ANNALY CAPITAL MANAGEMENT INC 10-Q

Item 1. Financial Statements ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF BUSINESS Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997. The Company is a leading diversified capital manager with investment strategies across mortgage finance. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, residential mortgage loans and mortgage servicing rights (“MSR”). The Company’s principal business objective is to generate net income for distribution to its stockholders and optimize its returns through prudent management of its diversified investment strategies. The Company is an internally-managed company that has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”). The Company’s investment groups are primarily comprised of the following: Investment Groups Description Annaly Agency Group Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including Agency commercial mortgage-backed securities. Annaly Residential Credit Group Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets. Annaly Mortgage Servicing Rights Group Invests in MSR, which provide the right to service residential loans in exchange for a portion of the interest payments made on the loans. In March 2021, the Company announced that it had entered into a definitive agreement to sell and exit its Commercial Real Estate (“CRE”) business. As of March 31, 2022, the assets held for sale and the associated liabilities were transferred. Refer to the “Sale of Commercial Real Estate Business” Note for additional information. In April 2022, the Company announced that it had entered into a definitive agreement to sell substantially all of the assets that comprise the Annaly Middle Market Lending ("MML") portfolio, including assets held on balance sheet as well as assets managed for third parties. Subject to customary closing conditions, the sale of the MML business is expected to be completed by the second quarter of 2022. Refer to the "Subsequent Events" Note for additional information. 2. BASIS OF PRESENTATION The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The accompanying consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”). The consolidated financial information as of December 31, 2021 has been derived from audited consolidated financial statements included in the Company’s 2021 Form 10-K. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Beginning with the quarter ended March 31, 2022, in light of the continued growth of its mortgage servicing rights portfolio, the Company enhanced its financial disclosures by separately reporting servicing income and servicing expense in its Consolidated Statements of Comprehensive Income (Loss). Servicing income and servicing expense were previously included within Other income (loss). As a result of this change, prior periods have been adjusted to conform to the current presentation. In addition, the Company consolidated certain line items in its Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation. Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives. Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings are combined into a single line item titled Net 5 gains (losses) on investments and other. As a result of these changes, prior periods have been adjusted to conform to the current presentation. Beginning with the quarter ended June 30, 2021, the Company began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other, net rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Other general and administrative expenses for the three months ended March 31, 2021 decreased by $ 1.8 million and Other, net decreased by the same amounts for the three months ended March 31, 2021. These reclassifications had no effect on the reported net income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss). In the opinion of management, all normal, recurring adjustments have been included for a fair presentation of this interim financial information. Interim period operating results may not be indicative of the operating results for a full year. 3. SIGNIFICANT ACCOUNTING POLICIES The Company’s significant accounting policies are described below or are included elsewhere in these notes to the consolidated financial statements. Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation. Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE. Variable Interest Entities – A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion to change. Refer to the “Variable Interest Entities” Note for further information. Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of joint ventures accounted for under the equity method. These investments are included in Other assets with income or loss included in Other, net. Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled $ 0.8 billion and $ 1.2 billion at March 31, 2022 and December 31, 2021, respectively. Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the FVO in order to simplify the accounting treatment for certain financial instruments. Items for which the FVO has been elected are presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the FVO see the table in the “Financial Instruments” Note. Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments. 6 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they meet the offsetting criteria. Please see below and refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements. Derivative Instruments – Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on derivatives. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. Refer to the “Derivative Instruments” Note for further discussion. Stock-Based Compensation – The Company measures compensation expense for stock-based awards at fair value, which is generally based on the grant-date fair value of the Company’s common stock. Compensation expense is recognized ratably over the vesting or requisite service period of the award. Stock-based awards that contain market-based conditions are valued using a model. Compensation expense for awards with performance conditions is recognized based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market conditions is recognized irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. Forfeitures are recorded when they occur. The Company generally issues new shares of common stock upon delivery of stock-based awards. Interest Income - The Company recognizes interest income primarily on Residential Securities (as defined in the “Securities” Note), residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion. For its securities, the Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), taking into account estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period. Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis. Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss). If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower. Refer to the “Interest Income and Interest Expense” Note for further discussion on interest. The Company has made an accounting policy election not to measure an allowance for loans losses on corporate debt for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income. 7 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income. Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“TRSs”). As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes. Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption. Standard Description Effective Date Effect on the Financial Statements or Other Significant Matters Standard that has been adopted ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting This ASU provides optional, temporary relief to accounting for contract modifications resulting from reference rate reform. January 1, 2020 The Company has elected to retrospectively apply the practical expedients to modifications of qualifying contracts as continuation of the existing contract rather than as a new contract. The adoption had no immediate impact and is not expected to have a material impact on the Company’s consolidated financial statements as the guidance continues to be applied to contract modifications until the ASU’s termination date. 8 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 4. FINANCIAL INSTRUMENTS The following table presents characteristics for certain of the Company’s financial instruments at March 31, 2022 and December 31, 2021. Financial Instruments (1) Balance Sheet Line Item Type / Form Measurement Basis March 31, 2022 December 31, 2021 Assets (dollars in thousands) Securities Agency mortgage-backed securities (2) Fair value, with unrealized gains (losses) through other comprehensive income $ 57,257,909 $ 59,939,383 Securities Agency mortgage-backed securities (3) Fair value, with unrealized gains (losses) through earnings 529,232 586,222 Securities Residential credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 845,809 936,228 Securities Non-agency mortgage-backed securities Fair value, with unrealized gains (losses) through earnings 1,737,333 1,663,336 Securities Commercial real estate debt investments - CMBS Fair value, with unrealized gains (losses) through earnings 348,666 521,440 Securities Commercial real estate debt investments - credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 8,688 9,065 Total securities 60,727,637 63,655,674 Loans, net Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 1,650,151 2,272,072 Loans, net Residential mortgage loan warehouse facility Fair value, with unrealized gains (losses) through earnings — 980 Loans, net Corporate debt, held for investment Amortized cost 1,967,667 1,968,991 Total loans, net 3,617,818 4,242,043 Interests in MSR Interest in net servicing cash flows Fair value, with unrealized gains (losses) through earnings 85,653 69,316 Assets transferred or pledged to securitization vehicles Agency mortgage-backed securities Fair value, with unrealized gains (losses) through other comprehensive income 544,991 589,873 Assets transferred or pledged to securitization vehicles Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 7,264,316 5,496,435 Total assets transferred or pledged to securitization vehicles 7,809,307 6,086,308 Liabilities Repurchase agreements Repurchase agreements Amortized cost 52,626,503 54,769,643 Other secured financing Loans Amortized cost 914,255 903,255 Debt issued by securitization vehicles Securities Fair value, with unrealized gains (losses) through earnings 6,711,953 5,155,633 Participations issued Participations issued Fair value, with unrealized gains (losses) through earnings 775,432 1,049,066 (1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. Interests in MSR are considered financial assets whereas directly held MSR are servicing assets or obligations. (2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. (3) Includes interest-only securities and reverse mortgages. 5. SECURITIES The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Transactions for regular-way securities are recorded on trade date, including to-be-announced (“TBA”) securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method. Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the 9 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss) as a securities loss provision and reflected as an allowance for credit losses on securities on the Consolidated Statements of Financial Condition, while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). When the fair value of a held-to-maturity security is less than the cost, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. For the three months ended March 31, 2021, the Company recognized a $ 0.4 million impairment on a commercial mortgage-backed security that was sold subsequently in 2021. Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”). Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis. TBA securities without intent to accept delivery (“TBA derivatives”) are accounted for as derivatives as discussed in the “Derivative Instruments” Note. CRT Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors. Non-Agency Mortgage-Backed Securities - The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, prime jumbo loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations. Agency mortgage-backed securities, non-Agency mortgage-backed securities and residential CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio. Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities (“CMBS”) are classified as available-for-sale and reported at fair value with any credit loss recognized through an allowance for credit losses and any other unrealized gains and losses reported as a component of Other comprehensive income (loss). Management evaluates its Commercial Securities for impairment at least quarterly. The Company elected the fair value option for all other Commercial Securities, including conduit and credit CMBS, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through earnings. The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the three months ended March 31, 2022: Agency Securities Residential Credit Securities Commercial Securities Total (dollars in thousands) Beginning balance January 1, 2022 $ 60,525,605 $ 2,599,564 $ 530,505 $ 63,655,674 Purchases 6,160,670 372,464 — 6,533,134 Sales and transfers ( 2,583,651 ) ( 177,561 ) ( 169,224 ) ( 2,930,436 ) Principal paydowns ( 2,910,094 ) ( 132,519 ) ( 773 ) ( 3,043,386 ) (Amortization) / accretion 24,656 890 4 25,550 Fair value adjustment ( 3,430,045 ) ( 79,696 ) ( 3,158 ) ( 3,512,899 ) Ending balance March 31, 2022 $ 57,787,141 $ 2,583,142 $ 357,354 $ 60,727,637 10 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following tables present the Company’s securities portfolio, excluding securities transferred or pledged to securitization vehicles, that were carried at their fair value at March 31, 2022 and December 31, 2021: March 31, 2022 Principal / Notional Remaining Premium Remaining Discount Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Agency (dollars in thousands) Fixed-rate pass-through $ 54,859,660 $ 3,047,099 $ ( 79,126 ) $ 57,827,633 $ 136,232 $ ( 2,585,619 ) $ 55,378,246 Adjustable-rate pass-through 284,000 5,581 ( 660 ) 288,921 8,490 ( 1,639 ) 295,772 CMO 110,247 1,827 — 112,074 103 ( 1,898 ) 110,279 Interest-only 1,784,533 435,220 — 435,220 149 ( 192,355 ) 243,014 Multifamily (1) 6,805,912 280,406 ( 6,099 ) 1,785,614 8,223 ( 68,736 ) 1,725,101 Reverse mortgages 33,287 3,414 — 36,701 — ( 1,972 ) 34,729 Total agency securities $ 63,877,639 $ 3,773,547 $ ( 85,885 ) $ 60,486,163 $ 153,197 $ ( 2,852,219 ) $ 57,787,141 Residential credit Credit risk transfer (2) $ 848,990 $ 7,899 $ ( 570 ) $ 854,879 $ 3,304 $ ( 12,374 ) $ 845,809 Alt-A 81,711 33 ( 16,943 ) 64,801 2,121 ( 2,344 ) 64,578 Prime (3) 299,044 9,405 ( 14,304 ) 263,750 6,396 ( 20,334 ) 249,812 Subprime 158,423 298 ( 15,359 ) 143,362 5,642 ( 4,479 ) 144,525 NPL/RPL 1,097,310 877 ( 3,357 ) 1,094,830 736 ( 20,558 ) 1,075,008 Prime jumbo (>=2010 vintage) (4) 1,391,118 13,143 ( 14,778 ) 217,179 2,851 ( 16,620 ) 203,410 Total residential credit securities $ 3,876,596 $ 31,655 $ ( 65,311 ) $ 2,638,801 $ 21,050 $ ( 76,709 ) $ 2,583,142 Total Residential Securities $ 67,754,235 $ 3,805,202 $ ( 151,196 ) $ 63,124,964 $ 174,247 $ ( 2,928,928 ) $ 60,370,283 Commercial Commercial Securities $ 363,046 $ — $ ( 96 ) $ 362,950 $ — $ ( 5,596 ) $ 357,354 Total securities $ 68,117,281 $ 3,805,202 $ ( 151,292 ) $ 63,487,914 $ 174,247 $ ( 2,934,524 ) $ 60,727,637 December 31, 2021 Principal / Notional Remaining Premium Remaining Discount Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Agency (dollars in thousands) Fixed-rate pass-through $ 54,432,252 $ 3,008,185 $ ( 18,314 ) $ 57,422,123 $ 1,349,125 $ ( 474,643 ) $ 58,296,605 Adjustable-rate pass-through 305,211 1,965 ( 2,124 ) 305,052 16,223 ( 2 ) 321,273 CMO 114,533 1,888 — 116,421 5,277 — 121,698 Interest-only 1,912,415 456,683 — 456,683 428 ( 163,197 ) 293,914 Multifamily (1) 5,671,138 273,553 — 1,453,946 15,330 ( 16,563 ) 1,452,713 Reverse mortgages 36,807 3,550 — 40,357 — ( 955 ) 39,402 Total agency investments $ 62,472,356 $ 3,745,824 $ ( 20,438 ) $ 59,794,582 $ 1,386,383 $ ( 655,360 ) $ 60,525,605 Residential credit Credit risk transfer (2) $ 924,101 $ 8,754 $ ( 1,176 ) $ 927,555 $ 9,641 $ ( 968 ) $ 936,228 Alt-A 83,213 31 ( 17,133 ) 66,111 3,627 ( 251 ) 69,487 Prime (3) 323,062 9,841 ( 14,757 ) 268,117 10,853 ( 3,529 ) 275,441 Subprime 170,671 349 ( 16,111 ) 154,909 8,285 ( 118 ) 163,076 NPL/RPL 987,415 950 ( 1,698 ) 986,667 2,739 ( 5,968 ) 983,438 Prime jumbo (>=2010 vintage) (4) 299,783 5,680 ( 6,410 ) 172,598 4,272 ( 4,976 ) 171,894 Total residential credit securities $ 2,788,245 $ 25,605 $ ( 57,285 ) $ 2,575,957 $ 39,417 $ ( 15,810 ) $ 2,599,564 Total Residential Securities $ 65,260,601 $ 3,771,429 $ ( 77,723 ) $ 62,370,539 $ 1,425,800 $ ( 671,170 ) $ 63,125,169 Commercial Commercial Securities $ 533,071 $ — $ ( 127 ) $ 532,944 $ 165 $ ( 2,604 ) $ 530,505 Total securities $ 65,793,672 $ 3,771,429 $ ( 77,850 ) $ 62,903,483 $ 1,425,965 $ ( 673,774 ) $ 63,655,674 (1) Principal/Notional amount includes $ 5.3 billion and $ 4.5 billion of Agency Multifamily interest-only securities as of March 31, 2022 and December 31, 2021, respectively. (2) Principal/Notional amount includes $ 1.4 million and $ 4.1 million of a CRT interest-only security as of March 31, 2022 and December 31, 2021, respectively. (3) Principal/Notional amount includes $ 30.4 million and $ 50.0 million of Prime interest-only securities as of March 31, 2022 and December 31, 2021, respectively. (4) Principal/Notional amount includes $ 1.2 billion and $ 126.5 million of Prime Jumbo interest-only securities as of March 31, 2022 and December 31, 2021, respectively. 11 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferred or pledged to securitization vehicles, by issuing Agency at March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 Investment Type (dollars in thousands) Fannie Mae $ 46,824,563 $ 48,404,991 Freddie Mac 9,819,001 10,880,033 Ginnie Mae 1,143,577 1,240,581 Total $ 57,787,141 $ 60,525,605 Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages. The following table summarizes the Company’s Residential Securities, excluding securities transferred or pledged to securitization vehicles, at March 31, 2022 and December 31, 2021, according to their estimated weighted average life classifications: March 31, 2022 December 31, 2021 Estimated Fair Value Amortized Cost Estimated Fair Value Amortized Cost Estimated weighted average life (dollars in thousands) Less than one year $ 181,054 $ 180,846 $ 253,129 $ 250,689 Greater than one year through five years 4,123,236 4,160,292 16,155,017 15,766,307 Greater than five years through ten years 51,112,733 53,521,509 45,470,212 45,102,607 Greater than ten years 4,953,260 5,262,317 1,246,811 1,250,936 Total $ 60,370,283 $ 63,124,964 $ 63,125,169 $ 62,370,539 The estimated weighted average lives of the Residential Securities at March 31, 2022 and December 31, 2021 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected. The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at March 31, 2022 and December 31, 2021. March 31, 2022 December 31, 2021 Estimated Fair Value (1) Gross Unrealized Losses (1) Number of Securities (1) Estimated Fair Value (1) Gross Unrealized Losses (1) Number of Securities (1) (dollars in thousands) Less than 12 months $ 37,098,530 $ ( 1,402,053 ) 1,838 $ 22,828,156 $ ( 475,064 ) 571 12 Months or more 12,118,518 ( 1,238,095 ) 301 383,815 ( 10,960 ) 19 Total $ 49,217,048 $ ( 2,640,148 ) 2,139 $ 23,211,971 $ ( 486,024 ) 590 (1) Excludes interest-only mortgage-backed securities and reverse mortgages. The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities have an actual or implied credit rating that is the same as that of the U.S. government. The investments are not considered to be impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. During the three months ended March 31, 2022 and 2021, the Company disposed of $ 2.8 billion and $ 3.0 billion of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three months ended March 31, 2022 and 2021. Gross Realized Gains Gross Realized Losses Net Realized Gains (Losses) For the three months ended (dollars in thousands) March 31, 2022 $ 1,565 $ ( 146,056 ) $ ( 144,491 ) March 31, 2021 $ 4,646 $ ( 65,340 ) $ ( 60,694 ) 12 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 6. LOANS The Company invests in residential and corporate loans. Loans are classified as either held for investment or held for sale. Loans are eligible to be accounted for under the fair value option. If loans are elected under the fair value option, they are carried at fair value with changes in fair value recognized in earnings. Otherwise, loans held for investment are carried at cost less impairment and loans held for sale are accounted for at the lower of cost or fair value. Excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, as of March 31, 2022 and December 31, 2021, the Company rep orted $ 1.7 billion and $ 2.3 billion, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $ 1.9 million and $ 2.3 million at March 31, 2022 and December 31, 2021, respectively. Allowance for Losses – The Company evaluates the need for a loss reserve on each of its loans classified as held-for-investment, which primarily include corporate debt, where the fair value option is not elected. Allowance for loan losses are written off in the period the loans are deemed uncollectible. Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each individual loan held for investment. An allowance is established at origination or acquisition that reflects management’s estimate of the total expected credit loss over the expected life of the loan. In estimating the lifetime expected credit losses, management utilizes a probability of default and loss given default methodology (“Loss Given Default methodology”), which considers projected economic conditions over the reasonable and supportable forecast period. The forecast incorporates primarily market-based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced from third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable period, the Company reverts to historical losses on a straight-line basis. Management uses third party vendors’ loan pool data for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s loan portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss (provision) reversal in the Consolidated Statements of Comprehensive Income (Loss). For loans experiencing credit deterioration, the Company may use a different methodology to determine the expected credit losses such as a discounted cash flow analysis. For collateral-dependent loans, if foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for any selling costs, if applicable. Additionally, the Company may elect the practical expedient for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty by measuring the allowance as the difference between the fair value of the collateral, less costs to sell, if applicable, and the amortized cost basis of the financial asset at the reporting date. Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment. Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date. The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management. The Company recorded net loan loss (provisions) reversals of ($ 0.6 ) million and $ 139.6 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and December 31, 2021, the Company’s loan loss allowance was $ 28.5 million and $ 27.9 million, respectively. 13 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table presents the activity of the Company’s loan investments, including loans held for sale and excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, for the three months ended March 31, 2022: Residential Corporate Debt Total (dollars in thousands) Beginning balance January 1, 2022 $ 2,272,072 $ 1,968,991 $ 4,241,063 Purchases / originations 2,025,930 171,697 2,197,627 Sales and transfers (1) ( 2,550,155 ) — ( 2,550,155 ) Principal payments ( 34,284 ) ( 174,238 ) ( 208,522 ) Gains / (losses) (2) ( 60,654 ) ( 608 ) ( 61,262 ) (Amortization) / accretion ( 2,758 ) 1,825 ( 933 ) Ending balance March 31, 2022 $ 1,650,151 $ 1,967,667 $ 3,617,818 (1) Includes securitizations, syndications and transfers to securitization vehicles. Includes transfer of residential loans to securitization vehicles with a carrying value of $ 2.5 billion during the three months ended March 31, 2022. (2) Includes loan loss allowances. The Company’s corporate loans also have off-balance-sheet credit exposure related to unfunded loan commitments, including revolvers, delayed draw term loans and future funding commitments that are not unconditionally cancellable by the Company. The Company utilizes the same methodology in calculating the liability related to the expected credit losses on these exposures as it does for the calculation of the allowance for loan losses. In determining the estimate of credit losses for off-balance-sheet credit exposures, the Company will consider the contractual period in which the entity is exposed to credit risk and the likelihood that funding will occur, if material. Estimated credit losses for off-balance-sheet credit exposures are included in Other liabilities on the Company’s Consolidated Statements of Financial Condition. Residential The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts. The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles and excluding loan warehouse facilities, at March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 (dollars in thousands) Fair value $ 8,914,467 $ 7,768,507 Unpaid principal balance $ 9,097,860 $ 7,535,855 The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021 for these investments, excluding loan warehouse facilities: For the Three Months Ended March 31, 2022 March 31, 2021 (dollars in thousands) Interest income $ 73,465 $ 37,109 Net gains (losses) on disposal of investments (1) ( 7,338 ) ( 5,220 ) Net unrealized gains (losses) on instruments measured at fair value through earnings (1) ( 415,248 ) 22,455 Total included in net income (loss) $ ( 349,121 ) $ 54,344 (1) These amounts are presented in the line item Net gains (losses) on investments and other on the Consolidated Statements of Comprehensive Income (Loss) 14 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table provides the geographic concentrations based on the unpaid principal balances at March 31, 2022 and December 31, 2021 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles: Geographic Concentrations of Residential Mortgage Loans March 31, 2022 December 31, 2021 Property location % of Balance Property location % of Balance California 48.4 % California 50.2 % New York 11.6 % New York 10.9 % Florida 6.8 % Florida 6.1 % All other (none individually greater than 5%) 33.2 % All other (none individually greater than 5%) 32.8 % Total 100.0 % 100.0 % The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 Portfolio Range Portfolio Weighted Average Portfolio Range Portfolio Weighted Average (dollars in thousands) Unpaid principal balance $ 1 - $ 4,396 $ 496 $ 1 - $ 4,382 $ 513 Interest rate 0.75 % - 15.00 % 4.02 % 0.75 % - 9.24 % 4.04 % Maturity 7/1/2029 - 4/1/2062 4/8/2051 7/1/2029 - 12/1/2061 12/22/2050 FICO score at loan origination 588 - 832 762 604 - 831 762 Loan-to-value ratio at loan origination 7 % - 103 % 66 % 8 % - 103 % 66 % At March 31, 2022 and December 31, 2021, approximately 13 % and 16 %, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate. The Company participates in an arrangement that provides a residential mortgage loan warehouse facility to a third-party originator. The Company has elected to apply the fair value option to this lending facility in order to simplify the accounting and keep the accounting consistent with other residential credit financial instruments with similar characteristics. At March 31, 2022 and December 31, 2021, the fair value and carrying value of this warehouse facility was $ 0 and $ 1.0 million, respectively, and reported as Loans, net in the Consolidated Statements of Financial Condition. As of March 31, 2022, the lending facility was not on nonaccrual status nor past due. Commercial As of December 31, 2021, commercial real estate loans are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition and classified as held for sale. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction. Corporate Debt The Company’s investments in corporate loans typically take the form of senior secured loans primarily in first or second lien positions. The Company’s senior secured loans generally have stated maturities of five to eight years . In connection with these senior secured loans, the Company receives a security interest in certain assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the effective interest method. The Company’s internal risk rating rubric for corporate debt has nine categories as depicted below: 15 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Risk Rating - Corporate Debt Description 1-5 / Performing Meets all present contractual obligations. 6 / Performing - Closely Monitored Meets all present contractual obligations but exhibits a defined weakness in either leverage or liquidity, but not both. Loans at this rating will require closer monitoring, but where we expect no loss of interest or principal. 7 / Substandard A loan that has a defined weakness in either leverage and/or liquidity, and which may require substantial changes to strengthen the asset. Loans at this rating level have a higher probability of loss, although no determination of the amount or timing of a loss is yet possible. 8 / Doubtful A loan that has missed a scheduled principal or interest payment or is otherwise deemed a non-earning account. The probability of loss is increasingly certain due to significant performance issues. 9 / Loss Considered uncollectible. Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s corporate debt held for investment by year of origination and internal risk rating. There was no provision for loan loss recorded on corporate loans using a discounted cash flow methodology for the three months ended March 31, 2022 and 2021. For the three months ended March 31, 2022 and 2021 the Company recorded a net loan loss (provision) reversal on corporate loans of ($ 0.6 ) million and $ 6.2 million, respectively, based upon its Loss Given Default methodology. At March 31, 2022 and December 31, 2021, the Company had unfunded corporate loan commitments of $ 284.5 million and $ 278.9 million, respectively. At March 31, 2022 and December 31, 2021, the liability related to the expected credit losses on the unfunded corporate loan commitments was $ 2.5 million and $ 2.3 million, respectively. The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at March 31, 2022 and December 31, 2021 are as follows: 16 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Industry Dispersion March 31, 2022 December 31, 2021 Total (1) Total (1) (dollars in thousands) Computer Programming, Data Processing & Other Computer Related Services $ 464,921 $ 437,257 Management & Public Relations Services 229,097 263,187 Industrial Inorganic Chemicals 155,728 156,292 Miscellaneous Industrial & Commercial 96,789 93,619 Miscellaneous Health & Allied Services, not elsewhere classified 96,104 64,133 Public Warehousing & Storage 95,037 94,179 Electronic Components & Accessories 92,166 92,261 Surgical, Medical & Dental Instruments & Supplies 80,391 80,786 Drugs 67,244 — Research, Development & Testing Services 62,689 59,311 Engineering, Architectural & Surveying 50,023 49,088 Offices & Clinics of Doctors of Medicine 49,910 50,017 Medical & Dental Laboratories 48,603 30,199 Insurance Agents, Brokers & Service 43,360 43,598 Telephone Communications 42,651 42,589 Electrical Work 42,611 42,617 Miscellaneous Equipment Rental & Leasing 32,367 32,346 Home Health Care Services 28,600 28,660 Metal Forgings & Stampings 27,514 27,483 Legal Services 26,146 26,105 Petroleum & Petroleum Products 20,705 21,434 Sanitary Services 20,410 20,453 Grocery Stores 19,646 19,745 Coating, Engraving & Allied Services 17,742 17,705 Chemicals & Allied Products 14,626 14,657 Mailing, Reproduction, Commercial Art & Photography & Stenographic 12,431 12,388 Machinery, Equipment & Supplies 10,323 10,814 Offices & Clinics of Other Health Practitioners 10,068 10,083 Schools & Educational Services, not elsewhere classified 9,765 9,781 Metal Cans & Shipping Containers — 118,204 Total $ 1,967,667 $ 1,968,991 (1) All middle market lending positions are floating rate. The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at March 31, 2022 and December 31, 2021. March 31, 2022 December 31, 2021 (dollars in thousands) First lien loans $ 1,471,546 $ 1,391,217 Second lien loans (1) 496,121 577,774 Total $ 1,967,667 $ 1,968,991 (1) Includes mezzanine positions. 17 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following tables represent a rollforward of the activity for the Company’s corporate debt investments held for investment at March 31, 2022 and December 31, 2021: March 31, 2022 First Lien Second Lien Total (dollars in thousands) Beginning balance (January 1, 2022) (1) $ 1,391,217 $ 577,774 $ 1,968,991 Originations & advances 154,396 17,301 171,697 Principal payments ( 74,251 ) ( 99,987 ) ( 174,238 ) Amortization & accretion of (premium) discounts 885 940 1,825 Allowance for loan losses Beginning allowance ( 17,341 ) ( 10,579 ) ( 27,920 ) Current period (allowance) reversal ( 701 ) 93 ( 608 ) Ending allowance ( 18,042 ) ( 10,486 ) ( 28,528 ) Net carrying value (March 31, 2022) $ 1,471,546 $ 496,121 $ 1,967,667 December 31, 2021 First Lien Second Lien Total (dollars in thousands) Beginning balance (January 1, 2021) (1) $ 1,489,125 $ 750,805 $ 2,239,930 Originations & advances 1,506,705 66,013 1,572,718 Sales and transfers (2) ( 1,122,275 ) ( 83,690 ) ( 1,205,965 ) Principal payments ( 492,884 ) ( 169,057 ) ( 661,941 ) Amortization & accretion of (premium) discounts 9,120 3,497 12,617 Allowance for loan losses Beginning allowance ( 18,767 ) ( 20,785 ) ( 39,552 ) Current period (allowance) reversal 1,426 10,206 11,632 Ending allowance ( 17,341 ) ( 10,579 ) ( 27,920 ) Net carrying value (December 31, 2021) $ 1,391,217 $ 577,774 $ 1,968,991 (1) Excludes loan loss allowances. (2) Includes syndications. The following table provides the amortized cost basis of corporate debt held for investment as of March 31, 2022 by vintage year and internal risk rating. Amortized Cost Basis by Risk Rating and Vintage (1) Risk Rating Vintage Total 2022 2021 2020 2019 2018 2017 2016 (dollars in thousands) 1-5 / Performing $ 1,797,943 $ 55,565 $ 641,746 $ 342,945 $ 221,796 $ 358,884 $ 138,903 $ 38,104 6 / Performing - Closely Monitored 65,000 — 22,522 26,146 16,332 — — — 7 / Substandard 104,724 — — 10,323 9,276 85,125 — — 8 / Doubtful — — — — — — — — 9 / Loss — — — — — — — — Total $ 1,967,667 $ 55,565 $ 664,268 $ 379,414 $ 247,404 $ 444,009 $ 138,903 $ 38,104 (1) The amortized cost basis excludes accrued interest and includes deferred fees on unfunded loans. As of March 31, 2022, the Company had $ 9.7 million of accrued interest receivable on corporate loans, which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition, and $ 0.8 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition. 18 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 7. MORTGAGE SERVICING RIGHTS The Company owns variable interests in entities that invest in MSR and Interests in MSR. Refer to the “Variable Interest Entities” Note for a detailed discussion on this topic. MSR represent the rights and obligations associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSR. The Company generally intends to hold the MSR as investments and elected to account for all of its investments in MSR at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party acts as a master servicer for the loans providing the net servicing cash flows represented by the Interests in MSR. The Company accounts for its Interests in MSR at fair value with change in fair value presented in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other, net in the Consolidated Statements of Comprehensive Income (Loss). The following tables present activity related to MSR and Interests in MSR for the three months ended March 31, 2022 and 2021: Mortgage Servicing Rights Three Months Ended March 31, 2022 March 31, 2021 (dollars in thousands) Fair value, beginning of period $ 544,562 $ 100,895 Purchases (1) 421,012 — Change in fair value due to: Changes in valuation inputs or assumptions (2) 158,963 27,673 Other changes, including realization of expected cash flows ( 15,600 ) ( 15,488 ) Fair value, end of period $ 1,108,937 $ 113,080 (1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. (2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates. Interests in MSR Three Months Ended March 31, 2022 (dollars in thousands) Beginning balance $ 69,316 Purchases (1) 4,913 Gain (loss) included in net income 11,424 Ending balance March 31, 2022 $ 85,653 (1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. 19 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 8. VARIABLE INTEREST ENTITIES Multifamily Securitization In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $ 0.5 billion and retained interest-only securities with a notional balance of $ 0.5 billion. At the inception of this arrangement, the Company determined that it was the primary beneficiary based upon its involvement in the design of this VIE and through the retention of a significant variable interest in the VIE. The Company elected the fair value option for the financial liabilities of this VIE in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. Residential Securitizations The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities. OBX Trusts The entities in the table below are referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company. Securitization Date of Closing Face Value at Closing (dollars in thousands) OBX 2018-1 March 2018 $ 327,162 OBX 2018-EXP1 August 2018 $ 383,451 OBX 2018-EXP2 October 2018 $ 384,027 OBX 2019-INV1 January 2019 $ 393,961 OBX 2019-EXP1 April 2019 $ 388,156 OBX 2019-INV2 June 2019 $ 383,760 OBX 2019-EXP2 July 2019 $ 463,405 OBX 2019-EXP3 October 2019 $ 465,492 OBX 2020-INV1 January 2020 $ 374,609 OBX 2020-EXP1 February 2020 $ 467,511 OBX 2020-EXP2 July 2020 $ 489,352 OBX 2020-EXP3 September 2020 $ 514,609 OBX 2021-NQM1 March 2021 $ 257,135 OBX 2021-J1 April 2021 $ 353,840 OBX 2021-NQM2 June 2021 $ 376,004 OBX 2021-J2 July 2021 $ 382,483 OBX 2021-NQM3 August 2021 $ 356,474 OBX 2021-INV1 September 2021 $ 320,199 OBX 2021-J3 October 2021 $ 453,650 OBX 2021-INV2 October 2021 $ 343,571 OBX 2021-INV3 November 2021 $ 470,576 OBX 2021-NQM4 November 2021 $ 542,836 OBX 2022-NQM1 January 2022 $ 556,696 OBX 2022-INV1 January 2022 $ 377,275 OBX 2022-INV2 February 2022 $ 466,686 OBX 2022-NQM2 February 2022 $ 439,421 OBX 2022-INV3 March 2022 $ 330,823 OBX 2022-NQM3 March 2022 $ 315,843 20 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements As of March 31, 2022 and December 31, 2021, a total carrying value of $ 6.2 billion and $ 4.6 billion, respectively, of bonds were held by third parties and the Company retained $ 892.5 million and $ 780.8 million, respectively, of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third party pricing services. The Company incurred $ 3.4 million and $ 0.7 million of costs during the three months ended March 31, 2022 and 2021, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $ 6.5 billion and $ 4.6 billion at March 31, 2022 and December 31, 2021, respectively. Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation. Credit Facility VIEs In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $ 675.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $ 716.4 million and $ 692.6 million at March 31, 2022 and December 31, 2021, respectively. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At March 31, 2022 and December 31, 2021, the subsidiary had an intercompany receivable of $ 455.5 million and $ 433.3 million, respectively, which eliminates upon consolidation and a secured financing of $ 455.5 million and $ 433.3 million, respectively, to the third party financial institution. In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $ 234.2 million and $ 400.0 million, respectively. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $ 396.6 million and $ 402.9 million at March 31, 2022 and December 31, 2021, respectively, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net. At March 31, 2022 and December 31, 2021, the subsidiary had a secured financing of $ 234.2 million and $ 238.2 million, respectively, to the third party financial institution. In January 2019, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $ 400.0 million. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $ 362.4 million and $ 368.0 million at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the subsidiary had a secured financing of $ 224.6 million and $ 231.8 million, respectively, to the third party financial institution. MSR VIEs The Company owns variable interests in an entity that invests in MSR and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100 % of the voting interests in this entity, in August 2017, the Company sold 100 % of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo. The Company also owns variable interests in entities that invest in Interests in MSR. These entities are VIEs because they do not have sufficient equity at risk to finance their activities and the Company is the primary beneficiary because it has power to remove the decision makers with or without cause and holds substantially all of the variable interests in the entities. The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $ 2.5 billion at March 31, 2022. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method. 21 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The statements of financial condition of the Company’s VIEs, excluding the multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at March 31, 2022 and December 31, 2021 are as follows: March 31, 2022 MSR VIEs Assets (dollars in thousands) Cash and cash equivalents $ 8,570 Loans 1,897 Mortgage servicing rights 9,101 Interests in MSR 85,653 Other assets 11,600 Total assets $ 116,821 Liabilities Payable for unsettled trades 2,155 Other liabilities 6,100 Total liabilities $ 8,255 December 31, 2021 MSR VIEs Assets (dollars in thousands) Cash and cash equivalents $ 16,187 Loans 2,347 Mortgage servicing rights 7,254 Interests in MSR 69,316 Other assets 10,406 Total assets $ 105,510 Liabilities Payable for unsettled trades 1,911 Other liabilities 14,582 Total liabilities $ 16,493 Corporate Debt Funds The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the three months ended March 31, 2022 and 2021, the Company transferred $ 0 and $ 15.1 million, respectively, of loans for cash. The loan transfers were accounted for as sales. Residential Credit Fund The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of March 31, 2022 and December 31, 2021, the Company had outstanding participating interests in residential mortgage loans of $ 0.8 billion and $ 1.0 billion, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings. 22 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 9. SALE OF COMMERCIAL REAL ESTATE BUSINESS On March 25, 2021, the Company entered into a definitive agreement to sell substantially all of the assets that comprise its CRE business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”) for $ 2.33 billion. The transaction included equity interests, loan assets and associated liabilities, and CMBS (other than commercial CRTs). The Company also sold nearly all of the remaining CRE business assets that are not included in the transaction with Slate. Certain employees who primarily supported the CRE business joined Slate in connection with the sale. In connection with the execution of the definitive agreement to sell the CRE business, during the three months ended March 31, 2021, the Company performed an assessment of goodwill, which was related to the Company’s 2013 acquisition of CreXus Investment Corp., and recognized an impairment of $ 71.8 million. During the three months ended March 31, 2021, the Company reported Business divestiture-related gains (losses) of ($ 249.6 ) million, in its Consolidated Statements of Comprehensive Income (Loss) which includes the aforementioned goodwill impairment as well as valuation adjustments resulting from classifying the assets as held for sale and estimated transaction costs. In addition, as a result of classifying the loans as held for sale, the previously recognized allowance for loan losses of $ 135.0 million, which includes $ 5.1 million on unfunded loan commitments, was reversed during the three months ended March 31, 2021. As of March 31, 2022, the assets held for sale and the associated liabilities were transferred to Slate. 10. DERIVATIVE INSTRUMENTS Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts. Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on derivatives. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At March 31, 2022 and December 31, 2021, ($ 1.5 ) billion and ($ 0.4 ) billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value. Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may have outstanding interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued 23 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value. Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values. TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date. Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing. Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis. Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps. The table below summarizes fair value information about our derivative assets and liabilities at March 31, 2022 and December 31, 2021: Derivatives Instruments March 31, 2022 December 31, 2021 Assets (dollars in thousands) Interest rate swaptions $ 213,882 $ 105,710 TBA derivatives 24,757 52,693 Futures contracts 724,696 9,028 Purchase commitments 484 1,779 Credit derivatives (1) 256 1,160 Total derivative assets $ 964,075 $ 170,370 Liabilities Interest rate swaps $ 481,696 $ 747,036 TBA derivatives 336,212 3,916 Futures contracts 5,850 129,134 Purchase commitments 73 870 Credit derivatives (1) 3,141 581 Total derivative liabilities $ 826,972 $ 881,537 (1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 410.0 million and $ 400.0 million at March 31, 2022 and December 31, 2021, respectively, plus any coupon shortfalls on the underlying tranche. As of March 31, 2022 and December 31, 2021 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and AA. The following table summarizes certain characteristics of the Company’s interest rate swaps at March 31, 2022 and December 31, 2021: 24 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements March 31, 2022 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) (dollars in thousands) 0 - 3 years $ 29,179,850 0.36 % 0.53 % 0.75 3 - 6 years 4,343,000 0.83 % 0.32 % 3.83 6 - 10 years 11,042,400 1.54 % 0.47 % 9.01 Greater than 10 years 1,915,000 3.45 % 0.34 % 16.90 Total / Weighted average $ 46,480,250 0.70 % 0.50 % 3.66 December 31, 2021 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) (dollars in thousands) 0 - 3 years $ 32,709,300 0.25 % 0.06 % 1.10 3 - 6 years 2,780,000 0.21 % 0.07 % 3.46 6 - 10 years 9,118,000 1.43 % 0.13 % 9.05 Greater than 10 years 1,300,000 4.04 % 0.11 % 18.70 Total / Weighted average $ 45,907,300 0.59 % 0.08 % 3.32 (1) As of March 31, 2022, 17 %, 46 % and 37 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2021, 18 %, 53 % and 29 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. (2) There were no forward starting swaps at March 31, 2022 and December 31, 2021. (3) At March 31, 2022 and December 31, 2021, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed. The following table summarizes certain characteristics of the Company’s swaptions at March 31, 2022 and December 31, 2021: March 31, 2022 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay $ 4,050,000 2.00 % 3M LIBOR 9.40 16.50 Long receive $ 1,000,000 1.49 % 3M LIBOR 11.45 17.49 December 31, 2021 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay $ 4,050,000 2.00 % 3M LIBOR 9.65 19.50 Long receive $ 2,000,000 1.47 % 3M LIBOR 10.95 11.38 25 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table summarizes certain characteristics of the Company’s TBA derivatives at March 31, 2022 and December 31, 2021: March 31, 2022 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts $ 18,885,000 $ 18,596,163 $ 18,284,708 $ ( 311,455 ) December 31, 2021 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts $ 20,133,000 $ 20,289,856 $ 20,338,633 $ 48,777 The following table summarizes certain characteristics of the Company’s futures derivatives at March 31, 2022 and December 31, 2021: March 31, 2022 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 2 year $ — $ ( 7,477,200 ) 1.98 U.S. Treasury futures - 5 year — ( 5,240,900 ) 4.40 U.S. Treasury futures - 10 year and greater — ( 15,028,000 ) 6.94 Total $ — $ ( 27,746,100 ) 5.12 December 31, 2021 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 2 year $ — $ ( 7,509,200 ) 1.96 U.S. Treasury futures - 5 year — ( 5,644,900 ) 4.38 U.S. Treasury futures - 10 year and greater — ( 9,381,000 ) 6.84 Total $ — $ ( 22,535,100 ) 4.60 The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty. The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at March 31, 2022 and December 31, 2021, respectively. 26 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements March 31, 2022 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaptions, at fair value $ 213,882 $ — $ — $ 213,882 TBA derivatives, at fair value 24,757 ( 22,571 ) — 2,186 Futures contracts, at fair value 724,696 ( 5,850 ) — 718,846 Purchase commitments 484 — — 484 Credit derivatives 256 ( 256 ) — — Liabilities Interest rate swaps, at fair value $ 481,696 $ — $ ( 35,387 ) $ 446,309 TBA derivatives, at fair value 336,212 ( 22,571 ) ( 1,220 ) 312,421 Futures contracts, at fair value 5,850 ( 5,850 ) — — Purchase commitments 73 — — 73 Credit derivatives 3,141 ( 256 ) ( 2,885 ) — December 31, 2021 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaptions, at fair value $ 105,710 $ — $ — $ 105,710 TBA derivatives, at fair value 52,693 ( 3,876 ) — 48,817 Futures contracts, at fair value 9,028 ( 9,028 ) — — Purchase commitments 1,779 — — 1,779 Credit derivatives 1,160 ( 516 ) — 644 Liabilities Interest rate swaps, at fair value $ 747,036 $ — $ ( 77,607 ) $ 669,429 TBA derivatives, at fair value 3,916 ( 3,876 ) ( 40 ) — Futures contracts, at fair value 129,134 ( 9,028 ) ( 120,106 ) — Purchase commitments 870 — — 870 Credit derivatives 581 ( 516 ) ( 65 ) — The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows: Net Interest Component of Interest Rate Swaps (1) Realized Gains (Losses) on Termination of Interest Rate Swaps (1) Unrealized Gains (Losses) on Interest Rate Swaps (1) For the three months ended (dollars in thousands) March 31, 2022 $ ( 62,541 ) $ — $ 1,323,439 March 31, 2021 $ ( 79,747 ) $ — $ 772,262 (1) Included in Net gains (losses) on derivatives on the Consolidated Statements of Comprehensive Income (Loss). 27 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows: Three Months Ended March 31, 2022 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Derivatives (dollars in thousands) Net TBA derivatives $ ( 756,139 ) $ ( 360,231 ) $ ( 1,116,370 ) Net interest rate swaptions ( 14,450 ) 122,622 108,172 Futures 553,154 838,952 1,392,106 Purchase commitments — ( 499 ) ( 499 ) Credit derivatives 1,060 ( 3,339 ) ( 2,279 ) Total $ 381,130 Three Months Ended March 31, 2021 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Derivatives (dollars in thousands) Net TBA derivatives $ ( 287,889 ) $ ( 342,228 ) $ ( 630,117 ) Net interest rate swaptions ( 22,210 ) 305,990 283,780 Futures 296,164 517,133 813,297 Purchase commitments — ( 1,907 ) ( 1,907 ) Credit derivatives 1,631 9,023 10,654 Total $ 475,707 Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange. Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features were in a net asset position at March 31, 2022. 11. FAIR VALUE MEASUREMENTS The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instrument and MSR fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows: 28 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value. The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis. The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level. Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1. Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities. Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy. The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2. For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information. The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including discount rates, prepayment rates, delinquency levels and costs to service. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented. 29 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements March 31, 2022 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 57,787,141 $ — $ 57,787,141 Credit risk transfer securities — 845,809 — 845,809 Non-Agency mortgage-backed securities — 1,737,333 — 1,737,333 Commercial mortgage-backed securities — 357,354 — 357,354 Loans Residential mortgage loans — 1,650,151 — 1,650,151 Mortgage servicing rights — — 1,108,937 1,108,937 Interests in MSR — — 85,653 85,653 Assets transferred or pledged to securitization vehicles — 7,809,307 — 7,809,307 Derivative assets Other derivatives 724,696 239,379 — 964,075 Total assets $ 724,696 $ 70,426,474 $ 1,194,590 $ 72,345,760 Liabilities Debt issued by securitization vehicles — 6,711,953 — 6,711,953 Participations issued — 775,432 — 775,432 Derivative liabilities Interest rate swaps — 481,696 — 481,696 Other derivatives 5,850 339,426 — 345,276 Total liabilities $ 5,850 $ 8,308,507 $ — $ 8,314,357 December 31, 2021 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 60,525,605 $ — $ 60,525,605 Credit risk transfer securities — 936,228 — 936,228 Non-Agency mortgage-backed securities — 1,663,336 — 1,663,336 Commercial mortgage-backed securities — 530,505 — 530,505 Loans Residential mortgage loans — 2,272,072 — 2,272,072 Residential mortgage loan warehouse facility — 980 — 980 Mortgage servicing rights — — 544,562 544,562 Interests in MSR — — 69,316 69,316 Assets transferred or pledged to securitization vehicles — 6,086,308 — 6,086,308 Derivative assets Other derivatives 9,028 161,342 — 170,370 Total assets $ 9,028 $ 72,176,376 $ 613,878 $ 72,799,282 Liabilities Debt issued by securitization vehicles $ — $ 5,155,633 $ — $ 5,155,633 Participations issued — 1,049,066 — 1,049,066 Derivative liabilities Interest rate swaps — 747,036 — 747,036 Other derivatives 129,134 5,367 — 134,501 Total liabilities $ 129,134 $ 6,957,102 $ — $ 7,086,236 Qualitative and Quantitative Information about Level 3 Fair Value Measurements The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable 30 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSR and Interests in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interests in MSR. Refer to the “Mortgage Servicing Rights” Note for additional information, including rollforwards. The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments. March 31, 2022 Unobservable Input (1) / Range (Weighted Average) (2) Discount rate Prepayment rate Delinquency rate Cost to service MSR held directly 3.8 % - 9.0 % ( 7.5 %) 5.5 % - 10.1 % ( 6.2 %) 0.1 % - 2.5 % ( 0.7 %) $ 89 - $ 103 ($ 94 ) Interests in MSR 7.1 % - 7.1 % ( 7.1 %) 4.2 % - 10.6 % ( 7.3 %) 0.4 % - 4.2 % ( 1.3 %) $ 82 - $ 87 ($ 84 ) December 31, 2021 Unobservable Input (1) / Range (Weighted Average) (2) Discount rate Prepayment rate Delinquency rate Cost to service MSR held directly 3.3 % - 11.1 % ( 7.0 %) 7.3 % - 15.9 % ( 9.4 %) 0.2 % - 2.5 % ( 1.2 %) $ 90 - $ 103 ($ 96 ) Interests in MSR 8.4 % - 8.4 % ( 8.4 %) 5.0 % - 14.4 % ( 9.1 %) 0.0 % - 0.2 % ( 0.1 %) $ 78 - $ 84 ($ 81 ) (1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets. (2) Weighted average discount rate computed based on the fair value of MSR, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSR. The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at March 31, 2022 and December 31, 2021. March 31, 2022 December 31, 2021 Carrying Value Fair Value Carrying Value Fair Value Financial assets (dollars in thousands) Corporate debt, held for investment 1,967,667 1,998,487 1,968,991 1,986,379 Financial liabilities Repurchase agreements $ 52,626,503 $ 52,626,503 $ 54,769,643 $ 54,769,643 Other secured financing 914,255 914,255 903,255 903,255 Corporate debt, held for investment and corporate debt, held for sale are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximate fair value and are considered Level 2 fair value measurements. Long term other secured financing is valued using Level 2 inputs. 12. GOODWILL AND INTANGIBLE ASSETS Goodwill The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain. 31 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. At March 31, 2022 and December 31, 2021, there was no goodwill balance. During the three months ended March 31, 2021, the Company recognized an impairment on goodwill in connection with the sale of the CRE business. Refer to the “Sale of Commercial Real Estate Business” Note for additional information. Intangible assets, net Finite life intangible assets are amortized over their expected useful lives. As part of the Company’s management internalization transaction, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $ 41.2 million based on the replacement cost of the employee base acquired by the Company. The following table presents the activity of finite lived intangible assets for the three months ended March 31, 2022. Intangible Assets, net (dollars in thousands) Balance at December 31, 2021 $ 24,241 Less: amortization expense ( 1,131 ) Balance at March 31, 2022 23,110 13. SECURED FINANCING Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing , and has determined that each of the financing agreements should be treated as a securing financing. The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities. Generally, the Company receives or posts collateral with a fair value approximately equal to or greater than the value of the secured financing. Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows. The Company had outstanding $ 52.6 billion and $ 54.8 billion of repurchase agreements with weighted average remaining maturities of 68 days and 52 days at March 31, 2022 and December 31, 2021, respectively. The Company has select arrangements with counterparties to enter into repurchase agreements for $ 1.9 billion with remaining capacity of $ 1.5 billion at March 31, 2022. 32 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements At March 31, 2022 and December 31, 2021, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: March 31, 2022 Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day $ 16,400,000 $ — $ — $ — $ — $ 16,400,000 0.32 % 2 to 29 days 10,752,049 44,492 222,229 — 9,169 11,027,939 0.29 % 30 to 59 days 5,887,961 — 235,736 — — 6,123,697 0.38 % 60 to 89 days 9,641,859 112,023 519,321 — 64,021 10,337,224 0.53 % 90 to 119 days 348,901 — 72,783 — — 421,684 0.32 % Over 119 days (2) 6,875,415 172,411 586,818 437,269 244,046 8,315,959 0.64 % Total $ 49,906,185 $ 328,926 $ 1,636,887 $ 437,269 $ 317,236 $ 52,626,503 0.41 % December 31, 2021 Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day $ — $ — $ — $ — $ — $ — — % 2 to 29 days 26,435,408 133,525 246,707 — 197,834 27,013,474 0.14 % 30 to 59 days 9,743,872 38,854 270,377 159,350 — 10,212,453 0.19 % 60 to 89 days 6,021,850 4,071 351,426 — — 6,377,347 0.17 % 90 to 119 days 4,812,345 — 12,573 — — 4,824,918 0.15 % Over 119 days (2) 5,711,448 — 96,283 345,651 188,069 6,341,451 0.27 % Total $ 52,724,923 $ 176,450 $ 977,366 $ 505,001 $ 385,903 $ 54,769,643 0.17 % (1) No repurchase agreements had a remaining maturity over 1 year at March 31, 2022 and December 31, 2021. The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at March 31, 2022 and December 31, 2021. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments. March 31, 2022 December 31, 2021 Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements (dollars in thousands) Gross amounts $ — $ 52,626,503 $ — $ 54,769,643 Amounts offset — — — — Netted amounts $ — $ 52,626,503 $ — $ 54,769,643 Other Secured Financing - Refer to the “Variable Interest Entities” Note for additional information on the Company’s other secured financing arrangements. Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 57.5 billion and $ 163.0 million, respectively, at March 31, 2022 and $ 59.2 billion and $ 160.8 million, respectively, at December 31, 2021. 33 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 14. CAPITAL STOCK (A) Common Stock The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at March 31, 2022 and December 31, 2021. Shares authorized Shares issued and outstanding March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 Par Value Common stock 2,936,500,000 2,936,500,000 1,461,012,252 1,459,736,258 $ 0.01 In December 2020, the Company announced that its board of directors (“Board”) authorized the repurchase of up to $ 1.5 billion of its outstanding common shares through December 31, 2021 (the “Prior Share Repurchase Program”). In January 2022, the Company announced that its Board authorized the repurchase of up to $ 1.5 billion of its outstanding shares of common stock through December 31, 2024 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the Prior Share Repurchase Program. During the three months ended March 31, 2022 and 2021, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program. In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2021 and August 6, 2020, collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc. (formerly known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated), Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares of its common stock, having an aggregate offering price of up to $ 1.5 billion, from time to time through any of the Sales Agents. During the three months ended March 31, 2022, the Company issued 0.8 million shares for proceeds of $ 6.2 million, net of commissions and fees, under the at-the-market sales program. No shares were issued under the at-the-market sales program during the three months ended March 31, 2021. (B) Preferred Stock The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at March 31, 2022 and December 31, 2021. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets. Shares Authorized Shares Issued And Outstanding Carrying Value Contractual Rate Earliest Redemption Date (1) Date At Which Dividend Rate Becomes Floating Floating Annual Rate March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021 Fixed-to-floating rate Series F 28,800,000 28,800,000 28,800,000 28,800,000 696,910 696,910 6.95 % 9/30/2022 9/30/2022 3M LIBOR + 4.993 % Series G 17,000,000 17,000,000 17,000,000 17,000,000 411,335 411,335 6.50 % 3/31/2023 3/31/2023 3M LIBOR + 4.172 % Series I 17,700,000 17,700,000 17,700,000 17,700,000 428,324 428,324 6.75 % 6/30/2024 6/30/2024 3M LIBOR + 4.989 % Total 63,500,000 63,500,000 63,500,000 63,500,000 $ 1,536,569 $ 1,536,569 (1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company. Each series of preferred stock has a par value of $ 0.01 per share and a liquidation and redemption price of $ 25.00 , plus accrued and unpaid dividends through their redemption date. Through March 31, 2022, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock. The Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Fixed-to-Floating Rate Cumulative Preferred Stock and Series I Fixed-to-Floating Rate Cumulative Preferred Stock rank senior to the common stock of the Company. 34 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements (C) Distributions to Stockholders The following table provides a summary of the Company’s dividend distribution activity for the periods presented: For the Three Months Ended March 31, 2022 March 31, 2021 (dollars in thousands, except per share data) Dividends and dividend equivalents declared on common stock and share-based awards $ 322,197 $ 308,346 Distributions declared per common share $ 0.22 $ 0.22 Distributions paid to common stockholders after period end $ 321,423 $ 307,671 Distributions paid per common share after period end $ 0.22 $ 0.22 Date of distributions paid to common stockholders after period end April 29, 2022 April 30, 2021 Dividends declared to series F preferred stockholders $ 12,510 $ 12,510 Dividends declared per share of series F preferred stock $ 0.434 $ 0.434 Dividends declared to series G preferred stockholders $ 6,906 $ 6,906 Dividends declared per share of series G preferred stock $ 0.406 $ 0.406 Dividends declared to series I preferred stockholders $ 7,467 $ 7,467 Dividends declared per share of series I preferred stock $ 0.422 $ 0.422 15. INTEREST INCOME AND INTEREST EXPENSE Refer to the “Significant Accounting Policies” Note for details surrounding the Company’s accounting policy related to net interest income on securities and loans. The following table summarizes the interest income recognition methodology for Residential Securities: Interest Income Methodology Agency Fixed-rate pass-through (1) Effective yield (3) Adjustable-rate pass-through (1) Effective yield (3) Multifamily (1) Contractual Cash Flows CMO (1) Effective yield (3) Reverse mortgages (2) Prospective Interest-only (2) Prospective Residential credit CRT (2) Prospective Alt-A (2) Prospective Prime (2) Prospective Subprime (2) Prospective NPL/RPL (2) Prospective Prime jumbo (2) Prospective (1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss). (2) Changes in fair value are recognized in Net gains (losses) on investments and other on the accompanying Consolidated Statements of Comprehensive Income (Loss). (3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception. 35 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following presents the components of the Company’s interest income and interest expense for the three months ended March 31, 2022 and March 31, 2021. For the Three Months Ended March 31, 2022 2021 Interest income (dollars in thousands) Agency Securities $ 522,951 $ 627,654 Residential credit securities 22,122 16,980 Residential mortgage loans (1) 73,488 37,109 Commercial investment portfolio (1) (2) 37,283 81,601 Reverse repurchase agreements 6 34 Total interest income $ 655,850 $ 763,378 Interest expense Repurchase agreements 26,879 42,585 Debt issued by securitization vehicles 34,625 26,276 Participations issued 5,852 597 Other 7,566 6,515 Total interest expense 74,922 75,973 Net interest income $ 580,928 $ 687,405 (1) Includes assets transferred or pledged to securitization vehicles. (2) Includes commercial real estate debt and preferred equity and corporate debt. 16. NET INCOME (LOSS) PER COMMON SHARE The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three months ended March 31, 2022 and March 31, 2021. For the Three Months Ended March 31, 2022 March 31, 2021 (dollars in thousands, except per share data) 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 Weighted average shares of common stock outstanding-basic 1,461,363,637 1,399,210,925 Add: Effect of stock awards, if dilutive 1,088,328 789,802 Weighted average shares of common stock outstanding-diluted 1,462,451,965 1,400,000,727 Net income (loss) per share available (related) to common share Basic $ 1.37 $ 1.23 Diluted $ 1.36 $ 1.23 The computations of diluted net income (loss) per share available (related) to common share for the three months ended March 31, 2022 and 2021 excludes 2.2 million and 0 , respectively, of potentially dilutive restricted and performance stock units because their effect would have been anti-dilutive. 17. INCOME TAXES For the three months ended March 31, 2022 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100 % of its REIT taxable income. 36 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code. The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs. As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income. The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at March 31, 2022 and December 31, 2021. The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company’s TRSs are subject to federal, state and local taxes. During the three months ended March 31, 2022 and 2021, the Company recorded $ 26.5 million and ($ 0.3 ) million, respectively, of income tax expense (benefit) attributable to its TRSs. The Company’s federal, state and local tax returns from 2018 and forward remain open for examination. 18. RISK MANAGEMENT The primary risks to the Company are capital, liquidity and funding risk, investment/market risk, credit risk and operational risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the existing collateral to reduce borrowing levels. The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges. Weakness in the mortgage market, the shape of the yield curve, changes in the expectations for the volatility of future interest rates and deterioration of financial conditions in general may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging strategies. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase overall costs to service the underlying mortgage loans. The Company is exposed to risk of loss if an issuer, borrower or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers and counterparties, credit rating monitoring and active servicer oversight. The Company depends on third-party service providers to perform various business processes related to its operations, including mortgage loan servicers and sub-servicers. The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors. These procedures include assessing a vendor’s 37 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information. 19. LEASE COMMITMENTS AND CONTINGENCIES The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of approximately four years . The corporate office lease includes an option to extend for up to five years , however the extension term was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the three months ended March 31, 2022 and 2021 was $ 0.8 million and $ 0.9 million, respectively. Supplemental information related to leases as of and for the three months ended March 31, 2022 was as follows: Operating Leases Classification March 31, 2022 Assets (dollars in thousands) Operating lease right-of-use assets Other assets $ 9,885 Liabilities Operating lease liabilities (1) Other liabilities $ 12,844 Lease term and discount rate Weighted average remaining lease term 3.5 years Weighted average discount rate (1) 2.9 % Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 965 (1) As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. The following table provides details related to maturities of lease liabilities: Maturity of Lease Liabilities Years ending December 31, (dollars in thousands) 2022 (remaining) $ 2,896 2023 3,862 2024 3,862 2025 2,896 Total lease payments $ 13,516 Less imputed interest 672 Present value of lease liabilities $ 12,844 Contingencies From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were no material contingencies at March 31, 2022 and December 31, 2021. 20. ARCOLA REGULATORY REQUIREMENTS Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. 38 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty. As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance. At March 31, 2022, Arcola had a minimum net capital requirement of $ 0.3 million. Arcola consistently operates with capital in excess of its regulatory capital requirements. Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at March 31, 2022 was $ 504.5 million with excess net capital of $ 504.2 million. 21. SUBSEQUENT EVENTS In April 2022, the Company entered into a definitive agreement to sell substantially all of the corporate loan interests held by the MML business operated by the Company, as well as assets managed for third parties (collectively, the "MML Portfolio"), to Ares Capital Management LLC. Subject to customary closing conditions, the transfer of the MML Portfolio is expected to be completed by the end of the second quarter of 2022. In May 2022, the Company completed and closed the securitization of residential mortgage loans, OBX 2022-NQM4 Trust with a face value of $ 457.3 million. The securitization represents financing transactions which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company. 39 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain); changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; the sale of our middle market lending portfolio; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt; risks related to investments in mortgage servicing rights (“MSR”); our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and our ability to maintain our exemption from registration under the Investment Company Act. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent annual report on Form 10-K and Item 1A “Risk Factors” in this quarterly report on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q. 40 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis INDEX TO ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 42 Recent Developments 42 Business Environment 42 Economic Environment 43 London Interbank Offered Rate (“LIBOR”) Transition Working Group 48 Results of Operations 44 Net Income (Loss) Summary 46 Non-GAAP Financial Measures 47 Earnings available for distribution , earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity 48 Premium Amortization Expense 50 Economic leverage and economic capital ratios 50 Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA) 52 Experienced and Projected Long-term CPR 52 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) 53 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 53 Other Income (Loss) 54 General and Administrative Expenses 55 Return on Average Equity 56 Unrealized Gains and Losses - Available-for-Sale Investments 56 Financial Condition 57 Residential Securities 57 Contractual Obligations 60 Off-Balance Sheet Arrangements 60 Capital Management 60 Stockholders’ Equity 61 Capital Stock 61 Leverage and Capital 61 Risk Management 62 Risk Appetite 62 Governance 62 Description of Risks 63 Capital, Liquidity and Funding Risk Management 64 Funding 64 Excess Liquidity 66 Maturity Profile 67 Stress Testing 68 Liquidity Management Policies 68 Investment/Market Risk Management 68 Credit Risk Management 70 Counterparty Risk Management 70 Operational Risk Management 71 Compliance, Regulatory and Legal Risk Management 71 Critical Accounting Estimates 72 Valuation of Financial Instruments 72 Residential Securities 72 Residential Mortgage Loans 72 MSR 74 Interest Rate Swaps 73 Revenue Recognition 73 Consolidation of Variable Interest Entities 74 Use of Estimates 74 Glossary of Terms 75 41 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Overview We are a leading diversified capital manager with investment strategies across mortgage finance. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities. For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K. Recent Developments In April 2022, we entered into a definitive agreement to sell all of the corporate loan interests held by the MML business operated by us, as well as assets managed for third parties (collectively, the "MML Portfolio"), to Ares Capital Management LLC (“Ares”). Subject to customary closing conditions, the sale of the MML Portfolio is expected to be completed by the end of the second quarter of 2022. Business Environment By many markers, the U.S. economy remained robust in the first quarter 2022, with a majority of the slowdown in U.S. gross domestic product (“GDP”) coming from volatile components such as inventories and trade. Moreover, inflation readings and the U.S. labor market remain very strong, suggesting that the Federal Reserve needs to remove monetary policy accommodation much faster than previously anticipated. The repricing expectations around Federal Reserve monetary policy led to a meaningful rise in Treasury yield levels, where 2-year yields rose 160 basis points during the quarter, marking the most severe quarterly selloff in nearly 40 years, while 10-year Treasury yields rose by somewhat less. Given the rise in Treasury yields, as well as concerning geopolitical developments that include the Russian invasion of Ukraine, interest rate volatility rose to the highest realized levels since the financial crisis. The volatile rate environment weighed heavily on mortgages, with production coupon nominal spreads widening roughly 40 basis points this quarter. The elevated volatility, combined with the prospects of an expeditious removal of monetary policy accommodation has led to a sharp repricing of fixed income assets during the first quarter, with the Bloomberg U.S. Aggregate Bond Market Index facing the worst quarterly performance since 1980. Consistent with the broader market, our portfolio was vulnerable to the exceptional volatility in this environment despite our efforts to defensively position it, experiencing an economic return of negative 12% for the quarter. In this challenging environment, we maintained a stable notional exposure to Agency mortgage-backed securities (“MBS”) after we began the year with our leverage at its lowest level since 2015. We actively managed our hedges to the shifting interest rate risk over the quarter and rebalanced our coupon exposure to better position ourselves in the rising rate environment. The spread widening seen during the quarter led to a notable change in prepayment dynamics. With mortgage rates at roughly 5% at quarter end, only a small fraction of borrowers maintained an incentive to refinance their mortgages. At the same time, cash-out activity should remain somewhat elevated due to the recent strong housing market and summer seasonals. As a result, the convexity of the broader Agency MBS universe and our mortgage portfolio improved meaningfully. Our portfolio speeds slowed 22 percent quarter-over-quarter, with our aggregate portfolio paying 16.7% measured in constant prepayment rates (“CPR”). Meanwhile, as mortgage production shifted into higher coupons, the to-be announced (“TBA”) deliverable in higher coupons shifted from seasoned, faster paying pools to new production, resulting in collateral scarcity and meaningful dollar roll specialness in these coupons. While this specialness will not last in perpetuity, we expect to continue to shift up in coupon while preferring TBA over pools given the favorable carry and spread dynamics. In MSR, mortgage originators continue to be active sellers as operating profitability has come under pressure from rising mortgage rates with traded MSR volumes nearly reaching levels seen in the full year 2020 in the first quarter alone. We used this opportunity to grow our portfolio through net purchases of over $400 million in market value. Combined with mark to market gains, we increased our MSR position to over $1.2 billion at quarter end. We continue to see MSR as complementary to our core Agency strategy due to its negative interest rate and mortgage spread duration and attractive unlevered returns and expect to allocate capital to the sector should market conditions remain favorable. In Residential Credit, our economic portfolio ended the quarter with $4.4 billion of assets, with the modest decline in the portfolio primarily driven by our robust securitization activity as we converted whole loans to OBX securities. The residential credit market was not immune to the volatility in the broader rates and credit markets with key benchmark asset classes establishing widest levels since the onset of the pandemic two years ago. AAA-rate non-qualified mortgage spreads widened 75 basis points while benchmark credit risk transfer M2-tranche spreads widened 160 basis points. Despite the challenging 42 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES