What changed in this filing

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Item 1. Financial Statements

2020-11-06 compared with 2020-08-06 · 436 added, 1066 removed, 586 unchanged (72% of the section changed)

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

Remaining Premium

Remaining Discount

Estimated Fair Value

(dollars in thousands)

Fixed-rate pass-through

Adjustable-rate pass-through

Interest-only

Reverse mortgages

Total agency securities

Residential credit

Prime interest-only

Prime jumbo (>=2010 vintage)

Prime jumbo (>=2010 vintage) Interest-only

Total residential credit securities

Total Residential Securities

Commercial Securities

Total securities

December 31, 2019

Remaining Premium

Remaining Discount

Estimated Fair Value

(dollars in thousands)

Fixed-rate pass-through

Adjustable-rate pass-through

Interest-only

Reverse mortgages

Total agency investments

Residential credit

Prime interest-only

Prime jumbo (>=2010 vintage)

Prime jumbo (>=2010 vintage) Interest-only

Total residential credit securities

Total Residential Securities

Commercial Securities

Total securities

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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)

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

Estimated weighted average life

(dollars in thousands)

Less than one year

Greater than one year through five years

Greater than five years through ten years

Greater than ten years

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

12 Months or more

(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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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

June 30, 2019

For the six months ended

June 30, 2020

June 30, 2019

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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 :

Corporate Debt

(dollars in thousands)

Beginning balance January 1, 2020

Impact of adopting CECL

Purchases / originations

Sales and transfers (1)

Principal payments

Gains / (losses) (2)

(Amortization) / accretion

Ending balance June 30, 2020

(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.

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 :

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

June 30, 2020

December 31, 2019

(dollars in thousands)

Unpaid principal balance

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

Net gains (losses) on disposal of investments and other

Net unrealized gains (losses) on instruments measured at fair value through earnings

Total included in net income (loss)

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

All other (none individually greater than 5%)

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 Weighted

Portfolio Weighted Average

(dollars in thousands)

Unpaid principal balance

Interest rate

0.88% - 9.24%

2.00% - 8.38%

7/1/2029 - 4/1/2060

1/1/2028 - 12/1/2059

FICO score at loan origination

Loan-to-value ratio at loan origination

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.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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

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.

Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable.

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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)

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

Portfolio (2)

Outstanding Principal

Portfolio (2)

(dollars in thousands)

Senior mortgages

Senior securitized mortgages (3)

Mezzanine loans

Carrying value includes unamortized origination fees of $ 6.9 million and $ 8.3 million at June 30, 2020 and December 31, 2019 , respectively.

Based on outstanding principal.

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 :

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

June 30, 2020

Securitized Mortgages (1)

(dollars in thousands)

Beginning balance (January 1, 2020) (2)

Originations & advances (principal)

Principal payments

Principal write off

Net (increase) decrease in origination fees

Realized gain

Amortization of net origination fees

Allowance for loan losses

Beginning allowance, prior to CECL adoption

Impact of adopting CECL

Current period allowance

Ending allowance

Net carrying value (June 30, 2020)

December 31, 2019

Securitized Mortgages (1)

(dollars in thousands)

Net carrying value (January 1, 2019)

Originations & advances (principal)

Principal payments

Net (increase) decrease in origination fees

Amortization of net origination fees

Net (increase) decrease in allowance

Net carrying value (December 31, 2019)

(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)

(dollars in thousands)

1-4 / Performing

5 / Performing - Closely Monitored

6 / Performing - Special Mention

7 / Substandard

(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 .

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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

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.

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.

Considered uncollectible.

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:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Industry Dispersion

June 30, 2020

December 31, 2019

(dollars in thousands)

Computer Programming, Data Processing & Other Computer Related Services

Management & Public Relations Services

Industrial Inorganic Chemicals

Miscellaneous Business Services

Public Warehousing & Storage

Engineering, Architectural, and Surveying

Metal Cans & Shipping Containers

Offices & Clinics of Doctors of Medicine

Surgical, Medical & Dental Instruments & Supplies

Electronic Components & Accessories

Insurance Agents, Brokers and Service

Telephone Communications

Miscellaneous Health & Allied Services, not elsewhere classified

Miscellaneous Equipment Rental & Leasing

Electric Work

Medical & Dental Laboratories

Metal Forgings & Stampings

Research, Development & Testing Services

Home Health Care Services

Motor Vehicles and Motor Vehicle Parts & Supplies

Legal Services

Petroleum and Petroleum Products

Grocery Stores

Coating, Engraving and Allied Services

Schools & Educational Services, not elsewhere classified

Chemicals & Allied Products

Machinery, Equipment & Supplies

Mailing, Reproduction, Commercial Art and Photography and Stenographic

Offices and Clinics of Other Health Practitioners

Miscellaneous Plastic Products

Nonferrous Foundries (Castings)

(1) All middle market lending positions are floating rate.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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

Second lien loans

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

(dollars in thousands)

Beginning balance (January 1, 2020) (1)

Originations & advances

Principal payments

Amortization & accretion of (premium) discounts

Loan restructuring

Allowance for loan losses

Beginning allowance, prior to CECL adoption

Impact of adopting CECL

Current period allowance

Ending allowance

Net carrying value (June 30, 2020)

(1) Excludes loan loss allowances.

December 31, 2019

(dollars in thousands)

Net carrying value (January 1, 2019)

Originations & advances

Principal payments

Amortization & accretion of (premium) discounts

Net (increase) decrease in allowance

Net carrying value (December 31, 2019)

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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)

(dollars in thousands)

1-5 / Performing

6 / Performing - Closely Monitored

7 / Substandard

(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.

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

Change in fair value due to:

Changes in valuation inputs or assumptions (1)

Other changes, including realization of expected cash flows

Fair value, end of period

(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).

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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)

Office Building

December 2019

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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.

