UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED:  September 30, 2021

OR

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

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER:  1-13447

ANNALY CAPITAL MANAGEMENT INC

(Exact Name of Registrant as Specified in its Charter)

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

(212) 696-0100

(Registrant’s telephone number, including area code)

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

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

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

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

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

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

1

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

2

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

See notes to consolidated financial statements.

3

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

See notes to consolidated financial statements.

4

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

1. DESCRIPTION OF BUSINESS

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

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

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

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

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

2. BASIS OF PRESENTATION

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

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

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

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

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

5

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

3. SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

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

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

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

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

6

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

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

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

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

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

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

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

7

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Recent Accounting Pronouncements

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

Standard

Description

Effective Date

Effect on the Financial Statements or Other Significant Matters

Standards that have been adopted

ASU 2016-13 Financial instruments - Credit losses (Topic 326): Measurement of credit losses on financial instruments (“ASU 2016-13”)

This ASU updates the existing incurred loss model to a current expected credit loss (“CECL”) model for financial assets and net investments in leases that are not accounted for at fair value through earnings. The amendments affect cash and cash equivalents, reverse repurchase agreements, certain loans, held-to-maturity debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures and any other financial assets not excluded from the scope.  There are also limited amendments to the impairment model for available-for-sale debt securities.

January 1, 2020

The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets and off-balance-sheet credit exposures in scope. The modified retrospective approach requires an adjustment to beginning retained earnings for the cumulative effect of adopting the standard. Results for reporting periods beginning after January 1, 2020 are presented in accordance with ASU 2016-13, while prior periods continue to be reported in accordance with previously applicable GAAP. As a result of the adoption, the Company recorded an increase to the loan loss allowance of $37.4 million and a liability of $2.2 million for unfunded loan commitments, which reduced beginning retained earnings by $39.6 million as of January 1, 2020.

ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

This ASU provides optional, temporary relief to accounting for contract modifications resulting from reference rate reform.

January 1, 2020

The Company has elected to retrospectively apply the practical expedients to modifications of qualifying contracts as continuation of the existing contract rather than as a new contract. The adoption had no immediate impact and is not expected to have a material impact on the Company’s consolidated financial statements as the guidance continues to be applied to contract modifications until the ASU’s termination date.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

4. FINANCIAL INSTRUMENTS

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

Financial Instruments (1)

Balance Sheet Line Item

Type / Form

Measurement Basis

September 30, 2021

December 31, 2020

Assets

(dollars in thousands)

Securities

Agency mortgage-backed securities (2)

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

$

62,223,417

$

73,562,972

Securities

Agency mortgage-backed securities (3)

Fair value, with unrealized gains (losses) through earnings

594,662

504,087

Securities

Residential credit risk transfer securities

Fair value, with unrealized gains (losses) through earnings

787,235

532,403

Securities

Non-agency mortgage-backed securities

Fair value, with unrealized gains (losses) through earnings

1,747,932

972,192

Securities

Commercial real estate debt investments - CMBS(4)

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

—

31,603

Securities

Commercial real estate debt investments - CMBS (4)(5)

Fair value, with unrealized gains (losses) through earnings

265,000

45,254

Securities

Commercial real estate debt investments - credit risk transfer securities

Fair value, with unrealized gains (losses) through earnings

4,106

3,885

Total securities

65,622,352

75,652,396

Loans, net

Residential mortgage loans

Fair value, with unrealized gains (losses) through earnings

1,686,268

345,810

Loans, net

Residential mortgage loan warehouse facility

Fair value, with unrealized gains (losses) through earnings

1,431

—

Loans, net

Commercial real estate debt and preferred equity, held for investment (4)

Amortized cost

—

498,081

Loans, net

Corporate debt, held for investment

Amortized cost

1,890,709

2,239,930

Loans, net

Corporate debt, held for sale

Lower of amortized cost or fair value

2,113

—

Total loans, net

3,580,521

3,083,821

Interests in MSR

Interest in net servicing cash flows

Fair value, with unrealized gains (losses) through earnings

57,530

—

Assets transferred or pledged to securitization vehicles

Agency mortgage-backed securities

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

597,923

620,347

Assets transferred or pledged to securitization vehicles

Residential mortgage loans

Fair value, with unrealized gains (losses) through earnings

4,140,558

3,249,251

Assets transferred or pledged to securitization vehicles

Commercial mortgage loans (4)

Fair value, with unrealized gains (losses) through earnings

—

2,166,073

Assets transferred or pledged to securitization vehicles

Commercial mortgage loans (4)

Amortized cost

—

874,349

Total assets transferred or pledged to securitization vehicles

4,738,481

6,910,020

Liabilities

Repurchase agreements

Repurchase agreements

Amortized cost

55,475,420

64,825,239

Other secured financing

Loans

Amortized cost

729,555

917,876

Debt issued by securitization vehicles

Securities

Fair value, with unrealized gains (losses) through earnings

3,935,410

5,652,982

Participations issued

Participations issued

Fair value, with unrealized gains (losses) through earnings

641,006

39,198

Mortgages payable

Loans (6)

Amortized cost

—

426,256

(1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. Interests in MSR are considered financial assets whereas directly held MSR are servicing assets or obligations. (2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. (3) Includes interest-only securities and reverse mortgages. (4) Excludes Assets of disposal group held for sale at September 30, 2021. (5) Includes single-asset / single-borrower CMBS. (6) Excludes Liabilities of disposal group held for sale at September 30, 2021.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

5. SECURITIES

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

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

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

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

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

The decline in value of these securities is solely due to market conditions and not the quality of the assets.  Substantially all of the Agency mortgage-backed securities have an actual or implied credit rating that is the same as that of the U.S. government. The investments are not considered to be impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity. 

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

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

6. LOANS

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

Residential

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

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

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

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

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

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

Geographic Concentrations of Residential Mortgage Loans

September 30, 2021

December 31, 2020

Property location

% of Balance

Property location

% of Balance

California

51.3%

California

48.9%

New York

10.7%

New York

14.0%

Florida

6.4%

Florida

6.0%

All other (none individually greater than 5%)

31.6%

All other (none individually greater than 5%)

31.1%

Total

100.0%

100.0%

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

Commercial

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

Corporate Debt  

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

 

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

7. MORTGAGE SERVICING RIGHTS

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

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

8. VARIABLE INTEREST ENTITIES

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

Multifamily Securitization

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

Residential Trusts

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Residential Securitizations

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

OBX Trusts

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Credit Facility VIEs

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

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

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

MSR VIEs

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

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

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

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

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

 

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

 

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

Securitized Loans at Fair Value Geographic Concentration of Credit Risk

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

    

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Corporate Debt Funds

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

Residential Credit Fund

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

9. SALE OF COMMERCIAL REAL ESTATE BUSINESS

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

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

			September 30, 2021
			(dollars in thousands)
Cash and cash equivalents			$	2,772
Securities			8,016