What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-19 compared with 2020-02-14 · 419 added, 371 removed, 1091 unchanged (42% of the section changed)

1 unchanged sentence

As of December 31,

2020 2019 2018

30-Year mortgage current coupon 1.34% 2.71% 3.50%

Mortgage basis

Mortgage basis 43 bps 79 bps 82 bps

Treasury rate 0.91% 1.92% 2.68%

London Interbank Offered Rate (“LIBOR”) Transition

1-Month 0.14% 1.76% 2.50%

6-Month 0.26% 1.91% 2.88%

London Interbank Offered Rate (“LIBOR”) Transition Working Group

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, processes and technology and define a communication strategy with shareholders, regulators and other stakeholders.

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.

See “Risks Related to Our Investing, Portfolio Management and Financing Activities-Changes in the method pursuant to which LIBOR is determined, or a discontinuation of LIBOR, may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.”

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

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

We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability.

LIBOR tenors have been extended from December 31, 2021 to June 2023.

Similar to the rest of the market, the bulk of our exposure is in derivatives contracts.

Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments with transition currently in process and adequate time left to resolve.

See “Risks Related to Our Investing, Portfolio Management and Financing Activities-Changes in the method pursuant to which LIBOR is determined and potential discontinuation of LIBOR may affect our results.”

Results of Operations

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As of and for the Years Ended December 31,

2020 2019 2018

(dollars in thousands, except per share data)

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Income (loss) before income taxes (918,195) (2,173,926) 51,773

Income taxes (28,423) (10,835) (2,375)

Net income (loss) (889,772) (2,163,091) 54,148

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

Basic $ (0.73) $ (1.60) $ (0.06)

Diluted $ (0.73) $ (1.60) $ (0.06)

Weighted average number of common shares outstanding

1,434,912,682

1,209,601,809

1,065,923,652

1,434,912,682

1,209,601,809

1,066,351,616

Basic 1,414,659,439 1,434,912,682 1,209,601,809

Diluted 1,414,659,439 1,434,912,682 1,209,601,809

Other information

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Leverage at period-end (1)

5.1:1 7.1:1 6.3:1

Economic leverage at period-end (2)

6.2:1 7.2:1 7.0:1

Capital ratio (3)

13.6 % 12.0 % 12.1 %

Annualized return on average total assets (0.89) % (1.76) % 0.05 %

Annualized return on average equity (6.31) % (14.11) % 0.38 %

Annualized core return on average equity (excluding PAA) (4)

Net interest margin (4)

Net interest margin (excluding PAA) (4)

1.46 % 0.83 % 1.39 %

Average yield on interest earning assets (5)

Average yield on interest earning assets (excluding PAA) (4)

Average cost of interest bearing liabilities (6)

2.44 % 3.15 % 3.23 %

Average GAAP cost of interest bearing liabilities (6)

1.09 % 2.57 % 2.15 %

Net interest spread 1.35 % 0.58 % 1.08 %

Net interest spread (excluding PAA) (4)

Constant prepayment rate

Long-term constant prepayment rate

Weighted average experienced CPR for the period 20.2 % 12.7 % 9.3 %

Weighted average projected long-term CPR at period-end 16.4 % 13.9 % 10.1 %

Common stock book value per share $ 8.92 $ 9.66 $ 9.39

Non-GAAP metrics (7)

Interest income (excluding PAA) $ 2,645,069 $ 4,042,191 $ 3,270,542

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Economic net interest income (excluding PAA) $ 1,538,080 $ 1,608,691 $ 1,473,235

Core earnings (4)

Premium amortization adjustment cost (benefit) $ 415,444 $ 254,894 $ (62,021)

Core earnings (excluding PAA) (8)

Core earnings per common share (4)

PAA cost (benefit) per common share (4)

$ 1,696,167 $ 1,575,396 $ 1,574,920

Core earnings (excluding PAA) per common share $ 1.10 $ 1.00 $ 1.20

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

Debt issued by securitization vehicles, certain credit facilities (included within other secured financing) and mortgages payable are non-recourse to us.

Annualized core return on average equity (excluding PAA) 12.03 % 10.28 % 10.99 %

Net interest margin (excluding PAA) (4)

1.74 % 1.32 % 1.52 %

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

2.90 % 3.36 % 3.17 %

Average economic cost of interest bearing liabilities (6)

1.34 % 2.25 % 2.04 %

Net interest spread (excluding PAA) 1.56 % 1.11 % 1.13 %

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

Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us.

(2) Computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding and net forward purchases (sales) of investments divided by total equity.

(3) 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 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.

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

Average interest earning assets reflects the average amortized cost of our investments during the period.

Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

(6) Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities.

Average interest bearing liabilities reflects the average balances during the period.

Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.

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

(7) Represents a non-GAAP financial measure.

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

(5) Represents the sum of our interest income 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 cost on interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.

Average interest bearing liabilities reflects the average amortized cost during the period.

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

(8) Excludes dividends on preferred stock.

2019 Compared with 2018

Net income (loss) was ($2.2) billion , which includes ($0.2) million attributable to noncontrolling interests, or ($1.60) per average basic common share, for the year ended December 31, 2019 compared to $54.1 million , which includes ($0.3) million attributable to noncontrolling interests, or ($0.06) per average basic common share, for the same period in 2018 .

We attribute the majority of the change in net income (loss) to unfavorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination or maturity of interest rate swaps, and higher interest expense, partially offset by lower net losses on disposal of investments and higher interest income.

Net unrealized gains (losses) on interest rate swaps was ($1.2) billion for the year ended December 31, 2019 compared to $424.1 million for the same period in 2018 .

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.4) billion for the year ended December 31, 2019 compared to $1.4 million for the same period in 2018 .

Interest expense was $2.8 billion for the year ended December 31, 2019 compared to $1.9 billion for the same period in 2018, reflecting higher borrowing rates and an increase in average Interest Bearing Liabilities in 2019.

Net losses on disposal of investments was ($47.9) million for the year ended December 31, 2019 compared to ($1.1) billion for the same period in 2018.

Net income (loss) was ($889.8) million, which includes $1.4 million attributable to noncontrolling interests, or ($0.73) per average basic common share, for the year ended December 31, 2020 compared to ($2.2) billion, which includes ($0.2) million attributable to noncontrolling interests, or ($1.60) 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, net gains (losses) on disposal of investments and other and net interest income, partially offset by unfavorable changes in the net interest component of interest rate swaps and net unrealized gains (losses) on instruments measured at fair value through earnings and realized gains (losses) on termination or maturity of interest rate swaps.

Net gains (losses) on other derivatives was $756.3 million for the year ended December 31, 2020 compared to ($680.8) million for the same period in 2019.

Net gains (losses) on disposal of investments and other was $661.5 million for the year ended December 31, 2020 compared to ($47.9) million for the same period in 2019.

Net interest income for the year ended December 31, 2020 was $1.3 billion compared to $1.0 billion for the same period in 2019.

The net interest component of interest rate swaps was ($207.9) million for the year ended December 31, 2020 compared to $351.4 million for the same period in 2019.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.9) billion for the year ended December 31, 2020 compared to ($1.4) billion for the same period in 2019.

Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 7 for additional information related to these changes.

Interest income increased to $3.8 billion for the year ended December 31, 2019 compared to $3.3 billion for the same period in 2018 , reflecting higher coupon income resulting from an increase in average Interest Earning Assets.

Core earnings (excluding premium amortization adjustment (“PAA”)) were $1.7 billion, or $1.10 per average common share, for the year ended December 31, 2020, compared to $1.6 billion, or $1.00 per average common share, for the same period in 2019.

Core earnings (excluding PAA) for the year ended December 31, 2019 remained relatively unchanged compared to the same period in 2018 as higher coupon income earned, resulting from an increase in average Interest Earning Assets, and favorable changes in the net interest component of interest rate swaps, was partially offset by an increase in interest expense from higher borrowing rates and an increase in average Interest Bearing Liabilities.

The changes in core earnings (excluding PAA) for the year ended December 31, 2020 compared to the same period 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

Beginning with the quarter ended September 30, 2018, we updated our calculation of core earnings and related metrics to reflect changes to our portfolio composition and operations, including the acquisition of MTGE Investment Corp.

(“MTGE” and such acquisition, the “MTGE Acquisition”) in September 2018.

Compared to prior periods, the revised definition of core earnings includes coupon income (expense) on CMBX positions (reported in Net gains (losses) on other derivatives) and excludes depreciation and amortization expense on real estate and related intangibles (reported in Other income (loss)), non-core income (loss) allocated to equity method investments (reported in Other income (loss)) and the income tax effect of non-core income (loss) (reported in Income taxes).

Prior period results have not been adjusted to conform to the revised calculation as the impact in each of those periods is not material.

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide the following non-GAAP financial measures:

core earnings and core earnings (excluding PAA);

core earnings attributable to common stockholders and core earnings attributable to common stockholders (excluding PAA);

core earnings and core earnings (excluding PAA) per average common share;

• core earnings (excluding PAA);

• core earnings (excluding PAA) attributable to common stockholders;

• core earnings (excluding PAA) per average common share;

• annualized core return on average equity (excluding PAA);

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• average yield on interest earning assets (excluding PAA);

• average economic cost of interest bearing liabilities;

• net interest margin (excluding PAA);

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While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations.

For example, we may calculate our non-GAAP metrics, such as core earnings, or the PAA, differently than our peers making comparative analysis difficult.

For example, we may calculate our non-GAAP metrics, such as core earnings (excluding PAA), or the PAA, differently than our peers making comparative analysis difficult.

Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium.

Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.

These non-GAAP measures provide additional detail 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.

Additional information pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.

Core earnings (excluding PAA), core earnings (excluding PAA) attributable to common stockholders, core earnings (excluding PAA) per average common share and annualized core return on average equity (excluding PAA)

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Core earnings and core earnings (excluding PAA), core earnings attributable to common stockholders and core earnings attributable to common stockholders (excluding PAA), core earnings and core earnings (excluding PAA) per average common share and annualized core return on average equity (excluding PAA)

Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies.

We 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, 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 core earnings (excluding PAA), which is defined as core earnings excluding the premium amortization adjustment 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, are used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective.

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.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

For the Years Ended December 31,

2020 2019 2018

(dollars in thousands, except per share data)

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Unrealized (gains) losses on interest rate swaps 904,532 1,210,276 (424,081)

Net (gains) losses on disposal of investments

Net (gains) losses on disposal of investments and other (661,513) 47,944 1,124,448

Net (gains) losses on other derivatives (756,305) 680,770 403,001

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Loan loss provision (1)

Adjustments to exclude components of other (income) loss

Depreciation and amortization expense related to commercial real estate (1)

151,188 16,569 3,496

Other adjustments

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

39,108 40,058 20,278

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

22,493 21,385 (12,665)

Non-core other (income) loss (4)

Adjustments to exclude components of general and administrative expenses and income taxes

Transaction expenses and non-recurring items (5)

11,293 19,284 65,416

Income tax effect of non-core income (loss) items (17,603) (5,961) 4,220

Adjustments to add back components of realized and unrealized (gains) losses

TBA dollar roll income and CMBX coupon income (6)

355,547 123,818 276,986

MSR amortization (7)

Core earnings (7)

(97,506) (77,719) (79,764)

Premium amortization adjustment cost (benefit) 415,444 254,894 (62,021)

Core earnings (excluding PAA) (8)

$ 1,696,167 $ 1,575,396 $ 1,574,920

Dividends on preferred stock 142,036 136,576 129,312

Core earnings attributable to common stockholders (7)

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

Core earnings (excluding PAA) attributable to common stockholders (8)

$ 1,554,131 $ 1,438,820 $ 1,445,608

GAAP net income (loss) per average common share $ (0.73) $ (1.60) $ (0.06)

Core earnings per average common share (7)

Core earnings (excluding PAA) per average common share (8)

$ 1.10 $ 1.00 $ 1.20

GAAP return (loss) on average equity (6.31) % (14.11) % 0.38 %

Core return on average equity (excluding PAA) (8)

12.03 % 10.28 % 10.99 %

(1) Includes $3.6 million of loss provision on the Company’s unfunded loan commitments for the year ended December 31, 2020, which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

Beginning with the quarter ended September 30, 2018, we exclude non-core (income) loss allocated to equity method investments, which represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR and a realized gain on sale within an unconsolidated joint venture , which are components of Other income (loss) .

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

(4) Represents the amount of consideration paid for the acquisition of MTGE in excess of the fair value of net assets acquired.

This amount is primarily attributable to a decline in portfolio valuation between the pricing and closing dates of the transaction and is consistent with changes in market values observed for similar instruments over the same period.

Represents costs incurred in connection with securitizations of residential whole loans.

The year ended December 31, 2019 also includes costs incurred in connection with the securitization of commercial loans and mortgage-backed securities.

The year ended December 31, 2018 also includes costs incurred in connection with the MTGE Acquisition.

(5) Includes costs incurred in connection with securitizations of residential whole loans.

The year ended December 31, 2020 also includes costs incurred in connection with the Internalization, the CEO search process and a securitization of Agency mortgage-backed securities.

The year ended December 31, 2019 also includes costs incurred in connection with the securitization of commercial loans and Agency mortgage-backed securities.

The year ended December 31, 2018 also includes costs incurred in connection with the acquisition of MTGE Investment Corp.

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

CMBX coupon income totaled $4.6 million and $2.3 million for the years ended December 31, 2019 and 2018 , respectively.

There were no adjustments for CMBX coupon income prior to the quarter ended September 30, 2018.

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

CMBX coupon income totaled $5.8 million, $4.6 million and $2.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.

(7) 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.

(8) Represents a non-GAAP financial measure.

Refer to disclosures within this section above for additional information on non-GAAP financial measures.

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 TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”.

The drop is a reflection of

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month.

The drop is a reflection of the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month.

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.

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The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities.

We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value as Net gains (losses) on other derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on other derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract.

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We report income (expense) on CMBX positions in Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss).

The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in core earnings.

The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in core earnings (excluding PAA).

Premium Amortization Expense

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Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Our GAAP metrics include the unadjusted impact of amortization and accretion associated with this method.

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For the Years Ended December 31,

2020 2019 2018

(dollars in thousands)

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Premium amortization expense (excluding PAA) $ 960,017 $ 858,892 $ 767,947

For the Years Ended December 31,

(per average common share)

Premium amortization expense

PAA cost (benefit)

Premium amortization expense (excluding PAA)

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.

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), which can obscure underlying trends in the performance of the portfolio.

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.

Prior to the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of funds.

Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps.

We use interest rate swaps to manage our exposure to changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings.

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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 year ended December 31, 2019 .

We did not enter into any MAC interest rate swaps during the years ended December 31, 2020 and December 31, 2019.

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.

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Interest Income (excluding PAA)

GAAP Interest Income

Interest Income (excluding PAA)

For the years ended

(dollars in thousands)

GAAP Interest Income PAA Cost

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

For the years ended (dollars in thousands)

December 31, 2020 $ 2,229,625 $ 415,444 $ 2,645,069

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December 31, 2018 $ 3,332,563 $ (62,021) $ 3,270,542

(1) Represents a non-GAAP financial measure.

Refer to disclosures within this section above for additional information on non-GAAP financial measures.

ANNALY CAPITAL MANAGEMENT, INC.

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

Net Interest Component of Interest Rate Swaps (1)

Economic Interest

Net Interest Component of Interest Rate Swaps Economic Interest

Net Interest Component

of Interest Rate Swaps (1)

Economic Net Interest Income (excluding PAA)

For the years ended

(dollars in thousands)

of Interest Rate Swaps Economic

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

For the years ended (dollars in thousands)

December 31, 2020 $ 899,112 $ 207,877 $ 1,106,989 $ 1,330,513 $ 207,877 $ 1,122,636 $ 415,444 $ 1,538,080

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December 31, 2018 $ 1,897,860 $ (100,553) $ 1,797,307 $ 1,434,703 $ (100,553) $ 1,535,256 $ (62,021) $ 1,473,235

Prior to the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of funds.

Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps.

(1) Represents a non-GAAP financial measure.

Refer to disclosures within this section above for additional information on non-GAAP financial measures.

Experienced and Projected Long-Term CPR

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Long-term CPR (2)

For the years ended

December 31, 2020 20.2% 16.4%

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(2) At December 31, 2020, 2019 and 2018, respectively.

Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA) and Net Interest Margin (excluding PAA)

Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average cost of interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of 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 TBA contract and CMBX balances, provide management with additional measures of our profitability that management relies upon in monitoring the performance of the business.

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

Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense divided by average interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of 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 TBA contract and CMBX balances, provide management with additional measures of our profitability that management relies upon in monitoring the performance of the business.

Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates our performance.

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

Average Interest Bearing Liabilities

Economic Interest Expense (2)(3)

Average Cost of Interest Bearing Liabilities (3)

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

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

Economic Net Interest Income (excluding PAA) (2)

Net Interest Spread (excluding PAA) (2)

For the years ended

(dollars in thousands)

For the years ended (dollars in thousands)

December 31, 2020 $91,198,821 $2,645,069 2.90% $82,719,182 $1,106,989 1.34% $1,538,080 1.56 %

4 unchanged sentences

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

(3) Average cost on interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.

Average interest bearing liabilities reflects the average amortized cost during the period.

(3) Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.

Average interest bearing liabilities reflects the average balances during the period.

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

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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 years ended

(dollars in thousands)

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 years ended (dollars in thousands)

December 31, 2020 $2,645,069 355,547 (899,112) (207,877) $1,893,627 $91,198,821 17,442,023 $108,640,844 1.74%

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

CMBX coupon income totaled $4.6 million and $2.3 million for the years ended December 31, 2019 and December 31, 2018 , respectively.

There were no adjustments for CMBX coupon income prior to September 30, 2018.

Economic Interest Expense and Average Cost of Interest Bearing Liabilities

CMBX coupon income totaled $5.8 million, $4.6 million and $2.3 million for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively.

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps.

The table below shows our average Interest Bearing Liabilities and average cost of Interest Bearing Liabilities as compared to average one-month and average six-month LIBOR for the periods presented.

Cost of Funds on Average Interest Bearing Liabilities

The table below shows our average interest bearing liabilities and average economic cost of interest bearing liabilities as compared to average one-month and average six-month LIBOR for the periods presented.

Economic Cost of Funds on Average Interest Bearing Liabilities

Interest Bearing

Interest Bearing Liabilities at

Liabilities Interest Bearing Liabilities at

Period End Economic

Expense Average

Liabilities (1)

LIBOR Average

One-Month LIBOR

Month LIBOR Average Cost

Average Six-Month LIBOR

For the years ended

(dollars in thousands)

For the years ended (dollars in thousands)

December 31, 2020 $ 82,719,182 $ 71,435,295 $ 1,106,989 1.34 % 0.52 % 0.69 % (0.17 %) 0.82 % 0.65 %

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December 31, 2018 $ 88,216,125 $ 88,646,247 $ 1,797,307 2.04 % 2.02 % 2.49 % (0.47 %) 0.02 % (0.45 %)

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

Prior to the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of funds.

Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps.

(1) Represents a non-GAAP financial measure.

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

2020 Compared with 2019

Economic interest expense increased by $636.2 million for the year ended December 31, 2019 compared to the same period in 2018 .

The change was primarily due to an increase in average Interest Bearing Liabilities and higher rates on repurchase agreements,

Economic interest expense decreased by $1.3 billion for the year ended December 31, 2020 compared to the same period in 2019.

The change 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 ($207.9) million for the year ended December 31, 2020 compared to $351.4 million for the same period in 2019.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

partially offset by the change in the net interest component of interest rate swaps which was $351.4 million for the year ended December 31, 2019 compared to $100.6 million for the same period in 2018.

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

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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, net gains (losses) on other derivatives and net unrealized gains (losses) on instruments measured at fair value through earnings.

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 years ended December 31, 2020, 2019 and 2018 were as follows:

For the Years Ended December 31,

2020 2019 2018

(dollars in thousands)

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

Net gains (losses) on disposal of investments

$ (3,030,037) $ (2,301,865) $ 526,043

Net gains (losses) on disposal of investments and other 661,513 (47,944) (1,124,448)

Net gains (losses) on other derivatives 756,305 (680,770) (403,001)

1 unchanged sentence

Loan loss provision (147,581) (16,569) (3,496)

Total $ (2,062,824) $ (3,011,127) $ (1,162,984)

(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.

2020 Compared with 2019

Net gains (losses) on interest rate swaps for the year ended December 31, 2019 was ($2.3) billion compared to $526.0 million for the same period in 2018, primarily attributable to unfavorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination of interest rate swaps.

Net unrealized gains (losses) on interest rate swaps was ($1.2) billion for the year ended December 31, 2019, reflecting a decline in forward interest rates, compared to $424.1 million for the same period in 2018, reflecting a rise in forward interest rates.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.4) billion resulting from interest rate swaps with a notional amount of $88.6 billion for the year ended December 31, 2019 compared to $1.4 million resulting from the termination or maturity of interest rate swaps with a notional amount of $750.0 million for the same period in 2018.

Net gains (losses) on disposal of investments was ($47.9) million for the year ended December 31, 2019 compared with ($1.1) billion for the same period in 2018.

For the year ended December 31, 2019 , we disposed of Residential Securities with a carrying value of $25.5 billion for an aggregate net loss of ($37.8) million .

For the same period in 2018 , we disposed of Residential Securities with a carrying value of $45.6 billion for an aggregate net loss of ($1.1) billion .

Net gains (losses) on interest rate swaps for the year ended December 31, 2020 was ($3.0) billion compared to ($2.3) billion for the same period in 2019, attributable to an unfavorable change in the net interest component of interest rate swaps and higher realized losses on termination or maturity of interest rate swaps, partially offset by lower unrealized losses on interest rate swaps.

The net interest component of interest rate swaps was ($207.9) million for the year ended December 31, 2020, compared to $351.4 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.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.9) billion resulting from interest rate swaps with a notional amount of $104.1 billion for the year ended December 31, 2020 compared to ($1.4) billion resulting from the termination or maturity of interest rate swaps with a notional amount of $88.6 billion for the same period in 2019.

Unrealized gains (losses) on interest rate swaps was ($0.9) billion for the year ended December 31, 2020 compared to ($1.2) 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 $661.5 million for the year ended December 31, 2020 compared with ($47.9) million for the same period in 2019.

For the year ended December 31, 2020, we disposed of Residential Securities with a carrying value of $51.8 billion for an aggregate net gain of $637.0 million.

For the same period in 2019, we disposed of Residential Securities with a carrying value of $25.5 billion for an aggregate net loss of ($37.8) million.

ANNALY CAPITAL MANAGEMENT, INC.

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Net gains (losses) on other derivatives was $756.3 million for the year ended December 31, 2020 compared to ($680.8) million for the same period in 2019.

The change in net gains (losses) on other derivatives was primarily comprised of changes in net gains (losses) on futures contracts, which was ($962.7) million for the year ended December 31, 2019 compared to ($104.0) million for the same period in 2018 , partially offset by the change in net gains (losses) on TBA derivatives, which was $326.8 million for the year ended December 31, 2019 compared to ($209.2) million for the same period in 2018 .

Net unrealized gains (losses) on instruments measured at fair value through earnings was $36.0 million for the year ended December 31, 2019 compared to ($158.1) million for the same period in 2018 , primarily due to favorable changes in unrealized gains (losses) on Agency interest-only investments, credit risk transfer securities, non-Agency mortgage-backed securities and residential loans, partially offset by unfavorable changes in unrealized gains (losses) on MSRs for the year ended December 31, 2019 compared to the same period in 2018 .

For the year ended December 31, 2019 , a loan loss provision of ($16.6) million was recorded on commercial mortgage and corporate loans compared to ($3.5) million on a commercial mortgage loan for the same period in 2018.

The change in net gains (losses) on other derivatives was primarily comprised of changes in net gains (losses) on futures contracts, which was ($280.1) million for the year ended December 31, 2020 compared to ($962.7) million for the same period in 2019 and higher net gains on TBA derivatives, which was $985.4 million for the year ended December 31, 2020 compared to $326.8 million for the same period in 2019.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($303.0) million for the year ended December 31, 2020 compared to $36.0 million for the same period in 2019, primarily due to unfavorable changes in unrealized gains (losses) on Agency interest-only securities, non-Agency mortgage-backed securities, commercial securitized loans of consolidated VIEs and residential credit risk transfer securities, partially offset by favorable changes in unrealized gains (losses) on commercial debt issued by securitization vehicles for the year ended December 31, 2020 compared to the same period in 2019.

For the year ended December 31, 2020, a loan loss provision of ($147.6) million was recorded on commercial mortgage and corporate loans compared to ($16.6) million for the same period in 2019.

Refer to the “Loans” Note located within Item 15 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.

Other income (loss) also includes the amount of consideration paid for the acquisition of MTGE in excess of the fair value of net assets acquired, which was $44.5 million for the year ended December 31, 2018.

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 on June 30, 2020) 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 years ended

(dollars in thousands)

For the years ended (dollars in thousands)

December 31, 2020 $ 239,198 0.24 % 1.70 %

1 unchanged sentence

December 31, 2018 $ 329,873 0.32 % 2.30 %

Includes $19.3 million of transaction costs incurred in connection with securitizations of residential whole loans, commercial loans and mortgage-backed securities for the year ended December 31, 2019 .

Includes $65.4 million of transaction costs incurred in connection with the MTGE Acquisition and securitizations of residential whole loans for the year ended December 31, 2018.

(1) Includes $11.3 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 search process for the year ended December 31, 2020.

Includes $19.3 million of transaction costs incurred in connection with securitizations of residential whole loans, commercial loans and Agency mortgage-backed securities for the year ended December 31, 2019.

Excluding these transaction costs, G&A expenses as a percentage of average total assets and as a percentage of average equity were 0.23% and 1.62%, respectively, and 0.23% and 1.84%, respectively, for the years ended December 31, 2020 and 2019, respectively.

1 unchanged sentence

G&A expenses decreased $62.4 million to $239.2 million for the year ended December 31, 2020 compared to the same period in 2019.

The change was largely attributable to transaction costs in connection with the MTGE Acquisition in 2018, partially offset by higher transaction costs related to securitizations of residential whole loans in 2019, transaction costs related to securitizations of commercial loans and mortgage-backed securities in 2019 and reimbursement payments made to the Manager for certain services in connection with the management and operations of Annaly which commenced during the third quarter of 2018.

The change was primarily due to lower compensation costs, reflecting cost savings related to the Internalization and lower management fees and expense reimbursements to our Former Manager 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 year ended December 31, 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

4 unchanged sentences

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

Prior to the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of funds.

Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps.

(2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps.

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

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(dollars in thousands)

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Total assets were $88.5 billion and $130.3 billion at December 31, 2020 and 2019, respectively.

The change was primarily due to increases in Agency mortgage-backed securities of $22.1 billion and assets transferred or pledged to securitization vehicles of $3.2 billion, partially offset by a decrease in reverse repurchase agreements of $0.7 billion.

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 $39.3 billion, including assets transferred or pledged to securitization vehicles, residential mortgage loans of $0.7 billion and commercial real estate debt investments of $0.4 billion.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at December 31, 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)

Residential 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 $ 74,788,301 $ 20,373,197 $ 532,403 $ 4,567,253 $ 3,619,245 $ 656,314 $ 2,239,930 $ 86,403,446

2 unchanged sentences

Debt issued by securitization vehicles 573,413 — — 2,617,000 2,462,569 — — 5,652,982

Participations issued — — — 39,198 — — — 39,198

Net forward purchases 865,081 — — 3,076 — — — 868,157

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Net equity allocated (%) 78 % 1 % 2 % 5 % 4 % 1 % 10 % 100 %

Debt/net equity ratio

Debt/net equity ratio 6.1:1 NM 0.9:1 6.1:1 5.5:1 1.9:1 0.7:1 5.1:1 (5)

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

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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 December 31, 2019 and December 31, 2018 we had on our Consolidated Statements of Financial Condition a total of $156.9 million and $183.2 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 $5.3 billion at each period 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).

At December 31, 2020 and December 31, 2019 we had on our Consolidated Statements of Financial Condition a total of $88.3 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 $4.0 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 years ended December 31, 2020 and 2019 was 20.2% and 12.7%, respectively.

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

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Estimated Fair Value

(dollars in thousands)

Agency (dollars in thousands)

Fixed-rate pass-through $ 71,302,578 $ 108,723,414

Adjustable-rate pass-through 477,516 1,524,331

CMO 149,767 160,016

Interest-only 421,909 708,562

Multifamily 1,663,507 1,717,197

Reverse mortgages 51,782 59,847

1 unchanged sentence

Residential credit

Residential CRT $ 532,403 $ 531,322

Alt-A 80,328 151,383

Prime 181,509 276,257

Prime Interest-only 1,240 3,167

Subprime 188,433 348,979

NPL/RPL 475,847 164,268

Prime jumbo (>= 2010 vintage) 43,283 184,664

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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 December 31, 2020 and December 31, 2019.

December 31, 2019

December 31, 2018

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

December 31, 2020 December 31, 2019

Residential Securities (1)

1 unchanged sentence

Principal amount $ 68,521,464 $ 107,412,143

Net premium 3,280,439 4,309,668

Amortized cost 71,801,903 111,721,811

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Weighted average yield 5.20 % 3.52 %

Weighted average term to next adjustment

Weighted average term to next adjustment 15 Months 13 Months

Weighted average lifetime cap (2)

0.41 % 8.24 %

Principal amount at period end as % of total residential securities 1.84 % 2.34 %

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Notional amount $ 3,642,143 $ 5,447,193

Net premium 602,790 876,129

Amortized cost 602,790 876,129

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Weighted average coupon rate 3.99 % 3.29 %

Weighted average yield

Weighted average yield NM 1.73 %

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

(2) Excludes non-Agency mortgage-backed securities and CRT securities as this attribute is not applicable to these asset classes.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

NM Not meaningful.

The following tables summarize certain characteristics of our Residential Credit portfolio at December 31, 2020.

Payment Structure

Investment Characteristics

Credit Enhancement

Delinquencies

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 23,718 — 23,718 4.81 % 0.97 % 0.86 % 43.63 %

Alt-A 80,328 25,286 55,042 3.73 % 9.70 % 17.40 % 18.86 %

Prime 181,509 12,128 169,381 4.44 % 7.02 % 8.94 % 30.73 %

Prime interest-only 1,240 1,240 — 0.47 % — % 5.21 % 45.03 %

Subprime 188,433 96,468 91,965 1.85 % 17.95 % 14.08 % 8.80 %

Re-performing loan securitizations 467,702 227,558 240,144 4.34 % 30.93 % 28.12 % 9.95 %

Non-performing loan securitizations 8,145 8,145 — 3.67 % 32.18 % 82.18 % 3.70 %

Prime jumbo (>=2010 vintage) 43,283 — 43,283 3.87 % 3.35 % 4.23 % 51.33 %

1 unchanged sentence

Total/weighted average (2)

$ 1,504,595 $ 372,377 $ 1,132,218 3.88 % 13.86 % 14.62 % 28.20 %

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

Interest-Only

Estimated Fair Value

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Product ARM Fixed Floater Interest-Only Estimated Fair Value

(dollars in thousands)

1 unchanged sentence

Private label credit risk transfer — — 23,718 — 23,718

Alt-A 18,133 48,629 13,566 — 80,328

Prime 40,859 135,887 4,763 — 181,509

Prime interest-only — — — 1,240 1,240

Subprime 7,486 71,776 108,939 232 188,433

Re-performing loan securitizations — 467,702 — — 467,702

Non-performing loan securitizations — 8,145 — — 8,145

Prime jumbo (>=2010 vintage) — 43,283 — — 43,283

Prime jumbo (>=2010 vintage) interest-only — — — 1,552 1,552

Total $ 66,478 $ 775,422 $ 659,580 $ 3,115 $ 1,504,595

Contractual Obligations

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

At December 31, 2019 , the interest rate swaps had a net fair value of ($705.7) million .

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Three to Five

At December 31, 2020, the interest rate swaps had a net fair value of ($1.0) billion.

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)

41,588 2,861 — — 44,449

Other secured financing 30,420 — 887,456 — 917,876

Interest expense on other secured financing (1)

20,112 39,190 15,868 — 75,170

Debt issued by securitization vehicles (principal) — — 167,670 5,481,520 5,649,190

Interest expense on debt issued by securitization vehicles 133,669 267,338 267,338 2,833,063 3,501,408

Participations issued (principal) — — — 37,365 37,365

Interest expense on participations issued 1,669 3,338 3,338 44,989 53,334

Mortgages payable (principal) 9,706 41,325 289,124 89,495 429,650

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Long-term operating lease obligations 3,918 7,724 6,757 — 18,399

Total $ 64,900,685 $ 580,049 $ 1,663,735 $ 8,545,317 $ 75,689,786

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at December 31, 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 FHLB Des Moines advances, securitization structures, credit facilities, mortgages payable or other term financing structures to finance certain of our assets.

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

During the year ended December 31, 2020, we received $19.6 billion from principal repayments and $52.6 billion in cash from disposal of Residential Securities.

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We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at December 31, 2020.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Capital Management

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

December 31, 2019

December 31, 2018

Stockholders’ equity

(dollars in thousands)

7.625% Series C cumulative redeemable preferred stock

December 31, 2020 December 31, 2019

Stockholders’ equity (dollars in thousands)

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

1 unchanged sentence

6.50% Series G fixed-to-floating rate cumulative redeemable preferred stock 411,335 411,335

8.125% Series H cumulative redeemable preferred stock

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

Common stock 13,982 14,301

Additional paid-in capital 19,750,818 19,966,923

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For the Years Ended

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(dollars in thousands)

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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.

During the year ended December 31, 2018 , we closed the public offering of an original issuance of 75.0 million shares of common stock for proceeds of $762.8 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 $114.4 million in proceeds before deducting offering expenses.

During the year ended December 31, 2018, we issued 43.6 million shares of common stock as part of the consideration for the MTGE Acquisition.

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 year ended December 31, 2019 , we repurchased 26.2 million shares of our common stock for an aggregate amount of $223.2 million, excluding commission costs.

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

During the years ended December 31, 2019 and 2018 , we issued 56.0 million shares of common stock for proceeds of $569.1 million, net of commissions and fees, and 24.0 million shares for proceeds of $251.1 million, net of commissions and fees, respectively, under the at-the-market sales program.

In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock, which expired on December 31, 2020 (“the Prior Share Repurchase Program”).

In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2021 (the “New Share Repurchase Program”).

The New Share Repurchase Program replaced the Prior Share Repurchase Program.

During the years ended December 31, 2020 and 2019, we repurchased 32.4 million and 26.2 million shares of our common stock for an aggregate amount of $208.9 million and $223.2 million, excluding commission costs, respectively.

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

No shares were issued under the at-the-market sales program during the year ended December 31, 2020.

During the years ended December 31, 2019, we issued 56.0 million shares of common stock for proceeds of $569.1 million, net of commissions and fees, under the at-the-market sales program.

No options were exercised during the years ended December 31, 2020, and 2019.

Preferred Stock

During the year ended December 31, 2020, the Company redeemed all 18.4 million of its issued and outstanding shares of 7.50% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”) for $460.0 million.

The cash redemption amount for each share of Series D Preferred Stock was $25.00.

During the year ended December 31, 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.

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During the year ended December 31, 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.

During the year ended ended December 31, 2018 , we issued 17.0 million shares of our 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock for gross proceeds of $425.0 million before deducting the underwriting discount and other estimated offering expenses, and 2.2 million shares of our Series H Preferred Stock in connection with the MTGE Acquisition.

Refer to the “Acquisition of MTGE Investment Corp.” Note in Part IV, Item 15 for additional information related to our Series H Preferred Stock.

During the year ended ended December 31, 2018 , redeemed 5.0 million shares of our 7.625% Series C Cumulative Redeemable Preferred Stock for $125.0 million and all 11.5 million of our issued and outstanding shares of 7.625% Series E Cumulative Redeemable Preferred Stock for $287.5 million .

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Management’s Discussion and Analysis

Leverage and Capital

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

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.

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

Based on the guidelines, we generally expect to maintain an economic leverage ratio of less than 10:1.

Our actual economic leverage ratio varies from time to time based upon various factors, including our Manager’s 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 actual economic leverage ratio varies from time to time based upon various factors, including our management’s 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

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Management’s Discussion and Analysis

international market conditions.

Our debt-to-equity ratio at December 31, 2020 and 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 and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity, at December 31, 2019 and 2018 was 7.2:1 and 7.0:1 , respectively.

Our capital ratio, which represents our ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives and exclusive of debt issued by securitization vehicles), was 12.0% and 12.1% at December 31, 2019 and 2018 , 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, at December 31, 2020 and 2019 was 6.2:1 and 7.2:1, 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 December 31, 2020 and 2019, respectively.

Risk Management

For more information on COVID-19, including actions we have taken in response, please refer to the section titled “Business Environment and COVID-19” within this Item 7.

We are subject to a variety of risks in the ordinary conduct of our business.

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We have built a strong and collaborative risk management culture throughout Annaly focused on awareness which supports appropriate understanding and management of our key risks.

Each employee of our Manager is accountable for identifying, monitoring and managing risk within their area of responsibility.

Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility.

Risk Appetite

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Our activities focus on income generation and capital preservation through proactive portfolio management, supported by a conservative liquidity and leverage posture.

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Management’s Discussion and Analysis

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.

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.

The Board exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”).

The Board exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”) with support from the other Board Committees.

The BRC is responsible for oversight of our risk governance structure, risk management and risk assessment guidelines and policies and our risk appetite.

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.

The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices.

The Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or ESG risk to us, and

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Management’s Discussion and Analysis

the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board.

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

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Our Chief Compliance Officer has reporting lines to the BAC.

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Management’s Discussion and Analysis

Description of Risks

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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.

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Management’s Discussion and Analysis

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.

Capital, Liquidity and Funding Risk Management

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

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Management’s Discussion and Analysis

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 including funding from the Federal Home Loan Bank of Des Moines (“FHLB”), debt issued by securitization vehicles, mortgages, credit facilities, note sales and various forms of equity.

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.

We maintain excess liquidity by holding unencumbered liquid assets that could be either used to collateralize additional borrowings or sold.

We seek to conservatively manage our repurchase agreement funding position through a variety of methods including diversity, breadth and depth of counterparties and maintaining a staggered maturity profile.

Additionally, our wholly-owned subsidiary, Arcola, provides direct access to third party funding as a FINRA member broker-dealer.

Our wholly-owned subsidiary, Arcola, provides direct access to third party funding as a FINRA member broker-dealer.

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

Arcola also borrows 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 December 31, 2019 , the weighted average days to maturity was 65 days .

At December 31, 2020 and December 31, 2019, the weighted average days to maturity was 64 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 FHLB funding through our captive insurance subsidiary Truman Insurance Company LLC (“Truman”).

We finance eligible Agency, residential credit and commercial investments through the FHLB.

A 2016 rule from the 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.

We believe our business objectives align well with the mission of the FHLB System.

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.

We utilize diverse funding sources to finance our commercial investments.

Aside from FHLB funding, we may utilize credit facilities, securitization funding and, in the case of investments in commercial real estate, CLO securitization funding, mortgage financing and note sales.

At December 31, 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 December 31, 2019 compared to the same period in 2018 , 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 year ended December 31, 2019 .

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

While haircut and margin requirements related to the Agency collateral we pledge under repurchase agreements and interest rate swaps were largely unchanged during the year

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Management’s Discussion and Analysis

Repurchase Agreements

Reverse Repurchase Agreements

Average Daily

Amount Outstanding

Ending Amount Outstanding

ended December 31, 2020, our counterparties did increase haircuts and margin requirements on credit assets beginning in March 2020, as a result of market disruptions brought on by COVID-19, which have since returned closer to pre-pandemic levels.

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

Quarter ended

(dollars in thousands)

Amount Outstanding Ending Amount Outstanding Average Daily

Amount Outstanding Ending Amount Outstanding

For the three months ended (dollars in thousands)

December 31, 2020 $ 65,528,297 $ 64,825,239 $ 210,484 $ —

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December 31, 2020

Balance Weighted

Average Rate % of Total

(dollars in thousands)

1 day $ — — % — %

2 to 29 days 30,841,837 0.29 % 46.9 %

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60 to 89 days 8,568,836 0.30 % 13.0 %

90 to 119 days 2,154,733 0.23 % 3.3 %

Over 119 days (1)

13,610,054 0.49 % 20.7 %

Total $ 65,743,115 0.35 % 100.0 %

(1) Approximately 2% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.

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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)

Securitized debt of consolidated VIEs (3)

917,876 2.22 % 2.96 % 1,353

Debt issued by securitization vehicles (3)

5,649,190 2.13 % 1.95 % 9,013

Participations issued (3)

37,365 4.47 % 4.70 % 11,664

Mortgages payable (3)

429,650 4.41 % 4.07 % 2,982

Total indebtedness $ 71,859,320

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

Includes advances from the Federal Home Loan Bank of Des Moines of $3.6 billion and financing under credit facilities.

(2) Includes financing under credit facilities.

(3) Non-recourse to Annaly.

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Management’s Discussion and Analysis

Excess Liquidity

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

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Management’s Discussion and Analysis

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

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The following table also provides the carrying amount of our encumbered and unencumbered financial assets at December 31, 2020:

Unencumbered Assets

Financial assets

(dollars in thousands)

Assets Unencumbered Assets Total

Financial assets (dollars in thousands)

Cash and cash equivalents $ 1,137,809 $ 105,894 $ 1,243,703

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Agency mortgage-backed securities (2)

66,929,821 6,874,366 73,804,187

Credit risk transfer securities 349,323 183,080 532,403

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Residential mortgage loans (2)

3,438,972 156,089 3,595,061

MSRs 5,541 95,354 100,895

Commercial real estate debt investments (2)

2,052,642 194,173 2,246,815

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

1,217,329 155,101 1,372,430

Corporate debt 1,596,536 643,394 2,239,930

Other assets (3)

— 69,472 69,472

Total financial assets $ 77,463,393 $ 8,713,695 $ 86,177,088

The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition.

(1) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the

Consolidated Statements of Financial Condition.

(2) Includes assets transferred or pledged to securitization vehicles

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Carrying Value (1)

Liquid assets

(dollars in thousands)

Liquid assets (dollars in thousands)

Cash and cash equivalents $ 1,243,703

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(7) Excludes certain second lien loans.

Denominator is computed based on the carrying amount of encumbered and encumbered financial assets, excluding Agency mortgage-backed securities and loans of consolidated VIEs carried at fair value of $7.0 billion .

(8) Denominator is computed based on the carrying amount of encumbered and encumbered financial assets, excluding assets transferred or pledged to securitization vehicles of $6.9 billion.

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Management’s Discussion and Analysis

Maturity Profile

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The following table illustrates the expected final maturities and cash flows of our assets, liabilities and derivatives.

The table is based on a static portfolio and

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Management’s Discussion and Analysis

assumes no reinvestment of asset cash flows and no future liabilities are entered into.

The table is based on a static portfolio and assumes no reinvestment of asset cash flows and no future liabilities are entered into.

In assessing the maturity of our assets, liabilities and off balance sheet obligations, we use the stated maturities, or our prepayment expectations for assets and liabilities that exhibit prepayment characteristics.

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The interest rate sensitivity of our assets and liabilities in the following table at December 31, 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)

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Management’s Discussion and Analysis

Months 3-12 Months More than 1 Year to 3 Years 3 Years and Over Total

Financial assets (dollars in thousands)

Cash and cash equivalents $ 1,243,703 $ — $ — $ — $ 1,243,703

Agency mortgage-backed securities (principal) — 8,621 1,726,132 65,264,228 66,998,981

Credit risk transfer securities (principal)

Residential credit risk transfer securities (principal) — 12,954 219,121 301,972 534,047

Non-agency mortgage-backed securities (principal) — 87,746 475,874 424,816 988,436

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Corporate debt (principal) — 30,686 408,983 1,869,188 2,308,857

Total loans 63,890 112,146 832,018 2,205,713 3,213,767

Assets transferred or pledged to securitization vehicles (principal) — — — 6,916,406 6,916,406

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Effect of utilizing reset dates (1)

8,179,336 1,276,252 (976,713) (8,478,875)

Total financial assets - interest rate sensitive

$ 9,486,929 $ 1,497,719 $ 2,276,432 $ 66,724,118 $ 79,985,198

Financial liabilities

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Debt issued by securitization vehicles (principal) — — — 5,649,190 5,649,190

Participations issued (principal) — — — 37,365 37,365

Total financial liabilities - maturity 49,978,329 14,693,268 184,062 6,574,011 71,429,670

Effect of utilizing reset dates (1)(2)

(29,253,956) (241,423) 23,235,886 6,259,493

Total financial liabilities - interest rate sensitive $ 20,724,373 $ 14,451,845 $ 23,419,948 $ 12,833,504 $ 71,429,670

Maturity gap $ (48,670,736) $ (14,471,801) $ 3,069,083 $ 68,628,982 $ 8,555,528

Cumulative maturity gap $ (48,670,736) $ (63,142,537) $ (60,073,454) $ 8,555,528

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(2) Includes effect of interest rate swaps.

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Management’s Discussion and Analysis

The methodologies we employ for evaluating interest rate risk include an analysis of our interest rate “gap,” measurement of the duration and convexity of our portfolio and sensitivities to interest rates and spreads.

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The metrics assist in assessing our liquidity conditions and are integrated into our escalation protocol.

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Management’s Discussion and Analysis

Investment/Market Risk Management

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Actual results could differ materially from these estimates.

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Management’s Discussion and Analysis

Change in Interest Rate (1)

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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.

Credit Risk Management

Key risk parameters have been established to specify our credit risk appetite.

We will seek to manage credit risk by making investments which conform within the firm’s specific investment policy parameters and optimize risk-return attributes.

We seek to manage credit risk by making investments which conform within the firm’s specific investment policy parameters and optimize risk-return attributes.

While we do not expect to encounter credit risk in our Agency mortgage-backed securities, we face credit risk on the non-Agency mortgage-backed securities and CRT securities in our portfolio.

In addition, we are also exposed to credit risk on residential mortgage loans, commercial real estate investments and corporate debt.

In addition, we are also exposed to credit risk on

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Management’s Discussion and Analysis

residential mortgage loans, commercial real estate investments and corporate debt.

MSR values may also be impacted if overall costs to service the underlying mortgage loans increase due to borrower performance.

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Our management monitors the overall portfolio risk and determines estimates of provision for loss.

Additionally, ALCO has oversight of the firm’s credit risk exposure.

Additionally, ALCO has oversight of our credit risk exposure.

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

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Agency mortgage-backed securities 86.4 % 89.5 %

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We monitor our exposure to counterparties across several dimensions including by type of arrangement, collateral type, counterparty type, ratings and geography.

Additionally, ALCO has oversight of the firm’s counterparty exposure.

Additionally, ALCO has oversight of our counterparty exposure.

The following table summarizes our exposure to counterparties by geography at December 31, 2020:

Number of Counterparties

Repurchase Agreement Financing

Interest Rate Swaps at Fair Value

(dollars in thousands)

Number of Counterparties Secured Financing (1)

Interest Rate Swaps at Fair Value Exposure - Secured Financing (2)

Exposure - Interest Rate Swaps (2)

Geography (dollars in thousands)

North America 24 $ 52,983,020 $ (361,964) $ 3,920,875 $ (1,620,846)

Asia (non-Japan)

(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 9,044,400 (644,528) 1,894,424 (905,245)

Japan 4 3,715,695 — 205,019 —

Total 38 $ 65,743,115 $ (1,006,492) $ 6,020,318 $ (2,526,091)

(1) Includes repurchase agreements and other secured financing.

(2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured 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.

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Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing.

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Management’s Discussion and Analysis

Residential Mortgage Loans

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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 other-than-temporary impairment if the fair value of the security is lower than its amortized cost.

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

Determining whether there is an other-than-temporary impairment may require us to exercise significant judgment and make estimates to determine expected cash flows incorporating assumptions such as changes in interest rates and loss expectations.

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Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.

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Management’s Discussion and Analysis

Consolidation of Variable Interest Entities

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To determine whether consolidation of the VIE is required, we must apply judgment to assess whether we have the power to direct the most significant activities of the VIE and whether we have either the rights to receive benefits or the obligation to absorb losses that could be potentially significant to the VIE.

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Management’s Discussion and Analysis

Use of Estimates

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Amortization also refers to the process of systematically reducing a recognized asset or liability (e.g., a purchase premium or discount for a debt security) with an offset to earnings.

Average GAAP Cost of Interest Bearing Liabilities and Average Economic Cost of Interest Bearing Liabilities

Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities.

Average interest bearing liabilities reflects the average balances during the period.

Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.

On a mortgage-backed security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.

Average Yield on Interest Earnings Assets and Average Yield on Interest Earnings Assets (excluding PAA)

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

Average interest earning assets reflects the average amortized cost of our investments during the period.

Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

Basis Point (“bp”)

One hundredth of one percent, used in expressing differences in interest rates.

One basis point is 0.01% of yield.

One basis point is 0.01% of

For example, a bond’s yield that changed from 3.00% to 3.50% would be said to have moved 50 basis points.

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

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Management’s Discussion and Analysis

Capital Ratio

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The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of CMBS securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount.

Additionally, the protection

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Management’s Discussion and Analysis

seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying CMBS securities as they occur.

Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying CMBS securities as they occur.

Securities, cash or property pledged by a borrower or party to a derivative contract to secure payment of a loan or derivative.

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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.

The more convex a security is, the more its duration will change with interest rate changes.

Core Earnings and Core Earnings Per Average Common Share

Core earnings 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 core earnings (excluding PAA) is defined as core earnings excluding the premium amortization adjustment 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.

Core earnings and core earnings (excluding PAA) per average common share is calculated by dividing core earnings or core earnings (excluding PAA) by average basic common shares for the period.

As discussed in the section titled “Non-GAAP Financial Measures”, these measures have been updated beginning in the third quarter ended September 30, 2018.

Prior period results will not be adjusted to conform to the revised calculation as the impact in each of those periods is not material.

Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share

Core earnings (excluding PAA) 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 expense related to commercial real estate and amortization of 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 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.

Core earnings (excluding PAA) per average common share is calculated by dividing core earnings (excluding PAA) by average basic common shares for the period.

Corporate Debt

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

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Management’s Discussion and Analysis

Credit Risk Transfer (“CRT”) Securities

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Current face is computed by multiplying the original face value of the security by the current principal balance factor.

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Person or organization that underwrites, trades and sells securities, e.g., a principal market-maker in securities.

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Non-GAAP financial measure that is comprised of GAAP interest expense and the net interest component of interest rate swaps.

Prior to the three months ended March 31, 2018, economic interest expense included the net interest component of interest rate swaps used to hedge cost of funds.

Beginning with the three months ended March 31, 2018, as a result of changes to our hedging portfolio, this metric reflects the net interest component of all interest rate swaps.

Economic Leverage Ratio (Economic Debt-to-Equity Ratio)

Calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

Calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding and net forward

purchases (sales) of investments divided by total equity.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

Debt issued by securitization vehicles, certain credit facilities (included within other secured financing) and mortgages payable are non-recourse to us and are excluded from this measure.

Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to us and are excluded from this measure.

Economic Net Interest Income

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Federal Home Loan Banks (“FHLB”)

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

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.

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Management’s Discussion and Analysis

Financial Industry Regulatory Authority, Inc.

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A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.

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Management’s Discussion and Analysis

Fixed Income Clearing Corporation (“FICC”)

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Interest Bearing Liabilities

Refers to repurchase agreements, debt issued by securitization vehicles, FHLB Des Moines advances and credit facilities.

Refers to repurchase agreements, debt issued by securitization vehicles and credit facilities.

Average interest bearing liabilities is based on daily balances.

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

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Management’s Discussion and Analysis

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

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Investment/Market Risk

Risk to earnings, capital or business resulting in the decline in value of our assets caused from changes in market

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Management’s Discussion and Analysis

variables, such as interest rates, which affect the values of Residential Securities and other investment instruments.

Risk to earnings, capital or business resulting in the decline in value of our assets caused from changes in market variables, such as interest rates, which affect the values of Residential Securities and other investment instruments.

Investment Advisers Act

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Calculated as total debt to total stockholders’ equity.

For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles and mortgages payable.

Certain credit facilities (included within other secured financing), debt issued by securitization vehicles and mortgages payable are non-recourse to us.

For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable.

Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us.

LIBOR (London Interbank Offered Rate)

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Represents interest income earned on our portfolio investments, less interest expense paid for borrowings.

Net Interest Margin

Represents the sum of our interest income 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 TBA contract and CMBX balances.

Net Interest Spread

Calculated by taking the average yield on Interest Earning Assets minus the average cost of Interest Bearing Liabilities, which includes the net interest component of interest rate swaps.

Net Interest Margin and Net Interest Margin (excluding PAA)

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

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Management’s Discussion and Analysis

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)

Net interest spread represents the average yield on interest earning assets less the average GAAP cost of interest bearing liabilities.

Net interest spread (excluding PAA) represents the average yield on interest earning assets (excluding PAA) less the average economic cost of interest bearing liabilities.

Non-Performing Loan (“NPL”)

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A stated principal amount in a derivative contract on which the contract is based.

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Management’s Discussion and Analysis

Operational Risk

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A collection of mortgage loans assembled by an originator or master servicer as the basis for a security.

In the case of

Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.

In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.

The amount by which the price of a security exceeds its principal amount.

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The indicative interest rate on loans that banks quote to their best commercial customers.

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Management’s Discussion and Analysis

Principal and Interest

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By contrast, the economic borrower’s obligation to repay non-recourse debt is limited to the value of the pledged collateral.

Recourse debt consists of repurchase

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Management’s Discussion and Analysis

agreements and other secured financing (excluding certain non-recourse credit facilities).

Securitized debt, certain credit facilities (included within other secured financing) and mortgages payable are non-recourse to us and are excluded from this measure.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

Reinvestment Risk

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Annaly and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs.

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Management’s Discussion and Analysis

To-Be-Announced Securities (“TBAs”)

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Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses.

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Management’s Discussion and Analysis

Total Return Swap

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

What changed 10-K

Item 7. Management’s Discussion and Analysis