See the “Securities” Note for further information on Residential Securities.

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Securitization

Date of Closing

Face Value at Closing

(dollars in thousands)

OBX 2018-EXP1

OBX 2018-EXP2

OBX 2019-INV1

OBX 2019-EXP1

OBX 2019-INV2

OBX 2019-EXP2

OBX 2019-EXP3

OBX 2020-INV1

OBX 2020-EXP1

February 2020

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.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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

(dollars in thousands)

Cash and cash equivalents

Assets transferred or pledged to securitization vehicles

Mortgage servicing rights

Principal and interest receivable

Debt issued by securitization vehicles (non-recourse)

Other secured financing

Payable for unsettled trades

Interest payable

Other liabilities

Total liabilities

December 31, 2019

Commercial Trusts

Residential Trusts

(dollars in thousands)

Cash and cash equivalents

Assets transferred or pledged to securitization vehicles

Mortgage servicing rights

Principal and interest receivable

Debt issued by securitization vehicles (non-recourse)

Other secured financing

Payable for unsettled trades

Interest payable

Other liabilities

Total liabilities

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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

Property Location

Principal Balance

(dollars in thousands)

No individual state greater than 5% .

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:

Building and building improvements

Furniture and fixtures

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 .

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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)

Buildings and improvements

Furniture, fixtures and equipment

accumulated depreciation

Total real estate held for investment, at amortized cost, net

Equity in unconsolidated joint ventures

Total real estate, net

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)

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.

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.

3 unchanged sentences

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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.

In the case of market agreed coupon (“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).

6 unchanged sentences

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.

At September 30, 2020 and December 31, 2019, $ 1.7 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.

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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 :

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

Derivatives Instruments

June 30, 2020

December 31, 2019

(dollars in thousands)

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 September 30, 2020 and December 31, 2019:

Derivatives Instruments September 30, 2020 December 31, 2019

Assets (dollars in thousands)

Interest rate swaps $ — $ 1,199

4 unchanged sentences

Credit derivatives (1)

Total derivative assets $ 103,245 $ 113,556

Interest rate swaps $ 1,126,179 $ 706,862

3 unchanged sentences

Credit derivatives (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.

Total derivative liabilities $ 1,182,681 $ 803,866

(1) The notional amount of the credit derivatives in which the Company purchased protection was $ 0.0 and $ 10.0 million at September 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 $ 499.0 million and $ 345.0 million at September 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-.

2 unchanged sentences

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

Current Notional (1)(2)

Weighted Average Pay Rate

Weighted Average Receive Rate

Weighted Average Years to Maturity (3)

The following table summarizes certain characteristics of the Company’s interest rate swaps at September 30, 2020 and December 31, 2019:

September 30, 2020

Maturity Current Notional (1)(2)

Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3)

(dollars in thousands)

$ 17,816,700 0.14 % 0.41 % 2.27

7,255,000 0.69 % 0.09 % 3.87

5,806,500 1.43 % 0.65 % 8.09

Greater than 10 years

1,349,000 2.90 % 0.39 % 21.85

Total / Weighted average $ 32,227,200 0.91 % 0.48 % 4.51

December 31, 2019

Current Notional (1)(2)

Maturity Current Notional (1)(2)

Weighted Average

Weighted Average Receive Rate

Weighted Average Years to Maturity

Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity

(dollars in thousands)

$ 38,942,400 1.60 % 1.84 % 1.29

16,097,450 1.77 % 1.87 % 4.30

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

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.

(1) As of September 30, 2020, 12 %, 77 % and 11 % 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.

There were no forward starting swaps at June 30, 2020 and December 31, 2019 .

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.

(2) As of September 30, 2020, notional amount includes $ 655.0 million of a forward starting pay fixed swap on October 1, 2020.

There were no forward starting swaps at December 31, 2019.

(3) As of September 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

The following table presents swaptions outstanding at September 30, 2020 and December 31, 2019.

September 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 $ 6,550,000 1.29 % 3M LIBOR 10.60 7.97

Long receive $ 250,000 1.66 % 3M LIBOR 10.27 3.20

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

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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

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

Implied Cost Basis

Implied Market Value

Net Carrying Value

The following table summarizes certain characteristics of the Company’s TBA derivatives at September 30, 2020 and December 31, 2019:

September 30, 2020

Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value

(dollars in thousands)

Purchase contracts $ 20,394,000 $ 21,176,883 $ 21,194,446 $ 17,563

Sale contracts ( 100,000 ) ( 104,844 ) ( 104,891 ) ( 47 )

Net TBA derivatives $ 20,294,000 $ 21,072,039 $ 21,089,555 $ 17,516

December 31, 2019

Purchase and sale contracts for derivative TBAs

Implied Cost Basis

Implied Market Value

Net Carrying Value

Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value

(dollars in thousands)

2 unchanged sentences

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

The following table summarizes certain characteristics of the Company’s futures derivatives at September 30, 2020 and December 31, 2019:

September 30, 2020

Notional - Long

Notional - Short

Weighted Average

Positions Notional - Short

Positions Weighted Average

Years to Maturity

1 unchanged sentence

Treasury futures - 10 year and greater

$ — $ ( 2,822,800 ) 6.90

Total $ — $ ( 2,822,800 ) 6.90

December 31, 2019

Notional - Long

Notional - Short

Weighted Average

Positions Notional - Short

Positions Weighted Average

Years to Maturity

1 unchanged sentence

Treasury futures - 2 year

$ — $ ( 180,000 ) 1.96

Treasury futures - 5 year

— ( 2,953,300 ) 4.42

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.

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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

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 September 30, 2020 and December 31, 2019, respectively.

September 30, 2020

Amounts Eligible for Offset

Gross Amounts

Financial Instruments

Cash Collateral

(dollars in thousands)

Gross Amounts Financial Instruments Cash Collateral Net Amounts

Assets (dollars in thousands)

Interest rate swaptions, at fair value $ 63,601 $ — $ — $ 63,601

TBA derivatives, at fair value 38,656 ( 18,950 ) — 19,706

Futures contracts, at fair value 550 ( 550 ) — —

Purchase commitments 438 — — 438

Interest rate swaps, at fair value $ 1,126,179 $ — $ ( 117,947 ) $ 1,008,232

1 unchanged sentence

Futures contracts, at fair value 7,792 ( 550 ) ( 7,242 ) —

Purchase commitments 488 — — 488

Credit derivatives 27,082 — ( 27,082 ) —

1 unchanged sentence

Amounts Eligible for Offset

Gross Amounts

Financial Instruments

Cash Collateral

(dollars in thousands)

Gross Amounts Financial Instruments Cash Collateral Net Amounts

Assets (dollars in thousands)

Interest rate swaps, at fair value $ 1,199 $ ( 951 ) $ — $ 248

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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

June 30, 2019

For the six months ended

June 30, 2020

June 30, 2019

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)

September 30, 2020 $ ( 62,529 ) $ ( 427 ) $ 170,327

September 30, 2019 $ 88,466 $ ( 682,602 ) $ ( 326,309 )

For the nine months ended

September 30, 2020 $ ( 141,070 ) $ ( 1,919,720 ) $ ( 1,162,768 )

September 30, 2019 $ 306,154 $ ( 1,438,349 ) $ ( 1,992,884 )

ANNALY CAPITAL MANAGEMENT, INC.

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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

Three Months Ended September 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)

1 unchanged sentence

Net interest rate swaptions ( 9,836 ) 3,263 ( 6,573 )

Futures ( 19,989 ) 10,337 ( 9,652 )

Purchase commitments — ( 51 ) ( 51 )

Credit derivatives 1,531 7,892 9,423

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

Three Months Ended September 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)

1 unchanged sentence

Net interest rate swaptions ( 2,778 ) ( 4,571 ) ( 7,349 )

Futures ( 424,268 ) 364,613 ( 59,655 )

Purchase commitments — ( 348 ) ( 348 )

Credit derivatives 1,784 885 2,669

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

Total $ ( 16,888 )

Nine Months Ended September 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)

1 unchanged sentence

Net interest rate swaptions 11,730 50,762 62,492

Futures ( 299,220 ) ( 350 ) ( 299,570 )

Purchase commitments — ( 1,194 ) ( 1,194 )

Credit derivatives 4,659 ( 31,839 ) ( 27,180 )

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

Total $ 546,658

Nine Months Ended September 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)

1 unchanged sentence

Net interest rate swaptions ( 44,088 ) 7,935 ( 36,153 )

Futures ( 1,430,450 ) 484,146 ( 946,304 )

Purchase commitments — 1,903 1,903

Credit derivatives 5,285 9,301 14,586

Total $ ( 638,458 )

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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

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.

The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at September 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.

1 unchanged sentence

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.

20 unchanged sentences

Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

For the fair value of debt issued by securitization vehicles, refer to the Note titled “Variable Interest Entities” for additional information.

2 unchanged sentences

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-

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

party pricing providers.

Model valuations are then compared to valuations obtained from third-party pricing providers.

Management reviews the valuations received from third-party pricing providers and uses them as a point of comparison to modeled values.

3 unchanged sentences

There were no transfers between levels of the fair value hierarchy during the periods presented.

June 30, 2020

(dollars in thousands)

September 30, 2020

Level 1 Level 2 Level 3 Total

Assets (dollars in thousands)

Agency mortgage-backed securities $ — $ 74,915,167 $ — $ 74,915,167

7 unchanged sentences

Other derivatives 550 102,695 — 103,245

Total assets $ 550 $ 82,741,086 $ 207,985 $ 82,949,621

Debt issued by securitization vehicles — 6,027,576 — 6,027,576

3 unchanged sentences

Total liabilities $ 7,792 $ 7,202,465 $ — $ 7,210,257

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

December 31, 2019

(dollars in thousands)

Level 1 Level 2 Level 3 Total

Assets (dollars in thousands)

Agency mortgage-backed securities $ — $ 112,893,367 $ — $ 112,893,367

8 unchanged sentences

Other derivatives 77,889 34,468 — 112,357

Total assets $ 77,889 $ 122,583,116 $ 378,078 $ 123,039,083

Debt issued by securitization vehicles $ — $ 5,622,801 $ — $ 5,622,801

3 unchanged sentences

Total liabilities $ 84,781 $ 6,341,886 $ — $ 6,426,667

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Quantitative Information about Level 3 Fair Value Measurements

12 unchanged sentences

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)

September 30, 2020 December 31, 2019

Valuation Technique Unobservable Input (1)

Range (Weighted Average ) (2)

1 unchanged sentence

Range (Weighted Average ) (2)

Discounted cash flow

Discount rate

9.0% -12.0% (9.3%)

Discounted cash flow Discount rate 9.0 % - 12.0 % ( 9.4 %)

Discount rate 9.0 % - 12.0 % ( 9.3 %)

9.0% -12.0% (9.3%)

Prepayment rate 14.6 % - 48.0 % ( 34.0 %)

11.1% - 44.7% (28.7%)

Prepayment rate 6.3 % - 26.6 % ( 13.7 %)

6.3% - 26.6% (13.7%)

Delinquency rate 0.0 % - 17.0 % ( 4.9 %)

0.0% - 9.0% (2.7%)

Delinquency rate 0.0 % - 4.0 % ( 2.2 %)

0.0% - 4.0% (2.2%)

Cost to service $ 83 - $ 223 ($ 128 )

$81 - $202 ($115)

Cost to service $ 81 - $ 135 ($ 107 )

$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

Financial assets

(dollars in thousands)

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at September 30, 2020 and December 31, 2019.

September 30, 2020 December 31, 2019

Value Carrying

Financial assets (dollars in thousands)

Commercial real estate debt and preferred equity, held for investment (1)

$ 1,456,459 $ 1,529,485 $ 1,606,091 $ 1,619,018

Corporate debt, held for investment 2,061,878 2,011,153 2,144,850 2,081,327

2 unchanged sentences

Other secured financing 861,373 861,373 4,455,700 4,455,700

Mortgage payable

Mortgages payable 507,934 594,242 485,005 515,994

(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.

Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment and mortgages 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.

4 unchanged sentences

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

over the fair value of the net assets acquired is recognized as goodwill.

The excess of the purchase price 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.

4 unchanged sentences

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 .

At September 30, 2020 and December 31, 2019, goodwill totaled $ 71.8 million.

Intangible assets, net

1 unchanged sentence

As part of the Internalization, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $ 41.2 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 .

The following table presents the activity of finite lived intangible assets for the nine months ended September 30, 2020.

Intangible Assets, net

4 unchanged sentences

amortization expense

Balance at June 30, 2020

Balance at September 30, 2020

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

SECURED FINANCING

5 unchanged sentences

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:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

June 30, 2020

Agency Mortgage-Backed Securities

Non-Agency Mortgage-Backed Securities

Residential Mortgage Loans

Commercial Loans

Commercial Mortgage-Backed Securities

Total Repurchase Agreements

Weighted Average Rate

The Company had outstanding $ 64.6 billion and $ 101.7 billion of repurchase agreements with weighted average borrowing rates of 0.81 % 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 72 days and 65 days at September 30, 2020 and December 31, 2019, respectively.

The Company has select arrangements with counterparties to enter into repurchase agreements for $ 2.4 billion with remaining capacity of $ 2.0 billion at September 30, 2020.

At September 30, 2020 and December 31, 2019, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates:

September 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 $ 2,700,000 $ — $ — $ — $ — $ — $ 2,700,000 0.13 %

2 to 29 days 23,585,476 68,994 196,748 — — 43,213 23,894,431 0.36 %

1 unchanged sentence

60 to 89 days 9,078,487 50,871 274,454 — 269,085 29,962 9,702,859 0.33 %

90 to 119 days 5,320,952 50,758 102,189 23,407 — 31,730 5,529,036 0.73 %

Over 119 days (1)

13,656,052 — 237,980 47,235 66,026 155,637 14,162,930 0.45 %

Total $ 62,804,603 $ 231,274 $ 884,809 $ 70,642 $ 335,111 $ 307,008 $ 64,633,447 0.42 %

December 31, 2019

Agency Mortgage-Backed Securities

Non-Agency Mortgage-Backed Securities

Commercial Mortgage-Backed Securities

Total Repurchase Agreements

Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Commercial

Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted

(dollars in thousands)

1 day $ — $ — $ — $ — $ — $ — — %

2 to 29 days 36,030,104 237,897 698,091 — 416,439 37,382,531 2.15 %

1 unchanged sentence

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)

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 .

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) No repurchase agreements had a remaining maturity over one year at September 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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

September 30, 2020 December 31, 2019

Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements

(dollars in thousands)

2 unchanged sentences

Netted amounts $ — $ 64,633,447 $ — $ 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”).

Other Secured Financing - The Company previously financed 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 September 30, 2020, the Company did not hold advances from the FHLB Des Moines.

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 .

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Mortgage loans payable at June 30, 2020 and December 31, 2019 , were as follows:

June 30, 2020

Carrying Value

Interest Rate

Fixed/Floating

Maturity Date

The weighted average rate of the advances from the FHLB Des Moines was 2.16 % at December 31, 2019.

The Company held $ 4.4 million and $ 147.9 million of stock in the FHLB Des Moines at September 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.

Refer to the Note titled “Variable Interest Entities” for additional information on the Company’s other secured financing arrangements.

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 $ 70.6 billion and $ 202.7 million, respectively, at September 30, 2020 and $ 112.8 billion and $ 357.9 million, respectively, at December 31, 2019.

Mortgage loans payable at September 30, 2020 and December 31, 2019, were as follows:

September 30, 2020

Property Mortgage

Carrying Value Mortgage

Principal Interest Rate Fixed/Floating

Rate Maturity Date Priority

(dollars in thousands)

Joint Ventures $ 316,661 $ 318,371 4.03 % - 4.96 %

4.03% - 4.96%

Joint Ventures

2.34% - 4.55%

1/1/2048 and 1/1/2053

Fixed 2024 - 2029 First liens

Joint Ventures 16,575 16,325 L+ 2.15 %

Floating 2/27/2022 First liens

Virginia 81,498 83,204 2.34 % - 4.55 %

Fixed 2036 - 2053 First liens

Virginia 24,457 25,000 L+ 2.85 %

Floating 5/1/2023 First liens

Texas 31,263 32,730 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 6,996 7,014 3.69 % Fixed 6/1/2053 First liens

Minnesota 13,090 13,124 3.69 % Fixed 6/1/2053 First liens

Wisconsin 7,688 7,708 3.69 % Fixed 6/1/2053 First liens

Total $ 507,934 $ 513,182

December 31, 2019

Carrying Value

Interest Rate

Fixed/Floating

Maturity Date

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 %

4.03% - 4.96%

Joint Ventures

2.34% - 4.55%

1/1/2048 and 1/1/2053

The following table details future mortgage loan principal payments at June 30, 2020 :

Mortgage Loan Principal Payments

(dollars in thousands)

2020 (remaining)

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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

The following table details future mortgage loan principal payments at September 30, 2020:

Mortgage Loan Principal Payments

(dollars in thousands)

2020 (remaining) $ 833

Later years 342,345

Total $ 513,182

CAPITAL 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

2,914,850,000

1,407,662,483

(A) Common Stock

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at September 30, 2020 and December 31, 2019.

Shares authorized Shares issued and outstanding

September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019 Par Value

2,914,850,000 2,914,850,000 1,402,928,317 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.

During the nine months ended September 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.

During the three and nine months ended September 30, 2020, the Company repurchased 4.8 million and 27.7 million shares of its common stock, respectively, for an aggregate amount of $ 31.3 million and $ 174.7 million, respectively, 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 .

During the three and nine months ended September 30, 2019, the Company repurchased 18.3 million shares of its common stock for an aggregate amount of $ 155.0 million, excluding commission costs.

All common shares purchased pursuant to this authorization were in open-market transactions.

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

Nine Months Ended

September 30, 2020 September 30, 2019

(dollars in thousands)

Shares issued through direct purchase and dividend reinvestment program

154,000 180,000

Amount raised from direct purchase and dividend reinvestment program

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.

$ 1,075 $ 1,795

In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2020, 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.

1 unchanged sentence

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.

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.

No shares were issued under the at-the-market sales program during the nine months ended September 30, 2020.

During the nine months ended

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

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

(dollars in thousands)

September 30, 2019, the Company issued 56.0 million shares for proceeds of $ 569.1 million, 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 September 30, 2020 and December 31, 2019.

Shares Authorized Shares Issued And Outstanding Carrying Value Contractual Rate Earliest Redemption Date (1)

Date At Which Dividend Rate Becomes Floating Floating Annual Rate

September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019 September 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

3M LIBOR + 4.993%

3M LIBOR + 4.172%

3M LIBOR + 4.989%

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 .

Through September 30, 2020, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.

During the three and nine months ended September 30, 2019, the Company redeemed all 7.0 million of its issued and outstanding shares of 7.625 % Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) for $ 175.0 million.

The cash redemption amount for each share of Series C Preferred Stock was $ 25.00 plus accrued and unpaid dividends to, but not including, the redemption date of July 21, 2019.

During the nine months ended September 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.

During the nine months ended September 30, 2019, the Company issued 17.7 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 $ 442.5 million befo re deducting the underwriting discount and other estimated offering expenses.

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.

Distributions to Stockholders

The following table provides a summary of the Company’s dividend distribution activity for the periods presented:

2 unchanged sentences

Financial Statements

For the Three Months Ended

For the Six Months Ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

For the Three Months Ended For the Nine Months Ended

September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019

(dollars in thousands, except per share data)

3 unchanged sentences

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

Date of distributions paid to common stockholders after period end October 30, 2020 October 31, 2019 October 30, 2020 October 31, 2019

Dividends declared to series C preferred stockholders $ — $ 742 $ — $ 7,414

32 unchanged sentences

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,

Interest income

(dollars in thousands)

The following presents the components of the Company’s interest income and interest expense for the three and nine months ended September 30, 2020 and September 30, 2019.

For the Three Months Ended September 30, For the Nine Months Ended September 30,

2020 2019 2020 2019

Interest income (dollars in thousands)

Residential Securities (1)

$ 439,502 $ 784,228 $ 1,307,566 $ 2,271,893

Residential mortgage loans (1)

42,508 37,673 132,936 102,689

Commercial investment portfolio (1) (2)

80,324 87,946 260,208 281,029

Reverse repurchase agreements 109 9,452 1,571 57,472

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Debt issued by securitization vehicles 32,491 34,524 113,367 102,882

Other 7,249 32,543 44,895 98,936

Total interest expense 115,126 766,905 804,631 2,164,817

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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

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 nine months ended September 30, 2020 and September 30, 2019.

For the Three Months Ended For the Nine Months Ended

September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019

(dollars in thousands, except per share data)

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Dividends on preferred stock (1)

35,509 36,151 106,527 101,067

Net income (loss) available (related) to common stockholders $ 980,165 $ ( 783,210 ) $ ( 1,874,906 ) $ ( 3,473,606 )

Weighted average shares of common stock outstanding-basic 1,404,202,695 1,453,359,211 1,419,645,475 1,436,204,582

1,423,909,112

1,456,038,736

1,427,451,716

1,427,485,102

Effect of stock awards, if dilutive 165,605 — — —

Weighted average shares of common stock outstanding-diluted 1,404,368,300 1,453,359,211 1,419,645,475 1,436,204,582

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

(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.

For the three months ended June 30, 2020 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860.

Basic $ 0.70 $ ( 0.54 ) $ ( 1.32 ) $ ( 2.42 )

Diluted $ 0.70 $ ( 0.54 ) $ ( 1.32 ) $ ( 2.42 )

(1) The three months ended September 30, 2019 exclude cumulative and undeclared dividends of $ 0.3 million on the Company's Series I 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 nine months ended September 30, 2020 excludes 0.5 million of potentially dilutive restricted stock units and 0.8 million of potentially dilutive restricted stock units and performance stock units because their effect would have been anti-dilutive.

For the three months ended September 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

It is generally the Company’s policy to distribute 100 % of its REIT taxable income.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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.

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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 .

Thus, no accruals for penalties and interest were deemed necessary at September 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.

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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.

During the three and nine months ended September 30, 2020, the Company recorded $ 9.7 million and ($ 14.9 ) million, respectively, of income tax expense (benefit) attributable to its TRSs.

During the three and nine months ended September 30, 2019, the Company recorded ($ 6.9 ) million and ($ 10.2 ) 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.

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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.

The significant decrease in economic activity and/or the resulting impact to 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.

If conditions related to COVID-19 continue to 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.

The full extent of the COVID 19-related disruptions, the duration of the pandemic and the effectiveness of government policies, laws and plans continue to be highly uncertain.

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;

On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Former Manager and certain affiliates of the Former Manager.

Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former 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 Former 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 Former Manager became employees of the Company.

The parties also terminated the Amended and Restated Management Agreement by and between the Company and the Former Manager (the “Management Agreement”) and therefore the Company no longer pays a management fee to, or reimburses expenses of, the Former Manager.

Pursuant to the Internalization Agreement, the Former Manager waived any Acceleration Fee (as defined in the Management Agreement).

Prior to the closing of the Internalization, the Former 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;

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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.

The Former 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 Former Manager a monthly management fee, and the Former Manager was responsible for providing personnel to manage the Company.

Prior to the closing of the Internalization, the Company had paid the Former 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 Former Manager any incentive fees.

For the six months ended June 30, 2020, the compensation and management fee computed in accordance with the Management Agreement was $ 77.9 million.

For the three and nine months ended September 30, 2019, the compensation and management fee was $ 41.2 million and $ 130.2 million, respectively.

Prior to the closing of the Internalization, the Company reimbursed the Former 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 Former Manager to the Company.

Pursuant to the Management Agreement, until the closing of the Internalization, the Company reimbursed the Former Manager for the cost of such services, provided such costs were no greater than those that would be payable to comparable third party providers.

Expense reimbursements and related waivers were routinely reviewed with the Audit Committee of the Board in conformance with established policies.

For the nine months ended September 30, 2020 and September 30, 2019, reimbursement payments to the Former Manager were $ 14.2 million and $ 14.3 million, respectively.

None of the reimbursement payments were attributable to compensation of the Company’s executive officers.

ANNALY CAPITAL MANAGEMENT, INC.

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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.

At September 30, 2020 and December 31, 2019 the Company had amounts payable to the Former Manager of $ 0 and $ 15.8 million, respectively.

LEASE COMMITMENTS AND CONTINGENCIES

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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

(dollars in thousands)

Operating lease right-of-use assets

The lease cost for the three and nine months ended September 30, 2020 was $ 0.9 million and $ 2.4 million, respectively.

Supplemental information related to leases as of and for the nine months ended September 30, 2020 was as follows:

Operating Leases Classification September 30, 2020

Assets (dollars in thousands)

Operating lease right-of-use assets Other assets $ 13,831

Operating lease liabilities (1)

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Lease term and discount rate

Weighted average remaining lease term

Weighted average remaining lease term 4.9 years

Weighted average discount rate (1)

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Maturity of Lease Liabilities

Years ending December 31,

(dollars in thousands)

Years ending December 31, (dollars in thousands)

2020 (remaining) $ 1,002

Later years 2,895

Total lease payments $ 19,401

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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 .

There were no material contingencies at September 30, 2020 and December 31, 2019.

ANNALY CAPITAL MANAGEMENT, INC.

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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 .

At September 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 .

Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at September 30, 2020 was $ 422.5 million with excess net capital of $ 422.2 million.

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 .

In October 2020, the Company repurchased 4.7 million shares of its common stock for an aggregate amount of $ 34.3 million, excluding commission costs, under the Company’s stock repurchase program.

ANNALY CAPITAL MANAGEMENT, INC.

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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.

and our ability to maintain our exemption from registration under the Investment Company Act.

For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent annual report on Form 10-K and Item 1A “Risk Factors” in this quarterly report on Form 10-Q.

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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”).

Prior to the closing of the Internalization (as defined in the “Related Party Transactions” Note located within Item 1) on June 30, 2020, we were externally managed by Annaly Management Company LLC (the “Former Manager”).

Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”

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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.

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

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.

Votek has notified Annaly of his intention to retire from his role as Senior Advisor effective August 31, 2020.

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.

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

economy rebounded at a faster pace than many had anticipated in the third quarter, best seen by the 3.2 percentage point decline in unemployment rate during the quarter to 7.9 percent in September.

Household spending rose sharply as certain sectors of the economy, most notably housing and goods consumption have shown signs of a v-shaped recovery with current activity well above levels seen ahead of the pandemic-induced economic downturn.

However, momentum in the economic recovery, which remains incomplete in aggregate despite the strength in the aforementioned sectors, is slowing as the service sector is unable to fully recover while the virus continues to surge in many states and government regulations limit social and business activities to help curb the spread of the virus.

The extended unemployment benefits afforded under the CARES Act, which meaningfully boosted incomes in the second and third quarter, expired in July although nearly half of all jobs lost during the pandemic have yet to be recovered.

The timing and speed of a U.S.

economic recovery remains highly uncertain and depends on continued monetary and fiscal policy accommodation.

In an environment similar to the second quarter, the Federal Reserve (“Fed”) continued to use all available tools to support market functioning and assist the economic recovery, while signaling it stands ready to provide more accommodation if needed.

The stable interest rate environment created by the large-scale Fed intervention and low levels of volatility across financial markets, even in light of uncertainties stemming from the 2020 U.S.

Presidential election, remained a positive backdrop for our businesses in the third quarter, allowing us to generate a 6.3% economic return during the quarter, while core earnings (excluding PAA) exceeded our dividend by ten cents.

Additionally, we achieved these results while reducing our leverage to 6.2x, reflecting that we maintain a cautious approach following the elevated market volatility back in March 2020.

Although our Agency MBS portfolio was largely unchanged in notional terms over the third quarter, we maintain a positive outlook.

The sector performed well during the third quarter as continued sizeable Fed purchases, now totaling more than $700 billion net of paydowns since March, combined with strong demand from banks, offset the high levels of supply and continued elevated prepayment speeds.

Given the Fed involvement in the market, we further shifted the Agency portfolio out of higher coupon specified pools into lower coupon specified pools and production coupon to-be-announced (“TBA”) contracts, such as 30-year UMBS 1.5% and 2.0%s.

While specified pool collateral offers meaningful call protection, more consistently accurate model durations, and exhibit better supply and demand dynamics than generic pools, TBAs currently offer improved float from Fed purchases removing the most negatively convex pools and attractive implied financing rates, allowing us to finance TBAs well below comparable specified pool collateral.

The attractive implied financing rates from TBA dollar roll specialness will not last in perpetuity, but they contribute to excess returns and serve to mitigate potential episodes of spread widening, such that, all other things being equal, we anticipate maintaining TBA positions in excess of their traditional portfolio share while the Fed remains heavily involved in the market.

Meanwhile, we continue to find value in specified pools as the investments we have made in specified pools over the last number of years are further paying off in this environment, exemplified by our portfolio prepaying roughly at a level of two third the level of prepayments of the 30-year fixed rate mortgage universe.

At September 30, 2020, 96% of our portfolio was comprised of high or medium quality specified pools or mortgages that are seasoned by at least 40 month and remains well positioned to withstand the current environment of elevated prepayment speeds.

In light of the low volatility interest rate environment, we were able to focus on our hedging activity on protecting the portfolio from tail risk as we opportunistically added out of the money swaptions at attractive pricing given low implied volatility in option pricing, while we also added modestly to our swaps and futures positions.

Funding remains widely available and balance sheet availability is strong given the abundance in reserves in the system.

Financing spreads have tightened for certain credit products.

and we have been able to amend and renegotiate a portion of our warehouse lines, which has decreased costs and improved our flexibility in light.

ANNALY CAPITAL MANAGEMENT, INC.

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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.

The aggregate portfolio of our credit businesses declined slightly in the third quarter, resulting in capital allocated to the credit businesses to decline to 20% as of September 30, 2020.

The decline was mainly driven by two residential credit securitizations we completed during the third quarter totaling $1 billion, which was the main reason for our reduced capital allocated in the quarter.

Fundamentals in the residential credit sectors continue to improve on the back of the strong housing market, as evidenced by less than 5% of the market is now in forbearance which is down from 9% in late May.

We continue to expand the sourcing of mortgage loans, activity which has increased slowly following the cessation in the activity following the market volatility in March.

Meanwhile, we have seen a reopening of loan channels in the Commercial Real Estate sector and are selectively evaluating new opportunities.

We do remain focused on portfolio management we continue to be in active dialogue with our borrowers to closely monitor underlying performance trends.

It is likely that parts of the commercial real estate landscape will be persistently changed by the pandemic, but it is still early to judge the full extent.

With respect to portfolio fundamentals in the Middle Market Lending business, underlying cash flow trends have been encouraging year over year, as sound EBITDA and revenue growth have helped to consistently delever our portfolio’s underlying portfolio companies.

Despite the decline in capital allocated to our credit businesses, tighter Agency spreads and the potential for improving macroeconomic indicators leave us focused on finding opportunities in credit sectors.

We anticipate potentially higher capital allocation on the margin to Residential Credit and Middle Market Lending, all else equal over the next few quarters.

Additionally, we analyze the buyback of common stock as part of our capital allocation framework.

We repurchased over $200 million in stock throughout the past six months at times when our evaluation deemed it the most attractive use of capital, and we will continue to consider using the buyback authorization as a tool to generate shareholder return when prudent to do so.

Business Continuity

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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,

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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.

To protect the health and well-being of our employees, 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 largely remotely since that time.

A majority of our business activities continue to be performed remotely, though we have seen a limited number of employees return to the office on a voluntary and periodic basis.

We continue to monitor guidance from federal, state and local authorities to gauge how to further proceed in any efforts to return to the office.

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.

Following the meaningful contraction in the second quarter, the pace of economic growth rebounded in the third quarter, with U.S.

gross domestic product (“GDP”) rising 33.1% on a seasonally adjusted annualized rate.

The rebound in U.S.

economic output was driven by the gradual reopening of manufacturing and services businesses, as well as a strong rebound in consumption.

The degree of the economic recovery nonetheless varies greatly between strong demand for goods and more muted demand for services, which continue to face the majority of impediments from social distancing measures and capacity limits to fight the pandemic.

Despite the improvements from the COVID-19 recession lows, much further progress must be made to reach output levels seen prior to the pandemic.

The degree, timing and velocity of the remaining recovery is highly uncertain and it is unlikely that the economy will be able to fully replace the lost output in aggregate 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.

The unemployment rate fell 3.2 percentage points in the third quarter to 7.9% in September according to the Bureau of Labor Statistics.

This marks a faster speed to the labor market recovery than previously anticipated as many workers were able to regain employment as pandemic restrictions were lifted or modified.

However, the job gains, while strong late in the second and early in third quarter, have

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Management’s Discussion and Analysis

slowed in recent months, suggesting that the remaining 48 percent of workers that have not been able to regain employment will have more difficulty obtaining employment.

Wage growth, as measured by the year-over-year change in private sector Average Hourly Earnings, contracted modestly during the quarter, reading 4.7% in the month of September compared to 4.9% in June 2020.

The continued elevated 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.

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.

Similar to the labor market, inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), have rebounded from their lows in the second quarter, though remain below the Fed’s 2% target in the third quarter of 2020.

The headline PCE measure increased by 1.37% year-over-year in September 2020.

The more stable core PCE measure, which excludes volatile food and energy prices, registered a similar 1.55% year-over-year increase, above the 1.14% year-over-year growth measured in June.

In support of the U.S.

economic recovery, Federal Open Market Committee (“FOMC”) maintained the Federal Funds Rate in the 0.00% - 0.25% range during the third quarter of 2020 and continued to signal that it will maintain the rate at current levels for an extended period of time.

In addition, the FOMC continued its quantitative easing and a number of lending programs.

The combined Fed actions have continued to support financial conditions and market functioning, which in turn has helped the economic recovery.

During the third quarter of 2020, the 10-year U.S.

Treasury rate remained nearly unchanged at 0.68% 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.

Treasuries and LIBOR-based interest rates.

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.

Treasury rate, continued to compress following much volatility during the first half of 2020 as mortgage-backed securities saw strong demand from numerous investors.

The following table presents interest rates and spreads at each date presented:

June 30, 2020

December 31, 2019

June 30, 2019

September 30, 2020 December 31, 2019 September 30, 2019

30-Year mortgage current coupon 1.40% 2.71% 2.61%

Mortgage basis

Mortgage basis 72 bps 79 bps 95 bps

Treasury rate 0.68% 1.92% 1.66%

1-Month 0.15% 1.76% 2.02%

6-Month 0.26% 1.91% 2.06%

London Interbank Offered Rate (“LIBOR”) Transition

We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates.

Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders.

The committee also continues to engage with industry working groups and other market participants regarding the transition.

As part of the transition from LIBOR, in October 2020, we participated in the Chicago Mercantile Exchange (“CME”) Group’s transitioning for price alignment and discounting for USD OTC cleared swaps from the daily effective federal funds rate to the secured overnight financing rate (“SOFR”).

As a result of this activity, our existing swap and swaption positions have been updated with the new SOFR discounting curve and basis swaps entered into during this transition were sold in the CME Group’s auction on October 19, 2020.

Results of Operations

The results of our operations are affected by various factors, many of which are beyond our control.

Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A.

“Risk Factors” of our most recent Annual Report on Form 10-K and in Part II, Item 1A.

“Risk Factors” in this Quarterly Report on Form 10-Q and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S.

generally accepted accounting principles (“GAAP”) and non-GAAP measurements.

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

Net Income (Loss) Summary

The following table presents financial information related to our results of operations as of and for the three and nine months ended September 30, 2020 and 2019.

As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30,

2020 2019 2020 2019

(dollars in thousands, except per share data)

Interest income $ 562,443 $ 919,299 $ 1,702,281 $ 2,713,083

Interest expense 115,126 766,905 804,631 2,164,817

Net interest income 447,317 152,394 897,650 548,266

Realized and unrealized gains (losses) 618,823 (875,406) (2,524,967) (3,796,814)

Other income (loss) 7,959 35,074 38,109 93,757

Total general and administrative expenses 48,832 66,138 194,127 228,283

Income (loss) before income taxes 1,025,267 (754,076) (1,783,335) (3,383,074)

Income taxes 9,719 (6,907) (14,928) (10,241)

Net income (loss) 1,015,548 (747,169) (1,768,407) (3,372,833)

Net income (loss) attributable to noncontrolling interests (126) (110) (28) (294)

Net income (loss) attributable to Annaly 1,015,674 (747,059) (1,768,379) (3,372,539)

Dividends on preferred stock (1)

35,509 36,151 106,527 101,067

Net income (loss) available (related) to common stockholders $ 980,165 $ (783,210) $ (1,874,906) $ (3,473,606)

Net income (loss) per share available (related) to common stockholders

Basic $ 0.70 $ (0.54) $ (1.32) $ (2.42)

Diluted $ 0.70 $ (0.54) $ (1.32) $ (2.42)

Weighted average number of common shares outstanding

Basic 1,404,202,695 1,453,359,211 1,419,645,475 1,436,204,582

Diluted 1,404,368,300 1,453,359,211 1,419,645,475 1,436,204,582

Other information

Asset portfolio at period-end $ 87,155,310 $ 125,840,378 $ 87,155,310 $ 125,840,378

Average total assets $ 91,325,532 $ 130,378,448 $ 102,465,855 $ 121,429,243

Average equity $ 13,996,138 $ 15,465,556 $ 14,124,037 $ 15,207,589

Leverage at period-end (2)

5.1:1 7.3:1 5.1:1 7.3:1

Economic leverage at period-end (3)

6.2:1 7.7:1 6.2:1 7.7:1

Capital ratio (4)

13.6 % 11.2 % 13.6 % 11.2 %

Annualized return on average total assets 4.45 % (2.29 %) (2.30 %) (3.70 %)

Annualized return on average equity 29.02 % (19.32 %) (16.69 %) (29.57 %)

Net interest margin (5)

2.15 % 0.48 % 1.27 % 0.61 %

Average yield on interest earning assets (6)

2.70 % 2.89 % 2.40 % 3.02 %

Average GAAP cost of interest bearing liabilities (7)

0.60 % 2.58 % 1.23 % 2.66 %

Net interest spread 2.10 % 0.31 % 1.17 % 0.36 %

Weighted average experienced CPR for the period 22.9 % 14.6 % 18.7 % 11.0 %

Weighted average projected long-term CPR at period-end 17.1 % 16.3 % 17.1 % 16.3 %

Common stock book value per share $ 8.70 $ 9.21 $ 8.70 $ 9.21

Non-GAAP metrics (8)

Interest income (excluding PAA) $ 596,322 $ 1,036,451 $ 2,078,624 $ 3,051,869

Economic interest expense (7)

$ 177,655 $ 678,439 $ 945,701 $ 1,858,663

Economic net interest income (excluding PAA) $ 418,667 $ 358,012 $ 1,132,923 $ 1,193,206

Premium amortization adjustment cost (benefit) $ 33,879 $ 117,152 $ 376,343 $ 338,786

Core earnings (excluding PAA) (9)

$ 482,323 $ 341,931 $ 1,237,121 $ 1,166,239

Core earnings (excluding PAA) per common share $ 0.32 $ 0.21 $ 0.80 $ 0.74

Annualized core return on average equity (excluding PAA) 13.79 % 8.85 % 11.68 % 10.23 %

Net interest margin (excluding PAA) (5)

2.05 % 1.10 % 1.67 % 1.29 %

Average yield on interest earning assets (excluding PAA) (6)

2.86 % 3.26 % 2.93 % 3.39 %

Average economic cost of interest bearing liabilities (7)

0.93 % 2.28 % 1.44 % 2.29 %

Net interest spread (excluding PAA) 1.93 % 0.98 % 1.49 % 1.10 %

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

What changed 10-Q

Item 1. Financial Statements