What changed in this filing

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Item 1. Financial Statements

2021-05-07 compared with 2020-11-06 · 213 added, 347 removed, 675 unchanged (45% of the section changed)

Financial Statements

Eurodollar futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks.

The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders.

These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S.

Treasuries and market liquidity.

The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract.

derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract.

Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract.

4 unchanged sentences

Derivatives are accounted for in accordance with FASB ASC 815, Derivatives and Hedging , which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss).

The changes in the estimated fair value are presented within Net gains (losses) on other derivatives with the exception of interest rate swaps which are separately presented.

The changes in the estimated fair value are presented within Net gains (losses) on other derivatives and financial instruments with the exception of interest rate swaps which are separately presented.

None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes.

1 unchanged sentence

In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions.

At September 30, 2020 and December 31, 2019, $ 1.7 billion and $ 517.8 million of variation margin was reported as an adjustment to interest rate swaps, at fair value.

At March 31, 2021 and December 31, 2020, $ 1.1 billion and $ 1.5 billion of variation margin was reported as an adjustment to interest rate swaps, at fair value.

Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk.

10 unchanged sentences

If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid.

If the Company sells or exercises a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid.

If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid.

The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values.

11 unchanged sentences

The counterparties are required to deliver the committed loans on a “best efforts” basis.

Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps.

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps.

The table below summarizes fair value information about our derivative assets and liabilities at September 30, 2020 and December 31, 2019:

Derivatives Instruments September 30, 2020 December 31, 2019

The table below summarizes fair value information about our derivative assets and liabilities at March 31, 2021 and December 31, 2020:

Derivatives Instruments March 31, 2021 December 31, 2020

Assets (dollars in thousands)

Interest rate swaps $ — $ 1,199

Interest rate swaptions $ 372,701 $ 74,470

10 unchanged sentences

Total derivative liabilities $ 939,622 $ 1,033,345

(1) The notional amount of the credit derivatives in which the Company purchased protection was $ 0.0 and $ 10.0 million at September 30, 2020 and December 31, 2019, respectively.

The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 499.0 million and $ 345.0 million at September 30, 2020 and December 31, 2019, respectively, plus any coupon shortfalls on the underlying tranche.

The credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and BBB-.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

September 30, 2020

(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 499.0 million and $ 504.0 million at March 31, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche.

As of March 31, 2021 and December 31, 2020 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and A.

The following table summarizes certain characteristics of the Company’s interest rate swaps at March 31, 2021 and December 31, 2020:

March 31, 2021

Maturity Current Notional (1)(2)

18 unchanged sentences

Total / Weighted average $ 34,329,650 0.92 % 0.37 % 3.94

(1) As of September 30, 2020, 12 %, 77 % and 11 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.

As of December 31, 2019, 75 % and 25 % of the Company’s interest rate swaps were linked to LIBOR and the overnight index swap rate, respectively.

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

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

(3) As of September 30, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps.

(1) As of March 31, 2021, 8 %, 62 % and 30 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.

As of December 31, 2020, 17 %, 72 % and 11 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.

(2) There were no forward starting swaps at March 31, 2021 and December 31, 2020.

(3) At March 31, 2021 and December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps.

As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed.

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

September 30, 2020

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The following table presents swaptions outstanding at March 31, 2021 and December 31, 2020.

March 31, 2021

Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration

7 unchanged sentences

Long receive $ 250,000 1.66 % 3M LIBOR 10.02 0.13

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

September 30, 2020

The following table summarizes certain characteristics of the Company’s TBA derivatives at March 31, 2021 and December 31, 2020:

March 31, 2021

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

1 unchanged sentence

Purchase contracts $ 22,496,000 $ 23,040,011 $ 22,793,892 $ ( 246,119 )

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

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

December 31, 2020

2 unchanged sentences

Purchase contracts $ 19,635,000 $ 20,277,088 $ 20,373,197 $ 96,109

Sale contracts ( 3,144,000 ) ( 3,294,486 ) ( 3,299,768 ) ( 5,282 )

Net TBA derivatives $ 6,899,000 $ 6,888,405 $ 6,892,270 $ 3,865

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

September 30, 2020

The following table summarizes certain characteristics of the Company’s futures derivatives at March 31, 2021 and December 31, 2020:

March 31, 2021

Notional - Long

3 unchanged sentences

(dollars in thousands)

Treasury futures - 5 year

— ( 3,425,000 ) 4.42

Treasury futures - 10 year and greater

9 unchanged sentences

— ( 1,240,000 ) 4.40

Treasury futures - 5 year

— ( 2,953,300 ) 4.42

Treasury futures - 10 year and greater

6 unchanged sentences

Financial Statements

The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at September 30, 2020 and December 31, 2019, respectively.

