What changed in this filing

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Item 1. Financial Statements

2021-08-06 compared with 2021-05-07 · 262 added, 195 removed, 693 unchanged (40% of the section changed)

Financial Statements

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

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

assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract.

In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps.

7 unchanged sentences

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

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

At June 30, 2021 and December 31, 2020, $ 1.1 billion and $ 1.5 billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.

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

28 unchanged sentences

Financial Statements

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

Derivatives Instruments March 31, 2021 December 31, 2020

The table below summarizes fair value information about our derivative assets and liabilities at June 30, 2021 and December 31, 2020:

Derivatives Instruments June 30, 2021 December 31, 2020

Assets (dollars in thousands)

11 unchanged sentences

Total derivative liabilities $ 900,259 $ 1,033,345

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

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

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

March 31, 2021

(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 445.0 million and $ 504.0 million at June 30, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche.

As of June 30, 2021 and December 31, 2020 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and A.

The following table summarizes certain characteristics of the Company’s interest rate swaps at June 30, 2021 and December 31, 2020:

June 30, 2021

Maturity Current Notional (1)(2)

18 unchanged sentences

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

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

(1) As of June 30, 2021, 13 %, 59 % and 28 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.

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

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

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

(2) There were no forward starting swaps at June 30, 2021 and December 31, 2020.

(3) At June 30, 2021 and December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps.

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

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Financial Statements

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

March 31, 2021

The following table presents swaptions outstanding at June 30, 2021 and December 31, 2020.

June 30, 2021

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

7 unchanged sentences

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

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

March 31, 2021

The following table summarizes certain characteristics of the Company’s TBA derivatives at June 30, 2021 and December 31, 2020:

June 30, 2021

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

5 unchanged sentences

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

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

March 31, 2021

The following table summarizes certain characteristics of the Company’s futures derivatives at June 30, 2021 and December 31, 2020:

June 30, 2021

Notional - Long

19 unchanged sentences

Total $ — $ ( 10,423,800 ) 6.60

The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition.

Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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

March 31, 2021

The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition.

Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty.

June 30, 2021

Amounts Eligible for Offset

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TBA derivatives, at fair value 2,837 ( 2,596 ) — 241

Futures contracts, at fair value 87,814 ( 8,141 ) ( 79,673 ) —

Purchase commitments 2,656 — — 2,656

Credit derivatives 434 ( 366 ) ( 68 ) —

December 31, 2020

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For the three months ended (dollars in thousands)

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

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

June 30, 2021 $ ( 83,087 ) $ — $ ( 141,067 )

June 30, 2020 $ ( 64,561 ) $ ( 1,521,732 ) $ 1,494,628

For the six months ended

June 30, 2021 $ ( 162,834 ) $ — $ 631,195

June 30, 2020 $ ( 78,541 ) $ ( 1,919,293 ) $ ( 1,333,095 )

ANNALY CAPITAL MANAGEMENT, INC.

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

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

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

5 unchanged sentences

Credit derivatives 2,777 1,931 4,708

Three Months Ended March 31, 2020

$ ( 357,808 )

Three Months Ended June 30, 2020

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

6 unchanged sentences

Total $ 170,916

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

Six Months Ended June 30, 2021

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

(dollars in thousands)

Net TBA derivatives $ ( 277,844 ) $ ( 67,002 ) $ ( 344,846 )

Net interest rate swaptions ( 44,997 ) 73,130 28,133

Futures 479,547 ( 60,766 ) 418,781

Purchase commitments — 469 469

Credit derivatives 4,408 10,954 15,362

Total $ 117,899

Six Months Ended June 30, 2020

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

(dollars in thousands)

Net TBA derivatives $ 521,610 $ 114,331 $ 635,941

Net interest rate swaptions 21,566 47,499 69,065

Futures ( 279,230 ) ( 10,687 ) ( 289,917 )

Purchase commitments — ( 1,143 ) ( 1,143 )

Credit derivatives 3,128 ( 39,732 ) ( 36,604 )

Total $ 377,342

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange.

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

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

The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at June 30, 2021 was approximately $ 725.2 million, which represents the maximum amount the Company would be required to pay upon termination.

This amount is fully collateralized.

FAIR VALUE MEASUREMENTS

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

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

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

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

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

Refer to the “Sale of Commercial Real Estate Business” Note for fair value measurements related to the assets and liabilities of the disposal group held for sale as of June 30, 2021.

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

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

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

Financial assets and

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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

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

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

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

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Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

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

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

The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy.

Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations.

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

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

The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers.

Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements.

The following tables present the estimated fair values of financial instruments and MSRs measured at fair value on a recurring basis.

The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

March 31, 2021

June 30, 2021

Level 1 Level 2 Level 3 Total

6 unchanged sentences

Mortgage servicing rights — — 202,616 202,616

Interests in MSR — — 49,035 49,035

Assets transferred or pledged to securitization vehicles — 4,073,156 — 4,073,156

8 unchanged sentences

Total liabilities $ 87,814 $ 4,443,342 $ — $ 4,531,156

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

December 31, 2020

17 unchanged sentences

Total liabilities $ 19,413 $ 6,706,112 $ — $ 6,725,525

Quantitative Information about Level 3 Fair Value Measurements

Qualitative and Quantitative Information about Level 3 Fair Value Measurements

The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset.

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

In practice, simultaneous changes in assumptions may not

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

always have a linear effect on the inputs discussed below.

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

Interrelationships may also exist between observable and unobservable inputs.

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For each of the individual relationships described below, the inverse relationship would also generally apply.

For MSRs, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement.

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

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

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

For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement.

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

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

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR.

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

March 31, 2021 December 31, 2020

Valuation Technique Unobservable Input (1)

Range (Weighted Average ) (2)

Unobservable Input (1)

Range (Weighted Average ) (2)

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

Discount rate 9.0 % - 12.0 % ( 9.4 %)

Prepayment rate 11.0 % - 39.2 % ( 26.9 %)

Prepayment rate 19.3 % - 55.5 % ( 42.0 %)

Delinquency rate 0.0 % - 6.0 % ( 2.5 %)

Cost to service $ 81 - $ 107 ($ 97 )

Cost to service $ 83 - $ 108 ($ 98 )

June 30, 2021

Unobservable Input (1) / Range (Weighted Average) (2)

Discount rate Prepayment rate Delinquency rate Cost to service

MSR consolidated with VIE 9.0 % - 12.0 % ( 9.0 %)

9.4 % - 30.7 % ( 20.2 %)

0.0 % - 6.0 % ( 2.4 %)

$ 84 - $ 114 ($ 99 )

MSR held directly 1.8 % - 21.7 % ( 9.0 %)

6.7 % - 14.4 % ( 7.5 %)

0.9 % - 1.8 % ( 1.1 %)

$ 99 - $ 106 ($ 101 )

Interests in MSR 9.5 % - 11.4 % ( 10.0 %)

4.8 % - 14.6 % ( 9.0 %)

0.6 % - 5.0 % ( 1.8 %)

$ 78 - $ 86 ($ 85 )

December 31, 2020

Unobservable Input (1) / Range (Weighted Average) (2)

Discount rate Prepayment rate Delinquency rate Cost to service

MSR consolidated with VIE 9.0 % - 12.0 % ( 9.4 %)

19.3 % - 55.5 % ( 42.0 %)

0.0 % - 6.0 % ( 2.5 %)

$ 83 - $ 108 ($ 98 )

(1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets.

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

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

March 31, 2021 December 31, 2020

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at June 30, 2021 and December 31, 2020.

June 30, 2021 December 31, 2020

Value Carrying

4 unchanged sentences

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

Corporate debt, held for sale 466,370 466,370 — —

Financial liabilities

3 unchanged sentences

(1) Includes assets of consolidated VIEs.

Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment and mortgages payable are valued using Level 3 inputs.

Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment, corporate debt, held for sale and mortgages payable are valued using Level 3 inputs.

The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements.

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

quantitative analysis is performed.

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

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

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

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

At June 30, 2021 and December 31, 2020, goodwill totaled $ 0 and $ 71.8 million, respectively.

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

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

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

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

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

During the three months ended June 30, 2021, the Company recognized an impairment of $ 4.3 million in Other income (loss) and $ 5.2 million in Business divestiture-related gains (losses) in the Consolidated Statements of Comprehensive Income (Loss) for changes to the assembled workforce.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

The following table presents the activity of finite lived intangible assets for the six months ended June 30, 2021.

Intangible Assets, net

1 unchanged sentence

Balance at December 31, 2020 $ 55,526

Impairment ( 9,549 )

Intangible assets included in disposal group held for sale ( 14,528 )

amortization expense ( 4,947 )

Balance at March 31, 2021

Balance at June 30, 2021

SECURED FINANCING

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

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

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

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

March 31, 2021

The Company had outstanding $ 60.2 billion and $ 64.8 billion of repurchase agreements with weighted average remaining maturities of 88 days and 64 days at June 30, 2021 and December 31, 2020, respectively.

The Company has select arrangements with counterparties to enter into repurchase agreements for select credit assets for $ 1.6 billion with remaining capacity of $ 1.4 billion at June 30, 2021.

At June 30, 2021 and December 31, 2020, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates:

June 30, 2021

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

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

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

(2) No repurchase agreements had a remaining maturity over 1 year at June 30, 2021.

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

The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at March 31, 2021 and December 31, 2020.

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

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements

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Netted amounts $ — $ 60,221,067 $ — $ 64,825,239

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

The fair value of mortgage-backed securities received as collateral in connection with reverse repurchase agreements was approximately $ 0 and $ 250.0 million, which the Company fully repledged, at June 30, 2021 and December 31, 2020, respectively.

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

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

Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 65.2 billion and $ 176.8 million, respectively, at June 30, 2021 and $ 70.6 billion and $ 196.9 million, respectively, at December 31, 2020.

CAPITAL STOCK

(A) Common Stock

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

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at June 30, 2021 and December 31, 2020.

Shares authorized Shares issued and outstanding

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

June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 Par Value

2,936,500,000 2,914,850,000 1,444,156,029 1,398,240,618 $ 0.01

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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.

During the three and six months ended June 30, 2021, no shares were purchased under the Current Share Repurchase Program.

During the three and six months ended June 30, 2020, the Company repurchased 22.9 million shares of its common stock for an aggregate amount of $ 143.3 million, excluding commission costs, under the Prior Share Repurchase Program.

All common shares were purchased in open-market transactions.

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

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

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

During the three and six months ended June 30, 2021, the Company issued 45.5 million shares, for proceeds of $ 420.4 million, net of commissions and fees under the at-the-market sales program.

No shares were issued under the at-the-market sales program during the three and six months ended June 30, 2020.

(B) Preferred Stock

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

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at June 30, 2021 and December 31, 2020.

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

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Date At Which Dividend Rate Becomes Floating Floating Annual Rate

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

June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020

Fixed-rate (dollars in thousands)

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

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

Through June 30, 2021, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.

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

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

For the Three Months Ended

March 31, 2021 March 31, 2020

For the Three Months Ended For the Six Months Ended

June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

(dollars in thousands, except per share data)

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

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

Date of distributions paid to common stockholders after period end July 30, 2021 July 31, 2020 July 30, 2021 July 31, 2020

Dividends declared to series D preferred stockholders $ — $ 8,625 $ — $ 17,250

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Financial Statements

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

For the Three Months Ended March 31,

The following presents the components of the Company’s interest income and interest expense for the three and six months ended June 30, 2021 and June 30, 2020.

For the Three Months Ended June 30, For the Six Months Ended June 30,

2021 2020 2021 2020

Interest income (dollars in thousands)

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NET INCOME (LOSS) PER COMMON SHARE

The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and nine months ended March 31, 2021 and March 31, 2020.

For the Three Months Ended

March 31, 2021 March 31, 2020

The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and six months ended June 30, 2021 and June 30, 2020.

For the Three Months Ended For the Six Months Ended

June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

(dollars in thousands, except per share data)

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Diluted $ ( 0.23 ) $ 0.58 $ 1.00 $ ( 2.00 )

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

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

The computations of diluted net income (loss) per share available (related) to common share for the three months ended June 30, 2021 excludes 3.2 million and the three and six months ended June 30, 2020 excludes 0.5 million and 0.4 million, respectively, of potentially dilutive restricted stock units because their effect would have been anti-dilutive.

For the three months ended June 30, 2021 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860.

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

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

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

Thus, no accruals for penalties and interest were deemed necessary at June 30, 2021 and December 31, 2020.

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

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

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

During the three and six months ended June 30, 2021, the Company recorded $ 5.1 million and $ 4.8 million, respectively, of income tax expense attributable to its TRSs.

During the three and six months ended June 30, 2020, the Company recorded $ 2.1 million and ($ 24.6 ) million, respectively, of income tax expense (benefit) attributable to its TRSs.

The Company’s federal, state and local tax returns from 2017 and forward remain open for examination.

RISK MANAGEMENT

The primary risks to the Company are capital, liquidity and funding risk, investment/market risk and credit risk.

The primary risks to the Company are capital, liquidity and funding risk, investment/market risk, credit risk and operational risk.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control.

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The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges.

Weakness in the mortgage market, the shape of the yield curve and changes in the expectations for the volatility of future interest rates may adversely affect the performance and market value of the Company’s investments.

Weakness in the mortgage market, the shape of the yield curve, changes in the expectations for the volatility of future interest rates and deterioration of financial conditions in general may adversely affect the performance and market value of the Company’s investments.

This could negatively impact the Company’s book value.

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The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt.

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

MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase the overall costs to service the underlying mortgage loans.

The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms.

The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties.

The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties, credit rating monitoring and active servicer oversight.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

The Company depends on third-party service providers to perform various business processes related to its operations, including mortgage loan servicers and sub-servicers.

The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors.

These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.

RELATED PARTY TRANSACTIONS

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Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($ 1.00 ).

In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager (the net effect of which was immaterial in amount), and the Company transitioned from an externally-managed real estate investment trust (“REIT”) to an internally-managed REIT.

At the closing, all employees of the Former Manager became employees of the Company.

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

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

For the three and six months ended June 30, 2020, the compensation and management fee computed in accordance with the Management Agreement was $ 37.0 million and $ 77.9 million, respectively, and reimbursement payments to the Former Manager were $ 7.1 million and $ 14.2 million, respectively.

LEASE COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

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

Operating Leases Classification March 31, 2021

The lease cost for the three and six months ended June 30, 2021 was $ 0.7 million and $ 1.6 million, respectively.

Supplemental information related to leases as of and for the six months ended June 30, 2021 was as follows:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Operating Leases Classification June 30, 2021

Assets (dollars in thousands)

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

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

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

There were no material contingencies at June 30, 2021 and December 31, 2020.

ARCOLA REGULATORY REQUIREMENTS

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

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

At June 30, 2021, Arcola had a minimum net capital requirement of $ 0.3 million.

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

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

Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at June 30, 2021 was $ 516.9 million with excess net capital of $ 516.6 million.

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AND SUBSIDIARIES

Financial Statements

SUBSEQUENT EVENTS

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

In July 2021, the Company completed and closed the securitization of residential mortgage loans, OBX 2021-J2 Trust, with a face value of $ 382.5 million.

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

In July 2021, in the previously announced divestiture of the Company’s CRE business, a significant majority of the assets, including the platform, were transferred to Slate as part of the first closing of the transaction with remaining assets expected to be transferred in the second half of 2021.

In July 2021, the Company syndicated $ 466.4 million of corporate loans, which were classified as held for sale as of June 30, 2021.

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changes in business conditions and the general economy;

operational risks or risk management failures by us or critical third parties, including cybersecurity incidents;

our ability to grow our residential credit business;

our ability to grow our middle market lending business;

credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt;

risks related to investments in MSRs;

credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt;

risks related to investments in MSR;

our ability to consummate any contemplated investment opportunities;

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Non-GAAP Financial Measures

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

Earnings available for distribution , earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity

Premium Amortization Expense

Economic leverage and economic capital ratios

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

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Management’s Discussion and Analysis

We are a leading diversified capital manager that invests in and finances residential and commercial assets.

We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending.

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

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

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

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

Certain employees who primarily support the CRE business will join Slate in connection with the sale.

Subject to customary closing conditions, including applicable regulatory approvals, the transfer of the CRE business is expected to be completed in the second half of 2021.

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

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

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

Business Environment and COVID-19

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

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

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

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

gross domestic product (“GDP”).

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

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

economy to gradually reopen an increasing number of service businesses.

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

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

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

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

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

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

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

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

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

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

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

The second quarter of 2021 saw 10-year Treasury rates decline by nearly 30 basis points despite peak economic reopening momentum and a meaningful acceleration in inflation readings.

Spreads on Agency mortgage-backed securities (“MBS”), which entered the quarter at tight levels signaling full valuations, widened while credit sector spreads remained well supported.

The challenging environment led us to generate a (4.0%) economic return (loss) and tangible economic return (loss), during the quarter on ($0.23) in GAAP net income (loss) per common share, and a $0.58 decline in our book value to $8.37 per common share as of June 30, 2021.

Our total portfolio net of securitized debt (which includes market value of TBA purchase contracts and CMBX derivatives and excludes held for sale assets) decreased during the quarter to $92.9 billion, while credit investments as a share of the aggregate portfolio rose from 27% to 29% during the quarter.

The rally in interest rates during the quarter was somewhat contradictory relative to the strong economy seen during the period.

Despite the economic reopening and inflation at multi-year highs, the yield curve flattened as rate markets viewed the pace of the current economic expansion as likely to fade, with growth and inflation expected to slow back to pre-pandemic levels in the medium-term.

Meanwhile, the Federal Reserve (“Fed”) began signaling a shift in its reaction function at the June Federal Open Market Committee (“FOMC”) meeting.

Having become concerned around an upside surprise in inflation, the FOMC signaled that it might raise short-term interest rates sooner than previously anticipated should inflation remain elevated.

Agency MBS, meanwhile, underperformed its rate hedges in this environment as banks slowed their purchases from record pace, investors recalibrated their taper expectations, and mortgage supply continued to remain elevated.

More specifically, higher coupon Agency MBS, those with coupons of or above 3.5 percent, continued to face elevated prepayment speeds, which led investors to adjust their models to reflect this reality, thereby lowering the valuations of these securities.

Faced with this challenging operating environment in Agency MBS, Annaly continued to prudently manage its portfolio, reducing leverage and hedging incremental moves in interest rates, while allocating capital towards credit investments with more attractive risk-adjusted returns.

As such, our residential credit business experienced another active quarter as we took advantage of opportunities in the unrated non- and re-performing securities market, as well as non-qualified loan market, activity which was boosted by the initiation of our in-house aggregation through Onslow Bay’s correspondent channel.

Launched in April 2021, the program offers a diversified suite of mortgage products to purchase residential mortgage loans on a best-efforts flow basis that adhere to our credit standards.

Outside of residential credit, we committed to increase our exposure to MSR during the quarter, through direct

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

purchases and third party partnerships bringing Annaly’s total MSR economic exposure (for both portfolios already settled and those committed to be settled at a future date) to approximately $409 million market value as of June 30, 2021.

Finally, we also saw considerable portfolio activity in our Middle Market Lending business, which originated six deals for a total of approximately $450 million during the quarter, net of originations subsequently classified as held for sale at the end of the quarter.

The previously announced sale of our Commercial Real Estate business remains on track to be completed in the second half of 2021.

After quarter end, the bulk of the platform – including a number of Annaly employees who supported the business – was successfully transferred as part of the first closing of the transaction.

A significant majority of the assets were sold during this first close and we have received over 80% of the capital by the time of this filing.

Business Continuity

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Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management.

Key tenets of the planning include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations.

Historical tabletop exercises have included use of CDC Influenza Pandemic exercise materials.

Key tenets of the plan include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations.

Historical tabletop exercises have included use of Center for Disease Control and Prevention Influenza Pandemic exercise materials.

That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/impact assessments to those scenarios.

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All employees were able to successfully perform their duties in this testing and we have operated largely remotely since that time.

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

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

Business activities continue to be performed primarily remotely, though we have seen a number of employees return to the office on a voluntary and periodic basis.

At the present, we expect employees to return to the office more regularly starting in the fourth quarter of 2021 subject to continued successful vaccine rollout and accomodative guidance from federal, state and local authorities.

Economic Environment

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

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

The rebound in U.S.

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

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

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

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

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

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

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

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

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

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

This inflated wage gains for most of 2020.

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

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

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

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

In support of the U.S.

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

In addition, the FOMC continued its quantitative easing program.

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

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

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

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

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

The pace of growth accelerated in the second quarter, with U.S.

gross domestic product (“GDP”) rising 6.5% percent on a seasonally adjusted annualized rate.

Growth was boosted as the U.S.

economy reopened and service sector consumption rose strongly, while consumers, supported by healthy balance sheets and recent stimulus payments, continued to spend on goods as well.

The unemployment rate fell 0.1 percentage points in the second quarter to 5.9% in June according to the Bureau of Labor Statistics.

Meanwhile, seasonally adjusted total non-farm payroll employment rose by an average 567 thousand workers per month to 145.8 million employees, but remains roughly 6.7 million employees below the number of employed in February 2020 at the onset of the COVID-19 pandemic.

Employment gains generally disappointed expectations for even better gains into the economic reopening, yet a number of factors including lingering COVID-19 fears, job skill mismatches, and elevated employment benefits appear to have held back employment growth.

Wage growth, as measured by the year-over-year change in private sector average hourly earnings, contracted further during the quarter, reading 3.6% in June compared to 4.3% in March 2021.

The slowdown in wage growth remains mostly a statistical anomaly, driven by a relatively larger share of job losses among lower-paid employees at the height of the pandemic, which inflated wage gains for most of 2020.

As these wage gains fall out of year-over-year calculations, wage gains tend to be somewhat depressed on these metrics.

Of note, wage growth has been relatively strong in reopening sectors of late.

For example, average hourly earnings in the leisure and hospitality sector have exceeded 1.0% month-over-month growth for four consecutive months, suggesting healthy earnings growth in a sector that is seeing strong demand for labor in the middle of the economic reopening.

Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), have risen sharply from their pandemic lows and are currently running meaningfully above the Fed’s 2% inflation target.

The headline PCE measure increased by 3.99% year-over-year in June 2021, while the more stable core PCE measure, which excludes volatile food and energy prices, registered 3.54% year-over-year increase, above the 1.97% year-over-year

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Management’s Discussion and Analysis

growth measured in March 2021.

The acceleration in price increases was driven by the combination of strong demand for goods and services and simultaneous supply bottlenecks.

For example, consumers, wary of COVID-19 related risks on public transportation but supported by excess savings from financial stimulus, opted to purchase increased amounts of cars.

Car manufacturers, meanwhile, were unable to meet increased demand as the pandemic led to disruptions to supply chains and a shortage in microchip production limited total production of new cars.

These bottlenecks are likely to ease in months ahead as production catches up to demand, thereby lowering price pressures.

Disregarding the current sharp rise in inflation measures for now, the FOMC maintained the Federal Funds Target Rate in the 0.00% - 0.25% range and continued to signal that it will maintain the rate at current levels for an extended period of time.

In addition, the FOMC continued its quantitative easing program.

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

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

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

June 30, 2021 December 31, 2020 June 30, 2020

30-Year mortgage current coupon 1.83% 1.34% 1.57%

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

On March 5, 2021, the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023.

The FCA's announcement coincides with the March 5, 2021 announcement of LIBOR's administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023.

These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate.

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

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

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

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

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

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

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

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

Commencing with our financial results for the quarter ended June 30, 2021 and for subsequent reporting periods, we relabeled “Core Earnings (excluding PAA)” as “Earnings Available for Distribution” (“EAD”).

Earnings Available for Distribution, which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with U.S.

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Management’s Discussion and Analysis

generally accepted accounting principles (“GAAP”), has replaced our prior presentation of Core Earnings (excluding PAA).

In addition, Core Earnings (excluding PAA) results from prior reporting periods has been relabeled Earnings Available for Distribution.

In line with evolving industry practices, we believe the term Earnings Available for Distribution more accurately reflects the principal purpose of the measure than the term Core Earnings (excluding PAA) and will serve as a useful indicator for investors in evaluating our performance and our ability to pay dividends.

The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods.

As such, Earnings Available for Distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities.

Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income.

Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution.

Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity-related or volume-related expenses as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items.

As such, prior periods have been conformed to the current presentation.

Refer to the “General and Administrative Expenses” section for additional information.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Net Income (Loss) Summary

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

As of and for the Three Months Ended March 31,

The following table presents financial information related to our results of operations as of and for the three and six months ended June 30, 2021 and 2020.

As of and for the Three Months Ended June 30,

As of and for the Six Months Ended June 30,

2021 2020 2021 2020

(dollars in thousands, except per share data)

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Other information

Asset portfolio at period-end $ 82,735,505 $ 92,129,743

Investment portfolio at period-end $ 80,222,151 $ 90,442,332 $ 80,222,151 $ 90,442,332

Average total assets $ 83,872,947 $ 95,187,964 $ 85,400,332 $ 106,890,336

Average equity $ 13,853,386 $ 13,252,567 $ 13,909,522 $ 14,100,492

Leverage at period-end (1)

Economic leverage at period-end (2)

Capital ratio (3)

GAAP leverage at period-end (1)

4.7:1 5.5:1 4.7:1 5.5:1

GAAP capital ratio at period-end (2)

16.6 % 14.8 % 16.6 % 14.8 %

Annualized return on average total assets (1.41 %) 3.60 % 3.41 % (5.21 %)

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Premium amortization adjustment cost (benefit) $ 153,607 $ 51,742 $ (60,963) $ 342,464

Core earnings (excluding PAA) (8)

Earnings available for distribution (7)

$ 451,358 $ 424,580 $ 890,877 $ 754,798

Core earnings (excluding PAA) per common share $ 0.29 $ 0.21

Annualized core return on average equity (excluding PAA) 12.53 % 9.27 %

Earnings available for distribution per common share $ 0.30 $ 0.27 $ 0.59 $ 0.48

Annualized EAD return on average equity (excluding PAA) 13.05 % 12.82 % 12.82 % 10.71 %

Economic leverage at period-end (1)

5.8:1 6.4:1 5.8:1 6.4:1

Economic capital ratio at period-end (2)

14.3 % 13.0 % 14.3 % 13.0 %

Net interest margin (excluding PAA) (3)

8 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements