ANNALY CAPITAL MANAGEMENT INC 10-Q

Item 2. Management’s Discussion and Analysis * Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, and participations issued divided by total equity. Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing. Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from economic leverage. (2) GAAP capital ratio is computed as total equity divided by total assets. Economic capital ratio is computed as total equity divided by total economic assets. Total economic assets include the implied market value of TBA derivatives and net of debt issued by securitization vehicles. (3) Net interest margin represents our interest income less interest expense divided by the average interest earning assets. Net interest margin does not include net interest component of interest rate swaps. Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances. (4) Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA). (5) Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. (6) Excludes dividends on preferred stock. GAAP Net income (loss) was $161.2 million, which includes ($5.8) million attributable to noncontrolling interests, or $0.27 per average basic common share, for the three months ended June 30, 2023 compared to $863.3 million, which includes ($3.4) million attributable to noncontrolling interests, or $2.21 per average basic common share, for the same period in 2022. We attribute the majority of the change in net income (loss) to an unfavorable change in net gains (losses) on investments and other and net interest income, partially offset by a favorable change in net gains (losses) on derivatives and net servicing income. Net gains (losses) on investments and other was ($1.3) billion for the three months ended June 30, 2023 compared to ($615.2) million for the same period in 2022. Net interest income for the three months ended June 30, 2023 was ($32.0) million compared to $475.1 million for the same period in 2022. Net gains (losses) on derivatives was $1.5 billion for the three months ended June 30, 2023 compared to $1.0 billion for the same period in 2022. Net servicing income for the three months ended June 30, 2023 was $74.9 million compared to $49.7 million for the same period in 2022. Refer to the section titled “Other income (loss)” located within this Item 2 for additional information related to these changes. Net income (loss) was ($678.1) million, which includes ($0.9) million attributable to noncontrolling interests, or ($1.51) per average basic common share, for the six months ended June 30, 2023 compared to $2.9 billion which includes ($1.7) million attributable to noncontrolling interests, or $7.60 per average basic common share, for the same period in 2022. We attribute the majority of the change in net income (loss) to an unfavorable change in net gains (losses) on derivatives, net interest income, and net gains (losses) on investments and other, partially offset by a favorable change in net servicing income and business divestiture-related losses. Net gains on derivatives for the six months ended June 30, 2023 was $574.6 million compared to $2.7 billion for the same period in 2022. Net interest income for the six months ended June 30, 2023 was ($12.5) million compared to $1.1 billion for the same period in 2022. Net gains (losses) on investments and other was ($1.3) billion for the six months ended June 30, 2023 compared to ($775.0) million for the same period in 2022. Net servicing income for the six months ended June 30, 2023 was $151.3 million compared to $80.7 million for the same period in 2022. Business divestiture-related (losses) was $0.0 million for the six months ended June 30, 2023 compared to ($24.3) million for the same period in 2022. Refer to the section titled “Other income (loss)” located within this Item 2 for additional information related to these changes. Non-GAAP Earnings available for distribution were $389.5 million, or $0.72 per average common share, for the three months ended June 30, 2023, compared to $490.8 million, or $1.22 per average common share, for the same period in 2022. The change in earnings available for distribution during the three months ended June 30, 2023 compared to the same period in 2022 was primarily due to higher interest expense from an increase in average borrowing rates and average interest bearing liabilities and a decline in TBA dollar roll income on reduced balances and specialness, partially offset by a favorable change in the net interest component of interest rate swaps, lower premium amortization expense, excluding PAA, resulting from purchasing assets with lower premium to par, and higher net servicing income. Earnings available for distribution were $816.6 million, or $1.52 per average common share, for the six months ended June 30, 2023, compared to $921.4 million, or $2.33 per average common share, for the same period in 2022. The change in earnings available for distribution during the six months ended June 30, 2023 compared to the same period in 2022 was primarily due to to higher interest expense from an increase in average borrowing rates and average interest bearing liabilities and a decline in TBA dollar roll income on reduced balances and specialness, partially offset by a favorable change in the net interest component of interest rate swaps, higher coupon income from increased rates, lower premium amortization expense, excluding PAA, resulting from purchasing assets with lower premium to par, and higher net servicing income. 41 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide the following non-GAAP financial measures: • earnings available for distribution (“EAD”); • earnings available for distribution attributable to common stockholders; • earnings available for distribution per average common share; • annualized EAD return on average equity; • economic leverage; • economic capital ratio; • interest income (excluding PAA); • economic interest expense; • economic net interest income (excluding PAA); • average yield on interest earning assets (excluding PAA); • average economic cost of interest bearing liabilities; • net interest margin (excluding PAA); and • net interest spread (excluding PAA). These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations. For example, we may calculate our non-GAAP metrics, such as earnings available for distribution, or the PAA, differently than our peers making comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results. These non-GAAP measures provide additional detail 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. Additional information pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below. 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 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 generate net income by earning a net interest spread on our investment portfolio, which is a function of interest income from our investment portfolio less financing, hedging and operating costs. Earnings available for distribution, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) net servicing income less realized amortization of MSR, (d) other income (loss) (excluding amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items), and excludes (g) the PAA representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective. We seek to fulfill our principal business objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of our capital allocation policy and risk governance framework. We believe these non-GAAP measures provide management and investors with additional details regarding our underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to provide additional transparency into the operating performance of our portfolio. In addition, EAD serves as a useful indicator for investors in evaluating our performance and ability to pay dividends. Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by our invested equity capital. 42 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis The following table presents a reconciliation of GAAP financial results to non-GAAP earnings available for distribution for the periods presented: For the Three Months Ended June 30, For the Six Months Ended June 30, 2023 2022 2023 2022 (dollars in thousands, except per share data) GAAP net income (loss) $ 161,187 $ 863,317 $ (678,141) $ 2,887,211 Adjustments to exclude reported realized and unrealized (gains) losses Net (gains) losses on investments and other (1) 1,316,837 615,216 1,315,125 775,020 Net (gains) losses on derivatives (2) (1,050,032) (1,014,651) 236,426 (2,719,220) Loan loss provision (reversal) (3) — (29,380) (219) (28,568) Business divestiture-related (gains) losses — 23,955 — 24,309 Other adjustments Amortization of intangibles 758 1,302 1,516 2,432 Non-EAD (income) loss allocated to equity method investments (4) 541 (3,270) 297 (13,190) Transaction expenses and non-recurring items (5) 2,650 1,751 4,008 5,101 Income tax effect of non-EAD income (loss) items 12,364 28,841 20,642 55,932 TBA dollar roll income and CMBX coupon income (6) 1,734 161,673 19,917 291,165 MSR amortization (7) (41,297) (33,810) (84,720) (53,462) EAD attributable to noncontrolling interests (3,344) 3,379 (6,814) 1,740 Premium amortization adjustment cost (benefit) (11,923) (127,521) (11,432) (307,037) Earnings available for distribution * 389,475 490,802 816,605 921,433 Dividends on preferred stock 35,766 26,883 67,641 53,766 Earnings available for distribution attributable to common stockholders * $ 353,709 $ 463,919 $ 748,964 $ 867,667 GAAP net income (loss) per average common share $ 0.27 $ 2.21 $ (1.51) $ 7.60 Earnings available for distribution per average common share * $ 0.72 $ 1.22 $ 1.52 $ 2.33 Annualized GAAP return (loss) on average equity 5.42 % 30.60 % (11.57 %) 48.44 % Annualized EAD return on average equity * 13.22 % 17.49 % 14.06 % 15.52 % * Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. (1) Includes a write-down which is reported in Other, net in the Company's Consolidated Statement of Comprehensive Income (Loss). (2) The adjustment to add back Net (gains) losses on derivatives does not include the net interest component of interest rate swaps which is reflected in earnings available for distribution. The net interest component of interest rate swaps totaled $425.3 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively and $811.0 million and ($61.5) million for the six months ended June 30, 2023 and 2022, respectively. (3) Includes $0.0 million and ($2.5) million for the three months ended June 30, 2023 and 2022, respectively, and $0.0 million and ($2.3) million for the six months ended June 30, 2023 and 2022, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other, net in the Consolidated Statements of Comprehensive Income (Loss). (4) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR, which is a component of Other, net in the Consolidated Statements of Comprehensive Income (Loss). (5) Represents costs incurred in connection with securitizations of residential whole loans. (6) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). CMBX coupon income totaled $0.5 million and $1.1 million for the three months ended June 30, 2023 and 2022, respectively and $1.5 million and $2.1 million for the six months ended June 30, 2023 and 2022, respectively. (7) MSR amortization utilizes purchase date cash flow assumptions and actual unpaid principal balances and is calculated as the difference between projected MSR yield income and net servicing income for the period. From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency MBS. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency MBS with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. The drop is a reflection of the expected net interest income from an investment in similar Agency MBS, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency MBS less an implied financing cost. TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency MBS. We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on 43 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps). TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency MBS (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of commercial mortgage-backed securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur. We report income (expense) on CMBX positions in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in earnings available for distribution. Premium Amortization Expense In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency MBS, excluding interest-only securities, multifamily and reverse mortgages, taking into account estimates of future principal prepayments in the calculation of the effective yield. We recalculate 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. 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. Our GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. Certain of our non-GAAP metrics exclude the effect of the PAA, which quantifies the component of premium amortization representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term Constant Prepayment Rate (“CPR”). The following table illustrates the impact of the PAA on premium amortization expense for our Residential Securities portfolio for the periods presented: For the Three Months Ended June 30, For the Six Months Ended June 30, 2023 2022 2023 2022 (dollars in thousands) Premium amortization expense $ 33,105 $ (4,869) $ 89,639 $ (30,222) Less: PAA cost (benefit) (11,923) (127,521) (11,432) (307,037) Premium amortization expense (excluding PAA) $ 45,028 $ 122,652 $ 101,071 $ 276,815 Economic Leverage and Economic Capital Ratios We use 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. Our capital structure is designed to offer an efficient complement of funding sources to generate positive risk-adjusted returns for our stockholders while maintaining appropriate liquidity to support our business and meet our financial obligations under periods of market stress. To maintain our desired capital profile, we utilize a mix of debt and equity funding. Debt funding may include the use of repurchase agreements, loans, securitizations, participations issued, lines of credit, asset backed lending facilities, corporate bond issuance, convertible bonds or other liabilities. Equity capital primarily consists of common and preferred stock. Our economic leverage ratio is computed as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and 44 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis other secured financing. Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from economic leverage. The following table presents a reconciliation of GAAP debt to economic debt for purposes of calculating our economic leverage ratio for the periods presented: As of June 30, 2023 June 30, 2022 Economic leverage ratio reconciliation (dollars in thousands) Repurchase agreements $ 61,637,600 $ 51,364,097 Other secured financing 500,000 — Debt issued by securitization vehicles 9,789,282 7,502,483 Participations issued 492,307 696,944 Total GAAP debt $ 72,419,189 $ 59,563,524 Less Non-Recourse Debt: Debt issued by securitization vehicles $ (9,789,282) $ (7,502,483) Participations issued (492,307) (696,944) Total recourse debt $ 62,137,600 $ 51,364,097 Plus / (Less): Cost basis of TBA and CMBX derivatives 3,625,443 19,723,326 Payable for unsettled trades 4,331,315 1,995,960 Receivable for unsettled trades (787,442) (434,227) Economic debt * $ 69,306,916 $ 72,649,156 Total equity $ 11,887,345 $ 11,089,900 Economic leverage ratio * 5.8:1 6.6:1 * Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. The following table presents a reconciliation of GAAP total assets to economic total assets for purposes of calculating our economic capital ratio for the periods presented: As of June 30, 2023 June 30, 2022 Economic capital ratio reconciliation (dollars in thousands) Total GAAP assets $ 89,330,477 $ 73,637,249 Less: Gross unrealized gains on TBA derivatives (1) (21,460) (60,661) Debt issued by securitization vehicles (9,789,282) (7,502,483) Plus: Implied market value of TBA derivatives 3,627,716 19,282,979 Total economic assets * $ 83,147,451 $ 85,357,084 Total equity $ 11,887,345 $ 11,089,900 Economic capital ratio (2) * 14.3% 13.0% * Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. (1) Included in Derivative assets in the Consolidated Statements of Financial Condition. (2) Economic capital ratio is computed as total equity divided by total economic assets. Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA) Interest income (excluding PAA) represents interest income excluding the effect of the premium amortization adjustment, and serves as the basis for deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below. We believe this measure provides management and investors with additional detail to enhance their understanding of our operating results and trends by excluding the component of premium amortization expense representing the cumulative effect of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency MBS (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. We use interest rate swaps to manage our exposure to changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings. Accordingly, adding the net interest component of interest rate swaps to interest 45 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of our financing strategy. We may use market agreed coupon (“MAC”) interest rate swaps in which we may receive or make a payment at the time of entering into such interest rate swap to compensate for the off-market nature of such interest rate swap. In accordance with GAAP, upfront payments associated with MAC interest rate swaps are not reflected in the net interest component of interest rate swaps, which is presented in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations. The following tables present a reconciliation of GAAP interest income and GAAP interest expense to non-GAAP interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA), respectively, for the periods presented: Interest Income (excluding PAA) GAAP Interest Income PAA Cost (Benefit) Interest Income (excluding PAA) * For the three months ended (dollars in thousands) June 30, 2023 $ 921,494 $ (11,923) $ 909,571 June 30, 2022 $ 645,615 $ (127,521) $ 518,094 For the six months ended June 30, 2023 $ 1,739,744 $ (11,432) $ 1,728,312 June 30, 2022 $ 1,301,465 $ (307,037) $ 994,428 * Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures. Economic Interest Expense and Economic Net Interest Income (excluding PAA) GAAP Interest Expense Add: Net Interest Component of Interest Rate Swaps Economic Interest Expense * GAAP Net Interest Income Less: Net Interest Component of Interest Rate Swaps Economic Net Interest Income * Add: PAA Cost (Benefit) Economic Net Interest Income (excluding PAA) * For the three months ended (dollars in thousands) June 30, 2023 $ 953,457 $ (425,293) $ 528,164 $ (31,963) $ (425,293) $ 393,330 $ (11,923) $ 381,407 June 30, 2022 $ 170,475 $ (992) $ 169,483 $ 475,140 $ (992) $ 476,132 $ (127,521) $ 348,611 For the six months ended June 30, 2023 $ 1,752,244 $ (810,999) $ 941,245 $ (12,500) $ (810,999) $ 798,499 $ (11,432) $ 787,067 June 30, 2022 $ 245,397 $ 61,549 $ 306,946 $ 1,056,068 $ 61,549 $ 994,519 $ (307,037) $ 687,482 * Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures. Experienced and Projected Long-Term CPR Prepayment speeds, as reflected by the CPR and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds and expectations of prepayment speeds on our Agency MBS portfolio increase, related purchase premium amortization increases, thereby reducing the yield on such assets. The following table presents the weighted average experienced CPR and weighted average projected long-term CPR on our Agency MBS portfolio as of and for the periods presented. Experienced CPR (1) Projected Long-term CPR (2) For the three months ended June 30, 2023 7.0 % 8.6 % June 30, 2022 14.9 % 7.7 % For the six months ended June 30, 2023 6.3 % 8.6 % June 30, 2022 15.8 % 7.7 % (1) For the three and six months ended June 30, 2023 and 2022, respectively. (2) At June 30, 2023 and 2022, respectively. 46 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA) and Average Economic Cost of Interest Bearing Liabilities Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense divided by average interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances, provide management with additional measures of our profitability that management relies upon in monitoring the performance of the business. Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates our performance. Net Interest Spread (excluding PAA) Average Interest Earning Assets (1) Interest Income (excluding PAA) * Average Yield on Interest Earning Assets (excluding PAA) * Average Interest Bearing Liabilities (2) Economic Interest Expense * (2) Average Economic Cost of Interest Bearing Liabilities * (2) Economic Net Interest Income (excluding PAA) * Net Interest Spread (excluding PAA) * For the three months ended (dollars in thousands) June 30, 2023 $ 86,254,955 $ 909,571 4.22 % $ 75,424,564 $ 528,164 2.77 % 381,407 1.45 % June 30, 2022 $ 72,123,055 $ 518,094 2.87 % $ 60,446,528 169,483 1.11 % 348,611 1.76 % For the six months ended June 30, 2023 $ 84,449,977 $ 1,728,312 4.09 % $ 73,030,098 $ 941,245 2.56 % 787,067 1.53 % June 30, 2022 $ 72,356,966 $ 994,428 2.75 % $ 61,155,910 $ 306,946 1.00 % 687,482 1.75 % * Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (1) Based on amortized cost. (2) Average interest bearing liabilities reflects the average balances during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Net Interest Margin (excluding PAA) Interest Income (excluding PAA) * TBA Dollar Roll and CMBX Coupon Income (1) Economic Interest Expense * Subtotal Average Interest Earnings Assets Average TBA Contract and CMBX Balances Subtotal Net Interest Margin (excluding PAA) * For the three months ended (dollars in thousands) June 30, 2023 $ 909,571 1,734 (528,164) $ 383,141 $ 86,254,955 6,303,202 $ 92,558,157 1.66 % June 30, 2022 $ 518,094 161,673 (169,483) $ 510,284 $ 72,123,055 20,566,553 $ 92,689,608 2.20 % For the six months ended June 30, 2023 $ 1,728,312 19,917 (941,245) $ 806,984 $ 84,449,977 10,126,544 $ 94,576,521 1.71 % June 30, 2022 $ 994,428 291,165 (306,946) $ 978,647 $ 72,356,966 19,898,046 $ 92,255,012 2.12 % * Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (1) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on derivatives. CMBX coupon income totaled $0.5 million and $1.1 million for the three months ended June 30, 2023 and 2022, respectively and $1.5 million and $2.1 million for the nine months ended June 30, 2023 and 2022, respectively. 47 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps. The table below shows our average interest bearing liabilities and average economic cost of interest bearing liabilities as compared to average one-month and average six-month SOFR for the periods presented. Average Economic Cost of Interest Bearing Liabilities Average Interest Bearing Liabilities Interest Bearing Liabilities at Period End Economic Interest Expense * (1) Average Economic Cost of Interest Bearing Liabilities * Average One- Month Term SOFR Average Six- Month Term SOFR Average One-Month Term SOFR Relative to Average Six- Month Term SOFR Average Economic Cost of Interest Bearing Liabilities Relative to Average One- Month Term SOFR Average Economic Cost of Interest Bearing Liabilities Relative to Average Six-Month Term SOFR For the three months ended June 30, 2023 $ 75,424,564 $ 71,919,189 $ 528,164 2.77 % 5.04 % 5.13 % (0.09 %) (2.27 %) (2.36 %) June 30, 2022 $ 60,446,528 $ 59,563,524 $ 169,483 1.11 % 0.92 % 1.75 % (0.83 %) 0.19 % (0.64 %) For the six months ended June 30, 2023 $ 73,030,098 $ 71,919,189 $ 941,245 2.56 % 4.83 % 5.03 % (0.20 %) (2.27 %) (2.47 %) June 30, 2022 $ 61,155,910 $ 59,563,524 $ 306,946 1.00 % 0.54 % 1.17 % (0.63 %) 0.46 % (0.17 %) * Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. Economic interest expense increased by $358.7 million for the three months ended June 30, 2023 compared to the same period in 2022, primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates and higher average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was $425.3 million for the three months ended June 30, 2023 compared to $1.0 million for the same period in 2022. Economic interest expense increased by $634.3 million for the six months ended June 30, 2023 compared to the same period in 2022, primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates and higher average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was $811.0 million for the six months ended June 30, 2023 compared to ($61.5) million for the same period in 2022. We do not manage our portfolio to have a pre-designated amount of borrowings at quarter or year end. Our borrowings at period end are a snapshot of our borrowings as of a date, and this number may differ from average borrowings over the period for a number of reasons. The mortgage-backed securities we own pay principal and interest towards the end of each month and the mortgage-backed securities we purchase are typically settled during the beginning of the month. As a result, depending on the amount of mortgage-backed securities we have committed to purchase, we may retain the principal and interest we receive in the prior month, or we may use it to pay down our borrowings. Moreover, we generally use interest rate swaps, swaptions and other derivative instruments to hedge our portfolio, and as we pledge or receive collateral under these agreements, our borrowings on any given day may be increased or decreased. Our average borrowings during a quarter may differ from period end borrowings as we implement our portfolio management strategies and risk management strategies over changing market conditions by increasing or decreasing leverage. Additionally, these numbers may differ during periods when we conduct equity capital raises, as in certain instances we may purchase additional assets and increase leverage in anticipation of an equity capital raise. Since our average borrowings and period end borrowings can be expected to differ, we believe our average borrowings during a period provide a more accurate representation of our exposure to the risks associated with leverage than our period end borrowings. At June 30, 2023 and December 31, 2022, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and MSR. All of our Residential Securities are currently accepted as collateral for these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and maintain the liquidity and strength of our balance sheet. 48 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Other Income (Loss) For the Three Months Ended June 30, 2023 and 2022 Net Gains (Losses) on Investments and Other Net gains (losses) on disposal of investments was ($610.4) million for the three months ended June 30, 2023 compared to ($646.2) million for the same period in 2022. For the three months ended June 30, 2023, we disposed of Residential Securities with a carrying value of $8.4 billion for an aggregate net gain (loss) of ($599.2) million. For the same period in 2022, we disposed of Residential Securities, with a carrying value of $6.6 billion for an aggregate net gain (loss) of ($657.3) million. Net unrealized gains (losses) on instruments measured at fair value through earnings was ($698.6) million for the three months ended June 30, 2023 compared to $31.0 million for the same period in 2022, primarily due to an unfavorable changes in unrealized gains (losses) on Agency MBS of ($738.9) million, securitized debt of consolidated VIEs of ($281.7) million, partially offset by favorable changes on securitized residential whole loans of consolidated VIEs of $148.7 million and residential credit securities of $124.2 million and commercial securities of $17.9 million. Net Gains (Losses) on Derivatives Net gains (losses) on interest rate swaps for the three months ended June 30, 2023 was $1.3 billion compared to $898.5 million for the same period in 2022, primarily attributable to the change in the net interest component of interest rate swaps and realized gains (losses) on termination of interest rate swaps, partially offset by the change in unrealized gains (losses) on interest rate swaps. Net interest component on interest rate swaps was $425.3 million for the three months ended June 30, 2023 compared to $1.0 million for the same period in 2022. Realized gains (losses) on termination of interest rate swaps was $48.1 million for the three months ended June 30, 2023 compared to $0.0 million for 2022, which reflected our termination of fixed-rate payer interest rate swaps with a notional amount of $820.8 million, compared to $3.1 billion for the same period in 2022. Unrealized gains (losses) on interest rate swaps was $841.7 million for the three months ended June 30, 2023 compared to $897.5 million for the same period in 2022, which reflected a less steep rise in forward interest rates compared to the prior period. Net gains (losses) on other derivatives was $160.2 million for the three months ended June 30, 2023 compared to $117.1 million for the same period in 2022. The change in net gains (losses) on other derivatives was primarily due to favorable changes in net gains (losses) on TBA derivatives, which was ($61.5) million for the three months ended June 30, 2023 compared to ($783.3) million for the same period in 2022, partially offset by an unfavorable change in net gains (losses) on futures, which was $171.2 million for the three months ended June 30, 2023 compared to $787.1 million for the same period in 2022, and net gains (losses) on interest rate swaptions, which was $53.4 million for the three months ended June 30, 2023 compared to $119.4 million for the same period in 2022. Other, Net Other, net includes brokerage and commission fees, due diligence costs, securitization expenses, and interest on custodial balances. We also report in Other, net items whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements. Given the nature of certain components of this line item, balances may fluctuate from period to period. Other, net for the three months ended June 30, 2023 was $9.1 million compared to ($5.5) million for the same period in 2022, primarily attributable to an increase in interest on custodial balances, partially offset by an increase in MSR financing expenses, a write-down and a decrease in earnings from joint ventures. For the Six Months Ended June 30, 2023 and 2022 Net Gains (Losses) on Investments and Other Net gains (losses) on disposal of investments and other was ($1.1) billion for the six months ended June 30, 2023 compared to ($790.4) million for the same period in 2022. For the six months ended June 30, 2023, we disposed of Residential Securities with a carrying value of $13.6 billion for an aggregate net gain (loss) of ($1.1) billion. For the same period in 2022, we disposed of Residential Securities with a carrying value of $9.4 billion for an aggregate net gain (loss) of ($801.8) million. Net unrealized gains (losses) on instruments measured at fair value through earnings was ($175.2) million for the six months ended June 30, 2023 compared to $15.4 million for the same period in 2022, primarily due to unfavorable changes in unrealized gains (losses) on securitized debt of consolidated VIEs of ($827.8) million, Agency MBS of ($271.9) million, MSR and 49 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Interests in MSR of ($150.0) million, and participations issued of ($60.4) million, partially offset by favorable changes on securitized residential whole loans of consolidated VIEs of $709.7 million, residential credit securities of $264.2 million, and residential whole loans of $122.7 million. Net Gains (Losses) on Derivatives Net gains (losses) on interest rate swaps for the six months ended June 30, 2023 was $598.8 million compared to $2.2 billion for the same period in 2022, attributable to unfavorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination of interest rate swaps, partially offset by the change in the net interest component of interest rate swaps. Unrealized gains (losses) on interest rate swaps was ($114.6) million for the six months ended June 30, 2023 compared to $2.2 billion for the same period in 2022, reflecting a sharper rise in forward interest rates during the prior period. Realized gains (losses) on termination of interest rate swaps was ($97.7) million for the six months ended June 30, 2023 compared to $0.0 million for the same period in 2022, which reflected our termination of fixed-rate payer and receiver interest rate swaps with notional amounts of $3.1 billion and $6.3 billion, respectively, compared to $3.1 billion notional amount of fixed-rate payer interest rate swaps for the same period in 2022. Net interest component on interest rate swaps was $811.0 million for the six months ended June 30, 2023 compared to ($61.5) million for the same period in 2022. Net gains (losses) on other derivatives was ($24.2) million for the six months ended June 30, 2023 compared to $498.3 million for the same period in 2022. The change in net gains (losses) on other derivatives was primarily due to unfavorable changes in net gains (losses) on futures derivatives, which was ($25.3) million for the six months ended June 30, 2023 compared to $2.2 billion for the same period in 2022, and net gains (losses) on interest rate swaptions, which was $9.7 million for the six months ended June 30, 2023 compared to $227.6 million for the same period in 2022, partially offset by a favorable change in TBA derivatives, which was $0.0 million for the six months ended June 30, 2023 compared to ($1.9) billion for the same period in 2022. Loan Loss (Provision) Reversal For the six months ended June 30, 2023 and 2022, net loan loss reversals of $0.2 million and $26.3 million on corporate loans, respectively. Refer to the “Loans” Note located within Item 1 for additional information related to these loan loss provisions. Business Divestiture-Related Gains (Losses) For the six months ended June 30, 2023, the majority of business divestiture-related gains (losses) were associated with the sale of our corporate loan interests. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction. For the six months ended June 30, 2022, business divestiture-related gains (losses) were associated with the sale of our commercial real estate business. General and Administrative Expenses General and administrative (“G&A”) expenses consist of compensation and other expenses. The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented. G&A Expenses and Operating Expense Ratios Total G&A Expenses Total G&A Expenses/Average Assets Total G&A Expenses/Average Equity For the three months ended (dollars in thousands) June 30, 2023 $ 42,915 0.19 % 1.44 % June 30, 2022 $ 36,038 0.19 % 1.28 % For the six months ended June 30, 2023 $ 83,743 0.19 % 1.43 % June 30, 2022 $ 81,802 0.22 % 1.37 % G&A expenses were $42.9 million for the three months ended June 30, 2023, an increase of $6.9 million compared to the same period in 2022. G&A expenses were $83.7 million for the six months ended June 30, 2023, an increase of $1.9 million compared to the same period in 2022. 50 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis The change in each period was primarily due to an increase in compensation, partially offset by lower expenses resulting from the divestiture of our MML assets, which was announced in the second quarter of 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction. Return on Average Equity The following table shows the components of our annualized return on average equity for the periods presented. Components of Annualized Return on Average Equity Economic Net Interest Income/ Average Equity (1) Net Servicing Income/Average Equity Other Income (Loss)/Average Equity (2) G&A Expenses/ Average Equity Income Taxes/ Average Equity Return on Average Equity For the three months ended June 30, 2023 13.22 % 2.52 % (8.40 %) (1.44 %) (0.48 %) 5.42 % June 30, 2022 16.88 % 1.76 % 14.07 % (1.28 %) (0.83 %) 30.60 % For the six months ended June 30, 2023 13.62 % 2.58 % (25.91) % (1.43 %) (0.43 %) (11.57 %) June 30, 2022 16.68 % 1.35 % 32.62 % (1.37 %) (0.84 %) 48.44 % (1) Economic net interest income includes the net interest component of interest rate swaps. (2) Other income (loss) excludes the net interest component of interest rate swaps. Unrealized Gains and Losses - Available-for-Sale Investments The unrealized fluctuations in market values of our available-for-sale Agency MBS, for which the fair value option is not elected, do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss). As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting. As a result, comparisons with companies that use amortized cost accounting for some or all of their balance sheet may not be meaningful. The table below shows cumulative unrealized gains and losses on our available-for-sale investments reflected in the Consolidated Statements of Financial Condition. June 30, 2023 December 31, 2022 (dollars in thousands) Unrealized gain $ 4,911 $ 5,910 Unrealized loss (2,387,442) (3,714,806) Accumulated other comprehensive income (loss) $ (2,382,531) $ (3,708,896) Unrealized changes in the estimated fair value of available-for-sale investments may have a direct effect on our potential earnings and dividends: positive changes will increase our equity base and allow us to increase our borrowing capacity while negative changes tend to reduce borrowing capacity. A very large negative change in the net fair value of our available-for-sale Residential Securities might impair our liquidity position, requiring us to sell assets with the potential result of realized losses upon sale. The fair value of these securities being less than amortized cost at June 30, 2023 is solely due to market conditions and not the quality of the assets. Substantially all of the Agency MBS have an actual or implied credit rating that is the same as that of the U.S. government. The investments do not require an allowance for credit losses because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. Also, we are guaranteed payment of the principal and interest amounts of the securities by the respective issuing Agency. 51 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Financial Condition Total assets were $89.3 billion and $81.9 billion at June 30, 2023 and December 31, 2022, respectively. The change was primarily due to increases in Agency MBS of $5.5 billion, securitized residential whole loans of consolidated VIEs of $2.2 billion, principal and interest receivable of $307.2 million, receivable for unsettled trades of $212.4 million and derivative assets of $115.1 million. Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at June 30, 2023: Agency MBS MSR Residential Credit (1) Commercial Total Assets (dollars in thousands) Fair value $ 67,764,264 $ 2,018,896 $ 15,545,246 $ 365,690 $ 85,694,096 Implied market value of derivatives (2) 3,627,716 — — — 3,627,716 Debt Repurchase agreements 57,918,976 — 3,394,312 324,312 61,637,600 Implied cost basis of derivatives (2) 3,625,443 — — — 3,625,443 Other secured financing — 500,000 — — 500,000 Debt issued by securitization vehicles — — 9,789,282 — 9,789,282 Participations issued — — 492,307 — 492,307 Net forward purchases 3,513,508 35,345 (4,847) (133) 3,543,873 Other Net other assets / liabilities 1,724,672 297,200 77,141 55,025 2,154,038 Net equity allocated $ 8,058,725 $ 1,780,751 $ 1,951,333 $ 96,536 $ 11,887,345 Net equity allocated (%) 68 % 15 % 16 % 1 % 100 % Debt/net equity ratio (3) 7.2:1 0.3:1 7.0:1 3.4:1 6.1:1 (1) Fair value includes residential loans held for sale, and assets and liabilities associated with non-controlling interests. (2) Derivatives include TBA contracts under Agency MBS. (3) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition. Residential Securities Substantially all of our Agency MBS at June 30, 2023 and December 31, 2022 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties. Our mortgage-backed securities were largely Fannie Mae, Freddie Mac, or Ginnie Mae pass through certificates or CMOs, which have an actual or implied credit rating that is the same as that of the U.S. government. We carry all of our Agency MBS at fair value on the Consolidated Statements of Financial Condition. We accrete discount balances as an increase to interest income over the expected life of the related interest earning assets and we amortize premium balances as a decrease to interest income over the expected life of the related interest earning assets. At June 30, 2023 and December 31, 2022, we had on our Consolidated Statements of Financial Condition a total of $1.3 billion and $1.1 billion, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities acquired at a price below principal value) and a total of $2.8 billion and $2.9 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities acquired at a price above principal value). The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended June 30, 2023 and 2022 was 7.0% and 14.9%, respectively. The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of June 30, 2023 and 2022 was 8.6% and 7.7%, respectively. Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-backed securities, all other factors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life of our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period. 52 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis The following table presents our Residential Securities that were carried at fair value at June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 Estimated Fair Value Agency Fixed-rate pass-through $ 65,348,798 $ 60,029,758 Adjustable-rate pass-through 211,550 234,387 CMO 85,502 89,610 Interest-only 293,519 218,077 Multifamily 1,797,123 1,674,165 Reverse mortgages 27,772 28,898 Total agency securities $ 67,764,264 $ 62,274,895 Residential credit Credit risk transfer $ 1,064,401 $ 997,557 Alt-A 119,215 91,216 Prime 196,613 197,870 Subprime 180,886 156,313 NPL/RPL 1,193,350 1,317,154 Prime jumbo (>= 2010 vintage) 318,042 228,593 Total residential credit securities $ 3,072,507 $ 2,988,703 Total Residential Securities $ 70,836,771 $ 65,263,598 The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities at June 30, 2023 and December 31, 2022. June 30, 2023 December 31, 2022 Residential Securities (1) (dollars in thousands) Principal amount $ 73,146,443 $ 68,290,976 Net premium 575,769 1,049,253 Amortized cost 73,722,212 69,340,229 Amortized cost / principal amount 100.79 % 101.54 % Carrying value 70,174,405 64,736,220 Carrying value / principal amount 95.94 % 94.79 % Weighted average coupon rate 4.37 % 4.03 % Weighted average yield 4.21 % 3.76 % Adjustable-rate Residential Securities (1) Principal amount $ 1,356,739 $ 1,407,295 Weighted average coupon rate 8.33 % 7.16 % Weighted average yield 7.87 % 7.01 % Weighted average term to next adjustment (2) 7 Months 9 Months Weighted average lifetime cap (3) 9.32 % 9.30 % Principal amount at period end as % of total residential securities 1.85 % 2.06 % Fixed-rate Residential Securities (1) Principal amount $ 71,789,703 $ 66,883,681 Weighted average coupon rate 4.29 % 3.96 % Weighted average yield 4.14 % 3.70 % Principal amount at period end as % of total residential securities 98.15 % 97.94 % Interest-only Residential Securities Notional amount $ 20,929,905 $ 17,346,307 Net premium 890,067 785,532 Amortized cost 890,067 785,532 Amortized cost / notional amount 4.25 % 4.53 % Carrying value 662,366 527,378 Carrying value / notional amount 3.16 % 3.04 % Weighted average coupon rate 0.59 % 0.56 % Weighted average yield NM NM (1) Excludes interest-only MBS. (2) Excludes non-Agency MBS and CRT securities. (3) Excludes non-Agency MBS and CRT securities as this attribute is not applicable to these asset classes. NM Not meaningful. 53 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis The following tables summarize certain characteristics of our Residential Credit portfolio at June 30, 2023. Payment Structure Investment Characteristics (1) Product Estimated Fair Value Senior Subordinate Coupon Credit Enhancement 60+ Delinquencies 3M VPR (2) (dollars in thousands) Credit risk transfer $ 1,064,401 $ — $ 1,064,401 9.32 % 1.92 % 0.80 % 5.24 % Alt-A 119,215 59,219 59,996 4.91 % 14.63 % 1.98 % 7.94 % Prime 196,613 42,858 153,755 3.43 % 8.02 % 0.35 % 4.91 % Subprime 180,886 68,503 112,383 6.33 % 23.18 % 9.07 % 7.65 % Re-performing loan securitizations 759,938 396,586 363,352 4.41 % 27.61 % 23.10 % 5.51 % Non-performing loan securitizations 433,412 406,441 26,971 3.57 % 40.40 % 60.40 % 10.10 % Prime jumbo (>=2010 vintage) 318,042 83,926 234,116 4.08 % 3.13 % 0.35 % 4.62 % Total/weighted average $ 3,072,507 $ 1,057,533 $ 2,014,974 5.90 % 16.34 % 15.28 % 6.20 % (1) Investment characteristics exclude the impact of interest-only securities. (2) Represents the 3 month voluntary prepayment rate (“VPR”). Bond Coupon Product ARM Fixed Floater Interest-Only Estimated Fair Value (dollars in thousands) Credit risk transfer $ — $ — $ 1,064,401 $ — $ 1,064,401 Alt-A 3,278 115,856 81 — 119,215 Prime — 192,356 — 4,257 196,613 Subprime — 157,436 23,339 111 180,886 Re-performing loan securitizations — 759,938 — — 759,938 Non-performing loan securitizations — 433,412 — — 433,412 Prime jumbo (>=2010 vintage) — 227,004 31,230 59,808 318,042 Total $ 3,278 $ 1,886,002 $ 1,119,051 $ 64,176 $ 3,072,507 Contractual Obligations The following table summarizes the effect on our liquidity and cash flows from contractual obligations at June 30, 2023. The table does not include the effect of net interest rate payments on our interest rate swap agreements. The net swap payments will fluctuate based on monthly changes in the receive rate. At June 30, 2023, the interest rate swaps had a net fair value of ($66.6) million. Within One Year One to Three Years Three to Five Years More than Five Years Total (dollars in thousands) Repurchase agreements $ 61,637,600 $ — $ — $ — $ 61,637,600 Interest expense on repurchase agreements (1) 406,701 — — — 406,701 Other secured financing 250,000 250,000 — — 500,000 Interest expense on other secured financing (1) 40,136 11,831 — — 51,967 Debt issued by securitization vehicles (principal) — — — 11,041,032 11,041,032 Interest expense on debt issued by securitization vehicles 437,784 875,568 875,568 12,836,518 15,025,438 Participations issued (principal) — — — 511,379 511,379 Interest expense on participations issued 33,939 67,877 67,877 843,364 1,013,057 Long-term operating lease obligations 4,104 5,332 422 — 9,858 Total $ 62,810,264 $ 1,210,608 $ 943,867 $ 25,232,293 $ 90,197,032 (1) Interest expense on repurchase agreements and other secured financing calculated based on rates at June 30, 2023. In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our current operations via repurchase agreements. We may use securitization structures, credit facilities, or other term financing structures to finance certain of our assets. During the six months ended June 30, 2023, we received $3.0 billion from principal repayments and $12.5 billion in cash from disposal of Securities. During the six months ended June 30, 2022, we received $5.7 billion from principal repayments and $8.4 billion in cash from disposal of Securities. 54 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Commitments and Contractual Obligations with Unconsolidated Entities We do not have any commitments or contractual obligations arising from arrangements with unconsolidated entities that have or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources. Capital Management Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of critical importance to our business strategy. A strong and robust capital position is essential to executing our investment strategy. Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy regardless of the market environment. Our capital policy defines the parameters and principles supporting a comprehensive capital management practice. The major risks impacting capital are capital, liquidity and funding risk, investment/market risk, credit risk, counterparty risk, operational risk and compliance, regulatory and legal risk. For further discussion of the risks we are subject to, please see Part I, Item 1A. “Risk Factors” in 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. Capital requirements are based on maintaining levels above approved thresholds, ensuring the quality of our capital appropriately reflects our asset mix, market and funding structure. In the event we fall short of our internal thresholds, we will consider appropriate actions which may include asset sales, changes in asset mix, reductions in asset purchases or originations, issuance of capital or other capital enhancing or risk reduction strategies. Stockholders’ Equity The following table provides a summary of total stockholders’ equity at June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 Stockholders’ equity (dollars in thousands) 6.95% Series F fixed-to-floating rate cumulative redeemable preferred stock 696,910 696,910 6.50% Series G fixed-to-floating rate cumulative redeemable preferred stock 411,335 411,335 6.75% Series I fixed-to-floating rate cumulative redeemable preferred stock 428,324 428,324 Common stock 4,939 4,683 Additional paid-in capital 23,550,346 22,981,320 Accumulated other comprehensive income (loss) (2,382,531) (3,708,896) Accumulated deficit (10,933,044) (9,543,233) Total stockholders’ equity $ 11,776,279 $ 11,270,443 Capital Stock Common Stock In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares, which expired on December 31, 2021 (the “Prior Share Repurchase Program”). In January 2022, we announced that our Board authorized the repurchase of up to $1.5 billion of our 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. During the three months ended June 30, 2022, we closed the public offering of an original issuance of 25 million shares of common stock for proceeds of $645.0 million before deducting offering expenses. In connection with the offering, we granted the underwriters a thirty-day option to purchase up to an additional 3.75 million shares of common stock, which the underwriters exercised in full resulting in an additional $96.8 million in proceeds before deducting offering expenses. The 2022 share amounts have been retroactively adjusted to reflect the effects of the Reverse Stock Split. On August 6, 2020, we entered into separate Amended and Restated Distribution Agency Agreements (as amended by Amendment No. 1 to the Amended and Restated Distribution Agency Agreements on August 6, 2021, and Amendment No. 2 to the Amended and Restated Distribution Agency Agreements on November 3, 2022, collectively, the “Sales Agreements”) with each of Barclays Capital Inc., BofA Securities, Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, 55 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Goldman Sachs & Co. LLC, Keefe, Bruyette & Woods, Inc., J.P. Morgan Securities LLC, RBC Capital Markets, LLC, UBS Securities LLC and Wells Fargo Securities, LLC (collectively, the “Sales Agents”). Pursuant to the Sales Agreements, we may offer and sell shares of common stock, having an aggregate offering price of up to $1.5 billion, from time to time through any of the Sales Agents (the “at-the-market sales program”). During the six months ended June 30, 2023, under the at-the-market sales program, we issued 25.3 million shares for proceeds of $562.7 million, net of commissions and fees. During the three and six months ended June 30, 2022, under the at-the-market sales program, we issued 8.3 million shares and 8.4 million shares, as retroactively adjusted to reflect the effects of the Reverse Stock Split, for proceeds of $214.9 million and $221.1 million, respectively, each, net of commissions and fees. Refer to the “Capital Stock” Note located within Item 1 for additional information related to the at-the-market sales program. Preferred Stock On November 3, 2022, our Board approved a repurchase plan for all of our existing outstanding Preferred Stock (as defined below, the “Preferred Stock Repurchase Program”). Under the terms of the plan, we are authorized to repurchase up to an aggregate of 63,500,000 shares of Preferred Stock, comprised of up to (i) 28,800,000 shares of our 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”), (ii) 17,000,000 shares of our 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series G Preferred Stock”), and (iii) 17,700,000 shares of our 6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Series I Preferred Stock”, and together with Series F Preferred Stock and Series G Preferred Stock, the “Preferred Stock”). The aggregate liquidation value of the Preferred Stock that may be repurchased by us 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. Purchases made pursuant to the Preferred Stock Repurchase Program will be made in either the open market or in privately negotiated transactions from time to time as permitted by securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us in our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The authorization does not obligate us to acquire any particular amount of Preferred Stock and the program may be suspended or discontinued at our discretion without prior notice. Leverage and Capital We believe that it is prudent to maintain conservative GAAP leverage ratios and economic leverage ratios as there may be continued volatility in the mortgage and credit markets. Our capital policy governs our capital and leverage position including setting limits. Based on the guidelines, we generally expect to maintain an economic leverage ratio of less than 10:1. Our actual economic leverage ratio varies from time to time based upon various factors, including our management’s opinion of the level of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions. Our GAAP leverage ratio at June 30, 2023 and December 31, 2022 was 6.1:1 and 6.0:1, respectively. Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 5.8:1 and 6.3:1, at June 30, 2023 and December 31, 2022, respectively. Our GAAP capital ratio at June 30, 2023 and December 31, 2022 was 13.3% and 13.9%, respectively. Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 14.3% and 13.4% at June 30, 2023 and December 31, 2022, respectively. Economic leverage ratio and economic capital ratio are non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to their most directly comparable GAAP results. 56 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Risk Management We are subject to a variety of risks in the ordinary conduct of our business. The effective management of these risks is of critical importance to the overall success of Annaly. The objective of our risk management framework is to identify, measure and monitor these risks. Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk. We believe we have built a strong and collaborative risk management culture throughout Annaly focused on awareness which supports appropriate understanding and management of our key risks. Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility. Risk Appetite We maintain a firm-wide risk appetite statement which defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. We engage in risk activities based on our core expertise that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive portfolio management, supported by a conservative liquidity and leverage posture. The risk appetite statement asserts the following key risk parameters to guide our investment management activities: Risk Parameter Description Portfolio Composition We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy. Leverage We generally expect to maintain an economic leverage ratio no greater than 10:1 considerate of our overall capital allocation framework. Liquidity Risk We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions. Interest Rate Risk We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation. Credit Risk We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns. Capital Preservation We will seek to protect our capital base through disciplined risk management practices. Operational Risk We will seek to limit impacts to our business through disciplined operational risk management practices addressing areas including but not limited to, management of key third party relationships (i.e. originators, sub-servicers), human capital management, cybersecurity and technology related matters, business continuity and financial reporting risk. Compliance, Regulatory and Legal We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act and the licenses and approvals of our regulated and licensed subsidiaries. Governance Risk management begins with our Board, through the review and oversight of the risk management framework, and executive management, through the ongoing formulation of risk management practices and related execution in managing risk. The Board exercises its oversight of risk management primarily through the Risk Committee and Audit Committee with support from the other Board Committees. The Risk Committee is responsible for oversight of our risk governance structure, risk management (operational and market risk) and risk assessment guidelines and policies and our risk appetite. The Audit Committee is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor selection, evaluation and review, and oversight of the internal audit function. The Risk Committee and the Audit Committee jointly oversee practices and policies related to cybersecurity and receive regular reports from management throughout the year on cybersecurity and related risks. The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices and other human capital matters such as succession and culture. The Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board, and the Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or ESG risk to us. The Corporate Responsibility Committee shares oversight of specific ESG-related matters with other Board Committees and meets jointly with the Management Development and Compensation Committee on the Company's human capital management and culture and with the Risk Committee on ESG-related regulatory and policy risks. Risk assessment and risk management are the responsibility of our management. A series of management committees has oversight or decision-making responsibilities for risk management activities. Membership of these committees is reviewed 57 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis regularly to ensure the appropriate personnel are engaged in the risk management process. Three primary management committees have been established to provide a comprehensive framework for risk management. The management committees responsible for our risk management include the Enterprise Risk Committee (“ERC”), Asset / Liability Committee (“ALCO”) and the Financial Reporting and Disclosure Committee (“FRDC”). Each of these committees reports to our management Operating Committee which is responsible for oversight and management of our operations, including oversight and approval authority over all aspects of our enterprise risk management. Audit Services is an independent function with reporting lines to the Audit Committee. Audit Services is responsible for performing our internal audit activities, which includes independently assessing and validating key controls within the risk management framework. Our compliance group is responsible for oversight of our regulatory compliance. Our Chief Compliance Officer has reporting lines to the Audit Committee. Description of Risks We are subject to a variety of risks due to the business we operate. Risk categories are an important component of a robust enterprise wide risk management framework. We have identified the following primary categories that we utilize to identify, assess, measure and monitor risk. Risk Description Capital, Liquidity and Funding Risk Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding. Investment/Market Risk Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused by changes in market variables, such as interest rates, which affect the values of investment securities and other investment instruments. Credit Risk Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in lending and investing activities. Counterparty Risk Risk to earnings, capital or business resulting from a counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in funding, hedging and investing activities. Operational Risk Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including business continuity planning), human factors or external events. This risk also applies to our use of proprietary and third party models, software vendors and data providers, and oversight of third-party service providers such as sub-servicers, due diligence firms etc. Compliance, Regulatory and Legal Risk Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model. Capital, Liquidity and Funding Risk Management Our capital, liquidity and funding risk management strategy is designed to ensure the availability of sufficient resources to support our business and meet our financial obligations under both normal and adverse market and business environments. Our capital, liquidity and funding risk management practices consist of the following primary elements: Element Description Funding Availability of diverse and stable sources of funds. Excess Liquidity Excess liquidity primarily in the form of unencumbered assets and cash. Maturity Profile Diversity and tenor of liabilities and modest use of leverage. Stress Testing Scenario modeling to measure the resiliency of our liquidity position. Liquidity Management Policies Comprehensive policies including monitoring, risk limits and an escalation protocol. Funding Our primary financing sources are repurchase agreements provided through counterparty arrangements and through our wholly-owned subsidiary, Arcola Securities, Inc. (“Arcola”), other secured financing, debt issued by securitization vehicles, mortgages, 58 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis credit facilities, note sales and various forms of equity. We maintain excess liquidity by holding unencumbered liquid assets that could be either used to collateralize additional borrowings or sold. We seek to conservatively manage our repurchase agreement funding position through a variety of methods including diversity, breadth and depth of counterparties and maintaining a staggered maturity profile. Arcola provides direct access to third party funding as a FINRA member broker-dealer. Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central counterparty. In addition, Arcola may borrow funds through direct repurchase agreements. To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements. At June 30, 2023 and December 31, 2022, the weighted average days to maturity was 44 days and 27 days, respectively. Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made. Should prepayment speeds on the mortgages underlying our Agency and Residential mortgage-backed securities and/or market interest rates or other factors move suddenly and cause declines in the market value of assets posted as collateral, resulting margin calls may cause an adverse change in our liquidity position. At June 30, 2023, we had total financial assets and cash pledged against existing liabilities of $64.7 billion. The weighted average haircut was approximately 3% on repurchase agreements. The quality and character of the Residential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at June 30, 2023 compared to the same period in 2022, and our counterparties did not materially alter any requirements, including required haircuts, related to the col lateral we pledge under repurchase agreements and interest rate swaps during the three months ended June 30, 2023. The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement balances outstanding for the periods presented: Repurchase Agreements Reverse Repurchase Agreements Average Daily Amount Outstanding Ending Amount Outstanding Average Daily Amount Outstanding Ending Amount Outstanding For the three months ended (dollars in thousands) June 30, 2023 $ 64,591,463 $ 61,637,600 $ 600,968 $ — March 31, 2023 60,477,833 60,993,018 371,429 — December 31, 2022 59,946,810 59,512,597 102,025 — September 30, 2022 56,354,310 54,160,731 139,991 — June 30, 2022 51,606,720 51,364,097 117,903 — March 31, 2022 53,961,689 52,626,503 39,535 — December 31, 2021 56,977,019 54,769,643 39,247 — September 30, 2021 57,504,986 55,475,420 44,964 — June 30, 2021 62,440,803 60,221,067 42,581 — The following table provides information on our repurchase agreements and other secured financing by maturity date at June 30, 2023. The weighted average remaining maturity on our repurchase agreements and other secured financing was 48 days at June 30, 2023: June 30, 2023 Principal Balance Weighted Average Rate % of Total (dollars in thousands) 1 day $ — — % — % 2 to 29 days 40,322,735 5.24 % 64.9 % 30 to 59 days 13,179,036 5.35 % 21.2 % 60 to 89 days 1,264,196 5.78 % 2.0 % 90 to 119 days 991,084 5.51 % 1.6 % Over 120 days (1) 6,380,549 5.56 % 10.3 % Total $ 62,137,600 5.31 % 100.0 % (1) Less than 1% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year. 59 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis We also finance our investments in residential mortgage loans through the issuance of securitization transactions sponsored by our wholly-owned subsidiary Onslow Bay Financial LLC (“Onslow Bay”) under the Onslow Bay private-label securitization program. The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at June 30, 2023: Weighted Average Rate Principal Balance As of Period End For the Quarter Weighted Average Days to Maturity (1) (dollars in thousands) Repurchase agreements $ 61,637,600 5.29 % 5.15 % 44 Other secured financing 500,000 7.92 % 7.81 % 473 Debt issued by securitization vehicles (2) 11,041,032 3.97 % 3.96 % 12,356 Participations issued (2) 511,379 6.64 % 6.26 % 10,895 Total indebtedness $ 73,690,011 (1) Determined based on estimated weighted-average lives of the underlying debt instruments. (2) Non-recourse to Annaly. Excess Liquidity Our primary source of liquidity is the availability of unencumbered assets which may be provided as collateral to support additional funding needs. We target minimum thresholds of available, unencumbered assets to maintain excess liquidity. The following table illustrates our asset portfolio available to support potential collateral obligations and funding needs. Assets are considered encumbered if pledged as collateral against an existing liability, and therefore are no longer available to support additional funding. An asset is considered unencumbered if it has not been pledged or securitized. The following table also provides the carrying amount of our encumbered and unencumbered financial assets at June 30, 2023: Encumbered Assets Unencumbered Assets Total Financial assets (dollars in thousands) Cash and cash equivalents $ 1,060,005 $ 176,867 $ 1,236,872 Investments, at carrying value (1) Agency mortgage-backed securities 60,114,396 4,180,070 64,294,466 Credit risk transfer securities 810,490 253,911 1,064,401 Non-agency mortgage-backed securities 1,730,531 282,431 2,012,962 Commercial mortgage-backed securities 365,690 — 365,690 Residential mortgage loans (2) 12,292,655 180,084 12,472,739 MSR 1,128,460 890,436 2,018,896 Other assets (3) — 75,680 75,680 Total financial assets $ 77,502,227 $ 6,039,479 $ 83,541,706 (1) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. (2) Includes assets transferred or pledged to securitization vehicles. (3) Includes commercial real estate investments and interests in certain joint ventures. We maintain liquid assets in order to satisfy our current and future obligations in normal and stressed operating environments. These are held as the primary means of liquidity risk mitigation. The composition of our liquid assets is also considered and is subject to certain parameters. The composition is monitored for concentration risk, including in respect of our deposits of our cash and cash equivalents, and asset type. We believe the assets we consider liquid can be readily converted into cash, through liquidation or by being used as collateral in financing arrangements (including as additional collateral to support existing financial arrangements). Our balance sheet also generates liquidity on an on-going basis through mortgage principal and interest repayments and net earnings held prior to payment of dividends. The following table presents our liquid assets as a percentage of total assets at June 30, 2023: 60 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Carrying Value (1) Liquid assets (dollars in thousands) Cash and cash equivalents $ 1,236,872 Residential Securities (2) 67,371,718 Commercial mortgage-backed securities 365,690 Residential mortgage loans (3) 1,154,320 Total liquid assets $ 70,128,600 Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (4) 97.13 % (1) Carrying value approximates the market value of assets. The assets listed in this table include $64.7 billion of assets that have been pledged as collateral against existing liabilities at June 30, 2023. Please refer to the Encumbered and Unencumbered Assets table for related information. (2) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. (3) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $11.3 billion. (4) Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles, of $11.3 billion. Maturity Profile We consider the profile of our assets, liabilities and derivatives when managing both liquidity risk as well as investment/market risk employing a measurement of both the maturity gap and interest rate sensitivity gap. We determine the amount of liquid assets that are required to be held by monitoring several liquidity metrics. We utilize several modeling techniques to analyze our current and potential obligations including the expected cash flows from our assets, liabilities and derivatives. The following table illustrates the expected final maturities and cash flows of our assets, liabilities and derivatives. The table is based on a static portfolio and assumes no reinvestment of asset cash flows and no future liabilities are entered into. In assessing the maturity of our assets, liabilities and off balance sheet obligations, we use the stated maturities, or our prepayment expectations for assets and liabilities that exhibit prepayment characteristics. Cash and cash equivalents are included in the ‘Less than 3 Months’ maturity bucket, as they are typically held for a short period of time. With respect to each maturity bucket, our maturity gap is considered negative when the amount of maturing liabilities exceeds the amount of maturing assets. A negative gap increases our liquidity risk as we must enter into future liabilities. Our interest rate sensitivity gap is the difference between interest earning assets and interest bearing liabilities maturing or re-pricing within a given time period. Unlike the calculation of maturity gap, interest rate sensitivity gap includes the effect of our interest rate swaps. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if assets and liabilities were perfectly matched in each maturity category. The amount of assets and liabilities utilized to compute our interest rate sensitivity gap was determined in accordance with the contractual terms of the assets and liabilities, except that adjustable-rate loans and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature. The effects of interest rate swaps, whereby we generally pay a fixed rate and receive a floating rate and effectively lock in our financing costs for a longer term, are also reflected in our interest rate sensitivity gap. 61 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis The interest rate sensitivity of our assets and liabilities in the following table at June 30, 2023 could vary substantially based on actual prepayment experience. Less than 3 Months 3-12 Months More than 1 Year to 3 Years 3 Years and Over Total Financial assets (dollars in thousands) Cash and cash equivalents $ 1,236,872 $ — $ — $ — $ 1,236,872 Agency mortgage-backed securities (principal) 65 1,488 426,696 69,459,947 69,888,196 Residential credit risk transfer securities (principal) 1,243 — 44,356 992,086 1,037,685 Non-agency mortgage-backed securities (principal) 176,886 35,523 952,612 1,055,541 2,220,562 Commercial mortgage-backed securities (principal) — 85,122 290,242 — 375,364 Total securities 178,194 122,133 1,713,906 71,507,574 73,521,807 Residential mortgage loans (principal) — — — 1,189,804 1,189,804 Total loans — — — 1,189,804 1,189,804 Assets transferred or pledged to securitization vehicles (principal) — — — 12,553,809 12,553,809 Total financial assets - maturity 1,415,066 122,133 1,713,906 85,251,187 88,502,292 Effect of utilizing reset dates (1) 13,957,987 269,252 (111,177) (14,116,062) — Total financial assets - interest rate sensitive $ 15,373,053 $ 391,385 $ 1,602,729 $ 71,135,125 $ 88,502,292 Financial liabilities Repurchase agreements $ 54,765,967 $ 6,871,633 $ — $ — $ 61,637,600 Other secured financing — 250,000 250,000 — 500,000 Debt issued by securitization vehicles (principal) — — — 11,041,032 11,041,032 Participations issued (principal) — — — 511,379 511,379 Total financial liabilities - maturity 54,765,967 7,121,633 250,000 11,552,411 73,690,011 Effect of utilizing reset dates (1)(2) (49,960,459) 6,303,922 7,107,358 36,549,179 — Total financial liabilities - interest rate sensitive $ 4,805,508 $ 13,425,555 $ 7,357,358 $ 48,101,590 $ 73,690,011 Maturity gap $ (53,350,901) $ (6,999,500) $ 1,463,906 $ 73,698,776 $ 14,812,281 Cumulative maturity gap $ (53,350,901) $ (60,350,401) $ (58,886,495) $ 14,812,281 Interest rate sensitivity gap $ 10,567,545 $ (13,034,170) $ (5,754,629) $ 23,033,535 $ 14,812,281 Cumulative rate sensitivity gap $ 10,567,545 $ (2,466,625) $ (8,221,254) $ 14,812,281 (1) Maturity gap utilizes stated maturities, or prepayment expectations for assets that exhibit prepayment characteristics, while interest rate sensitivity gap utilizes reset dates, if applicable. (2) Includes effect of interest rate swaps. The methodologies we employ for evaluating interest rate risk include an analysis of our interest rate “gap,” measurement of the duration and convexity of our portfolio and sensitivities to interest rates and spreads. Stress Testing We utilize liquidity stress testing to ensure we have sufficient liquidity under a variety of scenarios and stresses. These stress tests assist with the management of our pool of liquid assets and influence our current and future funding plans. The stresses applied include market-wide and firm-specific stresses. Liquidity Management Policies We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and measurement, along with well-defined key risk indicators. Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as the sustainability of the funding composition under stress conditions. We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-specific and market conditions. The metrics assist in assessing our liquidity conditions and are integrated into our escalation protocol. 62 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Investment/Market Risk Management One of the primary risks we are subject to is investment/market risk. Changes in the level of interest rates can affect our net interest income, which is the difference between the income we earn on our interest earning assets and the interest expense incurred from interest bearing liabilities and derivatives. Changes in the level of interest rates and spreads can also affect the value of our assets and potential realization of gains or losses from the sale of these assets. We may utilize a variety of financial instruments, including interest rate swaps, swaptions, options, futures and other hedges, in order to limit the adverse effects of interest rates on our results. In the case of interest rate swaps, we utilize contracts linked to LIBOR but may also enter into interest rate swaps where the floating leg is linked to SOFR, the overnight index swap rate or another index. In addition, we may use MAC interest rate swaps in which we may receive or make a payment at the time of entering such interest rate swap to compensate for the off-market nature of such interest rate swap. MAC interest rate swaps offer price transparency, flexibility and more efficient portfolio administration through compression which is the process of reducing the number of unique interest rate swap contracts and replacing them with fewer contracts containing market defined terms. Our portfolio and the value of our portfolio, including derivatives, may be adversely affected as a result of changing interest rates and spreads. We simulate a wide variety of interest rate scenarios in evaluating our risk. Scenarios are run to capture our sensitivity to changes in interest rates, spreads and the shape of the yield curve. We also consider the assumptions affecting our analysis such as those related to prepayments. In addition to predefined interest rate scenarios, we utilize Value-at-Risk measures to estimate potential losses in the portfolio over various time horizons utilizing various confidence levels. The following tables estimate the potential changes in economic net interest income over a twelve month period and the immediate effect on our portfolio market value (inclusive of derivative instruments), should interest rates instantaneously increase or decrease by 25, 50 or 75 basis points, and the effect of portfolio market value if mortgage option-adjusted spreads instantaneously increase or decrease by 5, 15 or 25 basis points (assuming shocks are parallel and instantaneous). All changes to income and portfolio market value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The net interest income simulations incorporate the interest expense effect of rate resets on liabilities and derivatives as well as the amortization expense and reinvestment of principal based on the prepayments on our securities, which varies based on the level of rates. The results assume no management actions in response to the rate or spread changes. The following table presents estimates at June 30, 2023. Actual results could differ materially from these estimates. Change in Interest Rate (1) Estimated Percentage Change in Portfolio Value (2) Estimated Change as a % on NAV (2)(3) Projected Percentage Change in Economic Net Interest Income (4) -75 Basis points 0.1% 0.6% 3.9% -50 Basis points 0.1% 1.0% 2.6% -25 Basis points 0.1% 0.7% 1.3% +25 Basis points (0.2%) (1.2%) (1.5%) +50 Basis points (0.4%) (2.9%) (3.1%) +75 Basis points (0.6%) (5.0%) (4.7%) MBS Spread Shock (1) Estimated Change in Portfolio Market Value (2) Estimated Change as a % on NAV (2)(3) -25 Basis points 1.4% 10.6% -15 Basis points 0.8% 6.3% -5 Basis points 0.3% 2.1% +5 Basis points (0.3%) (2.1%) +15 Basis points (0.8%) (6.2%) +25 Basis points (1.3%) (10.4%) (1) Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment professionals. Actual results could differ materially from these estimates. (2) Scenarios include securities, residential mortgage loans, MSR and derivative instruments. (3) NAV represents book value of equity. (4) Scenarios include securities, residential mortgage loans, repurchase agreements, other secured financing and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps. Credit Risk Management Key risk parameters have been established to specify our credit risk appetite. We seek to manage credit risk by making investments which conform to the firm’s specific investment policy parameters and optimize risk-return attributes. While we do not expect to encounter credit risk in our Agency mortgage-backed securities, we face credit risk on the non-Agency mortgage-backed securities and CRT securities in our portfolio. In addition, we are also exposed to credit risk on residential mortgage loans and commercial real estate investments. MSR values may also be impacted through reduced servicing fees and higher costs to service the underlying mortgage loans due to borrower performance. Generally, we are 63 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis subject to risk of loss if an issuer or borrower fails to perform its contractual obligations. We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure. In the case of residential mortgage loans and MSR, we may engage a third party to perform due diligence on a sample of loans that we believe sufficiently represents the entire pool. Once an investment is made, our ongoing surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate committee. We review credit and other risks of loss associated with each investment. Our management monitors the overall portfolio risk and determines estimates of provision for loss. Additionally, ALCO has oversight of our credit risk exposure. Our portfolio composition, based on balance sheet values, at June 30, 2023 and December 31, 2022 was as follows: June 30, 2023 December 31, 2022 Category Agency mortgage-backed securities 79.1 % 79.4 % Credit risk transfer securities 1.2 % 1.3 % Non-agency mortgage-backed securities 2.3 % 2.5 % Residential mortgage loans (1) 14.6 % 13.9 % Mortgage servicing rights 2.4 % 2.2 % Commercial real estate 0.4 % 0.7 % (1) Includes assets transferred or pledged to securitization vehicles. Counterparty Risk Management Our use of repurchase and derivative agreements and trading activities create exposure to counterparty risk relating to potential losses that could be recognized if the counterparties to these agreements fail to perform their obligations under the contracts. In the event of default by a counterparty, we could have difficulty obtaining our assets pledged as collateral. A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities as collateral to the applicable lender. The collateral we pledge generally exceeds the amount of the borrowings under each agreement. If the counterparty to the repurchase agreement defaults on its obligations and we are not able to recover our pledged asset, we are at risk of losing the over-collateralization or haircut. The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged by us to the lender including accrued interest receivable on such collateral. We also use interest rate swaps and other derivatives to manage interest rate risk. Under these agreements, we pledge securities and cash as collateral or settle variation margin payments as part of a margin arrangement. If a counterparty were to default on its obligations, we would be exposed to a loss to a derivative counterparty to the extent that the amount of our securities or cash pledged exceeded the unrealized loss on the associated derivative and we were not able to recover the excess collateral. Additionally, we would be exposed to a loss to a derivative counterparty to the extent that our unrealized gains on derivative instruments exceeded the amount of the counterparty’s securities or cash pledged to us. We monitor our exposure to counterparties across several dimensions including by type of arrangement, collateral type, counterparty type, ratings and geography. Additionally, ALCO has oversight of our counterparty exposure. The following table summarizes our exposure to counterparties by geography at June 30, 2023: Number of Counterparties Secured Financing (1) Interest Rate Swaps at Fair Value Exposure (2) Geography (dollars in thousands) North America 23 $ 45,967,772 $ (23,797) $ 3,276,353 Europe 10 11,145,302 (42,795) 847,458 Asia (non-Japan) 1 741,302 — 26,969 Japan 4 4,283,224 — 265,101 Total 38 $ 62,137,600 $ (66,592) $ 4,415,881 (1) Includes repurchase agreements and other secured financing. (2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured financing and derivatives for each counterparty. 64 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Operational Risk Management We are subject to operational risk in each of our business and support functions. Operational risk may arise from internal or external sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events. We manage operational risk through a variety of tools including policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor management. Other tools include Risk and Control Self Assessment (“RCSA”) testing, including disaster recovery/testing; systems controls, including access controls; training, including phishing exercises and cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. Our Operational Risk Management team conducts a disaster recovery exercise on an annual basis. Cyber security-related threats are addressed in tabletop exercises managed by the Cybersecurity Committee and business disruption events are addressed in tabletop exercises managed by the Operational Risk Management team. The results of these tabletop exercises are reported to management. Employee-level lines of defense against operational risk include proper segregation of incompatible duties, activity-level internal controls over financial reporting, the empowerment of business units to identify and mitigate operational risk sources, testing by our internal audit staff, and our overall governance framework. Operational Risk Management responsibilities are overseen by the ERC. The ERC is responsible for supporting the Operating Committee in the implementation, ongoing monitoring, and evaluation of the effectiveness of the enterprise-wide risk management framework. This oversight authority includes review of the strategies, policies, and practices established by management to identify, assess, measure, and manage enterprise-wide risk. Members of the Operational Risk Management team participate in the Cybersecurity Committee established to help mitigate cybersecurity risks. The role of the committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee our Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing. The Head of Information Technology Infrastructure is responsible for continuously reporting to the Cybersecurity Committee throughout the year regarding cybersecurity and related risks. Our Chief Technology Officer and Head of Information Technology Infrastructure are members of multiple industry associations that discuss industry threats, challenges and solutions to cybersecurity issues. Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems. The Cybersecurity Committee periodically reports to the ERC and the relevant Board committees. Our internal audit department determines whether our cybersecurity program and information security practices align with relevant portions of the National Institute of Standards and Technology (“NIST”) framework. There is no assurance that our efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur. We currently maintain cybersecurity insurance, however, there is no assurance that our current policy will cover all cybersecurity breaches or our related losses, or that we will be able to continue to maintain cybersecurity insurance in the future. We depend on third party service providers to perform various business processes related to our operations, including mortgage loan servicers and sub-servicers. Our 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. Compliance, Regulatory and Legal Risk Management Our business is organized as a REIT, and we seek to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT requires an analysis of various factual matters and circumstances. Accordingly, we closely monitor our REIT status within our risk management program. We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola, our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act and our subsidiary that operates as a licensed mortgage aggregator and master servicer. The financial services industry is highly regulated and receives significant attention from regulators, which may impact both our company and our business strategy. Our investments in residential whole loans and MSR require us to comply with applicable state and federal laws and regulations and maintain appropriate governmental licenses, approvals and exemptions. We proactively monitor the potential impact regulation may have both directly and indirectly on us. We maintain a process to actively monitor both actual and potential legal action that may affect us. Our risk management framework is designed to identify, measure and monitor these risks under the oversight of the ERC. We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we seek to continue to meet the requirements for this exemption from registration. The determination that we qualify for this exemption from registration depends on various factual matters and circumstances. Accordingly, in conjunction with our legal 65 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program. Compliance with Section 3(c)(5)(C) is monitored by the FRDC under oversight of the ERC. As a result of the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission (“CFTC”) gained jurisdiction over the regulation of interest rate swaps. The CFTC has asserted that this causes the operators of mortgage real estate investment trusts that use swaps as part of their business model to fall within the statutory definition of Commodity Pool Operator (“CPO”), and, absent relief from the Division of Swap Dealer and Intermediary Oversight or the CFTC, to register as CPOs. On December 7, 2012, as a result of numerous requests for no-action relief from the CPO registration requirement for operators of mortgage real estate investment trusts, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” that permits a CPO to receive relief by filing a claim to perfect the use of the relief. A claim submitted by a CPO will be effective upon filing, so long as the claim is materially complete. The conditions that must be met relate to initial margin and premiums requirements, net income derived annually from commodity interest positions that are not qualifying hedging transactions, marketing of interests in the mortgage real estate investment trust to the public, and identification of the entity as a mortgage real estate investment trust in its federal tax filings with the Internal Revenue Service. While we disagree with the CFTC’s position that mortgage REITs that use swaps as part of their business model fall within the statutory definition of a CPO, we have submitted a claim for the relief set forth in the no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” and believe we meet the criteria for such relief set forth therein. Critical Accounting Estimates The preparation of our consolidated financial statement in accordance with generally accepted accounting principles in the United States requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ materially from these estimates and changes in assumptions could have a significant effect on the consolidated financial statements. Our critical accounting policies that require us to make significant judgments or estimates are described below. For more information on these critical accounting policies and other significant accounting policies, refer to the Note titled “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 1. “Financial Statements.” Valuation of Financial Instruments Residential Securities Description: We carry residential securities at estimated fair value. There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities. Judgments and Uncertainties: Since we primarily invest in securities that can be valued using quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value. Internal fair values are determined using quoted prices from the TBA securities market, the Treasury curve and the underlying characteristics of the individual securities, which may include coupon, periodic and life caps, reset dates and the expected life of the security. While prepayment rates may be difficult to predict and require estimation and judgment in the valuation of Agency mortgage-backed securities, we use several third party models to validate prepayment speeds used in fair value measurements of residential securities. All internal fair values are compared to external pricing sources and/or dealer quotes to determine reasonableness. Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing. Sensitivity of Estimates to Change: Changes in underlying assumptions used in estimating fair value impact the carrying value of the residential securities as well as their yield. For example, an increase in CPR would decrease the carrying value and yield of our Agency mortgage-backed securities. Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds. Refer to the Experienced and Projected Long-Term CPR, Financial Condition – Residential Securities and the interest rate sensitivity and interest rate and MBS spread shock analysis and discussions within this Item 2. for further information. 66 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Residential Mortgage Loans Description: We elected to account for Residential Mortgage Loans at fair value. There is an active market for the residential whole loans in which we invest. Judgments and Uncertainties: Since we primarily invest in residential loans that can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value. Internal fair values are determined using quoted prices for similar market transactions, the swap curve and the underlying characteristics of the individual loans, which may include loan term, coupon, and reset dates. While prepayment rates may be difficult to predict and are a significant estimate requiring judgment in the valuation of residential whole loans, we validate prepayment speeds against those provided by independent pricing analytic providers specializing in residential mortgage loans. Internal fair values are generally compared to external pricing sources to determine reasonableness. Sensitivity of Estimates to Change: Changes to model assumptions, including prepayment speeds may significantly impact the fair value estimate of residential mortgage loans as well as unrealized gains and losses and yield on these assets. Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds. Refer to the interest rate sensitivity and interest rate shock analysis and discussions within this Item 2. for further information. MSR Description: We elected to account for MSR at fair value. The market for MSR is considered less active and transparent compared to securities. As such fair value estimates for our investment in MSR are obtained from models, which use significant unobservable inputs in their valuations. Judgments and Uncertainties: These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. 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 requires significant judgment by management and the third party pricing providers. Sensitivity of Estimates to Change: Changes in the underlying assumptions used to estimate the fair value of MSR impact the carrying value as well as the related unrealized gains and losses recognized. For further discussion of the sensitivity of the model inputs refer to the Note titled “Fair Value Measurements” in the Notes to the Consolidated Financial Statements included in Item 1. “Financial Statements.” Interest Rate Swaps Description: We are required to account for derivative assets and liabilities at fair value, which may or may not be cleared through a derivative clearing organization. We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization. We value uncleared derivatives using internal models with prices compared to counterparty marks. Judgments and Uncertainties: We use the overnight indexed swap (“OIS”) curve, the SOFR curve, or SOFR forward rates as an input to value substantially all of our uncleared interest rate swaps. Consistent with market practice, we exchange collateral (also called margin) based on the fair values of our interest rate swaps. Through this margining process, we may be able to compare our recorded fair value with the fair value calculated by the counterparty or derivatives clearing organization, providing additional verification of our recorded fair value of the uncleared interest rate swaps. Sensitivity of Estimates to Change: Changes in the OIS curve will impact the carrying value of our interest rate swap assets and liabilities. Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds. Refer to the interest rate sensitivity and interest rate shock analysis and discussions within this Item 2 for further information. Revenue Recognition Description: Interest income from coupon payments is accrued based on the outstanding principal amounts of the Residential Securities and their contractual terms. Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method. Judgments and Uncertainties: To aid in determining projected lives of the securities, we use third party model and market information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (i.e., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index 67 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis forecasts and expert judgment. Prepayment speeds vary according to the type of investment, conditions in the financial markets and other factors and cannot be predicted with any certainty. Sensitivity of Estimates to Change: Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Adjustments are made for actual prepayment activity as it relates to calculating the effective yield. The sensitivity of changes in interest rates to our economic net interest income is included in the interest rate shock analysis and discussions within this Item 2 for further information. Consolidation of Variable Interest Entities Description: We are required to determine if it is required to consolidate entities in which it holds a variable interest. Judgments and Uncertainties: Determining whether an entity has a controlling financial interest in a VIE requires significant judgment related to assessing the purpose and design of the VIE and determination of the activities that most significantly impact its economic performance. We must also identify explicit and implicit variable interests in the entity and consider our involvement in both the design of the VIE and its ongoing activities. To determine whether consolidation of the VIE is required, we must apply judgment to assess whether we have the power to direct the most significant activities of the VIE and whether we have either the rights to receive benefits or the obligation to absorb losses that could be potentially significant to the VIE. Use of Estimates The use of GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. 68 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Glossary of Terms A Adjustable-Rate Loan / Security A loan / security on which interest rates are adjusted at regular intervals according to predetermined criteria. The adjustable interest rate is tied to an objective, published interest rate index. Agency Refers to a federally chartered corporation, such as the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or an agency of the U.S. Government, such as the Government National Mortgage Association. Agency Mortgage-Backed Securities Refers to residential mortgage-backed securities that are issued or guaranteed by an Agency. Amortization Liquidation of a debt through installment payments. Amortization also refers to the process of systematically reducing a recognized asset or liability (e.g., a purchase premium or discount for a debt security) with an offset to earnings. Average GAAP Cost of Interest Bearing Liabilities and Average Economic Cost of Interest Bearing Liabilities Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities is a non-GAAP financial measure that reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average Life On a mortgage-backed security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions. Average Yield on Interest Earnings Assets and Average Yield on Interest Earnings Assets (excluding PAA) Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is a non-GAAP financial measure that is calculated using annualized interest income (excluding PAA). B Basis Point (“bp” or “bps”) One hundredth of one percent, used in expressing differences in interest rates. One basis point is 0.01% of yield. For example, a bond’s yield that changed from 3.00% to 3.50% would be said to have moved 50 basis points. Benchmark A bond or an index referencing a basket of bonds whose terms are used for comparison with other bonds of similar maturity. The global financial market typically looks to U.S. Treasury securities as benchmarks. Beneficial Owner One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank. Board Refers to the board of directors of Annaly. Bond The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation a fixed sum of money plus interest (usually represented by interest coupons attached to the bond) is payable to the holder or owner. Bonds are long-term securities with an original maturity of greater than one year. Book Value Per Share Calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit and dividing that number by the total common shares outstanding. Broker Generic name for a securities firm engaged in both buying and selling securities on behalf of customers or its own account. C Capital Buffer Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs. Capital Ratio (GAAP Capital Ratio) Calculated as total stockholders’ equity divided by total assets. 69 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Carry The amount an asset earns over its hedging and financing costs. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed. CMBX The CMBX index is a synthetic tradable index referencing a basket of 25 CMBS of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of CMBS securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying CMBS securities as they occur. Collateral Securities, cash or property pledged by a borrower or party to a derivative contract to secure payment of a loan or derivative. If the borrower fails to repay the loan or defaults under the derivative contract, the secured party may take ownership of the collateral. Collateralized Loan Obligation (“CLO”) A securitization collateralized by loans and other debt instruments. Collateralized Mortgage Obligation (“CMO”) A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans. Commodity Futures Trading Commission (“CFTC”) An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The CFTC regulates the swaps, commodity futures and options markets. Its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices and fraud. Commercial Mortgage-Backed Security (“CMBS” or “Commercial Securities”) Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner. Constant Prepayment Rate (“CPR”) The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month. Convexity A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes. Corporate Debt Non-government debt instruments issued by corporations. Long-term corporate debt can be issued as bonds or loans. Counterparty One of two entities in a transaction. For example, in the bond market a counterparty can be a state or local government, a broker-dealer or a corporation. Coupon The interest rate on a bond that is used to compute the amount of interest due on a periodic basis. Credit and Counterparty Risk Risk to earnings, capital or business, resulting from an obligor’s or counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. Credit and counterparty risk is present in lending, investing, funding and hedging activities. Credit Derivatives Derivative instruments that have one or more underlyings related to the credit risk of a specified entity (or group of entities) or an index that exposes the seller to potential loss from specified credit-risk related events. An example is credit derivatives referencing the commercial mortgage-backed securities index. Credit Risk Transfer (“CRT”) Securities Credit Risk Transfer securities are risk sharing transactions issued by Fannie Mae and Freddie Mac and similarly structured transactions arranged by third party market participants. The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae, Freddie Mac and/or third parties to private investors. Current Face The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor. D Dealer Person or organization that underwrites, trades and sells securities, e.g., a principal market-maker in securities. Default Risk Possibility that a bond issuer will fail to pay principal or interest when due. 70 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Derivative A financial product that derives its value from the price, price fluctuations and price expectations of an underlying instrument, index or reference pool (e.g. futures contracts, options, interest rate swaps, interest rate swaptions and certain to-be-announced securities). Discount Price When the dollar price is below face value, it is said to be selling at a discount. Duration The weighted maturity of a fixed-income investment’s cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates. E Earnings available for distribution (“EAD”) and Earnings available for distribution Per Average Common Share Non-GAAP financial measure defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) net servicing income less realized amortization of MSR, (d) other income (loss) (excluding amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities. Earnings available for distribution per average common share is a non-GAAP financial measure calculated by dividing earnings available for distribution by average basic common shares for the period. This metric was previously labeled Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share). The definition of EAD is identical to the definition of Core Earnings (excluding PAA) from prior reporting periods. Economic Capital A measure of the risk a firm is subject to. It is the amount of capital a firm needs as a buffer to protect against risk. It is a probabilistic measure of potential future losses at a given confidence level over a given time horizon. Economic Capital Ratio Non-GAAP financial measure that is calculated as total stockholders’ equity divided by total economic assets. Total economic assets includes the implied market value of TBA derivatives and are net of debt issued by securitization vehicles. Economic Interest Expense Non-GAAP financial measure that is comprised of GAAP interest expense and the net interest component of interest rate swaps. Economic Leverage Ratio (Economic Debt-to-Equity Ratio) Non-GAAP financial measure that is calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing. Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from this measure. Economic Net Interest Income Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense. Economic Return Refers to the Company’s change in book value plus dividends declared divided by the prior period’s book value. Encumbered Assets Assets on the company’s balance sheet which have been pledged as collateral against a liability. F Face Amount The par value (i.e., principal or maturity value) of a security appearing on the face of the instrument. Factor A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value. Fannie Mae Federal National Mortgage Association. Federal Deposit Insurance Corporation (“FDIC”) An independent agency created by the U.S. Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships. 71 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Federal Funds Rate The interest rate charged by banks on overnight loans of their excess reserve funds to other banks. Federal Housing Financing Agency (“FHFA”) The FHFA is an independent regulatory agency that oversees vital components of the secondary mortgage market including Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Financial Industry Regulatory Authority, Inc. (“FINRA”) FINRA is a non-governmental organization tasked with regulating all business dealings conducted between dealers, brokers and all public investors. Fixed-Rate Mortgage A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage. Fixed Income Clearing Corporation (“FICC”) The FICC is an agency that deals with the confirmation, settlement and delivery of fixed-income assets in the U.S. The agency ensures the systematic and efficient settlement of U.S. Government securities and mortgage-backed security transactions in the market. Floating Rate Bond A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index. Floating Rate CMO A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the SOFR, the Constant Maturity Treasury or the Cost of Funds Index. Freddie Mac Federal Home Loan Mortgage Corporation. Futures Contract A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A futures contract differs from an option in that an option gives one of the counterparties a right and the other an obligation to buy or sell, while a futures contract represents an obligation of both counterparties, one to deliver and the other to accept delivery. A futures contract is part of a class of financial instruments called derivatives. G GAAP U.S. generally accepted accounting principles. Ginnie Mae Government National Mortgage Association. H Hedge An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices. I In-the-Money Description for an option that has intrinsic value and can be sold or exercised for a profit; a call option is in-the-money when the strike price (execution price) is below the market price of the underlying security. Interest Bearing Liabilities Refers to repurchase agreements, debt issued by securitization vehicles and credit facilities. Average interest bearing liabilities is based on daily balances. Interest Earning Assets Refers to Residential Securities, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt and preferred equity interests, residential mortgage loans and corporate debt. Average interest earning assets is based on daily balances. Interest-Only (IO) Bond The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments. Interests in MSR Represents agreements to purchase all, or a component of, net servicing cash flows. Interest Rate Risk The risk that an investment’s value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. As market interest rates rise, the value of current fixed income investment holdings declines. Diversifying, deleveraging and hedging techniques are utilized to mitigate this risk. Interest rate risk is a form of market risk. 72 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Interest Rate Swap A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive a variable rate. Interest Rate Swaption Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement at some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer. International Swaps and Derivatives Association (“ISDA”) Master Agreement Standardized contract developed by ISDA used as an umbrella under which bilateral derivatives contracts are entered into. Inverse IO Bond An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as SOFR. As the benchmark rate changes, the IO coupon adjusts in the opposite direction. When the benchmark rate is relatively low, the IO pays a relatively high coupon payment, and vice versa. Investment/Market Risk Risk to earnings, capital or business resulting in the decline in value of our assets caused from changes in market variables, such as interest rates, which affect the values of Residential Securities and other investment instruments. Investment Advisers Act Refers to the Investment Advisers Act of 1940, as amended. Investment Company Act Refers to the Investment Company Act of 1940, as amended. L Leverage The use of borrowed money to increase investing power and economic returns. Leverage Ratio (GAAP Leverage Ratio or Debt-to-Equity Ratio) Calculated as total debt to total stockholders’ equity. For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, and participations issued. Debt issued by securitization vehicles and participations issued are non-recourse to us. LIBOR (London Interbank Offered Rate) A rate previously used as a benchmark for financial transactions. All tenors of LIBOR relevant to us are either no longer published or are no longer representative. Liquidity Risk Risk to earnings, capital or business arising from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding. Long-Term CPR Our projected prepayment speeds for certain Agency mortgage-backed securities using third party model and market information. Our prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Long-Term Debt Debt which matures in more than one year. M Market Agreed Coupon (“MAC”) Interest Rate Swap An interest rate swap contract structure with pre-defined, market agreed terms, developed by SIFMA and ISDA with the purpose of promoting liquidity and simplified administration. Monetary Policy Action taken by the Federal Open Market Committee of the Federal Reserve System to influence the money supply or interest rates. Mortgage-Backed Security (“MBS”) A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis. Mortgage Loan A mortgage loan granted by a bank, thrift or other financial institution that is based solely on real estate as security and is not insured or guaranteed by a government agency. Mortgage Servicing Rights (“MSR”) Contractual agreements constituting the right to service an existing mortgage where the holder receives the benefits and bears the costs and risks of servicing the mortgage. 73 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis N NAV Net asset value. Net Interest Income Represents interest income earned on our portfolio investments, less interest expense paid for borrowings. Net Interest Margin and Net Interest Margin (excluding PAA) Net interest margin represents our interest income less interest expense divided by average interest earning assets. Net interest margin (excluding PAA) is a non-GAAP financial measure that represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances. Net Interest Spread and Net Interest Spread (excluding PAA) Net interest spread represents the average yield on interest earning assets less the average GAAP cost of interest bearing liabilities. Net interest spread (excluding PAA) is a non-GAAP financial measure that represents the average yield on interest earning assets (excluding PAA) less the average economic cost of interest bearing liabilities. Non-Performing Loan (“NPL”) A loan that is close to defaulting or is in default. Notional Amount A stated principal amount in a derivative contract on which the contract is based. O Operational Risk Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems, human factors or external events. Option Contract A contract in which the buyer has the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Buyers of call options bet that a security will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself. Buyers of put options bet that the security’s price will drop below the price set by the option. An option is part of a class of financial instruments called derivatives, which means these financial instruments derive their value from the worth of an underlying investment. Original Face The face value or original principal amount of a security on its issue date. Out-of-the-Money Description for an option that has no intrinsic value and would be worthless if it expired today; for a call option, this situation occurs when the strike price is higher than the market price of the underlying security; for a put option, this situation occurs when the strike price is less than the market price of the underlying security. Overnight Index Swaps (“OIS”) An interest rate swap in which a fixed rate is exchanged for an overnight floating rate. Over-The-Counter (“OTC”) Market A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange. P Par Price equal to the face amount of a security; 100%. Par Amount The principal amount of a bond or note due at maturity. Also known as par value. Pass-Through Security A securitization structure where a GSE or other entity “passes” the amount collected from the borrowers every month to the investor, after deducting fees and expenses. Pool A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency. Premium The amount by which the price of a security exceeds its principal amount. When the dollar price of a bond is above its face value, it is said to be selling at a premium. Premium Amortization Adjustment (“PAA”) The cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities. Prepayment The unscheduled partial or complete payment of the principal amount outstanding on a mortgage loan or other debt before it is due. 74 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Prepayment Risk The risk that falling interest rates will lead to increased prepayments of mortgage or other loans, forcing the investor to reinvest at lower prevailing rates. Prepayment Speed The estimated rate at which mortgage borrowers will pay off the mortgages that underlie an MBS. Primary Market Market for offers or sales of new bonds by the issuer. Prime Rate The indicative interest rate on loans that banks quote to their best commercial customers. Principal and Interest The term used to refer to regularly scheduled payments or prepayments of principal and payments of interest on a mortgage or other security. R Rate Reset The adjustment of the interest rate on a floating-rate security according to a prescribed formula. Real Estate Investment Trust (“REIT”) A special purpose investment vehicle that provides investors with the ability to participate directly in the ownership or financing of real-estate related assets by pooling their capital to purchase and manage mortgage loans and/or income property. Recourse Debt Debt on which the economic borrower is obligated to repay the entire balance regardless of the value of the pledged collateral. By contrast, the economic borrower’s obligation to repay non-recourse debt is limited to the value of the pledged collateral. Recourse debt consists of repurchase agreements and other secured financing. Debt issued by securitization vehicles and participations issued are non-recourse to us and are excluded from this measure. Reinvestment Risk The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment. Re-Performing Loan (“RPL”) A type of loan in which payments were previously delinquent by at least 90 days but have resumed. Repurchase Agreement The sale of securities to investors with the agreement to buy them back at a higher price after a specified time period; a form of short-term borrowing. For the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. Residential Credit Securities Refers to CRT securities and non-Agency mortgage-backed securities. Residential Securities Refers to Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities. Residual In securitizations, the residual is the tranche that collects any cash flow from the collateral that remains after obligations to the other tranches have been met. Return on Average Equity Calculated by taking earnings divided by average stockholders’ equity. Reverse Repurchase Agreement Refer to Repurchase Agreement. The buyer of securities effectively provides a collateralized loan to the seller. Risk Appetite Statement Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. S Secondary Market Ongoing market for bonds previously offered or sold in the primary market. Secured Overnight Financing Rate (“SOFR”) Broad measure of the cost of borrowing cash overnight collateralized by Treasury securities and was chosen by the Alternative Reference Rate Committee as the preferred benchmark rate to replace dollar LIBOR. Settlement Date The date securities must be delivered and paid for to complete a transaction. Short-Term Debt Generally, debt which matures in one year or less. However, certain securities that mature in up to three years may be considered short-term debt. 75 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Spread When buying or selling a bond through a brokerage firm, investors will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee. Spreads differ based on several factors including liquidity. T Target Assets Includes Agency mortgage-backed securities, to-be-announced forward contracts, CRT securities, MSR, non-Agency mortgage-backed securities, residential mortgage loans, and commercial real estate investments. Tangible Economic Return Refers to the Company’s change in tangible book value (calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit less intangible assets) plus dividends declared divided by the prior period’s tangible book value. Taxable REIT Subsidiary (“TRS”) An entity that is owned directly or indirectly by a REIT and has jointly elected with the REIT to be treated as a TRS for tax purposes. Annaly and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs. To-Be-Announced (“TBA”) Securities A contract for the purchase or sale of a mortgage-backed security to be delivered at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date but does not include a specified pool number and number of pools. TBA Dollar Roll Income TBA dollar roll income is defined as the difference in price between two TBA contracts with the same terms but different settlement dates. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. TBA dollar roll income represents the equivalent of interest income on the underlying security less an implied cost of financing. Total Return Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses. Total Return Swap A derivative instrument where one party makes payments at a predetermined rate (either fixed or variable) while receiving a return on a specific asset (generally an equity index, loan or bond) held by the counterparty. U Unencumbered Assets Assets on our balance sheet which have not been pledged as collateral against an existing liability. U.S. Government-Sponsored Enterprise (“GSE”) Obligations Obligations of Agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress, such as Fannie Mae and Freddie Mac; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government. V Value-at-Risk (“VaR”) A statistical technique which measures the potential loss in value of an asset or portfolio over a defined period for a given confidence interval. Variable Interest Entity (“VIE”) An entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Variation Margin Cash or securities provided by a party to collateralize its obligations under a transaction as a result of a change in value of such transaction since the trade was executed or the last time collateral was provided. Volatility A statistical measure of the variance of price or yield over time. Volatility is low if the price does not change very much over a short period of time, and high if there is a greater change. Voting Interest Entity (“VOE”) An entity that has sufficient equity to finance its activities without additional subordinated financial support from other parties and in which equity investors have a controlling financial interest. W Warehouse Lending A line of credit extended to a loan originator to fund mortgages extended by the loan originators to property purchasers. The loan typically lasts from the time the mortgage is originated to when the mortgage is sold into the secondary market, whether directly or through a securitization. Warehouse lending can provide liquidity to the loan origination market. 76 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 2. Management’s Discussion and Analysis Weighted Average Coupon The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances. Weighted Average Life (“WAL”) The assumed weighted average amount of time that will elapse from the date of a security’s issuance until each dollar of principal is repaid to the investor. The WAL will change as the security ages and depending on the actual realized rate at which principal, scheduled and unscheduled, is paid on the loans underlying the MBS. Y Yield-to-Maturity The expected rate of return of a bond if it is held to its maturity date; calculated by taking into account the current market price, stated redemption value, coupon payments and time to maturity and assuming all coupons are reinvested at the same rate; equivalent to the internal rate of return. 77 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are contained within the section titled “Risk Management” of Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”