Annaly Capital Management - 10-Q quarterly report FY2022 Q1

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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: March 31, 2022

☐ 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 April 22, 2022 was 1,461,012,252.


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 March 31, 2022 (Unaudited) and December 31, 2021 (Derived from the audited consolidated financial statements at December 31, 2021)			1
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three months ended March 31, 2022 and 2021			2
Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2022 and 2021			3
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2022 and 2021			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			9
Note 6. Loans			13
Note 7. Mortgage Servicing Rights			19
Note 8. Variable Interest Entities			20
Note 9. Sale of Commercial Real Estate Business			26
Note 10. Derivative Instruments			23
Note 11. Fair Value Measurements			28
Note 12. Goodwill and Intangible Assets			31
Note 13. Secured Financing			32
Note 14. Capital Stock			34
Note 15. Interest Income and Interest Expense			35
Note 16. Net Income (Loss) per Common Share			36
Note 17. Income Taxes			36
Note 18. Risk Management			37

Note 19. Lease Commitments and Contingencies			38
Note 20. Arcola Regulatory Requirements			38
Note 21. Subsequent Events			39
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			40
Special Note Regarding Forward-Looking Statements			40
Overview			42
Business Environment			42
Results of Operations			44
Financial Condition			57
Capital Management			60
Risk Management			62
Critical Accounting Policies and Estimates			72
Glossary of Terms			75
Item 3. Quantitative and Qualitative Disclosures about Market Risk			84
Item 4. Controls and Procedures			84
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			85
Item 1A. Risk Factors			85
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			85
Item 5. Other Information			85
Item 6. Exhibits			85
SIGNATURES			87

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)
	March 31,		December 31,
	2022		2021 (1)
	(Unaudited)
Assets
Cash and cash equivalents (includes pledged assets of $830,546 and $1,222,505, respectively) (2)	$	955,840	$	1,342,090
Securities (includes pledged assets of $54,705,431 and $56,675,447, respectively) (3)	60,727,637		63,655,674
Loans, net (includes pledged assets of $2,778,141 and $2,462,776, respectively) (4)	3,617,818		4,242,043
Mortgage servicing rights	1,108,937		544,562
Interests in MSR	85,653		69,316
Assets transferred or pledged to securitization vehicles	7,809,307		6,086,308

Assets of disposal group held for sale	—		194,138


Derivative assets	964,075		170,370


Receivable for unsettled trades	407,225		2,656
Principal and interest receivable	246,739		234,983


Goodwill and intangible assets, net	23,110		24,241
Other assets	238,793		197,683

Total assets	$	76,185,134	$	76,764,064
Liabilities and stockholders’ equity
Liabilities
Repurchase agreements	$	52,626,503	$	54,769,643
Other secured financing	914,255		903,255

Debt issued by securitization vehicles	6,711,953		5,155,633
Participations issued	775,432		1,049,066

Liabilities of disposal group held for sale	—		154,956


Derivative liabilities	826,972		881,537
Payable for unsettled trades	1,992,568		147,908
Interest payable	80,870		91,176

Dividends payable	321,423		321,142
Other liabilities	456,388		94,423
Total liabilities	64,706,364		63,568,739
Stockholders’ equity







Preferred stock, par value $0.01 per share, 63,500,000 authorized, issued and outstanding	1,536,569		1,536,569
Common stock, par value $0.01 per share, 2,936,500,000 authorized, 1,461,012,252 and 1,459,736,258 issued and outstanding, respectively	14,610		14,597
Additional paid-in capital	20,321,952		20,313,832
Accumulated other comprehensive income (loss)	(2,465,482)		958,410
Accumulated deficit	(7,980,407)		(9,653,582)
Total stockholders’ equity	11,427,242		13,169,826
Noncontrolling interests	51,528		25,499
Total equity	11,478,770		13,195,325
Total liabilities and equity	$	76,185,134	$	76,764,064

(1)Derived from the audited consolidated financial statements at December 31, 2021.
(2)Includes cash of consolidated Variable Interest Entities (“VIEs”) of $8.6 million and $16.2 million at March 31, 2022 and December 31, 2021, respectively.
(3)Excludes $38.5 million and $44.2 million at March 31, 2022 and December 31, 2021, respectively, of Agency mortgage-backed securities and $709.0 million and $350.4 million at March 31, 2022 and December 31, 2021, respectively, of non-Agency mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition.
(4)Includes $1.9 million and $2.3 million of residential mortgage loans held for sale at March 31, 2022 and December 31, 2021, respectively.

See notes to consolidated financial statements.

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 March 31,
	2022		2021
Net interest income
Interest income	$	655,850	$	763,378
Interest expense	74,922		75,973
Net interest income	580,928		687,405
Net servicing income
Servicing and related income	$	34,715	9,229
Servicing and related expense	3,757		2,297
Net servicing income	30,958		6,932
Other income (loss)
Net gains (losses) on investments and other	(159,804)		38,405
Net gains (losses) on derivatives	1,642,028		1,169,383
Loan loss (provision) reversal	(608)		139,620
Business divestiture-related gains (losses)	(354)		(249,563)


Other, net	3,058		6,536
Total other income (loss)	1,484,320		1,104,381















General and administrative expenses
Compensation and management fee	33,002		31,518
Other general and administrative expenses	12,762		16,387
Total general and administrative expenses	45,764		47,905
Income (loss) before income taxes	2,050,442		1,750,813
Income taxes	26,548		(321)
Net income (loss)	2,023,894		1,751,134
Net income (loss) attributable to noncontrolling interests	1,639		321
Net income (loss) attributable to Annaly	2,022,255		1,750,813
Dividends on preferred stock	26,883		26,883
Net income (loss) available (related) to common stockholders	$	1,995,372	$	1,723,930
Net income (loss) per share available (related) to common stockholders
Basic	$	1.37	$	1.23
Diluted	$	1.36	$	1.23
Weighted average number of common shares outstanding
Basic	1,461,363,637		1,399,210,925
Diluted	1,462,451,965		1,400,000,727
Other comprehensive income (loss)
Net income (loss)	$	2,023,894	$	1,751,134
Unrealized gains (losses) on available-for-sale securities	(3,568,679)		(1,428,927)
Reclassification adjustment for net (gains) losses included in net income (loss)	144,787		56,823
Other comprehensive income (loss)	(3,423,892)		(1,372,104)
Comprehensive income (loss)	(1,399,998)		379,030
Comprehensive income (loss) attributable to noncontrolling interests	1,639		321
Comprehensive income (loss) attributable to Annaly	(1,401,637)		378,709
Dividends on preferred stock	26,883		26,883
Comprehensive income (loss) attributable to common stockholders	$	(1,428,520)	$	351,826


See notes to consolidated financial statements.

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 March 31,
		2022		2021
Preferred stock
Beginning of period		$	1,536,569	$	1,536,569



End of period		$	1,536,569	$	1,536,569
Common stock
Beginning of period		$	14,597	$	13,982
Issuance		8		—

Stock-based award activity		5		3


End of period		$	14,610	$	13,985
Additional paid-in capital
Beginning of period		$	20,313,832	$	19,750,818
Issuance		6,096		—

Stock-based award activity		2,024		4,008



End of period		$	20,321,952	$	19,754,826
Accumulated other comprehensive income (loss)
Beginning of period		$	958,410	$	3,374,335
Unrealized gains (losses) on available-for-sale securities		(3,568,679)		(1,428,927)
Reclassification adjustment for net gains (losses) included in net income (loss)		144,787		56,823
End of period		$	(2,465,482)	$	2,002,231
Accumulated deficit
Beginning of period		$	(9,653,582)	$	(10,667,388)


Net income (loss) attributable to Annaly		2,022,255		1,750,813
Dividends declared on preferred stock (1)		(26,883)		(26,883)
Dividends and dividend equivalents declared on common stock and stock-based awards (1)		(322,197)		(308,346)

End of period		$	(7,980,407)	$	(9,251,804)
Total stockholder’s equity		$	11,427,242	$	14,055,807
Noncontrolling interests
Beginning of period		$	25,499	$	13,480
Net income (loss) attributable to noncontrolling interests		1,639		321
Equity contributions from (distributions to) noncontrolling interests		24,390		(2,013)
End of period		$	51,528	$	11,788
Total equity		$	11,478,770	$	14,067,595

(1) Refer to the “Capital Stock” Note for dividends per share for each class of shares.

See notes to consolidated financial statements.

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 Three Months Ended March 31,
	2022		2021
Cash flows from operating activities
Net income (loss)	$	2,023,894	$	1,751,134
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Amortization of premiums and discounts of investments, net	(11,770)		(9,960)
Amortization of securitized debt premiums and discounts and deferred financing costs	(3,074)		(3,588)
Depreciation, amortization and other noncash expenses	4,746		8,408
Net (gains) losses on investments and derivatives	(1,544,765)		(1,287,535)
Business divestiture-related (gains) losses	354		249,563
Income from unconsolidated joint ventures	(8,384)		(1,025)
Loan loss provision (reversal)	608		(139,620)

Payments on purchases of loans held for sale	—		(969)

Proceeds from sales and repayments of loans held for sale	994		3,067






Net receipts (payments) on derivatives	856,299		435,107
Net change in

Other assets	(5,266)		(31,236)
Interest receivable	(8,069)		9,386
Interest payable	(10,657)		(89,000)
Other liabilities	734,238		170,818
Net cash provided by (used in) operating activities	2,029,148		1,064,550
Cash flows from investing activities
Payments on purchases of securities	(5,061,300)		(5,478,414)
Proceeds from sales of securities	2,393,169		2,852,764
Principal payments on securities	3,047,356		4,986,008
Payments on purchases and origination of loans	(2,194,285)		(651,397)
Proceeds from sales of loans	4,215		46,171
Principal payments on loans	605,626		683,451
Payments on purchases of MSR	(421,012)		—

Payments on purchases of interests in MSR	(4,913)		—
Investments in real estate	—		(746)
Proceeds from sales of real estate	—		4,265
Proceeds from reverse repurchase agreements	2,100,000		8,634,313
Payments on reverse repurchase agreements	(2,100,000)		(8,634,313)
Distributions in excess of cumulative earnings from unconsolidated joint ventures	—		290




Net cash provided by (used in) investing activities	(1,631,144)		2,442,392
Cash flows from financing activities
Proceeds from repurchase agreements and other secured financing	839,715,390		534,607,127
Payments on repurchase agreements and other secured financing	(841,845,524)		(537,932,992)

Proceeds from issuances of securitized debt	2,293,500		251,379
Principal payments on securitized debt	(398,843)		(357,224)

Net proceeds from stock offerings, direct purchases and dividend reinvestments	6,104		—

Proceeds from participations issued	676,499		183,067
Payments on repurchases of participations issued	(888,343)		(40,434)
Principal payments on participations issued	(17,370)		(1,293)
Net principal receipts (payments) on mortgages payable	—		(330)
Net contributions (distributions) from (to) noncontrolling interests	24,390		(2,013)

Settlement of stock-based awards in satisfaction of withholding tax requirements	(1,977)		(596)
Dividends paid	(348,080)		(334,543)
Net cash provided by (used in) financing activities	(784,254)		(3,627,852)
Net (decrease) increase in cash and cash equivalents	$	(386,250)	$	(120,910)
Cash and cash equivalents including cash pledged as collateral, beginning of period	1,342,090		1,243,703
Cash and cash equivalents including cash pledged as collateral, end of period	$	955,840	$	1,122,793
Supplemental disclosure of cash flow information
Interest received	$	565,361	$	783,900
Dividends received	$	—	$	33


Interest paid (excluding interest paid on interest rate swaps)	$	57,138	$	116,028
Net interest received (paid) on interest rate swaps	$	(66,918)	$	(133,628)
Taxes received (paid)	$	(677)	$	—
Noncash investing and financing activities
Receivable for unsettled trades	$	407,225	$	144,918
Payable for unsettled trades	$	1,992,568	$	1,070,080
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment	$	(3,423,892)	$	(1,372,104)


Dividends declared, not yet paid	$	321,423	$	307,671






See notes to consolidated financial statements.

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. 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 and mortgage servicing rights (“MSR”). 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”).

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 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 Mortgage Servicing Rights Group			Invests in MSR, which provide the right to service residential loans in exchange for a portion of the interest payments made on the loans.

In March 2021, the Company announced that it had entered into a definitive agreement to sell and exit its Commercial Real Estate (“CRE”) business. As of March 31, 2022, the assets held for sale and the associated liabilities were transferred. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.

In April 2022, the Company announced that it had entered into a definitive agreement to sell substantially all of the assets that comprise the Annaly Middle Market Lending ("MML") portfolio, including assets held on balance sheet as well as assets managed for third parties. Subject to customary closing conditions, the sale of the MML business is expected to be completed by the second quarter of 2022. Refer to the "Subsequent Events" 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, 2021 (the “2021 Form 10-K”). The consolidated financial information as of December 31, 2021 has been derived from audited consolidated financial statements included in the Company’s 2021 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 March 31, 2022, in light of the continued growth of its mortgage servicing rights portfolio, the Company enhanced its financial disclosures by separately reporting servicing income and servicing expense in its Consolidated Statements of Comprehensive Income (Loss). Servicing income and servicing expense were previously included within Other income (loss). As a result of this change, prior periods have been adjusted to conform to the current presentation.

In addition, the Company consolidated certain line items in its Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation. Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives. Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings are combined into a single line item titled Net

gains (losses) on investments and other. As a result of these changes, prior periods have been adjusted to conform to the current presentation.

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, net 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 Other, net decreased by the same amounts for the three months ended March 31, 2021. These reclassifications had no effect on the reported net income (loss) in the Company’s Consolidated Statements of Comprehensive Income (Loss).

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.


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 Other assets with income or loss included in Other, net.

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 $0.8 billion and $1.2 billion at March 31, 2022 and December 31, 2021, 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 gains (losses) on investments and other 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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 derivatives. 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. Compensation expense is recognized ratably over the vesting or requisite service period of the award. Stock-based awards that contain market-based conditions are valued using a model.

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 (Loss). 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 on corporate debt for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

Recent Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). 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
Standard that has been adopted



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.

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 March 31, 2022 and December 31, 2021.

Financial Instruments (1)

Balance Sheet Line Item

Type / Form

Measurement Basis

March 31, 2022

December 31, 2021

Assets

(dollars in thousands)

Securities

Agency mortgage-backed securities (2)

Fair value, with unrealized gains (losses) through other comprehensive income

57,257,909

59,939,383

Securities

Agency mortgage-backed securities (3)

Fair value, with unrealized gains (losses) through earnings

529,232

586,222

Securities

Residential credit risk transfer securities

Fair value, with unrealized gains (losses) through earnings

845,809

936,228

Securities

Non-agency mortgage-backed securities

Fair value, with unrealized gains (losses) through earnings

1,737,333

1,663,336

Securities

Commercial real estate debt investments - CMBS

Fair value, with unrealized gains (losses) through earnings

348,666

521,440

Securities

Commercial real estate debt investments - credit risk transfer securities

Fair value, with unrealized gains (losses) through earnings

8,688

9,065

Total securities

60,727,637

63,655,674

Loans, net

Residential mortgage loans

Fair value, with unrealized gains (losses) through earnings

1,650,151

2,272,072

Loans, net

Residential mortgage loan warehouse facility

Fair value, with unrealized gains (losses) through earnings

—

980

Loans, net

Corporate debt, held for investment

Amortized cost

1,967,667

1,968,991

Total loans, net

3,617,818

4,242,043

Interests in MSR

Interest in net servicing cash flows

Fair value, with unrealized gains (losses) through earnings

85,653

69,316

Assets transferred or pledged to securitization vehicles

Agency mortgage-backed securities

Fair value, with unrealized gains (losses) through other comprehensive income

544,991

589,873

Assets transferred or pledged to securitization vehicles

Residential mortgage loans

Fair value, with unrealized gains (losses) through earnings

7,264,316

5,496,435

Total assets transferred or pledged to securitization vehicles

7,809,307

6,086,308

Liabilities

Repurchase agreements

Amortized cost

52,626,503

54,769,643

Other secured financing

Loans

Amortized cost

914,255

903,255

Debt issued by securitization vehicles

Securities

Fair value, with unrealized gains (losses) through earnings

6,711,953

5,155,633

Participations issued

Fair value, with unrealized gains (losses) through earnings

775,432

1,049,066

(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.


5. SECURITIES

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

Impairment – Management evaluates available-for-sale securities 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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss) as a securities loss provision and reflected as an allowance for credit losses on securities on the Consolidated Statements of Financial Condition, while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). When the fair value of a held-to-maturity security is less than the cost, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. For the three months ended March 31, 2021, the Company recognized a $0.4 million impairment on a commercial mortgage-backed security that was sold subsequently in 2021.

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

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

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

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

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

Commercial Mortgage-Backed Securities (“Commercial Securities”) - 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.

The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the three months ended March 31, 2022:


	Agency Securities		Residential Credit Securities		Commercial Securities		Total
	(dollars in thousands)
Beginning balance January 1, 2022	$	60,525,605	$	2,599,564	$	530,505	$	63,655,674
Purchases	6,160,670		372,464		—		6,533,134
Sales and transfers	(2,583,651)		(177,561)		(169,224)		(2,930,436)
Principal paydowns	(2,910,094)		(132,519)		(773)		(3,043,386)
(Amortization) / accretion	24,656		890		4		25,550
Fair value adjustment	(3,430,045)		(79,696)		(3,158)		(3,512,899)
Ending balance March 31, 2022	$	57,787,141	$	2,583,142	$	357,354	$	60,727,637

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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 March 31, 2022 and December 31, 2021:


	March 31, 2022
	Principal / Notional		Remaining Premium		Remaining Discount		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	54,859,660	$	3,047,099	$	(79,126)	$	57,827,633	$	136,232	$	(2,585,619)	$	55,378,246
Adjustable-rate pass-through	284,000		5,581		(660)		288,921		8,490		(1,639)		295,772
CMO	110,247		1,827		—		112,074		103		(1,898)		110,279
Interest-only	1,784,533		435,220		—		435,220		149		(192,355)		243,014
Multifamily(1)	6,805,912		280,406		(6,099)		1,785,614		8,223		(68,736)		1,725,101
Reverse mortgages	33,287		3,414		—		36,701		—		(1,972)		34,729
Total agency securities	$	63,877,639	$	3,773,547	$	(85,885)	$	60,486,163	$	153,197	$	(2,852,219)	$	57,787,141
Residential credit
Credit risk transfer (2)	$	848,990	$	7,899	$	(570)	$	854,879	$	3,304	$	(12,374)	$	845,809
Alt-A	81,711		33		(16,943)		64,801		2,121		(2,344)		64,578
Prime (3)	299,044		9,405		(14,304)		263,750		6,396		(20,334)		249,812

Subprime	158,423		298		(15,359)		143,362		5,642		(4,479)		144,525
NPL/RPL	1,097,310		877		(3,357)		1,094,830		736		(20,558)		1,075,008
Prime jumbo (>=2010 vintage) (4)	1,391,118		13,143		(14,778)		217,179		2,851		(16,620)		203,410

Total residential credit securities	$	3,876,596	$	31,655	$	(65,311)	$	2,638,801	$	21,050	$	(76,709)	$	2,583,142
Total Residential Securities	$	67,754,235	$	3,805,202	$	(151,196)	$	63,124,964	$	174,247	$	(2,928,928)	$	60,370,283
Commercial
Commercial Securities	$	363,046	$	—	$	(96)	$	362,950	$	—	$	(5,596)	$	357,354
Total securities	$	68,117,281	$	3,805,202	$	(151,292)	$	63,487,914	$	174,247	$	(2,934,524)	$	60,727,637


	December 31, 2021
	Principal / Notional		Remaining Premium		Remaining Discount		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	54,432,252	$	3,008,185	$	(18,314)	$	57,422,123	$	1,349,125	$	(474,643)	$	58,296,605
Adjustable-rate pass-through	305,211		1,965		(2,124)		305,052		16,223		(2)		321,273
CMO	114,533		1,888		—		116,421		5,277		—		121,698

Interest-only	1,912,415		456,683		—		456,683		428		(163,197)		293,914
Multifamily (1)	5,671,138		273,553		—		1,453,946		15,330		(16,563)		1,452,713
Reverse mortgages	36,807		3,550		—		40,357		—		(955)		39,402
Total agency investments	$	62,472,356	$	3,745,824	$	(20,438)	$	59,794,582	$	1,386,383	$	(655,360)	$	60,525,605
Residential credit
Credit risk transfer (2)	$	924,101	$	8,754	$	(1,176)	$	927,555	$	9,641	$	(968)	$	936,228
Alt-A	83,213		31		(17,133)		66,111		3,627		(251)		69,487
Prime (3)	323,062		9,841		(14,757)		268,117		10,853		(3,529)		275,441

Subprime	170,671		349		(16,111)		154,909		8,285		(118)		163,076
NPL/RPL	987,415		950		(1,698)		986,667		2,739		(5,968)		983,438
Prime jumbo (>=2010 vintage) (4)	299,783		5,680		(6,410)		172,598		4,272		(4,976)		171,894

Total residential credit securities	$	2,788,245	$	25,605	$	(57,285)	$	2,575,957	$	39,417	$	(15,810)	$	2,599,564
Total Residential Securities	$	65,260,601	$	3,771,429	$	(77,723)	$	62,370,539	$	1,425,800	$	(671,170)	$	63,125,169
Commercial
Commercial Securities	$	533,071	$	—	$	(127)	$	532,944	$	165	$	(2,604)	$	530,505
Total securities	$	65,793,672	$	3,771,429	$	(77,850)	$	62,903,483	$	1,425,965	$	(673,774)	$	63,655,674

(1) Principal/Notional amount includes $5.3 billion and $4.5 billion of Agency Multifamily interest-only securities as of March 31, 2022 and December 31, 2021, respectively. (2) Principal/Notional amount includes $1.4 million and $4.1 million of a CRT interest-only security as of March 31, 2022 and December 31, 2021, respectively. (3) Principal/Notional amount includes $30.4 million and $50.0 million of Prime interest-only securities as of March 31, 2022 and December 31, 2021, respectively. (4) Principal/Notional amount includes $1.2 billion and $126.5 million of Prime Jumbo interest-only securities as of March 31, 2022 and December 31, 2021, respectively.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferred or pledged to securitization vehicles, by issuing Agency at March 31, 2022 and December 31, 2021:


	March 31, 2022		December 31, 2021
Investment Type	(dollars in thousands)
Fannie Mae	$	46,824,563	$	48,404,991
Freddie Mac	9,819,001		10,880,033
Ginnie Mae	1,143,577		1,240,581
Total	$	57,787,141	$	60,525,605

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 March 31, 2022 and December 31, 2021, according to their estimated weighted average life classifications:


	March 31, 2022				December 31, 2021
	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Estimated weighted average life	(dollars in thousands)
Less than one year	$	181,054	$	180,846	$	253,129	$	250,689
Greater than one year through five years	4,123,236		4,160,292		16,155,017		15,766,307
Greater than five years through ten years	51,112,733		53,521,509		45,470,212		45,102,607
Greater than ten years	4,953,260		5,262,317		1,246,811		1,250,936
Total	$	60,370,283	$	63,124,964	$	63,125,169	$	62,370,539

The estimated weighted average lives of the Residential Securities at March 31, 2022 and December 31, 2021 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 March 31, 2022 and December 31, 2021.


	March 31, 2022					December 31, 2021
	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	$	37,098,530	$	(1,402,053)	1,838	$	22,828,156	$	(475,064)	571
12 Months or more	12,118,518		(1,238,095)		301	383,815		(10,960)		19
Total	$	49,217,048	$	(2,640,148)	2,139	$	23,211,971	$	(486,024)	590

(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 months ended March 31, 2022 and 2021, the Company disposed of $2.8 billion and $3.0 billion of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three months ended March 31, 2022 and 2021.


	Gross Realized Gains		Gross Realized Losses		Net Realized Gains (Losses)
For the three months ended	(dollars in thousands)
March 31, 2022	$	1,565	$	(146,056)	$	(144,491)
March 31, 2021	$	4,646	$	(65,340)	$	(60,694)

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


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 March 31, 2022 and December 31, 2021, the Company reported $1.7 billion and $2.3 billion, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $1.9 million and $2.3 million at March 31, 2022 and December 31, 2021, respectively.

Allowance for Losses – The Company evaluates the need for a loss reserve on each of its loans classified as held-for-investment, which primarily include corporate debt, 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. An allowance is established at origination or acquisition that reflects management’s estimate 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.

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 ($0.6) million and $139.6 million for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022 and December 31, 2021, the Company’s loan loss allowance was $28.5 million and $27.9 million, respectively.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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 three months ended March 31, 2022:


	Residential		Corporate Debt		Total
	(dollars in thousands)
Beginning balance January 1, 2022	$	2,272,072	$	1,968,991	$	4,241,063

Purchases / originations	2,025,930		171,697		2,197,627
Sales and transfers (1)	(2,550,155)		—		(2,550,155)



Principal payments	(34,284)		(174,238)		(208,522)
Gains / (losses) (2)	(60,654)		(608)		(61,262)
(Amortization) / accretion	(2,758)		1,825		(933)

Ending balance March 31, 2022	$	1,650,151	$	1,967,667	$	3,617,818


(1) Includes securitizations, syndications and transfers to securitization vehicles. Includes transfer of residential loans to securitization vehicles with a carrying value of $2.5 billion during the three months ended March 31, 2022. (2) Includes loan loss allowances.

The Company’s corporate loans also have off-balance-sheet credit exposure related to unfunded loan commitments, including revolvers, delayed draw term loans and future funding commitments that are not unconditionally cancellable 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 gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts.

The 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 March 31, 2022 and December 31, 2021:


	March 31, 2022		December 31, 2021
	(dollars in thousands)
Fair value	$	8,914,467	$	7,768,507
Unpaid principal balance	$	9,097,860	$	7,535,855

The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021 for these investments, excluding loan warehouse facilities:


	For the Three Months Ended
	March 31, 2022		March 31, 2021
	(dollars in thousands)
Interest income	$	73,465	$	37,109
Net gains (losses) on disposal of investments (1)	(7,338)		(5,220)
Net unrealized gains (losses) on instruments measured at fair value through earnings (1)	(415,248)		22,455
Total included in net income (loss)	$	(349,121)	$	54,344

(1) These amounts are presented in the line item Net gains (losses) on investments and other on the Consolidated Statements of Comprehensive Income (Loss)

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The following table provides the geographic concentrations based on the unpaid principal balances at March 31, 2022 and December 31, 2021 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:

Geographic Concentrations of Residential Mortgage Loans

March 31, 2022

December 31, 2021

Property location

% of Balance

Property location

% of Balance

California

48.4%

California

50.2%

New York

11.6%

New York

10.9%

Florida

6.8%

Florida

6.1%

All other (none individually greater than 5%)

33.2%

All other (none individually greater than 5%)

32.8%

Total

100.0%

The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at March 31, 2022 and December 31, 2021:


	March 31, 2022		December 31, 2021
	Portfolio Range	Portfolio Weighted Average	Portfolio Range	Portfolio Weighted Average
	(dollars in thousands)
Unpaid principal balance	$1 - $4,396	$496	$1 - $4,382	$513
Interest rate	0.75% - 15.00%	4.02%	0.75% - 9.24%	4.04%
Maturity	7/1/2029 - 4/1/2062	4/8/2051	7/1/2029 - 12/1/2061	12/22/2050
FICO score at loan origination	588 - 832	762	604 - 831	762
Loan-to-value ratio at loan origination	7% - 103%	66%	8% - 103%	66%

At March 31, 2022 and December 31, 2021, approximately 13% and 16%, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.

The Company participates in an arrangement that provides a residential mortgage loan warehouse facility to a third-party originator. The Company has elected to apply the fair value option to this lending facility in order to simplify the accounting and keep the accounting consistent with other residential credit financial instruments with similar characteristics. At March 31, 2022 and December 31, 2021, the fair value and carrying value of this warehouse facility was $0 and $1.0 million, respectively, and reported as Loans, net in the Consolidated Statements of Financial Condition. As of March 31, 2022, the lending facility was not on nonaccrual status nor past due.

Commercial

As of December 31, 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. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the transaction.

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:

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


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.

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 three months ended March 31, 2022 and 2021.

For the three months ended March 31, 2022 and 2021 the Company recorded a net loan loss (provision) reversal on corporate loans of ($0.6) million and $6.2 million, respectively, based upon its Loss Given Default methodology.

At March 31, 2022 and December 31, 2021, the Company had unfunded corporate loan commitments of $284.5 million and $278.9 million, respectively. At March 31, 2022 and December 31, 2021, the liability related to the expected credit losses on the unfunded corporate loan commitments was $2.5 million and $2.3 million, respectively.

The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at March 31, 2022 and December 31, 2021 are as follows:

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


	Industry Dispersion
	March 31, 2022		December 31, 2021
	Total (1)		Total (1)
	(dollars in thousands)
Computer Programming, Data Processing & Other Computer Related Services	$	464,921	$	437,257
Management & Public Relations Services	229,097		263,187
Industrial Inorganic Chemicals	155,728		156,292
Miscellaneous Industrial & Commercial	96,789		93,619
Miscellaneous Health & Allied Services, not elsewhere classified	96,104		64,133
Public Warehousing & Storage	95,037		94,179
Electronic Components & Accessories	92,166		92,261
Surgical, Medical & Dental Instruments & Supplies	80,391		80,786
Drugs	67,244		—
Research, Development & Testing Services	62,689		59,311
Engineering, Architectural & Surveying	50,023		49,088
Offices & Clinics of Doctors of Medicine	49,910		50,017
Medical & Dental Laboratories	48,603		30,199
Insurance Agents, Brokers & Service	43,360		43,598
Telephone Communications	42,651		42,589
Electrical Work	42,611		42,617
Miscellaneous Equipment Rental & Leasing	32,367		32,346
Home Health Care Services	28,600		28,660
Metal Forgings & Stampings	27,514		27,483
Legal Services	26,146		26,105
Petroleum & Petroleum Products	20,705		21,434
Sanitary Services	20,410		20,453
Grocery Stores	19,646		19,745
Coating, Engraving & Allied Services	17,742		17,705
Chemicals & Allied Products	14,626		14,657
Mailing, Reproduction, Commercial Art & Photography & Stenographic	12,431		12,388
Machinery, Equipment & Supplies	10,323		10,814
Offices & Clinics of Other Health Practitioners	10,068		10,083
Schools & Educational Services, not elsewhere classified	9,765		9,781
Metal Cans & Shipping Containers	—		118,204




































Total	$	1,967,667	$	1,968,991

(1) All middle market lending positions are floating rate.

The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at March 31, 2022 and December 31, 2021.


	March 31, 2022		December 31, 2021
	(dollars in thousands)
First lien loans	$	1,471,546	$	1,391,217
Second lien loans (1)	496,121		577,774



Total	$	1,967,667	$	1,968,991

(1) Includes mezzanine positions.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The following tables represent a rollforward of the activity for the Company’s corporate debt investments held for investment at March 31, 2022 and December 31, 2021:


March 31, 2022
	First Lien		Second Lien		Total
	(dollars in thousands)
Beginning balance (January 1, 2022) (1)	$	1,391,217	$	577,774	$	1,968,991
Originations & advances	154,396		17,301		171,697

Principal payments	(74,251)		(99,987)		(174,238)
Amortization & accretion of (premium) discounts	885		940		1,825




Allowance for loan losses
Beginning allowance	(17,341)		(10,579)		(27,920)

Current period (allowance) reversal	(701)		93		(608)

Ending allowance	(18,042)		(10,486)		(28,528)

Net carrying value (March 31, 2022)	$	1,471,546	$	496,121	$	1,967,667


December 31, 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	1,506,705		66,013		1,572,718
Sales and transfers (2)	(1,122,275)		(83,690)		(1,205,965)
Principal payments	(492,884)		(169,057)		(661,941)
Amortization & accretion of (premium) discounts	9,120		3,497		12,617



Allowance for loan losses
Beginning allowance	(18,767)		(20,785)		(39,552)

Current period (allowance) reversal	1,426		10,206		11,632

Ending allowance	(17,341)		(10,579)		(27,920)

Net carrying value (December 31, 2021)	$	1,391,217	$	577,774	$	1,968,991


(1) Excludes loan loss allowances. (2) Includes syndications.

The following table provides the amortized cost basis of corporate debt held for investment as of March 31, 2022 by vintage year and internal risk rating.


Amortized Cost Basis by Risk Rating and Vintage (1)
Risk Rating	Vintage
	Total		2022		2021		2020		2019		2018		2017		2016
(dollars in thousands)
1-5 / Performing	$	1,797,943	$	55,565	$	641,746	$	342,945	$	221,796	$	358,884	$	138,903	$	38,104
6 / Performing - Closely Monitored	65,000		—		22,522		26,146		16,332		—		—		—
7 / Substandard	104,724		—		—		10,323		9,276		85,125		—		—
8 / Doubtful	—		—		—		—		—		—		—		—
9 / Loss	—		—		—		—		—		—		—		—
Total	$	1,967,667	$	55,565	$	664,268	$	379,414	$	247,404	$	444,009	$	138,903	$	38,104

(1) The amortized cost basis excludes accrued interest and includes deferred fees on unfunded loans. As of March 31, 2022, the Company had $9.7 million of accrued interest receivable on corporate loans, which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition, and $0.8 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


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 gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss).

Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party 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 gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other, net in the Consolidated Statements of Comprehensive Income (Loss).

The following tables present activity related to MSR and Interests in MSR for the three months ended March 31, 2022 and 2021:


Mortgage Servicing Rights	Three Months Ended
	March 31, 2022		March 31, 2021
	(dollars in thousands)
Fair value, beginning of period	$	544,562	$	100,895

Purchases (1)	421,012		—


Change in fair value due to:
Changes in valuation inputs or assumptions (2)	158,963		27,673
Other changes, including realization of expected cash flows	(15,600)		(15,488)
Fair value, end of period	$	1,108,937	$	113,080

(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. (2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates.


Interests in MSR	Three Months Ended
	March 31, 2022
	(dollars in thousands)
Beginning balance	$	69,316
Purchases (1)	4,913
Gain (loss) included in net income	11,424


Ending balance March 31, 2022	$	85,653

(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


8. VARIABLE INTEREST ENTITIES

Multifamily Securitization

In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $0.5 billion and retained interest-only securities with a notional balance of $0.5 billion. At the inception of this arrangement, the Company determined that it was the primary beneficiary based upon its involvement in the design of this VIE and through the retention of a significant variable interest in the VIE. The Company elected the fair value option for the financial liabilities of this VIE in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase.

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
OBX 2021-J3	October 2021	$	453,650
OBX 2021-INV2	October 2021	$	343,571
OBX 2021-INV3	November 2021	$	470,576
OBX 2021-NQM4	November 2021	$	542,836
OBX 2022-NQM1	January 2022	$	556,696
OBX 2022-INV1	January 2022	$	377,275
OBX 2022-INV2	February 2022	$	466,686
OBX 2022-NQM2	February 2022	$	439,421
OBX 2022-INV3	March 2022	$	330,823
OBX 2022-NQM3	March 2022	$	315,843

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

As of March 31, 2022 and December 31, 2021, a total carrying value of $6.2 billion and $4.6 billion, respectively, of bonds were held by third parties and the Company retained $892.5 million and $780.8 million, respectively, 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 $3.4 million and $0.7 million of costs during the three months ended March 31, 2022 and 2021, 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 $6.5 billion and $4.6 billion at March 31, 2022 and December 31, 2021, respectively.

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

Credit Facility VIEs

In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of March 31, 2022 and December 31, 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 $716.4 million and $692.6 million at March 31, 2022 and December 31, 2021, respectively. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At March 31, 2022 and December 31, 2021, the subsidiary had an intercompany receivable of $455.5 million and $433.3 million, respectively, which eliminates upon consolidation and a secured financing of $455.5 million and $433.3 million, respectively, 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 March 31, 2022 and December 31, 2021, the borrowing limit on this facility was $234.2 million and $400.0 million, respectively. 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 $396.6 million and $402.9 million at March 31, 2022 and December 31, 2021, respectively, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net. At March 31, 2022 and December 31, 2021, the subsidiary had a secured financing of $234.2 million and $238.2 million, respectively, 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 March 31, 2022 and December 31, 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 $362.4 million and $368.0 million at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, the subsidiary had a secured financing of $224.6 million and $231.8 million, respectively, 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 $2.5 billion at March 31, 2022. 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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 March 31, 2022 and December 31, 2021 are as follows:


March 31, 2022
	MSR VIEs
Assets	(dollars in thousands)
Cash and cash equivalents	$	8,570
Loans	1,897



Mortgage servicing rights	9,101
Interests in MSR	85,653


Other assets	11,600
Total assets	$	116,821
Liabilities



Payable for unsettled trades	2,155

Other liabilities	6,100
Total liabilities	$	8,255


December 31, 2021
	MSR VIEs
Assets	(dollars in thousands)
Cash and cash equivalents	$	16,187
Loans	2,347



Mortgage servicing rights	7,254
Interests in MSR	69,316


Other assets	10,406
Total assets	$	105,510
Liabilities



Payable for unsettled trades	1,911

Other liabilities	14,582
Total liabilities	$	16,493

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 months ended March 31, 2022 and 2021, the Company transferred $0 and $15.1 million, respectively, 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 March 31, 2022 and December 31, 2021, the Company had outstanding participating interests in residential mortgage loans of $0.8 billion and $1.0 billion, 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


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 included equity interests, loan assets and associated liabilities, and CMBS (other than commercial CRTs). The Company also sold nearly all of the remaining CRE business assets that are not included in the transaction with Slate. Certain employees who primarily supported the CRE business joined Slate in connection with the sale. In connection with the execution of the definitive agreement to sell the CRE business, during the three months ended March 31, 2021, the Company performed an assessment of goodwill, which was related to the Company’s 2013 acquisition of CreXus Investment Corp., and recognized an impairment of $71.8 million. During the three months ended March 31, 2021, the Company reported Business divestiture-related gains (losses) of ($249.6) million, in its Consolidated Statements of Comprehensive Income (Loss) which includes the aforementioned goodwill impairment as well as valuation adjustments resulting from classifying the assets as held for sale and estimated transaction costs. In addition, as a result of classifying the loans as held for sale, the previously recognized allowance for loan losses of $135.0 million, which includes $5.1 million on unfunded loan commitments, was reversed during the three months ended March 31, 2021. As of March 31, 2022, the assets held for sale and the associated liabilities were transferred to Slate.


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 Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts.

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

The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At March 31, 2022 and December 31, 2021, ($1.5) billion and ($0.4) 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 have outstanding 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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value.

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

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

MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market 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 March 31, 2022 and December 31, 2021:


Derivatives Instruments	March 31, 2022		December 31, 2021
Assets	(dollars in thousands)

Interest rate swaptions	$	213,882	$	105,710
TBA derivatives	24,757		52,693
Futures contracts	724,696		9,028
Purchase commitments	484		1,779
Credit derivatives (1)	256		1,160
Total derivative assets	$	964,075	$	170,370
Liabilities
Interest rate swaps	$	481,696	$	747,036

TBA derivatives	336,212		3,916
Futures contracts	5,850		129,134
Purchase commitments	73		870
Credit derivatives (1)	3,141		581
Total derivative liabilities	$	826,972	$	881,537

(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $410.0 million and $400.0 million at March 31, 2022 and December 31, 2021, respectively, plus any coupon shortfalls on the underlying tranche. As of March 31, 2022 and December 31, 2021 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and AA.

The following table summarizes certain characteristics of the Company’s interest rate swaps at March 31, 2022 and December 31, 2021:

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


March 31, 2022
Maturity	Current Notional (1)(2)		Weighted Average Pay Rate		Weighted Average Receive Rate		Weighted Average Years to Maturity (3)
(dollars in thousands)
0 - 3 years	$	29,179,850	0.36	%	0.53	%	0.75
3 - 6 years	4,343,000		0.83	%	0.32	%	3.83
6 - 10 years	11,042,400		1.54	%	0.47	%	9.01
Greater than 10 years	1,915,000		3.45	%	0.34	%	16.90
Total / Weighted average	$	46,480,250	0.70	%	0.50	%	3.66


December 31, 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	$	32,709,300	0.25	%	0.06	%	1.10
3 - 6 years	2,780,000		0.21	%	0.07	%	3.46
6 - 10 years	9,118,000		1.43	%	0.13	%	9.05
Greater than 10 years	1,300,000		4.04	%	0.11	%	18.70
Total / Weighted average	$	45,907,300	0.59	%	0.08	%	3.32

(1) As of March 31, 2022, 17%, 46% and 37% 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, 2021, 18%, 53% and 29% 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 March 31, 2022 and December 31, 2021. (3) At March 31, 2022 and December 31, 2021, 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 summarizes certain characteristics of the Company’s swaptions at March 31, 2022 and December 31, 2021:


March 31, 2022
	Current Underlying Notional	Weighted Average Underlying Fixed Rate	Weighted Average Underlying Floating Rate	Weighted Average Underlying Years to Maturity	Weighted Average Months to Expiration
(dollars in thousands)
Long pay	$4,050,000	2.00%	3M LIBOR	9.40	16.50
Long receive	$1,000,000	1.49%	3M LIBOR	11.45	17.49

December 31, 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	2.00%	3M LIBOR	9.65	19.50
Long receive	$2,000,000	1.47%	3M LIBOR	10.95	11.38

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

The following table summarizes certain characteristics of the Company’s TBA derivatives at March 31, 2022 and December 31, 2021:


March 31, 2022
Purchase and sale contracts for derivative TBAs	Notional		Implied Cost Basis		Implied Market Value		Net Carrying Value
(dollars in thousands)
Purchase contracts	$	18,885,000	$	18,596,163	$	18,284,708	$	(311,455)




December 31, 2021
Purchase and sale contracts for derivative TBAs	Notional		Implied Cost Basis		Implied Market Value		Net Carrying Value
(dollars in thousands)
Purchase contracts	$	20,133,000	$	20,289,856	$	20,338,633	$	48,777

The following table summarizes certain characteristics of the Company’s futures derivatives at March 31, 2022 and December 31, 2021:


March 31, 2022
	Notional - Long Positions		Notional - Short Positions		Weighted Average Years to Maturity
	(dollars in thousands)

U.S. Treasury futures - 2 year	$	—	$	(7,477,200)	1.98
U.S. Treasury futures - 5 year	—		(5,240,900)		4.40
U.S. Treasury futures - 10 year and greater	—		(15,028,000)		6.94
Total	$	—	$	(27,746,100)	5.12


December 31, 2021
	Notional - Long Positions		Notional - Short Positions		Weighted Average Years to Maturity
	(dollars in thousands)

U.S. Treasury futures - 2 year	$	—	$	(7,509,200)	1.96
U.S. Treasury futures - 5 year	—		(5,644,900)		4.38
U.S. Treasury futures - 10 year and greater	—		(9,381,000)		6.84
Total	$	—	$	(22,535,100)	4.60

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 March 31, 2022 and December 31, 2021, respectively.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


March 31, 2022
			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments		Cash Collateral		Net Amounts
Assets	(dollars in thousands)

Interest rate swaptions, at fair value	$	213,882	$	—	$	—	$	213,882
TBA derivatives, at fair value	24,757		(22,571)		—		2,186
Futures contracts, at fair value	724,696		(5,850)		—		718,846
Purchase commitments	484		—		—		484
Credit derivatives	256		(256)		—		—
Liabilities
Interest rate swaps, at fair value	$	481,696	$	—	$	(35,387)	$	446,309
TBA derivatives, at fair value	336,212		(22,571)		(1,220)		312,421
Futures contracts, at fair value	5,850		(5,850)		—		—
Purchase commitments	73		—		—		73
Credit derivatives	3,141		(256)		(2,885)		—

December 31, 2021
			Amounts Eligible for Offset
	Gross Amounts		Financial Instruments		Cash Collateral		Net Amounts
Assets	(dollars in thousands)

Interest rate swaptions, at fair value	$	105,710	$	—	$	—	$	105,710
TBA derivatives, at fair value	52,693		(3,876)		—		48,817
Futures contracts, at fair value	9,028		(9,028)		—		—
Purchase commitments	1,779		—		—		1,779
Credit derivatives	1,160		(516)		—		644
Liabilities
Interest rate swaps, at fair value	$	747,036	$	—	$	(77,607)	$	669,429
TBA derivatives, at fair value	3,916		(3,876)		(40)		—
Futures contracts, at fair value	129,134		(9,028)		(120,106)		—
Purchase commitments	870		—		—		870
Credit derivatives	581		(516)		(65)		—

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



	Net Interest Component of Interest Rate Swaps (1)		Realized Gains (Losses) on Termination of Interest Rate Swaps (1)		Unrealized Gains (Losses) on Interest Rate Swaps (1)
For the three months ended	(dollars in thousands)
March 31, 2022	$	(62,541)	$	—	$	1,323,439
March 31, 2021	$	(79,747)	$	—	$	772,262
(1) Included in Net gains (losses) on derivatives on the Consolidated Statements of Comprehensive Income (Loss).

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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


Three Months Ended March 31, 2022
Derivative Instruments	Realized Gain (Loss)		Unrealized Gain (Loss)		Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Derivatives
(dollars in thousands)
Net TBA derivatives	$	(756,139)	$	(360,231)	$	(1,116,370)
Net interest rate swaptions	(14,450)		122,622		108,172
Futures	553,154		838,952		1,392,106
Purchase commitments	—		(499)		(499)
Credit derivatives	1,060		(3,339)		(2,279)

Total					$	381,130


Three Months Ended March 31, 2021
Derivative Instruments	Realized Gain (Loss)		Unrealized Gain (Loss)		Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Derivatives
(dollars in thousands)
Net TBA derivatives	$	(287,889)	$	(342,228)	$	(630,117)
Net interest rate swaptions	(22,210)		305,990		283,780
Futures	296,164		517,133		813,297
Purchase commitments	—		(1,907)		(1,907)
Credit derivatives	1,631		9,023		10,654

Total					$	475,707

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 derivative instruments with the aforementioned features were in a net asset position at March 31, 2022.


11. FAIR VALUE MEASUREMENTS

The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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.

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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


March 31, 2022
	Level 1		Level 2		Level 3		Total
Assets	(dollars in thousands)
Securities
Agency mortgage-backed securities	$	—	$	57,787,141	$	—	$	57,787,141
Credit risk transfer securities	—		845,809		—		845,809
Non-Agency mortgage-backed securities	—		1,737,333		—		1,737,333
Commercial mortgage-backed securities	—		357,354		—		357,354
Loans
Residential mortgage loans	—		1,650,151		—		1,650,151

Mortgage servicing rights	—		—		1,108,937		1,108,937
Interests in MSR	—		—		85,653		85,653
Assets transferred or pledged to securitization vehicles	—		7,809,307		—		7,809,307
Derivative assets


Other derivatives	724,696		239,379		—		964,075
Total assets	$	724,696	$	70,426,474	$	1,194,590	$	72,345,760
Liabilities

Debt issued by securitization vehicles	—		6,711,953		—		6,711,953
Participations issued	—		775,432		—		775,432
Derivative liabilities
Interest rate swaps	—		481,696		—		481,696
Other derivatives	5,850		339,426		—		345,276
Total liabilities	$	5,850	$	8,308,507	$	—	$	8,314,357


December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets	(dollars in thousands)
Securities
Agency mortgage-backed securities	$	—	$	60,525,605	$	—	$	60,525,605
Credit risk transfer securities	—		936,228		—		936,228
Non-Agency mortgage-backed securities	—		1,663,336		—		1,663,336
Commercial mortgage-backed securities	—		530,505		—		530,505
Loans
Residential mortgage loans	—		2,272,072		—		2,272,072
Residential mortgage loan warehouse facility	—		980		—		980
Mortgage servicing rights	—		—		544,562		544,562
Interests in MSR	—		—		69,316		69,316
Assets transferred or pledged to securitization vehicles	—		6,086,308		—		6,086,308
Derivative assets


Other derivatives	9,028		161,342		—		170,370
Total assets	$	9,028	$	72,176,376	$	613,878	$	72,799,282
Liabilities

Debt issued by securitization vehicles	$	—	$	5,155,633	$	—	$	5,155,633
Participations issued	—		1,049,066		—		1,049,066
Derivative liabilities
Interest rate swaps	—		747,036		—		747,036
Other derivatives	129,134		5,367		—		134,501
Total liabilities	$	129,134	$	6,957,102	$	—	$	7,086,236

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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.


	March 31, 2022
	Unobservable Input (1) / Range (Weighted Average) (2)
	Discount rate	Prepayment rate	Delinquency rate	Cost to service

MSR held directly	3.8% - 9.0% (7.5%)	5.5% - 10.1% (6.2%)	0.1% - 2.5% (0.7%)	$89 - $103 ($94)
Interests in MSR	7.1% - 7.1% (7.1%)	4.2% - 10.6% (7.3%)	0.4% - 4.2% (1.3%)	$82 - $87 ($84)


	December 31, 2021
	Unobservable Input (1) / Range (Weighted Average) (2)
	Discount rate	Prepayment rate	Delinquency rate	Cost to service

MSR held directly	3.3% - 11.1% (7.0%)	7.3% - 15.9% (9.4%)	0.2% - 2.5% (1.2%)	$90 - $103 ($96)
Interests in MSR	8.4% - 8.4% (8.4%)	5.0% - 14.4% (9.1%)	0.0% - 0.2% (0.1%)	$78 - $84 ($81)
(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.

The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at March 31, 2022 and December 31, 2021.


	March 31, 2022		December 31, 2021
	Carrying Value	Fair Value	Carrying Value	Fair Value
Financial assets	(dollars in thousands)











Corporate debt, held for investment	1,967,667	1,998,487	1,968,991	1,986,379




Financial liabilities
Repurchase agreements	$52,626,503	$52,626,503	$54,769,643	$54,769,643
Other secured financing	914,255	914,255	903,255	903,255

Corporate debt, held for investment and corporate debt, held for sale are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximate fair value and are considered Level 2 fair value measurements. Long term other secured financing is valued using Level 2 inputs.


12. 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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 March 31, 2022 and December 31, 2021, there was no goodwill balance. During the three months ended March 31, 2021, the Company recognized an impairment on goodwill 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 Company’s management internalization transaction, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $41.2 million based on the replacement cost of the employee base acquired by the Company.

The following table presents the activity of finite lived intangible assets for the three months ended March 31, 2022.


Intangible Assets, net
(dollars in thousands)
Balance at December 31, 2021	$	24,241




Less: amortization expense	(1,131)
Balance at March 31, 2022	23,110


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. 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 $52.6 billion and $54.8 billion of repurchase agreements with weighted average remaining maturities of 68 days and 52 days at March 31, 2022 and December 31, 2021, respectively. The Company has select arrangements with counterparties to enter into repurchase agreements for $1.9 billion with remaining capacity of $1.5 billion at March 31, 2022.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

At March 31, 2022 and December 31, 2021, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates:


March 31, 2022
	Agency Mortgage-Backed Securities		CRTs		Non-Agency Mortgage-Backed Securities		Residential Mortgage Loans		Commercial Mortgage-Backed Securities		Total Repurchase Agreements		Weighted Average Rate
	(dollars in thousands)
1 day	$	16,400,000	$	—	$	—	$	—	$	—	$	16,400,000	0.32	%
2 to 29 days	10,752,049		44,492		222,229		—		9,169		11,027,939		0.29	%
30 to 59 days	5,887,961		—		235,736		—		—		6,123,697		0.38	%
60 to 89 days	9,641,859		112,023		519,321		—		64,021		10,337,224		0.53	%
90 to 119 days	348,901		—		72,783		—		—		421,684		0.32	%
Over 119 days (2)	6,875,415		172,411		586,818		437,269		244,046		8,315,959		0.64	%
Total	$	49,906,185	$	328,926	$	1,636,887	$	437,269	$	317,236	$	52,626,503	0.41	%


December 31, 2021
	Agency Mortgage-Backed Securities		CRTs		Non-Agency Mortgage-Backed Securities		Residential Mortgage Loans		Commercial Mortgage-Backed Securities		Total Repurchase Agreements		Weighted Average Rate
	(dollars in thousands)
1 day	$	—	$	—	$	—	$	—	$	—	$	—	—	%
2 to 29 days	26,435,408		133,525		246,707		—		197,834		27,013,474		0.14	%
30 to 59 days	9,743,872		38,854		270,377		159,350		—		10,212,453		0.19	%
60 to 89 days	6,021,850		4,071		351,426		—		—		6,377,347		0.17	%
90 to 119 days	4,812,345		—		12,573		—		—		4,824,918		0.15	%
Over 119 days (2)	5,711,448		—		96,283		345,651		188,069		6,341,451		0.27	%
Total	$	52,724,923	$	176,450	$	977,366	$	505,001	$	385,903	$	54,769,643	0.17	%

(1) No repurchase agreements had a remaining maturity over 1 year at March 31, 2022 and December 31, 2021.

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 March 31, 2022 and December 31, 2021. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments.


	March 31, 2022				December 31, 2021
	Reverse Repurchase Agreements		Repurchase Agreements		Reverse Repurchase Agreements		Repurchase Agreements
	(dollars in thousands)
Gross amounts	$	—	$	52,626,503	$	—	$	54,769,643
Amounts offset	—		—		—		—
Netted amounts	$	—	$	52,626,503	$	—	$	54,769,643

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 mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $57.5 billion and $163.0 million, respectively, at March 31, 2022 and $59.2 billion and $160.8 million, respectively, at December 31, 2021.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


14. CAPITAL STOCK

(A) Common Stock

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at March 31, 2022 and December 31, 2021.

Shares authorized

Shares issued and outstanding

March 31, 2022

December 31, 2021

March 31, 2022

December 31, 2021

Par Value

Common stock

2,936,500,000

1,461,012,252

1,459,736,258

$0.01

In December 2020, the Company announced that its board of directors (“Board”) authorized the repurchase of up to $1.5 billion of its outstanding common shares through December 31, 2021 (the “Prior Share Repurchase Program”). In January 2022, the Company announced that its Board authorized the repurchase of up to $1.5 billion of its outstanding shares of common stock through December 31, 2024 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the Prior Share Repurchase Program.

During the three months ended March 31, 2022 and 2021, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

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 months ended March 31, 2022, the Company issued 0.8 million shares for proceeds of $6.2 million, 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 months ended March 31, 2021.

(B) Preferred Stock

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at March 31, 2022 and December 31, 2021. 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
	March 31, 2022	December 31, 2021	March 31, 2022	December 31, 2021	March 31, 2022		December 31, 2021





Fixed-to-floating rate
Series F	28,800,000	28,800,000	28,800,000	28,800,000	696,910		696,910		6.95%	9/30/2022	9/30/2022	3M LIBOR + 4.993%
Series G	17,000,000	17,000,000	17,000,000	17,000,000	411,335		411,335		6.50%	3/31/2023	3/31/2023	3M LIBOR + 4.172%
Series I	17,700,000	17,700,000	17,700,000	17,700,000	428,324		428,324		6.75%	6/30/2024	6/30/2024	3M LIBOR + 4.989%
Total	63,500,000	63,500,000	63,500,000	63,500,000	$	1,536,569	$	1,536,569

(1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company.

Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus accrued and unpaid dividends through their redemption date. Through March 31, 2022, 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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


	For the Three Months Ended
	March 31, 2022		March 31, 2021
	(dollars in thousands, except per share data)
Dividends and dividend equivalents declared on common stock and share-based awards	$	322,197	$	308,346
Distributions declared per common share	$	0.22	$	0.22
Distributions paid to common stockholders after period end	$	321,423	$	307,671
Distributions paid per common share after period end	$	0.22	$	0.22
Date of distributions paid to common stockholders after period end	April 29, 2022		April 30, 2021








Dividends declared to series F preferred stockholders	$	12,510	$	12,510
Dividends declared per share of series F preferred stock	$	0.434	$	0.434
Dividends declared to series G preferred stockholders	$	6,906	$	6,906
Dividends declared per share of series G preferred stock	$	0.406	$	0.406


Dividends declared to series I preferred stockholders	$	7,467	$	7,467
Dividends declared per share of series I preferred stock	$	0.422	$	0.422


15. INTEREST INCOME AND INTEREST EXPENSE

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

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


			Interest Income Methodology
Agency
Fixed-rate pass-through (1)			Effective yield (3)
Adjustable-rate pass-through (1)			Effective yield (3)
Multifamily (1)			Contractual Cash Flows
CMO (1)			Effective yield (3)

Reverse mortgages (2)			Prospective
Interest-only (2)			Prospective
Residential credit
CRT (2)			Prospective
Alt-A (2)			Prospective
Prime (2)			Prospective
Subprime (2)			Prospective

NPL/RPL (2)			Prospective
Prime jumbo (2)			Prospective

(1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss). (2) Changes in fair value are recognized in Net gains (losses) on investments and other on the accompanying Consolidated Statements of Comprehensive Income (Loss). (3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception.

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 months ended March 31, 2022 and March 31, 2021.


	For the Three Months Ended March 31,
	2022		2021
Interest income	(dollars in thousands)

Agency Securities	$	522,951	$	627,654
Residential credit securities	22,122		16,980
Residential mortgage loans (1)	73,488		37,109
Commercial investment portfolio (1) (2)	37,283		81,601

Reverse repurchase agreements	6		34
Total interest income	$	655,850	$	763,378
Interest expense
Repurchase agreements	26,879		42,585

Debt issued by securitization vehicles	34,625		26,276

Participations issued	5,852		597
Other	7,566		6,515
Total interest expense	74,922		75,973
Net interest income	$	580,928	$	687,405

(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 months ended March 31, 2022 and March 31, 2021.


	For the Three Months Ended
	March 31, 2022		March 31, 2021
	(dollars in thousands, except per share data)
Net income (loss)	$	2,023,894	$	1,751,134
Net income (loss) attributable to noncontrolling interests	1,639		321
Net income (loss) attributable to Annaly	2,022,255		1,750,813
Dividends on preferred stock	26,883		26,883
Net income (loss) available (related) to common stockholders	$	1,995,372	$	1,723,930


Weighted average shares of common stock outstanding-basic	1,461,363,637		1,399,210,925
Add: Effect of stock awards, if dilutive	1,088,328		789,802
Weighted average shares of common stock outstanding-diluted	1,462,451,965		1,400,000,727
Net income (loss) per share available (related) to common share
Basic	$	1.37	$	1.23
Diluted	$	1.36	$	1.23

The computations of diluted net income (loss) per share available (related) to common share for the three months ended March 31, 2022 and 2021 excludes 2.2 million and 0, respectively, of potentially dilutive restricted and performance stock units because their effect would have been anti-dilutive.


17. INCOME TAXES

For the three months ended March 31, 2022 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100% of its REIT taxable income.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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 March 31, 2022 and December 31, 2021.

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 months ended March 31, 2022 and 2021, the Company recorded $26.5 million and ($0.3) million, respectively, of income tax expense (benefit) attributable to its TRSs. The Company’s federal, state and local tax returns from 2018 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 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 overall costs to service the underlying mortgage loans. The Company is exposed to risk of loss if an issuer, borrower or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers and counterparties, credit rating monitoring and active servicer oversight.

The Company depends on third-party service providers to perform various business processes related to its operations, including mortgage loan servicers and sub-servicers. The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors. These procedures include assessing a vendor’s

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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. 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 months ended March 31, 2022 and 2021 was $0.8 million and $0.9 million, respectively.

Supplemental information related to leases as of and for the three months ended March 31, 2022 was as follows:

Operating Leases

Classification

March 31, 2022

Assets

(dollars in thousands)

Operating lease right-of-use assets

Other assets

9,885

Liabilities

Operating lease liabilities (1)

Other liabilities

12,844

Lease term and discount rate

Weighted average remaining lease term

3.5 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

965

(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)
2022 (remaining)	$	2,896
2023	3,862
2024	3,862
2025	2,896



Total lease payments	$	13,516
Less imputed interest	672
Present value of lease liabilities	$	12,844

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 March 31, 2022 and December 31, 2021.


20. 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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 March 31, 2022, 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 March 31, 2022 was $504.5 million with excess net capital of $504.2 million.


21. SUBSEQUENT EVENTS

In April 2022, the Company entered into a definitive agreement to sell substantially all of the corporate loan interests held by the MML business operated by the Company, as well as assets managed for third parties (collectively, the "MML Portfolio"), to Ares Capital Management LLC. Subject to customary closing conditions, the transfer of the MML Portfolio is expected to be completed by the end of the second quarter of 2022.

In May 2022, the Company completed and closed the securitization of residential mortgage loans, OBX 2022-NQM4 Trust with a face value of $457.3 million. The securitization represents financing transactions which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company.

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; the sale of our middle market lending portfolio; 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 mortgage servicing rights (“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.

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			42
Recent Developments			42
Business Environment			42
Economic Environment			43
London Interbank Offered Rate (“LIBOR”) Transition Working Group			48
Results of Operations			44
Net Income (Loss) Summary			46
Non-GAAP Financial Measures			47
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			48
Premium Amortization Expense			50
Economic leverage and economic capital ratios			50
Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA)			52
Experienced and Projected Long-term CPR			52
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)			53
Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities			53
Other Income (Loss)			54

General and Administrative Expenses			55
Return on Average Equity			56
Unrealized Gains and Losses - Available-for-Sale Investments			56
Financial Condition			57
Residential Securities			57
Contractual Obligations			60
Off-Balance Sheet Arrangements			60
Capital Management			60
Stockholders’ Equity			61
Capital Stock			61
Leverage and Capital			61
Risk Management			62
Risk Appetite			62
Governance			62
Description of Risks			63
Capital, Liquidity and Funding Risk Management			64
Funding			64
Excess Liquidity			66
Maturity Profile			67
Stress Testing			68
Liquidity Management Policies			68
Investment/Market Risk Management			68
Credit Risk Management			70
Counterparty Risk Management			70
Operational Risk Management			71
Compliance, Regulatory and Legal Risk Management			71
Critical Accounting Estimates			72
Valuation of Financial Instruments			72
Residential Securities			72
Residential Mortgage Loans			72
MSR			74

Interest Rate Swaps			73
Revenue Recognition			73
Consolidation of Variable Interest Entities			74
Use of Estimates			74
Glossary of Terms			75

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Overview

We are a leading diversified capital manager with investment strategies across mortgage finance. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”

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

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

Recent Developments

In April 2022, we entered into a definitive agreement to sell all of the corporate loan interests held by the MML business operated by us, as well as assets managed for third parties (collectively, the "MML Portfolio"), to Ares Capital Management LLC (“Ares”). Subject to customary closing conditions, the sale of the MML Portfolio is expected to be completed by the end of the second quarter of 2022.

Business Environment

By many markers, the U.S. economy remained robust in the first quarter 2022, with a majority of the slowdown in U.S. gross domestic product (“GDP”) coming from volatile components such as inventories and trade. Moreover, inflation readings and the U.S. labor market remain very strong, suggesting that the Federal Reserve needs to remove monetary policy accommodation much faster than previously anticipated. The repricing expectations around Federal Reserve monetary policy led to a meaningful rise in Treasury yield levels, where 2-year yields rose 160 basis points during the quarter, marking the most severe quarterly selloff in nearly 40 years, while 10-year Treasury yields rose by somewhat less. Given the rise in Treasury yields, as well as concerning geopolitical developments that include the Russian invasion of Ukraine, interest rate volatility rose to the highest realized levels since the financial crisis. The volatile rate environment weighed heavily on mortgages, with production coupon nominal spreads widening roughly 40 basis points this quarter. The elevated volatility, combined with the prospects of an expeditious removal of monetary policy accommodation has led to a sharp repricing of fixed income assets during the first quarter, with the Bloomberg U.S. Aggregate Bond Market Index facing the worst quarterly performance since 1980. Consistent with the broader market, our portfolio was vulnerable to the exceptional volatility in this environment despite our efforts to defensively position it, experiencing an economic return of negative 12% for the quarter.

In this challenging environment, we maintained a stable notional exposure to Agency mortgage-backed securities (“MBS”) after we began the year with our leverage at its lowest level since 2015. We actively managed our hedges to the shifting interest rate risk over the quarter and rebalanced our coupon exposure to better position ourselves in the rising rate environment. The spread widening seen during the quarter led to a notable change in prepayment dynamics. With mortgage rates at roughly 5% at quarter end, only a small fraction of borrowers maintained an incentive to refinance their mortgages. At the same time, cash-out activity should remain somewhat elevated due to the recent strong housing market and summer seasonals. As a result, the convexity of the broader Agency MBS universe and our mortgage portfolio improved meaningfully. Our portfolio speeds slowed 22 percent quarter-over-quarter, with our aggregate portfolio paying 16.7% measured in constant prepayment rates (“CPR”). Meanwhile, as mortgage production shifted into higher coupons, the to-be announced (“TBA”) deliverable in higher coupons shifted from seasoned, faster paying pools to new production, resulting in collateral scarcity and meaningful dollar roll specialness in these coupons. While this specialness will not last in perpetuity, we expect to continue to shift up in coupon while preferring TBA over pools given the favorable carry and spread dynamics.

In MSR, mortgage originators continue to be active sellers as operating profitability has come under pressure from rising mortgage rates with traded MSR volumes nearly reaching levels seen in the full year 2020 in the first quarter alone. We used this opportunity to grow our portfolio through net purchases of over $400 million in market value. Combined with mark to market gains, we increased our MSR position to over $1.2 billion at quarter end. We continue to see MSR as complementary to our core Agency strategy due to its negative interest rate and mortgage spread duration and attractive unlevered returns and expect to allocate capital to the sector should market conditions remain favorable.

In Residential Credit, our economic portfolio ended the quarter with $4.4 billion of assets, with the modest decline in the portfolio primarily driven by our robust securitization activity as we converted whole loans to OBX securities. The residential credit market was not immune to the volatility in the broader rates and credit markets with key benchmark asset classes establishing widest levels since the onset of the pandemic two years ago. AAA-rate non-qualified mortgage spreads widened 75 basis points while benchmark credit risk transfer M2-tranche spreads widened 160 basis points. Despite the challenging

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

environment, our OBX platform had its most active quarter to date, with $2.5 billion of whole loans securitized across six transactions. Being a programmatic issuer has allowed us to lock in financing on 87% of our whole loan portfolio at an average cost of funds of 2.30%, approximately 240 basis points below the current market cost of funds. The recent selloff has incentivized originators to expand product offerings beyond Agency mortgages into alternative credit products, and we expect this to have a positive impact on the development of the non-QM market over time. We continue to dedicate resources to the growth of our correspondent loan channel, while also expanding our securitization partners. Housing fundamentals generally remain strong with healthy consumer balance sheets, a systematic shortage of single-family housing, low available for sale inventory and a robust labor market. While there are increasing headwinds, namely around higher mortgage rates and affordability, we maintain a constructive outlook on the residential credit sector.

Finally, subsequent to quarter end, we announced the sale of our MML Portfolio to Ares. The approximately $2.4 billion transaction, which includes assets managed for third parties, is expected to be accretive to book value and validates the quality of our differentiated corporate credit portfolio.

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 planning 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 CDC Influenza Pandemic exercise materials.

Business activities continued to be performed in a hybrid model in the first quarter of 2022, with employees returning to the office on a periodic basis. At the present, following guidance from federal, state and local authorities, the majority of our employees are returning to the office more regularly as we transition back to an in-office work model.

Economic Environment

The pace of economic growth slowed in the first quarter of 2022 relative to the quarterly pace seen in 2021, with U.S. GDP declined 1.4 percent on a seasonally adjusted annualized rate. However, the decline was largely attributable to fluctuations in volatile components of the economy, such as trade and inventory changes, while the core components of goods consumption and services spending showed positive economic momentum.

According to the Bureau of Labor Statistics, seasonally adjusted total non-farm payroll employment rose by an average 562 thousand workers during the first quarter, slightly below the 637 thousand workers added during the fourth quarter 2021. Overall, employment gains remain very strong, as the unemployment rate has fallen 1.1 percentage points in the last six months to 3.6% in March. Meanwhile, U.S. job openings remain near all-time record levels. Driven in part by continued strong labor demand, wage growth, as measured by the year-over-year change in private sector average hourly earnings, accelerated during the quarter, reading 5.6% in March compared to 4.9% in December 2021.

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 first quarter. The headline PCE measure increased by 6.6% year-over-year in March 2022, while the more stable core PCE measure, which excludes volatile food and energy prices, registered a 5.2% year-over-year increase. Prices remain meaningfully elevated, which is driven by strong demand for goods and services, though the Russian invasion of Ukraine and related Western economic sanctions have led to a sharp increase in food and commodity prices. Absent a major deterioration in the geopolitical situation, it appears that inflation pressures are close to peaking and inflation should slow going forward, though the degree of the moderation remains uncertain at best.

The Federal Open Market Committee (“FOMC”) conducts monetary policy with a dual mandate: to ensure full employment and stable prices. Given economic developments in 2021 and the first quarter, the FOMC will have to tighten monetary policy in order to assure meeting its mandate. Looking at the strong labor market and the elevated inflation readings, risks are emerging that further wage growth could boost inflation, thereby undermining the Federal Reserve’s stable price mandate. The FOMC has therefore begun to take steps to tighten policy and signaled additional tightening steps in the near future. As such, the FOMC raised the Federal Funds Target Rate to the 0.25% - 0.50% range during the first quarter and signaled that additional rate increases of greater magnitude will be necessary in the near-term future. In regard to its balance sheet, the FOMC ended its quantitative easing program at the beginning of March and has suggested that it will let assets mature at an aggregate pace of $95 billion per month across U.S. Treasuries and Agency MBS starting in either May or June 2022.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

During the first quarter of 2022, the 10-year U.S. Treasury rate rose meaningfully from 1.51% on December 31, 2021 to 2.34% on March 31, 2022. The mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, widened meaningfully over the course of the quarter to 115 basis points (bps) on March 31, 2022 as the shift in monetary policy and the anticipated elevated supply in Agency MBS weighed on the sector.

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


	March 31, 2022	December 31, 2021	March 31, 2021
30-Year mortgage current coupon	3.49%	2.07%	2.04%
Mortgage basis	115 bps	56 bps	30 bps
10-Year U.S. Treasury rate	2.34%	1.51%	1.74%
LIBOR
1-Month	0.45%	0.10%	0.11%
6-Month	1.47%	0.34%	0.21%

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 coincided with the announcement of LIBOR's administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease 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. The U.S. federal government enacted a legislative solution for certain “tough legacy” contracts, which in some cases inserts fallback language into the contract or provides a determining party with a safe harbor from litigation. 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. Some of these options fall within the safe harbor of the federal legislation. As of March 31, 2022, we had $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 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.

Beginning with the quarter ended March 31, 2022, in light of the continued growth of our mortgage servicing rights portfolio, we enhanced its financial disclosures by separately reporting servicing income and servicing expense in our Consolidated Statements of Comprehensive Income (Loss). Servicing income and servicing expense were previously included within Other income (loss). As a result of this change, prior periods have been adjusted to conform to the current presentation.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

In addition, we consolidated certain line items in our Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation. Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives. Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings are combined into a single line item titled Net gains (losses) on investments and other. As a result of these changes, prior periods have been adjusted to conform to the current presentation.

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 Earnings (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) net servicing income less realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment (“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.

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 months ended March 31, 2022 and 2021.


	As of and for the Three Months Ended March 31,
	2022			2021
	(dollars in thousands, except per share data)
Interest income	$	655,850		$	763,378
Interest expense	74,922			75,973
Net interest income	580,928			687,405
Servicing and related income	34,715			9,229
Servicing and related expense	3,757			2,297
Net servicing income	30,958			6,932
Other income (loss)	1,484,320			1,104,381
Less: Total general and administrative expenses	45,764			47,905
Income (loss) before income taxes	2,050,442			1,750,813
Income taxes	26,548			(321)
Net income (loss)	2,023,894			1,751,134
Less: Net income (loss) attributable to noncontrolling interests	1,639			321
Net income (loss) attributable to Annaly	2,022,255			1,750,813
Less: Dividends on preferred stock	26,883			26,883
Net income (loss) available (related) to common stockholders	$	1,995,372		$	1,723,930
Net income (loss) per share available (related) to common stockholders
Basic	$	1.37		$	1.23
Diluted	$	1.36		$	1.23
Weighted average number of common shares outstanding
Basic	1,461,363,637			1,399,210,925
Diluted	1,462,451,965			1,400,000,727
Other information
Investment portfolio at period-end	$	73,349,352		$	82,735,505
Average total assets	$	76,474,599		$	86,912,346
Average equity	$	12,337,048		$	14,044,696
GAAP leverage at period-end (1)	5.3:1			4.6:1
GAAP capital ratio at period-end (2)	15.1		%	16.5		%
Annualized return on average total assets	10.59		%	8.06		%
Annualized return on average equity	65.62		%	49.87		%
Net interest margin (3)	3.20		%	3.39		%
Average yield on interest earning assets (4)	3.61		%	3.76		%
Average GAAP cost of interest bearing liabilities (5)	0.48		%	0.42		%
Net interest spread	3.13		%	3.34		%
Weighted average experienced CPR for the period	16.7		%	23.9		%
Weighted average projected long-term CPR at period-end	9.5		%	11.8		%
Common stock book value per share	$	6.77		$	8.95
Non-GAAP metrics *
Interest income (excluding PAA)	$	476,334		$	548,808
Economic interest expense (5)	$	137,463		$	155,720
Economic net interest income (excluding PAA)	$	338,871		$	393,088
Premium amortization adjustment cost (benefit)	$	(179,516)		$	(214,570)
Earnings available for distribution (6)	$	430,631		$	439,519
Earnings available for distribution per average common share	$	0.28		$	0.29
Annualized EAD return on average equity (excluding PAA)	14.01		%	12.53		%
Economic leverage at period-end (1)	6.4:1			6.1:1
Economic capital ratio at period-end (2)	13.1		%	13.7		%
Net interest margin (excluding PAA) (3)	2.04		%	1.91		%
Average yield on interest earning assets (excluding PAA) (4)	2.62		%	2.71		%
Average economic cost of interest bearing liabilities (5)	0.89		%	0.87		%
Net interest spread (excluding PAA)	1.73		%	1.84		%

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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

(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, 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) Excludes dividends on preferred stock.

GAAP

Net income (loss) was $2.0 billion, which includes $1.6 million attributable to noncontrolling interests, or $1.37 per average basic common share, for the three months ended March 31, 2022 compared to $1.8 billion, which includes $0.3 million attributable to noncontrolling interests, or $1.23 per average basic common share, for the same period in 2021. We attribute the majority of the change in net income (loss) to higher net gains on derivatives and lower business divestiture-related losses, partially offset by unfavorable changes in net gains (losses) on investments and other, loan loss (provisions) reversals and interest income. Net gains on derivatives was $1.6 billion for the three months ended March 31, 2022 compared to $1.2 billion for the same period in 2021. Business divestiture-related losses was ($0.4) million for the three months ended March 31, 2022 compared to ($249.6) million for the same period in 2021. Net gains (losses) on investments and other was ($159.8) million for the three months ended March 31, 2022 compared to $38.4 million for the same period in 2021. Loan loss (provision) reversal was ($0.6) million for the three months ended March 31, 2022 compared to $139.6 million for the same period in 2021. Interest income for the three months ended March 31, 2022 was $655.9 million compared to $763.4 million for the same period in 2021. Refer to the section titled “Other income (loss)” located within this Item 2 for additional information related to these changes.

Non-GAAP

Earnings available for distribution were $430.6 million, or $0.28 per average common share, for the three months ended March 31, 2022, compared to $439.5 million, or $0.29 per average common share, for the same period in 2021. The change in earnings available for distribution during the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to lower coupon income resulting from the reduction in average interest earning assets, partially offset by higher TBA dollar roll income and net servicing income, and a favorable 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).

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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

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

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

Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We generate net income by earning a net interest spread on our investment portfolio, which is a function of interest income from our investment portfolio less financing, hedging and operating costs. Earnings available for distribution, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) net servicing income less realized amortization of MSR, (d) other income (loss) (excluding 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:

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis


	For the Three Months Ended March 31,
	2022			2021
	(dollars in thousands, except per share data)
GAAP net income (loss)	$	2,023,894		$	1,751,134
Net income (loss) attributable to noncontrolling interests	1,639			321
Net income (loss) attributable to Annaly	2,022,255			1,750,813
Adjustments to exclude reported realized and unrealized (gains) losses
Net (gains) losses on investments and other	159,804			(38,405)
Net (gains) losses on derivatives (1)	(1,704,569)			(1,249,130)





Loan loss provision (reversal) (2)	812			(144,870)
Business divestiture-related (gains) losses	354			249,563




Other adjustments
Depreciation expense related to commercial real estate and amortization of intangibles (3)	1,130			7,324
Non-EAD (income) loss allocated to equity method investments (4)	(9,920)			(9,680)


Transaction expenses and non-recurring items (5)	3,350			695
Income tax effect of non-EAD income (loss) items	27,091			4,334

TBA dollar roll income and CMBX coupon income (6)	129,492			98,933
MSR amortization (7)	(19,652)			(15,488)

Plus:
Premium amortization adjustment cost (benefit)	(179,516)			(214,570)
Earnings available for distribution *	430,631			439,519

Dividends on preferred stock	26,883			26,883

Earnings available for distribution attributable to common stockholders *	$	403,748		$	412,636
GAAP net income (loss) per average common share	$	1.37		$	1.23

Earnings available for distribution per average common share *	$	0.28		$	0.29
Annualized GAAP return (loss) on average equity	65.62		%	49.87		%
Annualized EAD return on average equity *	14.01		%	12.53		%
* Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. (1) The adjustment to add back Net (gains) losses on derivatives does not include the net interest component of interest rate swaps which is reflected in earnings available for distribution. The net interest component of interest rate swaps totaled ($62.5) million and ($79.7) million for the three months ended March 31, 2022 and March 31, 2021, respectively. (2) Includes $0.2 million and ($5.3) million for the three months ended March 31, 2022 and 2021, respectively, of loss provision (reversal) on unfunded loan commitments which is reported in Other, net in the Consolidated Statements of Comprehensive Income (Loss). (3) Includes depreciation and amortization expense related to equity method investments. (4) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR which is a component of Other, net in the Consolidated Statements of Comprehensive Income (Loss). (5) The three months ended March 31, 2022 and 2021 includes costs incurred in connection with securitizations of residential whole loans. (6) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). CMBX coupon income totaled $1.1 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively. (7) MSR amortization utilizes purchase date cash flow assumptions and actual unpaid principal balances and is calculated as the difference between projected MSR yield income and net servicing income for the period.

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

TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency MBS. We record TBA derivatives at fair value on our

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps).

TBA dollar roll income is calculated as the difference in price between two TBA contracts with the same terms but different settlement dates multiplied by the notional amount of the TBA contract. Although accounted for as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency MBS (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss).

The CMBX index is a synthetic tradable index referencing a basket of 25 commercial mortgage-backed securities of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of commercial mortgage-backed securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur. We report income (expense) on CMBX positions in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). The coupon payments received or paid on CMBX positions is equivalent to interest income (expense) and therefore included in earnings available for distribution.

Premium Amortization Expense

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

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

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


	For the Three Months Ended March 31,
	2022		2021
	(dollars in thousands)
Premium amortization expense	$	(25,353)	$	(11,891)
Less: PAA cost (benefit)	(179,516)		(214,570)
Premium amortization expense (excluding PAA)	$	154,163	$	202,679

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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
	March 31, 2022		March 31, 2021
Economic leverage ratio reconciliation	(dollars in thousands)
Repurchase agreements	$	52,626,503	$	61,202,477
Other secured financing	914,255		922,605
Debt issued by securitization vehicles	6,711,953		3,044,725
Participations issued	775,432		180,527

Debt included in liabilities of disposal group held for sale	—		3,260,788
Total GAAP debt	$	61,028,143	$	68,611,122
Less Non-Recourse Debt:
Credit facilities (1)	(914,255)		(922,605)
Debt issued by securitization vehicles	(6,711,953)		(3,044,725)
Participations issued	(775,432)		(180,527)

Non-recourse debt included in liabilities of disposal group held for sale	—		(2,968,620)
Total recourse debt	$	52,626,503	$	61,494,645
Plus / (Less):
Cost basis of TBA and CMBX derivatives	19,006,949		23,538,792
Payable for unsettled trades	1,992,568		1,070,080
Receivable for unsettled trades	(407,225)		(144,918)
Economic debt *	$	73,218,795	$	85,958,599
Total equity	$	11,478,770	$	14,067,595
Economic leverage ratio *	6.4:1		6.1:1

* Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. (1) Included in Other secured financing in the Consolidated Statements of Financial Condition.

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


	As of
	March 31, 2022		March 31, 2021
Economic capital ratio reconciliation	(dollars in thousands)
Total GAAP assets	$	76,185,134	$	85,369,589
Less:
Gross unrealized gains on TBA derivatives (1)	(24,757)		(17,404)
Debt issued by securitization vehicles (2)	(6,711,953)		(5,587,281)
Plus:
Implied market value of TBA derivatives	18,284,708		22,793,892
Total economic assets *	$	87,733,132	$	102,558,796
Total equity	$	11,478,770	$	14,067,595
Economic capital ratio * (3)	13.1%		13.7%

* Represents a non-GAAP financial measure. Refer to the disclosure within this section above for additional information on non-GAAP financial measures. (1) Included in Derivative assets in the Consolidated Statements of Financial Condition. (2) Includes debt issued by securitization vehicles reported in Liabilities of disposal group held for sale in the Consolidated Statements of Financial Condition. (3) Economic capital ratio is computed as total equity divided by total economic assets.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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, which is presented in Net gains (losses) on derivatives in the Consolidated Statements of Comprehensive Income (Loss). We did not enter into any MAC interest rate swaps during the three months ended March 31, 2022.

Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations.

The following tables present a reconciliation of GAAP interest income and GAAP interest expense to non-GAAP interest income (excluding PAA), economic interest expense and economic net interest income (excluding PAA), respectively, for the periods presented:

Interest Income (excluding PAA)


	GAAP Interest Income		PAA Cost (Benefit)		Interest Income (excluding PAA) *
For the three months ended	(dollars in thousands)
March 31, 2022	$	655,850	$	(179,516)	$	476,334
March 31, 2021	$	763,378	$	(214,570)	$	548,808



* Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures.

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


	GAAP Interest Expense			Add: Net Interest Component of Interest Rate Swaps		Economic Interest Expense *		GAAP Net Interest Income		Less: Net Interest Component of Interest Rate Swaps		Economic Net Interest Income *		Add: PAA Cost (Benefit)		Economic Net Interest Income (excluding PAA) *
For the three months ended			(dollars in thousands)
March 31, 2022	$	74,922		$	62,541	$	137,463	$	580,928	$	62,541	$	518,387	$	(179,516)	$	338,871
March 31, 2021	$	75,973		$	79,747	$	155,720	$	687,405	$	79,747	$	607,658	$	(214,570)	$	393,088



* Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures.

Experienced and Projected Long-Term CPR

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis


	Experienced CPR (1)		Projected Long-term CPR (2)
For the three months ended
March 31, 2022	16.7	%	9.5	%
March 31, 2021	23.9	%	11.8	%



(1) For the three months ended March 31, 2022 and 2021, respectively. (2) At March 31, 2022 and 2021, respectively.

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

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

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

Net Interest Spread (excluding PAA)


	Average Interest Earning Assets (1)		Interest Income (excluding PAA) *		Average Yield on Interest Earning Assets (excluding PAA) *		Average Interest Bearing Liabilities		Economic Interest Expense * (2)		Average Economic Cost of Interest Bearing Liabilities * (2)		Economic Net Interest Income (excluding PAA) *	Net Interest Spread (excluding PAA) *
For the three months ended	(dollars in thousands)
March 31, 2022	$	72,590,876	$	476,334	2.62	%	$	61,865,292	$	137,463	0.89	%	338,871	1.73	%
March 31, 2021	$	81,121,340	$	548,808	2.71	%	$	72,002,031	155,720		0.87	%	393,088	1.84	%



* Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (1) Based on amortized cost. (2) 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) *		TBA Dollar Roll and CMBX Coupon Income (1)	Economic Interest Expense *	Subtotal		Average Interest Earnings Assets		Average TBA Contract and CMBX Balances	Subtotal		Net Interest Margin (excluding PAA) *
For the three months ended			(dollars in thousands)
March 31, 2022	$	476,334	129,492	(137,463)	$	468,363	$	72,590,876	19,229,537	$	91,820,413	2.04	%
March 31, 2021	$	548,808	98,933	(155,720)	$	492,021	$	81,121,340	21,865,969	$	102,987,309	1.91	%



* Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (1) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on derivatives. CMBX coupon income totaled $1.1 million and $1.5 million for the three months ended March 31, 2022 and 2021, respectively.

Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Average Economic Cost of Interest Bearing Liabilities


	Average Interest Bearing Liabilities		Interest Bearing Liabilities at Period End		Economic Interest Expense * (1)		Average Economic Cost of Interest Bearing Liabilities *		Average One- Month 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
March 31, 2022	$	61,865,292	$	61,028,143	$	137,463	0.89	%	0.23	%	0.80	%	(0.57	%)	0.66	%	0.09	%
March 31, 2021	$	72,002,031	$	65,350,334	$	155,720	0.87	%	0.12	%	0.22	%	(0.10	%)	0.75	%	0.65	%



* Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (1) Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.

Economic interest expense decreased by $18.3 million for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to the change in the net interest component of interest rate swaps, which was ($62.5) million for the three months ended March 31, 2022 compared to ($79.7) million for the same period in 2021, and a decrease in average interest bearing liabilities.

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 March 31, 2022 and December 31, 2021, the majority of our debt represented repurchase agreements and other secured financing arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, and 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.

Other Income (Loss)

Other income (loss) is comprised of net gains (losses) on investments and other, net gains (losses) on derivatives, loan loss (provision) reversal, business divestiture-related gains (losses) and other, net. These components of realized and unrealized gains (losses) for the three months ended March 31, 2022 and 2021 were as follows:


	For the Three Months Ended March 31,
	2022		2021
	(dollars in thousands)
Net gains (losses) on investments and other	$	(159,804)	$	38,405
Net gains (losses) on derivatives	1,642,028		1,169,383
Loan loss (provision) reversal	(608)		139,620
Business divestiture-related gains (losses)	(354)		(249,563)
Other, net	3,058		6,536

Total	$	1,484,320	$	1,104,381

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

For the Three Months Ended March 31, 2022 and 2021

Net Gains (Losses) on Investments and Other

Net gains (losses) on disposal of investments was ($144.2) million for the three months ended March 31, 2022 compared to ($65.8) million for the same period in 2021. For the three months ended March 31, 2022, we disposed of Residential Securities with a carrying value of $2.8 billion for an aggregate net loss of ($144.5) million. For the same period in 2021, we disposed of Residential Securities with a carrying value of $3.0 billion for an aggregate net loss of ($61.0) million.

Net unrealized gains (losses) on instruments measured at fair value through earnings was ($15.6) million for the three months ended March 31, 2022 compared to $104.2 million for the same period in 2021, primarily due to unfavorable changes in unrealized gains (losses) on securitized residential whole loans of consolidated VIEs of ($376.5) million, securitized commercial loans of ($96.5) million, residential whole loans of ($60.3) million and non-Agency mortgage-backed securities of ($60.0) million, partially offset by favorable changes in residential securitized debt of consolidated VIEs of $285.2 million, MSR, including interests in MSR, of $151.6 million and commercial securitized debt of consolidated VIEs of $81.1 million for the three months ended March 31, 2022 compared to the same period in 2021.

Net Gains (Losses) on Derivatives

Net gains (losses) on interest rate swaps for the three months ended March 31, 2022 was $1.3 billion compared to $692.5 million for the same period in 2021, primarily attributable to a favorable change in unrealized gains (losses) on interest rate swaps. Unrealized gains (losses) on interest rate swaps was $1.3 billion for the three months ended March 31, 2022, reflecting a sharper rise in forward interest rates during the period, compared to $772.3 million for the same period in 2021.

Net gains (losses) on other derivatives was $381.1 million for the three months ended March 31, 2022 compared to $476.9 million for the same period in 2021. The change in net gains (losses) on other derivatives was primarily due to unfavorable changes in net gains (losses) on TBA derivatives, which was ($1.1) billion for the three months ended March 31, 2022 compared to ($630.1) million for the same period in 2021, and interest rate swaptions, which was $108.2 million for the three months ended March 31, 2022 compared to $283.8 million for the same period in 2021, partially offset by a favorable change in net gains (losses) on futures, which was $1.4 billion for the three months ended March 31, 2022 compared to $813.3 million for the same period in 2021.

Loan Loss (Provision) Reversal

For the three months ended March 31, 2022 and 2021, net loan loss (provisions) reversals were ($0.6) million on corporate loans and $139.6 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.

Business Divestiture-Related Gains (Losses)

The majority of business divestiture-related gains (losses) was recorded during the three months ended March 31, 2021 when the sale of our commercial real estate business was announced. Refer to the “Sale of Commercial Real Estate Business” Note located within Item 1 for additional information related to the transaction.

Other, Net

Other, net includes brokerage and commission fees, due diligence costs, securitization expenses and 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. We also report in Other, net items whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements. Given the nature of certain components of this line item, balances may fluctuate from period to period.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of compensation 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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, the prior period has 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. The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented.

G&A Expenses and Operating Expense Ratios


	Total G&A Expenses		Total G&A Expenses/Average Assets		Total G&A Expenses/Average Equity
For the three months ended	(dollars in thousands)
March 31, 2022	$	45,764	0.24	%	1.48	%
March 31, 2021	$	47,905	0.22	%	1.36	%

G&A expenses were $45.8 million for the three months ended March 31, 2022, a decrease of $2.1 million compared to the same period in 2021. The change was primarily due to lower expenses on commercial related investments during the three months ended March 31, 2022 as a result of the sale of the commercial real estate business, which was announced in the first quarter of 2021, compared with the same period in 2021.

Return on Average Equity

The following table shows the components of our annualized return on average equity for the periods presented.

Components of Annualized Return on Average Equity


	Economic Net Interest Income/ Average Equity (1)		Net Servicing Income/Average Equity		Other Income (Loss)/Average Equity (2)		G&A Expenses/ Average Equity		Income Taxes/ Average Equity		Return on Average Equity
For the three months ended
March 31, 2022	16.81	%	1.00	%	50.15	%	(1.48	%)	(0.86	%)	65.62	%
March 31, 2021	17.31	%	0.20	%	33.71	%	(1.36	%)	0.01	%	49.87	%



(1) Economic net interest income includes the net interest component of interest rate swaps. (2) Other income (loss) excludes the net interest component of interest rate swaps.

Unrealized Gains and Losses - Available-for-Sale Investments

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.


	March 31, 2022		December 31, 2021
	(dollars in thousands)
Unrealized gain	$	174,671	$	1,444,434
Unrealized loss	(2,640,153)		(486,024)
Accumulated other comprehensive income (loss)	$	(2,465,482)	$	958,410

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 March 31, 2022 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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

U.S. government. The investments do not require an allowance for credit losses because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. Also, we are guaranteed payment of the principal and interest amounts of the securities by the respective issuing Agency.

Financial Condition

Total assets were $76.2 billion and $76.8 billion at March 31, 2022 and December 31, 2021, respectively. The change was primarily due to a decrease in Agency MBS, of $2.7 billion, partially offset by increases in residential mortgage loans, including assets transferred or pledged to securitization vehicles, of $1.1 billion, derivative assets of $0.8 billion and MSR of $0.6 billion. Our portfolio composition, net equity allocation and debt-to-net equity ratio by asset class were as follows at March 31, 2022:


	Residential									Commercial
	Agency MBS			MSR			Residential Credit (1)				Commercial Real Estate			Corporate Debt			Total
Assets	(dollars in thousands)
Fair value/carrying value	$	58,332,132		$	1,194,590		$	11,497,609			$	357,354		$	1,967,667		$	73,349,352
Implied market value of derivatives (2)	18,284,708			—			—				407,115			—			18,691,823
Debt
Repurchase agreements	49,906,185			—			2,403,082				317,236			—			52,626,503
Implied cost basis of derivatives (2)	18,596,163			—			—				410,786			—			19,006,949
Other secured financing	—			—			—				—			914,255			914,255
Debt issued by securitization vehicles	504,255			—			6,207,698				—			—			6,711,953
Participations issued	—			—			775,432				—			—			775,432
Net forward purchases	1,314,901			264,844			5,598				—			—			1,585,343


Other
Other assets / liabilities (3)	788,267			132,888			33,240				8,703			94,934			1,058,032
Net equity allocated	$	7,083,603		$	1,062,634		$	2,139,039			$	45,150		$	1,148,346		$	11,478,772

Net equity allocated (%)	62		%	9		%	19		%		—		%	10		%	100		%

Debt/net equity ratio	7.1:1			NM			4.4:1				7:1			0.8:1			5.3:1			(4)

(1) Fair value/carrying includes residential loans held for sale. (2) Derivatives include TBA contracts under Agency MBS and CMBX balances under Commercial Real Estate. (3) Dedicated capital allocations assume capital related to held for sale assets will be redeployed within the Agency business line. (4) Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition. NM Not meaningful.

Residential Securities

Substantially all of our Agency MBS at March 31, 2022 and December 31, 2021 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 March 31, 2022 and December 31, 2021 we had on our Consolidated Statements of Financial Condition a total of $151.2 million and $77.7 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 $3.8 billion and $3.8 billion, respectively, of unamortized premium (which is the difference between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value).

The weighted average experienced prepayment speed on our Agency MBS portfolio for the three months ended March 31, 2022 and 2021 was 16.7% and 23.9%, respectively. The weighted average projected long-term prepayment speed on our Agency MBS portfolio as of March 31, 2022 and 2021 was 9.5% and 11.8%, respectively.

Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage-

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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

The following tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, that were carried at fair value at March 31, 2022 and December 31, 2021.


	March 31, 2022		December 31, 2021
	Estimated Fair Value
Agency
Fixed-rate pass-through	$	55,378,246	$	58,296,605
Adjustable-rate pass-through	295,772		321,273
CMO	110,279		121,698
Interest-only	243,014		293,914
Multifamily	1,725,101		1,452,713
Reverse mortgages	34,729		39,402
Total agency securities	$	57,787,141	$	60,525,605
Residential credit
Credit risk transfer	$	845,809	$	936,228
Alt-A	64,578		69,487
Prime	249,812		275,441

Subprime	144,525		163,076
NPL/RPL	1,075,008		983,438
Prime jumbo (>= 2010 vintage)	203,410		171,894

Total residential credit securities	$	2,583,142	$	2,599,564
Total Residential Securities	$	60,370,283	$	63,125,169

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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 March 31, 2022 and December 31, 2021.


	March 31, 2022			December 31, 2021
Residential Securities (1)	(dollars in thousands)
Principal amount	$	59,470,958		$	58,676,833
Net premium	2,936,590			2,973,471
Amortized cost	62,407,548			61,650,304
Amortized cost / principal amount	104.94		%	105.07		%
Carrying value	59,867,138			62,577,398
Carrying value / principal amount	100.67		%	106.65		%
Weighted average coupon rate	3.32		%	3.35		%
Weighted average yield	2.78		%	2.69		%
Adjustable-rate Residential Securities (1)
Principal amount	$	1,362,854		$	1,476,250
Weighted average coupon rate	3.29		%	2.81		%
Weighted average yield	5.82		%	6.57		%
Weighted average term to next adjustment (2)	10 Months			11 Months
Weighted average lifetime cap (3)	0.18		%	0.18		%
Principal amount at period end as % of total residential securities	2.29		%	2.52		%
Fixed-rate Residential Securities (1)
Principal amount	$	58,108,104		$	57,200,583
Weighted average coupon rate	3.32		%	3.36		%
Weighted average yield	2.71		%	2.60		%
Principal amount at period end as % of total residential securities	97.71		%	97.48		%
Interest-only Residential Securities
Notional amount	$	8,283,277		$	6,583,768
Net premium	717,416			720,235
Amortized cost	717,416			720,235
Amortized cost / notional amount	8.66		%	10.94		%
Carrying value	503,145			547,771
Carrying value / notional amount	6.07		%	8.32		%
Weighted average coupon rate	1.52		%	2.01		%
Weighted average yield	1.69		%	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 March 31, 2022.


			Payment Structure				Investment Characteristics
Product	Total		Senior		Subordinate		Coupon		Credit Enhancement		60+ Delinquencies		3M VPR (1)
(dollars in thousands)
Credit risk transfer	$	845,809	$	—	$	845,809	3.89	%	2.64	%	2.32	%	26.05	%

Alt-A	64,578		12,293		52,285		3.46	%	8.10	%	10.63	%	25.48	%
Prime	249,812		42,059		207,753		3.91	%	9.21	%	2.80	%	16.59	%

Subprime	144,525		80,769		63,756		2.20	%	22.00	%	11.94	%	8.22	%
Re-performing loan securitizations	641,352		246,056		395,296		3.58	%	25.87	%	26.79	%	10.68	%
Non-performing loan securitizations	433,656		415,207		18,449		2.38	%	30.64	%	71.40	%	10.22	%
Prime jumbo (>=2010 vintage)	203,410		8,419		194,991		4.28	%	2.98	%	1.79	%	7.48	%

Total/weighted average (2)	$	2,583,142	$	804,803	$	1,778,339	3.48	%	14.97	%	20.60	%	16.87	%

(1) Represents the 3 month voluntary prepayment rate (“VPR”). (2) Total investment characteristics exclude the impact of interest-only securities.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis


	Bond Coupon
Product	ARM		Fixed		Floater		Interest-Only		Estimated Fair Value
(dollars in thousands)
Credit risk transfer	$	—	$	—	$	845,808	$	1	$	845,809

Alt-A	4,500		51,418		8,660		—		64,578
Prime	27,991		216,921		4,678		222		249,812

Subprime	2,989		60,005		81,379		152		144,525
Re-performing loan securitizations	—		641,352		—		—		641,352
Non-performing loan securitizations	—		433,656		—		—		433,656
Prime jumbo (>=2010 vintage)	—		154,113		40,878		8,419		203,410

Total	$	35,480	$	1,557,465	$	981,403	$	8,794	$	2,583,142

Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from contractual obligations at March 31, 2022. The table does not include the effect of net interest rate payments on our interest rate swap agreements. The net swap payments will fluctuate based on monthly changes in the receive rate. At March 31, 2022, the interest rate swaps had a net fair value of ($0.5) billion.


	Within One Year		One to Three Years		Three to Five Years		More than Five Years		Total
	(dollars in thousands)
Repurchase agreements	$	52,626,503	$	—	$	—	$	—	$	52,626,503
Interest expense on repurchase agreements (1)	53,011		—		—		—		53,011
Other secured financing	—		224,550		689,705		—		914,255
Interest expense on other secured financing (1)	30,807		61,698		23,482		—		115,987
Debt issued by securitization vehicles (principal)	—		—		—		7,000,487		7,000,487
Interest expense on debt issued by securitization vehicles	176,430		352,860		352,860		4,918,680		5,800,830
Participations issued (principal)	—		—		—		791,614		791,614
Interest expense on participations issued	29,468		58,936		58,936		751,328		898,668


Long-term operating lease obligations	3,862		7,724		1,930		—		13,516
Total	$	52,920,081	$	705,768	$	1,126,913	$	13,462,109	$	68,214,871

(1) Interest expense on repurchase agreements and other secured financing calculated based on rates at March 31, 2022.

In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our current operations via repurchase agreements. We may use securitization structures, credit facilities, or other term financing structures to finance certain of our assets. During the three months ended March 31, 2022, we received $3.0 billion from principal repayments and $2.4 billion in cash from disposal of Residential securities. During the three months ended March 31, 2021, we received $5.0 billion from principal repayments and $2.8 billion in cash from disposal of Residential 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 March 31, 2022.

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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 March 31, 2022 and December 31, 2021:


	March 31, 2022		December 31, 2021
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	14,610		14,597
Additional paid-in capital	20,321,952		20,313,832
Accumulated other comprehensive income (loss)	(2,465,482)		958,410
Accumulated deficit	(7,980,407)		(9,653,582)
Total stockholders’ equity	$	11,427,242	$	13,169,826

Capital Stock

Common Stock

In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares, which expired on December 31, 2021 (the “Prior Share Repurchase Program”). In January 2022, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock through December 31, 2024 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the Prior Share Repurchase Program.

During the three months ended March 31, 2022 and 2021, no shares were purchased under the Current Share Repurchase Program or Prior Share Repurchase Program.

In January 2018, we 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”). We may offer and sell shares of our 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 months ended March 31, 2022, we issued 0.8 million shares for proceeds of $6.2 million, 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 months ended March 31, 2021. Refer to the “Capital Stock” Note located within Item 1 for additional information related to the at-the-market sales program.

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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 March 31, 2022 and December 31, 2021 was 5.3:1 and 4.7:1, respectively. Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity was 6.4:1 and 5.7:1, at March 31, 2022 and December 31, 2021, respectively. Our GAAP capital ratio at March 31, 2022 and December 31, 2021 was 15.1% and 17.2%, respectively. Our economic capital ratio, which represents our ratio of stockholders’ equity to total economic assets (inclusive of the implied market value of TBA derivatives and net of debt issued by securitization vehicles), was 13.1% and 14.4% at March 31, 2022 and December 31, 2021, respectively. Economic leverage ratio and economic capital ratio are non-GAAP financial measures. Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to their most directly comparable GAAP results.

Risk Management

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

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

Risk Appetite

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

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


Risk Parameter			Description
Portfolio Composition			We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy.
Leverage			We generally expect to maintain an economic leverage ratio no greater than 10:1 considerate of our overall capital allocation framework.
Liquidity Risk			We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions.
Interest Rate Risk			We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation.
Credit Risk			We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns.
Capital Preservation			We will seek to protect our capital base through disciplined risk management practices.
Operational			We will seek to limit impacts to our business through disciplined operational risk management practices addressing areas including but not limited to, management of key third party relationships (i.e. originators, sub-servicers), human capital management, cybersecurity and technology related matters, business continuity and financial reporting risk.
Compliance, Regulatory and Legal			We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act and the licenses and approvals of our regulated and licensed subsidiaries.

Governance

Risk management begins with our Board, through the review and oversight of the risk management framework, and executive management, through the ongoing formulation of risk management practices and related execution in managing risk. The Board exercises its oversight of risk management primarily through the 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,

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

risk management (operational and market risk) 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 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 and other human capital matters such as succession and culture. 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 business continuity planning), human factors or external events. This risk also applies to our use of proprietary and third party models, software vendors and data providers, and oversight of third-party service providers such as sub-servicers, due diligence firms etc.
Compliance, Regulatory and Legal Risk			Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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 March 31, 2022 and December 31, 2021, the weighted average days to maturity was 68 days and 52 days, respectively.

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

At March 31, 2022, we had total financial assets and cash pledged against existing liabilities of $58.4 billion. The weighted average haircut was approximately 3% on repurchase agreements. The quality and character of the Residential Securities that we pledge as collateral under the repurchase agreements and interest rate swaps did not materially change at March 31, 2022 compared to the same period in 2021, 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 March 31, 2022.

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)
March 31, 2022	$	53,961,689	$	52,626,503	$	39,535	$	—
December 31, 2021	56,977,019		54,769,643		39,247		—
September 30, 2021	57,504,986		55,475,420		44,964		—
June 30, 2021	62,440,803		60,221,067		42,581		—
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		—

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

The following table provides information on our repurchase agreements and other secured financing by maturity date at March 31, 2022. The weighted average remaining maturity on our repurchase agreements and other secured financing was 90 days at March 31, 2022:


	March 31, 2022
	Principal Balance		Weighted Average Rate		% of Total
	(dollars in thousands)
1 day	$	16,400,000	0.32	%	30.6	%
2 to 29 days	11,027,939		0.29	%	20.7	%
30 to 59 days	6,123,697		0.38	%	11.4	%
60 to 89 days	10,337,224		0.53	%	19.3	%
90 to 119 days	421,684		0.32	%	0.8	%
Over 120 days (1)	9,230,214		0.91	%	17.2	%
Total	$	53,540,758	0.46	%	100.0	%

(1) Approximately 2% 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 March 31, 2022:


			Weighted Average Rate
	Principal Balance		As of Period End		For the Quarter		Weighted Average Days to Maturity (1)
	(dollars in thousands)
Repurchase agreements	$	52,626,503	0.41	%	0.20	%	68
Other secured financing (2) (3)	914,255		3.37	%	3.34	%	1,374
Debt issued by securitization vehicles (3)	7,000,487		2.47	%	2.27	%	11,766
Participations issued (3)	791,614		3.72	%	2.59	%	11,131

Total indebtedness	$	61,332,859

(1) Determined based on estimated weighted-average lives of the underlying debt instruments. (2) Includes financing under credit facilities. (3) Non-recourse to Annaly.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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 March 31, 2022:


	Encumbered Assets		Unencumbered Assets		Total
Financial assets	(dollars in thousands)
Cash and cash equivalents	$	830,546	$	125,294	$	955,840

Investments, at carrying value (1)
Agency mortgage-backed securities (2)	53,318,251		3,864,222		57,182,473
Credit risk transfer securities	383,073		457,681		840,754
Non-agency mortgage-backed securities	1,205,357		531,976		1,737,333
Commercial mortgage-backed securities	343,741		13,613		357,354
Residential mortgage loans (2)	8,266,318		648,149		8,914,467
MSR	—		844,093		844,093
Interests in MSR	—		85,653		85,653


Corporate debt, held for investment	1,475,429		492,238		1,967,667


Other assets (3)	—		89,612		89,612
Total financial assets	$	65,822,715	$	7,152,531	$	72,975,246

(1) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. (2) Includes assets transferred or pledged to securitization vehicles. (3) Includes commercial real estate investments held for sale and interests in certain joint ventures.

We maintain liquid assets in order to satisfy our current and future obligations in normal and stressed operating environments. These are held as the primary means of liquidity risk mitigation. The composition of our liquid assets is also considered and is subject to certain parameters. The composition is monitored for concentration risk 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 March 31, 2022:


	Carrying Value (1)
Liquid assets	(dollars in thousands)
Cash and cash equivalents	$	955,840

Residential Securities (2) (3)	59,215,417
Commercial mortgage-backed securities	357,354
Residential mortgage loans (4)	1,650,151


Corporate debt, held for investment (5)	1,676,071



Total liquid assets	$	63,854,833
Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (6)	98.05		%
(1) Carrying value approximates the market value of assets. The assets listed in this table include $58.4 billion of assets that have been pledged as collateral against existing liabilities at March 31, 2022. 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 $0.5 billion. (4) Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $7.3 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, of $7.8 billion.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

The interest rate sensitivity of our assets and liabilities in the following table at March 31, 2022 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	$	955,840	$	—	$	—	$	—	$	955,840

Agency mortgage-backed securities (principal)	99		1,771		820,665		55,975,966		56,798,501
Residential credit risk transfer securities (principal)	263		34,358		206,434		606,495		847,550
Non-agency mortgage-backed securities (principal)	8,576		135,880		897,127		783,324		1,824,907
Commercial mortgage-backed securities (principal)	—		—		—		363,046		363,046
Total securities	8,938		172,009		1,924,226		57,728,831		59,834,004
Residential mortgage loans (principal)	—		—		—		1,684,314		1,684,314


Corporate debt (principal)	—		—		302,665		1,717,816		2,020,481
Total loans	—		—		302,665		3,402,130		3,704,795
Assets transferred or pledged to securitization vehicles (principal)	—		—		—		7,933,095		7,933,095
Total financial assets - maturity	964,778		172,009		2,226,891		69,064,056		72,427,734
Effect of utilizing reset dates (1)	11,229,428		604,239		(360,370)		(11,473,297)		—
Total financial assets - interest rate sensitive	$	12,194,206	$	776,248	$	1,866,521	$	57,590,759	$	72,427,734
Financial liabilities
Repurchase agreements	$	43,888,860	$	8,737,643	$	—	$	—	$	52,626,503
Other secured financing	—		—		224,550		689,705		914,255
Debt issued by securitization vehicles (principal)	—		—		—		7,000,487		7,000,487
Participations issued (principal)	—		—		—		791,614		791,614
Total financial liabilities - maturity	43,888,860		8,737,643		224,550		8,481,806		61,332,859
Effect of utilizing reset dates (1)(2)	(34,755,967)		5,921,090		13,504,368		15,330,509
Total financial liabilities - interest rate sensitive	$	9,132,893	$	14,658,733	$	13,728,918	$	23,812,315	$	61,332,859

Maturity gap	$	(42,924,082)	$	(8,565,634)	$	2,002,341	$	60,582,250	$	11,094,875

Cumulative maturity gap	$	(42,924,082)	$	(51,489,716)	$	(49,487,375)	$	11,094,875

Interest rate sensitivity gap	$	3,061,313	$	(13,882,485)	$	(11,862,397)	$	33,778,444	$	11,094,875

Cumulative rate sensitivity gap	$	3,061,313	$	(10,821,172)	$	(22,683,569)	$	11,094,875

(1)Maturity gap utilizes stated maturities, or prepayment expectations for assets that exhibit prepayment characteristics, while interest rate sensitivity gap utilizes reset dates, if applicable. (2)Includes effect of interest rate swaps.

The methodologies we employ for evaluating interest rate risk include an analysis of our interest rate “gap,” measurement of the duration and convexity of our portfolio and sensitivities to interest rates and spreads.

Stress Testing

We utilize liquidity stress testing to ensure we have sufficient liquidity under a variety of scenarios and stresses. These stress tests assist with the management of our pool of liquid assets and influence our current and future funding plans. The stresses applied include market-wide and firm-specific stresses.

Liquidity Management Policies

We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and measurement, along with well-defined key risk indicators. Both quantitative and qualitative targets are utilized to measure the ongoing stability and condition of the liquidity position, and include the level and composition of unencumbered assets, as well as the sustainability of the funding composition under stress conditions.

We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-specific and market conditions. The metrics assist in assessing our liquidity conditions and are integrated into our escalation protocol.

Investment/Market Risk Management

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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 March 31, 2022. 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	(17.0%)	0.3%	1.7%
-50 Basis points	(8.9%)	0.3%	1.8%
-25 Basis points	(3.6%)	0.2%	1.2%

+25 Basis points	3.2%	(0.3%)	(1.8%)
+50 Basis points	5.9%	(0.6%)	(4.1%)
+75 Basis points	8.5%	(1.0%)	(6.8%)
MBS Spread Shock (1)	Estimated Change in Portfolio Market Value	Estimated Change as a % on NAV (3)(4)
-25 Basis points	1.9%	12.3%
-15 Basis points	1.1%	7.4%
-5 Basis points	0.4%	2.4%

+5 Basis points	(0.4%)	(2.4%)
+15 Basis points	(1.1%)	(7.3%)
+25 Basis points	(1.8%)	(12.0%)
(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 securities, residential mortgage loans, 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 securities, residential mortgage loans, MSR and derivative instruments. (4) NAV represents book value of equity.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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 to the firm’s specific investment policy parameters and optimize risk-return attributes.

While we do not expect to encounter credit risk in our Agency mortgage-backed securities, we face credit risk on the non-Agency mortgage-backed securities and CRT securities in our portfolio. In addition, we are also exposed to credit risk on residential mortgage loans, 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. Generally, we are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations. We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure. We will originate or purchase commercial 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 March 31, 2022 and December 31, 2021 was as follows:


	March 31, 2022		December 31, 2021
Category
Agency mortgage-backed securities (1)	79.5	%	81.9	%
Credit risk transfer securities	1.2	%	1.3	%
Non-agency mortgage-backed securities	2.4	%	2.2	%
Residential mortgage loans (1)	12.2	%	10.4	%
Mortgage servicing rights	1.5	%	0.7	%
Interests in MSR	0.1	%	0.1	%
Commercial real estate (2)	0.4	%	0.7	%
Corporate debt	2.7	%	2.7	%
(1) Includes assets transferred or pledged to securitization vehicles. (2) Excludes commercial real estate assets held for sale as of December 31, 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 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

The following table summarizes our exposure to counterparties by geography at March 31, 2022:


	Number of Counterparties	Secured Financing (1)		Interest Rate Swaps at Fair Value		Exposure (2)
Geography	(dollars in thousands)
North America	23	$	43,812,679	$	(168,476)	$	2,518,780
Europe	11	7,683,040		(313,220)		1,905,342

Japan	3	2,045,039		—		111,132
Total	37	$	53,540,758	$	(481,696)	$	4,535,254

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

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, and 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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 Estimates

The preparation of our consolidated financial statement in accordance with generally accepted accounting principles in the United States requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ materially from these estimates and changes in assumptions could have a significant effect on the consolidated financial statements. Our critical accounting policies that require us to make significant judgments or estimates are described below. For more information on these critical accounting policies and other significant accounting policies, see the Note titled “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 1. “Financial Statements.”

Valuation of Financial Instruments

Residential Securities

Description: We carry residential securities at estimated fair value. There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities.

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

Sensitivity of Estimates to Change: Changes in underlying assumptions used in estimating fair value impact the carrying value of the residential securities as well as their yield. For example, an increase in CPR would decrease the carrying value and yield of our Agency mortgage-backed securities. Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds. See Experienced and Projected Long-Term CPR, Financial Condition – Residential Securities and the interest rate sensitivity and interest rate and MBS spread shock analysis and discussions within this Item 2. for further information.

Residential Mortgage Loans

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Description: We elected to account for Residential Mortgage Loans at fair value. There is an active market for the residential whole loans in which we invest.

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

Sensitivity of Estimates to Change: Changes to model assumptions, including prepayment speeds may significantly impact the fair value estimate of residential mortgage loans as well as unrealized gains and losses and yield on these assets. Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds. See the interest rate sensitivity and interest rate shock analysis and discussions within this Item 2. for further information.

MSR

Description: We elected to account for MSR at fair value. The market for mortgage servicing rights is considered less active and transparent compared to securities. As such fair value estimates for our investment in MSR are obtained from models, which use significant unobservable inputs in their valuations.

Judgments and Uncertainties: These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR requires significant judgment by management and the third party pricing providers.

Sensitivity of Estimates to Change: Changes in the underlying assumptions used to estimate the fair value of MSR impact the carrying value as well as the related unrealized gains and losses recognized. For further discussion of the sensitivity of the model inputs see the Note titled “Fair Value Measurements” in the Notes to the Consolidated Financial Statements included in Item 1. “Financial Statements.”

Interest Rate Swaps

Description: We are required to account for its derivative assets and liabilities at fair value, which may or may not be cleared through a derivative clearing organization. We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization.

Judgments and Uncertainties: 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.

Sensitivity of Estimates to Change: Changes in the OIS curve will impact the carrying value of our interest rate swap assets and liabilities. Our valuations are most sensitive to changes in interest rate, which also impacts prepayment speeds. See the interest rate sensitivity and interest rate shock analysis and discussions within this Item 2. for further information.

Revenue Recognition

Description: Interest income from coupon payments is accrued based on the outstanding principal amounts of the Residential Securities and their contractual terms. Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method.

Judgments and Uncertainties: To aid in determining projected lives of the securities, we use third party model and market information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (i.e., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

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

Sensitivity of Estimates to Change: Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Adjustments are made for actual prepayment activity as it relates to calculating the effective yield. The sensitivity of changes in interest rates to our economic net interest income is included in the interest rate shock analysis and discussions within this Item 2 for further information.

Consolidation of Variable Interest Entities

Description: We are required to determine if it is required to consolidate entities in which it holds a variable interest.

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

Use of Estimates

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis


Glossary of Terms


A

Adjustable-Rate Loan / Security

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

Agency

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

Agency Mortgage-Backed Securities

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

Amortization

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

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

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Carry

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

CMBX

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

Collateral

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

Collateralized Loan Obligation (“CLO”)

A securitization collateralized by loans and other debt instruments.

Collateralized Mortgage Obligation (“CMO”)

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

Commodity Futures Trading Commission (“CFTC”)

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

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

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

Constant Prepayment Rate (“CPR”)

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

Convexity

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

Corporate Debt

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

Counterparty

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

Coupon

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

Credit and Counterparty Risk

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

Credit Derivatives

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

Credit Risk Transfer (“CRT”) Securities

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

Current Face

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


D

Dealer

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

Default Risk

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Derivative

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

Discount Price

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

Duration

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


E

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

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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. The United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023.

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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis

Monetary Policy

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

Mortgage-Backed Security (“MBS”)

A security representing a direct interest in a pool of mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis.

Mortgage Loan

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

Mortgage Servicing Rights (“MSR”)

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


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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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 (“TBA”) Securities

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

TBA Dollar Roll Income

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

Total Return

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

Total Return Swap

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


U

Unencumbered Assets

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

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

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


V

Value-at-Risk (“VaR”)

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

Variable Interest Entity (“VIE”)

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

Variation Margin

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

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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


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 March 31, 2022 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

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 March 31, 2022, we were not party to any pending material legal proceedings.


ITEM 1A. RISK FACTORS

Other than the following risk factor relating to the announced sale of the MML Portfolio, 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.

We may not consummate the sale of the MML Portfolio on a timely basis, on its current terms or at all, and even if consummated, we may not fully realize the anticipated benefits of the sale.

As discussed under the Note titled “Subsequent Events” in the Notes to the Consolidated Financial Statements included in Item 1. "Financial Statements," we have entered into a definitive agreement to transfer the MML Portfolio. While the sale is expected to be completed by the end of the second quarter of 2022, there can be no assurance that the sale will be completed in a timely manner, on its current terms or at all, as the completion of the sale is dependent on a number of factors, including customary closing conditions. If we are unable to consummate the sale, then we will not derive the expected benefits to our business. Further, even if we do consummate the sale, we nonetheless may not fully realize the anticipated benefits of the transaction.


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

In January 2022, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2024. No shares were repurchased with respect to this share repurchase program during the quarter ended March 31, 2022. As of March 31, 2022, 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.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES


Exhibit Number			Exhibit Description





































































3.1			Amended and Restated Bylaws of the Registrant, effective as of February 9, 2022 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed February 10, 2022).
31.1			Certification of David L. Finkelstein, Chief Executive Officer and P resident (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 P resi dent (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 March 31, 2022 (Unaudited) and December 31, 2021 (Derived from the audited Consolidated Statement of Financial Condition at December 31, 2021); (ii) Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three months ended March 31, 2022 and 2021; (iii) Consolidated Statements of Stockholders’ Equity (Unaudited) for the three months ended March 31, 2022 and 2021; (iv) Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2022 and 2021; 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 March 31, 2022 (formatted in Inline XBRL and contained in Exhibit 101).

† Submitted electronically herewith.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:	May 3, 2022	By: /s/ David L. Finkelstein
		David L. Finkelstein
		Chief Executive Officer, President and Director (Principal Executive Officer)

Dated:	May 3, 2022	By: /s/ Serena Wolfe
		Serena Wolfe
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

II-1

Annaly Capital Management - 10-Q quarterly report FY2022 Q1

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