What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 248 added, 327 removed, 1123 unchanged (34% of the section changed)

Management’s Discussion and Analysis

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

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

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

(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), 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.

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(8) Excludes dividends on preferred stock.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net income (loss) was $1.8 billion, which includes $0.3 million attributable to noncontrolling interests, or $1.23 per average basic common share, for the three months ended March 31, 2021 compared to ($3.6) billion, which includes $0.1 million attributable to noncontrolling interests, or ($2.57) per average basic common share, for the same period in 2020.

We attribute the majority of the change in net income (loss) to favorable changes in unrealized gains (losses) on interest rate swaps, net unrealized gains (losses) on instruments measured at fair value through earnings and net interest income.

Net unrealized gains (losses) on interest rate swaps was $772.3 million for the three months ended March 31, 2021 compared to ($2.8) billion for the same period in 2020.

Net interest income for the three months ended March 31, 2021 was $687.4 million compared to $51.6 million for the same period in 2020.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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

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

Core earnings (excluding premium amortization adjustment (“PAA”)) were $439.5 million, or $0.29 per average common share, for the three months ended March 31, 2021, compared to $330.2 million, or $0.21 per average common share, for the same period in 2020.

The change in core earnings (excluding PAA) during the three months ended March 31, 2021 compared to the same period in 2020 was 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 lower average interest earning assets and unfavorable changes in the net interest component of interest rate swaps.

Non-GAAP Financial Measures

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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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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

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

2020 2019 2020 2019

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

For the Three Months Ended March 31,

(dollars in thousands, except per share data)

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Net (gains) losses on disposal of investments and other 65,786 (206,583)

Net (gains) losses on other derivatives (169,316) 16,888 (546,658) 638,458

Net (gains) losses on other derivatives and financial instruments

(476,868) (206,426)

Net unrealized (gains) losses on instruments measured at fair value through earnings (104,191) 730,160

Loan loss provision (1)

Loan loss provision (reversal) (1)

(144,870) 99,993

Business divestiture-related (gains) losses 249,563 —

Other adjustments

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

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

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

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Transaction expenses and non-recurring items (4)

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

Income tax effect of non-core income (loss) items 4,334 (23,862)

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Dividends on preferred stock 26,883 35,509

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

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

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12.53 % 9.27 %

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

(1) Includes ($5.3) million and $0.7 million of loss provision (reversal) on unfunded loan commitments for the three months ended March 31, 2021 and 2020, respectively, which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

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

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

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

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

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

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

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

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

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

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

(4) The three months ended March 31, 2021 includes costs incurred in connection with a securitization of residential whole loans.

The three months ended March 31, 2020 includes costs incurred in connection with securitizations of Agency MBS and residential whole loans as well as costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process.

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

CMBX coupon income totaled $1.5 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively.

(6) 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.

(7) Represents a non-GAAP financial measure.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

A TBA contract is an agreement to purchase or sell, for future delivery, an Agency mortgage-backed security with a specified issuer, term and coupon.

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

A TBA contract is an agreement to purchase or sell, for future delivery, an Agency MBS with a specified issuer, term and coupon.

A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold.

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 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 MBS, 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.

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions.

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 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).

The fair value of TBA derivatives is based on methods similar to those used to value Agency MBS.

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 and financial instruments 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.

Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed security (interest income less an implied cost of financing).

TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss).

Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency MBS (interest income less an implied cost of financing).

TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives and financial instruments in the Consolidated Statements of Comprehensive Income (Loss).

The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular rating and vintage.

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

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

We report income (expense) on CMBX positions in Net gains (losses) on other derivatives and financial instruments 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 (excluding PAA).

Premium Amortization Expense

In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency mortgage-backed securities, excluding interest-only securities, multifamily and reverse mortgages, taking into account estimates of future principal prepayments in the calculation of the effective yield.

In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency MBS, excluding interest-only securities, multifamily and reverse mortgages, taking into account estimates of future principal prepayments in the calculation of the effective yield.

We recalculate the effective yield as differences between anticipated and actual prepayments occur.

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

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

2020 2019 2020 2019

For the Three Months Ended March 31,

(dollars in thousands)

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Premium amortization expense (excluding PAA) $ 202,679 $ 326,215

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 MBS (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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

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

We did not enter into any MAC interest rate swaps during the three months ended March 31, 2021.

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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For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

March 31, 2021 $ 763,378 $ (214,570) $ 548,808

March 31, 2020 $ 555,026 $ 290,722 $ 845,748

(1) Represents a non-GAAP financial measure.

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

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

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For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

March 31, 2021 $ 75,973 $ 79,747 $ 155,720 $ 687,405 $ 79,747 $ 607,658 $ (214,570) $ 393,088

March 31, 2020 $ 503,473 $ 13,980 $ 517,453 $ 51,553 $ 13,980 $ 37,573 $ 290,722 $ 328,295

(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

Prepayment speeds, as reflected by the CPR and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty.

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

The following table presents the weighted average

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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

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

Experienced CPR (1)

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For the three months ended

September 30, 2020 22.9 % 17.1 %

September 30, 2019 14.6 % 16.3 %

For the nine months ended

September 30, 2020 18.7 % 17.1 %

September 30, 2019 11.0 % 16.3 %

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

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

March 31, 2021 23.9 % 11.8 %

March 31, 2020 13.6 % 17.7 %

(1) For the three months ended March 31, 2021 and 2020, respectively.

(2) At March 31, 2021 and 2020, respectively.

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

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.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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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For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

March 31, 2021 $ 81,121,340 $ 548,808 2.71 % $ 72,002,031 $ 155,720 0.87 % 393,088 1.84 %

March 31, 2020 $ 116,063,895 $ 845,748 2.91 % $ 107,029,466 $ 517,453 1.91 % 328,295 1.00 %

(1) Based on amortized cost.

(2) Represents a non-GAAP financial measure.

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Net Interest Margin (excluding PAA)

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For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

March 31, 2021 $ 548,808 98,933 (75,973) (79,747) $ 492,021 $ 81,121,340 21,865,969 $ 102,987,309 1.91 %

March 31, 2020 $ 845,748 44,904 (503,473) (13,980) $ 373,199 $ 116,063,895 9,965,142 $ 126,029,037 1.18 %

(1) Represents a non-GAAP financial measure.

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

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

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

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

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

CMBX coupon income totaled $1.5 million and $1.2 million for the three months ended March 31, 2021 and 2020, respectively.

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

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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.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Economic Cost of Funds on Average Interest Bearing Liabilities

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For the three months ended

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

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

For the nine months ended

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

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

March 31, 2021 $ 72,002,031 $ 65,350,334 $ 155,720 0.87 % 0.12 % 0.22 % (0.10 %) 0.75 % 0.65 %

March 31, 2020 $ 107,029,466 $ 80,750,560 $ 517,453 1.91 % 1.40 % 1.49 % (0.09 %) 0.51 % 0.42 %

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

(2) Represents a non-GAAP financial measure.

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

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

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

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

Economic interest expense decreased by $361.7 million for the three months ended March 31, 2021 compared to the same period in 2020.

The change was due to lower borrowing rates and a decrease in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was ($79.7) million for the three months ended March 31, 2021 compared to ($14.0) million for the same period in 2020.

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

3 unchanged sentences

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

Our average borrowings during a quarter may differ from period

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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

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

At March 31, 2021 and December 31, 2020, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans.

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

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

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

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

2020 2019 2020 2019

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

These components of realized and unrealized gains (losses) for the three and nine months ended March 31, 2021 and 2020 were as follows:

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

For the Three Months Ended March 31,

(dollars in thousands)

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Net gains (losses) on disposal of investments and other (65,786) 206,583

Net gains (losses) on other derivatives 169,316 (16,888) 546,658 (638,458)

Net gains (losses) on other derivatives and financial instruments

476,868 206,426

Net unrealized gains (losses) on instruments measured at fair value through earnings 104,191 (730,160)

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

Loan loss (provision) reversal 139,620 (99,326)

Business divestiture-related gains (losses) (249,563) (249,563)

Total $ 1,097,845 $ (3,905,304)

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

For the Three Months Ended September 30, 2020 and 2019

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

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

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

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

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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

For the Nine Months Ended September 30, 2020 and 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

For the Three Months Ended March 31, 2021 and 2020

Net gains (losses) on interest rate swaps for the three months ended March 31, 2021 was $692.5 million compared to ($3.2) billion for the same period in 2020.

The change was primarily attributable to favorable changes in unrealized gains (losses) on interest rate swaps, which was $772.3 million for the three months ended March 31, 2021, reflecting a rise in forward interest rates during the period, compared to ($2.8) billion for the same period in 2020, reflecting a decline in forward interest rates during the earlier period.

Net gains (losses) on disposal of investments and other was ($65.8) million for the three months ended March 31, 2021 compared to $206.6 million for the same period in 2020.

For the three months ended March 31, 2021, we disposed of Residential Securities with a carrying value of $3.0 billion for an aggregate net loss of ($61.0) million.

For the same period in 2020, we disposed of Residential Securities with a carrying value of $41.9 billion for an aggregate net gain of $267.3 million.

Net gains (losses) on other derivatives and financial instruments was $476.9 million for the three months ended March 31, 2021 compared to $206.4 million for the same period in 2020.

The change in net gains (losses) on other derivatives and financial instruments was primarily comprised of a favorable change in net gains (losses) on futures derivatives, which was $813.3 million for the three months ended March 31, 2021 compared to ($272.6) million for the same period in 2020, and higher net gains of interest rate swaptions, which was $283.8 million for the three months ended March 31, 2021 compared to $121.6 million for the same period in 2020, partially offset by an unfavorable change in net gains (losses) on TBA derivatives, which was ($630.1) million for the three months ended March 31, 2021 compared to $431.8 million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $104.2 million for the three months ended March 31, 2021 compared to ($730.2) million for the same period in 2020, primarily due to favorable changes in unrealized gains (losses) on securitized commercial loans of $511.6 million, credit risk transfer securities of $253.0 million, securitized residential whole loans of consolidated VIEs of $175.4 million, non-Agency MBS of $133.8 million, securitized debt of consolidated VIEs backed by Agency MBS of $120.2 million and MSRs of $109.7 million, partially offset by unfavorable changes in unrealized gains (losses) on commercial securitized debt of consolidated VIEs of ($490.8) million for the three months ended March 31, 2021 compared to the same period in 2020.

For the three months ended March 31, 2021 and 2020, net loan loss (provisions) reversals of $139.6 million and ($99.3) million, respectively, were recorded on commercial mortgage and corporate loans.

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

Other Income (Loss)

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General and Administrative Expenses

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

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For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

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

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

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

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

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

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

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

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

March 31, 2021 $ 49,695 0.23 % 1.42 %

March 31, 2020 $ 77,629 0.27 % 2.18 %

(1) Includes $0.7 million of transaction costs incurred in connection with a securitization of residential whole loans for the three months ended March 31, 2021.

Includes $7.2 million of transaction costs incurred in connection with securitizations of residential whole loans and Agency MBS as well as costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process for the three months ended March 31, 2020.

Excluding these transaction costs, G&A expenses as a percentage of average total assets were 0.23% and 0.25% and as a percentage of average equity were 1.40% and 1.98% for the three months ended March 31, 2021 and 2020, respectively.

G&A expenses were $49.7 million for the three months ended March 31, 2021, a decrease of $27.9 million compared to the same period in 2020, primarily due to cost savings generated from the Internalization which closed on June 30, 2020 and lower securitization transaction costs and professional fees during the first quarter of 2021 compared with the same period in 2020.

Return on Average Equity

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For the three months ended

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

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

For the nine months ended

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

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

March 31, 2021 17.31 % 33.54 % 0.43 % (1.42 %) 0.01 % 49.87 %

March 31, 2020 1.06 % (102.22 %) 0.42 % (2.18 %) 0.75 % (102.17 %)

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

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Unrealized Gains and Losses - Available-for-Sale Investments

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

(dollars in thousands)

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Unrealized changes in the estimated fair value of available-for-sale investments may have a direct effect on our potential earnings and dividends:

positive changes will increase our equity base and allow us to increase our borrowing capacity while negative changes tend to reduce borrowing capacity.

positive changes will increase our equity base and allow us to increase our borrowing capacity while

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

negative changes tend to reduce borrowing capacity.

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

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

Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating.

The fair value of these securities being less than amortized cost at March 31, 2021 is solely due to market conditions and not the quality of the assets.

Substantially all of the Agency MBS are “AAA” rated or carry an implied “AAA” rating.

The investments are not considered to be other-than-temporarily impaired because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, which may be maturity.

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Financial Condition

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Total assets were $85.4 billion and $88.5 billion at March 31, 2021 and December 31, 2020, respectively.

The change was primarily due to a decrease in Agency MBS of $4.5 billion, including assets transferred or pledged to securitization vehicles, partially offset by increases in derivative assets of $0.7 billion, credit risk transfer securities of $0.4 billion and non-Agency MBS of $0.3 billion.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at March 31, 2021:

Residential Commercial

Agency MBS and MSRs TBAs (1)

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

Investments Investments in CRE Corporate Debt Total (3)

Agency MBS and MSRs Residential Credit (1)

Commercial Real Estate (2)

Corporate Debt Total

Assets (dollars in thousands)

Fair value/carrying value $ 70,348,427 $ 5,907,759 $ 4,345,255 $ 2,074,475 $ 82,675,916

Implied market value of derivatives (3)

22,793,892 — 500,539 — 23,294,431

Repurchase agreements 59,401,472 1,473,570 327,435 — 61,202,477

Implied cost basis of derivatives (3)

23,040,011 — 498,781 — 23,538,792

Other secured financing — — — 922,605 922,605

Debt issued by securitization vehicles 549,941 2,494,784 — — 3,044,725

Participations issued — 180,527 — — 180,527

Net forward purchases 924,575 587 — — 925,162

Mortgages payable — — — — — 507,934 — 507,934

Liabilities of disposal group held for sale — — 3,260,788 — 3,260,788

Other assets / liabilities 985,837 53,507 90,388 42,592 1,172,324

Net equity allocated $ 10,212,157 $ 1,811,798 $ 849,178 $ 1,194,462 $ 14,067,595

Net equity allocated (%) 73 % 13 % 6 % 8 % 100 %

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

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

(2) Includes loans held for sale, net.

(3) Excludes the TBA asset, debt and equity balances.

(4) Net Equity Allocated, as disclosed in the above table, excludes non-portfolio related activity and may differ from stockholders’ equity per the Consolidated Statements of Financial Condition.

Debt/net equity ratio 5.9:1 2.3:1 0.4:1 0.8:1 4.6:1 (4)

(1) Fair value/carrying includes residential loans held for sale.

(2) Fair value/carrying includes commercial real estate investments held for sale.

(3) Derivatives include TBA contracts under Agency MBS and MSRs and CMBX balances under Commercial Real Estate.

(4) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition.

NM Not meaningful.

Excludes liabilities of disposal group held for sale.

Residential Securities

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

Substantially all of our Agency MBS at March 31, 2021 and December 31, 2020 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

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

We carry all of our Agency mortgage-backed securities at fair value on the Consolidated Statements of Financial Condition.

We carry all of our Agency MBS at fair value on the Consolidated Statements of Financial Condition.

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

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

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

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

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

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

At March 31, 2021 and December 31, 2020 we had on our Consolidated Statements of Financial Condition a total of $88.4 million and $88.3 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 $4.1 billion and $4.0 billion, respectively, of unamortized premium

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

September 30, 2020 December 31, 2019

(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 MBS portfolio for the three months ended March 31, 2021 and 2020 was 23.9% and 13.6%, respectively.

The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of March 31, 2021 and 2020 was 11.8% and 17.7%, respectively.

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at March 31, 2021 and December 31, 2020.

March 31, 2021 December 31, 2020

Estimated Fair Value

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Residential credit

CRT $ 411,538 $ 531,322

Residential CRT $ 930,983 $ 532,403

Alt-A 58,498 80,328

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Total Residential Securities $ 71,845,316 $ 75,571,654

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 September 30, 2020 and December 31, 2019.

September 30, 2020 December 31, 2019

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Management’s Discussion and Analysis

March 31, 2021 December 31, 2020

Residential Securities (1)

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Weighted average yield 3.86 % NM

(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.

(1) Excludes interest-only MBS.

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

NM Not meaningful.

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Management’s Discussion and Analysis

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

The following tables summarize certain characteristics of our Residential Credit portfolio at March 31, 2021.

Payment Structure Investment Characteristics

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

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Management’s Discussion and Analysis

Product ARM Fixed Floater Interest-Only Estimated Fair Value

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Contractual Obligations

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

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

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at March 31, 2021.

The table does not include the effect of net interest rate payments on our interest rate swap agreements and excludes assets and liabilities of the disposal group held for sale.

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

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

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Management’s Discussion and Analysis

At March 31, 2021, the interest rate swaps had a net fair value of ($0.7) billion.

Year One to Three

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Interest expense on debt issued by securitization vehicles 78,627 157,254 157,254 2,234,346 2,627,481

Mortgages payable (principal) 22,828 65,136 155,686 269,532 513,182

Interest expense on mortgages payable 20,314 39,431 34,312 126,522 220,579

Participations issued (principal) — — — 173,936 173,936

Interest expense on participations issued 6,416 12,831 12,831 167,065 199,143

Long-term operating lease obligations 3,886 7,724 5,792 — 17,402

Total $ 61,344,708 $ 217,894 $ 1,109,862 $ 5,552,043 $ 68,224,507

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

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at March 31, 2021.

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

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

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

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

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

During the three months ended March 31, 2021, we received $5.0 billion from principal repayments and $2.8 billion in cash from disposal of securities.

During the three months ended March 31, 2020, we received $4.9 billion from principal repayments and $41.1 billion in cash from disposal of securities.

Off-Balance Sheet Arrangements

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

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

We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at March 31, 2021.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Capital Management

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Stockholders’ Equity

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

September 30, 2020 December 31, 2019

The following table provides a summary of total stockholders’ equity at March 31, 2021 and December 31, 2020:

March 31, 2021 December 31, 2020

Stockholders’ equity (dollars in thousands)

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

6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock 696,910 696,910

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Capital Stock

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

For the 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 $ 1,075 $ 1,795

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

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

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

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

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

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

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

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

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

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

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

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

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

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 “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.

Leverage and Capital

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

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 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 international market conditions.

Our debt-to-equity ratio at March 31, 2021 and December 31, 2020 was 4.6:1 and 5.1:1, respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA derivative and CMBX notional outstanding and net forward purchases (sales) of investments divided by total equity was 6.1:1 and 6.2:1 at March 31, 2021 and December 31, 2020, 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 13.7% and 13.6% at March 31, 2021 and December 31, 2020, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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 opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions.

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

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

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

Risk Management

For more information on COVID-19, including actions we have taken in response, please refer to the section titled “Business Environment and Coronavirus Disease 2019 (“COVID-19”)” within this Item 2.

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 2.

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

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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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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 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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Each of these committees reports to our management Operating Committee which is responsible for oversight and management of our operations, including oversight and approval authority over all aspects of our enterprise risk management.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Audit Services is an independent function with reporting lines to the BAC.

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

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

In addition, Arcola borrows funds through direct repurchase agreements.

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

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

At March 31, 2021 and December 31, 2020, the weighted average days to maturity was 88 days and 64 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 membership in the Federal Home Loan Bank (“FHLB”) through our captive insurance subsidiary Truman Insurance Company LLC (“Truman”).

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

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.

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

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

At March 31, 2021, we had total financial assets and cash pledged against existing liabilities of $67.8 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 September 30, 2020 compared to the same period in 2019, and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the three months ended September 30, 2020.

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 March 31, 2021 compared to the same period in 2020, and our counterparties did not materially alter any requirements, including required haircuts, related to the col lateral we pledge under repurchase agreements and interest rate swaps during the three months ended March 31, 2021.

While haircut and margin requirements related to the Agency collateral we pledge under repurchase agreements and interest rate swaps were largely unchanged during the three months ended March 31, 2021, 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.

ANNALY CAPITAL MANAGEMENT, INC.

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For the three months ended (dollars in thousands)

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

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

March 31, 2021 $ 65,461,539 $ 61,202,477 $ 143,395 $ —

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September 30, 2019 108,389,796 102,682,104 1,459,070 —

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

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

September 30, 2020

June 30, 2019 101,983,828 105,181,241 3,478,510 —

March 31, 2019 87,781,404 88,554,170 3,937,769 523,449

The following table provides information on our repurchase agreements and other secured financing by maturity date at March 31, 2021.

The weighted average remaining maturity on our repurchase agreements and other secured financing was 106 days at March 31, 2021:

March 31, 2021

Balance Weighted

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

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

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at March 31, 2021:

Weighted Average Rate

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922,605 2.17 % 2.80 % 1,304

Securitized debt of consolidated VIEs (3)

Debt issued by securitization vehicles (3)

2,976,696 2.16 % 1.90 % 11,764

Mortgages payable (3)

Participations issued (3)

173,936 3.69 % 2.60 % 11,330

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(3) Non-recourse to Annaly.

Excess Liquidity

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Excess Liquidity

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

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

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

The following table also provides the carrying amount of our encumbered and unencumbered financial assets at March 31, 2021:

Encumbered Assets Unencumbered Assets Total

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Non-agency mortgage-backed securities 693,669 583,435 1,277,104

Commercial mortgage-backed securities 4,121 — 4,121

Residential mortgage loans (2)

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MSRs — 113,080 113,080

Commercial real estate debt investments (2)

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

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

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

Corporate debt, held for investment 1,564,052 510,423 2,074,475

Assets of disposal group held for sale (3)

3,286,829 358,748 3,645,577

Other assets (4)

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(2) Includes assets transferred or pledged to securitization vehicles.

(3) Includes interests in certain joint ventures and equity instruments.

(3) Comprised of commercial real estate investments held for sale.

(4) Includes interests in certain joint ventures.

We maintain liquid assets in order to satisfy our current and future obligations in normal and stressed operating environments.

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

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

The following table presents our liquid assets as a percentage of total assets at March 31, 2021:

Carrying Value (1)

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Residential Securities (2) (3)

Commercial mortgage-backed securities 4,121

Residential mortgage loans (4)

Commercial real estate debt investments (5)

Commercial real estate debt and preferred equity, held for investment (6)

Corporate debt, held for investment (5)

Assets of disposal group held for sale (6)

Total liquid assets $ 145,244,141

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

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

The assets listed in this table include $67.8 billion of assets that have been pledged as collateral against existing liabilities at March 31, 2021.

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

(2) 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.

(3) Excludes securitized Agency mortgage-backed securities of consolidated VIEs carried at fair value of $0.6 billion.

(3) Excludes securitized Agency MBS of consolidated VIEs carried at fair value of $0.6 billion.

(4) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $3.2 billion.

(5) Excludes securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.2 billion.

(6) Excludes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $0.9 billion.

(5) Excludes certain second lien loans.

(8) Denominator is computed based on the carrying amount of encumbered and encumbered financial assets, excluding assets transferred or pledged to securitization vehicles of $7.3 billion.

(6) Comprised of commercial real estate investments held for sale.

Excludes securitized commercial mortgage loans and senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $3.1 billion.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

The interest rate sensitivity of our assets and liabilities, excluding assets and liabilities of the disposal group held for sale, in the following table at March 31, 2021 could vary substantially based on actual prepayment experience.

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

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Agency mortgage-backed securities (principal) — 7,147 1,016,786 62,734,965 63,758,898

Credit risk transfer securities (principal) 16,426 19,832 80,375 335,876 452,509

Residential credit risk transfer securities (principal) — 531 571,571 357,536 929,638

Non-agency mortgage-backed securities (principal) — 84,663 776,813 433,865 1,295,341

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Residential mortgage loans (principal) — — — 513,064 513,064

Commercial real estate debt and preferred equity (principal) 76,970 51,658 477,053 45,302 650,983

Corporate debt (principal) — — 412,900 1,720,808 2,133,708

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— — — 2,976,696 2,976,696

Participations issued (principal) — — — 173,936 173,936

Total financial liabilities - maturity 41,903,428 19,299,049 — 4,073,237 65,275,714

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These stress tests assist with the management of our pool of liquid assets and influence our current and future funding plans.

Our stress tests are modeled over both short term and longer time horizons.

The stresses applied include market-wide and firm-specific stresses.

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

The following table presents estimates at September 30, 2020.

The following table presents estimates at March 31, 2021.

Actual results could differ materially from these estimates.

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Additionally, ALCO has oversight of our credit risk exposure.

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

September 30, 2020 December 31, 2019

Our portfolio composition, based on balance sheet values, at March 31, 2021 and December 31, 2020 was as follows:

March 31, 2021 December 31, 2020

Agency mortgage-backed securities (1)

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(2) Net of unamortized origination fees.

March 31, 2021 excludes commercial real estate assets held for sale.

Counterparty Risk Management

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Management’s Discussion and Analysis

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

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

The following table summarizes our exposure to counterparties by geography at March 31, 2021:

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)

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Total 35 $ 62,125,082 $ (672,637) $ 5,009,062 $ (1,753,830)

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

(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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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.

Determining whether there is an 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.

For commercial real estate loans and preferred equity investments classified as held for investment, we apply significant judgment in evaluating the need for a loss reserve.

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Commercial Mortgage-Backed Security

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

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

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

Constant Prepayment Rate (“CPR”)

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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

Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense.

Economic Return

Refers to the Company’s change in book value plus dividends declared divided by the prior period’s book value.

Encumbered Assets

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Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships.

Federal Funds Rate

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Federal Home Loan Banks (“FHLB”)

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

Federal Funds Rate

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

Federal Housing Financing Agency (“FHFA”)

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

Interest Rate Swaption

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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)

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

LIBOR is frequently used as the base for resetting

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

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

Liquidity Risk

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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.

Reinvestment Risk

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis