What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-06 · 396 added, 437 removed, 1054 unchanged (44% of the section changed)

Management’s Discussion and Analysis

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.

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.

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 six months ended June 30, 2020 and 2019 .

As of and for the Three Months Ended June 30,

As of and for the Six Months Ended June 30,

(dollars in thousands, except per share data)

Interest income

Interest expense

Net interest income

Realized and unrealized gains (losses)

Other income (loss)

Total general and administrative expenses

Income (loss) before income taxes

Net income (loss)

Net income (loss) attributable to noncontrolling interests

Net income (loss) attributable to Annaly

Dividends on preferred stock

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

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

Weighted average number of common shares outstanding

1,423,909,112

1,456,038,736

1,427,451,716

1,427,485,102

1,423,909,112

1,456,038,736

1,427,451,716

1,427,485,102

Other information

Asset portfolio at period-end

Average total assets

Average equity

Leverage at period-end (1)

Economic leverage at period-end (2)

Capital ratio (3)

Annualized return on average total assets

Annualized return on average equity

Net interest margin (4)

Average yield on interest earning assets (5)

Average GAAP cost of interest bearing liabilities (6)

Net interest spread

Weighted average experienced CPR for the period

Weighted average projected long-term CPR at period-end

Common stock book value per share

Non-GAAP metrics (7)

Interest income (excluding PAA)

Economic interest expense (6)

Economic net interest income (excluding PAA)

Premium amortization adjustment cost (benefit)

Core earnings (excluding PAA) (8)

Core earnings (excluding PAA) per common share

Annualized core return on average equity (excluding PAA)

Net interest margin (excluding PAA) (4)

Average yield on interest earning assets (excluding PAA) (5)

Average economic cost of interest bearing liabilities (6)

Net interest spread (excluding PAA)

(1) The three months ended September 30, 2019 exclude cumulative and undeclared dividends of $0.3 million on our Series I Preferred Stock as of June 30, 2019.

(2) Debt consists of repurchase agreements, other secured financing, debt issued by securitization vehicles and mortgages payable.

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(4) Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs.

(4) Net interest margin r epresents our interest income less interest expense divided by the average interest earning assets.

Net interest margin (excluding PAA) r epresents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

(5) Net interest margin represents our interest income less interest expense divided by the average interest earning assets.

Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

(6) Average yield on interest earning assets represents annualized interest income divided by average interest earning assets.

8 unchanged sentences

(9) Excludes dividends on preferred stock.

Net income (loss) was $856.2 million , which includes $32.0 thousand attributable to noncontrolling interests, or $0.58 per average basic common share, for the three months ended June 30, 2020 compared to ($1.8) billion , which includes ($83.0) thousand attributable to noncontrolling interests, or ($1.24) per average basic common share, for the same period in 2019 .

We attribute the majority of the change in net income (loss) to favorable changes in unrealized gains (losses) on interest rate swaps, net gains (losses) on other derivatives, net gains (losses) on disposal of investments and other and net unrealized gains (losses) on instruments measured at fair value through earnings, and higher net interest income, partially offset by higher realized losses on termination or maturity of interest rate swaps.

Net unrealized gains (losses) on interest rate swaps was $1.5 billion for the three months ended June 30, 2020 compared to ($1.3) billion for the same period in 2019 .

Net gains (losses) on other derivatives was $170.9 million for the three months ended June 30, 2020 compared to ($506.4) million for the same period in 2019 .

Net gains (losses) on disposal of investments and other was $246.7 million for the three months ended June 30, 2020 compared to ($38.3) million for the same period in 2019 .

Unrealized gains (losses) on instruments measured at fair value through earnings for the three months ended June 30, 2020 was $254.8 million compared to ($4.9) million for the same period in 2019 .

Net interest income for the three months ended June 30, 2020 was $398.8 million compared to $177.4 million for the same period in 2019 .

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.5) billion for the three months ended June 30, 2020 compared to ($167.5) million for the same period in 2019 .

Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.

Net income (loss) was ($2.8) billion , which includes $0.1 million attributable to noncontrolling interests, or ($2.00) per average basic common share, for the six months ended June 30, 2020 compared to ($2.6) billion , which includes ($0.2) million attributable to noncontrolling interests, or ($1.88) per average basic common share, for the same period in 2019 .

We attribute the majority of the change in net income (loss) to higher realized losses on termination or maturity of interest rate swaps, lower interest income and an unfavorable change in net unrealized gains (losses) on instruments measured at fair value through earnings, partially offset by a favorable change in net gains (losses) on other derivatives, lower interest expense and a favorable change in net gains (losses) on disposal of investments and other.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.9) billion for the six months ended June 30, 2020 compared to ($755.7) million for the same period in 2019 .

Interest income for the six months ended June 30, 2020 was $1.1 billion compared to $1.8 billion for the same period in 2019 .

Unrealized gains (losses) on instruments measured at fair value through earnings for the six months ended June 30, 2020 was ($475.4) million compared to $42.7 million for the same period in 2019 .

Net gains (losses) on other derivatives was $377.3 million for the six months ended June 30, 2020 compared to ($621.6) million for the same period in 2019 .

Interest expense for the six months ended June 30, 2020 was $689.5 million compared to $1.4 billion for the same period in 2019 .

Net gains (losses) on disposal of investments and other was $453.3 million for the six months ended June 30, 2020 compared to ($132.2) million for the same period in 2019 .

Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.

Core earnings (excluding premium amortization adjustment (“PAA”)) were $424.6 million , or $0.27 per average common share, for the three months ended June 30, 2020 , compared to $391.2 million , or $0.25 per average common share, for the same period in 2019 .

The change in core earnings (excluding PAA) during the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower interest expense from lower borrowing rates and higher TBA dollar roll income, partially offset by lower coupon income resulting from a decrease in the average yield on interest earnings assets and lower average interest earning assets, and unfavorable changes in the net interest component of interest rate swaps.

Core earnings (excluding premium amortization adjustment (“PAA”)) were $754.8 million , or $0.48 per average common share, for the six months ended June 30, 2020 , compared to $824.3 million , or $0.53 per average common share, for the same period in 2019 .

The change in core earnings (excluding PAA) during the three months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower coupon income resulting from a decrease in the average yield on interest earnings assets, increased amortization due to asset sales and unfavorable changes in the net interest component of interest rate swaps, partially offset by lower interest expense from lower borrowing rates and higher TBA dollar roll income.

Net income (loss) was $1.0 billion, which includes ($0.1) million attributable to noncontrolling interests, or $0.70 per average basic common share, for the three months ended September 30, 2020 compared to ($747.2) million, which includes ($0.1) million attributable to noncontrolling interests, or ($0.54) per average basic common share, for the same period in 2019.

We attribute the majority of the change in net income (loss) to favorable changes in realized gains (losses) on termination or maturity of interest rate swaps, unrealized gains (losses) on interest rate swaps, net interest income and net gains (losses) on other derivatives.

Realized gains (losses) on termination or maturity of interest rate swaps was ($0.4) million for the three months ended September 30, 2020 compared to ($682.6) million for the same period in 2019.

Net unrealized gains (losses) on interest rate swaps was $170.3 million for the three months ended September 30, 2020 compared to ($326.3) million for the same period in 2019.

Net interest income for the three months ended September 30, 2020 was $447.3 million compared to $152.4 million for the same period in 2019.

Net gains (losses) on other derivatives was $169.3 million for the three months ended September 30, 2020 compared to ($16.9) million for the same period in 2019.

Refer to the sections titled “Non-GAAP” and “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.

Net income (loss) was ($1.8) billion, which includes ($28.0) thousand attributable to noncontrolling interests, or ($1.32) per average basic common share, for the nine months ended September 30, 2020 compared to ($3.4) billion, which includes ($0.3) million attributable to noncontrolling interests, or ($2.42) per average basic common share, for the same period in 2019.

We attribute the majority of the change in net income (loss) to favorable changes in net gains (losses) on other derivatives, unrealized gains (losses) on interest rate swaps, net gains (losses) on disposal of investments and other and net interest income, partially offset by unfavorable changes in realized gains (losses) on termination or maturity of interest rate swaps, the net interest component of interest rate swaps and net unrealized gains (losses) on instruments measured at fair value through earnings.

Net gains (losses) on other derivatives was $546.7 million for the nine months ended September 30, 2020 compared to ($638.5) million for the same period in 2019.

Unrealized gains (losses) on interest rate swaps was ($1.2) billion for the nine months ended September 30, 2020 compared to ($2.0) billion for the same period in 2019.

Net gains (losses) on disposal of investments and other was $652.2 million for the nine months ended September 30, 2020 compared to ($65.7) million for the same period in 2019.

Net interest income for the nine months ended September 30, 2020 was $897.7 million compared to $548.3 million for the same period in 2019.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.9) billion for the nine months ended September 30, 2020 compared to ($1.4) billion for the same period in 2019.

The net interest component of interest rate swaps was ($141.1) million for the nine months ended September 30, 2020 compared to $306.2 million for the same period in 2019.

Unrealized gains (losses) on instruments measured at fair value through earnings for the nine months ended September 30, 2020 was ($354.1) million compared to $41.7 million for the same period in 2019.

Refer to the sections titled “Non-GAAP” and “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Core earnings (excluding premium amortization adjustment (“PAA”)) were $482.3 million, or $0.32 per average common share, for the three months ended September 30, 2020, compared to $341.9 million, or $0.21 per average common share, for the same period in 2019.

Core earnings (excluding premium amortization adjustment (“PAA”)) were $1.2 billion, or $0.80 per average common share, for the nine months ended September 30, 2020, compared to $1.2 billion, or $0.74 per average common share, for the same period in 2019.

The changes in core earnings (excluding PAA) during the three and nine months ended September 30, 2020 compared to the same periods in 2019 were primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities, and higher TBA dollar roll income, partially offset by lower coupon income resulting from a decrease in the average yield on interest earnings assets and lower average interest earning assets, and unfavorable changes in the net interest component of interest rate swaps.

Non-GAAP Financial Measures

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We generate net income by earning a net interest spread on our investment portfolio, which is a function of interest income from our investment portfolio less financing, hedging and operating costs.

Core earnings (excluding PAA), which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation and amortization expense on real estate and related intangibles, non-core income allocated to equity method investments and other non-core components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-core income (loss) items), and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective.

We seek to fulfill our principal business objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of our capital allocation policy and risk governance framework.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-core income (loss) items), and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective.

We believe these non-GAAP measures provide management and investors with additional details regarding our underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to provide additional transparency into the operating performance of our portfolio.

Annualized core return on average equity (excluding PAA), which is calculated by dividing core earnings (excluding PAA) over average stockholders’ equity, provides investors with additional detail on the core earnings generated by our invested equity capital.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

The following table presents a reconciliation of GAAP financial results to non-GAAP core earnings for the periods presented:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

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

2020 2019 2020 2019

(dollars in thousands, except per share data)

9 unchanged sentences

Loan loss provision (1)

(21,818) 3,504 150,719 9,207

Other adjustments

Depreciation expense related to commercial real estate and amortization of intangibles (2)

11,363 9,974 28,011 30,235

Non-core (income) loss allocated to equity method investments (3)

(1,151) 4,541 22,465 25,364

Transaction expenses and non-recurring items (4)

2,801 2,622 11,121 15,650

Income tax effect of non-core income (loss) items 13,890 (2,762) (6,619) (5,543)

TBA dollar roll income and CMBX coupon income (5)

114,092 15,554 256,520 86,917

MSR amortization (6)

(27,048) (21,963) (70,873) (55,599)

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

Core earnings (excluding PAA) (7)

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

Dividends on preferred stock (8)

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

Core earnings (excluding PAA) attributable to common stockholders (7)

$ 446,814 $ 305,780 $ 1,130,594 $ 1,065,172

GAAP net income (loss) per average common share $ 0.70 $ (0.54) $ (1.32) $ (2.42)

Core earnings (excluding PAA) per average common share (7)

$ 0.32 $ 0.21 $ 0.80 $ 0.74

GAAP return (loss) on average equity 29.02 % (19.32 %) (16.69 %) (29.57 %)

Core return on average equity (excluding PAA) (7)

Includes $3.8 million and $4.5 million of loss provision on the Company’s unfunded loan commitments for the three and six months ended June 30, 2020, respectively, which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

13.79 % 8.85 % 11.68 % 10.23 %

(1) Includes $0.2 million and $4.6 million of loss provision on the Company’s unfunded loan commitments for the three and nine months ended September 30, 2020, respectively, which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

(2) Includes depreciation and amortization expense related to equity method investments.

(3) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR which is a component of Other income (loss).

The three and six months ended June 30, 2020 includes costs incurred in connection with the Internalization and costs incurred in connection with the CEO transition.

The six months ended June 30, 2020 also includes costs incurred in connection with securitizations of residential whole loans and Agency mortgage-backed securities.

The three and six months ended June 30, 2019 includes costs incurred in connection with a securitization of residential whole loans .

The six months ended June 30, 2019 also includes costs incurred in connection with a securitization of commercial loans.

(4) The three and nine months ended September 30, 2020 includes costs incurred in connection with the a securitization of residential whole loans .

The nine months ended September 30, 2020 also includes costs incurred in connection with the Internalization, the CEO search process and a securitization of Agency mortgage-backed securities.

The three and nine months ended September 30, 2019 includes costs incurred in connection with a securitization of residential whole loans.

The nine months ended September 30, 2019 also includes costs incurred in connection with a securitization of commercial loans.

(5) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives.

CMBX coupon income totaled $1.6 million and $2.7 million for the three and six months ended June 30, 2020 .

CMBX coupon income totaled $0.8 million and $1.9 million for the three and six months ended June 30, 2019 , respectively.

CMBX coupon income totaled $1.5 million and $4.3 million for the three and nine months ended September 30, 2020.

CMBX coupon income totaled $1.5 million and $3.4 million for the three and nine months ended September 30, 2019, respectively.

(6) MSR amortization represents the portion of changes in fair value that is attributable to the realization of estimated cash flows on the Company’s MSR portfolio and is reported as a component of Net unrealized gains (losses) on instruments measured at fair value.

(7) Represents a non-GAAP financial measure.

(8) The three months ended September 30, 2019 exclude cumulative and undeclared dividends of $0.3 million on our Series I Preferred Stock as of June 30, 2019.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency mortgage-backed securities.

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The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued during the financing period.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency mortgage-backed security less an implied financing cost.

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The following table illustrates the impact of the PAA on premium amortization expense for our Residential Securities portfolio and residential securities transferred or pledged to securitization vehicles, for the periods presented:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

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

2020 2019 2020 2019

(dollars in thousands)

2 unchanged sentences

Premium amortization expense (excluding PAA) $ 214,839 $ 259,154 $ 760,000 $ 603,553

Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)

Interest income (excluding PAA) represents interest income excluding the effect of the premium amortization adjustment, and serves as the basis for deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

related to our Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.

Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)

We believe this measure provides management and investors with additional detail to enhance their understanding of our operating results and trends by excluding the component of premium amortization expense representing the cumulative effect of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.

Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

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In accordance with GAAP, upfront payments associated with MAC interest rate swaps are not reflected in the net interest component of interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss).

We did not enter into any MAC interest rate swaps during the three and six months ended June 30, 2020 .

We did not enter into any MAC interest rate swaps during the three and nine months ended September 30, 2020.

Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.

1 unchanged sentence

Interest Income (excluding PAA)

GAAP Interest Income

Interest Income (excluding PAA) (1)

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

GAAP Interest Income PAA Cost

(Benefit) Interest Income (excluding PAA) (1)

For the three months ended (dollars in thousands)

September 30, 2020 $ 562,443 $ 33,879 $ 596,322

September 30, 2019 $ 919,299 $ 117,152 $ 1,036,451

For the nine months ended

September 30, 2020 $ 1,702,281 $ 376,343 $ 2,078,624

September 30, 2019 $ 2,713,083 $ 338,786 $ 3,051,869

(1) Represents a non-GAAP financial measure.

Economic Interest Expense and Economic Net Interest Income (excluding PAA)

Net Interest Component of Interest Rate Swaps

Economic Interest

Net Interest Component of Interest Rate Swaps Economic Interest

Net Interest Component

of Interest Rate Swaps

Economic Net Interest Income (excluding PAA) (1)

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

(Benefit) Economic Net Interest Income (excluding PAA) (1)

For the three months ended (dollars in thousands)

September 30, 2020 $ 115,126 $ 62,529 $ 177,655 $ 447,317 $ 62,529 $ 384,788 $ 33,879 $ 418,667

September 30, 2019 $ 766,905 $ (88,466) $ 678,439 $ 152,394 $ (88,466) $ 240,860 $ 117,152 $ 358,012

For the nine months ended

September 30, 2020 $ 804,631 $ 141,070 $ 945,701 $ 897,650 $ 141,070 $ 756,580 $ 376,343 $ 1,132,923

September 30, 2019 $ 2,164,817 $ (306,154) $ 1,858,663 $ 548,266 $ (306,154) $ 854,420 $ 338,786 $ 1,193,206

(1) Represents a non-GAAP financial measure.

2 unchanged sentences

In general, as prepayment speeds and expectations of prepayment speeds on our Agency mortgage-backed securities portfolio increase, related purchase premium amortization increases, thereby reducing the yield on such assets.

The following table presents the weighted average experienced CPR and weighted average projected long-term CPR on our Agency mortgage-backed securities portfolio as of and for the periods presented.

The following table presents the weighted average

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Management’s Discussion and Analysis

experienced CPR and weighted average projected long-term CPR on our Agency mortgage-backed securities portfolio as of and for the periods presented.

Experienced CPR (1)

1 unchanged sentence

For the three months ended

June 30, 2020

June 30, 2019

For the six months ended

June 30, 2020

June 30, 2019

For the three and six months ended June 30, 2020 and 2019 , respectively.

At June 30, 2020 and 2019 , respectively.

September 30, 2020 22.9 % 17.1 %

September 30, 2019 14.6 % 16.3 %

For the nine months ended

September 30, 2020 18.7 % 17.1 %

September 30, 2019 11.0 % 16.3 %

(1) For the three and nine months ended September 30, 2020 and 2019, respectively.

(2) At September 30, 2020 and 2019, respectively.

Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA) and Average Economic Cost of Interest Bearing Liabilities

5 unchanged sentences

Average Yield on Interest Earning Assets (excluding PAA) (2)

Average Interest Bearing Liabilities

Economic Interest Expense (2)(3)

Average Interest Bearing Liabilities Economic Interest Expense (2)(3)

Average Economic Cost of Interest Bearing Liabilities (2)(3)

1 unchanged sentence

Net Interest Spread (excluding PAA) (2)

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

For the three months ended (dollars in thousands)

September 30, 2020 $ 83,286,119 $ 596,322 2.86 % $ 74,901,128 $ 177,655 0.93 % 418,667 1.93 %

September 30, 2019 $ 127,207,668 $ 1,036,451 3.26 % $ 116,391,094 $ 678,439 2.28 % 358,012 0.98 %

For the nine months ended

September 30, 2020 $ 94,607,284 $ 2,078,624 2.93 % $ 86,214,496 $ 945,701 1.44 % 1,132,923 1.49 %

September 30, 2019 $ 119,918,692 $ 3,051,869 3.39 % $ 107,182,973 $ 1,858,663 2.29 % 1,193,206 1.10 %

(1) Based on amortized cost.

3 unchanged sentences

Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Net Interest Margin (excluding PAA)

1 unchanged sentence

TBA Dollar Roll and CMBX Coupon Income (2)

Interest Expense

Net Interest Component of Interest Rate Swaps

Average Interest Earnings Assets

Average TBA Contract and CMBX Balances

Net Interest Margin (excluding PAA) (1)

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

Interest Expense Net Interest Component of Interest Rate Swaps Subtotal Average Interest Earnings Assets Average TBA Contract and CMBX Balances Subtotal Net Interest Margin (excluding PAA) (1)

For the three months ended (dollars in thousands)

September 30, 2020 $ 596,322 114,092 (115,126) (62,529) $ 532,759 $ 83,286,119 20,429,935 $ 103,716,054 2.05 %

September 30, 2019 $ 1,036,451 15,554 (766,905) 88,466 $ 373,566 $ 127,207,668 9,248,502 $ 136,456,170 1.10 %

For the nine months ended

September 30, 2020 $ 2,078,624 256,520 (804,631) (141,070) $ 1,389,443 $ 94,607,284 16,341,140 $ 110,948,424 1.67 %

September 30, 2019 $ 3,051,869 86,917 (2,164,817) 306,154 $ 1,280,123 $ 119,918,692 12,311,322 $ 132,230,014 1.29 %

(1) Represents a non-GAAP financial measure.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

(2) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives.

CMBX coupon income totaled $1.6 million and $2.7 million for the three and six months ended June 30, 2020 , respectively.

CMBX coupon income totaled $0.8 million and $1.9 million for the three and six months ended June 30, 2019 , respectively.

CMBX coupon income totaled $1.5 million and $4.3 million for the three and nine months ended September 30, 2020, respectively.

CMBX coupon income totaled $1.5 million and $3.4 million for the three and nine months ended September 30, 2019, respectively.

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

3 unchanged sentences

Interest Bearing

Interest Bearing Liabilities at

Liabilities Interest Bearing Liabilities at

Period End Economic

Average Economic

Liabilities (2)

LIBOR Average

One-Month LIBOR

Average Economic Cost

Month LIBOR Average Economic Cost

Average Six-Month LIBOR

For the three months ended

June 30, 2020

June 30, 2019

For the six months ended

June 30, 2020

June 30, 2019

September 30, 2020 $ 74,901,128 $ 71,522,396 $ 177,655 0.93 % 0.16 % 0.31 % (0.15 %) 0.77 % 0.62 %

September 30, 2019 $ 116,391,094 $ 111,004,216 $ 678,439 2.28 % 2.18 % 2.11 % 0.07 % 0.10 % 0.17 %

For the nine months ended

September 30, 2020 $ 86,214,496 $ 71,522,396 $ 945,701 1.44 % 0.64 % 0.83 % (0.19 %) 0.80 % 0.61 %

September 30, 2019 $ 107,182,974 $ 111,004,216 $ 1,858,663 2.29 % 2.37 % 2.45 % (0.08 %) (0.08 %) (0.16 %)

(1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

(2) Represents a non-GAAP financial measure.

Economic interest expense decreased by $416.0 million for the three months ended June 30, 2020 compared to the same period in 2019 .

Economic interest expense decreased by $412.2 million for the six months ended June 30, 2020 compared to the same period in 2019 .

The change in each period was due to lower borrowing rates and decreases in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was ($64.6) million for the three months ended June 30, 2020 compared to $83.7 million for the same period in 2019 and ($78.5) million for the six months ended June 30, 2020 compared to $217.7 million for the same period in 2019 .

Economic interest expense decreased by $500.8 million for the three months ended September 30, 2020 compared to the same period in 2019.

Economic interest expense decreased by $913.0 million for the nine months ended September 30, 2020 compared to the same period in 2019.

The change in each period was due to lower borrowing rates and decreases in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was ($62.5) million for the three months ended September 30, 2020 compared to $88.5 million for the same period in 2019 and ($141.1) million for the nine months ended September 30, 2020 compared to $306.2 million for the same period in 2019.

We do not manage our portfolio to have a pre-designated amount of borrowings at quarter or year end.

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Moreover, we generally use interest rate swaps, swaptions and other derivative instruments to hedge our portfolio, and as we pledge or receive collateral under these agreements, our borrowings on any given day may be increased or decreased.

Our average borrowings during a quarter may differ from period end borrowings as we implement our portfolio management strategies and risk management strategies over changing market conditions by increasing or decreasing leverage.

Our average borrowings during a quarter may differ from period

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

end borrowings as we implement our portfolio management strategies and risk management strategies over changing market conditions by increasing or decreasing leverage.

Additionally, these numbers may differ during periods when we conduct equity capital raises, as in certain instances we may purchase additional assets and increase leverage in anticipation of an equity capital raise.

Since our average borrowings and period end borrowings can be expected to differ, we believe our average borrowings during a period provide a more accurate representation of our exposure to the risks associated with leverage than our period end borrowings.

At June 30, 2020 and December 31, 2019 , the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans.

At September 30, 2020 and December 31, 2019, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans.

All of our Residential Securities are currently accepted as collateral for these borrowings.

However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and maintain the liquidity and strength of our balance sheet.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Realized and Unrealized Gains (Losses)

Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swaps, net gains (losses) on disposal of investments and other, net gains (losses) on other derivatives and net unrealized gains (losses) on instruments measured at fair value through earnings.

These components of realized and unrealized gains (losses) for the three and six months ended June 30, 2020 and 2019 were as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

These components of realized and unrealized gains (losses) for the three and nine months ended September 30, 2020 and 2019 were as follows:

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

2020 2019 2020 2019

(dollars in thousands)

Net gains (losses) on interest rate swaps (1)

$ 107,371 $ (920,445) $ (3,223,558) $ (3,125,079)

Net gains (losses) on disposal of investments and other 198,888 66,522 652,150 (65,727)

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Loan loss provision 21,993 (3,504) (146,084) (9,207)

Total $ 618,823 $ (875,406) $ (2,524,967) $ (3,796,814)

(1) Includes the net interest component of interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps and unrealized gains (losses) on interest rate swaps.

For the Three Months Ended June 30, 2020 and 2019

Net gains (losses) on interest rate swaps for the three months ended June 30, 2020 was ($91.7) million compared to ($1.4) billion for the same period in 2019 .

The change was primarily attributable to favorable changes in unrealized gains (losses) on interest rate swaps, partially offset by unfavorable changes in realized gains (losses) on termination or maturity of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $1.5 billion for the three months ended June 30, 2020 , reflecting the reversal of unrealized losses upon termination of swaps during the period compared to ($1.3) billion for the same period in 2019 , reflecting a decline in forward interest rates during the period.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.5) billion resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $38.2 billion and $38.1 billion, respectively, for the three months ended June 30, 2020 compared to ($167.5) million resulting from the termination or maturity of fixed-rate payer interest rate swaps with a notional amount of $18.6 billion for the same period in 2019 .

Net gains (losses) on disposal of investments and other was $246.7 million for the three months ended June 30, 2020 compared to ($38.3) million for the same period in 2019 .

For the three months ended June 30, 2020 , we disposed of Residential Securities with a carrying value of $5.5 billion for an aggregate net gain of $259.9 million .

For the Three Months Ended September 30, 2020 and 2019

Net gains (losses) on interest rate swaps for the three months ended September 30, 2020 was $107.4 million compared to ($920.4) million for the same period in 2019.

The change was primarily attributable to lower realized losses on termination or maturity of interest rate swaps and favorable changes in unrealized gains (losses) on interest rate swaps.

Realized gains (losses) on termination or maturity of interest rate swaps was ($0.4) million resulting from interest rate swaps with a notional amount of $375.0 million for the three months ended September 30, 2020 compared to ($682.6) million resulting from the termination or maturity of interest rate swaps with a notional amount of $30.6 billion for the same period in 2019.

Unrealized gains (losses) on interest rate swaps was $0.2 billion for the three months ended September 30, 2020, reflecting a rise in forward interest rates during the period compared to ($326.3) million for the same period in 2019, which reflected a decline in forward interest rates during the earlier period.

Net gains (losses) on disposal of investments and other was $198.9 million for the three months ended September 30, 2020 compared to $66.5 million for the same period in 2019.

For the three months ended September 30, 2020, w e recognized a realized gain of $104.8 million as a result of deconsolidating a multifamily VIE and we disposed of Residential Securities with a carrying value of $2.8 billion for an aggregate net gain of $103.9 million.

For the same period in 2019, we disposed of Residential Securities with a carrying value of $11.1 billion for an aggregate net loss of $76.3 million.

Net gains (losses) on other derivatives was $170.9 million for the three months ended June 30, 2020 compared to ($506.4) million for the same period in 2019 .

The change in net gains (losses) on other derivatives was primarily comprised of lower net losses on futures derivatives, which was ($17.3) million for the three months ended June 30, 2020 compared to ($597.2) million for the same period in 2019 and higher net gains on TBA derivatives, which was $204.2 million for the three months ended June 30, 2020 compared to $105.9 million for the same period in 2019 .

Net unrealized gains (losses) on instruments measured at fair value through earnings was $254.8 million for the three months ended June 30, 2020 compared to ($4.9) million for the same period in 2019 , primarily due to favorable changes in unrealized gains (losses) on commercial securitized loans of consolidated VIEs, credit risk transfer securities, residential loans and non-Agency mortgage-backed securities, partially offset by unfavorable changes in unrealized gains (losses) on commercial securitized debt of consolidated VIEs for the three months ended June 30, 2020 compared to the same period in 2019 .

For the three months ended June 30, 2020 , a loan loss provision of ($68.8) million was recorded on commercial mortgage and corporate loans.

No loan loss provision was recorded on loans for the three months ended June 30, 2019 .

Refer to the “Loans” Note located within Item 1 for additional information related to these loan loss provisions.

For the Six Months Ended June 30, 2020 and 2019

Net gains (losses) on interest rate swaps for the six months ended June 30, 2020 was ($3.3) billion compared to ($2.2) billion for the same period in 2019 , primarily attributable to unfavorable changes in realized gains (losses) on termination or maturity of interest rate swaps.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.9) billion resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $65.0 billion and $38.1 billion, re spectively, for the six months ended June 30, 2020 compared to ($755.7) million resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $45.4 billion and $11.3 billion, respectively, for the same period in 2019 .

Net gains (losses) on other derivatives was $169.3 million for the three months ended September 30, 2020 compared to ($16.9) million for the same period in 2019.

The change in net gains (losses) on other derivatives was primarily comprised of higher net gains on TBA derivatives, which was $176.2 million for the three months ended September 30, 2020 compared to $47.8 million for the same period in 2019 and lower net losses on futures derivatives, which was ($9.7) million for the three months ended September 30, 2020 compared to ($59.7) million for the same period in 2019.

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Management’s Discussion and Analysis

Net gains (losses) on disposal of investments and other was $453.3 million for the six months ended June 30, 2020 compared to ($132.2) million for the same period in 2019 .

For the six months ended June 30, 2020 , we disposed of Residential Securities with a carrying value of $47.4 billion for an aggregate net gain of $527.1 million .

Net unrealized gains (losses) on instruments measured at fair value through earnings was $121.3 million for the three months ended September 30, 2020 compared to ($1.1) million for the same period in 2019, primarily due to favorable changes in unrealized gains (losses) on securitized debt of consolidated VIEs backed by Agency mortgage-backed securities, commercial securitized loans of consolidated VIEs and securitized residential whole loans of consolidated VIEs, partially offset by unfavorable changes in unrealized gains (losses) on commercial securitized debt of consolidated VIEs and Agency interest-only securities for the three months ended September 30, 2020 compared to the same period in 2019.

For the three months ended September 30, 2020, a net loan loss provision reversal of $22.0 million was recorded on commercial mortgage and corporate loans.

For the three months ended September 30, 2019, a loan loss provision of ($3.5) million was recorded on a commercial mortgage loan.

Refer to the “Loans” Note located within Item 1 for additional information related to these loan loss provisions.

For the Nine Months Ended September 30, 2020 and 2019

Net gains (losses) on interest rate swaps for the nine months ended September 30, 2020 was ($3.2) billion compared to ($3.1) billion for the same period in 2019, primarily attributable to higher realized losses on termination or maturity of interest rate swaps and an unfavorable change in the net interest component of interest rate swaps, partially offset by lower unrealized losses on interest rate swaps.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.9) billion resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $65.4 billion and $38.1 billion, respectively, for the nine months ended September 30, 2020 compared to ($1.4) billion resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $75.7 billion and $11.6 billion, respectively, for the same period in 2019.

The net interest component of interest rate swaps was ($141.1) million for the nine months ended September 30, 2020, compared to $306.2 million for the same period in 2019, reflecting a decrease in rates combined with the timing of rate resets during the period and changes in notional balance.

Unrealized gains (losses) on interest rate swaps was ($1.2) billion for the nine months ended September 30, 2020, reflecting a decline in forward interest rates during the period compared to ($2.0) billion for the same period in 2019, which reflected a steeper decline in forward interest rates during the earlier period.

Net gains (losses) on disposal of investments and other was $652.2 million for the nine months ended September 30, 2020 compared to ($65.7) million for the same period in 2019.

For the nine months ended September 30, 2020, we disposed of Residential Securities with a carrying value of $50.2 billion for an aggregate net gain of $631.1 million and we recognized a realized gain of $104.8 million as a result of deconsolidating a multifamily VIE.

For the same period in 2019, we disposed of Residential Securities with a carrying value of $30.7 billion for an aggregate net loss of ($50.6) million.

Net gains (losses) on other derivatives was $377.3 million for the six months ended June 30, 2020 compared to ($621.6) million for the same period in 2019 .

The change in net gains (losses) on other derivatives was primarily comprised of lower net losses on futures derivatives, which was ($289.9) million for the six months ended June 30, 2020 compared to ($886.6) million for the same period in 2019 and higher net gains on TBA derivatives, which was $635.9 million for the six months ended June 30, 2020 compared to $279.7 million for the same period in 2019 .

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($475.4) million for the six months ended June 30, 2020 compared to $42.7 million for the same period in 2019 , primarily due to unfavorable changes in unrealized gains (losses) on commercial securitized loans of consolidated VIEs, securitized debt of consolidated VIEs backed by Agency mortgage-backed securities, Agency interest-only securities, credit risk transfer securities and residential loans, partially offset by favorable changes in unrealized gains (losses) on commercial securitized debt of consolidated VIEs for the six months ended June 30, 2020 compared to the same period in 2019 .

For the six months ended June 30, 2020 , a loan loss provision of ($168.1) million was recorded on commercial mortgage and corporate loans.

For the six months ended June 30, 2019 , a loan loss provision of ($5.7) million was recorded on a commercial mortgage loan.

Net gains (losses) on other derivatives was $546.7 million for the nine months ended September 30, 2020 compared to ($638.5) million for the same period in 2019.

The change in net gains (losses) on other derivatives was primarily comprised of higher net gains on TBA derivatives, which was $812.1 million for the nine months ended September 30, 2020 compared to $327.5 million for the same period in 2019 and lower net losses on futures derivatives, which was ($299.6) million for the nine months ended September 30, 2020 compared to ($946.3) million for the same period in 2019.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($354.1) million for the nine months ended September 30, 2020 compared to $41.7 million for the same period in 2019, primarily due to unfavorable changes in unrealized gains (losses) on commercial securitized loans of consolidated VIEs, Agency interest-only securities, credit risk transfer securities and residential loans, partially offset by favorable changes in unrealized gains (losses) on commercial securitized debt of consolidated VIEs for the nine months ended September 30, 2020 compared to the same period in 2019.

For the nine months ended September 30, 2020, a loan loss provision of ($146.1) million was recorded on commercial mortgage and corporate loans.

For the nine months ended September 30, 2019, a loan loss provision of ($9.2) million was recorded on a commercial mortgage loan.

Refer to the “Loans” Note located within Item 1 for additional information related to these loan loss provisions.

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Given the nature of certain components of this line item, balances may fluctuate from period to period.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of compensation and management fee and other expenses.

General and administrative (“G&A”) expenses consist of compensation and management fee (until closing of the Internalization) and other expenses.

The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented.

2 unchanged sentences

Total G&A Expenses/Average Equity (1)

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

Includes $1.1 million of costs incurred in connection with the Internalization and costs incurred in connection with the CEO transition for the three months ended June 30, 2020 .

Includes $8.3 million of transaction costs incurred in connection with securitizations of residential whole loans and Agency mortgage-backed securities as well as costs incurred in connection with the Internalization and costs incurred in connection with the CEO transition for the six months ended June 30, 2020 .

Includes $3.0 million and $13.0 million of transaction costs incurred in connection with securitizations of residential whole loans and commercial loans for the three and six months ended June 30, 2019 , respectively.

Excluding these transaction costs, G&A expenses as a percentage of average total assets were 0.28% and 0.26% and as a percentage of average equity were 2.01% and 1.94% for the three and six months ended June 30, 2020 , respectively.

Excluding these transaction costs, G&A expenses as a percentage of average total assets were 0.24% and 0.25% and as a percentage of average equity were 1.91% and 1.96% for the three and six months ended June 30, 2019 , respectively.

G&A expenses were $67.7 million for the three months ended June 30, 2020 , a decrease of $10.7 million compared to the same period in 2019 .

G&A expenses were $145.3 million for the six months ended June 30, 2020 , a decrease of $16.9 million compared to the same period in 2019 .

The change in each period was largely attributable to lower management fees in the second quarter

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

and first half of 2020 reflecting lower adjusted stockholders’ equity balances compared to the same periods in 2019 and lower transaction costs in the second quarter and first half of 2020 compared to the same periods in 2019.

For the three months ended (dollars in thousands)

September 30, 2020 $ 48,832 0.21 % 1.40 %

September 30, 2019 $ 66,138 0.20 % 1.71 %

For the nine months ended

September 30, 2020 $ 194,127 0.25 % 1.83 %

September 30, 2019 $ 228,283 0.25 % 2.00 %

(1) Includes $2.8 million of transaction costs incurred in connection with securitizations of residential whole loans for the three months ended September 30, 2020.

Includes $11.1 million of transaction costs incurred in connection with securitizations of residential whole loans and Agency mortgage-backed securities as well as costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process for the nine months ended September 30, 2020.

Includes $2.6 million of transaction costs incurred in connection with a securitization of residential whole loans for the three months ended September 30, 2019.

Includes $15.7 million of transaction costs incurred in connection with securitizations of residential whole loans and commercial loans for the nine months ended September 30, 2019.

Excluding these transaction costs, G&A expenses as a percentage of average total assets were 0.20% and 0.24% and as a percentage of average equity were 1.32% and 1.73% for the three and nine months ended September 30, 2020, respectively.

Excluding these transaction costs, G&A expenses as a percentage of average total assets were 0.19% and 0.23% and as a percentage of average equity were 1.64% and 1.86% for the three and nine months ended September 30, 2019, respectively.

G&A expenses were $48.8 million for the three months ended September 30, 2020, a decrease of $17.3 million compared to the same period in 2019, primarily due to lower compensation costs during the third quarter of 2020 compared with the same period in 2019 as a result of cost savings generated from the Internalization which closed on June 30, 2020.

G&A expenses were $194.1 million for the nine months ended September 30, 2020, a decrease of $34.2 million compared to the same period in 2019, primarily due to lower compensation costs, reflecting cost savings generated from the Internalization and lower management fees in the first half of 2020 reflecting lower adjusted stockholders’ equity balances compared to the same period in 2019, and lower transaction costs during the nine months ended September 30, 2020 compared to the same period in 2019.

Return on Average Equity

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Realized and Unrealized Gains and Losses/Average Equity (2)

Other Income (Loss)/Average Equity

G&A Expenses/ Average Equity

Taxes/ Average Equity

Other Income (Loss)/Average Equity G&A Expenses/ Average Equity Income

Taxes/ Average Equity Return on

Average Equity

For the three months ended

June 30, 2020

June 30, 2019

For the six months ended

June 30, 2020

June 30, 2019

September 30, 2020 11.01 % 19.47 % 0.23 % (1.40 %) (0.29 %) 29.02 %

September 30, 2019 6.23 % (24.93 %) 0.91 % (1.71 %) 0.18 % (19.32 %)

For the nine months ended

September 30, 2020 7.14 % (22.49 %) 0.36 % (1.83 %) 0.13 % (16.69 %)

September 30, 2019 7.49 % (35.97 %) 0.82 % (2.00 %) 0.09 % (29.57 %)

(1) Economic net interest income includes the net interest component of interest rate swaps.

2 unchanged sentences

With our available-for-sale accounting treatment on our Agency mortgage-backed securities, which represent the largest portion of assets on balance sheet, as well as certain commercial mortgage-backed securities, unrealized fluctuations in market values of assets do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss).

As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting.

As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

As a result, comparisons with companies that use amortized cost accounting for some or all of their balance sheet may not be meaningful.

The table below shows cumulative unrealized gains and losses on our available-for-sale investments reflected in the Consolidated Statements of Financial Condition.

June 30, 2020

December 31, 2019

September 30, 2020 December 31, 2019

(dollars in thousands)

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A very large negative change in the net fair value of our available-for-sale Residential Securities might impair our liquidity position, requiring us to sell assets with the potential result of realized losses upon sale.

The fair value of these securities being less than amortized cost at June 30, 2020 is solely due to market conditions and not the quality of the assets.

The fair value of these securities being less than amortized cost at September 30, 2020 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.

2 unchanged sentences

Financial Condition

Total assets were $93.5 billion and $130.3 billion at June 30, 2020 and December 31, 2019 , respectively.

The change, consistent with our portfolio repositioning to strengthen our balance sheet in the first quarter of 2020, was primarily due to a decrease in Agency mortgage-backed securities of $36.1 billion, excluding assets transferred or pledged to securitization vehicles, non-Agency mortgage-backed securities of $0.5 billion and residential mortgage loans of $0.5 billion, partially offset by an increase in assets

Total assets were $89.2 billion and $130.3 billion at September 30, 2020 and December 31, 2019, respectively.

The change, consistent with our portfolio repositioning to strengthen our balance sheet in the first quarter of 2020, was primarily due to a decrease in Agency mortgage-backed securities of $38.5 billion, including assets transferred or pledged to securitization vehicles, residential mortgage loans of $0.5 billion and non-Agency mortgage-backed securities of $0.4 billion.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at September 30, 2020:

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

transferred or pledged to securitization vehicles of $0.7 billion.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at June 30, 2020 :

Agency MBS and MSRs

Non-Agency MBS and Residential Mortgage Loans (2)

Investments in CRE

Corporate Debt

(dollars in thousands)

Residential Commercial

Agency MBS and MSRs TBAs (1)

CRTs Non-Agency MBS and Residential Mortgage Loans (2)

Investments Investments in CRE Corporate Debt Total (3)

Assets (dollars in thousands)

Fair value/carrying value $ 75,746,802 $ 21,089,555 $ 411,538 $ 4,459,240 $ 3,685,255 $ 790,597 $ 2,061,878 $ 87,155,310

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Net equity allocated (%) 80 % — % 1 % 4 % 4 % 2 % 9 % 100 %

Debt/net equity ratio

Debt/net equity ratio 5.7:1 NM 1.3:1 8.2:1 5.5:1 1.8:1 0.7:1 5.1:1 (5)

(1) Fair value/carrying value represents implied market value and repurchase agreements represent the notional value.

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Residential Securities

Substantially all of our Agency mortgage-backed securities at June 30, 2020 and December 31, 2019 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

Substantially all of our Agency mortgage-backed securities at September 30, 2020 and December 31, 2019 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

Our mortgage-backed securities were largely Freddie Mac, Fannie Mae or Ginnie Mae pass through certificates or CMOs, which carry an actual or implied “AAA” rating.

1 unchanged sentence

We accrete discount balances as an increase to interest income over the expected life of the related interest earning assets and we amortize premium balances as a decrease to interest income over the expected life of the related interest earning assets.

At June 30, 2020 and December 31, 2019 we had on our Consolidated Statements of Financial Condition a total of $92.8 million and $156.9 million , respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $3.8 billion and $5.3 billion , respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency mortgage-backed securities portfolio for the three months ended June 30, 2020 and 2019 was 19.5% and 11.2% , respectively.

The weighted average projected long-term prepayment speed on our Agency mortgage-backed securities portfolio as of June 30, 2020 and 2019 was 18.0% and 14.5% , respectively.

At September 30, 2020 and December 31, 2019 we had on our Consolidated Statements of Financial Condition a total of $92.1 million and $156.9 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $3.8 billion and $5.3 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency mortgage-backed securities portfolio for the three months ended September 30, 2020 and 2019 was 22.9% and 14.6%, respectively.

The weighted average projected long-term prepayment speed on our Agency mortgage-backed securities portfolio as of September 30, 2020 and 2019 was 17.1% and 16.3%, respectively.

Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period.

Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period.

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at September 30, 2020 and December 31, 2019.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at June 30, 2020 and December 31, 2019 .

June 30, 2020

December 31, 2019

September 30, 2020 December 31, 2019

Estimated Fair Value

(dollars in thousands)

Agency (dollars in thousands)

Fixed-rate pass-through $ 72,210,570 $ 108,723,414

Adjustable-rate pass-through 527,267 1,524,331

CMO 152,513 160,016

Interest-only 465,376 708,562

Multifamily 1,503,413 1,717,197

Reverse mortgages 56,028 59,847

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Residential credit

CRT $ 411,538 $ 531,322

Alt-A 90,954 151,383

Prime 186,178 276,257

Prime interest-only 1,191 3,167

Subprime 119,547 348,979

NPL/RPL 281,869 164,268

Prime jumbo (>= 2010 vintage) 36,204 184,664

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Total Residential Securities $ 76,044,307 $ 114,560,557

The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at June 30, 2020 and December 31, 2019 .

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

June 30, 2020

December 31, 2019

September 30, 2020 December 31, 2019

Residential Securities (1)

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Principal amount $ 69,004,541 $ 107,412,143

Net premium 3,091,544 4,309,668

Amortized cost 72,096,084 111,721,811

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Weighted average yield 4.82 % 3.52 %

Weighted average term to next adjustment

Weighted average term to next adjustment 16 Months 13 Months

Weighted average lifetime cap (2)

0.38 % 8.24 %

Principal amount at period end as % of total residential securities 1.80 % 2.34 %

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Notional amount $ 3,696,743 $ 5,447,193

Net premium 610,922 876,129

Amortized cost 610,922 876,129

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Weighted average coupon rate 4.22 % 3.29 %

Weighted average yield

Weighted average yield NM 1.73 %

(1) Excludes interest-only mortgage-backed securities.

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NM Not meaningful.

The following tables summarize certain characteristics of our Residential Credit portfolio at June 30, 2020 .

Payment Structure

Investment Characteristics

Credit Enhancement

Delinquencies

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

The following tables summarize certain characteristics of our Residential Credit portfolio at September 30, 2020.

Payment Structure Investment Characteristics

Product Total Senior Subordinate Coupon Credit Enhancement 60+

Delinquencies 3M VPR (1)

(dollars in thousands)

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Private label credit risk transfer 13,873 — 13,873 5.60 % — % 4.69 % 33.94 %

Alt-A 90,954 26,379 64,575 3.70 % 8.32 % 19.13 % 16.44 %

Prime 186,178 28,640 157,538 4.17 % 8.75 % 12.83 % 22.26 %

Prime interest-only 1,191 1,191 — 0.46 % — 6.20 % 40.34 %

Subprime 119,547 66,303 53,244 1.05 % 8.97 % 20.96 % 5.93 %

Re-performing loan securitizations 273,393 142,960 130,433 4.19 % 33.47 % 22.24 % 5.40 %

Non-performing loan securitizations 8,476 8,476 — 3.67 % 31.00 % 83.41 % — %

Prime jumbo (>=2010 vintage) 36,204 — 36,204 3.82 % 2.23 % 4.99 % 50.31 %

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Total/weighted average (2)

$ 1,129,140 $ 275,608 $ 853,532 3.87 % 11.34 % 13.55 % 23.43 %

(1) Represents the 3 month voluntary prepayment rate (“VPR”).

(2) Total investment characteristics exclude the impact of IOs.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Interest-Only

Estimated Fair Value

Product ARM Fixed Floater Interest-Only Estimated Fair Value

(dollars in thousands)

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Private label credit risk transfer — — 13,873 — 13,873

Alt-A 28,251 47,803 14,900 — 90,954

Prime 29,866 130,153 26,159 — 186,178

Prime interest-only — — — 1,191 1,191

Subprime — 3,975 115,415 157 119,547

Re-performing loan securitizations — 273,393 — — 273,393

Non-performing loan securitizations — 8,476 — — 8,476

Prime jumbo (>=2010 vintage) — 36,204 — — 36,204

Prime jumbo (>=2010 vintage) interest-only — — — 1,659 1,659

Total $ 58,117 $ 500,004 $ 568,012 $ 3,007 $ 1,129,140

Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at June 30, 2020 .

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at September 30, 2020.

The table does not include the effect of net interest rate payments on our interest rate swap agreements.

The net swap payments will fluctuate based on monthly changes in the floating rate.

At June 30, 2020 , the interest rate swaps had a net fair value of ($1.2) billion .

Three to Five

At September 30, 2020, the interest rate swaps had a net fair value of ($1.1) billion.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Year One to Three

Years Three to Five

Years More than

Five Years Total

(dollars in thousands)

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Interest expense on repurchase agreements (1)

59,043 — — — 59,043

Other secured financing 13,923 18,920 828,530 — 861,373

Interest expense on other secured financing (1)

19,090 36,668 19,116 — 74,874

Debt issued by securitization vehicles (principal) — — 185,909 5,841,938 6,027,847

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Long-term operating lease obligations 3,955 7,723 7,723 — 19,401

Interest expense on repurchase agreements and other secured financing calculated based on rates at June 30, 2020 .

Total $ 64,917,024 $ 385,809 $ 1,446,951 $ 9,569,912 $ 76,319,696

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at September 30, 2020.

In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our current operations via repurchase agreements.

We may use securitization structures, credit facilities, mortgages payable or other term financing structures to finance certain of our assets.

During the six months ended June 30, 2020 , we received $9.3 billion from principal repayments and $46.8 billion in cash from disposal of Residential Securities.

During the six months ended June 30, 2019 , we received $6.1 billion from principal repayments and $13.2 billion in cash from disposal of Residential Securities.

During the nine months ended September 30, 2020, we received $14.4 billion from principal repayments and $50.3 billion in cash from disposal of Residential Securities.

During the nine months ended September 30, 2019, we received $11.2 billion from principal repayments and $19.7 billion in cash from disposal of Residential Securities.

Off-Balance Sheet Arrangements

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In addition, we have provided customary non-recourse carve-out and environmental guarantees (or underlying indemnities with respect thereto) with respect to mortgage loans held by subsidiaries of these unconsolidated joint ventures.

We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at June 30, 2020 .

We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at September 30, 2020.

Capital Management

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of critical importance to our business strategy.

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

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

“Risk Factors” in this Quarterly Report on Form 10-Q and in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.

Capital requirements are based on maintaining levels above approved thresholds, ensuring the quality of our capital appropriately reflects our asset mix, market and funding structure.

In the event we fall short of our internal thresholds, we will consider appropriate actions which may include asset sales, changes in asset mix, reductions in asset purchases or originations, issuance of capital or other capital enhancing or risk reduction strategies.

Stockholders’ Equity

The following table provides a summary of total stockholders’ equity at June 30, 2020 and December 31, 2019 :

June 30, 2020

December 31, 2019

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Stockholders’ Equity

(dollars in thousands)

The following table provides a summary of total stockholders’ equity at September 30, 2020 and December 31, 2019:

September 30, 2020 December 31, 2019

Stockholders’ equity (dollars in thousands)

7.50% Series D cumulative redeemable preferred stock $ 445,457 $ 445,457

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6.75% Series I fixed-to-floating rate cumulative redeemable preferred stock 428,324 428,324

Common stock 14,029 14,301

Additional paid-in capital 19,798,032 19,966,923

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The following table provides activity related to our Direct Purchase and Dividend Reinvestment Program for the periods presented:

For the Three Months Ended

June 30, 2020

June 30, 2019

For the Nine Months Ended

September 30, 2020 September 30, 2019

(dollars in thousands)

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Amount raised from direct purchase and dividend reinvestment program $ 1,075 $ 1,795

During the six months ended June 30, 2019 , we 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, we 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, we 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.

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 , we issued 8.0 million and 56.0 million shares, respectively, for proceeds of $80.1 million and $569.1 million, respectively, net of commissions and fees, under the at-the-market sales program.

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

During the nine months ended September 30, 2019, we issued 56.0 million shares for proceeds of $569.1 million, net of commissions and fees, under the at-the-market sales program.

In June 2019, we announced that our Board had authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock through December 31, 2020.

During the three and six months ended June 30, 2020 , we repurchased an aggregate of 22.9 million shares of our common stock for an aggregate amount of $143.3 million, excluding commission costs.

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

All common shares purchased were part of a publicly announced plan in open-market transactions.

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

During the three and nine months ended September 30, 2019, we redeemed all 7.0 million of our 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, we redeemed all 2.2 million of our 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 nine months ended September 30, 2019, we issued 17.7 million shares of our 6.750% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock for gross proceeds of $442.5 million before deducting the underwriting discount and other estimated offering costs.

Leverage and Capital

We believe that it is prudent to maintain conservative debt-to-equity and economic leverage ratios as there may be continued

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

During the three and six months ended June 30, 2019 , we redeemed all 2.2 million of our 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 , we issued 16.0 million shares of our 6.750% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock for gross proceeds of $400.0 million before deducting the underwriting discount and other estimated offering costs.

Leverage and Capital

We believe that it is prudent to maintain conservative debt-to-equity and economic leverage ratios as there may be continued volatility in the mortgage and credit markets.

volatility in the mortgage and credit markets.

Our capital policy governs our capital and leverage position including setting limits.

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Our actual economic leverage ratio varies from time to time based upon various factors, including our opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions.

Our debt-to-equity ratio at June 30, 2020 and December 31, 2019 was 5.5:1 and 7.1:1 , respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA derivative and CMBX notional outstanding and net forward purchases (sales) of investments divided by total equity was 6.4:1 and 7.2:1 at June 30, 2020 and December 31, 2019 , respectively.

Our capital ratio, which represents our ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives and shown net of debt issued by securitization vehicles), was 13.0% and 12.0% at June 30, 2020 and December 31, 2019 , respectively.

Our debt-to-equity ratio at September 30, 2020 and December 31, 2019 was 5.1:1 and 7.1:1, respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA derivative and CMBX notional outstanding and net forward purchases (sales) of investments divided by total equity was 6.2:1 and 7.2:1 at September 30, 2020 and December 31, 2019, respectively.

Our capital ratio, which represents our ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives and shown net of debt issued by securitization vehicles), was 13.6% and 12.0% at September 30, 2020 and December 31, 2019, respectively.

Risk Management

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The risk appetite statement asserts the following key risk parameters to guide our investment management activities:

Risk Parameter

Portfolio Composition

We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy.

We generally expect to maintain an economic leverage ratio no greater than 10:1.

Liquidity Risk

We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions.

Interest Rate Risk

We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation.

We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns.

Capital Preservation

We will seek to protect our capital base through disciplined risk management practices.

We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Risk Parameter Description

Portfolio Composition We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy.

Leverage We generally expect to maintain an economic leverage ratio no greater than 10:1.

Liquidity Risk We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions.

Interest Rate Risk We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation.

Credit Risk We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns.

Capital Preservation We will seek to protect our capital base through disciplined risk management practices.

Compliance We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act.

Risk management begins with our Board, through the review and oversight of the risk management framework, and executive management, through the ongoing formulation of risk management practices and related execution in managing risk.

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The BAC is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor selection, evaluation and review, and oversight of the internal audit function.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Risk assessment and risk management are the responsibility of our management.

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We have identified the following primary categories that we utilize to identify, assess, measure and monitor risk.

Capital, Liquidity and Funding Risk

Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding.

Investment/Market Risk

Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused by changes in market variables, such as interest rates, which affect the values of investment securities and other investment instruments.

Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms of any contract or otherwise failure to perform as agreed.

Risk Description

Capital, Liquidity and Funding Risk Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding.

Investment/Market Risk Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused by changes in market variables, such as interest rates, which affect the values of investment securities and other investment instruments.

Credit Risk Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms of any contract or otherwise failure to perform as agreed.

This risk is present in lending and investing activities.

Counterparty Risk

Risk to earnings, capital or business resulting from a counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed.

Counterparty Risk Risk to earnings, capital or business resulting from a counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed.

This risk is present in funding, hedging and investing activities.

Operational Risk

Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including proprietary and third party models), human factors or external events.

Compliance, Regulatory and Legal Risk

Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model.

Operational Risk Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including proprietary and third party models), human factors or external events.

Compliance, Regulatory and Legal Risk Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model.

ANNALY CAPITAL MANAGEMENT, INC.

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Our capital, liquidity and funding risk management practices consist of the following primary elements:

Availability of diverse and stable sources of funds.

Excess Liquidity

Excess liquidity primarily in the form of unencumbered assets and cash.

Maturity Profile

Diversity and tenor of liabilities and modest use of leverage.

Stress Testing

Scenario modeling to measure the resiliency of our liquidity position.

Liquidity Management Policies

Comprehensive policies including monitoring, risk limits and an escalation protocol.

Element Description

Funding Availability of diverse and stable sources of funds.

Excess Liquidity Excess liquidity primarily in the form of unencumbered assets and cash.

Maturity Profile Diversity and tenor of liabilities and modest use of leverage.

Stress Testing Scenario modeling to measure the resiliency of our liquidity position.

Liquidity Management Policies Comprehensive policies including monitoring, risk limits and an escalation protocol.

Our primary financing sources are repurchase agreements provided through counterparty arrangements and through Arcola, other secured financing, debt issued by securitization vehicles, mortgages, credit facilities, note sales and various forms of equity.

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Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central counterparty.

In addition, Arcola has historically borrowed funds through direct repurchase agreements.

In addition, Arcola has borrowed funds through direct repurchase agreements.

To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements.

At June 30, 2020 and December 31, 2019 , the weighted average days to maturity was 74 days and 65 days , respectively.

At September 30, 2020 and December 31, 2019, the weighted average days to maturity was 72 days and 65 days, respectively.

Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made.

Should prepayment speeds on the mortgages underlying our Agency and Residential mortgage-backed securities and/or market interest rates or other factors move suddenly and cause declines in the market value of assets posted as collateral, resulting margin calls may cause an adverse change in our liquidity position.

We maintain access to Federal Home Loan Bank (“FHLB”) funding through our captive insurance subsidiary Truman Insurance Company LLC (“Truman”).

We maintain membership in the Federal Home Loan Bank (“FHLB”) through our captive insurance subsidiary Truman Insurance Company LLC (“Truman”).

A 2016 rule from the Federal Housing Finance Agency (“FHFA”) requires captive insurance companies to terminate their FHLB membership, however, given the length of its membership at the time the rule was enacted, Truman was granted a five year sunset provision whereby its membership will expire in February 2021.

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While there can be no assurances that such steps will be taken, we believe it would be appropriate for there to be legislative or other action to permit Truman and similar captive insurance subsidiaries to retain their membership status beyond the current sunset period.

However, in anticipation of the expiration of our membership, we have commenced actions to refinance our FHLB advances with alternative funding sources, including credit facilities and securitization funding.

At June 30, 2020 , we had total financial assets and cash pledged against existing liabilities of $75.5 billion .

However, in anticipation of the expiration of our membership, we have refinanced our prior FHLB advances with alternative funding sources, including credit facilities and securitization funding.

At September 30, 2020, we had total financial assets and cash pledged against existing liabilities of $71.7 billion.

The weighted average haircut was approximately 4% on repurchase agreements.

The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at June 30, 2020 compared to the same period in 2019 , and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the three months ended June 30, 2020 .

The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement balances outstanding for the periods presented:

The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at September 30, 2020 compared to the same period in 2019, and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the three months ended September 30, 2020.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Repurchase Agreements

Reverse Repurchase Agreements

Average Daily

Amount Outstanding

Ending Amount Outstanding

The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement balances outstanding for the periods presented:

Repurchase Agreements Reverse Repurchase Agreements

Average Daily

Amount Outstanding

Ending Amount Outstanding

For the three months ended

(dollars in thousands)

Amount Outstanding Ending Amount Outstanding Average Daily

Amount Outstanding Ending Amount Outstanding

For the three months ended (dollars in thousands)

September 30, 2020 $ 67,542,187 $ 64,633,447 $ 286,792 $ —

June 30, 2020 68,468,813 67,163,598 183,423 —

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September 30, 2018 79,214,382 79,073,026 2,330,519 1,234,704

June 30, 2018

The following table provides information on our repurchase agreements and other secured financing by maturity date at June 30, 2020 .

The weighted average remaining maturity on our repurchase agreements and other secured financing was 95 days at June 30, 2020 :

June 30, 2020

The following table provides information on our repurchase agreements and other secured financing by maturity date at September 30, 2020.

The weighted average remaining maturity on our repurchase agreements and other secured financing was 90 days at September 30, 2020:

September 30, 2020

Balance Weighted

Average Rate % of Total

(dollars in thousands)

1 day $ 2,700,000 0.13 % 4.1 %

2 to 29 days 23,894,431 0.36 % 36.5 %

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60 to 89 days 9,702,860 0.33 % 14.8 %

90 to 119 days 5,529,035 0.73 % 8.4 %

Over 120 days (1)

15,024,303 0.55 % 23.0 %

Total $ 65,494,820 0.44 % 100.0 %

(1) Approximately 1% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at June 30, 2020 :

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at September 30, 2020:

Weighted Average Rate

Principal Balance

As of Period End

For the Quarter

Weighted Average

Principal Balance As of Period End For the Quarter Weighted Average

Days to Maturity (1)

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Other secured financing (2)

861,373 2.23 % 2.56 % 1,432

Securitized debt of consolidated VIEs (3)

6,027,847 2.15 % 2.03 % 9,336

Mortgages payable (3)

513,182 3.99 % 3.95 % 4,174

Total indebtedness $ 72,035,849

(1) Determined based on estimated weighted-average lives of the underlying debt instruments.

(2) Includes advances from the Federal Home Loan Bank of Des Moines of $0.6 billion and financing under credit facilities.

(2) Includes financing under credit facilities.

(3) Non-recourse to Annaly.

Excess Liquidity

Our primary source of liquidity is the availability of unencumbered assets which may be provided as collateral to support additional funding needs.

We target minimum thresholds of available, unencumbered assets to maintain excess liquidity.

The following table illustrates our asset portfolio available to support potential collateral obligations and funding needs.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Our primary source of liquidity is the availability of unencumbered assets which may be provided as collateral to support additional funding needs.

We target minimum thresholds of available, unencumbered assets to maintain excess liquidity.

The following table illustrates our asset portfolio available to support potential collateral obligations and funding needs.

Assets are considered encumbered if pledged as collateral against an existing liability, and therefore are no longer available to support additional funding.

An asset is considered unencumbered if it has not been pledged or securitized.

The following table also provides the carrying amount of our encumbered and unencumbered financial assets at June 30, 2020 :

Encumbered Assets

Unencumbered Assets

Financial assets

(dollars in thousands)

The following table also provides the carrying amount of our encumbered and unencumbered financial assets at September 30, 2020:

Encumbered Assets Unencumbered Assets Total

Financial assets (dollars in thousands)

Cash and cash equivalents $ 1,025,431 $ 214,551 $ 1,239,982

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Agency mortgage-backed securities (2)

67,321,920 7,109,080 74,431,000

Credit risk transfer securities 313,863 97,675 411,538

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Residential mortgage loans (2)

3,661,516 80,122 3,741,638

MSRs 3,431 204,554 207,985

Commercial real estate debt investments (2)

2,035,747 193,049 2,228,796

Commercial real estate debt and preferred equity, held for investment (2)

1,330,069 126,390 1,456,459

Corporate debt, held for investment 1,446,512 615,366 2,061,878

Other assets (3)

— 74,548 74,548

Total financial assets $ 77,736,136 $ 8,835,290 $ 86,571,426

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Our balance sheet also generates liquidity on an on-going basis through mortgage principal and interest repayments and net earnings held prior to payment of dividends.

The following table presents our liquid assets as a percentage of total assets at June 30, 2020 :

The following table presents our liquid assets as a percentage of total assets at September 30, 2020:

Carrying Value (1)

Liquid assets

(dollars in thousands)

Liquid assets (dollars in thousands)

Cash and cash equivalents $ 1,239,982

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(1) Carrying value approximates the market value of assets.

The assets listed in this table include $75.5 billion of assets that have been pledged as collateral against existing liabilities at June 30, 2020 .

The assets listed in this table include $71.7 billion of assets that have been pledged as collateral against existing liabilities at September 30, 2020.

Please refer to the Encumbered and Unencumbered Assets table for related information.

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Management’s Discussion and Analysis

The interest rate sensitivity of our assets and liabilities in the following table at June 30, 2020 could vary substantially based on actual prepayment experience.

More than 1 Year to 3 Years

3 Years and Over

Financial assets

(dollars in thousands)

The interest rate sensitivity of our assets and liabilities in the following table at September 30, 2020 could vary substantially based on actual prepayment experience.

Months More than 1 Year to 3 Years 3 Years and Over Total

Financial assets (dollars in thousands)

Cash and cash equivalents $ 1,239,982 $ — $ — $ — $ 1,239,982

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Corporate debt (principal) 2,506 40,649 328,143 1,895,613 2,266,911

Total loans 79,476 92,307 805,196 2,093,981 3,070,960

Assets transferred or pledged to securitization vehicles (principal) — — — 7,305,027 7,305,027

1 unchanged sentence

Effect of utilizing reset dates (1)

8,063,965 1,313,480 (616,442) (8,761,003) —

Total financial assets - interest rate sensitive $ 10,195,144 $ 1,434,425 $ 2,085,787 $ 66,969,611 $ 80,684,967

2 unchanged sentences

Other secured financing

— 13,923 18,920 828,530 861,373

Debt issued by securitization vehicles (principal)

— — — 6,027,847 6,027,847

Total financial liabilities - maturity 44,992,493 19,654,877 18,920 6,856,377 71,522,667

Effect of utilizing reset dates (1)(2)

(27,046,228) (524,645) 20,016,750 7,554,123

Total financial liabilities - interest rate sensitive $ 17,946,265 $ 19,130,232 $ 20,035,670 $ 14,410,500 $ 71,522,667

Maturity gap $ (42,861,314) $ (19,533,932) $ 2,683,309 $ 68,874,237 $ 9,162,300

Cumulative maturity gap $ (42,861,314) $ (62,395,246) $ (59,711,937) $ 9,162,300

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The results assume no management actions in response to the rate or spread changes.

The following table presents estimates at June 30, 2020 .

The following table presents estimates at September 30, 2020.

Actual results could differ materially from these estimates.

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Estimated Change in

Portfolio Market Value

Estimated Change as a

Portfolio Market Value Estimated Change as a

% on NAV (3)(4)

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(3) Scenarios include Residential Securities, residential mortgage loans, MSRs and derivative instruments.

(4) NAV represents book value of eq uity.

(4) NAV represents book value of equity.

ANNALY CAPITAL MANAGEMENT, INC.

14 unchanged sentences

Additionally, ALCO has oversight of our credit risk exposure.

Our portfolio composition, based on balance sheet values, at June 30, 2020 and December 31, 2019 was as follows:

June 30, 2020

December 31, 2019

Our portfolio composition, based on balance sheet values, at September 30, 2020 and December 31, 2019 was as follows:

September 30, 2020 December 31, 2019

Agency mortgage-backed securities (1)

86.7 % 89.5 %

Credit risk transfer securities 0.5 % 0.4 %

22 unchanged sentences

Management’s Discussion and Analysis

The following table summarizes our exposure to counterparties by geography at June 30, 2020 :

Number of Counterparties

Repurchase Agreement Financing

Interest Rate Swaps at Fair Value

(dollars in thousands)

The following table summarizes our exposure to counterparties by geography at September 30, 2020:

Number of Counterparties Repurchase Agreement Financing Interest Rate Swaps at Fair Value Exposure (1)

Geography (dollars in thousands)

North America 25 $ 50,950,065 $ (402,402) $ 3,217,881

(1) Re presents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement financing and unrealized loss on swaps for each counterparty.

Europe 10 9,794,270 (723,777) 950,431

Japan 2 3,889,112 — 206,590

Total 37 $ 64,633,447 $ (1,126,179) $ 4,374,902

(1) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement financing and unrealized loss on swaps for each counterparty.

Operational Risk Management

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There is no assurance that these efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

We have purchased cybersecurity insurance, however, there is no assurance that the insurance policy will cover all cybersecurity breaches or that the policy will cover all losses.

We currently maintain cybersecurity insurance, however, there is no assurance that the insurance policy will cover all cybersecurity breaches or that the policy will cover all losses.

Compliance, Regulatory and Legal Risk Management

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The valuation of MSRs requires significant judgment by management and the third-party pricing providers.

Commercial Real Estate Investments

The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Management’s Discussion and Analysis

of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral.

Commercial Real Estate Investments

The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral.

These securities must also be evaluated for impairment if the fair value of the security is lower than its amortized cost.

65 unchanged sentences

Generic name for a securities firm engaged in both buying and selling securities on behalf of customers or its own account.

Capital Buffer

Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs.

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Management’s Discussion and Analysis

Capital Buffer

Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs.

Capital Ratio

18 unchanged sentences

Commercial Mortgage-Backed Security

Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner.

Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest

from the mortgages flow to certificate holders in a defined sequence or manner.

Constant Prepayment Rate (“CPR”)

The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single

Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month.

The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month.

A measure of the change in a security’s duration with respect to changes in interest rates.

12 unchanged sentences

Credit and counterparty risk is present in lending, investing, funding and hedging activities.

Credit Derivatives

Derivative instruments that have one or more underlyings related to the credit risk of a specified entity (or group of entities) or an index that exposes the seller to potential loss from specified credit-risk related events.

An example is credit derivatives referencing the commercial mortgage-backed securities index.

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Management’s Discussion and Analysis

Credit Derivatives

An example is credit derivatives referencing the commercial mortgage-backed securities index.

Credit Risk Transfer (“CRT”) Securities

33 unchanged sentences

The interest rate charged by banks on overnight loans of their excess reserve funds to other banks.

Federal Home Loan Banks (“FHLB”)

Government-sponsored banks that provide reliable liquidity to member financial institutions to support housing finance and community investment.

Federal Housing Financing Agency (“FHFA”)

The FHFA is an independent regulatory agency that oversees vital components of the secondary mortgage market

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Management’s Discussion and Analysis

including Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Federal Home Loan Banks (“FHLB”)

Government-sponsored banks that generally provide reliable liquidity to member financial institutions to support housing finance and community investment.

Federal Housing Financing Agency (“FHFA”)

The FHFA is an independent regulatory agency that oversees vital components of the secondary mortgage market including Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Financial Industry Regulatory Authority, Inc.

37 unchanged sentences

A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

For example, one party will pay fixed and receive a variable rate .

3 unchanged sentences

The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

International Swaps and Derivatives Association (“ISDA”) Master Agreement

17 unchanged sentences

The rate banks charge each other for short-term Eurodollar loans.

LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floating-rate legs of interest rate swaps.

LIBOR is frequently used as the base for resetting

rates on floating-rate securities and the floating-rate legs of interest rate swaps.

Liquidity Risk

2 unchanged sentences

Our projected prepayment speeds for certain Agency mortgage-backed securities using third-party model and market information.

Our prepayment speed projections

incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts.

Our prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts.

Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results.

12 unchanged sentences

Contractual agreements constituting the right to service an existing mortgage where the holder receives the benefits and bears the costs and risks of servicing the mortgage.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Net asset value.

3 unchanged sentences

Net interest margin represents our interest income less interest expense divided by average interest earning assets.

Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

Net Interest Spread and Net Interest Spread (excluding PAA)

21 unchanged sentences

Over-The-Counter (“OTC”) Market

A securities market that is conducted by dealers throughout the country through negotiation of price rather than through

the use of an auction system as represented by a stock exchange.

A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange.

Price equal to the face amount of a security;

10 unchanged sentences

The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Prepayment Risk

5 unchanged sentences

The term used to refer to regularly scheduled payments or prepayments of principal and payments of interest on a mortgage or other security.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

The adjustment of the interest rate on a floating-rate security according to a prescribed formula.

35 unchanged sentences

Spreads differ based on several factors including liquidity.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Target Assets

5 unchanged sentences

A contract for the purchase or sale of a mortgage-backed security to be delivered at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date but does not include a specified pool number and number of pools.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

TBA Dollar Roll Income

31 unchanged sentences

The WAL will change as the security ages and depending on the actual realized rate at which principal, scheduled and unscheduled, is paid on the loans underlying the MBS.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Yield-to-Maturity

8 unchanged sentences

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 2. Management’s Discussion and Analysis