September 30, 2020

The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at March 31, 2021 and December 31, 2020, respectively.

March 31, 2021

Amounts Eligible for Offset

5 unchanged sentences

Purchase commitments 1,170 — — 1,170

Credit derivatives 1,973 ( 366 ) — 1,607

Interest rate swaps, at fair value $ 672,637 $ — $ ( 78,967 ) $ 593,670

TBA derivatives, at fair value 263,523 ( 17,404 ) — 246,119

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

Purchase commitments 3,028 — — 3,028

4 unchanged sentences

Assets (dollars in thousands)

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

Interest rate swaptions, at fair value $ 74,470 $ — $ — $ 74,470

2 unchanged sentences

Purchase commitments 49 — — 49

Credit derivatives 5,657 — — 5,657

Interest rate swaps, at fair value $ 1,006,492 $ — $ ( 108,757 ) $ 897,735

TBA derivatives, at fair value 11,316 ( 5,018 ) — 6,298

Futures contracts, at fair value 19,413 ( 506 ) ( 18,907 ) —

Purchase commitments 907 — — 907

Credit derivatives 7,440 — ( 7,440 ) —

The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:

2 unchanged sentences

For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

March 31, 2021 $ ( 79,747 ) $ — $ 772,262

March 31, 2020 $ ( 13,980 ) $ ( 397,561 ) $ ( 2,827,723 )

ANNALY CAPITAL MANAGEMENT, INC.

2 unchanged sentences

The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:

Three Months Ended September 30, 2020

Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives

(dollars in thousands)

Net TBA derivatives $ 276,849 $ ( 100,680 ) $ 176,169

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

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

Purchase commitments — ( 51 ) ( 51 )

Credit derivatives 1,531 7,892 9,423

Three Months Ended September 30, 2019

Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives

(dollars in thousands)

Net TBA derivatives $ 93,919 $ ( 46,124 ) $ 47,795

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

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

Purchase commitments — ( 348 ) ( 348 )

Credit derivatives 1,784 885 2,669

Total $ ( 16,888 )

Nine Months Ended September 30, 2020

Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives

Three Months Ended March 31, 2021

Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments

(dollars in thousands)

4 unchanged sentences

Credit derivatives 1,631 9,023 10,654

Total $ 546,658

Nine Months Ended September 30, 2019

Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives

Three Months Ended March 31, 2020

Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments

(dollars in thousands)

6 unchanged sentences

Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions.

The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at September 30, 2020 was approximately $ 1.1 billion, which represents the maximum amount the Company would be required to pay upon termination.

The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at March 31, 2021 was approximately $ 70.8 million, which represents the maximum amount the Company would be required to pay upon termination.

This amount is fully collateralized.

1 unchanged sentence

The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSRs that are accounted for at fair value.

The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction bet ween market participants at the measurement date.

Refer to the Note titled “Sale of Commercial Real Estate Business” for fair value measurements related to the assets and liabilities of the disposal group held for sale as of March 31, 2021.

GAAP requires classification of financial instruments and MSRs into a three-level hierarchy based on the priority of the inputs to the valuation technique.

1 unchanged sentence

If the inputs used to measure the financial instruments and MSRs fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:

Financial assets and

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.

16 unchanged sentences

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

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

The Company classifies its investments in MSRs as Level 3 in the fair value measurements hierarchy.

7 unchanged sentences

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

September 30, 2020

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

March 31, 2021

Level 1 Level 2 Level 3 Total

11 unchanged sentences

Debt issued by securitization vehicles — 3,044,725 — 3,044,725

Participations issued — 180,527 — 180,527

Derivative liabilities

2 unchanged sentences

Total liabilities $ — $ 4,164,874 $ — $ 4,164,874

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

December 31, 2020

9 unchanged sentences

Derivative assets

Interest rate swaps — 1,199 — 1,199

Other derivatives 506 170,628 — 171,134

1 unchanged sentence

Debt issued by securitization vehicles $ — $ 5,652,982 $ — $ 5,652,982

Participations issued — 39,198 — 39,198

Derivative liabilities

7 unchanged sentences

The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions.

In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below.

In practice, simultaneous changes in assumptions may not

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

always have a linear effect on the inputs discussed below.

Interrelationships may also exist between observable and unobservable inputs.

3 unchanged sentences

A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSRs, which in turn could result in a decline in the estimated fair value of MSRs.

Refer to the Note titled “Mortgage Servicing Rights” for additional information.

Refer to the “Mortgage Servicing Rights” Note for additional information.

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSRs.

The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Valuation Technique Unobservable Input (1)

12 unchanged sentences

(2) Weighted average discount rate computed based on the fair value of MSRs, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSRs.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

September 30, 2020 December 31, 2019

The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at March 31, 2021 and December 31, 2020.

March 31, 2021 December 31, 2020

Value Carrying

3 unchanged sentences

Corporate debt, held for investment 2,074,475 2,074,790 2,239,930 2,226,045

Assets transferred or pledged to securitization vehicles — — 874,349 928,732

Financial liabilities

13 unchanged sentences

The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred.

If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed.

The quantitative impairment test for goodwill utilizes a two-step approach, whereby the Company compares the carrying value of each identified reporting unit to its fair value.

If the carrying value of the reporting unit is greater than its fair value, the second step is performed, where the implied fair value of goodwill is compared to its carrying value.

The Company recognizes an impairment charge for the amount by which the carrying amount of goodwill exceeds its fair value.

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

If a qualitative analysis indicates that there may be an impairment, a

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

quantitative analysis is performed.

The quantitative impairment test for goodwill compares the fair value of a reporting unit with its carrying value, including goodwill.

If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

At March 31, 2021 and December 31, 2020, goodwill totaled $ 0 and $ 71.8 million, respectively.

The change reflects the goodwill impairment in connection with the sale of the CRE business.

Refer to the “Sale of Commercial Real Estate Business” Note for additional information.

Intangible assets, net

Finite life intangible assets are amortized over their expected useful lives.

As part of the Internalization, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $ 41.2 million, and accrued liabilities and cash that were recognized on the legal entity acquired.

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

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

The following table presents the activity of finite lived intangible assets for the three months ended March 31, 2021.

Intangible Assets, net

1 unchanged sentence

Balance at December 31, 2020 $ 55,526

Intangible assets acquired

Intangible assets divested

Intangible assets included in disposal group held for sale ( 16,503 )

amortization expense ( 1,686 )

Balance at September 30, 2020

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

Balance at March 31, 2021

SECURED FINANCING

Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements.

At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing , and has determined that each of the financing agreements meet the specified criteria in this guidance.

The Company enters into reverse repurchase agreements to earn a yield on excess cash balances.

The Company obtains collateral in connection with the reverse repurchase agreements in order to mitigate credit risk exposure to its counterparties.

The Company receives collateral for reverse repurchase agreements and is required to post collateral for repurchase agreements.

To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities.

Generally, the Company receives or posts collateral with a fair value approximately equal to or greater than the value of the secured financing.

Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting.

The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows.

The Company had outstanding $ 64.6 billion and $ 101.7 billion of repurchase agreements with weighted average borrowing rates of 0.81 % and 1.99 %, after giving effect to the Company’s interest rate swaps used to hedge cost of funds, and weighted average remaining maturities of 72 days and 65 days at September 30, 2020 and December 31, 2019, respectively.

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

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

September 30, 2020

Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted Average Rate

The Company had outstanding $ 61.2 billion and $ 64.8 billion of repurchase agreements with weighted average borrowing rates of 0.72 % and 0.82 %, after giving effect to the Company’s interest rate swaps used to hedge cost of funds, and weighted average remaining maturities of 88 days and 64 days at March 31, 2021 and December 31, 2020, respectively.

The Company has select arrangements with counterparties to enter into repurchase agreements for $ 1.6 billion with remaining capacity of $ 1.4 billion at March 31, 2021.

At March 31, 2021 and December 31, 2020, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates:

March 31, 2021

Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Mortgage-Backed Securities (1)

Total Repurchase Agreements Weighted Average Rate

(dollars in thousands)

7 unchanged sentences

Total $ 59,401,472 $ 340,102 $ 893,483 $ 239,985 $ 327,435 $ 61,202,477 0.20 %

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

December 31, 2020

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

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

Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted

8 unchanged sentences

Total $ 62,744,910 $ 245,686 $ 1,050,439 $ 184,723 $ 271,801 $ 327,680 $ 64,825,239 0.32 %

(1) No repurchase agreements had a remaining maturity over one year at September 30, 2020 and December 31, 2019.

The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at September 30, 2020 and December 31, 2019.

(1) Includes commercial mortgage-backed securities held for sale.

(2) No repurchase agreements had a remaining maturity over 1 year at March 31, 2021.

Less than 1 % of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2020.

Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements

3 unchanged sentences

Netted amounts $ — $ 61,202,477 $ — $ 64,825,239

Other Secured Financing - The Company previously financed a portion of its financial assets with advances from the Federal Home Loan Bank of Des Moines (“FHLB Des Moines”).

Borrowings from FHLB Des Moines are reported in Other secured financing in the Company’s Consolidated Statements of Financial Condition.

At September 30, 2020, the Company did not hold advances from the FHLB Des Moines.

At December 31, 2019, $ 1.4 billion of advances from the FHLB Des Moines matured in less than one year and $ 2.1 billion matured between one to three years .

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

The Company held $ 4.4 million and $ 147.9 million of stock in the FHLB Des Moines at September 30, 2020 and December 31, 2019, respectively, which is reported at cost and included in Other assets on the Company’s Consolidated Statements of Financial Condition.

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

Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 70.6 billion and $ 202.7 million, respectively, at September 30, 2020 and $ 112.8 billion and $ 357.9 million, respectively, at December 31, 2019.

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

September 30, 2020

Property Mortgage

Carrying Value Mortgage

Principal Interest Rate Fixed/Floating

Rate Maturity Date Priority

(dollars in thousands)

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

Fixed 2024 - 2029 First liens

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

Floating 2/27/2022 First liens

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

Fixed 2036 - 2053 First liens

Virginia 24,457 25,000 L+ 2.85 %

Floating 5/1/2023 First liens

Texas 31,263 32,730 3.28 % Fixed 1/1/2048 and 1/1/2053 First liens

Utah 9,706 9,706 L+ 2.75 %

Floating 1/31/2021 First liens

Utah 6,996 7,014 3.69 % Fixed 6/1/2053 First liens

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

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

Total $ 507,934 $ 513,182

December 31, 2019

Property Mortgage

Carrying Value Mortgage

Principal Interest Rate Fixed/Floating

Rate Maturity Date Priority

(dollars in thousands)

Joint Ventures $ 316,566 $ 318,562 4.03 % - 4.96 %

Fixed 2024 - 2029 First liens

Joint Ventures 16,029 16,325 L+ 2.15 %

Floating 2/27/2022 First liens

Virginia 82,940 84,702 2.34 % - 4.55 %

Fixed 2036 - 2053 First liens

Texas 31,667 33,167 3.28 % Fixed 1/1/2048 and 1/1/2053 First liens

Utah 9,706 9,706 L+ 3.50 %

Floating 1/31/2020 First liens

Utah 7,077 7,096 3.69 % Fixed 6/1/2053 First liens

Minnesota 13,243 13,276 3.69 % Fixed 6/1/2053 First liens

Wisconsin 7,777 7,797 3.69 % Fixed 6/1/2053 First liens

Total $ 485,005 $ 490,631

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

Mortgage Loan Principal Payments

(dollars in thousands)

2020 (remaining) $ 833

Later years 342,345

Total $ 513,182

The fair value of mortgage-backed securities received as collateral in connection with reverse repurchase agreements was approximately $ 300.0 million and $ 250.0 million, which the Company fully repledged, at March 31, 2021 and December 31, 2020, respectively.

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

Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 66.9 billion and $ 183.9 million, respectively, at March 31, 2021 and $ 70.6 billion and $ 196.9 million, respectively, at December 31, 2020.

CAPITAL STOCK

(A) Common Stock

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

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at March 31, 2021 and December 31, 2020.

Shares authorized Shares issued and outstanding

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

2,914,850,000 2,914,850,000 1,402,928,317 1,430,106,199 $ 0.01

During the nine months ended September 30, 2019, the Company closed the public offering of an original issuance of 75.0 million shares of common stock for proceeds of $ 730.5 million before deducting offering expenses.

In connection with the offering, the Company granted the underwriters a thirty -day option to purchase up to an additional 11.3 million shares of common stock, which the underwriters exercised in full resulting in an additional $ 109.6 million in proceeds before deducting offering expenses.

In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $ 1.5 billion of its outstanding shares of common stock through December 31, 2020.

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

All common shares were purchased in open-market transactions.

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

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

The following table provides a summary of activity related to the Company’s Direct Purchase and Dividend Reinvestment Program.

Nine Months Ended

September 30, 2020 September 30, 2019

(dollars in thousands)

Shares issued through direct purchase and dividend reinvestment program

154,000 180,000

Amount raised from direct purchase and dividend reinvestment program

March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020 Par Value

2,936,500,000 2,914,850,000 1,398,502,906 1,398,240,618 $ 0.01

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

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

During the three months ended March 31, 2021 and 2020, no shares were purchased pursuant to these authorizations.

In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2020, collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc.

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The Company may offer and sell shares of its common stock, having an aggregate offering price of up to $ 1.5 billion from time to time through any of the Sales Agents.

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

During the nine months ended

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AND SUBSIDIARIES

Financial Statements

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

No shares were issued under the at-the-market sales program during the three months ended March 31, 2021 and 2020.

(B) Preferred Stock

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at September 30, 2020 and December 31, 2019.

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at March 31, 2021 and December 31, 2020.

In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets.

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Date At Which Dividend Rate Becomes Floating Floating Annual Rate

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

March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020

Fixed-rate (dollars in thousands)

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Each series of preferred stock has a par value of $ 0.01 per share and a liquidation and redemption price of $ 25.00 , plus accrued and unpaid dividends through their redemption date.

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

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

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

During the nine months ended September 30, 2019, the Company redeemed all 2.2 million of its issued and outstanding shares of 8.125 % Series H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”) for $ 55.0 million.

The cash redemption amount for each share of Series H Preferred Stock was $ 25.00 plus accrued and unpaid dividends to, but not including, the redemption date of May 31, 2019.

During the nine months ended September 30, 2019, the Company issued 17.7 million shares of its 6.750 % Seri es I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series I Preferred Stock”) for gross proceeds o f $ 442.5 million befo re deducting the underwriting discount and other estimated offering expenses.

The Series D Cumulative Redeemable Preferred Stock, Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company.

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

Through March 31, 2021, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.

The Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

For the Three Months Ended For the Nine Months Ended

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

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

For the Three Months Ended

March 31, 2021 March 31, 2020

(dollars in thousands, except per share data)

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Distributions paid per common share after period end $ 0.22 $ 0.25

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

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

Dividends declared per share of series C preferred stock $ — $ 0.106 $ — $ 1.060

Date of distributions paid to common stockholders after period end April 30, 2021 April 30, 2020

Dividends declared to series D preferred stockholders $ — $ 8,625

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Dividends declared per share of series G preferred stock $ 0.406 $ 0.406

Dividends declared to series H preferred stockholders $ — $ — $ — $ 1,862

Dividends declared per share of series H preferred stock $ — $ — $ — $ 0.846

Dividends declared to series I preferred stockholders $ 7,467 $ 7,468

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INTEREST INCOME AND INTEREST EXPENSE

Refer to the Note titled “Significant Accounting Policies” for details surrounding the Company’s accounting policy related to net interest income on securities and loans.

Refer to the“Significant Accounting Policies” Note for details surrounding the Company’s accounting policy related to net interest income on securities and loans.

The following table summarizes the interest income recognition methodology for Residential Securities:

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Financial Statements

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

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

2020 2019 2020 2019

The following presents the components of the Company’s interest income and interest expense for the three months ended March 31, 2021 and March 31, 2020.

For the Three Months Ended March 31,

Interest income (dollars in thousands)

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Debt issued by securitization vehicles 26,276 42,119

Participations issued 597 —

Other 6,515 27,333

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NET INCOME (LOSS) PER COMMON SHARE

The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and nine months ended September 30, 2020 and September 30, 2019.

For the Three Months Ended For the Nine Months Ended

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

For the Three Months Ended

March 31, 2021 March 31, 2020

(dollars in thousands, except per share data)

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Dividends on preferred stock 26,883 35,509

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

Net income (loss) available (related) to common stockholders $ 1,723,930 $ ( 3,675,764 )

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Diluted $ 1.23 $ ( 2.57 )

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

The computations of diluted net income (loss) per share available (related) to common share for the three and nine months ended September 30, 2020 excludes 0.5 million of potentially dilutive restricted stock units and 0.8 million of potentially dilutive restricted stock units and performance stock units because their effect would have been anti-dilutive.

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

The computations of diluted net income (loss) per share available (related) to common share for the three months ended March 31, 2020 excludes 0.1 million of potentially dilutive restricted stock units because their effect would have been anti-dilutive.

For the three months ended March 31, 2021 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860.

As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders.

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The Company does not have any unrecognized tax benefits that would affect its financial position.

Thus, no accruals for penalties and interest were deemed necessary at September 30, 2020 and December 31, 2019.

Thus, no accruals for penalties and interest were deemed necessary at March 31, 2021 and December 31, 2020.

The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions.

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The Company’s TRSs are subject to federal, state and local taxes.

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

During the three and nine months ended September 30, 2019, the Company recorded ($ 6.9 ) million and ($ 10.2 ) million, respectively of income tax benefit attributable to its TRSs.

During the three months ended March 31, 2021 and 2020, the Company recorded ($ 0.3 ) million and ($ 26.7 ) million, respectively, of income tax benefit attributable to its TRSs.

The Company’s federal, state and local tax returns from 2016 and forward remain open for examination.

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Financial Statements

The conditions related to Coronavirus Disease 2019 (“COVID-19”) could further impact the aforementioned primary risks to the Company.

The significant decrease in economic activity and/or the resulting impact to the housing market could have an adverse effect on the value of the Company’s investments in mortgage real estate-related assets, particularly residential real estate assets.

Further, borrowers may experience difficulties meeting their obligations or seek to forbear payment on or refinance their mortgage loans to avail themselves of lower rates which may have an adverse impact on the value of the Company’s mortgage real estate related-assets.

In addition to residential mortgage-related assets, the adverse economic conditions could negatively impact tenants in the Company’s commercial property assets and/or businesses in which it lends to in connection with its middle market lending activities, resulting in potential delinquencies, defaults or declines in asset values.

If conditions related to COVID-19 continue to persist, the Company could also experience an unwillingness or inability of its potential lenders to provide the Company with or renew financing, increased margin calls, and/or additional capital requirements particularly in connection with the Company’s less liquid credit assets.

These conditions could force the Company to sell its assets at inopportune times or otherwise cause the Company to potentially revise its strategic business initiatives, which could adversely affect its business.

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

RELATED PARTY TRANSACTIONS

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The Company did not pay the Former Manager any incentive fees.

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

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

Prior to the closing of the Internalization, the Company reimbursed the Former Manager for certain services in connection with the management and operations of the Company and its subsidiaries as permitted under the terms of the Management Agreement.

Such reimbursable expenses included the cost for certain legal, tax, accounting and other support and advisory services provided by employees of the Former Manager to the Company.

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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

For the three months ended March 31, 2020, the compensation and management fee computed in accordance with the Management Agreement was $ 40.8 million and reimbursement payments to the Former Manager were $ 7.1 million.

LEASE COMMITMENTS AND CONTINGENCIES

The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019 with no impact to retained earnings or other components of equity.

The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of five years .

The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of approximately five years .

The corporate office lease includes an option to extend for up to five years , however the extension term was not included in the operating lease liability calculation.

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The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

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

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

Operating Leases Classification September 30, 2020

The lease cost for the three months ended March 31, 2021 was $ 0.9 million.

Supplemental information related to leases as of and for the three months ended March 31, 2021 was as follows:

Operating Leases Classification March 31, 2021

Assets (dollars in thousands)

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(1) As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The following table provides details related to maturities of lease liabilities:

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2021 (remaining) $ 2,921

Later years 2,895

Total lease payments $ 17,402

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In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

There were no material contingencies at March 31, 2021 and December 31, 2020.

ARCOLA REGULATORY REQUIREMENTS

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As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance.

At September 30, 2020 Arcola had a minimum net capital requirement of $ 0.3 million.

At March 31, 2021 Arcola had a minimum net capital requirement of $ 0.3 million.

Arcola consistently operates with capital in excess of its regulatory capital requirements.

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

Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at March 31, 2021 was $ 515.0 million with excess net capital of $ 514.7 million.

SUBSEQUENT EVENTS

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

In April 2021, the Company completed and closed the securitization of residential mortgage loans, OBX 2021-J1 Trust, with a face value of $ 353.8 million.

The securitization represented a financing transaction which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company.

ANNALY CAPITAL MANAGEMENT, INC.

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changes in business conditions and the general economy;

our ability to grow our commercial business;

our ability to grow our residential credit business;

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federal income tax purposes;

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

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

and the timing and ultimate completion of the sale of our commercial real estate business.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Environment and Coronavirus Disease 2019 (“COVID-19”)

Recent Developments

Business Environment and COVID-19

Economic Environment

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

Results of Operations

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Experienced and Projected Long-term CPR

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

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

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

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For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K.

Business Environment and Coronavirus Disease 2019 (“COVID-19”)

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

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

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

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

The timing and speed of a U.S.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financing spreads have tightened for certain credit products.

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

Recent Developments

Sale of Commercial Real Estate Business

On March 25, 2021, we announced that we entered into a definitive agreement to sell and exit our Commercial Real Estate (“CRE”) business to Slate Asset Management L.P.

and Slate Grocery REIT (together, “Slate”).

The transaction represents the sale of substantially all of the assets that comprise our CRE business, which include equity interests, loan assets and commercial mortgage-backed securities (other than commercial CRTs).

Certain employees who primarily support the CRE business are expected to join Slate at completion of the sale.

Subject to customary closing conditions, including applicable regulatory approvals, the transfer of the CRE business is expected to be completed by the third quarter of 2021.

Revenues and expenses associated with the CRE business will be reflected in our results of operations and key financial metrics through closing.

Refer to the “Sale of Commercial Real Estate Business” Note located within Item 1 for additional information related to the announced transaction.

Business Environment and COVID-19

The first quarter of 2021 was marked by a meaningful selloff in interest rates, as 10-year Treasury rates rose more than 80 basis points.

Despite the increase in interest rates, spreads on Agency mortgage-backed securities (“MBS”) and credit products generally tightened, allowing us to generate a 3.6% economic return, excluding goodwill impairment, during the quarter on $0.29 in core earnings (excluding PAA), $1.23 in GAAP net income per common share and a marginal improvement in our book value.

Our total portfolio net of securitized debt decreased two percent during the quarter to $100.1 billion, while credit investments as a share of the aggregate portfolio rose from 22% to 27% during the quarter.

The sharp repricing in the rates market was driven by a meaningful boost in economic growth expectations, best seen in the Federal Reserve’s economic forecasts for 2021 growth in U.S.

gross domestic product (“GDP”).

While the members of the Federal Reserve’s Federal Open Market Committee (“FOMC”) had expected an already strong 4.2% year-over-year growth for GDP in 2021, in the December 2020 Summary of Economic Projections (“SEP”), they revised these projections to 6.5% year-over-year GDP growth in the March SEP.

If realized, growth would be the strongest in nearly 40 years, as the rising number of vaccinated individuals is allowing the U.S.

economy to gradually reopen an increasing number of service businesses.

At the same time, substantial government stimulus and healthy consumer balance sheets are boosting the U.S.

The repricing in interest rate markets also reflects the anticipation of meaningfully higher inflation.

Base effects created by a sharp deceleration in inflation one year ago and consumers’ willingness to pay elevated prices following the receipt of stimulus checks are lifting prices right now.

Inflation is likely to temporarily rise above the Federal Reserve’s inflation target in coming months, but it remains unclear as to whether higher inflation will take hold beyond that.

Similar to the trends seen during the second half of 2020, valuations continued to remain tight across nearly all asset classes in the first quarter of 2021 as optimism about the economic recovery, monetary and fiscal policy support, and strong demand from certain private market participants, for example from banks for Agency MBS, supported asset valuation.

Offsetting the effect from tight asset spreads, financing conditions remained very favorable.

Favorable financial conditions and ample liquidity continued to support the absolutely low levels of rates as well as the flat term structure of the repo curve.

Our net interest margin (excluding PAA) declined to 1.91% at the end of the first quarter from 1.98% at the end of 2020.

Our net interest margin was 3.39% at the end of the first quarter and 2.14% at the end of 2020.

Core earnings (excluding PAA) and net interest margin (excluding PAA) are non-GAAP financial measures.

Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to their most directly comparable GAAP results.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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

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

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

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

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

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

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

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

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

Business Continuity

Our well-established Business Continuity Planning (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics.

Our well-established Business Continuity Plan (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics.

It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise.

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

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

At the present, we expect additional employees to return to the office in the second half of 2021 subject to continued successful vaccine rollout and revised guidance from federal, state and local authorities.

Economic Environment

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

The pace of economic growth continued its expansion in the first quarter, with U.S.

gross domestic product (“GDP”) rising 6.4% on a seasonally adjusted annualized rate.

The rebound in U.S.

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

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

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

The degree, timing and velocity of the remaining recovery is highly uncertain and it is unlikely that the economy will be able to fully replace the lost output in aggregate before sometime in 2021 at the earliest.

The Fed conducts monetary policy with a dual mandate:

full employment and price stability.

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

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

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

economic output was driven by the partial reopening of the U.S.

economy due to an aggressive vaccination campaign, which has allowed the U.S.

to fully vaccinate roughly one-third of individuals over 18 years of age as of April 21, 2021 according to the Center of Disease Control and Prevention (“CDC”).

The successful vaccine rollout has allowed for the gradual loosening of social distancing and other COVID-19 related restrictions.

Though more progress has to be made in order to overcome COVID-19 and have the economy return to pre-pandemic levels, the U.S.

economy appeared to be entering a meaningful uptick in activity at the end of the first quarter.

The unemployment rate fell 0.7 percentage points in the first quarter to 6.0% in March according to the Bureau of Labor Statistics, though remains well above pre-pandemic levels.

Meanwhile, seasonally adjusted total non-farm payroll employment rose to 144.1 million employees, but remains roughly 8.4 million employees below the number of employed in February 2020 at the onset of the COVID-19 pandemic.

Wage growth, as measured by the year-over-year change in private sector Average Hourly Earnings, contracted during the quarter, reading 4.2% in March compared to 5.5% in December 2020.

The downward adjustment in wages is largely a statistical anomaly, driven by relatively larger share of job losses among lower-paid employees.

This inflated wage gains for most of 2020.

However, as employees in lower-paid sectors, for example in the leisure sector, reenter the work force, wage growth is expected to slow to rates more in line with historical averages.

Similar to the labor market, inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), have rebounded from their pandemic lows in the second quarter of 2020, though remain below the Fed’s 2% target in the first quarter of 2021.

The headline PCE measure increased by 2.32% year-over-year in March 2021.

The more stable core PCE measure, which excludes volatile food and energy prices, registered 1.83% year-over-year increase, above the 1.41% year-over-year growth measured in December 2020.

In support of the U.S.

economic recovery, the FOMC maintained the Federal Funds Rate in the 0.00% - 0.25% range during the first quarter of 2021 and continued to signal that it will maintain the rate at current levels for an extended period of time.

In addition, the FOMC continued its quantitative easing program.

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

During the first quarter of 2021, the 10-year U.S.

Treasury rate rose meaningfully from 0.91% on December 31, 2020 to 1.74% on March 31, 2021.

The mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S.

Treasury rate, continued to compress, reaching 0.30% or 30 basis points (bps) at the end of the quarter.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

The continued elevated wage growth is largely seen as a statistical anomaly.

A majority of the layoffs appear to have occurred in traditionally lower-paying sectors, such as the leisure industry, which in turn inflated the wages of the remaining employed individuals.

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

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

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

In support of the U.S.

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

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

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

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

Treasury rate remained nearly unchanged at 0.68% as Fed monetary policy actions maintained a range-bound interest rate environment in U.S.

Treasuries and LIBOR-based interest rates.

The mortgage basis, or the spread between the 30-year Agency mortgage-backed security coupon and 10-year U.S.

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

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

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

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

March 31, 2021 December 31, 2020 March 31, 2020

30-Year mortgage current coupon 2.04% 1.34% 1.80%

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6-Month 0.21% 0.26% 1.18%

London Interbank Offered Rate (“LIBOR”) Transition

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.

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

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

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.

Results of Operations

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

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

“Risk Factors” in this Quarterly Report on Form 10-Q.

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

Net Income (Loss) Summary

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

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

2020 2019 2020 2019

The following table presents financial information related to our results of operations as of and for the three months ended March 31, 2021 and 2020.

As of and for the Three Months Ended March 31,

(dollars in thousands, except per share data)

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Dividends on preferred stock 26,883 35,509

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

Net income (loss) available (related) to common stockholders $ 1,723,930 $ (3,675,764)

10 unchanged sentences

Leverage at period-end (1)

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

Economic leverage at period-end (2)

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

Capital ratio (3)

32 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements