What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-04 · 273 added, 363 removed, 1271 unchanged (33% 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.

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

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

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

Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity.

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

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

Recourse debt consists of repurchase agreements and other secured financing.

Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from economic leverage.

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

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(3) Net interest margin represents our interest income less interest expense divided by the average interest earning assets.

Net interest margin does not include net interest component of interest rate swaps.

Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

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(6) Excludes dividends on preferred stock.

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.

Net income (loss) was $161.2 million, which includes ($5.8) million attributable to noncontrolling interests, or $0.27 per average basic common share, for the three months ended June 30, 2023 compared to $863.3 million, which includes ($3.4) million attributable to noncontrolling interests, or $2.21 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 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 ($1.3) billion for the three months ended June 30, 2023 compared to ($615.2) million for the same period in 2022.

Net interest income for the three months ended June 30, 2023 was ($32.0) million compared to $475.1 million for the same period in 2022.

Net gains (losses) on derivatives was $1.5 billion for the three months ended June 30, 2023 compared to $1.0 billion for the same period in 2022.

Net servicing income for the three months ended June 30, 2023 was $74.9 million compared to $49.7 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 $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.

Net income (loss) was ($678.1) million, which includes ($0.9) million attributable to noncontrolling interests, or ($1.51) per average basic common share, for the six months ended June 30, 2023 compared to $2.9 billion which includes ($1.7) million attributable to noncontrolling interests, or $7.60 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, net interest income, and net gains (losses) on investments and other, partially offset by a favorable change in net servicing income and business divestiture-related losses.

Net gains on derivatives for the six months ended June 30, 2023 was $574.6 million compared to $2.7 billion for the same period in 2022.

Net interest income for the six months ended June 30, 2023 was ($12.5) million compared to $1.1 billion for the same period in 2022.

Net gains (losses) on investments and other was ($1.3) billion for the six months ended June 30, 2023 compared to ($775.0) million for the same period in 2022.

Net servicing income for the six months ended June 30, 2023 was $151.3 million compared to $80.7 million for the same period in 2022.

Business divestiture-related (losses) was $0.0 million for the six months ended June 30, 2023 compared to ($24.3) 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 $389.5 million, or $0.72 per average common share, for the three months ended June 30, 2023, compared to $490.8 million, or $1.22 per average common share, for the same period in 2022.

The change in earnings available for distribution during the three months ended June 30, 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 balances and specialness, partially offset by a favorable change in the net interest component of interest rate swaps, lower premium amortization expense, excluding PAA, resulting from purchasing assets with lower premium to par, and higher net servicing income.

Earnings available for distribution were $816.6 million, or $1.52 per average common share, for the six months ended June 30, 2023, compared to $921.4 million, or $2.33 per average common share, for the same period in 2022.

The change in earnings available for distribution during the six months ended June 30, 2023 compared to the same period in 2022 was primarily due to 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 balances and specialness, partially offset by a favorable change in the net interest component of interest rate swaps, higher coupon income from increased rates, lower premium amortization expense, excluding PAA, resulting from purchasing assets with lower premium to par, and higher net servicing income.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Non-GAAP Financial Measures

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

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

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

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

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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 March 31,

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2023 2022 2023 2022

(dollars in thousands, except per share data)

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Net (gains) losses on investments and other (1)

1,316,837 615,216 1,315,125 775,020

Net (gains) losses on derivatives (2)

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Loan loss provision (reversal) (3)

— (29,380) (219) (28,568)

Business divestiture-related (gains) losses — 23,955 — 24,309

Other adjustments

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

Amortization of intangibles 758 1,302 1,516 2,432

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

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Transaction expenses and non-recurring items (5)

2,650 1,751 4,008 5,101

Income tax effect of non-EAD income (loss) items 12,364 28,841 20,642 55,932

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

(1) Includes a write-down which is reported in Other, net in the Company's Consolidated Statement of Comprehensive Income (Loss).

(2) 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 $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.

The net interest component of interest rate swaps totaled $425.3 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively and $811.0 million and ($61.5) million for the six months ended June 30, 2023 and 2022, respectively.

(3) Includes $0.0 million and ($2.5) million for the three months ended June 30, 2023 and 2022, respectively, and $0.0 million and ($2.3) million for the six months ended June 30, 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).

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

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

(5) Represents 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 $1.1 million for the three months ended March 31, 2023 and 2022, respectively.

CMBX coupon income totaled $0.5 million and $1.1 million for the three months ended June 30, 2023 and 2022, respectively and $1.5 million and $2.1 million for the six months ended June 30, 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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Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency MBS less an implied financing cost.

TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions.

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions.

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 our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

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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Certain of our non-GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term Constant Prepayment Rate (“CPR”).

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 March 31,

The following table illustrates the impact of the PAA on premium amortization expense for our Residential Securities portfolio for the periods presented:

For the Three Months Ended June 30,

For the Six Months Ended June 30,

2023 2022 2023 2022

(dollars in thousands)

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To maintain our desired capital profile, we utilize a mix of debt and equity funding.

Debt funding may include the use of repurchase agreements, loans, securitizations, participations issued, lines of credit, asset backed lending facilities, corporate bond issuance, convertible bonds, mortgages payable or other liabilities.

Equity capital primarily consists of common and preferred stock.

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

Recourse debt consists of repurchase agreements and

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

other secured financing.

Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from economic leverage.

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

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Economic leverage ratio reconciliation

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Other secured financing

250,000 914,255

Debt issued by securitization vehicles

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Less Non-Recourse Debt:

Credit facilities (1)

$ — $ (914,255)

Debt issued by securitization vehicles

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

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

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

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Economic capital ratio reconciliation

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA)

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We use interest rate swaps to manage our exposure to changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings.

Accordingly, adding the net interest component of interest rate swaps to interest expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of our financing strategy.

Accordingly, adding the net interest component of interest rate swaps to interest

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of our financing strategy.

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

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

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

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

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

June 30, 2023 $ 921,494 $ (11,923) $ 909,571

June 30, 2022 $ 645,615 $ (127,521) $ 518,094

For the six months ended

June 30, 2023 $ 1,739,744 $ (11,432) $ 1,728,312

June 30, 2022 $ 1,301,465 $ (307,037) $ 994,428

* Represents a non-GAAP financial measure.

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For the three months ended (dollars in thousands)

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

June 30, 2023 $ 953,457 $ (425,293) $ 528,164 $ (31,963) $ (425,293) $ 393,330 $ (11,923) $ 381,407

June 30, 2022 $ 170,475 $ (992) $ 169,483 $ 475,140 $ (992) $ 476,132 $ (127,521) $ 348,611

For the six months ended

June 30, 2023 $ 1,752,244 $ (810,999) $ 941,245 $ (12,500) $ (810,999) $ 798,499 $ (11,432) $ 787,067

June 30, 2022 $ 245,397 $ 61,549 $ 306,946 $ 1,056,068 $ 61,549 $ 994,519 $ (307,037) $ 687,482

* Represents a non-GAAP financial measure.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Experienced CPR (1)

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For the three months ended

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.

June 30, 2023 7.0 % 8.6 %

June 30, 2022 14.9 % 7.7 %

For the six months ended

June 30, 2023 6.3 % 8.6 %

June 30, 2022 15.8 % 7.7 %

(1) For the three and six months ended June 30, 2023 and 2022, respectively.

(2) At June 30, 2023 and 2022, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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For the three months ended (dollars in thousands)

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 %

June 30, 2023 $ 86,254,955 $ 909,571 4.22 % $ 75,424,564 $ 528,164 2.77 % 381,407 1.45 %

June 30, 2022 $ 72,123,055 $ 518,094 2.87 % $ 60,446,528 169,483 1.11 % 348,611 1.76 %

For the six months ended

June 30, 2023 $ 84,449,977 $ 1,728,312 4.09 % $ 73,030,098 $ 941,245 2.56 % 787,067 1.53 %

June 30, 2022 $ 72,356,966 $ 994,428 2.75 % $ 61,155,910 $ 306,946 1.00 % 687,482 1.75 %

* Represents a non-GAAP financial measure.

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For the three months ended (dollars in thousands)

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 %

June 30, 2023 $ 909,571 1,734 (528,164) $ 383,141 $ 86,254,955 6,303,202 $ 92,558,157 1.66 %

June 30, 2022 $ 518,094 161,673 (169,483) $ 510,284 $ 72,123,055 20,566,553 $ 92,689,608 2.20 %

For the six months ended

June 30, 2023 $ 1,728,312 19,917 (941,245) $ 806,984 $ 84,449,977 10,126,544 $ 94,576,521 1.71 %

June 30, 2022 $ 994,428 291,165 (306,946) $ 978,647 $ 72,356,966 19,898,046 $ 92,255,012 2.12 %

* Represents a non-GAAP financial measure.

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(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

Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps.

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.

CMBX coupon income totaled $0.5 million and $1.1 million for the three months ended June 30, 2023 and 2022, respectively and $1.5 million and $2.1 million for the nine months ended June 30, 2023 and 2022, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps.

Average Economic Cost of Interest Bearing Liabilities

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Liabilities *

LIBOR Average

One-Month LIBOR

Month LIBOR Average Economic Cost

Average Six-Month LIBOR

Term SOFR Average

One-Month Term SOFR

Month Term SOFR Average Economic Cost

Average Six-Month Term SOFR

For the three months ended

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 %

June 30, 2023 $ 75,424,564 $ 71,919,189 $ 528,164 2.77 % 5.04 % 5.13 % (0.09 %) (2.27 %) (2.36 %)

June 30, 2022 $ 60,446,528 $ 59,563,524 $ 169,483 1.11 % 0.92 % 1.75 % (0.83 %) 0.19 % (0.64 %)

For the six months ended

June 30, 2023 $ 73,030,098 $ 71,919,189 $ 941,245 2.56 % 4.83 % 5.03 % (0.20 %) (2.27 %) (2.47 %)

June 30, 2022 $ 61,155,910 $ 59,563,524 $ 306,946 1.00 % 0.54 % 1.17 % (0.63 %) 0.46 % (0.17 %)

* Represents a non-GAAP financial measure.

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

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.

Economic interest expense increased by $358.7 million for the three months ended June 30, 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 $425.3 million for the three months ended June 30, 2023 compared to $1.0 million for the same period in 2022.

Economic interest expense increased by $634.3 million for the six months ended June 30, 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 $811.0 million for the six months ended June 30, 2023 compared to ($61.5) 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.

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

At 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.

At June 30, 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.

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

Other Income (Loss)

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 ($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 $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

Other Income (Loss)

For the Three Months Ended June 30, 2023 and 2022

Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments was ($610.4) million for the three months ended June 30, 2023 compared to ($646.2) million for the same period in 2022.

For the three months ended June 30, 2023, we disposed of Residential Securities with a carrying value of $8.4 billion for an aggregate net gain (loss) of ($599.2) million.

For the same period in 2022, we disposed of Residential Securities, with a carrying value of $6.6 billion for an aggregate net gain (loss) of ($657.3) million.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($698.6) million for the three months ended June 30, 2023 compared to $31.0 million for the same period in 2022, primarily due to an unfavorable changes in unrealized gains (losses) on Agency MBS of ($738.9) million, securitized debt of consolidated VIEs of ($281.7) million, partially offset by favorable changes on securitized residential whole loans of consolidated VIEs of $148.7 million and residential credit securities of $124.2 million and commercial securities of $17.9 million.

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.

Net gains (losses) on interest rate swaps for the three months ended June 30, 2023 was $1.3 billion compared to $898.5 million for the same period in 2022, primarily attributable to the change in the net interest component of interest rate swaps and realized gains (losses) on termination of interest rate swaps, partially offset by the change in unrealized gains (losses) on interest rate swaps.

Net interest component on interest rate swaps was $425.3 million for the three months ended June 30, 2023 compared to $1.0 million for the same period in 2022.

Realized gains (losses) on termination of interest rate swaps was $48.1 million for the three months ended June 30, 2023 compared to $0.0 million for 2022, which reflected our termination of fixed-rate payer interest rate swaps with a notional amount of $820.8 million, compared to $3.1 billion for the same period in 2022.

Unrealized gains (losses) on interest rate swaps was $841.7 million for the three months ended June 30, 2023 compared to $897.5 million for the same period in 2022, which reflected a less steep rise in forward interest rates compared to the prior period.

Net gains (losses) on other derivatives was $160.2 million for the three months ended June 30, 2023 compared to $117.1 million for the same period in 2022.

The change in net gains (losses) on other derivatives was primarily due to favorable changes in net gains (losses) on TBA derivatives, which was ($61.5) million for the three months ended June 30, 2023 compared to ($783.3) million for the same period in 2022, partially offset by an unfavorable change in net gains (losses) on futures, which was $171.2 million for the three months ended June 30, 2023 compared to $787.1 million for the same period in 2022, and net gains (losses) on interest rate swaptions, which was $53.4 million for the three months ended June 30, 2023 compared to $119.4 million for the same period in 2022.

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

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

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.

Other, net for the three months ended June 30, 2023 was $9.1 million compared to ($5.5) million for the same period in 2022, primarily attributable to an increase in interest on custodial balances, partially offset by an increase in MSR financing expenses, a write-down and a decrease in earnings from joint ventures.

For the Six Months Ended June 30, 2023 and 2022

Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments and other was ($1.1) billion for the six months ended June 30, 2023 compared to ($790.4) million for the same period in 2022.

For the six months ended June 30, 2023, we disposed of Residential Securities with a carrying value of $13.6 billion for an aggregate net gain (loss) of ($1.1) billion.

For the same period in 2022, we disposed of Residential Securities with a carrying value of $9.4 billion for an aggregate net gain (loss) of ($801.8) million.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($175.2) million for the six months ended June 30, 2023 compared to $15.4 million for the same period in 2022, primarily due to unfavorable changes in unrealized gains (losses) on securitized debt of consolidated VIEs of ($827.8) million, Agency MBS of ($271.9) million, MSR and

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Interests in MSR of ($150.0) million, and participations issued of ($60.4) million, partially offset by favorable changes on securitized residential whole loans of consolidated VIEs of $709.7 million, residential credit securities of $264.2 million, and residential whole loans of $122.7 million.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the six months ended June 30, 2023 was $598.8 million compared to $2.2 billion for the same period in 2022, attributable to unfavorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination of 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 ($114.6) million for the six months ended June 30, 2023 compared to $2.2 billion for the same period in 2022, reflecting a sharper rise in forward interest rates during the prior period.

Realized gains (losses) on termination of interest rate swaps was ($97.7) million for the six months ended June 30, 2023 compared to $0.0 million for the same period in 2022, which reflected our termination of fixed-rate payer and receiver interest rate swaps with notional amounts of $3.1 billion and $6.3 billion, respectively, compared to $3.1 billion notional amount of fixed-rate payer interest rate swaps for the same period in 2022.

Net interest component on interest rate swaps was $811.0 million for the six months ended June 30, 2023 compared to ($61.5) million for the same period in 2022.

Net gains (losses) on other derivatives was ($24.2) million for the six months ended June 30, 2023 compared to $498.3 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 derivatives, which was ($25.3) million for the six months ended June 30, 2023 compared to $2.2 billion for the same period in 2022, and net gains (losses) on interest rate swaptions, which was $9.7 million for the six months ended June 30, 2023 compared to $227.6 million for the same period in 2022, partially offset by a favorable change in TBA derivatives, which was $0.0 million for the six months ended June 30, 2023 compared to ($1.9) billion for the same period in 2022.

Loan Loss (Provision) Reversal

For the six months ended June 30, 2023 and 2022, net loan loss reversals of $0.2 million and $26.3 million on corporate loans, respectively.

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

Business Divestiture-Related Gains (Losses)

For the six months ended June 30, 2023, 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 for additional information on the transaction.

For the six months ended June 30, 2022, business divestiture-related gains (losses) were associated with the sale of our commercial real estate business.

General and Administrative Expenses

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For the three months ended (dollars in thousands)

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.

June 30, 2023 $ 42,915 0.19 % 1.44 %

June 30, 2022 $ 36,038 0.19 % 1.28 %

For the six months ended

June 30, 2023 $ 83,743 0.19 % 1.43 %

June 30, 2022 $ 81,802 0.22 % 1.37 %

G&A expenses were $42.9 million for the three months ended June 30, 2023, an increase of $6.9 million compared to the same period in 2022.

G&A expenses were $83.7 million for the six months ended June 30, 2023, an increase of $1.9 million compared to the same period in 2022.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

Return on Average Equity

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For the three months ended

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 %

June 30, 2023 13.22 % 2.52 % (8.40 %) (1.44 %) (0.48 %) 5.42 %

June 30, 2022 16.88 % 1.76 % 14.07 % (1.28 %) (0.83 %) 30.60 %

For the six months ended

June 30, 2023 13.62 % 2.58 % (25.91) % (1.43 %) (0.43 %) (11.57 %)

June 30, 2022 16.68 % 1.35 % 32.62 % (1.37 %) (0.84 %) 48.44 %

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

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

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(dollars in thousands)

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

The fair value of these securities being less than amortized cost at March 31, 2023 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 June 30, 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.

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

Financial Condition

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

Financial Condition

Total assets were $89.3 billion and $81.9 billion at June 30, 2023 and December 31, 2022, respectively.

The change was primarily due to increases in Agency MBS of $5.5 billion, securitized residential whole loans of consolidated VIEs of $2.2 billion, principal and interest receivable of $307.2 million, receivable for unsettled trades of $212.4 million and derivative assets of $115.1 million.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at June 30, 2023:

Agency MBS MSR Residential Credit (1)

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(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.

(2) Derivatives include TBA contracts under Agency MBS.

(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 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.

Substantially all of our Agency MBS at June 30, 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.

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

At 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.

At June 30, 2023 and December 31, 2022, we had on our Consolidated Statements of Financial Condition a total of $1.3 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 acquired at a price below principal value) and a total of $2.8 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 acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended June 30, 2023 and 2022 was 7.0% and 14.9%, respectively.

The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of June 30, 2023 and 2022 was 8.6% and 7.7%, 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 March 31, 2023 and December 31, 2022.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

March 31, 2023 December 31, 2022

The following table presents our Residential Securities that were carried at fair value at June 30, 2023 and December 31, 2022.

June 30, 2023 December 31, 2022

Estimated Fair Value

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Total Residential Securities $ 70,836,771 $ 65,263,598

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 March 31, 2023 and December 31, 2022.

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Residential Securities (1)

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Management’s Discussion and Analysis

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

The following tables summarize certain characteristics of our Residential Credit portfolio at June 30, 2023.

Payment Structure Investment Characteristics (1)

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Contractual Obligations

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

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at June 30, 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 March 31, 2023, the interest rate swaps had a net fair value of ($136.6) million.

At June 30, 2023, the interest rate swaps had a net fair value of ($66.6) million.

Year One to Three

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Total $ 62,810,264 $ 1,210,608 $ 943,867 $ 25,232,293 $ 90,197,032

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

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

During the six months ended June 30, 2023, we received $3.0 billion from principal repayments and $12.5 billion in cash from disposal of Securities.

During the six months ended June 30, 2022, we received $5.7 billion from principal repayments and $8.4 billion in cash from disposal of Securities.

ANNALY CAPITAL MANAGEMENT, INC.

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Stockholders’ Equity

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

March 31, 2023 December 31, 2022

The following table provides a summary of total stockholders’ equity at June 30, 2023 and December 31, 2022:

June 30, 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 months ended March 31, 2023 and 2022, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

During the three and six months ended June 30, 2023 and 2022, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

During the three months ended June 30, 2022, we closed the public offering of an original issuance of 25 million shares of common stock for proceeds of $645.0 million before deducting offering expenses.

In connection with the 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 resulting in an additional $96.8 million in proceeds before deducting offering expenses.

The 2022 share amounts have been retroactively adjusted to reflect the effects of the Reverse Stock Split.

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, 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, 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”).

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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.

Goldman Sachs & Co.

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

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 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 six months ended June 30, 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 and six months ended June 30, 2022, under the at-the-market sales program, we issued 8.3 million shares and 8.4 million shares, as retroactively adjusted to reflect the effects of the Reverse Stock Split, for proceeds of $214.9 million and $221.1 million, respectively, each, 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.

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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.

No shares were repurchased with respect to the Preferred Stock Repurchase Program during the three and six months ended June 30, 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 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.

Our GAAP leverage ratio at June 30, 2023 and December 31, 2022 was 6.1:1 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 5.8:1 and 6.3:1, at June 30, 2023 and December 31, 2022, respectively.

Our GAAP capital ratio at June 30, 2023 and December 31, 2022 was 13.3% 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 14.3% and 13.4% at June 30, 2023 and December 31, 2022, respectively.

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

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Risk Management

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Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility.

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Management’s Discussion and Analysis

Risk Appetite

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A series of management committees has oversight or decision-making responsibilities for risk management activities.

Membership of these committees is reviewed regularly to ensure the appropriate personnel are engaged in the risk management process.

Membership of these committees is reviewed

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

regularly to ensure the appropriate personnel are engaged in the risk management process.

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

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

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Management’s Discussion and Analysis

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

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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.

(“Arcola”), other secured financing, debt issued by securitization vehicles, mortgages,

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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.

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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.

At June 30, 2023 and December 31, 2022, the weighted average days to maturity was 44 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 March 31, 2023, we had total financial assets and cash pledged against existing liabilities of $64.7 billion.

At June 30, 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 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 June 30, 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 June 30, 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)

June 30, 2023 $ 64,591,463 $ 61,637,600 $ 600,968 $ —

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

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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

The following table provides information on our repurchase agreements and other secured financing by maturity date at June 30, 2023.

The weighted average remaining maturity on our repurchase agreements and other secured financing was 48 days at June 30, 2023:

June 30, 2023

Balance Weighted

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(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.

ANNALY CAPITAL MANAGEMENT, INC.

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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 March 31, 2023:

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at June 30, 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 March 31, 2023:

The following table also provides the carrying amount of our encumbered and unencumbered financial assets at June 30, 2023:

Encumbered Assets Unencumbered Assets Total

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

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

The following table presents our liquid assets as a percentage of total assets at June 30, 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 $64.7 billion of assets that have been pledged as collateral against existing liabilities at March 31, 2023.

The assets listed in this table include $64.7 billion of assets that have been pledged as collateral against existing liabilities at June 30, 2023.

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

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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 March 31, 2023 could vary substantially based on actual prepayment experience.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

The interest rate sensitivity of our assets and liabilities in the following table at June 30, 2023 could vary substantially based on actual prepayment experience.

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

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

Investment/Market Risk Management

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

Changes in the level of interest rates can affect our net interest income, which is the difference between the income we earn on our interest earning assets and the interest expense

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

incurred from interest bearing liabilities and derivatives.

Investment/Market Risk Management

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

Changes in the level of interest rates can affect our net interest income, which is the difference between the income we earn on our interest earning assets and the interest expense incurred from interest bearing liabilities and derivatives.

Changes in the level of interest rates and spreads can also affect the value of our assets and potential realization of gains or losses from the sale of these assets.

We may utilize a variety of financial instruments, including interest rate swaps, swaptions, options, futures and other hedges, in order to limit the adverse effects of interest rates on our results.

In the case of interest rate swaps, we utilize contracts linked to LIBOR but may also enter into interest rate swaps where the floating leg is linked to the overnight index swap rate or another index, particularly in light of the scheduled cessation of LIBOR.

In the case of interest rate swaps, we utilize contracts linked to LIBOR but may also enter into interest rate swaps where the floating leg is linked to SOFR, the overnight index swap rate or another index.

In addition, we may use MAC interest rate swaps in which we may receive or make a payment at the time of entering such interest rate swap to compensate for the off-market nature of such interest rate swap.

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

The following table presents estimates at March 31, 2023.

The following table presents estimates at June 30, 2023.

Actual results could differ materially from these estimates.

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

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

We have established policies and

Generally, we are

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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

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

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

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 March 31, 2023 and December 31, 2022 was as follows:

March 31, 2023 December 31, 2022

Our portfolio composition, based on balance sheet values, at June 30, 2023 and December 31, 2022 was as follows:

June 30, 2023 December 31, 2022

Agency mortgage-backed securities 79.1 % 79.4 %

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Additionally, ALCO has oversight of our counterparty exposure.

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

The following table summarizes our exposure to counterparties by geography at June 30, 2023:

Number of Counterparties Secured Financing (1)

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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.

Compliance with Section 3(c)(5)(C) is monitored by the FRDC under oversight of the ERC.

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

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for further information.

Residential Mortgage Loans

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

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Residential Mortgage Loans

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

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

Judgments and Uncertainties:

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

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

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

Sensitivity of Estimates to Change:

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

Adjustments are made for actual prepayment activity as it

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

relates to calculating the effective yield.

forecasts and expert judgment.

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

Sensitivity of Estimates to Change:

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

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

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

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

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

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

Earnings available for distribution per average common share is a non-GAAP financial measure calculated by dividing earnings available for distribution by average basic common shares for the period.

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Non-GAAP financial measure that is calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding and net forward purchases (sales) of investments divided by total equity.

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

Recourse debt consists of repurchase agreements and other secured financing.

Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from this measure.

Economic Net Interest Income

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Assets on the company’s balance sheet which have been pledged as collateral against a liability.

dollar deposit held in Europe or elsewhere outside the United States.

The par value (i.e., principal or maturity value) of a security appearing on the face of the instrument.

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Federal National Mortgage Association.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Federal Deposit Insurance Corporation (“FDIC”)

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Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Federal Funds Rate

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Floating Rate CMO

A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the LIBOR, the Constant Maturity Treasury or the Cost of Funds Index.

A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the SOFR, the Constant Maturity Treasury or the Cost of Funds Index.

Federal Home Loan Mortgage Corporation.

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The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Interests in MSR

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Interest rate risk is a form of market risk.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Interest Rate Swap

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Inverse IO Bond

An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as LIBOR.

An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as SOFR.

As the benchmark rate changes, the IO coupon adjusts in the opposite direction.

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Calculated as total debt to total stockholders’ equity.

For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable.

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

For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, and participations issued.

Debt issued by securitization vehicles and participations issued are non-recourse to us.

LIBOR (London Interbank Offered Rate)

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

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.

A rate previously used as a benchmark for financial transactions.

All tenors of LIBOR relevant to us are either no longer published or are no longer representative.

Liquidity Risk

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

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Mortgage-Backed Security (“MBS”)

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Contractual agreements constituting the right to service an existing mortgage where the holder receives the benefits and bears the costs and risks of servicing the mortgage.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Net asset value.

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A securitization structure where a GSE or other entity “passes” the amount collected from the borrowers every month to the investor, after deducting fees and expenses.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

A collection of mortgage loans assembled by an originator or master servicer as the basis for a security.

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The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Prepayment Risk

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By contrast, the economic borrower’s obligation to repay non-recourse debt is limited to the value of the pledged collateral.

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 us and are excluded from this measure.

Recourse debt consists of repurchase agreements and other secured financing.

Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from this measure.

Reinvestment Risk

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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.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Secondary Market

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However, certain securities that mature in up to three years may be considered short-term debt.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

When buying or selling a bond through a brokerage firm, investors will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee.

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Cash or securities provided by a party to collateralize its obligations under a transaction as a result of a change in value of such transaction since the trade was executed or the last time collateral was provided.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

A statistical measure of the variance of price or yield over time.

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Warehouse lending can provide liquidity to the loan origination market.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Weighted Average Coupon

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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