What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 232 added, 240 removed, 1309 unchanged (27% of the section changed)

19 unchanged sentences

(7) Excludes dividends on preferred stock.

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

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

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

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

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

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

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

Net income (loss) was $521.5 million, which includes $2.3 million attributable to noncontrolling interests, or $0.34 per average basic common share, for the three months ended September 30, 2021 compared to $1.0 billion, which includes ($0.1) million attributable to noncontrolling interests, or $0.70 per average basic common share, for the same period in 2020.

We attribute the majority of the change in net income (loss) to unfavorable changes in net gains (losses) on other derivatives and financial instruments, net gains (losses) on disposal of investments and net interest income.

Net gains (losses) on other derivatives was ($45.2) million for the three months ended September 30, 2021 compared to $169.3 million for the same period in 2020.

Net gains (losses) on disposal of investments and other was $12.0 million for the three months ended September 30, 2021 compared to $198.9 million for the same period in 2020.

Net interest income for the three months ended September 30, 2021 was $362.5 million compared to $447.3 million for the same period in 2020.

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

Net income (loss) was $1.5 billion, which includes $1.1 million attributable to noncontrolling interests, or $1.00 per average basic common share, for the six months ended June 30, 2021 compared to ($2.8) billion which includes $0.1 million attributable to noncontrolling interests, or ($2.00) per average basic common share, for the same period in 2020.

Net income (loss) was $2.0 billion, which includes $3.4 million attributable to noncontrolling interests, or $1.34 per average basic common share, for the nine months ended September 30, 2021 compared to ($1.8) billion, or ($1.32) per average basic common share, for the same period in 2020.

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

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

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

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

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

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

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

Net unrealized gains (losses) on interest rate swaps was $2.0 billion for the nine months ended September 30, 2021 compared to ($1.2) billion for the same period in 2020.

Realized losses on termination or maturity of interest rate swaps was ($1.2) billion for the nine months ended September 30, 2021, as our swaps portfolio was repositioned to reduce exposure to LIBOR, compared to ($1.9) billion for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings for the nine months ended September 30, 2021 was $199.0 million compared to ($354.1) million for the same period in 2020.

Net interest income for the nine months ended September 30, 2021 was $1.4 billion compared to $897.7 million for the same period in 2020.

Net gains (losses) on disposal of investments and other was ($37.6) million for the nine months ended September 30, 2021 compared to $652.2 million for the same period in 2020.

Net gains (losses) on other derivatives was $73.9 million for the nine months ended September 30, 2021 compared to $546.7 million for the same period in 2020.

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

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

The change in earnings available for distribution during the three months ended June 30, 2021 compared to the same period in 2020 was primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities, and higher TBA dollar roll

Earnings available for distribution were $437.5 million, or $0.28 per average common share, for the three months ended September 30, 2021, compared to $482.3 million, or $0.32 per average common share, for the same period in 2020.

The change in earnings available for distribution during the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to the runoff of higher-yielding assets and the reduction in average interest earning assets.

Earnings available for distribution were $1.3 billion, or $0.88 per average common share, for the nine months ended September 30, 2021, compared to $1.2 billion, or $0.80 per average common share, for the same period in 2020.

The change in earnings available for distribution during the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities and higher TBA dollar roll

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

income, partially offset by lower coupon income resulting from lower average interest earning assets and unfavorable changes in the net interest component of interest rate swaps.

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

The change in earnings available for distribution during the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities and higher TBA dollar roll income, partially offset by unfavorable changes in the net interest component of interest rate swaps.

income, partially offset by lower coupon income resulting from lower average interest earning assets and an unfavorable change in the net interest component of interest rate swaps.

Non-GAAP Financial Measures

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

provide additional transparency into the operating performance of our portfolio.

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

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2021 2020 2021 2020

37 unchanged sentences

12.81 % 13.79 % 12.79 % 11.68 %

(1) Includes $0.6 million and $3.8 million for the three months ended June 30, 2021 and 2020, respectively, and ($4.7) million and $4.5 million for the six months ended June 30, 2021 and 2020, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

(1) Includes ($0.6) million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and ($5.3) million and $4.6 million for the nine months ended September 30, 2021 and 2020, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

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

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

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

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

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

(4) The three and nine months ended September 30, 2021 and 2020 includes costs incurred in connection with securitizations of residential whole loans.

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

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

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

CMBX coupon income totaled $1.2 million and $1.5 million for the three months ended September 30, 2021 and 2020, respectively, and $4.1 million and $4.3 million for the nine months ended September 30, 2021 and 2020, respectively.

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

(7) Represents a non-GAAP financial measure.

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

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2021 2020 2021 2020

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

2021 June 30,

September 30,

2021 September 30,

Economic leverage ratio reconciliation

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$ 60,894,753 $ 72,030,330

Less Non-Recourse Debt:

Credit facilities (1)

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Non-recourse debt included in liabilities of disposal group held for sale (113,362) —

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

Total recourse debt $ 55,475,420 $ 64,666,290

Plus / (Less):

7 unchanged sentences

Economic leverage ratio (2)

* Represents a non-GAAP financial measure.

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

(2) Represents a non-GAAP financial measure.

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

ANNALY CAPITAL MANAGEMENT, INC.

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

2021 June 30,

September 30,

2021 September 30,

Economic capital ratio reconciliation

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Economic capital ratio (3)(4)

* Represents a non-GAAP financial measure.

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

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

(3) Represents a non-GAAP financial measure.

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

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

7 unchanged sentences

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

We did not enter into any MAC interest rate swaps during the three and six months ended June 30, 2021.

We did not enter into any MAC interest rate swaps during the three and nine months ended September 30, 2021.

Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.

The following tables provide GAAP measures of interest expense and net interest income and details with respect to reconciling the aforementioned line items on a non-GAAP basis for each respective period:

The following tables present a reconciliation of GAAP interest income and interest expense to non-GAAP interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA), respectively, for the periods presented:

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Interest Income (excluding PAA)

2 unchanged sentences

For the three months ended (dollars in thousands)

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

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

For the six months ended

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

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

September 30, 2021 $ 412,972 $ 60,726 $ 473,698

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

For the nine months ended

September 30, 2021 $ 1,560,256 $ (237) $ 1,560,019

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

(1) Represents a non-GAAP financial measure.

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

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Management’s Discussion and Analysis

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

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For the three months ended (dollars in thousands)

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

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

For the six months ended

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

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

September 30, 2021 $ 50,438 $ 54,411 $ 104,849 $ 362,534 $ 54,411 $ 308,123 $ 60,726 $ 368,849

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

For the nine months ended

September 30, 2021 $ 187,458 $ 217,245 $ 404,703 $ 1,372,798 $ 217,245 $ 1,155,553 $ (237) $ 1,155,316

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

(1) Represents a non-GAAP financial measure.

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For the three months ended

June 30, 2021 26.4 % 12.9 %

June 30, 2020 19.5 % 18.0 %

For the six months ended

June 30, 2021 25.2 % 12.9 %

June 30, 2020 16.6 % 18.0 %

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

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

September 30, 2021 23.1 % 12.7 %

September 30, 2020 22.9 % 17.1 %

For the nine months ended

September 30, 2021 24.5 % 12.7 %

September 30, 2020 18.7 % 17.1 %

(1) For the three and nine months ended September 30, 2021 and 2020, respectively.

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

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For the three months ended (dollars in thousands)

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

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

For the six months ended

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

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

September 30, 2021 $ 72,145,283 $ 473,698 2.63 % $ 62,614,042 $ 104,849 0.66 % 368,849 1.97 %

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

For the nine months ended

September 30, 2021 $ 77,061,130 $ 1,560,019 2.70 % $ 67,695,162 $ 404,703 0.79 % 1,155,316 1.91 %

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

(1) Based on amortized cost.

7 unchanged sentences

TBA Dollar Roll and CMBX Coupon Income (2)

Interest Expense Net Interest Component of Interest Rate Swaps Subtotal Average Interest Earnings Assets Average TBA Contract and CMBX Balances Subtotal Net Interest Margin (excluding PAA) (1)

Economic Interest Expense (1)

Subtotal Average Interest Earnings Assets Average TBA Contract and CMBX Balances Subtotal Net Interest Margin (excluding PAA) (1)

For the three months ended (dollars in thousands)

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

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

For the six months ended

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

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

September 30, 2021 $ 473,698 115,586 (104,849) $ 484,435 $ 72,145,283 22,739,226 $ 94,884,509 2.04 %

September 30, 2020 $ 596,322 114,092 (177,655) $ 532,759 $ 83,286,119 20,429,935 $ 103,716,054 2.05 %

For the nine months ended

September 30, 2021 $ 1,560,019 326,111 (404,703) $ 1,481,427 $ 77,061,130 21,122,086 $ 98,183,216 2.01 %

September 30, 2020 $ 2,078,624 256,520 (945,701) $ 1,389,443 $ 94,607,284 16,341,140 $ 110,948,424 1.67 %

(1) Represents a non-GAAP financial measure.

1 unchanged sentence

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

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

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

CMBX coupon income totaled $1.2 million and $4.1 million for the three and nine months ended September 30, 2021, respectively.

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

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

Economic Cost of Funds on Average Interest Bearing Liabilities

Average Economic Cost of Interest Bearing Liabilities

Interest Bearing

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Period End Economic

Expense (1)(2)

Average Economic

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For the three months ended

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

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

For the six months ended

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

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

September 30, 2021 $ 62,614,042 $ 60,781,391 $ 104,849 0.66 % 0.09 % 0.15 % (0.06 %) 0.57 % 0.51 %

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

For the nine months ended

September 30, 2021 $ 67,695,162 $ 60,781,391 $ 404,703 0.79 % 0.10 % 0.19 % (0.09 %) 0.69 % 0.60 %

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

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

1 unchanged sentence

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

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

Economic interest expense decreased by $468.2 million for the six months ended June 30, 2021 compared to the same period in 2020.

The change was due to lower borrowing rates and a decrease in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was ($83.1) million for the three months ended June 30, 2021 compared to ($64.6) million for the same period in 2020 and ($162.8) million for the six months ended June 30, 2021 compared to ($78.5) million for the same period in 2020.

Economic interest expense decreased by $72.8 million for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to lower borrowing rates and a decrease in average interest bearing liabilities.

Economic interest expense decreased by $541.0 million for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to lower borrowing rates and a decrease in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was ($217.2) million for the nine months ended September 30, 2021 compared to ($141.1) million for the same period in 2020.

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

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

At June 30, 2021 and December 31, 2020, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans.

At September 30, 2021 and December 31, 2020, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans.

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

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Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swaps, net gains (losses) on disposal of investments and other, net gains (losses) on other derivatives and financial instruments and net unrealized gains (losses) on instruments measured at fair value through earnings.

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

For the Three Months Ended June 30,

For the Six Months Ended June 30,

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2021 2020 2021 2020

10 unchanged sentences

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

For the Three Months Ended June 30, 2021 and 2020

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

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

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

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

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

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

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

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

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

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

For the Three Months Ended September 30, 2021 and 2020

Net gains (losses) on interest rate swaps for the three months ended September 30, 2021 was $130.1 million compared to $107.4 million for the same period in 2020, primarily attributable to a favorable change in unrealized gains (losses) on interest rate swaps, partially offset by a unfavorable change in realized gains (losses) on termination or maturity of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $1.4 billion for the three months ended September 30, 2021, resulting from the unwinding of interest rate swaps during the period, compared to $170.3 million for the same period in 2020.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.2) billion for the three months ended September 30, 2021, as we repositioned our swap portfolio to reduce our exposure to LIBOR and terminated fixed-rate payer and receiver interest rate swaps with notional amounts of $14.7 billion and $14.8 billion, respectively, compared to ($0.4) million for the same period in 2020, resulting from terminations of fixed-rate payer interest rate swaps with a notional amount of $375.0 million.

Net gains (losses) on disposal of investments and other was $12.0 million for the three months ended September 30, 2021 compared to $198.9 million for the same period in 2020.

For the three months ended September 30, 2021, we disposed of Residential Securities with a carrying value of $4.8 billion for an aggregate net gain of $26.7 million.

For the same period in 2020, we recognized a realized gain of $104.8 million as a result of deconsolidating a multifamily VIE and we disposed of Residential Securities with a carrying value of $2.8 billion for an aggregate net gain of $103.9 million.

Net gains (losses) on other derivatives and financial instruments was ($45.2) million for the three months ended September 30, 2021 compared to $169.3 million for the same period in 2020.

The change in net gains (losses) on other derivatives and financial instruments was primarily due to unfavorable changes in net gains (losses) on TBA derivatives, which was ($27.3) million for the three months ended September 30, 2021 compared to $176.2 million for the same period in 2020, and interest rate swaptions, which was ($68.9) million for the three months ended September 30, 2021 compared to ($6.6) million for the same period in 2020, partially offset by a favorable change in net gains (losses) on futures derivatives, which was $49.8 million for the three months ended September 30, 2021 compared to ($9.7) million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $90.8 million for the three months ended September 30, 2021 compared to $121.3 million for the same period in 2020, primarily due to unfavorable changes in unrealized gains (losses) on securitized debt of consolidated VIEs backed by Agency mortgage-backed securities of ($78.4) million, securitized residential whole loans of consolidated VIEs of ($59.3) million and securitized commercial loans of ($39.7) million, partially offset by favorable changes in MSR, including Interests in MSR, of $83.1 million, commercial securitized debt of consolidated VIEs of $49.4 million and Agency interest-only securities of $22.4 million for the three months ended September 30, 2021 compared to the same period in 2020.

For the three months ended September 30, 2021 and 2020, net loan loss reversals were $6.1 million on corporate loans and $22.0 million on commercial mortgage and corporate loans, respectively.

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

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Management’s Discussion and Analysis

For the Six Months Ended June 30, 2021 and 2020

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

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

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

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

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

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

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

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

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

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

For the Nine Months Ended September 30, 2021 and 2020

Net gains (losses) on interest rate swaps for the nine months ended September 30, 2021 was $598.5 million compared to ($3.2) billion for the same period in 2020, primarily attributable to favorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination or maturity of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $2.0 billion for the nine months ended September 30, 2021, reflecting a rise in forward interest rates during the period, compared to ($1.2) billion for the same period in 2020, reflecting a decline in forward interest rates during the earlier period.

Realized gains (losses) on termination or maturity of interest rate swaps was ($1.2) billion, as we repositioned our swap portfolio to reduce our exposure to LIBOR and terminated fixed-rate payer and receiver interest rate swaps with notional amounts of $14.7 billion and $14.8 billion, respectively, for the nine months ended September 30, 2021 compared to ($1.9) billion, resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $65.4 billion and $38.1 billion, respectively, for the same period in 2020.

Net gains (losses) on disposal of investments and other was ($37.6) million for the nine months ended September 30, 2021 compared to $652.2 million for the same period in 2020.

For the nine months ended September 30, 2021, we disposed of Residential Securities with a carrying value of $11.1 billion for an aggregate net gain of $0.8 million.

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

Net gains (losses) on other derivatives was $73.9 million for the nine months ended September 30, 2021 compared to $546.7 million for the same period in 2020.

The change in net gains (losses) on other derivatives was primarily due to the unfavorable change in net gains (losses) on TBA derivatives, which was ($372.1) million for the nine months ended September 30, 2021 compared to $812.1 million for the same period in 2020, partially offset by the favorable change in futures derivatives, which was $468.5 million for the nine months ended September 30, 2021 compared to ($299.6) million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $199.0 million for the nine months ended September 30, 2021 compared to ($354.1) million for the same period in 2020, primarily due to favorable changes in unrealized gains (losses) on securitized commercial loans of $281.1 million, MSR, including Interests in MSR, of $237.0 million, credit risk transfer securities of $80.3 million, securitized debt of consolidated VIEs backed by Agency mortgage-backed securities of $53.8 million, residential securitized debt of consolidated VIEs of $50.3 million and non-Agency MBS of $48.1 million, partially offset by an unfavorable change on commercial securitized debt of consolidated VIEs of ($221.4) million for the nine months ended September 30, 2021 compared to the same period in 2020.

For the nine months ended September 30, 2021 and 2020, net loan loss (provisions) reversals of $145.3 million and ($146.1) million, respectively, was recorded on commercial mortgage and corporate loans.

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

Other Income (Loss)

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

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

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

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

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

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Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items.

As such, prior periods have been conformed to the current presentation with Other general and administrative expenses for the three months ended March 31, 2021 adjusted downward by $1.8 million and for the three and six months ended June 30, 2020 adjusted downward by $2.9 million and $10.7 million, respectively.

As such, prior periods have been conformed to the current presentation with Other general and administrative expenses for the three months ended March 31, 2021 adjusted downward by $1.8 million and for the three and nine months ended September 30, 2020 adjusted downward by $4.2 million and $14.9 million, respectively.

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

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For the three months ended (dollars in thousands)

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

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

For the six months ended

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

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

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

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

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

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

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

September 30, 2021 $ 43,882 0.22 % 1.28 %

September 30, 2020 $ 44,587 0.20 % 1.27 %

For the nine months ended

September 30, 2021 $ 145,313 0.23 % 1.40 %

September 30, 2020 $ 179,222 0.23 % 1.69 %

(1) Includes $2.9 million of costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process for the nine months ended September 30, 2020.

Excluding these transaction costs, G&A expenses as a percentage of average total assets was unchanged at 0.23% and as a percentage of average equity was 1.66% for the nine months ended September 30, 2020.

G&A expenses were $43.9 million for the three months ended September 30, 2021, a decrease of $0.7 million compared to the same period in 2020.

G&A expenses were $145.3 million for the nine months ended September 30, 2021, a decrease of $33.9 million compared to the same period in 2020.

The change for the nine months ended September 30, 2021 compared with the same period in 2020 was largely attributable to cost savings generated from the Internalization which closed on June 30, 2020 and lower professional fees during the nine months ended September 30, 2021 compared with the same periods in 2020.

Return on Average Equity

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For the three months ended

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

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

For the six months ended

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

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

September 30, 2021 9.01 % 6.85 % 0.47 % (1.28 %) 0.20 % 15.25 %

September 30, 2020 11.01 % 19.47 % 0.10 % (1.27 %) (0.29 %) 29.02 %

For the nine months ended

September 30, 2021 11.12 % 8.99 % 0.29 % (1.40 %) 0.02 % 19.02 %

September 30, 2020 7.14 % (22.49 %) 0.22 % (1.69 %) 0.13 % (16.69 %)

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

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

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

(dollars in thousands)

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

The fair value of these securities being less than amortized cost at June 30, 2021 is solely due to market conditions and not the quality of the assets.

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

The fair value of these securities being less than amortized cost at September 30, 2021 is solely due to market conditions and not the quality of the assets.

Substantially all of the Agency MBS have an actual or implied credit rating that is the same as that of the U.S.

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

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Financial Condition

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

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

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

Total assets were $76.7 billion and $88.5 billion at September 30, 2021 and December 31, 2020, respectively.

The change was primarily due to decreases in Agency MBS, including assets transferred or pledged to securitization vehicles, of $11.3 billion and commercial real estate debt investments, including assets transferred or pledged to securitization vehicles, of $2.0 billion, partially offset by an increase in residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $2.2 billion.

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

Residential Commercial

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

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

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

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

(4) Dedicated capital allocations assume capital related to held for sale assets will be redeployed within the Agency business line.

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

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Residential Securities

Substantially all of our Agency MBS at June 30, 2021 and December 31, 2020 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

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

Substantially all of our Agency MBS at September 30, 2021 and December 31, 2020 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

Our mortgage-backed securities were largely Freddie Mac, Fannie Mae or Ginnie Mae pass through certificates or CMOs, which have an actual or implied credit rating that is the same as that of the U.S.

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

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

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

At September 30, 2021 and December 31, 2020 we had on our Consolidated Statements of Financial Condition a total of $82.2

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $4.0 billion and $4.0 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended June 30, 2021 and 2020 was 26.4% and 19.5%, respectively.

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

million and $88.3 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $3.9 billion and $4.0 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended September 30, 2021 and 2020 was 23.1% and 22.9%, respectively.

The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of September 30, 2021 and 2020 was 12.7% and 17.1%, respectively.

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

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

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

June 30, 2021 December 31, 2020

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

September 30, 2021 December 31, 2020

Estimated Fair Value

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Residential credit

Residential CRT $ 827,328 $ 532,403

Credit risk transfer $ 787,235 $ 532,403

Alt-A 53,541 80,328

Prime 279,737 182,749

Prime interest-only 524 1,240

Subprime 176,436 188,433

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Prime jumbo (>= 2010 vintage) 101,087 44,835

Prime jumbo (>= 2010 vintage) interest-only 893 1,552

Total residential credit securities $ 2,535,167 $ 1,504,595

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Management’s Discussion and Analysis

The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at June 30, 2021 and December 31, 2020.

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Residential Securities (1)

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Weighted average yield 7.20 % 5.20 %

Weighted average term to next adjustment 13 Months 15 Months

Weighted average term to next adjustment (2)

12 Months 15 Months

Weighted average lifetime cap (3)

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(1) Excludes interest-only MBS.

(2) Excludes non-Agency MBS and CRT securities.

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

NM Not meaningful.

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

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

Payment Structure Investment Characteristics

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(dollars in thousands)

Agency credit risk transfer $ 789,895 $ — $ 789,895 3.21 % 2.26 % 4.94 % 46.94 %

Private label credit risk transfer 37,433 — 37,433 3.93 % 0.58 % 2.73 % 5.68 %

Credit risk transfer $ 787,235 $ — $ 787,235 3.23 % 2.54 % 4.06 % 38.20 %

Alt-A 53,541 15,325 38,216 3.09 % 9.21 % 14.22 % 30.98 %

Prime 279,737 60,307 219,430 3.96 % 8.44 % 4.36 % 34.12 %

Prime interest-only 524 524 — 0.48 % — 3.65 % 64.95 %

Subprime 176,436 99,701 76,735 2.08 % 20.82 % 12.92 % 17.96 %

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Prime jumbo (>=2010 vintage) 101,087 795 100,292 3.84 % 4.31 % 13.36 % 31.98 %

Prime jumbo (>=2010 vintage) interest-only 893 893 — 0.37 % — 6.54 % 55.85 %

Total/weighted average (2)

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(dollars in thousands)

Agency credit risk transfer $ — $ 51 $ 789,793 $ 51 $ 789,895

Private label credit risk transfer — — 37,433 — 37,433

Credit risk transfer $ — $ — $ 787,206 $ 29 $ 787,235

Alt-A 5,110 37,345 11,086 — 53,541

Prime 33,162 241,236 4,958 381 279,737

Prime interest-only — — — 524 524

Subprime 7,252 73,063 95,938 183 176,436

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Prime jumbo (>=2010 vintage) — 100,292 — 795 101,087

Prime jumbo (>=2010 vintage) interest-only — — — 893 893

Total $ 45,524 $ 1,589,067 $ 899,188 $ 1,388 $ 2,535,167

Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at June 30, 2021.

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at September 30, 2021.

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

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

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

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

Year One to Three

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Total $ 55,626,883 $ 261,617 $ 972,171 $ 7,311,108 $ 64,171,779

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at June 30, 2021.

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at September 30, 2021.

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

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

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

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

During the nine months ended September 30, 2021, we received $14.6 billion from principal repayments and $11.1 billion in cash from disposal of securities.

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

Off-Balance Sheet Arrangements

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Stockholders’ Equity

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

June 30, 2021 December 31, 2020

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

September 30, 2021 December 31, 2020

Stockholders’ equity (dollars in thousands)

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Capital Stock

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

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

During the three and nine months ended September 30, 2021, we 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.

Refer to the “Capital Stock” Note located within Item 1 for additional information related to the at-the-market sales program.

In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock, which expired on December 31, 2020 (“the Prior Share Repurchase Program”).

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The Current Share Repurchase Program replaced the Prior Share Repurchase Program.

During the three and six months ended June 30, 2021, no shares were purchased pursuant to these authorizations.

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

During the three and nine months ended September 30, 2021, no shares were purchased pursuant to these authorizations.

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

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

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Based on the guidelines, we generally expect to maintain an economic leverage ratio of less than 10:1.

Our actual economic leverage ratio varies from time to time based upon various factors, including our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions.

Our actual economic leverage ratio varies from time to time based upon various factors, including our management’s opinion of the level

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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

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

Our GAAP leverage ratio at September 30, 2021 and December 31, 2020 was 4.4:1 and 5.1:1, respectively.

Our GAAP capital ratio at September 30, 2021 and December 31, 2020 was 17.9% and 15.9%, respectively.

Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 14.2% and 13.6% at September 30, 2021 and December 31, 2020, respectively.

Economic leverage ratio and economic capital ratio are non-GAAP financial measures.

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The BRC is responsible for oversight of our risk governance structure, risk management and risk assessment guidelines and policies and our risk appetite.

The BAC is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor selection, evaluation and review, and oversight of the internal audit function.

The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices.

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

The BAC is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

and Governance risk to us, and the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board.

selection, evaluation and review, and oversight of the internal audit function.

The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices.

The Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or Environment, Social, and Governance risk to us, and the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board.

Risk assessment and risk management are the responsibility of our management.

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

At June 30, 2021 and December 31, 2020, the weighted average days to maturity was 88 days and 64 days, respectively.

At September 30, 2021 and December 31, 2020, the weighted average days to maturity was 75 days and 64 days, respectively.

Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made.

Should prepayment speeds on the mortgages underlying our Agency and Residential mortgage-backed securities and/or market interest rates or other factors move suddenly and cause declines in the market value of assets posted as collateral, resulting margin calls may cause an adverse change in our liquidity position.

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

At September 30, 2021, we had total financial assets and cash pledged against existing liabilities of $61.2 billion.

The weighted average haircut was approximately 3% on repurchase agreements.

The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at June 30, 2021 compared to the same period in 2020, and our counterparties did not materially alter any requirements, including required haircuts, related to the col lateral we pledge under repurchase agreements and interest rate swaps during the three months ended June 30, 2021.

The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at September 30, 2021 compared to the same period in 2020, and our counterparties did not materially alter any requirements, including required haircuts, related to the col lateral we pledge under repurchase agreements and interest rate swaps during the three months ended September 30, 2021.

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

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For the three months ended (dollars in thousands)

September 30, 2021 $ 57,504,986 $ 55,475,420 $ 44,964 $ —

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

June 30, 2021

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

The weighted average remaining maturity on our repurchase agreements and other secured financing was 95 days at September 30, 2021:

September 30, 2021

Balance Weighted

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

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

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

Weighted Average Rate

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(3) Non-recourse to Annaly.

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Management’s Discussion and Analysis

Excess Liquidity

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

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

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Management’s Discussion and Analysis

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

Encumbered Assets Unencumbered Assets Total

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

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

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

Carrying Value (1)

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Corporate debt, held for sale 2,113

Assets of disposal group held for sale (6)

Total liquid assets $ 69,453,303

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

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

The assets listed in this table include $61.2 billion of assets that have been pledged as collateral against existing liabilities at September 30, 2021.

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

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(4) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $4.1 billion.

(5) Excludes certain second lien loans.

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

Excludes securitized commercial mortgage loans and senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.1 billion.

(7) Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles of $6.2 billion.

(5) Excludes unpledged second lien loans.

(6) Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles and certain assets of disposal group held for sale of $4.8 billion.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

The interest rate sensitivity of our assets and liabilities, excluding assets and liabilities of the disposal group held for sale and corporate loans held for sale, in the following table at June 30, 2021 could vary substantially based on actual prepayment experience.

The interest rate sensitivity of our assets and liabilities, excluding assets and liabilities of the disposal group held for sale and corporate loans held for sale, in the following table at September 30, 2021 could vary substantially based on actual prepayment experience.

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

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

The following table presents estimates at June 30, 2021.

The following table presents estimates at September 30, 2021.

Actual results could differ materially from these estimates.

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Additionally, ALCO has oversight of our credit risk exposure.

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

June 30, 2021 December 31, 2020

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

September 30, 2021 December 31, 2020

Agency mortgage-backed securities (1)

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Mortgage servicing rights 0.8 % 0.1 %

Interests in MSR 0.1 % — %

Commercial real estate (1) (2)

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

(2) Includes Interests in MSR.

(2) Net of unamortized origination fees.

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

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

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

(3) Includes corporate loans held for sale as of September 30, 2021.

Counterparty Risk Management

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Management’s Discussion and Analysis

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

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

Number of Counterparties Secured Financing (1)

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Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems.

The Cybersecurity Committee periodically reports to the ERC, and the Board via the BRC and the BAC.

The Cybersecurity Committee periodically reports to the ERC and the relevant Board committees.

There is no assurance that these efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

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

We currently maintain cybersecurity insurance, however, there is no assurance that our current policy will cover all cybersecurity breaches or our related losses, or that we will be able to continue to maintain cybersecurity insurance in the future.

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

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

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

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

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

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Our risk management framework is designed to identify, measure and monitor these risks under the oversight of the ERC.

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

The determination that we qualify for this

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Management’s Discussion and Analysis

exemption from registration depends on various factual matters and circumstances.

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

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

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

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

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

Management reviews the valuations received from third party pricing

These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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 requires significant judgment by management and the third party pricing providers.

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One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank.

Subordinate mortgage notes and/or subordinate mortgage loan participations.

The most subordinate commercial mortgage-backed security bond class.

Refers to the board of directors of Annaly.

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Generic name for a securities firm engaged in both buying and selling securities on behalf of customers or its own account.

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Management’s Discussion and Analysis

Capital Buffer

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Calculated as total stockholders’ equity divided by total assets.

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Management’s Discussion and Analysis

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

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Its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices and fraud.

Commercial Mortgage-Backed Security

Commercial Mortgage-Backed Security (“CMBS” or “Commercial Securities”)

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

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

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Management’s Discussion and Analysis

The current remaining monthly principal on a mortgage security.

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Possibility that a bond issuer will fail to pay principal or interest when due.

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Management’s Discussion and Analysis

A financial product that derives its value from the price, price fluctuations and price expectations of an underlying instrument, index or reference pool (e.g.

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

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Management’s Discussion and Analysis

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

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Federal National Mortgage Association.

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Management’s Discussion and Analysis

Federal Deposit Insurance Corporation (“FDIC”)

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Average interest bearing liabilities is based on daily balances.

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Management’s Discussion and Analysis

Interest Earning Assets

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

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Management’s Discussion and Analysis

Interests in MSR

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Debt which matures in more than one year.

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Management’s Discussion and Analysis

Market Agreed Coupon (“MAC”) Interest Rate Swap

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Action taken by the Federal Open Market Committee of the Federal Reserve System to influence the money supply or interest rates.

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Management’s Discussion and Analysis

Mortgage-Backed Security (“MBS”)

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Also known as par value.

Pass-Through Security

A securitization structure where a GSE or other entity “passes” the amount collected from the borrowers every month to the investor, after deducting fees and expenses.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Pass-Through Security

A securitization structure where a GSE or other entity “passes” the amount collected from the borrowers every month to the investor, after deducting fees and expenses.

A collection of mortgage loans assembled by an originator or master servicer as the basis for a security.

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Real Estate Investment Trust (“REIT”)

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

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

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

Recourse Debt

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

Secondary Market

Ongoing market for bonds previously offered or sold in the primary market.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Secondary Market

Ongoing market for bonds previously offered or sold in the primary market.

Secured Overnight Financing Rate (“SOFR”)

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis