What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 383 added, 205 removed, 1166 unchanged (34% of the section changed)

Management’s Discussion and Analysis

(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.

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

(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable divided by total equity.

Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

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

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

(2) GAAP capital ratio is computed as total equity divided by total assets.

Economic capital ratio is computed as total equity divided by total economic assets.

Total economic assets include the implied market value of TBA derivatives and net of debt issued by securitization vehicles.

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

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(7) Excludes dividends on preferred stock.

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.

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.

Net income (loss) was ($294.8) million, which includes $0.8 million attributable to noncontrolling interests, or ($0.23) per average basic common share, for the three months ended June 30, 2021 compared to $856.2 million, which includes $0.0 million attributable to noncontrolling interests, or $0.58 per average basic common share, for the same period in 2020.

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

Net unrealized gains (losses) on interest rate swaps was ($141.1) million for the three months ended June 30, 2021 compared to $1.5 billion for the same period in 2020.

Net gains (losses) on other derivatives and financial instruments was ($357.8) million for the three months ended June 30, 2021 compared to $170.9 million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $4.0 million for the three months ended June 30, 2021 compared to $254.8 million for the same period in 2020.

Net gains (losses) on disposal of investments and other was $16.2 million for the three months ended June 30, 2021 compared to $246.7 million for the same period in 2020.

Realized gains (losses) on termination or maturity of interest rate swaps was $0 for the three months ended June 30, 2021 compared to ($1.5) billion for the same period in 2020.

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

Net income (loss) was $1.5 billion, which includes $1.1 million attributable to noncontrolling interests, or $1.00 per average basic common share, for the six months ended June 30, 2021 compared to ($2.8) billion which includes $0.1 million attributable to noncontrolling interests, or ($2.00) 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, realized gains (losses) on termination or maturity of interest rate swaps, net unrealized gains (losses) on instruments measured at fair value through earnings and net interest income, partially offset by unfavorable changes in net gains (losses) on disposal of investments and other and net gains (losses) on other derivatives and financial instruments.

Realized losses on termination or maturity of interest rate swaps was $0 for the six months ended June 30, 2021 compared to ($1.9) billion for the same period in 2020.

Net unrealized gains (losses) on interest rate swaps was $631.2 million for the six months ended June 30, 2021 compared to ($1.3) billion for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings for the six months ended June 30, 2021 was $108.2 million compared to ($475.4) million for the same period in 2020.

Net interest income for the six months ended June 30, 2021 was $1.0 billion compared to $450.3 million for the same period in 2020.

Net gains (losses) on disposal of investments and other was ($49.6) million for the six months ended June 30, 2021 compared to $453.3 million for the same period in 2020.

Net gains (losses) on other derivatives was $119.1 million for the six months ended June 30, 2021 compared to $377.3 million for the same period in 2020.

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

Earnings available for distribution were $451.4 million, or $0.30 per average common share, for the three months ended June 30, 2021, compared to $424.6 million, or $0.27 per average common share, for the same period in 2020.

The change in earnings available for distribution during the three months ended June 30, 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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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.

Earnings available for distribution were $890.9 million, or $0.59 per average common share, for the six months ended June 30, 2021, compared to $754.8 million, or $0.48 per average common share, for the same period in 2020.

The change in earnings available for distribution during the six months ended June 30, 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 unfavorable changes in the net interest component of interest rate swaps.

Non-GAAP Financial Measures

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

• core earnings (excluding PAA);

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

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

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

• earnings available for distribution (“EAD”);

• earnings available for distribution attributable to common stockholders;

• earnings available for distribution per average common share;

• annualized EAD return on average equity;

• economic leverage;

• economic capital ratio;

• interest income (excluding PAA);

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

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

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

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

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.

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

These non-GAAP measures provide additional detail to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers.

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

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

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

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

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

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

Earnings available for distribution, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation and amortization expense on real estate and related 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, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective.

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

For the Three Months Ended March 31,

provide additional transparency into the operating performance of our portfolio.

In addition, EAD serves as a useful indicator for investors in evaluating the Company's performance and ability to pay dividends.

Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by our invested equity capital.

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2021 2020 2021 2020

(dollars in thousands, except per share data)

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

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

5,635 8,714 12,959 16,648

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

3,141 4,218 (6,539) 23,616

Transaction expenses and non-recurring items (4)

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

1,150 1,075 1,845 8,320

Income tax effect of non-EAD income (loss) items 7,147 3,353 11,481 (20,509)

TBA dollar roll income and CMBX coupon income (5)

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

Core earnings (excluding PAA) (7)

Earnings available for distribution (7)

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

Dividends on preferred stock 26,883 35,509 53,766 71,018

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

Earnings available for distribution attributable to common stockholders (7)

$ 424,475 $ 389,071 $ 837,111 $ 683,780

GAAP net income (loss) per average common share $ (0.23) $ 0.58 $ 1.00 $ (2.00)

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

Earnings available for distribution per average common share (7)

$ 0.30 $ 0.27 $ 0.59 $ 0.48

GAAP return (loss) on average equity 49.87 % (102.17 %)

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

Annualized GAAP return (loss) on average equity (8.51 %) 25.84 % 20.94 % (39.49 %)

Annualized EAD return on average equity (7)

13.05 % 12.82 % 12.82 % 10.71 %

(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).

(1) Includes $0.6 million and $3.8 million for the three months ended June 30, 2021 and 2020, respectively, and ($4.7) million and $4.5 million for the six months ended June 30, 2021 and 2020, respectively, of loss provision (reversal) on unfunded loan commitments 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 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.

(4) The three and six months ended June 30, 2021 includes costs incurred in connection with securitizations of residential whole loans.

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

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

(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.

CMBX coupon income totaled $1.4 million and $1.6 million for the three months ended June 30, 2021 and 2020, respectively, and $2.9 million and $2.7 million for the six months ended June 30, 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.

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 MBS.

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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.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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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).

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

Premium Amortization Expense

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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 March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2021 2020 2021 2020

(dollars in thousands)

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Premium amortization expense (excluding PAA) $ 166,501 $ 218,946 $ 369,180 $ 545,161

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.

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Management’s Discussion and Analysis

Economic leverage and economic capital ratios

We use capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.

Our capital structure is designed to offer an efficient complement of funding sources to generate positive risk-adjusted returns for our stockholders while maintaining appropriate liquidity to support our business and meet our financial obligations under periods of market stress.

To maintain our desired capital profile, we utilize a mix of debt and equity funding.

Debt funding may include the use of repurchase agreements, loans, securitizations, participations issued, lines of credit, asset backed lending facilities, corporate bond issuance, convertible bonds, mortgages payable or other liabilities.

Equity capital primarily consists of common and preferred stock.

Our economic leverage ratio is computed as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

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

The following table presents a reconciliation of GAAP debt to economic debt for purposes of calculating our economic leverage ratio for the periods presented:

2021 June 30,

Economic leverage ratio reconciliation

(dollars in thousands)

Repurchase agreements

$ 60,221,067 $ 67,163,598

Other secured financing

909,655 1,538,996

Debt issued by securitization vehicles

3,315,087 6,458,130

Participations issued

Mortgages payable

Debt included in liabilities of disposal group held for sale 2,306,633 —

Total GAAP debt

$ 67,068,252 $ 75,669,289

Credit facilities (1)

(909,655) (895,793)

Debt issued by securitization vehicles

(3,315,087) (6,458,130)

Participations issued

Mortgages payable

Non-recourse debt included in liabilities of disposal group held for sale (2,035,982) —

Total non-recourse debt $ 60,491,718 $ 67,806,801

Plus / (Less):

Cost basis of TBA and CMBX derivatives

18,107,549 19,525,825

Payable for unsettled trades 154,405 2,122,735

Receivable for unsettled trades (14,336) (747,082)

Economic debt *

$ 78,739,336 $ 88,708,279

$ 13,639,176 $ 13,797,603

Economic leverage ratio *

* Represents a non-GAAP financial measure.

(1) Included in Other secured financing in the Consolidated Statements of Financial Condition.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

The following table presents a reconciliation of GAAP total assets to economic total assets for purposes of calculating our economic capital ratio for the periods presented:

2021 June 30,

Economic capital ratio reconciliation

(dollars in thousands)

Total GAAP assets

$ 82,376,305 $ 93,458,653

Gross unrealized gains on TBA derivatives (1)

(31,943) (123,974)

Debt issued by securitization vehicles (2)

(4,925,196) (6,458,130)

Implied market value of TBA derivatives

17,691,150 19,148,701

Total economic assets *

$ 95,110,316 $ 106,025,250

$ 13,639,176 $ 13,797,603

Economic capital ratio (3) *

* Represents a non-GAAP financial measure.

(1) Included in Derivative assets in the Consolidated Statements of Financial Condition.

(2) Includes debt issued by securitization vehicles reported in Liabilities of disposal group held for sale in the Consolidated Statements of Financial Condition.

(3) Economic capital ratio is computed as total equity divided by total economic assets.

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

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 months ended March 31, 2021.

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

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

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

June 30, 2021 $ 383,906 $ 153,607 $ 537,513

June 30, 2020 $ 584,812 $ 51,742 $ 636,554

For the six months ended

June 30, 2021 $ 1,147,284 $ (60,963) $ 1,086,321

June 30, 2020 $ 1,139,838 $ 342,464 $ 1,482,302

(1) Represents a non-GAAP financial measure.

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

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Management’s Discussion and Analysis

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

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For the three months ended (dollars in thousands)

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

June 30, 2021 $ 61,047 $ 83,087 $ 144,134 $ 322,859 $ 83,087 $ 239,772 $ 153,607 $ 393,379

June 30, 2020 $ 186,032 $ 64,561 $ 250,593 $ 398,780 $ 64,561 $ 334,219 $ 51,742 $ 385,961

For the six months ended

June 30, 2021 $ 137,020 $ 162,834 $ 299,854 $ 1,010,264 $ 162,834 $ 847,430 $ (60,963) $ 786,467

June 30, 2020 $ 689,505 $ 78,541 $ 768,046 $ 450,333 $ 78,541 $ 371,792 $ 342,464 $ 714,256

(1) Represents a non-GAAP financial measure.

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For the three months ended

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

June 30, 2021 26.4 % 12.9 %

June 30, 2020 19.5 % 18.0 %

For the six months ended

June 30, 2021 25.2 % 12.9 %

June 30, 2020 16.6 % 18.0 %

(1) For the three and six months ended June 30, 2021 and 2020, respectively.

(2) At June 30, 2021 and 2020, respectively.

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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.

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

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

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

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For the three months ended (dollars in thousands)

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 %

June 30, 2021 $ 77,916,766 $ 537,513 2.76 % $ 68,469,413 $ 144,134 0.83 % 393,379 1.93 %

June 30, 2020 $ 84,471,839 $ 636,554 3.01 % $ 76,712,894 $ 250,593 1.29 % 385,961 1.72 %

For the six months ended

June 30, 2021 $ 79,519,053 $ 1,086,321 2.73 % $ 70,235,722 $ 299,854 0.85 % 786,467 1.88 %

June 30, 2020 $ 100,267,867 $ 1,482,302 2.96 % $ 91,871,180 $ 768,046 1.65 % 714,256 1.31 %

(1) Based on amortized cost.

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For the three months ended (dollars in thousands)

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 %

June 30, 2021 $ 537,513 111,592 (61,047) (83,087) $ 504,971 $ 77,916,766 18,761,062 $ 96,677,828 2.09 %

June 30, 2020 $ 636,554 97,524 (186,032) (64,561) $ 483,485 $ 84,471,839 18,628,343 $ 103,100,182 1.88 %

For the six months ended

June 30, 2021 $ 1,086,321 210,525 (137,020) (162,834) $ 996,992 $ 79,519,053 20,313,516 $ 99,832,569 2.00 %

June 30, 2020 $ 1,482,302 142,428 (689,505) (78,541) $ 856,684 $ 100,267,867 14,296,743 $ 114,564,610 1.50 %

(1) Represents a non-GAAP financial measure.

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(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

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

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

CMBX coupon income totaled $1.4 million and $2.9 million for the three and six months ended June 30, 2021, respectively.

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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Management’s Discussion and Analysis

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

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

Economic Cost of Funds on Average Interest Bearing Liabilities

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For the three months ended

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 %

June 30, 2021 $ 68,469,413 $ 66,642,378 $ 144,134 0.83 % 0.10 % 0.19 % (0.09 %) 0.73 % 0.64 %

June 30, 2020 $ 76,712,894 $ 75,160,724 $ 250,593 1.29 % 0.35 % 0.70 % (0.35 %) 0.94 % 0.59 %

For the six months ended

June 30, 2021 $ 70,235,722 $ 64,761,619 $ 299,854 0.85 % 0.11 % 0.20 % (0.09 %) 0.74 % 0.65 %

June 30, 2020 $ 91,871,180 $ 75,160,724 $ 768,046 1.65 % 0.89 % 1.10 % (0.21 %) 0.76 % 0.55 %

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

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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.

Economic interest expense decreased by $106.5 million for the three months ended June 30, 2021 compared to the same period in 2020.

Economic interest expense decreased by $468.2 million for the six months ended June 30, 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 ($83.1) million for the three months ended June 30, 2021 compared to ($64.6) million for the same period in 2020 and ($162.8) million for the six months ended June 30, 2021 compared to ($78.5) 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.

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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 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.

At June 30, 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.

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

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 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,

Realized and Unrealized Gains (Losses)

These components of realized and unrealized gains (losses) for the three and nine months ended June 30, 2021 and 2020 were as follows:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2021 2020 2021 2020

(dollars in thousands)

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(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 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 Three Months Ended June 30, 2021 and 2020

Net gains (losses) on interest rate swaps for the three months ended June 30, 2021 was ($224.2) million compared to ($91.7) million for the same period in 2020, primarily attributable to an unfavorable change in unrealized gains (losses) on interest rate swaps, partially offset by a favorable change in Realized gains (losses) on termination or maturity of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was ($141.1) million for the three months ended June 30, 2021, reflecting a decline in forward interest rates during the period, compared to $1.5 billion for the same period in 2020, resulting from the unwinding of interest rate swaps during the earlier period.

Realized gains (losses) on termination or maturity of interest rate swaps was $0 for the three months ended June 30, 2021 compared to ($1.5) billion for the same period in 2020, resulting from terminations of fixed-rate payer and receiver interest rate swaps with notional amounts of $38.2 billion and $38.1 billion, respectively.

Net gains (losses) on disposal of investments and other was $16.2 million for the three months ended June 30, 2021 compared to $246.7 million for the same period in 2020.

For the three months ended June 30, 2021, we disposed of Residential Securities with a carrying value of $3.3 billion for an aggregate net gain of $34.8 million.

For the same period in 2020, we disposed of Residential Securities with a carrying value of $5.5 billion for an aggregate net gain of $259.9 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.

Net gains (losses) on other derivatives and financial instruments was ($357.8) million for the three months ended June 30, 2021 compared to $170.9 million for the same period in 2020.

The change in net gains (losses) on other derivatives and financial instruments was primarily comprised of higher net losses on futures derivatives, which was ($394.5) million for the three months ended June 30, 2021 compared to ($17.3) million for the same period in 2020, and interest rate swaptions, which was ($255.6) million for the three months ended June 30, 2021 compared to ($52.5) million for the same period in 2020, partially offset by higher net gains on TBA derivatives, which was $285.3 million for the three months ended June 30, 2021 compared to $204.2 million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $4.0 million for the three months ended June 30, 2021 compared to $254.8 million for the same period in 2020, primarily due to unfavorable changes in unrealized gains (losses) on securitized commercial loans of ($190.8) million, credit risk transfer securities of ($173.7) million, securitized residential whole loans of consolidated VIEs of ($76.9) million, Agency interest-only securities of ($69.2) million and non-Agency MBS of ($67.2) million, partially offset by favorable changes in unrealized gains (losses) on commercial securitized debt of consolidated VIEs of $219.9 million, residential securitized debt of consolidated VIEs of $76.9 million and MSR, including Interests in MSR, of $44.2 million for the three months ended June 30, 2021 compared to the same period in 2020.

For the three months ended June 30, 2021 and 2020, net loan loss (provisions) were ($0.5) million on corporate loans and ($68.8) million on commercial mortgage and corporate loans, respectively.

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

Other Income (Loss)

Other income (loss) includes certain revenues and costs associated with our investments in commercial real estate, including rental income and recoveries, net servicing income on MSRs, operating costs as well as depreciation and amortization expense.

We report in Other income (loss) items whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

For the Six Months Ended June 30, 2021 and 2020

Net gains (losses) on interest rate swaps for the six months ended June 30, 2021 was $468.4 million compared to ($3.3) billion for the same period in 2020, primarily attributable to favorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination or maturity of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $631.2 million for the six months ended June 30, 2021, reflecting a decline in forward interest rates during the period, compared to ($1.3) billion for the same period in 2020, reflecting a rise in forward interest rates during the earlier period.

Realized gains (losses) on termination or maturity of interest rate swaps was zero for the six months ended June 30, 2021 compared to ($1.9) billion, resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $65.0 billion and $38.1 billion, respectively, for the same period in 2020.

Net gains (losses) on disposal of investments and other was ($49.6) million for the six months ended June 30, 2021 compared to $453.3 million for the same period in 2020.

For the six months ended June 30, 2021, we disposed of Residential Securities with a carrying value of $6.2 billion for an aggregate net loss of ($25.9) million.

For the same period in 2020, we disposed of Residential Securities with a carrying value of $47.4 billion for an aggregate net loss of $527.1 million.

Net gains (losses) on other derivatives was $119.1 million for the six months ended June 30, 2021 compared to $377.3 million for the same period in 2020.

The change in net gains (losses) on other derivatives was primarily due to the change in net gains (losses) on TBA derivatives, which was ($344.8) million for the six months ended June 30, 2021 compared to $635.9 million for the same period in 2020, partially offset by the change in futures derivatives, which was $418.8 million for the six months ended June 30, 2021 compared to ($289.9) million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $108.2 million for the six months ended June 30, 2021 compared to ($475.4) million for the same period in 2020, primarily due to favorable changes in unrealized gains (losses) on securitized commercial loans of $320.8 million, MSR, including Interests in MSR, of $154.0 million, securitized debt of consolidated VIEs backed by Agency mortgage-backed securities of $132.2 million, securitized residential whole loans of consolidated VIEs of $98.8 million, credit risk transfer securities of $86.5 million and non-Agency MBS of $59.6 million, partially offset by unfavorable changes on commercial securitized debt of consolidated VIEs of ($270.8) million for the six months ended June 30, 2021 compared to the same period in 2020.

For the six months ended June 30, 2021 and 2020, net loan loss (provisions) reversals of $139.1 million and ($168.1) million, respectively, was recorded on commercial mortgage and corporate loans.

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

Other Income (Loss)

Other income (loss) includes certain revenues and costs associated with our investments in commercial real estate, including rental income and recoveries, operating costs as well as depreciation and amortization expense, net servicing income on MSRs, brokerage and commission fees, due diligence costs and securitization expenses.

We report in Other income (loss) items whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements.

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

General and Administrative 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.

Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization 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 with Other general and administrative expenses for the three months ended March 31, 2021 adjusted downward by $1.8 million and for the three and six months ended June 30, 2020 adjusted downward by $2.9 million and $10.7 million, respectively.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

G&A Expenses and Operating Expense Ratios

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For the three months ended (dollars in thousands)

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.

June 30, 2021 $ 53,526 0.26 % 1.55 %

June 30, 2020 $ 64,770 0.27 % 1.95 %

For the six months ended

June 30, 2021 $ 101,431 0.24 % 1.46 %

June 30, 2020 $ 134,635 0.25 % 1.91 %

(1) Includes $0.5 million and $2.9 million of costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process for the three and six months ended June 30, 2020, respectively.

Excluding these transaction costs, G&A expenses as a percentage of average total assets were unchanged at 0.27% and 0.25% and as a percentage of average equity were 1.94% and 1.87% for the three and six months ended June 30, 2020, respectively.

G&A expenses were $53.5 million for the three months ended June 30, 2021, a decrease of $11.2 million compared to the same period in 2020.

G&A expenses were $101.4 million for the six months ended June 30, 2021, a decrease of $33.2 million compared to the same period in 2020.

The change in each period was largely attributable to cost savings generated from the Internalization which closed on June 30, 2020 and lower professional fees during the second quarter and first half of 2021 compared with the same periods in 2020.

Return on Average Equity

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For the three months ended

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 %)

June 30, 2021 6.92 % (13.79 %) 0.06 % (1.55 %) (0.15 %) (8.51 %)

June 30, 2020 10.09 % 17.40 % 0.37 % (1.95 %) (0.07 %) 25.84 %

For the six months ended

June 30, 2021 12.18 % 10.06 % 0.25 % (1.48 %) (0.07 %) 20.94 %

June 30, 2020 5.27 % (43.48 %) 0.28 % (1.91 %) 0.35 % (39.49 %)

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

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

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(dollars in thousands)

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Accumulated other comprehensive income (loss) $ 1,780,275 $ 3,374,335

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

negative changes tend to reduce borrowing capacity.

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.

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 March 31, 2021 is solely due to market conditions and not the quality of the assets.

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

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Financial Condition

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:

Total assets were $82.4 billion and $88.5 billion at June 30, 2021 and December 31, 2020, respectively.

The change was primarily due to a decrease in Agency MBS, including assets transferred or pledged to securitization vehicles, of $7.6 billion partially offset by increases in residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $0.9 billion and non-Agency MBS of $0.6 billion.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at June 30, 2021:

Residential Commercial

Agency MBS and MSRs Residential Credit (1)

Agency MBS and MSR Residential Credit (1)

Commercial Real Estate (2)

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Other assets / liabilities (4)

1,821,036 2,090 (857,773) (310,672) 654,681

Net equity allocated $ 9,665,873 $ 2,648,587 $ 11,963 $ 1,312,752 $ 13,639,175

Net equity allocated (%) 71 % 19 % — % 10 % 100 %

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

Debt/net equity ratio 6.1:1 1.6:1 NM 0.7:1 4.7:1 (5)

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

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

(4) Dedicated capital allocations as of June 30, 2021 assume capital related to held for sale assets will be redeployed within the Agency business line.

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

Excludes liabilities of disposal group held for sale.

NM Not meaningful.

Residential Securities

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.

Substantially all of our Agency MBS at June 30, 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.

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

At 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

At June 30, 2021 and December 31, 2020 we had on our Consolidated Statements of Financial Condition a total of $84.3 million and $88.3 million, respectively, of unamortized discount (which is the difference between the remaining principal value and

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

(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.

current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $4.0 billion and $4.0 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 MBS portfolio for the three months ended June 30, 2021 and 2020 was 26.4% and 19.5%, respectively.

The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of June 30, 2021 and 2020 was 12.9% and 18.0%, 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 March 31, 2021 and December 31, 2020.

March 31, 2021 December 31, 2020

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at June 30, 2021 and December 31, 2020.

June 30, 2021 December 31, 2020

Estimated Fair Value

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Total Residential Securities $ 68,878,170 $ 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 March 31, 2021 and December 31, 2020.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Residential Securities (1)

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NM Not meaningful.

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

The following tables summarize certain characteristics of our Residential Credit portfolio at June 30, 2021.

Payment Structure Investment Characteristics

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

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

(2) Total investment characteristics exclude the impact of interest-only securities.

ANNALY CAPITAL MANAGEMENT, INC.

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Contractual Obligations

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

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at June 30, 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 March 31, 2021, the interest rate swaps had a net fair value of ($0.7) billion.

At June 30, 2021, the interest rate swaps had a net fair value of ($0.8) billion.

Year One to Three

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Total $ 60,356,753 $ 220,708 $ 1,117,762 $ 5,912,525 $ 67,607,748

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

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

During the six months ended June 30, 2021, we received $10.2 billion from principal repayments and $6.4 billion in cash from disposal of securities.

During the six months ended June 30, 2020, we received $9.3 billion from principal repayments and $46.8 billion in cash from disposal of 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 March 31, 2021.

We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at June 30, 2021.

ANNALY CAPITAL MANAGEMENT, INC.

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Stockholders’ Equity

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

March 31, 2021 December 31, 2020

The following table provides a summary of total stockholders’ equity at June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

Stockholders’ equity (dollars in thousands)

8 unchanged sentences

Capital Stock

During the three and six months ended June 30, 2021, we 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.

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”).

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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 pursuant to these authorizations.

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

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

Leverage and Capital

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

We believe that it is prudent to maintain conservative GAAP leverage ratios 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.

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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.

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Management’s Discussion and Analysis

Our GAAP leverage ratio at June 30, 2021 and December 31, 2020 was 4.7:1 and 5.1:1, respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 5.8:1 and 6.2:1 at June 30, 2021 and December 31, 2020, respectively.

Our GAAP capital ratio at June 30, 2021 and December 31, 2020 was 16.6% and 15.9%, respectively.

Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 14.3% and 13.6% at June 30, 2021 and December 31, 2020, respectively.

Economic leverage ratio and economic capital ratio 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.

Risk Management

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Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk.

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

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

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

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

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

Operational We will seek to limit impacts to our business through disciplined operational risk management practices.

Compliance, Regulatory and Legal We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act and the licenses and approvals of our regulated and licensed subsidiaries.

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

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The 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.

The Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or Environment, Social,

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Management’s Discussion and Analysis

and Governance 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.

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Management’s Discussion and Analysis

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

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

This risk also applies to our use of software vendors and data providers.

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

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

At March 31, 2021 and December 31, 2020, the weighted average days to maturity was 88 days and 64 days, respectively.

At June 30, 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.

At March 31, 2021, we had total financial assets and cash pledged against existing liabilities of $67.8 billion.

At June 30, 2021, we had total financial assets and cash pledged against existing liabilities of $66.4 billion.

The weighted average haircut was approximately 3% 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 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.

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Management’s Discussion and Analysis

The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at June 30, 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 June 30, 2021.

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

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For the three months ended (dollars in thousands)

June 30, 2021 $ 62,440,803 $ 60,221,067 $ 42,581 $ —

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

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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

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Management’s Discussion and Analysis

The following table provides information on our repurchase agreements and other secured financing by maturity date at June 30, 2021.

The weighted average remaining maturity on our repurchase agreements and other secured financing was 111 days at June 30, 2021:

June 30, 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 March 31, 2021:

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at June 30, 2021:

Weighted Average Rate

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(3) Non-recourse to Annaly.

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Management’s Discussion and Analysis

Excess Liquidity

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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 March 31, 2021:

The following table also provides the carrying amount of our encumbered and unencumbered financial assets at June 30, 2021:

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Management’s Discussion and Analysis

Encumbered Assets Unencumbered Assets Total

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3,244,342 1,253,580 4,497,922

MSRs — 113,080 113,080

MSR — 202,616 202,616

Interests in MSR — 49,035 49,035

Corporate debt, held for investment 1,378,036 688,673 2,066,709

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

Assets of disposal group held for sale (3)

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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 March 31, 2021:

The following table presents our liquid assets as a percentage of total assets at June 30, 2021:

Carrying Value (1)

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Corporate debt, held for investment (5)

Corporate debt, held for sale 466,370

Assets of disposal group held for sale (6)

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

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.

The assets listed in this table include $66.4 billion of assets that have been pledged as collateral against existing liabilities at June 30, 2021.

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

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Management’s Discussion and Analysis

The interest rate sensitivity of our assets and liabilities, 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.

The interest rate sensitivity of our assets and liabilities, excluding assets and liabilities of the disposal group held for sale and corporate loans held for sale, in the following table at June 30, 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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We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and measurement, along with well-defined key risk indicators.

Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as both short-term and long-term sustainability of the funding composition under stress conditions.

Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as sustainability of the funding composition under stress conditions.

We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-specific and market conditions.

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Changes in the level of interest rates can affect our net interest income, which is the difference between the income we earn on our interest earning assets and the interest expense incurred from interest bearing liabilities and derivatives.

Changes in the level of interest rates and spreads can also affect the value of our securities and potential realization of gains or losses from the sale of these assets.

Changes in the level of interest rates and spreads can also affect the value of our assets and potential realization of gains or losses from the sale of these assets.

We may utilize a variety of financial instruments, including interest rate swaps, swaptions, options, futures and other hedges, in order to limit the adverse effects of interest rates on our results.

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

The following table presents estimates at March 31, 2021.

The following table presents estimates at June 30, 2021.

Actual results could differ materially from these estimates.

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Economic net interest income includes the net interest component of interest rate swaps.

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

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

(4) NAV represents book value of equity.

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

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

MSR values may also be impacted through reduced servicing fees and higher costs to service the underlying mortgage loans due to borrower performance.

We are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations.

We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure.

We will originate or purchase commercial investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee.

Once a commercial investment is made, our ongoing surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate committee.

We will originate or purchase investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee.

In the case of residential mortgage loans and MSR, we may engage a third party to perform due diligence on a sample of loans that we believe sufficiently represents the entire pool.

Once an investment is made, our ongoing surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate committee.

We review credit and other risks of loss associated with each investment.

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Additionally, ALCO has oversight of our credit risk exposure.

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

Our portfolio composition, based on balance sheet values, at June 30, 2021 and December 31, 2020 was as follows:

June 30, 2021 December 31, 2020

Agency mortgage-backed securities (1)

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

(2) Includes Interests in MSR.

(3) Net of unamortized origination fees.

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

Excludes commercial real estate assets held for sale as of June 30, 2021.

(4) Includes corporate loans held for sale as of June 30, 2021.

Counterparty Risk Management

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Management’s Discussion and Analysis

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

The following table summarizes our exposure to counterparties by geography at June 30, 2021:

Number of Counterparties Secured Financing (1)

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

We depend on third party service providers to perform various business processes related to our operations, including mortgage loan servicers and sub-servicers.

Our 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.

Compliance, Regulatory and Legal Risk Management

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Accordingly, we closely monitor our REIT status within our risk management program.

We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola and our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act.

We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola, our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act and our subsidiary that operates as a licensed mortgage aggregator and master servicer.

The financial services industry is highly regulated and receives significant attention from regulators, which may impact both our company as well as our business strategy.

Our investments in residential whole loans and MSR require us to comply with applicable state and federal laws and regulations, and maintain appropriate governmental licenses, approvals and exemptions.

We proactively monitor the potential impact regulation may have both directly and indirectly on us.

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We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we seek to continue to meet the requirements for this exemption from registration.

The determination that we qualify for this exemption from registration depends on various factual matters and circumstances.

Accordingly, in conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program.

The monitoring of this risk is also under the oversight of the ERC.

The determination that we qualify for this

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Management’s Discussion and Analysis

exemption from registration depends on various factual matters and circumstances.

Accordingly, in conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program.

The monitoring of this risk is also under the oversight of the ERC.

As a result of the Dodd-Frank Act, the U.S.

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Internal fair values are generally compared to external pricing sources to determine reasonableness.

Fair value estimates for our investment in MSRs are obtained from models, which use significant unobservable inputs in their valuations.

Fair value estimates for our investment in MSR are obtained from models, which use significant unobservable inputs in their valuations.

These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates.

Model valuations are then compared to valuations obtained from third party pricing providers.

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.

Management reviews the valuations received from third party pricing

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Management’s Discussion and Analysis

providers and uses them as a point of comparison to modeled values.

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

Commercial Real Estate Investments

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

Capital Ratio

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

Capital Ratio (GAAP Capital Ratio)

Calculated as total stockholders’ equity divided by total assets.

The amount an asset earns over its hedging and financing costs.

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

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

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

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

Corporate Debt

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

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Management’s Discussion and Analysis

Credit Derivatives

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The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae, Freddie Mac and/or third parties to private investors.

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Management’s Discussion and Analysis

The current remaining monthly principal on a mortgage security.

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The weighted maturity of a fixed-income investment’s cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.

Earnings available for distribution (“EAD”) and Earnings available for distribution Per Average Common Share

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 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 per average common share is calculated by dividing earnings available for distribution by average basic common shares for the period.

This metric was previously labeled Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share).

The definition of EAD is identical to the definition of Core Earnings (excluding PAA) from prior reporting periods.

Economic Capital

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It is a probabilistic measure of potential future losses at a given confidence level over a given time horizon.

Economic Capital Ratio

Non-GAAP financial measure that is calculated as total stockholders’ equity divided by total economic assets.

Total economic assets includes the implied market value of TBA derivatives and are net of debt issued by securitization vehicles.

Economic Interest Expense

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

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

Non-GAAP financial measure that is calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

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

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dollar deposit held in Europe or elsewhere outside the United States.

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Management’s Discussion and Analysis

The par value (i.e., principal or maturity value) of a security appearing on the face of the instrument.

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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.

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Management’s Discussion and Analysis

Federal Funds Rate

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Average interest bearing liabilities is based on daily balances.

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Management’s Discussion and Analysis

Interest Earning Assets

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The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments.

Interests in MSR

Represents agreements to purchase all, or a component of, net servicing cash flows.

Interest Rate Risk

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

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Management’s Discussion and Analysis

Interest Rate Swaption

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The use of borrowed money to increase investing power and economic returns.

Leverage Ratio (Debt-to-Equity Ratio)

Leverage Ratio (GAAP Leverage Ratio or Debt-to-Equity Ratio)

Calculated as total debt to total stockholders’ equity.

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Debt which matures in more than one year.

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Management’s Discussion and Analysis

Market Agreed Coupon (“MAC”) Interest Rate Swap

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A mortgage loan granted by a bank, thrift or other financial institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.

Mortgage Servicing Rights (“MSRs”)

Mortgage Servicing Rights (“MSR”)

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

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Management’s Discussion and Analysis

Net asset value.

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Also known as par value.

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Management’s Discussion and Analysis

Pass-Through Security

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

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Management’s Discussion and Analysis

Prepayment Risk

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The estimated rate at which mortgage borrowers will pay off the mortgages that underlie an MBS.

Primary Market

Market for offers or sales of new bonds by the issuer.

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

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Real Estate Investment Trust (“REIT”)

A special purpose investment vehicle that provides investors with the ability to participate directly in the ownership or financing of real-estate related assets by pooling their capital to purchase and manage mortgage loans and/or income property.

A special purpose investment vehicle that provides investors with the ability to participate directly in the

ownership or financing of real-estate related assets by pooling their capital to purchase and manage mortgage loans and/or income property.

Recourse Debt

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Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy.

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Management’s Discussion and Analysis

Secondary Market

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Spreads differ based on several factors including liquidity.

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Management’s Discussion and Analysis

Target Assets

Includes Agency mortgage-backed securities, to-be-announced forward contracts, CRT securities, MSRs, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt.

Includes Agency mortgage-backed securities, to-be-announced forward contracts, CRT securities, MSR, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt.

Tangible Economic Return

Refers to the Company’s change in tangible book value (calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit less intangible assets) plus dividends declared divided by the prior period’s tangible book value.

Taxable REIT Subsidiary (“TRS”)

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Cash or securities provided by a party to collateralize its obligations under a transaction as a result of a change in value of such transaction since the trade was executed or the last time collateral was provided.

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Management’s Discussion and Analysis

A statistical measure of the variance of price or yield over time.

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

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Management’s Discussion and Analysis

Yield-to-Maturity

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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