) 
 $ 
 981,202 
 
 $ 
 — 
 
 $ 
 315,601 
 
 $ 
 1,296,803 
 
 Originations & advances (principal) 
 572,204 
 
 — 
 
 21,709 
 
 593,913 
 
 Principal payments 
 ( 16,785 
 ) 
 
 ( 150,245 
 ) 
 
 ( 149,633 
 ) 
 
 ( 316,663 
 ) 
 
 Transfers 
 ( 1,034,754 
 ) 
 
 1,083,487 
 
 ( 8,675 
 ) 
 
 40,058 
 
 Net (increase) decrease in origination fees 
 ( 4,200 
 ) 
 
 — 
 
 ( 184 
 ) 
 
 ( 4,384 
 ) 
 
 Amortization of net origination fees 
 2,023 
 
 3,136 
 
 412 
 
 5,571 
 
 Net (increase) decrease in allowance 
 — 
 
 — 
 
 ( 9,207 
 ) 
 
 ( 9,207 
 ) 
 
 Net carrying value (December 31, 2019) 
 $ 
 499,690 
 
 $ 
 936,378 
 
 $ 
 170,023 
 
 $ 
 1,606,091 
 
 (1) Represents assets of consolidated VIEs. 
 
 (2) Excludes loan loss allowances. 
 
 The following table provides the internal loan risk ratings of commercial real estate investments held for investment as of June 30, 2020 . 
 
 Amortized Cost Basis by Risk Rating and Vintage (1) 
 
 Risk Rating 
 Vintage 
 
 Total 
 
 2020 
 
 2019 
 
 2018 
 
 2017 
 
 2016 
 
 Prior 
 
 (dollars in thousands) 
 
 1-4 / Performing 
 $ 
 350,361 
 
 $ 
 91,417 
 
 $ 
 166,518 
 
 $ 
 — 
 
 $ 
 12,675 
 
 $ 
 — 
 
 $ 
 79,751 
 
 5 / Performing - Closely Monitored 
 264,420 
 
 — 
 
 158,806 
 
 — 
 
 39,883 
 
 65,731 
 
 — 
 
 6 / Performing - Special Mention 
 666,561 
 
 67,312 
 
 218,925 
 
 268,236 
 
 60,565 
 
 — 
 
 51,523 
 
 7 / Substandard 
 67,003 
 
 — 
 
 — 
 
 67,003 
 
 — 
 
 — 
 
 — 
 
 8 / Doubtful 
 145,159 
 
 — 
 
 — 
 
 37,374 
 
 107,785 
 
 — 
 
 — 
 
 9 / Loss (2) 
 — 
 
 — 
 
 — 
 
 — 
 
 — 
 
 — 
 
 — 
 
 Total 
 $ 
 1,493,504 
 
 $ 
 158,729 
 
 $ 
 544,249 
 
 $ 
 372,613 
 
 $ 
 220,908 
 
 $ 
 65,731 
 
 $ 
 131,274 
 
 (1) The amortized cost basis excludes accrued interest. As of June 30, 2020, the Company had $ 4.3 million of accrued interest receivable on commercial loans which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition. 
 (2) Includes two commercial mezzanine loans for which the Company recorded a full loan loss allowance of $ 46.6 million . 
 
 18 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Corporate Debt 
 The Company’s investments in corporate loans typically take the form of senior secured loans primarily in first or second lien positions. The Company’s senior secured loans generally have stated maturities of five to seven years . In connection with these senior secured loans, the Company receives a security interest in certain assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the effective interest method. 
 The Company’s internal risk rating rubric for corporate debt has nine categories as depicted below: 
 
 Risk Rating - Corporate Debt 
 Description 
 
 1-5 / Performing 
 Meets all present contractual obligations. 
 
 6 / Performing - Closely Monitored 
 Meets all present contractual obligations but exhibits a defined weakness in either leverage or liquidity, but not both. Loans at this rating will require closer monitoring, but where we expect no loss of interest or principal. 
 
 7 / Substandard 
 A loan that has a defined weakness in either leverage and/or liquidity, and which may require substantial changes to strengthen the asset. Loans at this rating level have a higher probability of loss, although no determination of the amount or timing of a loss is yet possible. 
 
 8 / Doubtful 
 A loan that has missed a scheduled principal or interest payment or is otherwise deemed a non-earning account. The probability of loss is increasingly certain due to significant performance issues. 
 
 9 / Loss 
 Considered uncollectible. 
 
 Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s corporate debt held for investment by year of origination and internal risk rating. 
 For the six months ended June 30, 2020, the Company recorded a loan loss provision of $ 10.0 million on impaired corporate loans using a discounted cash flow methodology with a beginning principal balance and carrying value, net of allowances of $ 29.3 million and $ 4.3 million , respectively. During the six months ended June 30, 2020, a loan was restructured and the Company received $ 2.8 million of second lien debt and $ 4.8 million of equity. As a result of the restructuring, $ 19.6 million of first lien debt was written off and the related allowance of $ 11.9 million was charged off. There was no provision for loan loss recorded on corporate loans for the six months ended June 30, 2019 . 
 As a result of the implementation of the Loss given default methodology under the modified retrospective method, a cumulative effect loan loss allowance on corporate loans of $ 29.7 million was recorded on January 1, 2020. For the three and six months ended June 30, 2020, the Company recorded a loan loss allowance on corporate loans of $ 7.6 million and $ 21.7 million , respectively, based upon its Loss given default methodology. 
 As of June 30, 2020 and December 31, 2019 , the amortized cost basis of corporate loans on nonaccrual status was $ 0 and $ 12.2 million , respectively. 
 At June 30, 2020 and December 31, 2019 , the Company had unfunded corporate loan commitments of $ 74.9 million and $ 81.2 million , respectively. At June 30, 2020 , the liability related to the expected credit losses on the unfunded corporate loan commitments was $ 0.8 million . 
 The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at June 30, 2020 and December 31, 2019 are as follows: 
 
 19 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Industry Dispersion 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Total (1) 
 
 Total (1) 
 
 (dollars in thousands) 
 
 Computer Programming, Data Processing & Other Computer Related Services 
 
 $ 
 406,827 
 
 $ 
 394,193 
 
 Management & Public Relations Services 
 
 277,511 
 
 339,179 
 
 Industrial Inorganic Chemicals 
 147,622 
 
 — 
 
 Miscellaneous Business Services 
 
 122,279 
 
 164,033 
 
 Public Warehousing & Storage 
 
 116,967 
 
 107,029 
 
 Engineering, Architectural, and Surveying 
 
 110,926 
 
 124,201 
 
 Metal Cans & Shipping Containers 
 
 108,333 
 
 118,456 
 
 Offices & Clinics of Doctors of Medicine 
 
 104,000 
 
 106,993 
 
 Surgical, Medical & Dental Instruments & Supplies 
 
 99,657 
 
 102,182 
 
 Electronic Components & Accessories 
 
 77,788 
 
 24,000 
 
 Insurance Agents, Brokers and Service 
 70,978 
 
 75,410 
 
 Telephone Communications 
 
 57,482 
 
 61,210 
 
 Miscellaneous Health & Allied Services, not elsewhere classified
 
 52,177 
 
 78,908 
 
 Miscellaneous Equipment Rental & Leasing 
 
 49,505 
 
 49,776 
 
 Electric Work 
 40,642 
 
 43,175 
 
 Medical & Dental Laboratories 
 35,231 
 
 41,344 
 
 Metal Forgings & Stampings 
 29,739 
 
 — 
 
 Research, Development & Testing Services 
 
 29,541 
 
 45,610 
 
 Home Health Care Services 
 28,896 
 
 29,361 
 
 Motor Vehicles and Motor Vehicle Parts & Supplies 
 28,415 
 
 28,815 
 
 Legal Services 
 27,923 
 
 — 
 
 Petroleum and Petroleum Products 
 
 24,745 
 
 24,923 
 
 Grocery Stores 
 22,948 
 
 23,248 
 
 Coating, Engraving and Allied Services 
 20,298 
 
 47,249 
 
 Schools & Educational Services, not elsewhere classified 
 
 19,331 
 
 19,586 
 
 Drugs 
 15,856 
 
 15,923 
 
 Chemicals & Allied Products 
 14,844 
 
 15,002 
 
 Machinery, Equipment & Supplies 
 12,419 
 
 — 
 
 Mailing, Reproduction, Commercial Art and Photography and Stenographic 
 12,356 
 
 14,755 
 
 Offices and Clinics of Other Health Practitioners 
 10,091 
 
 10,098 
 
 Miscellaneous Plastic Products 
 9,937 
 
 10,000 
 
 Nonferrous Foundries (Castings) 
 — 
 
 30,191 
 
 Total 
 $ 
 2,185,264 
 
 $ 
 2,144,850 
 
 (1) All middle market lending positions are floating rate. 
 
 20 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at June 30, 2020 and December 31, 2019 . 
 
 June 30, 2020 
 
 December 31, 2019 
 
 (dollars in thousands) 
 
 First lien loans 
 $ 
 1,357,123 
 
 $ 
 1,396,140 
 
 Second lien loans 
 828,141 
 
 748,710 
 
 Total 
 $ 
 2,185,264 
 
 $ 
 2,144,850 
 
 The following tables represent a rollforward of the activity for the Company’s corporate debt investments held for investment at June 30, 2020 and December 31, 2019: 
 
 June 30, 2020 
 
 First Lien 
 
 Second Lien 
 
 Total 
 
 (dollars in thousands) 
 
 Beginning balance (January 1, 2020) (1) 
 $ 
 1,403,503 
 
 $ 
 748,710 
 
 $ 
 2,152,213 
 
 Originations & advances 
 484,393 
 
 179,003 
 
 663,396 
 
 Principal payments 
 ( 247,658 
 ) 
 
 ( 25,898 
 ) 
 
 ( 273,556 
 ) 
 
 Amortization & accretion of (premium) discounts 
 4,898 
 
 1,874 
 
 6,772 
 
 Loan restructuring 
 ( 19,550 
 ) 
 
 2,818 
 
 ( 16,732 
 ) 
 
 Sales 
 ( 248,258 
 ) 
 
 ( 47,382 
 ) 
 
 ( 295,640 
 ) 
 
 Syndications 
 5,600 
 
 — 
 
 5,600 
 
 Allowance for loan losses 
 
 — 
 
 Beginning allowance, prior to CECL adoption 
 ( 7,363 
 ) 
 
 — 
 
 ( 7,363 
 ) 
 
 Impact of adopting CECL 
 ( 10,787 
 ) 
 
 ( 18,866 
 ) 
 
 ( 29,653 
 ) 
 
 Current period allowance 
 ( 19,549 
 ) 
 
 ( 12,118 
 ) 
 
 ( 31,667 
 ) 
 
 Write offs 
 11,894 
 
 — 
 
 11,894 
 
 Ending allowance 
 ( 25,805 
 ) 
 
 ( 30,984 
 ) 
 
 ( 56,789 
 ) 
 
 Net carrying value (June 30, 2020) 
 $ 
 1,357,123 
 
 $ 
 828,141 
 
 $ 
 2,185,264 
 
 (1) Excludes loan loss allowances. 
 
 December 31, 2019 
 
 First Lien 
 
 Second Lien 
 
 Total 
 
 (dollars in thousands) 
 
 Net carrying value (January 1, 2019) 
 $ 
 1,346,356 
 
 $ 
 540,826 
 
 $ 
 1,887,182 
 
 Originations & advances 
 542,463 
 
 345,573 
 
 888,036 
 
 Principal payments 
 ( 228,302 
 ) 
 
 ( 140,625 
 ) 
 
 ( 368,927 
 ) 
 
 Amortization & accretion of (premium) discounts 
 5,960 
 
 2,936 
 
 8,896 
 
 Sales 
 ( 262,974 
 ) 
 
 — 
 
 ( 262,974 
 ) 
 
 Net (increase) decrease in allowance 
 ( 7,363 
 ) 
 
 — 
 
 ( 7,363 
 ) 
 
 Net carrying value (December 31, 2019) 
 $ 
 1,396,140 
 
 $ 
 748,710 
 
 $ 
 2,144,850 
 
 21 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The following table provides the amortized cost basis of corporate debt held for investment as of June 30, 2020 by vintage year and internal risk rating. 
 
 Amortized Cost Basis by Risk Rating and Vintage (1) 
 
 Risk Rating 
 Vintage 
 
 Total 
 
 2020 
 
 2019 
 
 2018 
 
 2017 
 
 2016 
 
 2015 
 
 Revolvers 
 
 (dollars in thousands) 
 
 1-5 / Performing 
 $ 
 1,613,987 
 
 $ 
 275,139 
 
 $ 
 413,306 
 
 $ 
 503,077 
 
 $ 
 301,941 
 
 $ 
 72,187 
 
 $ 
 34,048 
 
 $ 
 14,289 
 
 6 / Performing - Closely Monitored 
 382,619 
 
 — 
 
 77,211 
 
 221,072 
 
 38,366 
 
 44,728 
 
 — 
 
 1,242 
 
 7 / Substandard 
 172,548 
 
 — 
 
 23,911 
 
 108,333 
 
 40,304 
 
 — 
 
 — 
 
 — 
 
 8 / Doubtful 
 16,623 
 
 — 
 
 — 
 
 12,356 
 
 4,267 
 
 — 
 
 — 
 
 — 
 
 9 / Loss 
 — 
 
 — 
 
 — 
 
 — 
 
 — 
 
 — 
 
 — 
 
 — 
 
 Total 
 $ 
 2,185,777 
 
 $ 
 275,139 
 
 $ 
 514,428 
 
 $ 
 844,838 
 
 $ 
 384,878 
 
 $ 
 116,915 
 
 $ 
 34,048 
 
 $ 
 15,531 
 
 (1) The amortized cost basis excludes accrued interest and costs related to unfunded loans. As of June 30, 2020, the Company had $ 11.4 million of accrued interest receivable on corporate loans which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition. 
 
 7. MORTGAGE SERVICING RIGHTS 
 
 The Company owns variable interests in an entity that invests in MSRs. Refer to the “Variable Interest Entities” Note for a detailed discussion on this topic. 
 MSRs represent the rights associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSRs. The Company intends to hold the MSRs as investments and elected to account for all of its investments in MSRs at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Servicing income, net of servicing expenses, is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). 
 The following table presents activity related to MSRs for the three and six months ended June 30, 2020 and 2019 : 
 
 Three Months Ended 
 
 Six Months Ended 
 
 June 30, 2020 
 
 June 30, 2019 
 
 June 30, 2020 
 
 June 30, 2019 
 
 (dollars in thousands) 
 
 Fair value, beginning of period 
 $ 
 280,558 
 
 $ 
 500,745 
 
 $ 
 378,078 
 
 $ 
 557,813 
 
 Change in fair value due to: 
 
 Changes in valuation inputs or assumptions (1) 
 ( 27,629 
 ) 
 
 ( 55,749 
 ) 
 
 ( 106,854 
 ) 
 
 ( 98,838 
 ) 
 
 Other changes, including realization of expected cash flows 
 ( 25,529 
 ) 
 
 ( 19,668 
 ) 
 
 ( 43,824 
 ) 
 
 ( 33,647 
 ) 
 
 Fair value, end of period 
 $ 
 227,400 
 
 $ 
 425,328 
 
 $ 
 227,400 
 
 $ 
 425,328 
 
 (1) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates. 
 
 For the three and six months ended June 30, 2020 , the Company recognized $ 16.4 million and $ 39.2 million , respectively, and for the three and six months ended June 30, 2019 , the Company recognized $ 27.5 million and $ 55.2 million , respectively, of net servicing income from MSRs in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). 
 
 22 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 8. VARIABLE INTEREST ENTITIES 
 
 Commercial Trusts 
 The Company has invested in subordinate mortgage-backed securities issued by commercial securitization trusts (“Commercial Trusts”) and determined that it is the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership of the subordinate securities and its current designation as the directing certificate holder. Information regarding these securitization trusts are summarized in the table below. 
 
 Type of Underlying Collateral 
 Settlement Date 
 Cut-off Date Principal Balance 
 Face Value of Company’s Variable Interest at Settlement Date 
 
 (dollars in thousands) 
 
 Multifamily 
 April 2015 
 $ 
 1,192,607 
 
 $ 
 89,446 
 
 Hotels 
 June 2018 
 $ 
 982,000 
 
 $ 
 93,500 
 
 Multifamily 
 August 2019 
 $ 
 271,700 
 
 $ 
 20,270 
 
 Office Building 
 October 2019 
 $ 
 60,000 
 
 $ 
 60,000 
 
 Multifamily 
 October 2019 
 $ 
 415,000 
 
 $ 
 75,359 
 
 Multifamily 
 December 2019 
 $ 
 394,000 
 
 $ 
 110,350 
 
 Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the Commercial Trusts in order to avoid an accounting mismatch, and to represent more faithfully the economics of its interest in the entities. The fair value option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company applied the practical expedient under ASU 2014-07, whereby the Company determines whether the fair value of the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the financial liabilities of the Commercial Trusts are more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily and commercial mortgage-backed securities, while the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial assets of the Commercial Trusts are an aggregate fair value derived from the fair value of the financial liabilities, the Company has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value measurement hierarchy. 
 The Commercial Trusts mortgage loans had an aggregate unpaid principal balance of $ 2.3 billion and $ 2.3 billion at June 30, 2020 and December 31, 2019 , respectively. At June 30, 2020 and December 31, 2019 , there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or securitized debt securities at June 30, 2020 and 2019 based upon the Company’s process of monitoring events of default on the underlying mortgage loans. 
 Commercial Securitizations 
 The Company also invests in commercial mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Commercial Securities. 
 
 23 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Collateralized Loan Obligation 
 In February 2019, the Company closed NLY 2019-FL2, a managed commercial real estate collateralized loan obligation (“CLO”) securitization with a face value of $ 857.3 million , which provides non-recourse financing to the Company collateralized by certain commercial real estate mortgage loans originated by the Company. As of June 30, 2020 a total of $ 610.1 million of notes were held by third parties and the Company retained or purchased $ 196.6 million of subordinated notes and preferred shares, which eliminate upon consolidation. The Company has determined that it is the primary beneficiary because it has the right to direct the servicer as well as remove the special servicer without cause and it holds variable interests that could be potentially significant to the CLO. The transfers of loans to the CLO did not qualify for sale accounting because the Company maintains effective control over the loans. The Company elected the fair value option for the financial liabilities issued by the CLO in order to simplify the accounting; however, the commercial loans continue to be carried at amortized cost as they were not eligible for the fair value option as it was not elected at origination of the loans. The Company incurred $ 8.3 million of costs in connection with the CLO that were expensed as incurred during the year ended December 31, 2019. The aggregate unpaid principal balance of loans in the CLO was $ 857.3 million at June 30, 2020 and there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the debt securities at June 30, 2020 based upon the Company’s process of monitoring events of default on the underlying mortgage loans. The contractual principal amount of the CLO debt held by third parties was $ 633.9 million at June 30, 2020 . 
 Multifamily Securitization 
 In November 2019, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $ 1.0 billion and retained interest only securities with a notional balance of $ 1.0 billion and senior securities with a principal balance of $ 28.5 million . In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $ 0.5 billion and retained interest only securities with a notional balance of $ 0.5 billion . The Company determined that it was the primary beneficiary based upon its involvement in the design of these VIEs. The Company elected the fair value option for the financial liabilities of these VIEs in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. The Company incurred $ 1.1 million of costs in connection with this multifamily securitization that were expensed as incurred during the six months ended June 30, 2020 . 
 Residential Trusts 
 The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owns the subordinate securities, and a subsidiary of the Company continues to be the master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third-party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was $ 43.2 million and $ 57.3 million at June 30, 2020 and December 31, 2019 , respectively. 
 Residential Securitizations 
 The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities. 
 OBX Trusts 
 The entities in the table below are referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company. 
 
 24 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Securitization 
 Date of Closing 
 Face Value at Closing 
 
 (dollars in thousands) 
 
 OBX 2018-1 
 March 2018 
 $ 
 327,162 
 
 OBX 2018-EXP1 
 August 2018 
 $ 
 383,451 
 
 OBX 2018-EXP2 
 October 2018 
 $ 
 384,027 
 
 OBX 2019-INV1 
 January 2019 
 $ 
 393,961 
 
 OBX 2019-EXP1 
 April 2019 
 $ 
 388,156 
 
 OBX 2019-INV2 
 June 2019 
 $ 
 383,760 
 
 OBX 2019-EXP2 
 July 2019 
 $ 
 463,405 
 
 OBX 2019-EXP3 
 October 2019 
 $ 
 465,492 
 
 OBX 2020-INV1 
 January 2020 
 $ 
 374,609 
 
 OBX 2020-EXP1 
 February 2020 
 $ 
 467,511 
 
 As of June 30, 2020 , a total of $ 2.3 billion of bonds were held by third parties and the Company retained $ 526.3 million of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third-party pricing services. The Company incurred $ 0.0 and $ 3.0 million of costs during the three months ended June 30, 2020 and 2019 , respectively, and $ 3.7 million and $ 4.7 million of costs during the six months ended June 30, 2020 and 2019 , respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $ 2.3 billion at June 30, 2020 . 
 Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation. 
 Credit Facility VIEs 
 In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of June 30, 2020 , the borrowing limit on this facility was $ 625.0 million . The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $ 741.3 million at June 30, 2020 . The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At June 30, 2020 , the subsidiary had an intercompany receivable of $ 426.4 million , which eliminates upon consolidation and a secured financing of $ 426.4 million to the third party financial institution. 
 In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of June 30, 2020 , the borrowing limit on this facility was $ 320.0 million . The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $ 454.9 million at June 30, 2020 , which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net. At June 30, 2020 , the subsidiary had a secured financing of $ 257.8 million to the third party financial institution. 
 In January 2019, a consolidated subsidiary of the Company (the “Borrower”) entered into a $ 300.0 million credit facility with a third party financial institution. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $ 336.8 million at June 30, 2020 . As of June 30, 2020 , the Borrower had a secured financing of $ 211.6 million to the third party financial institution. 
 MSR Silo 
 The Company also owns variable interests in an entity that invests in MSRs and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100 % of the voting interests in this entity, in August 2017, the Company sold 100 % of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the 
 
 25 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo. 
 The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $ 2.6 billion at June 30, 2020 . Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method. 
 The statements of financial condition of the Company’s VIEs, excluding the CLO, credit facility VIEs and OBX Trusts as the transfers of loans did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at June 30, 2020 and December 31, 2019 are as follows: 
 
 June 30, 2020 
 
 Commercial Trusts 
 
 Residential Trusts 
 
 MSR Silo 
 
 Assets 
 (dollars in thousands) 
 
 Cash and cash equivalents 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 74,654 
 
 Loans 
 — 
 
 — 
 
 61,147 
 
 Assets transferred or pledged to securitization vehicles 
 2,150,623 
 
 60,948 
 
 — 
 
 Mortgage servicing rights 
 — 
 
 — 
 
 227,400 
 
 Principal and interest receivable 
 5,405 
 
 364 
 
 — 
 
 Other assets 
 — 
 
 — 
 
 23,581 
 
 Total assets 
 $ 
 2,156,028 
 
 $ 
 61,312 
 
 $ 
 386,782 
 
 Liabilities 
 
 Debt issued by securitization vehicles (non-recourse) 
 $ 
 1,830,018 
 
 $ 
 43,408 
 
 $ 
 — 
 
 Other secured financing 
 — 
 
 — 
 
 33,896 
 
 Payable for unsettled trades 
 — 
 
 — 
 
 11,720 
 
 Interest payable 
 1,622 
 
 104 
 
 — 
 
 Other liabilities 
 — 
 
 129 
 
 2,378 
 
 Total liabilities 
 $ 
 1,831,640 
 
 $ 
 43,641 
 
 $ 
 47,994 
 
 December 31, 2019 
 
 Commercial Trusts 
 
 Residential Trusts 
 
 MSR Silo 
 
 Assets 
 (dollars in thousands) 
 
 Cash and cash equivalents 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 67,455 
 
 Loans 
 — 
 
 — 
 
 66,722 
 
 Assets transferred or pledged to securitization vehicles 
 2,345,120 
 
 75,924 
 
 — 
 
 Mortgage servicing rights 
 — 
 
 — 
 
 378,078 
 
 Principal and interest receivable 
 7,085 
 
 408 
 
 — 
 
 Other assets 
 — 
 
 — 
 
 27,021 
 
 Total assets 
 $ 
 2,352,205 
 
 $ 
 76,332 
 
 $ 
 539,276 
 
 Liabilities 
 
 Debt issued by securitization vehicles (non-recourse) 
 $ 
 1,967,523 
 
 $ 
 57,905 
 
 $ 
 — 
 
 Other secured financing 
 — 
 
 — 
 
 38,981 
 
 Payable for unsettled trades 
 — 
 
 — 
 
 18,364 
 
 Interest payable 
 3,008 
 
 137 
 
 — 
 
 Other liabilities 
 — 
 
 78 
 
 2,393 
 
 Total liabilities 
 $ 
 1,970,531 
 
 $ 
 58,120 
 
 $ 
 59,738 
 
 26 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the CLO, OBX Trusts and credit facility VIEs, at June 30, 2020 are as follows: 
 
 Securitized Loans at Fair Value Geographic Concentration of Credit Risk 
 
 Commercial Trusts 
 
 Residential Trusts 
 
 Property Location 
 
 Principal Balance 
 
 % of Balance 
 
 Property Location 
 
 Principal Balance 
 
 % of Balance 
 
 (dollars in thousands) 
 
 California 
 
 $ 
 1,270,544 
 
 38.7 
 % 
 
 California 
 
 $ 
 27,442 
 
 45.0 
 % 
 
 Texas 
 
 478,457 
 
 14.6 
 % 
 
 Texas 
 
 8,309 
 
 13.6 
 % 
 
 New York 
 
 370,697 
 
 11.3 
 % 
 
 Illinois 
 
 6,534 
 
 10.7 
 % 
 
 Florida 
 
 196,495 
 
 6.0 
 % 
 
 Other (1) 
 
 18,695 
 
 30.7 
 % 
 
 Other (1) 
 
 968,561 
 
 29.4 
 % 
 
 Total 
 
 $ 
 3,284,754 
 
 100.0 
 % 
 
 Total 
 
 $ 
 60,980 
 
 100.0 
 % 
 
 (1) 
 No individual state greater than 5% . 
 
 9. REAL ESTATE 
 
 Real estate investments are carried at historical cost less accumulated depreciation. Historical cost includes all costs necessary to bring the asset to the condition and location necessary for its intended use, including financing during the construction period. Costs directly related to acquisitions deemed to be business combinations are expensed. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements that extend the useful life of the asset are capitalized and depreciated over their useful life. 
 Real estate investments are depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows: 
 
 Category 
 Term 
 
 Building and building improvements 
 1 - 44 years 
 
 Furniture and fixtures 
 1 - 4 years 
 
 There was no real estate acquired in settlement of residential mortgage loans at June 30, 2020 or December 31, 2019 other than real estate held by securitization trusts that the Company was required to consolidate. The Company would be considered to have received physical possession of residential real estate property collateralizing a residential mortgage loan, so that the loan is derecognized and the real estate property would be recognized, if either (i) the Company obtains legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveys all interest in the residential real estate property to the Company to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. 
 Real estate investments, including REO, that do not meet the criteria to be classified as held for sale are classified in the Consolidated Statements of Financial Condition as held for investment. Real estate held for sale is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Once a property is determined to be held for sale, depreciation is no longer recorded. 
 The Company’s real estate portfolio (REO and real estate held for investment) is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate future undiscounted cash flows to be generated by the property is less than the carrying value of the property. In conducting this review, the Company considers U.S. macroeconomic factors, including real estate sector conditions, together with asset specific and other factors. To the extent impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property. 
 During the six months ended June 30, 2020 , the Company entered into a deed-in-lieu of foreclosure agreement and took title of a commercial real estate property with a basis of $ 35.3 million . There were no new acquisitions of real estate holdings during the six months ended June 30, 2019 . No properties were sold during the six months ended June 30, 2020 . The Company sold one of its wholly owned triple net leased properties during the six months ended June 30, 2019 for $ 6.7 million and recognized a gain on sale of $ 2.7 million . 
 
 27 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The weighted average amortization period for intangible assets and liabilities at June 30, 2020 is 5.4 years. Above market leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in Other liabilities in the Consolidated Statements of Financial Condition. 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Real estate, net 
 (dollars in thousands) 
 
 Land 
 $ 
 135,220 
 
 $ 
 121,720 
 
 Buildings and improvements 
 593,758 
 
 571,396 
 
 Furniture, fixtures and equipment 
 11,375 
 
 11,238 
 
 Subtotal 
 740,353 
 
 704,354 
 
 Less: accumulated depreciation 
 ( 98,770 
 ) 
 
 ( 87,532 
 ) 
 
 Total real estate held for investment, at amortized cost, net 
 641,583 
 
 616,822 
 
 Equity in unconsolidated joint ventures 
 104,484 
 
 108,816 
 
 Total real estate, net 
 $ 
 746,067 
 
 $ 
 725,638 
 
 Depreciation expense was $ 6.0 million and $ 11.2 million for the three and six months ended June 30, 2020 , respectively. Depreciation expense was $ 6.0 million and $ 11.8 million for the three and six months ended June 30, 2019 , respectively. Depreciation expense is included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). 
 
 Rental Income 
 
 The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse the Company for certain operating costs. Rental income is included in Other income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss). 
 Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at June 30, 2020 for consolidated investments in real estate are as follows: 
 
 June 30, 2020 
 
 (dollars in thousands) 
 
 2020 (remaining) 
 $ 
 27,410 
 
 2021 
 53,386 
 
 2022 
 48,948 
 
 2023 
 45,517 
 
 2024 
 41,734 
 
 Later years 
 188,627 
 
 Total 
 $ 
 405,622 
 
 10. DERIVATIVE INSTRUMENTS 
 
 Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. 
 In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon 
 
 28 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts. 
 Derivatives are accounted for in accordance with FASB ASC 815, Derivatives and Hedging , which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. 
 The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At June 30, 2020 and December 31, 2019 , $ 1.8 billion and $ 517.8 million of variation margin was reported as an adjustment to interest rate swaps, at fair value. 
 Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value. 
 Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values. 
 TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. 
 MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date. 
 Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing. 
 Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis. 
 Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps. 
 The table below summarizes fair value information about our derivative assets and liabilities at June 30, 2020 and December 31, 2019 : 
 
 29 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Derivatives Instruments 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Assets 
 
 (dollars in thousands) 
 
 Interest rate swaps 
 
 $ 
 — 
 
 $ 
 1,199 
 
 Interest rate swaptions 
 
 41,668 
 
 11,580 
 
 TBA derivatives 
 
 123,974 
 
 15,181 
 
 Futures contracts 
 
 — 
 
 77,889 
 
 Purchase commitments 
 
 — 
 
 2,050 
 
 Credit derivatives (1) 
 
 — 
 
 5,657 
 
 $ 
 165,642 
 
 $ 
 113,556 
 
 Liabilities 
 
 Interest rate swaps 
 
 $ 
 1,198,970 
 
 $ 
 706,862 
 
 TBA derivatives 
 
 5,778 
 
 11,316 
 
 Futures contracts 
 
 17,579 
 
 84,781 
 
 Purchase commitments 
 
 — 
 
 907 
 
 Credit derivatives (1) 
 
 34,711 
 
 — 
 
 $ 
 1,257,038 
 
 $ 
 803,866 
 
 (1) 
 The notional amount of the credit derivatives in which the Company purchased protection was $ 0.0 and $ 10.0 million at June 30, 2020 and December 31, 2019 , respectively. The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 495.0 million and $ 345.0 million at June 30, 2020 and December 31, 2019 , respectively, plus any coupon shortfalls on the underlying tranche. The credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and BBB-. 
 
 30 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The following table summarizes certain characteristics of the Company’s interest rate swaps at June 30, 2020 and December 31, 2019 : 
 
 June 30, 2020 
 
 Maturity 
 Current Notional (1)(2) 
 
 Weighted Average Pay Rate 
 
 Weighted Average Receive Rate 
 
 Weighted Average Years to Maturity (3) 
 
 (dollars in thousands) 
 
 0 - 3 years 
 $ 
 15,469,400 
 
 0.20 
 % 
 
 0.42 
 % 
 
 2.37 
 
 3 - 6 years 
 6,215,450 
 
 0.73 
 % 
 
 0.15 
 % 
 
 4.09 
 
 6 - 10 years 
 5,456,500 
 
 1.51 
 % 
 
 1.18 
 % 
 
 8.22 
 
 Greater than 10 years 
 1,709,000 
 
 3.16 
 % 
 
 0.57 
 % 
 
 19.60 
 
 Total / Weighted average 
 $ 
 28,850,350 
 
 1.01 
 % 
 
 0.75 
 % 
 
 4.87 
 
 December 31, 2019 
 
 Maturity 
 Current Notional (1)(2) 
 
 Weighted Average 
Pay Rate 
 
 Weighted Average Receive Rate 
 
 Weighted Average Years to Maturity 
 
 (dollars in thousands) 
 
 0 - 3 years 
 $ 
 38,942,400 
 
 1.60 
 % 
 
 1.84 
 % 
 
 1.29 
 
 3 - 6 years 
 16,097,450 
 
 1.77 
 % 
 
 1.87 
 % 
 
 4.30 
 
 6 - 10 years 
 16,176,500 
 
 2.20 
 % 
 
 2.02 
 % 
 
 9.00 
 
 Greater than 10 years 
 2,930,000 
 
 3.76 
 % 
 
 1.86 
 % 
 
 17.88 
 
 Total / Weighted average 
 $ 
 74,146,350 
 
 1.84 
 % 
 
 1.89 
 % 
 
 4.23 
 
 (1) 
 As of June 30, 2020 , 17 % , 80 % and 3 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2019 , 75 % and 25 % of the Company’s interest rate swaps were linked to LIBOR and the overnight index swap rate, respectively. 
 
 (2) 
 There were no forward starting swaps at June 30, 2020 and December 31, 2019 . 
 
 (3) 
 As of June 30, 2020 , the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed. 
 
 The following table presents swaptions outstanding at June 30, 2020 and December 31, 2019 . 
 
 June 30, 2020 
 
 Current Underlying Notional 
 
 Weighted Average Underlying Fixed Rate 
 
 Weighted Average Underlying Floating Rate 
 
 Weighted Average Underlying Years to Maturity 
 
 Weighted Average Months to Expiration 
 
 (dollars in thousands) 
 
 Long pay 
 
 $ 4,625,000 
 
 1.60 % 
 
 3M LIBOR 
 
 10.45 
 
 6.60 
 
 Long receive 
 
 $ 250,000 
 
 1.66 % 
 
 3M LIBOR 
 
 10.53 
 
 6.27 
 
 December 31, 2019 
 
 Current Underlying Notional 
 
 Weighted Average Underlying Fixed Rate 
 
 Weighted Average Underlying Floating Rate 
 
 Weighted Average Underlying Years to Maturity 
 
 Weighted Average Months to Expiration 
 
 (dollars in thousands) 
 
 Long pay 
 
 $ 4,675,000 
 
 2.53 % 
 
 3M LIBOR 
 
 9.22 
 
 4.66 
 
 Long receive 
 
 $ 2,000,000 
 
 1.49 % 
 
 3M LIBOR 
 
 10.29 
 
 3.40 
 
 31 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The following table summarizes certain characteristics of the Company’s TBA derivatives at June 30, 2020 and December 31, 2019 : 
 
 June 30, 2020 
 
 Purchase and sale contracts for derivative TBAs 
 Notional 
 
 Implied Cost Basis 
 
 Implied Market Value 
 
 Net Carrying Value 
 
 (dollars in thousands) 
 
 Purchase contracts 
 $ 
 18,381,000 
 
 $ 
 19,030,505 
 
 $ 
 19,148,701 
 
 $ 
 118,196 
 
 Net TBA derivatives 
 $ 
 18,381,000 
 
 $ 
 19,030,505 
 
 $ 
 19,148,701 
 
 $ 
 118,196 
 
 December 31, 2019 
 
 Purchase and sale contracts for derivative TBAs 
 Notional 
 
 Implied Cost Basis 
 
 Implied Market Value 
 
 Net Carrying Value 
 
 (dollars in thousands) 
 
 Purchase contracts 
 $ 
 10,043,000 
 
 $ 
 10,182,891 
 
 $ 
 10,192,038 
 
 $ 
 9,147 
 
 Sale contracts 
 ( 3,144,000 
 ) 
 
 ( 3,294,486 
 ) 
 
 ( 3,299,768 
 ) 
 
 ( 5,282 
 ) 
 
 Net TBA derivatives 
 $ 
 6,899,000 
 
 $ 
 6,888,405 
 
 $ 
 6,892,270 
 
 $ 
 3,865 
 
 The following table summarizes certain characteristics of the Company’s futures derivatives at June 30, 2020 and December 31, 2019 : 
 
 June 30, 2020 
 
 Notional - Long
Positions 
 
 Notional - Short
Positions 
 
 Weighted Average
Years to Maturity 
 
 (dollars in thousands) 
 
 U.S. Treasury futures - 10 year and greater 
 $ 
 — 
 
 $ 
 ( 1,847,800 
 ) 
 
 6.87 
 
 Total 
 $ 
 — 
 
 $ 
 ( 1,847,800 
 ) 
 
 6.87 
 
 December 31, 2019 
 
 Notional - Long
Positions 
 
 Notional - Short
Positions 
 
 Weighted Average
Years to Maturity 
 
 (dollars in thousands) 
 
 U.S. Treasury futures - 2 year 
 $ 
 — 
 
 $ 
 ( 180,000 
 ) 
 
 1.96 
 
 U.S. Treasury futures - 5 year 
 — 
 
 ( 2,953,300 
 ) 
 
 4.42 
 
 U.S. Treasury futures - 10 year and greater 
 2,600,000 
 
 ( 5,806,400 
 ) 
 
 9.74 
 
 Total 
 $ 
 2,600,000 
 
 $ 
 ( 8,939,700 
 ) 
 
 8.26 
 
 The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty. 
 
 32 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at June 30, 2020 and December 31, 2019 , respectively. 
 
 June 30, 2020 
 
 Amounts Eligible for Offset 
 
 Gross Amounts 
 
 Financial Instruments 
 
 Cash Collateral 
 
 Net Amounts 
 
 Assets 
 (dollars in thousands) 
 
 Interest rate swaptions, at fair value 
 $ 
 41,668 
 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 41,668 
 
 TBA derivatives, at fair value 
 123,974 
 
 ( 4,848 
 ) 
 
 — 
 
 119,126 
 
 Liabilities 
 
 Interest rate swaps, at fair value 
 $ 
 1,198,970 
 
 $ 
 — 
 
 $ 
 ( 124,301 
 ) 
 
 $ 
 1,074,669 
 
 TBA derivatives, at fair value 
 5,778 
 
 ( 4,848 
 ) 
 
 — 
 
 930 
 
 Futures contracts, at fair value 
 17,579 
 
 — 
 
 ( 17,579 
 ) 
 
 — 
 
 Credit derivatives 
 34,711 
 
 — 
 
 ( 34,711 
 ) 
 
 — 
 
 December 31, 2019 
 
 Amounts Eligible for Offset 
 
 Gross Amounts 
 
 Financial Instruments 
 
 Cash Collateral 
 
 Net Amounts 
 
 Assets 
 (dollars in thousands) 
 
 Interest rate swaps, at fair value 
 $ 
 1,199 
 
 $ 
 ( 951 
 ) 
 
 $ 
 — 
 
 $ 
 248 
 
 Interest rate swaptions, at fair value 
 11,580 
 
 — 
 
 — 
 
 11,580 
 
 TBA derivatives, at fair value 
 15,181 
 
 ( 5,018 
 ) 
 
 — 
 
 10,163 
 
 Futures contracts, at fair value 
 77,889 
 
 ( 10,902 
 ) 
 
 — 
 
 66,987 
 
 Purchase commitments 
 2,050 
 
 — 
 
 — 
 
 2,050 
 
 Credit derivatives 
 5,657 
 
 — 
 
 — 
 
 5,657 
 
 Liabilities 
 
 Interest rate swaps, at fair value 
 $ 
 706,862 
 
 $ 
 ( 951 
 ) 
 
 $ 
 ( 104,205 
 ) 
 
 $ 
 601,706 
 
 TBA derivatives, at fair value 
 11,316 
 
 ( 5,018 
 ) 
 
 — 
 
 6,298 
 
 Futures contracts, at fair value 
 84,781 
 
 ( 10,902 
 ) 
 
 ( 73,879 
 ) 
 
 — 
 
 Purchase commitments 
 907 
 
 — 
 
 — 
 
 907 
 
 The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows: 
 
 Location on Consolidated Statements of Comprehensive Income (Loss) 
 
 Net Interest Component of Interest Rate Swaps 
 
 Realized Gains (Losses) on Termination of Interest Rate Swaps 
 
 Unrealized Gains (Losses) on Interest Rate Swaps 
 
 For the three months ended 
 (dollars in thousands) 
 
 June 30, 2020 
 $ 
 ( 64,561 
 ) 
 
 $ 
 ( 1,521,732 
 ) 
 
 $ 
 1,494,628 
 
 June 30, 2019 
 $ 
 83,653 
 
 $ 
 ( 167,491 
 ) 
 
 $ 
 ( 1,276,019 
 ) 
 
 For the six months ended 
 
 June 30, 2020 
 $ 
 ( 78,541 
 ) 
 
 $ 
 ( 1,919,293 
 ) 
 
 $ 
 ( 1,333,095 
 ) 
 
 June 30, 2019 
 $ 
 217,688 
 
 $ 
 ( 755,747 
 ) 
 
 $ 
 ( 1,666,575 
 ) 
 
 33 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows: 
 
 Three Months Ended June 30, 2020 
 
 Derivative Instruments 
 Realized Gain (Loss) 
 
 Unrealized Gain (Loss) 
 
 Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives 
 
 (dollars in thousands) 
 
 Net TBA derivatives 
 $ 
 250,525 
 
 $ 
 ( 46,363 
 ) 
 
 $ 
 204,162 
 
 Net interest rate swaptions 
 ( 29,880 
 ) 
 
 ( 22,634 
 ) 
 
 ( 52,514 
 ) 
 
 Futures 
 246 
 
 ( 17,579 
 ) 
 
 ( 17,333 
 ) 
 
 Purchase commitments 
 — 
 
 9,666 
 
 9,666 
 
 Credit derivatives 
 1,203 
 
 25,732 
 
 26,935 
 
 Total 
 
 $ 
 170,916 
 
 Three Months Ended June 30, 2019 
 
 Derivative Instruments 
 Realized Gain (Loss) 
 
 Unrealized Gain (Loss) 
 
 Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives 
 
 (dollars in thousands) 
 
 Net TBA derivatives 
 $ 
 174,221 
 
 $ 
 ( 68,291 
 ) 
 
 $ 
 105,930 
 
 Net interest rate swaptions 
 ( 11,317 
 ) 
 
 ( 7,178 
 ) 
 
 ( 18,495 
 ) 
 
 Futures 
 ( 514,441 
 ) 
 
 ( 82,779 
 ) 
 
 ( 597,220 
 ) 
 
 Purchase commitments 
 — 
 
 1,106 
 
 1,106 
 
 Credit derivatives 
 1,199 
 
 1,069 
 
 2,268 
 
 Total 
 
 $ 
 ( 506,411 
 ) 
 
 Six Months Ended June 30, 2020 
 
 Derivative Instruments 
 Realized Gain (Loss) 
 
 Unrealized Gain (Loss) 
 
 Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives 
 
 (dollars in thousands) 
 
 Net TBA derivatives 
 $ 
 521,610 
 
 $ 
 114,331 
 
 $ 
 635,941 
 
 Net interest rate swaptions 
 21,566 
 
 47,499 
 
 69,065 
 
 Futures 
 ( 279,230 
 ) 
 
 ( 10,687 
 ) 
 
 ( 289,917 
 ) 
 
 Purchase commitments 
 — 
 
 ( 1,143 
 ) 
 
 ( 1,143 
 ) 
 
 Credit derivatives 
 3,128 
 
 ( 39,732 
 ) 
 
 ( 36,604 
 ) 
 
 Total 
 
 $ 
 377,342 
 
 Six Months Ended June 30, 2019 
 
 Derivative Instruments 
 Realized Gain (Loss) 
 
 Unrealized Gain (Loss) 
 
 Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives 
 
 (dollars in thousands) 
 
 Net TBA derivatives 
 $ 
 387,946 
 
 $ 
 ( 108,231 
 ) 
 
 $ 
 279,715 
 
 Net interest rate swaptions 
 ( 41,309 
 ) 
 
 12,506 
 
 ( 28,803 
 ) 
 
 Futures 
 ( 1,006,182 
 ) 
 
 119,533 
 
 ( 886,649 
 ) 
 
 Purchase commitments 
 — 
 
 2,251 
 
 2,251 
 
 Credit derivatives 
 3,501 
 
 8,415 
 
 11,916 
 
 Total 
 
 $ 
 ( 621,570 
 ) 
 
 Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange. 
 Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative 
 
 34 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 instruments with the aforementioned features that are in a net liability position at June 30, 2020 was approximately $ 1.1 billion , which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized. 
 
 11. FAIR VALUE MEASUREMENTS 
 
 The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSRs that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 
 GAAP requires classification of financial instruments and MSRs into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). 
 If the inputs used to measure the financial instruments and MSRs fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows: 
 Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets. 
 Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. 
 Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value. 
 The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis. 
 The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level. 
 Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1. 
 Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities. 
 Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy. 
 The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2. 
 For the fair value of debt issued by securitization vehicles, refer to the Note titled “Variable Interest Entities” for additional information. 
 The Company classifies its investments in MSRs as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. 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- 
 
 35 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 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 MSRs requires significant judgment by management and the third-party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. 
 The following tables present the estimated fair values of financial instruments and MSRs measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented. 
 
 June 30, 2020 
 
 Level 1 
 
 Level 2 
 
 Level 3 
 
 Total 
 
 Assets 
 (dollars in thousands) 
 
 Securities 
 
 Agency mortgage-backed securities 
 $ 
 — 
 
 $ 
 76,761,800 
 
 $ 
 — 
 
 $ 
 76,761,800 
 
 Credit risk transfer securities 
 — 
 
 362,901 
 
 — 
 
 362,901 
 
 Non-Agency mortgage-backed securities 
 — 
 
 619,840 
 
 — 
 
 619,840 
 
 Commercial mortgage-backed securities 
 — 
 
 61,202 
 
 — 
 
 61,202 
 
 Loans 
 
 Residential mortgage loans 
 — 
 
 1,168,521 
 
 — 
 
 1,168,521 
 
 Mortgage servicing rights 
 — 
 
 — 
 
 227,400 
 
 227,400 
 
 Assets transferred or pledged to securitization vehicles 
 — 
 
 6,815,833 
 
 — 
 
 6,815,833 
 
 Derivative assets 
 
 Other derivatives 
 — 
 
 165,642 
 
 — 
 
 165,642 
 
 Total assets 
 $ 
 — 
 
 $ 
 85,955,739 
 
 $ 
 227,400 
 
 $ 
 86,183,139 
 
 Liabilities 
 
 Debt issued by securitization vehicles 
 — 
 
 6,458,130 
 
 — 
 
 6,458,130 
 
 Derivative liabilities 
 
 Interest rate swaps 
 — 
 
 1,198,970 
 
 — 
 
 1,198,970 
 
 Other derivatives 
 17,579 
 
 40,489 
 
 — 
 
 58,068 
 
 Total liabilities 
 $ 
 17,579 
 
 $ 
 7,697,589 
 
 $ 
 — 
 
 $ 
 7,715,168 
 
 December 31, 2019 
 
 Level 1 
 
 Level 2 
 
 Level 3 
 
 Total 
 
 Assets 
 (dollars in thousands) 
 
 Securities 
 
 Agency mortgage-backed securities 
 $ 
 — 
 
 $ 
 112,893,367 
 
 $ 
 — 
 
 $ 
 112,893,367 
 
 Credit risk transfer securities 
 — 
 
 531,322 
 
 — 
 
 531,322 
 
 Non-Agency mortgage-backed securities 
 — 
 
 1,135,868 
 
 — 
 
 1,135,868 
 
 Commercial mortgage-backed securities 
 — 
 
 273,023 
 
 — 
 
 273,023 
 
 Loans 
 
 Residential mortgage loans 
 — 
 
 1,647,787 
 
 — 
 
 1,647,787 
 
 Mortgage servicing rights 
 — 
 
 — 
 
 378,078 
 
 378,078 
 
 Assets transferred or pledged to securitization vehicles 
 — 
 
 6,066,082 
 
 — 
 
 6,066,082 
 
 Derivative assets 
 
 Interest rate swaps 
 — 
 
 1,199 
 
 — 
 
 1,199 
 
 Other derivatives 
 77,889 
 
 34,468 
 
 — 
 
 112,357 
 
 Total assets 
 $ 
 77,889 
 
 $ 
 122,583,116 
 
 $ 
 378,078 
 
 $ 
 123,039,083 
 
 Liabilities 
 
 Debt issued by securitization vehicles 
 $ 
 — 
 
 $ 
 5,622,801 
 
 $ 
 — 
 
 $ 
 5,622,801 
 
 Derivative liabilities 
 
 Interest rate swaps 
 — 
 
 706,862 
 
 — 
 
 706,862 
 
 Other derivatives 
 84,781 
 
 12,223 
 
 — 
 
 97,004 
 
 Total liabilities 
 $ 
 84,781 
 
 $ 
 6,341,886 
 
 $ 
 — 
 
 $ 
 6,426,667 
 
 36 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Quantitative Information about Level 3 Fair Value Measurements 
 The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSRs, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSRs, which in turn could result in a decline in the estimated fair value of MSRs. Refer to the Note titled “Mortgage Servicing Rights” for additional information. 
 The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSRs. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments. 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Valuation Technique 
 Unobservable Input (1) 
 
 Range (Weighted Average ) (2) 
 
 Unobservable Input (1) 
 
 Range (Weighted Average ) (2) 
 
 Discounted cash flow 
 Discount rate 
 
 9.0% -12.0% (9.3%) 
 
 Discount rate 
 
 9.0% -12.0% (9.3%) 
 
 Prepayment rate 
 
 11.1% - 44.7% (28.7%) 
 
 Prepayment rate 
 
 6.3% - 26.6% (13.7%) 
 
 Delinquency rate 
 
 0.0% - 9.0% (2.7%) 
 
 Delinquency rate 
 
 0.0% - 4.0% (2.2%) 
 
 Cost to service 
 
 $81 - $202 ($115) 
 
 Cost to service 
 
 $81 - $135 ($107) 
 
 (1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets. 
 
 (2) Weighted average discount rate computed based on the fair value of MSRs, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSRs. 
 
 The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at June 30, 2020 and December 31, 2019 . 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Carrying
Value 
 
 Fair
Value 
 
 Carrying
Value 
 
 Fair
Value 
 
 Financial assets 
 
 (dollars in thousands) 
 
 Loans 
 
 Commercial real estate debt and preferred equity, held for investment (1) 
 
 $ 
 1,493,504 
 
 $ 
 1,567,118 
 
 $ 
 1,606,091 
 
 $ 
 1,619,018 
 
 Corporate debt, held for investment 
 
 2,185,264 
 
 2,114,904 
 
 2,144,850 
 
 2,081,327 
 
 Financial liabilities 
 
 Repurchase agreements 
 
 $ 
 67,163,598 
 
 $ 
 67,163,598 
 
 $ 
 101,740,728 
 
 $ 
 101,740,728 
 
 Other secured financing 
 
 1,538,996 
 
 1,538,996 
 
 4,455,700 
 
 4,455,700 
 
 Mortgage payable 
 
 508,565 
 
 595,542 
 
 485,005 
 
 515,994 
 
 (1) Includes assets of consolidated VIEs. 
 
 Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment and mortgage payable are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements. Long term other secured financing are valued using Level 2 inputs. 
 
 12. GOODWILL AND INTANGIBLE ASSETS 
 
 Goodwill 
 The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price 
 
 37 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain. 
 The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill utilizes a two-step approach, whereby the Company compares the carrying value of each identified reporting unit to its fair value. If the carrying value of the reporting unit is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its carrying value. The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair value. At June 30, 2020 and December 31, 2019 , goodwill totaled $ 71.8 million . 
 Intangible assets, net 
 Finite life intangible assets are amortized over their expected useful lives. As part of the Internalization, which closed on June 30, 2020 , the Company recognized an intangible asset for the acquired assembled workforce of approximately $ 41 million , and accrued liabilities and cash that were recognized on the legal entity acquired. The following table presents the activity of finite lived intangible assets for the six months ended June 30, 2020 . 
 
 Intangible Assets, net 
 
 (dollars in thousands) 
 
 Balance at December 31, 2019 
 $ 
 20,957 
 
 Intangible assets acquired 
 47,686 
 
 Intangible assets divested 
 ( 110 
 ) 
 
 Less: amortization expense 
 ( 2,668 
 ) 
 
 Balance at June 30, 2020 
 $ 
 65,865 
 
 13. SECURED FINANCING 
 
 Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing , and has determined that each of the financing agreements meet the specified criteria in this guidance. 
 The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company obtains collateral in connection with the reverse repurchase agreements in order to mitigate credit risk exposure to its counterparties. 
 Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows. 
 The Company had outstanding $ 67.2 billion and $ 101.7 billion of repurchase agreements with weighted average borrowing rates of 0.70 % and 1.99 % , after giving effect to the Company’s interest rate swaps used to hedge cost of funds, and weighted average remaining maturities of 74 days and 65 days at June 30, 2020 and December 31, 2019 , respectively. The Company has select arrangements with counterparties to enter into repurchase agreements for $ 2.1 billion with remaining capacity of $ 1.7 billion at June 30, 2020 . 
 At June 30, 2020 and December 31, 2019 , the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: 
 
 38 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 June 30, 2020 
 
 Agency Mortgage-Backed Securities 
 
 CRTs 
 
 Non-Agency Mortgage-Backed Securities 
 
 Residential Mortgage Loans 
 
 Commercial Loans 
 
 Commercial Mortgage-Backed Securities 
 
 Total Repurchase Agreements 
 
 Weighted Average Rate 
 
 (dollars in thousands) 
 
 1 day 
 $ 
 15,091,891 
 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 15,091,891 
 
 0.15 
 % 
 
 2 to 29 days 
 17,911,648 
 
 2,281 
 
 143,055 
 
 — 
 
 — 
 
 27,997 
 
 18,084,981 
 
 0.48 
 % 
 
 30 to 59 days 
 4,724,516 
 
 — 
 
 70,301 
 
 — 
 
 66,026 
 
 131,188 
 
 4,992,031 
 
 0.67 
 % 
 
 60 to 89 days 
 5,061,005 
 
 41,283 
 
 271,552 
 
 — 
 
 — 
 
 39,697 
 
 5,413,537 
 
 0.47 
 % 
 
 90 to 119 days 
 8,643,555 
 
 8,090 
 
 — 
 
 — 
 
 — 
 
 19,856 
 
 8,671,501 
 
 0.58 
 % 
 
 Over 119 days (1) 
 14,297,403 
 
 — 
 
 176,232 
 
 47,652 
 
 303,575 
 
 84,795 
 
 14,909,657 
 
 0.74 
 % 
 
 Total 
 $ 
 65,730,018 
 
 $ 
 51,654 
 
 $ 
 661,140 
 
 $ 
 47,652 
 
 $ 
 369,601 
 
 $ 
 303,533 
 
 $ 
 67,163,598 
 
 0.49 
 % 
 
 December 31, 2019 
 
 Agency Mortgage-Backed Securities 
 
 CRTs 
 
 Non-Agency Mortgage-Backed Securities 
 
 Commercial
Loans 
 
 Commercial Mortgage-Backed Securities 
 
 Total Repurchase Agreements 
 
 Weighted 
 Average 
 Rate 
 
 (dollars in thousands) 
 
 1 day 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 — 
 
 $ 
 — 
 
 — 
 % 
 
 2 to 29 days 
 36,030,104 
 
 237,897 
 
 698,091 
 
 — 
 
 416,439 
 
 37,382,531 
 
 2.15 
 % 
 
 30 to 59 days 
 15,079,989 
 
 — 
 
 115,805 
 
 — 
 
 104,363 
 
 15,300,157 
 
 2.00 
 % 
 
 60 to 89 days 
 21,931,335 
 
 30,841 
 
 151,920 
 
 — 
 
 3,639 
 
 22,117,735 
 
 1.97 
 % 
 
 90 to 119 days 
 9,992,914 
 
 — 
 
 — 
 
 — 
 
 — 
 
 9,992,914 
 
 1.97 
 % 
 
 Over 119 days (1) 
 16,557,123 
 
 — 
 
 58,712 
 
 303,078 
 
 28,478 
 
 16,947,391 
 
 1.90 
 % 
 
 Total 
 $ 
 99,591,465 
 
 $ 
 268,738 
 
 $ 
 1,024,528 
 
 $ 
 303,078 
 
 $ 
 552,919 
 
 $ 
 101,740,728 
 
 2.03 
 % 
 
 (1) 
 Approximately 1 % of total repurchase agreements had a remaining maturity over one year at June 30, 2020 . No repurchase agreements had a remaining maturity over one year at December 31, 2019 . 
 
 The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at June 30, 2020 and December 31, 2019 . Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments. 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Reverse Repurchase Agreements 
 
 Repurchase Agreements 
 
 Reverse Repurchase Agreements 
 
 Repurchase Agreements 
 
 (dollars in thousands) 
 
 Gross amounts 
 $ 
 150,000 
 
 $ 
 67,313,598 
 
 $ 
 100,000 
 
 $ 
 101,840,728 
 
 Amounts offset 
 ( 150,000 
 ) 
 
 ( 150,000 
 ) 
 
 ( 100,000 
 ) 
 
 ( 100,000 
 ) 
 
 Netted amounts 
 $ 
 — 
 
 $ 
 67,163,598 
 
 $ 
 — 
 
 $ 
 101,740,728 
 
 Other Secured Financing - The Company also finances a portion of its financial assets with advances from the Federal Home Loan Bank of Des Moines (“FHLB Des Moines”). Borrowings from FHLB Des Moines are reported in Other secured financing in the Company’s Consolidated Statements of Financial Condition. At June 30, 2020 , $ 0.6 billion of advances from the FHLB Des Moines matured in less than one year . At December 31, 2019 , $ 1.4 billion of advances from the FHLB Des Moines matured in less than one year and $ 2.1 billion matured between one to three years . The weighted average rate of the advances from the FHLB Des Moines was 1.55 % and 2.16 % at June 30, 2020 and December 31, 2019 , respectively. The Company held $ 28.8 million and $ 147.9 million of capital stock in the FHLB Des Moines at June 30, 2020 and December 31, 2019 , respectively, which is reported at cost and included in Other assets on the Company’s Consolidated Statements of Financial Condition. 
 Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 74.3 billion and $ 225.8 million , respectively, at June 30, 2020 and $ 112.8 billion and $ 357.9 million , respectively, at December 31, 2019 . 
 
 39 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Mortgage loans payable at June 30, 2020 and December 31, 2019 , were as follows: 
 
 June 30, 2020 
 
 Property 
 Mortgage
Carrying Value 
 
 Mortgage
Principal 
 
 Interest Rate 
 
 Fixed/Floating
Rate 
 
 Maturity Date 
 
 Priority 
 
 (dollars in thousands) 
 
 Joint Ventures 
 $ 
 316,631 
 
 $ 
 318,433 
 
 4.03% - 4.96% 
 
 Fixed 
 
 2024 - 2029 
 
 First liens 
 
 Joint Ventures 
 16,517 
 
 16,325 
 
 L+2.15% 
 
 Floating 
 
 2/27/2022 
 
 First liens 
 
 Virginia 
 81,980 
 
 83,710 
 
 2.34% - 4.55% 
 
 Fixed 
 
 2036 - 2053 
 
 First liens 
 
 Virginia 
 24,447 
 
 25,000 
 
 L+2.85% 
 
 Floating 
 
 2036 - 2053 
 
 First liens 
 
 Texas 
 31,400 
 
 32,877 
 
 3.28 % 
 
 Fixed 
 
 1/1/2048 and 1/1/2053 
 
 First liens 
 
 Utah 
 9,706 
 
 9,706 
 
 L+2.75% 
 
 Floating 
 
 1/31/2021 
 
 First liens 
 
 Utah 
 7,024 
 
 7,041 
 
 3.69 % 
 
 Fixed 
 
 6/1/2053 
 
 First liens 
 
 Minnesota 
 13,142 
 
 13,175 
 
 3.69 % 
 
 Fixed 
 
 6/1/2053 
 
 First liens 
 
 Wisconsin 
 7,718 
 
 7,738 
 
 3.69 % 
 
 Fixed 
 
 6/1/2053 
 
 First liens 
 
 Total 
 $ 
 508,565 
 
 $ 
 514,005 
 
 December 31, 2019 
 
 Property 
 Mortgage
Carrying Value 
 
 Mortgage
Principal 
 
 Interest Rate 
 
 Fixed/Floating
Rate 
 
 Maturity Date 
 
 Priority 
 
 (dollars in thousands) 
 
 Joint Ventures 
 $ 
 316,566 
 
 $ 
 318,562 
 
 4.03% - 4.96% 
 
 Fixed 
 
 2024 - 2029 
 
 First liens 
 
 Joint Ventures 
 16,029 
 
 16,325 
 
 L+2.15% 
 
 Floating 
 
 2/27/2022 
 
 First liens 
 
 Virginia 
 82,940 
 
 84,702 
 
 2.34% - 4.55% 
 
 Fixed 
 
 2036 - 2053 
 
 First liens 
 
 Texas 
 31,667 
 
 33,167 
 
 3.28 % 
 
 Fixed 
 
 1/1/2048 and 1/1/2053 
 
 First liens 
 
 Utah 
 9,706 
 
 9,706 
 
 L+3.50% 
 
 Floating 
 
 1/31/2020 
 
 First liens 
 
 Utah 
 7,077 
 
 7,096 
 
 3.69 % 
 
 Fixed 
 
 6/1/2053 
 
 First liens 
 
 Minnesota 
 13,243 
 
 13,276 
 
 3.69 % 
 
 Fixed 
 
 6/1/2053 
 
 First liens 
 
 Wisconsin 
 7,777 
 
 7,797 
 
 3.69 % 
 
 Fixed 
 
 6/1/2053 
 
 First liens 
 
 Total 
 $ 
 485,005 
 
 $ 
 490,631 
 
 The following table details future mortgage loan principal payments at June 30, 2020 : 
 
 Mortgage Loan Principal Payments 
 
 (dollars in thousands) 
 
 2020 (remaining) 
 $ 
 1,657 
 
 2021 
 13,197 
 
 2022 
 20,034 
 
 2023 
 3,844 
 
 2024 
 3,980 
 
 Later years 
 471,293 
 
 Total 
 $ 
 514,005 
 
 40 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 14. CAPITAL STOCK 
 
 (A) 
 Common Stock 
 
 The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at June 30, 2020 and December 31, 2019 . 
 
 Shares authorized 
 
 Shares issued and outstanding 
 
 June 30, 2020 
 
 December 31, 2019 
 
 June 30, 2020 
 
 December 31, 2019 
 Par Value 
 
 Common stock 
 2,914,850,000 
 
 2,914,850,000 
 
 1,407,662,483 
 
 1,430,106,199 
 
 $ 0.01 
 
 During the six months ended June 30, 2019 , the Company closed the public offering of an original issuance of 75.0 million shares of common stock for proceeds of $ 730.5 million before deducting offering expenses. In connection with the offering, the Company granted the underwriters a thirty-day option to purchase up to an additional 11.3 million shares of common stock, which the underwriters exercised in full resulting in an additional $ 109.6 million in proceeds before deducting offering expenses. 
 In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $ 1.5 billion of its outstanding shares of common stock through December 31, 2020. During the three and six months ended June 30, 2020 , the Company repurchased 22.9 million shares of its common stock for an aggregate amount of $ 143.3 million , excluding commission costs, pursuant to this authorization. All common shares were purchased in open-market transactions. No shares were purchased pursuant to this authorization during the three and six months ended June 30, 2019 . 
 The following table provides a summary of activity related to the Company’s Direct Purchase and Dividend Reinvestment Program. 
 
 Six Months Ended 
 
 June 30, 2020 
 
 June 30, 2019 
 
 (dollars in thousands) 
 
 Shares issued through direct purchase and dividend reinvestment program 
 
 63,000 
 
 180,000 
 
 Amount raised from direct purchase and dividend reinvestment program 
 
 $ 
 405 
 
 $ 
 1,795 
 
 In January 2018, the Company entered into separate Distribution Agency Agreements (collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc. (formerly known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated), Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company 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. No shares were issued under the at-the-market sales program during the six months ended June 30, 2020 . During the three and six months ended June 30, 2019 , the Company issued 8.0 million shares and 56.0 million , respectively, for proceeds of $ 80.1 million and $ 569.1 million , respectively, net of commissions and fees, under the at-the-market sales program. 
 
 (B) 
 Preferred Stock 
 
 The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at June 30, 2020 and December 31, 2019 . In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets. 
 
 41 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Shares Authorized 
 
 Shares Issued And Outstanding 
 
 Carrying Value 
 Contractual Rate 
 Earliest Redemption Date (1) 
 Date At Which Dividend Rate Becomes Floating 
 Floating Annual Rate 
 
 June 30, 2020 
 
 December 31, 2019 
 
 June 30, 2020 
 
 December 31, 2019 
 
 June 30, 2020 
 
 December 31, 2019 
 
 Fixed-rate 
 
 (dollars in thousands) 
 
 Series D 
 18,400,000 
 
 18,400,000 
 
 18,400,000 
 
 18,400,000 
 
 445,457 
 
 445,457 
 
 7.50 % 
 9/13/2017 
 NA 
 NA 
 
 Fixed-to-floating rate 
 
 Series F 
 28,800,000 
 
 28,800,000 
 
 28,800,000 
 
 28,800,000 
 
 696,910 
 
 696,910 
 
 6.95 % 
 9/30/2022 
 9/30/2022 
 3M LIBOR + 4.993% 
 
 Series G 
 19,550,000 
 
 19,550,000 
 
 17,000,000 
 
 17,000,000 
 
 411,335 
 
 411,335 
 
 6.50 % 
 3/31/2023 
 3/31/2023 
 3M LIBOR + 4.172% 
 
 Series I 
 18,400,000 
 
 18,400,000 
 
 17,700,000 
 
 17,700,000 
 
 428,324 
 
 428,324 
 
 6.75 % 
 6/30/2024 
 6/30/2024 
 3M LIBOR + 4.989% 
 
 Total 
 85,150,000 
 
 85,150,000 
 
 81,900,000 
 
 81,900,000 
 
 $ 
 1,982,026 
 
 $ 
 1,982,026 
 
 (1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company. 
 
 Each series of preferred stock has a par value of $ 0.01 per share and a liquidation and redemption price of $ 25.00 , plus accrued and unpaid dividends through their redemption date. Through June 30, 2020 , the Company had declared and paid all required quarterly dividends on the Company’s preferred stock. 
 During the three and six months ended June 30, 2019 , the Company redeemed all 2.2 million of its issued and outstanding shares of 8.125 % Series H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”) for $ 55.0 million . The cash redemption amount for each share of Series H Preferred Stock was $ 25.00 plus accrued and unpaid dividends to, but not including, the redemption date of May 31, 2019. 
 During the three and six months ended June 30, 2019 , the Company issued 16.0 million shares of its 6.750 % Seri es I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series I Preferred Stock”) for gross proceeds o f $ 400.0 million befo re deducting the underwriting discount and other estimated offering expenses. In connection with the offering, the Company granted the underwriters a thirty-day option to purchase up to an additional 2.4 million shares of Series I Preferred Stock solely to cover over-allotments. 
 The Series D Cumulative Redeemable Preferred Stock, Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company. 
 
 (C) 
 Distributions to Stockholders 
 
 The following table provides a summary of the Company’s dividend distribution activity for the periods presented: 
 
 42 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 For the Three Months Ended 
 
 For the Six Months Ended 
 
 June 30, 2020 
 
 June 30, 2019 
 
 June 30, 2020 
 
 June 30, 2019 
 
 (dollars in thousands, except per share data) 
 
 Dividends and dividend equivalents declared on common stock and share-based awards 
 $ 
 309,972 
 
 $ 
 364,266 
 
 $ 
 667,791 
 
 $ 
 798,893 
 
 Distributions declared per common share 
 $ 
 0.22 
 
 $ 
 0.25 
 
 $ 
 0.47 
 
 $ 
 0.55 
 
 Distributions paid to common stockholders after period end 
 $ 
 309,686 
 
 $ 
 364,066 
 
 $ 
 309,686 
 
 $ 
 364,066 
 
 Distributions paid per common share after period end 
 $ 
 0.22 
 
 $ 
 0.25 
 
 $ 
 0.22 
 
 $ 
 0.25 
 
 Date of distributions paid to common stockholders after period end 
 July 31, 2020 
 
 July 31, 2019 
 
 July 31, 2020 
 
 July 31, 2019 
 
 Dividends declared to series C preferred stockholders 
 $ 
 — 
 
 $ 
 3,336 
 
 $ 
 — 
 
 $ 
 6,672 
 
 Dividends declared per share of series C preferred stock (1) 
 $ 
 — 
 
 $ 
 0.477 
 
 $ 
 — 
 
 $ 
 0.953 
 
 Dividends declared to series D preferred stockholders 
 $ 
 8,625 
 
 $ 
 8,625 
 
 $ 
 17,250 
 
 $ 
 17,250 
 
 Dividends declared per share of series D preferred stock 
 $ 
 0.469 
 
 $ 
 0.469 
 
 $ 
 0.938 
 
 $ 
 0.938 
 
 Dividends declared to series F preferred stockholders 
 $ 
 12,510 
 
 $ 
 12,510 
 
 $ 
 25,020 
 
 $ 
 25,020 
 
 Dividends declared per share of series F preferred stock 
 $ 
 0.434 
 
 $ 
 0.434 
 
 $ 
 0.869 
 
 $ 
 0.868 
 
 Dividends declared to series G preferred stockholders 
 $ 
 6,906 
 
 $ 
 6,906 
 
 $ 
 13,812 
 
 $ 
 13,812 
 
 Dividends declared per share of series G preferred stock 
 $ 
 0.406 
 
 $ 
 0.406 
 
 $ 
 0.813 
 
 $ 
 0.813 
 
 Dividends declared to series H preferred stockholders 
 $ 
 — 
 
 $ 
 745 
 
 $ 
 — 
 
 $ 
 1,862 
 
 Dividends declared per share of series H preferred stock 
 $ 
 — 
 
 $ 
 0.339 
 
 $ 
 — 
 
 $ 
 0.846 
 
 Dividends declared to series I preferred stockholders 
 $ 
 7,468 
 
 $ 
 — 
 
 $ 
 14,936 
 
 $ 
 — 
 
 Dividends declared per share of series I preferred stock 
 $ 
 0.422 
 
 $ 
 — 
 
 $ 
 0.844 
 
 $ 
 — 
 
 15. INTEREST INCOME AND INTEREST EXPENSE 
 
 Refer to the Note titled “Significant Accounting Policies” for details surrounding the Company’s accounting policy related to net interest income on securities and loans. 
 The following table summarizes the interest income recognition methodology for Residential Securities: 
 
 Interest Income Methodology 
 
 Agency 
 
 Fixed-rate pass-through (1) 
 Effective yield (3) 
 
 Adjustable-rate pass-through (1) 
 Effective yield (3) 
 
 Multifamily (1) 
 Contractual Cash Flows 
 
 CMO (1) 
 Effective yield (3) 
 
 Reverse mortgages (2) 
 Prospective 
 
 Interest-only (2) 
 Prospective 
 
 Residential credit 
 
 CRT (2) 
 Prospective 
 
 Alt-A (2) 
 Prospective 
 
 Prime (2) 
 Prospective 
 
 Subprime (2) 
 Prospective 
 
 NPL/RPL (2) 
 Prospective 
 
 Prime jumbo (2) 
 Prospective 
 
 Prime jumbo interest-only (2) 
 Prospective 
 
 (1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss). 
 (2) Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss). 
 (3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception. 
 
 43 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The following presents the components of the Company’s interest income and interest expense for the three and six months ended June 30, 2020 and June 30, 2019 . 
 
 For the Three Months Ended June 30, 
 
 For the Six Months Ended June 30, 
 
 2020 
 
 2019 
 
 2020 
 
 2019 
 
 Interest income 
 (dollars in thousands) 
 
 Residential Securities (1) 
 $ 
 457,684 
 
 $ 
 777,891 
 
 $ 
 868,064 
 
 $ 
 1,487,665 
 
 Residential mortgage loans (1) 
 42,871 
 
 35,025 
 
 90,428 
 
 65,016 
 
 Commercial investment portfolio (1) (2) 
 84,208 
 
 92,131 
 
 179,884 
 
 193,083 
 
 Reverse repurchase agreements 
 49 
 
 22,551 
 
 1,462 
 
 48,020 
 
 Total interest income 
 $ 
 584,812 
 
 $ 
 927,598 
 
 $ 
 1,139,838 
 
 $ 
 1,793,784 
 
 Interest expense 
 
 Repurchase agreements 
 136,962 
 
 683,647 
 
 570,983 
 
 1,263,161 
 
 Debt issued by securitization vehicles 
 38,757 
 
 34,151 
 
 80,876 
 
 68,358 
 
 Other 
 10,313 
 
 32,419 
 
 37,646 
 
 66,393 
 
 Total interest expense 
 186,032 
 
 750,217 
 
 689,505 
 
 1,397,912 
 
 Net interest income 
 $ 
 398,780 
 
 $ 
 177,381 
 
 $ 
 450,333 
 
 $ 
 395,872 
 
 (1) Includes assets transferred or pledged to securitization vehicles. 
 (2) Includes commercial real estate debt and preferred equity and corporate debt. 
 
 16. NET INCOME (LOSS) PER COMMON SHARE 
 
 The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and six months ended June 30, 2020 and June 30, 2019 . 
 
 For the Three Months Ended 
 
 For the Six Months Ended 
 
 June 30, 2020 
 
 June 30, 2019 
 
 June 30, 2020 
 
 June 30, 2019 
 
 (dollars in thousands, except per share data) 
 
 Net income (loss) 
 $ 
 856,234 
 
 $ 
 ( 1,776,413 
 ) 
 
 $ 
 ( 2,783,955 
 ) 
 
 $ 
 ( 2,625,664 
 ) 
 
 Net income (loss) attributable to noncontrolling interests 
 32 
 
 ( 83 
 ) 
 
 98 
 
 ( 184 
 ) 
 
 Net income (loss) attributable to Annaly 
 856,202 
 
 ( 1,776,330 
 ) 
 
 ( 2,784,053 
 ) 
 
 ( 2,625,480 
 ) 
 
 Dividends on preferred stock (1) 
 35,509 
 
 32,422 
 
 71,018 
 
 64,916 
 
 Net income (loss) available (related) to common stockholders 
 $ 
 820,693 
 
 $ 
 ( 1,808,752 
 ) 
 
 $ 
 ( 2,855,071 
 ) 
 
 $ 
 ( 2,690,396 
 ) 
 
 Weighted average shares of common stock outstanding-basic 
 1,423,909,112 
 
 1,456,038,736 
 
 1,427,451,716 
 
 1,427,485,102 
 
 Add: Effect of stock awards, if dilutive 
 — 
 
 — 
 
 — 
 
 — 
 
 Weighted average shares of common stock outstanding-diluted 
 1,423,909,112 
 
 1,456,038,736 
 
 1,427,451,716 
 
 1,427,485,102 
 
 Net income (loss) per share available (related) to common share 
 
 Basic 
 $ 
 0.58 
 
 $ 
 ( 1.24 
 ) 
 
 $ 
 ( 2.00 
 ) 
 
 $ 
 ( 1.88 
 ) 
 
 Diluted 
 $ 
 0.58 
 
 $ 
 ( 1.24 
 ) 
 
 $ 
 ( 2.00 
 ) 
 
 $ 
 ( 1.88 
 ) 
 
 (1) The three and six months ended June 30, 2019 includes cumulative and undeclared dividends of $ 0.3 million on the Company's Series Preferred Stock as of June 30, 2019. 
 The computations of diluted net income (loss) per share available (related) to common share for the three and six months ended June 30, 2020 excludes 0.5 million and 0.4 million of potentially dilutive restricted stock units and performance stock units because their effect would have been anti-dilutive. 
 
 17. INCOME TAXES 
 
 For the three months ended June 30, 2020 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder 
 
 44 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 composition. It is generally the Company’s policy to distribute 100 % of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code. 
 The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs. As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income. 
 The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at June 30, 2020 and December 31, 2019 . 
 The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company’s TRSs are subject to federal, state and local taxes. 
 During the three and six months ended June 30, 2020 , the Company recorded $ 2.1 million and ($ 24.6 ) million , respectively, of income tax expense (benefit) attributable to its TRSs. During the three and six months ended June 30, 2019 , the Company recorded ($ 5.9 ) million and ($ 3.3 ) million , respectively of income tax benefit attributable to its TRSs. The Company’s federal, state and local tax returns from 2016 and forward remain open for examination. 
 
 18. RISK MANAGEMENT 
 
 The primary risks to the Company are capital, liquidity and funding risk, investment/market risk and credit risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the existing collateral to reduce borrowing levels. 
 The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges. 
 Weakness in the mortgage market, the shape of the yield curve and changes in the expectations for the volatility of future interest rates may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging strategies. 
 The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. Substantially all of the Company’s Agency mortgage-backed securities have an actual or implied “AAA” rating. 
 The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted if overall costs to service the underlying mortgage loans increase due to borrower performance. The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties. 
 
 45 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 The conditions related to Coronavirus Disease 2019 (“COVID-19”) could further impact the aforementioned primary risks to the Company. The significant decrease in economic activity and/or the resulting decline in the housing market could have an adverse effect on the value of the Company’s investments in mortgage real estate-related assets, particularly residential real estate assets. Further, borrowers may experience difficulties meeting their obligations or seek to forbear payment on or refinance their mortgage loans to avail themselves of lower rates which may have an adverse impact on the value of the Company’s mortgage real estate related-assets. In addition to residential mortgage-related assets, the adverse economic conditions could negatively impact tenants in the Company’s commercial property assets and/or businesses in which it lends to in connection with its middle market lending activities, resulting in potential delinquencies, defaults or declines in asset values. 
 If conditions related to COVID-19 persist, the Company could also experience an unwillingness or inability of its potential lenders to provide the Company with or renew financing, increased margin calls, and/or additional capital requirements particularly in connection with the Company’s less liquid credit assets. These conditions could force the Company to sell its assets at inopportune times or otherwise cause the Company to potentially revise its strategic business initiatives, which could adversely affect its business. The extent of the COVID 19-related disruptions, the duration of the pandemic and the effectiveness of government policies, laws and plans are unknown at this time. 
 
 19. RELATED PARTY TRANSACTIONS 
 
 Closing of the Internalization and Termination of Management Agreement 
 On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Manager and certain affiliates of the Manager. Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Manager and the Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($1.00). In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Manager (the net effect of which was immaterial in amount), and the Company transitioned from an externally-managed real estate investment trust (“REIT”) to an internally-managed REIT. At the closing, all employees of the Manager became employees of the Company. The parties also terminated the Amended and Restated Management Agreement by and between the Company and the Manager (the “Management Agreement”) and therefore the Company no longer pays a management fee to, or reimburses expenses of, the Manager. Pursuant to the Internalization Agreement, the Manager waived any Acceleration Fee (as defined in the Management Agreement). 
 Prior to the closing of the Internalization, management of the Company was conducted by the Manager through the authority delegated to it in the Management Agreement and pursuant to the policies established by the Board. The management agreement was amended and restated on August 1, 2018, and further amended on March 27, 2019 (the management agreement, as amended and restated, is referred to as “Management Agreement”). 
 Prior to the closing of the Internalization, the Manager, under the Management Agreement and subject to the supervision and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s investment portfolio; (ii) recommending alternative forms of capital raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The Manager also performed such other supervisory and management services and activities relating to the Company’s assets and operations as appropriate. In exchange for the management services, the Company paid the Manager a monthly management fee, and the Manager was responsible for providing personnel to manage the Company. Prior to the amendment to the Management Agreement, that was executed on March 27, 2019, the Company had paid the Manager a flat monthly management fee equal to 1/12th of 1.05% of Stockholders' Equity (as defined in the Management Agreement) for its management services. Pursuant to the March 27, 2019 amendment to the Management Agreement, until the closing of the Internalization, the Company paid the Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i) 1.05% of Stockholders' Equity (as defined in the Management Agreement) up to $ 17.28 billion , and (ii) 0.75 % of Stockholders' Equity (as defined in the Management Agreement) in excess of $ 17.28 billion . The Company did not pay the Manager any incentive fees. 
 For the three and six months ended June 30, 2020 , the compensation and management fee was $ 37.0 million and $ 77.9 million , respectively. For the three and six months ended June 30, 2019 , the compensation and management fee was $ 44.2 million and $ 89.1 million , respectively. 
 Following the unanimous approval of the Company’s independent directors (the “Independent Directors”), in August 2018, the Company began reimbursing the Manager for certain services in connection with the management and operations of the Company and its subsidiaries as permitted under the terms of the Management Agreement. Such reimbursable expenses included the cost for certain legal, tax, accounting and other support and advisory services provided by employees of the Manager to the Company. Pursuant to the Management Agreement, until the closing of the Internalization, the Company reimbursed the Manager for the cost of such services, provided such costs were no greater than those that would be payable to comparable third party providers. 
 
 46 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 Expense reimbursements and related waivers were routinely reviewed with the Audit Committee of the Board in conformance with established policies. For the three and six months ended June 30, 2020 , reimbursement payments to the Manager were $ 7.1 million and $ 14.2 million , respectively. For the three and six months ended June 30, 2019 , reimbursement payments to the Manager were $ 7.1 million and $ 14.3 million , respectively. None of the reimbursement payments were attributable to compensation of the Company’s executive officers. 
 At June 30, 2020 and December 31, 2019 the Company had amounts payable to the Manager of $ 0.0 million and $ 15.8 million , respectively. 
 
 20. LEASE COMMITMENTS AND CONTINGENCIES 
 
 The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019 with no impact to retained earnings or other components of equity. The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of five years . The corporate office lease includes an option to extend for up to five years , however the extension term was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the three and six months ended June 30, 2020 was $ 0.8 million and $ 1.6 million , respectively. 
 Supplemental information related to leases as of and for the six months ended June 30, 2020 was as follows: 
 
 Operating Leases 
 Classification 
 June 30, 2020 
 
 Assets 
 (dollars in thousands) 
 
 Operating lease right-of-use assets 
 Other assets 
 $ 
 14,488 
 
 Liabilities 
 
 Operating lease liabilities (1) 
 Other liabilities 
 $ 
 18,867 
 
 Lease term and discount rate 
 
 Weighted average remaining lease term 
 
 5.2 years 
 
 Weighted average discount rate (1) 
 
 2.9 % 
 
 Cash paid for amounts included in the measurement of lease liabilities 
 
 Operating cash flows from operating leases 
 
 $ 
 1,856 
 
 (1) As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. 
 
 The following table provides details related to maturities of lease liabilities: 
 
 Maturity of Lease Liabilities 
 
 Years ending December 31, 
 (dollars in thousands) 
 
 2020 (remaining) 
 $ 
 1,943 
 
 2021 
 3,918 
 
 2022 
 3,862 
 
 2023 
 3,862 
 
 2024 
 3,862 
 
 Later years 
 2,895 
 
 Total lease payments 
 $ 
 20,342 
 
 Less imputed interest 
 1,475 
 
 Present value of lease liabilities 
 $ 
 18,867 
 
 Contingencies 
 From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were no material contingencies at June 30, 2020 and December 31, 2019 . 
 
 47 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 1. Financial Statements 

 21. ARCOLA REGULATORY REQUIREMENTS 
 
 Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. 
 Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty. 
 As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance. At June 30, 2020 Arcola had a minimum net capital requirement of $ 0.3 million . Arcola consistently operates with capital in excess of its regulatory capital requirements. Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at June 30, 2020 was $ 421.7 million with excess net capital of $ 421.4 million . 
 
 22. SUBSEQUENT EVENTS 
 
 In July 2020, the Company repurchased 4.8 million shares of its common stock for an aggregate amount of $ 31.3 million , excluding commission costs, under the Company’s stock repurchase program. 
 In July 2020, the Company completed and closed the securitization of residential mortgage loans, OBX 2020-EXP2 Trust, with a face value of $ 489.4 million . The securitization represented a financing transaction which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company. 
 In July 2020, the Company entered into an additional credit facility for residential mortgage loans with a third party financial institution. The borrowing limit on this facility is $ 250 million . 
 
 48 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 2. Management’s Discussion and Analysis 

 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 the Securities 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,” “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; our ability to grow our commercial business; our ability to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt; risks related to investments in MSRs; 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 for U.S. federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act; and the risk that the expected benefits, including long-term cost savings, of the Internalization are not achieved. 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” mean Annaly 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. 
 
 49 
 
 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 
 51 
 
 Business Environment and Coronavirus Disease 2019 (“COVID-19”) 
 51 
 
 Economic Environment 
 53 
 
 Results of Operations 
 54 
 
 Net Income (Loss) Summary 
 54 
 
 Non-GAAP Financial Measures 
 54 
 
 Core earnings (excluding PAA), core earnings (excluding PAA) attributable to common stockholders, core earnings (excluding PAA) per average common share and annualized core return on average equity (excluding PAA) 
 54 
 
 Premium Amortization Expense 
 57 
 
 Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA) 
 57 
 
 Experienced and Projected Long-term CPR 
 58 
 
 Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA) and Net Interest Margin (excluding PAA) 
 59 
 
 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 
 60 
 
 Realized and Unrealized Gains (Losses) 
 60 
 
 Other Income (Loss) 
 62 
 
 General and Administrative Expenses 
 62 
 
 Return on Average Equity 
 63 
 
 Unrealized Gains and Losses - Available-for-Sale Investments 
 63 
 
 Financial Condition 
 63 
 
 Residential Securities 
 64 
 
 Contractual Obligations 
 67 
 
 Off-Balance Sheet Arrangements 
 67 
 
 Capital Management 
 67 
 
 Stockholders’ Equity 
 68 
 
 Capital Stock 
 68 
 
 Leverage and Capital 
 69 
 
 Risk Management 
 69 
 
 Risk Appetite 
 69 
 
 Governance 
 70 
 
 Description of Risks 
 70 
 
 Capital, Liquidity and Funding Risk Management 
 71 
 
 Funding 
 71 
 
 Excess Liquidity 
 72 
 
 Maturity Profile 
 74 
 
 Stress Testing 
 75 
 
 Liquidity Management Policies 
 75 
 
 Investment/Market Risk Management 
 76 
 
 Credit Risk Management 
 77 
 
 Counterparty Risk Management 
 77 
 
 Operational Risk Management 
 78 
 
 Compliance, Regulatory and Legal Risk Management 
 78 
 
 Critical Accounting Policies and Estimates 
 79 
 
 Valuation of Financial Instruments 
 79 
 
 Residential Securities 
 79 
 
 Residential Mortgage Loans 
 79 
 
 Commercial Real Estate Investments 
 79 
 
 Interest Rate Swaps 
 80 
 
 Revenue Recognition 
 80 
 
 Consolidation of Variable Interest Entities 
 80 
 
 Use of Estimates 
 80 
 
 Glossary of Terms 
 81 
 
 50 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 2. Management’s Discussion and Analysis 

 Overview 
 We are a leading diversified capital manager that invests in and finances residential and commercial assets. 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-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Prior to the closing of the Internalization (as defined below) on June 30, 2020, we were externally managed by Annaly Management Company LLC (the “Manager”). Our common stock is listed on the New 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. 
 Recent Developments 
 Closing of the Internalization and Termination of Management Agreement 
 On February 12, 2020, the Company entered an internalization agreement (the “Internalization Agreement”) with the Manager and certain affiliates of the Manager. Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Manager and the Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($1.00). In connection with the closing of the Internalization, on June 30, 2020, Annaly acquired all of the assets and liabilities of the Manager (the net effect of which was immaterial in amount), and Annaly transitioned from an externally-managed real estate investment trust (“REIT”) to an internally-managed REIT. At the closing, all employees of the Manager became employees of Annaly. The parties terminated the Amended and Restated Management Agreement by and between Annaly and the Manager (the “Management Agreement”) and therefore we no longer pay a management fee to, or reimburse expenses of, the Manager. Pursuant to the Internalization Agreement, the Manager waived any Acceleration Fee (as defined in the Management Agreement). 
 In connection with the Internalization, we entered into employment and severance contracts with our executive officers (other than Mr. Votek) that became effective at the closing of the Internalization. 
 Strategic Relationships 
 In line with our focus on establishing and growing strategic relationships with industry leading partners, during the second quarter of 2020, we entered into a relationship with GIC Private Limited, a leading Sovereign Wealth Fund, through the creation of a joint venture with the purpose of investing in residential credit assets, including newly-originated residential loans and securities issued by our subsidiaries. 
 Retirement of Glenn A. Votek from Senior Advisor Role 
 Glenn A. Votek, our former Interim Chief Executive Officer and President, was appointed to the role of Senior Advisor to Annaly on March 13, 2020 to assist with the leadership transition upon the promotion of Mr. Finkelstein as our Chief Executive Officer. Mr. Votek has notified Annaly of his intention to retire from his role as Senior Advisor effective August 31, 2020. Mr. Votek will continue to serve as a member of our Board of Directors following his retirement as Senior Advisor. 
 Appointment of Chief Operating Officer 
 On June 30, 2020, Steven F. Campbell was appointed as our Chief Operating Officer. Mr. Campbell joined Annaly in April 2015 and was most recently serving as the Head of Business Operations. 
 
 Business Environment and Coronavirus Disease 2019 (“COVID-19”) 
 The second quarter of 2020 marked an improvement in financial conditions from the first quarter, despite protracted disruptions to the U.S. and world economies from the outbreak of COVID-19. The COVID-19 pandemic outbreak continues to affect nearly all ways of life and nearly every aspect of the economy. The far-reaching stimulus measures undertaken in March and April by the U.S. Congress and the Federal Reserve (“Fed”) have helped consumers and businesses impacted to fight the pandemic and should help support an economic recovery going forward. Indeed, following the near total cessation of all non-essential economic activity in certain U.S. cities and states in late March and April, much of the U.S. began to reopen businesses in the second half 
 
 51 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 2. Management’s Discussion and Analysis 

 of the quarter. As a result, economic activity saw a recovery from the activity lows in May and June, though the recent spike in COVID-19 cases risks delaying a continued recovery. 
 
 The outlook for the economic recovery remains uncertain as COVID-19 cases in the U.S. have been rising sharply in recent weeks. While social distancing measures and the shutdown to the economy were much less significant than during the early spring months, it remains difficult to judge the recovery timeline and the degree to which changes across the economy will be structural versus just cyclical. In the current environment, we continue to believe the Agency sector presents the most attractive investment opportunity, aided in part by the sector’s strong liquidity and lower volatility. Given the sector’s fundamental and technical factors, we anticipate further room for spread tightening throughout the remainder of the year. While we expect our allocation to credit to remain at the lower end of recent years allocation, we continue to evaluate opportunities to deploy capital across our three credit businesses, an analysis informed by increasing clarity into the underlying fundamentals of each credit sector. Overall, we maintain a constructive view of the operating environment and our ability to deliver compelling returns as each of our businesses’ respective markets begin to emerge from the volatility and disruption caused by the pandemic. 
 
 Agency mortgage-backed security (“MBS”) spreads stabilized meaningfully from the extreme volatility seen in March as the Fed intervened by buying more than $830 billion gross of portfolio paydowns between March and June, to improve market functioning. Agency MBS spreads have stabilized at levels somewhat above their average levels in 2019 as the market continues to face two major headwinds, high levels of supply and meaningfully elevated levels of prepayments, both a result of the record low in mortgage rates. In this environment, we further increased our position in MBS to-be-announced (“TBA”) contracts as these offer attractive financing conditions given the Fed’s involvement, while simultaneously rotating out of higher coupon pools into lower coupon pools to reduce premium dollar price MBS positions. Meanwhile, funding conditions have improved meaningfully from the stresses seen in March. Driven by the large-scale liquidity injections from the Fed’s asset purchases and temporary repo operations, financial system liquidity rose meaningfully, in turn increasing repo counterparties’ ability to provide funding. Moreover, with short-term interest rates at levels close to zero percent, funding costs have improved meaningfully as seen in the significant decline in the average economic cost of funds quarter over quarter. 
 
 Over the quarter, our credit business portfolios remained largely unchanged. Market conditions improved meaningfully across all credit businesses in the second quarter, though recovery varied between individual sectors. Residential credit saw a stronger recovery on the back of continued supply/demand imbalances in the loan and securitized product markets combined with the fading impact of forbearance policies implemented earlier this year. Meanwhile, commercial credit investment activity remained lackluster, with investment volumes falling some estimated 80 percent year-over-year. The reduced transaction volumes were in large part driven by continued elevated uncertainties around Commercial Real Estate (“CRE“) operating fundamentals, primarily in the hardest hit sectors such as hospitality and retail sector, while multifamily and office sector valuations have held up on continued strong rent collections. Similar to CRE, our middle market lending business has seen reduced activity, but valuations improved on better market technicals. 
 
 We took prudent steps during the second quarter with an aim of positioning the Company to be prepared to capitalize on potential opportunities that could arise in later parts of the economic recovery. As part of our preparation, we have strived to be conservative with respect to our leverage as well as our dividend. Our goal in this market environment has been to maintain strong liquidity and to manage the portfolio within conservative risk parameters to produce high quality earnings without using excess leverage or risk. 
 
 Business Continuity 
 
 Our well-established Business Continuity Planning (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise. 
 
 The BCP is regularly updated and tested. Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management. Key tenets of the planning include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations. 
 
 Historical tabletop exercises have included use of CDC Influenza Pandemic exercise materials. That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/ impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19. We took proactive actions, which included canceling non-essential travel and instituting 100% remote working, ahead of New York State-mandated requirements. To protect the health and well-being of our employees, 
 
 52 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 
 Item 2. Management’s Discussion and Analysis 

 their families and communities remote work requirements began in phases in early March, culminating with a company-wide exercise on March 13, 2020 to test connectivity and functionality. All employees were able to successfully perform their duties in this testing and we have operated remotely since that time. 
 
 As a result, all of our business activities continue to be performed remotely until such time that federal, state and local authorities issue further guidance and our Crisis Response Team deems it appropriate for employees to return to our corporate office. Throughout this period there were no significant changes to processes or controls resulting from remote work requirements. 
 
 Economic Environment 
 The pace of economic growth recorded its most meaningful contraction in several decades in the second quarter, with U.S. gross domestic product (“GDP”) registering a 32.9% decline on a seasonally adjusted annualized rate as the COVID-19 pandemic led to wide-spread closures of manufacturing and services businesses, while disrupting global supply chains. Economic growth is expected to reverse a portion of the contraction and expand in the second half of 2020 as restrictions on social distancing were eased and economic activity appears to have increased in certain parts of the country. However, the degree, timing and velocity of any recovery remains highly uncertain and it is unlikely that the economy will be able to fully replace the lost output before sometime in 2021 at the earliest. 
 The Fed conducts monetary policy with a dual mandate: full employment and price stability. The unemployment rate rose to 11.1% in June after reading just 3.5% in February prior to the COVID-19 pandemic according to the Bureau of Labor Statistics. The sharp rise in the unemployment rate was driven by employers reporting a 13.3 million decline in non-farm payrolls during the quarter as many industries laid off workers in light of closed businesses and reduced activity. The labor market saw a modest improvement in the later parts of the second quarter, with a portion of employees regaining work, though the disruption to employment remains nearly unprecedented and will take significant time to fully repair. Wage growth, as measured by the year-over-year change in private sector Average Hourly Earnings, rose sharply during the quarter, reading 5.0% in the month of June compared to 3.4% in March 2020. The sharp rise in wage growth is largely seen as a statistical anomaly. A majority of the layoffs appear to have occurred in traditionally lower-paying sectors, such as the leisure industry, which in turn inflated the wages of the remaining employed individuals. 
 Inflation has declined meaningfully below the Fed’s 2% target in the second quarter of 2020 as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”). The headline PCE measure increased by 0.75% year-over-year in June 2020. The more stable core PCE measure, which excludes volatile food and energy prices, registered a similar 0.95% year-over-year increase, below the 1.7% year-over-year growth measured in March. In light of the sharp economic downturn and the fast deceleration in inflation, the Fed appears worried that the core and headline PCE measures will remain significantly below its target for an extended period of time. 
 Following its nearly unprecedented action in the first quarter of 2020, the Federal Open Market Committee (“FOMC”) maintained the Federal Funds Rate in the 0.00% - 0.25% range during the second quarter. Moreover, the FOMC began to signal that it will maintain the rate at current levels for an extended period of time in order to aid the economic recovery following the COVID-19 related slowdown in the U.S. and global economy. In addition, the FOMC continued its quantitative easing program while implementing a number of lending programs to support the U.S. economy. The combined Fed actions have meaningfully improved financial conditions and market functioning, which in turn has helped the economic recovery in its infancy. 
 During the second quarter ending June 30, 2020, the 10-year U.S. Treasury rate remained nearly unchanged at 0.66% as Fed monetary policy actions maintained a range-bound interest rate environment in U.S. Treasuries, while LIBOR-based interest rates continued to decline in light of reduced concerns about liquidity and credit risk. The mortgage basis, or the spread between the 30-year Agency mortgage-backed security coupon and 10-year U.S. Treasury rate, normalized following a volatile first quarter, but remained somewhat higher than seen during most of 2019 amid investor concerns over mortgage refinancing activity. 
 The following table presents interest rates and spreads at each date presented: 
 
 June 30, 2020 
 
 December 31, 2019 
 
 June 30, 2019 
 
 30-Year mortgage current coupon 
 1.57% 
 
 2.71% 
 
 2.74% 
 
 Mortgage basis 
 91 bps 
 
 79 bps 
 
 73 bps 
 
 10-Year U.S. Treasury rate 
 0.66% 
 
 1.92% 
 
 2.01% 
 
 LIBOR 
 
 1-Month 
 0.16% 
 
 1.76% 
 
 2.40% 
 
 6-Month 
 0.37% 
 
 1.91% 
 
 2.20% 
 
 London Interbank Offered Rate (“LIBOR”) Transition 
 
 53 
 
 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
ANNALY CAPITAL MANAGEMENT INC 10-Q

Item 1. Financial Statements
