What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-07-29 compared with 2024-05-02 · 1082 added, 24 removed, 478 unchanged (70% of the section changed)

Management’s Discussion and Analysis

including mortgage loan servicers and sub-servicers.

* Represents a non-GAAP financial measure.

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

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

Treasury securities sold, not yet purchased 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, other secured financing, and U.S.

Treasury securities sold, not yet purchased.

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) Annualized GAAP return (loss) on average equity annualizes realized and unrealized gains and (losses) which may not be indicative of full year performance, unannualized GAAP return (loss) on average equity is (0.08%), and 1.35% for the three months ended June 30, 2024 and 2023, respectively, and 4.01% and (5.79%) for the the six months ended June 30, 2024 and 2023, respectively.

(4) 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 coupo n income less economic interest expense divide d by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.

(5) 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).

(6) 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, the net interest component of interest rate swaps, and, beginning with the quarter ended June 30, 2024, net interest on initial margin related to interest rate swaps, which is reported in Other, net in the Company’s Consolidated Statement of Comprehensive Income (Loss).

Prior period results have not been adjusted in accordance with this change as the impact is not material.

Net interest on variation margin related to interest rate swaps was previously and is currently included in the Net interest component of interest rate swaps in the Company's Consolidated Statement of Comprehensive Income (Loss) for all periods presented.

(7) Excludes dividends on preferred stock.

Net income (loss) was ($8.8) million, which includes $0.7 million attributable to noncontrolling interests, or ($0.09) per average basic common share, for the three months ended June 30, 2024, compared to $161.2 million, which includes ($5.8) million attributable to noncontrolling interests, or $0.27 per average basic common share, for the same period in 2023.

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

Net gains (losses) on derivatives was $430.5 million for the three months ended June 30, 2024 compared to $1.5 billion for the same period in 2023.

Net gains (losses) on investments and other was ($568.7) million for the three months ended June 30, 2024 compared to ($1.3) billion for the same period in 2023.

Net interest income for the three months ended June 30, 2024 was $53.6 million compared to ($32.0) million for the same period in 2023.

Net servicing income for the three months ended June 30, 2024 was $107.9 million compared to $74.9 million for the same period in 2023.

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

Net income (loss) was $456.3 million, which includes $2.9 million attributable to noncontrolling interests, or $0.76 per average basic common share, for the six months ended June 30, 2024 compared to ($678.1) million, which includes ($0.9) million attributable to noncontrolling interests, or ($1.51) per average basic common share, for the same period in 2023.

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

Net gains on derivatives for the six months ended June 30, 2024 was $1.8 billion compared to $574.6 million for the same period in 2023.

Net interest income for the six months ended June 30, 2024 was $47.1 million compared to ($12.5) million for the same period in 2023.

Net servicing income for the six months ended June 30, 2024 was $210.8 million compared to $151.3 million for the same period in 2023.

Net gains (losses) on investments and other was ($1.6) billion for the six months ended June 30, 2024 compared to ($1.3) billion for the same period in 2023.

Earnings available for distribution were $377.1 million, or $0.68 per average common share, for the three months ended June 30, 2024 compared to $389.5 million, or $0.72 per average common share, for the same period in 2023.

The change in earnings available for distribution during the three months ended June 30, 2024, compared to the same period in 2023, was primarily due to higher interest expense from an increase in average borrowing rates and average interest bearing liabilities, and an unfavorable change in the net interest component of interest rate swaps.

This change was partially offset by higher coupon income, resulting from purchasing assets higher up in the coupon stack, lower premium amortization expense, excluding PAA, and higher net servicing income.

Earnings available for distribution were $735.1 million, or $1.32 per average common share, for the six months ended June 30, 2024, compared to $816.6 million, or $1.52 per average common share, for the same period in 2023.

The change in earnings available for distribution during the six months ended June 30, 2024, compared to the same period in 2023, was primarily due

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

to higher interest expense from an increase in average borrowing rates and average interest bearing liabilities, an unfavorable change in the net interest component of interest rate swaps, and a decline in TBA dollar roll income on reduced balances and specialness.

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);

• 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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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.

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,

2024 2023 2024 2023

(dollars in thousands, except per share data)

GAAP net income (loss) $ (8,833) $ 161,187 $ 456,341 $ (678,141)

Adjustments to exclude reported realized and unrealized (gains) losses

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

568,874 1,316,837 1,562,994 1,315,125

Net (gains) losses on derivatives (2)

(132,115) (1,050,032) (1,179,110) 236,426

Loan loss provision (reversal) — — — (219)

Other adjustments

Amortization of intangibles 673 758 1,346 1,516

Non-EAD (income) loss allocated to equity method investments (3)

(523) 541 (307) 297

Transaction expenses and non-recurring items (4)

5,329 2,650 9,066 4,008

Income tax effect of non-EAD income (loss) items 10,016 12,364 7,098 20,642

TBA dollar roll income and CMBX coupon income (5)

486 1,734 1,861 19,917

MSR amortization (6)

(56,100) (41,297) (106,721) (84,720)

EAD attributable to noncontrolling interests (3,362) (3,344) (7,148) (6,814)

Premium amortization adjustment cost (benefit) (7,306) (11,923) (10,319) (11,432)

Earnings available for distribution *

377,139 389,475 735,101 816,605

Dividends on preferred stock 37,158 35,766 74,219 67,641

Earnings available for distribution attributable to common stockholders *

$ 339,981 $ 353,709 $ 660,882 $ 748,964

GAAP net income (loss) per average common share $ (0.09) $ 0.27 $ 0.76 $ (1.51)

Earnings available for distribution per average common share *

$ 0.68 $ 0.72 $ 1.32 $ 1.52

Annualized GAAP return (loss) on average equity (7)

(0.31 %) 5.42 % 8.03 % (11.57 %)

Annualized EAD return on average equity *

13.36 % 13.22 % 13.03 % 14.06 %

* Represents a non-GAAP financial measure.

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

(1) Includes write-downs or recoveries which are 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 $298.4 million and $425.3 million for the three months ended June 30, 2024 and 2023, respectively, and $628.5 million and $811.0 million for the six months ended June 30, 2024 and 2023, respectively.

(3) 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).

(4) Represents costs incurred in connection with securitizations of residential whole loans.

(5) 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 and $0.5 million for the three months ended June 30, 2024 and 2023, respectively, and $0 and $1.5 million for the six months ended June 30, 2024 and 2023, respectively.

(6) 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.

(7) Annualized GAAP return (loss) on average equity annualizes realized and unrealized gains and (losses) which may not be indicative of full year performance, unannualized GAAP return (loss) on average equity is (0.08%), and 1.35% for the three months ended June 30, 2024 and 2023, respectively, and 4.01% and (5.79%) for the the six months ended June 30, 2024 and 2023, respectively.

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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

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

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 models 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,

2024 2023 2024 2023

(dollars in thousands)

Premium amortization expense $ 10,437 $ 33,105 $ 37,169 $ 89,639

PAA cost (benefit) (7,306) (11,923) (10,319) (11,432)

Premium amortization expense (excluding PAA) $ 17,743 $ 45,028 $ 47,488 $ 101,071

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

Recourse debt consists of repurchase agreements, other secured financing, and U.S Treasury securities sold, not yet purchased.

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:

June 30, 2024 June 30, 2023

Economic leverage ratio reconciliation

(dollars in thousands)

Repurchase agreements

$ 60,787,994 $ 61,637,600

Other secured financing

600,000 500,000

Debt issued by securitization vehicles

15,831,915 9,789,282

Participations issued

1,144,821 492,307

Treasury securities sold, not yet purchased 1,974,602 —

Total GAAP debt

$ 80,339,332 $ 72,419,189

Less Non-Recourse Debt:

Debt issued by securitization vehicles

$ (15,831,915) $ (9,789,282)

Participations issued

(1,144,821) (492,307)

Total recourse debt $ 63,362,596 $ 62,137,600

Plus / (Less):

Cost basis of TBA and CMBX derivatives

1,639,941 3,625,443

Payable for unsettled trades 1,096,271 4,331,315

Receivable for unsettled trades (320,659) (787,442)

Economic debt *

$ 65,778,149 $ 69,306,916

$ 11,262,904 $ 11,887,345

Economic leverage ratio *

* 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:

June 30, 2024 June 30, 2023

Economic capital ratio reconciliation

(dollars in thousands)

Total GAAP assets

$ 93,668,577 $ 89,330,477

Gross unrealized gains on TBA derivatives (1)

(14,641) (21,460)

Debt issued by securitization vehicles

(15,831,915) (9,789,282)

Implied market value of TBA derivatives

1,652,389 3,627,716

Total economic assets *

$ 79,474,410 $ 83,147,451

$ 11,262,904 $ 11,887,345

Economic capital ratio (2) *

* 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Economic interest expense is comprised of GAAP interest expense, the net interest component of interest rate swaps (which includes net interest on variation margin related to interest rate swaps) and net interest on initial margin related to interest rate swaps, which is reported in Other, net in the Company’s Consolidated Statement of Comprehensive Income (Loss).

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

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

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, 2024 $ 1,177,325 $ (7,306) $ 1,170,019

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

For the six months ended

June 30, 2024 $ 2,271,813 $ (10,319) $ 2,261,494

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

* 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)

Net Interest Component of Interest Rate Swaps and Net Interest on Initial Margin Economic Interest

Expense * GAAP Net

Net Interest Component

of Interest Rate Swaps and Net Interest on Initial Margin Economic

Income * Add:

(Benefit) Economic Net Interest Income (excluding PAA) *

For the three months ended (dollars in thousands)

June 30, 2024 $ 1,123,767 $ (317,297) $ 806,470 $ 53,558 $ (317,297) $ 370,855 $ (7,306) $ 363,549

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

For the six months ended

June 30, 2024 $ 2,224,706 $ (647,446) $ 1,577,260 $ 47,107 $ (647,446) $ 694,553 $ (10,319) $ 684,234

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

* 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Experienced CPR (1)

Projected Long-term CPR (2)

For the three months ended

June 30, 2024 7.4 % 8.5 %

June 30, 2023 7.0 % 8.6 %

For the six months ended

June 30, 2024 6.7 % 8.5 %

June 30, 2023 6.3 % 8.6 %

(1) For the three and six months ended June 30, 2024 and 2023, respectively.

(2) At June 30, 2024 and 2023, respectively.

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

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 economic interest expense 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

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, 2024 $ 91,008,934 $ 1,170,019 5.14 % $ 81,901,233 $ 806,470 3.90 % 363,549 1.24 %

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

For the six months ended

June 30, 2024 $ 90,373,830 $ 2,261,494 5.00 % $ 81,291,672 $ 1,577,260 3.84 % 684,234 1.16 %

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

* 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.

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

Prior period results have not been adjusted in accordance with this change as the impact is not material.

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, 2024 $ 1,170,019 486 (806,470) $ 364,035 $ 91,008,934 998,990 $ 92,007,924 1.58 %

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

For the six months ended

June 30, 2024 $ 2,261,494 1,861 (1,577,260) $ 686,095 $ 90,373,830 574,290 $ 90,948,120 1.51 %

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

* 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 and $0.5 million for the three months ended June 30, 2024 and 2023, respectively.

CMBX coupon income totaled $0 and $1.5 million for the six months ended June 30, 2024 and 2023, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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 following table 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

Interest Bearing

Liabilities Interest Bearing Liabilities at

Period End Economic

Expense * (1)

Average Economic

Liabilities *

Term SOFR Average

One-Month Term SOFR

Month Term SOFR Average Economic Cost

Average Six-Month Term SOFR

For the three months ended

June 30, 2024 $ 81,901,233 $ 79,739,332 $ 806,470 3.90 % 5.33 % 5.29 % 0.04 % (1.43 %) (1.39 %)

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

For the six months ended

June 30, 2024 $ 81,291,672 $ 79,739,332 $ 1,577,260 3.84 % 5.33 % 5.25 % 0.08 % (1.49 %) (1.41 %)

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

* 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, the net interest component of interest rate swaps, and, beginning with the quarter ended June 30, 2024, net interest on initial margin related to interest rate swaps, which is reported in Other, net in the Company’s Consolidated Statement of Comprehensive Income (Loss).

Prior period results have not been adjusted in accordance with this change as the impact is not material.

Economic interest expense increased by $278.3 million for the three months ended June 30, 2024, compared to the same period in 2023, primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates, higher average interest bearing liabilities, and the reduction in the net interest component of interest rate swaps, which was $298.4 million for the three months ended June 30, 2024, compared to $425.3 million for the same period in 2023.

Economic interest expense increased by $636.0 million for the six months ended June 30, 2024 compared to the same period in 2023, primarily due to higher interest expense on repurchase agreements reflecting higher borrowing rates, higher average interest bearing liabilities and the reduction in the net interest component of interest rate swaps, which was $628.5 million for the six months ended June 30, 2024 compared to $811.0 million for the same period in 2023.

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, 2024 and December 31, 2023, 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Other Income (Loss)

For the Three Months Ended June 30, 2024 and 2023

Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments was ($336.0) million for the three months ended June 30, 2024, compared to ($610.4) million for the same period in 2023.

For the three months ended June 30, 2024, we disposed of Residential Securities with a carrying value of $5.2 billion for an aggregate net gain (loss) of ($375.0) million.

For the same period in 2023, we disposed of Residential Securities, with a carrying value of $8.4 billion for an aggregate net gain (loss) of ($599.2) million.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($232.8) million for the three months ended June 30, 2024, compared to ($698.6) million for the same period in 2023, primarily due to favorable changes in unrealized gains (losses) on Agency MBS of $498.0 million and securitized residential whole loans of consolidated VIEs of $172.6 million, partially offset by unfavorable changes in residential securitized debt of consolidated VIEs of ($125.7) million, U.S.

Treasury securities sold, not yet purchased of ($44.9) million, and MSR of ($28.2) million.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the three months ended June 30, 2024 was $414.6 million compared to $1.3 billion for the same period in 2023, primarily attributable to unfavorable changes in unrealized and realized gains (losses) on interest rate swaps and net interest component of interest rate swaps.

Unrealized gains (losses) on interest rate swaps was $97.5 million for the three months ended June 30, 2024, compared to $841.7 million for the same period in 2023.

Realized gains (losses) on termination of interest rate swaps was $18.7 million for the three months ended June 30, 2024, compared to $48.1 million for the same period in 2023, which reflected our termination of fixed-rate payer and receiver interest rate swaps with notional amounts of $410.0 million and $3.0 billion, compared to notional amounts of $820.8 million of fixed-rate payer interest rate swaps for the same period in 2023.

Net interest component on interest rate swaps was $298.4 million for the three months ended June 30, 2024, compared to $425.3 million for the same period in 2023.

Net gains (losses) on other derivatives was $15.9 million for the three months ended June 30, 2024, compared to $160.2 million for the same period in 2023.

The change in net gains (losses) on other derivatives was primarily due to unfavorable changes in net gains (losses) on futures, which was $2.3 million for the three months ended June 30, 2024, compared to $171.2 million for the same period in 2023, and net gains (losses) on interest rate swaptions, which was $11.5 million for the three months ended June 30, 2024, compared to $53.4 million for the same period in 2023, partially offset by a favorable change in net gains (losses) on TBA derivatives, which was ($0.3) million for the three months ended June 30, 2024, compared to ($61.5) million for the same period in 2023.

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, 2024 was $24.8 million compared to $9.1 million for the same period in 2023, primarily attributable to an increase in interest on custodial balances and decrease in asset write-downs, partially offset by an increase in securitization related costs and MSR financing expenses.

For the Six Months Ended June 30, 2024 and 2023

Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments and other was ($881.9) million for the six months ended June 30, 2024 compared to ($1.1) billion for the same period in 2023.

For the six months ended June 30, 2024, we disposed of Residential Securities with a carrying value of $13.3 billion for an aggregate net gain (loss) of ($813.2) million.

For the same period in 2023, we disposed of Residential Securities with a carrying value of $13.6 billion for an aggregate net gain (loss) of ($1.1) billion.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($680.9) million for the six months ended June 30, 2024 compared to ($175.2) million for the same period in 2023, primarily due to unfavorable changes in unrealized gains (losses) on Agency MBS of ($600.9) million, securitized residential whole loans of consolidated VIEs of ($122.3) million, residential whole loans of ($59.1) million, and mortgage servicing rights of ($16.9) million, partially offset by

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

favorable changes on securitized debt of consolidated VIEs of $172.2 million, U.S.

Treasury securities sold, not yet purchased of $88.4 million, and participations issued of $29.3 million.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the six months ended June 30, 2024 was $1.6 billion compared to $598.8 million for the same period in 2023, attributable to favorable 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 $998.4 million for the six months ended June 30, 2024 compared to ($114.6) million for the same period in 2023.

Realized gains (losses) on termination of interest rate swaps was ($2.5) million for the six months ended June 30, 2024, compared to ($97.7) million for the same period in 2023, which reflected our termination of fixed-rate payer and receiver interest rate swaps with notional amounts of $2.7 billion and $3.3 billion, compared to fixed-rate payer and receiver interest rate swaps with notional amounts of $3.1 billion and $6.3 billion for the same period in 2023.

Net interest component on interest rate swaps was $628.5 million for the six months ended June 30, 2024 compared to $811.0 million for the same period in 2023.

Net gains (losses) on other derivatives was $183.2 million for the six months ended June 30, 2024 compared to ($24.2) million for the same period in 2023.

The change in net gains (losses) on other derivatives was primarily due to favorable changes in net gains (losses) on futures, which was $139.4 million for the six months ended June 30, 2024 compared to ($25.3) million for the same period in 2023, and net gains (losses) on interest rate swaptions, which was $42.2 million for the six months ended June 30, 2024 compared to $9.7 million for the same period in 2023.

Other, net for the six months ended June 30, 2024 was $48.2 million compared to $24.6 million for the same period in 2023, primarily attributable to an increase in interest on custodial balances and decrease in asset write-downs, partially offset by an increase in securitization related costs and MSR financing expenses.

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

Expenses Total G&A Expenses/Average Assets Total G&A Expenses/Average Equity

For the three months ended (dollars in thousands)

June 30, 2024 $ 44,891 0.19 % 1.58 %

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

For the six months ended

June 30, 2024 $ 83,461 0.18 % 1.47 %

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

G&A expenses were $44.9 million for the three months ended June 30, 2024, an increase of $2.0 million compared to the same period in 2023.

The change in the period was primarily due to an increase in compensation, partially offset by lower expenses related to technology and professional fees.

G&A expenses were $83.5 million for the six months ended June 30, 2024, a decrease of $0.3 million compared to the same period in 2023.

The change in the period was primarily due to lower professional fees and expenses related to technology, equipment, and insurance, partially offset by an increase in compensation.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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, 2024 12.37 % 3.79 % (14.47 %) (1.58 %) (0.42 %) (0.31 %)

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

For the six months ended

June 30, 2024 11.89 % 3.71 % (5.91 %) (1.47 %) (0.19 %) 8.03 %

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

(1) Economic net interest income includes the net interest component of interest rate swaps and net interest on initial margin related to interest rate swaps, which is reported in Other, net in the Company’s Consolidated Statement of Comprehensive Income (Loss).

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

June 30, 2024 December 31, 2023

(dollars in thousands)

Unrealized gain $ 3,820 $ 5,051

Unrealized loss (1,160,747) (1,340,451)

Accumulated other comprehensive income (loss) $ (1,156,927) $ (1,335,400)

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, 2024 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.

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.

Financial Condition

Total assets were $93.7 billion and $93.2 billion at June 30, 2024 and December 31, 2023, respectively.

The change was primarily due to increases in securitized residential whole loans of consolidated VIEs of $4.6 billion, mortgage servicing rights of $663.4 million, residential whole loans of $195.1 million, and cash and cash equivalents of $175.0 million, partially offset by decreases in securities of $2.6 billion, receivables for unsettled trades of $2.4 billion and principal and interest receivable of $305.6 million.

Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at June 30, 2024:

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

Agency MBS MSR Residential Credit (1)

Commercial Total

Assets (dollars in thousands)

Fair value $ 64,390,905 $ 2,785,614 $ 23,036,336 $ 112,552 $ 90,325,407

Implied market value of derivatives (2)

1,652,389 — — — 1,652,389

Repurchase agreements 56,692,738 — 3,994,635 100,621 60,787,994

Implied cost basis of derivatives (2)

1,639,941 — — — 1,639,941

Other secured financing — 600,000 — — 600,000

Debt issued by securitization vehicles — — 15,831,915 — 15,831,915

Participations issued — — 1,144,821 — 1,144,821

Treasury securities sold, not yet purchased 1,929,728 (2,566) 47,444 (4) 1,974,602

Net forward purchases 729,929 45,683 — — 775,612

Net other assets / liabilities 1,422,239 363,448 188,347 65,959 2,039,993

Net equity allocated $ 6,473,197 $ 2,505,945 $ 2,205,868 $ 77,894 $ 11,262,904

Net equity allocated (%) 58 % 22 % 19 % 1 % 100 %

Debt/net equity ratio (3)

9.1:1 0.2:1 9.5:1 1.3:1 7.1:1

(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 in the Consolidated Statements of Financial Condition.

Residential Securities

Substantially all of our Agency MBS at June 30, 2024 and December 31, 2023 were backed by single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties.

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

We carry all of our Agency MBS at fair value in 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, 2024 and December 31, 2023, we had in our Consolidated Statements of Financial Condition a total of $1.3 billion and $1.4 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 $2.2 billion and $2.4 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, 2024 and 2023 was 7.4% and 7.0%, respectively.

The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of June 30, 2024 and 2023 was 8.5% and 8.6%, 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

The following table presents our Residential Securities that were carried at fair value at June 30, 2024 and December 31, 2023.

June 30, 2024 December 31, 2023

Estimated Fair Value

Fixed-rate pass-through $ 60,474,480 $ 62,198,941

Adjustable-rate pass-through 177,761 191,489

CMO 76,919 82,972

Interest-only 273,556 264,005

Multifamily 3,361,183 3,544,528

Reverse mortgages 27,006 26,853

Total agency securities $ 64,390,905 $ 66,308,788

Residential credit

Credit risk transfer $ 838,437 $ 974,059

Alt-A 156,928 150,235

Prime 32,812 180,647

Subprime 259,366 235,605

NPL/RPL 1,096,168 1,197,555

Prime jumbo (>= 2010 vintage) 157,585 344,232

Total residential credit securities $ 2,541,296 $ 3,082,333

Total Residential Securities $ 66,932,201 $ 69,391,121

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, 2024 and December 31, 2023.

June 30, 2024 December 31, 2023

Residential Securities (1)

(dollars in thousands)

Principal amount $ 68,250,510 $ 70,078,626

Net premium 35,644 63,902

Amortized cost 68,286,154 70,142,528

Amortized cost / principal amount 100.05 % 100.09 %

Carrying value 66,166,223 68,701,769

Carrying value / principal amount 96.95 % 98.04 %

Weighted average coupon rate 4.94 % 4.68 %

Weighted average yield 4.91 % 4.64 %

Adjustable-rate Residential Securities (1)

Principal amount $ 1,044,405 $ 1,206,700

Weighted average coupon rate 8.94 % 8.79 %

Weighted average yield 8.11 % 8.09 %

Weighted average term to next adjustment (2)

7 Months 8 Months

Weighted average lifetime cap (3)

9.33 % 9.34 %

Principal amount at period end as % of total residential securities 1.53 % 1.72 %

Fixed-rate Residential Securities (1)

Principal amount $ 67,206,105 $ 68,871,926

Weighted average coupon rate 4.88 % 4.61 %

Weighted average yield 4.86 % 4.58 %

Principal amount at period end as % of total residential securities 98.47 % 98.28 %

Interest-only Residential Securities

Notional amount $ 30,734,260 $ 25,918,105

Net premium 913,589 865,467

Amortized cost 913,589 865,467

Amortized cost / notional amount 2.97 % 3.34 %

Carrying value 765,978 689,352

Carrying value / notional amount 2.49 % 2.66 %

Weighted average coupon rate 0.48 % 0.43 %

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

The following tables summarize certain characteristics of our Residential Credit portfolio at June 30, 2024.

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 $ 838,437 $ — $ 838,437 9.81 % 1.69 % 0.81 % 4.92 %

Alt-A 156,928 — 156,928 7.07 % 9.34 % 2.86 % 12.34 %

Prime 32,812 20,653 12,159 4.05 % 0.74 % 2.45 % 2.96 %

Subprime 259,366 65,321 194,045 7.38 % 23.20 % 11.02 % 8.52 %

Re-performing loan securitizations 708,262 403,469 304,793 5.81 % 27.64 % 15.99 % 3.86 %

Non-performing loan securitizations 387,906 341,407 46,499 5.84 % 39.59 % 60.06 % 6.72 %

Prime jumbo (>=2010 vintage) 157,585 87,771 69,814 5.30 % 1.02 % 0.45 % 5.21 %

Total/weighted average $ 2,541,296 $ 918,621 $ 1,622,675 7.31 % 18.30 % 15.98 % 5.72 %

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

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

Product ARM Fixed Floater Interest-Only Estimated Fair Value

(dollars in thousands)

Credit risk transfer $ — $ — $ 838,437 $ — $ 838,437

Alt-A 1,242 155,686 — — 156,928

Prime — 18,573 — 14,239 32,812

Subprime — 238,662 20,622 82 259,366

Re-performing loan securitizations — 708,262 — — 708,262

Non-performing loan securitizations — 387,906 — — 387,906

Prime jumbo (>=2010 vintage) — 49,563 20,251 87,771 157,585

Total $ 1,242 $ 1,558,652 $ 879,310 $ 102,092 $ 2,541,296

Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at June 30, 2024.

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, 2024, the interest rate swaps had a net fair value of $1.5 million.

Year One to Three

Years Three to Five

Years More than

Five Years Total

(dollars in thousands)

Repurchase agreements $ 60,461,281 $ 326,713 $ — $ — $ 60,787,994

Interest expense on repurchase agreements (1)

344,189 19,608 — — 363,797

Other secured financing 225,000 375,000 — — 600,000

Interest expense on other secured financing (1)

41,659 13,465 — — 55,124

Debt issued by securitization vehicles (principal) — — — 16,911,585 16,911,585

Interest expense on debt issued by securitization vehicles 855,537 1,711,074 1,711,074 26,306,021 30,583,706

Participations issued (principal) — — — 1,115,487 1,115,487

Interest expense on participations issued 82,030 164,059 164,059 2,039,541 2,449,689

Long-term operating lease obligations 4,111 1,487 157 — 5,755

Total $ 62,013,807 $ 2,611,406 $ 1,875,290 $ 46,372,634 $ 112,873,137

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at June 30, 2024.

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, 2024, we received $3.1 billion from principal repayments and $14.9 billion in cash from disposal of Securities.

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

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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 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, 2024 and December 31, 2023:

June 30, 2024 December 31, 2023

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 5,010 5,001

Additional paid-in capital 23,694,663 23,672,391

Accumulated other comprehensive income (loss) (1,156,927) (1,335,400)

Accumulated deficit (12,898,191) (12,622,768)

Total stockholders’ equity $ 11,181,124 $ 11,255,793

Capital 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, 2024 and 2023, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

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

1 to the Amended and Restated Distribution Agency Agreements on August 6, 2021, 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., 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”).

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

During the three and six months ended June 30, 2024, under the at-the-market sales program, we issued 0.6 million shares for proceeds of $11.3 million, net of commissions and fees.

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.

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, 2024.

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

The timing, manner, price and amount of any repurchases will be determined by 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, 2024 and December 31, 2023 was 7.1:1 and 6.8:1, 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 5.7:1, at June 30, 2024 and December 31, 2023, respectively.

Our GAAP capital ratio at June 30, 2024 and December 31, 2023 was 12.0% and 12.2%, respectively.

Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 14.2% and 14.0% at June 30, 2024 and December 31, 2023, 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.

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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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 to 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.

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 environmental, social, and governance (“ESG”) risk to us.

The full Board has overall responsibility for ESG oversight, and the Corporate Responsibility Committee meets jointly with other Committees from time to time in order to review areas of shared responsibility.

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 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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

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.

Liquidity and Funding Risk Management

Our 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 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.

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

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

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

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

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, 2024 and December 31, 2023, the weighted average days to maturity was 36 days and 44 days, respectively.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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.

We have continued to diversify our financing profile adding new non-mark-to-market facilities and financing options under existing facilities for our Residential Credit operating segment.

The non-mark-to-market facilities have margin call features that adjust on factors other than the changes in the market value of pledged collateral.

We remain active and flexible in our liquidity structure to market developments.

At June 30, 2024, we had total financial assets and cash pledged against existing liabilities of $65.3 billion.

The weighted average haircut was approximately 4% 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, 2024, compared to the same period in 2023, 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, 2024.

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, 2024 $ 63,043,218 $ 60,787,994 $ 2,322,479 $ —

March 31, 2024 64,027,388 58,975,232 2,323,485 —

December 31, 2023 61,924,576 62,201,543 1,340,204 —

September 30, 2023 66,020,036 64,693,821 257,097 —

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 —

Our committed facility warehouse lines provide financing for our MSR portfolio for liquidity purposes.

We maintain a conservative approach to these facilities, generally over-collateralizing the lines against margin calls.

The following table provides information on our repurchase agreements and other secured financing by maturity date at June 30, 2024.

The weighted average remaining maturity on our repurchase agreements and other secured financing was 40 days at June 30, 2024:

June 30, 2024

Principal Balance Weighted Average Rate % of Total

(dollars in thousands)

1 day $ 19,022,508 5.58 % 31.0 %

2 to 29 days 15,167,764 5.53 % 24.7 %

30 to 59 days 17,821,775 5.51 % 29.0 %

60 to 89 days 4,144,700 5.67 % 6.8 %

90 to 119 days 858,510 6.22 % 1.4 %

Over 119 days (1)

4,372,737 6.26 % 7.1 %

Total $ 61,387,994 5.61 % 100.0 %

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

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

In order to increase financing optionality for our Onslow Bay platform we closed a new warehouse facility that includes expanded product offerings with a non-mark-to-market component for residential whole loans and a new non-mark-to-market two-year facility for OBX retained securities.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

The following table presents our outstanding debt balances and associated weighted average rates and days to maturity at June 30, 2024:

Weighted Average Rate

Principal Balance As of Period End For the Quarter Weighted Average

Days to Maturity (1)

(dollars in thousands)

Repurchase agreements $ 60,787,994 5.59 % 5.53 % 36

Other secured financing 600,000 8.08 % 8.07 % 409

Debt issued by securitization vehicles (2)

16,911,585 5.06 % 5.05 % 12,869

Participations issued (2)

1,115,487 7.35 % 6.97 % 10,900

Total indebtedness $ 79,415,066

(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, 2024:

Encumbered Assets Unencumbered Assets Total

Financial assets (dollars in thousands)

Cash and cash equivalents $ 1,266,528 $ 320,580 $ 1,587,108

Investments, at carrying value (1)

Agency mortgage-backed securities 60,523,798 3,207,638 63,731,436

Credit risk transfer securities 835,000 3,437 838,437

Non-agency mortgage-backed securities 1,330,017 372,842 1,702,859

Commercial mortgage-backed securities 112,552 — 112,552

Residential mortgage loans (2)

20,010,979 484,061 20,495,040

MSR 1,865,890 919,724 2,785,614

Other assets (3)

— 56,990 56,990

Total financial assets $ 85,944,764 $ 5,365,272 $ 91,310,036

(1) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported in 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, 2024:

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

Carrying Value (1)

Liquid assets (dollars in thousands)

Cash and cash equivalents $ 1,587,108

Residential Securities (2)

Commercial mortgage-backed securities 112,552

Residential mortgage loans (3)

Total liquid assets $ 70,520,539

Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (4)

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

The assets listed in this table include $65.3 billion of assets that have been pledged as collateral against existing liabilities at June 30, 2024.

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 in the Consolidated Statements of Financial Condition.

(3) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $17.9 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 $18.0 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.

The interest rate sensitivity of our assets and liabilities in the following table at June 30, 2024 could vary substantially based on actual prepayment experience.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

Management’s Discussion and Analysis

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

Financial assets (dollars in thousands)

Cash and cash equivalents $ 1,587,108 $ — $ — $ — $ 1,587,108

Agency mortgage-backed securities (principal) — 23 63,066 65,711,370 65,774,459

Residential credit risk transfer securities (principal) — 4,510 1,807 773,976 780,293

Non-agency mortgage-backed securities (principal) 59,276 95,966 656,435 884,081 1,695,758

Commercial mortgage-backed securities (principal) — 47,933 64,355 — 112,288

Total securities 59,276 148,432 785,663 67,369,427 68,362,798

Residential mortgage loans (principal) — — 71 2,485,350 2,485,421

Total loans — — 71 2,485,350 2,485,421

Assets transferred or pledged to securitization vehicles (principal) — — — 18,997,139 18,997,139

Total financial assets - maturity 1,646,384 148,432 785,734 88,851,916 91,432,466

Effect of utilizing reset dates (1)

19,517,345 501,356 285,489 (20,304,190) —

Total financial assets - interest rate sensitive $ 21,163,729 $ 649,788 $ 1,071,223 $ 68,547,726 $ 91,432,466

Financial liabilities

Repurchase agreements $ 56,156,747 $ 4,304,534 $ 326,713 $ — $ 60,787,994

Debt issued by securitization vehicles (principal)

— — — 16,911,585 16,911,585

Participations issued (principal) — — — 1,115,487 1,115,487

Treasury securities sold, not yet purchased 1,974,602 — — — 1,974,602

Total financial liabilities - maturity 58,131,349 4,304,534 326,713 18,027,072 80,789,668

Effect of utilizing reset dates (1)(2)

(52,353,970) 5,741,092 11,294,114 35,318,764 —

Total financial liabilities - interest rate sensitive $ 5,777,379 $ 10,045,626 $ 11,620,827 $ 53,345,836 $ 80,789,668

Maturity gap $ (56,484,965) $ (4,156,102) $ 459,021 $ 70,824,844 $ 10,642,798

Cumulative maturity gap $ (56,484,965) $ (60,641,067) $ (60,182,046) $ 10,642,798

Interest rate sensitivity gap $ 15,386,350 $ (9,395,838) $ (10,549,604) $ 15,201,890 $ 10,642,798

Cumulative rate sensitivity gap $ 15,386,350 $ 5,990,512 $ (4,559,092) $ 10,642,798

(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.

ANNALY CAPITAL MANAGEMENT, INC.

AND SUBSIDIARIES

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 SOFR but may also enter into interest rate swaps where the floating leg is linked to 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, 2024.

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%) (0.9%) 5.7%

-50 Basis points —% —% 4.1%

-25 Basis points —% 0.3% 2.0%

+25 Basis points (0.1%) (0.8%) (2.7%)

+50 Basis points (0.2%) (2.0%) (5.8%)

+75 Basis points (0.4%) (3.5%) (9.2%)

MBS Spread Shock (1)

Estimated Change in

Portfolio Market Value (2)

Estimated Change as a

% on NAV (2)(3)

-25 Basis points 1.3% 10.4%

-15 Basis points 0.8% 6.2%

-5 Basis points 0.3% 2.1%

+5 Basis points (0.3%) (2.0%)

+15 Basis points (0.8%) (6.1%)

+25 Basis points (1.3%) (10.1%)

(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 and net interest on initial margin related to interest rate swaps, which is reported in Other, net in the Company’s Consolidated Statement of Comprehensive Income (Loss).

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

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Management’s Discussion and Analysis

servicing fees and higher costs to service the underlying mortgage loans due to borrower performance.

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

We have established policies and 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, 2024 and December 31, 2023 was as follows:

June 30, 2024 December 31, 2023

Agency mortgage-backed securities 71.3 % 75.9 %

Credit risk transfer securities 0.9 % 1.1 %

Non-agency mortgage-backed securities 1.9 % 2.4 %

Residential mortgage loans (1)

22.7 % 17.9 %

Mortgage servicing rights 3.1 % 2.4 %

Commercial real estate 0.1 % 0.3 %

(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, 2024:

Number of Counterparties Secured Financing (1)

Interest Rate Swaps at Fair Value Exposure (2)

Geography (dollars in thousands)

North America 21 $ 45,225,272 $ 4,736 $ 3,046,774

Europe 9 11,901,346 (3,226) 823,054

Asia (non-Japan) 1 405,932 — 11,779

Japan 4 3,855,444 — 398,346

Total 35 $ 61,387,994 $ 1,510 $ 4,279,953

(1) Includes repurchase agreements and other secured financing.

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

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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 processes, 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 and periodically conducts other operational risk tabletop exercises.

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, processes, policies, and practices established by management to identify, assess, measure, and manage enterprise-wide risk.

Cybersecurity is part of our enterprise-wide risk management framework.

Processes for assessing, identifying and managing cybersecurity risks include cybersecurity risk assessments, use of key risk indicators, vendor cybersecurity risk management, employee training, including phishing exercises and cybersecurity awareness training, penetration testing, evaluation of cybersecurity insurance and periodic engagements by our internal audit department, which determines whether our cybersecurity program and information security practices align with relevant parts of the National Institute of Standards and Technology (“NIST”) framework.

We periodically engage penetration testing companies and law firms to assist in these processes.

When we do so, we hire reputable companies, limit their access to only information necessary for the specific purpose and maintain security controls around confidential information, including personally identifiable information.

We also maintain a Cybersecurity Incident Response Plan (“Response Plan”) with processes to identify, contain, mitigate and escalate cybersecurity incidents, utilizing cross-functional expertise and external resources as needed.

We conduct periodic tabletop exercises to test our Response Plan and our reaction to various business disruption events, and the results of these tabletop exercises are reported to the Cybersecurity Committee and the ERC.

We also have processes in place to oversee and identify material risks from cybersecurity threats associated with our use of third party service providers upon which we depend on 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.

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However, even though we take steps to employ reasonable cybersecurity efforts, not every cybersecurity incident can be prevented or detected.

We also may be held responsible for cybersecurity threats affecting our third party service providers, including servicers and sub-servicers.

We also may be held responsible for cybersecurity threats affecting our third party service providers, including servicers and sub-

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Management’s Discussion and Analysis

Therefore, while we believe there are currently no risks from any potential threat or cybersecurity incident that are reasonably likely to have a material effect on our business strategy, results of operations or financial condition, the likelihood or severity of such risks are difficult to predict.

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

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Management’s Discussion and Analysis

Critical Accounting Estimates

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All internal fair values are compared to external pricing sources and/or dealer quotes to determine reasonableness.

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Management’s Discussion and Analysis

Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing.

3 unchanged sentences

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.

Residential Mortgage Loans

9 unchanged sentences

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.

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

We elected to account for MSR at fair value.

1 unchanged sentence

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

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Management’s Discussion and Analysis

Judgments and Uncertainties:

19 unchanged sentences

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

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Management’s Discussion and Analysis

Revenue Recognition

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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.

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Management’s Discussion and Analysis

Use of Estimates

108 unchanged sentences

Economic Interest Expense

Non-GAAP financial measure that is comprised of GAAP interest expense and the net interest component of interest rate swaps.

Non-GAAP financial measure that is comprised of GAAP interest expense, the net interest component of interest rate swaps and net interest on initial margin related to interest rate swaps, which is reported in Other, net in the Company’s Consolidated Statement of Comprehensive Income (Loss).

Economic Leverage Ratio (Economic Debt-to-Equity Ratio)

44 unchanged sentences

An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices.

Initial Margin

Cash or securities provided by a party to collateralize its obligations under a transaction that is not based on changes in the value of such transaction since the trade was executed.

Description for an option that has intrinsic value and can be sold or exercised for a profit;

8 unchanged sentences

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.

ANNALY CAPITAL MANAGEMENT, INC.

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Management’s Discussion and Analysis

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.

Interest Rate Risk

43 unchanged sentences

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.

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Management’s Discussion and Analysis

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

7 unchanged sentences

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 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 economic interest expense 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)

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

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.

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Management’s Discussion and Analysis

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

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.

The amount by which the price of a security exceeds its principal amount.

110 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis