ANNALY CAPITAL MANAGEMENT INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Our management, including our Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed, (1) were effective in ensuring that information required to be disclosed by Annaly in reports it files or submits under the Securities Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in ensuring that information required to be disclosed by Annaly in reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. There have been no changes in our internal controls over financial reporting that occurred during the three months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. Management’s Annual Report On Internal Control Over Financial Reporting Management of Annaly is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is a process designed by, or under the supervision of, Annaly’s CEO and CFO and effected by the Annaly’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: • pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Annaly; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Annaly are being made only in accordance with authorizations of management and directors of Annaly; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Annaly’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and presentation of financial statements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the 94 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Annaly’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission’s (“COSO”) Internal Control-Integrated Framework (2013). Based on the Annaly’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013), Annaly’s management concluded that its internal control over financial reporting was effective as of December 31, 2021. Annaly’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on Annaly’s internal control over financial reporting, which is included herein. 95 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Annaly Capital Management, Inc. Opinion on Internal Control Over Financial Reporting We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Annaly Capital Management, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 17, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP New York, NY February 17, 2022 96 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 97 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Item 10 as to our directors is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021. The information regarding our executive officers required by Item 10 appears in Part I of this Form 10-K. The information required by Item 10 as to our compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021. We have adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b) of Regulation S-K. This Code of Business Conduct and Ethics applies to our principal executive officer, principal financial officer and principal accounting officer. This Code of Business Conduct and Ethics is publicly available on our website at www.annaly.com. We intend to satisfy the disclosure requirements regarding amendments to, or waivers from, certain provisions of this Code of Business Conduct and Ethics by posting on our website. The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2021. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plan Information On May 20, 2020, at our 2020 Annual Meeting of Stockholders, our stockholders approved the 2020 Equity Incentive Plan. The 2020 Equity Incentive Plan authorizes us to grant options, stock appreciation rights, dividend equivalent rights, or other share-based awards, including restricted shares up to an aggregate of 125,000,000 shares, subject to adjustments for any awards that were outstanding under our 2010 Equity Incentive Plan (the “Prior Incentive Plan,” together with the 2020 Equity Incentive Plan, the “Incentive Plans”) on the effective date of the 2020 Equity Incentive Plan and subsequently expire, terminate, or are surrendered or forfeited. Since the adoption of the 2020 Equity Incentive Plan, no further awards have been made under the Prior Incentive Plan, although existing awards remained effective. The following table provides information as of December 31, 2021 concerning shares of our common stock authorized for issuance under the Incentive Plans. (a) (b) (c) Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under the Incentive Plans (excluding securities in column ‘a’) Equity compensation plans approved by security holders — $ — 121,808,095 Equity compensation plans not approved by security holders — — — Total — $ — 121,808,095 Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021. 98 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2021. 99 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this report: 1. Financial Statements. See Index to Financial Statements below. 2. Schedules to Financial Statements. See Index to Financial Statements below All financial statement schedules not included have been omitted because they are either inapplicable or the information required is provided in our Financial Statements and Notes thereto. 3. Exhibits. See Exhibit Index below. EXHIBIT INDEX Exhibit Number Exhibit Description 3.1 Articles of Amendment and Restatement of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed August 5, 1997). 3.2 Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-3 (Registration Statement 333-74618) filed June 12, 2002). 3.3 Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed August 3, 2006). 3.4 Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.4 of the Registrant’s Quarterly Report on Form 10-Q filed May 7, 2008). 3.5 Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed June 23, 2011). 3.6 Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed May 23, 2019). 3.7 Form of Articles Supplementary designating the Registrant’s 7.875% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A filed April 1, 2004). 3.8 Articles Supplementary of the Registrant’s designating an additional 2,750,000 shares of the Company’s 7.875% Series A Cumulative Redeemable Preferred Stock, as filed with the State Department of Assessments and Taxation of Maryland on October 15, 2004 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed October 18, 2004). 3.9 Articles Supplementary designating the Registrant’s 6% Series B Cumulative Convertible Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on 8-K filed April 10, 2006). 3.10 Articles Supplementary designating the Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed May 16, 2012). 3.11 Articles Supplementary designating the Registrant’s 7.50% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed September 13, 2012). 3.12 Articles Supplementary designating the Registrant’s 7.625% Series E Cumulative Redeemable Preferred Stock, liquidation preference $25.00 (incorporated by reference to Exhibit 3.12 to the Registrant’s Registration Statement on Form 8-A filed July 12, 2016). 3.13 Articles Supplementary reclassifying the Registrant’s 6% Series B Cumulative Convertible Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.13 to the Registrant’s Registration Statement on Form 8-A filed July 27, 2017). 3.14 Articles Supplementary designating the Registrant’s 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.14 to the Registrant’s Registration Statement on Form 8-A filed July 27, 2017). 100 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 3.15 Articles Supplementary reclassifying and designating (1) 7,412,500 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of undesignated Common Stock; (2) 650,000 authorized but unissued shares of the Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock; and (3) 3,400,000 authorized but unissued shares of the Registrant’s 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock. (incorporated by reference to Exhibit 3.15 of the Registrant’s Quarterly Report on Form 10-Q filed November 3, 2017). 3.16 Articles Supplementary designating Annaly’s 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.16 to the Registrant’s Registration Statement on Form 8-A filed January 10, 2018). 3.17 Articles Supplementary reclassifying and designating (i) 11,500,000 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of Registrant’s undesignated common stock and (ii) 5,000,000 authorized but unissued shares of Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of Registrant’s undesignated common stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 3, 2018). 3.18 Form of Articles Supplementary designating Annaly’s 8.125% Series H Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.17 to the Registrant’s Registration Statement on Form 8-A filed September 7, 2018). 3.19 Articles Supplementary reclassifying and designating 2,200,000 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of undesignated Common Stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed June 3, 2019). 3.20 Articles Supplementary designating Annaly’s 6.750% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.20 to the Registrant’s Registration Statement on Form 8-A filed June 26, 2019). 3.21 Articles Supplementary reclassifying and designating 7,000,000 authorized but unissued shares of Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of Registrant’s undesignated common stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed July 22, 2019). 3.22 Articles Supplementary filed with the State Department of Assessments and Taxation of Maryland effective on January 4, 2021 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed January 5, 2021). 3.23 Amended and Restated Bylaws of the Registrant, February 9 , 20 22 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed Febr uary 1 0 , 20 22 ). 4.1 Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed September 17, 1997). 4.2 Specimen Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-74618) filed on December 5, 2001). 4.3 Specimen Series E Preferred Stock Certificate (incorporated by reference to Exhibit 4.7 to the Registrant’s Registration Statement (Registration No. 333-211140) on Form S-4/A filed May 27, 2016). 4. 4 Specimen Series G Preferred Stock Certificate (incorporated by reference to Exhibit 4.9 to the Registrant’s Registration Statement on Form 8-A filed January 10, 2018). 4. 5 Specimen Series I Preferred Stock Certificate (incorporated by reference to Exhibit 4.7 to the Registrant’s Registration Statement on Form 8-A filed June 26, 2019). 4. 6 Indenture, dated as of February 12, 2010, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed February 12, 2010). 4. 7 Indenture, dated as of February 1, 2019, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.7 to the Registrant’s Current Report on Form S-3 filed February 1, 2019). 4. 8 Supplemental Indenture, dated as of February 12, 2010, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed February 12, 2010). 4. 9 Second Supplemental Indenture, dated as of May 14, 2012, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed May 14, 2012). 101 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 4.1 0 Description of Securities. † 10.1 Form of Master Repurchase Agreement (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed August 5, 1997). 10.2 Registrant’s 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 1, 2010).* 10.3 Registrant’s Deferred Compensation Plan for Directors (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed February 23, 2017).* 10.4 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 20, 2017). 10. 5 2020 Equity Incentive Plan (incorporated herein by reference to Annex A to the Registrant’s proxy statement dated April 8, 2020).* 10. 6 Form of Deferred Stock Unit Award for Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 21, 2020).* 10. 7 Annaly Capital Management, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 1, 2020).* 10. 8 Form of 2020 Performance Stock Unit Award (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed July 1, 2020).* 10. 9 Form of 202 0 Restricted Stock Unit Award (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed July 1, 2020).* 10.1 0 Form of 202 2 Performance Stock Unit Awar d . *† 10.11 Form of 2022 Restricted Stock Unit Award. *† 21.1 Subsidiaries of Registrant. † 23.1 Consent of Ernst & Young LLP. † 31.1 Certification of David L. Finkelstein, Chief Executive Officer and P resident (Principal Executive Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. † 31.2 Certification of Serena Wolfe, Chief Financial Officer (Principal Financial Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. † 32.1 Certification of David L. Finkelstein, Chief Executive Officer and President (Principal Executive Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † 32.2 Certification of Serena Wolfe, Chief Financial Officer (Principal Financial Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † 101.INS XBRL The instance document does not appear in the interactive data file because its Extensible Business Reporting Language (XBRL) tags are embedded within the Inline XBRL document. The following documents are formatted in Inline XBRL: (i) Consolidated Statements of Financial Condition at December 31, 2021 and 2020; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019; (iii) Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019; and (v) Notes to Consolidated Financial Statements. 101.SCH XBRL Taxonomy Extension Schema Document † 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document † 101.DEF XBRL Additional Taxonomy Extension Definition Linkbase Document Created† 101.LAB XBRL Taxonomy Extension Label Linkbase Document † 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document † 104 The cover page for the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2021 (formatted in Inline XBRL and contained in Exhibit 101). * Exhibit Numbers 10.2, 10.3, 10.5, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11 are management contracts or compensatory plans required to be filed as Exhibits to this Form 10-K. † Submitted electronically herewith. 102 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 16. FORM 10-K SUMMARY None. 103 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) F- 1 Consolidated Financial Statements as of December 31, 2021 and 2020 and for the Years Ended December 31, 2021, 2020 and 2019 Consolidated Statements of Financial Condition F- 3 Consolidated Statements of Comprehensive Income (Loss) F- 4 Consolidated Statements of Stockholders’ Equity F- 5 Consolidated Statements of Cash Flows F- 6 Notes To Consolidated Financial Statements Note 1. Description of Business F- 7 Note 2. Basis of Presentation F- 7 Note 3. Significant Accounting Policies F- 8 Note 4. Financial Instruments F- 11 Note 5. Securities F- 12 Note 6. Loans F- 16 Note 7. Mortgage Servicing Rights F- 24 Note 8. Variable Interest Entities F- 25 Note 9. S ale of Commercial Real Estate Business F- 28 Note 10. Derivative Instruments F- 29 Note 11. Fair Value Measurements F- 33 Note 12. Goodwill and Intangible Assets F- 36 Note 13. Secured Financing F- 37 Note 14. Capital Stock F- 39 Note 15. Long-Term Stock Incentive Plan F-4 4 Note 16. Interest Income and Interest Expense F- 42 Note 17. Net Income (Loss) Per Common Share F- 43 Note 18. Income Taxes F- 43 Note 19. Risk Management F- 44 Note 20. Related Party Transactions F- 45 Note 21. Lease Commitments and Con tingencies F- 46 Note 22. Arcola Regulatory Requirements F- 46 Note 2 3 . Subsequent Events F- 47 104 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Annaly Capital Management, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial condition of Annaly Capital Management, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 17, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Amortization of net premiums on Agency mortgage-backed securities Description of the Matter Amortization of net premiums on Agency securities totaled $761.8 million for the year ended December 31, 2021. As disclosed in Note 3 to the consolidated financial statements, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities. Amortization or accretion is derived taking into account estimates of future principal prepayments, which are derived using third-party models and market information, in the calculation of the effective yield. Auditing the amortization of net premiums on Agency mortgage-backed securities is complex due to the high degree of judgment in management’s assumptions used in the measurement process including prepayment rates which are uncertain in nature. These assumptions have a significant effect on the amortization of net premiums on Agency mortgage-backed securities. F-1 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s processes to calculate amortization of net premiums on its Agency mortgage-backed securities, including management’s review of third-party models and assumptions (i.e., prepayment rates) and the completeness and accuracy of data used in the Company’s cash flow models and the calculation of projected cash flows. To test the amortization of net premiums, our audit procedures included, among others, evaluating the Company's methodology and utilizing the support of internal specialists to independently develop ranges of prepayment rates for a sample of securities based on current industry, market and economic data. We compared management’s prepayment rates to the ranges developed by the internal specialists to assess management’s estimate. We also recalculated management’s projected cash flows and the amortization of premiums or accretion of discounts for a sample of securities. Valuation of mortgage servicing rights Description of the Matter The Company invests in servicing related assets comprised of mortgage servicing rights and interests in mortgage servicing rights (collectively “MSR”) totaling $544.6 million and $69.3 million, respectively, as of December 31, 2021 as included in Note 7 to the consolidated financial statements. The Company records MSR at fair value on a recurring basis with changes in fair value recognized in the statement of comprehensive income (loss). These fair value estimates are based on valuation techniques used to estimate future cash flows that incorporate significant unobservable assumptions, which include discount rates, prepayment rates and servicing costs. Auditing the valuation of MSR is complex and required the use of a specialist due to the high degree of judgement in the assumptions made by management which are unobservable in nature. Additionally, selecting and applying audit procedures to address the estimation uncertainty involves auditor subjectivity and industry-specific knowledge of MSR, including the current market conditions considered by a market participant. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated and tested the Company’s processes and the design and operating effectiveness of internal controls addressing the valuation of MSR, comprising management’s governance over the functionality of the discounted cash flow model utilized to estimate fair value; management’s review of the completeness and accuracy of the significant assumptions used in the discounted cash flow model (i.e., discount rates, prepayment rates and servicing costs); management’s comparison of the assumptions used to independent third-party data; and management’s evaluation of the internal fair value mark to third-party independent valuation firms’ ranges, as well as their evaluation of the competence and objectivity of those third-party independent valuation firms, to assess the reasonableness of the fair values developed by the Company. To test the valuation of MSR, our audit procedures included, among others, evaluating the Company’s valuation techniques used to estimate future cash flows, validating the accuracy and completeness of model objective inputs by agreeing these inputs to the Company’s underlying records and third-party data, and testing the assumptions used by management by comparing them to current industry, market and economic trends. We involved our valuation specialists to assist in our evaluation of the Company’s model, valuation methodology and the assumptions used by management, and to independently develop a range of fair values for the MSR. We compared the assumptions made by management and management’s estimate of fair value to the assumptions and fair value ranges developed by management’s valuation specialists and our independent ranges to assess management’s estimates of fair value. We also assessed the competence and objectivity of management’s independent valuation firms engaged to evaluate the reasonableness of the fair values developed by the Company. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2012. New York, NY February 17, 2022 F-2 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data) December 31, December 31, 2021 2020 Assets Cash and cash equivalents (includes pledged assets of $ 1,222,505 and $ 1,137,809 , respectively) (1) $ 1,342,090 $ 1,243,703 Securities (includes pledged assets of $ 56,675,447 and $ 67,471,074 , respectively) (2) 63,655,674 75,652,396 Loans, net (includes pledged assets of $ 2,462,776 and $ 2,231,035 , respectively) (3) 4,242,043 3,083,821 Mortgage servicing rights (includes pledged assets of $ — and $ 5,541 , respectively) 544,562 100,895 Interests in MSR 69,316 — Assets transferred or pledged to securitization vehicles 6,086,308 6,910,020 Real estate, net — 656,314 Assets of disposal group held for sale 194,138 — Derivative assets 170,370 171,134 Receivable for unsettled trades 2,656 15,912 Principal and interest receivable 234,983 268,073 Goodwill and intangible assets, net 24,241 127,341 Other assets 197,683 225,494 Total assets $ 76,764,064 $ 88,455,103 Liabilities and stockholders’ equity Liabilities Repurchase agreements $ 54,769,643 $ 64,825,239 Other secured financing 903,255 917,876 Debt issued by securitization vehicles 5,155,633 5,652,982 Participations issued 1,049,066 39,198 Mortgages payable — 426,256 Liabilities of disposal group held for sale 154,956 — Derivative liabilities 881,537 1,033,345 Payable for unsettled trades 147,908 884,069 Interest payable 91,176 191,116 Dividends payable 321,142 307,613 Other liabilities 94,423 155,613 Total liabilities 63,568,739 74,433,307 Stockholders’ equity Preferred stock, par value $ 0.01 per share, 63,500,000 and 85,150,000 authorized, respectively, 63,500,000 issued and outstanding 1,536,569 1,536,569 Common stock, par value $ 0.01 per share, 2,936,500,000 and 2,914,850,000 authorized, respectively, 1,459,736,258 and 1,398,240,618 issued and outstanding, respectively 14,597 13,982 Additional paid-in capital 20,313,832 19,750,818 Accumulated other comprehensive income (loss) 958,410 3,374,335 Accumulated deficit ( 9,653,582 ) ( 10,667,388 ) Total stockholders’ equity 13,169,826 14,008,316 Noncontrolling interests 25,499 13,480 Total equity 13,195,325 14,021,796 Total liabilities and equity $ 76,764,064 $ 88,455,103 (1) Includes cash of consolidated Variable Interest Entities (“VIEs”) of $ 16.2 million and $ 22.2 million at December 31, 2021 and 2020, respectively. (2) Excludes $ 44.2 million and $ 81.5 million at December 31, 2021 and 2020, respectively, of agency mortgage-backed securities, $ 350.4 million and $ 576.6 million at December 31, 2021 and 2020, respectively, of non-Agency mortgage-backed securities and $ 0.0 million and $ 391.0 million at December 31, 2021 and 2020, respectively, of commercial mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition. (3) Includes $ 2.3 million and $ 47.0 million of residential mortgage loans held for sale at December 31, 2021 and 2020, respectively. See notes to consolidated financial statements. F-3 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) For The Years Ended December 31, 2021 2020 2019 Net interest income Interest income $ 1,983,036 $ 2,229,625 $ 3,787,297 Interest expense 249,243 899,112 2,784,875 Net interest income 1,733,793 1,330,513 1,002,422 Realized and unrealized gains (losses) Net interest component of interest rate swaps ( 276,142 ) ( 207,877 ) 351,375 Realized gains (losses) on termination or maturity of interest rate swaps ( 1,236,349 ) ( 1,917,628 ) ( 1,442,964 ) Unrealized gains (losses) on interest rate swaps 2,198,486 ( 904,532 ) ( 1,210,276 ) Subtotal 685,995 ( 3,030,037 ) ( 2,301,865 ) Net gains (losses) on disposal of investments and other ( 62,705 ) 661,513 ( 47,944 ) Net gains (losses) on other derivatives and financial instruments 121,735 756,305 ( 680,770 ) Net unrealized gains (losses) on instruments measured at fair value through earnings 183,663 ( 303,024 ) 36,021 Loan loss (provision) reversal 145,066 ( 147,581 ) ( 16,569 ) Business divestiture-related gains (losses) ( 278,559 ) — — Subtotal 109,200 967,213 ( 709,262 ) Total realized and unrealized gains (losses) 795,195 ( 2,062,824 ) ( 3,011,127 ) Other income (loss) 57,981 36,311 106,547 General and administrative expenses Compensation and management fee 118,451 131,685 170,628 Other general and administrative expenses 67,563 90,510 101,140 Total general and administrative expenses 186,014 222,195 271,768 Income (loss) before income taxes 2,400,955 ( 918,195 ) ( 2,173,926 ) Income taxes 4,675 ( 28,423 ) ( 10,835 ) Net income (loss) 2,396,280 ( 889,772 ) ( 2,163,091 ) Net income (loss) attributable to noncontrolling interests 6,384 1,391 ( 226 ) Net income (loss) attributable to Annaly 2,389,896 ( 891,163 ) ( 2,162,865 ) Dividends on preferred stock 107,532 142,036 136,576 Net income (loss) available (related) to common stockholders $ 2,282,364 $ ( 1,033,199 ) $ ( 2,299,441 ) Net income (loss) per share available (related) to common stockholders Basic $ 1.60 $ ( 0.73 ) $ ( 1.60 ) Diluted $ 1.60 $ ( 0.73 ) $ ( 1.60 ) Weighted average number of common shares outstanding Basic 1,427,426,079 1,414,659,439 1,434,912,682 Diluted 1,428,569,003 1,414,659,439 1,434,912,682 Other comprehensive income (loss) Net income (loss) $ 2,396,280 $ ( 889,772 ) $ ( 2,163,091 ) Unrealized gains (losses) on available-for-sale securities ( 2,419,618 ) 2,012,878 4,135,862 Reclassification adjustment for net (gains) losses included in net income (loss) 3,693 ( 776,734 ) ( 17,806 ) Other comprehensive income (loss) ( 2,415,925 ) 1,236,144 4,118,056 Comprehensive income (loss) ( 19,645 ) 346,372 1,954,965 Comprehensive income (loss) attributable to noncontrolling interests 6,384 1,391 ( 226 ) Comprehensive income (loss) attributable to Annaly ( 26,029 ) 344,981 1,955,191 Dividends on preferred stock 107,532 142,036 136,576 Comprehensive income (loss) attributable to common stockholders $ ( 133,561 ) $ 202,945 $ 1,818,615 See notes to consolidated financial statements. F-4 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands) For The Years Ended December 31, 2021 2020 2019 Preferred stock Beginning of period $ 1,536,569 $ 1,982,026 $ 1,778,168 Issuance — — 428,324 Redemption — ( 445,457 ) ( 224,466 ) End of period $ 1,536,569 $ 1,536,569 $ 1,982,026 Common stock Beginning of period $ 13,982 $ 14,301 $ 13,138 Issuance 609 — 1,422 Buyback of common stock — ( 324 ) ( 261 ) Stock-based award activity 6 3 — Direct purchase and dividend reinvestment — 2 2 End of period $ 14,597 $ 13,982 $ 14,301 Additional paid-in capital Beginning of period $ 19,750,818 $ 19,966,923 $ 18,794,331 Issuance 551,606 ( 93 ) 1,397,484 Buyback of common stock — ( 209,094 ) ( 223,313 ) Stock-based award activity 11,408 6,452 2,162 Redemption of preferred stock — ( 14,543 ) ( 5,534 ) Direct purchase and dividend reinvestment — 1,173 1,793 End of period $ 20,313,832 $ 19,750,818 $ 19,966,923 Accumulated other comprehensive income (loss) Beginning of period $ 3,374,335 $ 2,138,191 $ ( 1,979,865 ) Unrealized gains (losses) on available-for-sale securities ( 2,419,618 ) 2,012,878 4,135,862 Reclassification adjustment for net gains (losses) included in net income (loss) 3,693 ( 776,734 ) ( 17,806 ) End of period $ 958,410 $ 3,374,335 $ 2,138,191 Accumulated deficit Beginning of period - unadjusted $ ( 10,667,388 ) $ ( 8,309,424 ) $ ( 4,493,660 ) Cumulative effect of change in accounting principle for credit losses — ( 39,641 ) — Beginning of period - adjusted ( 10,667,388 ) ( 8,349,065 ) ( 4,493,660 ) Net income (loss) attributable to Annaly 2,389,896 ( 891,163 ) ( 2,162,865 ) Dividends declared on preferred stock (1) ( 107,532 ) ( 142,036 ) ( 136,576 ) Dividends and dividend equivalents declared on common stock and stock-based awards (1) ( 1,268,558 ) ( 1,285,124 ) ( 1,516,323 ) End of period $ ( 9,653,582 ) $ ( 10,667,388 ) $ ( 8,309,424 ) Total stockholder’s equity $ 13,169,826 $ 14,008,316 $ 15,792,017 Noncontrolling interests Beginning of period $ 13,480 $ 4,327 $ 5,689 Net income (loss) attributable to noncontrolling interests 6,384 1,391 ( 226 ) Equity contributions from (distributions to) noncontrolling interests 5,635 7,762 ( 1,136 ) End of period $ 25,499 $ 13,480 $ 4,327 Total equity $ 13,195,325 $ 14,021,796 $ 15,796,344 (1) Refer to the “Capital Stock” Note for dividends per share for each class of shares. See notes to consolidated financial statements. F-5 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) For The Years Ended December 31, 2021 2020 2019 Cash flows from operating activities Net income (loss) $ 2,396,280 $ ( 889,772 ) $ ( 2,163,091 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities Amortization of premiums and discounts of investments, net 784,110 1,371,178 1,113,273 Amortization of securitized debt premiums and discounts and deferred financing costs ( 6,620 ) ( 11,576 ) ( 11,854 ) Depreciation, amortization and other noncash expenses 24,636 41,357 31,559 Net (gains) losses on disposals of investments and other 62,705 ( 661,513 ) 47,944 Net (gains) losses on investments and derivatives ( 1,267,535 ) 2,368,879 1,855,025 Net (gains) losses on business divestitures 278,559 — — Income from unconsolidated joint ventures 12,181 7,072 6,893 Loan loss provision (reversal) ( 145,066 ) 147,581 16,569 Payments on purchases of loans held for sale ( 51,403 ) ( 147,833 ) ( 250,348 ) Proceeds from sales and repayments of loans held for sale 90,020 168,716 282,693 Net receipts (payments) on derivatives 932,867 ( 1,958,131 ) ( 1,939,634 ) Net change in Other assets 31,044 249,778 ( 39,880 ) Interest receivable 32,926 159,320 ( 85,951 ) Interest payable ( 99,590 ) ( 285,219 ) ( 94,593 ) Other liabilities 1,725 ( 31,870 ) 31,838 Net cash provided by (used in) operating activities 3,076,839 527,967 ( 1,199,557 ) Cash flows from investing activities Payments on purchases of securities ( 22,344,751 ) ( 32,676,856 ) ( 63,465,822 ) Proceeds from sales of securities 11,670,321 52,639,778 25,606,504 Principal payments on securities 18,742,951 19,571,476 17,199,893 Payments on purchases and origination of loans ( 7,715,200 ) ( 2,257,314 ) ( 4,126,123 ) Proceeds from sales and maturities of loans 1,213,745 624,026 365,787 Principal payments on loans 2,610,912 2,222,500 3,139,084 Payments on purchases of MSR ( 473,035 ) — — Proceeds from sales of MSR 82,175 72,160 — Payments on purchases of interests in MSR ( 65,107 ) — — Investments in real estate ( 2,329 ) ( 7,450 ) ( 39,144 ) Proceeds from sales of real estate 53,910 149,600 24,955 Proceeds from reverse repurchase agreements 16,734,313 58,800,000 98,339,755 Payments on reverse repurchase agreements ( 16,734,313 ) ( 58,800,000 ) ( 97,689,715 ) Distributions in excess of cumulative earnings from unconsolidated joint ventures 290 7,590 3,155 Proceeds from sale of equity securities 6,957 — — Cash acquired (paid) in asset acquisition — 6,264 — Net proceeds from business divestiture 1,118,440 — — Net cash provided by (used in) investing activities 4,899,279 40,351,774 ( 20,641,671 ) Cash flows from financing activities Proceeds from repurchase agreements and other secured financing 2,288,704,788 2,776,331,362 5,470,733,256 Payments on repurchase agreements and other secured financing ( 2,298,775,005 ) ( 2,816,805,618 ) ( 5,449,836,013 ) Proceeds from issuances of securitized debt 3,719,027 2,385,374 3,444,055 Principal payments on securitized debt ( 1,716,196 ) ( 1,238,962 ) ( 2,031,959 ) Payment of deferred financing cost ( 9,279 ) ( 553 ) ( 12,228 ) Net proceeds from stock offerings, direct purchases and dividend reinvestments 552,215 1,175 1,829,025 Redemptions of preferred stock — ( 460,000 ) ( 230,000 ) Proceeds from participations issued 1,847,821 38,741 — Payments on repurchases of participations issued ( 818,575 ) — — Principal payments on participations issued ( 23,374 ) — — Net principal receipts (payments) on mortgages payable ( 2,237 ) ( 60,980 ) ( 26,202 ) Net contributions (distributions) from (to) noncontrolling interests 5,635 7,762 ( 1,136 ) Net payments on share repurchase — ( 209,418 ) ( 223,574 ) Settlement of stock-based awards in satisfaction of withholding tax requirements ( 2,830 ) — — Dividends paid ( 1,359,721 ) ( 1,475,650 ) ( 1,689,016 ) Net cash provided by (used in) financing activities ( 7,877,731 ) ( 41,486,767 ) 21,956,208 Net (decrease) increase in cash and cash equivalents $ 98,387 $ ( 607,026 ) $ 114,980 Cash and cash equivalents including cash pledged as collateral, beginning of period 1,243,703 1,850,729 1,735,749 Cash and cash equivalents including cash pledged as collateral, end of period $ 1,342,090 $ 1,243,703 $ 1,850,729 Supplemental disclosure of cash flow information Interest received $ 2,701,381 $ 3,681,826 $ 4,811,218 Dividends received $ 51 $ 4,643 $ 8,395 Interest paid (excluding interest paid on interest rate swaps) $ 269,244 $ 1,166,977 $ 2,902,644 Net interest received (paid) on interest rate swaps $ ( 340,738 ) $ 296,621 $ ( 323,028 ) Taxes received (paid) $ ( 3,797 ) $ 1,515 $ 2,284 Noncash investing and financing activities Receivable for unsettled trades $ 2,656 $ 15,912 $ 4,792 Payable for unsettled trades $ 147,908 $ 884,069 $ 463,387 Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment $ ( 2,415,925 ) $ 1,236,144 $ 4,118,056 Dividends declared, not yet paid $ 321,142 $ 307,613 $ 357,527 Derecognition of assets of consolidated VIEs $ 3,075,961 $ 1,222,221 $ — Derecognition of securitized debt of consolidated VIEs $ 2,506,799 $ 1,141,311 $ — Derecognition of mortgages payable $ 314,485 $ — $ — See notes to consolidated financial statements. F-6 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED December 31, 2021, 2020 and 2019 ________________________________________________________________________________________________________________________________ 1. DESCRIPTION OF BUSINESS Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997. The Company is a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, residential mortgage loans, mortgage servicing rights (“MSR”) and corporate debt. The Company’s principal business objective is to generate net income for distribution to its stockholders and optimize its returns through prudent management of its diversified investment strategies. The Company is an internally-managed company that has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”). Prior to the closing of the Internalization (as defined in “Related Party Transactions” Note) on June 30, 2020, the Company was externally managed by Annaly Management Company LLC (the “Former Manager”). The Company’s three investment groups are primarily comprised of the following: Investment Groups Description Annaly Agency Group Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including MSR and Agency commercial mortgage-backed securities. Annaly Residential Credit Group Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets. Annaly Middle Market Lending Group Provides financing to private equity-backed middle market businesses, focusing primarily on senior debt within select industries. In March 2021, the Company announced that it had entered into a definitive agreement to sell and exit its Commercial Real Estate (“CRE”) business. During the year ended December 31, 2021, the platform and the significant majority of the assets were transferred with remaining assets expected to be transferred by the end of the first quarter of 2022 subject to regulatory approvals. Refer to the “Sale of Commercial Real Estate Business” Note for additional information. 2. BASIS OF PRESENTATION The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Certain line items in the Company’s Consolidated Statements of Cash Flows were aggregated to simplify presentation. Prior periods have been adjusted to conform to the current presentation. Beginning with the quarter ended June 30, 2021, the Company began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Other general and administrative expenses for the three months ended March 31, 2021 decreased by $ 1.8 million and for the years ended December 31, 2020 and 2019 decreased by $ 17.0 million and $ 29.9 million, respectively, and Other income (loss) decreased by the same amounts for the three months ended March 31, 2021 and the years ended December 31, 2020 and 2019, respectively. F-7 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 3. SIGNIFICANT ACCOUNTING POLICIES The Company’s significant accounting policies are described below or are included elsewhere in these notes to the consolidated financial statements. Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation. Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE. Variable Interest Entities – A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion to change. Refer to the “Variable Interest Entities” Note for further information. Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of joint ventures accounted for under the equity method. These investments are included in real estate, net and Other assets with income or loss included in Other income (loss). Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled $ 1.2 billion and $ 1.1 billion at December 31, 2021 and December 31, 2020, respectively. Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the FVO in order to simplify the accounting treatment for certain financial instruments. Items for which the FVO has been elected are presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the FVO see the table in the “Financial Instruments” Note. Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments. Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they meet the offsetting criteria. Please see below and refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements. Derivative Instruments – 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. Refer to the “Derivative Instruments” Note for further discussion. Stock-Based Compensation – The Company measures compensation expense for stock-based awards at fair value, which is generally based on the grant-date fair value of the Company’s common stock. Compensation expense is recognized ratably over the vesting or requisite service period of the award. Stock-based awards that contain market-based conditions are valued using a model. F-8 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Compensation expense for awards with performance conditions is recognized based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market conditions is recognized irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. Forfeitures are recorded when they occur. The Company generally issues new shares of common stock upon delivery of stock-based awards. Interest Income - The Company recognizes interest income primarily on Residential Securities (as defined in the “Securities” Note), residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion. For its securities, the Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), taking into account estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period. Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis. Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss). If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower. Refer to the “Interest Income and Interest Expense” Note for further discussion on interest. The Company has made an accounting policy election not to measure an allowance for loans losses for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual due date for commercial loans or 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income. Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income. Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“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 its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes. F-9 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption. Standard Description Effective Date Effect on the Financial Statements or Other Significant Matters Standards that have been adopted ASU 2016-13 Financial instruments - Credit losses (Topic 326): Measurement of credit losses on financial instruments (“ASU 2016-13”) This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect cash and cash equivalents, reverse repurchase agreements, certain loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope. There are also limited amendments to the impairment model for available-for-sale debt securities. January 1, 2020 The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets and off-balance-sheet credit exposures in scope. The modified retrospective approach requires an adjustment to beginning retained earnings for the cumulative effect of adopting the standard. Results for reporting periods beginning after January 1, 2020 are presented in accordance with ASU 2016-13, while prior periods continue to be reported in accordance with previously applicable GAAP. As a result of the adoption, the Company recorded an increase to the loan loss allowance of $ 37.4 million and a liability of $ 2.2 million for unfunded loan commitments, which reduced beginning retained earnings by $ 39.6 million as of January 1, 2020. ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting This ASU provides optional, temporary relief to accounting for contract modifications resulting from reference rate reform. January 1, 2020 The Company has elected to retrospectively apply the practical expedients to modifications of qualifying contracts as continuation of the existing contract rather than as a new contract. The adoption had no immediate impact and is not expected to have a material impact on the Company’s consolidated financial statements as the guidance continues to be applied to contract modifications until the ASU’s termination date. F-10 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 4. FINANCIAL INSTRUMENTS The following table presents characteristics for certain of the Company’s financial instruments at December 31, 2021 and 2020. Financial Instruments (1) Balance Sheet Line Item Type / Form Measurement Basis December 31, 2021 December 31, 2020 Assets (dollars in thousands) Securities Agency mortgage-backed securities (2) Fair value, with unrealized gains (losses) through other comprehensive income $ 59,939,383 $ 73,562,972 Securities Agency mortgage-backed securities (3) Fair value, with unrealized gains (losses) through earnings 586,222 504,087 Securities Residential credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 936,228 532,403 Securities Non-agency mortgage-backed securities Fair value, with unrealized gains (losses) through earnings 1,663,336 972,192 Securities Commercial real estate debt investments - CMBS (4) Fair value, with unrealized gains (losses) through other comprehensive income — 31,603 Securities Commercial real estate debt investments - CMBS (4) Fair value, with unrealized gains (losses) through earnings 521,440 45,254 Securities Commercial real estate debt investments - credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 9,065 3,885 Total securities 63,655,674 75,652,396 Loans, net Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 2,272,072 345,810 Loans, net Residential mortgage loan warehouse facility Fair value, with unrealized gains (losses) through earnings 980 — Loans, net Commercial real estate debt and preferred equity, held for investment (4) Amortized cost — 498,081 Loans, net Corporate debt, held for investment Amortized cost 1,968,991 2,239,930 Total loans, net 4,242,043 3,083,821 Interests in MSR Interest in net servicing cash flows Fair value, with unrealized gains (losses) through earnings 69,316 — Assets transferred or pledged to securitization vehicles Agency mortgage-backed securities Fair value, with unrealized gains (losses) through other comprehensive income 589,873 620,347 Assets transferred or pledged to securitization vehicles Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 5,496,435 3,249,251 Assets transferred or pledged to securitization vehicles Commercial mortgage loans Fair value, with unrealized gains (losses) through earnings — 2,166,073 Assets transferred or pledged to securitization vehicles Commercial mortgage loans Amortized cost — 874,349 Total assets transferred or pledged to securitization vehicles 6,086,308 6,910,020 Liabilities Repurchase agreements Repurchase agreements Amortized cost 54,769,643 64,825,239 Other secured financing Loans Amortized cost 903,255 917,876 Debt issued by securitization vehicles Securities Fair value, with unrealized gains (losses) through earnings 5,155,633 5,652,982 Participations issued Participations issued Fair value, with unrealized gains (losses) through earnings 1,049,066 39,198 Mortgages payable Loans (5) Amortized cost — 426,256 (1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. Interests in MSR are considered financial assets whereas directly held MSR are servicing assets or obligations. (2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. (3) Includes interest-only securities and reverse mortgages. (4) Excludes Assets of disposal group held for sale at December 31, 2021. (5) Excludes Liabilities of disposal group held for sale at December 31, 2021. F-11 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 5. SECURITIES The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Transactions for regular-way securities are recorded on trade date, including TBA securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method. Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss) as a Securities Loss Provision and reflected as an Allowance for Credit Losses on Securities on the Consolidated Statements of Financial Condition, while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). When the fair value of a held-to-maturity security is less than the cost, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. For the year ended December 31, 2021, the Company recognized a $ 0.4 million impairment on a commercial mortgage-backed security that it intended to sell. There was no impairment recognized for the years ended December 31, 2020, and 2019. Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”). Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis. TBA securities without intent to accept delivery (“TBA derivatives”) are accounted for as derivatives as discussed in the “Derivative Instruments” Note. CRT Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors. Non-Agency Mortgage-Backed Securities - The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations. Agency mortgage-backed securities, non-Agency mortgage-backed securities and residential CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio. Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities (“CMBS”) are classified as available-for-sale and reported at fair value with any credit loss recognized through an allowance for credit losses and any other unrealized gains and losses reported as a component of Other comprehensive income (loss). Management evaluates its Commercial Securities for impairment at least quarterly. The Company elected the fair value option for all other Commercial Securities, including conduit and credit CMBS, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through earnings. As of December 31, 2021, CMBS included in the announced sale of the Company’s CRE business have been sold. Prior to their sale, the securities were reported in Assets of disposal group held for sale and Securities, respectively, in the Consolidated Statements of Financial Condition. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction. The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the year ended December 31, 2021: F-12 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Agency Securities Residential Credit Securities Commercial Securities Total (dollars in thousands) Beginning balance January 1, 2021 $ 74,067,059 $ 1,504,595 $ 80,742 $ 75,652,396 Purchases 18,887,983 2,129,147 534,226 21,551,356 Sales and transfers (1) ( 11,392,003 ) ( 156,130 ) ( 83,775 ) ( 11,631,908 ) Principal paydowns ( 17,860,666 ) ( 880,649 ) ( 181 ) ( 18,741,496 ) (Amortization) / accretion ( 761,838 ) 1,478 298 ( 760,062 ) Fair value adjustment ( 2,414,930 ) 1,123 ( 805 ) ( 2,414,612 ) Ending balance December 31, 2021 $ 60,525,605 $ 2,599,564 $ 530,505 $ 63,655,674 (1) Includes transfers to assets of disposal group held for sale. F-13 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following tables present the Company’s securities portfolio, excluding securities transferred or pledged to securitization vehicles, that was carried at their fair value at December 31, 2021 and 2020: December 31, 2021 Principal / Notional Remaining Premium Remaining Discount Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Agency (dollars in thousands) Fixed-rate pass-through $ 54,432,252 $ 3,008,185 $ ( 18,314 ) $ 57,422,123 $ 1,349,125 $ ( 474,643 ) $ 58,296,605 Adjustable-rate pass-through 305,211 1,965 ( 2,124 ) 305,052 16,223 ( 2 ) 321,273 CMO 114,533 1,888 — 116,421 5,277 — 121,698 Interest-only 1,912,415 456,683 — 456,683 428 ( 163,197 ) 293,914 Multifamily (1) 5,671,138 273,553 — 1,453,946 15,330 ( 16,563 ) 1,452,713 Reverse mortgages 36,807 3,550 — 40,357 — ( 955 ) 39,402 Total agency securities $ 62,472,356 $ 3,745,824 $ ( 20,438 ) $ 59,794,582 $ 1,386,383 $ ( 655,360 ) $ 60,525,605 Residential credit Credit risk transfer (2) $ 924,101 $ 8,754 $ ( 1,176 ) $ 927,555 $ 9,641 $ ( 968 ) $ 936,228 Alt-A 83,213 31 ( 17,133 ) 66,111 3,627 ( 251 ) 69,487 Prime (3) 323,062 9,841 ( 14,757 ) 268,117 10,853 ( 3,529 ) 275,441 Subprime 170,671 349 ( 16,111 ) 154,909 8,285 ( 118 ) 163,076 NPL/RPL 987,415 950 ( 1,698 ) 986,667 2,739 ( 5,968 ) 983,438 Prime jumbo (>=2010 vintage) (4) 299,783 5,680 ( 6,410 ) 172,598 4,272 ( 4,976 ) 171,894 Total residential credit securities $ 2,788,245 $ 25,605 $ ( 57,285 ) $ 2,575,957 $ 39,417 $ ( 15,810 ) $ 2,599,564 Total Residential Securities $ 65,260,601 $ 3,771,429 $ ( 77,723 ) $ 62,370,539 $ 1,425,800 $ ( 671,170 ) $ 63,125,169 Commercial Commercial Securities $ 533,071 — $ ( 127 ) $ 532,944 $ 165 $ ( 2,604 ) $ 530,505 Total securities $ 65,793,672 $ 3,771,429 $ ( 77,850 ) $ 62,903,483 $ 1,425,965 $ ( 673,774 ) $ 63,655,674 December 31, 2020 Principal / Notional Remaining Premium Remaining Discount Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Agency (dollars in thousands) Fixed-rate pass-through $ 64,800,235 $ 3,325,020 $ ( 22,143 ) $ 68,103,112 $ 3,200,542 $ ( 1,076 ) $ 71,302,578 Adjustable-rate pass-through 455,675 2,869 ( 3,369 ) 455,175 22,341 — 477,516 CMO 139,664 2,177 — 141,841 7,926 — 149,767 Interest-only 2,790,537 564,297 — 564,297 3,513 ( 145,901 ) 421,909 Multifamily (1) 1,910,384 50,148 ( 1,057 ) 1,604,913 59,548 ( 954 ) 1,663,507 Reverse mortgages 47,585 4,183 — 51,768 252 ( 238 ) 51,782 Total agency investments $ 70,144,080 $ 3,948,694 $ ( 26,569 ) $ 70,921,106 $ 3,294,122 $ ( 148,169 ) $ 74,067,059 Residential credit Credit risk transfer (2) $ 544,780 $ 7,324 $ ( 2,430 ) $ 538,941 $ 3,062 $ ( 9,600 ) $ 532,403 Alt-A 93,001 51 ( 17,368 ) 75,684 4,644 — 80,328 Prime (3) 372,539 7,008 ( 15,999 ) 168,861 14,607 ( 719 ) 182,749 Subprime 197,779 584 ( 18,181 ) 180,182 8,312 ( 61 ) 188,433 NPL/RPL 475,108 821 ( 2,416 ) 473,513 3,782 ( 1,448 ) 475,847 Prime jumbo (>=2010 vintage) (4) 336,320 7,010 ( 5,300 ) 46,406 3,680 ( 5,251 ) 44,835 Total residential credit securities $ 2,019,527 $ 22,798 $ ( 61,694 ) $ 1,483,587 $ 38,087 $ ( 17,079 ) $ 1,504,595 Total Residential Securities $ 72,163,607 $ 3,971,492 $ ( 88,263 ) $ 72,404,693 $ 3,332,209 $ ( 165,248 ) $ 75,571,654 Commercial Commercial Securities $ 89,858 $ — $ ( 7,471 ) $ 82,387 $ 54 $ ( 1,699 ) $ 80,742 Total securities $ 72,253,465 $ 3,971,492 $ ( 95,734 ) $ 72,487,080 $ 3,332,263 $ ( 166,947 ) $ 75,652,396 (1) Principal/Notional amount includes $ 4.5 billion and $ 354.6 million of Agency Multifamly interest-only security as of December 31, 2021 and December 31, 2020, respectively. (2) Principal/Notional amount includes $ 4.1 million and $ 10.7 million of a CRT interest-only security as of December 31, 2021 and December 31, 2020, respectively. (3) Principal/Notional amount includes $ 50.0 million and $ 194.7 million of Prime interest-only securities as of December 31, 2021 and December 31, 2020, respectively. (4) Principal/Notional amount includes $ 126.5 million and $ 291.6 million of Prime Jumbo interest-only securities as of December 31, 2021 and December 31, 2020, respectively. F-14 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferred or pledged to securitization vehicles, by issuing Agency at December 31, 2021 and 2020: December 31, 2021 December 31, 2020 Investment Type (dollars in thousands) Fannie Mae $ 48,404,991 $ 56,218,033 Freddie Mac 10,880,033 17,735,041 Ginnie Mae 1,240,581 113,985 Total $ 60,525,605 $ 74,067,059 Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages. The following table summarizes the Company’s Residential Securities, excluding securities transferred or pledged to securitization vehicles, at December 31, 2021 and 2020, according to their estimated weighted average life classifications: December 31, 2021 December 31, 2020 Estimated Fair Value Amortized Cost Estimated Fair Value Amortized Cost Estimated weighted average life (dollars in thousands) Less than one year $ 253,129 $ 250,689 $ 110,203 $ 109,540 Greater than one year through five years 16,155,017 15,766,307 45,643,138 43,404,877 Greater than five years through ten years 45,470,212 45,102,607 28,509,058 27,610,923 Greater than ten years 1,246,811 1,250,936 1,309,255 1,279,353 Total $ 63,125,169 $ 62,370,539 $ 75,571,654 $ 72,404,693 The estimated weighted average lives of the Residential Securities at December 31, 2021 and 2020 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected. The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at December 31, 2021 and 2020. December 31, 2021 December 31, 2020 Estimated Fair Value (1) Gross Unrealized Losses (1) Number of Securities (1) Estimated Fair Value (1) Gross Unrealized Losses (1) Number of Securities (1) (dollars in thousands) Less than 12 months $ 22,828,156 $ ( 475,064 ) 571 $ 777,586 $ ( 2,030 ) 30 12 Months or more 383,815 ( 10,960 ) 19 — — — Total $ 23,211,971 $ ( 486,024 ) 590 $ 777,586 $ ( 2,030 ) 30 (1) Excludes interest-only mortgage-backed securities and reverse mortgages. The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities have an actual or implied credit rating that is the same as that of the U.S. government. The investments are not considered to be impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. During the years ended December 31, 2021 and 2020, the Company disposed of $ 11.5 billion and $ 51.8 billion, respectively, of Residential Securities. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the years ended December 31, 2021 and 2020. Gross Realized Gains Gross Realized Losses Net Realized Gains (Losses) For the year ended (dollars in thousands) December 31, 2021 $ 102,567 $ ( 105,646 ) $ ( 3,079 ) December 31, 2020 $ 942,450 $ ( 305,449 ) $ 637,001 F-15 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 6. LOANS The Company invests in residential and corporate loans. Loans are classified as either held for investment or held for sale. Loans are eligible to be accounted for under the fair value option. If loans are elected under the fair value option, they are carried at fair value with changes in fair value recognized in earnings. Otherwise, loans held for investment are carried at cost less impairment and loans held for sale are accounted for at the lower of cost or fair value. Excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, as of December 31, 2021 and 2020, the Company reported $ 2.3 billion and $ 345.8 million, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $ 2.3 million and $ 47.0 million at December 31, 2021 and 2020, respectively. Allowance for Losses – The Company evaluates the need for a loss reserve on each of its loans classified as held-for-investment, which primarily include corporate debt and commercial loans, where the fair value option is not elected. Allowance for loan losses are written off in the period the loans are deemed uncollectible. Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each individual loan held for investment. An allowance is established at origination or acquisition that reflects management’s estimate of the total expected credit loss over the expected life of the loan. In estimating the lifetime expected credit losses, management utilizes a probability of default and loss given default methodology (“Loss Given Default methodology”), which considers projected economic conditions over the reasonable and supportable forecast period. The forecast incorporates primarily market-based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced from third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable period, the Company reverts to historical losses on a straight-line basis. Management uses third party vendors’ loan pool data for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s loan portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss (provision) reversal in the Consolidated Statements of Comprehensive Income (Loss). For loans experiencing credit deterioration, the Company may use a different methodology to determine the expected credit losses such as a discounted cash flow analysis. For collateral-dependent loans, if foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for any selling costs, if applicable. Additionally, the Company may elect the practical expedient for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty by measuring the allowance as the difference between the fair value of the collateral, less costs to sell, if applicable, and the amortized cost basis of the financial asset at the reporting date. The Company’s commercial loans were collateralized by commercial real estate including, but not limited to, multifamily real estate, office and retail space, hotels and industrial space. At origination, the fair value of the collateral generally exceeded the principal loan balance. Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment. Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date. The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management. The Company recorded net loan loss (provisions) reversals of $ 145.1 million, ($ 147.6 ) million and ($ 16.6 ) million for the years ended December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021 and 2020, the Company’s loan loss allowance was $ 27.9 million and $ 169.5 million, respectively. F-16 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table presents the activity of the Company’s loan investments, including loans held for sale and excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, for the year ended December 31, 2021: Residential Commercial Corporate Debt Corporate Debt Held for Sale (1) Total (dollars in thousands) Beginning balance January 1, 2021 $ 345,810 $ 498,081 $ 2,239,930 $ — $ 3,083,821 Purchases / originations 6,120,021 126,722 1,572,718 468,483 8,287,944 Sales and transfers (2) ( 4,084,742 ) ( 608,202 ) ( 1,205,965 ) ( 468,483 ) ( 6,367,392 ) Principal payments ( 81,677 ) ( 84,929 ) ( 661,941 ) — ( 828,547 ) Gains / (losses) (3) ( 16,693 ) 67,784 11,632 — 62,723 (Amortization) / accretion ( 10,647 ) 544 12,617 — 2,514 Ending balance December 31, 2021 $ 2,272,072 $ — $ 1,968,991 $ — $ 4,241,063 (1) Represents loans the Company originated during the three months ended June 30, 2021 and subsequently syndicated and closed. (2) Includes securitizations, syndications and transfers to securitization vehicles and commercial loan transfers to assets for disposal group held for sale. Includes transfer of residential loans to securitization vehicles with a carrying value of $ 3.9 billion during the year ended December 31, 2021. (3) Includes loan loss allowances. The Company also has off-balance-sheet credit exposures related to unfunded loan commitments, including revolvers, delayed draw term loans and future funding commitments that are not unconditionally cancellable by the Company. The Company utilizes the same methodology in calculating the liability related to the expected credit losses on these exposures as it does for the calculation of the allowance for loan losses. In determining the estimate of credit losses for off-balance-sheet credit exposures, the Company will consider the contractual period in which the entity is exposed to credit risk and the likelihood that funding will occur, if material. Estimated credit losses for off-balance-sheet credit exposures are included in Other liabilities on the Company’s Consolidated Statements of Financial Condition. Residential The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Additionally, the Company consolidated a collateralized financing entity that securitized prime adjustable-rate jumbo residential mortgage loans until November 2021, when the Company exercised its clean-up call and liquidated the securitization trust. The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts. The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles and excluding loan warehouse facilities, at December 31, 2021 and 2020: December 31, 2021 December 31, 2020 (dollars in thousands) Fair value $ 7,768,507 $ 3,595,061 Unpaid principal balance $ 7,535,855 $ 3,482,865 The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for December 31, 2021 and 2020 for these investments, excluding loan warehouse facilities: For the Years Ended December 31, 2021 December 31, 2020 (dollars in thousands) Interest income $ 182,325 $ 170,259 Net gains (losses) on disposal of investments and other ( 37,212 ) ( 38,372 ) Net unrealized gains (losses) on instruments measured at fair value through earnings 19,545 37,693 Total included in net income (loss) $ 164,658 $ 169,580 F-17 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table provides the geographic concentrations based on the unpaid principal balances at December 31, 2021 and 2020 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles: Geographic Concentrations of Residential Mortgage Loans December 31, 2021 December 31, 2020 Property location % of Balance Property location % of Balance California 50.2 % California 48.9 % New York 10.9 % New York 14.0 % Florida 6.1 % Florida 6.0 % All other (none individually greater than 5%) 32.8 % All other (none individually greater than 5%) 31.1 % Total 100.0 % 100.0 % The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at December 31, 2021 and 2020: December 31, 2021 December 31, 2020 Portfolio Range Portfolio Weighted Average Portfolio Range Portfolio Weighted Average (dollars in thousands) Unpaid principal balance $ 1 - $ 4,382 $ 513 $ 1 - $ 3,448 $ 473 Interest rate 0.75 % - 9.24 % 4.04 % 0.50 % - 9.24 % 4.89 % Maturity 7/1/2029 - 12/1/2061 12/22/2050 7/1/2029 - 1/1/2061 4/17/2046 FICO score at loan origination 604 - 831 762 505 - 829 755 Loan-to-value ratio at loan origination 8 % - 103 % 66 % 8 % - 104 % 67 % At December 31, 2021 and 2020, approximately 16 % and 37 %, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate. During the year ended December 31, 2021, the Company participated in an arrangement that provided a residential mortgage loan warehouse facility to a third-party originator. The Company has elected to apply the fair value option to this lending facility in order to simplify the accounting and keep the accounting consistent with other residential credit financial instruments with similar characteristics. At December 31, 2021, the fair value and carrying value of this warehouse facility was approximately $ 1.0 million and is reported as Loans, net in the Consolidated Statements of Financial Condition. As of December 31, 2021, the lending facility was not on nonaccrual status nor past due. Commercial As of December 31, 2021, commercial real estate loans are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition and classified as held for sale. As of December 31, 2020, commercial real estate loans are reported in Loans, net in the Consolidated Statements of Financial Condition and classified as held for investment. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction. The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. The difference between the principal amount of a loan and proceeds at acquisition is recorded as either a discount or premium. Commercial real estate loans and preferred equity interests that were designated as held for investment and were originated or purchased by the Company are carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less an allowance for losses, if necessary. Origination fees and costs, premiums or discounts are amortized into interest income over the life of the loan. During the period the Company owns the assets, management generally reviews the most recent financial information and metrics derived therefrom produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the Company’s commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan, economic trends (both macro and those affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject property is located. Management monitors the financial condition and operating results of its borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations. The Company’s commercial loans are collateral-dependent and, as such, for loans experiencing credit deterioration, the Company is required to record an allowance based upon the fair value of the underlying collateral if foreclosure is probable or if the practical expedient is elected. For the year ended December 31, 2021, the Company reversed the loan loss allowance F-18 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements resulting in a loan loss reversal on impaired commercial loans of $ 67.4 million as the loans are classified as held for sale and are carried at lower of cost or fair value. For the year ended December 31, 2020, the Company recorded a loan loss (provision) on impaired commercial loans of ($ 78.4 ) million with a principal balance and carrying value, net of allowances of $ 181.2 million and $ 113.6 million, respectively, based upon the fair value of the underlying collateral. The Company uses a discounted cash flow or market based valuation technique based upon the underlying property to project property cash flows. In projecting these cash flows, the Company reviewed the borrower financial statements, rent rolls, economic trends and other factors management deems important. These nonrecurring fair value measurements are considered to be in level three of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value. For the year ended December 31, 2021, the Company reversed the loan loss allowance based upon its Loss Given Default methodology resulting in a loan loss reversal on commercial loans of $ 62.5 million as the loans were classified as held for sale and carried at lower of cost or fair value. For the year ended December 31, 2020, the Company recorded a net loan loss (provision) of ($ 54.8 ) million based upon its Loss Given Default methodology. As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect loan loss allowance of $ 7.8 million was recorded on January 1, 2020. During the year ended December 31, 2020, the Company modified five commercial loans with a carrying value of $ 243.8 million at December 31, 2020. The maturity dates on four commercial loans were extended and one commercial loan was granted a 120 day forbearance. Additionally, as part of the restructuring two loans had partial paydowns totaling $ 4.5 million. The loan loss allowance recorded for these commercial loans was $ 23.6 million at December 31, 2020. Future funding commitments on the restructured loans total $ 4.1 million at December 31, 2020. At December 31, 2020, the amortized cost basis of commercial loans on nonaccrual status was $ 46.8 million. For the year ended December 31, 2020, the Company recognized interest income on commercial loans on nonaccrual status of $ 2.1 million. At December 31, 2020, the Company had unfunded commercial real estate loan commitments of $ 99.3 million. At December 31, 2020, the liability related to the expected credit losses on the unfunded commercial loan commitments was $ 5.1 million. At December 31, 2020, approximately 94 % of the carrying value of the Company’s CRE Debt and Preferred Equity Investments, including loans transferred or pledged to securitization vehicles were adjustable-rate. The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for sale at December 31, 2021and held for investment at December 31, 2020: December 31, 2021 Senior Mortgages Senior Securitized Mortgages (1) Mezzanine Loans Total (dollars in thousands) Beginning balance (January 1, 2021) (2) $ 373,925 $ 874,349 $ 124,156 $ 1,372,430 Originations & advances (principal) 127,481 69 644 128,194 Principal payments ( 75,007 ) ( 87,584 ) ( 9,922 ) ( 172,513 ) Transfers and sales (3) ( 436,408 ) ( 849,469 ) ( 171,794 ) ( 1,457,671 ) Net (increase) decrease in origination fees ( 1,403 ) — — ( 1,403 ) Amortization of net origination fees 501 486 43 1,030 Allowance for loan losses Beginning allowance ( 10,911 ) ( 62,149 ) ( 56,873 ) ( 129,933 ) Current period (allowance) reversal 10,911 62,149 56,873 129,933 Ending allowance — — — — Net carrying value (December 31, 2021) $ — $ — $ — $ — F-19 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements December 31, 2020 Senior Mortgages Senior Securitized Mortgages (1) Mezzanine Loans Total (dollars in thousands) Net carrying value (January 1, 2020) $ 499,690 $ 936,378 $ 182,726 $ 1,618,794 Originations & advances (principal) 206,090 — 12,374 218,464 Principal payments ( 77,344 ) ( 144,308 ) ( 78 ) ( 221,730 ) Principal write off — — ( 7,000 ) ( 7,000 ) Transfers (3) ( 245,120 ) 142,621 ( 7,100 ) ( 109,599 ) Net (increase) decrease in origination fees ( 1,055 ) ( 653 ) ( 80 ) ( 1,788 ) Realized gain 204 — — 204 Amortization of net origination fees 2,371 2,460 187 5,018 Allowance for loan losses Beginning Allowance, prior to CECL adoption — — ( 12,703 ) ( 12,703 ) Impact of adopting CECL ( 2,263 ) ( 4,166 ) ( 1,336 ) ( 7,765 ) Current period provision ( 8,648 ) ( 57,983 ) ( 66,521 ) ( 133,152 ) Write offs — — 23,687 23,687 Ending allowance ( 10,911 ) ( 62,149 ) ( 56,873 ) ( 129,933 ) Net carrying value (December 31, 2020) $ 373,925 $ 874,349 $ 124,156 $ 1,372,430 (1) Represents assets of consolidated VIEs held for sale at December 31, 2021. (2) Excludes loan loss allowances. (3) Includes transfers to securitization vehicles and for the year ended December 31, 2021, transfers to assets for disposal group held for sale. Corporate Debt The Company’s investments in corporate loans typically take the form of senior secured loans primarily in first or second lien positions. The Company’s senior secured loans generally have stated maturities of five to eight years . In connection with these senior secured loans, the Company receives a security interest in certain assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the effective interest method. The Company’s internal risk rating rubric for corporate debt has nine categories as depicted below: Risk Rating - Corporate Debt Description 1-5 / Performing Meets all present contractual obligations. 6 / Performing - Closely Monitored Meets all present contractual obligations but exhibits a defined weakness in either leverage or liquidity, but not both. Loans at this rating will require closer monitoring, but where we expect no loss of interest or principal. 7 / Substandard A loan that has a defined weakness in either leverage and/or liquidity, and which may require substantial changes to strengthen the asset. Loans at this rating level have a higher probability of loss, although no determination of the amount or timing of a loss is yet possible. 8 / Doubtful A loan that has missed a scheduled principal or interest payment or is otherwise deemed a non-earning account. The probability of loss is increasingly certain due to significant performance issues. 9 / Loss Considered uncollectible. Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s corporate debt held for investment by year of origination and internal risk rating. There was no provision for loan loss recorded on corporate loans using a discounted cash flow methodology for the year ended December 31, 2021. For the year ended December 31, 2020, the Company recorded a loan loss (provision) of ($ 4.5 ) million on impaired corporate loans using a discounted cash flow methodology. During the year ended December 31, 2020, the loan was restructured and the Company received $ 2.8 million of second lien debt and $ 4.8 million of equity. As a result of the restructuring, $ 19.6 million of first lien debt was written off and the related allowance of $ 11.9 million was charged off. For the year ended December 31, 2019, the Company recorded a loan loss provision of $ 7.4 million on a corporate loan with a principal balance and carrying value of $ 19.6 million and $ 12.2 million, respectively. F-20 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements For the year ended December 31, 2021, the Company recorded a net loan loss reversal on corporate loans of $ 11.6 million, based upon its Loss Given Default methodology. For the year ended December 31, 2020, the Company recorded a net loan loss (provision) on corporate loans of ($ 9.9 ) million, based upon its Loss Given Default methodology. As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect loan loss allowance on corporate loans of $ 29.7 million was recorded on January 1, 2020. As of December 31, 2021 and December 31, 2020, no corporate loans were on nonaccrual status. At December 31, 2021 and December 31, 2020, the Company had unfunded corporate loan commitments of $ 278.9 million and $ 87.3 million, respectively. At December 31, 2021 and December 31, 2020, the liability related to the expected credit losses on the unfunded corporate loan commitments was $ 2.3 million and $ 0.7 million, respectively. F-21 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at December 31, 2021 and 2020 are as follows: Industry Dispersion December 31, 2021 December 31, 2020 Total (1) Total (1) (dollars in thousands) Computer Programming, Data Processing & Other Computer Related Services $ 437,257 $ 483,142 Management & Public Relations Services 263,187 300,869 Industrial Inorganic Chemicals 156,292 156,391 Metal Cans & Shipping Containers 118,204 115,670 Public Warehousing & Storage 94,179 132,397 Miscellaneous Industrial & Commercial 93,619 77,163 Electronic Components & Accessories 92,261 78,129 Surgical, Medical & Dental Instruments & Supplies 80,786 83,161 Miscellaneous Health & Allied Services, not elsewhere classified 64,133 58,857 Research, Development & Testing Services 59,311 62,008 Offices & Clinics of Doctors of Medicine 50,017 104,781 Engineering, Architectural & Surveying 49,088 77,308 Insurance Agents, Brokers & Service 43,598 67,193 Electrical Work 42,617 41,128 Telephone Communications 42,589 58,450 Miscellaneous Equipment Rental & Leasing 32,346 49,587 Medical & Dental Laboratories 30,199 30,711 Home Health Care Services 28,660 28,587 Metal Forgings & Stampings 27,483 27,523 Legal Services 26,105 26,399 Petroleum & Petroleum Products 21,434 33,890 Sanitary Services 20,453 — Grocery Stores 19,745 22,895 Coating, Engraving & Allied Services 17,705 19,484 Chemicals & Allied Products 14,657 14,686 Mailing, Reproduction, Commercial Art & Photography & Stenographic 12,388 12,733 Machinery, Equipment & Supplies 10,814 12,096 Offices & Clinics of Other Health Practitioners 10,083 9,730 Schools & Educational Services, not elsewhere classified 9,781 29,040 Miscellaneous Business Services — 12,980 Drugs — 12,942 Total $ 1,968,991 $ 2,239,930 (1) All middle market lending positions are floating rate. The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at December 31, 2021 and 2020. December 31, 2021 December 31, 2020 (dollars in thousands) First lien loans $ 1,391,217 $ 1,489,125 Second lien loans (1) 577,774 750,805 Total $ 1,968,991 $ 2,239,930 (1) Includes mezzanine positions F-22 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following tables represent a rollforward of the activity for the Company’s corporate debt investments held for investment at December 31, 2021 and December 31, 2020: December 31, 2021 First Lien Second Lien Total (dollars in thousands) Beginning balance (January 1, 2021) (1) $ 1,489,125 $ 750,805 $ 2,239,930 Originations & advances 1,506,705 66,013 1,572,718 Sales and transfers (2) ( 1,122,275 ) ( 83,690 ) ( 1,205,965 ) Principal payments ( 492,884 ) ( 169,057 ) ( 661,941 ) Amortization & accretion of (premium) discounts 9,120 3,497 12,617 Allowance for loan losses Beginning allowance ( 18,767 ) ( 20,785 ) ( 39,552 ) Current period (allowance) reversal 1,426 10,206 11,632 Ending allowance ( 17,341 ) ( 10,579 ) ( 27,920 ) Net carrying value (December 31, 2021) $ 1,391,217 $ 577,774 $ 1,968,991 December 31, 2020 First Lien Second Lien Total (dollars in thousands) Beginning balance (January 1, 2020) (1) $ 1,403,503 $ 748,710 $ 2,152,213 Originations & advances 834,211 227,433 1,061,644 Sales (2) ( 273,887 ) ( 79,203 ) ( 353,090 ) Principal payments ( 444,759 ) ( 132,000 ) ( 576,759 ) Amortization & accretion of (premium) discounts 8,374 3,832 12,206 Loan restructuring ( 19,550 ) 2,818 ( 16,732 ) Allowance for loan losses Beginning allowance, prior to CECL adoption ( 7,363 ) — ( 7,363 ) Impact of adopting CECL ( 10,787 ) ( 18,866 ) ( 29,653 ) Current period (allowance) reversal ( 12,510 ) ( 1,919 ) ( 14,429 ) Write offs 11,893 — 11,893 Ending allowance ( 18,767 ) ( 20,785 ) ( 39,552 ) Net carrying value (December 31, 2020) $ 1,489,125 $ 750,805 $ 2,239,930 (1) Excludes loan loss allowances. (2) Includes syndications. The following table provides the amortized cost basis of corporate debt held for investment as of December 31, 2021 by vintage year and internal risk rating. Amortized Cost Basis by Risk Rating and Vintage (1) Risk Rating Vintage Total 2021 2020 2019 2018 2017 2016 (dollars in thousands) 1-5 / Performing $ 1,799,355 $ 565,619 $ 374,894 $ 219,028 $ 477,834 $ 138,660 $ 23,320 6 / Performing - Closely Monitored 64,441 22,036 26,105 16,300 — — — 7 / Substandard 105,195 — 10,814 9,280 85,101 — — 8 / Doubtful — — — — — — — 9 / Loss — — — — — — — Total $ 1,968,991 $ 587,655 $ 411,813 $ 244,608 $ 562,935 $ 138,660 $ 23,320 (1) The amortized cost basis excludes accrued interest and includes deferred loan fees on unfunded loans. As of December 31, 2021, the Company had $ 11.2 million of accrued interest receivable on corporate loans, which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition, and $ 2.6 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition. F-23 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 7. MORTGAGE SERVICING RIGHTS The Company owns variable interests in entities that invest in MSR and Interests in MSR. Refer to the “Variable Interest Entities” Note for a detailed discussion on this topic. MSR represent the rights and obligations associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSR. The Company generally intends to hold the MSR as investments and elected to account for all of its investments in MSR at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Servicing income, net of servicing expenses, is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party acts as a master servicer for the loans providing the net servicing cash flows represented by the Interests in MSR. The Company accounts for its Interests in MSR at fair value with change in fair value presented in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). The following table presents activity related to MSR and Interests in MSR for the years ended December 31, 2021 and 2020: Mortgage Servicing Rights December 31, 2021 December 31, 2020 (dollars in thousands) Fair value, beginning of period $ 100,895 $ 378,078 Purchases (1) 468,196 — Sales ( 82,176 ) ( 72,160 ) Change in fair value due to Changes in valuation inputs or assumptions (2) 120,879 ( 107,517 ) Other changes, including realization of expected cash flows ( 63,232 ) ( 97,506 ) Fair value, end of period $ 544,562 $ 100,895 (1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. (2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates. Interests in MSR December 31, 2021 (dollars in thousands) Beginning balance $ — Purchases (1) 65,107 Gain (loss) included in net income 4,209 Ending balance December 31, 2021 $ 69,316 (1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. For the years ended December 31, 2021 and 2020, the Company recognized $ 56.8 million and $ 66.6 million of net servicing income from MSR in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). For the year ended December 31, 2021, the Company recognized $ 7.6 million and for the year ended December 31, 2020, the Company did no t recognize net income from Interests in MSR in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). F-24 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 8. VARIABLE INTEREST ENTITIES At December 31, 2021, commercial trusts, commercial securitizations and the collateralized loan obligation are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition. Refer to the “Sale of Commercial Real Estate Business” Note for additional information. Multifamily Securitization In November 2019, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $ 1.0 billion and retained interest-only securities with a notional balance of $ 1.0 billion and senior securities with a principal balance of $ 28.5 million. In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $ 0.5 billion and retained interest-only securities with a notional balance of $ 0.5 billion. At the inception of the arrangements, the Company determined that it was the primary beneficiary based upon its involvement in the design of these VIEs and through the retention of a significant variable interest in the VIEs. The Company elected the fair value option for the financial liabilities of these VIEs in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. In 2020, the Company deconsolidated the 2019 multifamily VIE since it sold all of its interest-only securities and no longer retains a significant variable interest in the entity. As a result of the deconsolidation of this VIE, the Company derecognized approximately $ 1.2 billion of securities and approximately $ 1.1 billion of debt issued by securitization vehicles and recognized a realized gain of $ 104.8 million, which is included in Net gains (losses) on disposal of investments and other in the Consolidated Statements of Comprehensive Income (Loss). The Company incurred $ 1.1 million of costs in connection with the 2020 multifamily securitization that were expensed as incurred during the year ended December 31, 2020. Residential Trusts The Company consolidated a securitization trust, which is included in “Residential Trusts” in the table for the year ended December 31, 2020 below, that issued residential mortgage-backed securities that were collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owned the subordinate securities, and a subsidiary of the Company continued to be the master servicer. As such, the Company was deemed to be the primary beneficiary of the residential mortgage trust and consolidated the entity. The Company elected the fair value option for the financial assets and liabilities of this VIE, but did not elect to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was zero and $ 23.0 million at December 31, 2021 and 2020, respectively. In November 2021, the Company exercised its clean-up call and liquidated the securitization trust. There was no gain or loss recorded upon deconsolidation. Residential Securitizations The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities. OBX Trusts The entities in the table below are referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company. F-25 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Securitization Date of Closing Face Value at Closing (dollars in thousands) OBX 2018-1 March 2018 $ 327,162 OBX 2018-EXP1 August 2018 $ 383,451 OBX 2018-EXP2 October 2018 $ 384,027 OBX 2019-INV1 January 2019 $ 393,961 OBX 2019-EXP1 April 2019 $ 388,156 OBX 2019-INV2 June 2019 $ 383,760 OBX 2019-EXP2 July 2019 $ 463,405 OBX 2019-EXP3 October 2019 $ 465,492 OBX 2020-INV1 January 2020 $ 374,609 OBX 2020-EXP1 February 2020 $ 467,511 OBX 2020-EXP2 July 2020 $ 489,352 OBX 2020-EXP3 September 2020 $ 514,609 OBX 2021-NQM1 March 2021 $ 257,135 OBX 2021-J1 April 2021 $ 353,840 OBX 2021-NQM2 June 2021 $ 376,004 OBX 2021-J2 July 2021 $ 382,483 OBX 2021-NQM3 August 2021 $ 356,474 OBX 2021-INV1 September 2021 $ 320,199 OBX 2021-J3 October 2021 $ 453,650 OBX 2021-INV2 October 2021 $ 343,571 OBX 2021-INV3 November 2021 $ 470,576 OBX 2021-NQM4 November 2021 $ 542,836 As of December 31, 2021 and 2020, a total carrying value of $ 4.6 billion and $ 2.6 billion, respectively, of bonds were held by third parties and the Company retained $ 780.8 million and $ 653.0 million, respectively, of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third party pricing services. During the years ended December 31, 2021 and 2020, the Company incurred $ 5.6 million and $ 7.2 million, respectively, of costs in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $ 4.6 billion and $ 2.5 billion at December 31, 2021 and 2020, respectively. Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation. Credit Facility VIEs In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of December 31, 2021 and 2020, the borrowing limit on this facility was $ 675.0 million and $ 625.0 million, respectively. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $ 692.6 million and $ 786.9 million at December 31, 2021 and 2020, respectively. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At December 31, 2021 and 2020, the subsidiary had an intercompany receivable of $ 433.3 million and $ 441.1 million, respectively, which eliminates upon consolidation and a secured financing of $ 433.3 million and $ 441.1 million, respectively, to the third party financial institution. In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of December 31, 2021 and 2020, the borrowing limit on this facility was $ 400.0 million and $ 320.0 million, respectively. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $ 402.9 million and $ 400.4 million at December 31, 2021 and 2020, respectively, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under F-26 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Loans, net. At December 31, 2021 and 2020, the subsidiary had a secured financing of $ 238.2 million and $ 209.7 million, respectively, to the third party financial institution. In January 2019, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of December 31, 2021 and 2020, the borrowing limit on this facility was $ 400.0 million and $ 300.0 million, respectively. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $ 368.0 million and $ 409.2 million at December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, the Borrower had a secured financing of $ 231.8 million and $ 236.6 million, respectively, to the third party financial institution. MSR VIEs The Company owns variable interests in an entity that invests in MSR and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100 % of the voting interests in this entity, in August 2017, the Company sold 100 % of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo. The Company also owns variable interests in entities that invest in Interests in MSR. These entities are VIEs because they do not have sufficient equity at risk to finance their activities and the Company is the primary beneficiary because it has power to remove the decision makers with or without cause and holds substantially all of the variable interests in the entities. The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $ 2.4 billion at December 31, 2021. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method. The statements of financial condition of the Company’s VIEs, excluding the multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at December 31, 2021 and 2020 are as follows: December 31, 2021 MSR VIEs Assets (dollars in thousands) Cash and cash equivalents $ 16,187 Loans 2,347 Mortgage servicing rights 7,254 Interests in MSR 69,316 Other assets 10,406 Total assets $ 105,510 Liabilities Payable for unsettled trades 1,911 Other liabilities 14,582 Total liabilities $ 16,493 F-27 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements December 31, 2020 Commercial Trusts Residential Trusts MSR VIEs Assets (dollars in thousands) Cash and cash equivalents $ — $ — $ 22,241 Loans — — 47,048 Assets transferred or pledged to securitization vehicles 2,166,073 40,035 — Mortgage servicing rights — — 100,895 Principal and interest receivable 5,509 226 — Total assets $ 2,171,582 $ 40,261 $ 170,184 Liabilities Debt issued by securitization vehicles (non-recourse) $ 1,836,785 $ 23,351 $ — Other secured financing — — 30,420 Payable for unsettled trades — — 3,076 Interest payable 1,697 55 — Other liabilities — 246 13,345 Total liabilities $ 1,838,482 $ 23,652 $ 46,841 Corporate Debt Transfers The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the year ended December 31, 2021, the Company transferred $ 316.9 million of loans for cash. The loan transfers were accounted for as sales. Residential Credit Fund The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of December 31, 2021 and 2020 the Company had outstanding participating interests in residential mortgage loans of $ 1.0 billion and $ 39.2 million, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings. 9. SALE OF COMMERCIAL REAL ESTATE BUSINESS On March 25, 2021, the Company entered into a definitive agreement to sell substantially all of the assets that comprise its CRE business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”) for $ 2.33 billion. The transaction includes equity interests, loan assets and associated liabilities, and CMBS (other than commercial CRTs). The Company also intends to sell nearly all of the remaining CRE business assets that are not included in the transaction with Slate. A real estate property that was held for sale, which is not included in the transaction with Slate, was sold during the year ended December 31, 2021 and resulted in the recognition of a gain of $ 4.8 million in Business divestiture-related gains (losses) in the Consolidated Statements of Comprehensive Income (Loss). In connection with the execution of the definitive agreement to sell the CRE business, during the year ended December 31, 2021, the Company performed an assessment of goodwill, which was related to the Company’s 2013 acquisition of CreXus Investment Corp., and recognized an impairment of $ 71.8 million. As a result of classifying the loans as held for sale, the previously recognized allowance for loan losses of $ 135.0 million, which includes $ 5.1 million on unfunded loan commitments, was reversed during the three months ended March 31, 2021. During the year ended December 31, 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 first quarter of 2022 subject to regulatory approvals. The pretax income (loss) of the CRE business was ($ 31.6 ) million for the year ended December 31, 2021 and ($ 99.6 ) million for the year F-28 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ended December 31, 2020. Certain employees who primarily supported the CRE business joined Slate in connection with the sale. The carrying value of the total assets in the disposal group was $ 194.1 million at December 31, 2021, primarily real estate, net. The carrying value of total liabilities in the disposal group was $ 154.9 million at December 31, 2021, primarily mortgages payable on the related real estate held for sale. 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 December 31, 2021 and 2020, ($ 393.4 ) million 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 have outstanding interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value. Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. F-29 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 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 December 31, 2021 and 2020: Derivatives Instruments December 31, 2021 December 31, 2020 Assets (dollars in thousands) Interest rate swaptions $ 105,710 $ 74,470 TBA derivatives 52,693 96,109 Futures contracts 9,028 506 Purchase commitments 1,779 49 Credit derivatives (1) 1,160 — $ 170,370 $ 171,134 Liabilities Interest rate swaps $ 747,036 $ 1,006,492 TBA derivatives 3,916 — Futures contracts 129,134 19,413 Purchase commitments 870 — Credit derivatives (1) 581 7,440 $ 881,537 $ 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 $ 400.0 million and $ 504.0 million at December 31, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche. As of December 31, 2021 and 2020, the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and AA, and AAA and A, respectively. F-30 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table summarizes certain characteristics of the Company’s interest rate swaps at December 31, 2021 and 2020: December 31, 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 $ 32,709,300 0.25 % 0.06 % 1.10 3 - 6 years 2,780,000 0.21 % 0.07 % 3.46 6 - 10 years 9,118,000 1.43 % 0.13 % 9.05 Greater than 10 years 1,300,000 4.04 % 0.11 % 18.70 Total / Weighted average $ 45,907,300 0.59 % 0.08 % 3.32 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 December 31, 2021, 18 %, 53 % and 29 % 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 December 31, 2021 and December 31, 2020. (3) At December 31, 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 summarizes certain characteristics of the Company’s swaptions at December 31, 2021 and 2020. December 31, 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 2.00 % 3M LIBOR 9.65 19.50 Long receive $ 2,000,000 1.47 % 3M LIBOR 10.95 11.38 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 December 31, 2021 and 2020: December 31, 2021 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts $ 20,133,000 $ 20,289,856 $ 20,338,633 $ 48,777 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 F-31 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The following table summarizes certain characteristics of the Company’s futures derivatives at December 31, 2021 and 2020: December 31, 2021 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 2 year $ — $ ( 7,509,200 ) 1.96 U.S. Treasury futures - 5 year — ( 5,644,900 ) 4.38 U.S. Treasury futures - 10 year and greater — ( 9,381,000 ) 6.84 Total $ — $ ( 22,535,100 ) 4.60 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 December 31, 2021 and 2020, respectively. December 31, 2021 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaptions, at fair value $ 105,710 $ — $ — $ 105,710 TBA derivatives, at fair value 52,693 ( 3,876 ) — 48,817 Futures contracts, at fair value 9,028 ( 9,028 ) — — Purchase commitments 1,779 — — 1,779 Credit derivatives 1,160 ( 516 ) — 644 Liabilities Interest rate swaps, at fair value $ 747,036 $ — $ ( 77,607 ) $ 669,429 TBA derivatives, at fair value 3,916 ( 3,876 ) ( 40 ) — Futures contracts, at fair value 129,134 ( 9,028 ) ( 120,106 ) — Purchase commitments 870 — — 870 Credit derivatives 581 ( 516 ) ( 65 ) — 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 ) — F-32 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 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 years ended (dollars in thousands) December 31, 2021 $ ( 276,142 ) $ ( 1,236,349 ) $ 2,198,486 December 31, 2020 $ ( 207,877 ) $ ( 1,917,628 ) $ ( 904,532 ) December 31, 2019 $ 351,375 $ ( 1,442,964 ) $ ( 1,210,276 ) The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows: Year Ended December 31, 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 $ ( 354,410 ) $ ( 47,332 ) $ ( 401,742 ) Net interest rate swaptions ( 78,431 ) 2,387 ( 76,044 ) Futures 683,534 ( 101,199 ) 582,335 Purchase commitments — 860 860 Credit derivatives 8,234 6,931 15,165 Total $ 120,574 Year Ended December 31, 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 $ 893,120 $ 92,244 $ 985,364 Net interest rate swaptions 11,730 46,301 58,031 Futures ( 268,084 ) ( 12,015 ) ( 280,099 ) Purchase commitments — ( 1,093 ) ( 1,093 ) Credit derivatives 6,068 ( 11,966 ) ( 5,898 ) Total $ 756,305 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 derivative instruments with the aforementioned features that are in a net liability position at December 31, 2021 was approximately $ 0.7 billion, 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 F-33 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements “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 December 31, 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. 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. F-34 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 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. December 31, 2021 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 60,525,605 $ — $ 60,525,605 Credit risk transfer securities — 936,228 — 936,228 Non-Agency mortgage-backed securities — 1,663,336 — 1,663,336 Commercial mortgage-backed securities — 530,505 — 530,505 Loans Residential mortgage loans — 2,272,072 — 2,272,072 Residential mortgage loan warehouse facility — 980 — 980 Mortgage servicing rights — — 544,562 544,562 Interests in MSR — — 69,316 69,316 Assets transferred or pledged to securitization vehicles — 6,086,308 — 6,086,308 Derivative assets Other derivatives 9,028 161,342 — 170,370 Total assets $ 9,028 $ 72,176,376 $ 613,878 $ 72,799,282 Liabilities Debt issued by securitization vehicles — 5,155,633 — 5,155,633 Participations issued — 1,049,066 — 1,049,066 Derivative liabilities Interest rate swaps — 747,036 — 747,036 Other derivatives 129,134 5,367 — 134,501 Total liabilities $ 129,134 $ 6,957,102 $ — $ 7,086,236 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 F-35 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 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 Interest 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 Interest in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interest 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 Interest 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. December 31, 2021 Unobservable Input (1) / Range (Weighted Average) (2) Discount rate Prepayment rate Delinquency rate Cost to service MSR held directly 3.3 % - 11.1 % ( 7.0 %) 7.3 % - 15.9 % ( 9.4 %) 0.2 % - 2.5 % ( 1.2 %) $ 90 - $ 103 ($ 96 ) Interests in MSR 8.4 % - 8.4 % ( 8.4 %) 5.0 % - 14.4 % ( 9.1 %) 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. The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at December 31, 2021 and 2020. December 31, 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 1,968,991 1,986,379 2,239,930 2,226,045 Assets transferred or pledged to securitization vehicles — — 874,349 928,732 Financial liabilities Repurchase agreements $ 54,769,643 $ 54,769,643 $ 64,825,239 $ 64,825,239 Other secured financing 903,255 903,255 917,876 917,876 Mortgage 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 approximate fair value and are considered Level 2 fair value measurements. Long term other secured financing is valued using Level 2 inputs. 12. GOODWILL AND INTANGIBLE ASSETS Goodwill F-36 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 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 December 31, 2021 and 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. As part of the sale of the CRE business, certain intangible assets connected with those real estate assets were transferred into the disposal group held for sale. During the year ended December 31, 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. The following table presents the activity of finite lived intangible assets for the year ended December 31, 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 ( 7,208 ) Balance at December 31, 2021 $ 24,241 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. 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 $ 54.8 billion and $ 64.8 billion of repurchase agreements with weighted average remaining maturities of 52 days and 64 days at December 31, 2021 and 2020, respectively. The Company has select arrangements with counterparties to enter into repurchase agreements for $ 1.9 billion with remaining capacity of $ 1.4 billion at December 31, 2021. F-37 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements At December 31, 2021 and 2020, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: December 31, 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 $ — $ — $ — $ — $ — $ — — % 2 to 29 days 26,435,408 133,525 246,707 — 197,834 27,013,474 0.14 % 30 to 59 days 9,743,872 38,854 270,377 159,350 — 10,212,453 0.19 % 60 to 89 days 6,021,850 4,071 351,426 — — 6,377,347 0.17 % 90 to 119 days 4,812,345 — 12,573 — — 4,824,918 0.15 % Over 119 days (2) 5,711,448 — 96,283 345,651 188,069 6,341,451 0.27 % Total $ 52,724,923 $ 176,450 $ 977,366 $ 505,001 $ 385,903 $ 54,769,643 0.17 % 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 December 31, 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 December 31, 2021 and 2020. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments. December 31, 2021 December 31, 2020 Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements (dollars in thousands) Gross amounts $ — $ 54,769,643 $ 250,000 $ 65,075,239 Amounts offset — — ( 250,000 ) ( 250,000 ) Netted amounts $ — $ 54,769,643 $ — $ 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 $ 59.2 billion and $ 160.8 million, respectively, at December 31, 2021 and $ 70.6 billion and $ 196.9 million, respectively, at December 31, 2020. F-38 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 14. CAPITAL STOCK (A) Common Stock The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at December 31, 2021 and 2020. Shares authorized Shares issued and outstanding December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 Par Value Common stock 2,936,500,000 2,914,850,000 1,459,736,258 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 “2019 - 2020 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 “2021 Share Repurchase Program”). The 2021 Share Repurchase Program replaced the Prior Share Repurchase Program. In January 2022, we announced that our Board authorized the repurchase of up to $ 1.5 billion of our outstanding shares of common stock through December 31, 2024 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the 2019 - 2020 Share Repurchase Program, which had replaced the Prior Share Repurchase Program. During the year ended December 31, 2021, no shares were repurchased under the 2021 Share Repurchase Program. During the year ended December 31, 2020, the Company repurchased 32.4 million shares of its common stock for an aggregate amount of $ 208.9 million, excluding commission costs. All common shares purchased were part of a publicly announced plan in open-market transactions. The following table provides a summary of activity related to the Company’s Direct Purchase and Dividend Reinvestment Program. December 31, 2021 December 31, 2020 (dollars in thousands) Shares issued through direct purchase and dividend reinvestment program — 166,000 Amount raised from direct purchase and dividend reinvestment program $ — $ 1,175 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 year ended December 31, 2021, the Company issued 60.9 million shares of common stock for proceeds of $ 552.4 million, net of commissions and fees, under the at-the-market sales program. No shares were issued under the at-the-market sales program during the year ended December 31, 2020. (B) Preferred Stock The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at December 31, 2021 and 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. F-39 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Shares Authorized Shares Issued And Outstanding Carrying Value Contractual Rate Earliest Redemption Date (1) Date At Which Dividend Rate Becomes Floating Floating Annual Rate December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020 December 31, 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 December 31, 2021, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock. During the year ended December 31, 2020, the Company redeemed all 18.4 million of its issued and outstanding shares of 7.50 % Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”) for $ 460.0 million. The cash redemption amount for each share of Series D Preferred Stock was $ 25.00 . 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. (C) Distributions to Stockholders The following table provides a summary of the Company’s dividend distribution activity for the periods presented: For the Years Ended December 31, 2021 December 31, 2020 (dollars in thousands, except per share data) Dividends and dividend equivalents declared on common stock and share-based awards $ 1,268,558 $ 1,285,124 Distributions declared per common share (1) $ 0.88 $ 0.91 Distributions paid to common stockholders after period end $ 321,142 $ 307,613 Distributions paid per common share after period end $ 0.22 $ 0.22 Date of distributions paid to common stockholders after period end January 31, 2022 January 29, 2021 Dividends declared to series D preferred stockholders $ — $ 34,500 Dividends declared per share of series D preferred stock (2) $ — $ 1.875 Dividends declared to series F preferred stockholders $ 50,040 $ 50,040 Dividends declared per share of series F preferred stock (2) $ 1.738 $ 1.738 Dividends declared to series G preferred stockholders $ 27,624 $ 27,625 Dividends declared per share of series G preferred stock (2) $ 1.625 $ 1.625 Dividends declared to series I preferred stockholders $ 29,868 $ 29,871 Dividends declared per share of series I preferred stock (2) $ 1.688 $ 1.688 (1) For the year ended December 31, 2021, 100 % of common stock dividend distributions of $ 0.87 per share was taxable as a return of capital. For the year ended December 31, 2020, 74 % and 26 % of common stock dividend distributions of $ 0.95 per share were taxable as ordinary income and capital gains, respectively. (2) For the year ended December 31, 2021, 100 % of the preferred stock dividend distributions per share was taxable as a return of capital. For the year ended December 31, 2020, 74 % and 26 % of the preferred stock dividend distributions per share were taxable as ordinary income and capital gains, respectively. F-40 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 15. LONG-TERM STOCK INCENTIVE PLAN Employees, Directors and other service providers of the Company are eligible to participate in the Company’s 2020 Equity Incentive Plan (the “Plan”), which provides for equity-based compensation in the form of stock options, share appreciation rights, dividend equivalent rights, restricted shares, restricted stock units (“RSUs”), and other share-based awards. The Company has the ability to award up to an aggregate of 125,000,000 shares under the terms of the Plan, subject to adjustment for any awards that were outstanding under the Company’s 2010 Equity Incentive Plan (the “Prior Plan”, collectively the “Plans") on the effective date of the Plan and subsequently expire, terminate, or are surrendered or forfeited. No new awards are permitted to be made under the Prior Plan, although existing awards remain effective. Restricted Stock Units The Company grants RSUs (including RSUs subject to performance conditions (“PSUs”)) to employees, which are generally valued based on the closing price of the underlying shares on the date of grant. For RSUs that vest, the underlying shares of common stock are delivered (net of required withholding tax) as outlined in the applicable award agreements. PSUs are subject to the Company’s achievement of specified performance criteria and the number of awards that vest can range from zero to 150 % of the grant amount. Award agreements generally provide that vesting is accelerated in certain circumstances, such as death and disability. Delivery of the underlying shares of common stock, which generally occurs over a three-year period, is conditioned on the grantees satisfying certain vesting and other requirements outlined in the award agreements. The following table sets forth activity related to the Company’s RSUs and PSUs awarded under the Plans: For the Year Ended December 31, 2021 Number of Shares Weighted Average Grant Date Fair Value (dollars in thousands) Beginning balance 1,670,738 $ 7.05 Granted (1) 1,824,434 $ 6.92 Vested ( 739,815 ) $ 7.35 Forfeited (1) ( 94,353 ) $ 8.22 Ending balance (2) 2,661,004 $ 6.84 (1) Includes dividend equivalent rights. (2) The ending balance includes 680,351 PSUs and related dividend equivalent rights subject to performance conditions and future service requirements, and represents the target amount of such PSUs that may be earned. The Company recognized equity-based compensation expense of $ 9.8 million for the year ended December 31, 2021. As of December 31, 2021, there was $ 12.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.73 years. F-41 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 16. 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 (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. The following presents the components of the Company’s interest income and interest expense for the years ended December 31, 2021, 2020 and 2019. For the Years Ended December 31, 2021 2020 2019 Interest income (dollars in thousands) Agency Securities (1) $ 1,484,354 $ 1,661,566 $ 3,105,035 Residential credit securities 78,681 57,394 90,511 Residential mortgage loans (1) 182,359 170,259 150,066 Commercial investment portfolio (1) (2) 237,597 338,763 378,395 Reverse repurchase agreements 45 1,643 63,290 Total interest income $ 1,983,036 $ 2,229,625 $ 3,787,297 Interest expense Repurchase agreements 116,974 705,218 2,513,282 Debt issued by securitization vehicles 93,006 142,602 141,981 Participations issued 12,071 78 — Other 27,192 51,214 129,612 Total interest expense 249,243 899,112 2,784,875 Net interest income $ 1,733,793 $ 1,330,513 $ 1,002,422 (1) Includes assets transferred or pledged to securitization vehicles. (2) Includes commercial real estate debt and preferred equity and corporate debt. F-42 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 17. 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 years ended December 31, 2021, 2020 and 2019. For the Years Ended December 31, 2021 December 31, 2020 December 31, 2019 (dollars in thousands, except per share data) Net income (loss) $ 2,396,280 $ ( 889,772 ) $ ( 2,163,091 ) Net income (loss) attributable to noncontrolling interests 6,384 1,391 ( 226 ) Net income (loss) attributable to Annaly 2,389,896 ( 891,163 ) ( 2,162,865 ) Dividends on preferred stock 107,532 142,036 136,576 Net income (loss) available (related) to common stockholders $ 2,282,364 $ ( 1,033,199 ) $ ( 2,299,441 ) Weighted average shares of common stock outstanding-basic 1,427,426,079 1,414,659,439 1,434,912,682 Add: Effect of stock awards, if dilutive 1,142,924 — — Weighted average shares of common stock outstanding-diluted 1,428,569,003 1,414,659,439 1,434,912,682 Net income (loss) per share available (related) to common share Basic $ 1.60 $ ( 0.73 ) $ ( 1.60 ) Diluted $ 1.60 $ ( 0.73 ) $ ( 1.60 ) The computations of diluted net income (loss) per share available (related) to common share for the year ended December 31, 2020 excludes 1.0 million of potentially dilutive restricted stock units and performance stock units because their effect would have been anti-dilutive. 18. INCOME TAXES For the year ended December 31, 2021 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100 % of its REIT taxable income. To 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 December 31, 2021 and 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 years ended December 31, 2021, 2020 and 2019 the Company recorded $ 4.7 million, ($ 28.4 ) million and ($ 10.8 ) million, respectively, of income tax expense (benefit) attributable to its TRSs. The Company’s federal, state and local tax returns from 2018 and forward remain open for examination. F-43 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 19. 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 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 overall costs to service the underlying mortgage loans. The Company is exposed to risk of loss if an issuer, borrower, or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, 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. F-44 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 20. 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 was $ 14.2 million. For the year ended December 31, 2019, the compensation and management fee was $ 170.6 million and reimbursement payments to the former manager was $ 21.4 million. F-45 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 21. 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 year ended December 31, 2021 was $ 3.3 million. Supplemental information related to leases as of and for the year ended December 31, 2021 was as follows: Operating Leases Classification December 31, 2021 Assets (dollars in thousands) Operating lease right-of-use assets Other assets $ 10,542 Liabilities Operating lease liabilities (1) Other liabilities $ 13,713 Lease term and discount rate Weighted average remaining lease term 3.7 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 $ 3,918 (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 ended December 31, (dollars in thousands) 2022 $ 3,862 2023 3,862 2024 3,862 2025 2,895 Total lease payments $ 14,481 Less imputed interest 768 Present value of lease liabilities $ 13,713 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 December 31, 2021 and 2020. 22. 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. F-46 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements As a member of FINRA, Arcola is required to maintain a minimum net capital balance. At December 31, 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 December 31, 2021 was $ 512.3 million with excess net capital of $ 512.0 million. 23. SUBSEQUENT EVENTS In January 2022, the Company completed and closed the securitizations of residential mortgage loans, OBX 2022-NQM1 and OBX 2022-INV1, with face values of $ 556.7 million and $ 377.3 million, respectively and in February 2022, completed and closed OBX 2022-INV2, with a face value of $ 466.7 million. The securitizations represented financing transactions which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company. F-47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANNALY CAPITAL MANAGEMENT, INC. Date: February 17, 2022 By: /s/ David L. Finkelstein David L. Finkelstein Chief Executive Officer and President (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date /s/ David L. Finkelstein David L. Finkelstein Chief Executive Officer, President and Director (Principal Executive Officer) February 17, 2022 /s/ Serena Wolfe Serena Wolfe Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 17, 2022 /s/ Francine J. Bovich Francine J. Bovich Director February 17, 2022 /s/ Wellington J. Denahan Wellington J. Denahan Director, Vice Chair of the Board February 17, 2022 /s/ Katherine Beirne Fallon Katherine Beirne Fallon Director February 17, 2022 /s/ Thomas Edward Hamilton Thomas Edward Hamilton Director February 17, 2022 /s/ Kathy Hopinkah Hannan Kathy Hopinkah Hannan Director February 17, 2022 /s/ Michael E. Haylon Michael E. Haylon Director, Chair of the Board February 17, 2022 /s/ Eric A. Reeves Eric A. Reeves Director February 17, 2022 /s/ John H. Schaefer John H. Schaefer Director February 17, 2022 /s/ Glenn A. Votek Glenn A. Votek Director February 17, 2022 /s/ Vicki Williams Vicki Williams Director February 17, 2022 II-1