ANNALY CAPITAL MANAGEMENT INC 10-Q

Item 1. Financial Statements Compensation expense for awards with performance conditions is recognized based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market conditions is recognized irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. Forfeitures are recorded when they occur. The Company generally issues new shares of common stock upon delivery of stock-based awards. Interest Income - The Company recognizes interest income primarily on Residential Securities (as defined in the “Securities” Note), residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not received is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income (Loss). For its securities, the Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), taking into account estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period. Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis. Premiums or discounts associated with the purchase of multifamily securities are amortized or accreted into interest income based upon their contractual payment terms. If a prepayment occurs, an adjustment is made to the unpaid principal balance and unamortized premium or discount in the current period and the original effective yield continues to be applied. Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss). If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower. The Company has made an accounting policy election not to measure an allowance for loans losses for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual due date for commercial loans or 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income. Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income. Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“TRSs”). As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes. Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). There were no recent ASUs that are expected to have a significant impact on the Company’s consolidated financial statements when adopted or that had a significant impact on the Company’s consolidated financial statements upon adoption. 7 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 4. FINANCIAL INSTRUMENTS The following table presents characteristics for certain of the Company’s financial instruments at June 30, 2023 and December 31, 2022. Financial Instruments (1) Balance Sheet Line Item Type / Form Measurement Basis June 30, 2023 December 31, 2022 Assets (dollars in thousands) Securities Agency mortgage-backed securities (2) Fair value, with unrealized gains (losses) through other comprehensive income $ 23,968,429 $ 34,528,515 Securities Agency mortgage-backed securities (3) Fair value, with unrealized gains (losses) through earnings 43,795,835 27,746,380 Securities Residential credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 1,064,401 997,557 Securities Non-agency mortgage-backed securities Fair value, with unrealized gains (losses) through earnings 2,008,106 1,991,146 Securities Commercial real estate debt investments - CMBS Fair value, with unrealized gains (losses) through earnings 365,690 508,406 Securities Commercial real estate debt investments - credit risk transfer securities Fair value, with unrealized gains (losses) through earnings — 17,903 Total securities 71,202,461 65,789,907 Loans, net Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 1,154,320 1,809,832 Total loans, net 1,154,320 1,809,832 Assets transferred or pledged to securitization vehicles Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 11,318,419 9,121,912 Total assets transferred or pledged to securitization vehicles 11,318,419 9,121,912 Liabilities Repurchase agreements Repurchase agreements Amortized cost 61,637,600 59,512,597 Other secured financing Loans Amortized cost 500,000 250,000 Debt issued by securitization vehicles Securities Fair value, with unrealized gains (losses) through earnings 9,789,282 7,744,160 Participations issued Participations issued Fair value, with unrealized gains (losses) through earnings 492,307 800,849 (1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. (2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities purchased prior to July 1, 2022. (3) Includes interest-only securities and reverse mortgages and, effective July 1, 2022, newly purchased Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. 5. SECURITIES The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Effective July 1, 2022, the Company elected the fair value option for any newly purchased Agency mortgage-backed securities in order to simplify the accounting for these securities. Agency mortgage-backed securities purchased prior to July 1, 2022, are still classified as available-for-sale with changes in fair value recognized in other comprehensive income. During the three and six months ended June 30, 2023, ($ 744.7 ) million and $ 358.0 million, respectively, of unrealized gains (losses) on Agency mortgage-backed securities were reported in Net gains (losses) on investments and other in the Company's Consolidated Statements of Comprehensive Income (Loss). The Company has also elected the fair value option for CRT securities, interest only securities, Non-Agency and commercial mortgage-backed securities in order to simplify the accounting. Transactions for regular-way securities are recorded on trade date, including to-be-announced (“TBA”) securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method. Impairment – Management evaluates available-for-sale securities where the fair value option has not been elected and held-to-maturity debt securities for impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely 8 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss) as a securities loss provision and reflected as an allowance for credit losses on securities on the Consolidated Statements of Financial Condition, while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). When the fair value of a held-to-maturity security is less than the cost, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”). Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis. TBA securities without intent to accept delivery (“TBA derivatives”) are accounted for as derivatives as discussed in the “Derivative Instruments” Note. CRT Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors. Non-Agency Mortgage-Backed Securities - The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, prime jumbo loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations. Agency mortgage-backed securities, non-Agency mortgage-backed securities and residential CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio. Commercial Mortgage-Backed Securities (“Commercial Securities”) - The Company invests in Commercial Securities such as conduit, credit CMBS, single-asset single borrower and collateralized loan obligations. The following represents a rollforward of the activity for the Company’s securities for the six months ended June 30, 2023: Agency Securities Residential Credit Securities Commercial Securities Total (dollars in thousands) Beginning balance January 1, 2023 $ 62,274,895 $ 2,988,703 $ 526,309 $ 65,789,907 Purchases 20,646,908 563,963 23,940 21,234,811 Sales ( 13,221,595 ) ( 405,028 ) ( 189,866 ) ( 13,816,489 ) Principal paydowns ( 2,834,559 ) ( 173,160 ) ( 4,781 ) ( 3,012,500 ) (Amortization) / accretion ( 100,881 ) 11,242 630 ( 89,009 ) Fair value adjustment 999,496 86,787 9,458 1,095,741 Ending balance June 30, 2023 $ 67,764,264 $ 3,072,507 $ 365,690 $ 71,202,461 9 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following tables present the Company’s securities portfolio that were carried at their fair value at June 30, 2023 and December 31, 2022: June 30, 2023 Principal / Notional Remaining Premium Remaining Discount Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Agency (dollars in thousands) Fixed-rate pass-through $ 68,032,859 $ 1,851,124 $ ( 1,203,805 ) $ 68,680,178 $ 43,777 $ ( 3,375,157 ) $ 65,348,798 Adjustable-rate pass-through 209,207 18,434 ( 69 ) 227,572 1,963 ( 17,985 ) 211,550 CMO 97,934 1,715 — 99,649 — ( 14,147 ) 85,502 Interest-only 2,308,196 492,333 — 492,333 1,913 ( 200,727 ) 293,519 Multifamily (1) 11,502,217 348,474 ( 1,549 ) 1,867,896 4,609 ( 75,382 ) 1,797,123 Reverse mortgages 27,225 3,310 — 30,535 — ( 2,763 ) 27,772 Total agency securities $ 82,177,638 $ 2,715,390 $ ( 1,205,423 ) $ 71,398,163 $ 52,262 $ ( 3,686,161 ) $ 67,764,264 Residential credit Credit risk transfer $ 1,037,685 $ 3,987 $ ( 4,686 ) $ 1,036,986 $ 32,292 $ ( 4,877 ) $ 1,064,401 Alt-A 137,130 9 ( 5,054 ) 132,085 450 ( 13,320 ) 119,215 Prime (2) 837,579 9,454 ( 21,866 ) 234,903 1,488 ( 39,778 ) 196,613 Subprime 226,613 — ( 30,469 ) 196,144 2,187 ( 17,445 ) 180,886 NPL/RPL 1,271,228 4,490 ( 13,052 ) 1,262,666 473 ( 69,789 ) 1,193,350 Prime jumbo (>=2010 vintage) (3) 8,388,475 63,124 ( 50,068 ) 351,332 6,797 ( 40,087 ) 318,042 Total residential credit securities $ 11,898,710 $ 81,064 $ ( 125,195 ) $ 3,214,116 $ 43,687 $ ( 185,296 ) $ 3,072,507 Total residential securities $ 94,076,348 $ 2,796,454 $ ( 1,330,618 ) $ 74,612,279 $ 95,949 $ ( 3,871,457 ) $ 70,836,771 Commercial Commercial securities $ 375,364 $ — $ ( 1,347 ) $ 374,017 $ 93 $ ( 8,420 ) $ 365,690 Total securities $ 94,451,712 $ 2,796,454 $ ( 1,331,965 ) $ 74,986,296 $ 96,042 $ ( 3,879,877 ) $ 71,202,461 December 31, 2022 Principal / Notional Remaining Premium Remaining Discount Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Agency (dollars in thousands) Fixed-rate pass-through $ 63,232,479 $ 2,105,813 $ ( 1,003,225 ) $ 64,335,067 $ 62,060 $ ( 4,367,369 ) $ 60,029,758 Adjustable-rate pass-through 232,028 17,065 ( 85 ) 249,008 2,138 ( 16,759 ) 234,387 CMO 101,543 1,781 — 103,324 — ( 13,714 ) 89,610 Interest-only 1,824,339 438,295 — 438,295 153 ( 220,371 ) 218,077 Multifamily (1) 9,801,375 311,785 ( 1,021 ) 1,750,737 7,588 ( 84,160 ) 1,674,165 Reverse mortgages 28,478 3,379 — 31,857 — ( 2,959 ) 28,898 Total agency investments $ 75,220,242 $ 2,878,118 $ ( 1,004,331 ) $ 66,908,288 $ 71,939 $ ( 4,705,332 ) $ 62,274,895 Residential credit Credit risk transfer $ 1,013,368 $ 6,790 $ ( 4,828 ) $ 1,015,330 $ 6,629 $ ( 24,402 ) $ 997,557 Alt-A 111,009 9 ( 5,048 ) 105,970 — ( 14,754 ) 91,216 Prime (2) 1,946,186 19,496 ( 17,375 ) 240,694 1,528 ( 44,352 ) 197,870 Subprime 202,304 — ( 32,188 ) 170,116 1,275 ( 15,078 ) 156,313 NPL/RPL 1,426,616 1,624 ( 15,500 ) 1,412,740 87 ( 95,673 ) 1,317,154 Prime jumbo (>=2010 vintage) (3) 5,717,558 37,260 ( 29,242 ) 272,623 1,685 ( 45,715 ) 228,593 Total residential credit securities $ 10,417,041 $ 65,179 $ ( 104,181 ) $ 3,217,473 $ 11,204 $ ( 239,974 ) $ 2,988,703 Total residential securities $ 85,637,283 $ 2,943,297 $ ( 1,108,512 ) $ 70,125,761 $ 83,143 $ ( 4,945,306 ) $ 65,263,598 Commercial Commercial securities $ 546,499 $ — $ ( 2,405 ) $ 544,094 $ — $ ( 17,785 ) $ 526,309 Total securities $ 86,183,782 $ 2,943,297 $ ( 1,110,917 ) $ 70,669,855 $ 83,143 $ ( 4,963,091 ) $ 65,789,907 (1) Principal/Notional amount includes $ 10.0 billion and $ 8.4 billion of Agency Multifamily interest-only securities as of June 30, 2023 and December 31, 2022, respectively. (2) Principal/Notional amount includes $ 0.6 billion and $ 1.7 billion of Prime interest-only securities as of June 30, 2023 and December 31, 2022, respectively. (3) Principal/Notional amount includes $ 8.1 billion and $ 5.5 billion of Prime Jumbo interest-only securities as of June 30, 2023 and December 31, 2022, respectively. 10 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table presents the Company’s Agency mortgage-backed securities portfolio by issuing Agency at June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 Investment Type (dollars in thousands) Fannie Mae $ 60,770,531 $ 54,043,015 Freddie Mac 6,938,615 8,174,080 Ginnie Mae 55,118 57,800 Total $ 67,764,264 $ 62,274,895 Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages. The following table summarizes the Company’s Residential Securities at June 30, 2023 and December 31, 2022, according to their estimated weighted average life classifications: June 30, 2023 December 31, 2022 Estimated Fair Value Amortized Cost Estimated Fair Value Amortized Cost Estimated weighted average life (dollars in thousands) Less than one year $ 205,983 $ 217,068 $ 247,921 $ 264,637 Greater than one year through five years 3,409,612 3,550,741 3,002,471 3,206,250 Greater than five years through ten years 64,372,051 67,829,362 55,593,990 59,658,578 Greater than ten years 2,849,125 3,015,108 6,419,216 6,996,296 Total $ 70,836,771 $ 74,612,279 $ 65,263,598 $ 70,125,761 The estimated weighted average lives of the Residential Securities at June 30, 2023 and December 31, 2022 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected. The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 Estimated Fair Value (1) Gross Unrealized Losses (1) Number of Securities (1) Estimated Fair Value (1) Gross Unrealized Losses (1) Number of Securities (1) (dollars in thousands) Less than 12 months $ 2,437,743 $ ( 145,721 ) 155 $ 33,061,267 $ ( 3,448,120 ) 2,481 12 Months or more 21,348,507 ( 2,241,721 ) 2,065 1,260,378 ( 266,686 ) 129 Total $ 23,786,250 $ ( 2,387,442 ) 2,220 $ 34,321,645 $ ( 3,714,806 ) 2,610 (1) Excludes interest-only mortgage-backed securities and reverse mortgages and effective July 1, 2022, newly purchased Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities have an actual or implied credit rating that is the same as that of the U.S. government. An impairment has not been recognized in earnings related to these investments because the decline in value is not related to credit quality, the Company currently has not made a decision to sell the securities nor is it more likely than not that the securities will be required to be sold before recovery. During the three and six months ended June 30, 2023, the Company disposed of $ 8.4 billion and $ 13.6 billion of Residential Securities, respectively. During the three and six months ended June 30, 2022, the Company disposed of $ 6.6 billion and $ 9.4 billion of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three and six months ended June 30, 2023 and 2022, which is included in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). 11 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Gross Realized Gains Gross Realized Losses Net Realized Gains (Losses) For the three months ended (dollars in thousands) June 30, 2023 $ 9,496 $ ( 608,732 ) $ ( 599,236 ) June 30, 2022 $ 27,263 $ ( 684,560 ) $ ( 657,297 ) For the six months ended June 30, 2023 $ 13,765 $ ( 1,134,849 ) $ ( 1,121,084 ) June 30, 2022 $ 28,828 $ ( 830,615 ) $ ( 801,787 ) 6. LOANS The Company invests in residential loans. Loans are classified as either held for investment or held for sale. Loans are eligible to be accounted for under the fair value option. If loans are elected under the fair value option, they are carried at fair value with changes in fair value recognized in earnings. Otherwise, loans held for investment are carried at cost less impairment and loans held for sale are accounted for at the lower of cost or fair value. Excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, as of June 30, 2023 and December 31, 2022, the Company rep orted $ 1.2 billion and $ 1.8 billion, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $ 1.1 million and $ 1.3 million at June 30, 2023 and December 31, 2022, respectively. Allowance for Losses – Prior to the sale of its corporate debt and commercial loan portfolios, the Company evaluated the need for a loss reserve on each of its loans classified as held-for investment and carried at amortized cost based upon estimated current expected credit losses. The Company recorded net loan loss (provisions) reversals of $ 0.0 million and $ 26.9 million for the three months ended June 30, 2023 and 2022, respectively, and $ 0.2 million and $ 26.3 million for the six months ended June 30, 2023 and 2022, respectively. The following table presents the activity of the Company’s loan investments, excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, for the six months ended June 30, 2023: Residential (dollars in thousands) Beginning balance January 1, 2023 $ 1,809,832 Purchases / originations 1,934,157 Sales and transfers (1) ( 2,544,578 ) Principal payments ( 58,070 ) Gains / (losses) 16,751 (Amortization) / accretion ( 3,772 ) Ending balance June 30, 2023 $ 1,154,320 (1) Includes transfer of residential loans to securitization vehicles with a carrying value of $ 2.5 billion during the six months ended June 30, 2023. Residential The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts. The mortgage loans are secured by first liens on primarily one-to-four family residential properties. A subsidiary of the Company has engaged a third party to act as its custodian, agent and bailee for the purposes of receiving and holding certain documents, instruments and papers related to the residential mortgage loans it purchases. Pursuant to the Company’s custodial 12 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements agreement, the custodian segregates and maintains continuous custody of all documents constituting the mortgage file with respect to each mortgage loan owned by the subsidiary in secure and fire resistant facilities and in a manner consistent with the standard of care employed by prudent mortgage loan document custodians. At or prior to the funding of any residential mortgage loan, the related seller, pursuant to the terms of our mortgage loan purchase agreement, must deliver to the custodian, the mortgage loan documents including the mortgage note, the mortgage and other related loan documents. In addition, a complete credit file for the related mortgage and borrower must be delivered to the subsidiary prior to the date of purchase. The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles and excluding loan warehouse facilities, at June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 (dollars in thousands) Fair value $ 12,472,739 $ 10,931,744 Unpaid principal balance $ 13,743,613 $ 12,247,346 The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022 for these investments, excluding loan warehouse facilities: For the Three Months Ended For the Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (dollars in thousands) Interest income $ 162,202 $ 91,645 $ 309,432 $ 165,110 Net gains (losses) on disposal of investments (1) ( 1,495 ) ( 5,321 ) ( 2,272 ) ( 12,658 ) Net unrealized gains (losses) on instruments measured at fair value through earnings (1) ( 167,759 ) ( 324,481 ) 92,680 ( 739,729 ) Total included in net income (loss) $ ( 7,052 ) $ ( 238,157 ) $ 399,840 $ ( 587,277 ) (1) These amounts are presented in the line item Net gains (losses) on investments and other on the Consolidated Statements of Comprehensive Income (loss). The following table provides the geographic concentrations based on the unpaid principal balances at June 30, 2023 and December 31, 2022 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles: Geographic Concentrations of Residential Mortgage Loans June 30, 2023 December 31, 2022 Property location % of Balance Property location % of Balance California 43.2 % California 44.8 % New York 10.0 % New York 10.3 % Florida 9.2 % Florida 8.3 % Texas 5.3 % Texas 5.1 % All other (none individually greater than 5%) 32.3 % All other (none individually greater than 5%) 31.5 % Total 100.0 % 100.0 % The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 Portfolio Range Portfolio Weighted Average Portfolio Range Portfolio Weighted Average (dollars in thousands) Unpaid principal balance $ 3 - $ 4,396 $ 481 $ 3 - $ 4,396 $ 489 Interest rate 2.00 % - 12.00 % 4.97 % 2.00 % - 15.00 % 4.61 % Maturity 7/1/2029 - 6/1/2063 12/9/2051 7/1/2029 - 1/1/2063 10/6/2051 FICO score at loan origination 588 - 839 758 588 - 831 759 Loan-to-value ratio at loan origination 5 % - 100 % 68 % 5 % - 100 % 68 % At June 30, 2023 and December 31, 2022, approximately 11 % of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate. The Company participates in an arrangement that provides a residential mortgage loan warehouse facility to a third-party originator. The Company has elected to apply the fair value option to this lending facility in order to simplify the accounting 13 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements and keep the accounting consistent with other residential credit financial instruments with similar characteristics. At both June 30, 2023 and December 31, 2022, there were no outstanding balances on this warehouse facility. Corporate Debt In April 2022, the Company entered into a definitive agreement to sell substantially all of the corporate loan interests held by the MML business operated by the Company, as well as assets managed for third parties. All of the assets comprising the MML Portfolio were transferred by the end of 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction. 7. MORTGAGE SERVICING RIGHTS MSR represent the rights and obligations associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSR. The Company generally intends to hold the MSR as investments and elected to account for all of its investments in MSR at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party acted as a master servicer for the loans providing the net servicing cash flows represented by the Interests in MSR. The Company accounts for its Interests in MSR at fair value with change in fair value presented in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other, net in the Consolidated Statements of Comprehensive Income (Loss). The following tables present activity related to MSR and Interests in MSR for the three and six months ended June 30, 2023 and 2022: Mortgage Servicing Rights Three Months Ended Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (dollars in thousands) Fair value, beginning of period $ 1,790,980 $ 1,108,937 $ 1,748,209 $ 544,562 Purchases (1) 177,521 262,960 214,151 683,983 Sales — ( 9,065 ) — ( 9,075 ) Change in fair value due to: Changes in valuation inputs or assumptions (2) 80,323 79,606 110,530 238,568 Other changes, including realization of expected cash flows ( 29,928 ) ( 21,018 ) ( 53,994 ) ( 36,618 ) Fair value, end of period $ 2,018,896 $ 1,421,420 $ 2,018,896 $ 1,421,420 (1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. (2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates. Interests in MSR Three Months Ended Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (dollars in thousands) Beginning balance $ — $ 85,653 $ — $ 69,316 Purchases (1) — ( 53 ) — 4,860 Gain (loss) included in net income — ( 1,978 ) — 9,446 Ending balance $ — $ 83,622 $ — $ 83,622 (1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. 14 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 8. VARIABLE INTEREST ENTITIES The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $ 1.2 billion at June 30, 2023. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method. Multifamily Securitization In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $ 0.5 billion and retained interest-only securities with a notional balance of $ 0.5 billion. At the inception of this arrangement, the Company determined that it was the primary beneficiary based upon its involvement in the design of this VIE and through the retention of a significant variable interest in the VIE. The Company elected the fair value option for the financial liabilities of this VIE in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. During the year ended December 31, 2022, the Company deconsolidated the 2020 multifamily VIE since it sold all of its interest-only securities and no longer retains a significant variable interest in the entity. Residential Securitizations The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. The Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. Refer to the “Securities” Note for further information on Residential Securities. OBX Trusts Residential securitizations are issued by entities generally referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company. Residential securitizations closed during the year are included in the table below. Securitization Date of Closing Face Value at Closing (dollars in thousands) OBX 2023-NQM1 January 2023 $ 405,209 OBX 2023-J1 February 2023 $ 305,755 OBX 2023-NQM2 February 2023 $ 420,650 OBX 2023-NQM3 April 2023 $ 407,525 OBX 2023-NQM4 May 2023 $ 394,291 OBX 2023-INV1 May 2023 $ 314,839 OBX 2023-NQM5 June 2023 $ 390,271 As of June 30, 2023 and December 31, 2022, a total carrying value of $ 9.8 billion and $ 7.7 billion, respectively, of bonds were held by third parties and the Company retained $ 1.2 billion and $ 1.0 billion, respectively, of MBS, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. Effective August 1, 2022, upon initial consolidation of new securitization entities, the Company elected to apply the measurement alternative for consolidated collateralized financing entities in order to simplify the accounting and valuation processes. The liabilities of these securitization entities are deemed to be more observable and are used to measure the fair value of the assets. The Company incurred $ 2.7 million and $ 1.8 million of costs during the three months ended June 30, 2023 and 2022, respectively, and $ 4.0 million and $ 5.1 million of costs during the six months ended June 30, 2023 and 2022, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $ 11.0 billion and $ 9.0 billion at June 30, 2023 and December 31, 2022, respectively. During the three months ended June 30, 2023 and 2022, the Company recorded $ 130.5 million and $ 395.9 million, respectively, and ($ 81.4 ) million and $ 694.0 million during the six months ended June 30, 2023 and 2022 of unrealized gains (losses) on debt held by third parties issued by OBX Trusts, which is reported in Net gains (losses) on investments and other in the Company's Consolidated Statements of Comprehensive Income (Loss). 15 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation. Credit Facility VIEs In connection with the sale of all of the assets that comprise the MML Portfolio, the credit facilities which provided financing for the Company’s corporate debt were paid-off and terminated during the three months ended June 30, 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction. MSR VIEs The Company owns variable interests in an entity that invests in MSR and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100 % of the voting interests in this entity, in August 2017, the Company sold 100 % of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo. The Company owned variable interests in entities that invested in Interests in MSR. These entities were VIEs because they did not have sufficient equity at risk to finance their activities and the Company was the primary beneficiary because it had power to remove the decision makers with or without cause and held substantially all of the variable interests in the entities. During the quarter ended September 30, 2022, the Company terminated its contracts previously classified as Interests in MSR on its Consolidated Statements of Financial Condition and purchased the underlying MSR. As a result, consolidated VIEs holding the Interests in MSR and related assets and liabilities were liquidated. No gain or loss was recognized upon deconsolidation. The underlying MSR were initially recognized at fair value and subsequent changes in fair value are recognized in earnings. Refer to the “Mortgage Servicing Rights” Note and “Fair Value Measurements” Note for further information regarding MSR. The statements of financial condition of the Company’s VIEs, excluding the multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at June 30, 2023 and December 31, 2022 are as follows: MSR VIE June 30, 2023 December 31, 2022 Assets (dollars in thousands) Cash and cash equivalents $ 3,544 $ 2,239 Loans 1,148 1,293 Mortgage servicing rights 22 27 Other assets 378 1,238 Total assets $ 5,092 $ 4,797 Liabilities Payable for unsettled trades $ — $ 2,152 Other liabilities 1,267 1,409 Total liabilities $ 1,267 $ 3,561 Corporate Debt Funds The Company managed parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities were considered VIEs because the investors did not have substantive liquidation, kick-out or participating rights. The fees that the Company earned were not considered variable interests of the VIE. The Company was not the primary beneficiary of the Fund Entities and therefore did not consolidate the Fund Entities. The corporate loans in the Fund Entities were assets managed for third parties and were part of the MML Portfolio transferred to Ares during the three months ended June 30, 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction. 16 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Residential Credit Fund The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of June 30, 2023 and December 31, 2022, the Company had outstanding participating interests in residential mortgage loans of $ 492.3 million and $ 800.8 million, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings. 9. SALE OF MIDDLE MARKET LENDING PORTFOLIO In April 2022, the Company entered into a definitive agreement to sell substantially all of the corporate loan interests held by the MML business operated by the Company, as well as assets managed for third parties (collectively, the “MML Portfolio”) for $ 2.4 billion. The Company’s loans, having an unpaid principal balance of $ 1.9 billion, were transferred for cash proceeds of $ 1.9 billion and a realized gain of $ 20.4 million was recorded during the year ended December 31, 2022. All of the assets comprising the MML Portfolio were transferred by the end of 2022. 10. DERIVATIVE INSTRUMENTS Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Secured Overnight Financing Rate (“SOFR”) futures contracts and certain forward purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts. Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on derivatives. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged or received under such transactions. At June 30, 2023 and December 31, 2022, ($ 3.1 ) billion and ($ 3.2 ) billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value. 17 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may have outstanding interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), SOFR, the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value. Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The Company’s swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values. TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market values. Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing. Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis. Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps. 18 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The table below summarizes fair value information about the Company’s derivative assets and liabilities at June 30, 2023 and December 31, 2022: Derivatives Instruments June 30, 2023 December 31, 2022 Assets (dollars in thousands) Interest rate swaps $ 30,026 $ 33,006 Interest rate swaptions 264,406 256,991 TBA derivatives 21,460 17,056 Futures contracts 139,108 33,179 Purchase commitments 2,119 1,832 Total derivative assets $ 457,119 $ 342,064 Liabilities Interest rate swaps $ 96,618 $ 108,724 TBA derivatives 19,187 69,270 Futures contracts (1) 37,049 11,919 Purchase commitments 3,328 460 Credit derivatives (2) — 13,799 Total derivative liabilities $ 156,182 $ 204,172 (1) As of June 30, 2023, this includes $ 36.4 million of SOFR futures options. (2) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $ 420.0 million at December 31, 2022, plus any coupon shortfalls on the underlying tranche. As of December 31, 2022 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and AA. The following tables summarize certain characteristics of the Company’s interest rate swaps at June 30, 2023 and December 31, 2022: June 30, 2023 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) (dollars in thousands) 0 - 3 years $ 21,617,608 2.02 % 5.01 % 0.89 3 - 6 years 7,464,799 2.96 % 5.06 % 4.57 6 - 10 years 27,823,637 2.72 % 5.12 % 8.10 Greater than 10 years 2,081,060 3.71 % 4.84 % 24.43 Total / Weighted average $ 58,987,104 2.50 % 5.05 % 5.58 December 31, 2022 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) (dollars in thousands) 0 - 3 years $ 26,355,700 0.88 % 4.33 % 0.75 3 - 6 years 1,120,400 2.53 % 3.95 % 4.07 6 - 10 years 22,492,200 2.54 % 4.24 % 8.76 Greater than 10 years 2,309,000 3.49 % 4.26 % 22.93 Total / Weighted average $ 52,277,300 1.74 % 4.28 % 5.25 (1) As of June 30, 2023, 12 %, 12 % and 76 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the SOFR, respectively. As of December 31, 2022, 17 %, 23 % and 60 % of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the SOFR, respectively. (2) As of June 30, 2023, notional amount includes $ 734.0 million of forward starting pay fixed swaps. There were no forward starting swaps at December 31, 2022. (3) The weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed. 19 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following tables summarize certain characteristics of the Company’s swaptions at June 30, 2023 and December 31, 2022: June 30, 2023 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay $ 2,500,000 2.02 % 3M LIBOR 7.69 8.25 Long receive $ 750,000 1.57 % 3M LIBOR 10.57 6.79 December 31, 2022 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay $ 2,500,000 2.02 % 3M LIBOR 8.19 14.28 Long receive $ 750,000 1.57 % 3M LIBOR 11.07 12.82 The following tables summarize certain characteristics of the Company’s TBA derivatives at June 30, 2023 and December 31, 2022: June 30, 2023 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts $ 5,649,000 $ 5,537,076 $ 5,519,589 $ ( 17,487 ) Sale contracts ( 1,915,000 ) ( 1,911,633 ) ( 1,891,873 ) 19,760 Net TBA derivatives $ 3,734,000 $ 3,625,443 $ 3,627,716 $ 2,273 December 31, 2022 (dollars in thousands) Purchase contracts $ 10,589,000 $ 10,675,739 $ 10,623,350 $ ( 52,389 ) Sale contracts ( 44,000 ) ( 44,849 ) ( 44,674 ) 175 Net TBA derivatives $ 10,545,000 $ 10,630,890 $ 10,578,676 $ ( 52,214 ) The following tables summarize certain characteristics of the Company’s futures derivatives at June 30, 2023 and December 31, 2022: June 30, 2023 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 2 year $ — $ ( 9,071,400 ) 1.97 U.S. Treasury futures - 5 year 98,000 — 4.39 U.S. Treasury futures - 10 year and greater — ( 2,439,800 ) 8.01 Total $ 98,000 $ ( 11,511,200 ) 3.26 December 31, 2022 Notional - Long Positions Notional - Short Positions Weighted Average Years to Maturity (dollars in thousands) U.S. Treasury futures - 2 year $ — $ ( 8,518,400 ) 1.96 U.S. Treasury futures - 5 year — ( 5,803,400 ) 4.37 U.S. Treasury futures - 10 year and greater — ( 6,866,900 ) 8.15 Total $ — $ ( 21,188,700 ) 4.63 20 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The Company presents derivative contracts on a gross basis in the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty. The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset in our Consolidated Statements of Financial Condition at June 30, 2023 and December 31, 2022, respectively. June 30, 2023 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaps, at fair value $ 30,026 $ ( 23,168 ) $ — $ 6,858 Interest rate swaptions, at fair value 264,406 ( 113,023 ) ( 147,234 ) 4,149 TBA derivatives, at fair value 21,460 ( 1,699 ) — 19,761 Futures contracts, at fair value 139,108 ( 24,822 ) — 114,286 Purchase commitments 2,119 — — 2,119 Liabilities Interest rate swaps, at fair value $ 96,618 $ ( 57,398 ) $ — $ 39,220 TBA derivatives, at fair value 19,187 ( 16,480 ) ( 1,761 ) 946 Futures contracts, at fair value (1) 37,049 ( 24,822 ) ( 12,227 ) — Purchase commitments 3,328 — — 3,328 December 31, 2022 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaps, at fair value $ 33,006 $ ( 24,625 ) $ — $ 8,381 Interest rate swaptions, at fair value 256,991 — — 256,991 TBA derivatives, at fair value 17,056 ( 16,875 ) — 181 Futures contracts, at fair value 33,179 ( 2,414 ) — 30,765 Purchase commitments 1,832 — — 1,832 Liabilities Interest rate swaps, at fair value $ 108,724 $ ( 24,625 ) $ ( 1,251 ) $ 82,848 TBA derivatives, at fair value 69,270 ( 16,875 ) — 52,395 Futures contracts, at fair value 11,919 ( 2,414 ) ( 9,505 ) — Purchase commitments 460 — — 460 Credit derivatives 13,799 — ( 9,291 ) 4,508 (1) As of June 30, 2023, this includes $ 36.4 million of SOFR futures options. The effect of interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss) is as follows: Location on Consolidated Statements of Comprehensive Income (Loss) Net Interest Component of Interest Rate Swaps (1) Realized Gains (Losses) on Termination of Interest Rate Swaps (1) Unrealized Gains (Losses) on Interest Rate Swaps (1) For the three months ended (dollars in thousands) June 30, 2023 $ 425,293 $ 48,148 $ 841,702 June 30, 2022 $ 992 $ ( 16 ) $ 897,537 For the six months ended June 30, 2023 $ 810,999 $ ( 97,671 ) $ ( 114,570 ) June 30, 2022 $ ( 61,549 ) $ ( 16 ) $ 2,220,976 (1) Included in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). 21 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The effect of other derivative contracts in the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows: Three Months Ended June 30, 2023 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Derivatives (dollars in thousands) Net TBA derivatives $ 99,361 $ ( 160,873 ) $ ( 61,512 ) Net interest rate swaptions — 53,413 53,413 Futures (1) ( 242,013 ) 413,240 171,227 Purchase commitments — ( 3,444 ) ( 3,444 ) Credit derivatives ( 17,970 ) 18,468 498 Total $ 160,182 (1) For the three months ended June 30, 2023, this includes $ 18.8 million of unrealized loss related to SOFR futures options. Three Months Ended June 30, 2022 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Derivatives (dollars in thousands) Net TBA derivatives $ ( 1,064,242 ) $ 280,992 $ ( 783,250 ) Net interest rate swaptions — 119,436 119,436 Futures 1,167,524 ( 380,436 ) 787,088 Purchase commitments — 2,671 2,671 Credit derivatives 374 ( 9,189 ) ( 8,815 ) Total $ 117,130 Six Months Ended June 30, 2023 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives (dollars in thousands) Net TBA derivatives $ ( 54,488 ) $ 54,487 $ ( 1 ) Net interest rate swaptions 2,323 7,415 9,738 Futures (1) ( 123,681 ) 98,362 ( 25,319 ) Purchase commitments — ( 2,581 ) ( 2,581 ) Credit derivatives ( 19,282 ) 13,260 ( 6,022 ) Total $ ( 24,185 ) (1) For the six months ended June 30, 2023, this includes $ 18.8 million of unrealized loss related to SOFR futures options. Six Months Ended June 30, 2022 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives (dollars in thousands) Net TBA derivatives $ ( 1,820,381 ) $ ( 79,239 ) $ ( 1,899,620 ) Net interest rate swaptions ( 14,450 ) 242,058 227,608 Futures 1,720,678 458,516 2,179,194 Purchase commitments — 2,172 2,172 Credit derivatives 1,434 ( 12,528 ) ( 11,094 ) Total $ 498,260 Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the 22 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange. Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features were in a net asset position at June 30, 2023. 11. FAIR VALUE MEASUREMENTS The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instrument and MSR fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value. The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis. The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level. Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1. Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities. Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy. The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2. 23 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information. The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including discount rates, prepayment rates, delinquency levels and costs to service. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented. June 30, 2023 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 67,764,264 $ — $ 67,764,264 Credit risk transfer securities — 1,064,401 — 1,064,401 Non-Agency mortgage-backed securities — 2,008,106 — 2,008,106 Commercial mortgage-backed securities — 365,690 — 365,690 Loans Residential mortgage loans — 1,154,320 — 1,154,320 Mortgage servicing rights — — 2,018,896 2,018,896 Assets transferred or pledged to securitization vehicles — 11,318,419 — 11,318,419 Derivative assets Interest rate swaps — 30,026 — 30,026 Other derivatives 139,108 287,985 — 427,093 Total assets $ 139,108 $ 83,993,211 $ 2,018,896 $ 86,151,215 Liabilities Debt issued by securitization vehicles — 9,789,282 — 9,789,282 Participations issued — 492,307 — 492,307 Derivative liabilities Interest rate swaps — 96,618 — 96,618 Other derivatives 37,049 22,515 — 59,564 Total liabilities $ 37,049 $ 10,400,722 $ — $ 10,437,771 24 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements December 31, 2022 Level 1 Level 2 Level 3 Total Assets (dollars in thousands) Securities Agency mortgage-backed securities $ — $ 62,274,895 $ — $ 62,274,895 Credit risk transfer securities — 997,557 — 997,557 Non-Agency mortgage-backed securities — 1,991,146 — 1,991,146 Commercial mortgage-backed securities — 526,309 — 526,309 Loans Residential mortgage loans — 1,809,832 — 1,809,832 Mortgage servicing rights — — 1,748,209 1,748,209 Assets transferred or pledged to securitization vehicles — 9,121,912 — 9,121,912 Derivative assets Interest rate swaps — 33,006 — 33,006 Other derivatives 33,179 275,879 — 309,058 Total assets $ 33,179 $ 77,030,536 $ 1,748,209 $ 78,811,924 Liabilities Debt issued by securitization vehicles $ — $ 7,744,160 $ — $ 7,744,160 Participations issued — 800,849 — 800,849 Derivative liabilities Interest rate swaps — 108,724 — 108,724 Other derivatives 11,919 83,529 — 95,448 Total liabilities $ 11,919 $ 8,737,262 $ — $ 8,749,181 Qualitative and Quantitative Information about Level 3 Fair Value Measurements The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSR and Interests in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interests in MSR. Refer to the “Mortgage Servicing Rights” Note for additional information, including rollforwards. The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments. Unobservable Input (1) Range (Weighted Average) (2) June 30, 2023 December 31, 2022 Discount rate 7.6 % - 10.2 % ( 8.8 %) 8.4 % - 10.7 % ( 9.7 %) Prepayment rate 4.6 % - 9.0 % ( 5.2 %) 4.8 % - 8.1 % ( 5.4 %) Delinquency rate 0.2 % - 3.9 % ( 1.2 %) 0.2 % - 4.5 % ( 1.3 %) Cost to service $ 85 - $ 109 ($ 94 ) $ 86 - $ 118 ($ 95 ) (1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets. (2) Weighted average discount rate computed based on the fair value of MSR, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSR. 25 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 Carrying Value Fair Value Carrying Value Fair Value Financial liabilities Repurchase agreements $ 61,637,600 $ 61,637,600 $ 59,512,597 $ 59,512,597 Other secured financing 500,000 500,000 250,000 250,000 The carrying values of repurchase agreements and short term other secured financing approximate fair value and are considered Level 2 fair value measurements. Long term other secured financing is valued using Level 2 inputs. 12. INTANGIBLE ASSETS Intangible assets, net Finite life intangible assets are amortized over their expected useful lives. As part of the Company’s management internalization transaction, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $ 41.2 million based on the replacement cost of the employee base acquired by the Company. The following table presents the activity of finite lived intangible assets for the six months ended June 30, 2023. Intangible Assets, net (dollars in thousands) Beginning balance January 1, 2023 $ 16,679 Less: amortization expense ( 1,516 ) Ending balance June 30, 2023 $ 15,163 13. SECURED FINANCING Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing , and has determined that each of the financing agreements should be treated as a secured financing. The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities. Generally, the Company receives or posts collateral with a fair value approximately equal to or greater than the value of the secured financing. Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows. The Company had outstanding $ 61.6 billion and $ 59.5 billion of repurchase agreements with weighted average remaining maturities of 44 days and 27 days at June 30, 2023 and December 31, 2022, respectively. In connection with its residential mortgage loans, the Company has select arrangements with counterparties to enter into repurchase agreements for $ 2.0 billion with remaining capacity of $ 1.4 billion at June 30, 2023. 26 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements At June 30, 2023 and December 31, 2022, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: June 30, 2023 Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day $ — $ — $ — $ — $ — $ — — % 2 to 29 days 39,019,374 367,226 658,795 — 277,340 40,322,735 5.24 % 30 to 59 days 12,163,114 257,347 758,575 — — 13,179,036 5.35 % 60 to 89 days 612,095 — 647,848 — 4,253 1,264,196 5.78 % 90 to 119 days 753,315 — 191,428 3,622 42,719 991,084 5.51 % Over 119 days (1) 5,371,078 — — 509,471 — 5,880,549 5.36 % Total $ 57,918,976 $ 624,573 $ 2,256,646 $ 513,093 $ 324,312 $ 61,637,600 5.29 % December 31, 2022 Agency Mortgage-Backed Securities CRTs Non-Agency Mortgage-Backed Securities Residential Mortgage Loans Commercial Mortgage-Backed Securities Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day $ — $ — $ — $ — $ — $ — — % 2 to 29 days 30,244,050 193,069 524,432 200,931 263,711 31,426,193 4.27 % 30 to 59 days 21,200,770 149,733 632,673 — 124,390 22,107,566 4.18 % 60 to 89 days 4,410,473 — 782,905 — 68,647 5,262,025 4.59 % 90 to 119 days — 125,893 73,251 168,656 — 367,800 5.82 % Over 119 days (1) — — — 349,013 — 349,013 6.37 % Total $ 55,855,293 $ 468,695 $ 2,013,261 $ 718,600 $ 456,748 $ 59,512,597 4.29 % (1) No repurchase agreements had a remaining maturity over 1 year at June 30, 2023. No repurchase agreements had a remaining maturity over 1 year at December 31, 2022. The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at June 30, 2023 and December 31, 2022. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments. June 30, 2023 December 31, 2022 Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements (dollars in thousands) Gross amounts $ — $ 61,637,600 $ — $ 59,512,597 Amounts offset — — — — Netted amounts $ — $ 61,637,600 $ — $ 59,512,597 Other Secured Financing - As of June 30, 2023, the Company had $ 750 million in total committed credit facilities to finance a portion of its MSR portfolio. Outstanding borrowings under this facility as of June 30, 2023 totaled $ 500.0 million with maturities ranging between one to three years . The weighted average interest rate of the borrowings was 7.92 % as of June 30, 2023. Borrowings are reported in Other secured financing in the Company’s Consolidated Statements of Financial Condition. Refer to the “Variable Interest Entities” Note for additional information on the Company’s other secured financing arrangements at December 31, 2022. Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $ 64.8 billion and $ 249.5 million, respectively, at June 30, 2023 and $ 62.2 billion and $ 226.4 million, respectively, at December 31, 2022. 27 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 14. CAPITAL STOCK (A) Common Stock The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at June 30, 2023 and December 31, 2022. Shares authorized Shares issued and outstanding June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Par Value Common stock 1,468,250,000 2,936,500,000 493,893,288 468,309,810 $ 0.01 In December 2020, the Company announced that its Board of Directors (“Board”) authorized the repurchase of up to $ 1.5 billion of its outstanding common shares through December 31, 2021 (the “Prior Share Repurchase Program”). In January 2022, the Company announced that its Board authorized the repurchase of up to $ 1.5 billion of its outstanding shares of common stock through December 31, 2024 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the 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. On August 6, 2020, the Company entered into separate Amended and Restated Distribution Agency Agreements (as amended by Amendment No. 1 to the Amended and Restated Distribution Agency Agreements on August 6, 2021 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, the Company may offer and sell shares of its common stock, having an aggregate offering price of up to $ 1.5 billion, from time to time through any of the Sales Agents (the “at-the-market sales program”). During the three months ended June 30, 2022, the Company 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, the Company granted the underwriters a thirty-day option to purchase up to an additional 3.75 million shares of common stock, which the underwriters exercised in full, resulting in an additional $ 96.8 million in proceeds before deducting offering expenses. During the six months ended June 30, 2023, under the at-the-market sales program, the Company issued 25.3 million shares for proceeds of $ 562.7 million, net of commissions and fees. During the three and six months ended June 30, 2022, under the at-the-market sales program, the Company issued 8.3 million shares for proceeds of $ 214.9 million, and 8.4 million shares for proceeds of $ 221.1 million, respectively, each net of commissions and fees. The 2022 share amounts have been retroactively adjusted to reflect the effects of the Reverse Stock Split. (B) Preferred Stock The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at June 30, 2023 and December 31, 2022. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets. Shares Authorized Shares Issued And Outstanding Carrying Value Contractual Rate Earliest Redemption Date (1) Date At Which Dividend Rate Becomes Floating Floating Annual Rate June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Fixed-to-floating rate Series F 28,800,000 28,800,000 28,800,000 28,800,000 696,910 696,910 6.95 % 9/30/2022 9/30/2022 3M LIBOR + 4.993 % Series G 17,000,000 17,000,000 17,000,000 17,000,000 411,335 411,335 6.50 % 3/31/2023 3/31/2023 3M LIBOR + 4.172 % Series I 17,700,000 17,700,000 17,700,000 17,700,000 428,324 428,324 6.75 % 6/30/2024 6/30/2024 3M LIBOR + 4.989 % Total 63,500,000 63,500,000 63,500,000 63,500,000 $ 1,536,569 $ 1,536,569 (1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company. Each series of preferred stock has a par value of $ 0.01 per share and a liquidation and redemption price of $ 25.00 , plus accrued and unpaid dividends through their redemption date. Through June 30, 2023, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock. 28 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements The Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Fixed-to-Floating Rate Cumulative Preferred Stock and Series I Fixed-to-Floating Rate Cumulative Preferred Stock rank senior to the common stock of the Company. On November 3, 2022, the Company’s Board of Directors approved a repurchase plan for all of its existing outstanding Preferred Stock (as defined below, the “Preferred Stock Repurchase Program”). Under the terms of the plan, the Company is authorized to repurchase up to an aggregate of 63,500,000 shares of Preferred Stock, comprised of up to (i) 28,800,000 shares of its 6.95 % Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $ 0.01 per share (the “Series F Preferred Stock”), (ii) 17,000,000 shares of its 6.50 % Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $ 0.01 per share (the “Series G Preferred Stock”), and (iii) 17,700,000 shares of its 6.75 % Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $ 0.01 per share (the “Series I Preferred Stock”, and together with Series F Preferred Stock and Series G Preferred Stock, the “Preferred Stock”). The aggregate liquidation value of the Preferred Stock that may be repurchased by the Company pursuant to the Preferred Stock Repurchase Program, as of November 3, 2022, was approximately $ 1.6 billion. The Preferred Stock Repurchase Program became effective on November 3, 2022, and shall expire on December 31, 2024. No shares were repurchased with respect to the Preferred Stock Repurchase Program during the three and six months ended June 30, 2023. (C) Distributions to Stockholders The following table provides a summary of the Company’s dividend distribution activity for the periods presented: For the Three Months Ended For the Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (dollars in thousands, except per share data) Dividends and dividend equivalents declared on common stock and share-based awards $ 322,448 $ 355,467 $ 644,947 $ 677,664 Distributions declared per common share $ 0.65 $ 0.88 $ 1.30 $ 1.76 Distributions paid to common stockholders after period end $ 321,031 $ 354,027 $ 321,031 $ 354,027 Distributions paid per common share after period end $ 0.65 $ 0.88 $ 0.65 $ 0.88 Date of distributions paid to common stockholders after period end July 28, 2023 July 29, 2022 July 28, 2023 July 29, 2022 Dividends declared to series F preferred stockholders $ 18,274 $ 12,510 $ 35,776 $ 25,020 Dividends declared per share of series F preferred stock $ 0.635 $ 0.434 $ 1.242 $ 0.869 Dividends declared to series G preferred stockholders $ 10,025 $ 6,906 $ 16,931 $ 13,812 Dividends declared per share of series G preferred stock $ 0.590 $ 0.406 $ 0.996 $ 0.813 Dividends declared to series I preferred stockholders $ 7,467 $ 7,467 $ 14,934 $ 14,934 Dividends declared per share of series I preferred stock $ 0.422 $ 0.422 $ 0.844 $ 0.844 29 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 15. INTEREST INCOME AND INTEREST EXPENSE Refer to the “Significant Accounting Policies” Note for details surrounding the Company’s accounting policy related to net interest income on securities and loans. The following table summarizes the interest income recognition methodology for Residential Securities: Interest Income Methodology Agency Fixed-rate pass-through (1) Effective yield (3) Adjustable-rate pass-through (1) Effective yield (3) Multifamily (1) Contractual Cash Flows CMO (1) Effective yield (3) Reverse mortgages (2) Prospective Interest-only (2) Prospective Residential credit CRT (2) Prospective Alt-A (2) Prospective Prime (2) Prospective Subprime (2) Prospective NPL/RPL (2) Prospective Prime jumbo (2) Prospective (1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss) for securities purchased prior to July 1, 2022. Effective July 1, 2022, changes in fair value are recognized in Net gains (losses) on investments and other on the accompanying Consolidated Statements of Comprehensive Income (Loss) for newly purchased securities. (2) Changes in fair value are recognized in Net gains (losses) on investments and other on the accompanying Consolidated Statements of Comprehensive Income (Loss). (3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception. The following table presents the components of the Company’s interest income and interest expense for the three and six months ended June 30, 2023 and 2022. For the Three Months Ended June 30, For the Six Months Ended June 30, 2023 2022 2023 2022 Interest income (dollars in thousands) Agency securities $ 686,912 $ 497,135 $ 1,290,014 $ 1,020,086 Residential credit securities 56,477 30,037 110,222 52,159 Residential mortgage loans (1) 162,202 91,648 309,433 165,136 Commercial investment portfolio (1) (2) 8,310 26,575 18,197 63,858 Reverse repurchase agreements 7,593 220 11,878 226 Total interest income $ 921,494 $ 645,615 $ 1,739,744 $ 1,301,465 Interest expense Repurchase agreements 841,257 105,608 1,539,999 132,487 Debt issued by securitization vehicles 101,819 50,303 190,753 84,928 Participations issued 10,381 9,379 21,492 15,231 Other — 5,185 — 12,751 Total interest expense 953,457 170,475 1,752,244 245,397 Net interest income $ ( 31,963 ) $ 475,140 $ ( 12,500 ) $ 1,056,068 (1) Includes assets transferred or pledged to securitization vehicles. (2) Includes commercial real estate debt and preferred equity and corporate debt. 30 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 16. NET INCOME (LOSS) PER COMMON SHARE The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and six months ended June 30, 2023 and 2022. For the Three Months Ended For the Six Months Ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (dollars in thousands, except per share data) Net income (loss) $ 161,187 $ 863,317 $ ( 678,141 ) $ 2,887,211 Net income (loss) attributable to noncontrolling interests ( 5,846 ) ( 3,379 ) ( 918 ) ( 1,740 ) Net income (loss) attributable to Annaly 167,033 866,696 ( 677,223 ) 2,888,951 Dividends on preferred stock 35,766 26,883 67,641 53,766 Net income (loss) available (related) to common stockholders $ 131,267 $ 839,813 $ ( 744,864 ) $ 2,835,185 Weighted average shares of common stock outstanding-basic 494,165,256 380,609,192 491,939,177 373,017,228 Add: Effect of stock awards, if dilutive 193,726 289,558 — 296,495 Weighted average shares of common stock outstanding-diluted 494,358,982 380,898,750 491,939,177 373,313,723 Net income (loss) per share available (related) to common share Basic $ 0.27 $ 2.21 $ ( 1.51 ) $ 7.60 Diluted $ 0.27 $ 2.20 $ ( 1.51 ) $ 7.59 The computations of diluted net income (loss) per share available (related) to common share for the three and six months ended June 30, 2023 excludes 1.3 million and 1.8 million, respectively, and for the three and six months ended June 30, 2022 excludes 0.8 million and 0.7 million, respectively, of potentially dilutive restricted and performance stock units because their effect would have been anti-dilutive. 17. INCOME TAXES For the three months ended June 30, 2023, the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100 % of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code. The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of joint ventures, have made separate joint elections to treat these subsidiaries as TRSs. As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income. The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at June 30, 2023 and December 31, 2022. The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company’s TRSs are subject to federal, state and local taxes. During the three and six months ended June 30, 2023, the Company recorded $ 14.3 million and $ 25.3 million, respectively, of income tax expense attributable to its TRSs. During the three and six months ended June 30, 2022, the Company recorded $ 23.4 million and $ 50.0 million, respectively, of income tax expense attributable to its TRSs. The Company’s federal, state and local tax returns from 2019 and forward remain open for examination. 31 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 18. RISK MANAGEMENT The primary risks to the Company are capital, liquidity and funding risk, investment/market risk, credit risk and operational risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the existing collateral to reduce borrowing levels. The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges. Weakness in the mortgage market, the shape of the yield curve, changes in the expectations for the volatility of future interest rates and deterioration of financial conditions in general may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging strategies. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on commercial mortgage-backed securities, residential mortgage loans, CRT securities, and other non-Agency mortgage-backed securities. MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase overall costs to service the underlying mortgage loans. The Company is exposed to risk of loss if an issuer, borrower or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers and counterparties, credit rating monitoring and active servicer oversight. The Company depends on third-party service providers to perform various business processes related to its operations, including mortgage loan servicers and sub-servicers. The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors. For mortgage loan servicers and sub-servicers, these procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information. 32 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1. Financial Statements 19. LEASE COMMITMENTS AND CONTINGENCIES The Company’s operating leases are primarily comprised of corporate office leases with remaining lease terms of approximately two years and five years , respectively. The corporate office leases include options to extend for up to five years , however the extension terms were not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the three and six months ended June 30, 2023 and 2022 was $ 0.8 million and $ 1.6 million, and $ 0.8 million and $ 1.6 million, respectively. Supplemental information related to leases as of and for the six months ended June 30, 2023 was as follows: Operating Leases Classification June 30, 2023 Assets (dollars in thousands) Operating lease right-of-use assets Other assets $ 7,432 Liabilities Operating lease liabilities (1) Other liabilities $ 9,422 Lease term and discount rate Weighted average remaining lease term 2.5 years Weighted average discount rate (1) 3.2 % Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,030 (1) For the Company’s leases that do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. The following table provides details related to maturities of lease liabilities: Maturity of Lease Liabilities Years ending December 31, (dollars in thousands) 2023 (remaining) $ 2,050 2024 4,107 2025 3,149 2026 261 2027 269 Later years 22 Total lease payments $ 9,858 Less imputed interest 436 Present value of lease liabilities $ 9,422 Contingencies From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were no material contingencies at June 30, 2023 and December 31, 2022. 20. SUBSEQUENT EVENTS In July 2023, the Company completed and closed the securitization of residential mortgage loans, OBX 2023-NQM6, with a face value of $ 400.5 million. The securitization represents financing transactions which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company. 33 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Such statements include those relating to the Company’s future performance, macro outlook, the interest rate and credit environments, tax reform and future opportunities. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities (“MBS”) and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of the Company’s assets; changes in business conditions and the general economy; the Company’s ability to grow its residential credit business; the Company's ability to grow its mortgage servicing rights business; credit risks related to the Company’s investments in credit risk transfer securities and residential mortgage-backed securities and related residential mortgage credit assets; risks related to investments in mortgage servicing rights; the Company’s ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting the Company’s business; the Company’s ability to maintain its qualification as a REIT for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; and risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q. 34 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis INDEX TO ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 36 Reverse Stock Split 36 Business Environment 36 Economic Environment 37 London Interbank Offered Rate (“LIBOR”) Transition 38 Income Tax Reform 38 Results of Operations 39 Net Income (Loss) Summary 40 Non-GAAP Financial Measures 42 Earnings Available for Distribution , Earnings Available for Distribution Attributable to Common Stockholders, Earnings Available for Distribution Per Average Common Share and Annualized EAD Return on Average Equity 42 Premium Amortization Expense 44 Economic Leverage and Economic Capital Ratios 44 Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA) 45 Experienced and Projected Long-term CPR 46 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 47 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 48 Other Income (Loss) 49 General and Administrative Expenses 50 Return on Average Equity 51 Unrealized Gains and Losses - Available-for-Sale Investments 51 Financial Condition 52 Residential Securities 52 Contractual Obligations 54 Commitments and Contractual Obligations with Unconsolidated Entities 55 Capital Management 55 Stockholders’ Equity 55 Capital Stock 55 Leverage and Capital 56 Risk Management 57 Risk Appetite 57 Governance 57 Description of Risks 58 Capital, Liquidity and Funding Risk Management 58 Funding 58 Excess Liquidity 60 Maturity Profile 61 Stress Testing 62 Liquidity Management Policies 62 Investment/Market Risk Management 63 Credit Risk Management 63 Counterparty Risk Management 64 Operational Risk Management 65 Compliance, Regulatory and Legal Risk Management 65 Critical Accounting Estimates 66 Valuation of Financial Instruments 66 Residential Securities 66 Residential Mortgage Loans 67 MSR 67 Interest Rate Swaps 67 Revenue Recognition 67 Consolidation of Variable Interest Entities 68 Use of Estimates 68 Glossary of Terms 69 35 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Overview We are a leading diversified capital manager with investment strategies across mortgage finance. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities. For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K. Reverse Stock Split On September 8, 2022, we announced that our Board had unanimously approved a reverse stock split of our common stock at a ratio of 1-for-4 (the “Reverse Stock Split”). The Reverse Stock Split was effective following the close of business on September 23, 2022 (the “Effective Time”). Accordingly, at the Effective Time, every four issued and outstanding shares of our common stock were converted into one share of our common stock. No fractional shares were issued in connection with the Reverse Stock Split. Instead, each stockholder that would have held fractional shares as a result of the Reverse Stock Split received cash in lieu of such fractional shares. The par value per share of our common stock remained unchanged at $0.01 per share after the Reverse Stock Split. Accordingly, for all historical periods presented, an amount equal to the par value of the reduced number of shares resulting from the Reverse Stock Split was reclassified from Common stock to Additional paid in capital in our Consolidated Statements of Financial Condition. All references made to share or per share amounts in the accompanying consolidated financial statements and disclosures have been retroactively adjusted, where applicable, to reflect the effects of the Reverse Stock Split. Business Environment The U.S. economy remains on solid footing demonstrated by healthy gains in the labor market and economic growth consistent with the prior quarter as the regional banking stress has abated. Banks have largely been able to retain deposits and the main implication of the turbulence has been the overhang of assets from the Silicon Valley Bank and Signature Bank receiverships that need to be absorbed by private market participants. The Federal Deposit Insurance Corporation (“FDIC”) began selling assets in the second quarter, which weighed on Agency MBS for parts of the quarter, but money manager demand and transparency on the disposition process have already helped the market digest a substantial portion of the $114 billion in assets. Inflation remained elevated through most of the quarter. However, data began to signal a more pronounced slowdown in June as lower used-car prices, an improvement in shelter inflation, and a seemingly more price sensitive consumer have begun to put downward pressure on prices. Economic data during the quarter suggests that the likelihood of a “soft landing” has increased and that the Federal Reserve (“Fed”) will hold interest rates higher for longer, particularly if the labor market continues to demonstrate resilience. We believe that the Fed has reached peak interest rate levels for the cycle after the 25 basis points increase at the Federal Open Market Committee (“FOMC”) meeting in July, but upside surprises in inflation readings may lead to an additional hike this year. The housing market has continued to perform well, having experienced five consecutive months of national home price increases according to Zillow. Recent momentum has turned positive even in previously hard-hit areas, as the top 50 metro areas all experienced positive month-over-month home price appreciation in June, with year-to-date national home prices now up 4.7%. Many market participants were projecting meaningful home price declines with the assumption that elevated mortgage rates and low affordability would translate to reduced housing demand. Although transactional activity has declined, the market has been supported by historically low available-for-sale inventory as existing borrowers with low mortgage rates are unwilling to move given the potential increase in payments. Total active inventory was down approximately 10% from last year and is currently 45% below June 2019 levels. The current balance of supply and demand in the housing market and resilient home prices are positive for both our Residential Credit and MSR portfolios as existing borrowers retain and build more equity. Given the challenging supply and demand picture in the Agency MBS market in the early part of the quarter, we proactively reduced our exposure with our portfolio declining by roughly $5 billion in notional value in the quarter. This tactical shift proved to be beneficial as spreads reached their quarterly peak in late May and it afforded us flexibility to opportunistically deploy capital across our businesses amidst the volatility. In June, after the U.S. Congress resolved the debt ceiling and the banking sector recovered, risk-on sentiment reemerged and Agency MBS experienced broad-based outperformance, ultimately driving spreads modestly tighter for the quarter. 36 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis We continued to rotate our portfolio positioning into higher coupons, which provide the most attractive nominal spreads while reducing our holdings of seasoned intermediate coupons and 15-year MBS. As a result, the average coupon on our portfolio shifted modestly higher to 4.3%. We nonetheless remained disciplined in managing our convexity profile through collateral selection. We also took advantage of softer specific payups to replace over $8 billion TBAs with specified pools during the quarter. In addition to their favorable prepayment profile, specified pools provide incremental carry relative to TBAs in the current environment. Meanwhile, the notional value of our hedges declined in line with our assets, keeping our hedge ratio relatively unchanged during the quarter. We maintained a slight flattening bias throughout the quarter as 2s/10s in Treasuries reached negative 100 basis points but have shifted to balanced curve positioning given the extreme inversion in the yield curve. The diversity of our assets allows us to be opportunistic in our rates exposure as the market stays highly sensitive to incoming data. Residential credit spreads tightened during the quarter, resulting in a flatter credit curve given a supportive backdrop of limited net issuance, resiliency in the housing market, and a strong consumer. Benchmark CRT spreads with a below investment grade credit rating tightened 95 basis points on the quarter, while production coupon non-qualified mortgage (“Non-QM”) whole loan spreads were approximately 75 basis points tighter, reflecting a declining cost of funds in the securitization market. Annaly’s portfolio ended the quarter at $4.9 billion in market value, down approximately $300 million quarter-over-quarter given our increased pace of securitization activity. Whole loan purchases remained healthy, increasing 16% relative to the first quarter, with approximately $750 million of whole loans settled. We securitized $1.5 billion in loans in the second quarter through our OBX platform, generating $162 million of retained assets across our wholly-owned subsidiary Onslow Bay Financial LLC (“Onslow Bay”) and our joint venture. After pricing our latest Non-QM securitization in July, our aggregate year-to-date securitization volume totals over $3 billion across eight transactions. Our securitization activity has been supported by our correspondent channel, which continues to gain momentum despite a challenging landscape for mortgage origination. Our second quarter loan lock volume of $1.5 billion was our largest since inception and the channel accounted for roughly 85% of our total whole loan settlements. We have maintained a disciplined credit focus as demonstrated by the current pipeline having a roughly 750 weighted average FICO, a 68% weighted average loan-to-value ratio as well as limited layered risk. Finally, we grew our MSR portfolio by approximately $350 million during the quarter through the purchase of four bulk packages. Including $126 million market value of unsettled commitments, the portfolio now stands at just over $2 billion in market value and $150 billion in unpaid principal balance. The portfolio exhibited another quarter of slow prepayment speeds, prepaying approximately 4 CPR. Delinquencies were roughly unchanged and remained minimal. Our strategy of acquiring low note rate, high credit quality MSR continued to deliver predictable cash flows with attractive risk-adjusted returns. MSR trading volumes were strong in the second quarter as market participants efficiently absorbed high levels of bulk supply, a dynamic that we expect to persist for the foreseeable future. Despite elevated supply, pricing has held firm and MSR valuations improved driven by the rise in rates, modest spread tightening, and muted prepayment speeds. Economic Environment U.S. economic activity remained resilient to tighter financial conditions in the second quarter as gross domestic product rose 2.4% on a seasonally adjusted annualized rate. Measures of consumption have moderated from the strong pace seen at the beginning of the year, as spending on services has stabilized and spending on goods has slowed. However, consumer confidence remains high, in large part due to the ongoing strength of the labor market and healthy state of household balance sheets. Additionally, the housing sector has rebounded somewhat, with new home sales and construction manufacturing rising in the quarter, helped by fiscal measures such as the CHIPS Act. The effect of the resumption of student debt payments on disposable income and tighter lending standards from the U.S. regional banking sector are potential headwinds to growth in the near term. We believe the U.S. labor market is softening at the margin but remains strong. According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose at a slower rate in the second quarter than the prior quarter, with a monthly average 244,000 workers added in the second quarter of 2023 compared to an average 312,000 workers in the first quarter. Additionally, the unemployment rate ended the quarter at 3.6%, slightly higher than the historically low level of 3.4% reached in January. Labor demand remains high, with job openings, as measured by the Bureau of Labor Statistics, increasing by 1.6 million openings in the quarter and still significantly elevated from pre-COVID averages. Meanwhile, wage growth, as measured by the year-over-year change in private sector average hourly earnings, increased to 4.4% in June compared to 4.3% in March. Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), remain above the Fed’s 2% inflation target. However, signs of slowing inflation have increased as the headline PCE measure has eased to 3.0% year-over-year in June compared to 4.2% in March. The more stable core PCE measure, which excludes volatile food and energy prices, registered a 4.1% year-over-year increase, also notably lower than the 4.6% in March. 37 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis 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 FOMC conducts monetary policy with a dual mandate: to ensure full employment and stable prices. The FOMC has aggressively tightened monetary policy to ensure it meets its mandate, although the pace of tightening has slowed in recent months to provide time to assess incoming data and the lagged effects of tightening thus far. Therefore, the FOMC raised the Federal Funds Target Rate by 25 basis points to the 5.0% - 5.25% range during the second quarter, relative to 50 bps the prior quarter. Regarding its balance sheet, the FOMC continues to decline at a pace of $95 billion per month across U.S. Treasuries and Agency MBS. During the second quarter of 2023, the 10-year U.S. Treasury rate increased from 3.47% on March 31, 2023 to 3.84% on June 30, 2023. Interest rate volatility remained meaningfully elevated during the quarter, as seen in the 2-year U.S. Treasury rate that moved within a 148 basis point range. The mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, remained historically wide and closed the quarter at 179 basis points given continued tightening in monetary policy, elevated financial market volatility, and reduced investor demand for Agency MBS. The following table presents interest rates and spreads at each date presented: June 30, 2023 December 31, 2022 June 30, 2022 30-Year mortgage current coupon 5.63% 5.39% 4.38% Mortgage basis 179 bps 152 bps 137 bps 10-Year U.S. Treasury rate 3.84% 3.87% 3.01% LIBOR 1-Month 5.22% 4.39% 1.79% 6-Month 5.76% 5.14% 2.94% OIS SOFR Swaps 1-Month 5.14% 4.36% 1.68% 6-Month 5.37% 4.80% 2.59% London Interbank Offered Rate (“LIBOR”) Transition All LIBOR tenors relevant to us either are no longer published or are no longer representative. All of our LIBOR-linked instruments have fallen back, or will fall back upon the next scheduled reset date, to a non-LIBOR-based index, either by their contractual terms, pursuant to U.S. federal legislation, through clearinghouse action, or otherwise. 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. 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. 38 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis 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. 39 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. 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 and six months ended June 30, 2023 and 2022. As of and for the Three Months Ended June 30, As of and for the Six Months Ended June 30, 2023 2022 2023 2022 (dollars in thousands, except per share data) Interest income $ 921,494 $ 645,615 $ 1,739,744 $ 1,301,465 Interest expense 953,457 170,475 1,752,244 245,397 Net interest income (31,963) 475,140 (12,500) 1,056,068 Servicing and related income 83,790 55,685 168,063 90,400 Servicing and related expense 8,930 5,949 16,810 9,706 Net servicing income 74,860 49,736 151,253 80,694 Other income (loss) 175,482 397,899 (707,841) 1,882,219 Less: Total general and administrative expenses 42,915 36,038 83,743 81,802 Income (loss) before income taxes 175,464 886,737 (652,831) 2,937,179 Income taxes 14,277 23,420 25,310 49,968 Net income (loss) 161,187 863,317 (678,141) 2,887,211 Less: Net income (loss) attributable to noncontrolling interests (5,846) (3,379) (918) (1,740) Net income (loss) attributable to Annaly 167,033 866,696 (677,223) 2,888,951 Less: Dividends on preferred stock 35,766 26,883 67,641 53,766 Net income (loss) available (related) to common stockholders $ 131,267 $ 839,813 $ (744,864) $ 2,835,185 Net income (loss) per share available (related) to common stockholders Basic $ 0.27 $ 2.21 $ (1.51) $ 7.60 Diluted $ 0.27 $ 2.20 $ (1.51) $ 7.59 Weighted average number of common shares outstanding Basic 494,165,256 380,609,192 491,939,177 373,017,228 Diluted 494,358,982 380,898,750 491,939,177 373,313,723 Other information Investment portfolio at period-end $ 85,694,096 $ 71,009,570 $ 85,694,096 $ 71,009,570 Average total assets $ 88,081,247 $ 74,911,192 $ 86,004,402 $ 75,528,816 Average equity $ 11,898,189 $ 11,284,335 $ 11,721,935 $ 11,921,332 GAAP leverage at period-end (1) 6.1:1 5.4:1 6.1:1 5.4:1 GAAP capital ratio at period-end (2) 13.3 % 15.1 % 13.3 % 15.1 % Annualized return on average total assets 0.73 % 4.61 % (1.58 %) 7.65 % Annualized return on average equity 5.42 % 30.60 % (11.57 %) 48.44 % Net interest margin (3) (0.15 %) 2.64 % (0.03 %) 2.92 % Average yield on interest earning assets (4) 4.27 % 3.58 % 4.12 % 3.60 % Average GAAP cost of interest bearing liabilities (5) 5.00 % 1.12 % 4.77 % 0.80 % Net interest spread (0.73 %) 2.46 % (0.65 %) 2.80 % Weighted average experienced CPR for the period 7.0 % 14.9 % 6.3 % 15.8 % Weighted average projected long-term CPR at period-end 8.6 % 7.7 % 8.6 % 7.7 % Common stock book value per share $ 20.73 $ 23.59 $ 20.73 $ 23.59 Non-GAAP metrics * Interest income (excluding PAA) $ 909,571 $ 518,094 $ 1,728,312 $ 994,428 Economic interest expense (5) $ 528,164 $ 169,483 $ 941,245 $ 306,946 Economic net interest income (excluding PAA) $ 381,407 $ 348,611 $ 787,067 $ 687,482 Premium amortization adjustment cost (benefit) $ (11,923) $ (127,521) $ (11,432) $ (307,037) Earnings available for distribution (6) $ 389,475 $ 490,802 $ 816,605 $ 921,433 Earnings available for distribution per average common share $ 0.72 $ 1.22 $ 1.52 $ 2.33 Annualized EAD return on average equity (excluding PAA) 13.22 % 17.49 % 14.06 % 15.52 % Economic leverage at period-end (1) 5.8:1 6.6:1 5.8:1 6.6:1 Economic capital ratio at period-end (2) 14.3 % 13.0 % 14.3 % 13.0 % Net interest margin (excluding PAA) (3) 1.66 % 2.20 % 1.71 % 2.12 % Average yield on interest earning assets (excluding PAA) (4) 4.22 % 2.87 % 4.09 % 2.75 % Average economic cost of interest bearing liabilities (5) 2.77 % 1.11 % 2.56 % 1.00 % Net interest spread (excluding PAA) 1.45 % 1.76 % 1.53 % 1.75 % 40 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES