UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:  September 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER:  1-13447

ANNALY CAPITAL MANAGEMENT INC

(Exact Name of Registrant as Specified in its Charter)

Maryland		22-3479661
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
1211 Avenue of the Americas
New York,	New York	10036
(Address of principal executive offices)		(Zip Code)

(212) 696-0100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	NLY	New York Stock Exchange
6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	NLY.F	New York Stock Exchange
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	NLY.G	New York Stock Exchange
6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	NLY.I	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑    No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑ Accelerated
filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐    No  ☑

The number of shares of the registrant’s Common Stock outstanding on October 22, 2021 was 1,450,120,688.

ANNALY CAPITAL MANAGEMENT, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I  -  FINANCIAL INFORMATION	Page
Item 1.  Financial Statements	1
Consolidated Statements of Financial Condition at September 30, 2021 (Unaudited) and December 31, 2020 (Derived from the audited consolidated financial statements at December 31, 2020)	1
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, 2021 and 2020	2
Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2021 and 2020	3
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2021 and 2020	4
Notes to Consolidated Financial Statements (Unaudited)	5
Note 1. Description of Business	5
Note 2. Basis of Presentation	5
Note 3. Significant Accounting Policies	6
Note 4. Financial Instruments	9
Note 5. Securities	10
Note 6. Loans	13
Note 7. Mortgage Servicing Rights	22
Note 8. Variable Interest Entities	23
Note 9. Sale of Commercial Real Estate Business	26
Note 10. Derivative Instruments	28
Note 11. Fair Value Measurements	34
Note 12. Goodwill and Intangible Assets	37
Note 13. Secured Financing	38
Note 14. Capital Stock	39
Note 15. Interest Income and Interest Expense	41
Note 16. Net Income (Loss) per Common Share	42
Note 17. Income Taxes	42
Note 18. Risk Management	43
Note 19. Related Party Transactions	44
Note 20. Lease Commitments and Contingencies	44
Note 21. Arcola Regulatory Requirements	45
Note 22. Subsequent Events	45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
Special Note Regarding Forward-Looking Statements	47
Overview	49
Business Environment and COVID-19	49
Results of Operations	51
Financial Condition	66
Capital Management	70
Risk Management	71
Critical Accounting Policies and Estimates	81
Glossary of Terms	83
Item 3. Quantitative and Qualitative Disclosures about Market Risk	92
Item 4. Controls and Procedures	92
PART II  -  OTHER INFORMATION
Item 1. Legal Proceedings	93
Item 1A. Risk Factors	93
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	93
Item 5. Other Information	93
Item 6. Exhibits	93
SIGNATURES	95

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data)
	September 30,		December 31,
	2021		2020 (1)
	(Unaudited)
Assets
Cash and cash equivalents (includes pledged assets of $896,255 and $1,137,809, respectively) (2)	$	1,046,300	$	1,243,703
Securities (includes pledged assets of $57,950,911 and $67,471,074, respectively) (3)	65,622,352		75,652,396
Loans, net (includes pledged assets of $2,267,661 and $2,231,035, respectively) (4)	3,580,521		3,083,821
Mortgage servicing rights (includes pledged assets of $0 and $5,541, respectively) (5)	572,259		100,895
Interests in MSR	57,530		—
Assets transferred or pledged to securitization vehicles	4,738,481		6,910,020
Real estate, net	—		656,314
Assets of disposal group held for sale (includes pledged assets of $52,684 and $0, respectively)	238,042		—
Derivative assets	331,395		171,134
Receivable for unsettled trades	42,482		15,912
Principal and interest receivable	234,810		268,073
Goodwill and intangible assets, net	25,371		127,341
Other assets	172,890		225,494
Total assets	$	76,662,433	$	88,455,103
Liabilities and stockholders’ equity
Liabilities
Repurchase agreements	$	55,475,420	$	64,825,239
Other secured financing	729,555		917,876
Debt issued by securitization vehicles	3,935,410		5,652,982
Participations issued	641,006		39,198
Mortgages payable	—		426,256
Liabilities of disposal group held for sale	159,508		—
Derivative liabilities	912,134		1,033,345
Payable for unsettled trades	571,540		884,069
Interest payable	109,586		191,116
Dividends payable	318,986		307,613
Other liabilities	91,421		155,613
Total liabilities	62,944,566		74,433,307
Stockholders’ equity
Preferred stock, par value $0.01 per share, 63,500,000 and 85,150,000 authorized, respectively, 63,500,000 issued and outstanding	1,536,569		1,536,569
Common stock, par value $0.01 per share, 2,936,500,000 and 2,914,850,000 authorized, respectively, 1,449,935,017 and 1,398,240,618 issued and outstanding, respectively	14,499		13,982
Additional paid-in capital	20,228,366		19,750,818
Accumulated other comprehensive income (loss)	1,638,638		3,374,335
Accumulated deficit	(9,720,270)		(10,667,388)
Total stockholders’ equity	13,697,802		14,008,316
Noncontrolling interests	20,065		13,480
Total equity	13,717,867		14,021,796
Total liabilities and equity	$	76,662,433	$	88,455,103
(1)Derived from the audited consolidated financial statements at December 31, 2020.
(2)Includes cash of consolidated Variable Interest Entities (“VIEs”) of $11.0 million and $22.2 million at September 30, 2021 and December 31, 2020, respectively.
(3)Excludes $46.4 million and $81.5 million at September 30, 2021 and December 31, 2020, respectively, of Agency mortgage-backed securities, $245.8 million and $576.6 million at September 30, 2021 and December 31, 2020, respectively, of non-Agency mortgage-backed securities and $0 and $391.0 million at September 30, 2021 and December 31, 2020, respectively, of commercial mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition.
(4)Includes $3.7 million and $47.0 million of residential mortgage loans held for sale at September 30, 2021 and December 31, 2020, respectively, and $2.1 million and $0 of corporate loans held for sale at September 30, 2021 and December 31, 2020, respectively.
(5)Includes $86.2 million and $0 million of mortgage servicing rights held for sale at September 30, 2021 and December 31, 2020.
See notes to consolidated financial statements.

1

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) (Unaudited)
	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2021		2020		2021		2020
Net interest income
Interest income	$	412,972	$	562,443	$	1,560,256	$	1,702,281
Interest expense	50,438		115,126		187,458		804,631
Net interest income	362,534		447,317		1,372,798		897,650
Realized and unrealized gains (losses)
Net interest component of interest rate swaps	(54,411)		(62,529)		(217,245)		(141,070)
Realized gains (losses) on termination or maturity of interest rate swaps	(1,196,417)		(427)		(1,196,417)		(1,919,720)
Unrealized gains (losses) on interest rate swaps	1,380,946		170,327		2,012,141		(1,162,768)
Subtotal	130,118		107,371		598,479		(3,223,558)
Net gains (losses) on disposal of investments and other	12,002		198,888		(37,561)		652,150
Net gains (losses) on other derivatives and financial instruments	(45,168)		169,316		73,892		546,658
Net unrealized gains (losses) on instruments measured at fair value through earnings	90,817		121,255		198,992		(354,133)
Loan loss (provision) reversal	6,134		21,993		145,260		(146,084)
Business divestiture-related gains (losses)	(14,009)		—		(262,045)		—
Subtotal	49,776		511,452		118,538		698,591
Total realized and unrealized gains (losses)	179,894		618,823		717,017		(2,524,967)
Other income (loss)	16,221		3,714		31,364		23,204
General and administrative expenses
Compensation and management fee	27,859		29,196		91,390		107,057
Other general and administrative expenses	16,023		15,391		53,923		72,165
Total general and administrative expenses	43,882		44,587		145,313		179,222
Income (loss) before income taxes	514,767		1,025,267		1,975,866		(1,783,335)
Income taxes	(6,767)		9,719		(1,954)		(14,928)
Net income (loss)	521,534		1,015,548		1,977,820		(1,768,407)
Net income (loss) attributable to noncontrolling interests	2,290		(126)		3,405		(28)
Net income (loss) attributable to Annaly	519,244		1,015,674		1,974,415		(1,768,379)
Dividends on preferred stock	26,883		35,509		80,649		106,527
Net income (loss) available (related) to common stockholders	$	492,361	$	980,165	$	1,893,766	$	(1,874,906)
Net income (loss) per share available (related) to common stockholders
Basic	$	0.34	$	0.70	$	1.34	$	(1.32)
Diluted	$	0.34	$	0.70	$	1.33	$	(1.32)
Weighted average number of common shares outstanding
Basic	1,445,315,914		1,404,202,695		1,418,424,208		1,419,645,475
Diluted	1,446,357,867		1,404,368,300		1,419,502,205		1,419,645,475
Other comprehensive income (loss)
Net income (loss)	$	521,534	$	1,015,548	$	1,977,820	$	(1,768,407)
Unrealized gains (losses) on available-for-sale securities	(113,451)		(140,671)		(1,733,919)		2,220,271
Reclassification adjustment for net (gains) losses included in net income (loss)	(28,186)		(112,347)		(1,778)		(769,406)
Other comprehensive income (loss)	(141,637)		(253,018)		(1,735,697)		1,450,865
Comprehensive income (loss)	379,897		762,530		242,123		(317,542)
Comprehensive income (loss) attributable to noncontrolling interests	2,290		(126)		3,405		(28)
Comprehensive income (loss) attributable to Annaly	377,607		762,656		238,718		(317,514)
Dividends on preferred stock	26,883		35,509		80,649		106,527
Comprehensive income (loss) attributable to common stockholders	$	350,724	$	727,147	$	158,069	$	(424,041)
See notes to consolidated financial statements.

2

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands) (Unaudited)
	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2021		2020		2021		2020
Preferred stock
Beginning of period	$	1,536,569	$	1,982,026	$	1,536,569	$	1,982,026
End of period	$	1,536,569	$	1,982,026	$	1,536,569	$	1,982,026
Common stock
Beginning of period	$	14,442	$	14,077	$	13,982	$	14,301
Issuance	55		—		511		—
Buyback of common stock	—		(49)		—		(277)
Stock-based award activity	2		—		6		3
Direct purchase and dividend reinvestment	—		1		—		2
End of period	$	14,499	$	14,029	$	14,499	$	14,029
Additional paid-in capital
Beginning of period	$	20,178,692	$	19,827,216	$	19,750,818	$	19,966,923
Issuance	48,853		—		468,823		(93)
Buyback of common stock	—		(31,363)		—		(174,799)
Stock-based award activity	821		1,510		8,725		4,928
Direct purchase and dividend reinvestment	—		669		—		1,073
End of period	$	20,228,366	$	19,798,032	$	20,228,366	$	19,798,032
Accumulated other comprehensive income (loss)
Beginning of period	$	1,780,275	$	3,842,074	$	3,374,335	$	2,138,191
Unrealized gains (losses) on available-for-sale securities	(113,451)		(140,671)		(1,733,919)		2,220,271
Reclassification adjustment for net gains (losses) included in net income (loss)	(28,186)		(112,347)		(1,778)		(769,406)
End of period	$	1,638,638	$	3,589,056	$	1,638,638	$	3,589,056
Accumulated deficit
Beginning of period - unadjusted	$	(9,892,863)	$	(11,871,927)	$	(10,667,388)	$	(8,309,424)
Cumulative effect of change in accounting principle for credit losses	—		—		—		(39,641)
Beginning of period - adjusted	(9,892,863)		(11,871,927)		(10,667,388)		(8,349,065)
Net income (loss) attributable to Annaly	519,244		1,015,674		1,974,415		(1,768,379)
Dividends declared on preferred stock (1)	(26,883)		(35,509)		(80,649)		(106,527)
Dividends and dividend equivalents declared on common stock and stock-based awards (1)	(319,768)		(309,175)		(946,648)		(976,966)
End of period	$	(9,720,270)	$	(11,200,937)	$	(9,720,270)	$	(11,200,937)
Total stockholder’s equity	$	13,697,802	$	14,182,206	$	13,697,802	$	14,182,206
Noncontrolling interests
Beginning of period	$	22,061	$	4,137	$	13,480	$	4,327
Net income (loss) attributable to noncontrolling interests	2,290		(126)		3,405		(28)
Equity contributions from (distributions to) noncontrolling interests	(4,286)		8,455		3,180		8,167
End of period	$	20,065	$	12,466	$	20,065	$	12,466
Total equity	$	13,717,867	$	14,194,672	$	13,717,867	$	14,194,672
(1)    Refer to the “Capital Stock” Note for dividends per share for each class of shares.

See notes to consolidated financial statements.

3

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
	For The Nine Months Ended September 30,
	2021		2020
Cash flows from operating activities
Net income (loss)	$	1,977,820	$	(1,768,407)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Amortization of premiums and discounts of investments, net	555,659		1,130,285
Amortization of securitized debt premiums and discounts and deferred financing costs	(4,129)		(7,263)
Depreciation, amortization and other noncash expenses	21,084		28,181
Net (gains) losses on disposal of investments and other	37,561		(652,150)
Net (gains) losses on investments and derivatives	(1,088,608)		2,889,963
Net (gains) losses on business divestitures	262,045		—
Income from unconsolidated joint ventures	5,889		(2,596)
Loan loss provision (reversal)	(145,260)		146,084
Payments on purchases of loans held for sale	(51,403)		(120,855)
Proceeds from sales and repayments of loans held for sale	88,050		139,672
Net receipts (payments) on derivatives	608,184		(2,210,881)
Net change in
Other assets	22,441		291,745
Interest receivable	34,881		148,165
Interest payable	(81,183)		(320,997)
Other liabilities	(27,750)		(30,769)
Net cash provided by (used in) operating activities	2,215,281		(339,823)
Cash flows from investing activities
Payments on purchases of securities	(18,334,872)		(24,970,238)
Proceeds from sales of securities	11,146,996		50,295,038
Principal payments on securities	14,638,456		14,392,160
Payments on purchases and origination of loans	(4,710,425)		(1,658,578)
Proceeds from sales of loans	879,147		583,040
Principal payments on loans	2,016,373		1,558,859
Payments on purchases of MSR	(416,149)		—
Proceeds from sales of MSR	376		—
Payments on purchases of interests in MSR	(53,034)		—
Investments in real estate	(1,815)		(6,123)
Proceeds from sales of real estate	53,910		—
Proceeds from reverse repurchase agreements	15,184,313		46,100,000
Payments on reverse repurchase agreements	(15,184,313)		(46,100,000)
Distributions in excess of cumulative earnings from unconsolidated joint ventures	290		6,641
Proceeds from sale of equity securities	6,957		—
Cash acquired in asset acquisition	—		1,047
Net proceeds from business divestiture	1,118,100		—
Net cash provided by (used in) investing activities	6,344,310		40,201,846
Cash flows from financing activities
Proceeds from repurchase agreements and other secured financing	1,702,497,310		2,353,694,509
Payments on repurchase agreements and other secured financing	(1,712,035,449)		(2,394,417,060)
Proceeds from issuances of securitized debt	2,005,080		2,385,374
Principal payments on securitized debt	(1,270,367)		(860,306)
Payment of deferred financing cost	—		(553)
Net proceeds from stock offerings, direct purchases and dividend reinvestments	469,334		1,075
Proceeds from participations issued	1,036,800		—
Payments on repurchases of participations issued	(434,873)		—
Principal payments on participations issued	(10,420)		—
Net principal receipts (payments) on mortgages payable	(1,019)		22,550
Net contributions (distributions) from (to) noncontrolling interests	3,180		8,167
Net payment on share repurchase	—		(175,076)
Settlement of stock-based awards in satisfaction of withholding tax requirements	(2,773)		—
Dividends paid	(1,013,797)		(1,131,450)
Net cash provided by (used in) financing activities	(8,756,994)		(40,472,770)
Net (decrease) increase in cash and cash equivalents	$	(197,403)	$	(610,747)
Cash and cash equivalents including cash pledged as collateral, beginning of period	1,243,703		1,850,729
Cash and cash equivalents including cash pledged as collateral, end of period	$	1,046,300	$	1,239,982
Supplemental disclosure of cash flow information
Interest received	$	2,107,854	$	2,926,598
Dividends received	$	51	$	4,485
Interest paid (excluding interest paid on interest rate swaps)	$	228,875	$	1,050,203
Net interest paid on interest rate swaps	$	258,061	$	290,277
Taxes received (paid)	$	780	$	1,551
Noncash investing and financing activities
Receivable for unsettled trades	$	42,482	$	54,200
Payable for unsettled trades	$	571,540	$	1,176,001
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment	$	(1,735,697)	$	1,450,865
Dividends declared, not yet paid	$	318,986	$	308,644
Derecognition of assets of consolidated VIEs	$	3,052,280	$	1,222,221
Derecognition of securitized debt of consolidated VIEs	$	2,496,118	$	1,141,311
Derecognition of mortage payable of consolidated VIEs	$	314,485	$	—

See notes to consolidated financial statements.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. DESCRIPTION OF BUSINESS

Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997.  The Company is a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, residential mortgage loans, mortgage servicing rights (“MSR”) and corporate debt. The Company’s principal business objective is to generate net income for distribution to its stockholders and optimize its returns through prudent management of its diversified investment strategies.

The Company is an internally-managed company that has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”). Prior to the closing of the Internalization (as defined in the “Related Party Transactions” Note) on June 30, 2020, the Company was externally managed by Annaly Management Company LLC (the “Former Manager”).

The Company’s investment groups are primarily comprised of the following:

Investment Groups	Description
Annaly Agency Group	Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including MSR and Agency commercial mortgage-backed securities.
Annaly Residential Credit Group	Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets.
Annaly Middle Market Lending Group	Provides financing to private equity backed middle market businesses, focusing primarily on senior debt within select industries.

In March 2021, the Company announced that it had entered into a definitive agreement to sell and exit its Commercial Real Estate (“CRE”) business. During the three months ended September 30, 2021, the platform and the significant majority of the assets were transferred with remaining assets expected to be transferred by the end of the year subject to regulatory approvals. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.

2. BASIS OF PRESENTATION

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).

The accompanying consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Form 10-K”). The consolidated financial information as of December 31, 2020 has been derived from audited consolidated financial statements included in the Company’s 2020 Form 10-K.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Beginning with the quarter ended June 30, 2021, the Company began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Other general and administrative expenses for the three months ended March 31, 2021 decreased by $1.8 million and for the three and nine months ended September 30, 2020 decreased by $4.2 million and $14.9 million, respectively, and Other income (loss) decreased by the same amounts for the three months ended March 31, 2021 and the three and nine months ended September 30, 2020, respectively.

In the opinion of management, all normal, recurring adjustments have been included for a fair presentation of this interim financial information. Interim period operating results may not be indicative of the operating results for a full year.

5

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

3. SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described below or are included elsewhere in these notes to the consolidated financial statements.

Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation.

Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE.

Variable Interest Entities – A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion to change. Refer to the “Variable Interest Entities” Note for further information.

Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of joint ventures accounted for under the equity method. These investments are included in real estate, net and Other assets with income or loss included in Other income (loss).

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled $0.9 billion and $1.1 billion at September 30, 2021 and December 31, 2020, respectively.

Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the FVO in order to simplify the accounting treatment for certain financial instruments. Items for which the FVO has been elected are presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the FVO see the table in the “Financial Instruments” Note.

Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments.

Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they meet the offsetting criteria. Please see below and refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements.

Derivative Instruments – Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives and financial instruments with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. Refer to the “Derivative Instruments” Note for further discussion.

Stock-Based Compensation – The Company measures compensation expense for stock-based awards at fair value, which is generally based on the grant-date fair value of the Company’s common stock. Stock-based awards that contain market-based conditions are valued using a model.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Compensation expense is recognized ratably over the vesting or requisite service period of the award. Compensation expense for awards with performance conditions is recognized based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market conditions is recognized irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. Forfeitures are recorded when they occur. The Company generally issues new shares of common stock upon delivery of stock-based awards.

Interest Income - The Company recognizes interest income primarily on Residential Securities (as defined in the “Securities” Note), residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income. Refer to the “Interest Income and Interest Expense” Note for further discussion.

For its securities, the Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), taking into account estimates of future principal prepayments in the calculation of the effective yield.  The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.

Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis.

Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss).

If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower. Refer to the “Interest Income and Interest Expense” Note for further discussion on interest.

The Company has made an accounting policy election not to measure an allowance for loans losses for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual due date for commercial loans or 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income.

Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income.

Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“TRSs”).  As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes.

7

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Recent Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”).  ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption.

Standard	Description	Effective Date	Effect on the Financial Statements or Other Significant Matters
Standards that have been adopted
ASU 2016-13 Financial instruments - Credit losses (Topic 326): Measurement of credit losses on financial instruments (“ASU 2016-13”)	This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect cash and cash equivalents, reverse repurchase agreements, certain loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope.  There are also limited amendments to the impairment model for available-for-sale debt securities.	January 1, 2020	The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets and off-balance-sheet credit exposures in scope. The modified retrospective approach requires an adjustment to beginning retained earnings for the cumulative effect of adopting the standard. Results for reporting periods beginning after January 1, 2020 are presented in accordance with ASU 2016-13, while prior periods continue to be reported in accordance with previously applicable GAAP. As a result of the adoption, the Company recorded an increase to the loan loss allowance of $37.4 million and a liability of $2.2 million for unfunded loan commitments, which reduced beginning retained earnings by $39.6 million as of January 1, 2020.
ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	This ASU provides optional, temporary relief to accounting for contract modifications resulting from reference rate reform.	January 1, 2020	The Company has elected to retrospectively apply the practical expedients to modifications of qualifying contracts as continuation of the existing contract rather than as a new contract. The adoption had no immediate impact and is not expected to have a material impact on the Company’s consolidated financial statements as the guidance continues to be applied to contract modifications until the ASU’s termination date.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

4. FINANCIAL INSTRUMENTS

The following table presents characteristics for certain of the Company’s financial instruments at September 30, 2021 and December 31, 2020.

Financial Instruments (1)
Balance Sheet Line Item	Type / Form	Measurement Basis	September 30, 2021		December 31, 2020
	Assets	(dollars in thousands)
Securities	Agency mortgage-backed securities (2)	Fair value, with unrealized gains (losses) through other comprehensive income	$	62,223,417	$	73,562,972
Securities	Agency mortgage-backed securities (3)	Fair value, with unrealized gains (losses) through earnings	594,662		504,087
Securities	Residential credit risk transfer securities	Fair value, with unrealized gains (losses) through earnings	787,235		532,403
Securities	Non-agency mortgage-backed securities	Fair value, with unrealized gains (losses) through earnings	1,747,932		972,192
Securities	Commercial real estate debt investments - CMBS(4)	Fair value, with unrealized gains (losses) through other comprehensive income	—		31,603
Securities	Commercial real estate debt investments - CMBS (4)(5)	Fair value, with unrealized gains (losses) through earnings	265,000		45,254
Securities	Commercial real estate debt investments - credit risk transfer securities	Fair value, with unrealized gains (losses) through earnings	4,106		3,885
Total securities			65,622,352		75,652,396
Loans, net	Residential mortgage loans	Fair value, with unrealized gains (losses) through earnings	1,686,268		345,810
Loans, net	Residential mortgage loan warehouse facility	Fair value, with unrealized gains (losses) through earnings	1,431		—
Loans, net	Commercial real estate debt and preferred equity, held for investment (4)	Amortized cost	—		498,081
Loans, net	Corporate debt, held for investment	Amortized cost	1,890,709		2,239,930
Loans, net	Corporate debt, held for sale	Lower of amortized cost or fair value	2,113		—
Total loans, net			3,580,521		3,083,821
Interests in MSR	Interest in net servicing cash flows	Fair value, with unrealized gains (losses) through earnings	57,530		—
Assets transferred or pledged to securitization vehicles	Agency mortgage-backed securities	Fair value, with unrealized gains (losses) through other comprehensive income	597,923		620,347
Assets transferred or pledged to securitization vehicles	Residential mortgage loans	Fair value, with unrealized gains (losses) through earnings	4,140,558		3,249,251
Assets transferred or pledged to securitization vehicles	Commercial mortgage loans (4)	Fair value, with unrealized gains (losses) through earnings	—		2,166,073
Assets transferred or pledged to securitization vehicles	Commercial mortgage loans (4)	Amortized cost	—		874,349
Total assets transferred or pledged to securitization vehicles			4,738,481		6,910,020
	Liabilities
Repurchase agreements	Repurchase agreements	Amortized cost	55,475,420		64,825,239
Other secured financing	Loans	Amortized cost	729,555		917,876
Debt issued by securitization vehicles	Securities	Fair value, with unrealized gains (losses) through earnings	3,935,410		5,652,982
Participations issued	Participations issued	Fair value, with unrealized gains (losses) through earnings	641,006		39,198
Mortgages payable	Loans (6)	Amortized cost	—		426,256
(1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. Interests in MSR are considered financial assets whereas directly held MSR are servicing assets or obligations. (2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. (3) Includes interest-only securities and reverse mortgages. (4) Excludes Assets of disposal group held for sale at September 30, 2021. (5) Includes single-asset / single-borrower CMBS. (6) Excludes Liabilities of disposal group held for sale at September 30, 2021.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

5. SECURITIES

The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Transactions for regular-way securities are recorded on trade date, including to-be-announced securities (“TBA securities”) that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method.

Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security.  Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss) as a Securities Loss Provision and reflected as an Allowance for Credit Losses on Securities on the Consolidated Statements of Financial Condition, while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). For the nine months ended September 30, 2021, the Company recognized a $0.4 million impairment on a commercial mortgage-backed security that it intends to sell. There was no impairment recognized for the three and nine months ended September 30, 2020.

Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”). 

Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis. TBA securities without intent to accept delivery (“TBA derivatives”) are accounted for as derivatives as discussed in the “Derivative Instruments” Note.

CRT Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors.

Non-Agency Mortgage-Backed Securities - The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.

Agency mortgage-backed securities, non-Agency mortgage-backed securities and residential CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio.

Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities (“CMBS”) are classified as available-for-sale and reported at fair value with any credit loss recognized through an allowance for credit losses and any other unrealized gains and losses reported as a component of Other comprehensive income (loss). Management evaluates its Commercial Securities for impairment at least quarterly. The Company elected the fair value option for all other Commercial Securities, including conduit and credit CMBS, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through earnings. As of September 30, 2021, CMBS included in the announced sale of the Company’s CRE business are reported in Assets of disposal group held for sale and Securities, respectively, in the Consolidated Statements of Financial Condition. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the nine months ended September 30, 2021:

	Agency Securities		Residential Credit Securities		Commercial Securities		Total
	(dollars in thousands)
Beginning balance January 1, 2021	$	74,067,059	$	1,504,595	$	80,742	$	75,652,396
Purchases	16,066,339		1,669,148		265,006		18,000,493
Sales and transfers (1)	(10,961,428)		(102,216)		(78,770)		(11,142,414)
Principal paydowns	(14,083,553)		(555,460)		—		(14,639,013)
(Amortization) / accretion	(542,125)		820		292		(541,013)
Fair value adjustment	(1,728,213)		18,280		1,836		(1,708,097)
Ending balance September 30, 2021	$	62,818,079	$	2,535,167	$	269,106	$	65,622,352
(1) Includes transfers to assets of disposal group held for sale.

The following tables present the Company’s securities portfolio, excluding securities transferred or pledged to securitization vehicles, that were carried at their fair value at September 30, 2021 and December 31, 2020:

	September 30, 2021
	Principal / Notional		Remaining Premium		Remaining Discount		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	55,667,603	$	3,107,102	$	(19,552)	$	58,755,153	$	1,815,792	$	(272,823)	$	60,298,122
Adjustable-rate pass-through	331,164		1,644		(2,991)		329,817		19,204		—		349,021
CMO	120,598		1,906		—		122,504		6,740		—		129,244
Interest-only	2,091,601		482,544		—		482,544		919		(153,522)		329,941
Multifamily(1)	4,435,186		243,588		(979)		1,668,149		23,448		(21,125)		1,670,472
Reverse mortgages	38,452		3,721		—		42,173		—		(894)		41,279
Total agency securities	$	62,684,604	$	3,840,505	$	(23,522)	$	61,400,340	$	1,866,103	$	(448,364)	$	62,818,079
Residential credit
Credit risk transfer (2)	$	780,039	$	6,639	$	(1,593)	$	776,784	$	11,598	$	(1,147)	$	787,235
Alt-A	66,805		31		(16,879)		49,957		3,584		—		53,541
Prime (3)	343,013		10,197		(15,226)		269,586		12,191		(2,040)		279,737
Subprime	183,962		403		(16,984)		167,381		9,340		(285)		176,436
NPL/RPL	1,130,807		1,107		(2,126)		1,129,788		7,700		(357)		1,137,131
Prime jumbo (>=2010 vintage) (4)	252,011		6,105		(5,844)		101,283		4,663		(4,859)		101,087
Total residential credit securities	$	2,756,637	$	24,482	$	(58,652)	$	2,494,779	$	49,076	$	(8,688)	$	2,535,167
Total Residential Securities	$	65,441,241	$	3,864,987	$	(82,174)	$	63,895,119	$	1,915,179	$	(457,052)	$	65,353,246
Commercial
Commercial Securities	$	269,000	$	6	$	(103)	$	268,903	$	209	$	(6)	$	269,106
Total securities	$	65,710,241	$	3,864,993	$	(82,277)	$	64,164,022	$	1,915,388	$	(457,058)	$	65,622,352

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

	December 31, 2020
	Principal / Notional		Remaining Premium		Remaining Discount		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	64,800,235	$	3,325,020	$	(22,143)	$	68,103,112	$	3,200,542	$	(1,076)	$	71,302,578
Adjustable-rate pass-through	455,675		2,869		(3,369)		455,175		22,341		—		477,516
CMO	139,664		2,177		—		141,841		7,926		—		149,767
Interest-only	2,790,537		564,297		—		564,297		3,513		(145,901)		421,909
Multifamily (1)	1,910,384		50,148		(1,057)		1,604,913		59,548		(954)		1,663,507
Reverse mortgages	47,585		4,183		—		51,768		252		(238)		51,782
Total agency investments	$	70,144,080	$	3,948,694	$	(26,569)	$	70,921,106	$	3,294,122	$	(148,169)	$	74,067,059
Residential credit
Credit risk transfer (2)	$	544,780	$	7,324	$	(2,430)	$	538,941	$	3,062	$	(9,600)	$	532,403
Alt-A	93,001		51		(17,368)		75,684		4,644		—		80,328
Prime (3)	372,539		7,008		(15,999)		168,861		14,607		(719)		182,749
Subprime	197,779		584		(18,181)		180,182		8,312		(61)		188,433
NPL/RPL	475,108		821		(2,416)		473,513		3,782		(1,448)		475,847
Prime jumbo (>=2010 vintage) (4)	336,320		7,010		(5,300)		46,406		3,680		(5,251)		44,835
Total residential credit securities	$	2,019,527	$	22,798	$	(61,694)	$	1,483,587	$	38,087	$	(17,079)	$	1,504,595
Total Residential Securities	$	72,163,607	$	3,971,492	$	(88,263)	$	72,404,693	$	3,332,209	$	(165,248)	$	75,571,654
Commercial
Commercial Securities	$	89,858	$	—	$	(7,471)	$	82,387	$	54	$	(1,699)	$	80,742
Total securities	$	72,253,465	$	3,971,492	$	(95,734)	$	72,487,080	$	3,332,263	$	(166,947)	$	75,652,396
(1) Principal/Notional amount includes $3.0 billion and $354.6 million of Agency Multifamily interest-only securities as of September 30, 2021 and December 31, 2020, respectively. (2) Principal/Notional amount includes $8.3 million and $10.7 million of a CRT interest-only security as of September 30, 2021 and December 31, 2020, respectively. (3) Principal/Notional amount includes $68.4 million and $194.7 million of Prime interest-only securities as of September 30, 2021 and December 31, 2020, respectively. (4) Principal/Notional amount includes $151.0 million and $291.6 million of Prime Jumbo interest-only securities as of September 30, 2021 and December 31, 2020, respectively.

The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferred or pledged to securitization vehicles, by issuing Agency at September 30, 2021 and December 31, 2020: 

	September 30, 2021		December 31, 2020
Investment Type	(dollars in thousands)
Fannie Mae	$	49,315,620	$	56,218,033
Freddie Mac	12,230,337		17,735,041
Ginnie Mae	1,272,122		113,985
Total	$	62,818,079	$	74,067,059

Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages.

The following table summarizes the Company’s Residential Securities, excluding securities transferred or pledged to securitization vehicles, at September 30, 2021 and December 31, 2020, according to their estimated weighted average life classifications:

	September 30, 2021				December 31, 2020
	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Estimated weighted average life	(dollars in thousands)
Less than one year	$	321,612	$	319,986	$	110,203	$	109,540
Greater than one year through five years	16,777,839		16,217,155		45,643,138		43,404,877
Greater than five years through ten years	46,915,780		46,011,641		28,509,058		27,610,923
Greater than ten years	1,338,015		1,346,337		1,309,255		1,279,353
Total	$	65,353,246	$	63,895,119	$	75,571,654	$	72,404,693

12

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The estimated weighted average lives of the Residential Securities at September 30, 2021 and December 31, 2020 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected.

The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020.

	September 30, 2021					December 31, 2020
	Estimated Fair Value (1)		Gross Unrealized Losses (1)		Number of Securities (1)	Estimated Fair Value (1)		Gross Unrealized Losses (1)		Number of Securities (1)
	(dollars in thousands)
Less than 12 months	$	19,701,354	$	(292,136)	409	$	777,586	$	(2,030)	30
12 Months or more	4,640		(136)		2	—		—		—
Total	$	19,705,994	$	(292,272)	411	$	777,586	$	(2,030)	30
(1) Excludes interest-only mortgage-backed securities and reverse mortgages.

The decline in value of these securities is solely due to market conditions and not the quality of the assets.  Substantially all of the Agency mortgage-backed securities have an actual or implied credit rating that is the same as that of the U.S. government. The investments are not considered to be impaired because the Company currently has 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 the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. 

During the three and nine months ended September 30, 2021, the Company disposed of $4.8 billion and $11.1 billion of Residential Securities, respectively. During the three and nine months ended September 30, 2020, the Company disposed of $2.8 billion and $50.2 billion of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three and nine months ended September 30, 2021 and 2020.

	Gross Realized Gains		Gross Realized Losses		Net Realized Gains (Losses)
For the three months ended	(dollars in thousands)
September 30, 2021	$	30,368	$	(3,636)	$	26,732
September 30, 2020	$	117,373	$	(13,440)	$	103,933
For the nine months ended
September 30, 2021	$	87,499	$	(86,657)	$	842
September 30, 2020	$	929,010	$	(297,934)	$	631,076

6. LOANS

The Company invests in residential and corporate loans. Loans are classified as either held for investment or held for sale. Loans are eligible to be accounted for under the fair value option. If loans are elected under the fair value option, they are carried at fair value with changes in fair value recognized in earnings. Otherwise, loans held for investment are carried at cost less impairment and loans held for sale are accounted for at the lower of cost or fair value.

Excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, as of September 30, 2021 and December 31, 2020, the Company reported $1.7 billion and $345.8 million, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $3.7 million and $47.0 million at September 30, 2021 and December 31, 2020, respectively.

Allowance for Losses – The Company evaluates the need for a loss reserve on each of its loans classified as held for investment where the fair value option is not elected. Allowance for loan losses are written off in the period the loans are deemed uncollectible.

Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each individual loan held for investment. A provision is established at origination or acquisition that reflects management’s estimate

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

of the total expected credit loss over the expected life of the loan. In estimating the lifetime expected credit losses, management utilizes a probability of default and loss given default methodology (“Loss Given Default methodology”), which considers projected economic conditions over the reasonable and supportable forecast period. The forecast incorporates primarily market-based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced from third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable period, the Company reverts to historical losses on a straight-line basis. Management uses third party vendors’ loan pool data for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s loan portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss (provision) reversal in the Consolidated Statements of Comprehensive Income (Loss).

For loans experiencing credit deterioration, the Company may use a different methodology to determine the expected credit losses such as a discounted cash flow analysis. For collateral-dependent loans, if foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for any selling costs, if applicable. Additionally, the Company may elect the practical expedient for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty by measuring the allowance as the difference between the fair value of the collateral, less costs to sell, if applicable, and the amortized cost basis of the financial asset at the reporting date. The Company’s commercial loans are collateralized by commercial real estate including, but not limited to, multifamily real estate, office and retail space, hotels and industrial space. At origination, the fair value of the collateral generally exceeds the principal loan balance.

Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment.  Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date.

The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment.  The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies.  Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management.

The Company recorded net loan loss (provisions) reversals of $6.1 million and $145.3 million for the three and nine months ended September 30, 2021, respectively. The Company recorded net loan loss (provisions) reversals of $22.0 million and ($146.1) million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 and December 31, 2020, the Company’s loan loss allowance was $27.7 million and $169.5 million, respectively.

The following table presents the activity of the Company’s loan investments, including loans held for sale and excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, for the nine months ended September 30, 2021:

	Residential		Commercial		Corporate Debt		Corporate Debt Held for Sale (1)		Total
	(dollars in thousands)
Beginning balance January 1, 2021	$	345,810	$	498,081	$	2,239,930	$	—	$	3,083,821
Purchases / originations	3,597,844		126,722		1,055,048		468,483		5,248,097
Sales and transfers (2)	(2,206,190)		(608,202)		(879,622)		(466,370)		(4,160,384)
Principal payments	(43,690)		(84,929)		(546,631)		—		(675,250)
Gains / (losses) (3)	(784)		67,784		11,826		—		78,826
(Amortization) / accretion	(6,722)		544		10,158		—		3,980
Ending balance September 30, 2021	$	1,686,268	$	—	$	1,890,709	$	2,113	$	3,579,090
(1) Represents loans the Company originated during the three months ended June 30, 2021 and subsequently syndicated and closed. At September 30, 2021, loans held for sale were carried at the lower of cost or fair value. (2) Includes securitizations, syndications, transfers to securitization vehicles and commercial loan transfers to assets of disposal group held for sale. Includes transfer of residential loans to securitization vehicles with a carrying value of $2.0 billion during the nine months ended September 30, 2021. (3) Includes loan loss allowances.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The Company also has off-balance-sheet credit exposures related to unfunded loan commitments, including revolvers, delayed draw term loans and future funding commitments that are not unconditionally cancelable by the Company. The Company utilizes the same methodology in calculating the liability related to the expected credit losses on these exposures as it does for the calculation of the allowance for loan losses. In determining the estimate of credit losses for off-balance-sheet credit exposures, the Company will consider the contractual period in which the entity is exposed to credit risk and the likelihood that funding will occur, if material. Estimated credit losses for off-balance-sheet credit exposures are included in Other liabilities on the Company’s Consolidated Statements of Financial Condition.

Residential

The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Additionally, the Company consolidates a collateralized financing entity that securitized prime adjustable-rate jumbo residential mortgage loans. The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts.

The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles and excluding loan warehouse facilities, at September 30, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020
	(dollars in thousands)
Fair value	$	5,826,826	$	3,595,061
Unpaid principal balance	$	5,602,342	$	3,482,865

The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020 for these investments, excluding loan warehouse facilities:

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands)
Interest income	$	45,799	$	42,508	$	121,871	$	132,937
Net gains (losses) on disposal of investments and other	(7,154)		(4,638)		(34,095)		(22,014)
Net unrealized gains (losses) on instruments measured at fair value through earnings	12,525		77,837		49,436		(4,381)
Total included in net income (loss)	$	51,170	$	115,707	$	137,212	$	106,542

The following table provides the geographic concentrations based on the unpaid principal balances at September 30, 2021 and December 31, 2020 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:

Geographic Concentrations of Residential Mortgage Loans
September 30, 2021		December 31, 2020
Property location	% of Balance	Property location	% of Balance
California	51.3%	California	48.9%
New York	10.7%	New York	14.0%
Florida	6.4%	Florida	6.0%
All other (none individually greater than 5%)	31.6%	All other (none individually greater than 5%)	31.1%
Total	100.0%		100.0%

The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at September 30, 2021 and December 31, 2020:

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

	September 30, 2021		December 31, 2020
	Portfolio Range	Portfolio Weighted Average	Portfolio Range	Portfolio Weighted Average
	(dollars in thousands)
Unpaid principal balance	$1 - $4,382	$517	$1 - $3,448	$473
Interest rate	0.50% - 9.24%	4.25%	0.50% - 9.24%	4.89%
Maturity	7/1/2029 - 10/1/2061	6/5/2050	7/1/2029 - 1/1/2061	4/17/2046
FICO score at loan origination	604 - 829	761	505 - 829	755
Loan-to-value ratio at loan origination	8% - 103%	66%	8% - 104%	67%

At September 30, 2021 and December 31, 2020, approximately 22% and 37%, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.

During the three months ended September 30, 2021, the Company participated in an arrangement that provided a residential mortgage loan warehouse facility to a third-party originator. The Company has elected to apply the fair value option to this lending facility in order to simplify the accounting and keep the accounting consistent with other residential credit financial instruments with similar characteristics. At September 30, 2021, the fair value and carrying value of this warehouse facility was approximately $1.4 million and is reported as Loans, net in the Consolidated Statements of Financial Condition. As of September 30, 2021, the lending facility was not on nonaccrual status nor past due.

Commercial

As of September 30, 2021, commercial real estate loans are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition and classified as held for sale. As of December 31, 2020, commercial real estate loans are reported in Loans, net in the Consolidated Statements of Financial Condition and classified as held for investment. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction.

The Company’s commercial real estate loans are comprised of adjustable-rate and fixed-rate loans. The difference between the principal amount of a loan and proceeds at acquisition is recorded as either a discount or premium. Commercial real estate loans and preferred equity interests that were designated as held for investment and were originated or purchased by the Company were carried at their outstanding principal balance, net of unamortized origination fees and costs, premiums or discounts, less an allowance for losses, if necessary. Origination fees and costs, premiums or discounts are amortized into interest income over the life of the loan. 

During the period the Company owns the assets, management generally reviews the most recent financial information and metrics derived therefrom produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the Company’s commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan, economic trends (both macro and those affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject property is located.  Management monitors the financial condition and operating results of its borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations.

The Company’s commercial loans are collateral-dependent and, as such, for loans experiencing credit deterioration, the Company is required to record an allowance for loans held for investment based upon the fair value of the underlying collateral if foreclosure is probable or if the practical expedient is elected. For the nine months ended September 30, 2021, the Company reversed the loan loss allowance resulting in a loan loss reversal on impaired commercial loans of $67.4 million as the loans are classified as held for sale and are carried at lower of cost or fair value. For the three and nine months ended September 30, 2020, the Company recorded a loan loss (provision) reversal on impaired commercial loans of $0 and ($74.1) million, respectively, based upon the fair value of the underlying collateral. The Company uses a discounted cash flow or market based valuation technique based upon the underlying property to project property cash flows. In projecting these cash flows, the Company reviewed the borrower financial statements, rent rolls, economic trends and other factors management deems important. These nonrecurring fair value measurements are considered to be in Level 3 of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

For the nine months ended September 30, 2021, the Company reversed the loan loss allowance based upon its Loss Given Default methodology resulting in a loan loss reversal on commercial loans of $62.5 million as the loans are classified as held for sale and are carried at lower of cost or fair value. For the three and nine months ended September 30, 2020, the Company recorded a net loan loss (provision) reversal of $4.9 million and ($57.4) million, respectively, based upon its Loss Given Default methodology. As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect loan loss allowance of $7.8 million was recorded on January 1, 2020.

During the year ended December 31, 2020, the Company modified five commercial loans with a carrying value of $243.8 million at December 31, 2020. The maturity dates on four commercial loans were extended and one commercial loan was granted a 120 day forebearance. Additionally, as part of the restructuring, two loans had partial paydowns totaling $4.5 million. The loan loss allowance recorded for these commercial loans was $23.6 million at December 31, 2020. Future funding commitments on the restructured loans totaled $4.1 million at December 31, 2020.

At December 31, 2020, the amortized cost basis of commercial loans on nonaccrual status was $46.8 million. For the year ended December 31, 2020, the Company recognized interest income on commercial loans on nonaccrual status of $2.1 million.

At December 31, 2020, the Company had unfunded commercial real estate loan commitments of $99.3 million. At December 31, 2020, the liability related to the expected credit losses on the unfunded commercial loan commitments was $5.1 million.

At December 31, 2020, approximately 94% of the carrying value, net of allowances of the Company’s CRE Debt and Preferred Equity Investments, including loans transferred or pledged to securitization vehicles, were adjustable-rate.

The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for sale at September 30, 2021 and held for investment at December 31, 2020:

September 30, 2021
	Senior Mortgages		Senior Securitized Mortgages (1)		Mezzanine Loans		Total
	(dollars in thousands)
Beginning balance (January 1, 2021) (2)	$	373,925	$	874,349	$	124,156	$	1,372,430
Originations & advances (principal)	127,481		69		644		128,194
Principal payments	(75,007)		(87,253)		(9,922)		(172,182)
Transfers and sales (3)	(436,408)		(797,116)		(171,794)		(1,405,318)
Net (increase) decrease in origination fees	(1,403)		—		—		(1,403)
Amortization of net origination fees	501		486		43		1,030
Allowance for loan losses
Beginning allowance	(10,911)		(62,149)		(56,873)		(129,933)
Current period (allowance) reversal	10,911		62,149		56,873		129,933
Ending allowance	—		—		—		—
Net carrying value (September 30, 2021)	$	—	$	52,684	$	—	$	52,684

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

December 31, 2020
	Senior Mortgages		Senior Securitized Mortgages (1)		Mezzanine Loans		Total
	(dollars in thousands)
Beginning balance (January 1, 2020) (2)	$	499,690	$	936,378	$	182,726	$	1,618,794
Originations & advances (principal)	206,090		—		12,374		218,464
Principal payments	(77,344)		(144,308)		(78)		(221,730)
Principal write off	—		—		(7,000)		(7,000)
Transfers (3)	(245,120)		142,621		(7,100)		(109,599)
Net (increase) decrease in origination fees	(1,055)		(653)		(80)		(1,788)
Realized gain	204		—		—		204
Amortization of net origination fees	2,371		2,460		187		5,018
Allowance for loan losses
Beginning allowance, prior to CECL adoption	—		—		(12,703)		(12,703)
Impact of adopting CECL	(2,263)		(4,166)		(1,336)		(7,765)
Current period (allowance) reversal	(8,648)		(57,983)		(66,521)		(133,152)
Write offs	—		—		23,687		23,687
Ending allowance	(10,911)		(62,149)		(56,873)		(129,933)
Net carrying value (December 31, 2020)	$	373,925	$	874,349	$	124,156	$	1,372,430
(1) Represents assets of consolidated VIEs held for sale at September 30, 2021. (2) Excludes loan loss allowances. (3) Includes transfers to securitization vehicles.

Corporate Debt  

The Company’s investments in corporate loans typically take the form of senior secured loans primarily in first or second lien positions. The Company’s senior secured loans generally have stated maturities of five to eight years. In connection with these senior secured loans, the Company receives a security interest in certain assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the effective interest method.

The Company’s internal risk rating rubric for corporate debt has nine categories as depicted below:

Risk Rating - Corporate Debt	Description
1-5 / Performing	Meets all present contractual obligations.
6 / Performing - Closely Monitored	Meets all present contractual obligations but exhibits a defined weakness in either leverage or liquidity, but not both. Loans at this rating will require closer monitoring, but where we expect no loss of interest or principal.
7 / Substandard	A loan that has a defined weakness in either leverage and/or liquidity, and which may require substantial changes to strengthen the asset. Loans at this rating level have a higher probability of loss, although no determination of the amount or timing of a loss is yet possible.
8 / Doubtful	A loan that has missed a scheduled principal or interest payment or is otherwise deemed a non-earning account. The probability of loss is increasingly certain due to significant performance issues.
9 / Loss	Considered uncollectible.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s corporate debt held for investment by year of origination and internal risk rating.

There was no provision for loan loss recorded on corporate loans using a discounted cash flow methodology for the nine months ended September 30, 2021. For the three months ended September 30, 2020, the Company recorded a loan loss (provision) reversal of $5.4 million on impaired corporate loans using a discounted cash flow methodology with a principal balance and carrying value, net of allowances of $9.7 million and $9.6 million, respectively. For the nine months ended September 30, 2020, the Company recorded a net loan loss (provision) of ($4.5) million on impaired corporate loans using a discounted cash flow methodology with a principal balance and carrying value, net of allowances of $29.3 million and $21.9 million, respectively. During the nine months ended September 30, 2020, a loan was restructured and the Company received $2.8 million of second lien debt and $4.8 million of equity. As a result of the restructuring, $19.6 million of first lien debt was written off and the related allowance of $11.9 million was charged off.

For the three and nine months ended September 30, 2021 the Company recorded a net loan loss (provision) reversal on corporate loans of $6.1 million and $11.8 million, respectively, based upon its Loss Given Default methodology. For the three and nine months ended September 30, 2020 the Company recorded a net loan loss (provision) reversal on corporate loans of $11.6 million and ($10.1) million, respectively, based upon its Loss Given Default methodology. As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect loan loss allowance on corporate loans of $29.7 million was recorded on January 1, 2020.

At September 30, 2021 and December 31, 2020, the Company had unfunded corporate loan commitments of $221.7 million and $87.3 million, respectively. At September 30, 2021 and December 31, 2020, the liability related to the expected credit losses on the unfunded corporate loan commitments was $0.5 million and $0.7 million, respectively.

The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at September 30, 2021 and December 31, 2020 are as follows:

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

	Industry Dispersion
	September 30, 2021			December 31, 2020
		Total (1)		Total (1)
	(dollars in thousands)
Computer Programming, Data Processing & Other Computer Related Services		$	435,210	$	483,142
Management & Public Relations Services		263,196		300,869
Industrial Inorganic Chemicals		156,483		156,391
Metal Cans & Shipping Containers		117,355		115,670
Public Warehousing & Storage		88,032		132,397
Surgical, Medical & Dental Instruments & Supplies		81,160		83,161
Electronic Components & Accessories		78,452		78,129
Offices & Clinics of Doctors of Medicine		61,243		104,781
Telephone Communications		58,881		58,450
Specialty Outpatient Facilities, not elsewhere classified		48,109		—
Research, Development & Testing Services		45,546		62,008
Insurance Agents, Brokers and Service		43,827		67,193
Electric Work		42,635		41,128
Engineering, Architectural, and Surveying		39,275		77,308
Miscellaneous Industrial and Commercial		33,074		77,163
Miscellaneous Equipment Rental & Leasing		32,332		49,587
Medical & Dental Laboratories		30,404		30,711
Schools & Educational Services, not elsewhere classified		29,186		29,040
Home Health Care Services		28,726		28,587
Metal Forgings & Stampings		27,449		27,523
Legal Services		26,392		26,399
Petroleum and Petroleum Products		21,471		33,890
Grocery Stores		19,632		22,895
Coating, Engraving and Allied Services		18,458		19,484
Chemicals & Allied Products		14,689		14,686
Mailing, Reproduction, Commercial Art and Photography and Stenographic		12,311		12,733
Machinery, Equipment & Supplies		11,370		12,096
Sanitary Services		10,743		—
Offices and Clinics of Other Health Practitioners		10,095		9,730
Miscellaneous Business Services		1,952		12,980
Drugs		1,756		12,942
Computer integrated systems design		1,265		—
Miscellaneous Food Preparations		—		58,857
Total		$	1,890,709	$	2,239,930
(1) All middle market lending positions are floating rate.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at September 30, 2021 and December 31, 2020.

	September 30, 2021		December 31, 2020
	(dollars in thousands)
First lien loans	$	1,302,441	$	1,489,125
Second lien loans	588,268		750,805
Total	$	1,890,709	$	2,239,930

The following tables represent a rollforward of the activity for the Company’s corporate debt investments held for investment at September 30, 2021 and December 31, 2020:

September 30, 2021
	First Lien		Second Lien		Total
	(dollars in thousands)
Beginning balance (January 1, 2021) (1)	$	1,489,125	$	750,805	$	2,239,930
Originations & advances	988,568		66,480		1,055,048
Sales and transfers (2)	(795,932)		(83,690)		(879,622)
Principal payments	(388,928)		(157,703)		(546,631)
Amortization & accretion of (premium) discounts	7,078		3,080		10,158
Loan restructuring	—		—		—
Allowance for loan losses
Beginning allowance	(18,767)		(20,785)		(39,552)
Current period (allowance) reversal	2,530		9,296		11,826
Ending allowance	(16,237)		(11,489)		(27,726)
Net carrying value (September 30, 2021)	$	1,302,441	$	588,268	$	1,890,709

December 31, 2020
	First Lien		Second Lien		Total
	(dollars in thousands)
Beginning balance (January 1, 2020) (1)	$	1,403,503	$	748,710	$	2,152,213
Originations & advances	834,211		227,433		1,061,644
Sales (2)	(273,887)		(79,203)		(353,090)
Principal payments	(444,759)		(132,000)		(576,759)
Amortization & accretion of (premium) discounts	8,374		3,832		12,206
Loan restructuring	(19,550)		2,818		(16,732)
Allowance for loan losses
Beginning allowance, prior to CECL adoption	(7,363)		—		(7,363)
Impact of adopting CECL	(10,787)		(18,866)		(29,653)
Current period (allowance) reversal	(12,510)		(1,919)		(14,429)
Write offs	11,893		—		11,893
Ending allowance	(18,767)		(20,785)		(39,552)
Net carrying value (December 31, 2020)	$	1,489,125	$	750,805	$	2,239,930
(1) Excludes loan loss allowances. (2) Includes syndications and, for the period ended September 30, 2021 includes transfers to held for sale.

21

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Item 1. Financial Statements

The following table provides the amortized cost basis of corporate debt held for investment as of September 30, 2021 by vintage year and internal risk rating.

Amortized Cost Basis by Risk Rating and Vintage (1)
Risk Rating	Vintage
	Total		2021		2020		2019		2018		2017		2016		2015
(dollars in thousands)
1-5 / Performing	$	1,728,548	$	416,715	$	363,377	$	219,426	$	545,882	$	159,772	$	23,376
6 / Performing - Closely Monitored	40,195		820		26,392		—		—		12,983		—		—
7 / Substandard	121,966		—		11,370		25,556		85,040		—		—		—
8 / Doubtful	—		—		—		—		—		—		—		—
9 / Loss	—		—		—		—		—		—		—		—
Total	$	1,890,709	$	417,535	$	401,139	$	244,982	$	630,922	$	172,755	$	23,376	$	—
(1) The amortized cost basis excludes accrued interest and includes deferred fees on unfunded loans. As of September 30, 2021, the Company had $12.1 million of accrued interest receivable on corporate loans which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition and $2.1 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition.

7. MORTGAGE SERVICING RIGHTS

The Company owns variable interests in entities that invest in MSR and Interests in MSR. Refer to the “Variable Interest Entities” Note for a detailed discussion on this topic.

MSR represent the rights and obligations associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSR. The Company generally intends to hold the MSR as investments and elected to account for all of its investments in MSR at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Servicing income, net of servicing expenses, is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). At September 30, 2021, MSR with a fair value of approximately $86.2 million met the criteria to be classified as held for sale. The fair value of these MSR is the agreed upon sale price and the sale is expected to occur in the fourth quarter of 2021.

Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party acts as a master servicer for the loans providing the net servicing cash flows represented by the Interests in MSR. The Company accounts for its Interests in MSR at fair value with change in fair value presented in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

The following tables presents activity related to MSR and Interests in MSR for the three and nine months ended September 30, 2021 and 2020:  

Mortgage Servicing Rights	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands)
Fair value, beginning of period	$	202,616	$	227,400	$	100,895	$	378,078
Purchases (1)	312,327		—		411,309		—
Sales	—		—		(376)		—
Change in fair value due to:
Changes in valuation inputs or assumptions (2)	76,107		7,633		108,403		(99,220)
Other changes, including realization of expected cash flows	(18,791)		(27,048)		(47,972)		(70,873)
Fair value, end of period	$	572,259	$	207,985	$	572,259	$	207,985
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. (2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates.

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Item 1. Financial Statements

Interests in MSR	Three Months Ended		Nine Months Ended
	September 30, 2021		September 30, 2021
	(dollars in thousands)
Beginning balance	$	49,035	$	—
Purchases (1)	5,936		53,034
Gain (loss) included in net income	2,559		4,496
Ending balance September 30, 2021	$	57,530	$	57,530
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.

For the three and nine months ended September 30, 2021, the Company recognized $14.9 million and $29.7 million, respectively, and for the three and nine months ended September 30, 2020, the Company recognized $15.1 million and $54.4 million, respectively, of net servicing income from MSR in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

For the three and nine months ended September 30, 2021, the Company recognized $2.7 million and $4.7 million, respectively, and for the three and nine months ended September 30, 2020, the Company did not recognize net income from Interests in MSR in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

8. VARIABLE INTEREST ENTITIES

At September 30, 2021, commercial trusts, commercial securitizations and the collateralized loan obligation are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.

Multifamily Securitization

In November 2019, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $1.0 billion and retained interest-only securities with a notional balance of $1.0 billion and senior securities with a principal balance of $28.5 million. In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $0.5 billion and retained interest-only securities with a notional balance of $0.5 billion. At the inception of the arrangements, the Company determined that it was the primary beneficiary based upon its involvement in the design of these VIEs and through the retention of a significant variable interest in the VIEs. The Company elected the fair value option for the financial liabilities of these VIEs in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. In 2020, the Company deconsolidated the 2019 multifamily VIE since it sold all of its interest-only securities and no longer retains a significant variable interest in the entity. The Company incurred $1.1 million of costs in connection with the 2020 multifamily securitization that were expensed as incurred during the nine months ended September 30, 2020.

Residential Trusts

The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owns the subordinate securities, and a subsidiary of the Company continues to be the master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was $10.7 million and $23.0 million at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, a total of $10.7 million of bonds were held by third parties and the Company retained $12.1 million of mortgage-backed securities, which were eliminated in consolidation.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Residential Securitizations

The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities.

OBX Trusts

The entities in the table below are referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company.

Securitization	Date of Closing	Face Value at Closing
		(dollars in thousands)
OBX 2018-1	March 2018	$	327,162
OBX 2018-EXP1	August 2018	$	383,451
OBX 2018-EXP2	October 2018	$	384,027
OBX 2019-INV1	January 2019	$	393,961
OBX 2019-EXP1	April 2019	$	388,156
OBX 2019-INV2	June 2019	$	383,760
OBX 2019-EXP2	July 2019	$	463,405
OBX 2019-EXP3	October 2019	$	465,492
OBX 2020-INV1	January 2020	$	374,609
OBX 2020-EXP1	February 2020	$	467,511
OBX 2020-EXP2	July 2020	$	489,352
OBX 2020-EXP3	September 2020	$	514,609
OBX 2021-NQM1	March 2021	$	257,135
OBX 2021-J1	April 2021	$	353,840
OBX 2021-NQM2	June 2021	$	376,004
OBX 2021-J2	July 2021	$	382,483
OBX 2021-NQM3	August 2021	$	356,474
OBX 2021-INV1	September 2021	$	320,199

As of September 30, 2021, a total of $3.4 billion of bonds were held by third parties and the Company retained $678.4 million of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third party pricing services. The Company incurred $2.2 million and $2.8 million of costs during the three months ended September 30, 2021 and 2020, respectively, and $4.0 million and $7.1 million of costs during the nine months ended September 30, 2021 and 2020, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $3.3 billion at September 30, 2021.

Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Credit Facility VIEs

In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of September 30, 2021, the borrowing limit on this facility was $675.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $595.4 million at September 30, 2021. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At September 30, 2021, the subsidiary had an intercompany receivable of $359.0 million, which eliminates upon consolidation and a secured financing of $359.0 million to the third party financial institution.

In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of September 30, 2021, the borrowing limit on this facility was $400.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $371.2 million at September 30, 2021, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net. At September 30, 2021, the subsidiary had a secured financing of $199.2 million to the third party financial institution.

In January 2019, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of September 30, 2021, the borrowing limit on this facility was $400.0 million. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $301.7 million at September 30, 2021. As of September 30, 2021, the subsidiary had a secured financing of $171.4 million to the third party financial institution.

MSR VIEs

The Company owns variable interests in an entity that invests in MSR and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo.

The Company also owns variable interests in entities that invest in Interests in MSR. These entities are VIEs because they do not have sufficient equity at risk to finance their activities and the Company is the primary beneficiary because it has power to remove the decision makers with or without cause and holds substantially all of the variable interests in the entities.

The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $2.2 billion at September 30, 2021. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method.

The statements of financial condition of the Company’s VIEs, excluding the multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at September 30, 2021 and December 31, 2020 are as follows:

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

September 30, 2021
	Residential Trusts		MSR VIEs
Assets	(dollars in thousands)
Cash and cash equivalents	$	—	$	11,046
Loans	—		3,726
Assets transferred or pledged to securitization vehicles	23,739		—
Mortgage servicing rights	—		90,979
Interests in MSR	—		57,530
Principal and interest receivable	156		—
Other assets	—		12,774
Total assets	$	23,895	$	176,055
Liabilities
Debt issued by securitization vehicles (non-recourse)	$	10,717	$	—
Payable for unsettled trades	—		2,152
Interest payable	25		—
Other liabilities	414		7,714
Total liabilities	$	11,156	$	9,866

December 31, 2020
	Residential Trusts		MSR VIEs
Assets	(dollars in thousands)
Cash and cash equivalents	$	—	$	22,241
Loans	—		47,048
Assets transferred or pledged to securitization vehicles	40,035		—
Mortgage servicing rights	—		100,895
Principal and interest receivable	226		—
Total assets	$	40,261	$	170,184
Liabilities
Debt issued by securitization vehicles (non-recourse)	$	23,351	$	—
Other secured financing	—		30,420
Payable for unsettled trades	—		3,076
Interest payable	55		—
Other liabilities	246		13,345
Total liabilities	$	23,652	$	46,841

The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the multifamily securitization, credit facility and OBX Trusts VIEs, at September 30, 2021 are as follows:

Securitized Loans at Fair Value Geographic Concentration of Credit Risk

Residential Trusts
Property Location	Principal Balance		% of Balance
California	$	12,219	52.6	%
Illinois	3,516		15.1	%
Texas	2,456		10.6	%
Other (1)	5,052		21.7	%
Total	$	23,243	100.0	%
(1) No individual state greater than 5%.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Corporate Debt Funds

The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the three and nine months ended September 30, 2021, the Company transferred $209.9 million and $284.9 million of loans for cash. The loan transfers were accounted for as sales.

Residential Credit Fund

The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of September 30, 2021 and December 31, 2020, the Company has issued participating interests in residential mortgage loans in the amount of $641.0 million and $39.2 million, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings.

9. SALE OF COMMERCIAL REAL ESTATE BUSINESS

On March 25, 2021, the Company entered into a definitive agreement to sell substantially all of the assets that comprise its CRE business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”) for $2.33 billion. The transaction includes equity interests, loan assets and associated liabilities, and CMBS (other than commercial CRTs). The Company also intends to sell nearly all of the remaining CRE business assets that are not included in the transaction with Slate. During the three months ended September 30, 2021, the majority of assets held for sale and the associated liabilities were transferred to Slate, with the remaining assets expected to be transferred by the end of the year subject to regulatory approvals. The pretax income (loss) of the CRE business was $5.9 million and ($24.8) million for the three and nine months ended September 30, 2021, respectively and $10.4 million and ($151.9) million for the three and nine months ended September 30, 2020, respectively. Certain employees who primarily supported the CRE business joined Slate in connection with the sale.

The carrying values of the major classes of assets and liabilities of the disposal group held for sale as of September 30, 2021 are presented in the table below:

	September 30, 2021
	(dollars in thousands)
Cash and cash equivalents	$	2,772
Securities	8,016
Assets transferred or pledged to securitization vehicles	52,684
Real estate, net	142,381
Intangible assets, net	6,573
Other assets	25,616
Total assets of disposal group held for sale	$	238,042
Mortgages payable	$	113,362
Interest payable	347
Other liabilities	45,799
Total liabilities of disposal group held for sale	$	159,508

Certain assets and liabilities of the disposal group held for sale are in VIEs that are consolidated by the Company because it is the primary beneficiary.

The remaining security in the disposal group held for sale is carried at fair value and is categorized in Level 2 of the fair value measurement hierarchy as the valuation is based upon quoted prices in active markets for similar assets. The remaining loan held for sale is reported as Assets pledged to securitization vehicles and is carried at lower of cost or fair value and as such that

27

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

loan required a valuation allowance of $28.4 million and had a nonrecurring fair value measurement of $52.7 million as of September 30, 2021. This nonrecurring fair value measurement is categorized as Level 3 of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value. The real estate held for sale is carried at lower of cost or fair value and was based upon the sale price and allocated to individual properties to determine if a valuation allowance was necessary.

10. DERIVATIVE INSTRUMENTS

Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments.  The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. 

In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts.

Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on other derivatives and financial instruments with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. 

The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At September 30, 2021 and December 31, 2020, ($0.2) billion and $1.5 billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.

Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk.  In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value.

Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates.  Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future.  The Company’s swaptions are not centrally cleared.  The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values.

TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities.

MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns.  MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid.  MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date.

Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing.

Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis.

Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps.

The table below summarizes fair value information about our derivative assets and liabilities at September 30, 2021 and December 31, 2020:

Derivatives Instruments	September 30, 2021		December 31, 2020
Assets	(dollars in thousands)
Interest rate swaptions	$	123,506	$	74,470
TBA derivatives	1,776		96,109
Futures contracts	199,728		506
Purchase commitments	3,702		49
Credit derivatives (1)	2,683		—
Total derivative assets	$	331,395	$	171,134
Liabilities
Interest rate swaps	$	754,248	$	1,006,492
TBA derivatives	155,515		—
Futures contracts	108		19,413
Purchase commitments	2,263		—
Credit derivatives (1)	—		7,440
Total derivative liabilities	$	912,134	$	1,033,345
(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $425.0 million and $504.0 million at September 30, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche. As of September 30, 2021 and December 31, 2020 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA to AA and AAA to A, respectively.

The following table summarizes certain characteristics of the Company’s interest rate swaps at September 30, 2021 and December 31, 2020:

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

September 30, 2021
Maturity	Current Notional (1)(2)		Weighted Average Pay Rate		Weighted Average Receive Rate		Weighted Average Years to Maturity (3)
(dollars in thousands)
0 - 3 years	$	31,311,750	0.24	%	0.06	%	1.30
3 - 6 years	2,780,000		0.21	%	0.06	%	3.72
6 - 10 years	9,131,000		1.43	%	0.10	%	9.29
Greater than 10 years	1,556,000		3.83	%	0.10	%	19.74
Total / Weighted average	$	44,778,750	0.60	%	0.07	%	3.72
December 31, 2020
Maturity	Current Notional (1)(2)		Weighted Average Pay Rate		Weighted Average Receive Rate		Weighted Average Years to Maturity (3)
(dollars in thousands)
0 - 3 years	$	23,680,150	0.27	%	0.11	%	1.96
3 - 6 years	3,600,000		0.18	%	0.09	%	4.21
6 - 10 years	5,565,500		1.40	%	0.62	%	7.76
Greater than 10 years	1,484,000		3.06	%	0.36	%	20.52
Total / Weighted average	$	34,329,650	0.92	%	0.37	%	3.94
(1) As of September 30, 2021, 19%, 54% and 27% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2020, 17%, 72% and 11% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. (2) There were no forward starting swaps at September 30, 2021 and December 31, 2020. (3) At September 30, 2021 and December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed.

The following table presents swaptions outstanding at September 30, 2021 and December 31, 2020.

September 30, 2021
	Current Underlying Notional	Weighted Average Underlying Fixed Rate	Weighted Average Underlying Floating Rate	Weighted Average Underlying Years to Maturity	Weighted Average Months to Expiration
(dollars in thousands)
Long pay	$4,050,000	1.87%	3M LIBOR	10.11	17.57
Long receive	$2,000,000	1.47%	3M LIBOR	11.20	14.45
December 31, 2020
	Current Underlying Notional	Weighted Average Underlying Fixed Rate	Weighted Average Underlying Floating Rate	Weighted Average Underlying Years to Maturity	Weighted Average Months to Expiration
(dollars in thousands)
Long pay	$8,050,000	1.27%	3M LIBOR	10.40	5.42
Long receive	$250,000	1.66%	3M LIBOR	10.02	0.13

The following table summarizes certain characteristics of the Company’s TBA derivatives at September 30, 2021 and December 31, 2020:

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

September 30, 2021
Purchase and sale contracts for derivative TBAs	Notional		Implied Cost Basis		Implied Market Value		Net Carrying Value
(dollars in thousands)
Purchase contracts	$	23,201,000	$	23,776,374	$	23,622,635	$	(153,739)
December 31, 2020
Purchase and sale contracts for derivative TBAs	Notional		Implied Cost Basis		Implied Market Value		Net Carrying Value
(dollars in thousands)
Purchase contracts	$	19,635,000	$	20,277,088	$	20,373,197	$	96,109

The following table summarizes certain characteristics of the Company’s futures derivatives at September 30, 2021 and December 31, 2020:

September 30, 2021
	Notional - Long Positions		Notional - Short Positions		Weighted Average Years to Maturity
	(dollars in thousands)
U.S. Treasury futures - 2 year	$	—	$	(1,067,000)	2.00
U.S. Treasury futures - 5 year	—		(3,274,000)		4.41
U.S. Treasury futures - 10 year and greater	—		(10,976,500)		7.17
Total	$	—	$	(15,317,500)	6.22
December 31, 2020
	Notional - Long Positions		Notional - Short Positions		Weighted Average Years to Maturity
	(dollars in thousands)
U.S. Treasury futures - 5 year	—		(1,240,000)		4.40
U.S. Treasury futures - 10 year and greater	—		(9,183,800)		6.90
Total	$	—	$	(10,423,800)	6.60

The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty.

The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at September 30, 2021 and December 31, 2020, respectively.

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Item 1. Financial Statements

September 30, 2021
			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments		Cash Collateral		Net Amounts
Assets	(dollars in thousands)
Interest rate swaptions, at fair value	$	123,506	$	—	$	—	$	123,506
TBA derivatives, at fair value	1,776		(1,659)		—		117
Futures contracts, at fair value	199,728		(108)		—		199,620
Purchase commitments	3,702		—		—		3,702
Credit derivatives	2,683		—		—		2,683
Liabilities
Interest rate swaps, at fair value	$	754,248	$	—	$	(78,167)	$	676,081
TBA derivatives, at fair value	155,515		(1,659)		(2,060)		151,796
Futures contracts, at fair value	108		(108)		—		—
Purchase commitments	2,263		—		—		2,263
December 31, 2020
			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments		Cash Collateral		Net Amounts
Assets	(dollars in thousands)
Interest rate swaptions, at fair value	$	74,470	$	—	$	—	$	74,470
TBA derivatives, at fair value	96,109		—		—		96,109
Futures contracts, at fair value	506		(506)		—		—
Purchase commitments	49		—		—		49
Liabilities
Interest rate swaps, at fair value	$	1,006,492	$	—	$	(108,757)	$	897,735
Futures contracts, at fair value	19,413		(506)		(18,907)		—
Credit derivatives	7,440		—		(7,440)		—

The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:

Location on Consolidated Statements of Comprehensive Income (Loss)
	Net Interest Component of Interest Rate Swaps		Realized Gains (Losses) on Termination of Interest Rate Swaps		Unrealized Gains (Losses) on Interest Rate Swaps
For the three months ended	(dollars in thousands)
September 30, 2021	$	(54,411)	$	(1,196,417)	$	1,380,946
September 30, 2020	$	(62,529)	$	(427)	$	170,327
For the nine months ended
September 30, 2021	$	(217,245)	$	(1,196,417)	$	2,012,141
September 30, 2020	$	(141,070)	$	(1,919,720)	$	(1,162,768)

The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Three Months Ended September 30, 2021
Derivative Instruments	Realized Gain (Loss)		Unrealized Gain (Loss)		Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments
(dollars in thousands)
Net TBA derivatives	$	155,569	$	(182,845)	$	(27,276)
Net interest rate swaptions	(24,265)		(44,602)		(68,867)
Futures	(229,534)		279,293		49,759
Purchase commitments	—		920		920
Credit derivatives	2,616		(2,320)		296
Total					$	(45,168)

Three Months Ended September 30, 2020
Derivative Instruments	Realized Gain (Loss)		Unrealized Gain (Loss)		Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments
(dollars in thousands)
Net TBA derivatives	$	276,849	$	(100,680)	$	176,169
Net interest rate swaptions	(9,836)		3,263		(6,573)
Futures	(19,989)		10,337		(9,652)
Purchase commitments	—		(51)		(51)
Credit derivatives	1,531		7,892		9,423
Total					$	169,316

Nine Months Ended September 30, 2021
Derivative Instruments	Realized Gain (Loss)		Unrealized Gain (Loss)		Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives	$	(122,275)	$	(249,847)	$	(372,122)
Net interest rate swaptions	(69,262)		28,528		(40,734)
Futures	250,013		218,527		468,540
Purchase commitments	—		1,389		1,389
Credit derivatives	7,024		8,634		15,658
Total					$	72,731

Nine Months Ended September 30, 2020
Derivative Instruments	Realized Gain (Loss)		Unrealized Gain (Loss)		Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives	$	798,459	$	13,651	$	812,110
Net interest rate swaptions	11,730		50,762		62,492
Futures	(299,220)		(350)		(299,570)
Purchase commitments	—		(1,194)		(1,194)
Credit derivatives	4,659		(31,839)		(27,180)
Total					$	546,658

Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange.

Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all

33

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

derivative instruments with the aforementioned features that are in a net liability position at September 30, 2021 was approximately $612.7 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.

11. FAIR VALUE MEASUREMENTS

The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer to the “Sale of Commercial Real Estate Business” Note for fair value measurements related to the assets and liabilities of the disposal group held for sale as of September 30, 2021.

GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

If the inputs used to measure the financial instrument and MSR fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value.

The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis.

The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level.

Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.

Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities.

Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.

The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information.

The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including discount rates, prepayment rates, delinquency levels and costs to service. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. 

The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented.

September 30, 2021
	Level 1		Level 2		Level 3		Total
Assets	(dollars in thousands)
Securities
Agency mortgage-backed securities	$	—	$	62,818,079	$	—	$	62,818,079
Credit risk transfer securities	—		787,235		—		787,235
Non-Agency mortgage-backed securities	—		1,747,932		—		1,747,932
Commercial mortgage-backed securities	—		269,106		—		269,106
Loans
Residential mortgage loans	—		1,686,268		—		1,686,268
Residential mortgage loan warehouse facility	—		1,431		—		1,431
Mortgage servicing rights	—		—		572,259		572,259
Interests in MSR	—		—		57,530		57,530
Assets transferred or pledged to securitization vehicles	—		4,738,481		—		4,738,481
Derivative assets
Other derivatives	199,728		131,667		—		331,395
Total assets	$	199,728	$	72,180,199	$	629,789	$	73,009,716
Liabilities
Debt issued by securitization vehicles	—		3,935,410		—		3,935,410
Participations issued	—		641,006		—		641,006
Derivative liabilities
Interest rate swaps	—		754,248		—		754,248
Other derivatives	108		157,778		—		157,886
Total liabilities	$	108	$	5,488,442	$	—	$	5,488,550

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets	(dollars in thousands)
Securities
Agency mortgage-backed securities	$	—	$	74,067,059	$	—	$	74,067,059
Credit risk transfer securities	—		532,403		—		532,403
Non-Agency mortgage-backed securities	—		972,192		—		972,192
Commercial mortgage-backed securities	—		80,742		—		80,742
Loans
Residential mortgage loans	—		345,810		—		345,810
Mortgage servicing rights	—		—		100,895		100,895
Assets transferred or pledged to securitization vehicles	—		6,035,671		—		6,035,671
Derivative assets
Other derivatives	506		170,628		—		171,134
Total assets	$	506	$	82,204,505	$	100,895	$	82,305,906
Liabilities
Debt issued by securitization vehicles	$	—	$	5,652,982	$	—	$	5,652,982
Participations issued	—		39,198		—		39,198
Derivative liabilities
Interest rate swaps	—		1,006,492		—		1,006,492
Other derivatives	19,413		7,440		—		26,853
Total liabilities	$	19,413	$	6,706,112	$	—	$	6,725,525

Qualitative and Quantitative Information about Level 3 Fair Value Measurements

The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSR and Interests in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interests in MSR. Refer to the “Mortgage Servicing Rights” Note for additional information, including rollforwards.

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.

	September 30, 2021
	Unobservable Input (1) / Range (Weighted Average) (2)
	Discount rate	Prepayment rate	Delinquency rate	Cost to service
MSR held directly	3.0% - 12.6% (7.7%)	6.9% - 17.8% (9.0%)	0.9% - 1.4% (1.0%)	$92 - $103 ($98)
Interests in MSR	7.5% - 9.0% (7.9%)	5.1% - 15.9% (9.6%)	0.0% - 0.2% (0.1%)	$78 - $84 ($81)

	December 31, 2020
	Unobservable Input (1) / Range (Weighted Average) (2)
	Discount rate	Prepayment rate	Delinquency rate	Cost to service
MSR consolidated with VIE	9.0% - 12.0% (9.4%)	19.3% - 55.5% (42.0%)	0.0% - 6.0% (2.5%)	$83 - $108 ($98)
(1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets. (2) Weighted average discount rate computed based on the fair value of MSR, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSR.

36

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at September 30, 2021 and December 31, 2020.

	September 30, 2021		December 31, 2020
	Carrying Value	Fair Value	Carrying Value	Fair Value
Financial assets	(dollars in thousands)
Loans
Commercial real estate debt and preferred equity, held for investment (1)	$—	$—	$1,372,430	$1,442,071
Corporate debt, held for investment	1,890,709	1,904,287	2,239,930	2,226,045
Assets transferred or pledged to securitization vehicles	—	—	874,349	928,732
Corporate debt, held for sale	2,113	2,113	—	—
Financial liabilities
Repurchase agreements	$55,475,420	$55,475,420	$64,825,239	$64,825,239
Other secured financing	729,555	729,555	917,876	917,876
Mortgages payable	—	—	426,256	474,779
(1) Includes assets of consolidated VIEs.

Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment, corporate debt, held for sale and mortgages payable are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements. Long term other secured financing are valued using Level 2 inputs.

12.  GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain.

The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. At September 30, 2021 and December 31, 2020, goodwill totaled $0 and $71.8 million, respectively. The change reflects the goodwill impairment in connection with the sale of the CRE business. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.

Intangible assets, net

Finite life intangible assets are amortized over their expected useful lives. As part of the Internalization, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $41.2 million based on the replacement cost of the employee base acquired by the Company. During the nine months ended September 30, 2021, the Company recognized an impairment of $4.3 million in Other income (loss) and $5.2 million in Business divestiture-related gains (losses) in the Consolidated Statements of Comprehensive Income (Loss) for changes to the assembled workforce.

37

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The following table presents the activity of finite lived intangible assets for the nine months ended September 30, 2021.

Intangible Assets, net
(dollars in thousands)
Balance at December 31, 2020	$	55,526
Impairment	(9,549)
Intangible assets transferred to disposal group held for sale	(14,528)
Less: amortization expense	(6,078)
Balance at September 30, 2021	25,371

13. SECURED FINANCING

Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing, and has determined that each of the financing agreements should be treated as a securing financing.

The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company receives collateral for reverse repurchase agreements and is required to post collateral for repurchase agreements. To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities. Generally, the Company receives or posts collateral with a fair value approximately equal to or greater than the value of the secured financing.

Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows.

The Company had outstanding $55.5 billion and $64.8 billion of repurchase agreements with weighted average remaining maturities of 75 days and 64 days at September 30, 2021 and December 31, 2020, respectively. The Company has select arrangements with counterparties to enter into repurchase agreements for select credit assets for $1.6 billion with remaining capacity of $1.3 billion at September 30, 2021.

At September 30, 2021 and December 31, 2020, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: 

September 30, 2021
	Agency Mortgage-Backed Securities		CRTs		Non-Agency Mortgage-Backed Securities		Residential Mortgage Loans		Commercial Mortgage-Backed Securities (1)		Total Repurchase Agreements		Weighted Average Rate
	(dollars in thousands)
1 day	$	7,926,088	$	—	$	—	$	—	$	—	$	7,926,088	0.07	%
2 to 29 days	15,853,554		6,911		228,809		—		64,518		16,153,792		0.13	%
30 to 59 days	3,965,483		—		117,226		—		—		4,082,709		0.18	%
60 to 89 days	3,134,779		—		91,544		—		—		3,226,323		0.17	%
90 to 119 days	9,884,441		136,909		37,527		—		138,252		10,197,129		0.18	%
Over 119 days (2)	13,004,874		56,924		510,501		317,080		—		13,889,379		0.20	%
Total	$	53,769,219	$	200,744	$	985,607	$	317,080	$	202,770	$	55,475,420	0.15	%

38

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

December 31, 2020
	Agency Mortgage-Backed Securities		CRTs		Non-Agency Mortgage-Backed Securities		Residential Mortgage Loans		Commercial Loans		Commercial Mortgage-Backed Securities		Total Repurchase Agreements		Weighted Average Rate
	(dollars in thousands)
1 day	$	—	$	—	$	—	$	—	$	—	$	—	$	—	—	%
2 to 29 days	30,151,875		129,993		354,904		$	76,799	—		128,267		30,841,838		0.29	%
30 to 59 days	10,247,972		16,073		161,274		$	—	—		142,336		10,567,655		0.42	%
60 to 89 days	8,181,410		99,620		259,401		$	—	—		28,406		8,568,837		0.30	%
90 to 119 days	2,154,733		—		—		$	—	—		—		2,154,733		0.23	%
Over 119 days (2)	12,008,920		—		274,860		$	107,924	271,801		28,671		12,692,176		0.36	%
Total	$	62,744,910	$	245,686	$	1,050,439	$	184,723	$	271,801	$	327,680	$	64,825,239	0.32	%
(1) Includes commercial mortgage-backed securities held for sale. (2) No repurchase agreements had a remaining maturity over 1 year at September 30, 2021. Less than 1% of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2020.

The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at September 30, 2021 and December 31, 2020. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments.

	September 30, 2021				December 31, 2020
	Reverse Repurchase Agreements		Repurchase Agreements		Reverse Repurchase Agreements		Repurchase Agreements
	(dollars in thousands)
Gross amounts	$	—	$	55,475,420	$	250,000	$	65,075,239
Amounts offset	—		—		(250,000)		(250,000)
Netted amounts	$	—	$	55,475,420	$	—	$	64,825,239

The fair value of mortgage-backed securities received as collateral in connection with reverse repurchase agreements was approximately $250.0 million, which the Company fully repledged, at December 31, 2020.

Other Secured Financing - Refer to the “Variable Interest Entities” Note for additional information on the Company’s other secured financing arrangements.

Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $60.3 billion and $163.2 million, respectively, at September 30, 2021 and $70.6 billion and $196.9 million, respectively, at December 31, 2020.

14. CAPITAL STOCK

(A)    Common Stock

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at September 30, 2021 and December 31, 2020.

	Shares authorized		Shares issued and outstanding
	September 30, 2021	December 31, 2020	September 30, 2021	December 31, 2020	Par Value
Common stock	2,936,500,000	2,914,850,000	1,449,935,017	1,398,240,618	$0.01

In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $1.5 billion of its outstanding shares of common stock, which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In December 2020, the Company announced that its Board authorized the repurchase of up to $1.5 billion of its outstanding common shares through December 31, 2021 (the “Current Share Repurchase Program”). The Current Share Repurchase

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Program replaced the Prior Share Repurchase Program. During the three and nine months ended September 30, 2021, no shares were purchased under the Current Share Repurchase Program. During the three and nine months ended September 30, 2020, the Company repurchased 4.8 million and 27.7 million shares of its common stock, respectively, for an aggregate amount of $31.3 million and $174.7 million, respectively, excluding commission costs, under the Prior Share Repurchase Program. All common shares were purchased in open-market transactions.

In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2021 and August 6, 2020, collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc. (formerly known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated), Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares of its common stock, having an aggregate offering price of up to $1.5 billion from time to time through any of the Sales Agents. During the three and nine months ended September 30, 2021, the Company issued 5.6 million and 51.1 million shares, respectively, for proceeds of $49.0 million and $469.5 million, respectively, net of commissions and fees, under the at-the-market sales program. No shares were issued under the at-the-market sales program during the three and nine months ended September 30, 2020.

(B)    Preferred Stock

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at September 30, 2021 and December 31, 2020. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets.

	Shares Authorized		Shares Issued And Outstanding		Carrying Value				Contractual Rate	Earliest Redemption Date (1)	Date At Which Dividend Rate Becomes Floating	Floating Annual Rate
	September 30, 2021	December 31, 2020	September 30, 2021	December 31, 2020	September 30, 2021		December 31, 2020
Fixed-rate		(dollars in thousands)
Series D	—	18,400,000	—	—	—		—		7.50%	9/13/2017	NA	NA
Fixed-to-floating rate
Series F	28,800,000	28,800,000	28,800,000	28,800,000	696,910		696,910		6.95%	9/30/2022	9/30/2022	3M LIBOR + 4.993%
Series G	17,000,000	19,550,000	17,000,000	17,000,000	411,335		411,335		6.50%	3/31/2023	3/31/2023	3M LIBOR + 4.172%
Series I	17,700,000	18,400,000	17,700,000	17,700,000	428,324		428,324		6.75%	6/30/2024	6/30/2024	3M LIBOR + 4.989%
Total	63,500,000	85,150,000	63,500,000	63,500,000	$	1,536,569	$	1,536,569
(1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company.

Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus accrued and unpaid dividends through their redemption date. Through September 30, 2021, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.

The Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Fixed-to-Floating Rate Cumulative Preferred Stock and Series I Fixed-to-Floating Rate Cumulative Preferred Stock rank senior to the common stock of the Company.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

(C)    Distributions to Stockholders

The following table provides a summary of the Company’s dividend distribution activity for the periods presented:

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands, except per share data)
Dividends and dividend equivalents declared on common stock and share-based awards	$	319,768	$	309,175	$	946,648	$	976,966
Distributions declared per common share	$	0.22	$	0.22	$	0.66	$	0.69
Distributions paid to common stockholders after period end	$	318,986	$	308,644	$	318,986	$	308,644
Distributions paid per common share after period end	$	0.22	$	0.22	$	0.22	$	0.22
Date of distributions paid to common stockholders after period end	October 29, 2021		October 30, 2020		October 29, 2021		October 30, 2020
Dividends declared to series D preferred stockholders	$	—	$	8,625	$	—	$	25,875
Dividends declared per share of series D preferred stock	$	—	$	0.469	$	—	$	1.406
Dividends declared to series F preferred stockholders	$	12,510	$	12,510	$	37,530	$	37,530
Dividends declared per share of series F preferred stock	$	0.434	$	0.434	$	1.303	$	1.303
Dividends declared to series G preferred stockholders	$	6,906	$	6,906	$	20,718	$	20,718
Dividends declared per share of series G preferred stock	$	0.406	$	0.406	$	1.219	$	1.219
Dividends declared to series I preferred stockholders	$	7,467	$	7,468	$	22,401	$	22,404
Dividends declared per share of series I preferred stock	$	0.422	$	0.422	$	1.266	$	1.266

15.  INTEREST INCOME AND INTEREST EXPENSE

Refer to the “Significant Accounting Policies” Note for details surrounding the Company’s accounting policy related to net interest income on securities and loans.

The following table summarizes the interest income recognition methodology for Residential Securities:

	Interest Income Methodology
Agency
Fixed-rate pass-through (1)	Effective yield (3)
Adjustable-rate pass-through (1)	Effective yield (3)
Multifamily (1)	Contractual Cash Flows
CMO (1)	Effective yield (3)
Reverse mortgages (2)	Prospective
Interest-only (2)	Prospective
Residential credit
CRT (2)	Prospective
Alt-A (2)	Prospective
Prime (2)	Prospective
Subprime (2)	Prospective
NPL/RPL (2)	Prospective
Prime jumbo (2)	Prospective
Prime jumbo interest-only (2)	Prospective
(1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss). (2) Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss). (3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The following presents the components of the Company’s interest income and interest expense for the three and nine months ended September 30, 2021 and September 30, 2020.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
Interest income	(dollars in thousands)
Agency Securities	$	299,898	$	428,088	$	1,183,353	$	1,264,171
Residential credit securities	20,774		11,414		57,231		43,395
Residential mortgage loans (1)	45,801		42,508		121,873		132,936
Commercial investment portfolio (1) (2)	46,494		80,324		197,758		260,208
Reverse repurchase agreements	5		109		41		1,571
Total interest income	$	412,972	$	562,443	$	1,560,256	$	1,702,281
Interest expense
Repurchase agreements	22,397		75,386		94,122		646,369
Debt issued by securitization vehicles	18,740		32,491		68,232		113,367
Participations issued	2,578		—		4,914		—
Other	6,723		7,249		20,190		44,895
Total interest expense	50,438		115,126		187,458		804,631
Net interest income	$	362,534	$	447,317	$	1,372,798	$	897,650
(1) Includes assets transferred or pledged to securitization vehicles. (2) Includes commercial real estate debt and preferred equity and corporate debt.

16.  NET INCOME (LOSS) PER COMMON SHARE

The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and nine months ended September 30, 2021 and September 30, 2020.

	For the Three Months Ended				For the Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands, except per share data)
Net income (loss)	$	521,534	$	1,015,548	$	1,977,820	$	(1,768,407)
Net income (loss) attributable to noncontrolling interests	2,290		(126)		3,405		(28)
Net income (loss) attributable to Annaly	519,244		1,015,674		1,974,415		(1,768,379)
Dividends on preferred stock	26,883		35,509		80,649		106,527
Net income (loss) available (related) to common stockholders	$	492,361	$	980,165	$	1,893,766	$	(1,874,906)
Weighted average shares of common stock outstanding-basic	1,445,315,914		1,404,202,695		1,418,424,208		1,419,645,475
Add: Effect of stock awards, if dilutive	1,041,953		165,605		1,077,997		—
Weighted average shares of common  stock outstanding-diluted	1,446,357,867		1,404,368,300		1,419,502,205		1,419,645,475
Net income (loss) per share available (related) to common share
Basic	$	0.34	$	0.70	$	1.34	$	(1.32)
Diluted	$	0.34	$	0.70	$	1.33	$	(1.32)

The computations of diluted net income (loss) per share available (related) to common share for the three and nine months ended September 30, 2020 excludes 0.5 million and 0.8 million, respectively, of potentially dilutive restricted stock units because their effect would have been anti-dilutive.

17.  INCOME TAXES

For the three months ended September 30, 2021 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income

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Item 1. Financial Statements

to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100% of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code.

The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs.  As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income.

The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at September 30, 2021 and December 31, 2020.

The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company’s TRSs are subject to federal, state and local taxes.

During the three and nine months ended September 30, 2021, the Company recorded ($6.8) million and ($2.0) million, respectively, of income tax (benefit) attributable to its TRSs. During the three and nine months ended September 30, 2020, the Company recorded $9.7 million and ($14.9) million, respectively, of income tax expense (benefit) attributable to its TRSs. The Company’s federal, state and local tax returns from 2017 and forward remain open for examination.

18.  RISK MANAGEMENT

The primary risks to the Company are capital, liquidity and funding risk, investment/market risk, credit risk and operational risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the existing collateral to reduce borrowing levels.

The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges.

Weakness in the mortgage market, the shape of the yield curve, changes in the expectations for the volatility of future interest rates and deterioration of financial conditions in general may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging strategies.

The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government.

The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase the overall costs to service the underlying mortgage loans. The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties, credit rating monitoring and active servicer oversight.

The Company depends on third-party service providers to perform various business processes related to its operations, including mortgage loan servicers and sub-servicers. The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors. These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.

19.  RELATED PARTY TRANSACTIONS

Closing of the Internalization and Termination of Management Agreement

On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Former Manager and certain affiliates of the Former Manager. Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($1.00). In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager (the net effect of which was immaterial in amount), and the Company transitioned from an externally-managed REIT to an internally-managed REIT. At the closing, all employees of the Former Manager became employees of the Company. The parties also terminated the Amended and Restated Management Agreement by and between the Company and the Former Manager (the “Management Agreement”) and therefore the Company no longer pays a management fee to, or reimburses expenses of, the Former Manager. Pursuant to the Internalization Agreement, the Former Manager waived any Acceleration Fee (as defined in the Management Agreement).

Prior to the closing of the Internalization, the Former Manager, under the Management Agreement and subject to the supervision and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s investment portfolio; (ii) recommending alternative forms of capital raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The Former Manager also performed such other supervisory and management services and activities relating to the Company’s assets and operations as appropriate. In exchange for the management services, the Company paid the Former Manager a monthly management fee, and the Former Manager was responsible for providing personnel to manage the Company. Prior to the closing of the Internalization, the Company had paid the Former Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i) 1.05% of Stockholders' Equity (as defined in the Management Agreement) up to $17.28 billion, and (ii) 0.75% of Stockholders' Equity (as defined in the Management Agreement) in excess of $17.28 billion. The Company did not pay the Former Manager any incentive fees.

For the six months ended June 30, 2020, the compensation and management fee computed in accordance with the Management Agreement was $77.9 million and reimbursement payments to the Former Manager were $14.2 million.

20.  LEASE COMMITMENTS AND CONTINGENCIES

The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of approximately four years. The corporate office lease includes an option to extend for up to five years, however the extension term was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the three and nine months ended September 30, 2021 was $0.8 million and $2.5 million, respectively.

Supplemental information related to leases as of and for the nine months ended September 30, 2021 was as follows:

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Operating Leases	Classification	September 30, 2021
Assets	(dollars in thousands)
Operating lease right-of-use assets	Other assets	$	11,194
Liabilities
Operating lease liabilities (1)	Other liabilities	$	14,576
Lease term and discount rate
Weighted average remaining lease term		4.0 years
Weighted average discount rate (1)		2.9%
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	2,953
(1) As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.

The following table provides details related to maturities of lease liabilities:

	Maturity of Lease Liabilities
Years ending December 31,	(dollars in thousands)
2021 (remaining)	$	965
2022	3,862
2023	3,862
2024	3,862
2025	2,895
Total lease payments	$	15,446
Less imputed interest	870
Present value of lease liabilities	$	14,576

Contingencies

From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were no material contingencies at September 30, 2021 and December 31, 2020.

21.  ARCOLA REGULATORY REQUIREMENTS

Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. 

Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary.  All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty.

As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance. At September 30, 2021, Arcola had a minimum net capital requirement of $0.3 million. Arcola consistently operates with capital in excess of its regulatory capital requirements. Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at September 30, 2021 was $515.3 million with excess net capital of $515.0 million.

22.  SUBSEQUENT EVENTS

In October 2021, the Company completed and closed the securitizations of residential mortgage loans, OBX 2021-J3 Trust and OBX 2021-INV2, with face values of $453.6 million and $343.6 million, respectively. The securitizations represented financing

45

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

transactions which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company.

In October 2021, the Company completed and closed the fundraising period for the Fund Entities. Through the conclusion of the fundraising period, an aggregate of $371.4 million in capital was committed to the Fund Entities.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain); changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt; risks related to investments in MSR; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and our ability to maintain our exemption from registration under the Investment Company Act. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent annual report on Form 10-K and Item 1A “Risk Factors” in this quarterly report on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company.  Refer to the section titled “Glossary of Terms” located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

INDEX TO ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Page
Overview	49
Recent Developments	49
Business Environment and COVID-19	49
Economic Environment	50
London Interbank Offered Rate (“LIBOR”) Transition Working Group	48
Results of Operations	51
Net Income (Loss) Summary	53
Non-GAAP Financial Measures	55
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	55
Premium Amortization Expense	57
Economic leverage and economic capital ratios	58
Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)	59
Experienced and Projected Long-term CPR	60
Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), and Net Interest Margin (excluding PAA), and Average Economic Cost of Interest Bearing Liabilities)	61
Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities	62
Realized and Unrealized Gains (Losses)	62
Other Income (Loss)	64
General and Administrative Expenses	64
Return on Average Equity	65
Unrealized Gains and Losses - Available-for-Sale Investments	65
Financial Condition	66
Residential Securities	66
Contractual Obligations	69
Off-Balance Sheet Arrangements	69
Capital Management	70
Stockholders’ Equity	70
Capital Stock	70
Leverage and Capital	70
Risk Management	71
Risk Appetite	71
Governance	71
Description of Risks	72
Capital, Liquidity and Funding Risk Management	73
Funding	73
Excess Liquidity	75
Maturity Profile	76
Stress Testing	77
Liquidity Management Policies	77
Investment/Market Risk Management	78
Credit Risk Management	79
Counterparty Risk Management	79
Operational Risk Management	80
Compliance, Regulatory and Legal Risk Management	80
Critical Accounting Policies and Estimates	81
Valuation of Financial Instruments	81
Residential Securities	81
Residential Mortgage Loans	81
MSR	74
Commercial Real Estate Investments	82
Interest Rate Swaps	82
Revenue Recognition	82
Consolidation of Variable Interest Entities	82
Use of Estimates	82
Glossary of Terms	83

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Overview

We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Prior to the closing of the Internalization (as defined in the “Related Party Transactions” Note located within Item 1) on June 30, 2020, we were externally managed by Annaly Management Company LLC (the “Former Manager”). Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”

We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.

For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K.

Recent Developments

Sale of Commercial Real Estate Business

On March 25, 2021, we announced that we entered into a definitive agreement to sell our Commercial Real Estate (“CRE”) business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”). The transaction represents the sale of substantially all of the assets that comprise our CRE business, which include equity interests, loan assets and associated liabilities and commercial mortgage-backed securities (other than commercial CRTs). Certain employees who primarily supported the CRE business joined Slate in connection with the sale. During the three months ended September 30, 2021, the majority of assets held for sale and the associated liabilities were transferred to Slate with the remaining assets expected to be transferred by the end of the year subject to regulatory approvals. Revenues and expenses associated with the CRE business will be reflected in our results of operations and key financial metrics through closing. Refer to the “Sale of Commercial Real Estate Business” Note located within Item 1 for additional information related to the transaction.

Business Environment and COVID-19 

The pace of economic growth slowed during the third quarter as rising COVID-19 cases from the Delta wave, production bottlenecks and global supply chain disruptions prevented a faster economic recovery. In line with lower consumption and investment activity, labor market gains have also slowed relative to the very strong pace at the beginning of the summer. While inflation remains elevated by higher goods and energy prices, record home price appreciation has started to filter into inflation’s shelter component, suggesting that price pressures may persist for longer than previously anticipated. Despite the moderation in the pace of the economic recovery, financial conditions remained accommodative, and liquidity was ample in financial markets, best seen by the record $1.6 trillion usage of the Federal Reserve’s (the “Fed”) Reverse Repo Facility on September 30, 2021. In light of this environment, investors have focused on the Fed’s reduction in its pace of asset purchases (“Taper”). The Fed’s transparent communications have helped limit the market impact to both rates and Agency MBS ahead of the official announcement of the Taper, which is set to begin in November 2021 and likely to conclude in the summer of 2022. Moreover, the elevated inflation readings and more hawkish messaging from central banks have pulled forward investors’ expectation of a rate hike, with markets currently pricing as much as two hikes in 2022.

Annaly’s portfolio generated a positive economic return of 2.9%, GAAP net income per common share of $0.34 and earnings available for distribution per common share of $0.28 cents in the third quarter of 2021 as a result of a modestly improved operating environment for Agency MBS. Mortgages performed in line with hedges although interest rates fluctuated throughout the third quarter of 2021. Ultimately, the sector benefited from the aforementioned clarity surrounding the upcoming Taper. During the third quarter of 2021, we increased our Agency portfolio by nearly $3 billion, utilizing a portion of the proceeds from the Commercial Real Estate sale. Additions to our Agency portfolio were primarily in TBA securities, as we temporarily took advantage of continued attractive financing conditions in that market while assessing other opportunities to deploy the capital. Heading into the Taper, we believe our balanced approach to portfolio composition continues to be a prudent strategy. In addition to the conservative positioning of our portfolio, we maintained a low leverage profile with our economic leverage unchanged quarter-over-quarter at 5.8x.

Capital allocation shifted marginally further toward credit, reaching 30% in the third quarter, up from 29% in the prior quarter, as Annaly’s Residential Credit group had another strong quarter. Onslow Bay’s securitization platform remains active, completing nearly $2 billion of securitizations since the start of the third quarter and nearly $3 billion of securitizations year-to-date. Our residential whole loan correspondent channel, which launched in April, continues to gain momentum in the marketplace, and Annaly’s large capital base and market expertise uniquely position Onslow Bay as an aggregator within the industry. In addition, Annaly grew its holdings of mortgage servicing rights by more than 40% with the portfolio representing $575 million in market value and 4% of dedicated capital. Finally, Annaly’s Middle Market Lending strategy managed $2.3

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Item 2. Management’s Discussion and Analysis

billion in funded assets at quarter end, including the nearly $450 million in assets supported by the inaugural private closed-end middle market lending fund, which closed subsequent to quarter end.

Earnings available for distribution and economic leverage 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.

Business Continuity

Our well-established Business Continuity Plan (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise.

The BCP is regularly updated and tested. Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management. Key tenets of the plan include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations.

Historical tabletop exercises have included use of Center for Disease Control and Prevention Influenza Pandemic exercise materials. That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19. We took proactive actions, which included canceling non-essential travel and instituting 100% remote working, ahead of New York State-mandated requirements. To protect the health and well-being of our employees, their families and communities, remote work requirements began in phases in early March 2020, culminating with a company-wide exercise on March 13, 2020 to test connectivity and functionality. All employees were able to successfully perform their duties in this testing and we have operated largely remotely since that time.

Business activities continue to be performed primarily remotely, though we have seen a number of employees return to the office on a voluntary and periodic basis. At the present, we expect employees to return to the office more regularly in the medium term, subject to continued successful vaccine rollout and revised guidance from federal, state and local authorities.

Economic Environment

The pace of economic growth slowed in the third quarter relative to the first half of 2021, with U.S. gross domestic product (“GDP”) rising 2.0 percent on a seasonally adjusted annualized rate. Growth moderated as spread of the COVID-19 Delta variant and fading stimulus payments led to a moderation in consumer spending, while global supply chain disruptions limited industrial production at the margin. Despite the slowdown, U.S. economic growth is expected to record its highest annual growth in over thirty years as vaccinations and government stimulus payments have facilitated recovery following the sharp, pandemic-induced downturn in 2020.

According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose by an average 550 thousand workers during the third quarter of 2021, which nearly matches average monthly employment gains seen in 2021 year-to-date. Although parts of the summer saw very strong labor market gains, best seen in the seasonally adjusted 1.1 million jobs gained in July, the labor market recovery has slowed somewhat in recent months as the Delta wave reduced service sector hiring. Despite the moderation in non-farm payrolls growth, the unemployment rate fell 1.1 percentage points in the third quarter to 4.8% in September 2021. Wage growth, as measured by the year-over-year change in private sector average hourly earnings, accelerated during the quarter, reading 4.6% in September 2021 compared to 3.7% in June 2021. The improvement in wage growth was driven by a combination of factors, including more muted wage growth during the summer of 2020 that is now being removed from year-over-year change calculations. In addition, employers in sectors that either have strong demand for labor or whose workers are subject to elevated COVID-19 exposure risks have faced increased difficulties hiring or retaining workers without increasing wages. Business demand for labor and employees’ willingness to quit their jobs and seek other employment both rose to all-time highs during the quarter.

Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), remained meaningfully above the Fed’s 2% inflation target during the third quarter. The headline PCE measure increased by 4.38% year-over-year in September 2021, while the more stable core PCE measure, which excludes volatile food and energy prices, registered a 3.62% year-over-year increase, in line with the 3.59% year-over-year growth measured in June 2021. Prices remain elevated, in large part a function of muted inflation during the summer and fall of 2020, but also due to strong demand for goods and services, and rising food and commodity prices. Although many of the factors driving inflation could normalize over the medium-term, rising shelter inflation driven by record home price appreciation will likely keep inflation higher for longer.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

The Federal Open Market Committee (“FOMC”) maintained the Federal Funds Target Rate in the 0.00% - 0.25% range during the third quarter of 2021 and continued to signal that it will maintain that range for an extended period. While the FOMC continued its quantitative easing program, it signaled at its September FOMC meeting that a gradual removal of asset purchases may soon be warranted. Subsequent to quarter end, the FOMC formally announced a gradual reduction in its asset purchases beginning in November 2021. Purchases are expected to be reduced at a pace of $10 billion a month in U.S. Treasuries and $5 billion a month in U.S. Agency MBS, suggesting the Tapering process could conclude by the middle of 2022. Despite the anticipated removal of accommodation, financial conditions remain very accommodative, which in turn has helped the economic recovery.

During the third quarter of 2021, the 10-year U.S. Treasury rate rose slightly from 1.47% on June 30, 2021 to 1.49% on September 30, 2021. The mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, widened over the quarter to 48 basis points (bps) at the end of the quarter.

The following table below presents interest rates and spreads at each date presented:

	September 30, 2021	December 31, 2020	September 30, 2020
30-Year mortgage current coupon	1.97%	1.34%	1.40%
Mortgage basis	48 bps	43 bps	72 bps
10-Year U.S. Treasury rate	1.49%	0.91%	0.68%
LIBOR
1-Month	0.08%	0.14%	0.15%
6-Month	0.16%	0.26%	0.26%

London Interbank Offered Rate (“LIBOR”) Transition Working Group

The United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincides with the announcement of LIBOR's administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate.

We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates. Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders. The committee also continues to engage with industry working groups and other market participants regarding the transition. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability. Similar to the rest of the market, the bulk of our exposure is in derivatives contracts. Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments and adequate time left to resolve. The State of New York approved legislative solutions for contracts such as residential whole loans that are governed by New York state law, although more legislative work is needed in other states and at the federal level. We are supportive of the potential legislative solutions at the state and federal level. We are considering all available options with respect to our preferred stock, which include liability management actions such as tenders, calls, exchange offers, language amendments, changing the calculation agent, and/or allowing fallbacks to trigger. As of September 30, 2021, we expect to have $1.5 billion of USD LIBOR-linked preferred stock that may remain outstanding beyond the June 30, 2023 cessation date.

Results of Operations

The results of our operations are affected by various factors, many of which are beyond our control. Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A. “Risk Factors” of our most recent Annual Report on Form 10-K and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.

This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements. To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers.

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

Commencing with our financial results for the quarter ended June 30, 2021 and for subsequent reporting periods, we relabeled “Core Earnings (excluding PAA)” as “Earnings Available for Distribution” (“EAD”). Earnings Available for Distribution, which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with GAAP, has replaced our prior presentation of Core Earnings (excluding PAA). In addition, Core Earnings (excluding PAA) results from prior reporting periods have been relabeled Earnings Available for Distribution. In line with evolving industry practices, we believe the term Earnings Available for Distribution more accurately reflects the principal purpose of the measure than the term Core Earnings (excluding PAA) and will serve as a useful indicator for investors in evaluating our performance and our ability to pay dividends.

The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods. As such, Earnings Available for Distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment (“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.

Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income. Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution.

Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity-related or volume-related expenses as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Refer to the “General and Administrative Expenses” section for additional information.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Net Income (Loss) Summary

The following table presents financial information related to our results of operations as of and for the three and nine months ended September 30, 2021 and 2020.

	As of and for the Three Months Ended September 30,						As of and for the Nine Months Ended September 30,
	2021			2020			2021			2020
	(dollars in thousands, except per share data)
Interest income	$	412,972		$	562,443		$	1,560,256		$	1,702,281
Interest expense	50,438			115,126			187,458			804,631
Net interest income	362,534			447,317			1,372,798			897,650
Realized and unrealized gains (losses)	179,894			618,823			717,017			(2,524,967)
Other income (loss)	16,221			3,714			31,364			23,204
Less: Total general and administrative expenses	43,882			44,587			145,313			179,222
Income (loss) before income taxes	514,767			1,025,267			1,975,866			(1,783,335)
Income taxes	(6,767)			9,719			(1,954)			(14,928)
Net income (loss)	521,534			1,015,548			1,977,820			(1,768,407)
Less: Net income (loss) attributable to noncontrolling interests	2,290			(126)			3,405			(28)
Net income (loss) attributable to Annaly	519,244			1,015,674			1,974,415			(1,768,379)
Less: Dividends on preferred stock	26,883			35,509			80,649			106,527
Net income (loss) available (related) to common stockholders	$	492,361		$	980,165		$	1,893,766		$	(1,874,906)
Net income (loss) per share available (related) to common stockholders
Basic	$	0.34		$	0.70		$	1.34		$	(1.32)
Diluted	$	0.34		$	0.70		$	1.33		$	(1.32)
Weighted average number of common shares outstanding
Basic	1,445,315,914			1,404,202,695			1,418,424,208			1,419,645,475
Diluted	1,446,357,867			1,404,368,300			1,419,502,205			1,419,645,475
Other information
Investment portfolio at period-end	$	74,809,185		$	87,155,310		$	74,809,185		$	87,155,310
Average total assets	$	79,519,369		$	91,325,532		$	83,215,858		$	102,465,855
Average equity	$	13,678,522		$	13,996,138		$	13,861,609		$	14,124,037
GAAP leverage at period-end (1)	4.4:1			5.1:1			4.4:1			5.1:1
GAAP capital ratio at period-end (2)	17.9		%	15.9		%	17.9		%	15.9		%
Annualized return on average total assets	2.62		%	4.45		%	3.17		%	(2.30		%)
Annualized return on average equity	15.25		%	29.02		%	19.02		%	(16.69		%)
Net interest margin (3)	2.01		%	2.15		%	2.38		%	1.27		%
Average yield on interest earning assets (4)	2.29		%	2.70		%	2.70		%	2.40		%
Average GAAP cost of interest bearing liabilities (5)	0.32		%	0.60		%	0.37		%	1.23		%
Net interest spread	1.97		%	2.10		%	2.33		%	1.17		%
Weighted average experienced CPR for the period	23.1		%	22.9		%	24.5		%	18.7		%
Weighted average projected long-term CPR at period-end	12.7		%	17.1		%	12.7		%	17.1		%
Common stock book value per share	$	8.39		$	8.70		$	8.39		$	8.70
Non-GAAP metrics (6)
Interest income (excluding PAA)	$	473,698		$	596,322		$	1,560,019		$	2,078,624
Economic interest expense (5)	$	104,849		$	177,655		$	404,703		$	945,701
Economic net interest income (excluding PAA)	$	368,849		$	418,667		$	1,155,316		$	1,132,923
Premium amortization adjustment cost (benefit)	$	60,726		$	33,879		$	(237)		$	376,343
Earnings available for distribution (7)	$	437,471		$	482,323		$	1,328,348		$	1,237,121
Earnings available for distribution per average common share	$	0.28		$	0.32		$	0.88		$	0.80
Annualized EAD return on average equity (excluding PAA)	12.81		%	13.79		%	12.79		%	11.68		%
Economic leverage at period-end (1)	5.8:1			6.2:1			5.8:1			6.2:1
Economic capital ratio at period-end (2)	14.2		%	13.6		%	14.2		%	13.6		%
Net interest margin (excluding PAA) (3)	2.04		%	2.05		%	2.01		%	1.67		%
Average yield on interest earning assets (excluding PAA) (4)	2.63		%	2.86		%	2.70		%	2.93		%
Average economic cost of interest bearing liabilities (5)	0.66		%	0.93		%	0.79		%	1.44		%
Net interest spread (excluding PAA)	1.97		%	1.93		%	1.91		%	1.49		%

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Item 2. Management’s Discussion and Analysis

(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable divided by total equity. Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to the Company and are excluded from economic leverage.

(2) GAAP capital ratio is computed as total equity divided by total assets. Economic capital ratio is computed as total equity divided by total economic assets. Total economic assets include the implied market value of TBA derivatives and net of debt issued by securitization vehicles.

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

(4) Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

(5) Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

(6) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.

(7) Excludes dividends on preferred stock.

GAAP

Net income (loss) was $521.5 million, which includes $2.3 million attributable to noncontrolling interests, or $0.34 per average basic common share, for the three months ended September 30, 2021 compared to $1.0 billion, which includes ($0.1) million attributable to noncontrolling interests, or $0.70 per average basic common share, for the same period in 2020. We attribute the majority of the change in net income (loss) to unfavorable changes in net gains (losses) on other derivatives and financial instruments, net gains (losses) on disposal of investments and net interest income. Net gains (losses) on other derivatives was ($45.2) million for the three months ended September 30, 2021 compared to $169.3 million for the same period in 2020. Net gains (losses) on disposal of investments and other was $12.0 million for the three months ended September 30, 2021 compared to $198.9 million for the same period in 2020. Net interest income for the three months ended September 30, 2021 was $362.5 million compared to $447.3 million for the same period in 2020. Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.

Net income (loss) was $2.0 billion, which includes $3.4 million attributable to noncontrolling interests, or $1.34 per average basic common share, for the nine months ended September 30, 2021 compared to ($1.8) billion, or ($1.32) per average basic common share, for the same period in 2020. We attribute the majority of the change in net income (loss) to favorable changes in unrealized gains (losses) on interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps, net unrealized gains (losses) on instruments measured at fair value through earnings and net interest income, partially offset by unfavorable changes in Net gains (losses) on disposal of investments and other and net gains (losses) on other derivatives and financial instruments. Net unrealized gains (losses) on interest rate swaps was $2.0 billion for the nine months ended September 30, 2021 compared to ($1.2) billion for the same period in 2020. Realized losses on termination or maturity of interest rate swaps was ($1.2) billion for the nine months ended September 30, 2021, as our swaps portfolio was repositioned to reduce exposure to LIBOR, compared to ($1.9) billion for the same period in 2020. Net unrealized gains (losses) on instruments measured at fair value through earnings for the nine months ended September 30, 2021 was $199.0 million compared to ($354.1) million for the same period in 2020. Net interest income for the nine months ended September 30, 2021 was $1.4 billion compared to $897.7 million for the same period in 2020. Net gains (losses) on disposal of investments and other was ($37.6) million for the nine months ended September 30, 2021 compared to $652.2 million for the same period in 2020. Net gains (losses) on other derivatives was $73.9 million for the nine months ended September 30, 2021 compared to $546.7 million for the same period in 2020. Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.

Non-GAAP

Earnings available for distribution were $437.5 million, or $0.28 per average common share, for the three months ended September 30, 2021, compared to $482.3 million, or $0.32 per average common share, for the same period in 2020. The change in earnings available for distribution during the three months ended September 30, 2021 compared to the same period in 2020 was primarily due to the runoff of higher-yielding assets and the reduction in average interest earning assets.

Earnings available for distribution were $1.3 billion, or $0.88 per average common share, for the nine months ended September 30, 2021, compared to $1.2 billion, or $0.80 per average common share, for the same period in 2020. The change in earnings available for distribution during the nine months ended September 30, 2021 compared to the same period in 2020 was primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities and higher TBA dollar roll

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Item 2. Management’s Discussion and Analysis

income, partially offset by lower coupon income resulting from lower average interest earning assets and an unfavorable change in the net interest component of interest rate swaps.

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide the following non-GAAP financial measures:

•earnings available for distribution (“EAD”);

•earnings available for distribution attributable to common stockholders;

•earnings available for distribution per average common share;

•annualized EAD return on average equity;

•economic leverage;

•economic capital ratio;

•interest income (excluding PAA);

•economic interest expense;

•economic net interest income (excluding PAA);

•average yield on interest earning assets (excluding PAA);

•average economic cost of interest bearing liabilities;

•net interest margin (excluding PAA); and

•net interest spread (excluding PAA).

These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations. For example, we may calculate our non-GAAP metrics, such as earnings available for distribution, or the PAA, differently than our peers making comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.

These non-GAAP measures provide additional detail to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers. Additional information pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.

Earnings available for distribution, earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity

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

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

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

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Item 2. Management’s Discussion and Analysis

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
	(dollars in thousands, except per share data)
GAAP net income (loss)	$	521,534		$	1,015,548		$	1,977,820		$	(1,768,407)
Net income (loss) attributable to noncontrolling interests	2,290			(126)			3,405			(28)
Net income (loss) attributable to Annaly	519,244			1,015,674			1,974,415			(1,768,379)
Adjustments to exclude reported realized and unrealized (gains) losses
Realized (gains) losses on termination or maturity of interest rate swaps	1,196,417			427			1,196,417			1,919,720
Unrealized (gains) losses on interest rate swaps	(1,380,946)			(170,327)			(2,012,141)			1,162,768
Net (gains) losses on disposal of investments and other	(12,002)			(198,888)			37,561			(652,150)
Net (gains) losses on other derivatives and financial instruments	45,168			(169,316)			(73,892)			(546,658)
Net unrealized (gains) losses on instruments measured at fair value through earnings	(90,817)			(121,255)			(198,992)			354,133
Loan loss provision (reversal) (1)	(6,771)			(21,818)			(150,563)			150,719
Business divestiture-related (gains) losses	14,009			—			262,045			—
Other adjustments
Depreciation expense related to commercial real estate and amortization of intangibles (2)	1,122			11,363			14,081			28,011
Non-EAD (income) loss allocated to equity method investments (3)	(2,046)			(1,151)			(8,585)			22,465
Transaction expenses and non-recurring items (4)	2,201			2,801			4,046			11,121
Income tax effect of non-EAD income (loss) items	(6,536)			13,890			4,945			(6,619)
TBA dollar roll income and CMBX coupon income (5)	115,586			114,092			326,111			256,520
MSR amortization (6)	(17,884)			(27,048)			(46,863)			(70,873)
Plus:
Premium amortization adjustment cost (benefit)	60,726			33,879			(237)			376,343
Earnings available for distribution (7)	437,471			482,323			1,328,348			1,237,121
Dividends on preferred stock	26,883			35,509			80,649			106,527
Earnings available for distribution attributable to common stockholders (7)	$	410,588		$	446,814		$	1,247,699		$	1,130,594
GAAP net income (loss) per average common share	$	0.34		$	0.70		$	1.34		$	(1.32)
Earnings available for distribution per average common share (7)	$	0.28		$	0.32		$	0.88		$	0.80
Annualized GAAP return (loss) on average equity	15.25		%	29.02		%	19.02		%	(16.69		%)
Annualized EAD return on average equity (7)	12.81		%	13.79		%	12.79		%	11.68		%
(1) Includes ($0.6) million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, and ($5.3) million and $4.6 million for the nine months ended September 30, 2021 and 2020, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). (2) Includes depreciation and amortization expense related to equity method investments. (3) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR which is a component of Other income (loss). (4) The three and nine months ended September 30, 2021 and 2020 includes costs incurred in connection with securitizations of residential whole loans. The nine months ended September 30, 2020 also includes costs incurred in connection with the Internalization, the CEO search process and a securitization of of Agency mortgage-backed securities. (5) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives and financial instruments. CMBX coupon income totaled $1.2 million and $1.5 million for the three months ended September 30, 2021 and 2020, respectively, and $4.1 million and $4.3 million for the nine months ended September 30, 2021 and 2020, respectively. (6) MSR amortization represents the portion of changes in fair value that is attributable to the realization of estimated cash flows on our MSR portfolio and is reported as a component of Net unrealized gains (losses) on instruments measured at fair value. (7) Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures.

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Item 2. Management’s Discussion and Analysis

From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency MBS. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency MBS with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. The drop is a reflection of the expected net interest income from an investment in similar Agency MBS, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency MBS less an implied financing cost.

TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency MBS. We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on other derivatives and financial instruments in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency MBS (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives and financial instruments 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 other derivatives and financial instruments in the Consolidated Statements of Comprehensive Income (Loss). The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in earnings available for distribution.

Premium Amortization Expense

In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency MBS, excluding interest-only securities, multifamily and reverse mortgages, taking into account estimates of future principal prepayments in the calculation of the effective yield. We recalculate the effective yield as differences between anticipated and actual prepayments occur. Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.

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

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
	(dollars in thousands)
Premium amortization expense	$	233,429	$	248,718	$	541,646	$	1,136,343
Less: PAA cost (benefit)	60,726		33,879		(237)		376,343
Premium amortization expense (excluding PAA)	$	172,703	$	214,839	$	541,883	$	760,000

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Item 2. Management’s Discussion and Analysis

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, mortgages payable or other liabilities. Equity capital primarily consists of common and preferred stock.

Our economic leverage ratio is computed as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to us and are excluded from economic leverage.

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

	As of
	September 30, 2021		September 30, 2020
Economic leverage ratio reconciliation	(dollars in thousands)
Repurchase agreements	$	55,475,420	$	64,633,447
Other secured financing	729,555		861,373
Debt issued by securitization vehicles	3,935,410		6,027,576
Participations issued	641,006		—
Mortgages payable	—		507,934
Debt included in liabilities of disposal group held for sale	113,362		—
Total GAAP debt	$	60,894,753	$	72,030,330
Less Non-Recourse Debt:
Credit facilities (1)	(729,555)		(828,530)
Debt issued by securitization vehicles	(3,935,410)		(6,027,576)
Participations issued	(641,006)		—
Mortgages payable	—		(507,934)
Non-recourse debt included in liabilities of disposal group held for sale	(113,362)		—
Total recourse debt	$	55,475,420	$	64,666,290
Plus / (Less):
Cost basis of TBA and CMBX derivatives	24,202,686		21,571,095
Payable for unsettled trades	571,540		1,176,001
Receivable for unsettled trades	(42,482)		(54,200)
Economic debt (2)	$	80,207,164	$	87,359,186
Total equity	$	13,717,867	$	14,194,672
Economic leverage ratio (2)	5.8:1		6.2:1
(1) Included in Other secured financing in the Consolidated Statements of Financial Condition. (2) Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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

	As of
	September 30, 2021		September 30, 2020
Economic capital ratio reconciliation	(dollars in thousands)
Total GAAP assets	$	76,662,433	$	89,192,411
Less:
Gross unrealized gains on TBA derivatives (1)	(1,776)		(38,656)
Debt issued by securitization vehicles (2)	(3,935,410)		(6,027,576)
Plus:
Implied market value of TBA derivatives	23,622,635		21,089,555
Total economic assets (3)	$	96,347,882	$	104,215,734
Total equity	$	13,717,867	$	14,194,672
Economic capital ratio (3)(4)	14.2%		13.6%
(1) Included in Derivative assets in the Consolidated Statements of Financial Condition. (2) Includes debt issued by securitization vehicles reported in Liabilities of disposal group held for sale in the Consolidated Statements of Financial Condition. (3) Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. (4) Economic capital ratio is computed as total equity divided by total economic assets.

Interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)

Interest income (excluding PAA) represents interest income excluding the effect of the premium amortization adjustment, and serves as the basis for deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below. We believe this measure provides management and investors with additional detail to enhance their understanding of our operating results and trends by excluding the component of premium amortization expense representing the cumulative effect of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency MBS (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio.

Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. We use interest rate swaps to manage our exposure to changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings. Accordingly, adding the net interest component of interest rate swaps to interest 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 in the Consolidated Statements of Comprehensive Income (Loss). We did not enter into any MAC interest rate swaps during the three and nine months ended September 30, 2021.

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 interest expense to non-GAAP interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA), respectively, for the periods presented:

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Item 2. Management’s Discussion and Analysis

Interest Income (excluding PAA)

	GAAP Interest Income		PAA Cost (Benefit)		Interest Income (excluding PAA) (1)
For the three months ended	(dollars in thousands)
September 30, 2021	$	412,972	$	60,726	$	473,698
September 30, 2020	$	562,443	$	33,879	$	596,322
For the nine months ended
September 30, 2021	$	1,560,256	$	(237)	$	1,560,019
September 30, 2020	$	1,702,281	$	376,343	$	2,078,624
(1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures.

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

	GAAP Interest Expense			Add: Net Interest Component of Interest Rate Swaps		Economic Interest Expense (1)		GAAP Net Interest Income		Less: Net Interest Component of Interest Rate Swaps		Economic Net Interest Income (1)		Add: PAA Cost (Benefit)		Economic Net Interest Income (excluding PAA) (1)
For the three months ended			(dollars in thousands)
September 30, 2021	$	50,438		$	54,411	$	104,849	$	362,534	$	54,411	$	308,123	$	60,726	$	368,849
September 30, 2020	$	115,126		$	62,529	$	177,655	$	447,317	$	62,529	$	384,788	$	33,879	$	418,667
For the nine months ended
September 30, 2021	$	187,458		$	217,245	$	404,703	$	1,372,798	$	217,245	$	1,155,553	$	(237)	$	1,155,316
September 30, 2020	$	804,631		$	141,070	$	945,701	$	897,650	$	141,070	$	756,580	$	376,343	$	1,132,923
(1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures.

Experienced and Projected Long-Term CPR

Prepayment speeds, as reflected by the CPR and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds and expectations of prepayment speeds on our Agency MBS portfolio increase, related purchase premium amortization increases, thereby reducing the yield on such assets. The following table presents the weighted average experienced CPR and weighted average projected long-term CPR on our Agency MBS portfolio as of and for the periods presented.

	Experienced CPR (1)		Projected Long-term CPR (2)
For the three months ended
September 30, 2021	23.1	%	12.7	%
September 30, 2020	22.9	%	17.1	%
For the nine months ended
September 30, 2021	24.5	%	12.7	%
September 30, 2020	18.7	%	17.1	%
(1) For the three and nine months ended September 30, 2021 and 2020, respectively. (2) At September 30, 2021 and 2020, respectively.

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Item 2. Management’s Discussion and Analysis

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

Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense divided by average interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average TBA contract and CMBX balances, provide management with additional measures of our profitability that management relies upon in monitoring the performance of the business.

Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates our performance.

Net Interest Spread (excluding PAA)

	Average Interest Earning     Assets (1)		Interest Income (excluding PAA) (2)		Average Yield on Interest Earning Assets (excluding PAA) (2)		Average Interest Bearing Liabilities		Economic Interest Expense (2)(3)		Average Economic Cost of Interest Bearing Liabilities (2)(3)		Economic Net Interest Income (excluding PAA) (2)	Net Interest Spread (excluding PAA) (2)
For the three months ended	(dollars in thousands)
September 30, 2021	$	72,145,283	$	473,698	2.63	%	$	62,614,042	$	104,849	0.66	%	368,849	1.97	%
September 30, 2020	$	83,286,119	$	596,322	2.86	%	$	74,901,128	$	177,655	0.93	%	418,667	1.93	%
For the nine months ended
September 30, 2021	$	77,061,130	$	1,560,019	2.70	%	$	67,695,162	$	404,703	0.79	%	1,155,316	1.91	%
September 30, 2020	$	94,607,284	$	2,078,624	2.93	%	$	86,214,496	$	945,701	1.44	%	1,132,923	1.49	%
(1) Based on amortized cost. (2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (3) Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Economic interest expense is comprised of  GAAP interest expense and the net interest component of interest rate swaps.

Net Interest Margin (excluding PAA)

	Interest Income (excluding PAA) (1)		TBA Dollar Roll and CMBX Coupon Income (2)	Economic Interest Expense (1)	Subtotal		Average Interest Earnings Assets		Average TBA Contract and CMBX Balances	Subtotal		Net Interest Margin (excluding PAA) (1)
For the three months ended			(dollars in thousands)
September 30, 2021	$	473,698	115,586	(104,849)	$	484,435	$	72,145,283	22,739,226	$	94,884,509	2.04	%
September 30, 2020	$	596,322	114,092	(177,655)	$	532,759	$	83,286,119	20,429,935	$	103,716,054	2.05	%
For the nine months ended
September 30, 2021	$	1,560,019	326,111	(404,703)	$	1,481,427	$	77,061,130	21,122,086	$	98,183,216	2.01	%
September 30, 2020	$	2,078,624	256,520	(945,701)	$	1,389,443	$	94,607,284	16,341,140	$	110,948,424	1.67	%
(1) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (2) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives and financial instruments. CMBX coupon income totaled $1.2 million and $4.1 million for the three and nine months ended September 30, 2021, respectively. CMBX coupon income totaled $1.5 million and $4.3 million for the three and nine months ended September 30, 2020, respectively.

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Item 2. Management’s Discussion and Analysis

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps. The table below shows our average interest bearing liabilities and average economic cost of interest bearing liabilities as compared to average one-month and average six-month LIBOR for the periods presented.

Average Economic Cost of Interest Bearing Liabilities

	Average Interest Bearing Liabilities		Interest Bearing Liabilities at Period End		Economic Interest Expense (1)(2)		Average Economic Cost of Interest Bearing Liabilities (2)		Average One- Month LIBOR		Average Six- Month LIBOR		Average One-Month LIBOR Relative to Average Six- Month LIBOR		Average Economic Cost of Interest Bearing Liabilities Relative to Average One- Month LIBOR		Average Economic Cost of Interest Bearing Liabilities Relative to Average Six-Month LIBOR
For the three months ended
September 30, 2021	$	62,614,042	$	60,781,391	$	104,849	0.66	%	0.09	%	0.15	%	(0.06	%)	0.57	%	0.51	%
September 30, 2020	$	74,901,128	$	71,522,396	$	177,655	0.93	%	0.16	%	0.31	%	(0.15	%)	0.77	%	0.62	%
For the nine months ended
September 30, 2021	$	67,695,162	$	60,781,391	$	404,703	0.79	%	0.10	%	0.19	%	(0.09	%)	0.69	%	0.60	%
September 30, 2020	$	86,214,496	$	71,522,396	$	945,701	1.44	%	0.64	%	0.83	%	(0.19	%)	0.80	%	0.61	%
(1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. (2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.

Economic interest expense decreased by $72.8 million for the three months ended September 30, 2021 compared to the same period in 2020, primarily due to lower borrowing rates and a decrease in average interest bearing liabilities. Economic interest expense decreased by $541.0 million for the nine months ended September 30, 2021 compared to the same period in 2020, primarily due to lower borrowing rates and a decrease in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps, which was ($217.2) million for the nine months ended September 30, 2021 compared to ($141.1) million for the same period in 2020.

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 September 30, 2021 and December 31, 2020, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans. 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.

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Item 2. Management’s Discussion and Analysis

Realized and Unrealized Gains (Losses)

Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swaps, net gains (losses) on disposal of investments and other, net gains (losses) on other derivatives and financial instruments and net unrealized gains (losses) on instruments measured at fair value through earnings. These components of realized and unrealized gains (losses) for the three and nine months ended September 30, 2021 and 2020 were as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2021		2020		2021		2020
	(dollars in thousands)
Net gains (losses) on interest rate swaps (1)	$	130,118	$	107,371	$	598,479	$	(3,223,558)
Net gains (losses) on disposal of investments and other	12,002		198,888		(37,561)		652,150
Net gains (losses) on other derivatives and financial instruments	(45,168)		169,316		73,892		546,658
Net unrealized gains (losses) on instruments measured at fair value through earnings	90,817		121,255		198,992		(354,133)
Loan loss (provision) reversal	6,134		21,993		145,260		(146,084)
Business divestiture-related gains (losses)	(14,009)		—		(262,045)		—
Total	$	179,894	$	618,823	$	717,017	$	(2,524,967)
(1)Includes the net interest component of interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps and unrealized gains (losses) on interest rate swaps.

For the Three Months Ended September 30, 2021 and 2020

Net gains (losses) on interest rate swaps for the three months ended September 30, 2021 was $130.1 million compared to $107.4 million for the same period in 2020, primarily attributable to a favorable change in unrealized gains (losses) on interest rate swaps, partially offset by a unfavorable change in realized gains (losses) on termination or maturity of interest rate swaps. Unrealized gains (losses) on interest rate swaps was $1.4 billion for the three months ended September 30, 2021, resulting from the unwinding of interest rate swaps during the period, compared to $170.3 million for the same period in 2020. Realized gains (losses) on termination or maturity of interest rate swaps was ($1.2) billion for the three months ended September 30, 2021, as we repositioned our swap portfolio to reduce our exposure to LIBOR and terminated fixed-rate payer and receiver interest rate swaps with notional amounts of $14.7 billion and $14.8 billion, respectively, compared to ($0.4) million for the same period in 2020, resulting from terminations of fixed-rate payer interest rate swaps with a notional amount of $375.0 million.

Net gains (losses) on disposal of investments and other was $12.0 million for the three months ended September 30, 2021 compared to $198.9 million for the same period in 2020. For the three months ended September 30, 2021, we disposed of Residential Securities with a carrying value of $4.8 billion for an aggregate net gain of $26.7 million. For the same period in 2020, we recognized a realized gain of $104.8 million as a result of deconsolidating a multifamily VIE and we disposed of Residential Securities with a carrying value of $2.8 billion for an aggregate net gain of $103.9 million.

Net gains (losses) on other derivatives and financial instruments was ($45.2) million for the three months ended September 30, 2021 compared to $169.3 million for the same period in 2020. The change in net gains (losses) on other derivatives and financial instruments was primarily due to unfavorable changes in net gains (losses) on TBA derivatives, which was ($27.3) million for the three months ended September 30, 2021 compared to $176.2 million for the same period in 2020, and interest rate swaptions, which was ($68.9) million for the three months ended September 30, 2021 compared to ($6.6) million for the same period in 2020, partially offset by a favorable change in net gains (losses) on futures derivatives, which was $49.8 million for the three months ended September 30, 2021 compared to ($9.7) million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $90.8 million for the three months ended September 30, 2021 compared to $121.3 million for the same period in 2020, primarily due to unfavorable changes in unrealized gains (losses) on securitized debt of consolidated VIEs backed by Agency mortgage-backed securities of ($78.4) million, securitized residential whole loans of consolidated VIEs of ($59.3) million and securitized commercial loans of ($39.7) million, partially offset by favorable changes in MSR, including Interests in MSR, of $83.1 million, commercial securitized debt of consolidated VIEs of $49.4 million and Agency interest-only securities of $22.4 million for the three months ended September 30, 2021 compared to the same period in 2020.

For the three months ended September 30, 2021 and 2020, net loan loss reversals were $6.1 million on corporate loans and $22.0 million on commercial mortgage and corporate loans, respectively. Refer to the “Loans” Note located within Item 1 for additional information related to the loan loss (provisions) reversals.

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Item 2. Management’s Discussion and Analysis

For the Nine Months Ended September 30, 2021 and 2020

Net gains (losses) on interest rate swaps for the nine months ended September 30, 2021 was $598.5 million compared to ($3.2) billion for the same period in 2020, primarily attributable to favorable changes in unrealized gains (losses) on interest rate swaps and realized gains (losses) on termination or maturity of interest rate swaps. Unrealized gains (losses) on interest rate swaps was $2.0 billion for the nine months ended September 30, 2021, reflecting a rise in forward interest rates during the period, compared to ($1.2) billion for the same period in 2020, reflecting a decline in forward interest rates during the earlier period. Realized gains (losses) on termination or maturity of interest rate swaps was ($1.2) billion, as we repositioned our swap portfolio to reduce our exposure to LIBOR and terminated fixed-rate payer and receiver interest rate swaps with notional amounts of $14.7 billion and $14.8 billion, respectively, for the nine months ended September 30, 2021 compared to ($1.9) billion, resulting from fixed-rate payer and receiver interest rate swaps with notional amounts of $65.4 billion and $38.1 billion, respectively, for the same period in 2020.

Net gains (losses) on disposal of investments and other was ($37.6) million for the nine months ended September 30, 2021 compared to $652.2 million for the same period in 2020. For the nine months ended September 30, 2021, we disposed of Residential Securities with a carrying value of $11.1 billion for an aggregate net gain of $0.8 million. For the same period in 2020, we disposed of Residential Securities with a carrying value of $50.2 billion for an aggregate net gain of $631.1 million and we recognized a realized gain of $104.8 million as a result of deconsolidating a multifamily VIE.

Net gains (losses) on other derivatives was $73.9 million for the nine months ended September 30, 2021 compared to $546.7 million for the same period in 2020. The change in net gains (losses) on other derivatives was primarily due to the unfavorable change in net gains (losses) on TBA derivatives, which was ($372.1) million for the nine months ended September 30, 2021 compared to $812.1 million for the same period in 2020, partially offset by the favorable change in futures derivatives, which was $468.5 million for the nine months ended September 30, 2021 compared to ($299.6) million for the same period in 2020.

Net unrealized gains (losses) on instruments measured at fair value through earnings was $199.0 million for the nine months ended September 30, 2021 compared to ($354.1) million for the same period in 2020, primarily due to favorable changes in unrealized gains (losses) on securitized commercial loans of $281.1 million, MSR, including Interests in MSR, of $237.0 million, credit risk transfer securities of $80.3 million, securitized debt of consolidated VIEs backed by Agency mortgage-backed securities of $53.8 million, residential securitized debt of consolidated VIEs of $50.3 million and non-Agency MBS of $48.1 million, partially offset by an unfavorable change on commercial securitized debt of consolidated VIEs of ($221.4) million for the nine months ended September 30, 2021 compared to the same period in 2020.

For the nine months ended September 30, 2021 and 2020, net loan loss (provisions) reversals of $145.3 million and ($146.1) million, respectively, was recorded on commercial mortgage and corporate loans. Refer to the “Loans” Note located within Item 1 for additional information related to these loan loss provisions.

Other Income (Loss)

Other income (loss) includes certain revenues and costs associated with our investments in commercial real estate, including rental income and recoveries, operating costs as well as depreciation and amortization expense, net servicing income on MSR, brokerage and commission fees, due diligence costs and securitization expenses. We also report in Other income (loss) 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.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of compensation and management fee (until closing of the Internalization on June 30, 2020) and other expenses. Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation with Other general and administrative expenses for the three months ended March 31, 2021 adjusted downward by $1.8 million and for the three and nine months ended September 30, 2020 adjusted downward by $4.2 million and $14.9 million, respectively. The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented.

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Item 2. Management’s Discussion and Analysis

G&A Expenses and Operating Expense Ratios

	Total G&A Expenses (1)		Total G&A Expenses/Average Assets (1)		Total G&A Expenses/Average Equity (1)
For the three months ended	(dollars in thousands)
September 30, 2021	$	43,882	0.22	%	1.28	%
September 30, 2020	$	44,587	0.20	%	1.27	%
For the nine months ended
September 30, 2021	$	145,313	0.23	%	1.40	%
September 30, 2020	$	179,222	0.23	%	1.69	%
(1) Includes $2.9 million of costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process for the nine months ended September 30, 2020. Excluding these transaction costs, G&A expenses as a percentage of average total assets was unchanged at 0.23% and as a percentage of average equity was 1.66% for the nine months ended September 30, 2020.

G&A expenses were $43.9 million for the three months ended September 30, 2021, a decrease of $0.7 million compared to the same period in 2020. G&A expenses were $145.3 million for the nine months ended September 30, 2021, a decrease of $33.9 million compared to the same period in 2020. The change for the nine months ended September 30, 2021 compared with the same period in 2020 was largely attributable to cost savings generated from the Internalization which closed on June 30, 2020 and lower professional fees during the nine months ended September 30, 2021 compared with the same periods in 2020.

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)		Realized and Unrealized Gains and Losses/Average Equity (2)		Other Income (Loss)/Average Equity		G&A Expenses/ Average Equity		Income Taxes/ Average Equity		Return on Average Equity
For the three months ended
September 30, 2021	9.01	%	6.85	%	0.47	%	(1.28	%)	0.20	%	15.25	%
September 30, 2020	11.01	%	19.47	%	0.10	%	(1.27	%)	(0.29	%)	29.02	%
For the nine months ended
September 30, 2021	11.12	%	8.99	%	0.29	%	(1.40	%)	0.02	%	19.02	%
September 30, 2020	7.14	%	(22.49	%)	0.22	%	(1.69	%)	0.13	%	(16.69	%)
(1) Economic net interest income includes the net interest component of interest rate swaps. (2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps.

Unrealized Gains and Losses - Available-for-Sale Investments

With our available-for-sale accounting treatment on our Agency MBS, which represent the largest portion of assets on balance sheet, as well as certain commercial mortgage-backed securities, unrealized fluctuations in market values of assets do not impact our GAAP net income (loss) but rather are reflected on our balance sheet by changing the carrying value of the asset and stockholders’ equity under accumulated other comprehensive income (loss). As a result of this fair value accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting. As a result, comparisons with companies that use amortized cost accounting for some or all of their balance sheet may not be meaningful.

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

	September 30, 2021		December 31, 2020
	(dollars in thousands)
Unrealized gain	$	1,930,909	$	3,378,523
Unrealized loss	(292,271)		(4,188)
Accumulated other comprehensive income (loss)	$	1,638,638	$	3,374,335

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Item 2. Management’s Discussion and Analysis

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 September 30, 2021 is solely due to market conditions and not the quality of the assets. Substantially all of the Agency MBS have an actual or implied credit rating that is the same as that of the U.S. government. The investments are not considered to be other-than-temporarily impaired 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 $76.7 billion and $88.5 billion at September 30, 2021 and December 31, 2020, respectively. The change was primarily due to decreases in Agency MBS, including assets transferred or pledged to securitization vehicles, of $11.3 billion and commercial real estate debt investments, including assets transferred or pledged to securitization vehicles, of $2.0 billion, partially offset by an increase in residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $2.2 billion. Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at September 30, 2021:

	Residential						Commercial
	Agency MBS and MSR			Residential Credit (1)				Commercial Real Estate (2)			Corporate Debt			Total
Assets	(dollars in thousands)
Fair value/carrying value	$	64,045,791		$	8,363,424			$	472,187		$	1,892,822		$	74,774,224
Implied market value of derivatives (3)	23,622,635			—				427,683			—			24,050,318
Debt
Repurchase agreements	53,769,219			1,503,431				202,770			—			55,475,420
Implied cost basis of derivatives (3)	23,776,374			—				426,312			—			24,202,686
Other secured financing	—			—				—			729,555			729,555
Debt issued by securitization vehicles	554,196			3,381,214				—			—			3,935,410
Participations issued	—			641,006				—			—			641,006
Net forward purchases	472,058			12,000				45,000			—			529,058
Liabilities of disposal group held for sale	—			—				113,362			—			113,362
Other
Other assets / liabilities (4)	451,601			76,049				(45,372)			37,544			519,822
Net equity allocated	$	9,548,180		$	2,901,822			$	67,054		$	1,200,811		$	13,717,867
Net equity allocated (%)	70		%	21		%		—		%	9		%	100		%
Debt/net equity ratio	5.7:1			1.9:1				NM			0.6:1			4.4:1			(5)
(1) Fair value/carrying includes residential loans held for sale. (2) Fair value/carrying includes commercial real estate investments held for sale. (3) Derivatives include TBA contracts under Agency MBS and MSR and CMBX balances under Commercial Real Estate. (4) Dedicated capital allocations assume capital related to held for sale assets will be redeployed within the Agency business line. (5) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition. Excludes liabilities of disposal group held for sale. NM Not meaningful.

Residential Securities

Substantially all of our Agency MBS at September 30, 2021 and December 31, 2020 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 Freddie Mac, Fannie Mae or Ginnie Mae pass through certificates or CMOs, which have an actual or implied credit rating that is the same as that of the U.S. government. We carry all of our Agency MBS at fair value on the Consolidated Statements of Financial Condition.

We accrete discount balances as an increase to interest income over the expected life of the related interest earning assets and we amortize premium balances as a decrease to interest income over the expected life of the related interest earning assets. At September 30, 2021 and December 31, 2020 we had on our Consolidated Statements of Financial Condition a total of $82.2

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Item 2. Management’s Discussion and Analysis

million and $88.3 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $3.9 billion and $4.0 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended September 30, 2021 and 2020 was 23.1% and 22.9%, respectively. The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of September 30, 2021 and 2020 was 12.7% and 17.1%, respectively.

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

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at September 30, 2021 and December 31, 2020.

	September 30, 2021		December 31, 2020
	Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	60,298,122	$	71,302,578
Adjustable-rate pass-through	349,021		477,516
CMO	129,244		149,767
Interest-only	329,941		421,909
Multifamily	1,670,472		1,663,507
Reverse mortgages	41,279		51,782
Total agency securities	$	62,818,079	$	74,067,059
Residential credit
Credit risk transfer	$	787,235	$	532,403
Alt-A	53,541		80,328
Prime	279,737		182,749
Subprime	176,436		188,433
NPL/RPL	1,137,131		475,847
Prime jumbo (>= 2010 vintage)	101,087		44,835
Total residential credit securities	$	2,535,167	$	1,504,595
Total Residential Securities	$	65,353,246	$	75,571,654

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Item 2. Management’s Discussion and Analysis

The following table summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at September 30, 2021 and December 31, 2020.

	September 30, 2021			December 31, 2020
Residential Securities (1)	(dollars in thousands)
Principal amount	$	60,112,308		$	68,521,464
Net premium	3,069,578			3,280,439
Amortized cost	63,181,884			71,801,903
Amortized cost / principal amount	105.11		%	104.79		%
Carrying value	64,798,658			75,116,466
Carrying value / principal amount	107.80		%	109.62		%
Weighted average coupon rate	3.40		%	3.58		%
Weighted average yield	2.75		%	2.86		%
Adjustable-rate Residential Securities (1)
Principal amount	$	1,324,201		$	1,257,966
Weighted average coupon rate	2.77		%	3.20		%
Weighted average yield	7.20		%	5.20		%
Weighted average term to next adjustment (2)	12 Months			15 Months
Weighted average lifetime cap (3)	0.23		%	0.41		%
Principal amount at period end as % of total residential securities	2.20		%	1.84		%
Fixed-rate Residential Securities (1)
Principal amount	$	58,788,107		$	67,263,498
Weighted average coupon rate	3.41		%	3.58		%
Weighted average yield	2.66		%	2.82		%
Principal amount at period end as % of total residential securities	97.80		%	98.16		%
Interest-only Residential Securities
Notional amount	$	5,328,932		$	3,642,143
Net premium	713,235			602,790
Amortized cost	713,235			602,790
Amortized cost / notional amount	13.38		%	16.55		%
Carrying value	554,588			455,188
Carrying value / notional amount	10.41		%	12.50		%
Weighted average coupon rate	2.61		%	3.99		%
Weighted average yield	0.39		%	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.

The following tables summarize certain characteristics of our Residential Credit portfolio at September 30, 2021.

			Payment Structure				Investment Characteristics
Product	Total		Senior		Subordinate		Coupon		Credit Enhancement		60+ Delinquencies		3M VPR (1)
(dollars in thousands)
Credit risk transfer	$	787,235	$	—	$	787,235	3.23	%	2.54	%	4.06	%	38.20	%
Alt-A	53,541		15,325		38,216		3.09	%	9.21	%	14.22	%	30.98	%
Prime	279,737		60,307		219,430		3.96	%	8.44	%	4.36	%	34.12	%
Subprime	176,436		99,701		76,735		2.08	%	20.82	%	12.92	%	17.96	%
Re-performing loan securitizations	724,672		297,458		427,214		3.79	%	26.37	%	24.76	%	10.65	%
Non-performing loan securitizations	412,459		387,156		25,303		2.33	%	30.99	%	63.08	%	5.25	%
Prime jumbo (>=2010 vintage)	101,087		795		100,292		3.84	%	4.31	%	13.36	%	31.98	%
Total/weighted average (2)	$	2,535,167	$	860,742	$	1,674,425	3.26	%	16.12	%	20.80	%	22.68	%
(1) Represents the 3 month voluntary prepayment rate (“VPR”). (2) Total investment characteristics exclude the impact of interest-only securities.

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Item 2. Management’s Discussion and Analysis

	Bond Coupon
Product	ARM		Fixed		Floater		Interest-Only		Estimated Fair Value
(dollars in thousands)
Credit risk transfer	$	—	$	—	$	787,206	$	29	$	787,235
Alt-A	5,110		37,345		11,086		—		53,541
Prime	33,162		241,236		4,958		381		279,737
Subprime	7,252		73,063		95,938		183		176,436
Re-performing loan securitizations	—		724,672		—		—		724,672
Non-performing loan securitizations	—		412,459		—		—		412,459
Prime jumbo (>=2010 vintage)	—		100,292		—		795		101,087
Total	$	45,524	$	1,589,067	$	899,188	$	1,388	$	2,535,167

Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at September 30, 2021. The table does not include the effect of net interest rate payments on our interest rate swap agreements and excludes assets and liabilities of the disposal group held for sale. The net swap payments will fluctuate based on monthly changes in the floating rate. At September 30, 2021, the interest rate swaps had a net fair value of ($0.8) billion.

	Within One Year		One to Three Years		Three to Five Years		More than Five Years		Total
	(dollars in thousands)
Repurchase agreements	$	55,475,420	$	—	$	—	$	—	$	55,475,420
Interest expense on repurchase agreements (1)	20,682		—		—		—		20,682
Other secured financing	—		—		729,555		—		729,555
Interest expense on other secured financing (1)	20,769		41,594		26,453		—		88,816
Debt issued by securitization vehicles (principal)	—		—		—		3,858,270		3,858,270
Interest expense on debt issued by securitization vehicles	86,926		173,852		173,852		2,344,696		2,779,326
Participations issued (principal)	—		—		—		617,276		617,276
Interest expense on participations issued	19,224		38,449		38,449		490,866		586,988
Long-term operating lease obligations	3,862		7,722		3,862		—		15,446
Total	$	55,626,883	$	261,617	$	972,171	$	7,311,108	$	64,171,779
(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at September 30, 2021.

In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our current operations via repurchase agreements. We may use securitization structures, credit facilities or other term financing structures to finance certain of our assets. During the nine months ended September 30, 2021, we received $14.6 billion from principal repayments and $11.1 billion in cash from disposal of securities. During the nine months ended September 30, 2020, we received $14.4 billion from principal repayments and $50.3 billion in cash from disposal of securities.

Off-Balance Sheet Arrangements

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

We have limited future funding commitments related to certain of our unconsolidated joint ventures. In addition, we have provided customary non-recourse carve-out and environmental guarantees (or underlying indemnities with respect thereto) with respect to mortgage loans held by subsidiaries of these unconsolidated joint ventures. We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at September 30, 2021.

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Item 2. Management’s Discussion and Analysis

Capital Management

Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of critical importance to our business strategy. A strong and robust capital position is essential to executing our investment strategy. Our capital strategy is predicated on a strong capital position, which enables us to execute our investment strategy regardless of the market environment. Our capital policy defines the parameters and principles supporting a comprehensive capital management practice.

The major risks impacting capital are capital, liquidity and funding risk, investment/market risk, credit risk, counterparty risk, operational risk and compliance, regulatory and legal risk. For further discussion of the risks we are subject to, please see Part I, Item 1A. “Risk Factors” in our most recent Annual Report on Form 10-K and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.

Capital requirements are based on maintaining levels above approved thresholds, ensuring the quality of our capital appropriately reflects our asset mix, market and funding structure. In the event we fall short of our internal thresholds, we will consider appropriate actions which may include asset sales, changes in asset mix, reductions in asset purchases or originations, issuance of capital or other capital enhancing or risk reduction strategies.

Stockholders’ Equity

The following table provides a summary of total stockholders’ equity at September 30, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020
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	14,499		13,982
Additional paid-in capital	20,228,366		19,750,818
Accumulated other comprehensive income (loss)	1,638,638		3,374,335
Accumulated deficit	(9,720,270)		(10,667,388)
Total stockholders’ equity	$	13,697,802	$	14,008,316

Capital Stock

Common Stock

During the three and nine months ended September 30, 2021, we issued 5.6 million and 51.1 million shares, respectively, for proceeds of $49.0 million and $469.5 million, respectively, net of commissions and fees, under the at-the-market sales program. No shares were issued under the at-the-market sales program during the three and nine months ended September 30, 2020. Refer to the “Capital Stock” Note located within Item 1 for additional information related to the at-the-market sales program.

In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock, which expired on December 31, 2020 (“the Prior Share Repurchase Program”). In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2021 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the Prior Share Repurchase Program. During the three and nine months ended September 30, 2021, no shares were purchased pursuant to these authorizations. During the three and nine months ended September 30, 2020, we repurchased an aggregate of 4.8 million and 27.7 million shares of our common stock, respectively, for an aggregate amount of $31.3 million and $174.7 million, respectively, excluding commission costs. All common shares purchased were part of a publicly announced plan in open-market transactions.

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

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Item 2. Management’s Discussion and Analysis

of risk of our assets and liabilities, our liquidity position, our level of unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and international market conditions.

Our GAAP leverage ratio at September 30, 2021 and December 31, 2020 was 4.4:1 and 5.1:1, respectively. Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 5.8:1 and 6.2:1 at September 30, 2021 and December 31, 2020, respectively. Our GAAP capital ratio at September 30, 2021 and December 31, 2020 was 17.9% and 15.9%, respectively. Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 14.2% and 13.6% at September 30, 2021 and December 31, 2020, 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

For more information on COVID-19, including actions we have taken in response, please refer to the section titled “Business Environment and COVID-19” within this Item 2.

We are subject to a variety of risks in the ordinary conduct of our business. The effective management of these risks is of critical importance to the overall success of Annaly. The objective of our risk management framework is to identify, measure and monitor these risks.

Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk. We believe we have built a strong and collaborative risk management culture throughout Annaly focused on awareness which supports appropriate understanding and management of our key risks. Each employee is accountable for identifying, monitoring and managing risk within their area of responsibility.

Risk Appetite

We maintain a firm-wide risk appetite statement which defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. We engage in risk activities based on our core expertise that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive portfolio management, supported by a conservative liquidity and leverage posture.

The risk appetite statement asserts the following key risk parameters to guide our investment management activities:

Risk Parameter	Description
Portfolio Composition	We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy.
Leverage	We generally expect to maintain an economic leverage ratio no greater than 10:1.
Liquidity Risk	We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions.
Interest Rate Risk	We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation.
Credit Risk	We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns.
Capital Preservation	We will seek to protect our capital base through disciplined risk management practices.
Operational	We will seek to limit impacts to our business through disciplined operational risk management practices.
Compliance, Regulatory and Legal	We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act and the licenses and approvals of our regulated and licensed subsidiaries.

Governance

Risk management begins with our Board, through the review and oversight of the risk management framework, and executive management, through the ongoing formulation of risk management practices and related execution in managing risk. The Board exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”) with support from the other Board Committees. The BRC is responsible for oversight of our risk governance structure, risk management and risk assessment guidelines and policies and our risk appetite. The BAC is responsible for oversight of the quality and integrity of our accounting, internal controls and financial reporting practices, including independent auditor

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Item 2. Management’s Discussion and Analysis

selection, evaluation and review, and oversight of the internal audit function. The Management Development and Compensation Committee is responsible for oversight of risk related to our compensation policies and practices. The Corporate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or Environment, Social, and Governance risk to us, and the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framework and the annual self-evaluation of the Board.

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. Four primary management committees have been established to provide a comprehensive framework for risk management. The management committees responsible for our risk management include the Enterprise Risk Committee (“ERC”), Asset and Liability Committee (“ALCO”), Investment Committee and the Financial Reporting and Disclosure Committee (“FRDC”). Each of these committees reports to our management Operating Committee which is responsible for oversight and management of our operations, including oversight and approval authority over all aspects of our enterprise risk management. 

Audit Services is an independent function with reporting lines to the BAC. Audit Services is responsible for performing our internal audit activities, which includes independently assessing and validating key controls within the risk management framework.

Our compliance group is responsible for oversight of our regulatory compliance. Our Chief Compliance Officer has reporting lines to the BAC.

Description of Risks

We are subject to a variety of risks due to the business we operate. Risk categories are an important component of a robust enterprise wide risk management framework.

We have identified the following primary categories that we utilize to identify, assess, measure and monitor risk.

Risk	Description
Capital, Liquidity and Funding Risk	Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding.
Investment/Market Risk	Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused by changes in market variables, such as interest rates, which affect the values of investment securities and other investment instruments.
Credit Risk	Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in lending and investing activities.
Counterparty Risk	Risk to earnings, capital or business resulting from a counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in funding, hedging and investing activities.
Operational Risk	Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including proprietary and third party models), human factors or external events. This risk also applies to our use of software vendors and data providers.
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.

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Item 2. Management’s Discussion and Analysis

Capital, Liquidity and Funding Risk Management

Our capital, liquidity and funding risk management strategy is designed to ensure the availability of sufficient resources to support our business and meet our financial obligations under both normal and adverse market and business environments. Our capital, liquidity and funding risk management practices consist of the following primary elements:

Element	Description
Funding	Availability of diverse and stable sources of funds.
Excess Liquidity	Excess liquidity primarily in the form of unencumbered assets and cash.
Maturity Profile	Diversity and tenor of liabilities and modest use of leverage.
Stress Testing	Scenario modeling to measure the resiliency of our liquidity position.
Liquidity Management Policies	Comprehensive policies including monitoring, risk limits and an escalation protocol.

Funding

Our primary financing sources are repurchase agreements provided through counterparty arrangements and through Arcola, other secured financing, debt issued by securitization vehicles, mortgages, credit facilities, note sales and various forms of equity. We maintain excess liquidity by holding unencumbered liquid assets that could be either used to collateralize additional borrowings or sold.

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

Our wholly-owned subsidiary, Arcola, provides direct access to third party funding as a FINRA member broker-dealer. Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central counterparty. In addition, Arcola borrows funds through direct repurchase agreements.

To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements. At September 30, 2021 and December 31, 2020, the weighted average days to maturity was 75 days and 64 days, respectively.

Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made. Should prepayment speeds on the mortgages underlying our Agency and Residential mortgage-backed securities and/or market interest rates or other factors move suddenly and cause declines in the market value of assets posted as collateral, resulting margin calls may cause an adverse change in our liquidity position.

At September 30, 2021, we had total financial assets and cash pledged against existing liabilities of $61.2 billion. The weighted average haircut was approximately 3% on repurchase agreements. The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at September 30, 2021 compared to the same period in 2020, and our counterparties did not materially alter any requirements, including required haircuts, related to the collateral we pledge under repurchase agreements and interest rate swaps during the three months ended September 30, 2021.

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)
September 30, 2021	$	57,504,986	$	55,475,420	$	44,964	$	—
June 30, 2021	62,440,803		60,221,067		42,581		—
March 31, 2021	65,461,539		61,202,477		143,395		—
December 31, 2020	65,528,297		64,825,239		210,484		—
September 30, 2020	67,542,187		64,633,447		286,792		—
June 30, 2020	68,468,813		67,163,598		183,423		—
March 31, 2020	96,756,341		72,580,183		461,123		—
December 31, 2019	102,760,107		101,740,728		1,006,487		—
September 30, 2019	108,389,796		102,682,104		1,459,070		—

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Item 2. Management’s Discussion and Analysis

The following table provides information on our repurchase agreements and other secured financing by maturity date at September 30, 2021. The weighted average remaining maturity on our repurchase agreements and other secured financing was 95 days at September 30, 2021:

	September 30, 2021
	Principal Balance		Weighted Average Rate		% of Total
	(dollars in thousands)
1 day	$	7,926,088	0.07	%	14.1	%
2 to 29 days	16,153,791		0.13	%	28.7	%
30 to 59 days	4,082,709		0.18	%	7.3	%
60 to 89 days	3,226,323		0.17	%	5.7	%
90 to 119 days	10,197,130		0.18	%	18.2	%
Over 120 days (1)	14,618,934		0.33	%	26.0	%
Total	$	56,204,975	0.19	%	100.0	%
(1) Approximately 1% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year.

The table below presents our outstanding debt balances and associated weighted average rates and days to maturity at September 30, 2021:

			Weighted Average Rate
	Principal Balance		As of Period End		For the Quarter		Weighted Average Days to Maturity (1)
	(dollars in thousands)
Repurchase agreements	$	55,475,420	0.15	%	0.15	%	75
Other secured financing (2)	729,555		2.85	%	3.34	%	1,561
Debt issued by securitization vehicles (3)	3,858,270		2.20	%	1.90	%	11,519
Participations issued (3)	617,276		3.11	%	2.23	%	11,145
Total indebtedness	$	60,680,521
(1) Determined based on estimated weighted-average lives of the underlying debt instruments. (2) Includes financing under credit facilities. (3) Non-recourse to Annaly.

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Item 2. Management’s Discussion and Analysis

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 September 30, 2021:

	Encumbered Assets		Unencumbered Assets		Total
Financial assets	(dollars in thousands)
Cash and cash equivalents	$	896,255	$	150,045	$	1,046,300
Investments, at carrying value (1)
Agency mortgage-backed securities (2)	57,236,682		5,752,213		62,988,895
Credit risk transfer securities	186,343		600,892		787,235
Non-agency mortgage-backed securities	905,809		830,123		1,735,932
Commercial mortgage-backed securities	220,000		49,106		269,106
Residential mortgage loans (2)	4,647,899		1,178,927		5,826,826
MSR	—		528,798		528,798
Interests in MSR	—		57,530		57,530
Corporate debt, held for investment	1,268,365		622,344		1,890,709
Corporate debt, held for sale	—		2,113		2,113
Assets of disposal group held for sale (3)	52,684		8,016		60,700
Other assets (4)	—		43,174		43,174
Total financial assets	$	65,414,037	$	9,823,281	$	75,237,318
(1) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. (2) Includes assets transferred or pledged to securitization vehicles. (3) Comprised of commercial real estate investments held for sale. (4) Includes 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 and asset type. We believe the assets we consider liquid can be readily converted into cash, through liquidation or by being used as collateral in financing arrangements (including as additional collateral to support existing financial arrangements). Our balance sheet also generates liquidity on an on-going basis through mortgage principal and interest repayments and net earnings held prior to payment of dividends. The following table presents our liquid assets as a percentage of total assets at September 30, 2021:

	Carrying Value (1)
Liquid assets	(dollars in thousands)
Cash and cash equivalents	$	1,046,300
Residential Securities (2) (3)	64,913,956
Commercial mortgage-backed securities	269,106
Residential mortgage loans (4)	1,686,268
Corporate debt, held for investment (5)	1,535,560
Corporate debt, held for sale	2,113
Total liquid assets	$	69,453,303
Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (6)	98.59		%
(1) Carrying value approximates the market value of assets. The assets listed in this table include $61.2 billion of assets that have been pledged as collateral against existing liabilities at September 30, 2021. Please refer to the Encumbered and Unencumbered Assets table for related information. (2) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. (3) Excludes securitized Agency MBS of consolidated VIEs carried at fair value of $0.6 billion. (4) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $4.1 billion. (5) Excludes unpledged second lien loans. (6) Denominator is computed based on the carrying amount of encumbered and unencumbered financial assets, excluding assets transferred or pledged to securitization vehicles and certain assets of disposal group held for sale of $4.8 billion.

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Item 2. Management’s Discussion and Analysis

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.

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Item 2. Management’s Discussion and Analysis

The interest rate sensitivity of our assets and liabilities, excluding assets and liabilities of the disposal group held for sale and corporate loans held for sale, in the following table at September 30, 2021 could vary substantially based on actual prepayment experience.

	Less than 3 Months		3-12  Months		More than 1 Year to 3 Years		3 Years and Over		Total
Financial assets	(dollars in thousands)
Cash and cash equivalents	$	1,046,300	$	—	$	—	$	—	$	1,046,300
Agency mortgage-backed securities (principal)	9,243		4,094		1,035,141		56,534,880		57,583,358
Residential credit risk transfer securities (principal)	120		135,711		263,280		372,627		771,738
Non-agency mortgage-backed securities (principal)	33,236		145,882		968,294		609,800		1,757,212
Commercial mortgage-backed securities (principal)	—		—		—		269,000		269,000
Total securities	42,599		285,687		2,266,715		57,786,307		60,381,308
Residential mortgage loans (principal)	—		—		—		1,626,524		1,626,524
Corporate debt (principal)	—		19,509		250,700		1,670,992		1,941,201
Total loans	—		19,509		250,700		3,297,516		3,567,725
Assets transferred or pledged to securitization vehicles (principal)	—		—		—		4,503,257		4,503,257
Total financial assets - maturity	1,088,899		305,196		2,517,415		65,587,080		69,498,590
Effect of utilizing reset dates (1)	6,934,904		977,207		(336,999)		(7,575,112)		—
Total financial assets - interest rate sensitive	$	8,023,803	$	1,282,403	$	2,180,416	$	58,011,968	$	69,498,590
Financial liabilities
Repurchase agreements	$	31,388,911	$	24,086,509	$	—	$	—	$	55,475,420
Other secured financing	—		—		—		729,555		729,555
Debt issued by securitization vehicles (principal)	—		—		—		3,858,270		3,858,270
Participations issued (principal)	—		—		—		617,276		617,276
Total financial liabilities - maturity	31,388,911		24,086,509		—		5,205,101		60,680,521
Effect of utilizing reset dates (1)(2)	(41,225,103)		10,609,647		19,026,444		11,589,012
Total financial liabilities - interest rate sensitive	$	(9,836,192)	$	34,696,156	$	19,026,444	$	16,794,113	$	60,680,521
Maturity gap	$	(30,300,012)	$	(23,781,313)	$	2,517,415	$	60,381,979	$	8,818,069
Cumulative maturity gap	$	(30,300,012)	$	(54,081,325)	$	(51,563,910)	$	8,818,069
Interest rate sensitivity gap	$	17,859,995	$	(33,413,753)	$	(16,846,028)	$	41,217,855	$	8,818,069
Cumulative rate sensitivity gap	$	17,859,995	$	(15,553,758)	$	(32,399,786)	$	8,818,069
(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 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.

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Item 2. Management’s Discussion and Analysis

Investment/Market Risk Management

One of the primary risks we are subject to is investment/market risk. Changes in the level of interest rates can affect our net interest income, which is the difference between the income we earn on our interest earning assets and the interest expense incurred from interest bearing liabilities and derivatives. Changes in the level of interest rates and spreads can also affect the value of our assets and potential realization of gains or losses from the sale of these assets. We may utilize a variety of financial instruments, including interest rate swaps, swaptions, options, futures and other hedges, in order to limit the adverse effects of interest rates on our results. In the case of interest rate swaps, we utilize contracts linked to LIBOR but may also enter into interest rate swaps where the floating leg is linked to the overnight index swap rate or another index, particularly in light of a potential transition away from LIBOR. 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 September 30, 2021. Actual results could differ materially from these estimates.

Change in Interest Rate (1)	Projected Percentage Change in Economic Net Interest Income (2)	Estimated Percentage Change in Portfolio Value (3)	Estimated Change as a % on NAV (3)(4)
-75 Basis points	(33.9%)	(0.1%)	(0.3%)
-50 Basis points	(21.0%)	0.1%	0.6%
-25 Basis points	(9.3%)	0.2%	0.9%
+25 Basis points	6.8%	(0.3%)	(1.7%)
+50 Basis points	13.2%	(0.8%)	(4.2%)
+75 Basis points	18.7%	(1.3%)	(7.5%)
MBS Spread Shock (1)	Estimated Change in Portfolio Market Value	Estimated Change as a  % on NAV (3)(4)
-25 Basis points	1.8%	10.1%
-15 Basis points	1.1%	6.1%
-5 Basis points	0.4%	2.0%
+5 Basis points	(0.4%)	(2.0%)
+15 Basis points	(1.1%)	(6.0%)
+25 Basis points	(1.8%)	(10.0%)
(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 Residential Securities, commercial real estate investments, corporate debt, repurchase agreements, other secured financing and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps. (3) Scenarios include Residential Securities, residential mortgage loans, MSR and derivative instruments. (4) NAV represents book value of equity.

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Item 2. Management’s Discussion and Analysis

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 within 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, commercial real estate investments and corporate debt. MSR values may also be impacted through reduced servicing fees and higher costs to service the underlying mortgage loans due to borrower performance. 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. We will originate or purchase investments that meet our comprehensive underwriting process and credit standards and are approved by the appropriate committee. In the case of residential mortgage loans and MSR, we may engage a third party to perform due diligence on a sample of loans that we believe sufficiently represents the entire pool. 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 September 30, 2021 and December 31, 2020 was as follows:

	September 30, 2021		December 31, 2020
Category
Agency mortgage-backed securities (1)	85.0	%	86.4	%
Credit risk transfer securities	1.1	%	0.6	%
Non-agency mortgage-backed securities	2.3	%	1.1	%
Residential mortgage loans (1)	7.8	%	4.2	%
Mortgage servicing rights	0.8	%	0.1	%
Interests in MSR	0.1	%	—	%
Commercial real estate (1) (2)	0.4	%	5.0	%
Corporate debt (3)	2.5	%	2.6	%
(1) Includes assets transferred or pledged to securitization vehicles. (2) Net of unamortized origination fees. Excludes commercial real estate assets held for sale as of September 30, 2021. (3) Includes corporate loans held for sale as of September 30, 2021.

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 and certain commercial real estate investments 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.

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Item 2. Management’s Discussion and Analysis

The following table summarizes our exposure to counterparties by geography at September 30, 2021:

	Number of Counterparties	Secured Financing (1)		Interest Rate Swaps at Fair Value		Exposure - Secured Financing (2)		Exposure - Interest Rate Swaps (2)
Geography	(dollars in thousands)
North America	22	$	47,218,935	$	(270,962)	$	2,750,336	$	(127,116)
Europe	9	6,235,044		(483,286)		1,024,060		(412,803)
Japan	4	2,750,996		—		38,813		—
Total	35	$	56,204,975	$	(754,248)	$	3,813,209	$	(539,919)
(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 unrealized loss on swaps for each counterparty.

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. Model risk considers potential errors with a model’s results due to uncertainty in model parameters and inappropriate methodologies used. The result of these risks may include financial loss and reputational damage. We manage operational risk through a variety of tools including policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor management. Other tools include testing, including disaster recovery testing; systems controls, including access controls; training, including cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. Employee-level lines of defense against operational risk include proper segregation of incompatible duties, activity-level internal controls over financial reporting, the empowerment of business units to identify and mitigate operational risk sources, testing by our internal audit staff, and our overall governance framework.  

We have established a Cybersecurity Committee to help mitigate cybersecurity risks. The role of the committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee our Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing. Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems. The Cybersecurity Committee periodically reports to the ERC and the relevant Board committees. There is no assurance that these efforts will effectively mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur. We currently maintain cybersecurity insurance, however, there is no assurance that our current policy will cover all cybersecurity breaches or our related losses, or that we will be able to continue to maintain cybersecurity insurance in the future.

We depend on third party service providers to perform various business processes related to our operations, including mortgage loan servicers and sub-servicers. Our vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third party vendors. These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.

Compliance, Regulatory and Legal Risk Management

Our business is organized as a REIT, and we seek to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT requires an analysis of various factual matters and circumstances. Accordingly, we closely monitor our REIT status within our risk management program. We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola, our subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act and our subsidiary that operates as a licensed mortgage aggregator and master servicer.

The financial services industry is highly regulated and receives significant attention from regulators, which may impact both our company and our business strategy. Our investments in residential whole loans and MSR require us to comply with applicable state and federal laws and regulations and maintain appropriate governmental licenses, approvals and exemptions. We proactively monitor the potential impact regulation may have both directly and indirectly on us. We maintain a process to actively monitor both actual and potential legal action that may affect us. Our risk management framework is designed to identify, measure and monitor these risks under the oversight of the ERC.

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Item 2. Management’s Discussion and Analysis

We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act, and we seek to continue to meet the requirements for this exemption from registration. The determination that we qualify for this exemption from registration depends on various factual matters and circumstances. Accordingly, in conjunction with our legal department, we closely monitor our compliance with Section 3(c)(5)(C) within our risk management program. The monitoring of this risk is also under the oversight of the ERC.

As a result of the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission (“CFTC”) gained jurisdiction over the regulation of interest rate swaps. The CFTC has asserted that this causes the operators of mortgage real estate investment trusts that use swaps as part of their business model to fall within the statutory definition of Commodity Pool Operator (“CPO”), and, absent relief from the Division of Swap Dealer and Intermediary Oversight or the CFTC, to register as CPOs. On December 7, 2012, as a result of numerous requests for no-action relief from the CPO registration requirement for operators of mortgage real estate investment trusts, the Division of Swap Dealer and Intermediary Oversight of the CFTC issued no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” that permits a CPO to receive relief by filing a claim to perfect the use of the relief. A claim submitted by a CPO will be effective upon filing, so long as the claim is materially complete. The conditions that must be met relate to initial margin and premiums requirements, net income derived annually from commodity interest positions that are not qualifying hedging transactions, marketing of interests in the mortgage real estate investment trust to the public, and identification of the entity as a mortgage real estate investment trust in its federal tax filings with the Internal Revenue Service. While we disagree with the CFTC’s position that mortgage REITs that use swaps as part of their business model fall within the statutory definition of a CPO, we have submitted a claim for the relief set forth in the no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” and believe we meet the criteria for such relief set forth therein.

Critical Accounting Policies and Estimates

Our critical accounting policies that require us to make significant judgments or estimates are described below. For more information on these critical accounting policies and other significant accounting policies, see “Significant Accounting Policies” in the notes to the consolidated financial statements.

Valuation of Financial Instruments

Residential Securities

There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities. Since we primarily invest in securities that can be valued using actively quoted prices for actively traded assets, there is a high degree of observable inputs and less subjectivity in measuring fair value. Internal fair values are determined using quoted prices from the TBA securities market, the Treasury curve and the underlying characteristics of the individual securities, which may include coupon, periodic and life caps, reset dates and the expected life of the security. While prepayment rates may be difficult to predict and require estimation and judgment in the valuation of Agency mortgage-backed securities, we use several third party models to validate prepayment speeds used in fair value measurements of residential securities. All internal fair values are compared to external pricing sources and/or dealer quotes to determine reasonableness. Additionally, securities used as collateral for repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing additional verification of our internal pricing.

Residential Mortgage Loans

There is an active market for the residential whole loans in which we invest. Since we primarily invest in residential loans that can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value. Internal fair values are determined using quoted prices for similar market transactions, the swap curve and the underlying characteristics of the individual loans, which may include loan term, coupon, and reset dates. While prepayment rates may be difficult to predict and are a significant estimate requiring judgment in the valuation of residential whole loans, we validate prepayment speeds against those provided by independent pricing analytic providers specializing in residential mortgage loans. Internal fair values are generally compared to external pricing sources to determine reasonableness.

MSR

Fair value estimates for our investment in MSR are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs

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Item 2. Management’s Discussion and Analysis

including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR requires significant judgment by management and the third party pricing providers.

Commercial Real Estate Investments

The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral.  These securities must also be evaluated for impairment if the fair value of the security is lower than its amortized cost. Determining whether there is an impairment may require us to exercise significant judgment and make estimates to determine expected cash flows incorporating assumptions such as changes in interest rates and loss expectations. For commercial real estate loans and preferred equity investments classified as held for investment, we apply significant judgment in evaluating the need for a loss reserve. Estimated net recoverable value of the commercial real estate loans and preferred equity investments and other factors such as the fair value of any collateral, the amount and status of senior debt, the prospects of the borrower and the competitive landscape where the borrower conducts business must be considered in determining the allowance for loan losses. For commercial real estate loans held for sale, significant judgment may need to be applied in determining the fair value of the loans and whether a valuation allowance is necessary. Factors that may need to be considered to determine the fair value of a loan held for sale include the borrower’s credit quality, liquidity and other market factors and the fair value of the underlying collateral.

Interest Rate Swaps

We use the overnight indexed swap (“OIS”) curve as an input to value substantially all of our uncleared interest rate swaps. We believe using the OIS curve, which reflects the interest rate typically paid on cash collateral, enables us to most accurately determine the fair value of uncleared interest rate swaps. Consistent with market practice, we exchange collateral (also called margin) based on the fair values of our interest rate swaps. Through this margining process, we may be able to compare our recorded fair value with the fair value calculated by the counterparty or derivatives clearing organization, providing additional verification of our recorded fair value of the uncleared interest rate swaps. We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization.

Revenue Recognition

Interest income from coupon payments is accrued based on the outstanding principal amounts of the Residential Securities and their contractual terms. Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. To aid in determining projected lives of the securities, we use third party model and market information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (i.e., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts and expert judgment. Prepayment speeds vary according to the type of investment, conditions in the financial markets and other factors and cannot be predicted with any certainty. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Adjustments are made for actual prepayment activity as it relates to calculating the effective yield. Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.

Consolidation of Variable Interest Entities

Determining whether an entity has a controlling financial interest in a VIE requires significant judgment related to assessing the purpose and design of the VIE and determination of the activities that most significantly impact its economic performance. We must also identify explicit and implicit variable interests in the entity and consider our involvement in both the design of the VIE and its ongoing activities. To determine whether consolidation of the VIE is required, we must apply judgment to assess whether we have the power to direct the most significant activities of the VIE and whether we have either the rights to receive benefits or the obligation to absorb losses that could be potentially significant to the VIE.

Use of Estimates

The use of GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

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Item 2. Management’s Discussion and Analysis

Glossary of Terms

A

Adjustable-Rate Loan / Security

A loan / security on which interest rates are adjusted at regular intervals according to predetermined criteria. The adjustable interest rate is tied to an objective, published interest rate index.

Agency

Refers to a federally chartered corporation, such as the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, or an agency of the U.S. Government, such as the Government National Mortgage Association.

Agency Mortgage-Backed Securities

Refers to residential mortgage-backed securities that are issued or guaranteed by an Agency.

Amortization

Liquidation of a debt through installment payments.  Amortization also refers to the process of systematically reducing a recognized asset or liability (e.g., a purchase premium or discount for a debt security) with an offset to earnings.

Average GAAP Cost of Interest Bearing Liabilities and Average Economic Cost of Interest Bearing Liabilities

Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities.

Average Life

On a mortgage-backed security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions.

Average Yield on Interest Earnings Assets and Average Yield on Interest Earnings Assets (excluding PAA)

Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).

B

Basis Point (“bp”)

One hundredth of one percent, used in expressing differences in interest rates.  One basis point is 0.01% of yield. For example, a bond’s yield that changed from 3.00% to 3.50% would be said to have moved 50 basis points.

Benchmark

A bond or an index referencing a basket of bonds whose terms are used for comparison with other bonds of similar maturity. The global financial market typically looks to U.S. Treasury securities as benchmarks.

Beneficial Owner

One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank.

Board

Refers to the board of directors of Annaly.

Bond

The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formula for determining that rate, and maturing on a date certain, on which date and upon presentation a fixed sum of money plus interest (usually represented by interest coupons attached to the bond) is payable to the holder or owner. Bonds are long-term securities with an original maturity of greater than one year.

Book Value Per Share

Calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit and dividing that number by the total common shares outstanding.

Broker

Generic name for a securities firm engaged in both buying and selling securities on behalf of customers or its own account.

C

Capital Buffer

Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs.

Capital Ratio (GAAP Capital Ratio)

Calculated as total stockholders’ equity divided by total assets. 

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Item 2. Management’s Discussion and Analysis

Carry

The amount an asset earns over its hedging and financing costs. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed.

CMBX

The CMBX index is a synthetic tradable index referencing a basket of 25 CMBS of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of CMBS securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying CMBS securities as they occur.

Collateral

Securities, cash or property pledged by a borrower or party to a derivative contract to secure payment of a loan or derivative. If the borrower fails to repay the loan or defaults under the derivative contract, the secured party may take ownership of the collateral.

Collateralized Loan Obligation (“CLO”)

A securitization collateralized by loans and other debt instruments.

Collateralized Mortgage Obligation (“CMO”)

A multiclass bond backed by a pool of mortgage pass-through securities or mortgage loans.

Commodity Futures Trading Commission (“CFTC”)

An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The CFTC regulates the swaps, commodity futures and options markets. Its goals include the promotion of competitive and efficient futures markets and the protection of investors against manipulation, abusive trade practices and fraud.

Commercial Mortgage-Backed Security (“CMBS” or “Commercial Securities”)

Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner.

Constant Prepayment Rate (“CPR”)

The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month.

Convexity

A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a security is, the more its duration will change with interest rate changes.

Corporate Debt

Non-government debt instruments issued by corporations. Long-term corporate debt can be issued as bonds or loans.

Counterparty

One of two entities in a transaction. For example, in the bond market a counterparty can be a state or local government, a broker-dealer or a corporation.

Coupon

The interest rate on a bond that is used to compute the amount of interest due on a periodic basis.

Credit and Counterparty Risk

Risk to earnings, capital or business, resulting from an obligor’s or counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. Credit and counterparty risk is present in lending, investing, funding and hedging activities.

Credit Derivatives

Derivative instruments that have one or more underlyings related to the credit risk of a specified entity (or group of entities) or an index that exposes the seller to potential loss from specified credit-risk related events. An example is credit derivatives referencing the commercial mortgage-backed securities index.

Credit Risk Transfer (“CRT”) Securities

Credit Risk Transfer securities are risk sharing transactions issued by Fannie Mae and Freddie Mac and similarly structured transactions arranged by third party market participants. The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae, Freddie Mac and/or third parties to private investors.

Current Face

The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original face value of the security by the current principal balance factor.

D

Dealer

Person or organization that underwrites, trades and sells securities, e.g., a principal market-maker in securities.

Default Risk

Possibility that a bond issuer will fail to pay principal or interest when due.

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Item 2. Management’s Discussion and Analysis

Derivative

A financial product that derives its value from the price, price fluctuations and price expectations of an underlying instrument, index or reference pool (e.g. futures contracts, options, interest rate swaps, interest rate swaptions and certain to-be-announced securities).

Discount Price

When the dollar price is below face value, it is said to be selling at a discount.

Duration

The weighted maturity of a fixed-income investment’s cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates.

E

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

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

This metric was previously labeled Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share). The definition of EAD is identical to the definition of Core Earnings (excluding PAA) from prior reporting periods.

Economic Capital

A measure of the risk a firm is subject to.  It is the amount of capital a firm needs as a buffer to protect against risk.  It is a probabilistic measure of potential future losses at a given confidence level over a given time horizon.

Economic Capital Ratio

Non-GAAP financial measure that is calculated as total stockholders’ equity divided by total economic assets. Total economic assets includes the implied market value of TBA derivatives and are net of debt issued by securitization vehicles.

Economic Interest Expense

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

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

Non-GAAP financial measure that is calculated as the sum of recourse debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to us and are excluded from this measure.

Economic Net Interest Income

Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense.

Economic Return

Refers to the Company’s change in book value plus dividends declared divided by the prior period’s book value.

Encumbered Assets

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

Eurodollar

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

F

Face Amount

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

Factor

A decimal value reflecting the proportion of the outstanding principal balance of a mortgage security, which changes over time, in relation to its original principal value.

Fannie Mae

Federal National Mortgage Association.

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Item 2. Management’s Discussion and Analysis

Federal Deposit Insurance Corporation (“FDIC”)

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

Federal Funds Rate

The interest rate charged by banks on overnight loans of their excess reserve funds to other banks.

Federal Housing Financing Agency (“FHFA”)

The FHFA is an independent regulatory agency that oversees vital components of the secondary mortgage market including Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Financial Industry Regulatory Authority, Inc. (“FINRA”)

FINRA is a non-governmental organization tasked with regulating all business dealings conducted between dealers, brokers and all public investors.

Fixed-Rate Mortgage

A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage.

Fixed Income Clearing Corporation (“FICC”)

The FICC is an agency that deals with the confirmation, settlement and delivery of fixed-income assets in the U.S. The agency ensures the systematic and efficient settlement of U.S. Government securities and mortgage-backed security transactions in the market.

Floating Rate Bond

A bond for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.

Floating Rate CMO

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

Freddie Mac

Federal Home Loan Mortgage Corporation.

Futures Contract

A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A futures contract differs from an option in that an option gives one of the counterparties a right and the other an obligation to buy or sell, while a futures contract represents an obligation of both counterparties, one to deliver and the other to accept delivery. A futures contract is part of a class of financial instruments called derivatives.

G

GAAP

U.S. generally accepted accounting principles.

Ginnie Mae

Government National Mortgage Association.

H

Hedge

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

I

In-the-Money

Description for an option that has intrinsic value and can be sold or exercised for a profit; a call option is in-the-money when the strike price (execution price) is below the market price of the underlying security.

Interest Bearing Liabilities

Refers to repurchase agreements, debt issued by securitization vehicles and credit facilities. Average interest bearing liabilities is based on daily balances.

Interest Earning Assets

Refers to Residential Securities, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt and preferred equity interests, residential mortgage loans and corporate debt. Average interest earning assets is based on daily balances.

Interest-Only (IO) Bond

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

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Item 2. Management’s Discussion and Analysis

Interests in MSR

Represents agreements to purchase all, or a component of, net servicing cash flows.

Interest Rate Risk

The risk that an investment’s value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. As market interest rates rise, the value of current fixed income investment holdings declines. Diversifying, deleveraging and hedging techniques are utilized to mitigate this risk. Interest rate risk is a form of market risk.

Interest Rate Swap

A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive a variable rate.

Interest Rate Swaption

Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap agreement at some specified date in the future. The swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer.

International Swaps and Derivatives Association (“ISDA”) Master Agreement

Standardized contract developed by ISDA used as an umbrella under which bilateral derivatives contracts are entered into.

Inverse IO Bond

An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as LIBOR. As the benchmark rate changes, the IO coupon adjusts in the opposite direction. When the benchmark rate is relatively low, the IO pays a relatively high coupon payment, and vice versa.

Investment/Market Risk

Risk to earnings, capital or business resulting in the decline in value of our assets caused from changes in market variables, such as interest rates, which affect the values of Residential Securities and other investment instruments.

Investment Advisers Act

Refers to the Investment Advisers Act of 1940, as amended.

Investment Company Act

Refers to the Investment Company Act of 1940, as amended.

L

Leverage

The use of borrowed money to increase investing power and economic returns.

Leverage Ratio (GAAP Leverage Ratio or Debt-to-Equity Ratio)

Calculated as total debt to total stockholders’ equity. For purposes of calculating this ratio total debt includes repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable. Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us.

LIBOR (London Interbank Offered Rate)

The rate banks charge each other for short-term Eurodollar loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floating-rate legs of interest rate swaps.

Liquidity Risk

Risk to earnings, capital or business arising from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding.

Long-Term CPR

Our projected prepayment speeds for certain Agency mortgage-backed securities using third party model and market information. Our prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forecasts.  Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results.

Long-Term Debt

Debt which matures in more than one year.

M

Market Agreed Coupon (“MAC”) Interest Rate Swap

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

Monetary Policy

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. 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

A mortgage loan granted by a bank, thrift or other financial institution that is based solely on real estate as security and is not insured or guaranteed by a government agency.

Mortgage Servicing Rights (“MSR”)

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

N

NAV

Net asset value.

Net Interest Income

Represents interest income earned on our portfolio investments, less interest expense paid for borrowings.

Net Interest Margin and Net Interest Margin (excluding PAA)

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

Net Interest Spread and Net Interest Spread (excluding PAA)

Net interest spread represents the average yield on interest earning assets less the average GAAP cost of interest bearing liabilities. Net interest spread (excluding PAA) represents the average yield on interest earning assets (excluding PAA) less the average economic cost of interest bearing liabilities.

Non-Performing Loan (“NPL”)

A loan that is close to defaulting or is in default.

Notional Amount

A stated principal amount in a derivative contract on which the contract is based.

O

Operational Risk

Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems, human factors or external events.

Option Contract

A contract in which the buyer has the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Buyers of call options bet that a security will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself. Buyers of put options bet that the security’s price will drop below the price set by the option. An option is part of a class of financial instruments called derivatives, which means these financial instruments derive their value from the worth of an underlying investment.

Original Face

The face value or original principal amount of a security on its issue date.

Out-of-the-Money

Description for an option that has no intrinsic value and would be worthless if it expired today; for a call option, this situation occurs when the strike price is higher than the market price of the underlying security; for a put option, this situation occurs when the strike price is less than the market price of the underlying security.

Overnight Index Swaps (“OIS”)

An interest rate swap in which a fixed rate is exchanged for an overnight floating rate.

Over-The-Counter (“OTC”) Market

A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange.

P

Par

Price equal to the face amount of a security; 100%.

Par Amount

The principal amount of a bond or note due at maturity. Also known as par value.

Pass-Through Security

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

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Item 2. Management’s Discussion and Analysis

Pool

A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass-through securities, pools are identified by a number assigned by the issuing agency.

Premium

The amount by which the price of a security exceeds its principal amount. When the dollar price of a bond is above its face value, it is said to be selling at a premium.

Premium Amortization Adjustment (“PAA”)

The cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities.

Prepayment

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

Prepayment Risk

The risk that falling interest rates will lead to increased prepayments of mortgage or other loans, forcing the investor to reinvest at lower prevailing rates.

Prepayment Speed

The estimated rate at which mortgage borrowers will pay off the mortgages that underlie an MBS.

Primary Market

Market for offers or sales of new bonds by the issuer.

Prime Rate

The indicative interest rate on loans that banks quote to their best commercial customers.

Principal and Interest

The term used to refer to regularly scheduled payments or prepayments of principal and payments of interest on a mortgage or other security.

R

Rate Reset

The adjustment of the interest rate on a floating-rate security according to a prescribed formula.

Real Estate Investment Trust (“REIT”)

A special purpose investment vehicle that provides investors with the ability to participate directly in the ownership or financing of real-estate related assets by pooling their capital to purchase and manage mortgage loans and/or income property.

Recourse Debt

Debt on which the economic borrower is obligated to repay the entire balance regardless of the value of the pledged collateral. By contrast, the economic borrower’s obligation to repay non-recourse debt is limited to the value of the pledged collateral. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us and are excluded from this measure.

Reinvestment Risk

The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment.

Re-Performing Loan (“RPL”)

A type of loan in which payments were previously delinquent by at least 90 days but have resumed.

Repurchase Agreement

The sale of securities to investors with the agreement to buy them back at a higher price after a specified time period; a form of short-term borrowing. For the party on the other end of the  transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement.

Residential Securities

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

Residual

In securitizations, the residual is the tranche that collects any cash flow from the collateral that remains after obligations to the other tranches have been met.

Return on Average Equity

Calculated by taking earnings divided by average stockholders’ equity.

Reverse Repurchase Agreement

Refer to Repurchase Agreement. The buyer of securities effectively provides a collateralized loan to the seller.

Risk Appetite Statement

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

S

Secondary Market

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

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Item 2. Management’s Discussion and Analysis

Secured Overnight Financing Rate (“SOFR”)

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

Settlement Date

The date securities must be delivered and paid for to complete a transaction.

Short-Term Debt

Generally, debt which matures in one year or less. However, certain securities that mature in up to three years may be considered short-term debt.

Spread

When buying or selling a bond through a brokerage firm, investors will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee. Spreads differ based on several factors including liquidity.

T

Target Assets

Includes Agency mortgage-backed securities, to-be-announced forward contracts, CRT securities, MSR, non-Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt.

Tangible Economic Return

Refers to the Company’s change in tangible book value (calculated by summing common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated deficit less intangible assets) plus dividends declared divided by the prior period’s tangible book value.

Taxable REIT Subsidiary (“TRS”)

An entity that is owned directly or indirectly by a REIT and has jointly elected with the REIT to be treated as a TRS for tax purposes. Annaly and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs.

To-Be-Announced Securities (“TBAs”)

A contract for the purchase or sale of a mortgage-backed security to be delivered at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date but does not include a specified pool number and number of pools.

TBA Dollar Roll Income

TBA dollar roll income is defined as the difference in price between two TBA contracts with the same terms but different settlement dates. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. TBA dollar roll income represents the equivalent of interest income on the underlying security less an implied cost of financing.

Total Return

Investment performance measure over a stated time period which includes coupon interest, interest on interest, and any realized and unrealized gains or losses.

Total Return Swap

A derivative instrument where one party makes payments at a predetermined rate (either fixed or variable) while receiving a return on a specific asset (generally an equity index, loan or bond) held by the counterparty.

U

Unencumbered Assets

Assets on our balance sheet which have not been pledged as collateral against an existing liability.

U.S. Government-Sponsored Enterprise (“GSE”) Obligations

Obligations of Agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress, such as Fannie Mae and Freddie Mac; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.

V

Value-at-Risk (“VaR”)

A statistical technique which measures the potential loss in value of an asset or portfolio over a defined period for a given confidence interval.

Variable Interest Entity (“VIE”)

An entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.

Variation Margin

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Volatility

A statistical measure of the variance of price or yield over time. Volatility is low if the price does not change very much over a short period of time, and high if there is a greater change.

Voting Interest Entity (“VOE”)

An entity that has sufficient equity to finance its activities without additional subordinated financial support from other parties and in which equity investors have a controlling financial interest.

W

Warehouse Lending

A line of credit extended to a loan originator to fund mortgages extended by the loan originators to property purchasers. The loan typically lasts from the time the mortgage is originated to when the mortgage is sold into the secondary market, whether directly or through a securitization.  Warehouse lending can provide liquidity to the loan origination market.

Weighted Average Coupon

The weighted average interest rate of the underlying mortgage loans or pools that serve as collateral for a security, weighted by the size of the principal loan balances.

Weighted Average Life (“WAL”)

The assumed weighted average amount of time that will elapse from the date of a security’s issuance until each dollar of principal is repaid to the investor. The WAL will change as the security ages and depending on the actual realized rate at which principal, scheduled and unscheduled, is paid on the loans underlying the MBS.

Y

Yield-to-Maturity

The expected rate of return of a bond if it is held to its maturity date; calculated by taking into account the current market price, stated redemption value, coupon payments and time to maturity and assuming all coupons are reinvested at the same rate; equivalent to the internal rate of return.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk are contained within the section titled “Risk Management” of Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

ITEM 4. CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this report.  Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed, (1) were effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in ensuring that information required to be disclosed by the Company in reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. 

There have been no changes in our internal controls over financial reporting that occurred during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. At September 30, 2021, we were not party to any pending material legal proceedings.

ITEM 1A. RISK FACTORS

Other than the risk factor relating to the announced sale of the CRE business disclosed in Item 1A. “Risk Factors” of our quarterly report on Form 10-Q for the quarter ended March 31, 2021, there have been no material changes to the risk factors disclosed in Item 1A. “Risk Factors” of our most recent annual report on Form 10-K. The materialization of any risks and uncertainties identified in our Special Note Regarding Forward-Looking Statements contained in this report together with those previously disclosed in our most recent annual report on Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Special Note Regarding Forward-Looking Statements” in this quarterly report or our most recent annual report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2021. No shares were repurchased with respect to this share repurchase program during the quarter ended September 30, 2021. As of September 30, 2021, the maximum dollar value of shares that may yet be purchased under this plan was $1.5 billion.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibits:

The exhibits required by this item are set forth on the Exhibit Index attached hereto. 

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Exhibit Number	Exhibit Description
31.1	Certification of David L. Finkelstein, Chief Executive Officer and Chief Investment Officer (Principal Executive Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
31.2	Certification of Serena Wolfe, Chief Financial Officer (Principal Financial Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
32.1	Certification of David L. Finkelstein, Chief Executive Officer and Chief Investment Officer (Principal Executive Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
32.2	Certification of Serena Wolfe, Chief Financial Officer (Principal Financial Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
101.INS XBRL	The instance document does not appear in the interactive data file because its Extensible Business Reporting Language (XBRL) tags are embedded within the Inline XBRL document. The following documents are formatted in Inline XBRL: (i) Consolidated Statements of Financial Condition at September 30, 2021 (Unaudited) and December 31, 2020 (Derived from the audited Consolidated Statement of Financial Condition at December 31, 2020); (ii) Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and nine months ended September 30, 2021 and 2020; (iii) Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and nine months ended September 30, 2021 and 2020; (iv) Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2021 and 2020; and (v) Notes to Consolidated Financial Statements (Unaudited).
101.SCH XBRL	Taxonomy Extension Schema Document †
101.CAL XBRL	Taxonomy Extension Calculation Linkbase Document †
101.DEF XBRL	Additional Taxonomy Extension Definition Linkbase Document Created †
101.LAB XBRL	Taxonomy Extension Label Linkbase Document †
101.PRE XBRL	Taxonomy Extension Presentation Linkbase Document †
104	The cover page for the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (formatted in Inline XBRL and contained in Exhibit 101).

† Submitted electronically herewith.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ANNALY CAPITAL MANAGEMENT, INC.
Dated:	November 4, 2021	By: /s/ David L. Finkelstein
		David L. Finkelstein
		Chief Executive Officer and Chief Investment Officer (Principal Executive Officer)
Dated:	November 4, 2021	By: /s/ Serena Wolfe
		Serena Wolfe
		Chief Financial Officer (Principal Financial Officer)

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