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Item 1. Financial Statements

2023-05-04 compared with 2022-11-03 · 276 added, 694 removed, 889 unchanged (52% of the section changed)

Financial Statements

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DESCRIPTION OF BUSINESS

Annaly Capital Management, Inc.

(the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997.

The Company is a leading diversified capital manager with investment strategies across mortgage finance.

The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, residential mortgage loans and mortgage servicing rights (“MSR”).

The Company’s principal business objective is to generate net income for distribution to its stockholders and optimize its returns through prudent management of its diversified investment strategies.

The Company is an internally-managed company that has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).

The Company’s investment groups are primarily comprised of the following:

Investment Groups Description

Annaly Agency Group Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including Agency commercial mortgage-backed securities.

Annaly Residential Credit Group Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets.

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

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

As of September 30, 2022, the CRE 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.

The vast majority of these assets were legally transferred at the end of the third quarter of 2022 and the remaining assets are expected to be transferred by the end of the fourth quarter of 2022.

Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.

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, beginning with the quarter ended March 31, 2022, the Company consolidated certain line items in its Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation.

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

Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings

are combined into a single line item titled Net gains (losses) on investments and other.

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

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.

Reverse Stock Split

On September 8, 2022, the Company announced that its Board of Directors had unanimously approved a reverse stock split of the Company’s common stock at a ratio of 1-for-4 (the “Reverse Stock Split”).

The Reverse Stock Split was effective following the close of business on September 23, 2022 (the “Effective Time”).

Accordingly, at the Effective Time, every four issued and outstanding shares of the Company’s common stock were converted into one share of the Company’s common stock.

No fractional shares were issued in connection with the Reverse Stock Split.

Instead, each stockholder that would have held fractional shares as a result of the Reverse Stock Split received cash in lieu of such fractional shares.

The par value per share of the Company’s common stock remained unchanged at $ 0.01 per share after the Reverse Stock Split.

Accordingly, for all historical periods presented, an amount equal to the par value of the reduced number of shares resulting from the Reverse Stock Split was reclassified from Common stock to Additional paid in capital in the Company’s Consolidated Statements of Financial Condition.

All other references made to share or per share amounts in the accompanying consolidated financial statements and disclosures have also been retroactively adjusted, where applicable, to reflect the effects of the Reverse Stock Split.

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 $ 1.2 billion and $ 1.2 billion at September 30, 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).

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

additional information regarding financial instruments for which the Company has elected the FVO see the table in the “Financial Instruments” Note.

Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments.

Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note.

Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they meet the offsetting criteria.

Please see below and refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements.

Derivative Instruments – Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss).

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

4 unchanged sentences

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 accrued but not received 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.

6 unchanged sentences

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 or discounts associated with the purchase of multifamily securities are amortized or accreted into interest income based upon their contractual payment terms.

If a prepayment occurs, an adjustment is made to the unpaid principal balance and unamortized premium or discount in the current period and the original effective yield continues to be applied.

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.

6 unchanged sentences

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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.

The Company has made an accounting policy election not to measure an allowance for loans losses for accrued interest receivable.

If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual due date for commercial loans or 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income.

Any interest written off that is recovered is recognized as interest income.

7 unchanged sentences

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”).

ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption.

Standard Description Effective Date Effect on the Financial Statements or Other Significant Matters

Standard that has been adopted

Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

This ASU provides optional, temporary relief to accounting for contract modifications resulting from reference rate reform.

January 1, 2020 The Company has elected to retrospectively apply the practical expedients to modifications of qualifying contracts as continuation of the existing contract rather than as a new contract.

The adoption had no immediate impact and is not expected to have a material impact on the Company’s consolidated financial statements as the guidance continues to be applied to contract modifications until the ASU’s termination date.

There were no recent ASUs that are expected to have a significant impact on the Company’s consolidated financial statements when adopted or that had a significant impact on the Company’s consolidated financial statements upon adoption.

ANNALY CAPITAL MANAGEMENT, INC.

2 unchanged sentences

FINANCIAL INSTRUMENTS

The following table presents characteristics for certain of the Company’s financial instruments at September 30, 2022 and December 31, 2021.

The following table presents characteristics for certain of the Company’s financial instruments at March 31, 2023 and December 31, 2022.

Financial Instruments (1)

Balance Sheet Line Item Type / Form Measurement Basis September 30, 2022 December 31, 2021

Balance Sheet Line Item Type / Form Measurement Basis March 31, 2023 December 31, 2022

Assets (dollars in thousands)

9 unchanged sentences

Loans, net Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 1,642,822 1,809,832

Loans, net Residential mortgage loan warehouse facility Fair value, with unrealized gains (losses) through earnings 70 980

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

Total loans, net 1,642,822 1,809,832

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

Assets transferred or pledged to securitization vehicles Agency mortgage-backed securities Fair value, with unrealized gains (losses) through other comprehensive income 431,388 589,873

Assets transferred or pledged to securitization vehicles Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 10,277,588 9,121,912

5 unchanged sentences

(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 purchased prior to July 1, 2022.

5 unchanged sentences

Agency mortgage-backed securities purchased prior to July 1, 2022, are still classified as available-for-sale with changes in fair value recognized in other comprehensive income.

During the three months ended March 31, 2023, $ 386.7 million of unrealized gains (losses) on Agency mortgage-backed securities were reported in Net gains (losses) on investments and other in the Company's Consolidated Statements of Comprehensive Income (Loss).

The Company has also elected the fair value option for CRT securities, interest only securities, Non-Agency and commercial mortgage-backed securities in order to simplify the accounting.

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 where the fair value option has not been elected 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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired.

For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security.

than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security.

Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis).

1 unchanged sentence

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 nine months ended September 30, 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.

7 unchanged sentences

Commercial Mortgage-Backed Securities (“Commercial Securities”) - The Company invests in Commercial Securities such as conduit, credit CMBS, single-asset single borrower and collateralized loan obligations.

The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the nine months ended September 30, 2022:

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, 2023:

Agency Securities Residential Credit Securities Commercial Securities Total

3 unchanged sentences

Purchases 8,073,778 372,839 23,940 8,470,557

Sales and transfers

( 4,984,037 ) ( 225,907 ) ( 51,591 ) ( 5,261,535 )

2 unchanged sentences

Fair value adjustment 1,582,194 60,584 1,662 1,644,440

Ending balance September 30, 2022

Ending balance March 31, 2023

$ 65,623,534 $ 3,114,040 $ 500,611 $ 69,238,185

2 unchanged sentences

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 September 30, 2022 and December 31, 2021:

September 30, 2022

March 31, 2023

Notional Remaining Premium Remaining Discount Amortized

13 unchanged sentences

Credit risk transfer $ 1,087,475 $ 6,626 $ ( 5,184 ) $ 1,088,917 $ 10,154 $ ( 13,687 ) $ 1,085,384

$ 1,100,944 $ 7,170 $ ( 4,385 ) $ 1,103,729 $ 900 $ ( 47,723 ) $ 1,056,906

Alt-A 118,110 9 ( 5,027 ) 113,092 — ( 11,523 ) 101,569

24 unchanged sentences

Credit risk transfer $ 1,013,368 $ 6,790 $ ( 4,828 ) $ 1,015,330 $ 6,629 $ ( 24,402 ) $ 997,557

$ 924,101 $ 8,754 $ ( 1,176 ) $ 927,555 $ 9,641 $ ( 968 ) $ 936,228

Alt-A 111,009 9 ( 5,048 ) 105,970 — ( 14,754 ) 91,216

8 unchanged sentences

Total securities $ 86,183,782 $ 2,943,297 $ ( 1,110,917 ) $ 70,669,855 $ 83,143 $ ( 4,963,091 ) $ 65,789,907

(1) Principal/Notional amount includes $ 7.2 billion and $ 4.5 billion of Agency Multifamily interest-only securities as of September 30, 2022 and December 31, 2021, respectively.

(2) Principal/Notional amount includes $ 0.0 million and $ 4.1 million of a CRT interest-only security as of September 30, 2022 and December 31, 2021, respectively.

(3) Principal/Notional amount includes $ 1.7 billion and $ 50.0 million of Prime interest-only securities as of September 30, 2022 and December 31, 2021, respectively.

(4) Principal/Notional amount includes $ 1.9 billion and $ 126.5 million of Prime Jumbo interest-only securities as of September 30, 2022 and December 31, 2021, respectively.

(1) Principal/Notional amount includes $ 8.8 billion and $ 8.4 billion of Agency Multifamily interest-only securities as of March 31, 2023 and December 31, 2022, respectively.

(2) Principal/Notional amount includes $ 0.6 billion and $ 1.7 billion of Prime interest-only securities as of March 31, 2023 and December 31, 2022, respectively.

(3) Principal/Notional amount includes $ 7.8 billion and $ 5.5 billion of Prime Jumbo interest-only securities as of March 31, 2023 and December 31, 2022, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

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 September 30, 2022 and December 31, 2021:

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Investment Type (dollars in thousands)

4 unchanged sentences

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 September 30, 2022 and December 31, 2021, according to their estimated weighted average life classifications:

September 30, 2022 December 31, 2021

The following table summarizes the Company’s Residential Securities, excluding securities transferred or pledged to securitization vehicles, at March 31, 2023 and December 31, 2022, according to their estimated weighted average life classifications:

March 31, 2023 December 31, 2022

Estimated Fair Value Amortized

6 unchanged sentences

Total $ 68,737,574 $ 71,956,868 $ 65,263,598 $ 70,125,761

The estimated weighted average lives of the Residential Securities at September 30, 2022 and December 31, 2021 in the table above are based upon projected principal prepayment rates.

The estimated weighted average lives of the Residential Securities at March 31, 2023 and December 31, 2022 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 September 30, 2022 and December 31, 2021.

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Estimated Fair Value (1)

12 unchanged sentences

An impairment has not been recognized in earnings related to these investments because the decline in value is not related to credit quality, the Company currently has not made a decision to sell the securities nor is it more likely than not that the securities will be required to be sold before recovery.

During the three and nine months ended September 30, 2022, the Company disposed of $ 11.6 billion and $ 21.0 billion of Residential Securities, respectively.

During the three and nine months ended September 30, 2021, the Company disposed of $ 4.8 billion and $ 11.1 billion of Residential Securities, respectively.

The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three and nine months ended September 30, 2022 and 2021.

During the three months ended March 31, 2023 and 2022, the Company disposed of $ 5.2 billion and $ 2.8 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, 2023 and 2022.

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

For the three months ended (dollars in thousands)

March 31, 2023 $ 4,269 $ ( 526,117 ) $ ( 521,848 )

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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

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

For the three months ended (dollars in thousands)

September 30, 2022 $ 17,324 $ ( 1,491,325 ) $ ( 1,474,001 )

September 30, 2021 $ 30,368 $ ( 3,636 ) $ 26,732

For the nine months ended

September 30, 2022 $ 46,152 $ ( 2,321,940 ) $ ( 2,275,788 )

September 30, 2021 $ 87,499 $ ( 86,657 ) $ 842

The Company invests in residential loans.

3 unchanged sentences

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 September 30, 2022 and December 31, 2021, the Company rep orted $ 1.6 billion and $ 2.3 billion, respectively, of loans for which the fair value option was elected.

Excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, as of March 31, 2023 and December 31, 2022, the Company rep orted $ 1.6 billion and $ 1.8 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.

2 unchanged sentences

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 $ 1.4 million and $ 2.3 million at September 30, 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.

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 $ 1.6 million and $ 27.9 million for the three and nine months ended September 30, 2022, respectively.

The Company recorded net loan loss (provisions) reversals of $ 6.1 million and $ 145.3

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

million for the three and nine months ended September 30, 2021, respectively.

As of September 30, 2022 and December 31, 2021, the Company’s loan loss allowance was $ 0.0 million and $ 27.9 million, respectively.

The following table presents the activity of the Company’s loan investments, excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, for the nine months ended September 30, 2022:

Residential Corporate Debt

The carrying value of the Company’s residential loans held for sale was $ 1.2 million and $ 1.3 million at March 31, 2023 and December 31, 2022, respectively.

Allowance for Losses – Prior to the sale of its corporate debt and commercial loan portfolios, the Company evaluated the need for a loss reserve on each of its loans classified as held-for investment and carried at amortized cost based upon estimated current expected credit losses.

The Company recorded net loan loss (provisions) reversals of $ 0.2 million and ($ 0.6 ) million for the three months ended March 31, 2023 and 2022, respectively.

(dollars in thousands)

Beginning balance January 1, 2023

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

Purchases / originations 927,497

3 unchanged sentences

Gains / (losses) 21,820

( 166,111 ) ( 23,320 ) ( 189,431 )

(Amortization) / accretion ( 1,459 )

Ending balance September 30, 2022

$ 1,551,637 $ — $ 1,551,637

(1) Includes securitizations, syndications, transfers to securitization vehicles and corporate debt transfers to assets of disposal group held for sale and other assets.

Includes transfer of residential loans to securitization vehicles with a carrying value of $ 5.5 billion during the nine months ended September 30, 2022.

(2) Includes loan loss allowances.

Ending balance March 31, 2023

(1) Includes transfer of residential loans to securitization vehicles with a carrying value of $ 1.1 billion during the three months ended March 31, 2023.

The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans.

2 unchanged sentences

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 September 30, 2022 and December 31, 2021:

September 30, 2022 December 31, 2021

The mortgage loans are secured by first liens on primarily one-to-four family residential properties.

A subsidiary of the Company has engaged a third party to act as its custodian, agent and bailee for the purposes of receiving and holding certain documents, instruments and papers related to the residential mortgage loans it purchases.

Pursuant to the Company’s custodial agreement, the custodian segregates and maintains continuous custody of all documents constituting the mortgage file with respect to each mortgage loan owned by the subsidiary in secure and fire resistant facilities and in a manner consistent with the standard of care employed by prudent mortgage loan document custodians.

At or prior to the funding of any residential mortgage loan, the related seller, pursuant to the terms of our mortgage loan purchase agreement, must deliver to the custodian, the mortgage loan documents including the mortgage note, the mortgage and other related loan documents.

In addition, a complete credit file for the related mortgage and borrower must be delivered to the subsidiary prior to the date of purchase.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

March 31, 2023 December 31, 2022

(dollars in thousands)

1 unchanged sentence

Unpaid principal balance $ 12,978,189 $ 12,247,346

The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021 for these investments, excluding loan warehouse facilities:

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

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, 2023 and 2022 for these investments, excluding loan warehouse facilities:

For the Three Months Ended

March 31, 2023 March 31, 2022

(dollars in thousands)

6 unchanged sentences

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

The following table provides the geographic concentrations based on the unpaid principal balances at September 30, 2022 and December 31, 2021 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The following table provides the geographic concentrations based on the unpaid principal balances at March 31, 2023 and December 31, 2022 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:

Geographic Concentrations of Residential Mortgage Loans

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Property location % of Balance Property location % of Balance

2 unchanged sentences

Florida 8.9 % Florida 8.3 %

Texas 5.3 % Texas 5.1 %

All other (none individually greater than 5%) 32.1 % All other (none individually greater than 5%) 31.5 %

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 September 30, 2022 and December 31, 2021:

September 30, 2022 December 31, 2021

The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

Portfolio Weighted

11 unchanged sentences

68 % 5 % - 100 %

At September 30, 2022 and December 31, 2021, approximately 11 % 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.

At March 31, 2023 and December 31, 2022, approximately 11 % 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 September 30, 2022 and December 31, 2021, the fair value and carrying value of this warehouse facility was $ 0.1 million and $ 1.0 million, respectively, and reported as Loans, net in the Consolidated Statements of Financial Condition.

As of September 30, 2022, the lending facility was not on nonaccrual status nor past due.

As of December 31, 2021, commercial real estate loans were 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

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 (“Ares”).

The vast majority of these assets were legally transferred to Ares at the end of the third quarter and the remaining assets are expected to be transferred by the end of the fourth quarter of 2022.

Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.

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.

At both March

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

31, 2023 and December 31, 2022, the fair value and carrying value of this warehouse facility was approximately $ 0.0 million and reported as Loans, net in the Consolidated Statements of Financial Condition.

As of March 31, 2023, the lending facility was not on nonaccrual status nor past due.

Corporate Debt

All of the assets comprising the MML Portfolio were transferred by the end of 2022.

Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.

MORTGAGE SERVICING RIGHTS

MSR represent the rights and obligations associated with servicing pools of residential mortgage loans.

4 unchanged sentences

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.

A third party acted 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 and nine months ended September 30, 2022 and 2021:

Mortgage Servicing Rights Three Months Ended Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

The following tables present activity related to MSR and Interests in MSR for the three months ended March 31, 2023 and 2022:

Mortgage Servicing Rights Three Months Ended

March 31, 2023 March 31, 2022

(dollars in thousands)

2 unchanged sentences

36,630 421,012

Transfers (2)

82,650 — 82,650 —

Sales — — ( 9,076 ) ( 376 )

Change in fair value due to:

4 unchanged sentences

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

(2) Transfers from Interests in MSR - Refer to the “Variable Interest Entities” Note for additional information.

(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 Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

Interests in MSR Three Months Ended

March 31, 2023 March 31, 2022

(dollars in thousands)

1 unchanged sentence

Purchases (1)

— 5,936 4,860 53,034

Transfers (2)

( 82,650 ) — ( 82,650 ) —

Gain (loss) included in net income — 11,424

Ending balance September 30, 2022

$ — $ 57,530 $ — $ 57,530

Ending balance March 31, 2023

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

4 unchanged sentences

VARIABLE INTEREST ENTITIES

The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $ 1.1 billion at September 30, 2022.

The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $ 1.1 billion at March 31, 2023.

Assets of the VIEs may only be used to settle obligations of the VIEs.

8 unchanged sentences

however, the financial assets were not eligible for the fair value option as it was not elected at purchase.

During the year ended December 31, 2022, the Company deconsolidated the 2020 multifamily VIE since it sold all of its interest-only securities and no longer retains a significant variable interest in the entity.

Residential Securitizations

2 unchanged sentences

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.

Refer to the “Securities” Note for further information on Residential Securities.

Residential securitizations are issued by entities generally 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.

3 unchanged sentences

OBX 2023-NQM1 January 2023 $ 405,209

OBX 2022-INV1 January 2022 $ 377,275

OBX 2022-INV2 February 2022 $ 466,686

OBX 2023-J1 February 2023 $ 305,755

OBX 2023-NQM2 February 2023 $ 420,650

OBX 2022-INV3 March 2022 $ 330,823

OBX 2022-NQM3 March 2022 $ 315,843

OBX 2022-NQM4 May 2022 $ 457,285

OBX 2022-J1 May 2022 $ 389,334

OBX 2022-NQM5 June 2022 $ 390,775

OBX 2022-INV4 June 2022 $ 335,900

OBX 2022-NQM6 June 2022 $ 387,913

OBX 2022-J2 August 2022 $ 305,969

OBX 2022-NQM7 August 2022 $ 358,931

OBX 2022-NQM8 September 2022 $ 397,470

As of September 30, 2022 and December 31, 2021, a total carrying value of $ 7.4 billion and $ 4.6 billion, respectively, of bonds were held by third parties and the Company retained $ 1.0 billion and $ 780.8 million, respectively, of mortgage-backed securities, which were eliminated in consolidation.

As of March 31, 2023 and December 31, 2022, a total carrying value of $ 8.8 billion and $ 7.7 billion, respectively, of bonds were held by third parties and the Company retained $ 1.1 billion and $ 1.0 billion, respectively, of MBS, 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 had 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.

Effective August 1, 2022, upon initial consolidation of new securitization entities, the Company elected to apply the measurement alternative for consolidated collateralized financing entities in order to simplify its accounting and valuation processes.

The liabilities of these securitization entities are deemed to be more observable and are used to measure the fair

The liabilities of these securitization entities are deemed to be more observable and are used to measure the fair value of the assets.

The Company incurred $ 1.4 million and $ 3.4 million of costs during the three months ended March 31, 2023 and 2022, 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 $ 9.9 billion and $ 9.0 billion at March 31, 2023 and December 31, 2022, respectively.

During the three months ended March 31, 2023 and 2022, the Company recorded ($ 211.9 ) million and $ 298.1 million, respectively, of unrealized gains (losses) on debt held by third parties issued by OBX Trusts, which is reported in Net gains (losses) on investments and other in the Company's Consolidated Statements of Comprehensive Income (Loss).

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.

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

value of the assets.

The Company incurred $ 1.7 million and $ 2.2 million of costs during the three months ended September 30, 2022 and 2021, respectively, and $ 6.8 million and $ 4.0 million of costs during the nine months ended September 30, 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 $ 8.6 billion and $ 4.6 billion at September 30, 2022 and December 31, 2021, respectively.

Credit Facility VIEs

In connection with the sale of substantially all of the assets that comprise the MML Portfolio, the credit facilities which provided financing for the Company’s corporate debt were paid-off and terminated during the three months ended June 30, 2022.

In connection with the sale of all of the assets that comprise the MML Portfolio, the credit facilities which provided financing for the Company’s corporate debt were paid-off and terminated during the three months ended June 30, 2022.

Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.

4 unchanged sentences

These entities were VIEs because they did not have sufficient equity at risk to finance their activities and the Company was the primary beneficiary because it had power to remove the decision makers with or without cause and held substantially all of the variable interests in the entities.

During the quarter ended September 30, 2022, the Company terminated its contracts previously classified as Interests in MSR on its Consolidated Statements of Financial Condition and purchased the underlying mortgage servicing rights.

As a result, consolidated VIEs holding the Interests in MSR and related assets and liabilities were liquidated.

No gain or loss was recognized upon deconsolidation.

The underlying mortgage servicing rights were initially recognized at fair value and subsequent changes in fair value are recognized in earnings.

See the “Mortgage Servicing Rights” Note and “Fair Value Measurements” Note for further information regarding MSR.

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 September 30, 2022 and December 31, 2021 are as follows:

September 30, 2022

Cash and cash equivalents $ 3,533

Mortgage servicing rights 37

Interests in MSR —

Other assets 4,068

Total assets $ 9,016

Payable for unsettled trades $ 2,152

Other liabilities 3,636

Total liabilities $ 5,788

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

December 31, 2021

The underlying MSR were initially recognized at fair value and subsequent changes in fair value are recognized in earnings.

Refer to the “Mortgage Servicing Rights” Note and “Fair Value Measurements” Note for further information regarding MSR.

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, 2023 and December 31, 2022 are as follows:

March 31, 2023 December 31, 2022

Assets (dollars in thousands)

Cash and cash equivalents $ 2,456 $ 2,239

Loans 1,180 1,293

Mortgage servicing rights 25 27

Interests in MSR 69,316

Other assets 1,262 1,238

10 unchanged sentences

Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

Residential Credit Fund

2 unchanged sentences

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 September 30, 2022 and December 31, 2021, the Company had outstanding participating interests in residential mortgage loans of $ 0.7 billion and $ 1.0 billion, respectively.

As of March 31, 2023 and December 31, 2022, the Company had outstanding participating interests in residential mortgage loans of $ 673.4 million and $ 800.8 million, respectively.

These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition.

The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings.

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 nine months ended September 30, 2021, the Company reported Business divestiture-related gains (losses) of ($ 262.0 ) million, in its Consolidated Statements of Comprehensive Income (Loss) which includes the aforementioned goodwill impairment as well as valuation adjustments resulting from classifying the CRE assets as held for sale and estimated transaction costs.

As of September 30, 2022, the assets held for sale and the associated liabilities were transferred to Slate.

SALE OF MIDDLE MARKET LENDING PORTFOLIO

The Company’s loans, having an unpaid principal balance of

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

$ 1.9 billion, were transferred to Ares for cash proceeds of $ 1.9 billion and a realized gain of $ 20.4 million was recorded during the nine months ended September 30, 2022.

As of September 30, 2022, loans with an unpaid principal balance of $ 14.2 million were classified as held for sale pending receipt of required consents to assign the loans to Ares.

The loans classified as held for sale are carried at lower of cost or fair value measured using the agreed upon sales price, which is considered to be Level 2 in the fair value measurement hierarchy.

The nature of the Company’s continuing involvement with the transferred loans is primarily administrative, including providing customary representations and warranties regarding the transferred loans.

The Company’s loans, having an unpaid principal balance of $ 1.9 billion, were transferred for cash proceeds of $ 1.9 billion and a realized gain of $ 20.4 million was recorded during the year ended December 31, 2022.

All of the assets comprising the MML Portfolio were transferred by the end of 2022.

DERIVATIVE INSTRUMENTS

18 unchanged sentences

The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives.

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

At September 30, 2022 and December 31, 2021, ($ 3.2 ) billion and ($ 0.4 ) billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.

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 or received under such transactions.

At March 31, 2023 and December 31, 2022, ($ 2.3 ) billion and ($ 3.2 ) billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

10 unchanged sentences

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

If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

received or the fair value of the underlying interest rate swap received and the premium paid.

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

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

3 unchanged sentences

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.

MBS options are measured at fair value using internal pricing models and compared to the counterparty market values.

Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates.

6 unchanged sentences

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

The table below summarizes fair value information about our derivative assets and liabilities at September 30, 2022 and December 31, 2021:

Derivatives Instruments September 30, 2022 December 31, 2021

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The table below summarizes fair value information about the Company’s derivative assets and liabilities at March 31, 2023 and December 31, 2022:

Derivatives Instruments March 31, 2023 December 31, 2022

Assets (dollars in thousands)

4 unchanged sentences

Purchase commitments 2,706 1,832

Credit derivatives (1)

Total derivative assets $ 400,139 $ 342,064

4 unchanged sentences

Credit derivatives (1)

19,486 13,799

Total derivative liabilities $ 473,515 $ 204,172

(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 420.0 million and $ 400.0 million at September 30, 2022 and December 31, 2021, respectively, plus any coupon shortfalls on the underlying tranche.

As of September 30, 2022 and December 31, 2021 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and AA.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The following table summarizes certain characteristics of the Company’s interest rate swaps at September 30, 2022 and December 31, 2021:

September 30, 2022

(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 385.0 million and $ 420.0 million at March 31, 2023 and December 31, 2022, respectively, plus any coupon shortfalls on the underlying tranche.

As of March 31, 2023 the credit derivative tranches referencing the basket of bonds had AAA ratings and as of December 31, 2022 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, 2023 and December 31, 2022:

March 31, 2023

Maturity Current Notional (1)(2)

18 unchanged sentences

Total / Weighted average $ 52,277,300 1.74 % 4.28 % 5.25

(1) As of September 30, 2022, 22 %, 30 % and 48 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.

(1) As of March 31, 2023, 13 %, 19 % and 68 % 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, 2022, 17 %, 23 % and 60 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.

(2) There were no forward starting swaps at September 30, 2022 and December 31, 2021.

(3) At September 30, 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.

(2) There were no forward starting swaps at March 31, 2023 and December 31, 2022.

(3) At March 31, 2023 and December 31, 2022, 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 September 30, 2022 and December 31, 2021:

September 30, 2022

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The following table summarizes certain characteristics of the Company’s swaptions at March 31, 2023 and December 31, 2022:

March 31, 2023

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

7 unchanged sentences

Long receive $ 750,000 1.57 % 3M LIBOR 11.07 12.82

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

The following table summarizes certain characteristics of the Company’s TBA derivatives at September 30, 2022 and December 31, 2021:

September 30, 2022

The following table summarizes certain characteristics of the Company’s TBA derivatives at March 31, 2023 and December 31, 2022:

March 31, 2023

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

1 unchanged sentence

Purchase contracts $ 11,968,000 $ 11,857,664 $ 12,020,810 $ 163,146

Sale contracts ( 1,980,000 ) ( 1,895,947 ) ( 1,877,778 ) 18,169

Net TBA derivatives $ 11,968,000 $ 11,857,664 $ 12,020,810 $ 163,146

December 31, 2022

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

(dollars in thousands)

Purchase contracts $ 10,589,000 $ 10,675,739 $ 10,623,350 $ ( 52,389 )

The following table summarizes certain characteristics of the Company’s futures derivatives at September 30, 2022 and December 31, 2021:

September 30, 2022

Sale contracts ( 44,000 ) ( 44,849 ) ( 44,674 ) 175

Net TBA derivatives $ 10,545,000 $ 10,630,890 $ 10,578,676 $ ( 52,214 )

The following table summarizes certain characteristics of the Company’s futures derivatives at March 31, 2023 and December 31, 2022:

March 31, 2023

Notional - Long

28 unchanged sentences

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

The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset in our Consolidated Statements of Financial Condition at September 30, 2022 and December 31, 2021, respectively.

September 30, 2022

The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset in our Consolidated Statements of Financial Condition at March 31, 2023 and December 31, 2022, respectively.

March 31, 2023

Amounts Eligible for Offset

15 unchanged sentences

Assets (dollars in thousands)

Interest rate swaps, at fair value $ 33,006 $ ( 24,625 ) $ — $ 8,381

Interest rate swaptions, at fair value 256,991 — — 256,991

2 unchanged sentences

Purchase commitments 1,832 — — 1,832

Credit derivatives 1,160 ( 516 ) — 644

Interest rate swaps, at fair value $ 108,724 $ ( 24,625 ) $ ( 1,251 ) $ 82,848

9 unchanged sentences

For the three months ended (dollars in thousands)

September 30, 2022 $ 141,110 $ ( 83,393 ) $ 1,251,350

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

For the nine months ended

September 30, 2022 $ 79,561 $ ( 83,409 ) $ 3,472,326

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

March 31, 2023 $ 385,706 $ ( 145,819 ) $ ( 956,272 )

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

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

3 unchanged sentences

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

Three Months Ended September 30, 2022

Three Months Ended March 31, 2023

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

5 unchanged sentences

Credit derivatives ( 1,312 ) ( 5,209 ) ( 6,521 )

Three Months Ended September 30, 2021

$ ( 184,367 )

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

6 unchanged sentences

Total $ 381,130

Nine Months Ended September 30, 2022

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

(dollars in thousands)

Net TBA derivatives $ ( 2,250,909 ) $ ( 656,394 ) $ ( 2,907,303 )

Net interest rate swaptions ( 33,399 ) 272,668 239,269

Futures 2,332,338 1,656,458 3,988,796

Purchase commitments — ( 2,358 ) ( 2,358 )

Credit derivatives 2,539 ( 14,510 ) ( 11,971 )

Total $ 1,306,433

Nine Months Ended September 30, 2021

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

(dollars in thousands)

Net TBA derivatives $ ( 122,275 ) $ ( 249,847 ) $ ( 372,122 )

Net interest rate swaptions ( 69,262 ) 28,528 ( 40,734 )

Futures 250,013 218,527 468,540

Purchase commitments — 1,389 1,389

Credit derivatives 7,024 8,634 15,658

Total $ 72,731

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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 September 30, 2022.

The aggregate fair value of all derivative instruments with the aforementioned features were in a liability position at March 31, 2023 of $ 161.8 million, which represents the maximum amount the Company would be required to pay upon termination.

This amount is fully collateralized.

FAIR VALUE MEASUREMENTS

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Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy.

7 unchanged sentences

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

September 30, 2022

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

March 31, 2023

Level 1 Level 2 Level 3 Total

5 unchanged sentences

Residential mortgage loans — 1,642,822 — 1,642,822

Residential mortgage loan warehouse facility — 70 — 70

Mortgage servicing rights — — 1,790,980 1,790,980

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Total liabilities $ 293,840 $ 9,659,017 $ — $ 9,952,857

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

December 31, 2022

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Residential mortgage loans — 1,809,832 — 1,809,832

Residential mortgage loan warehouse facility — 980 — 980

Mortgage servicing rights — — 1,748,209 1,748,209

Interests in MSR — — 69,316 69,316

Assets transferred or pledged to securitization vehicles — 9,121,912 — 9,121,912

Derivative assets

Interest rate swaps — 33,006 — 33,006

Other derivatives 33,179 275,879 — 309,058

9 unchanged sentences

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

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

The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

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.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Financial Statements

September 30, 2022

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

Discount rate Prepayment rate Delinquency rate Cost to service

MSR held directly 6.6 % - 9.5 % ( 8.7 %)

4.8 % - 8.0 % ( 5.3 %)

0.1 % - 4.1 % ( 0.9 %)

$ 88 - $ 108 ($ 94 )

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 %)

Unobservable Input (1)

Range (Weighted Average) (2)

March 31, 2023 December 31, 2022

Discount rate 7.9 % - 10.8 % ( 8.9 %)

8.4 % - 10.7 % ( 9.7 %)

Interests in MSR 8.4 % - 8.4 % ( 8.4 %)

Prepayment rate 4.8 % - 8.7 % ( 5.4 %)

4.8 % - 8.1 % ( 5.4 %)

Delinquency rate 0.2 % - 4.5 % ( 1.2 %)

0.2 % - 4.5 % ( 1.3 %)

Cost to service $ 85 - $ 115 ($ 96 )

$ 86 - $ 118 ($ 95 )

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(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 September 30, 2022 and December 31, 2021.

September 30, 2022 December 31, 2021

The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at March 31, 2023 and December 31, 2022.

March 31, 2023 December 31, 2022

Value Carrying

Financial assets (dollars in thousands)

Corporate debt, held for investment $ — $ — $ 1,968,991 $ 1,986,379

Financial liabilities

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Other secured financing 250,000 250,000 250,000 250,000

Corporate debt, held for investment and corporate debt, held for sale are valued using Level 3 inputs.

Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information.

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

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

At September 30, 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 nine months ended September 30, 2022.

At March 31, 2023 and December 31, 2022, there was no goodwill balance.

ANNALY CAPITAL MANAGEMENT, INC.

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Intangible assets, net

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

The following table presents the activity of finite lived intangible assets for the three months ended March 31, 2023.

Intangible Assets, net

(dollars in thousands)

Balance at December 31, 2021

Impairment ( 4,157 )

Beginning balance January 1, 2023

amortization expense ( 758 )

Balance at September 30, 2022

Ending balance March 31, 2023

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.

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

The Company had outstanding $ 54.2 billion and $ 54.8 billion of repurchase agreements with weighted average remaining maturities of 57 days and 52 days at September 30, 2022 and December 31, 2021, respectively.

The Company has select arrangements with counterparties to enter into repurchase agreements for $ 1.8 billion with remaining capacity of $ 1.4 billion at September 30, 2022.

At September 30, 2022 and December 31, 2021, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates:

September 30, 2022

The Company had outstanding $ 61.0 billion and $ 59.5 billion of repurchase agreements with weighted average remaining maturities of 59 days and 27 days at March 31, 2023 and December 31, 2022, respectively.

In connection with its residential mortgage loans, the Company has select arrangements with counterparties to enter into repurchase agreements for $ 2.0 billion with remaining capacity of $ 1.3 billion at March 31, 2023.

At March 31, 2023 and December 31, 2022, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates:

March 31, 2023

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

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Total $ 55,855,293 $ 468,695 $ 2,013,261 $ 718,600 $ 456,748 $ 59,512,597 4.29 %

(1) Approximately 0 % repurchase agreements had a remaining maturity over 1 year at September 30, 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 September 30, 2022 and December 31, 2021.

(1) No repurchase agreements had a remaining maturity over 1 year at March 31, 2023.

No repurchase agreements had a remaining maturity over 1 year at December 31, 2022.

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements

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Netted amounts $ — $ 60,993,018 $ — $ 59,512,597

Other Secured Financing - As of September 30, 2022, the Company had a $ 250 million committed credit facility and a $ 250 million incremental facility provision to finance a portion of its MSR portfolio.

Outstanding borrowings under this facility as of September 30, 2022 totaled $ 250.0 million with maturities ranging between one to three years .

The weighted average rate of the advances was 5.81 % as of September 30, 2022.

Other Secured Financing - As of March 31, 2023, the Company had $ 750 million in total committed credit facilities to finance a portion of its MSR portfolio.

Outstanding borrowings under this facility as of March 31, 2023 totaled $ 250.0 million with maturities ranging between one to three years .

The weighted average interest rate of the borrowings was 7.54 % as of March 31, 2023.

Borrowings are reported in Other secured financing in the Company’s Consolidated Statements of Financial Condition.

Refer to the “Variable Interest Entities” Note for additional information on the Company’s other secured financing arrangements at December 31, 2022.

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 $ 57.2 billion and $ 199.1 million, respectively, at September 30, 2022 and $ 59.2 billion and $ 160.8 million, respectively, at December 31, 2021.

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 $ 64.0 billion and $ 235.8 million, respectively, at March 31, 2023 and $ 62.2 billion and $ 226.4 million, respectively, at December 31, 2022.

CAPITAL STOCK

(A) Common Stock

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at September 30, 2022 and December 31, 2021.

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at March 31, 2023 and December 31, 2022.

Shares authorized Shares issued and outstanding

September 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021 Par Value

March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Par Value

2,936,500,000 2,936,500,000 493,880,938 468,309,810 $ 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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Financial Statements

through December 31, 2024 (the “Current Share Repurchase Program”).

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

During the three and nine months ended September 30, 2022 and 2021, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

During the three months ended September 30, 2022, the Company closed the public offering of an original issuance of 25 million shares of common stock for proceeds of $ 665.0 million before deducting offering expenses.

During the the nine months ended September 30, 2022, the Company closed two public offerings for an aggregate original issuance of 50 million shares of common stock for aggregate proceeds of $ 1.31 billion before deducting offering expenses.

In connection with each offering, the Company granted the underwriters a thirty-day option to purchase up to an additional 3.75 million shares of common stock, which the underwriters exercised in full in both instances, resulting in an additional $ 99.8 million and $ 196.5 million in proceeds before deducting offering expenses for the three and nine months ended September 30, 2022, respectively.

The stock offerings conducted during the three and nine months ended September 30, 2022 were completed prior to the Reverse Stock Split and the foregoing share amounts have been retroactively adjusted to reflect the effects thereof.

replaced the Prior Share Repurchase Program.

During the three months ended March 31, 2023 and 2022, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

On August 6, 2020, the Company entered into separate Amended and Restated Distribution Agency Agreements (as amended by Amendment No.

1 to the Amended and Restated Distribution Agency Agreements on August 6, 2021, collectively, the “Sales Agreements”) with each of RBC Capital Markets, LLC, Barclays Capital Inc., BofA Securities, Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.

1 to the Amended and Restated Distribution Agency Agreements on August 6, 2021 and Amendment No.

2 to the Amended and Restated Distribution Agency Agreements on November 3, 2022, collectively, the “Sales Agreements”) with each of Barclays Capital Inc., BofA Securities, Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.

LLC, Keefe, Bruyette & Woods, Inc., J.P.

Morgan Securities LLC, UBS Securities LLC and Wells Fargo Securities, LLC (collectively, the “Sales Agents”).

Morgan Securities LLC, RBC Capital Markets, LLC, UBS Securities LLC and Wells Fargo Securities, LLC (collectively, the “Sales Agents”).

Pursuant to the Sales Agreements, 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 (the “at-the-market sales program”).

During the three and nine months ended September 30, 2022, under the at-the-market sales program, the Company issued 36.8 million shares for proceeds of $ 913.9 million and 45.2 million shares for proceeds of $ 1.1 billion, respectively, each net of commissions and fees.

During the three and nine months ended September 30, 2021, under the at-the-market sales program, the Company issued 1.4 million shares for proceeds of $ 49.0 million and 12.8 million shares for proceeds of $ 469.5 million, respectively, each net of commissions and fees.

The foregoing share amounts have been retroactively adjusted to reflect the effects of the Reverse Stock Split.

During the three months ended March 31, 2023, under the at-the-market sales program, the Company issued 25.3 million shares for proceeds of $ 562.7 million, net of commissions and fees.

During the three months ended March 31, 2022, under the at-the-market sales program, the Company issued 0.2 million shares, as retroactively adjusted to reflect the effects of the Reverse Stock Split, for proceeds of $ 6.2 million, net of commissions and fees.

(B) Preferred Stock

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at September 30, 2022 and December 31, 2021.

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at March 31, 2023 and December 31, 2022.

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

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Date At Which Dividend Rate Becomes Floating Floating Annual Rate

September 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022

Fixed-to-floating rate

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

Through September 30, 2022, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.

Through March 31, 2023, 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.

On November 3, 2022, the Company’s Board of Directors approved a repurchase plan for all of its existing outstanding Preferred Stock (as defined below, the “Preferred Stock Repurchase Program”).

Under the terms of the plan, the Company is authorized to repurchase up to an aggregate of 63,500,000 shares of Preferred Stock, comprised of up to (i) 28,800,000 shares of its 6.95 % Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $ 0.01 per share (the “Series F Preferred Stock”), (ii) 17,000,000 shares of its 6.50 % Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $ 0.01 per share (the “Series G Preferred Stock”), and (iii) 17,700,000 shares of its 6.75 % Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $ 0.01 per share (the “Series I Preferred Stock”, and together with Series F Preferred Stock and Series G Preferred Stock, the “Preferred Stock”).

The aggregate liquidation value of the Preferred Stock that may be repurchased by the Company pursuant to the Preferred Stock Repurchase Program, as of November 3, 2022, was approximately $ 1.6 billion.

The Preferred Stock Repurchase Program became effective on November 3, 2022, and shall expire on December 31, 2024.

No shares were repurchased with respect to the Preferred Stock Repurchase Program during the three months ended March 31, 2023.

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Financial Statements

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

For the Three Months Ended

March 31, 2023 March 31, 2022

(dollars in thousands, except per share data)

3 unchanged sentences

Distributions paid per common share after period end $ 0.65 $ 0.88

Date of distributions paid to common stockholders after period end October 31, 2022 October 29, 2021 October 31, 2022 October 29, 2021

Date of distributions paid to common stockholders after period end April 28, 2023 April 29, 2022

Dividends declared to series F preferred stockholders $ 17,502 $ 12,510

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Financial Statements

The following presents the components of the Company’s interest income and interest expense for the three and nine months ended September 30, 2022 and September 30, 2021.

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

2022 2021 2022 2021

The following presents the components of the Company’s interest income and interest expense for the three months ended March 31, 2023 and 2022.

For the Three Months Ended March 31,

Interest income (dollars in thousands)

4 unchanged sentences

Commercial investment portfolio (1) (2)

8,853 46,494 72,711 197,758

Reverse repurchase agreements 4,285 6

10 unchanged sentences

NET INCOME (LOSS) PER COMMON SHARE

The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and nine months ended September 30, 2022 and September 30, 2021.

For the Three Months Ended For the Nine Months Ended

September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021

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, 2023 and 2022.

For the Three Months Ended

March 31, 2023 March 31, 2022

(dollars in thousands, except per share data)

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Diluted $ ( 1.79 ) $ 5.46

The computations of diluted net income (loss) per share available (related) to common share for the three and nine months ended September 30, 2022 excludes 1.4 million and 0.7 million, respectively, of potentially dilutive restricted and performance stock units because their effect would have been anti-dilutive.

For the three months ended September 30, 2022 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860.

The computations of diluted net income (loss) per share available (related) to common share for the the three months ended March 31, 2023 and 2022 excludes 1.7 million and 0.6 million, respectively, of potentially dilutive restricted and performance stock units because their effect would have been anti-dilutive.

For the three months ended March 31, 2023, 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.

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

generate and its stockholder composition.

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

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

The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc.

and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs.

and certain subsidiaries of joint ventures, 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.

2 unchanged sentences

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

Thus, no accruals for penalties and interest were deemed necessary at September 30, 2022 and December 31, 2021.

Thus, no accruals for penalties and interest were deemed necessary at March 31, 2023 and December 31, 2022.

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.

1 unchanged sentence

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

During the three and nine months ended September 30, 2022, the Company recorded ($ 4.3 ) million and $ 45.7 million, respectively, of income tax expense/(benefit) attributable to its TRSs.

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

During the three months ended March 31, 2023 and 2022, the Company recorded $ 11.0 million and $ 26.5 million, respectively, of income tax expense (benefit) attributable to its TRSs.

The Company’s federal, state and local tax returns from 2019 and forward remain open for examination.

12 unchanged sentences

The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S.

The Company is exposed to credit risk on commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt.

The Company is exposed to credit risk on commercial mortgage-backed securities, residential mortgage loans, CRT securities, and other non-Agency mortgage-backed securities.

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.

1 unchanged sentence

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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Financial Statements

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

The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors.

These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.

engaging, onboarding and monitoring the performance of third-party vendors.

For mortgage loan servicers and sub-servicers, these procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.

LEASE COMMITMENTS AND CONTINGENCIES

The Company’s operating leases are primarily comprised of corporate office leases with remaining lease terms of approximately three years and 5 years, respectively.

The Company’s operating leases are primarily comprised of corporate office leases with remaining lease terms of approximately two years and five years , respectively.

The corporate office leases include options to extend for up to five years , however the extension terms were not included in the operating lease liability calculation.

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

The lease cost for the three and nine months ended September 30, 2022 and 2021 was $ 0.8 million and $ 2.4 million, and $ 0.8 million and $ 2.5 million, respectively.

Supplemental information related to leases as of and for the nine months ended September 30, 2022 was as follows:

Operating Leases Classification September 30, 2022

The lease cost for the three months ended March 31, 2023 and 2022 was $ 0.8 million and $ 0.8 million, respectively.

Supplemental information related to leases as of and for the three months ended March 31, 2023 was as follows:

Operating Leases Classification March 31, 2023

Assets (dollars in thousands)

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

There were no material contingencies at September 30, 2022 and December 31, 2021.

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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 September 30, 2022, Arcola had a minimum net capital requirement of $ 0.3 million.

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

Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at September 30, 2022 was $ 513.8 million with excess net capital of $ 513.5 million.

There were no material contingencies at March 31, 2023 and December 31, 2022.

SUBSEQUENT EVENTS

In October 2022, the Company exercised the $ 250 million incremental facility provision for financing its MSR investments.

The Preferred Stock Repurchase Program became effective on November 3, 2022, and shall expire on December 31, 2024.

Purchases made pursuant to the Preferred Stock Repurchase Program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements.

The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors.

The authorization does not obligate the Company to acquire any particular amount of Preferred Stock and the program may be suspended or discontinued at the Company’s discretion without prior notice.

On November 3, 2022, the Company entered into an Amendment No.

2 (collectively, the “Amendments”) to each of the separate Amended and Restated Distribution Agency Agreements, previously entered into on August 6, 2020 and amended by Amendment No.

1 to the Amended and Restated Distribution Agency Agreements on August 6, 2021 (collectively, the “Sales Agreements,” as amended by the Amendments, the “Amended Sales Agreements”), with each of J.P.

Morgan Securities LLC, Barclays Capital Inc., BofA Securities, Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co.

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

Under the terms of the Amended Sales Agreements, 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.

Refer to Item 5 for additional information related to this increase to the at-the-market program.

In April 2023, the Company completed and closed the securitization of residential mortgage loans, OBX 2023-NQM3, with a face value of $ 407.5 million.

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

In April 2023, the Company closed a new $ 250 million credit facility for the Company’s residential mortgage loans.

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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,” “should,” “estimate,” “project,” “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;

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.

Such statements include those relating to the Company’s future performance, macro outlook, the interest rate and credit environments, tax reform and future opportunities.

Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, 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 mortgage-backed securities (“MBS”) 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 the market value of the Company’s 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;

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

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.

the Company’s ability to grow its residential credit business;

the Company's ability to grow its mortgage servicing rights business;

credit risks related to the Company’s investments in credit risk transfer securities and residential mortgage-backed securities and related residential mortgage credit assets;

risks related to investments in mortgage servicing rights;

the Company’s ability to consummate any contemplated investment opportunities;

changes in government regulations or policy affecting the Company’s business;

the Company’s ability to maintain its 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.

the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940;

operational risks or risk management failures by us or critical third parties, including cybersecurity incidents;

and risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions.

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 any subsequent Quarterly Reports on Form 10-Q.

The Company does not undertake, and specifically disclaims 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, except as required by law.

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.

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Contractual Obligations

Off-Balance Sheet Arrangements

Commitments and Contractual Obligations with Unconsolidated Entities

Capital Management

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Reverse Stock Split

On September 8, 2022, we announced that our Board of Directors had unanimously approved a reverse stock split of our common stock at a ratio of 1-for-4 (the “Reverse Stock Split”).

On September 8, 2022, we announced that our Board had unanimously approved a reverse stock split of our common stock at a ratio of 1-for-4 (the “Reverse Stock Split”).

The Reverse Stock Split was effective following the close of business on September 23, 2022 (the “Effective Time”).

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Accordingly, for all historical periods presented, an amount equal to the par value of the reduced number of shares resulting from the Reverse Stock Split was reclassified from Common stock to Additional paid in capital in our Consolidated Statements of Financial Condition.

All references made to share or per share amounts in the accompanying consolidated financial statements and disclosures have been retroactively adjusted, where applicable, to reflect the effects of the Reverse Stock Split.

Business Environment

As 2022 continues to be a historically challenging year, the third quarter (“Q3 2022”) saw broader fixed income markets underperform and mortgage spreads widen once again.

Stubbornly elevated inflation readings, rapid Federal Reserve (“Fed”) interest rate hikes, tightening financial conditions, high volatility, geopolitical turmoil, and rising financial stability risks have weighed on markets.

The total return for the Bloomberg U.S.

Aggregate Bond Market index was negative 14.6% in the first three quarters of 2022, far worse than 1994 – the prior worst year in the history of the index – when the total return was negative 2.9%.

In light of this difficult environment, we experienced a negative economic return of 11.7% during Q3 2022.

The Fed has signaled it is determined to keep tightening monetary policy until inflation returns to its target, a commitment that has been echoed by all Fed officials since Fed Chair Jerome Powell’s speech at the Federal Reserve Bank of Kansas City’s Economic Symposium in Jackson Hole, Wyoming at the end of August.

This has caused a meaningful repricing of the Federal Funds Target Rate expectations.

The repricing in monetary policy rates has led to a sharp selloff in interest rates and high levels of volatility as surprises in economic data have fueled expectations for an ever-higher monetary policy rate.

In light of this volatility and price action, investor demand for fixed income products has been weak, particularly for Agency mortgage-backed securities (“Agency MBS”).

Q3 2022 represents only the third quarter in the last ten years in which banks and mutual funds, the two largest holders of mortgage securities and loans, have reduced their Agency MBS holdings simultaneously.

In light of the sharp selloff in interest rates and widening in mortgage spreads, the Freddie Mac national survey mortgage rate rose to 6.70% as of September 30, 2022, more than doubling in 2022 and contributing to a sharp slowdown in housing market activity.

Home price appreciation appears to have peaked and has begun to reverse in several cities, if not nationwide.

Given significantly reduced mortgage affordability from high home prices and rapidly rising mortgage rates, we now expect the housing market to correct downward, potentially erasing the entire home price appreciation seen thus far this year by early to mid 2023.

Although prices could fall significantly from their recent highs, we anticipate housing fundamentals could ultimately see help from the structural tailwinds of strong demographics and a shortage in construction over the last ten plus years.

Slower housing activity should benefit the Agency MBS market primarily by reducing net supply, although we believe it should not be enough to have a material impact on our Residential Credit portfolio in the near-term.

Homeowners have built up meaningful equity cushions, mortgage lending standards have been robust, and given low rates on existing mortgages, most homeowners with steady incomes are unlikely to default unless labor markets weaken considerably in coming months.

Despite the volatility in interest rate and mortgage markets, funding conditions have been stable.

Agency MBS repurchase agreements (“repo”), residential credit financing, and MSR financing facilities remain readily available.

Our financing rates have risen sharply but have been thus far commensurate with other short-term interest rates.

While high volatility could drive an increase in repo haircuts, we have seen limited evidence of such a dynamic thus far.

The favorable financing conditions

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continue to be driven by the high balances of investor cash in short-term interest rate products, best seen by the elevated bank reserve balances and the near record Reverse Repo facility with the Fed.

Notwithstanding the Fed balance sheet runoff reaching its steady-state run rate of up to $95 billion per month, financing conditions should remain accommodative as cash remains ample over the medium-term.

For much of this challenging year, we have remained focused on prudently managing our liquidity, leverage, and risk profile in the current environment.

We continue to position ourselves defensively given sustained volatility and have robust liquidity with $6.1 billion in unencumbered assets, including $4.3 billion in cash and unencumbered Agency MBS.

This represents over 50% of our equity as of September 30, 2022.

During Q3 2022, we maintained our economic leverage around 6.5x until mid-September.

However, in light of the sharp market selloff in the last two weeks of the Q3 2022, our leverage increased to end Q3 2022 at 7.1x.

While we are comfortable with our current portfolio positioning, we would expect our leverage range to trend lower over the long term, reflective of our target capital allocation.

In terms of our portfolio mix, we modestly grew each of our three strategies with our total portfolio assets increasing to $86.2 billion in market value, up from $82.3 billion in the quarter prior.

Starting with Agency, despite our capital allocation decreasing to 67% from 71% in the prior quarter, our overall Agency portfolio holdings grew by $3 billion in market value as we selectively deployed capital from our accretive equity raises.

Meanwhile, Residential Credit portfolio growth was focused on opportunistic additions of securities that are less susceptible to home price declines in light of deteriorating housing market fundamentals.

Although we believe that our whole loan portfolio is well-positioned amidst further anticipated weakness in the sector, we have begun tightening our already stringent credit standards and expect the pace of securitizations to moderate in the near-term.

Nevertheless, we remained the largest nonbank issuer of prime-jumbo and expanded credit MBS this quarter, pricing three residential whole loan securitizations totaling $1.1 billion in proceeds.

This has largely been a result of our residential whole loan correspondent channel, which recently achieved over $2 billion in aggregated loans since its inception in April 2021.

Finally, we have now further scaled our MSR platform, having more than tripled our portfolio size year-over-year.

The MSR portfolio benefits from stable cash flows in the current environment of low prepayments and helps hedge the risks of further slowdown in housing activity.

We were active in the market during Q3 2022, growing our portfolio by nearly 10%.

Though we were the second largest purchaser of MSR year-to-date through September 30, 2022, we expect to be measured with respect to future growth considerate of the sector’s relative attractiveness and our risk parameters.

Overall, we expect market challenges will persist in the near-term and expect to maintain a defensive posture until volatility subsides.

While spreads across our investment strategies are historically attractive, we are focused on liquidity management and optionality in light of potential additional market turbulence in the near-term.

When the market outlook improves, we expect to be well-positioned to take advantage of attractive opportunities across our three businesses.

Economic Environment

The pace of economic growth rebounded in Q3 2022 relative to the quarterly pace seen in the first half of 2022, with U.S.

gross domestic product (“GDP”) rising 2.6 percent on a seasonally adjusted annualized rate.

Growth improved as consumption and investment activity, outside of residential investment, remained robust, while inventories and net exports provided less of a drag on economic activity than in the first six months of the year.

According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose by an average 372 thousand workers during Q3 2022.

This is slightly above the 349 thousand workers added during the second quarter 2022.

Overall, employment gains remain strong as the unemployment rate fell to 3.5% during Q3 2022.

Meanwhile, U.S.

job openings remain above historical levels.

Wage growth, as measured by the year-over-year change in private sector average hourly earnings, slowed somewhat during the quarter, reading 5.0% in September compared to 5.2% in June 2022.

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

The headline PCE measure increased by 6.2% year-over-year in September 2022.

Meanwhile, the more stable core PCE measure, which excludes volatile food and energy prices, registered a 5.1% year-over-year increase.

Prices remain meaningfully elevated, which is driven by continued strong demand for services, while goods prices have eased somewhat.

Inflation pressures remain a major challenge for the United States and the broader global economy as price pressures have failed to ease thus far.

While forecasts continue to see a slowdown in coming months, the degree of the slowdown remains very uncertain.

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

to ensure full employment and stable prices.

Given continued strong labor markets and significantly elevated inflation, the FOMC is aggressively tightening monetary policy in an attempt to meets its mandate.

As such, the FOMC raised the Federal Funds Target Rate by 150 bps to the 3.00% - 3.25% range during the third quarter.

It also signaled that additional rate increases of potentially similar magnitudes will be necessary in the coming months.

Regarding its balance sheet, the FOMC transitioned to implement the full

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aggregate pace of asset maturities of up to $95 billion per month across U.S.

Treasuries and Agency MBS starting in September.

During Q3 2022, the 10-year U.S.

Treasury rate continued to rise from 3.01% on June 30, 2022 to 3.83% on September 30, 2022.

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

Treasury rate, widened further over the course of Q3 2022 to 185 basis points on September 30, 2022 and is now 137 basis points wider than at the end of the third quarter 2021.

This widening continues to be driven by the meaningful tightening in monetary policy, elevated financial market volatility, and reduced investor demand for Agency MBS.

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

September 30, 2022 December 31, 2021 September 30, 2021

30-Year mortgage current coupon 5.68% 2.07% 1.97%

Mortgage basis 185 bps 56 bps 48 bps

Treasury rate 3.83% 1.51% 1.49%

1-Month 3.14% 0.10% 0.08%

6-Month 4.23% 0.34% 0.16%

OIS SOFR Swaps

1-Month 3.05% 0.05% 0.05%

6-Month 4.00% 0.19% 0.05%

London Interbank Offered Rate (“LIBOR”) Transition

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

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

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

The firm has a plan facilitating an orderly conversion to alternative reference rates.

The plan included steps to evaluate exposure;

review contracts;

assess impact to our business;

process and technology and outline a communication strategy with shareholders;

regulators and other stakeholders.

As LIBOR cessation enters its final stages, we continue to remain on track with our transition plan, which requires different solutions depending on the underlying asset or liability.

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

Under the legislation, the Board of Governors of the Federal Reserve is required to promulgate rules designating a SOFR-based rate and incorporating the statutory spread adjustments for each LIBOR tenor (which match the ARRC/ISDA spread adjustments, including the 1-year transition period for consumer loans) as the replacement rates for covered LIBOR contracts.

The Federal Reserve has proposed (i) SOFR compounded in arrears for derivatives, using the same methodology as the ISDA protocol, (ii) CME Term SOFR for all other covered non-GSE cash products and (iii) a 30-day compounded SOFR average for certain GSE contracts, but the proposed rules are not yet final.

When final rules are released, we will evaluate the impact of the the final rules on assets and liabilities covered by the legislation and continue to consider all available options with respect to our preferred stock, which include liability management actions such as tenders, calls, exchange offers, language amendments, changing the calculation agent, and/or allowing fallbacks to trigger.

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

As of September 30, 2022, we had $1.5 billion of USD LIBOR-linked preferred stock that may remain outstanding beyond the June 30, 2023 cessation date.

Income Tax Reform

On August 16, 2022, tax legislation, informally known as the Inflation Reduction Act (the “IRA”), was enacted, and included several changes impacting U.S.

federal income tax laws applicable to corporations.

The components most relevant to our business are the imposition of a 1% excise tax on stock repurchases by publicly-traded corporations and a 15% corporate minimum tax (“CMT”) on GAAP financial statement income.

However, the new legislation explicitly excludes REITs from the law and we do not expect the CMT to apply to our TRSs.

In the event the application of the CMT were to be imposed on our

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TRSs, we do not expect a material impact to our operations as it would simply affect the timing of the payment of income taxes already accrued.

While technical corrections or other amendments to the IRA or administrative guidance interpreting the IRA may be forthcoming, we continue to analyze the overall effects of the IRA to our operations, our industry and the economy in general.

Results of Operations

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

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

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

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

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

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

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers.

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

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

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

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

In addition, beginning with the quarter ended March 31, 2022, we consolidated certain line items in our Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation.

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

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

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

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

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

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Net Income (Loss) Summary

The following table presents financial information related to our results of operations as of and for the three and nine months ended September 30, 2022 and 2021.

As of and for the Three Months Ended September 30,

As of and for the Nine Months Ended September 30,

2022 2021 2022 2021

(dollars in thousands, except per share data)

Interest income $ 678,488 $ 412,972 $ 1,979,953 $ 1,560,256

Interest expense 400,491 50,438 645,888 187,458

Net interest income 277,997 362,534 1,334,065 1,372,798

Servicing and related income 74,486 17,948 164,886 37,696

Servicing and related expense 7,780 3,012 17,486 7,912

Net servicing income 66,706 14,936 147,400 29,784

Other income (loss) (585,069) 181,179 1,297,150 718,597

Total general and administrative expenses 37,922 43,882 119,724 145,313

Income (loss) before income taxes (278,288) 514,767 2,658,891 1,975,866

Income taxes (4,311) (6,767) 45,657 (1,954)

Net income (loss) (273,977) 521,534 2,613,234 1,977,820

Net income (loss) attributable to noncontrolling interests 1,287 2,290 (453) 3,405

Net income (loss) attributable to Annaly (275,264) 519,244 2,613,687 1,974,415

Dividends on preferred stock 26,883 26,883 80,649 80,649

Net income (loss) available (related) to common stockholders $ (302,147) $ 492,361 $ 2,533,038 $ 1,893,766

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

Basic $ (0.70) $ 1.36 $ 6.46 $ 5.34

Diluted $ (0.70) $ 1.36 $ 6.45 $ 5.34

Weighted average number of common shares outstanding

Basic 429,858,876 361,328,979 392,172,655 354,606,052

Diluted 429,858,876 361,589,467 392,445,034 354,875,551

Other information

Investment portfolio at period-end $ 79,309,699 $ 74,809,185 $ 79,309,699 $ 74,809,185

Average total assets $ 79,522,007 $ 79,519,369 $ 77,998,303 $ 83,215,858

Average equity $ 11,020,728 $ 13,678,522 $ 11,678,888 $ 13,861,609

GAAP leverage at period-end (1)

5.8:1 4.4:1 5.8:1 4.4:1

GAAP capital ratio at period-end (2)

12.8 % 17.9 % 12.8 % 17.9 %

Annualized return on average total assets (1.38 %) 2.62 % 4.47 % 3.17 %

Annualized return on average equity (9.94 %) 15.25 % 29.83 % 19.02 %

Net interest margin (3)

1.42 % 2.01 % 2.39 % 2.38 %

Average yield on interest earning assets (4)

3.47 % 2.29 % 3.55 % 2.70 %

Average GAAP cost of interest bearing liabilities (5)

2.38 % 0.32 % 1.36 % 0.37 %

Net interest spread 1.09 % 1.97 % 2.19 % 2.33 %

Weighted average experienced CPR for the period 9.8 % 23.1 % 13.8 % 24.5 %

Weighted average projected long-term CPR at period-end 7.6 % 12.7 % 7.6 % 12.7 %

Common stock book value per share $ 19.94 $ 33.55 $ 19.94 $ 33.55

Non-GAAP metrics *

Interest income (excluding PAA) $ 633,074 $ 473,698 $ 1,627,502 $ 1,560,019

Economic interest expense (5)

$ 259,381 $ 104,849 $ 566,327 $ 404,703

Economic net interest income (excluding PAA) $ 373,693 $ 368,849 $ 1,061,175 $ 1,155,316

Premium amortization adjustment cost (benefit) $ (45,414) $ 60,726 $ (352,451) $ (237)

Earnings available for distribution (6)

$ 480,696 $ 437,471 $ 1,402,129 $ 1,328,348

Earnings available for distribution per average common share $ 1.06 $ 1.14 $ 3.37 $ 3.52

Annualized EAD return on average equity (excluding PAA) 17.57 % 12.81 % 16.09 % 12.79 %

Economic leverage at period-end (1)

7.1:1 5.8:1 7.1:1 5.8:1

Economic capital ratio at period-end (2)

11.8 % 14.2 % 11.8 % 14.2 %

Net interest margin (excluding PAA) (3)

1.98 % 2.04 % 2.07 % 2.01 %

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

3.24 % 2.63 % 2.92 % 2.70 %

Average economic cost of interest bearing liabilities (5)

1.54 % 0.66 % 1.19 % 0.79 %

Net interest spread (excluding PAA) 1.70 % 1.97 % 1.73 % 1.91 %

The first three months of 2023 represented another volatile quarter in which initial economic optimism about a slowdown in inflation and a more stable interest rate outlook ultimately faded given banking sector turbulence.

The Silicon Valley Bank-induced turmoil led to questions about the outlook for the banking system, the economy, and monetary policy.

Moreover, it increased bond market volatility, resulting in some of the highest levels of realized and implied fixed income volatility since the Great Financial Crisis.

Outside of the banking sector, U.S.

economic data has proven relatively resilient, with the labor market still recording 345,000 jobs per month this quarter and U.S.

inflation readings staying above the Federal Reserve’s target measure.

Although inflation has slowed, the improvement has been slower than initially anticipated as strong service sector inflation remains supported by sound wage growth.

However, we anticipate the Federal Reserve is likely close to the end of its hiking cycle and will enter a period of a prolonged hold in short-term interest rates as economic data suggests a slowdown in activity.

A pause in Federal Reserve rate hikes should lower interest rate volatility going forward all else equal, though other risk events – most notably the potential Congressional failure to raise the debt ceiling in time – remain on the horizon.

Agency MBS performance diverged meaningfully each month in the first quarter given the interest and spread volatility.

In January 2023, MBS spreads tightened significantly, driven by the decline in implied volatility and strong inflows into fixed income funds.

Mortgage spreads began to widen in February, however, as interest rates rose amid renewed inflation fears.

This ultimately gave way to more meaningful cheapening in March as volatility spiked on the news of both Silicon Valley Bank and Signature Bank entering Federal Deposit Insurance Corporation (“FDIC”) receivership.

In total, mortgage option-adjusted spreads widened approximately 5-15 basis points across coupons during the quarter.

We grew our Agency MBS portfolio modestly in this environment commensurate with the accretive equity raised early in the quarter while maintaining appropriate leverage.

We continued our strategy of moving exposure from lower coupons into intermediate and higher coupons.

At quarter end, only 5% of our portfolio was in 2.5% coupons or lower, down from 34% a year ago.

As a result of this shift, the portfolio was better protected from the spread widening that occurred in lower coupons due to the FDIC receivership portfolio sales.

Additionally, over 50% of our portfolio is in what we would define as intermediate coupons, 3.5% through 4.5%, which remain more insulated from potential bank sales while also avoiding the supply pressure of production coupons.

This dynamic drove investors to shift into these coupons, driving marginally positive hedged performance across this portion of our portfolio, despite headline MBS spreads widening over the quarter.

The management of our interest rate exposure also helped navigate the historic volatility experienced in March.

Over seven consecutive days starting March 9, 2023, the 2-year Treasury note moved in excess of 20 basis points per day.

Throughout this period, our portfolio was well-positioned and we were able to replace maturing swaps at attractive levels.

In addition, we

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Item 1. Financial Statements