What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-05 · 441 added, 316 removed, 1225 unchanged (38% of the section changed)

Management’s Discussion and Analysis

environment, our OBX platform had its most active quarter to date, with $2.5 billion of whole loans securitized across six transactions.

Being a programmatic issuer has allowed us to lock in financing on 87% of our whole loan portfolio at an average cost of funds of 2.30%, approximately 240 basis points below the current market cost of funds.

The recent selloff has incentivized originators to expand product offerings beyond Agency mortgages into alternative credit products, and we expect this to have a positive impact on the development of the non-QM market over time.

We continue to dedicate resources to the growth of our correspondent loan channel, while also expanding our securitization partners.

Housing fundamentals generally remain strong with healthy consumer balance sheets, a systematic shortage of single-family housing, low available for sale inventory and a robust labor market.

While there are increasing headwinds, namely around higher mortgage rates and affordability, we maintain a constructive outlook on the residential credit sector.

Finally, subsequent to quarter end, we announced the sale of our MML Portfolio to Ares.

The approximately $2.4 billion transaction, which includes assets managed for third parties, is expected to be accretive to book value and validates the quality of our differentiated corporate credit portfolio.

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 planning 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 CDC Influenza Pandemic exercise materials.

Business activities continued to be performed in a hybrid model in the first quarter of 2022, with employees returning to the office on a periodic basis.

At the present, following guidance from federal, state and local authorities, the majority of our employees are returning to the office more regularly as we transition back to an in-office work model.

Economic Environment

The pace of economic growth slowed in the first quarter of 2022 relative to the quarterly pace seen in 2021, with U.S.

GDP declined 1.4 percent on a seasonally adjusted annualized rate.

However, the decline was largely attributable to fluctuations in volatile components of the economy, such as trade and inventory changes, while the core components of goods consumption and services spending showed positive economic momentum.

According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose by an average 562 thousand workers during the first quarter, slightly below the 637 thousand workers added during the fourth quarter 2021.

Overall, employment gains remain very strong, as the unemployment rate has fallen 1.1 percentage points in the last six months to 3.6% in March.

Meanwhile, U.S.

job openings remain near all-time record levels.

Driven in part by continued strong labor demand, wage growth, as measured by the year-over-year change in private sector average hourly earnings, accelerated during the quarter, reading 5.6% in March compared to 4.9% in December 2021.

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 first quarter.

The headline PCE measure increased by 6.6% year-over-year in March 2022, while the more stable core PCE measure, which excludes volatile food and energy prices, registered a 5.2% year-over-year increase.

Prices remain meaningfully elevated, which is driven by strong demand for goods and services, though the Russian invasion of Ukraine and related Western economic sanctions have led to a sharp increase in food and commodity prices.

Absent a major deterioration in the geopolitical situation, it appears that inflation pressures are close to peaking and inflation should slow going forward, though the degree of the moderation remains uncertain at best.

The Federal Open Market Committee (“FOMC”) conducts monetary policy with a dual mandate:

to ensure full employment and stable prices.

Given economic developments in 2021 and the first quarter, the FOMC will have to tighten monetary policy in order to assure meeting its mandate.

Looking at the strong labor market and the elevated inflation readings, risks are emerging that further wage growth could boost inflation, thereby undermining the Federal Reserve’s stable price mandate.

The FOMC has therefore begun to take steps to tighten policy and signaled additional tightening steps in the near future.

As such, the FOMC raised the Federal Funds Target Rate to the 0.25% - 0.50% range during the first quarter and signaled that additional rate increases of greater magnitude will be necessary in the near-term future.

In regard to its balance sheet, the FOMC ended its quantitative easing program at the beginning of March and has suggested that it will let assets mature at an aggregate pace of $95 billion per month across U.S.

Treasuries and Agency MBS starting in either May or June 2022.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

During the first quarter of 2022, the 10-year U.S.

Treasury rate rose meaningfully from 1.51% on December 31, 2021 to 2.34% on March 31, 2022.

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

Treasury rate, widened meaningfully over the course of the quarter to 115 basis points (bps) on March 31, 2022 as the shift in monetary policy and the anticipated elevated supply in Agency MBS weighed on the sector.

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

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

30-Year mortgage current coupon 3.49% 2.07% 2.04%

Mortgage basis 115 bps 56 bps 30 bps

Treasury rate 2.34% 1.51% 1.74%

1-Month 0.45% 0.10% 0.11%

6-Month 1.47% 0.34% 0.21%

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 coincided 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.

federal government enacted a legislative solution for certain “tough legacy” contracts, which in some cases inserts fallback language into the contract or provides a determining party with a safe harbor from litigation.

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.

Some of these options fall within the safe harbor of the federal legislation.

As of March 31, 2022, we had $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 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.

Beginning with the quarter ended March 31, 2022, in light of the continued growth of our mortgage servicing rights portfolio, we enhanced its financial disclosures by separately reporting servicing income and servicing expense in our 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.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

In addition, we consolidated certain line items in our 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.

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 Earnings (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) net servicing income less 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.

ANNALY CAPITAL MANAGEMENT, INC.

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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 months ended March 31, 2022 and 2021.

As of and for the Three Months Ended March 31,

(dollars in thousands, except per share data)

Interest income $ 655,850 $ 763,378

Interest expense 74,922 75,973

Net interest income 580,928 687,405

Servicing and related income 34,715 9,229

Servicing and related expense 3,757 2,297

Net servicing income 30,958 6,932

Other income (loss) 1,484,320 1,104,381

Total general and administrative expenses 45,764 47,905

Income (loss) before income taxes 2,050,442 1,750,813

Income taxes 26,548 (321)

Net income (loss) 2,023,894 1,751,134

Net income (loss) attributable to noncontrolling interests 1,639 321

Net income (loss) attributable to Annaly 2,022,255 1,750,813

Dividends on preferred stock 26,883 26,883

Net income (loss) available (related) to common stockholders $ 1,995,372 $ 1,723,930

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

Basic $ 1.37 $ 1.23

Diluted $ 1.36 $ 1.23

Weighted average number of common shares outstanding

Basic 1,461,363,637 1,399,210,925

Diluted 1,462,451,965 1,400,000,727

Other information

Investment portfolio at period-end $ 73,349,352 $ 82,735,505

Average total assets $ 76,474,599 $ 86,912,346

Average equity $ 12,337,048 $ 14,044,696

GAAP leverage at period-end (1)

GAAP capital ratio at period-end (2)

15.1 % 16.5 %

Annualized return on average total assets 10.59 % 8.06 %

Annualized return on average equity 65.62 % 49.87 %

Net interest margin (3)

3.20 % 3.39 %

Average yield on interest earning assets (4)

3.61 % 3.76 %

Average GAAP cost of interest bearing liabilities (5)

0.48 % 0.42 %

Net interest spread 3.13 % 3.34 %

Weighted average experienced CPR for the period 16.7 % 23.9 %

Weighted average projected long-term CPR at period-end 9.5 % 11.8 %

Common stock book value per share $ 6.77 $ 8.95

Non-GAAP metrics *

Interest income (excluding PAA) $ 476,334 $ 548,808

Economic interest expense (5)

$ 137,463 $ 155,720

Economic net interest income (excluding PAA) $ 338,871 $ 393,088

Premium amortization adjustment cost (benefit) $ (179,516) $ (214,570)

Earnings available for distribution (6)

$ 430,631 $ 439,519

Earnings available for distribution per average common share $ 0.28 $ 0.29

Annualized EAD return on average equity (excluding PAA) 14.01 % 12.53 %

Economic leverage at period-end (1)

Economic capital ratio at period-end (2)

13.1 % 13.7 %

Net interest margin (excluding PAA) (3)

2.04 % 1.91 %

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

2.62 % 2.71 %

Average economic cost of interest bearing liabilities (5)

0.89 % 0.87 %

Net interest spread (excluding PAA) 1.73 % 1.84 %

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Management’s Discussion and Analysis

* Represents a non-GAAP financial measure.

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

(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable divided by total equity.

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

(6) Represents a non-GAAP financial measure.

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

(6) Excludes dividends on preferred stock.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

Net income (loss) was $2.0 billion, which includes $1.6 million attributable to noncontrolling interests, or $1.37 per average basic common share, for the three months ended March 31, 2022 compared to $1.8 billion, which includes $0.3 million attributable to noncontrolling interests, or $1.23 per average basic common share, for the same period in 2021.

We attribute the majority of the change in net income (loss) to higher net gains on derivatives and lower business divestiture-related losses, partially offset by unfavorable changes in net gains (losses) on investments and other, loan loss (provisions) reversals and interest income.

Net gains on derivatives was $1.6 billion for the three months ended March 31, 2022 compared to $1.2 billion for the same period in 2021.

Business divestiture-related losses was ($0.4) million for the three months ended March 31, 2022 compared to ($249.6) million for the same period in 2021.

Net gains (losses) on investments and other was ($159.8) million for the three months ended March 31, 2022 compared to $38.4 million for the same period in 2021.

Loan loss (provision) reversal was ($0.6) million for the three months ended March 31, 2022 compared to $139.6 million for the same period in 2021.

Interest income for the three months ended March 31, 2022 was $655.9 million compared to $763.4 million for the same period in 2021.

Refer to the section titled “Other income (loss)” located within this Item 2 for additional information related to these changes.

Earnings available for distribution were $430.6 million, or $0.28 per average common share, for the three months ended March 31, 2022, compared to $439.5 million, or $0.29 per average common share, for the same period in 2021.

The change in earnings available for distribution during the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to lower coupon income resulting from the reduction in average interest earning assets, partially offset by higher TBA dollar roll income and net servicing income, and a favorable change in the net interest component of interest rate swaps.

Non-GAAP Financial Measures

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• net interest spread (excluding PAA).

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP.

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

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

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

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

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Management’s Discussion and Analysis

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2021 2020 2021 2020

For the Three Months Ended March 31,

(dollars in thousands, except per share data)

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Adjustments to exclude reported realized and unrealized (gains) losses

Realized (gains) losses on termination or maturity of interest rate swaps 1,196,417 427 1,196,417 1,919,720

Unrealized (gains) losses on interest rate swaps (1,380,946) (170,327) (2,012,141) 1,162,768

Net (gains) losses on disposal of investments and other (12,002) (198,888) 37,561 (652,150)

Net (gains) losses on other derivatives and financial instruments

Net (gains) losses on investments and other 159,804 (38,405)

Net (gains) losses on derivatives (1)

(1,704,569) (1,249,130)

Net unrealized (gains) losses on instruments measured at fair value through earnings (90,817) (121,255) (198,992) 354,133

Loan loss provision (reversal) (2)

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Depreciation expense related to commercial real estate and amortization of intangibles (3)

1,122 11,363 14,081 28,011

Non-EAD (income) loss allocated to equity method investments (4)

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Transaction expenses and non-recurring items (5)

2,201 2,801 4,046 11,121

Income tax effect of non-EAD income (loss) items 27,091 4,334

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14.01 % 12.53 %

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

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

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

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

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

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

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

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

* Represents a non-GAAP financial measure.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

(1) The adjustment to add back Net (gains) losses on derivatives does not include the net interest component of interest rate swaps which is reflected in earnings available for distribution.

The net interest component of interest rate swaps totaled ($62.5) million and ($79.7) million for the three months ended March 31, 2022 and March 31, 2021, respectively.

(2) Includes $0.2 million and ($5.3) million for the three months ended March 31, 2022 and 2021, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other, net in the Consolidated Statements of Comprehensive Income (Loss).

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

(4) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR which is a component of Other, net in the Consolidated Statements of Comprehensive Income (Loss).

(5) The three months ended March 31, 2022 and 2021 includes costs incurred in connection with securitizations of residential whole loans.

(6) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).

CMBX coupon income totaled $1.1 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively.

(7) MSR amortization utilizes purchase date cash flow assumptions and actual unpaid principal balances and is calculated as the difference between projected MSR yield income and net servicing income for the period.

From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency MBS.

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The fair value of TBA derivatives is based on methods similar to those used to value Agency MBS.

We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on other derivatives and financial instruments in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

We record TBA derivatives at fair value on our

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract.

Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency MBS (interest income less an implied cost of financing).

TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives and financial instruments in the Consolidated Statements of Comprehensive Income (Loss).

TBA dollar roll income is reported as a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).

The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular rating and vintage.

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Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur.

We report income (expense) on CMBX positions in Net gains (losses) on other derivatives and financial instruments in the Consolidated Statements of Comprehensive Income (Loss).

We report income (expense) on CMBX positions in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).

The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in earnings available for distribution.

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2021 2020 2021 2020

For the Three Months Ended March 31,

(dollars in thousands)

2 unchanged sentences

Premium amortization expense (excluding PAA) $ 154,163 $ 202,679

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Economic leverage and economic capital ratios

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Our economic leverage ratio is computed as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities).

Recourse debt consists of repurchase agreements and

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

other secured financing (excluding certain non-recourse credit facilities).

Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to us and are excluded from economic leverage.

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

September 30,

2021 September 30,

March 31, 2022 March 31, 2021

Economic leverage ratio reconciliation

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Participations issued

Mortgages payable

775,432 180,527

Debt included in liabilities of disposal group held for sale — 3,260,788

7 unchanged sentences

Participations issued

Mortgages payable

(775,432) (180,527)

Non-recourse debt included in liabilities of disposal group held for sale — (2,968,620)

9 unchanged sentences

Economic leverage ratio *

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

* Represents a non-GAAP financial measure.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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

September 30,

2021 September 30,

March 31, 2022 March 31, 2021

Economic capital ratio reconciliation

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Economic capital ratio * (3)

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

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

* Represents a non-GAAP financial measure.

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)

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We may use market agreed coupon (“MAC”) interest rate swaps in which we may receive or make a payment at the time of entering into such interest rate swap to compensate for the off-market nature of such interest rate swap.

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

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

In accordance with GAAP, upfront payments associated with MAC interest rate swaps are not reflected in the net interest component of interest rate swaps, which is presented in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).

We did not enter into any MAC interest rate swaps during the three months ended March 31, 2022.

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

Interest Income (excluding PAA)

2 unchanged sentences

For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

March 31, 2022 $ 655,850 $ (179,516) $ 476,334

March 31, 2021 $ 763,378 $ (214,570) $ 548,808

* Represents a non-GAAP financial measure.

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For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

March 31, 2022 $ 74,922 $ 62,541 $ 137,463 $ 580,928 $ 62,541 $ 518,387 $ (179,516) $ 338,871

March 31, 2021 $ 75,973 $ 79,747 $ 155,720 $ 687,405 $ 79,747 $ 607,658 $ (214,570) $ 393,088

* Represents a non-GAAP financial measure.

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The following table presents the weighted average experienced CPR and weighted average projected long-term CPR on our Agency MBS portfolio as of and for the periods presented.

Experienced CPR (1)

Projected Long-term CPR (2)

For the three months ended

September 30, 2021 23.1 % 12.7 %

September 30, 2020 22.9 % 17.1 %

For the nine months ended

September 30, 2021 24.5 % 12.7 %

September 30, 2020 18.7 % 17.1 %

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Experienced CPR (1)

Projected Long-term CPR (2)

For the three months ended

March 31, 2022 16.7 % 9.5 %

March 31, 2021 23.9 % 11.8 %

(1) For the three months ended March 31, 2022 and 2021, respectively.

(2) At March 31, 2022 and 2021, respectively.

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

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For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

(1) Based on amortized cost.

March 31, 2022 $ 72,590,876 $ 476,334 2.62 % $ 61,865,292 $ 137,463 0.89 % 338,871 1.73 %

March 31, 2021 $ 81,121,340 $ 548,808 2.71 % $ 72,002,031 155,720 0.87 % 393,088 1.84 %

* Represents a non-GAAP financial measure.

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

(1) Based on amortized cost.

(2) Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.

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TBA Dollar Roll and CMBX Coupon Income (1)

Economic Interest Expense (1)

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

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

For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

March 31, 2022 $ 476,334 129,492 (137,463) $ 468,363 $ 72,590,876 19,229,537 $ 91,820,413 2.04 %

March 31, 2021 $ 548,808 98,933 (155,720) $ 492,021 $ 81,121,340 21,865,969 $ 102,987,309 1.91 %

* Represents a non-GAAP financial measure.

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

CMBX coupon income totaled $1.1 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively.

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Average Economic Cost of Interest Bearing Liabilities

12 unchanged sentences

For the three months ended

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

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

For the nine months ended

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

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

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

March 31, 2022 $ 61,865,292 $ 61,028,143 $ 137,463 0.89 % 0.23 % 0.80 % (0.57 %) 0.66 % 0.09 %

March 31, 2021 $ 72,002,031 $ 65,350,334 $ 155,720 0.87 % 0.12 % 0.22 % (0.10 %) 0.75 % 0.65 %

* Represents a non-GAAP financial measure.

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

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

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

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

Economic interest expense decreased by $18.3 million for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to the change in the net interest component of interest rate swaps, which was ($62.5) million for the three months ended March 31, 2022 compared to ($79.7) million for the same period in 2021, and a decrease in average interest bearing liabilities.

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

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

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

At March 31, 2022 and December 31, 2021, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and corporate loans.

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

However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and maintain the liquidity and strength of our balance sheet.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Realized and Unrealized Gains (Losses)

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

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2021 2020 2021 2020

Other Income (Loss)

Other income (loss) is comprised of net gains (losses) on investments and other, net gains (losses) on derivatives, loan loss (provision) reversal, business divestiture-related gains (losses) and other, net.

These components of realized and unrealized gains (losses) for the three months ended March 31, 2022 and 2021 were as follows:

For the Three Months Ended March 31,

(dollars in thousands)

Net gains (losses) on interest rate swaps (1)

$ 130,118 $ 107,371 $ 598,479 $ (3,223,558)

Net gains (losses) on disposal of investments and other 12,002 198,888 (37,561) 652,150

Net gains (losses) on other derivatives and financial instruments

Net gains (losses) on investments and other $ (159,804) $ 38,405

Net gains (losses) on derivatives

1,642,028 1,169,383

Net unrealized gains (losses) on instruments measured at fair value through earnings 90,817 121,255 198,992 (354,133)

Loan loss (provision) reversal (608) 139,620

Business divestiture-related gains (losses) (354) (249,563)

Other, net 3,058 6,536

Total $ 1,484,320 $ 1,104,381

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

For the Three Months Ended September 30, 2021 and 2020

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

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

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

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

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

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

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

For the Nine Months Ended September 30, 2021 and 2020

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

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

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

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

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

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

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

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

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

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

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

Other Income (Loss)

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

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

For the Three Months Ended March 31, 2022 and 2021

Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments was ($144.2) million for the three months ended March 31, 2022 compared to ($65.8) million for the same period in 2021.

For the three months ended March 31, 2022, we disposed of Residential Securities with a carrying value of $2.8 billion for an aggregate net loss of ($144.5) million.

For the same period in 2021, we disposed of Residential Securities with a carrying value of $3.0 billion for an aggregate net loss of ($61.0) million.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($15.6) million for the three months ended March 31, 2022 compared to $104.2 million for the same period in 2021, primarily due to unfavorable changes in unrealized gains (losses) on securitized residential whole loans of consolidated VIEs of ($376.5) million, securitized commercial loans of ($96.5) million, residential whole loans of ($60.3) million and non-Agency mortgage-backed securities of ($60.0) million, partially offset by favorable changes in residential securitized debt of consolidated VIEs of $285.2 million, MSR, including interests in MSR, of $151.6 million and commercial securitized debt of consolidated VIEs of $81.1 million for the three months ended March 31, 2022 compared to the same period in 2021.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the three months ended March 31, 2022 was $1.3 billion compared to $692.5 million for the same period in 2021, primarily attributable to a favorable change in unrealized gains (losses) on interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $1.3 billion for the three months ended March 31, 2022, reflecting a sharper rise in forward interest rates during the period, compared to $772.3 million for the same period in 2021.

Net gains (losses) on other derivatives was $381.1 million for the three months ended March 31, 2022 compared to $476.9 million for the same period in 2021.

The change in net gains (losses) on other derivatives was primarily due to unfavorable changes in net gains (losses) on TBA derivatives, which was ($1.1) billion for the three months ended March 31, 2022 compared to ($630.1) million for the same period in 2021, and interest rate swaptions, which was $108.2 million for the three months ended March 31, 2022 compared to $283.8 million for the same period in 2021, partially offset by a favorable change in net gains (losses) on futures, which was $1.4 billion for the three months ended March 31, 2022 compared to $813.3 million for the same period in 2021.

Loan Loss (Provision) Reversal

For the three months ended March 31, 2022 and 2021, net loan loss (provisions) reversals were ($0.6) million on corporate loans and $139.6 million on commercial mortgage and corporate loans, respectively.

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

Business Divestiture-Related Gains (Losses)

The majority of business divestiture-related gains (losses) was recorded during the three months ended March 31, 2021 when the sale of our commercial real estate business was announced.

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

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

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

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

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of compensation and management fee (until closing of the Internalization on June 30, 2020) and other expenses.

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

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

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

General and administrative (“G&A”) expenses consist of compensation and other expenses.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items.

As such, the prior period has been conformed to the current presentation with Other general and administrative expenses for the three months ended March 31, 2021 adjusted downward by $1.8 million.

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

G&A Expenses and Operating Expense Ratios

Total G&A Expenses/Average Assets (1)

Total G&A Expenses/Average Equity (1)

Expenses Total G&A Expenses/Average Assets Total G&A Expenses/Average Equity

For the three months ended (dollars in thousands)

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

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

For the nine months ended

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

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

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

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

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

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

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

March 31, 2022 $ 45,764 0.24 % 1.48 %

March 31, 2021 $ 47,905 0.22 % 1.36 %

G&A expenses were $45.8 million for the three months ended March 31, 2022, a decrease of $2.1 million compared to the same period in 2021.

The change was primarily due to lower expenses on commercial related investments during the three months ended March 31, 2022 as a result of the sale of the commercial real estate business, which was announced in the first quarter of 2021, compared with the same period in 2021.

Return on Average Equity

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Economic Net Interest Income/ Average Equity (1)

Realized and Unrealized Gains and Losses/Average Equity (2)

Other Income (Loss)/Average Equity G&A Expenses/ Average Equity Income

Net Servicing Income/Average Equity Other Income (Loss)/Average Equity (2)

G&A Expenses/ Average Equity Income

Taxes/ Average Equity Return on

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For the three months ended

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

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

For the nine months ended

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

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

March 31, 2022 16.81 % 1.00 % 50.15 % (1.48 %) (0.86 %) 65.62 %

March 31, 2021 17.31 % 0.20 % 33.71 % (1.36 %) 0.01 % 49.87 %

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

(2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps.

(2) Other income (loss) excludes the net interest component of interest rate swaps.

Unrealized Gains and Losses - Available-for-Sale Investments

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

(dollars in thousands)

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Accumulated other comprehensive income (loss) $ (2,465,482) $ 958,410

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Unrealized changes in the estimated fair value of available-for-sale investments may have a direct effect on our potential earnings and dividends:

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

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

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

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

The fair value of these securities being less than amortized cost at March 31, 2022 is solely due to market conditions and not the quality of the assets.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

The investments do not require an allowance for credit losses because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, which may be maturity.

Also, we are guaranteed payment of the principal and interest amounts of the securities by the respective issuing Agency.

Financial Condition

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

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

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

Total assets were $76.2 billion and $76.8 billion at March 31, 2022 and December 31, 2021, respectively.

The change was primarily due to a decrease in Agency MBS, of $2.7 billion, partially offset by increases in residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $1.1 billion, derivative assets of $0.8 billion and MSR of $0.6 billion.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at March 31, 2022:

Residential Commercial

Agency MBS and MSR Residential Credit (1)

Commercial Real Estate (2)

Corporate Debt Total

Agency MBS MSR Residential Credit (1)

Commercial Real Estate Corporate Debt Total

Assets (dollars in thousands)

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Net forward purchases 1,314,901 264,844 5,598 — — 1,585,343

Liabilities of disposal group held for sale — — 113,362 — 113,362

Other assets / liabilities (3)

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(1) Fair value/carrying includes residential loans held for sale.

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

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

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

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

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

Excludes liabilities of disposal group held for sale.

NM Not meaningful.

Residential Securities

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

Substantially all of our Agency MBS at March 31, 2022 and December 31, 2021 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

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

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

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

At March 31, 2022 and December 31, 2021 we had on our Consolidated Statements of Financial Condition a total of $151.2 million and $77.7 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $3.8 billion and $3.8 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended March 31, 2022 and 2021 was 16.7% and 23.9%, respectively.

The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of March 31, 2022 and 2021 was 9.5% and 11.8%, respectively.

Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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

backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period.

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

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

September 30, 2021 December 31, 2020

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at March 31, 2022 and December 31, 2021.

March 31, 2022 December 31, 2021

Estimated Fair Value

Agency (dollars in thousands)

Fixed-rate pass-through $ 55,378,246 $ 58,296,605

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Management’s Discussion and Analysis

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Residential Securities (1)

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NM Not meaningful.

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

The following tables summarize certain characteristics of our Residential Credit portfolio at March 31, 2022.

Payment Structure Investment Characteristics

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Contractual Obligations

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

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

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

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

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at March 31, 2022.

The table does not include the effect of net interest rate payments on our interest rate swap agreements.

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

At March 31, 2022, the interest rate swaps had a net fair value of ($0.5) billion.

Year One to Three

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Total $ 52,920,081 $ 705,768 $ 1,126,913 $ 13,462,109 $ 68,214,871

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

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at March 31, 2022.

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

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

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

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

During the three months ended March 31, 2022, we received $3.0 billion from principal repayments and $2.4 billion in cash from disposal of Residential securities.

During the three months ended March 31, 2021, we received $5.0 billion from principal repayments and $2.8 billion in cash from disposal of Residential Securities.

Off-Balance Sheet Arrangements

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at March 31, 2022.

Capital Management

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A strong and robust capital position is essential to executing our investment strategy.

Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy regardless of the market environment.

Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

regardless of the market environment.

Our capital policy defines the parameters and principles supporting a comprehensive capital management practice.

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Stockholders’ Equity

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

September 30, 2021 December 31, 2020

The following table provides a summary of total stockholders’ equity at March 31, 2022 and December 31, 2021:

March 31, 2022 December 31, 2021

Stockholders’ equity (dollars in thousands)

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Capital Stock

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

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

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

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

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

In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares, which expired on December 31, 2021 (the “Prior Share Repurchase Program”).

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

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

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

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

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

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, we entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2021 and August 6, 2020, collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc.

(formerly known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated), Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.

Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”).

We may offer and sell shares of our 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 months ended March 31, 2022, we 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.

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

Leverage and Capital

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

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

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

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

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

Our GAAP leverage ratio at March 31, 2022 and December 31, 2021 was 5.3:1 and 4.7:1, respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 6.4:1 and 5.7:1, at March 31, 2022 and December 31, 2021, respectively.

Our GAAP capital ratio at March 31, 2022 and December 31, 2021 was 15.1% and 17.2%, respectively.

Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 13.1% and 14.4% at March 31, 2022 and December 31, 2021, respectively.

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

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Risk Management

For more information on COVID-19, including actions we have taken in response, please refer to the section titled “Business Environment and COVID-19” within this Item 2.

We are subject to a variety of risks in the ordinary conduct of our business.

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Portfolio Composition We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy.

Leverage We generally expect to maintain an economic leverage ratio no greater than 10:1.

Leverage We generally expect to maintain an economic leverage ratio no greater than 10:1 considerate of our overall capital allocation framework.

Liquidity Risk We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions.

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Capital Preservation We will seek to protect our capital base through disciplined risk management practices.

Operational We will seek to limit impacts to our business through disciplined operational risk management practices.

Operational We will seek to limit impacts to our business through disciplined operational risk management practices addressing areas including but not limited to, management of key third party relationships (i.e.

originators, sub-servicers), human capital management, cybersecurity and technology related matters, business continuity and financial reporting risk.

Compliance, Regulatory and Legal We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act and the licenses and approvals of our regulated and licensed subsidiaries.

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The Board exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”) with support from the other Board Committees.

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

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

The BRC is responsible for oversight of our risk governance structure,

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

risk management (operational and market risk) and risk assessment guidelines and policies and our risk appetite.

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

The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices and other human capital matters such as succession and culture.

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

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This risk is present in funding, hedging and investing activities.

Operational Risk Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including proprietary and third party models), human factors or external events.

This risk also applies to our use of software vendors and data providers.

Operational Risk Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including business continuity planning), human factors or external events.

This risk also applies to our use of proprietary and third party models, software vendors and data providers, and oversight of third-party service providers such as sub-servicers, due diligence firms etc.

Compliance, Regulatory and Legal Risk Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model.

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

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

At March 31, 2022 and December 31, 2021, the weighted average days to maturity was 68 days and 52 days, respectively.

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

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

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

At March 31, 2022, we had total financial assets and cash pledged against existing liabilities of $58.4 billion.

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

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

The quality and character of the Residential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at March 31, 2022 compared to the same period in 2021, and our counterparties did not materially alter any requirements, including required haircuts, related to the col lateral we pledge under repurchase agreements and interest rate swaps during the three months ended March 31, 2022.

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

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For the three months ended (dollars in thousands)

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

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

March 31, 2022 $ 53,961,689 $ 52,626,503 $ 39,535 $ —

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September 30, 2020 67,542,187 64,633,447 286,792 —

June 30, 2020 68,468,813 67,163,598 183,423 —

March 31, 2020 96,756,341 72,580,183 461,123 —

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

September 30, 2021

The following table provides information on our repurchase agreements and other secured financing by maturity date at March 31, 2022.

The weighted average remaining maturity on our repurchase agreements and other secured financing was 90 days at March 31, 2022:

March 31, 2022

Balance Weighted

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(1) Approximately 2% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.

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

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at March 31, 2022:

Weighted Average Rate

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

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

The following table also provides the carrying amount of our encumbered and unencumbered financial assets at March 31, 2022:

Encumbered Assets Unencumbered Assets Total

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Corporate debt, held for investment 1,475,429 492,238 1,967,667

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

Assets of disposal group held for sale (3)

52,684 8,016 60,700

Other assets (3)

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

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

(4) Includes interests in certain joint ventures.

(3) Includes commercial real estate investments held for sale and interests in certain joint ventures.

We maintain liquid assets in order to satisfy our current and future obligations in normal and stressed operating environments.

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

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

The following table presents our liquid assets as a percentage of total assets at March 31, 2022:

Carrying Value (1)

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Corporate debt, held for investment (5)

Corporate debt, held for sale 2,113

Total liquid assets $ 63,854,833

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

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

The assets listed in this table include $58.4 billion of assets that have been pledged as collateral against existing liabilities at March 31, 2022.

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

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(5) Excludes unpledged second lien loans.

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

(6) Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles, of $7.8 billion.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

The interest rate sensitivity of our assets and liabilities in the following table at March 31, 2022 could vary substantially based on actual prepayment experience.

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

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We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and measurement, along with well-defined key risk indicators.

Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as sustainability of the funding composition under stress conditions.

Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as the sustainability of the funding composition under stress conditions.

We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-specific and market conditions.

The metrics assist in assessing our liquidity conditions and are integrated into our escalation protocol.

Investment/Market Risk Management

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Investment/Market Risk Management

One of the primary risks we are subject to is investment/market risk.

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

The following table presents estimates at September 30, 2021.

The following table presents estimates at March 31, 2022.

Actual results could differ materially from these estimates.

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Actual results could differ materially from these estimates.

(2) Scenarios include Residential Securities, commercial real estate investments, corporate debt, repurchase agreements, other secured financing and interest rate swaps.

(2) Scenarios include securities, residential mortgage loans, corporate debt, repurchase agreements, other secured financing and interest rate swaps.

Economic net interest income includes the net interest component of interest rate swaps.

(3) Scenarios include Residential Securities, residential mortgage loans, MSR and derivative instruments.

(3) Scenarios include securities, residential mortgage loans, MSR and derivative instruments.

(4) NAV represents book value of equity.

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Key risk parameters have been established to specify our credit risk appetite.

We seek to manage credit risk by making investments which conform within the firm’s specific investment policy parameters and optimize risk-return attributes.

We seek to manage credit risk by making investments which conform to the firm’s specific investment policy parameters and optimize risk-return attributes.

While we do not expect to encounter credit risk in our Agency mortgage-backed securities, we face credit risk on the non-Agency mortgage-backed securities and CRT securities in our portfolio.

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MSR values may also be impacted through reduced servicing fees and higher costs to service the underlying mortgage loans due to borrower performance.

We are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations.

Generally, we are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations.

We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure.

We will originate or purchase investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee.

We will originate or purchase commercial investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee.

In the case of residential mortgage loans and MSR, we may engage a third party to perform due diligence on a sample of loans that we believe sufficiently represents the entire pool.

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Additionally, ALCO has oversight of our credit risk exposure.

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

September 30, 2021 December 31, 2020

Our portfolio composition, based on balance sheet values, at March 31, 2022 and December 31, 2021 was as follows:

March 31, 2022 December 31, 2021

Agency mortgage-backed securities (1)

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Residential mortgage loans (1)

12.2 % 10.4 %

Mortgage servicing rights 1.5 % 0.7 %

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

(2) Net of unamortized origination fees.

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

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

(2) Excludes commercial real estate assets held for sale as of December 31, 2021.

Counterparty Risk Management

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In the event of default by a counterparty, we could have difficulty obtaining our assets pledged as collateral.

A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities and certain commercial real estate investments as collateral to the applicable lender.

A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities as collateral to the applicable lender.

The collateral we pledge generally exceeds the amount of the borrowings under each agreement.

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Management’s Discussion and Analysis

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

The following table summarizes our exposure to counterparties by geography at March 31, 2022:

Number of Counterparties Secured Financing (1)

Interest Rate Swaps at Fair Value Exposure - Secured Financing (2)

Exposure - Interest Rate Swaps (2)

Interest Rate Swaps at Fair Value Exposure (2)

Geography (dollars in thousands)

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(1) Includes repurchase agreements and other secured financing.

(2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured financing and unrealized loss on swaps for each counterparty.

(2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured financing and derivatives for each counterparty.

Operational Risk Management

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Accordingly, we closely monitor our REIT status within our risk management program.

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

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

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

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While we disagree with the CFTC’s position that mortgage REITs that use swaps as part of their business model fall within the statutory definition of a CPO, we have submitted a claim for the relief set forth in the no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” and believe we meet the criteria for such relief set forth therein.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

The preparation of our consolidated financial statement in accordance with generally accepted accounting principles in the United States requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.

Actual results may differ materially from these estimates and changes in assumptions could have a significant effect on the consolidated financial statements.

Our critical accounting policies that require us to make significant judgments or estimates are described below.

For more information on these critical accounting policies and other significant accounting policies, see “Significant Accounting Policies” in the notes to the consolidated financial statements.

For more information on these critical accounting policies and other significant accounting policies, see the Note titled “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 1.

“Financial Statements.”

Valuation of Financial Instruments

Residential Securities

We carry residential securities at estimated fair value.

There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities.

Since we primarily invest in securities that can be valued using actively quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value.

Judgments and Uncertainties:

Since we primarily invest in securities that can be valued using quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value.

Internal fair values are determined using quoted prices from the TBA securities market, the Treasury curve and the underlying characteristics of the individual securities, which may include coupon, periodic and life caps, reset dates and the expected life of the security.

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Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing.

Sensitivity of Estimates to Change:

Changes in underlying assumptions used in estimating fair value impact the carrying value of the residential securities as well as their yield.

For example, an increase in CPR would decrease the carrying value and yield of our Agency mortgage-backed securities.

Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds.

See Experienced and Projected Long-Term CPR, Financial Condition – Residential Securities and the interest rate sensitivity and interest rate and MBS spread shock analysis and discussions within this Item 2.

for further information.

Residential Mortgage Loans

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

We elected to account for Residential Mortgage Loans at fair value.

There is an active market for the residential whole loans in which we invest.

Judgments and Uncertainties:

Since we primarily invest in residential loans that can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value.

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Internal fair values are generally compared to external pricing sources to determine reasonableness.

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

including prepayment rates, delinquency levels, costs to service and discount rates.

Sensitivity of Estimates to Change:

Changes to model assumptions, including prepayment speeds may significantly impact the fair value estimate of residential mortgage loans as well as unrealized gains and losses and yield on these assets.

Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds.

See the interest rate sensitivity and interest rate shock analysis and discussions within this Item 2.

for further information.

We elected to account for MSR at fair value.

The market for mortgage servicing rights is considered less active and transparent compared to securities.

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

Judgments and Uncertainties:

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

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

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The valuation of MSR requires significant judgment by management and the third party pricing providers.

Commercial Real Estate Investments

The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral.

These securities must also be evaluated for impairment if the fair value of the security is lower than its amortized cost.

Determining whether there is an impairment may require us to exercise significant judgment and make estimates to determine expected cash flows incorporating assumptions such as changes in interest rates and loss expectations.

For commercial real estate loans and preferred equity investments classified as held for investment, we apply significant judgment in evaluating the need for a loss reserve.

Estimated net recoverable value of the commercial real estate loans and preferred equity investments and other factors such as the fair value of any collateral, the amount and status of senior debt, the prospects of the borrower and the competitive landscape where the borrower conducts business must be considered in determining the allowance for loan losses.

For commercial real estate loans held for sale, significant judgment may need to be applied in determining the fair value of the loans and whether a valuation allowance is necessary.

Factors that may need to be considered to determine the fair value of a loan held for sale include the borrower’s credit quality, liquidity and other market factors and the fair value of the underlying collateral.

Sensitivity of Estimates to Change:

Changes in the underlying assumptions used to estimate the fair value of MSR impact the carrying value as well as the related unrealized gains and losses recognized.

For further discussion of the sensitivity of the model inputs see the Note titled “Fair Value Measurements” in the Notes to the Consolidated Financial Statements included in Item 1.

“Financial Statements.”

Interest Rate Swaps

We are required to account for its derivative assets and liabilities at fair value, which may or may not be cleared through a derivative clearing organization.

We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization.

Judgments and Uncertainties:

We use the overnight indexed swap (“OIS”) curve as an input to value substantially all of our uncleared interest rate swaps.

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Through this margining process, we may be able to compare our recorded fair value with the fair value calculated by the counterparty or derivatives clearing organization, providing additional verification of our recorded fair value of the uncleared interest rate swaps.

We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization.

Sensitivity of Estimates to Change:

Changes in the OIS curve will impact the carrying value of our interest rate swap assets and liabilities.

Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds.

See the interest rate sensitivity and interest rate shock analysis and discussions within this Item 2.

for further information.

Revenue Recognition

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Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method.

Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.

Judgments and Uncertainties:

To aid in determining projected lives of the securities, we use third party model and market information to project prepayment speeds.

Our prepayment speed projections incorporate underlying loan characteristics (i.e., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts and expert judgment.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

forecasts and expert judgment.

Prepayment speeds vary according to the type of investment, conditions in the financial markets and other factors and cannot be predicted with any certainty.

Sensitivity of Estimates to Change:

Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results.

Adjustments are made for actual prepayment activity as it relates to calculating the effective yield.

Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.

The sensitivity of changes in interest rates to our economic net interest income is included in the interest rate shock analysis and discussions within this Item 2 for further information.

Consolidation of Variable Interest Entities

We are required to determine if it is required to consolidate entities in which it holds a variable interest.

Judgments and Uncertainties:

Determining whether an entity has a controlling financial interest in a VIE requires significant judgment related to assessing the purpose and design of the VIE and determination of the activities that most significantly impact its economic performance.

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Earnings available for distribution (“EAD”) and Earnings available for distribution Per Average Common Share

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 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 is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) net servicing income less 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 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 per average common share is calculated by dividing earnings available for distribution by average basic common shares for the period.

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LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floating-rate legs of interest rate swaps.

The United Kingdom Financial Conduct Authority, 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.

Liquidity Risk

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An interest rate swap contract structure with pre-defined, market agreed terms, developed by SIFMA and ISDA with the purpose of promoting liquidity and simplified administration.

Monetary Policy

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Monetary Policy

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

Mortgage-Backed Security (“MBS”)

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Annaly and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs.

To-Be-Announced Securities (“TBAs”)

To-Be-Announced (“TBA”) Securities

A contract for the purchase or sale of a mortgage-backed security to be delivered at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date but does not include a specified pool number and number of pools.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis