What changed in this filing

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Item 1. Financial Statements

2022-05-04 compared with 2021-11-05 · 888 added, 407 removed, 578 unchanged (69% of the section changed)

Financial Statements

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

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 and mortgage servicing rights (“MSR”).

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”).

The Company’s 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 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 Mortgage Servicing Rights Group Invests in MSR, which provide the right to service residential loans in exchange for a portion of the interest payments made on the loans.

In March 2021, the Company announced that it had entered into a definitive agreement to sell and exit its Commercial Real Estate (“CRE”) business.

As of March 31, 2022, the assets held for sale and the associated liabilities were transferred.

Refer to the “Sale of Commercial Real Estate Business” Note for additional information.

In April 2022, the Company announced that it had entered into a definitive agreement to sell substantially all of the assets that comprise the Annaly Middle Market Lending ("MML") portfolio, including assets held on balance sheet as well as assets managed for third parties.

Subject to customary closing conditions, the sale of the MML business is expected to be completed by the second quarter of 2022.

Refer to the "Subsequent Events" Note for additional information.

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 accompanying consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”).

The consolidated financial information as of December 31, 2021 has been derived from audited consolidated financial statements included in the Company’s 2021 Form 10-K.

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.

Beginning with the quarter ended March 31, 2022, in light of the continued growth of its mortgage servicing rights portfolio, the Company enhanced its financial disclosures by separately reporting servicing income and servicing expense in its Consolidated Statements of Comprehensive Income (Loss).

Servicing income and servicing expense were previously included within Other income (loss).

As a result of this change, prior periods have been adjusted to conform to the current presentation.

In addition, the Company consolidated certain line items in its Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation.

Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives.

Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings are combined into a single line item titled Net

gains (losses) on investments and other.

As a result of these changes, 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, net 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 Other, net decreased by the same amounts for the three months ended March 31, 2021.

These reclassifications had no effect on the reported net income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss).

In the opinion of management, all normal, recurring adjustments have been included for a fair presentation of this interim financial information.

Interim period operating results may not be indicative of the operating results for a full year.

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 Other assets with income or loss included in Other, net.

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 $ 0.8 billion and $ 1.2 billion at March 31, 2022 and December 31, 2021, 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 gains (losses) on investments and other 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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 derivatives.

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.

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 on corporate debt for accrued interest receivable.

If interest receivable is deemed to be uncollectible or not collected within 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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.

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

Standard that has been adopted

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

FINANCIAL INSTRUMENTS

The following table presents characteristics for certain of the Company’s financial instruments at March 31, 2022 and December 31, 2021.

Financial Instruments (1)

Balance Sheet Line Item Type / Form Measurement Basis March 31, 2022 December 31, 2021

Assets (dollars in thousands)

Securities Agency mortgage-backed securities (2)

Fair value, with unrealized gains (losses) through other comprehensive income $ 57,257,909 $ 59,939,383

Securities Agency mortgage-backed securities (3)

Fair value, with unrealized gains (losses) through earnings 529,232 586,222

Securities Residential credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 845,809 936,228

Securities Non-agency mortgage-backed securities Fair value, with unrealized gains (losses) through earnings 1,737,333 1,663,336

Securities Commercial real estate debt investments - CMBS Fair value, with unrealized gains (losses) through earnings 348,666 521,440

Securities Commercial real estate debt investments - credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 8,688 9,065

Total securities 60,727,637 63,655,674

Loans, net Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 1,650,151 2,272,072

Loans, net Residential mortgage loan warehouse facility Fair value, with unrealized gains (losses) through earnings — 980

Loans, net Corporate debt, held for investment Amortized cost 1,967,667 1,968,991

Total loans, net 3,617,818 4,242,043

Interests in MSR Interest in net servicing cash flows Fair value, with unrealized gains (losses) through earnings 85,653 69,316

Assets transferred or pledged to securitization vehicles Agency mortgage-backed securities Fair value, with unrealized gains (losses) through other comprehensive income 544,991 589,873

Assets transferred or pledged to securitization vehicles Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 7,264,316 5,496,435

Total assets transferred or pledged to securitization vehicles 7,809,307 6,086,308

Repurchase agreements Repurchase agreements Amortized cost 52,626,503 54,769,643

Other secured financing Loans Amortized cost 914,255 903,255

Debt issued by securitization vehicles Securities Fair value, with unrealized gains (losses) through earnings 6,711,953 5,155,633

Participations issued Participations issued Fair value, with unrealized gains (losses) through earnings 775,432 1,049,066

(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.

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 gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss).

Transactions for regular-way securities are recorded on trade date, including to-be-announced (“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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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 three months ended March 31, 2021, the Company recognized a $ 0.4 million impairment on a commercial mortgage-backed security that was sold subsequently in 2021.

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, prime jumbo 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.

The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the three months ended March 31, 2022:

Agency Securities Residential Credit Securities Commercial Securities Total

(dollars in thousands)

Beginning balance January 1, 2022

$ 60,525,605 $ 2,599,564 $ 530,505 $ 63,655,674

Purchases 6,160,670 372,464 — 6,533,134

Sales and transfers

( 2,583,651 ) ( 177,561 ) ( 169,224 ) ( 2,930,436 )

Principal paydowns ( 2,910,094 ) ( 132,519 ) ( 773 ) ( 3,043,386 )

(Amortization) / accretion 24,656 890 4 25,550

Fair value adjustment ( 3,430,045 ) ( 79,696 ) ( 3,158 ) ( 3,512,899 )

Ending balance March 31, 2022

$ 57,787,141 $ 2,583,142 $ 357,354 $ 60,727,637

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 were carried at their fair value at March 31, 2022 and December 31, 2021:

March 31, 2022

Notional Remaining Premium Remaining Discount Amortized

Cost Unrealized

Gains Unrealized

Losses Estimated Fair Value

Agency (dollars in thousands)

Fixed-rate pass-through $ 54,859,660 $ 3,047,099 $ ( 79,126 ) $ 57,827,633 $ 136,232 $ ( 2,585,619 ) $ 55,378,246

Adjustable-rate pass-through 284,000 5,581 ( 660 ) 288,921 8,490 ( 1,639 ) 295,772

CMO 110,247 1,827 — 112,074 103 ( 1,898 ) 110,279

Interest-only 1,784,533 435,220 — 435,220 149 ( 192,355 ) 243,014

Multifamily (1)

6,805,912 280,406 ( 6,099 ) 1,785,614 8,223 ( 68,736 ) 1,725,101

Reverse mortgages 33,287 3,414 — 36,701 — ( 1,972 ) 34,729

Total agency securities $ 63,877,639 $ 3,773,547 $ ( 85,885 ) $ 60,486,163 $ 153,197 $ ( 2,852,219 ) $ 57,787,141

Residential credit

Credit risk transfer (2)

$ 848,990 $ 7,899 $ ( 570 ) $ 854,879 $ 3,304 $ ( 12,374 ) $ 845,809

Alt-A 81,711 33 ( 16,943 ) 64,801 2,121 ( 2,344 ) 64,578

299,044 9,405 ( 14,304 ) 263,750 6,396 ( 20,334 ) 249,812

Subprime 158,423 298 ( 15,359 ) 143,362 5,642 ( 4,479 ) 144,525

NPL/RPL 1,097,310 877 ( 3,357 ) 1,094,830 736 ( 20,558 ) 1,075,008

Prime jumbo (>=2010 vintage) (4)

1,391,118 13,143 ( 14,778 ) 217,179 2,851 ( 16,620 ) 203,410

Total residential credit securities $ 3,876,596 $ 31,655 $ ( 65,311 ) $ 2,638,801 $ 21,050 $ ( 76,709 ) $ 2,583,142

Total Residential Securities $ 67,754,235 $ 3,805,202 $ ( 151,196 ) $ 63,124,964 $ 174,247 $ ( 2,928,928 ) $ 60,370,283

Commercial Securities $ 363,046 $ — $ ( 96 ) $ 362,950 $ — $ ( 5,596 ) $ 357,354

Total securities $ 68,117,281 $ 3,805,202 $ ( 151,292 ) $ 63,487,914 $ 174,247 $ ( 2,934,524 ) $ 60,727,637

December 31, 2021

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 investments $ 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

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 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

(1) Principal/Notional amount includes $ 5.3 billion and $ 4.5 billion of Agency Multifamily interest-only securities as of March 31, 2022 and December 31, 2021, respectively.

(2) Principal/Notional amount includes $ 1.4 million and $ 4.1 million of a CRT interest-only security as of March 31, 2022 and December 31, 2021, respectively.

(3) Principal/Notional amount includes $ 30.4 million and $ 50.0 million of Prime interest-only securities as of March 31, 2022 and December 31, 2021, respectively.

(4) Principal/Notional amount includes $ 1.2 billion and $ 126.5 million of Prime Jumbo interest-only securities as of March 31, 2022 and December 31, 2021, respectively.

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 March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

Investment Type (dollars in thousands)

Fannie Mae $ 46,824,563 $ 48,404,991

Freddie Mac 9,819,001 10,880,033

Ginnie Mae 1,143,577 1,240,581

Total $ 57,787,141 $ 60,525,605

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 March 31, 2022 and December 31, 2021, according to their estimated weighted average life classifications:

March 31, 2022 December 31, 2021

Estimated Fair Value Amortized

Cost Estimated Fair Value Amortized

Estimated weighted average life (dollars in thousands)

Less than one year $ 181,054 $ 180,846 $ 253,129 $ 250,689

Greater than one year through five years 4,123,236 4,160,292 16,155,017 15,766,307

Greater than five years through ten years 51,112,733 53,521,509 45,470,212 45,102,607

Greater than ten years 4,953,260 5,262,317 1,246,811 1,250,936

Total $ 60,370,283 $ 63,124,964 $ 63,125,169 $ 62,370,539

The estimated weighted average lives of the Residential Securities at March 31, 2022 and December 31, 2021 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 March 31, 2022 and December 31, 2021.

March 31, 2022 December 31, 2021

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 $ 37,098,530 $ ( 1,402,053 ) 1,838 $ 22,828,156 $ ( 475,064 ) 571

12 Months or more 12,118,518 ( 1,238,095 ) 301 383,815 ( 10,960 ) 19

Total $ 49,217,048 $ ( 2,640,148 ) 2,139 $ 23,211,971 $ ( 486,024 ) 590

(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.

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 three months ended March 31, 2022 and 2021, the Company disposed of $ 2.8 billion and $ 3.0 billion of Residential Securities, respectively.

The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three months ended March 31, 2022 and 2021.

Gross Realized Gains Gross Realized Losses Net Realized Gains (Losses)

For the three months ended (dollars in thousands)

March 31, 2022 $ 1,565 $ ( 146,056 ) $ ( 144,491 )

March 31, 2021 $ 4,646 $ ( 65,340 ) $ ( 60,694 )

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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 March 31, 2022 and December 31, 2021, the Company rep orted $ 1.7 billion and $ 2.3 billion, 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 $ 1.9 million and $ 2.3 million at March 31, 2022 and December 31, 2021, 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, 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.

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 ($ 0.6 ) million and $ 139.6 million for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022 and December 31, 2021, the Company’s loan loss allowance was $ 28.5 million and $ 27.9 million, respectively.

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 three months ended March 31, 2022:

Residential Corporate Debt

(dollars in thousands)

Beginning balance January 1, 2022

$ 2,272,072 $ 1,968,991 $ 4,241,063

Purchases / originations 2,025,930 171,697 2,197,627

Sales and transfers (1)

( 2,550,155 ) — ( 2,550,155 )

Principal payments ( 34,284 ) ( 174,238 ) ( 208,522 )

Gains / (losses) (2)

( 60,654 ) ( 608 ) ( 61,262 )

(Amortization) / accretion ( 2,758 ) 1,825 ( 933 )

Ending balance March 31, 2022

$ 1,650,151 $ 1,967,667 $ 3,617,818

(1) Includes securitizations, syndications and transfers to securitization vehicles.

Includes transfer of residential loans to securitization vehicles with a carrying value of $ 2.5 billion during the three months ended March 31, 2022.

(2) Includes loan loss allowances.

The Company’s corporate loans also have off-balance-sheet credit exposure 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.

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 gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss).

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 March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

(dollars in thousands)

Fair value $ 8,914,467 $ 7,768,507

Unpaid principal balance $ 9,097,860 $ 7,535,855

The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021 for these investments, excluding loan warehouse facilities:

For the Three Months Ended

March 31, 2022 March 31, 2021

(dollars in thousands)

Interest income $ 73,465 $ 37,109

Net gains (losses) on disposal of investments (1)

( 7,338 ) ( 5,220 )

Net unrealized gains (losses) on instruments measured at fair value through earnings (1)

( 415,248 ) 22,455

Total included in net income (loss) $ ( 349,121 ) $ 54,344

(1) These amounts are presented in the line item Net gains (losses) on investments and other on the Consolidated Statements of Comprehensive Income (Loss)

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The following table provides the geographic concentrations based on the unpaid principal balances at March 31, 2022 and December 31, 2021 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:

Geographic Concentrations of Residential Mortgage Loans

March 31, 2022 December 31, 2021

Property location % of Balance Property location % of Balance

California 48.4 % California 50.2 %

New York 11.6 % New York 10.9 %

Florida 6.8 % Florida 6.1 %

All other (none individually greater than 5%) 33.2 % All other (none individually greater than 5%) 32.8 %

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 March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

Portfolio Weighted

Average Portfolio

Portfolio Weighted Average

(dollars in thousands)

Unpaid principal balance $ 1 - $ 4,396

$ 496 $ 1 - $ 4,382

Interest rate 0.75 % - 15.00 %

4.02 % 0.75 % - 9.24 %

Maturity 7/1/2029 - 4/1/2062 4/8/2051 7/1/2029 - 12/1/2061 12/22/2050

FICO score at loan origination 588 - 832

762 604 - 831

Loan-to-value ratio at loan origination 7 % - 103 %

66 % 8 % - 103 %

At March 31, 2022 and December 31, 2021, approximately 13 % and 16 %, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.

The Company participates in an arrangement that provides 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 March 31, 2022 and December 31, 2021, the fair value and carrying value of this warehouse facility was $ 0 and $ 1.0 million, respectively, and reported as Loans, net in the Consolidated Statements of Financial Condition.

As of March 31, 2022, the lending facility was not on nonaccrual status nor past due.

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.

Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction.

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:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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 three months ended March 31, 2022 and 2021.

For the three months ended March 31, 2022 and 2021 the Company recorded a net loan loss (provision) reversal on corporate loans of ($ 0.6 ) million and $ 6.2 million, respectively, based upon its Loss Given Default methodology.

At March 31, 2022 and December 31, 2021, the Company had unfunded corporate loan commitments of $ 284.5 million and $ 278.9 million, respectively.

At March 31, 2022 and December 31, 2021, the liability related to the expected credit losses on the unfunded corporate loan commitments was $ 2.5 million and $ 2.3 million, respectively.

The Company invests in corporate loans through its Annaly Middle Market Lending Group.

The industry and rate attributes of the portfolio at March 31, 2022 and December 31, 2021 are as follows:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Industry Dispersion

March 31, 2022 December 31, 2021

(dollars in thousands)

Computer Programming, Data Processing & Other Computer Related Services $ 464,921 $ 437,257

Management & Public Relations Services 229,097 263,187

Industrial Inorganic Chemicals 155,728 156,292

Miscellaneous Industrial & Commercial 96,789 93,619

Miscellaneous Health & Allied Services, not elsewhere classified 96,104 64,133

Public Warehousing & Storage 95,037 94,179

Electronic Components & Accessories 92,166 92,261

Surgical, Medical & Dental Instruments & Supplies 80,391 80,786

Drugs 67,244 —

Research, Development & Testing Services 62,689 59,311

Engineering, Architectural & Surveying 50,023 49,088

Offices & Clinics of Doctors of Medicine 49,910 50,017

Medical & Dental Laboratories 48,603 30,199

Insurance Agents, Brokers & Service 43,360 43,598

Telephone Communications 42,651 42,589

Electrical Work 42,611 42,617

Miscellaneous Equipment Rental & Leasing 32,367 32,346

Home Health Care Services 28,600 28,660

Metal Forgings & Stampings 27,514 27,483

Legal Services 26,146 26,105

Petroleum & Petroleum Products 20,705 21,434

Sanitary Services 20,410 20,453

Grocery Stores 19,646 19,745

Coating, Engraving & Allied Services 17,742 17,705

Chemicals & Allied Products 14,626 14,657

Mailing, Reproduction, Commercial Art & Photography & Stenographic 12,431 12,388

Machinery, Equipment & Supplies 10,323 10,814

Offices & Clinics of Other Health Practitioners 10,068 10,083

Schools & Educational Services, not elsewhere classified 9,765 9,781

Metal Cans & Shipping Containers — 118,204

Total $ 1,967,667 $ 1,968,991

(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 March 31, 2022 and December 31, 2021.

March 31, 2022 December 31, 2021

(dollars in thousands)

First lien loans $ 1,471,546 $ 1,391,217

Second lien loans (1)

496,121 577,774

Total $ 1,967,667 $ 1,968,991

(1) Includes mezzanine positions.

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 March 31, 2022 and December 31, 2021:

March 31, 2022

First Lien Second Lien Total

(dollars in thousands)

Beginning balance (January 1, 2022) (1)

$ 1,391,217 $ 577,774 $ 1,968,991

Originations & advances 154,396 17,301 171,697

Principal payments ( 74,251 ) ( 99,987 ) ( 174,238 )

Amortization & accretion of (premium) discounts 885 940 1,825

Allowance for loan losses

Beginning allowance ( 17,341 ) ( 10,579 ) ( 27,920 )

Current period (allowance) reversal ( 701 ) 93 ( 608 )

Ending allowance ( 18,042 ) ( 10,486 ) ( 28,528 )

Net carrying value (March 31, 2022)

$ 1,471,546 $ 496,121 $ 1,967,667

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

(1) Excludes loan loss allowances.

(2) Includes syndications.

The following table provides the amortized cost basis of corporate debt held for investment as of March 31, 2022 by vintage year and internal risk rating.

Amortized Cost Basis by Risk Rating and Vintage (1)

Risk Rating Vintage

Total 2022 2021 2020 2019 2018 2017 2016

(dollars in thousands)

1-5 / Performing $ 1,797,943 $ 55,565 $ 641,746 $ 342,945 $ 221,796 $ 358,884 $ 138,903 $ 38,104

6 / Performing - Closely Monitored 65,000 — 22,522 26,146 16,332 — — —

7 / Substandard 104,724 — — 10,323 9,276 85,125 — —

8 / Doubtful — — — — — — — —

9 / Loss — — — — — — — —

Total $ 1,967,667 $ 55,565 $ 664,268 $ 379,414 $ 247,404 $ 444,009 $ 138,903 $ 38,104

(1) The amortized cost basis excludes accrued interest and includes deferred fees on unfunded loans.

As of March 31, 2022, the Company had $ 9.7 million of accrued interest receivable on corporate loans, which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition, and $ 0.8 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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 gains (losses) on investments and other 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 gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss).

Cash flows received for Interests in MSR are recorded in Other, net in the Consolidated Statements of Comprehensive Income (Loss).

The following tables present activity related to MSR and Interests in MSR for the three months ended March 31, 2022 and 2021:

Mortgage Servicing Rights Three Months Ended

March 31, 2022 March 31, 2021

(dollars in thousands)

Fair value, beginning of period $ 544,562 $ 100,895

Purchases (1)

Change in fair value due to:

Changes in valuation inputs or assumptions (2)

158,963 27,673

Other changes, including realization of expected cash flows ( 15,600 ) ( 15,488 )

Fair value, end of period $ 1,108,937 $ 113,080

(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 Three Months Ended

March 31, 2022

(dollars in thousands)

Beginning balance $ 69,316

Purchases (1)

Gain (loss) included in net income 11,424

Ending balance March 31, 2022

(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

VARIABLE INTEREST ENTITIES

Multifamily Securitization

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 this arrangement, the Company determined that it was the primary beneficiary based upon its involvement in the design of this VIE and through the retention of a significant variable interest in the VIE.

The Company elected the fair value option for the financial liabilities of this VIE 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.

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.

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.

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

OBX 2022-NQM1 January 2022 $ 556,696

OBX 2022-INV1 January 2022 $ 377,275

OBX 2022-INV2 February 2022 $ 466,686

OBX 2022-NQM2 February 2022 $ 439,421

OBX 2022-INV3 March 2022 $ 330,823

OBX 2022-NQM3 March 2022 $ 315,843

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

As of March 31, 2022 and December 31, 2021, a total carrying value of $ 6.2 billion and $ 4.6 billion, respectively, of bonds were held by third parties and the Company retained $ 892.5 million and $ 780.8 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.

The Company incurred $ 3.4 million and $ 0.7 million of costs during the three months ended March 31, 2022 and 2021, respectively, in connection with these securitizations that were expensed as incurred.

The contractual principal amount of the OBX Trusts’ debt held by third parties was $ 6.5 billion and $ 4.6 billion at March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $ 675.0 million.

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 $ 716.4 million and $ 692.6 million at March 31, 2022 and December 31, 2021, respectively.

The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation.

At March 31, 2022 and December 31, 2021, the subsidiary had an intercompany receivable of $ 455.5 million and $ 433.3 million, respectively, which eliminates upon consolidation and a secured financing of $ 455.5 million and $ 433.3 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 March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $ 234.2 million and $ 400.0 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 $ 396.6 million and $ 402.9 million at March 31, 2022 and December 31, 2021, respectively, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net.

At March 31, 2022 and December 31, 2021, the subsidiary had a secured financing of $ 234.2 million and $ 238.2 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 March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $ 400.0 million.

The Company has pledged as collateral for this facility corporate loans with a carrying amount of $ 362.4 million and $ 368.0 million at March 31, 2022 and December 31, 2021, respectively.

As of March 31, 2022 and December 31, 2021, the subsidiary had a secured financing of $ 224.6 million and $ 231.8 million, respectively, to the third party financial institution.

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 $ 2.5 billion at March 31, 2022.

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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 March 31, 2022 and December 31, 2021 are as follows:

March 31, 2022

Assets (dollars in thousands)

Cash and cash equivalents $ 8,570

Mortgage servicing rights 9,101

Interests in MSR 85,653

Other assets 11,600

Total assets $ 116,821

Payable for unsettled trades 2,155

Other liabilities 6,100

Total liabilities $ 8,255

December 31, 2021

Assets (dollars in thousands)

Cash and cash equivalents $ 16,187

Mortgage servicing rights 7,254

Interests in MSR 69,316

Other assets 10,406

Total assets $ 105,510

Payable for unsettled trades 1,911

Other liabilities 14,582

Total liabilities $ 16,493

Corporate Debt Funds

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 three months ended March 31, 2022 and 2021, the Company transferred $ 0 and $ 15.1 million, respectively, 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 March 31, 2022 and December 31, 2021, the Company had outstanding participating interests in residential mortgage loans of $ 0.8 billion and $ 1.0 billion, 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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 included equity interests, loan assets and associated liabilities, and CMBS (other than commercial CRTs).

The Company also sold nearly all of the remaining CRE business assets that are not included in the transaction with Slate.

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

In connection with the execution of the definitive agreement to sell the CRE business, during the three months ended March 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.

During the three months ended March 31, 2021, the Company reported Business divestiture-related gains (losses) of ($ 249.6 ) million, in its Consolidated Statements of Comprehensive Income (Loss) which includes the aforementioned goodwill impairment as well as valuation adjustments resulting from classifying the assets as held for sale and estimated transaction costs.

In addition, 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.

As of March 31, 2022, the assets held for sale and the associated liabilities were transferred to Slate.

DERIVATIVE INSTRUMENTS

11 unchanged sentences

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).

Subsequent changes in fair value from inception of these interest rate swaps are reflected within Net gains (losses) on derivatives 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.

1 unchanged sentence

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.

The changes in the estimated fair value are presented within Net gains (losses) on derivatives.

None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes.

1 unchanged sentence

In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions.

At September 30, 2021 and December 31, 2020, ($ 0.2 ) billion and $ 1.5 billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.

At March 31, 2022 and December 31, 2021, ($ 1.5 ) billion and ($ 0.4 ) billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.

Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk.

In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings.

The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index.

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.

Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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.

4 unchanged sentences

If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid.

If the Company

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid.

If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid.

The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values.

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

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

Derivatives Instruments September 30, 2021 December 31, 2020

The table below summarizes fair value information about our derivative assets and liabilities at March 31, 2022 and December 31, 2021:

Derivatives Instruments March 31, 2022 December 31, 2021

Assets (dollars in thousands)

11 unchanged sentences

Total derivative liabilities $ 826,972 $ 881,537

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

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

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

(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 410.0 million and $ 400.0 million at March 31, 2022 and December 31, 2021, respectively, plus any coupon shortfalls on the underlying tranche.

As of March 31, 2022 and December 31, 2021 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and AA.

The following table summarizes certain characteristics of the Company’s interest rate swaps at March 31, 2022 and December 31, 2021:

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

September 30, 2021

March 31, 2022

Maturity Current Notional (1)(2)

18 unchanged sentences

Total / Weighted average $ 45,907,300 0.59 % 0.08 % 3.32

(1) As of September 30, 2021, 19 %, 54 % and 27 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.

(1) As of March 31, 2022, 17 %, 46 % and 37 % 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, 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.

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

(3) At September 30, 2021 and December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps.

(2) There were no forward starting swaps at March 31, 2022 and December 31, 2021.

(3) At March 31, 2022 and December 31, 2021, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps.

As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed.

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

September 30, 2021

The following table summarizes certain characteristics of the Company’s swaptions at March 31, 2022 and December 31, 2021:

March 31, 2022

Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration

7 unchanged sentences

Long receive $ 2,000,000 1.47 % 3M LIBOR 10.95 11.38

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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

September 30, 2021

The following table summarizes certain characteristics of the Company’s TBA derivatives at March 31, 2022 and December 31, 2021:

March 31, 2022

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

5 unchanged sentences

Purchase contracts $ 20,133,000 $ 20,289,856 $ 20,338,633 $ 48,777

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

September 30, 2021

The following table summarizes certain characteristics of the Company’s futures derivatives at March 31, 2022 and December 31, 2021:

March 31, 2022

Notional - Long

18 unchanged sentences

$ — $ ( 7,509,200 ) 1.96

Treasury futures - 5 year

— ( 5,644,900 ) 4.38

Treasury futures - 10 year and greater

3 unchanged sentences

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

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

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 March 31, 2022 and December 31, 2021, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

September 30, 2021

March 31, 2022

Amounts Eligible for Offset

10 unchanged sentences

Purchase commitments 73 — — 73

Credit derivatives 3,141 ( 256 ) ( 2,885 ) —

December 31, 2021

6 unchanged sentences

Purchase commitments 1,779 — — 1,779

Credit derivatives 1,160 ( 516 ) — 644

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 ) —

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

Net Interest Component of Interest Rate Swaps (1)

Realized Gains (Losses) on Termination of Interest Rate Swaps (1)

Unrealized Gains (Losses) on Interest Rate Swaps (1)

For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

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

March 31, 2022 $ ( 62,541 ) $ — $ 1,323,439

March 31, 2021 $ ( 79,747 ) $ — $ 772,262

(1) Included in Net gains (losses) on derivatives on the Consolidated Statements of Comprehensive Income (Loss).

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

Three Months Ended September 30, 2021

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

(dollars in thousands)

Net TBA derivatives $ 155,569 $ ( 182,845 ) $ ( 27,276 )

Net interest rate swaptions ( 24,265 ) ( 44,602 ) ( 68,867 )

Futures ( 229,534 ) 279,293 49,759

Purchase commitments — 920 920

Credit derivatives 2,616 ( 2,320 ) 296

Three Months Ended September 30, 2020

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

(dollars in thousands)

Net TBA derivatives $ 276,849 $ ( 100,680 ) $ 176,169

Net interest rate swaptions ( 9,836 ) 3,263 ( 6,573 )

Futures ( 19,989 ) 10,337 ( 9,652 )

Purchase commitments — ( 51 ) ( 51 )

Credit derivatives 1,531 7,892 9,423

Total $ 169,316

Nine Months Ended September 30, 2021

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

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

Three Months Ended March 31, 2022

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

(dollars in thousands)

4 unchanged sentences

Credit derivatives 1,060 ( 3,339 ) ( 2,279 )

Total $ 72,731

Nine Months Ended September 30, 2020

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

Three Months Ended March 31, 2021

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

(dollars in thousands)

7 unchanged sentences

Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions.

The aggregate fair value of all

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

This amount is fully collateralized.

The aggregate fair value of all derivative instruments with the aforementioned features were in a net asset position at March 31, 2022.

FAIR VALUE MEASUREMENTS

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The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Refer to the “Sale of Commercial Real Estate Business” Note for fair value measurements related to the assets and liabilities of the disposal group held for sale as of September 30, 2021.

GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique.

2 unchanged sentences

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:

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.

16 unchanged sentences

Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information.

8 unchanged sentences

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

September 30, 2021

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Financial Statements

March 31, 2022

Level 1 Level 2 Level 3 Total

5 unchanged sentences

Residential mortgage loans — 1,650,151 — 1,650,151

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

Mortgage servicing rights — — 1,108,937 1,108,937

10 unchanged sentences

Total liabilities $ 5,850 $ 8,308,507 $ — $ 8,314,357

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Financial Statements

December 31, 2021

6 unchanged sentences

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

11 unchanged sentences

Relevant inputs vary depending on the nature of the instrument being measured at fair value.

The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below.

The sensitivities of significant unobservable

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.

8 unchanged sentences

The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.

September 30, 2021

March 31, 2022

Unobservable Input (1) / Range (Weighted Average) (2)

11 unchanged sentences

Discount rate Prepayment rate Delinquency rate Cost to service

MSR consolidated with VIE 9.0 % - 12.0 % ( 9.4 %)

MSR held directly 3.3 % - 11.1 % ( 7.0 %)

7.3 % - 15.9 % ( 9.4 %)

1 unchanged sentence

$ 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 )

(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.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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

September 30, 2021 December 31, 2020

The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at March 31, 2022 and December 31, 2021.

March 31, 2022 December 31, 2021

Value Carrying

Financial assets (dollars in thousands)

Commercial real estate debt and preferred equity, held for investment (1)

$ — $ — $ 1,372,430 $ 1,442,071

Corporate debt, held for investment 1,967,667 1,998,487 1,968,991 1,986,379

Assets transferred or pledged to securitization vehicles — — 874,349 928,732

Corporate debt, held for sale 2,113 2,113 — —

Financial liabilities

1 unchanged sentence

Other secured financing 914,255 914,255 903,255 903,255

Mortgages payable — — 426,256 474,779

(1) Includes assets of consolidated VIEs.

Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment, corporate debt, held for sale and mortgages payable are valued using Level 3 inputs.

The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements.

Long term other secured financing are valued using Level 2 inputs.

Corporate debt, held for investment and corporate debt, held for sale 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.

GOODWILL AND INTANGIBLE ASSETS

4 unchanged sentences

Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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.

2 unchanged sentences

If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

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

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

At March 31, 2022 and December 31, 2021, there was no goodwill balance.

During the three months ended March 31, 2021, the Company recognized an impairment on goodwill in connection with the sale of the CRE business.

Refer to the “Sale of Commercial Real Estate Business” Note for additional information.

1 unchanged sentence

Finite life intangible assets are amortized over their expected useful lives.

As part of the Internalization, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $ 41.2 million based on the replacement cost of the employee base acquired by the Company.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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

As part of the Company’s management internalization transaction, 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.

The following table presents the activity of finite lived intangible assets for the three months ended March 31, 2022.

Intangible Assets, net

1 unchanged sentence

Balance at December 31, 2021

Impairment ( 9,549 )

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

amortization expense ( 1,131 )

Balance at September 30, 2021

Balance at March 31, 2022

SECURED FINANCING

2 unchanged sentences

The Company enters into reverse repurchase agreements to earn a yield on excess cash balances.

The Company receives collateral for reverse repurchase agreements and is required to post collateral for repurchase agreements.

To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities.

2 unchanged sentences

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

The Company had outstanding $ 55.5 billion and $ 64.8 billion of repurchase agreements with weighted average remaining maturities of 75 days and 64 days at September 30, 2021 and December 31, 2020, respectively.

The Company has select arrangements with counterparties to enter into repurchase agreements for select credit assets for $ 1.6 billion with remaining capacity of $ 1.3 billion at September 30, 2021.

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

September 30, 2021

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

Total Repurchase Agreements Weighted Average Rate

The Company had outstanding $ 52.6 billion and $ 54.8 billion of repurchase agreements with weighted average remaining maturities of 68 days and 52 days at March 31, 2022 and December 31, 2021, respectively.

The Company has select arrangements with counterparties to enter into repurchase agreements for $ 1.9 billion with remaining capacity of $ 1.5 billion at March 31, 2022.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

At March 31, 2022 and December 31, 2021, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates:

March 31, 2022

Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted Average Rate

(dollars in thousands)

7 unchanged sentences

Total $ 49,906,185 $ 328,926 $ 1,636,887 $ 437,269 $ 317,236 $ 52,626,503 0.41 %

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Financial Statements

December 31, 2021

Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial

Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted

Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted

(dollars in thousands)

7 unchanged sentences

Total $ 52,724,923 $ 176,450 $ 977,366 $ 505,001 $ 385,903 $ 54,769,643 0.17 %

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

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

Less than 1 % of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2020.

The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at September 30, 2021 and December 31, 2020.

(1) No repurchase agreements had a remaining maturity over 1 year at March 31, 2022 and December 31, 2021.

Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments.

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements

3 unchanged sentences

Netted amounts $ — $ 52,626,503 $ — $ 54,769,643

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

Other Secured Financing - Refer to the “Variable Interest Entities” Note for additional information on the Company’s other secured financing arrangements.

Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 60.3 billion and $ 163.2 million, respectively, at September 30, 2021 and $ 70.6 billion and $ 196.9 million, respectively, at December 31, 2020.

Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 57.5 billion and $ 163.0 million, respectively, at March 31, 2022 and $ 59.2 billion and $ 160.8 million, respectively, at December 31, 2021.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

CAPITAL STOCK

(A) Common Stock

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

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at March 31, 2022 and December 31, 2021.

Shares authorized Shares issued and outstanding

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

March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 Par Value

2,936,500,000 2,936,500,000 1,461,012,252 1,459,736,258 $ 0.01

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

In December 2020, the Company announced that its Board authorized the repurchase of up to $ 1.5 billion of its outstanding common shares through December 31, 2021 (the “Current Share Repurchase Program”).

The Current Share Repurchase

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

Program replaced the Prior Share Repurchase Program.

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

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

All common shares were purchased in open-market transactions.

In December 2020, the Company announced that its board of directors (“Board”) authorized the repurchase of up to $ 1.5 billion of its outstanding common shares through December 31, 2021 (the “Prior Share Repurchase Program”).

In January 2022, the Company announced that its Board authorized the repurchase of up to $ 1.5 billion of its outstanding shares of common stock through December 31, 2024 (the “Current Share Repurchase Program”).

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

During the three months ended March 31, 2022 and 2021, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

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.

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

During the three and nine months ended September 30, 2021, the Company issued 5.6 million and 51.1 million shares, respectively, for proceeds of $ 49.0 million and $ 469.5 million, respectively, net of commissions and fees, under the at-the-market sales program.

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

During the three months ended March 31, 2022, the Company issued 0.8 million shares for proceeds of $ 6.2 million, net of commissions and fees, under the at-the-market sales program.

No shares were issued under the at-the-market sales program during the three months ended March 31, 2021.

(B) Preferred Stock

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

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at March 31, 2022 and December 31, 2021.

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

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Date At Which Dividend Rate Becomes Floating Floating Annual Rate

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

Fixed-rate (dollars in thousands)

Series D — 18,400,000 — — — — 7.50 % 9/13/2017 NA NA

March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021

Fixed-to-floating rate

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

Through September 30, 2021, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.

Through March 31, 2022, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.

The Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Fixed-to-Floating Rate Cumulative Preferred Stock and Series I Fixed-to-Floating Rate Cumulative Preferred Stock rank senior to the common stock of the Company.

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

For the Three Months Ended For the Nine Months Ended

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

For the Three Months Ended

March 31, 2022 March 31, 2021

(dollars in thousands, except per share data)

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

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

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

Dividends declared per share of series D preferred stock $ — $ 0.469 $ — $ 1.406

Date of distributions paid to common stockholders after period end April 29, 2022 April 30, 2021

Dividends declared to series F preferred stockholders $ 12,510 $ 12,510

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Prime jumbo (2)

Prime jumbo interest-only (2)

(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).

(2) Changes in fair value are recognized in Net gains (losses) on investments and other 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.

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Financial Statements

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

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

2021 2020 2021 2020

The following presents the components of the Company’s interest income and interest expense for the three months ended March 31, 2022 and March 31, 2021.

For the Three Months Ended March 31,

Interest income (dollars in thousands)

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NET INCOME (LOSS) PER COMMON SHARE

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

For the Three Months Ended For the Nine Months Ended

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

The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three months ended March 31, 2022 and March 31, 2021.

For the Three Months Ended

March 31, 2022 March 31, 2021

(dollars in thousands, except per share data)

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Diluted $ 1.36 $ 1.23

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

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

The computations of diluted net income (loss) per share available (related) to common share for the three months ended March 31, 2022 and 2021 excludes 2.2 million and 0 , respectively, of potentially dilutive restricted and performance stock units because their effect would have been anti-dilutive.

For the three months ended March 31, 2022 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 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.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition.

It is generally the Company’s policy to distribute 100 % of its REIT taxable income.

To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code.

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

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

Thus, no accruals for penalties and interest were deemed necessary at March 31, 2022 and December 31, 2021.

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

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

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

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

During the three months ended March 31, 2022 and 2021, the Company recorded $ 26.5 million and ($ 0.3 ) 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.

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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.

The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt.

MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase the overall costs to service the underlying mortgage loans.

The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms.

The Company 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

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

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

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

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.

RELATED PARTY TRANSACTIONS

Closing of the Internalization and Termination of Management Agreement

On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Former Manager and certain affiliates of the Former Manager.

Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($ 1.00 ).

In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager (the net effect of which was immaterial in amount), and the Company transitioned from an externally-managed REIT to an internally-managed REIT.

At the closing, all employees of the Former Manager became employees of the Company.

The parties also terminated the Amended and Restated Management Agreement by and between the Company and the Former Manager (the “Management Agreement”) and therefore the Company no longer pays a management fee to, or reimburses expenses of, the Former Manager.

Pursuant to the Internalization Agreement, the Former Manager waived any Acceleration Fee (as defined in the Management Agreement).

Prior to the closing of the Internalization, the Former Manager, under the Management Agreement and subject to the supervision and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s investment portfolio;

(ii) recommending alternative forms of capital raising;

(iii) supervising the Company’s financing and hedging activities;

and (iv) day to day management functions.

The Former Manager also performed such other supervisory and management services and activities relating to the Company’s assets and operations as appropriate.

In exchange for the management services, the Company paid the Former Manager a monthly management fee, and the Former Manager was responsible for providing personnel to manage the Company.

Prior to the closing of the Internalization, the Company had paid the Former Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i) 1.05% of Stockholders' Equity (as defined in the Management Agreement) up to $ 17.28 billion, and (ii) 0.75 % of Stockholders' Equity (as defined in the Management Agreement) in excess of $ 17.28 billion.

The Company did not pay the Former Manager any incentive fees.

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

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.

LEASE COMMITMENTS AND CONTINGENCIES

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

Operating Leases Classification September 30, 2021

The lease cost for the three months ended March 31, 2022 and 2021 was $ 0.8 million and $ 0.9 million, respectively.

Supplemental information related to leases as of and for the three months ended March 31, 2022 was as follows:

Operating Leases Classification March 31, 2022

Assets (dollars in thousands)

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

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

There were no material contingencies at March 31, 2022 and December 31, 2021.

ARCOLA REGULATORY REQUIREMENTS

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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.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities.

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

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

At March 31, 2022, Arcola had a minimum net capital requirement of $ 0.3 million.

Arcola consistently operates with capital in excess of its regulatory capital requirements.

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

Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at March 31, 2022 was $ 504.5 million with excess net capital of $ 504.2 million.

SUBSEQUENT EVENTS

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

The securitizations represented financing

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

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

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

In April 2022, the Company entered into a definitive agreement to sell substantially all of the corporate loan interests held by the MML business operated by the Company, as well as assets managed for third parties (collectively, the "MML Portfolio"), to Ares Capital Management LLC.

Subject to customary closing conditions, the transfer of the MML Portfolio is expected to be completed by the end of the second quarter of 2022.

In May 2022, the Company completed and closed the securitization of residential mortgage loans, OBX 2022-NQM4 Trust with a face value of $ 457.3 million.

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

ANNALY CAPITAL MANAGEMENT, INC.

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our ability to grow our residential credit business;

our ability to grow our middle market lending business;

the sale of our middle market lending portfolio;

credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt;

risks related to investments in MSR;

risks related to investments in mortgage servicing rights (“MSR”);

our ability to consummate any contemplated investment opportunities;

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Recent Developments

Business Environment and COVID-19

Business Environment

Economic Environment

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Experienced and Projected Long-term CPR

Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), and Net Interest Margin (excluding PAA), and Average Economic Cost of Interest Bearing Liabilities)

Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA), and Average Economic Cost of Interest Bearing Liabilities)

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

Realized and Unrealized Gains (Losses)

Other Income (Loss)

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Compliance, Regulatory and Legal Risk Management

Critical Accounting Policies and Estimates

Critical Accounting Estimates

Valuation of Financial Instruments

1 unchanged sentence

Residential Mortgage Loans

Commercial Real Estate Investments

Interest Rate Swaps

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Management’s Discussion and Analysis

We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending.

We are a leading diversified capital manager with investment strategies across mortgage finance.

Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies.

We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT.

Prior to the closing of the Internalization (as defined in the “Related Party Transactions” Note located within Item 1) on June 30, 2020, we were externally managed by Annaly Management Company LLC (the “Former Manager”).

Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”

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Recent Developments

Sale of Commercial Real Estate Business

On March 25, 2021, we announced that we entered into a definitive agreement to sell our Commercial Real Estate (“CRE”) business to Slate Asset Management L.P.

and Slate Grocery REIT (together, “Slate”).

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

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

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

Revenues and expenses associated with the CRE business will be reflected in our results of operations and key financial metrics through closing.

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

Business Environment and COVID-19

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

Earnings available for distribution and economic leverage are non-GAAP financial measures.

Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to their most directly comparable GAAP results.

Business Continuity

Our well-established Business Continuity Plan (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics.

It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise.

The BCP is regularly updated and tested.

Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management.

Key tenets of the plan include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations.

Historical tabletop exercises have included use of Center for Disease Control and Prevention Influenza Pandemic exercise materials.

That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/impact assessments to those scenarios.

Regular meetings were commenced to implement and review active internal and external communications planning.

These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19.

We took proactive actions, which included canceling non-essential travel and instituting 100% remote working, ahead of New York State-mandated requirements.

To protect the health and well-being of our employees, their families and communities, remote work requirements began in phases in early March 2020, culminating with a company-wide exercise on March 13, 2020 to test connectivity and functionality.

All employees were able to successfully perform their duties in this testing and we have operated largely remotely since that time.

Business activities continue to be performed primarily remotely, though we have seen a number of employees return to the office on a voluntary and periodic basis.

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

Economic Environment

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

gross domestic product (“GDP”) rising 2.0 percent on a seasonally adjusted annualized rate.

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

Despite the slowdown, U.S.

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

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

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

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

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

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

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

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mortgage basis 48 bps 43 bps 72 bps

Treasury rate 1.49% 0.91% 0.68%

1-Month 0.08% 0.14% 0.15%

6-Month 0.16% 0.26% 0.26%

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

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

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

These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate.

We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates.

Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders.

The committee also continues to engage with industry working groups and other market participants regarding the transition.

We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability.

Similar to the rest of the market, the bulk of our exposure is in derivatives contracts.

Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments and adequate time left to resolve.

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

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

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

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

Results of Operations

The results of our operations are affected by various factors, many of which are beyond our control.

Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A.

“Risk Factors” of our most recent Annual Report on Form 10-K and in Part II, Item 1A.

“Risk Factors” in this Quarterly Report on Form 10-Q.

This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S.

generally accepted accounting principles (“GAAP”) and non-GAAP measurements.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers.

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

Commencing with our financial results for the quarter ended June 30, 2021 and for subsequent reporting periods, we relabeled “Core Earnings (excluding PAA)” as “Earnings Available for Distribution” (“EAD”).

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

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

In line with evolving industry practices, we believe the term Earnings Available for Distribution more accurately reflects the principal purpose of the measure than the term Core Earnings (excluding PAA) and will serve as a useful indicator for investors in evaluating our performance and our ability to pay dividends.

The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods.

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

Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income.

Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution.

Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity-related or volume-related expenses as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items.

As such, prior periods have been conformed to the current presentation.

Refer to the “General and Administrative Expenses” section for additional information.

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Management’s Discussion and Analysis

Net Income (Loss) Summary

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

As of and for the Three Months Ended September 30,

As of and for the Nine Months Ended September 30,

2021 2020 2021 2020

(dollars in thousands, except per share data)

Interest income $ 412,972 $ 562,443 $ 1,560,256 $ 1,702,281

Interest expense 50,438 115,126 187,458 804,631

Net interest income 362,534 447,317 1,372,798 897,650

Realized and unrealized gains (losses) 179,894 618,823 717,017 (2,524,967)

Other income (loss) 16,221 3,714 31,364 23,204

Total general and administrative expenses 43,882 44,587 145,313 179,222

Income (loss) before income taxes 514,767 1,025,267 1,975,866 (1,783,335)

Income taxes (6,767) 9,719 (1,954) (14,928)

Net income (loss) 521,534 1,015,548 1,977,820 (1,768,407)

Net income (loss) attributable to noncontrolling interests 2,290 (126) 3,405 (28)

Net income (loss) attributable to Annaly 519,244 1,015,674 1,974,415 (1,768,379)

Dividends on preferred stock 26,883 35,509 80,649 106,527

Net income (loss) available (related) to common stockholders $ 492,361 $ 980,165 $ 1,893,766 $ (1,874,906)

Net income (loss) per share available (related) to common stockholders

Basic $ 0.34 $ 0.70 $ 1.34 $ (1.32)

Diluted $ 0.34 $ 0.70 $ 1.33 $ (1.32)

Weighted average number of common shares outstanding

Basic 1,445,315,914 1,404,202,695 1,418,424,208 1,419,645,475

Diluted 1,446,357,867 1,404,368,300 1,419,502,205 1,419,645,475

Other information

Investment portfolio at period-end $ 74,809,185 $ 87,155,310 $ 74,809,185 $ 87,155,310

Average total assets $ 79,519,369 $ 91,325,532 $ 83,215,858 $ 102,465,855

Average equity $ 13,678,522 $ 13,996,138 $ 13,861,609 $ 14,124,037

GAAP leverage at period-end (1)

4.4:1 5.1:1 4.4:1 5.1:1

GAAP capital ratio at period-end (2)

17.9 % 15.9 % 17.9 % 15.9 %

Annualized return on average total assets 2.62 % 4.45 % 3.17 % (2.30 %)

Annualized return on average equity 15.25 % 29.02 % 19.02 % (16.69 %)

Net interest margin (3)

2.01 % 2.15 % 2.38 % 1.27 %

Average yield on interest earning assets (4)

2.29 % 2.70 % 2.70 % 2.40 %

Average GAAP cost of interest bearing liabilities (5)

0.32 % 0.60 % 0.37 % 1.23 %

Net interest spread 1.97 % 2.10 % 2.33 % 1.17 %

Weighted average experienced CPR for the period 23.1 % 22.9 % 24.5 % 18.7 %

Weighted average projected long-term CPR at period-end 12.7 % 17.1 % 12.7 % 17.1 %

Common stock book value per share $ 8.39 $ 8.70 $ 8.39 $ 8.70

Non-GAAP metrics (6)

Interest income (excluding PAA) $ 473,698 $ 596,322 $ 1,560,019 $ 2,078,624

Economic interest expense (5)

$ 104,849 $ 177,655 $ 404,703 $ 945,701

Economic net interest income (excluding PAA) $ 368,849 $ 418,667 $ 1,155,316 $ 1,132,923

Premium amortization adjustment cost (benefit) $ 60,726 $ 33,879 $ (237) $ 376,343

Earnings available for distribution (7)

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

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

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

Economic leverage at period-end (1)

5.8:1 6.2:1 5.8:1 6.2:1

Economic capital ratio at period-end (2)

14.2 % 13.6 % 14.2 % 13.6 %

Net interest margin (excluding PAA) (3)

2.04 % 2.05 % 2.01 % 1.67 %

Average yield on interest earning assets (excluding PAA) (4)

2.63 % 2.86 % 2.70 % 2.93 %

Average economic cost of interest bearing liabilities (5)

0.66 % 0.93 % 0.79 % 1.44 %

Net interest spread (excluding PAA) 1.97 % 1.93 % 1.91 % 1.49 %

In April 2022, we entered into a definitive agreement to sell all of the corporate loan interests held by the MML business operated by us, as well as assets managed for third parties (collectively, the "MML Portfolio"), to Ares Capital Management LLC (“Ares”).

Subject to customary closing conditions, the sale of the MML Portfolio is expected to be completed by the end of the second quarter of 2022.

Business Environment

By many markers, the U.S.

economy remained robust in the first quarter 2022, with a majority of the slowdown in U.S.

gross domestic product (“GDP”) coming from volatile components such as inventories and trade.

Moreover, inflation readings and the U.S.

labor market remain very strong, suggesting that the Federal Reserve needs to remove monetary policy accommodation much faster than previously anticipated.

The repricing expectations around Federal Reserve monetary policy led to a meaningful rise in Treasury yield levels, where 2-year yields rose 160 basis points during the quarter, marking the most severe quarterly selloff in nearly 40 years, while 10-year Treasury yields rose by somewhat less.

Given the rise in Treasury yields, as well as concerning geopolitical developments that include the Russian invasion of Ukraine, interest rate volatility rose to the highest realized levels since the financial crisis.

The volatile rate environment weighed heavily on mortgages, with production coupon nominal spreads widening roughly 40 basis points this quarter.

The elevated volatility, combined with the prospects of an expeditious removal of monetary policy accommodation has led to a sharp repricing of fixed income assets during the first quarter, with the Bloomberg U.S.

Aggregate Bond Market Index facing the worst quarterly performance since 1980.

Consistent with the broader market, our portfolio was vulnerable to the exceptional volatility in this environment despite our efforts to defensively position it, experiencing an economic return of negative 12% for the quarter.

In this challenging environment, we maintained a stable notional exposure to Agency mortgage-backed securities (“MBS”) after we began the year with our leverage at its lowest level since 2015.

We actively managed our hedges to the shifting interest rate risk over the quarter and rebalanced our coupon exposure to better position ourselves in the rising rate environment.

The spread widening seen during the quarter led to a notable change in prepayment dynamics.

With mortgage rates at roughly 5% at quarter end, only a small fraction of borrowers maintained an incentive to refinance their mortgages.

At the same time, cash-out activity should remain somewhat elevated due to the recent strong housing market and summer seasonals.

As a result, the convexity of the broader Agency MBS universe and our mortgage portfolio improved meaningfully.

Our portfolio speeds slowed 22 percent quarter-over-quarter, with our aggregate portfolio paying 16.7% measured in constant prepayment rates (“CPR”).

Meanwhile, as mortgage production shifted into higher coupons, the to-be announced (“TBA”) deliverable in higher coupons shifted from seasoned, faster paying pools to new production, resulting in collateral scarcity and meaningful dollar roll specialness in these coupons.

While this specialness will not last in perpetuity, we expect to continue to shift up in coupon while preferring TBA over pools given the favorable carry and spread dynamics.

In MSR, mortgage originators continue to be active sellers as operating profitability has come under pressure from rising mortgage rates with traded MSR volumes nearly reaching levels seen in the full year 2020 in the first quarter alone.

We used this opportunity to grow our portfolio through net purchases of over $400 million in market value.

Combined with mark to market gains, we increased our MSR position to over $1.2 billion at quarter end.

We continue to see MSR as complementary to our core Agency strategy due to its negative interest rate and mortgage spread duration and attractive unlevered returns and expect to allocate capital to the sector should market conditions remain favorable.

In Residential Credit, our economic portfolio ended the quarter with $4.4 billion of assets, with the modest decline in the portfolio primarily driven by our robust securitization activity as we converted whole loans to OBX securities.

The residential credit market was not immune to the volatility in the broader rates and credit markets with key benchmark asset classes establishing widest levels since the onset of the pandemic two years ago.

AAA-rate non-qualified mortgage spreads widened 75 basis points while benchmark credit risk transfer M2-tranche spreads widened 160 basis points.

Despite the challenging

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Item 1. Financial Statements