ANNALY CAPITAL MANAGEMENT INC 10-Q

Item 1. Financial Statements 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. 10. 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. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts. Derivatives are 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. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At 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. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value. Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company 28 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. 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. TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date. Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing. Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis. Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps. 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) Interest rate swaptions $ 123,506 $ 74,470 TBA derivatives 1,776 96,109 Futures contracts 199,728 506 Purchase commitments 3,702 49 Credit derivatives (1) 2,683 — Total derivative assets $ 331,395 $ 171,134 Liabilities Interest rate swaps $ 754,248 $ 1,006,492 TBA derivatives 155,515 — Futures contracts 108 19,413 Purchase commitments 2,263 — Credit derivatives (1) — 7,440 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 $ 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: 29 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements September 30, 2021 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) (dollars in thousands) 0 - 3 years $ 31,311,750 0.24 % 0.06 % 1.30 3 - 6 years 2,780,000 0.21 % 0.06 % 3.72 6 - 10 years 9,131,000 1.43 % 0.10 % 9.29 Greater than 10 years 1,556,000 3.83 % 0.10 % 19.74 Total / Weighted average $ 44,778,750 0.60 % 0.07 % 3.72 December 31, 2020 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) (dollars in thousands) 0 - 3 years $ 23,680,150 0.27 % 0.11 % 1.96 3 - 6 years 3,600,000 0.18 % 0.09 % 4.21 6 - 10 years 5,565,500 1.40 % 0.62 % 7.76 Greater than 10 years 1,484,000 3.06 % 0.36 % 20.52 Total / Weighted average $ 34,329,650 0.92 % 0.37 % 3.94 (1) As of 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 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. 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 (dollars in thousands) Long pay $ 4,050,000 1.87 % 3M LIBOR 10.11 17.57 Long receive $ 2,000,000 1.47 % 3M LIBOR 11.20 14.45 December 31, 2020 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay $ 8,050,000 1.27 % 3M LIBOR 10.40 5.42 Long receive $ 250,000 1.66 % 3M LIBOR 10.02 0.13 The following table summarizes certain characteristics of the Company’s TBA derivatives at September 30, 2021 and December 31, 2020: 30 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements September 30, 2021 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts $ 23,201,000 $ 23,776,374 $ 23,622,635 $ ( 153,739 ) December 31, 2020 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts $ 19,635,000 $ 20,277,088 $ 20,373,197 $ 96,109 The following table summarizes certain characteristics of the Company’s futures derivatives at September 30, 2021 and December 31, 2020: September 30, 2021 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 2 year $ — $ ( 1,067,000 ) 2.00 U.S. Treasury futures - 5 year — ( 3,274,000 ) 4.41 U.S. Treasury futures - 10 year and greater — ( 10,976,500 ) 7.17 Total $ — $ ( 15,317,500 ) 6.22 December 31, 2020 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 5 year — ( 1,240,000 ) 4.40 U.S. Treasury futures - 10 year and greater — ( 9,183,800 ) 6.90 Total $ — $ ( 10,423,800 ) 6.60 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. 31 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements September 30, 2021 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaptions, at fair value $ 123,506 $ — $ — $ 123,506 TBA derivatives, at fair value 1,776 ( 1,659 ) — 117 Futures contracts, at fair value 199,728 ( 108 ) — 199,620 Purchase commitments 3,702 — — 3,702 Credit derivatives 2,683 — — 2,683 Liabilities Interest rate swaps, at fair value $ 754,248 $ — $ ( 78,167 ) $ 676,081 TBA derivatives, at fair value 155,515 ( 1,659 ) ( 2,060 ) 151,796 Futures contracts, at fair value 108 ( 108 ) — — Purchase commitments 2,263 — — 2,263 December 31, 2020 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaptions, at fair value $ 74,470 $ — $ — $ 74,470 TBA derivatives, at fair value 96,109 — — 96,109 Futures contracts, at fair value 506 ( 506 ) — — Purchase commitments 49 — — 49 Liabilities Interest rate swaps, at fair value $ 1,006,492 $ — $ ( 108,757 ) $ 897,735 Futures contracts, at fair value 19,413 ( 506 ) ( 18,907 ) — Credit derivatives 7,440 — ( 7,440 ) — The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows: Location on Consolidated Statements of Comprehensive Income (Loss) Net Interest Component of Interest Rate Swaps Realized Gains (Losses) on Termination of Interest Rate Swaps Unrealized Gains (Losses) on Interest Rate Swaps For the three months ended (dollars in thousands) 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: 32 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 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 (dollars in thousands) Net TBA derivatives $ 155,569 $ ( 182,845 ) $ ( 27,276 ) Net interest rate swaptions ( 24,265 ) ( 44,602 ) ( 68,867 ) Futures ( 229,534 ) 279,293 49,759 Purchase commitments — 920 920 Credit derivatives 2,616 ( 2,320 ) 296 Total $ ( 45,168 ) 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 (dollars in thousands) Net TBA derivatives $ 276,849 $ ( 100,680 ) $ 176,169 Net interest rate swaptions ( 9,836 ) 3,263 ( 6,573 ) Futures ( 19,989 ) 10,337 ( 9,652 ) Purchase commitments — ( 51 ) ( 51 ) Credit derivatives 1,531 7,892 9,423 Total $ 169,316 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 (dollars in thousands) Net TBA derivatives $ ( 122,275 ) $ ( 249,847 ) $ ( 372,122 ) Net interest rate swaptions ( 69,262 ) 28,528 ( 40,734 ) Futures 250,013 218,527 468,540 Purchase commitments — 1,389 1,389 Credit derivatives 7,024 8,634 15,658 Total $ 72,731 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 (dollars in thousands) Net TBA derivatives $ 798,459 $ 13,651 $ 812,110 Net interest rate swaptions 11,730 50,762 62,492 Futures ( 299,220 ) ( 350 ) ( 299,570 ) Purchase commitments — ( 1,194 ) ( 1,194 ) Credit derivatives 4,659 ( 31,839 ) ( 27,180 ) 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 Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange. Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all 33 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 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. 11. FAIR VALUE MEASUREMENTS The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer to the “Sale of Commercial Real Estate Business” Note for fair value measurements related to the assets and liabilities of the disposal group held for sale as of 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 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: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value. The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis. The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level. Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1. Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities. Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy. 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. 34 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information. The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including discount rates, prepayment rates, delinquency levels and costs to service. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented. September 30, 2021 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 62,818,079 $ — $ 62,818,079 Credit risk transfer securities — 787,235 — 787,235 Non-Agency mortgage-backed securities — 1,747,932 — 1,747,932 Commercial mortgage-backed securities — 269,106 — 269,106 Loans 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 Interests in MSR — — 57,530 57,530 Assets transferred or pledged to securitization vehicles — 4,738,481 — 4,738,481 Derivative assets Other derivatives 199,728 131,667 — 331,395 Total assets $ 199,728 $ 72,180,199 $ 629,789 $ 73,009,716 Liabilities Debt issued by securitization vehicles — 3,935,410 — 3,935,410 Participations issued — 641,006 — 641,006 Derivative liabilities Interest rate swaps — 754,248 — 754,248 Other derivatives 108 157,778 — 157,886 Total liabilities $ 108 $ 5,488,442 $ — $ 5,488,550 35 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements December 31, 2020 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 74,067,059 $ — $ 74,067,059 Credit risk transfer securities — 532,403 — 532,403 Non-Agency mortgage-backed securities — 972,192 — 972,192 Commercial mortgage-backed securities — 80,742 — 80,742 Loans Residential mortgage loans — 345,810 — 345,810 Mortgage servicing rights — — 100,895 100,895 Assets transferred or pledged to securitization vehicles — 6,035,671 — 6,035,671 Derivative assets Other derivatives 506 170,628 — 171,134 Total assets $ 506 $ 82,204,505 $ 100,895 $ 82,305,906 Liabilities Debt issued by securitization vehicles $ — $ 5,652,982 $ — $ 5,652,982 Participations issued — 39,198 — 39,198 Derivative liabilities Interest rate swaps — 1,006,492 — 1,006,492 Other derivatives 19,413 7,440 — 26,853 Total liabilities $ 19,413 $ 6,706,112 $ — $ 6,725,525 Qualitative and Quantitative Information about Level 3 Fair Value Measurements The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSR and Interests in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interests in MSR. Refer to the “Mortgage Servicing Rights” Note for additional information, including rollforwards. The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments. September 30, 2021 Unobservable Input (1) / Range (Weighted Average) (2) Discount rate Prepayment rate Delinquency rate Cost to service MSR held directly 3.0 % - 12.6 % ( 7.7 %) 6.9 % - 17.8 % ( 9.0 %) 0.9 % - 1.4 % ( 1.0 %) $ 92 - $ 103 ($ 98 ) Interests in MSR 7.5 % - 9.0 % ( 7.9 %) 5.1 % - 15.9 % ( 9.6 %) 0.0 % - 0.2 % ( 0.1 %) $ 78 - $ 84 ($ 81 ) December 31, 2020 Unobservable Input (1) / Range (Weighted Average) (2) Discount rate Prepayment rate Delinquency rate Cost to service MSR consolidated with VIE 9.0 % - 12.0 % ( 9.4 %) 19.3 % - 55.5 % ( 42.0 %) 0.0 % - 6.0 % ( 2.5 %) $ 83 - $ 108 ($ 98 ) (1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets. (2) Weighted average discount rate computed based on the fair value of MSR, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSR. 36 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at September 30, 2021 and December 31, 2020. September 30, 2021 December 31, 2020 Carrying Value Fair Value Carrying Value Fair Value Financial assets (dollars in thousands) Loans Commercial real estate debt and preferred equity, held for investment (1) $ — $ — $ 1,372,430 $ 1,442,071 Corporate debt, held for investment 1,890,709 1,904,287 2,239,930 2,226,045 Assets transferred or pledged to securitization vehicles — — 874,349 928,732 Corporate debt, held for sale 2,113 2,113 — — Financial liabilities Repurchase agreements $ 55,475,420 $ 55,475,420 $ 64,825,239 $ 64,825,239 Other secured financing 729,555 729,555 917,876 917,876 Mortgages payable — — 426,256 474,779 (1) Includes assets of consolidated VIEs. Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment, corporate debt, held for sale and mortgages payable are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements. Long term other secured financing are valued using Level 2 inputs. 12. GOODWILL AND INTANGIBLE ASSETS Goodwill The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain. The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. At 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. Refer to the “Sale of Commercial Real Estate Business” Note for additional information. Intangible assets, net Finite life intangible assets are amortized over their expected useful lives. As part of the Internalization, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $ 41.2 million based on the replacement cost of the employee base acquired by the Company. During the 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. 37 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table presents the activity of finite lived intangible assets for the nine months ended September 30, 2021. Intangible Assets, net (dollars in thousands) Balance at December 31, 2020 $ 55,526 Impairment ( 9,549 ) Intangible assets transferred to disposal group held for sale ( 14,528 ) Less: amortization expense ( 6,078 ) Balance at September 30, 2021 25,371 13. SECURED FINANCING Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing , and has determined that each of the financing agreements should be treated as a securing financing. The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company receives collateral for reverse repurchase agreements and is required to post collateral for repurchase agreements. To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities. Generally, the Company receives or posts collateral with a fair value approximately equal to or greater than the value of the secured financing. Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows. The Company had outstanding $ 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) Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day $ 7,926,088 $ — $ — $ — $ — $ 7,926,088 0.07 % 2 to 29 days 15,853,554 6,911 228,809 — 64,518 16,153,792 0.13 % 30 to 59 days 3,965,483 — 117,226 — — 4,082,709 0.18 % 60 to 89 days 3,134,779 — 91,544 — — 3,226,323 0.17 % 90 to 119 days 9,884,441 136,909 37,527 — 138,252 10,197,129 0.18 % Over 119 days (2) 13,004,874 56,924 510,501 317,080 — 13,889,379 0.20 % Total $ 53,769,219 $ 200,744 $ 985,607 $ 317,080 $ 202,770 $ 55,475,420 0.15 % 38 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements December 31, 2020 Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day $ — $ — $ — $ — $ — $ — $ — — % 2 to 29 days 30,151,875 129,993 354,904 $ 76,799 — 128,267 30,841,838 0.29 % 30 to 59 days 10,247,972 16,073 161,274 $ — — 142,336 10,567,655 0.42 % 60 to 89 days 8,181,410 99,620 259,401 $ — — 28,406 8,568,837 0.30 % 90 to 119 days 2,154,733 — — $ — — — 2,154,733 0.23 % Over 119 days (2) 12,008,920 — 274,860 $ 107,924 271,801 28,671 12,692,176 0.36 % Total $ 62,744,910 $ 245,686 $ 1,050,439 $ 184,723 $ 271,801 $ 327,680 $ 64,825,239 0.32 % (1) Includes commercial mortgage-backed securities held for sale. (2) No repurchase agreements had a remaining maturity over 1 year at 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 September 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. September 30, 2021 December 31, 2020 Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements (dollars in thousands) Gross amounts $ — $ 55,475,420 $ 250,000 $ 65,075,239 Amounts offset — — ( 250,000 ) ( 250,000 ) 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 $ 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 $ 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. 14. CAPITAL STOCK (A) Common Stock 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 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Par Value Common stock 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 39 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 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, 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. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares of its common stock, having an aggregate offering price of up to $ 1.5 billion from time to time through any of the Sales Agents. During the three and 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 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. Shares Authorized Shares Issued And Outstanding Carrying Value Contractual Rate Earliest Redemption Date (1) Date At Which Dividend Rate Becomes Floating Floating Annual Rate September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Fixed-rate (dollars in thousands) Series D — 18,400,000 — — — — 7.50 % 9/13/2017 NA NA Fixed-to-floating rate Series F 28,800,000 28,800,000 28,800,000 28,800,000 696,910 696,910 6.95 % 9/30/2022 9/30/2022 3M LIBOR + 4.993 % Series G 17,000,000 19,550,000 17,000,000 17,000,000 411,335 411,335 6.50 % 3/31/2023 3/31/2023 3M LIBOR + 4.172 % Series I 17,700,000 18,400,000 17,700,000 17,700,000 428,324 428,324 6.75 % 6/30/2024 6/30/2024 3M LIBOR + 4.989 % Total 63,500,000 85,150,000 63,500,000 63,500,000 $ 1,536,569 $ 1,536,569 (1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company. Each series of preferred stock has a par value of $ 0.01 per share and a liquidation and redemption price of $ 25.00 , plus accrued and unpaid dividends through their redemption date. Through 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. 40 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements (C) Distributions to Stockholders The following table provides a summary of the Company’s dividend distribution activity for the periods presented: For the Three Months Ended For the Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (dollars in thousands, except per share data) Dividends and dividend equivalents declared on common stock and share-based awards $ 319,768 $ 309,175 $ 946,648 $ 976,966 Distributions declared per common share $ 0.22 $ 0.22 $ 0.66 $ 0.69 Distributions paid to common stockholders after period end $ 318,986 $ 308,644 $ 318,986 $ 308,644 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 October 29, 2021 October 30, 2020 October 29, 2021 October 30, 2020 Dividends declared to series D preferred stockholders $ — $ 8,625 $ — $ 25,875 Dividends declared per share of series D preferred stock $ — $ 0.469 $ — $ 1.406 Dividends declared to series F preferred stockholders $ 12,510 $ 12,510 $ 37,530 $ 37,530 Dividends declared per share of series F preferred stock $ 0.434 $ 0.434 $ 1.303 $ 1.303 Dividends declared to series G preferred stockholders $ 6,906 $ 6,906 $ 20,718 $ 20,718 Dividends declared per share of series G preferred stock $ 0.406 $ 0.406 $ 1.219 $ 1.219 Dividends declared to series I preferred stockholders $ 7,467 $ 7,468 $ 22,401 $ 22,404 Dividends declared per share of series I preferred stock $ 0.422 $ 0.422 $ 1.266 $ 1.266 15. INTEREST INCOME AND INTEREST EXPENSE Refer to the “Significant Accounting Policies” Note for details surrounding the Company’s accounting policy related to net interest income on securities and loans. The following table summarizes the interest income recognition methodology for Residential Securities: Interest Income Methodology Agency Fixed-rate pass-through (1) Effective yield (3) Adjustable-rate pass-through (1) Effective yield (3) Multifamily (1) Contractual Cash Flows CMO (1) Effective yield (3) Reverse mortgages (2) Prospective Interest-only (2) Prospective Residential credit CRT (2) Prospective Alt-A (2) Prospective Prime (2) Prospective Subprime (2) Prospective NPL/RPL (2) Prospective Prime jumbo (2) Prospective Prime jumbo interest-only (2) Prospective (1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss). (2) Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss). (3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception. 41 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following presents the components of the Company’s interest income and interest expense for the three and 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) 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) 45,801 42,508 121,873 132,936 Commercial investment portfolio (1) (2) 46,494 80,324 197,758 260,208 Reverse repurchase agreements 5 109 41 1,571 Total interest income $ 412,972 $ 562,443 $ 1,560,256 $ 1,702,281 Interest expense Repurchase agreements 22,397 75,386 94,122 646,369 Debt issued by securitization vehicles 18,740 32,491 68,232 113,367 Participations issued 2,578 — 4,914 — Other 6,723 7,249 20,190 44,895 Total interest expense 50,438 115,126 187,458 804,631 Net interest income $ 362,534 $ 447,317 $ 1,372,798 $ 897,650 (1) Includes assets transferred or pledged to securitization vehicles. (2) Includes commercial real estate debt and preferred equity and corporate debt. 16. NET INCOME (LOSS) PER COMMON SHARE The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and 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) Net income (loss) $ 521,534 $ 1,015,548 $ 1,977,820 $ ( 1,768,407 ) Net income (loss) attributable to noncontrolling interests 2,290 ( 126 ) 3,405 ( 28 ) Net income (loss) attributable to Annaly 519,244 1,015,674 1,974,415 ( 1,768,379 ) Dividends on preferred stock 26,883 35,509 80,649 106,527 Net income (loss) available (related) to common stockholders $ 492,361 $ 980,165 $ 1,893,766 $ ( 1,874,906 ) Weighted average shares of common stock outstanding-basic 1,445,315,914 1,404,202,695 1,418,424,208 1,419,645,475 Add: Effect of stock awards, if dilutive 1,041,953 165,605 1,077,997 — Weighted average shares of common stock outstanding-diluted 1,446,357,867 1,404,368,300 1,419,502,205 1,419,645,475 Net income (loss) per share available (related) to common share Basic $ 0.34 $ 0.70 $ 1.34 $ ( 1.32 ) 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 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. 17. INCOME TAXES 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 42 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. 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. The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs. As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income. The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at 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. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company’s TRSs are subject to federal, state and local taxes. During the three and 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. 18. RISK MANAGEMENT The primary risks to the Company are capital, liquidity and funding risk, investment/market risk, credit risk and operational risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the existing collateral to reduce borrowing levels. The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges. Weakness in the mortgage market, the shape of the yield curve, changes in the expectations for the volatility of future interest rates and deterioration of financial conditions in general may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging strategies. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase the overall costs to service the underlying mortgage loans. The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral 43 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. 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. The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors. These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information. 19. RELATED PARTY TRANSACTIONS Closing of the Internalization and Termination of Management Agreement On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Former Manager and certain affiliates of the Former Manager. Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($ 1.00 ). In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager (the net effect of which was immaterial in amount), and the Company transitioned from an externally-managed REIT to an internally-managed REIT. At the closing, all employees of the Former Manager became employees of the Company. The parties also terminated the Amended and Restated Management Agreement by and between the Company and the Former Manager (the “Management Agreement”) and therefore the Company no longer pays a management fee to, or reimburses expenses of, the Former Manager. Pursuant to the Internalization Agreement, the Former Manager waived any Acceleration Fee (as defined in the Management Agreement). Prior to the closing of the Internalization, the Former Manager, under the Management Agreement and subject to the supervision and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s investment portfolio; (ii) recommending alternative forms of capital raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The Former Manager also performed such other supervisory and management services and activities relating to the Company’s assets and operations as appropriate. In exchange for the management services, the Company paid the Former Manager a monthly management fee, and the Former Manager was responsible for providing personnel to manage the Company. Prior to the closing of the Internalization, the Company had paid the Former Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i) 1.05% of Stockholders' Equity (as defined in the Management Agreement) up to $ 17.28 billion, and (ii) 0.75 % of Stockholders' Equity (as defined in the Management Agreement) in excess of $ 17.28 billion. The Company did not pay the Former Manager any incentive fees. For the 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. 20. LEASE COMMITMENTS AND CONTINGENCIES The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of approximately four years . The corporate office lease includes an option to extend for up to five years , however the extension term was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the three and 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: 44 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Operating Leases Classification September 30, 2021 Assets (dollars in thousands) Operating lease right-of-use assets Other assets $ 11,194 Liabilities Operating lease liabilities (1) Other liabilities $ 14,576 Lease term and discount rate Weighted average remaining lease term 4.0 years Weighted average discount rate (1) 2.9 % Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,953 (1) As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. The following table provides details related to maturities of lease liabilities: Maturity of Lease Liabilities Years ending December 31, (dollars in thousands) 2021 (remaining) $ 965 2022 3,862 2023 3,862 2024 3,862 2025 2,895 Total lease payments $ 15,446 Less imputed interest 870 Present value of lease liabilities $ 14,576 Contingencies From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were no material contingencies at September 30, 2021 and December 31, 2020. 21. ARCOLA REGULATORY REQUIREMENTS Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty. As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance. At 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 September 30, 2021 was $ 515.3 million with excess net capital of $ 515.0 million. 22. 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 45 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 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. 46 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain); changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt; risks related to investments in MSR; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; 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. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q. 47 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis INDEX TO ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 49 Recent Developments 49 Business Environment and COVID-19 49 Economic Environment 50 London Interbank Offered Rate (“LIBOR”) Transition Working Group 48 Results of Operations 51 Net Income (Loss) Summary 53 Non-GAAP Financial Measures 55 Earnings available for distribution , earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity 55 Premium Amortization Expense 57 Economic leverage and economic capital ratios 58 Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA) 59 Experienced and Projected Long-term CPR 60 Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), and Net Interest Margin (excluding PAA), and Average Economic Cost of Interest Bearing Liabilities) 61 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 62 Realized and Unrealized Gains (Losses) 62 Other Income (Loss) 64 General and Administrative Expenses 64 Return on Average Equity 65 Unrealized Gains and Losses - Available-for-Sale Investments 65 Financial Condition 66 Residential Securities 66 Contractual Obligations 69 Off-Balance Sheet Arrangements 69 Capital Management 70 Stockholders’ Equity 70 Capital Stock 70 Leverage and Capital 70 Risk Management 71 Risk Appetite 71 Governance 71 Description of Risks 72 Capital, Liquidity and Funding Risk Management 73 Funding 73 Excess Liquidity 75 Maturity Profile 76 Stress Testing 77 Liquidity Management Policies 77 Investment/Market Risk Management 78 Credit Risk Management 79 Counterparty Risk Management 79 Operational Risk Management 80 Compliance, Regulatory and Legal Risk Management 80 Critical Accounting Policies and Estimates 81 Valuation of Financial Instruments 81 Residential Securities 81 Residential Mortgage Loans 81 MSR 74 Commercial Real Estate Investments 82 Interest Rate Swaps 82 Revenue Recognition 82 Consolidation of Variable Interest Entities 82 Use of Estimates 82 Glossary of Terms 83 48 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Overview We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Prior to the closing of the Internalization (as defined in the “Related Party Transactions” Note located within Item 1) on June 30, 2020, we were externally managed by Annaly Management Company LLC (the “Former Manager”). Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities. For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K. Recent Developments Sale of Commercial Real Estate Business On March 25, 2021, we announced that we entered into a definitive agreement to sell 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 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” Note located within Item 1 for additional information related to the transaction. Business Environment and COVID-19 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 49 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis 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 Our well-established Business Continuity Plan (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise. The BCP is regularly updated and tested. Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management. Key tenets of the plan include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations. Historical tabletop exercises have included use of Center for Disease Control and Prevention Influenza Pandemic exercise materials. That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19. We took proactive actions, which included canceling non-essential travel and instituting 100% remote working, ahead of New York State-mandated requirements. To protect the health and well-being of our employees, their families and communities, remote work requirements began in phases in early March 2020, culminating with a company-wide exercise on March 13, 2020 to test connectivity and functionality. All employees were able to successfully perform their duties in this testing and we have operated largely remotely since that time. Business activities continue to be performed primarily remotely, though we have seen a number of employees return to the office on a voluntary and periodic basis. At the present, we expect employees to return to the office more regularly in the medium term, subject to continued successful vaccine rollout and revised guidance from federal, state and local authorities. Economic Environment 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 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. 50 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis 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: September 30, 2021 December 31, 2020 September 30, 2020 30-Year mortgage current coupon 1.97% 1.34% 1.40% Mortgage basis 48 bps 43 bps 72 bps 10-Year U.S. Treasury rate 1.49% 0.91% 0.68% LIBOR 1-Month 0.08% 0.14% 0.15% 6-Month 0.16% 0.26% 0.26% London Interbank Offered Rate (“LIBOR”) Transition Working Group 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. We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates. Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders. The committee also continues to engage with industry working groups and other market participants regarding the transition. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability. Similar to the rest of the market, the bulk of our exposure is in derivatives contracts. Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments 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 The results of our operations are affected by various factors, many of which are beyond our control. Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A. “Risk Factors” of our most recent Annual Report on Form 10-K and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q. This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements. To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to 51 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis 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 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. The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods. As such, Earnings Available for Distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities. Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income. Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution. Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity-related or volume-related expenses as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Refer to the “General and Administrative Expenses” section for additional information. 52 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Net Income (Loss) Summary The following table presents financial information related to our results of operations as of and for the three and 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 (dollars in thousands, except per share data) Interest income $ 412,972 $ 562,443 $ 1,560,256 $ 1,702,281 Interest expense 50,438 115,126 187,458 804,631 Net interest income 362,534 447,317 1,372,798 897,650 Realized and unrealized gains (losses) 179,894 618,823 717,017 (2,524,967) Other income (loss) 16,221 3,714 31,364 23,204 Less: Total general and administrative expenses 43,882 44,587 145,313 179,222 Income (loss) before income taxes 514,767 1,025,267 1,975,866 (1,783,335) Income taxes (6,767) 9,719 (1,954) (14,928) Net income (loss) 521,534 1,015,548 1,977,820 (1,768,407) Less: Net income (loss) attributable to noncontrolling interests 2,290 (126) 3,405 (28) Net income (loss) attributable to Annaly 519,244 1,015,674 1,974,415 (1,768,379) Less: Dividends on preferred stock 26,883 35,509 80,649 106,527 Net income (loss) available (related) to common stockholders $ 492,361 $ 980,165 $ 1,893,766 $ (1,874,906) Net income (loss) per share available (related) to common stockholders Basic $ 0.34 $ 0.70 $ 1.34 $ (1.32) Diluted $ 0.34 $ 0.70 $ 1.33 $ (1.32) Weighted average number of common shares outstanding Basic 1,445,315,914 1,404,202,695 1,418,424,208 1,419,645,475 Diluted 1,446,357,867 1,404,368,300 1,419,502,205 1,419,645,475 Other information Investment portfolio at period-end $ 74,809,185 $ 87,155,310 $ 74,809,185 $ 87,155,310 Average total assets $ 79,519,369 $ 91,325,532 $ 83,215,858 $ 102,465,855 Average equity $ 13,678,522 $ 13,996,138 $ 13,861,609 $ 14,124,037 GAAP leverage at period-end (1) 4.4:1 5.1:1 4.4:1 5.1:1 GAAP capital ratio at period-end (2) 17.9 % 15.9 % 17.9 % 15.9 % Annualized return on average total assets 2.62 % 4.45 % 3.17 % (2.30 %) Annualized return on average equity 15.25 % 29.02 % 19.02 % (16.69 %) Net interest margin (3) 2.01 % 2.15 % 2.38 % 1.27 % Average yield on interest earning assets (4) 2.29 % 2.70 % 2.70 % 2.40 % Average GAAP cost of interest bearing liabilities (5) 0.32 % 0.60 % 0.37 % 1.23 % Net interest spread 1.97 % 2.10 % 2.33 % 1.17 % Weighted average experienced CPR for the period 23.1 % 22.9 % 24.5 % 18.7 % Weighted average projected long-term CPR at period-end 12.7 % 17.1 % 12.7 % 17.1 % Common stock book value per share $ 8.39 $ 8.70 $ 8.39 $ 8.70 Non-GAAP metrics (6) Interest income (excluding PAA) $ 473,698 $ 596,322 $ 1,560,019 $ 2,078,624 Economic interest expense (5) $ 104,849 $ 177,655 $ 404,703 $ 945,701 Economic net interest income (excluding PAA) $ 368,849 $ 418,667 $ 1,155,316 $ 1,132,923 Premium amortization adjustment cost (benefit) $ 60,726 $ 33,879 $ (237) $ 376,343 Earnings available for distribution (7) $ 437,471 $ 482,323 $ 1,328,348 $ 1,237,121 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 % Economic leverage at period-end (1) 5.8:1 6.2:1 5.8:1 6.2:1 Economic capital ratio at period-end (2) 14.2 % 13.6 % 14.2 % 13.6 % Net interest margin (excluding PAA) (3) 2.04 % 2.05 % 2.01 % 1.67 % Average yield on interest earning assets (excluding PAA) (4) 2.63 % 2.86 % 2.70 % 2.93 % Average economic cost of interest bearing liabilities (5) 0.66 % 0.93 % 0.79 % 1.44 % Net interest spread (excluding PAA) 1.97 % 1.93 % 1.91 % 1.49 % 53 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES