ANNALY CAPITAL MANAGEMENT INC 10-Q

Item 1. Financial Statements assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts. Derivatives are accounted for in accordance with FASB ASC 815, Derivatives and Hedging , which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives and financial instruments with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At June 30, 2021 and December 31, 2020, $ 1.1 billion and $ 1.5 billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value. Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value. Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values. TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date. Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing. Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis. Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps. 29 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The table below summarizes fair value information about our derivative assets and liabilities at June 30, 2021 and December 31, 2020: Derivatives Instruments June 30, 2021 December 31, 2020 Assets (dollars in thousands) Interest rate swaptions $ 134,434 $ 74,470 TBA derivatives 31,944 96,109 Futures contracts 8,141 506 Purchase commitments 3,174 49 Credit derivatives (1) 4,196 — Total derivative assets $ 181,889 $ 171,134 Liabilities Interest rate swaps $ 806,952 $ 1,006,492 TBA derivatives 2,837 — Futures contracts 87,814 19,413 Purchase commitments 2,656 — Credit derivatives (1) — 7,440 Total derivative liabilities $ 900,259 $ 1,033,345 (1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 445.0 million and $ 504.0 million at June 30, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche. As of June 30, 2021 and December 31, 2020 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and A. The following table summarizes certain characteristics of the Company’s interest rate swaps at June 30, 2021 and December 31, 2020: June 30, 2021 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) (dollars in thousands) 0 - 3 years $ 31,164,200 0.24 % 0.09 % 1.55 3 - 6 years 3,100,000 0.13 % 0.08 % 3.88 6 - 10 years 5,730,500 1.25 % 0.61 % 8.18 Greater than 10 years 1,984,000 2.68 % 0.28 % 17.50 Total / Weighted average $ 41,978,700 0.81 % 0.34 % 3.38 December 31, 2020 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) (dollars in thousands) 0 - 3 years $ 23,680,150 0.27 % 0.11 % 1.96 3 - 6 years 3,600,000 0.18 % 0.09 % 4.21 6 - 10 years 5,565,500 1.40 % 0.62 % 7.76 Greater than 10 years 1,484,000 3.06 % 0.36 % 20.52 Total / Weighted average $ 34,329,650 0.92 % 0.37 % 3.94 (1) As of June 30, 2021, 13 %, 59 % and 28 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2020, 17 %, 72 % and 11 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. (2) There were no forward starting swaps at June 30, 2021 and December 31, 2020. (3) At June 30, 2021 and December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed. 30 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table presents swaptions outstanding at June 30, 2021 and December 31, 2020. June 30, 2021 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay $ 4,550,000 1.35 % 3M LIBOR 10.14 2.80 Long receive $ 1,500,000 1.51 % 3M LIBOR 11.40 16.93 December 31, 2020 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay $ 8,050,000 1.27 % 3M LIBOR 10.40 5.42 Long receive $ 250,000 1.66 % 3M LIBOR 10.02 0.13 The following table summarizes certain characteristics of the Company’s TBA derivatives at June 30, 2021 and December 31, 2020: June 30, 2021 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts $ 17,314,000 $ 17,662,043 $ 17,691,150 $ 29,107 December 31, 2020 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts $ 19,635,000 $ 20,277,088 $ 20,373,197 $ 96,109 The following table summarizes certain characteristics of the Company’s futures derivatives at June 30, 2021 and December 31, 2020: June 30, 2021 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 5 year — ( 2,884,000 ) 4.42 U.S. Treasury futures - 10 year and greater $ — $ ( 10,227,500 ) 7.47 Total $ — $ ( 13,111,500 ) 6.80 December 31, 2020 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 5 year — ( 1,240,000 ) 4.40 U.S. Treasury futures - 10 year and greater — ( 9,183,800 ) 6.90 Total $ — $ ( 10,423,800 ) 6.60 31 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty. The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at June 30, 2021 and December 31, 2020, respectively. June 30, 2021 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaptions, at fair value $ 134,434 $ — $ — $ 134,434 TBA derivatives, at fair value 31,944 ( 2,596 ) — 29,348 Futures contracts, at fair value 8,141 ( 8,141 ) — — Purchase commitments 3,174 — — 3,174 Credit derivatives 4,196 — — 4,196 Liabilities Interest rate swaps, at fair value $ 806,952 $ — $ ( 83,737 ) $ 723,215 TBA derivatives, at fair value 2,837 ( 2,596 ) — 241 Futures contracts, at fair value 87,814 ( 8,141 ) ( 79,673 ) — Purchase commitments 2,656 — — 2,656 December 31, 2020 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaptions, at fair value $ 74,470 $ — $ — $ 74,470 TBA derivatives, at fair value 96,109 — — 96,109 Futures contracts, at fair value 506 ( 506 ) — — Purchase commitments 49 — — 49 Liabilities Interest rate swaps, at fair value $ 1,006,492 $ — $ ( 108,757 ) $ 897,735 Futures contracts, at fair value 19,413 ( 506 ) ( 18,907 ) — Credit derivatives 7,440 — ( 7,440 ) — The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows: Location on Consolidated Statements of Comprehensive Income (Loss) Net Interest Component of Interest Rate Swaps Realized Gains (Losses) on Termination of Interest Rate Swaps Unrealized Gains (Losses) on Interest Rate Swaps For the three months ended (dollars in thousands) June 30, 2021 $ ( 83,087 ) $ — $ ( 141,067 ) June 30, 2020 $ ( 64,561 ) $ ( 1,521,732 ) $ 1,494,628 For the six months ended June 30, 2021 $ ( 162,834 ) $ — $ 631,195 June 30, 2020 $ ( 78,541 ) $ ( 1,919,293 ) $ ( 1,333,095 ) 32 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows: Three Months Ended June 30, 2021 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments (dollars in thousands) Net TBA derivatives $ 10,045 $ 275,226 $ 285,271 Net interest rate swaptions ( 22,787 ) ( 232,860 ) ( 255,647 ) Futures 183,383 ( 577,899 ) ( 394,516 ) Purchase commitments — 2,376 2,376 Credit derivatives 2,777 1,931 4,708 Total $ ( 357,808 ) Three Months Ended June 30, 2020 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments (dollars in thousands) Net TBA derivatives $ 250,525 $ ( 46,363 ) $ 204,162 Net interest rate swaptions ( 29,880 ) ( 22,634 ) ( 52,514 ) Futures 246 ( 17,579 ) ( 17,333 ) Purchase commitments — 9,666 9,666 Credit derivatives 1,203 25,732 26,935 Total $ 170,916 Six Months Ended June 30, 2021 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives (dollars in thousands) Net TBA derivatives $ ( 277,844 ) $ ( 67,002 ) $ ( 344,846 ) Net interest rate swaptions ( 44,997 ) 73,130 28,133 Futures 479,547 ( 60,766 ) 418,781 Purchase commitments — 469 469 Credit derivatives 4,408 10,954 15,362 Total $ 117,899 Six Months Ended June 30, 2020 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives (dollars in thousands) Net TBA derivatives $ 521,610 $ 114,331 $ 635,941 Net interest rate swaptions 21,566 47,499 69,065 Futures ( 279,230 ) ( 10,687 ) ( 289,917 ) Purchase commitments — ( 1,143 ) ( 1,143 ) Credit derivatives 3,128 ( 39,732 ) ( 36,604 ) Total $ 377,342 Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the 33 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange. Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at June 30, 2021 was approximately $ 725.2 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized. 11. FAIR VALUE MEASUREMENTS The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer to the “Sale of Commercial Real Estate Business” Note for fair value measurements related to the assets and liabilities of the disposal group held for sale as of June 30, 2021. GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments and MSR fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value. The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis. The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level. Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1. Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities. Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy. 34 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2. For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information. The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. 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 MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented. June 30, 2021 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 66,468,519 $ — $ 66,468,519 Credit risk transfer securities — 827,328 — 827,328 Non-Agency mortgage-backed securities — 1,582,323 — 1,582,323 Commercial mortgage-backed securities — 154,165 — 154,165 Loans Residential mortgage loans — 1,029,928 — 1,029,928 Mortgage servicing rights — — 202,616 202,616 Interests in MSR — — 49,035 49,035 Assets transferred or pledged to securitization vehicles — 4,073,156 — 4,073,156 Derivative assets Other derivatives 8,141 173,748 — 181,889 Total assets $ 8,141 $ 74,309,167 $ 251,651 $ 74,568,959 Liabilities Debt issued by securitization vehicles — 3,315,087 — 3,315,087 Participations issued — 315,810 — 315,810 Derivative liabilities Interest rate swaps — 806,952 — 806,952 Other derivatives 87,814 5,493 — 93,307 Total liabilities $ 87,814 $ 4,443,342 $ — $ 4,531,156 35 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements December 31, 2020 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 74,067,059 $ — $ 74,067,059 Credit risk transfer securities — 532,403 — 532,403 Non-Agency mortgage-backed securities — 972,192 — 972,192 Commercial mortgage-backed securities — 80,742 — 80,742 Loans Residential mortgage loans — 345,810 — 345,810 Mortgage servicing rights — — 100,895 100,895 Assets transferred or pledged to securitization vehicles — 6,035,671 — 6,035,671 Derivative assets Other derivatives 506 170,628 — 171,134 Total assets $ 506 $ 82,204,505 $ 100,895 $ 82,305,906 Liabilities Debt issued by securitization vehicles $ — $ 5,652,982 $ — $ 5,652,982 Participations issued — 39,198 — 39,198 Derivative liabilities Interest rate swaps — 1,006,492 — 1,006,492 Other derivatives 19,413 7,440 — 26,853 Total liabilities $ 19,413 $ 6,706,112 $ — $ 6,725,525 Qualitative and Quantitative Information about Level 3 Fair Value Measurements The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSR and Interests in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interests in MSR. Refer to the “Mortgage Servicing Rights” Note for additional information, including rollforwards. The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments. June 30, 2021 Unobservable Input (1) / Range (Weighted Average) (2) Discount rate Prepayment rate Delinquency rate Cost to service MSR consolidated with VIE 9.0 % - 12.0 % ( 9.0 %) 9.4 % - 30.7 % ( 20.2 %) 0.0 % - 6.0 % ( 2.4 %) $ 84 - $ 114 ($ 99 ) MSR held directly 1.8 % - 21.7 % ( 9.0 %) 6.7 % - 14.4 % ( 7.5 %) 0.9 % - 1.8 % ( 1.1 %) $ 99 - $ 106 ($ 101 ) Interests in MSR 9.5 % - 11.4 % ( 10.0 %) 4.8 % - 14.6 % ( 9.0 %) 0.6 % - 5.0 % ( 1.8 %) $ 78 - $ 86 ($ 85 ) December 31, 2020 Unobservable Input (1) / Range (Weighted Average) (2) Discount rate Prepayment rate Delinquency rate Cost to service MSR consolidated with VIE 9.0 % - 12.0 % ( 9.4 %) 19.3 % - 55.5 % ( 42.0 %) 0.0 % - 6.0 % ( 2.5 %) $ 83 - $ 108 ($ 98 ) (1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets. (2) Weighted average discount rate computed based on the fair value of MSR, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSR. 36 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at June 30, 2021 and December 31, 2020. June 30, 2021 December 31, 2020 Carrying Value Fair Value Carrying Value Fair Value Financial assets (dollars in thousands) Loans Commercial real estate debt and preferred equity, held for investment (1) $ — $ — $ 1,372,430 $ 1,442,071 Corporate debt, held for investment 2,066,709 2,080,002 2,239,930 2,226,045 Assets transferred or pledged to securitization vehicles — — 874,349 928,732 Corporate debt, held for sale 466,370 466,370 — — Financial liabilities Repurchase agreements $ 60,221,067 $ 60,221,067 $ 64,825,239 $ 64,825,239 Other secured financing 909,655 909,655 917,876 917,876 Mortgages payable — — 426,256 474,779 (1) Includes assets of consolidated VIEs. Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment, corporate debt, held for sale and mortgages payable are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements. Long term other secured financing are valued using Level 2 inputs. 12. GOODWILL AND INTANGIBLE ASSETS Goodwill The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain. The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. At June 30, 2021 and December 31, 2020, goodwill totaled $ 0 and $ 71.8 million, respectively. The change reflects the goodwill impairment in connection with the sale of the CRE business. Refer to the “Sale of Commercial Real Estate Business” Note for additional information. Intangible assets, net Finite life intangible assets are amortized over their expected useful lives. As part of the Internalization, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $ 41.2 million based on the replacement cost of the employee base acquired by the Company. During the three months ended June 30, 2021, the Company recognized an impairment of $ 4.3 million in Other income (loss) and $ 5.2 million in Business divestiture-related gains (losses) in the Consolidated Statements of Comprehensive Income (Loss) for changes to the assembled workforce. 37 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table presents the activity of finite lived intangible assets for the six months ended June 30, 2021. Intangible Assets, net (dollars in thousands) Balance at December 31, 2020 $ 55,526 Impairment ( 9,549 ) Intangible assets included in disposal group held for sale ( 14,528 ) Less: amortization expense ( 4,947 ) Balance at June 30, 2021 $ 26,502 13. SECURED FINANCING Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing , and has determined that each of the financing agreements should be treated as a securing financing. The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company receives collateral for reverse repurchase agreements and is required to post collateral for repurchase agreements. To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities. Generally, the Company receives or posts collateral with a fair value approximately equal to or greater than the value of the secured financing. Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows. The Company had outstanding $ 60.2 billion and $ 64.8 billion of repurchase agreements with weighted average remaining maturities of 88 days and 64 days at June 30, 2021 and December 31, 2020, respectively. The Company has select arrangements with counterparties to enter into repurchase agreements for select credit assets for $ 1.6 billion with remaining capacity of $ 1.4 billion at June 30, 2021. At June 30, 2021 and December 31, 2020, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: June 30, 2021 Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Mortgage-Backed Securities (1) Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day $ 10,052,550 $ — $ — $ — $ 142,617 $ 10,195,167 0.09 % 2 to 29 days 15,688,201 178,719 290,174 — 64,188 16,221,282 0.14 % 30 to 59 days 5,981,872 66,309 212,087 177,401 — 6,437,669 0.27 % 60 to 89 days 4,495,510 3,147 126,747 — 14,549 4,639,953 0.16 % 90 to 119 days 5,873,992 — — — — 5,873,992 0.16 % Over 119 days (2) 16,713,446 — 98,417 41,141 — 16,853,004 0.18 % Total $ 58,805,571 $ 248,175 $ 727,425 $ 218,542 $ 221,354 $ 60,221,067 0.16 % 38 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements December 31, 2020 Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day $ — $ — $ — $ — $ — $ — $ — — % 2 to 29 days 30,151,875 129,993 354,904 $ 76,799 — 128,267 30,841,838 0.29 % 30 to 59 days 10,247,972 16,073 161,274 $ — — 142,336 10,567,655 0.42 % 60 to 89 days 8,181,410 99,620 259,401 $ — — 28,406 8,568,837 0.30 % 90 to 119 days 2,154,733 — — $ — — — 2,154,733 0.23 % Over 119 days (2) 12,008,920 — 274,860 $ 107,924 271,801 28,671 12,692,176 0.36 % Total $ 62,744,910 $ 245,686 $ 1,050,439 $ 184,723 $ 271,801 $ 327,680 $ 64,825,239 0.32 % (1) Includes commercial mortgage-backed securities held for sale. (2) No repurchase agreements had a remaining maturity over 1 year at June 30, 2021. Less than 1 % of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2020. The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at June 30, 2021 and December 31, 2020. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments. June 30, 2021 December 31, 2020 Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements (dollars in thousands) Gross amounts $ — $ 60,221,067 $ 250,000 $ 65,075,239 Amounts offset — — ( 250,000 ) ( 250,000 ) Netted amounts $ — $ 60,221,067 $ — $ 64,825,239 The fair value of mortgage-backed securities received as collateral in connection with reverse repurchase agreements was approximately $ 0 and $ 250.0 million, which the Company fully repledged, at June 30, 2021 and December 31, 2020, respectively. Other Secured Financing - Refer to the “Variable Interest Entities” Note for additional information on the Company’s other secured financing arrangements. Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 65.2 billion and $ 176.8 million, respectively, at June 30, 2021 and $ 70.6 billion and $ 196.9 million, respectively, at December 31, 2020. 14. CAPITAL STOCK (A) Common Stock The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at June 30, 2021 and December 31, 2020. Shares authorized Shares issued and outstanding June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 Par Value Common stock 2,936,500,000 2,914,850,000 1,444,156,029 1,398,240,618 $ 0.01 In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $ 1.5 billion of its outstanding shares of common stock, which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In 39 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements December 2020, the Company announced that its Board authorized the repurchase of up to $ 1.5 billion of its outstanding common shares through December 31, 2021 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the Prior Share Repurchase Program. During the three and six months ended June 30, 2021, no shares were purchased under the Current Share Repurchase Program. During the three and six months ended June 30, 2020, the Company repurchased 22.9 million shares of its common stock for an aggregate amount of $ 143.3 million, excluding commission costs, under the Prior Share Repurchase Program. All common shares were purchased in open-market transactions. In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2020, collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc. (formerly known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated), Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares of its common stock, having an aggregate offering price of up to $ 1.5 billion from time to time through any of the Sales Agents. During the three and six months ended June 30, 2021, the Company issued 45.5 million shares, for proceeds of $ 420.4 million, net of commissions and fees under the at-the-market sales program. No shares were issued under the at-the-market sales program during the three and six months ended June 30, 2020. (B) Preferred Stock The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at June 30, 2021 and December 31, 2020. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets. Shares Authorized Shares Issued And Outstanding Carrying Value Contractual Rate Earliest Redemption Date (1) Date At Which Dividend Rate Becomes Floating Floating Annual Rate June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 Fixed-rate (dollars in thousands) Series D — 18,400,000 — — — — 7.50 % 9/13/2017 NA NA Fixed-to-floating rate Series F 28,800,000 28,800,000 28,800,000 28,800,000 696,910 696,910 6.95 % 9/30/2022 9/30/2022 3M LIBOR + 4.993 % Series G 17,000,000 19,550,000 17,000,000 17,000,000 411,335 411,335 6.50 % 3/31/2023 3/31/2023 3M LIBOR + 4.172 % Series I 17,700,000 18,400,000 17,700,000 17,700,000 428,324 428,324 6.75 % 6/30/2024 6/30/2024 3M LIBOR + 4.989 % Total 63,500,000 85,150,000 63,500,000 63,500,000 $ 1,536,569 $ 1,536,569 (1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company. Each series of preferred stock has a par value of $ 0.01 per share and a liquidation and redemption price of $ 25.00 , plus accrued and unpaid dividends through their redemption date. Through June 30, 2021, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock. The Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company. 40 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements (C) Distributions to Stockholders The following table provides a summary of the Company’s dividend distribution activity for the periods presented: For the Three Months Ended For the Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (dollars in thousands, except per share data) Dividends and dividend equivalents declared on common stock and share-based awards $ 318,534 $ 309,972 $ 626,880 $ 667,791 Distributions declared per common share $ 0.22 $ 0.22 $ 0.44 $ 0.47 Distributions paid to common stockholders after period end $ 317,714 $ 309,686 $ 317,714 $ 309,686 Distributions paid per common share after period end $ 0.22 $ 0.22 $ 0.22 $ 0.22 Date of distributions paid to common stockholders after period end July 30, 2021 July 31, 2020 July 30, 2021 July 31, 2020 Dividends declared to series D preferred stockholders $ — $ 8,625 $ — $ 17,250 Dividends declared per share of series D preferred stock $ — $ 0.469 $ — $ 0.938 Dividends declared to series F preferred stockholders $ 12,510 $ 12,510 $ 25,020 $ 25,020 Dividends declared per share of series F preferred stock $ 0.434 $ 0.434 $ 0.869 $ 0.869 Dividends declared to series G preferred stockholders $ 6,906 $ 6,906 $ 13,812 $ 13,812 Dividends declared per share of series G preferred stock $ 0.406 $ 0.406 $ 0.813 $ 0.813 Dividends declared to series I preferred stockholders $ 7,467 $ 7,468 $ 14,934 $ 14,936 Dividends declared per share of series I preferred stock $ 0.422 $ 0.422 $ 0.844 $ 0.844 15. INTEREST INCOME AND INTEREST EXPENSE Refer to the “Significant Accounting Policies” Note for details surrounding the Company’s accounting policy related to net interest income on securities and loans. The following table summarizes the interest income recognition methodology for Residential Securities: Interest Income Methodology Agency Fixed-rate pass-through (1) Effective yield (3) Adjustable-rate pass-through (1) Effective yield (3) Multifamily (1) Contractual Cash Flows CMO (1) Effective yield (3) Reverse mortgages (2) Prospective Interest-only (2) Prospective Residential credit CRT (2) Prospective Alt-A (2) Prospective Prime (2) Prospective Subprime (2) Prospective NPL/RPL (2) Prospective Prime jumbo (2) Prospective Prime jumbo interest-only (2) Prospective (1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss). (2) Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss). (3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception. 41 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following presents the components of the Company’s interest income and interest expense for the three and six months ended June 30, 2021 and June 30, 2020. For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 Interest income (dollars in thousands) Residential Securities (1) $ 275,278 $ 457,684 $ 919,912 $ 868,064 Residential mortgage loans (1) 38,963 42,871 76,072 90,428 Commercial investment portfolio (1) (2) 69,663 84,208 151,264 179,884 Reverse repurchase agreements 2 49 36 1,462 Total interest income $ 383,906 $ 584,812 $ 1,147,284 $ 1,139,838 Interest expense Repurchase agreements 29,140 136,962 71,725 570,983 Debt issued by securitization vehicles 23,216 38,757 49,492 80,876 Participations issued 1,739 — 2,336 — Other 6,952 10,313 13,467 37,646 Total interest expense 61,047 186,032 137,020 689,505 Net interest income $ 322,859 $ 398,780 $ 1,010,264 $ 450,333 (1) Includes assets transferred or pledged to securitization vehicles. (2 ) Includes commercial real estate debt and preferred equity and corporate debt. 16. NET INCOME (LOSS) PER COMMON SHARE The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and six months ended June 30, 2021 and June 30, 2020. For the Three Months Ended For the Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (dollars in thousands, except per share data) Net income (loss) $ ( 294,848 ) $ 856,234 $ 1,456,286 $ ( 2,783,955 ) Net income (loss) attributable to noncontrolling interests 794 32 1,115 98 Net income (loss) attributable to Annaly ( 295,642 ) 856,202 1,455,171 ( 2,784,053 ) Dividends on preferred stock 26,883 35,509 53,766 71,018 Net income (loss) available (related) to common stockholders $ ( 322,525 ) $ 820,693 $ 1,401,405 $ ( 2,855,071 ) Weighted average shares of common stock outstanding-basic 1,410,239,138 1,423,909,112 1,404,755,496 1,427,451,716 Add: Effect of stock awards, if dilutive — — 1,008,776 — Weighted average shares of common stock outstanding-diluted 1,410,239,138 1,423,909,112 1,405,764,272 1,427,451,716 Net income (loss) per share available (related) to common share Basic $ ( 0.23 ) $ 0.58 $ 1.00 $ ( 2.00 ) Diluted $ ( 0.23 ) $ 0.58 $ 1.00 $ ( 2.00 ) The computations of diluted net income (loss) per share available (related) to common share for the three months ended June 30, 2021 excludes 3.2 million and the three and six months ended June 30, 2020 excludes 0.5 million and 0.4 million, respectively, of potentially dilutive restricted stock units because their effect would have been anti-dilutive. 17. INCOME TAXES For the three months ended June 30, 2021 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100 % of its REIT taxable income. 42 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code. The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs. As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income. The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at June 30, 2021 and December 31, 2020. The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company’s TRSs are subject to federal, state and local taxes. During the three and six months ended June 30, 2021, the Company recorded $ 5.1 million and $ 4.8 million, respectively, of income tax expense attributable to its TRSs. During the three and six months ended June 30, 2020, the Company recorded $ 2.1 million and ($ 24.6 ) million, respectively, of income tax expense (benefit) attributable to its TRSs. The Company’s federal, state and local tax returns from 2017 and forward remain open for examination. 18. RISK MANAGEMENT The primary risks to the Company are capital, liquidity and funding risk, investment/market risk, credit risk and operational risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the existing collateral to reduce borrowing levels. The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges. Weakness in the mortgage market, the shape of the yield curve, changes in the expectations for the volatility of future interest rates and deterioration of financial conditions in general may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging strategies. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. Substantially all of the Company’s Agency mortgage-backed securities have an actual or implied “AAA” rating. The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase the overall costs to service the underlying mortgage loans. The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties, credit rating monitoring and active servicer oversight. 43 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The Company depends on third-party service providers to perform various business processes related to its operations, including mortgage loan servicers and sub-servicers. The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors. These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information. 19. RELATED PARTY TRANSACTIONS Closing of the Internalization and Termination of Management Agreement On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Former Manager and certain affiliates of the Former Manager. Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($ 1.00 ). In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager (the net effect of which was immaterial in amount), and the Company transitioned from an externally-managed REIT to an internally-managed REIT. At the closing, all employees of the Former Manager became employees of the Company. The parties also terminated the Amended and Restated Management Agreement by and between the Company and the Former Manager (the “Management Agreement”) and therefore the Company no longer pays a management fee to, or reimburses expenses of, the Former Manager. Pursuant to the Internalization Agreement, the Former Manager waived any Acceleration Fee (as defined in the Management Agreement). Prior to the closing of the Internalization, the Former Manager, under the Management Agreement and subject to the supervision and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s investment portfolio; (ii) recommending alternative forms of capital raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The Former Manager also performed such other supervisory and management services and activities relating to the Company’s assets and operations as appropriate. In exchange for the management services, the Company paid the Former Manager a monthly management fee, and the Former Manager was responsible for providing personnel to manage the Company. Prior to the closing of the Internalization, the Company had paid the Former Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i) 1.05% of Stockholders' Equity (as defined in the Management Agreement) up to $ 17.28 billion, and (ii) 0.75 % of Stockholders' Equity (as defined in the Management Agreement) in excess of $ 17.28 billion. The Company did not pay the Former Manager any incentive fees. For the three and six months ended June 30, 2020, the compensation and management fee computed in accordance with the Management Agreement was $ 37.0 million and $ 77.9 million, respectively, and reimbursement payments to the Former Manager were $ 7.1 million and $ 14.2 million, respectively. 20. LEASE COMMITMENTS AND CONTINGENCIES The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of approximately four years . The corporate office lease includes an option to extend for up to five years , however the extension term was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the three and six months ended June 30, 2021 was $ 0.7 million and $ 1.6 million, respectively. Supplemental information related to leases as of and for the six months ended June 30, 2021 was as follows: 44 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Operating Leases Classification June 30, 2021 Assets (dollars in thousands) Operating lease right-of-use assets Other assets $ 11,843 Liabilities Operating lease liabilities (1) Other liabilities $ 15,437 Lease term and discount rate Weighted average remaining lease term 4.2 years Weighted average discount rate (1) 2.9 % Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 1,983 (1) As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. The following table provides details related to maturities of lease liabilities: Maturity of Lease Liabilities Years ending December 31, (dollars in thousands) 2021 (remaining) $ 1,935 2022 3,862 2023 3,862 2024 3,862 2025 2,895 Total lease payments $ 16,416 Less imputed interest 979 Present value of lease liabilities $ 15,437 Contingencies From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were no material contingencies at June 30, 2021 and December 31, 2020. 21. ARCOLA REGULATORY REQUIREMENTS Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty. As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance. At June 30, 2021, Arcola had a minimum net capital requirement of $ 0.3 million. Arcola consistently operates with capital in excess of its regulatory capital requirements. Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at June 30, 2021 was $ 516.9 million with excess net capital of $ 516.6 million. 45 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 22. SUBSEQUENT EVENTS In July 2021, the Company completed and closed the securitization of residential mortgage loans, OBX 2021-J2 Trust, with a face value of $ 382.5 million. The securitization represented a financing transaction which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company. In July 2021, in the previously announced divestiture of the Company’s CRE business, a significant majority of the assets, including the platform, were transferred to Slate as part of the first closing of the transaction with remaining assets expected to be transferred in the second half of 2021. In July 2021, the Company syndicated $ 466.4 million of corporate loans, which were classified as held for sale as of June 30, 2021. 46 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain); changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt; risks related to investments in MSR; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act; and the timing and ultimate completion of the sale of our commercial real estate business. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent annual report on Form 10-K and Item 1A “Risk Factors” in this quarterly report on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q. 47 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis INDEX TO ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 49 Recent Developments 49 Business Environment and COVID-19 49 Economic Environment 50 London Interbank Offered Rate (“LIBOR”) Transition Working Group 48 Results of Operations 51 Net Income (Loss) Summary 53 Non-GAAP Financial Measures 55 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 55 Premium Amortization Expense 57 Economic leverage and economic capital ratios 58 Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA) 59 Experienced and Projected Long-term CPR 60 Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), and Net Interest Margin (excluding PAA), and Average Economic Cost of Interest Bearing Liabilities) 61 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 62 Realized and Unrealized Gains (Losses) 63 Other Income (Loss) 64 General and Administrative Expenses 64 Return on Average Equity 65 Unrealized Gains and Losses - Available-for-Sale Investments 65 Financial Condition 66 Residential Securities 66 Contractual Obligations 69 Off-Balance Sheet Arrangements 69 Capital Management 70 Stockholders’ Equity 70 Capital Stock 70 Leverage and Capital 70 Risk Management 71 Risk Appetite 71 Governance 71 Description of Risks 72 Capital, Liquidity and Funding Risk Management 73 Funding 73 Excess Liquidity 74 Maturity Profile 76 Stress Testing 77 Liquidity Management Policies 77 Investment/Market Risk Management 78 Credit Risk Management 79 Counterparty Risk Management 79 Operational Risk Management 80 Compliance, Regulatory and Legal Risk Management 80 Critical Accounting Policies and Estimates 81 Valuation of Financial Instruments 81 Residential Securities 81 Residential Mortgage Loans 81 MSR 74 Commercial Real Estate Investments 82 Interest Rate Swaps 82 Revenue Recognition 82 Consolidation of Variable Interest Entities 82 Use of Estimates 82 Glossary of Terms 83 48 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Overview We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Prior to the closing of the Internalization (as defined in the “Related Party Transactions” Note located within Item 1) on June 30, 2020, we were externally managed by Annaly Management Company LLC (the “Former Manager”). Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” We use our 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. For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K. Recent Developments Sale of Commercial Real Estate Business On March 25, 2021, we announced that we entered into a definitive agreement to sell and exit our Commercial Real Estate (“CRE”) business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”). The transaction represents the sale of substantially all of the assets that comprise our CRE business, which include equity interests, loan assets and commercial mortgage-backed securities (other than commercial CRTs). Certain employees who primarily support the CRE business will join Slate in connection with the sale. Subject to customary closing conditions, including applicable regulatory approvals, the transfer of the CRE business is expected to be completed in the second half of 2021. Revenues and expenses associated with the CRE business will be reflected in our results of operations and key financial metrics through closing. Refer to the “Sale of Commercial Real Estate Business” and “Subsequent Events” Notes located within Item 1 for additional information related to the announced transaction. Business Environment and COVID-19 The second quarter of 2021 saw 10-year Treasury rates decline by nearly 30 basis points despite peak economic reopening momentum and a meaningful acceleration in inflation readings. Spreads on Agency mortgage-backed securities (“MBS”), which entered the quarter at tight levels signaling full valuations, widened while credit sector spreads remained well supported. The challenging environment led us to generate a (4.0%) economic return (loss) and tangible economic return (loss), during the quarter on ($0.23) in GAAP net income (loss) per common share, and a $0.58 decline in our book value to $8.37 per common share as of June 30, 2021. Our total portfolio net of securitized debt (which includes market value of TBA purchase contracts and CMBX derivatives and excludes held for sale assets) decreased during the quarter to $92.9 billion, while credit investments as a share of the aggregate portfolio rose from 27% to 29% during the quarter. The rally in interest rates during the quarter was somewhat contradictory relative to the strong economy seen during the period. Despite the economic reopening and inflation at multi-year highs, the yield curve flattened as rate markets viewed the pace of the current economic expansion as likely to fade, with growth and inflation expected to slow back to pre-pandemic levels in the medium-term. Meanwhile, the Federal Reserve (“Fed”) began signaling a shift in its reaction function at the June Federal Open Market Committee (“FOMC”) meeting. Having become concerned around an upside surprise in inflation, the FOMC signaled that it might raise short-term interest rates sooner than previously anticipated should inflation remain elevated. Agency MBS, meanwhile, underperformed its rate hedges in this environment as banks slowed their purchases from record pace, investors recalibrated their taper expectations, and mortgage supply continued to remain elevated. More specifically, higher coupon Agency MBS, those with coupons of or above 3.5 percent, continued to face elevated prepayment speeds, which led investors to adjust their models to reflect this reality, thereby lowering the valuations of these securities. Faced with this challenging operating environment in Agency MBS, Annaly continued to prudently manage its portfolio, reducing leverage and hedging incremental moves in interest rates, while allocating capital towards credit investments with more attractive risk-adjusted returns. As such, our residential credit business experienced another active quarter as we took advantage of opportunities in the unrated non- and re-performing securities market, as well as non-qualified loan market, activity which was boosted by the initiation of our in-house aggregation through Onslow Bay’s correspondent channel. Launched in April 2021, the program offers a diversified suite of mortgage products to purchase residential mortgage loans on a best-efforts flow basis that adhere to our credit standards. Outside of residential credit, we committed to increase our exposure to MSR during the quarter, through direct 49 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis purchases and third party partnerships bringing Annaly’s total MSR economic exposure (for both portfolios already settled and those committed to be settled at a future date) to approximately $409 million market value as of June 30, 2021. Finally, we also saw considerable portfolio activity in our Middle Market Lending business, which originated six deals for a total of approximately $450 million during the quarter, net of originations subsequently classified as held for sale at the end of the quarter. The previously announced sale of our Commercial Real Estate business remains on track to be completed in the second half of 2021. After quarter end, the bulk of the platform – including a number of Annaly employees who supported the business – was successfully transferred as part of the first closing of the transaction. A significant majority of the assets were sold during this first close and we have received over 80% of the capital by the time of this filing. Business Continuity Our well-established Business Continuity Plan (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise. The BCP is regularly updated and tested. Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management. Key tenets of the plan include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations. Historical tabletop exercises have included use of Center for Disease Control and Prevention Influenza Pandemic exercise materials. That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19. We took proactive actions, which included canceling non-essential travel and instituting 100% remote working, ahead of New York State-mandated requirements. To protect the health and well-being of our employees, their families and communities remote work requirements began in phases in early March 2020, culminating with a company-wide exercise on March 13, 2020 to test connectivity and functionality. All employees were able to successfully perform their duties in this testing and we have operated largely remotely since that time. Business activities continue to be performed primarily remotely, though we have seen a number of employees return to the office on a voluntary and periodic basis. At the present, we expect employees to return to the office more regularly starting in the fourth quarter of 2021 subject to continued successful vaccine rollout and accomodative guidance from federal, state and local authorities. Economic Environment The pace of growth accelerated in the second quarter, with U.S. gross domestic product (“GDP”) rising 6.5% percent on a seasonally adjusted annualized rate. Growth was boosted as the U.S. economy reopened and service sector consumption rose strongly, while consumers, supported by healthy balance sheets and recent stimulus payments, continued to spend on goods as well. The unemployment rate fell 0.1 percentage points in the second quarter to 5.9% in June according to the Bureau of Labor Statistics. Meanwhile, seasonally adjusted total non-farm payroll employment rose by an average 567 thousand workers per month to 145.8 million employees, but remains roughly 6.7 million employees below the number of employed in February 2020 at the onset of the COVID-19 pandemic. Employment gains generally disappointed expectations for even better gains into the economic reopening, yet a number of factors including lingering COVID-19 fears, job skill mismatches, and elevated employment benefits appear to have held back employment growth. Wage growth, as measured by the year-over-year change in private sector average hourly earnings, contracted further during the quarter, reading 3.6% in June compared to 4.3% in March 2021. The slowdown in wage growth remains mostly a statistical anomaly, driven by a relatively larger share of job losses among lower-paid employees at the height of the pandemic, which inflated wage gains for most of 2020. As these wage gains fall out of year-over-year calculations, wage gains tend to be somewhat depressed on these metrics. Of note, wage growth has been relatively strong in reopening sectors of late. For example, average hourly earnings in the leisure and hospitality sector have exceeded 1.0% month-over-month growth for four consecutive months, suggesting healthy earnings growth in a sector that is seeing strong demand for labor in the middle of the economic reopening. Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), have risen sharply from their pandemic lows and are currently running meaningfully above the Fed’s 2% inflation target. The headline PCE measure increased by 3.99% year-over-year in June 2021, while the more stable core PCE measure, which excludes volatile food and energy prices, registered 3.54% year-over-year increase, above the 1.97% year-over-year 50 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis growth measured in March 2021. The acceleration in price increases was driven by the combination of strong demand for goods and services and simultaneous supply bottlenecks. For example, consumers, wary of COVID-19 related risks on public transportation but supported by excess savings from financial stimulus, opted to purchase increased amounts of cars. Car manufacturers, meanwhile, were unable to meet increased demand as the pandemic led to disruptions to supply chains and a shortage in microchip production limited total production of new cars. These bottlenecks are likely to ease in months ahead as production catches up to demand, thereby lowering price pressures. Disregarding the current sharp rise in inflation measures for now, the FOMC maintained the Federal Funds Target Rate in the 0.00% - 0.25% range and continued to signal that it will maintain the rate at current levels for an extended period of time. In addition, the FOMC continued its quantitative easing program. The combined Fed actions have continued to support financial conditions and market functioning, which in turn has helped the economic recovery. The following table below presents interest rates and spreads at each date presented: June 30, 2021 December 31, 2020 June 30, 2020 30-Year mortgage current coupon 1.83% 1.34% 1.57% Mortgage basis 36 bps 43 bps 91 bps 10-Year U.S. Treasury rate 1.47% 0.91% 0.66% LIBOR 1-Month 0.10% 0.14% 0.15% 6-Month 0.16% 0.26% 0.26% London Interbank Offered Rate (“LIBOR”) Transition Working Group On March 5, 2021, the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincides with the March 5, 2021 announcement of LIBOR's administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate. We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates. Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders. The committee also continues to engage with industry working groups and other market participants regarding the transition. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability. Similar to the rest of the market, the bulk of our exposure is in derivatives contracts. Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments with transition currently in process and adequate time left to resolve. Results of Operations The results of our operations are affected by various factors, many of which are beyond our control. Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A. “Risk Factors” of our most recent Annual Report on Form 10-K and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements. To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers. Refer to the “Non-GAAP Financial Measures” section for additional information. Commencing with our financial results for the quarter ended June 30, 2021 and for subsequent reporting periods, we relabeled “Core Earnings (excluding PAA)” as “Earnings Available for Distribution” (“EAD”). Earnings Available for Distribution, which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with U.S. 51 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis generally accepted accounting principles (“GAAP”), has replaced our prior presentation of Core Earnings (excluding PAA). In addition, Core Earnings (excluding PAA) results from prior reporting periods has been relabeled Earnings Available for Distribution. In line with evolving industry practices, we believe the term Earnings Available for Distribution more accurately reflects the principal purpose of the measure than the term Core Earnings (excluding PAA) and will serve as a useful indicator for investors in evaluating our performance and our ability to pay dividends. The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods. As such, Earnings Available for Distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities. Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income. Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution. Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity-related or volume-related expenses as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Refer to the “General and Administrative Expenses” section for additional information. 52 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Net Income (Loss) Summary The following table presents financial information related to our results of operations as of and for the three and six months ended June 30, 2021 and 2020. As of and for the Three Months Ended June 30, As of and for the Six Months Ended June 30, 2021 2020 2021 2020 (dollars in thousands, except per share data) Interest income $ 383,906 $ 584,812 $ 1,147,284 $ 1,139,838 Interest expense 61,047 186,032 137,020 689,505 Net interest income 322,859 398,780 1,010,264 450,333 Realized and unrealized gains (losses) (560,722) 511,951 537,123 (3,143,790) Other income (loss) 1,675 12,328 15,143 19,490 Less: Total general and administrative expenses 53,526 64,770 101,431 134,635 Income (loss) before income taxes (289,714) 858,289 1,461,099 (2,808,602) Income taxes 5,134 2,055 4,813 (24,647) Net income (loss) (294,848) 856,234 1,456,286 (2,783,955) Less: Net income (loss) attributable to noncontrolling interests 794 32 1,115 98 Net income (loss) attributable to Annaly (295,642) 856,202 1,455,171 (2,784,053) Less: Dividends on preferred stock 26,883 35,509 53,766 71,018 Net income (loss) available (related) to common stockholders $ (322,525) $ 820,693 $ 1,401,405 $ (2,855,071) Net income (loss) per share available (related) to common stockholders Basic $ (0.23) $ 0.58 $ 1.00 $ (2.00) Diluted $ (0.23) $ 0.58 $ 1.00 $ (2.00) Weighted average number of common shares outstanding Basic 1,410,239,138 1,423,909,112 1,404,755,496 1,427,451,716 Diluted 1,410,239,138 1,423,909,112 1,405,764,272 1,427,451,716 Other information Investment portfolio at period-end $ 80,222,151 $ 90,442,332 $ 80,222,151 $ 90,442,332 Average total assets $ 83,872,947 $ 95,187,964 $ 85,400,332 $ 106,890,336 Average equity $ 13,853,386 $ 13,252,567 $ 13,909,522 $ 14,100,492 GAAP leverage at period-end (1) 4.7:1 5.5:1 4.7:1 5.5:1 GAAP capital ratio at period-end (2) 16.6 % 14.8 % 16.6 % 14.8 % Annualized return on average total assets (1.41 %) 3.60 % 3.41 % (5.21 %) Annualized return on average equity (8.51 %) 25.84 % 20.94 % (39.49 %) Net interest margin (3) 1.66 % 1.89 % 2.54 % 0.90 % Average yield on interest earning assets (4) 1.97 % 2.77 % 2.89 % 2.27 % Average GAAP cost of interest bearing liabilities (5) 0.35 % 0.96 % 0.39 % 1.48 % Net interest spread 1.62 % 1.81 % 2.50 % 0.79 % Weighted average experienced CPR for the period 26.4 % 19.5 % 25.2 % 16.6 % Weighted average projected long-term CPR at period-end 12.9 % 18.0 % 12.9 % 18.0 % Common stock book value per share $ 8.37 $ 8.39 $ 8.37 $ 8.39 Non-GAAP metrics (6) Interest income (excluding PAA) $ 537,513 $ 636,554 $ 1,086,321 $ 1,482,302 Economic interest expense (5) $ 144,134 $ 250,593 $ 299,854 $ 768,046 Economic net interest income (excluding PAA) $ 393,379 $ 385,961 $ 786,467 $ 714,256 Premium amortization adjustment cost (benefit) $ 153,607 $ 51,742 $ (60,963) $ 342,464 Earnings available for distribution (7) $ 451,358 $ 424,580 $ 890,877 $ 754,798 Earnings available for distribution per common share $ 0.30 $ 0.27 $ 0.59 $ 0.48 Annualized EAD return on average equity (excluding PAA) 13.05 % 12.82 % 12.82 % 10.71 % Economic leverage at period-end (1) 5.8:1 6.4:1 5.8:1 6.4:1 Economic capital ratio at period-end (2) 14.3 % 13.0 % 14.3 % 13.0 % Net interest margin (excluding PAA) (3) 2.09 % 1.88 % 2.00 % 1.50 % Average yield on interest earning assets (excluding PAA) (4) 2.76 % 3.01 % 2.73 % 2.96 % Average economic cost of interest bearing liabilities (5) 0.83 % 1.29 % 0.85 % 1.65 % Net interest spread (excluding PAA) 1.93 % 1.72 % 1.88 % 1.31 % 53 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES