What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-03 · 369 added, 298 removed, 1265 unchanged (35% of the section changed)

Management’s Discussion and Analysis

continued to rotate hedges out of Treasury futures into SOFR swaps, which we see as a more efficient hedge for our portfolio and also more closely matches our repo funding costs in a rising rate environment.

After a difficult quarter, Agency MBS are trading at historically attractive levels in terms of both nominal and option-adjusted spreads.

However, the technical picture remains challenged given the substantial amount of supply the private market needs to absorb, with relative value investors representing the primary source of demand.

Organic supply is expected to approach $200 billion, while Federal Reserve portfolio runoff and anticipated bank sales should push total supply to the private market to nearly $500 billion over the course of 2023.

While MBS spreads should be supported when volatility subsides, it is likely that valuations will settle at wider levels than prior episodes when banks were more active in the market.

In our Residential Credit business, performance was mixed across products at the end of the quarter, as benchmark credit risk transfer (“CRT”) security spreads were 10-25 basis points tighter while AAA-rated non-qualified mortgage (“Non-QM”) securities ultimately underperformed and widened 30-40 basis points from 2022 year-end levels.

Consistent with the Agency market, credit markets experienced strong performance in the first two months of the year, only to reverse course in mid-March given elevated market volatility and the resulting fallout surrounding the aforementioned regional bank failures.

Our residential credit portfolio ended the first quarter marginally higher at $5.2 billion in market value, representing 18% of the firm’s capital.

The increase in market value was driven by opportunistic purchases of predominantly investment grade CRT and retention of OBX assets generated through securitization.

Our excess warehouse capacity and liquidity management allowed us to be selective in accessing the capital markets via our OBX securitization platform.

We securitized three transactions in the first quarter totaling $1.1 billion, including two Non-QM securitizations and a Jumbo partnership transaction, all closing before February month end and the subsequent widening of Non-QM spreads.

Finally, within our MSR portfolio, consistent with recent quarters, we remained patient, adding just one bulk package for roughly $3 billion in unpaid principal balance (“UPB”) during the quarter.

Following this transaction, our portfolio is now comprised of nearly $2 billion in market value and $130 billion UPB of very low note rate, high credit quality MSR with an attractive risk profile, as evidenced by serious delinquencies remaining less than 50 basis points.

Further, we continue to see robust, stable cash flows with recent portfolio prepayment speeds trending below 3 CPR.

Overall, we remain confident in our outlook and positioning across our three businesses and continue to favor a more conservative posture given the potential for sustained volatility.

As noted, a more careful approach to leverage and liquidity has been beneficial in this environment where fundamentals have improved while some technical headwinds persist.

Economic Environment

Economic activity moderated in the first quarter as U.S.

gross domestic product (“GDP”) rose 1.1 percent on a seasonally adjusted annualized rate.

Consumption, however, remained strong as spending was boosted by warmer weather during January and February and an increase in social security payments for the annual cost of living adjustment.

However, the effect of higher interest rates from the Federal Reserve and tighter lending standards from the U.S.

regional banking sector are potential headwinds to growth in the near term.

labor market remains tight.

According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose at a faster rate in the first quarter than the prior quarter, with a monthly average 345,000 workers added in the first quarter of 2023 compared to an average 284,000 workers in the fourth quarter of 2022.

Additionally, the unemployment rate ended the quarter at 3.5% after falling to the historically low level of 3.4% in January.

However, labor demand has declined somewhat, and wage growth continues to slow from peak levels seen in 2022.

Job openings, as measured by the Bureau of Labor Statistics, declined by 1.6 million openings in the quarter, and wage growth, as measured by the year-over-year change in private sector average hourly earnings, declined to 4.2% in March 2023 compared to 4.8% in December 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 eased to 4.2% year-over-year in March 2023.

Meanwhile, the more stable core PCE measure, which excludes volatile food and energy prices, registered a 4.6% year-over-year increase.

Inflation pressures remain a major challenge for the United States and the broader global economy as price increases have moderated more slowly than previously expected.

While forecasts continue to see further moderation in coming months, the degree of the slowdown remains 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 elevated inflation, the FOMC has aggressively tightened monetary policy to ensure it meets its mandate.

As such, the FOMC raised the Federal Funds Target Rate by 50 basis points to the 4.75% - 5.0% range during the first quarter.

It also signaled that additional rate increases will likely be necessary in the coming months, although it will be closely monitoring incoming data in the wake of the regional banking turmoil.

Regarding its balance sheet, the FOMC continues to decline at a pace of $95 billion per month across U.S.

Treasuries and Agency MBS.

However, the Federal Reserve balance sheet expanded in the quarter due to the increase in lending to support the banking system.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Federal Reserve announced the creation of the Bank Term Funding Program on March 12, 2023, offering loans to certain depository institutions to safeguard deposits.

During the first quarter of 2023, the 10-year U.S.

Treasury rate declined from 3.87% on December 31, 2022 to 3.47% on March 31, 2023.

However, interest rate volatility was meaningfully elevated during the quarter, as seen in the 2-year U.S.

Treasury rate that moved within a 130 basis point range in the month of March alone.

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

Treasury rate, widened by 7 basis points over the course of the quarter to 158 basis points on March 31st, 2023.

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:

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

30-Year mortgage current coupon 5.05% 5.39% 3.49%

Mortgage basis 158 bps 152 bps 115 bps

Treasury rate 3.47% 3.87% 2.34%

1-Month 4.86% 4.39% 0.45%

6-Month 5.31% 5.14% 1.47%

OIS SOFR Swaps

1-Month 4.81% 4.36% 0.29%

6-Month 4.91% 4.80% 1.07%

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 representative publication of such LIBOR tenors immediately after the last publication on June 30, 2023.

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

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

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.

The Board of Governors of the Federal Reserve promulgated rules required by this legislation.

Subsequent to March 31, 2023, in accordance with procedures prescribed by the CME Group, all of the Company’s remaining LIBOR interest rate swaps cleared through the CME Group were converted into SOFR interest rate swaps.

We continue to consider all available options with respect to our preferred stock, including those available under the federal legislation.

As of March 31, 2023, we had $1.5 billion of USD LIBOR-linked preferred stock that may remain outstanding beyond the June 30, 2023 cessation date.

See the risk factor titled “The discontinuation of LIBOR may affect our results” in Part I, Item 1A “Risk Factors” in our most recent annual report on Form 10-K for additional information.

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 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Net Income (Loss) Summary

The following table presents financial information related to our results of operations as of and for the three months ended March 31, 2023 and 2022.

As of and for the Three Months Ended March 31,

(dollars in thousands, except per share data)

Interest income $ 818,250 $ 655,850

Interest expense 798,787 74,922

Net interest income 19,463 580,928

Servicing and related income 84,273 34,715

Servicing and related expense 7,880 3,757

Net servicing income 76,393 30,958

Other income (loss) (883,323) 1,484,320

Total general and administrative expenses 40,828 45,764

Income (loss) before income taxes (828,295) 2,050,442

Income taxes 11,033 26,548

Net income (loss) (839,328) 2,023,894

Net income (loss) attributable to noncontrolling interests 4,928 1,639

Net income (loss) attributable to Annaly (844,256) 2,022,255

Dividends on preferred stock 31,875 26,883

Net income (loss) available (related) to common stockholders $ (876,131) $ 1,995,372

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

Basic $ (1.79) $ 5.46

Diluted $ (1.79) $ 5.46

Weighted average number of common shares outstanding

Basic 489,688,364 365,340,909

Diluted 489,688,364 365,612,991

Other information

Investment portfolio at period-end $ 82,949,575 $ 73,349,352

Average total assets $ 84,341,365 $ 76,474,599

Average equity $ 11,639,230 $ 12,337,048

GAAP leverage at period-end (1)

GAAP capital ratio at period-end (2)

13.7 % 15.1 %

Annualized return on average total assets (3.98 %) 10.59 %

Annualized return on average equity (28.84 %) 65.62 %

Net interest margin (3)

0.09 % 3.20 %

Average yield on interest earning assets (4)

3.96 % 3.61 %

Average GAAP cost of interest bearing liabilities (5)

4.52 % 0.48 %

Net interest spread (0.56 %) 3.13 %

Weighted average experienced CPR for the period 5.5 % 16.7 %

Weighted average projected long-term CPR at period-end 8.4 % 9.5 %

Common stock book value per share $ 20.77 $ 27.08

Non-GAAP metrics *

Interest income (excluding PAA) $ 818,741 $ 476,334

Economic interest expense (5)

$ 413,081 $ 137,463

Economic net interest income (excluding PAA) $ 405,660 $ 338,871

Premium amortization adjustment cost (benefit) $ 491 $ (179,516)

Earnings available for distribution (6)

$ 427,130 $ 430,631

Earnings available for distribution per average common share $ 0.81 $ 1.11

Annualized EAD return on average equity (excluding PAA) 14.82 % 14.01 %

Economic leverage at period-end (1)

Economic capital ratio at period-end (2)

13.2 % 13.1 %

Net interest margin (excluding PAA) (3)

1.76 % 2.04 %

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

3.96 % 2.62 %

Average economic cost of interest bearing liabilities (5)

2.34 % 0.89 %

Net interest spread (excluding PAA) 1.62 % 1.73 %

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

* Represents a non-GAAP financial measure.

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

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

(2) GAAP capital ratio is computed as total equity divided by total assets.

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(6) Excludes dividends on preferred stock.

Net income (loss) was ($274.0) million, which includes $1.3 million attributable to noncontrolling interests, or ($0.70) per average basic common share, for the three months ended September 30, 2022 compared to $521.5 million, which includes $2.3 million attributable to noncontrolling interests, or $1.36 per average basic common share, for the same period in 2021.

We attribute the majority of the change in net income (loss) to an unfavorable change in net gains (losses) on investments and other and net interest income, partially offset by a favorable change in net gains (losses) on derivatives and net servicing income.

Net gains (losses) on investments and other was ($2.7) billion for the three months ended September 30, 2022 compared to $102.8 million for the same period in 2021.

Net interest income for the three months ended September 30, 2022 was $278.0 million compared to $362.5 million for the same period in 2021.

Net gains (losses) on derivatives was $2.1 billion for the three months ended September 30, 2022 compared to $85.0 million for the same period in 2021.

Net servicing income for the three months ended September 30, 2022 was $66.7 million compared to $14.9 million for the same period in 2021.

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

Net income (loss) was $2.6 billion, which includes ($0.5) million attributable to noncontrolling interests, or $6.46 per average basic common share, for the nine months ended September 30, 2022 compared to $2.0 billion which includes $3.4 million attributable to noncontrolling interests, or $5.34 per average basic common share, for the same period in 2021.

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

Net gains on derivatives for the nine months ended September 30, 2022 was $4.8 billion compared to $672.4 million for the same period in 2021.

Business divestiture-related (losses) was ($27.2) million for the nine months ended September 30, 2022 compared to ($262.0) million for the same period in 2021.

Net gains (losses) on investments and other was ($3.5) billion for the nine months ended September 30, 2022 compared to $161.4 million for the same period in 2021.

Net income (loss) was ($839.3) million, which includes $4.9 million attributable to noncontrolling interests, or ($1.79) per average basic common share, for the three months ended March 31, 2023 compared to $2.0 billion, which includes $1.6 million attributable to noncontrolling interests, or $5.46 per average basic common share, for the same period in 2022.

We attribute the majority of the change in net income (loss) to an unfavorable change in net gains (losses) on derivatives and net interest income, partially offset by a favorable change in net gains (losses) on investments and other and net servicing income.

Net gains (losses) on derivatives was ($900.8) million for the three months ended March 31, 2023 compared to $1.6 billion for the same period in 2022.

Net interest income for the three months ended March 31, 2023 was $19.5 million compared to $580.9 million for the same period in 2022.

Net gains (losses) on investments and other was $1.7 million for the three months ended March 31, 2023 compared to ($159.8) million for the same period in 2022.

Net servicing income for the three months ended March 31, 2023 was $76.4 million compared to $31.0 million for the same period in 2022.

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

Earnings available for distribution were $480.7 million, or $1.06 per average common share, for the three months ended September 30, 2022, compared to $437.5 million, or $1.14 per average common share, for the same period in 2021.

The change in earnings available for distribution during the three months ended September 30, 2022 compared to the same period in 2021 was primarily due to lower premium amortization expense, excluding PAA, resulting from lower prepayment speed projections, a favorable change in the net interest component of interest rate swaps, and higher net servicing income, partially offset by higher interest expense from an increase in average borrowing rates and average interest bearing liabilities.

Earnings available for distribution were $1.4 billion, or $3.37 per average common share, for the nine months ended September 30, 2022, compared to $1.3 billion, or $3.52 per average common share, for the same period in 2021.

The change in earnings available for distribution during the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to lower premium amortization expense, excluding PAA, resulting from lower prepayment speed projections, a favorable change in the net interest component of interest rate swaps, higher TBA dollar roll income and higher net servicing income, partially offset by higher interest expense from an increase in average borrowing rates.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Earnings available for distribution were $427.1 million, or $0.81 per average common share, for the three months ended March 31, 2023, compared to $430.6 million, or $1.11 per average common share, for the same period in 2022.

The change in earnings available for distribution during the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to higher interest expense from an increase in average borrowing rates and average interest bearing liabilities and a decline in TBA dollar roll income on reduced specialness, partially offset by lower premium amortization expense, excluding PAA, resulting from lower prepayment speed projections, a favorable change in the net interest component of interest rate swaps, and higher net servicing income.

Non-GAAP Financial Measures

13 unchanged sentences

• net interest spread (excluding PAA).

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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We believe these non-GAAP measures provide management and investors with additional details regarding our underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to provide additional transparency into the operating performance of our portfolio.

In addition, EAD serves as a useful indicator for investors in evaluating the Company's performance and ability to pay dividends.

In addition, EAD serves as a useful indicator for investors in evaluating our performance and ability to pay dividends.

Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by our invested equity capital.

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The following table presents a reconciliation of GAAP financial results to non-GAAP earnings available for distribution for the periods presented:

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022 2021 2022 2021

For the Three Months Ended March 31,

(dollars in thousands, except per share data)

GAAP net income (loss) $ (839,328) $ 2,023,894

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

Adjustments to exclude reported realized and unrealized (gains) losses

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Loan loss provision (reversal) (2)

(1,613) (6,771) (30,181) (150,563)

Business divestiture-related (gains) losses — 354

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

758 1,122 3,190 14,081

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

1 unchanged sentence

Transaction expenses and non-recurring items (5)

1,712 2,201 6,813 4,046

Income tax effect of non-EAD income (loss) items 8,278 27,091

3 unchanged sentences

(43,423) (19,652)

EAD attributable to noncontrolling interests (3,470) (1,639)

Premium amortization adjustment cost (benefit) 491 (179,516)

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

The net interest component of interest rate swaps totaled $141.1 million and ($54.4) million for the three months ended September 30, 2022 and September 30, 2021, respectively and $79.6 million and ($217.2) million for the nine months ended September 30, 2022 and September 30, 2021, respectively.

(2) Includes $0.0 million and ($0.6) million for the three months ended September 30, 2022 and 2021, respectively, and ($2.3) million and ($5.3) million for the nine months ended September 30, 2022 and 2021, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other, net in the Consolidated Statements of Comprehensive Income (Loss).

The net interest component of interest rate swaps totaled $385.7 million and ($62.5) million for the three months ended March 31, 2023 and 2022, respectively.

(2) Includes $0.0 million and $0.2 million for the three months ended March 31, 2023 and 2022, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other, net in the Consolidated Statements of Comprehensive Income (Loss).

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

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

(5) The three and nine months ended September 30, 2022 and 2021 includes costs incurred in connection with securitizations of residential whole loans.

(5) The three months ended March 31, 2023 and 2022 includes costs incurred in connection with securitizations of residential whole loans.

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

CMBX coupon income totaled $1.1 million and $1.2 million for the three months ended September 30, 2022 and 2021, respectively and $3.2 million and $4.1 million for the nine months ended September 30, 2022 and 2021, respectively.

CMBX coupon income totaled $1.1 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively.

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

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

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

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

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

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2022 2021 2022 2021

For the Three Months Ended March 31,

(dollars in thousands)

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

September 30, 2022 September 30, 2021

March 31, 2023 March 31, 2022

Economic leverage ratio reconciliation

8 unchanged sentences

673,431 775,432

Debt included in liabilities of disposal group held for sale — 113,362

Total GAAP debt

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(673,431) (775,432)

Non-recourse debt included in liabilities of disposal group held for sale — (113,362)

Total recourse debt $ 61,243,018 $ 52,626,503

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

September 30, 2022 September 30, 2021

March 31, 2023 March 31, 2022

Economic capital ratio reconciliation

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

We did not enter into any MAC interest rate swaps during the three and nine months ended September 30, 2022.

We did not enter into any MAC interest rate swaps during the three months ended March 31, 2023.

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

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For the three months ended (dollars in thousands)

September 30, 2022 $ 678,488 $ (45,414) $ 633,074

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

For the nine months ended

September 30, 2022 $ 1,979,953 $ (352,451) $ 1,627,502

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

March 31, 2023 $ 818,250 $ 491 $ 818,741

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

* Represents a non-GAAP financial measure.

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For the three months ended (dollars in thousands)

September 30, 2022 $ 400,491 $ (141,110) $ 259,381 $ 277,997 $ (141,110) $ 419,107 $ (45,414) $ 373,693

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

For the nine months ended

September 30, 2022 $ 645,888 $ (79,561) $ 566,327 $ 1,334,065 $ (79,561) $ 1,413,626 $ (352,451) $ 1,061,175

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

March 31, 2023 $ 798,787 $ (385,706) $ 413,081 $ 19,463 $ (385,706) $ 405,169 $ 491 $ 405,660

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

* Represents a non-GAAP financial measure.

2 unchanged sentences

Prepayment speeds, as reflected by the CPR and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty.

In general, as prepayment speeds and expectations of prepayment speeds on our Agency MBS portfolio increase, related purchase premium amortization increases,

In general, as prepayment speeds and expectations of prepayment speeds on our Agency MBS portfolio increase, related purchase premium amortization increases, thereby reducing the yield on such assets.

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

ANNALY CAPITAL MANAGEMENT, INC.

1 unchanged sentence

Management’s Discussion and Analysis

thereby reducing the yield on such assets.

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

Experienced CPR (1)

1 unchanged sentence

For the three months ended

September 30, 2022 9.8 % 7.6 %

September 30, 2021 23.1 % 12.7 %

For the nine months ended

September 30, 2022 13.8 % 7.6 %

September 30, 2021 24.5 % 12.7 %

(1) For the three and nine months ended September 30, 2022 and 2021, respectively.

(2) At September 30, 2022 and 2021, respectively.

March 31, 2023 5.5 % 8.4 %

March 31, 2022 16.7 % 9.5 %

(1) For the three months ended March 31, 2023 and 2022, respectively.

(2) At March 31, 2023 and 2022, respectively.

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

11 unchanged sentences

For the three months ended (dollars in thousands)

September 30, 2022 $ 78,143,337 $ 633,074 3.24 % $ 65,755,563 $ 259,381 1.54 % 373,693 1.70 %

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

For the nine months ended

September 30, 2022 $ 74,285,756 $ 1,627,502 2.92 % $ 62,689,128 $ 566,327 1.19 % 1,061,175 1.73 %

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

March 31, 2023 $ 82,644,998 $ 818,741 3.96 % $ 70,635,632 $ 413,081 2.34 % 405,660 1.62 %

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

* Represents a non-GAAP financial measure.

4 unchanged sentences

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Net Interest Margin (excluding PAA)

3 unchanged sentences

For the three months ended (dollars in thousands)

September 30, 2022 $ 633,074 105,543 (259,381) $ 479,236 $ 78,143,337 18,837,475 $ 96,980,812 1.98 %

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

For the nine months ended

September 30, 2022 $ 1,627,502 396,708 (566,327) $ 1,457,883 $ 74,285,756 19,544,521 $ 93,830,277 2.07 %

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

March 31, 2023 $ 818,741 18,183 (413,081) $ 423,843 $ 82,644,998 13,949,884 $ 96,594,882 1.76 %

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

* Represents a non-GAAP financial measure.

1 unchanged sentence

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

CMBX coupon income totaled $1.1 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively.

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

1 unchanged sentence

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Average Economic Cost of Interest Bearing Liabilities

12 unchanged sentences

For the three months ended

September 30, 2022 $ 65,755,563 $ 63,000,978 $ 259,381 1.54 % 2.47 % 3.56 % (1.09 %) (0.93 %) (2.02 %)

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

For the nine months ended

September 30, 2022 $ 62,689,128 $ 63,000,978 $ 566,327 1.19 % 1.25 % 2.17 % (0.92 %) (0.06 %) (0.98 %)

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

March 31, 2023 $ 70,635,632 $ 70,472,360 $ 413,081 2.34 % 4.62 % 5.16 % (0.54 %) (2.28 %) (2.82 %)

March 31, 2022 $ 61,865,292 $ 60,113,888 $ 137,463 0.89 % 0.23 % 0.80 % (0.57 %) 0.66 % 0.09 %

* Represents a non-GAAP financial measure.

1 unchanged sentence

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

Economic interest expense increased by $154.5 million for the three months ended September 30, 2022 compared to the same period in 2021, primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates and higher average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was $141.1 million for the three months ended September 30, 2022 compared to ($54.4) million for the same period in 2021.

Economic interest expense increased by $161.6 million for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates, partially offset by lower average interest bearing liabilities and the change in the net interest component of interest rate swaps, which was $79.6 million for the nine months ended September 30, 2022 compared to ($217.2) million for the same period in 2021.

Economic interest expense increased by $275.6 million for the three months ended March 31, 2023 compared to the same period in 2022, primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates and higher average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was $385.7 million for the three months ended March 31, 2023 compared to ($62.5) million for the same period in 2022.

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

1 unchanged sentence

The mortgage-backed securities we own pay principal and interest towards the end of each month and the mortgage-backed securities we purchase are typically settled during the beginning of the month.

As a result, depending on the amount of mortgage-backed securities we have committed to purchase, we may retain the principal and interest we receive

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

in the prior month, or we may use it to pay down our borrowings.

As a result, depending on the amount of mortgage-backed securities we have committed to purchase, we may retain the principal and interest we receive in the prior month, or we may use it to pay down our borrowings.

Moreover, we generally use interest rate swaps, swaptions and other derivative instruments to hedge our portfolio, and as we pledge or receive collateral under these agreements, our borrowings on any given day may be increased or decreased.

2 unchanged sentences

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

At September 30, 2022 the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and MSR.

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

At March 31, 2023 and December 31, 2022, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and MSR.

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

1 unchanged sentence

Other Income (Loss)

For the Three Months Ended September 30, 2022 and 2021

For the Three Months Ended March 31, 2023 and 2022

Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments was ($1.5) billion for the three months ended September 30, 2022 compared to $12.0 million for the same period in 2021.

For the three months ended September 30, 2022, we disposed of Residential Securities with a carrying value of $11.6 billion for an aggregate net loss of ($1.5) billion.

Net gains (losses) on disposal of investments was ($521.6) million for the three months ended March 31, 2023 compared to ($144.2) million for the same period in 2022.

For the three months ended March 31, 2023, we disposed of Residential Securities with a carrying value of $5.2 billion for an aggregate net loss of ($521.8) million.

For the same period in 2022, we disposed of Residential Securities with a carrying value of $2.8 billion for an aggregate net gain of ($144.5) million.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($1.2) billion for the three months ended September 30, 2022 compared to $90.8 million for the same period in 2021, primarily due to unfavorable changes in unrealized gains (losses) on Agency MBS of ($1.0) billion, securitized residential whole loans of consolidated VIEs of ($492.9) million, residential whole loans of ($64.1) million, partially offset by favorable changes on securitized debt of consolidated VIEs of $335.2 million.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the three months ended September 30, 2022 was $1.3 billion compared to $130.1 million for the same period in 2021, primarily attributable to the change in realized gains (losses) on termination of interest rate swaps.

Realized gains (losses) on termination of interest rate swaps was ($83.4) million for the three months ended September 30, 2022 compared to ($1.2) billion for 2021 as in in the current period we terminated fixed-receiver interest rate swaps with a notional amount of $10.0 billion compared to the same period in 2021 when we repositioned our swap portfolio to reduce our exposure to LIBOR and terminated fixed-rate payer and receiver interest rate swaps with notional amounts of $14.7 billion and $14.8 billion, respectively.

Net gains (losses) on other derivatives was $808.2 million for the three months ended September 30, 2022 compared to ($45.2) million for the same period in 2021.

The change in net gains (losses) on other derivatives was primarily due to favorable changes in net gains (losses) on futures, which was $1.8 billion for the three months ended September 30, 2022 compared to $49.8 million for the same period in 2021, and net gains (losses) on interest rate swaptions, which was $11.7 million for the three months ended September 30, 2022 compared to ($68.9) million for the same period in 2021, partially offset by an unfavorable change in net gains (losses) on TBA derivatives, which was ($1.0) billion for the three months ended September 30, 2022 compared to ($27.3) million for the same period in 2021.

Loan Loss (Provision) Reversal

For the three months ended September 30, 2022 and 2021, net loan loss (provision) reversal were $1.6 million and $6.1 million on corporate loans, respectively.

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

Net unrealized gains (losses) on instruments measured at fair value through earnings was $523.3 million for the three months ended March 31, 2023 compared to ($15.6) million for the same period in 2022, primarily due to favorable changes in unrealized gains (losses) on securitized residential whole loans of consolidated VIEs of $561.0 million, Agency MBS of $467.1 million, residential credit securities of $139.9 million, residential whole loans of $114.7 million, partially offset by unfavorable changes on securitized debt of consolidated VIEs of ($546.1) million, MSR of ($137.8) million and participations issued of ($53.6) million and Interests in MSR of ($11.4) million.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Business Divestiture-Related Gains (Losses)

For the three months ended September 30, 2022, the majority of business divestiture-related gains (losses) was associated with the sale of our corporate loan interests, in connection with the announcement of the sale of our MML Portfolio.

Refer to the “Sale of Middle Market Lending Portfolio” Note and the “Loans” Note located within Item 1 for additional information related to the transaction.

For the three months ended September 30, 2021, the majority of business divestiture-related gains (losses) was associated with the sale of our commercial real estate business.

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

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

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the three months ended March 31, 2023 was ($716.4) million compared to $1.3 billion for the same period in 2022, primarily attributable to the change in unrealized gains (losses) on interest rate swaps, partially offset by the change in the net interest component of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was ($956.3) million for the three months ended March 31, 2023, reflecting a decline in forward interest rates during the period, compared to $1.3 billion for the same period in 2022, which reflected a rise in forward interest rates during the period.

Net interest component on interest rate swaps was $385.7 million for the three months ended March 31, 2023 compared to ($62.5) million for the same period in 2022.

Net gains (losses) on other derivatives was ($184.4) million for the three months ended March 31, 2023 compared to $381.1 million for the same period in 2022.

The change in net gains (losses) on other derivatives was primarily due to unfavorable changes in net gains (losses) on futures, which was ($196.5) million for the three months ended March 31, 2023 compared to $1.4 billion for the same period in 2022, and net gains (losses) on interest rate swaptions, which was ($43.7) million for the three months ended March 31, 2023 compared to $108.2 million for the same period in 2022, partially offset by a favorable change in net gains (losses) on TBA derivatives, which was $61.5 million for the three months ended March 31, 2023 compared to ($1.1) billion for the same period in 2022.

Other, net includes brokerage and commission fees, due diligence costs, securitization expenses, and interest on custodial balances.

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

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

For the Nine Months Ended September 30, 2022 and 2021

Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments and other was ($2.3) billion for the nine months ended September 30, 2022 compared to ($37.6) million for the same period in 2021.

For the nine months ended September 30, 2022, we disposed of Residential Securities with a carrying value of $21.0 billion for an aggregate net loss of ($2.3) billion.

For the same period in 2021, we disposed of Residential Securities with a carrying value of $11.1 billion for an aggregate net loss of $0.8 million.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($1.2) billion for the nine months ended September 30, 2022 compared to $199.0 million for the same period in 2021, primarily due to unfavorable changes in unrealized gains (losses) on securitized residential whole loans of consolidated VIEs of ($1.2) billion, Agency MBS of ($1.0) billion, non-Agency MBS of ($170.2) million, residential whole loans of ($123.7) million, CRT securities of ($72.5) million, partially offset by favorable changes on residential securitized debt of consolidated VIEs of $1.0 billion, and MSR of $185.5 million.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the nine months ended September 30, 2022 was $3.5 billion compared to $598.5 million for the same period in 2021, attributable to favorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $3.5 billion for the nine months ended September 30, 2022 compared to $2.0 billion for the same period in 2021, reflecting a sharper rise in forward interest rates during the current period.

Realized gains (losses) on termination of interest rate swaps was ($83.4) million for the nine months ended September 30, 2022 compared to ($1.2) billion for the same period in 2021 as in the current period we terminated fixed-receiver interest rate swaps with a notional amount of $10.0 billion compared to the same period in 2021 when we repositioned our swap portfolio to reduce our exposure to LIBOR and terminated fixed-rate payer and receiver interest rate swaps with notional amounts of $14.7 billion and $14.8 billion, respectively.

Net gains (losses) on other derivatives was $1.3 billion for the nine months ended September 30, 2022 compared to $73.9 million for the same period in 2021.

The change in net gains (losses) on other derivatives was primarily due to the favorable changes in net gains (losses) on futures derivatives, which was $4.0 billion for the nine months ended September 30, 2022 compared to $468.5 million for the same period in 2021, and net gains (losses) on interest rate swaptions, which was $239.3 million for the nine months ended September 30, 2022 compared to ($40.7) million for the same period in 2021, partially offset by an unfavorable change in TBA derivatives, which was ($2.9) billion for the nine months ended September 30, 2022 compared to ($372.1) million million for the same period in 2021.

Loan Loss (Provision) Reversal

For the nine months ended September 30, 2022 and 2021, net loan loss reversals of $27.9 million on corporate loans and $145.3 million on commercial mortgage and corporate loans, respectively.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Business Divestiture-Related Gains (Losses)

For the nine months ended September 30, 2022, the majority of business divestiture-related gains (losses) were associated with the sale of our corporate loan interests.

Refer to the “Sale of Middle Market Lending Portfolio” Note and located within Item 1 for additional information related to the transaction.

For the nine months ended September 30, 2021, business divestiture-related gains (losses) were associated with the sale of our commercial real estate business.

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

Other, net for the three months ended March 31, 2023 was $15.5 million compared to $3.1 million for the same period in 2022, primarily attributable to an increase in interest on custodial balances, partially offset by a decrease in rental income and earnings from joint ventures.

General and Administrative Expenses

4 unchanged sentences

For the three months ended (dollars in thousands)

September 30, 2022 $ 37,922 0.19 % 1.38 %

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

For the nine months ended

September 30, 2022 $ 119,724 0.20 % 1.37 %

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

G&A expenses were $37.9 million for the three months ended September 30, 2022, a decrease of $6.0 million compared to the same period in 2021.

G&A expenses were $119.7 million for the nine months ended September 30, 2022, a decrease of $25.6 million compared to the same period in 2021.

The change in each period was primarily due to lower expenses on our commercial portfolio, as a result of the sale of our commercial real estate business which was announced in the first quarter of 2021, as well as lower expenses resulting from the divestiture of our MML assets, which was announced in the second quarter of 2022, during the three and nine months ended September 30, 2022 compared with the same periods in 2021.

March 31, 2023 $ 40,828 0.19 % 1.40 %

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

G&A expenses were $40.8 million for the three months ended March 31, 2023, a decrease of $4.9 million compared to the same period in 2022.

The change in each period was primarily due to lower expenses resulting from the divestiture of our MML assets, which was announced in the second quarter of 2022.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Return on Average Equity

7 unchanged sentences

For the three months ended

September 30, 2022 15.21 % 2.42 % (26.35 %) (1.38 %) 0.16 % (9.94 %)

September 30, 2021 9.01 % 0.44 % 6.88 % (1.28 %) 0.20 % 15.25 %

For the nine months ended

September 30, 2022 16.14 % 1.68 % 13.90 % (1.37 %) (0.52 %) 29.83 %

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

March 31, 2023 13.92 % 2.63 % (43.61 %) (1.40 %) (0.38 %) (28.84 %)

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

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

1 unchanged sentence

Unrealized Gains and Losses - Available-for-Sale Investments

With our available-for-sale accounting treatment on our Agency MBS, which represent the largest portion of assets on balance sheet, unrealized fluctuations in market values of assets do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss).

The unrealized fluctuations in market values of our available-for-sale Agency MBS, for which the fair value option is not elected, do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss).

As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting.

As a result, comparisons with companies that use amortized cost accounting for some or all of their balance sheet may not be meaningful.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

(dollars in thousands)

5 unchanged sentences

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

The fair value of these securities being less than amortized cost at September 30, 2022 is solely due to market conditions and not the quality of the assets.

The fair value of these securities being less than amortized cost at March 31, 2023 is solely due to market conditions and not the quality of the assets.

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

2 unchanged sentences

Financial Condition

Total assets were $85.4 billion and $76.8 billion at September 30, 2022 and December 31, 2021, respectively.

The change was primarily due to increases in Agency MBS of $2.5 billion, residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $2.6 billion, MSR of $1.2 billion, derivative assets of $1.8 billion, and receivable for unsettled trades of $2.2 billion, partially offset by decreases in corporate loans of $2.0 billion.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at September 30, 2022:

Residential Commercial

Total assets were $86.8 billion and $81.9 billion at March 31, 2023 and December 31, 2022, respectively.

The change was primarily due to increases in Agency MBS of $3.3 billion, securitized residential whole loans of consolidated VIEs of $1.2 billion, cash and cash equivalents of $217.5 million, principal and interest receivable of $136.4 million, and receivable for unsettled trades of $104.0 million.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at March 31, 2023:

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Agency MBS MSR Residential Credit (1)

Commercial Real Estate Total

Commercial Total

Assets (dollars in thousands)

Fair value/carrying value $ 63,468,629 $ 1,705,254 $ 13,535,945 $ 588,500 $ 79,298,328

Fair value $ 65,623,534 $ 1,790,980 $ 15,034,450 $ 500,611 $ 82,949,575

Implied market value of derivatives (2)

7 unchanged sentences

Net forward purchases 2,564,829 14,531 578 — 2,579,938

Other assets / liabilities (3)

2,028,195 250,991 78,534 98,697 2,456,417

Net other assets / liabilities 1,693,716 239,545 97,474 86,343 2,117,078

Net equity allocated $ 7,749,854 $ 1,765,994 $ 2,262,476 $ 130,709 $ 11,909,033

1 unchanged sentence

Debt/net equity ratio (3)

(1) Fair value/carrying includes residential loans held for sale, and assets and liabilities associated with non-controlling interests.

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

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

7.4:1 0.1:1 5.7:1 3.3:1 5.9:1

(1) Fair value includes residential loans held for sale, and assets and liabilities associated with non-controlling interests.

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

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

Residential Securities

Substantially all of our Agency MBS at September 30, 2022 and December 31, 2021 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

Our mortgage-backed

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

Substantially all of our Agency MBS at March 31, 2023 and December 31, 2022 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

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

We carry all of our Agency MBS at fair value on the Consolidated Statements of Financial Condition.

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

At September 30, 2022 and December 31, 2021 we had on our Consolidated Statements of Financial Condition a total of $843.0 million and $77.7 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $3.3 billion and $3.8 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended September 30, 2022 and 2021 was 9.8% and 23.1%, respectively.

The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of September 30, 2022 and 2021 was 7.6% and 12.7%, respectively.

At March 31, 2023 and December 31, 2022, we had on our Consolidated Statements of Financial Condition a total of $1.2 billion and $1.1 billion, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $2.9 billion and $2.9 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended March 31, 2023 and 2022 was 5.5% and 16.7%, respectively.

The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of March 31, 2023 and 2022 was 8.4% and 9.5%, respectively.

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

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

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at September 30, 2022 and December 31, 2021.

September 30, 2022 December 31, 2021

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at March 31, 2023 and December 31, 2022.

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Management’s Discussion and Analysis

March 31, 2023 December 31, 2022

Estimated Fair Value

15 unchanged sentences

Total Residential Securities $ 68,737,574 $ 65,263,598

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at September 30, 2022 and December 31, 2021.

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Residential Securities (1)

35 unchanged sentences

NM Not meaningful.

The following tables summarize certain characteristics of our Residential Credit portfolio at September 30, 2022.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

The following tables summarize certain characteristics of our Residential Credit portfolio at March 31, 2023.

Payment Structure Investment Characteristics (1)

Product Total Senior Subordinate Coupon Credit Enhancement 60+

Product Estimated Fair Value Senior Subordinate Coupon Credit Enhancement 60+

Delinquencies 3M VPR (2)

8 unchanged sentences

Total/weighted average $ 3,114,040 $ 1,097,104 $ 2,016,936 5.71 % 15.55 % 16.71 % 4.29 %

$ 3,213,612 $ 1,162,825 $ 2,050,787 4.96 % 16.27 % 19.65 % 9.25 %

(1) Represents the 3 month voluntary prepayment rate (“VPR”) and excludes the impact of interest-only securities.

(2) Total investment characteristics exclude the impact of interest-only securities.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

(1) Investment characteristics exclude the impact of interest-only securities.

(2) Represents the 3 month voluntary prepayment rate (“VPR”).

Product ARM Fixed Floater Interest-Only Estimated Fair Value

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Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at September 30, 2022.

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at March 31, 2023.

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

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

At September 30, 2022, the interest rate swaps had a net fair value of ($71.2) million.

At March 31, 2023, the interest rate swaps had a net fair value of ($136.6) million.

Year One to Three

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Total $ 61,939,326 $ 1,088,435 $ 827,965 $ 22,437,275 $ 86,293,001

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at September 30, 2022.

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at March 31, 2023.

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

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

During the nine months ended September 30, 2022, we received $7.9 billion from principal repayments and $16.7 billion in cash from disposal of Residential securities.

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

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships which would have been established for the sole purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

We have limited future funding commitments related to certain of our unconsolidated joint ventures.

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

We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at September 30, 2022.

Capital Management

Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of critical importance to our business strategy.

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

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

During the three months ended March 31, 2023, we received $1.3 billion from principal repayments and $4.7 billion in cash from disposal of Securities.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

regardless of the market environment.

Commitments and Contractual Obligations with Unconsolidated Entities

We do not have any commitments or contractual obligations arising from arrangements with unconsolidated entities that have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.

Capital Management

Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of critical importance to our business strategy.

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

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

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

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Stockholders’ Equity

The following table provides a summary of total stockholders’ equity at September 30, 2022 and December 31, 2021:

September 30, 2022 December 31, 2021

The following table provides a summary of total stockholders’ equity at March 31, 2023 and December 31, 2022:

March 31, 2023 December 31, 2022

Stockholders’ equity (dollars in thousands)

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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, we 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, we 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, we 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.

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, we 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, we 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, we 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, we

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

issued 1.4 million and 12.8 million shares for proceeds of $49.0 million and $469.5 million, respectively, each net of commissions and fees.

During the three months ended March 31, 2023, under the at-the-market sales program, we 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, we 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.

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

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

On November 3, 2022, we entered into Amendment No.

2 to the Sales Agreements with each of the Sales Agents to increase the available amount of shares of our common stock that we may sell through the Sales Agents.

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

Preferred Stock

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

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

Under the terms of the plan, we are 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 our 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 our 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 our 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”).

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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.

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.

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Our actual economic leverage ratio varies from time to time based upon various factors, including our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions.

Our GAAP leverage ratio at September 30, 2022 and December 31, 2021 was 5.8:1 and 4.7:1, respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 7.1:1 and 5.7:1, at September 30, 2022 and December 31, 2021, respectively.

Our GAAP capital ratio at September 30, 2022 and December 31, 2021 was 12.8% and 17.2%, respectively.

Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 11.8% and 14.4% at September 30, 2022 and December 31, 2021, respectively.

Our GAAP leverage ratio at March 31, 2023 and December 31, 2022 was 5.9:1 and 6.0:1, respectively.

Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 6.4:1 and 6.3:1, at March 31, 2023 and December 31, 2022, respectively.

Our GAAP capital ratio at March 31, 2023 and December 31, 2022 was 13.7% and 13.9%, respectively.

Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 13.2% and 13.4% at March 31, 2023 and December 31, 2022, respectively.

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

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

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

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

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

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Risk management begins with our Board, through the review and oversight of the risk management framework, and executive management, through the ongoing formulation of risk management practices and related execution in managing risk.

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

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

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

The Board exercises its oversight of risk management primarily through the Risk Committee and Audit Committee with support from the other Board Committees.

The Risk Committee is responsible for oversight of our risk governance structure, risk management (operational and market risk) and risk assessment guidelines and policies and our risk appetite.

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

The Risk Committee and the Audit Committee jointly oversee practices and policies related to cybersecurity and receive regular reports from management throughout the year on cybersecurity and related risks.

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

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

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

The Corporate Responsibility Committee shares oversight of specific ESG-related matters with other Board Committees and meets jointly with the Management Development and Compensation Committee on the Company's human capital management and culture and with the Risk Committee on ESG-related regulatory and policy risks.

Risk assessment and risk management are the responsibility of our management.

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Three primary management committees have been established to provide a comprehensive framework for risk management.

The management committees responsible for our risk management include the Enterprise Risk Committee (“ERC”), Asset and Liability Committee (“ALCO”) and the Financial Reporting and Disclosure Committee (“FRDC”).

The management committees responsible for our risk management include the Enterprise Risk Committee (“ERC”), Asset / Liability Committee (“ALCO”) and the Financial Reporting and Disclosure Committee (“FRDC”).

Each of these committees reports to our management Operating Committee which is responsible for oversight and management of our operations, including oversight and approval authority over all aspects of our enterprise risk management.

Audit Services is an independent function with reporting lines to the BAC.

Audit Services is an independent function with reporting lines to the Audit Committee.

Audit Services is responsible for performing our internal audit activities, which includes independently assessing and validating key controls within the risk management framework.

Our compliance group is responsible for oversight of our regulatory compliance.

Our Chief Compliance Officer has reporting lines to the BAC.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Our compliance group is responsible for oversight of our regulatory compliance.

Our Chief Compliance Officer has reporting lines to the Audit Committee.

Description of Risks

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Liquidity Management Policies Comprehensive policies including monitoring, risk limits and an escalation protocol.

Our primary financing sources are repurchase agreements provided through counterparty arrangements and through Arcola, other secured financing, debt issued by securitization vehicles, mortgages, credit facilities, note sales and various forms of equity.

Our primary financing sources are repurchase agreements provided through counterparty arrangements and through our wholly-owned subsidiary, Arcola Securities, Inc.

(“Arcola”), other secured financing, debt issued by securitization vehicles, mortgages, credit facilities, note sales and various forms of equity.

We maintain excess liquidity by holding unencumbered liquid assets that could be either used to collateralize additional borrowings or sold.

We seek to conservatively manage our repurchase agreement funding position through a variety of methods including diversity, breadth and depth of counterparties and maintaining a staggered maturity profile.

Our wholly-owned subsidiary, Arcola, provides direct access to third party funding as a FINRA member broker-dealer.

Arcola provides direct access to third party funding as a FINRA member broker-dealer.

Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central counterparty.

In addition, Arcola borrows funds through direct repurchase agreements.

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

At September 30, 2022 and December 31, 2021, the weighted average days to maturity was 57 days and 52 days, respectively.

In addition, Arcola may borrow funds through direct repurchase agreements.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

At March 31, 2023 and December 31, 2022, the weighted average days to maturity was 59 days and 27 days, respectively.

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

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

At September 30, 2022, we had total financial assets and cash pledged against existing liabilities of $57.6 billion.

The weighted average haircut was approximately 4% on repurchase agreements, primarily attributable to Agency MBS.

The quality and character of the Residential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at September 30, 2022 compared to the same period in 2021, and our counterparties did not materially alter any requirements, including required haircuts, related to the col lateral we pledge under repurchase agreements and interest rate swaps during the three months ended September 30, 2022.

At March 31, 2023, we had total financial assets and cash pledged against existing liabilities of $64.7 billion.

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

The quality and character of the Residential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at March 31, 2023 compared to the same period in 2022, and our counterparties did not materially alter any requirements, including required haircuts, related to the col lateral we pledge under repurchase agreements and interest rate swaps during the three months ended March 31, 2023.

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

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For the three months ended (dollars in thousands)

September 30, 2022 $ 56,354,310 $ 54,160,731 $ 139,991 $ —

June 30, 2022 51,606,720 51,364,097 117,903 —

March 31, 2023 $ 60,477,833 $ 60,993,018 $ 371,429 $ —

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

The following table provides information on our repurchase agreements and other secured financing by maturity date at September 30, 2022.

The weighted average remaining maturity on our repurchase agreements and other secured financing was 59 days at September 30, 2022:

September 30, 2022

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

March 31, 2021 65,461,539 61,202,477 143,395 —

The following table provides information on our repurchase agreements and other secured financing by maturity date at March 31, 2023.

The weighted average remaining maturity on our repurchase agreements and other secured financing was 61 days at March 31, 2023:

March 31, 2023

Balance Weighted

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Total $ 61,243,018 5.04 % 100.0 %

(1) Approximately 0% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.

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

We also finance our investments in residential mortgage loans through the issuance of securitization transactions sponsored by our wholly-owned subsidiary Onslow Bay Financial LLC (“Onslow Bay”) under the Onslow Bay private-label securitization program.

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Management’s Discussion and Analysis

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at September 30, 2022:

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at March 31, 2023:

Weighted Average Rate

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

The following table also provides the carrying amount of our encumbered and unencumbered financial assets at September 30, 2022:

The following table also provides the carrying amount of our encumbered and unencumbered financial assets at March 31, 2023:

Encumbered Assets Unencumbered Assets Total

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Agency mortgage-backed securities 59,404,522 3,594,517 62,999,039

52,757,032 4,049,168 56,806,200

Credit risk transfer securities 605,516 479,868 1,085,384

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MSR 946,464 844,516 1,790,980

Assets of disposal group held for sale (3)

11,371 — 11,371

Other assets (3)

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

(3) Comprised of corporate loans held for sale

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

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The composition of our liquid assets is also considered and is subject to certain parameters.

The composition is monitored for concentration risk and asset type.

The composition is monitored for concentration risk, including in respect of our deposits of our cash and cash equivalents, and asset type.

We believe the assets we consider liquid can be readily converted into cash, through liquidation or by being used as collateral in financing arrangements (including as additional collateral to support existing financial arrangements).

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

The following table presents our liquid assets as a percentage of total assets at September 30, 2022:

The following table presents our liquid assets as a percentage of total assets at March 31, 2023:

ANNALY CAPITAL MANAGEMENT, INC.

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

The assets listed in this table include $57.6 billion of assets that have been pledged as collateral against existing liabilities at September 30, 2022.

The assets listed in this table include $64.7 billion of assets that have been pledged as collateral against existing liabilities at March 31, 2023.

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

(2) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition.

(3) Excludes securitized Agency MBS of consolidated VIEs carried at fair value of $0.4 billion.

(3) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $10.3 billion.

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The effects of interest rate swaps, whereby we generally pay a fixed rate and receive a floating rate and effectively lock in our financing costs for a longer term, are also reflected in our interest rate sensitivity gap.

The interest rate sensitivity of our assets and liabilities in the following table at September 30, 2022 could vary substantially based on actual prepayment experience.

The interest rate sensitivity of our assets and liabilities in the following table at March 31, 2023 could vary substantially based on actual prepayment experience.

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

The following table presents estimates at September 30, 2022.

The following table presents estimates at March 31, 2023.

Actual results could differ materially from these estimates.

Change in Interest Rate (1)

Projected Percentage Change in Economic Net Interest Income (2)

Estimated Percentage Change in Portfolio Value (2)

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% on NAV (2)(3)

Projected Percentage Change in Economic Net Interest Income (4)

-75 Basis points (0.2%) (1.3%) (1.7%)

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Estimated Change in

Portfolio Market Value Estimated Change as a

Portfolio Market Value (2)

Estimated Change as a

% on NAV (2)(3)

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Actual results could differ materially from these estimates.

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

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

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

(3) NAV represents book value of equity.

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

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

Credit Risk Management

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procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure.

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

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

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Additionally, ALCO has oversight of our credit risk exposure.

Our portfolio composition, based on balance sheet values, at September 30, 2022 and December 31, 2021 was as follows:

September 30, 2022 December 31, 2021

Our portfolio composition, based on balance sheet values, at March 31, 2023 and December 31, 2022 was as follows:

March 31, 2023 December 31, 2022

Agency mortgage-backed securities 79.1 % 79.4 %

80.0 % 81.9 %

Credit risk transfer securities 1.3 % 1.3 %

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Mortgage servicing rights 2.2 % 2.2 %

Interests in MSR — % 0.1 %

Commercial real estate 0.6 % 0.7 %

Corporate debt (3)

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

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

(3) Excludes corporate loans held for sale as of September 30, 2022.

Counterparty Risk Management

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Additionally, ALCO has oversight of our counterparty exposure.

The following table summarizes our exposure to counterparties by geography at September 30, 2022:

The following table summarizes our exposure to counterparties by geography at March 31, 2023:

Number of Counterparties Secured Financing (1)

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Europe 9 7,926,284 (84,180) 798,506

Asia (non-Japan) 1 768,828 — 28,506

Japan 4 4,289,070 — 234,579

Total 35 $ 61,243,018 $ (136,646) $ 4,067,583

(1) Represents repurchase agreements and other secured financing.

(1) Includes repurchase agreements and other secured financing.

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

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Operational risk may arise from internal or external sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events.

Model risk considers potential errors with a model’s results due to uncertainty in model parameters and inappropriate methodologies used.

The result of these risks may include financial loss and reputational damage.

We manage operational risk through a variety of tools including policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor management.

Other tools include testing, including disaster recovery testing;

Other tools include Risk and Control Self Assessment (“RCSA”) testing, including disaster recovery/testing;

systems controls, including access controls;

training, including cybersecurity awareness training;

training, including phishing exercises and cybersecurity awareness training;

and monitoring, which includes the use of key risk indicators.

Our Operational Risk Management team conducts a disaster recovery exercise on an annual basis.

Cyber security-related threats are addressed in tabletop exercises managed by the Cybersecurity Committee and business disruption events are addressed in tabletop exercises managed by the Operational Risk Management team.

The results of these tabletop exercises are reported to management.

Employee-level lines of defense against operational risk include proper segregation of incompatible duties, activity-level internal controls over financial reporting, the empowerment of business units to identify and mitigate operational risk sources, testing by our internal audit staff, and our overall governance framework.

We have established a Cybersecurity Committee to help mitigate cybersecurity risks.

Operational Risk Management responsibilities are overseen by the ERC.

The ERC is responsible for supporting the Operating Committee in the implementation, ongoing monitoring, and evaluation of the effectiveness of the enterprise-wide risk management framework.

This oversight authority includes review of the strategies, policies, and practices established by management to identify, assess, measure, and manage enterprise-wide risk.

Members of the Operational Risk Management team participate in the Cybersecurity Committee established to help mitigate cybersecurity risks.

The role of the committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee our Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing.

The Head of Information Technology Infrastructure is responsible for continuously reporting to the Cybersecurity Committee throughout the year regarding cybersecurity and related risks.

Our Chief Technology Officer and Head of Information Technology Infrastructure are members of multiple industry associations that discuss industry threats, challenges and solutions to cybersecurity issues.

Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems.

The Cybersecurity Committee periodically reports to the ERC and the relevant Board committees.

There is no assurance that these efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

Our internal audit department determines whether our cybersecurity program and information security practices align with relevant portions of the National Institute of Standards and Technology (“NIST”) framework.

There is no assurance that our efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

We currently maintain cybersecurity insurance, however, there is no assurance that our current policy will cover all cybersecurity breaches or our related losses, or that we will be able to continue to maintain cybersecurity insurance in the future.

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Our 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.

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.

Compliance, Regulatory and Legal Risk Management

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

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

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

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

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The determination that we qualify for this exemption from registration depends on various factual matters and circumstances.

Accordingly, in conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program.

The monitoring of this risk is also under the oversight of the ERC.

Accordingly, in conjunction with our legal

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program.

The monitoring of this risk is also under the oversight of the ERC.

As a result of the Dodd-Frank Act, the U.S.

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

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

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

“Financial Statements.”

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

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

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

for further information.

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

Judgments and Uncertainties:

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

Internal fair values are determined using quoted prices for

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Management’s Discussion and Analysis

similar market transactions, the swap curve and the underlying characteristics of the individual loans, which may include loan term, coupon, and reset dates.

Judgments and Uncertainties:

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

Internal fair values are determined using quoted prices for similar market transactions, the swap curve and the underlying characteristics of the individual loans, which may include loan term, coupon, and reset dates.

While prepayment rates may be difficult to predict and are a significant estimate requiring judgment in the valuation of residential whole loans, we validate prepayment speeds against those provided by independent pricing analytic providers specializing in residential mortgage loans.

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

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

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

for further information.

We elected to account for MSR at fair value.

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

The market for MSR is considered less active and transparent compared to securities.

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

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

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

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

“Financial Statements.”

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

We value uncleared derivatives using internal models with prices compared to counterparty marks.

Judgments and Uncertainties:

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

We believe using the OIS curve, which reflects the interest rate typically paid on cash collateral, enables us to most accurately determine the fair value of uncleared interest rate swaps.

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

Consistent with market practice, we exchange collateral (also called margin) based on the fair values of our interest rate swaps.

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

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

Refer to the interest rate sensitivity and interest rate shock analysis and discussions within this Item 2 for further information.

Revenue Recognition

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The rate banks charge each other for short-term Eurodollar loans.

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

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

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

Monetary Policy

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

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Management’s Discussion and Analysis

Monetary Policy

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

Mortgage-Backed Security (“MBS”)

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For the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.

Residential Credit Securities

Refers to CRT securities and non-Agency mortgage-backed securities.

Residential Securities

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Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy.

Secondary Market

Ongoing market for bonds previously offered or sold in the primary market.

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Management’s Discussion and Analysis

Secondary Market

Ongoing market for bonds previously offered or sold in the primary market.

Secured Overnight Financing Rate (“SOFR”)

Broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and was chosen by the Alternative Reference Rate Committee as the preferred benchmark rate to replace dollar LIBOR in coming years.

Settlement Date

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis