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Item 1. Financial Statements

2021-11-05 compared with 2021-08-06 · 207 added, 177 removed, 778 unchanged (33% of the section changed)

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.

loan required a valuation allowance of $ 28.4 million and had a nonrecurring fair value measurement of $ 52.7 million as of September 30, 2021.

This nonrecurring fair value measurement is categorized as Level 3 of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value.

The real estate held for sale is carried at lower of cost or fair value and was based upon the sale price and allocated to individual properties to determine if a valuation allowance was necessary.

DERIVATIVE INSTRUMENTS

Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S.

Treasury and Eurodollar futures contracts and certain forward purchase commitments.

The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps.

In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts.

The Company may also enter into TBA derivatives, MBS options and U.S.

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

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

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

Treasuries and market liquidity.

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

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

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.

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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).

Derivatives are recognized 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.

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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.

At September 30, 2021 and December 31, 2020, ($ 0.2 ) 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.

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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.

If the Company

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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

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

Derivatives Instruments September 30, 2021 December 31, 2020

Assets (dollars in thousands)

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Total derivative liabilities $ 912,134 $ 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

(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 425.0 million and $ 504.0 million at September 30, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche.

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

September 30, 2021

Maturity Current Notional (1)(2)

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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.

(1) As of September 30, 2021, 19 %, 54 % and 27 % 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.

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

(3) At September 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

June 30, 2021

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

September 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

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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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

September 30, 2021

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

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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

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

September 30, 2021

Notional - Long

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$ — $ ( 1,067,000 ) 2.00

Treasury futures - 5 year

— ( 3,274,000 ) 4.41

Treasury futures - 10 year and greater

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Total $ — $ ( 10,423,800 ) 6.60

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

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

The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at September 30, 2021 and December 31, 2020, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

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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.

June 30, 2021

September 30, 2021

Amounts Eligible for Offset

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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 )

September 30, 2021 $ ( 54,411 ) $ ( 1,196,417 ) $ 1,380,946

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

For the nine months ended

September 30, 2021 $ ( 217,245 ) $ ( 1,196,417 ) $ 2,012,141

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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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

Three Months Ended September 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

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Credit derivatives 2,616 ( 2,320 ) 296

$ ( 357,808 )

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

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

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Total $ 169,316

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

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

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Total $ 72,731

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

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

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Total $ 546,658

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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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.

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.

derivative instruments with the aforementioned features that are in a net liability position at September 30, 2021 was approximately $ 612.7 million, which represents the maximum amount the Company would be required to pay upon termination.

This amount is fully collateralized.

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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.

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 September 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.

If the inputs used to measure the financial instrument 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:

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

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.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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.

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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.

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

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

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

June 30, 2021

September 30, 2021

Level 1 Level 2 Level 3 Total

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Residential mortgage loans — 1,686,268 — 1,686,268

Residential mortgage loan warehouse facility — 1,431 — 1,431

Mortgage servicing rights — — 572,259 572,259

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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

September 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 3.0 % - 12.6 % ( 7.7 %)

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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

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

September 30, 2021 December 31, 2020

Value Carrying

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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.

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

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

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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.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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

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

Intangible Assets, net

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Impairment ( 9,549 )

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

Intangible assets transferred to disposal group held for sale ( 14,528 )

amortization expense ( 6,078 )

Balance at June 30, 2021

Balance at September 30, 2021

SECURED FINANCING

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

The Company had outstanding $ 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

The Company had outstanding $ 55.5 billion and $ 64.8 billion of repurchase agreements with weighted average remaining maturities of 75 days and 64 days at September 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 $ 1.3 billion at September 30, 2021.

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

September 30, 2021

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

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

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

(2) No repurchase agreements had a remaining maturity over 1 year at September 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

September 30, 2021 December 31, 2020

Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements

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Netted amounts $ — $ 55,475,420 $ — $ 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.

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

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.

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 $ 60.3 billion and $ 163.2 million, respectively, at September 30, 2021 and $ 70.6 billion and $ 196.9 million, respectively, at December 31, 2020.

CAPITAL STOCK

(A) Common Stock

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

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at September 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

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

2,936,500,000 2,914,850,000 1,449,935,017 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 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

ANNALY CAPITAL MANAGEMENT, INC.

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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.

Program replaced the Prior Share Repurchase Program.

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

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

In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2021 and 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.

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

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.

During the three and nine months ended September 30, 2021, the Company issued 5.6 million and 51.1 million shares, respectively, for proceeds of $ 49.0 million and $ 469.5 million, respectively, 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 nine months ended September 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.

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

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

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Date At Which Dividend Rate Becomes Floating Floating Annual Rate

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

September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020

Fixed-rate (dollars in thousands)

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

Through 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.

Through September 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 Fixed-to-Floating Rate Cumulative Preferred Stock and Series I Fixed-to-Floating Rate Cumulative Preferred Stock rank senior to the common stock of the Company.

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

For the Three Months Ended For the Six Months Ended

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

For the Three Months Ended For the Nine Months Ended

September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

(dollars in thousands, except per share data)

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

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

Date of distributions paid to common stockholders after period end October 29, 2021 October 30, 2020 October 29, 2021 October 30, 2020

Dividends declared to series D preferred stockholders $ — $ 8,625 $ — $ 25,875

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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,

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

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

2021 2020 2021 2020

Interest income (dollars in thousands)

Residential Securities (1)

$ 275,278 $ 457,684 $ 919,912 $ 868,064

Agency Securities $ 299,898 $ 428,088 $ 1,183,353 $ 1,264,171

Residential credit securities 20,774 11,414 57,231 43,395

Residential mortgage loans (1)

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NET INCOME (LOSS) PER COMMON SHARE

The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and 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

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

For the Three Months Ended For the Nine Months Ended

September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

(dollars in thousands, except per share data)

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Diluted $ 0.34 $ 0.70 $ 1.33 $ ( 1.32 )

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

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

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

For the three months ended September 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.

To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income

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Financial Statements

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.

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.

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

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

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

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

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

During the three 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.

During the three and nine months ended September 30, 2021, the Company recorded ($ 6.8 ) million and ($ 2.0 ) million, respectively, of income tax (benefit) attributable to its TRSs.

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

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

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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.

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.

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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.

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Financial Statements

and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties, credit rating monitoring and active servicer oversight.

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

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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.

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

LEASE COMMITMENTS AND CONTINGENCIES

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

The lease cost for the three and 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:

The lease cost for the three and nine months ended September 30, 2021 was $ 0.8 million and $ 2.5 million, respectively.

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

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Financial Statements

Operating Leases Classification June 30, 2021

Operating Leases Classification September 30, 2021

Assets (dollars in thousands)

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

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

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

ARCOLA REGULATORY REQUIREMENTS

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

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

At September 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.

Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at September 30, 2021 was $ 515.3 million with excess net capital of $ 515.0 million.

SUBSEQUENT EVENTS

In October 2021, the Company completed and closed the securitizations of residential mortgage loans, OBX 2021-J3 Trust and OBX 2021-INV2, with face values of $ 453.6 million and $ 343.6 million, respectively.

The securitizations represented financing

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Financial Statements

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.

transactions which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company.

In October 2021, the Company completed and closed the fundraising period for the Fund Entities.

Through the conclusion of the fundraising period, an aggregate of $ 371.4 million in capital was committed to the Fund Entities.

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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.

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

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

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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.

On March 25, 2021, we announced that we entered into a definitive agreement to sell 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.

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

Certain employees who primarily supported the CRE business joined Slate in connection with the sale.

During the three months ended September 30, 2021, the majority of assets held for sale and the associated liabilities were transferred to Slate with the remaining assets expected to be transferred by the end of the year subject to regulatory approvals.

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.

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

The pace of economic growth slowed during the third quarter as rising COVID-19 cases from the Delta wave, production bottlenecks and global supply chain disruptions prevented a faster economic recovery.

In line with lower consumption and investment activity, labor market gains have also slowed relative to the very strong pace at the beginning of the summer.

While inflation remains elevated by higher goods and energy prices, record home price appreciation has started to filter into inflation’s shelter component, suggesting that price pressures may persist for longer than previously anticipated.

Despite the moderation in the pace of the economic recovery, financial conditions remained accommodative, and liquidity was ample in financial markets, best seen by the record $1.6 trillion usage of the Federal Reserve’s (the “Fed”) Reverse Repo Facility on September 30, 2021.

In light of this environment, investors have focused on the Fed’s reduction in its pace of asset purchases (“Taper”).

The Fed’s transparent communications have helped limit the market impact to both rates and Agency MBS ahead of the official announcement of the Taper, which is set to begin in November 2021 and likely to conclude in the summer of 2022.

Moreover, the elevated inflation readings and more hawkish messaging from central banks have pulled forward investors’ expectation of a rate hike, with markets currently pricing as much as two hikes in 2022.

Annaly’s portfolio generated a positive economic return of 2.9%, GAAP net income per common share of $0.34 and earnings available for distribution per common share of $0.28 cents in the third quarter of 2021 as a result of a modestly improved operating environment for Agency MBS.

Mortgages performed in line with hedges although interest rates fluctuated throughout the third quarter of 2021.

Ultimately, the sector benefited from the aforementioned clarity surrounding the upcoming Taper.

During the third quarter of 2021, we increased our Agency portfolio by nearly $3 billion, utilizing a portion of the proceeds from the Commercial Real Estate sale.

Additions to our Agency portfolio were primarily in TBA securities, as we temporarily took advantage of continued attractive financing conditions in that market while assessing other opportunities to deploy the capital.

Heading into the Taper, we believe our balanced approach to portfolio composition continues to be a prudent strategy.

In addition to the conservative positioning of our portfolio, we maintained a low leverage profile with our economic leverage unchanged quarter-over-quarter at 5.8x.

Capital allocation shifted marginally further toward credit, reaching 30% in the third quarter, up from 29% in the prior quarter, as Annaly’s Residential Credit group had another strong quarter.

Onslow Bay’s securitization platform remains active, completing nearly $2 billion of securitizations since the start of the third quarter and nearly $3 billion of securitizations year-to-date.

Our residential whole loan correspondent channel, which launched in April, continues to gain momentum in the marketplace, and Annaly’s large capital base and market expertise uniquely position Onslow Bay as an aggregator within the industry.

In addition, Annaly grew its holdings of mortgage servicing rights by more than 40% with the portfolio representing $575 million in market value and 4% of dedicated capital.

Finally, Annaly’s Middle Market Lending strategy managed $2.3

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Management’s Discussion and Analysis

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

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

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

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

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

billion in funded assets at quarter end, including the nearly $450 million in assets supported by the inaugural private closed-end middle market lending fund, which closed subsequent to quarter end.

Earnings available for distribution and economic leverage 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.

Business Continuity

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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.

At the present, we expect employees to return to the office more regularly in the medium term, subject to continued successful vaccine rollout and revised guidance from federal, state and local authorities.

Economic Environment

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

The pace of economic growth slowed in the third quarter relative to the first half of 2021, with U.S.

gross domestic product (“GDP”) rising 2.0 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

Growth moderated as spread of the COVID-19 Delta variant and fading stimulus payments led to a moderation in consumer spending, while global supply chain disruptions limited industrial production at the margin.

Despite the slowdown, U.S.

economic growth is expected to record its highest annual growth in over thirty years as vaccinations and government stimulus payments have facilitated recovery following the sharp, pandemic-induced downturn in 2020.

According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose by an average 550 thousand workers during the third quarter of 2021, which nearly matches average monthly employment gains seen in 2021 year-to-date.

Although parts of the summer saw very strong labor market gains, best seen in the seasonally adjusted 1.1 million jobs gained in July, the labor market recovery has slowed somewhat in recent months as the Delta wave reduced service sector hiring.

Despite the moderation in non-farm payrolls growth, the unemployment rate fell 1.1 percentage points in the third quarter to 4.8% in September 2021.

Wage growth, as measured by the year-over-year change in private sector average hourly earnings, accelerated during the quarter, reading 4.6% in September 2021 compared to 3.7% in June 2021.

The improvement in wage growth was driven by a combination of factors, including more muted wage growth during the summer of 2020 that is now being removed from year-over-year change calculations.

In addition, employers in sectors that either have strong demand for labor or whose workers are subject to elevated COVID-19 exposure risks have faced increased difficulties hiring or retaining workers without increasing wages.

Business demand for labor and employees’ willingness to quit their jobs and seek other employment both rose to all-time highs during the quarter.

Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), remained meaningfully above the Fed’s 2% inflation target during the third quarter.

The headline PCE measure increased by 4.38% year-over-year in September 2021, while the more stable core PCE measure, which excludes volatile food and energy prices, registered a 3.62% year-over-year increase, in line with the 3.59% year-over-year growth measured in June 2021.

Prices remain elevated, in large part a function of muted inflation during the summer and fall of 2020, but also due to strong demand for goods and services, and rising food and commodity prices.

Although many of the factors driving inflation could normalize over the medium-term, rising shelter inflation driven by record home price appreciation will likely keep inflation higher for longer.

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Management’s Discussion and Analysis

growth measured in March 2021.

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

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

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

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

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

In addition, the FOMC continued its quantitative easing program.

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

The Federal Open Market Committee (“FOMC”) maintained the Federal Funds Target Rate in the 0.00% - 0.25% range during the third quarter of 2021 and continued to signal that it will maintain that range for an extended period.

While the FOMC continued its quantitative easing program, it signaled at its September FOMC meeting that a gradual removal of asset purchases may soon be warranted.

Subsequent to quarter end, the FOMC formally announced a gradual reduction in its asset purchases beginning in November 2021.

Purchases are expected to be reduced at a pace of $10 billion a month in U.S.

Treasuries and $5 billion a month in U.S.

Agency MBS, suggesting the Tapering process could conclude by the middle of 2022.

Despite the anticipated removal of accommodation, financial conditions remain very accommodative, which in turn has helped the economic recovery.

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

Treasury rate rose slightly from 1.47% on June 30, 2021 to 1.49% on September 30, 2021.

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

Treasury rate, widened over the quarter to 48 basis points (bps) at the end of the quarter.

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

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

September 30, 2021 December 31, 2020 September 30, 2020

30-Year mortgage current coupon 1.97% 1.34% 1.40%

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

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

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

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 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.

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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.

The State of New York approved legislative solutions for contracts such as residential whole loans that are governed by New York state law, although more legislative work is needed in other states and at the federal level.

We are supportive of the potential legislative solutions at the state and federal level.

We are considering all available options with respect to our preferred stock, which include liability management actions such as tenders, calls, exchange offers, language amendments, changing the calculation agent, and/or allowing fallbacks to trigger.

As of September 30, 2021, we expect to have $1.5 billion of USD LIBOR-linked preferred stock that may remain outstanding beyond the June 30, 2023 cessation date.

Results of Operations

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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.

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

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Management’s Discussion and Analysis

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

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

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.

Earnings Available for Distribution, which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with GAAP, has replaced our prior presentation of Core Earnings (excluding PAA).

In addition, Core Earnings (excluding PAA) results from prior reporting periods have 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.

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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,

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

As of and for the Three Months Ended September 30,

As of and for the Nine Months Ended September 30,

2021 2020 2021 2020

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$ 437,471 $ 482,323 $ 1,328,348 $ 1,237,121

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

Earnings available for distribution per average common share $ 0.28 $ 0.32 $ 0.88 $ 0.80

Annualized EAD return on average equity (excluding PAA) 12.81 % 13.79 % 12.79 % 11.68 %

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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 1. Financial Statements