Annaly Capital Management
Annual Report 2020

Plain-text annual report

RR R ii Annaly Capital Management Inc. 2020 Annual Report Note: Please refer to Glossary for defined terms and "Annaly | Power, Proven, People" in Endnotes section for footnoted information. Power of Annaly The industry leader with a differentiated investing model Annaly’s Size, Scale and Diversification ~16x Size of Median mREIT by Market Cap(1) $14bn 10 Permanent Capital(2) Financing Options $8.7bn Unencumbered Assets Scale Diversified Financing Liquid Annaly uses its size and scale to support two fundamental pillars of the American economy: housing and business Annaly is able to efficiently diversify investments across its businesses through a rigorous shared capital model and capital allocation process Annaly’s deep and diverse financing sources include traditional repo, warehouse lines and financing through our own broker dealer Our diversified, lower leveraged strategy results in greater liquidity - $8.7bn of total unencumbered assets and $6.3bn of cash and unencumbered Agency MBS Market Cap ($mm) | Annaly vs. mREIT Peers $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 – Annaly Market Cap: $11.4bn 1 r e e P 2 r e e P 3 r e e P 4 r e e P 5 r e e P 6 r e e P 7 r e e P 8 r e e P 9 r e e P 0 1 r e e P 1 1 r e e P 2 1 r e e P 3 1 r e e P 4 1 r e e P 5 1 r e e P 6 1 r e e P 7 1 r e e P 8 1 r e e P 9 1 r e e P 0 2 r e e P 1 2 r e e P 2 2 r e e P 3 2 r e e P 4 2 r e e P 5 2 r e e P 6 2 r e e P 7 2 r e e P 8 2 r e e P 9 2 r e e P 0 3 r e e P 1 3 r e e P 2 3 r e e P 3 3 r e e P 4 3 r e e P 5 3 r e e P 6 3 r e e P 7 3 r e e P Peer Median Market Cap: $723mm Note: Please refer to Glossary for defined terms and “Power of Annaly” in Endnotes section for footnoted information. iv Annaly Capital Management Inc. 2020 Annual Report Proven Results Proven over 20+ years to be a stable source of yield for shareholders Since inception, Annaly has delivered ~$21bn in dividends to shareholders(1) $22,500 $20,000 $17,500 $15,000 $12,500 $10,000 $7,500 $5,000 $2,500 – 1,200% 1,000% 800% 600% 400% 200% – (200%) 7 9 9 1 8 9 9 1 9 9 9 1 0 0 0 2 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 Prior Cumulative Dividends Declared Dividends Declared During Year Annaly has delivered total returns of 861% since IPO, outperforming the broader market by ~1.75x 861% 496% 10/1/1997 8/16/2001 7/2/2005 5/17/2009 4/2/2013 2/15/2017 1/1/2021 Annaly S&P 500 Note: Please refer to Glossary for defined terms and “Proven Results” in Endnotes section for footnoted information. Annaly Capital Management Inc. 2020 Annual Report v People First Our greatest asset is our employees – highly skilled individuals with varying sets of professional experience across sectors, credit cycles and functions – who come to work every day committed to the long-term success and growth of our Company OurPeople Thedeepandvariedexpertiseofourtalentedprofessionalshassupportedour successfulevolutiontothediversifiedcapitalmanagerwearetoday Employee Gender and Racial Diversity 32% 32% 45% 38% of employees identify as women of employees identify as racially / ethnically diverse of new hires in 2020 identify as racially / ethnically diverse of promoted employees in 2020 identify as women or racially / ethnically diverse Diversity in Leadership 64% 100% 17% 38% of Continuing Directors identify as women or racially / ethnically diverse 7 out of 11 of Board Committee Chairs identify as women 5 out of 5 of Executive Officers identify as women 1 out of 6 of Operating Committee members identify as women 5 out of 13 vi Annaly Capital Management Inc. 2020 Annual Report Contents 01 Message from Our CEO 02 OOur Investment Strategies Agency Residential Credit Middle Market Lending Commercial Real Estate | Planned Divestiture 03 Financing, Capital & Liquidity 04 Operational Efficiency 05 Corporate Responsibility & Governance Leading with Purpose & Impact Board Composition & Shareholder Engagement Board of Directors 1 6 7 8 9 10 11 12 13 14 15 16 Annaly Capital Management Inc. 2020 Annual Report vii Message from Our CEO Dear Fellow Shareholders, management succession, corporate culture, diversity and employment. our 2020 was a year that tested our humanity as our world was transformed by a pandemic that affected all aspects of our lives. In reflecting on the year, I believe a bright spot amidst the darkness was our resilience. The strength and courage universal exhibited responders, medical first by professionals and countless others who continue to lead our country through this difficult period are truly inspiring. On behalf of everyone at Annaly, we are grateful for the selflessness and sacrifices made by so many during this crisis and we are reminded of the responsibility to lead with purpose and impact during this time of rapid change. Resilience is also a quality shared by the employees of Annaly whose tireless efforts helped us successfully navigate this past year to deliver a positive economic return for our shareholders. We delivered performance that we are proud of amidst the historic volatility experienced early in the year as the virus’s devastating economic impacts unfolded. Annaly successfully transitioned to a remote work environment ahead of government mandates and we prioritized staying engaged with our employees through new and innovative mediums. We’ve provided flexible work arrangements and our focus on technology has allowed for a seamless working experience throughout the year. This period has reinforced the importance of culture, our people and emergency planning and system resiliency, which has been a priority of ours for years. In that spirit, we expanded (formerly) Compensation Committee, which has been renamed as and Development broad Compensation Committee, include to capital of oversight human the Company’s management, including policies and strategies related to recruiting, retention, career development, the mandate Management the the of LEADING WITH PURPOSE & IMPACT 2020 was also a year marked by social unrest sparked by issues of injustice and inequality. At Annaly, we believe firmly in utilizing our voice to speak out in support of equality and we have a corporate long-standing commitment responsibility and a culture champions inclusivity. We have taken significant steps to improve our diversity efforts at Annaly including expanded unconscious bias training, naming our first Head of Inclusion and establishing an Inclusion Support Committee of Executive Sponsors. to that Additionally, on the 23rd anniversary of our IPO, we inaugural corporate responsibility published our report, which details our significant corporate governance responsible enhancements, investments, corporate philanthropy and human capital initiatives. These practices are integral to our business at Annaly and our report includes related supplemental various sustainability reporting frameworks and details how we integrate ESG within our investment processes and corporate strategy. We are continuously enhancing these practices and are acutely focused on ensuring our investments make a positive impact on the world around us. disclosures under Over the last few years, we have made significant enhancements to our corporate governance in order to drive value for shareholders. Notably, the completion of our management internalization in June 2020 underscores our commitment to further align the interests of management and shareholders and demonstrates our continued efforts towards enhanced governance practices that incorporate the views the internalization, which has already resulted in long-term owners. Ultimately, of Note: Please refer to Glossary for defined terms and “Message from Our CEO” in Endnotes section for footnoted information. 1 Annaly Capital Management Inc. 2020 Annual Report the long run. As a testament increased transparency and disclosures to our is expected to save operating costs shareholders, over to the internalization’s value, we have already reduced our operating expense ratio by over 20 basis points to 1.62% as of year-end, which was at the low end of the long-term target at range we announcement of the internalization in February 2020 and well below the average of our mREIT Peers. established on our focus strengthen Most recently, we welcomed Eric A. Reeves to our Board of Directors. Eric’s valuable insight and legal and private capital expertise will enrich Annaly and further corporate governance and business performance. We believe our Company benefits from a diverse group of voices on the Board and we have been committed to increasing the Board’s breadth as indicated by the range of expertise in our Board skills and experiences matrix, which is set forth in the proxy statement for our 2021 annual meeting of stockholders. PORTFOLIO PERFORMANCE & STRATEGY In the face of continued economic uncertainty, Annaly delivered strong results for 2020 that were driven by careful management of our well-positioned investment portfolio. Key to our performance during the crisis was the liquidity of our Agency MBS holdings and the ability to transact in volatile markets, as well as ample availability of financing. Of further benefit was our relatively low overall leverage profile and our differentiated approach to credit investing. Throughout the year, we shifted our capital allocation increasingly towards Agency MBS given environment the more low characterized by record low financing costs, interest rate volatility and supportive supply and demand dynamics. operating favorable Our conservatively positioned credit businesses, which carry relatively low leverage and limited exposure to sectors most impacted by the pandemic, were able to weather the disruption experienced early in the year. To further illustrate this point, we were able to reverse CECL reserves over the course of the year, which declined by $20 million from the second quarter to year end. While capital allocation to credit was near the low end of our target range at 22% at year end, the relative value equation shifted back towards certain areas of credit as the economic recovery solidified and we began increasing the measured pace of activity in certain businesses. Residential strong fundamental performance, and Middle Market Lending, which saw credit performance indicators improve year over year, represented the majority of the $2.4 billion in credit originations for the year. Credit, which exhibited an been important We announced in March 2021 that we entered into a definitive agreement to sell our Commercial Real Estate business in a cash transaction valued at $2.3 billion. The Commercial Real Estate business pillar of Annaly’s has differentiated 2013. since investment model However, given structural changes in the operating environment, this transaction allows Annaly to successfully monetize the platform and provides additional capacity to further expand our leadership in the core of our strategy – residential mortgage finance. We are grateful to the team who supported and built the business over the years and we wish them well in their future endeavors. FINANCING, CAPITAL & LIQUIDITY At the beginning of 2020, we took prudent steps to fortify our balance sheet that proved invaluable as Note: Please refer to Glossary for defined terms and “Message from Our CE O”in En dno tes section for footnoted information. Annaly Capital Management Inc. 2020 Annual Report 2 the market disruption experienced in March and April Finally, we continued to use our stock buyback took hold. We proactively reduced leverage starting program as an effective tool to generate shareholder in Q1 2020 and continued to do so in subsequent return. Annaly repurchased $209 million of common quarters, ending the year a full turn lower at 6.2x, stock(3) in 2020 when our evaluation deemed it the which is the lowest economic leverage the Company most attractive use of capital. We renewed our has had in more than three years. Additionally, we $1.5 billion common stock repurchase program significantly increased our liquidity with nearly authorization(4) at year-end and will consider $9 billion of unencumbered assets as of December additional opportunistic repurchases in the future 31, 2020, the strongest liquidity position for the when appropriate to do so. Company in years. We believe that this combination of low leverage and robust liquidity allowed us to STRATEGIC VISION manage our capital more efficiently during a period At Annaly, we see many synergies between our of pronounced volatility, which differentiated us from Agency and Residential Credit businesses and are other market participants this past year. During 2020, we continued to utilize the breadth of our financing capabilities, diversifying financing through securitizations and increasing capacity under our credit facilities. Annaly Residential Credit Group completed five residential whole loan securitizations totaling $2.1 billion since the focused on strategically expanding our leadership across all aspects of the housing market. We plan to grow our operational capabilities and products within our core competencies, diversifying and growing our opportunity set through residential loan acquisition channels, mortgage servicing rights (“MSR”) and other asset types. beginning of 2020 and was the third largest As demonstrated by the announced divestiture of non-bank issuer of new origination RMBS in 2020(1). the Commercial Real Estate business, we are laying Additionally, we secured $1.125 billion of additional the foundation to further diversify within residential capacity across two new credit facilities for the housing finance. Within Agency, we are planning to Residential Credit business. We took advantage of begin investing in MSR on balance sheet and have the relative attractiveness of balance sheet and also established a partnership with a highly structural leverage compared to capital structure reputable originator partner to further increase our leverage, as evidenced by these transactions and the exposure to the asset class. We have made several redemption of our $460 million 7.50% Series D key hires to support this growth and recently opened Cumulative Redeemable Preferred Stock. Overall, the an office in Dallas to broaden our sub-servicing constructive financing environment was unlike oversight capabilities. Our Residential Credit anything we have witnessed in our Company’s business has continued to form strategic history. We achieved record-low financing costs with partnerships to secure loan production and further average economic cost of interest bearing our securitization platform, where we have been a liabilities(2) declining 114 basis points to 0.87% over programmatic issuer since the beginning of 2018. the course of the year. Note: Please refer to Glossary for defined terms and “Message from Our CEO” in Endnotes section for footnoted information. 3 Annaly Capital Management Inc. 2020 Annual Report One of the many differentiators of our platform will that the pandemic will end in the near future, we are continue to be the optionality embedded in our energized about our prospects and look forward to alternative strategies, such as our Middle Market continuing to update you on our progress on these Lending platform. Through that business, which has exciting initiatives. been on balance sheet since 2010, we generate leading returns with cycle-agnostic investments. We Sincerely, also expect to maintain exposure in commercial real estate through opportunistic and efficient strategies within the realm of securities. More broadly, we are committed to continuing to deliver the highest quality returns for our shareholders, while maintaining a conservative leverage posture compared to peers. CONCLUSION As I reflect on my first year as CEO of Annaly I am grateful for the support and dedication of our employees, our management team, our Board and all of Annaly’s stakeholders. Last year, these relationships mattered more than ever. Throughout our nearly 25-year history, our external stakeholders have been key to our success and longevity and we deeply value these partnerships. 2020 will be marked as the most trying and exciting year of my career and the lessons learned from this crisis, like each before it, fuels our organizational growth and perspective. Following the volatility last year, we are optimistic about the health of our financial position and we will remain nimble upon future dislocations to acquire assets at attractive valuations that will perpetuate our organic business objectives. Our attention to driving shareholder value and staying focused despite the severe turbulence surrounding us enabled us to achieve several strategic milestones during an otherwise challenging year. With real hope David Finkelstein Chief Executive Officer & Chief Investment Officer David Finkelstein was named CEO and Director in March 2020. Mr. Finkelstein has been with Annaly since 2013 and has served as Chief Investment Officer since 2016. In this role, he has managed the Agency portfolio and platform and helped build and oversee Annaly’s three credit businesses. Mr. Finkelstein first encountered Annaly in 2000 as a counterparty while trading fixed income investments at Salomon Smith Barney and continued his partnership with the Company in subsequent senior trading roles at Citigroup Inc. and Barclays PLC. Mr. Finkelstein joined Annaly from the Federal Reserve Bank of New York, where he served for four years as an Officer in the Markets Group and was the primary strategist and policy advisor for the MBS Purchase Program. Mr. Finkelstein received a B.A. in Business Administration from the University of Washington and a M.B.A. from the University of Chicago, Booth School of Business. Mr. Finkelstein also holds the Chartered Financial Analyst® designation. Note: Please refer to Glossary for defined terms and “Message from Our CEO” in Endnotes section for footnoted information. Annaly Capital Management Inc. 2020 Annual Report 44 5 Annaly Capital Management Inc. 2020 Annual Report Annaly Investment Strategies $14 billion in permanent capital(1) invested in two fundamental pillars of the American economy: housing and business Portfolio Overview Annaly Agency Group(2) 30yr 90% Whole Loans 11% Prime Jumbo 2% RPL & NPL 19% Prime/Alt-A/ Subprime 19% 2nd Lien 34% Annaly Residential Credit Group(3) Annaly Middle Market Lending Group Annaly Commercial Real Estate Group | Planned Divestiture(4) Mezzanine 5% Whole Loans 19% DUS 2% 15yr & 20yr 7% Other 1% OBX Retained 27% CRT 22% 1st Lien 66% CMBS 34% Equity 42% 778% of Dedicated Capital 7% of Dedicated Capital 10% of Dedicated Capital 5% of Dedicated Capital Note: Please refer to Glossary for defined terms and “Annaly Investment Strategies” in Endnotes section for footnoted information. Annaly Capital Management Inc. 2020 Annual Report 6 Agency The AAnnaly Agency Group invests in Agency MBS collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae Assets(1) $94.6bn Dedicated Capital $10.7bn Strategic Approach Agency Portfolio Detail   Annaly’s Agency Portfolio is made up of high quality, liquid securities, including specified pools, TBAs, ARMs and derivatives Portfolio benefits from in-house proprietary analytics that identify emerging prepayment trends and aid in accurately estimating cash flows  Diversified portfolio construct enhances total return profile while duration and convexity risks are hedged to protect book value across various interest rate and spread environments  Annaly’s Agency team has access to traditional wholesale and proprietary broker-dealer repo Assets Specified Pools and TBA Holdings, % 100% 75% 50% 25% 0% 2017 2018 2019 2020 Pools TBA Hedges(2) Agency Hedging Composition, % 100% 75% 50% 25% 0% 2017 2018 2019 2020 Swaps Swaptions Futures Note: Please refer to Glossary for defined terms and “Our Investment Strategies | Agency” in Endnotes section for footnoted information. 7 Annaly Capital Management Inc. 2020 Annual Report Residential Credit The AAnnaly Residential Credit Group invests in Non-Agency residential mortgage assets within the securitized product and whole loan markets Assets(1) $2.5bn Dedicated Capital $0.9bn Strategic Approach Annaly Securitization History Annaly Securitizations ($mm)  Ability to invest across securitized and whole loan markets based on relative value  Whole loan strategy focused on loans made to creditworthy borrowers who are underserved by traditional bank lenders  Programmatic securitization sponsor of new origination, residential whole loans with thirteen deals comprising +$5 billion of issuance since the beginning of 2018  Securitization program gives Annaly the ability to create proprietary investments tailored to desired credit preferences with control over diligence, origination partners, servicers and loss mitigation  Securities span the capital structure and both current and legacy securities  Utilize a variety of funding sources to finance the business, including securitization, repo and warehouse lines $515 $489 $463$465 $468 $383$384 $394 $388 $384 $375 $327 $257 Mar Aug Oct Jan Apr Jun Jul Oct Jan Feb Jul Sep Mar 2018 2019 2020 2021 Investor Expanded Prime Seasoned ARMs Non-QM Note: Please refer to Glossary for defined terms and “Our Investment Strategies | Residential Credit ” in Endnotes section for footnoted information. Annaly Capital Management Inc. 2020 Annual Report 8 Middle Market Lending The AAnnaly Middle Market Lending Group provides financing to private equity backed middle market businesses, focusing primarily on senior debt within select industries Assets $2.2bn Dedicated Capital $1.4bn Strategic Approach AMML by the Numbers Portfolio as of December 31, 2020  Execute on a disciplined credit focused investment strategy comprised predominantly of first and second lien loans  Maintain strong relationships with top quartile U.S. based private equity firms to generate repeat deal flow 29 Private Equity Sponsors  Experienced investment team with a history of allocating capital through multiple economic cycles $44mm Average Investment Size(1) 48 Portfolio Borrowers 0.7x Leverage on Portfolio(2)  Utilize a credit intensive investment process and long-established relationships to build a defensive portfolio with a stringent focus on non- discretionary, niche industries  Deal types include leveraged buyouts, acquisition financing, refinancings and dividend recapitalizations $95mm Average EBITDA at Underwriting L+5.2% / L+8.3% Weighted Average First / Second Lien LIBOR Spread Note: Please refer to Glossary for defined terms and “Our Investment Strategies | Middle Market Lending” in Endnotes section for footnoted information. 9 Annaly Capital Management Inc. 2020 Annual Report Commercial Real Estate | Planned Divestiture Annaly has entered into a definitive agreement to sell the AAnnaly Commercial Real Estate Group to Slate Asset Management, a global investment and asset management firm focused on real estate, for $2.33 billion. Subject to customary closing conditions, including applicable regulatory approvals, the transaction is expected to be completed by Q3 2021 $2,330,000,000 March 25, 2021 Strategic Evolution Annaly acquired CreXus Investment Corp. and entered into the commercial mortgage market Diversified into healthcare CRE with acquisition of MTGE Investment Corp. Closed first $857mm managed CRE CLO 2013 2014 2015 2016 2017 2018 2019 2020+ Expanded business with new team that joined from a leading real estate company Established strategic partnership with Pearlmark Real Estate Partners Announced agreement to sell Commercial Real Estate business to Slate Asset Management Investment Portfolio ($bn)(1) $1.6 $1.5 $2.5 $2.3 $2.0 $2.9 $2.7 $2.3 2013 2014 2015 2016 2017 2018 2019 2020 Note: Please refer to Glossary for defined terms and “Commercial Real Estate | Planned Divestiture” in Endnotes section for footnoted information. Annaly Capital Management Inc. 2020 Annual Report 10 Financing, Capital & Liquidity Annaly’s deep and diverse financing sources provide the Company with unique competitive advantages. Throughout the year, Annaly further enhanced its capital structure and liquidity through prudent capital management Annaly’s Approach to Leverage Capital Structure Leverage  Evaluate the relative benefits and considerations of all forms of capital and financing  Includes unsecured debt and preferred equity, which we view as implicit leverage  Monitor the relative attractiveness of capital structure leverage compared to balance sheet leverage − Evaluate capital markets opportunities through this holistic lens Overall Risk Profile Balance Sheet Leverage Asset-Level Structural Leverage  Consider structural leverage relative to balance sheet leverage  Focus on synchronizing our financing with the liquidity of our investments  Utilize prudent balance sheet leverage for higher spread duration, more structurally levered instruments Economic Leverage  Maintain a relatively stable amount of total leverage on common equity − Maintained Q3 2020 economic leverage ratio through Q4 2020, despite the preferred redemption and stock repurchases(1), after four consecutive quarters of decreasing leverage 7.7xx 7.2xx 6.8xx 6.4xx 6.2xx 6.2xx 9/30/19 12/31/19 3/31/20 6/30/20 9/30/20 12/31/20 Financing, Capital and Liquidity Highlights Since the Beginning of 2020 Redeemed all outstanding shares of the $460 million 7.50% Series D preferred stock in December 2020 Closed five residential whole loan securitizations totaling $2.1 billioon(2) Added $1.12255 billion of capacity for our ARC business across two new credit facilities Record-low financing costs with average economic cost of interest bearing liabilities decliinninng 114bppss to 0.87% over the course of the year $8.7 billioon of unencumbered assets, including cash and unencumbered Agency MBS of $6.3 billion Repurchased $209 million of common stock in 2020 and authorized new $1.5 billion common stock repurchase program(3) Note: Please refer to Glossary for defined terms and “Financing, Capital & Liquidity” in Endnotes section for footnoted information. 11 Annaly Capital Management Inc. 2020 Annual Report Operational Efficiency Annaly operates a highly institutionalized platform and benefits from its scale and efficiency, operating at lower cost levels than peer averages. The Internalization provides an opportunity for incremental cost control and operating flexibility Technology Risk Management Legal, Compliance & Audit Services Finance & Treasury Business Operations  Robust compliance  Full service financial function and protocols operations  Proprietary, flexible and integrated systems platform  Innovative technology leadership  Robust, enterprise- class digital infrastructure and controls  Sophisticated market risk capabilities and deep credit skills  Independent internal  Hedging and financing audit function expertise  Risk professionals embedded within the investment groups  Comprehensive risk governance framework  Deep in-house legal and regulatory expertise across investment strategies, corporate transactions and governance  Capital markets funding acumen  Sophisticated tax expertise  Self-clearing operations  Straight-through processing  Robust reporting and transparency  Strong internal  Strong tested system controls environment and process redundancies to ensure business continuity Annaly’s Internalization provides an opportunity for incremental cost control and operating flexibility Operating Expense as % of Equity(1) Annaly’s Long-Term Target(1): 1.45%–1.60% 6.81% Realized cost savings reduced the operating expense ratio by +20bps year-over-year to 1.62% in 2020. We expect additional cost savings following the Commercial Real Estate business divestiture and have adjusted our long- term target range from 1.60%-1.75% to 1.45%-1.60% accordingly 3.34% 1.84% 1.62% 1.45% -1.60% External mREIT Avg. (YE 2020) (2) Internal mREIT Avg. (YE 2020) (2) (2019 Actual) (2020 Actual) (Long-Term Target) Note: Please refer to Glossary for defined terms and “Operational Efficiency” in Endnotes section for footnoted information. Annaly Capital Management Inc. 2020 Annual Report 12 Corporate Responsibility & Governance Annaly has made several important governance enhancements to promote shareholder value and support transparency over the last few years 2017 Publication of BBoard Skills Matrix in Proxy Established CCorporate Responsibility Committee of the Board 2018 Initiated an eenergy audit to track and monitor impact and energy usage Appointed Head of Corporate Responsibility and Government Relations Adopted bylaw amendment to declassify the Board Adopted an enhanceed self- evaluation process for the Board and comprehensive Director refreshment policy Elected ttwo new, highly qualified independent directors 2019 Added eextensive disclosure on the Company’s Corporate Responsibility and ESG efforts to our corporate website Elected ttwo new, highly qualified independent Directors Separated the roles of CEO and Chair of the Board; appointed the Company’s first independent Board Chair Internalized mmanagement structure Published Inaugural Corporate Responsibility Report 2021 2020 Redesigned Executive Compensation Program to reflect internally-managed structure Elected a nnew, highly qualified independent Director Disclosed rracial/ethnic diversity of our Directors in our Board skills and experiences matrix 13 Annaly Capital Management Inc. 2020 Annual Report Leading with Purpose & Impact During this time of considerable global challenges, Annaly has chosen to lead with purpose and impact Published Inaugural Corporate Responsibility Report  Annaly published our inaugural Corporate Responsibility report on the 23rd anniversary of our IPO, demonstrating our commitment to transparency and robust ESG practices  The report introduces supplemental disclosures under the Sustainability Accounting Standards Board (“SASB”) and Global Reporting Initiative (“GRI”) frameworks and outlines goals and commitments across our five key ESG areas: Corporate Governance Human Capital Responsible Investments Risk Management Environment Expanded our High-Impact Partnerships  Annaly’s corporate giving has been focused on high-impact programs that seek to advance social issues that we are committed to: combatting homelessness and advancing the professional development of women and underrepresented groups  Considering new challenges in 2020, we responded with specific actions: − Continued our work with Girls Who Invest and launched a new partnership with Project Destined. These efforts aim to help build a pipeline of gender, racially and socioeconomically diverse professionals − Contributions in response to the COVID-19 pandemic supporting non-profit organizations serving vulnerable New Yorkers Increased Focus on Diversity & Inclusion  We have prioritized continuing to improve our diversity efforts, which have long been a business imperative at Annaly as we believe it helps us generate stronger returns for our shareholders  Some of our 2020 inclusion efforts include: − Identified our first Head of Inclusion with support from a cross-functional team − Developed an Inclusion Support Committee of Executive Sponsors − Conducted unconscious bias training for all employees to establish foundational knowledge, language and understanding to support Annaly’s diversity and inclusion initiatives − Organized meetings with business heads and staff to discuss employees’ views and concerns followed by an employee inclusion survey Annaly Capital Management Inc. 2020 Annual Report 14 Board Composition & Shareholder Engagement Efforts We are committed to having a Board representing diverse backgrounds and a wide range of professional experiences that we believe benefits the long-term interest of our shareholders, whom we regularly engage with on corporate responsibility and governance matters 11 Board of Directors 7 5 Continuing Directors Continuing Directors Identify as Women or Racially/Ethnically Diverse Standing Board Committees Tenure Age >10 Years 2 Directors 5 to 10 Years 2 Directors 6.0 years 60’s 4 Directors <5 Years 7 Directors 56 40’s 4 Directors Represents the average tenure of Continuing Directors Represents the average age of Continuing Directors 50’s | 3 Directors Followingtheclosingofthe Internalization,the CompensationCommittee assumedbroadoversightof theCompany’shumancapital management–including policiesandstrategiesrelated toretention,management succession,corporateculture anddiversity–andchanged itsnametotheManagement Developmentand CompensationCommittee 2020–2021 Global Shareholder Engagement Efforts(1) Outreachincluded Outreachincludedapproximately 100% ~90% Wetakeprideinour extensiveoutreachefforts andarecommittedto transparency,enhanced disclosureandcontinued engagement of top 100 institutional investors of institutional ownership Note: Please refer to Glossary for defined terms and “Board Composition & Shareholder Engagement Efforts” in Endnotes section for footnoted information. 15 Annaly Capital Management Inc. 2020 Annual Report Board of Directors Annaly’s highly qualified Board of Directors possess a broad array of complementary skills and experience Annaly Board of Directors Director Principal Occupation Committees David L. Finkelstein Chief Executive Officer & Chief Investment Officer Annaly Capital Management, Inc. Michael Haylon Managing Director and Head of Conning North America Conning, Inc.  Independent Chaair of thee Board  Audit  Risk Wellington J. Denahan Former Executive Chairman and Co-Founder Annaly Capital Management, Inc.  Vicee Chaair of the Board  Risk (Chair)  Corporate Responsibility Francine J. Bovich Former Managing Director Morgan Stanley Investment Management  Nominating/Corporate Governance (Chair)  Corporate Responsibility Katie Beirne Fallon Chief Global Impact Officer McDonald’s Corporation  Corporate Responsibility (Chair)  Nominating and Corporate Governance Thomas Hamilton Owner and Director Construction Forms, Inc. Kathy Hopinkah Hannan Former National Managing Partner, Global Lead Partner KPMG LLP Eric A. Reeves Managing Director, Head of Private Capital Investments Duchossois Capital Management John H. Schaefer Former President and Chief Operating Officer Morgan Stanley Global Wealth Management Donnell A. Segalas(1) Chief Executive Officer and Managing Partner Pinnacle Asset Management, L.P.  Audit  Management Development & Compensation  Risk  Audit (Chair)  Management Development & Compensation  Nominating/Corporate Governance  Corporate Responsibility  Nominating/Corporate Governance  Audit  Management Development & Compensation  Risk  Corporate Responsibility  Management Development & Compensation  Nominating/Corporate Governance Glenn A. Votek Former Senior Advisor Annaly Capital Management, Inc.  Corporate Responsibility  Risk Vicki Williams Chief Human Resources Officer NBCUniversal  Management Development & Compensation (Chair)  Audit Note: Please refer to Glossary for defined terms and “Board of Directors” in Endnotes section for footnoted information. Annaly Capital Management Inc. 2020 Annual Report 16 [THIS PAGE INTENTIONALLY LEFT BLANK] UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: December 31, 2020 OR ☐ TRANSIT RR ION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSIT RR ION PERIOD FROM _______________ TO _________________ COMMISSION FILE NUMBER: 1-13447 ANNALY CAPITAL MANAGEMENT INC (Exact Name of Registrant as Specified in its Charter) Maryland (State or other jurisdiction of incorporation or organization) 22-3479661 (IRS Employer Identification No.) 1211 Avenue of the Americas New York, New York (Address of principal executive offices) 10036 (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 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock 6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock NLY NLY.F NLY.G NLY.I Securities registered pursuant to Section 12(g) of the Act: None New York Stock Exchange New York Stock Exchange New York Stock Exchange New York Stock Exchange Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑ 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 subjeu ct to such filff ing 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 chaptea r) 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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. “smaller reporting company,” m Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑ 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 ☑ At June 30, 2020, the aggregate market value of the voting common stock held by non-affiliates of the registrant was apa proximately $9.2 billion, based on the closing sales price of the registrant’s common stock on such date as reported on the New York Stock Exchange. The number of shares of the registrant’s Common Stock outstanding on February 2, 2021 was 1,398,502,906. DOCUMENTS INCORPORATED RR BY REFERENCE ve proxy statement pursuant to Regulation 14A within 120 days of the end of the The registrant intends to file a definiti of such proxy statement are incorporated by reference into Part III of this PP ortions fiscal year ended December 31, 2020. P00 Form 10-K. dd ANNALY CAPITAL MANAGEMENT, INC. 2020 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Properties Legal Proceedings Mine Safety Disclosures Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits, Financial Statement Schedules Exhibit Index Item 16. Form 10-K Summary Financial Statements Signatures Page 1 11 50 50 50 50 51 54 55 97 97 97 97 100 101 101 101 102 102 103 103 107 108 II-1 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1. BUSINESS PART I ITEM 1. BUSINESS s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S “Annaly,”ll it is mii ade clear that the term means only t ll hett parent company. “we,” “us,” or “our” refers e CC to Annaly Cll apital Management, Inc. and our wholly-owned subsidiaries, excep ee t where Refee r to the section titled “Glossary of Terms” located at the end of Part II, Item 7. “Management’s Discussion and Analyll sisyy Financial Condition and Results ott ions.” for definitions of certain of the commonly used terms in this annual report Form 10-K. perat O f Oo e of on The following descripti related Notes thereto, and the information set forth under the heading “Special Note Regarding ForwFF “ in Item 7. “Manageme e read in conjunction with the Consoli of Financial Condition and Results ott nt’s Discussion and Analysisyy on of our business should bll peO rations.” f Oo CC i dated Financial Statements and the ard-Looking Statements” INDEX TO ITEM 1. BUSINESS Business Overview Business and Investment Strategy Our Portfolio and Capital Allocation Policy Risk Appetite Capital Structure and Financing Operating Platform Risk Management Closing of the Internalization and Termination of the Management Agreement Information about our Executive Officers Human Capital Regulatory Requirements Competition Corporate Governance Distributions Available Information Page 2 2 3 3 5 5 6 6 6 7 8 9 9 10 10 1 ANNALY CAPITAL MANAGEMENT, INC. ANDAA ITEM 1. BUSINESS SUBSIDIARIES Business Overview Introduction We are a leading diversified capital manager that invests in and finances residential and commercial assets. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that (“REIT”). Prior to the closing of the Internalization (as defined below has elected to be taxed as a real estate investment trust under “Closing of the Internalization and Termination of the Management Agreement”) on June 30, 2020, we were externally managed by Annaly Management Company LLC (our “Former Manager”). Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” r t We use our capital between the yield on our assets and the cost of our borrowings and hedging activities. coupled with borrowed funds a ff to invest primarily in real estate related investments, earning the spread We believe that our business objectives are supporte extensive experience of our employe the availabili m ion of financing sources and our operational efficiencies. ty and diversificat the es, the diversity of our investment strategy, a comprehensive risk management approach, d by our size and conservative financial posture relative to the industry,rr u a ff Investment Groups Our four investment groups are primarily comprised of the following: Investment Groups Annaly Agency Group Annaly Residential Credit Group Description Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Invests primarily in non-Agency residential mortgage assets within securitized product and whole loan markets. Annaly Commercial Real Estate Group Originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity investments. Annaly Middle Market Lending Group Provides financing to private equity-backed middle market businesses, focusing primarily on senior debt within select industries. Operating Platl formt Our operating platform reflects our investments in systems, infrastructure and personnel. Our technology investments have led to the development of proprietary portfolio analytics, financial and capita l allocation modeling, and other risk and reporting tools, which, coupled with cutting-edge digital transformation applications, support the diversification and operating efficiency of our business. Our operating platform supports our investments in Agency assets as well as residential credit assets, commercial real estate assets, residential mortgage loans, mortgage servicing rights and corporate loans. We believe that the diversity of our investment alternatives provides us the fleff xibility to adapt to changes in market conditions and to take advantage of potential opportuni ties. a t Business and Investment Strategy Shared Capita al Model Our company is comprised of four investment groups, each of which has multiple investment options to capita relative returns groups. Our shared capital model drives our capita value while also managing risk. alize on attractive and market opportunities. In aggregate, we maintain numerous investment options across our investment al allocation strategy allowing us to rotate our investments based on relative t Strategic Relationshipsi A key element of our strategy is to establish and grow strategic relationships with industry leading partners in order to develop and broaden access to quality originations flow as well as to leverage third party operations to effici ently manage operating for our shareholders. Additionally, we have attracted capital costs, all in an effort partners to our business, augmenting our public capita s, which has resulted in increased scale without sacrificing balance sheet liquidity. Certain of our strategic relationships also afford us the opportunity to support communities through socially responsible investing. to generate attractive risk adjusted returns ff t al markets effort ff ff t We have created multiple strategic and capia tal partnerships across our investment groups including the following: 2 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA ITEM 1. BUSINESS SUBSIDIARIES – Annaly Residential Credit Group has established relationships with key mortgage loan originators and aggregators ently source proprietary originations suited to our risk including well-known money center banks, allowing us to effici parameters. ff – Annaly Commercial Real Estate Group maintains a partnership with Pearlmark Real Estate Partners, a leading real estate private equity sponsor, providing access to co-investment opportunities through their seasoned commercial real estate investment team. – We have partnered with Pingora Loan Servicing, a premier mortgage servicer for MSR assets and a wholly-owned with GIC Private Limited (“GIC”), a leading f Bayview Asset Management, through our joint venturet subsidiary orr Sovereign Wealth Fund. – We have also partnered with GIC through the creation of a joint venture with the purpose of investing in residential credit assets, including newly-originated residential loans and securities issued by our subsidiaries. – We have partnered with Capital Impact Partners, a national community development financial instituti t on, to create a social impact joint venture supporting projects in underserved communities across the country. Our Portfolio and Capital Allocation Policy Under our capita asset classes as we determine to be appropri a a ate fromff time to time. l allocation policy and subject to oversight by our Board, we may allocate our investments within our target Our Board may adopt changes to our capita a l allocation policy and targeted assets at its discretion. The nature of our assets and our operations are intended to meet our REIT qualification requirements and our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (“Investment Company Act”). Our portfolio composition and capita al allocation at December 31, 2020 and 2019 were as follows: Investment Group Residential Annaly Agency Group (2)(3) Annaly Residential Credit Group (3) Commercial Annaly Commercial Real Estate Group (3) Annaly Middle Market Lending Group December 31, 2020 December 31, 2019 Percentage of Portfolio Capital Allocation (1) Percentage of Portfolio Capital Allocation (1) 93% 3% 2% 2% 78% 7% 5% 10% 93% 3% 2% 2% 74% 10% 7% 9% (1) (2) (3) Capital allocation represents the percentage of equity allocated to each category. Includes MSRs and TBA purchase contracts. Includes assets transferred or pledged to securitization vehicles net of debt issued by securitization vehicles. Risk Appetite ff wide risk appe We maintain a firm- tite statement which defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. We engage in risk activities based on our core expertise that aim to enhance value for our stockholders. Our activities focus on income generation and capital preservation through proactive portfolio management, supported by a conservative liquidity and leverage posture. a ff The risk appetite statement asserts the following key risk parameters to guide our investment management activities: Risk Parameter Description Portfolio composition We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy. a Leverage Liquidity risk Interest rate risk Credit risk We generally expect to maintain an economic leverage ratio no greater than 10:1. We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs even under adverse market conditions. We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income generation and capital preservation. We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns. Capital preservation We will seek to protect our capital base through disciplined risk management practices. Compliance We will comply with regulatory requirements needed to maintain our REIT status, our exemption from registration under the Investment Company Act and the licenses and registrations of our regulated subsidiaries. 3 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1. BUSINESS roved the investment and operating policies and strategies that support our risk appet Our Board has reviewed and appa ite statement set forth in this Form 10-K. Our Board has the power to modify or waive these policies and strategies to the extent that our Board, in its discretion, determines that the modification or waiver is in the best interests of our stockholders. Among other fact ors, market developments which affect our policies and strategies or which change our assessment of the market may cause our Board to revise our policies and strategies. a ff We may seek to expand our capia tal base in order to further increase our ability to acquire new and different types of assets when t from new investments appear attractive relative to the targeted risk-adjusted returns. the potential returns We may in the future ies. es by offering our debt or equity securities in exchange for such opportunit acquire assets or companim t t Target Assets Within the confines of the risk appet consideration of the folff lowing: a ite statement, we seek to generate the highest risk-adjusted returns t on capital invested, after • • • The amount, nature and variability of anticipated cash flows from the asset across a variety of interest rate, yield, spread, financing cost, credit loss and prepayment scenarios; The liquidity of the asset; The ability to pledge the asset to secure collateralized borrowings; • • • The costs of finff ancing, hedging and managing the asset; The impact of the asset to our REIT compliance and our exemption from registration under the Investment Company Act; and The capita purchase and finaff al requirements associated with the ncing of the asset. • When applic borrower; a abla e, the credit of the underlying We target the purchase and sale of the assets listed below as part of our investment strategy. Our targeted assets and asset acquisition strategy may change over time as market conditions change and as our business evolves. Investment Group Targeted Asset Class Description Annaly Agency Group Annaly Residential Credit Group Agency mortgage-backed securities To-be-announced forward contracts (“TBAs”) Agency pass-through certificates issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. Other Agency MBS include collateralized mortgage obligations (“CMOs”), interest-only securities and inverse floaters Forward contracts for Agency pass-through certificates Agency commercial mortgage- backed securities Pass-through certificates collateralized by commercial mortgages guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae Mortgage Servicing Rights (“MSRs”) Rights to service a pool of residential loans in exchange for a portion of the interest payments made on the loans Residential mortgage loans Residential mortgage loans that are not guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae Residential mortgage-backed securities Securities collateralized by pools of residential loans that are not guaranteed by one of the Agencies Agency or private label credit risk transfer securities (“CRT”) Risk sharing transactions issued by Freddie Mac and Fannie Mae and similarly structured transactions arranged by third party market participants, designed to synthetically transfer mortgage credit risk to private investors Commercial mortgage loans Loans collateralized by commercial real estate properties Annaly Commercial Real Estate Group Commercial mortgage-backed securities Mezzanine loans Securities collateralized by pools of commercial mortgage loans Loans collateralized by commercial real estate properties subordinate to first mortgage loans Real property Commercial real estate properties that generate current cash flow Annaly Middle Market Lending Group First lien middle market loans Senior secured loans made to middle market companies that are the first to be repaid in the event of a borrower default Second lien middle market loans Senior secured loans to middle market companies that have a junior claim on collateral to those of first lien loans We believe that future interest rates and mortgage prepayment rates are very difficult to predict. Therefore, we seek to acquire assets which we believe will provide attractive returns over a broad range of interest rate and prepayment scenarios. t 4 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ALY CAPITAL MANAGEMENT, INC. ANDAA ANNAA ITEM 1. BUSINESS SUBSIDIARIES Capital Structure and Financing al structure is designed to offer an efficient complement of funding Our capita sources to generate positive risk-adjusted returns for our stockholders while maintaining appropriate liquidity to support our business and meet our financial obligations under periods of market stress. To maintain our desired capita l profile, we utilize a mix of debt and equity funding. Debt funding may include the use of repurchase agreements, loans, securitizations, participations issued, lines of credit, asset backed lending facilities, corporate bond issuance, convertible bonds, mortgages payablea al primarily consists of common and preferred stock. or other liabilities. Equity capita a ff ff We finance our Agency mortgage-backed securities and residential credit investments primarily with repurchase ce certain commercial real estate investments with repurchase agreements. We seek to diversify our agreements. We also finan exposure and limit concentrations by entering into repurchase agreements with multiple counterparties. We enter into repurchase agreements with broker-dealers, commercial banks and other lenders that typically offer this type of financing. We enter into collateralized borrowings with finaff ncial institutions meeting internal credit standards and we monitor the financial ons on a regular basis. At December 31, 2020, we had $64.8 billion of repurchase agreements condition of these instituti outstanding. t Additionally, our wholly-owned subsidiary, Arcola Securities, Inc. (“Arcola”), provides direct access to third party fundi FINRA mRR service offered by the Fixed Income Clearing Corporation (“FICC”), with FICC acting as the central counterpart provides us greater depth and diversity of repurchase agreement funding while also limiting our counterparty exposure. ng as a ember broker-dealer. As an eligible institution, Arcola also raises funds through the General Collateral Finance Repo y.tt Arcola ff r To reduce our liquidity risk we maintain a laddered approach to our repurchase agreements. At December 31, 2020, the weighted average days to maturity was 64 days. We utilize diverse funding sources to finance securitization funding and, in the case of equity investments in commercial real estate, mortgage financing. our commercial investments, ff including bilateral borrowing facilities, t our stockholders. We generally expect to maintain an We utilize leverage to enhance the risk-adjusted returns generated forff time to time based upon various factors, including our economic leverage ratio of no greater than 10:1. This ratio varies fromff management’s opinion of the level of risk of our assets and liabili ties, our mix of assets, our liquidity position, our level of a unused borrowing capacity, the availability of credit, over-collateralization levels required by lenders when we pledge assets to secure borrowings and, lastly, our assessment of domestic and international market conditions. Since the financial crisis beginning in 2007, we have maintained an economic leverage ratio below 8:1, which is generally lower than what our leverage ratio had been prior to 2007. For purposes of calculating this ratio, our economic leverage ratio is equal to the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. ff Our target economic leverage ratio is determined under our capital management policy. Should our actual economic leverage ratio increase above the target level, we will consider appropriate measures. Our actions may include asset sales, changes in asset mix, reductions in asset purchases or originations, issuance of capital or other capital enhancing or risk reduction strategies. The following tablea presents our leverage, economic leverage and capital ratios as of the periods presented. Leverage ratio Economic leverage ratio December 31, 2020 December 31, 2019 5.1:1 6.2:1 7.1:1 7.2:1 Capital ratio 13.6% 12.0% Operating Platform ff le and scalable operating platform to support the management and maintenance of our diverse asset We maintain a flexib to enhance resiliency, efficiency, cybersecurity and scalabia lity while also portfolio. We have invested in our infrastructuret ensuring coverage of our target assets. Our information technology applications span the portfolio life-cycle including pre-trade analysis, trade execution and capture, trade settlement and financ ing, monitoring, and financial accounting and reporting. ff Technology appl ications also support our control functions including risk, complim ance, middle- and back-office functions. We have added breadth to our operating platform to accommodate diverse asset classes and drive automation-based efficiencies. a 5 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA ITEM 1. BUSINESS SUBSIDIARIES Our business operations include a centralized collateral management function that permits in-house settlement and self-clearing, thereby creating greater control and management of our collateral. Through technology, we have also incorporated exception based processing, critical data assurance and paperless workflows. Our infrastructuret investment has driven operating efficiencies while expanding the platform. Routine disaster recovery and penetration testing enhances our systems resiliency, security and recovery orr a smooth transition to the remote work environment in which we currently operate dued f critical systems throughout the computing estate, and positioned us forff to Coronavirus Disease 2019 (“COVID-19”). Risk Management Risk is a natural element of our business. Effective risk management is of critical importance to our business strategy. The objective of our risk management framework is to identify, measure, monitor and control the key risks to which we are subject. Our approac discussion a of our risk management process and policies please refer to the section titled “Risk Management” of Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” h to risk management is comprehensive and has been designed to foste r a holistic view of risk. For a full ff ff Closing of the Internalization and Termination of the Management Agreement On February 12, 2020, we entered into an internalization agreement (the “Internalization Agreement”) with our Former Manager and certain affiliates of our Former Manager. Pursuant to the Internalization Agreement, we agreed to acquire all of the outstanding equity interests of our Former Manager and our Former Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($1.00). In connection with the closing of the Internalization, on June 30, 2020, we acquired all of the assets and liabia lities of our Former Manager (the net effect of which was immaterial in amount), and we transitioned from an externally-managed REIT to an internally-managed REIT. At the closing, all employees of our Former Manager became our employees. The parties also terminated the Amended and Restated Management Agreement by and between us and our Former Manager (the “Management Agreement”) and therefore we no to, or reimburse expenses of, our Former Manager. Pursuant to the Internalization Agreement, our longer pay a management feeff Former Manager waived any termination fee. For additional informff ation about the Internalization, see the Note titled “Related Party Transactions” in the Notes to the Consolidated Financial Statements included in Item 15. “Exhibits, Financial Statement d Schedules.” Information about our Executive Officers ff The foll owing tablea ff sets forth certain information as of January 31, 2021 concerning our executive officers: Name Age Title David L. Finkelstein Serena Wolfe Steven F. Campbell Timothy P. Coffey Ilker Ertas Anthony C. Green 48 41 48 47 50 46 Chief Executive Officer and Chief Investment Officer Chief Financial Officer Chief Operating Officer Chief Credit Officer Head of Securitized Products Chief Corporate Officer, Chief Legal Officer and Secretary David L. Finkelstein has served as the Chief Executive Officer of Annaly since March 2020, and Chief Investment Officer of Annaly since November 2016. Mr. Finkelstein previously served as Annaly’s Chief Investment Officer, Agency and RMBS beginning in February 2015 and as Annaly’s Head of Agency Trading beginning in August 2013. Prior to joining Annaly in 2013, Mr. Finkelstein served for four years as an Offiff cer in the Markets Group of the Federal Reserve Bank of New York where he was the primary strategist and policy advisor forff the MBS purchase program. Mr. Finkelstein has over 20 years of experience in fixed income investments. Prior to the Federal Reserve Bank of New York, Mr. Finkelstein held Agency MBS nc. and Barclays PLC. Mr. Finkelstein received his B.A. in Business trading positions at Salomon Smith Barney, Citigroup Iu f Chicago, Booth School of Business. Administration from the University of Washington and his M.B.A. from the University ott Mr. Finkelstein also holds the Chartered Financial Analyst® designation. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S Serena Wolfe has served as Chief Financial Officer of Annaly since December 2019. Prior to joining Annaly in 2019, Ms. & Young (“EY”) since 2011 and as its Central Region Real Estate Hospitality & Wolfe served as a Partner at Ernst s and client relationships across Construction (“RHC”) leader from 2017 to November 2019, managing the go-to-market effort ff r 6 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 1. BUSINESS the sector. Ms. Wolfe was previously also EY’s Global RHC Assurance Leader. Ms. Wolfe practiced with EY forff over 20 years, including six years with EY Australia and 16 years with the U.S. practice. Ms. Wolfe graduad ted froff m the University of Queensland with a Bachelor of Commerce in Accounting. She is a Certifiedff c Accountant in the states of New York, California, Illinois and Pennsylvania. Publiu Steven F. Campbell has served as Chief Operating Officer of Annaly since June 2020. Prior to this position, Mr. Campbell served in a number of other senior roles at Annaly, including as Head of Business Operations froff m September 2019 to June 2020, Head of Credit Operations and Enterprise Risk froff m February 2018 to September 2019, Chief Operating Officer of Annaly Commercial Real Estate Group fu 2018 and Head of Credit Strategy from April 2015 to February 2018. Mr. Campbell has over 20 years of experience in financial services. Prior to joining Annaly in 2015, Mr. Campbell held various roles over six years at Fortress Investment Group LLC, including serving as a Managing Director in the ration and D.B. Zwirn & Co, Credit Funds business. Prior to that, Mr. Campbell held positions at General Electric Capital Corpor L.P. with a focus on credit and debt restrucrr the University of Notre Dame and a M.B.A. from the University ot turing. Mr. Campbell received a B.B.A. fromff f Chicago, Booth School of Business. roff m December 2016 to February r Timothy P. Coffey has served as Chief Credit Officer of Annaly since January 2016. Mr. Coffey served as Annaly’s Head of Middle Market Lending from 2010 until January 2016. Mr. Coffeyff has over 20 years of experience in leveraged finance and has turing and distribution positions. Prior to joining Annaly in 2010, Mr. Coffey held a variety of origination, execution, strucr served as Managing Director and Head of Debt Capital Markets in the Leverage Finance Group au t Bank of Ireland. Prior to that, Mr. Coffeyff held positions at Scotia Capital, the holding company of Saul Steinberg’s Reliance Group Holdings and SC Johnson International. Mr. Coffey received his B.A. in Finance fromff Marquette University. Ilker Ertas has served as Head of Securitized Products at Annaly since February 2019. Prior to this position, Mr. Ertas served in a number of other senior roles at Annaly, including as Head of RMBS Portfolff ios from February 2018 to February 2019, Head of Trading from February 2017 to February 2018, Head of Asset Trading from October 2016 to February 2017 and Managing d Director, Agency & Residential Credit from June 2015 to October 2016. Mr. Ertas has 20 years of experience in U.S. fixeff income markets. Prior to joining Annaly in 2015, Mr. Ertas was at Citigroup Iu nc., where he was most recently a Managing Director and Head of Mortgage Derivatives Trading. Mr. Ertas has also held mortgage trading positions at Barclays PLC and Lehman Brothers Holdings Inc. Mr. Ertas received a B.S. in Industrial Engineering from Bogazici University in Istanbul, Turkey and a M.B.A. from the Yale School of Management. Anthony C. Green has served as Chief Corporate Officer of Annaly since January 2019 and as Chief Legal Officer and Secretary of Annaly since March 2017. Mr. Green previously served as Annaly’s Deputy General Counsel from 2009 until February 2017. Prior to joining Annaly, Mr. Green was a partner in the Corporate, Securities, Mergers & Acquisitions Group at the law firff m K&L Gates LLP. Mr. Green has over 20 years of experience in corporate and securities law. Mr. Green holds a B.A. in Economics and Political Science fromff the University of Pennsylvania and a J.D. and LL.M. in International and Comparam Cornell Law School. tive Law fromff Human Capital In connection with the closing of the Internalization on June 30, 2020, we transitioned from an externally-managed REIT to an internally-managed REIT. Our human capita al group oversees our human capital management to ensure that it is strategically integrated with our goals and business plans. In addition, the Management Development and Compensation Committee of the Board provides independent oversight of the our policies and strategies related to human capital management. As of December 31, 2020, we had 180 emplom yees. Our People and Culture We recognize that our emplom yees are our most important asset, and we are committed to promoting their well-being, engagement, development and full potential. We are focused on foste ring an inclusive and rewarding work environment for all our employe es, with ongoing opportunities for career development and wellness support that seeks to facilitate the achievement m of their professional goals. ff is built on six core values: ownership, accountability, communication, collaboration, diversity and inclusion and Our culturet l to how we operate our business. humility. These values are embedded in our professional and personal conduct and are crucia All employees are responsible forff and are vital to the continued success of our company. Guided by these values, we are committed to attracting, developing and retaining the best talent, with diverse experiences, perspectives and backgrounds. upholding these values, which formff the bedrock of our culturet rr es in the design and We utilize emplom yee surveys to create an open and honest feedback forum, actively involve our employe evolution of our culture, enhance our overall productivity and mitigate risk. Our leaders review survey feedba ck to increase ff m employe e engagement and drive positive changes throughout the firff m. m 7 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA ITEM 1. BUSINESS SUBSIDIARIES II COVID- 19 m es have largely worked remotely since March 2020. We supported our emplm oyees’ In response to COVID-19, our employe remote working through stipends to upgrade home offiff ce equq ipment. Since September 2020, there are a limited number of es who voluntarily work in the office on occasion. We implemented a regular Coronavirus testing protocol to optimize employe m our ability to provide a safe wff r we recognize that ted people’s daily emotional lives and mental health. As a result, we have increased our mental health the pandemic has affecff connected with one another and to equip them offerings and hosted a multitude of virtual seminars to help keep our employees with tools to help alleviate some of the increased stress and burdens. ork environment. In addition to addressing physical health and safety concerns, m Diversity & IncII lusion m The diversity of our employees brings a critical range of thought and experience throughout our company, cultivating innovation, fresh perspectives and vital new ideas. Diversity and inclusion are essential tenets of our corporate culture. Our human capital management group, in coordination with our recently named Head of Inclusion and Inclusion Support Committee of Executive Sponsors, is responsible for overseeing and continuing to improve our diversity and inclusion initiatives. With We are committed to achieving diversity, including gender and racial/ethnic diversity, across all levels of our company. 50% of total employees in 2020 identifying as either female or racially/ethnically diverse, we are driven by the belief that es supports our continued long-term growth. In 2017, we launched the Women’s Interactive having a diverse group of employe Network, which provides targeted development and networking opportunit ies, knowledge exchanges, mentorship, coaching and t ts. Our diversity and inclusion efforts also include firm-wide initiatives like an unconscious bias training volunteer efforff ional knowledge, language and understanding to support the strategic diversity and program offered in 2020 to establa ish foundat inclusion efforts of the firm, organizing forums to discuss employe es’ views and actively seeking out feedback from emplom yee surveys. m m m ff Employee Development, Benefits and Wellness ll We seek to invest in and promote talent to cultivate a high-performance culture and build on the capabili of our employee m and choices. s. We invest in a wide range of benefits and wellness initiatives for our employm a ties and full potential ees to support healthy lifestyles Our employee m compensation packages are designed to align employe motivate talented employees. In addition, we offer emplom yees benefitsff and flexible spending accounts, telemedicine benefits, tuition reimbursement plan to cover all or part of the cost of educad related to their specific job. compensation program includes base salary, annual incentive bonuses and stock-based awards. Employe e e and stockholder interests and to provide incentives to attract, retain and including health and insurance coverage, health savings care resources. We also have a ld directly tion in a fieff 401(K) plans, paid time off and family rs emplom yee educad tion that furthe m m ff ff ff e needs and interests as well as our overall We offer a number of learning and development programs tailored to our employe strategic business objectives. For example, we offer targeted professional development training for employe es at various stages in their career. In 2020, we began offering firm-wide culture sessions where we facilitate discussions to gain insights on our company’s enhancement priorities. culturet m m m Corporate and Employee Philanthropy tt and Volunteerism Our corporate giving has been focused on high-impact programs that seek to advance social issues we are committed to, In including combating homelessness and advancing the professional development of women and underrepresented groups. 2020, we also provided support to COVID-19 relief efforts in our New York City community. Annaly and our employee s endeavor to meaningfully contribute to the communities where we live, work, and invest through Annaly’s corporate giving, m employe e volunteerism and our employee charity match program. m Regulatory Requirements We have elected, organized and operated in a manner that qualifies us to be taxed as a REIT under the Internal Revenue Code of 1986, as amended and regulations promulgated thereunder (the “Code”). So long as we qualify for taxation as a REIT, we generally will not be subject to U.S. federal income tax on our taxable income that is distributed to our stockholders. REIT subsidiaries (“TRSs”), consists of qualified REIT real Furthermore, substantially all of our assets, other than our taxablea estate assets (of the type described in Section 856(c)(5) of the Code). We regularly monitor our investments and the income from these investments and, to the extent we enter into hedging transactions, we monitor income from our hedging transactions as well, so as to ensure at all times that we maintain our qualification as a REIT and our exemption from registration under the Investment Company Act. Arcola is a member of FINRA and is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. As a self-clearing, registered broker dealer, Arcola is required to maintain minimum net capa ital by FINRA.RR Arcola consistently operates with capia tal in excess of its regulatory capia tal requirements as defined by SEC Rule 15c3-1. ff 8 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA ITEM 1. BUSINESS SUBSIDIARIES We have a subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act. As a result, we are subject to the anti-fraud provisions of the Investment Advisers Act and to fiduciary duties derived from these provisions that appa ly to our relationships with that subsidiary’s clients. These provisions and duties impose restrictions and obligations on us with respect to our dealings with our subsidiary’s clients, including, for example, restrictions on agency, cross and principal transactions. Our registered investment adviser subsidiary is subject to periodic SEC examinations and other requirements under the Investment Advisers Act and related regulations primarily intended to benefit advisory clients. These additional e and comprehensive compliance program, recordkeeping ff requirements relate to, among other things, maintaining an effectiv and reporting requirements and disclosure requirements. The financial services industry is subject to extensive regulation and supervision in the U.S. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) and the rules thereunder significantly altered the financial regulatory regime within which financial institutions operate. Other reforms have been adopted or are being considered by other regulators and policy makers worldwide. We will continue to assess our business, risk management and compliance practices to conform to developments in the regulatory environment. Competition We operate in a highly competitive market for investment opportunit ies and competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these investments. In acquiring our target assets, we will compete with financial institutions, institutional investors, other lenders, government entities and certain other REITs. For a full discussion of the risks associated with competm ition see the “Risks Related to Our Investing, Portfolio Management and Financing Activities” section in Item 1A. “Risk Factors.” ff t Corporate Governance We strive to conduct our business in accordance with the highest ethical standards and in complim ance with appa governmental laws, rules and regulations. Our notable governance practices and policies include: licable • We closed our management internalization transaction on June 30, 2020 and transitioned from an externally-managed REIT to an internally- managed REIT. • Our Board is composed of a majority of independent directors, and our Audit, Management Development and Compensation, and Nominating/Corporate Governance Committees are composed exclusively of independent directors. • m • We have separated the roles of Chair of the Board and Chief Executive Officer, and appointed an independent Chair of the Board. In December 2018, we amended our bylaws to declassify our Board over a three-year period with all directors standing for annual election by our company’s annual meeting of stockholders in 2021. • We have adopted an enhanced director refreshment policy, which provides that an independent director may not stand for re-election at the next annual meeting of stockholders taking place at the end of his or her term following the earlier of his or her: (i) 15th anniversary of service on our Board or (ii) 73rd birthday. • We have adopted a Code of Business Conduct and ff Ethics, which sets fort h the basic principles and guidelines for resolving various legal and ethical questions that may arise in the workplace and in the conduct of our business. This code is applicablea our directors, officers and employees. to 9 • We have adopted Corpor rate Governance Guidelines which, in conjunction with the charters of our Board committees, provide the framework for the governance of our company. • We have procedurdd es by which any of our m es, officers or directors may raise concerns employe m confidentially about our company’s accounting, internal controls or auditing matters with the Chair of the Board, the independent directors, or the Chair of the Audit Committee or through our whistleblower phone hotline or e-mail inbox. conduct, • We have an Insider Trading Policy that prohibits our directors, officers and emplm oyees, as well as those of our subsidiaries from buying or selling our securities on the basis of material nonpublic information and prohibits communicating material nonpublic information about our company to others. Our Insider Trading Policy prohibits our directors, officers and employees, from (1) holding our stock in a margin account as eligible collateral, or otherwise pledging our stock as collateral for a loan, or (2) engaging in any hedging transactions with respect to our equity securities held by them. Our executive officers are subjeb ct to a robust clawback policy, which includes triggers for financial restatements and misconduct. Our executive officers are subjeb ct to stock ownership guidelines and holding restrictions. • • s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA ITEM 1. BUSINESS SUBSIDIARIES Distributions In accordance with the requirements for maintaining REIT status, we intend to distribute to stockholders aggregate dividends equaling at least 90% of our REIT taxable income (determined without regard to the deduction of dividends paid and by excluding any net capital gain) for each taxable year and will endeavor to distribute at least 100% of our REIT taxable income so as not to be subject to tax. Distributions of economic profitff s froff m our enterprise could be classified as return of capital due to differences between book and tax accounting rules. We may make additional returns l when the potential risk-adjusted returns t to the limitations of applicable securities and state t corporation laws, we can returnt capital by making purchases of our own capita al stock or through payment of dividends. l to exceed our cost of capita from new investments faiff l. Subjecb a of capita a a t Available Information of charge, our annual Our website is www.annaly.com. We make available on this website under “Investors - SEC Filings,” freeff reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicablea such materials to the SEC pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Securities Exchange Act”). Our website and the information contained therein are not incorporated into this annual report on Form 10-K. after we electronically file or furnish ff Also posted on our website, and available in print upon request of any stockholder to our Investor Relations Department, are charters for our Audit Committee, Management Development and Compensation Committee, Nominating/Corporate Governance Committee, Risk Committee and Corpor rate Governance Guidelines and our Code of Business Conduct and Ethics. Within the time period required by the SEC, we will post on our website any amendment to the Code of Business Conduct and Ethics and any waiver applicable to any executive officer, director or senior financial officer. rate Responsibility Committee, our Corpor Our Investor Relations Department can be contacted at: Annaly Capital Management, Inc. 1211 Avenue of the Americas New York, New York 10036 Attn: Investor Relations Telephone: 888-8ANNALY E-mail: investor@annaly.com The SEC also maintains a website that contains reports, proxy and information statements and other information we file with the SEC at www.sec.gov. 10 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES ITEM 1A. RISK FACTORS An investment in our stock involves a number of risks. Beforff e making an investment decision, you should carefully consider all of the risks described in this annual report on Form 10-K. If any of the risks discussed in this annual report on Form 10-K actually occur, our business, financial condition and results of operations could be materially adversely affecff ted. If this were to occur, the trading price of our stock could decline significantly and you may lose all or part of your investment. Readers should not consider any descriptions of these factors to be a complete set of all potential risks that could affect us. ff INDEX TO ITEM 1A. RISK FACTORS Summary Risk Factors Risks Related to the Coronavirus Disease 2019 (“COVID-19”) Risks Related to Our Investing, Portfolio Management and Financing Activities Risks Related to Our Credit Assets Risks Related To Commercial Real Estate Debt, Preferred Equity Investments, Net Lease Real Estate Assets and Other Equity Ownership of Real Estate Assets Risks Related to Our Residential Credit Business Risks Related to Our Business Structure Risks Related to Our Taxation as a REIT Risks of Ownership of Our Common Stock Regulatory Risks Page 12 14 15 28 32 36 40 40 47 49 11 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES Summary Risk Factors Risks Related to COVID-19 • COVID-19 has affected, and will likely continue to affect, the U.S. economy, the mortgage REIT industry and our business. • We cannot predict the effect that government policies, laws and plans in response to the COVID-19 pandemic will have on us. Risks Related to Our Investing, Portfolio Management and Financing Activities Our strategy involves the use of leverage, which increases the risk that we may incur substantial losses. Our leverage may cause margin calls and defaults and force us to sell assets under adverse market conditions. Failure to procure or renew funding on favorable terms, or at all, would adversely affect our results and financial condition. Failure to effectively manage our liquidity would adversely affect our results and financial condition. Risk management policies and procedures may not adequately identify all risks to our businesses. An increase or decrease in prepayment rates may adversely affect our profitability. Volatile market conditions for mortgages and mortgage-related assets can result in a significant contraction in liquidity. Competition may limit our ability to acquire desirable investments in our target assets and also affect the pricing of these assets. Increases in interest payments on our borrowings relative to interest earned on our assets may adversely affect profitability. Differences in timing of interest rate adjustments on our interest earning assets and borrowings may adversely affect profitability. Changes in the method pursuant to which LIBOR is determined and potential discontinuation of LIBOR may affect our results. An increase in interest rates may adversely affect the market value of our interest earning assets and, therefore, also our book value. • We may change our policies without stockholder approval. • • • We may exceed our target leverage ratios, or we may not be able to achieve our optimal leverage. • • • • • We are subject to reinvestment risk. • • • • • • • We may experience declines in market value of our assets resulting in us recording impairments, which may effect on our results. • The soundness of other financial institutions could adversely affect us. • Our hedging strategies may be costly or ineffective and our use of derivatives may expose us to counterparty and liquidity risks. • It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts. • Any incorrect, misleading or incomplete information used in connection with analytical models would subject us to potential risks. • Accounting rules related to certain of our transactions are highly complex and involve significant judgment and assumptions. • We are dependent on information systems and third parties; system failures or cybersecurity incidents could disrupt our business. • • • We may enter into new lines of business, acquire other companies or engage in other strategic initiatives. • We are subject to risks and liabilities in connection with sponsoring, investing in and managing new funds and other accounts. • • We depend on third-party service providers, including mortgage loan servicers, for a variety of services related to our business. • • Purchases and sales of Agency MBS by Federal Reserve may adversely affect the price and return associated with Agency MBS. New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac and the federal government. Securitizations, including non-recourse securitizations, may expose us to additional risks. Counterparties may require us to enter into restrictive covenants relating to our operations that may inhibit our ability to grow. Investments in MSRs may expose us to additional risks. Risks Related To Our Credit Assets Our assets may become non-performing or sub-performing assets, which are subject to increased risks relative to performing loans. Prolonged economic slowdown or declining real estate values could impair the assets we may own and adversely affect our results. Geographic concentration exposes investors to greater risk of default and loss. Inadequate property insurance coverage could have an adverse impact on our operating results. • We invest in securities in the credit risk transfer sector that are subject to mortgage credit risk. • • • • We may incur losses when a borrower defaults on a loan and the underlying collateral value is less than the amount due. • • We may be required to repurchase commercial or residential mortgage loans or indemnify investors. • • When we foreclose on an asset, we may come to own and operate the property securing the loan. • • • Financial covenants could adversely affect our ability to conduct our business. Proposals to acquire mortgage loans by eminent domain may adversely affect the value of our assets. Our investments in corporate loans and debt securities for middle market companies carry risks. Our due diligence of potential assets may not reveal all liabilities and other weaknesses. Risks Related To Commercial Real Estate Debt, Preferred Equity Investments, Net Lease Real Estate Assets and Other Equity The real estate assets we acquire are subject to risks particular to real property, which may adversely affect our returns Commercial loan assets we originate and/or acquire depend on the ability Commercial and non-Agency mortgage-backed securities we acquire may be subject to losses. Borrowers may be unable to repay the Remaining Principal Balance on the Maturity Date. The B-Notes that we originate and acquire may be subject to risks related to their privately negotiated structure and terms. The mezzanine loan assets and other subordinate debt positions that we originate and acquire involve greater risks of loss. • • • • • • • We are subject to additional risks associated with loan participations and co-lending arrangements. • Construction loans involve an increased risk of loss. a of property owner to generate net income from operating. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 12 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors Lease expirations, lease defaults and lease terminations may adversely affect our revenue. Our real estate investments are illiquid. • We may experience losses if the creditworthiness of our tenants deteriorates and they are unable to meet their lease obligations. • • • We may not control the special servicing of the mortgage loans included in the commercial MBS in which we invest. • Joint venture investments could be adversely affected by our lack of sole decision-making authority. Risks Related To Our Residential Credit Business Our investments in non-Agency MBS or other investment assets of lower credit quality involve credit risk. Our investments in non-Agency MBS are collateralized by non-prime loans and may also include subprime mortgage loans. Our investments may include subordinated tranches of non-Agency MBS, which are subordinate in payment to senior securities. • • • • We are subject to counterparty risk and may be unable to seek indemnity or demand repurchase of residential whole loans. • Our investments in residential whole loans subject us to servicing-related risks, including those associated with foreclosure. • Challenges to the MERS® System could materially and adversely affect our business, results of operations and financial condition. • We may be subject to liability for potential violations of truth-in-lending or other similar consumer protection laws and regulations. • We may not be able to obtain or maintain the governmental licenses required to operate our Residential Credit business. • Our ability to profitably execute or participate in future securitizations transactions, including, in particular, securitizations of residential mortgage loans, is dependent on numerous factors and if we are not able to achieve our desired level of profitability or if we are unable to execute or participate in future securitizations, or incur losses in connection therewith, it could have a material adverse impact on our business and financial results. Risks Related to Our Business Structure • We may be exposed to risks to which we have not historically been exposed as a result of the Internalization. • The departure of any of our key personnel could materially and adversely affect us. Risks Related to Our Taxation as a REITR Our failure to maintain our qualification as a REIT would have adverse tax consequences. Distributions to tax-exempt investors may be classified as unrelated business taxable income. • • We have certain distribution requirements, which could adversely affect our ability to execute our business plan. • • We may choose to pay dividends in our own stock, which may require stockholders to pay taxes in excess of cash dividends. • • • • • • • • • • • • • • • • • Our inability to deduct certain compensation paid to our executives could require us to increase our distributions to stockholders. Limits on ownership of our stock could have adverse consequences to you and limit your opportunity to receive a premium. Our TRSs cannot constitute more than 20% of our total assets. TRSs are subject to regular corporate tax and REIT gross income tests limit the amount of dividends they can pay to REIT parents. Certain circumstances relating to a TRS may subject the REIT to a penalty tax. Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. Complying with REIT requirements may cause us to forgo or liquidate otherwise attractive opportunities. Liquidation of assets may jeopardize our REIT qualification or create additional tax liability forff Failure of certain investments to qualify as real estate assets could adversely affect our status as a REIT. Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities. Qualifying as a REIT involves highly technical and complex provisions of the Code. The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring CMOs. Some financing activities may subject us to U.S. federal income tax and could have negative tax consequences for our stockholders. The lease of qualified healthcare properties to a TRS is subject to special requirements. Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests. Dividends payable by REITs generally receive different tax treatment than dividend income from regular corporations. New legislation or administrative or judicial action could make it more difficult or impossible for us to remain qualified as a REIT. us. Risks of Ownership of Our Common Stock The market price and trading volume of our common stock may be volatile and negatively impacted by broad market fluctuations. Our charter does not permit ownership of over 9.8% of our common or preferred stock without prior approval from our Board. Provisions contained in Maryland law that are reflected in our charter and bylaws may have anti-takeover effects. • • • • We have not established a minimum dividend payment level and cannot assure stockholders of our ability to pay dividends. • Our reported GAAP financial results differ from the taxable income results that impact our dividend distribution requirements. Regulatory Risks • • Loss of Investment Company Act exemption from registration would adversely affect us. Changes in laws or regulations governing our operations or our failure to comply with those laws or regulations may affect us. 13 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES Risks Related to COVID-19 COVID-19 has adversely all a ffec industrytt and our business. ted, and will likely ii rr contintt ue to adverdd sely affect, the U.S. economy, tyy hett mortgage REITEE General COVID-19 is causing significant disruptions to the U.S. and global economies and has contributed to volatility and negative pressure in financial markets. COVID-19 and the related social distancing measures have had a broad negative impact on the U.S. and global economies as many businesses, particularly smaller ones within the service-sector, have been force d to close, furlough and/or lay off emplom yees. As a result, U.S. unemployment claims have dramatically risen at unprecedented rates. Other economic activity, including retail sales and industrial production, have slowed as well. The pace, timing and strength of any recovery are still unknown and difficult to predict. ff m The U.S. federal government, as well as many state and local governments, have adopted a number of emergency measures and travel bans, “shelter in place” restrictions, recommendations in response to the COVID-19 pandemic, including imposing cancelling events, banning large gatherings, closing non-essential businesses, and generally promoting social curfews, ff distancing (including in the workplace, which has resulted in a significaff nt increase in employees working remotely). Across the country, moratoriums are in place in certain states to stop evictions and foreclosures in an effort to lessen the financial burden created by the COVID-19 outbreak and various states have even promulgated guidance to regulated servicers requiring ate policies to assist mortgagors in need as a result of the COVID-19 pandemic. A number of states have enacted ff them to formul laws which impose significant limits on the default remedies of lenders secured by real property.tt While some states have begun a phased relaxation of certain of these measures, substantial restrictions on economic activity remain in place. Although it cannot be predicted, additional policy action at the fede ral, state and local level is possible in the near future. The COVID-19 pandemic (and any future COVID-19 outbreaks) and resulting emergency measures has led (and may continue to lead) to al markets, the economy of the United States and the economies significant disruptions in the global supply chain, global capita of other nations. Concern aboa ut the potential effects of the COVID-19 pandemic and the effecff tiveness of measures being put in place by governmental bodies and reserve banks at various levels as well as by private enterprises to contain or mitigate its spread has adversely affected economic conditions and capital markets globally, and has led to significant volatility in global financial markets. There can be no assurance that the containment measures or other measures implemented from time to time t those measures will have on the economy. While non- will be successful in limiting the spread of the virus and what effecff remains uncertain, and essential economic activity is to some extent returnin may vary substantially depending on the location and the type of activity. The disrupr tion and volatility in the credit markets and the reduction of economic activity in severely affected sectors may continue for an extended period or indefinitely, and may worsen the recession in the United States and/or globally. g in certain jurisdictions, the timing of such returnt ff t ff quarter of 2020, particularly in March, COVID-19 began to adversely affect the mortgage REIT industry Beginning in the first generally. In addition to negative general economic conditions, the impact of COVID-19 caused severe volatility across asset classes, including mortgage-related assets. In order to increase liquidity, fixed income investors were forced to sell U.S. Treasuries and Agency MBS, leading to an excess supply of these assets in need of redistribution. Pressure in financing markets and the need to meet margin obligations (particularly in the mortgage REIT industry in connection with repurchase financing obligations) created additional selling pressure in U.S. Treasury and Agency MBS markets, and widening of credit spreads. Other markets, including the market for residential credit and commercial real estate securities, also experienced similar trends, albeit on a relatively lesser scale. Economic Conditions ff The conditions related to COVID-19 discussed above have also adversely affected our business and we expect these conditions to continue during 2021. The significant decrease in economic activity and/or resulting decline in the housing market could have an adverse effect on the value of our investments in mortgage real estate-related assets, particularly residential real estate assets. In addition, as interest rates continue to decline as a result of demand for U.S. Treasury securities and the activities of the Federal Reserve, prepayments on our assets are likely to increase due to refinancing activity, which could have a material on our results of operations. Further, in light of COVID-19’s impact on the overall economy, such as rising adverse effect ff unemploym ent levels or changes in consumer behavior related to loans as well as government policies and pronouncements, borrowers may experience difficulties meeting their obligations or seek to forbear payment on or refinance their mortgage loans to avail themselves of lower rates. Elevated levels of delinquency or default would have an adverse impact on the value of our mortgage real estate related-assets. In addition to residential mortgage-related assets, the adverse economic conditions could negatively impactm tenants on our commercial property assets and/or businesses in which we lend to in connection with our middle market lending activities, resulting in potential delinquencies, defaults or declines in asset values. To the extent current m 14 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES conditions persist or worsen, we expect there to be a negative effect on our results of operations, which may reduce earnings and, in turn, cash available for distribution to our stockholders. The continued spread of COVID-19 could also negatively impact the availabia lity of key personnel necessary to conduct our business. ff Financing Conditions We may also experience more difficulty in our financing operations. COVID-19 has caused mortgage REITs to experience severe disruptions in financing operations (including the cost, attractiveness and availability of financing), especially the ability to utilize repurchase financing and the margin requirements related to such financing. The less liquid markets that make up au significant portion of our credit portfolio, including residential securities and whole loans, commercial real estate securities and loans and middle market lending, experienced significant disruption over this crisis period, marked by a sharp retraction in borrowers. If conditions related to COVID-19 persist, we could experience an volumes and a lack of access to credit forff ity of our potential lenders to provide us with or renew financing, increased margin calls, and/ordd unwillingness or inabila al requirements. These conditions could force us to sell our assets at inopportune times or otherwise cause us to additional capita t our business. To the extent the COVID-19 potentially revise our strategic business initiatives, which could adversely affecff t of heightening many of the other risks pandemic adversely affects our business and financial results, it may also have the effecff described in this Annual Report on Form 10-K for the year ended December 31, 2020, such as our risks related to our use of leverage, management of our liquidity, exposure to counterparties, our ability to pay dividends in the future and our ability to protect our information technology networks and infrast ructure from unauthorized access, misuse, malware, phishing and other events that could have a security impacm t as a result of our remote working environment or otherwise. ff We cannot predict the effecff global recessionary economic conditions tt t that tt willii have on us. government policies, laws and plans adopted in r ii esponse to the COVID-VV 19 pandemic and The extent of the COVID-19-related disruptions and the duration of the pandemic as well as the long-term impacts of the social, economic, and financial disrupr tions caused by the COVID-19 pandemic are unknown at this time and may be severe. Governments have adopted, and we expect will continue to adopt, policies, laws and plans intended to address the COVID-19 pandemic and adverse developments in the credit, financial and mortgage markets. While the U.S. Federal Reserve, the U.S. government and other governments have implem mented unprecedented financial support or relief measures in response to concernsr ts of the COVID-19 pandemic, the likelihood of such measures calming the volatility in the financial markets or addressing a long-term national or global economic downturn cannot be predicted and we cannot assure you that these programs will be effect ient at addressing the adverse impacts of the pandemic or otherwise have a positive impact on our business. surrounding the economic effecff ive or sufficff ff Risks Related to Our Investing, Portfolio Management and Financing Activities We may ca hange our policll tt ies witii hout .ll stoctt kholder approval a time to time. Our Board and Our Board has established very broad investment guidelines that may be amended fromff management determine all of our significant policies, including our investment, financing, capita l and asset allocation and a distribution policies. They may amend or revise these policies at any time without a vote of our stockholders, or otherwise initiate a change in asset allocation. For example, in the first quarter of 2020, we proactively reduced the size of our Agency t our MBS portfolio in order to manage our leverage profile in response to COVID-19. Policy changes could adversely affecff financial condition, results of operations, the market price of our common stock or our ability to pay dividends or distributions. tt Our strategy involvell s thett use of leverage, we hich increases the riskii thatt t we may incur substanti ali tt losses. on investments. We incur this leverage We expect our leverage to vary with market conditions and our assessment of risk/returnt by borrowing against a substantial portion of the market value of our assets. Leverage, which is fundam ental to our investment strategy, creates significant risks. The risks associated with leverage are more acute during periods of economic slowdown or recession, which the U.S. economy has experienced in connection with the conditions created by the COVID-19 pandemic. ff Because of our leverage, we may incur substa ntial losses if our borrowing costs increase, and we may be unabla e to execute our investment strategy if leverage is unavailable or is unavailable on attractive terms. The reasons our borrowing costs may increase or our ability to borrow may decline include, but are not limited to, the folff lowing: u • • short-term interest rates increase; the market value of our investments availablea collateralize borrowings decreases; to • • the “haircut” applied to our assets under the repurchase agreements or other secured financing arrangements increases; interest rate volatility increases; 15 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors • forced sales, particularly under adverse market conditions, such as those which occured as a result of the COVID-19 pandemic; • • there is a disruption in the repo market generally or that supports it; or the infrastructuret ff the availability of financ ing in the market decreases. Our levll eragea may ca ause margin cii allsll and defaultsll and force us to stt ell all ssets utt nder adverse market conditiii ons. Because of our leverage, a decline in the value of our interest earnir ng assets may result in our lenders initiating margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. Our fixed-rate mortgage-backed securities generally are more susceptible to margin calls as rate securities. Margin calls are most likely in increases in interest rates tend to more negatively affect the market value of fixed- market conditions in which the unencumbered assets that we would use to meet the margin calls have also decreased in value. The risks associated with margin calls are more acute during periods of economic slowdown or recession, which the U.S. economy has experienced in connection with the conditions created by the COVID-19 pandemic. We experienced margin calls much higher than historical norms during the onset of COVID-19. d ff If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. This could force us to sell our interest earning assets under adverse market conditions, or allow lenders to sell those assets on our behalf at prices that could be below our estimation of their value. Additionally, in the event of our bankruptcy, our borrowings, which are generally made under repurchase agreements, may qualify for special treatment under the U.S. Bankruptcy Code. This special treatment would allow tcy Code and to liquidate the the lenders under these agreements to avoid the automatic stay provisions of the U.S. Bankrupr collateral under these agreements without delay. We may ea xcee eed our target leverage ratios. We generally expect to maintain an economic leverage ratio of less than 10:1. However, we are not required to stay below this economic leverage ratio. We may exceed this ratio by incurring additional debt without increasing the amount of equity wtt e have. For example, if we increase the amount of borrowings under our master repurchase agreements with our existing or new counterparties or the market value of our portfolio declines, our economic leverage ratio would increase. If we increase our economic leverage ratio, the adverse impact on our financial condition and results of operations from the types of risks associated with the use of leverage would likely be more severe. Our target economic leverage ratio is set for the portfolio as a whole, rather than separately for each asset type. The economic leverage ratio on Agency mortgage-backed securities may exceed the target ratio for the portfolio as a whole. Because credit assets are generally less levered than Agency mortgage- backed securities, at a given economic leverage ratio an increased allocation to credit assets generally means an increase in economic leverage on Agency mortgage-backed securities. The economic leverage on our Agency mortgage-backed securities is the primary driver of the risk of being unable to meet margin calls discussed above. We may na ot be able to achieve our optimtt al leverage.ee We use leverage as a strategy to increase the returnt leverage for any of the following reasons: to our investors. However, we may not be able to achieve our desired • • we determine that the leverage would expose us to excessive risk; our lenders do not make funding availablea acceptable rates; or to us at • our lenders require that we provide additional collateral to cover our borrowings. ii Failure to procure or renew fundingii on favorable t ertt msrr , os ll r at all, wll ould adversely all ffea ct our resultsll and financi ii alii tt condition. t One or more of our lenders could be unwilling or unable to provide us with financing. This could potentially increase our financing costs and reduce our liquidity. Furthermore, if any of our potential lenders or existing lenders is unwilling or unable to provide us with financing or if we are not able to renew or replace maturing borrowings, we could be forced to sell our assets time when prices are depressed. Our business, results of operations and financial condition may be materially at an inopportune ted by disruptions in the financial markets, including disruptions associated with the conditions created by the adversely affecff COVID-19 pandemic. We cannot assure you that, under such extreme conditions, these markets will remain an efficient source , we will have to find alternative forms of financing for our assets, which of financing for our assets. If our strategy is not viablea may not be availablea . Further, as a REIT, we are required to distribute annually at least 90% of our REIT taxable income (subject to certain adjustments) to our stockholders and are, therefore, not able to retain significant amounts of our earnings for new investments. We cannot assure you that any, or sufficient, funding or capita on terms If we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the that are acceptable to us. al will be available to us in the future ff ff 16 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES market price of our common stock and our ability to make distributions to our stockholders. Moreover, our ability to grow will through the be dependent on our ability to procure additional funding. issuance of additional equity or borrowings, our growth will be constrained. To the extent we are not able to raise additional funds ff ff ii Failure to effeff ctively mll anage our liquidit y wtt ii ould all dversely affect our results att nd financial conditiii on. Our ability to meet cash needs depends on many factors, several of which are beyond our control. Ineffective management of liquidity levels could cause us to be unable to meet certain financial obligations. Potential conditions that could impair our ity of any of our potential lenders to provide us with or renew finff ancing, margin calls, liquidity include: unwillingness or inabila additional capital requirements appl to our lenders, a disruptu ion in the financial markets (especially in light of the disruption caused by the COVID-19 pandemic) or declining confidence in our reputation or in financial markets in general. These conditions could force us to sell our assets at inopportune times or otherwise cause us to potentially revise our strategic business initiatives. icablea a Riskii management policll ies and procedures may na ot adequately identifytt all risks to our businesses. We have established and maintain risk management policies and procedures designed to support our risk framework, and to identify, measure, monitor and control financial risks. Risks include market risk (interest rate, spread and prepayment), liquidity risk, credit risk and operational risk. These policies and procedures may not sufficiently identify the full range of risks that we are or may become exposed to. Any changes to business activities, including expansion of traded or illiquid products, may result in our being exposed to different risks or an increase in certain risks. Our management may have less experience in identifying and managing the risks of new business activities. Any failure to identify and mitigate financial risks could result in an adverse impact to our financial condition, business or results of operations. Additionally, as regulations and markets in which we operate continue to evolve, our risk management policies and procedures may not always keep sufficient pace with those changes. An increase or decdd rease in prepayme ee nt ratestt may aa dversely affect our profitabi ii liii ty. ii The mortgage-backed securities we acquire are backed by pools of mortgage loans. We receive payments, generally, from the payments that are made on the underlying mortgage loans. We ofteff n purchase mortgage-backed securities that have a higher coupon rate than the prevailing market interest rates. In exchange for a higher coupou n rate, we typically pay a premium over par value to acquire these mortgage-backed securities. In accordance with U.S. generally accepted accounting principles f the related mortgage-backed (“GAAP”), we amortize the premiums on our mortgage-backed securities over the expected life off securities. If the mortgage loans securing these mortgage-backed securities prepay at a more rapida rate than anticipated, we will ity. have to amortize our premiums on an accelerated basis that may adversely affecff t our profitabila Defaults on mortgage loans underlying Agency mortgage-backed securities typically have the same effect as prepayments because of the underlying Agency guarantee. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by conditions in the housing and financial markets, general d-rate and adjustable-rate mortgage loans. We may seek to minimize economic conditions and the relative interest rates on fixeff prepayment risk to the extent practical, and in selecting investments we must balance prepayment risk against other risks and the potential returns prepayment risk. We may choose to bear increased prepayment risk if we believe that the potential returns justify the risk. of each investment. No strategy can completely insulate us fromff t Conversely, a decline in prepayment rates on our investments will reduce the amount of principal we receive and therefore reduce the amount of cash we otherwise could have reinvested in higher yielding assets at that time, which could negatively impact our future operating results. We are subject to rtt einvii tt estmen t risk. We also are subject to reinvestment risk as a result of changes in interest rates. Any significant decrease in economic activity or resulting decline in the housing market could have an adverse effecff t on our investments in mortgage-related assets. Declines in interest rates are generally accompanied by increased prepayments of mortgage loans, which in turt n results in a prepayment of the related mortgage-backed securities. An increase in prepayments could result in the reinvestment of the proceeds we receive from such prepayments into lower yielding assets. Conversely, increases in interest rates are generally accompanied by decreased prepayments of mortgage loans, which could reduce our capita al available to reinvest into higher-yielding assets. 17 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES rr tt conditions ii cant contraction in liqui dity Volatile market gg a signifi assets in which we invest. ii for mortgages and mortgage-r tt tt for mortgages elated ll tt and mortgage assets att ll -related s well as the broader financial markets can result i rr assets,tt which may adversely ll nii value of to hett affecff t thett Our results of operations are materially affecte including Agency mortgage-backed securities, as well as the broader financial markets and the economy generally. d by conditions in the markets for mortgages and mortgage-related assets, ff Significant adverse changes in finff ancial market conditions can result in a deleveraging of the global financial system and the forced sale of large quantities of mortgage-related and other financial assets. Concerns over economic recession, COVID-19 or other pandemic diseases, geopolitical issues including events such as the United Kingdom’s recent exit froff m the European Union (commonly referred to as “Brexit”), trade wars, unemployment, the availability and cost of financing, the mortgage market, the repurchase agreement market and a declining real estate market or prolonged government shutdown may contribute the economy and markets. Increased market uncertainty and instability in to increased volatility and diminished expectations forff and credit markets, combined with declines in business light of the COVID-19 pandemic in both U.S. and international capital and consumer confidence and increased unemployment, have also contributed to volatility in domestic and internat ional markets. a r For example, as a result of the finff ancial crises beginning in the summer of 2007 and through the subsequent credit and housing crisis, many traditional mortgage investors suffered severe losses in their residential mortgage portfolios and several major market participants failed or were impaired, resulting in a significant contraction in market liquidity forff mortgage-related assets. This illiquidity negatively affected both the terms and availability of financing for all mortgage-related assets. Additionally, the recession resulting from the COVID-19 pandemic could be more protracted than the recession caused by the financial crisis, which could result in a significant rise in delinquencies and defaults on mortgage-related assets and further negatively impactm market liquidity for mortgage-related assets. Further increased volatility and deterioration in the markets forff mortgages and mortgage-related assets as well as the broader financial markets may adversely affecff t the performance and market value of our Agency mortgage-backed securities. If these conditions exist, institutions from which we seek financing for our investments may tighten their lending standards or become insolvent, which could make it more difficult for us to obtain financing on favorablea ity and financial condition may be adversely affecff ted if we are unable to obtain cost-effecff tive financing for our investments. terms or at all. Our profitabila Competm ittt iontt these assets. may limi t oii ur abilitll y t o att ii tt cquireii ii desirabl ll nvii e i estmett nts i tt n oii ur target assets att nd could all a lso affec t thett pricing of We operate in a highly competitive market for investment opportunities. Our profitability depends, in large part, on our ability to acquire our target assets at attractive prices. In acquiring our target assets, we will compete with a variety of institutional nce companies, public and private funds, government entities, commercial and investors, including other REITs, specialty finaff investment banks, commercial finance and insurance companies and other finff ancial institutt ions. Many of our competim tors are ncial, technical, technological, marketing and other resources than we do. substantially larger and have considerably greater finaff Other REITs with investment objectives that overlap wa al, which may create additional competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. Many of our competm itors are not subject to the operating constraints associated In addition, some of our with REIT compliance or maintenance of an exemption from the Investment Company Act. competm itors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider varietyt of investments and establish more relationships than us. Furthermore, competition for investments in our target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. We cannot provide assurance that the competitive pressures we face will not have a material adverse effecff t on our business, financial condition and results of operations. Also, as a result of this competition, desirable investments in our target assets may be limited in the future and we may not be able to take advantage of attractive investment opportunities from time to time, as we can provide no assurance that we will be ablea to identify and make investments that are consistent with our investment objectives. ith ours may elect to raise significant amounts of capita t An increase in the interest payments ott adversely affect our profitabi .yy liii tyii ii n our borrowings relati ll ve to the intii erett st we earn on our int ii ertt est earning assets may We generally earn money based uponu the spread between the interest payments we earn on our interest earning assets and the interest payments we must make on our borrowings. If the interest payments on our borrowings increase relative to the interest we earn on our interest earning assets, our profitability may be adversely affected. A significant portion of our assets are longer- term, fixed-rate interest earning assets, and a significant portion of our borrowings are shorter-term, floating-rate borrowings. Periods of rising interest rates or a relatively flat or inverted yield curve could decrease or eliminate the spread between the interest payments we earn on our interest earning assets and the interest payments we must make on our borrowings. 18 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES ii ngii Differences in timi .yy our profitabiliii tyii of interett st rate adjustments ott n our interett st earning assets and our borrowings may adversely affect We rely primarily on short-term borrowings to acquire interest earning assets with long-term maturities. Some of the interest earning assets we acquire are adjustablea ver time based upon -rate interest earning assets. This means that their interest rates may vary orr changes in an objective index, such as: u • • LIBOR. The rate banks charge each other for short- term Eurodollar loans. Treasury Rate. A monthly or weekly average yield of benchmark U.S. Treasury securities, as published by the Federal Reserve Board. • Secured Overnight Financing Rate. A measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, as published by the Federal Reserve Bank of New York. These indices generally reflect short-term interest rates. The interest rates on our borrowings similarly reflect short-term interest rates. Nevertheless, the interest rates on our borrowings generally adjust more frequently than the interest rates on our Accordingly, adjusd in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjust table-rate interest earning assets, which are also typically subject to periodic and lifetime interest rate caps.a able-rate interest earning assets. d Changes in the method pursuant to which LIBOR ll results. II is detett rmineii d and potentiali ii discontinuati on of LIBOR may aa ffea ct our LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory reform. These reforms may cause such benchmarks to perform differently than in the past, or have guidance and proposals forff other consequences which cannot be predicted. In particular, regulators and law enforcement agencies in the U.K. and elsewhere conducted criminal and civil investigations into whether the banks that contributed information to the British Bankers’ Association (“BBA”) in connection with the daily calculation of various LIBOR rates (“LIBOR rates”) may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR rates. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR rates. LIBOR rates are calculated by reference to a market for interbank lending that continues to shrink, as it is based on increasingly fewer actuat l transactions. This increases the subjectivity of the calculation process and increases the risk of manipulation. Actions by the regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator), are expected to result in changes to the manner in which LIBOR rates are determined or the establia shment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates afteff r 2021. t of these changes, other reforms, or the establishment of alternative reference rates in the It is not possible to predict the effecff United Kingdom or elsewhere. Furthermore, in the U.S., efforts to identify a set of U.S. dollar reference interest rates include proposals by the Alternarr tive Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by short-term repurchase agreements, backed by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. It is likely that U.S. Dollar LIBOR (“USD-LIBOR”) will be replaced by SOFR published by the Federal Reserve Bank of New York. The manner and timing of this shift is not known with certainty. It is possible, but unlikely, that USD-LIBOR will be used in new instruments created after 2021. Global regulators expect that the most-used tenors of USD-LIBOR will continue to be published through June 2023, but are encouraging regulated institutions to make the shift earlier. For each existing LIBOR- based instrument, the manner and timing of the switch depends on the terms of the relevant contract and the specificsff of future events. The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated. Any of these alternative methods may result in interest rates that are higher than if LIBOR were available in its current form, which could have a material adverse effect on results. bank credit risk, while SOFR does not. SOFR is not an exact replacement forff USD-LIBOR. USD-LIBOR accounts forff Therefore, LIBOR and SOFR are expected to behave differeff ntly at times when market participants are concerned about the financial strength of banks. Also, SOFR is an overnight rate instead of a term rate. There is currently no perfect way to create robust, forward-looking SOFR term rates. A large and liquid market in SOFR-based future s could eventually lead to the ability to calculate forward-looking SOFR term rates, but currently the SOFR-based futures market is small relative to LIBOR-based futures markets. Regulators and other members of the Alternative Reference Rates Committee (“ARRC”) have indicated that market participants should stop using USD-LIBOR now, despite the unavailability of a forward-looking SOFR term rate. ff 19 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES However, a large majori sponsor, still reference USD-LIBOR. a ty of new issuance of floating-rate instruments, including some transactions in which we are issuer or Regulators and other members of the ARRC have also indicated that all instruments that reference USD-LIBOR should include robust fallbacks. The ARRC has published falff lbacks for several asset types, and the International Swaps and Derivatives Association (“ISDA”) has prepared documentation to implement fallbacks for derivatives. Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread. ISDA has described the spread calculation methodology that will appa ly to derivatives that adopt the ISDA recommendations for derivatives. The spread calculation methodology for non-derivatives is currently not known. The spread calculation is intended to minimize value transfer between counterparties, borrowers, and lenders, but there is no assurance that the calculated spread will be faiff r and accurate. lbacks recomm d d hThe f lfallb k iinstruments LIB ended byby hthe ARRC ar de diffifferent ffor ivarious hiThis couldld ilwill il incorporate hthe recommend dded f lfallblba kcks. dges. bOR-basedd assets andd our USD-LIBOR b-based id interest rate hhedges. non-derivatiive iinstruments, d i bOR-basedd it in unexpec dted diffdifferences bbetween our USD- l resul lalll USD-LIB dand not ilwilll m kake hth ie instrument fifixedd-rate, or lblbackk thhat fa f lalfff yMany e ixistiingg USD-LIBOR b-based id instruments iei hther ddo not con iin prac itice t trary to hthe contract lual fa f lalfff iintent. W he have adhdheredd to thhe ISDA 2020 IBOR llFallbba kcks Protoc lol, bbut may iy incur costs ame dindi gng iinstruments not covered bd byy lruleb kbooks to iim lplement ffallbllba kcks recomme d dnded byby hthe ARRC. We m yay d idecidde not to am dend, hthat Protoc lol or byby lclea iringhouse nghouse adjust blable-rate iin -faci gng adjust gmortgagges, are iimprac iti dand i krisk fof lili itiggatiion. Our lle dnders may by b le less hiwhichh case we m yay bbear hthe cost andd ri kisk fof lili itigatigation. Some iinstruments, illwillinging to ext dend credidit secu dred byby assets htha dt do not iincl dlude iWi hth respect to hthose iinstruments, we may by bear hthe cost continuation fof LIBOR, p yarty i ymay bbeliliev ie is con template hth de diis lblba kck hthat one p lcularlyrly consumer f i parti brobust ffallllbbackks. rovidde i y lcal to am dend. providde i l i i hother ma krket pa irti icipants hhav le less experiience u dnderstanddiingg a dnd m dodelingling SOF bR-basedd assets and ld liiabili i bOR-basedd assets a dnd lili bilabiliitiies, iinc ependent on d We a dnd LIB USD-LIBOR cessa itio in i ds d ffuture lili itigga ition, iit iis not currentlyly prac iti provide livaliddate hthe f ifair v lalues off cer providers to hthe ce ssation fof LIBOR iin h i their pricing i ricing m dodells. i culty fof iinvestiingg, hhedgidgi gng, reasi gng hthe difdiffififff culty kunknown ffuture ffacts, hthe language lvalua ition dand i krisk ma gnagement. Because hthe iimpactm thhan fof language fof iindi idivid ldual contracts, andd thhe outcome fof potenti lial service i counti gng ffor i dmodells to account ffor hthe cessatiion off LIBOR. We use rovidders ac service p i a bilities inci lal iinstruments. We are not aware fof hthose lcal ffor our itain fifina i l involves operati dand correct hThe process fof tra insitiion i dand we ymay not idide intifyfy ki f forward-looki gng, partiies ypayment iis ddue. Proposedd mech ihanisms to hthe ddayy thhat ddoes not f lfullyly reflflect iinterest rates during l i krisks. ional lalll off thhose during hthe callc lula ition d l fRefeff rences to USD-LIBOR may by be e b ddmbedd ded iin computer freferences. Because compou dnd ded SOFR iis b kbackwar dcode or dmodells, ooking rathher hthan alculate p yayment amounts iuntill result iin a p yayment amount thhat d ld-looking kk l l bl iming ig issue unable to c l ymay lsolve hthe operati ional l iti iperi dod. kimaki gng or rec i ieivi gng USD-LIBOR b-basedd p yayments m yay bbe lalso ibl iani gng hthat some iinstruments possible thhat USD-LIBOR ilwilll contiinue to bbe ldwould co intinue to bbe subje d It iis me lalso bbe callc lulatedd pursuant to an en itirelyrely diffdifferent me hth dodology gnificant itime andd resources. ymay publi h dshed hthat contiinues to bbe require isignifica bli i publi h dshed bli iwithhout b ibei gng representa itive off a yny subject to hthe kweaknk esses named USD-LIBOR andd thhe frefore con itinues to bbe ology. Preparingring ffor andd addddressing fof hthe LIBOR c lalcul underlyingying ma krket, lation process. A rate m yay dused ffor certaiin contracts, bbu it is ressing hthe cessatiion off USD-LIBOR cessatiion d l i hould fpreferredd shhares sh ld flo-floa iti gng plicablle to hthat fof our fifi dxed-t provisions ap li b i i ldHolders ssation i ce hshares to hcha gnge hthe e ixistinging USD-LIBOR cessatiio fn f lalfff hthe same tiim ie i bt begiegins to didispute over hthe itime. results fof hthe USD-LIBOR f ll fallb kbacks ffor hthat l frefer to thhe lrelevant prospectus to lclass. W de do not currentlyntly iint dend to am dend lblbackks. Ea hch fof our fifixed yany lclasses hsuch lclass hthat iis currentlyly outstanding dundersta dnd hthe USD-LIBOR- drred d-to-floatinging fl anding bbecomes callll blable at dorder to a idvoid a dd shhares iin funds at an u fnfavorablblea ional f fprefe d l ff additi iraise ddi ypay a USD-LIBOR b-basedd rate. hShouldld we hchoose to callll a cllass fof pr feferre fff lclass, we may by b fe f orced d to An increase in interett book value. st rates may adversely affect thett market value of oo ur interett st earningii assets att nd, therefore, e also our Increases in interest rates may negatively affect the market value of our interest earning assets because in a period of rising interest rates, the value of certain interest earning assets may fall and reduce our book value. For example, our fixed-rate interest earning assets are generally negatively affecff ted by increases in interest rates because in a period of rising rates, the coupon we earn on our fixed-rate interest earning assets would not change. Our book value would be reduced by the amount of a decline in the market value of our interest earning assets. ff We may ea ee xpe adverse effecff rience declines t on our results of operations and financial conditiii on. in the market value of oo ur assets resultingtt ii in us recording impairm m ents, which may ha ave an 20 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES ff A decline in the market value of our mortgage-backed securities or other assets may require us to recognize an “other-than- ent (“OTTI”) against such assets under GAAP. For a discussion of the assessment of OTTI, see the section temporary” impairmm titled “Significan t Accounting Policies” in the Notes to the Consolidated Financial Statements included in Item 15. “Exhibits, Financial Statement Schedules.” The determination as to whether an OTTI exists and, if so, the amount we consider other-than- temporarily impaired is subjective, as such determinations are based on both facff tual and subjective information available at the time of assessment. As a result, the timing and amount of OTTI constitutt e material estimates that are susceptible to significant change. The soundness of other tt ii financi alii tt institutions could adversely affect us. r ated as a result of trading, clearing, counterparty,tt borrower, or other relationships. We Financial services institutions are interrel have exposure to many different counterparties, and routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other financial ons. Many of these transactions expose us to credit or counterparty risk in the event of default of our counterparty or, in instituti t customers. Such credit risk could be heightened in respect of our European counterparties certain instances, our counterparty’s due to continuing uncertainty in the global finance market, including Brexit. There is no assurance that any such losses would not materially and adversely impact our revenues, financial condition and earnings. tt t Our hedging dd tt strate giee s may be costly,ll and may not hedge our risks as intende tt d. Our policies permit us to enter into interest rate swaps, capsa and floors, interest rate swaptions, interest rate futures, and other derivative transactions to help us mitigate our interest rate and prepayment risks described above subject to maintaining our qualification as a REIT and our Investment Companym Act exemption. We have used interest rate swaps and options to enter into s) to provide a level of protection against interest rate risks. interest rate swaps (commonly referred to as interest rate swaption We may also purchase or sell TBAs on Agency mortgage-backed securities, purchase or write put or call options on TBAs and invest in other types of mortgage derivatives, such as interest-only securities. No hedging strategy can protect us completely. l to protect or could adversely affect us because, among other things: interest rate Entering into interest rate hedging may faiff ng periods of volatile interest rates; available hedges may not correspond directly hedging can be expensive, particularly durid with the risk for which protection is sought; and the durat ion of the hedge may not match the duration of the related asset or liability. The expected transition fromff LIBOR to alternative reference rates adds additional complication to our hedging strategies. d a Our use of derivativett s may expose xx us to counterparty att ii nd liqui dit i y rtt isks.kk The Dodd-Frank Act, and regulations under it, have caused significant changes to the structure of the market for interest rate swaps and swaptia change, but do not eliminate, the risks we face in our hedging activities. ons. These new structures t Most swaps that we enter into must be cleared by a Derivatives Clearing Organization (“DCO”). DCOs are subject to regulatoryrr oversight, use extensive risk management processes, and might receive “too big to fail” support from the government in the case of insolvency. We access the DCO through several Futures Commission Merchants (“FCMs”). For any cleared swap, we payments, potential bear the credit risk of both the DCO and the relevant FCM, in the form of potential late or unrecoverablea difficulty or delay in accessing collateral that we have posted, and potential loss of any positive market value of the swap position. In the event of a default by the DCO or FCM, we also bear market risk, because the asset or liabia lity being hedged is no longer effectively hedged. s xecution Facility. We bear additional fees for use of the DCO. We also bear feeff Most swaps must be or are traded on a Swap Ea rs. Because the standardized swaps available on for use of the Swap Execution Facility.t We continue to bear risk of trade error Swap Execution Facilities and cleared through DCOs are not as customizablea the implementation as the swaps available beforeff of Dodd-Frank Act, we may bear additional basis risk from hedge positions that do not exactly reflect the interest rate risk on the asset being hedged. Futures transactions are subject to risks analogous to those of cleared swaps, except that forff higher risk that collateral we have posted is unavailable to us if the FCM defaults. futures transactions we bear a Some derivatives transactions, such as swaptions, are not currently required to be cleared through a DCO. Therefore, we bear on CMBX indexes are also not the credit risk of the dealer with which we executed the swaption. TBA contracts and swapsa cleared, and we bear the credit risk of the dealer. Derivative transactions are subject to margin requirements. The relevant contract or clearinghouse ruler s dictate the method of determining the required amount of margin, the types of collateral accepted and the timing required to meet margin calls. 21 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES Additionally, for cleared swaps and futures, FCMs may have the right to require more margin than the clearinghouse requires. The requirement to meet margin calls can create liquidity risks, and we bear the cost of funding the margin that we post. Also, as discussed above, we bear credit risk if a dealer, FCM, or clearinghouse is holding collateral we have posted. Generally, we attempt to retain the ability to close out of a hedging position or create an offsetting position. However, in some cases we may not be able to do so at economically viable prices, or we may be unable to do so without consent of the counterparty. Therefore, in some situations a derivative position can be illiquid, forcing us to hold it to its maturity or scheduled termination date. It is possible that new regulations could be issued governing the derivatives market, or that additional types of derivatives switch to being executed on Swap Ea xecution Facilities or cleared on a DCO. Ongoing regulatory change in this area could increase costs, increase risks, and adversely affeff ct our business and results of operations. It may be uneconomical to "tt tt contract s,tt which could nll roll" our TBA dBB arll olldd ii ct our financi ffea ll roll t conditiontt alii egativtt ely all and resultsll of operations. tt ratt nsactiott ns or we may ba e unable to meet margin cii allsll on our TBATT From time to time, we enter into TBAs as an alternate means of investing in and financing Agency mortgage-backed securities. A TBA contract is an agreement to purchase or sell, for future delivery, an Agency mortgage-backed security with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but differff ent settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referre d to as the “drop”. The drop is a reflection of the expected net interest income fromff an investment in similar Agency mortgage-backed securities, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll ncing is the party that would retain all principal and interest payments accrued market, the party providing the implied finaff during the financing period. Accordingly, TBA dollar roll income generally represents the economic equivalent of the net interest income earned on the underlying Agency mortgage-backed security less an implied financing cost. Consequently, dollar roll transactions and such forward purchases of Agency securities represent a formff of off-balance sheet financing and increase our "at risk" leverage. ff The economic returnt of a TBA dollar roll generally equates to interest income on a generic TBA-eligible security less an implied financing cost, and there may be situations in which the implied financing cost exceeds the interest income, resulting in a negative carry on the position. If we roll our TBA dollar roll positions when they have a negative carry, the positions would decrease net income and amounts available forff distributions to shareholders. There may be situat tions in which we are unable or unwilling to roll our TBA dollar roll positions. The TBA transaction could have a negative carry or otherwise be uneconomical, we may be unable to find counterparties with whom to trade in sufficient volume, or we may be required to collateralize the TBA positions in a way that is uneconomical. Because TBA dollar rolls ity or unwillingness to roll has effects similar to any other loss of financing. If we do not represent implied financing, an inabila roll our TBA positions prior to the settlement date, we would have to take physical delivery of the underlying securities and settle our obligations for cash. We may not have sufficient funds or alternative finan to settle such obligations. Counterparties may also make margin calls as the value of a generic TBA-eligible security (and therefore the value of the TBA contract) declines. Margin calls on TBA positions or failure to roll TBA positions could have the effeff cts described in the liquidity risks described above. cing sources availablea a ff We use analyti incompletell ll n informat cal modeldd s all iontt tt nd data in connection with t ould sll therewith wtt used in connectiontt hett valuationtt ubject us to potentialii of our assets,tt ii risks. and any incorrect, mtt isleadingii or m Given our strategies and the complexi ty of the valuation of our assets, we must rely heavily on analytical models (both proprietary models developed by us and those supplied by third parties) and information and data supplied by our third party vendors and servicers. Models and data are used to value assets or potential asset purchases and also in connection with hedging our assets. When models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on models and data, especially valuation models, we may be induced d to buy certain assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorablea opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful. Furthermore, despite our valuation validation processes our models may nevertheless prove to be incorrect. Some of the risks of relying on analytical models and third-party data are particular to analyzing tranches fromff securitizations, such as commercial or residential mortgage-backed securities. These risks include, but are not limited to, the following: (i) liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled collateral cash flows and/ordd 22 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors based on simplifying assumptim ons that lead to errors; (ii) information about collateral may be incorrect, incomplete, or misleading; (iii) collateral or bond historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation (e.g., different issuers may report delinquency statistics based on different definitions of what constitutet s a delinquent loan); or (iv) collateral or bond information may be outdated, in which case the models may contain incorrect assumptim ons as to what has occurred since the date information was last updated. ff The use of predictive models has inherent risks. For example, such models may incorrectly forec Some of the analytical models used by us, such as mortgage prepayment models or mortgage default models, are predictive in nature. ast future behavior, t leading to potential losses on a cash flow and/or a mark-to-market basis. In addition, the predictive models used by us may differ substantially from those models used by other market participants, with the result that valuations based on these predictive models may be substantially higher or lower for certain assets than actual market prices. Furthermore, since predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliabila ity of the supplied historical data and the abia lity of these historical models to accurately reflect future periods. Additionally, such models may be more prone to inaccuracies in light of the unprecedented conditions created by the COVID-19 pandemic. In particular, the economic, financial and related impacts of COVID-19 is and will be very difficult to model (including as related to the housing and mortgage markets), as the catalyst for these conditions (i.e., a global pandemic) is an event that is unparalleled in modern history and therefore is subject to wide variables, assumptim ons and inputs. Therefore, historical data used in analytical models may be less reliablea in predicting futff uret conditions. Further, the conditions created by COVID-19 have increased volatility across asset classes. Extreme volatility in any asset class, including real estate and mortgage-related assets, increases the likelihood of analytical models being inaccurate as market participants attempt to value assets that have frequent, significant swings in pricing. Many of the models we use include LIBOR as an input. The expected transition away from LIBOR may require changes to models, may change the underlying economic relationships being modeled, and may require the models to be run with less historical data than is currently available for LIBOR. We may incorrectly value LIBOR-based instruments because our models do not currently account for LIBOR cessation. All valuation models rely on correct market data inputs. If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect. However, even if market data is inputted correctly, “model prices” will often differ substantially fromff characteristics, such as derivative instruments or t structured market prices, especially forff securities with complexm notes. Accountingtt assumptions, Additiii onallyll , oyy ur applicatiott n of Go AAGG P may produce financialii omplem x a ee rules relatell tt and changes in accounting treatment may adversely affect our profitabi romff that fluctuate f ur transactions are highly c ii ertain o tt d to c resultsll f oo tt ll tt nd involve significant and impactm judgmegg nt and our financial results.tt liii tyii one period to another. tt Accounting rules for valuations of investments, mortgage loan sales and securitizations, investment consolidations, acquisitions of real estate and other aspects of our operations are highly complex and involve significant judgment and assumptim ons. These complem xities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders. Changes in accounting interpretations or assumptions could impact our financial statements and our ability to prepare our financial statements in a timely fashion. Our inabila on in the future would likely adversely affect our share price significantly. The fair value at which our assets may be recorded may not be an indication of their realizable value. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since market prices of investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset was recorded. Accordingly, the value of our common shares could be adversely affected by our determinations regarding the fair value of our investments, whether in the applicable period or in the future. Additionally, such valuations may flucff tuate over short periods of time. ity to prepare our financial statements in a timely fashi ff We have made certain accounting elections which may result in volatility in our periodic net income, as computed in accordance with GAAP. For example, changes in fair value of certain instruments are reflected in GAAP net income (loss) while others are reflected in Other comprehensive income (loss). i We are highly significantly disrii upt our business, abilitll y t ii peo rate our business. tt o ott ii dependent on information systems tt and third parties, and systeyy ms failures or cybe c which may, in turn, negativtt ely all ffa ecff t thett market price of oo rsecurity incidents couldll ur common stock and our ii Our business is highly dependent on communications and information systems. Any failure or interrur ptu ion of our systems or cyber-attacks or security breaches of our networks or systems could cause delays or other problems in our securities trading 23 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES In addition, we also faceff activities, including mortgage-backed securities trading activities. A disruptiu on or breach could also lead to unauthorized access to and release, misuse, loss or destruction of our confidential information or personal or confidential information of our es or third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, financial employe m oing business with third parties that rely on us to meet their own data protection losses, litigation and increased difficulty dt the risk of operational failure, termination or capacity constraints of any of the third requirements. parties with which we do business or that facilitate our business activities, including clearing agents or other financi al intermediaries we use to facilitate our securities transactions, if their respective systems experience failure, interruptu ion, cyber- attacks, or security breaches. Certain third parties provide information needed forff our financial statements that we cannot obtain or verify from other sources. If one of those third parties experiences a system failure or cybersecurity incident, we may not have access to that information or may not have confidence in its accuracy. We may face increased costs as we continue to evolve our cyber defenses in order to contend with changing risks. These costs and losses associated with these risks are difficult to predict and quantify, but could have a significant adverse effect on our operating results. Additionally, the legal and regulatory environment surrounding information privacy and security in the U.S. and international jurisdictions is constantly evolving. New business initiatives have increased, and may continue to increase, the extent to which we are subject to such U.S. and international information privacy and security regulations. In addition, due to the transition to remote working environments as a result of the COVID-19 pandemic, there is an elevated risk of such events occurring. ff m r malware, viruses, computer Computem hacking and phishing attacks have become more prevalent in our industry and we are from time to time subject to such attempted attacks. We rely heavily on our finff ancial, accounting and other data processing systems. Although we have not detected a material cybersecurity breach to date, other financial instituti ons have reported material breaches of their systems, some of which have been significant. Even with all reasonable security efforts, not every breach can be prevented or even detected. It is possible that we have experienced an undetected breach. There is no assurance that we, or the third parties that facilitate our business activities, have not or will not experience a breach. We may be held responsible if certain third parties that facff ilitate our business activities experience a breach. It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or the networks or systems of third parties that facff ilitate our business activities) or any failure to maintain performance, reliabila ity and security of our technical infrastructure, but such computer malware, viruses, and computer hacking and phishing attacks may negatively affect our operations. t Our use of non-recourse securitizations ii ee may ea xpose us to risks which could rll esult in losses to utt s. We utilize non-recourse securitizations of our assets in mortgage loans, especially loans that we originate, when they are available. Prior to any such financing, we may seek to finance assets with relatively short-term facilities until a sufficient portfolio is accumulated. As a result, we would be subject to the risk that we would not be able to acquire, during the period that any short-term facilities are available, sufficient eligible assets to maximize the efficiency of a securitization. We also would bear the risk that we would not be ablea to obtain a new short-term facility or would not be able to renew any short-term facilities after they expire should we need more time to seek and acquire sufficient eligible assets for a securitization. In addition, conditions in the capital markets, including potential volatility and disruption in the capital and credit markets, may not permit a non-recourse securitization at any particular time or may make the issuance of any such securitization less attractive to us even when we do have sufficient eligible assets. While we would intend to retain the non-investment grade tranches of securitizations and, therefore, still have exposure to any assets included in such securitizations, our inabila ity to enter into such securitizations would increase our overall exposure to risks associated with direct ownership of such assets, including the risk of default. Our inabila ity to refinance any short-term facilities would also increase our risk because borrowings thereunder would likely be recourse to us as an entity. If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance of potentially ncing or to liquidate assets at an inopportune time or price. To the extent that we are unable to obtain less attractive finaff financing for our assets, to the extent that we retain such assets in our portfolio, our returns on investment and earnings will be negatively impacted. our assets on a long-term basis, we may be required to seek other forms ff ff t tt Securitizati ons expose us to additional tt risks. In a securitization structure, we convey a pool of assets to a special purpose vehicle, the issuing entity, and in turn the issuing entity issues one or more classes of non-recourse notes pursuant to the terms of an indenture. The notes are secured by the pool of assets. In exchange for the transfer of assets to the issuing entity,t we receive the cash proceeds of the sale of non-recourse notes and a 100% interest in certain subordinate interests of the issuing entity. The securitization of all or a portion of our nate interest we retain in the commercial or residential loan portfolio might magnify off issuing entity would be subordinate to the notes issued to investors and we would, therefore, absa orb ar ll of the losses sustained with respect to a securitized pool of assets before the owners of the notes experience any losses. Moreover, we cannot assure to do so at favorable rates (particularly in light of the you that we will be able to access the securitization market or be ablea ur exposure to losses because any subordi u t 24 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES unpredictable impact of the COVID-19 pandemic on the securitization markets). The inabila adversely affect our performance and our ability to grow our business. ff ity to securitize our portfolio could Counterparties may require us to enter into restrictive covenants rtt grow our business and increase revenues. ii elatll ingtt to our operations tt that may inhibit oii ott ur abilitll y t tt If or when we obtain debt financing, lenders (especially in the case of credit facilities) may impose restrictions on us that would affect our ability to incur additional debt, make certain allocations or acquisitions, reduce liquidity below certain levels, make distributions to our stockholders, or redeem debt or equq ity securities, and may impact our flexibility to determine our operating policies and strategies. We may sell assets or reduce leverage at an inopportune time to avoid breaching these restrictions. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral. We may also be subju ect to cross-default and acceleration rights and, with respect to collateralized debt, the posting of additional collateral and foreclosure rights upon default. A default and resulting repayment acceleration could significantly reduce our liquidity, which could require us to sell our assets to repay amounts dued tly harm our business, financial condition, results of operations and ability to make and outstanding. This could also significan distributions, which could cause our share price to decline. A default could also significantly limit our financing alternatives such that we would be unable to pursue our leverage strategy, which could adversely affeff ct our returns. a ff ew lines We may ea ii ntertt ii result in additiii onal risks of business, ii and uncertainti into ntt ii acquire other companiesi es in our businesses. or engage in other strategice tt initiat ivtt es, each of which may We may pursue growth through acquisitions of other companies or other strategic initiatives. To the extent we pursue strategic investments or acquisitions, undertake other strategic initiatives or consider new lines of business, we will face numerous risks and uncertainties, including risks associated with: • • • • • • • • t a ity of es that ty of suitablea opportunities; ties accurately and terms for those opportunities; the availabili the level of competition from other companim may have greater financial resources; our ability to assess the value, strengths, weaknesses, liabilities and potential profitabila potential acquisition opportuni negotiate acceptablea the required investment of capital and other resources; the lack of availabili the terms of any finaff the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk; the diversion of management’s attention from our core businesses; the potential loss of key personnel of an acquired business; ty of financing and, if availabla e, ncings; a • • • • • • • ities in any acquired business; assumption of liabila the disruption of our ongoing businesses; the increasing demands on or issues related to the combining or integrating operational and management systems and controls; compliance with additional regulatory requirements; costs associated with integrating and overseeing the operations of the new businesses; failure to realize the full benefits of an acquisition, ff including expected synergies, cost savings, or sales or growth opportunit timeframe or at all; and post-acquisition deterioration in an acquired business that could result in lower or negative earnings contribution and/or goodwill impairment charges. ies, within the anticipated t Entry i nto certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which rr we are currently exempt, and may lead to increased litigation and regulatory risk. The decision to increase or decrease investments within a line of business may lead to additional risks and uncertainties. In addition, if a new or acquired business ient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will generates insufficff be adversely affected . Our strategic initiatives may include joint ventures, in which case we will be subju ect to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control. ff We are subject to r investmett ii nt accounts, includingii isks and liabili tt potent ial tt tt tiii es in connection withii sponsoring, ii investingtt in and managingii new funds and other regulatorytt ii risks. 25 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors We have, and may in the future, sponsor, manage and serve as general partner and/odd r manager of new funds or investment accounts, including collateralized loan obligations (“CLO”). Such sponsorship and management of, and investment in, such funds and accounts may involve risks not otherwise present with a direct investment in such funds, and accounts’ target investments, including, for example: • • • ff the possibility that investors in the funds/ accounts might become bankrupt or otherwise be unable to meet their capital commitment obligations; that operating and/or management agreements of a fund/account may restrict our ability to transfer or liquidate our interest when we desire or on advantageous terms; that our relationships with the investors will be generally contractual in naturet terminated or dissolved under the terms of the agreements, or we may be removed as general partner and/or manager (with or without cause), and in such event, we may not continue to manage or invest in the applicaba le fund/account; and may be • • that disputes between us and the investors may tration that would increase result in litigation or arbir our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the investments owned by fund/account to additional risk; and the applicablea that we may incur liability for obligations of a fund/ ff account by reason of being its general partner or manager. a Further, in relation to our operations, we have a subsidiary that is registered with the SEC as an investment adviser under the Investment Advisers Act. As a result, we are subject to the anti-fraud provisions of the Investment Advisers Act and to fiduciary duties derived froff m these provisions that appl y to our relationships with that subsidiary’s clients. These provisions and duties impose restrictions and obligations on us with respect to our dealings with our subsidiary’s clients, including, forff example, restrictions on agency, cross and principal transactions. Our registered investment adviser subsidiary is subject to periodic SEC examinations and other requirements under the Investment Advisers Act and related regulations primarily intended to benefit advisory clients. These additional requirements relate to, among other things, maintaining an effective and comprehensive compliance program, recordkeeping and reporting requirements and disclosure requirements. The Investment Advisers Act generally grants the SEC broad administrative powers, including the power to limit or restrict an investment adviser from conducting advisory activities in the event it fails to complym with federal securities laws. Additional sanctions that may be imposed for failure to comply with appa licable requirements under the Investment Advisers Act include the prohibition of individuals from associating with an investment adviser, the revocation of registrations and other censures and fines. We may in the future be required to register one or more entities as a commodity pool operator or commodity trading adviser, subjecting those entities to the regulations and oversight of the Commodity Futures Trading Commission and the National Futures Association. We may also become subject to various international regulations on the asset management industry. ff Investmett ee nts in MSRs may ea xpose us to additiii onal risks. ii are considered to be largely dependent on underlying MSRs that either We invest in financial instruments whose cash flows the investment. We expect to increase our exposure to MSR-related investments in directly or indirectly act as collateral forff the 2021. Generally, we have the right to receive certain cash flows servicing fees and/or excess servicing spread associated with the MSRs. While we do not directly own MSRs, our investments in MSR-related assets indirectly expose us to risks associated with MSRs, including the following: from the owner of the MSRs that are generated fromff ff ff • • Investments in MSRs are highly illiquid and subject to numerous restrictions on transfer and, as a result, there is risk that we would be unable to locate a willing buyer or get required approval to sell MSRs in the futff uret should we desire to do so. Our rights to the excess servicing spread are subordina u Mac and Ginnie Mae, and are subject to extinguishment. Fannie Mae and Freddie Mac each require approval of the sale of excess servicing spreads pertaining to their respective MSRs. We have entered into acknowledgment agreements or subordination of interest agreements with them, which acknowledge our subordinated rights. te to the interests of Fannie Mae, Freddie 26 • • Changes in minimum servicing compensation for agency loans could occur at any time and could negatively impact the value of the income derived from MSRs. The value of MSRs is highly sensitive to changes in prepayment rates. Decreasing market interest rates are generally associated with increases in prepayment rates as borrowers are ablea to refinance their loans at lower costs. Prepayments result in the partial or complete loss of the cash flows from the related MSR. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES If we are not able to successfully manage these and other risks related to investing in MSRs, it may adversely affect our MSR-related assets. ff the value of s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S We dWW epedd relatell nd on third-party service providers, ii includingii mortgage loan servicers and sub-servicers,rr for a variety ott f so ervices d to ott ii ur business. We are, te hett dd refore, se ubject to the risks associatedtt with thirdii -party service providers. We depend on a variety of services provided by third-party service providers related to our investments in MSRs as well as forff general operating purposes. For example, we rely on the mortgage servicers who service the mortgage loans underlying our MSRs to, among other things, collect principal and interest payments on such mortgage loans and perform loss mitigation laws and regulations. Mortgage servicers and other service providers, such as trustees, services in accordance with appli bond insurance providers, due diligence vendors and document custodians, may fail to perforff m or otherwise not perform in a manner that promotes our interests. cablea a For example, any legislation or regulation intended to reduce or prevent foreclosures through, among other things, loan modifications may reduce the value of mortgage loans, including those underlying our MSRs. Mortgage servicers may be required or otherwise incentivized by the Federal or state governments to pursue actions designed to assist mortgagors, such as loan modifications, forbearance plans and other actions intended to prevent foreclosure even if such loan modifications and other actions are not in the best interests of the beneficial owners of the mortgage loans. Similarly, legislation delaying the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans or otherwise limiting the ability of mortgage servicers to take actions that may be essential to preserve the value of the mortgage loans may also reduce the value of mortgage loans underlying our MSRs. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increase servicing costs. As a consequence of the foregoing matters, our business, financial condition and results of operations may be adversely affeff cted. Purchases and sales of Ao associatedtt with Agency mortgage-backed securities. gency mortgage-backed securities by the FedeFF rr ral Reserve may adverdd sel a y all ffec t thett price and return The Federal Reserve owns approximately $2.0 trillion of Agency mortgage-backed securities as of December 31, 2020. In response to the market conditions created by the COVID-19 pandemic, the Federal Reserve has taken a number of proactive measures, including cutting its target benchmark interest rate to 0%-0.25%, instituti ng a quantitative easing program, including the purchase of an unconstrained amount of Agency residential mortgage-backed securities, and putting in place a commercial facility and term and overnight repurchase agreement financing facilities, all to bolster liquidity and to promote ff paper funding price stabia lity and the smooth functioning of the mortgage-backed securities market. Certain actions taken by the U.S., including the Federal Reserve, in response to the COVID-19 pandemic may have a negative a impact on our results. For example, decreases in short-term interest rates, such as those announced by the Federal Reserve during the first quarter of 2020, may have a negative impact on our results. The Federal Reserve significantly further lowered interest rates in response to COVID-19 pandemic concerns. These market interest rate declines may negatively affect our results of operations. t ay be passed affectingii New laws mw government, ott n the other, wrr backed securities. the relati ll a dversely all ffec hich could all onship between FanFF nie Mae and Freddiedd Mac, on thett price of,o or our abilitll y t ii tt o i tt nves one hand, and the federal nd finance Agency mortgage- t in aii t thett dd The interest and principal payments we expect to receive on the Agency mortgage-backed securities in which we invest are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Principal and interest payments on Ginnie Mae certificates are directly guaranteed by the U.S. government. Principal and interest payments relating to the securities issued by Fannie Mae and Freddie Mac are only guaranteed by each respective Agency. In September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship of the FHFA, their federal regulator, pursuant to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a part of the Housing and ct of 2008. In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S. Economic Recovery Arr Department of the Treasury entered into Preferred Stock Purchase Agreements with the FHFA and have taken various actions intended to provide Fannie Mae and Freddie Mac with additional liquidity in an effoff In September 2019, FHFA and the U.S. Treasury Department agreed to modifications to the Preferred Stock Purchase Agreements that will permit Fannie Mae and Freddie Mac to maintain capita l reserves of $25 billion and $20 billion, respectively. rt to ensure their finaff a ncial stability. a Shortly after Fannie Mae and Freddie Mac were placed in fede ral conservatorship, the Secretary of the U.S. Treasury suggested that the guarantee payment structure of Fannie Mae and Freddie Mac in the U.S. housing finance market should be re- examined. The future roles of Fannie Mae and Freddie Mac could be significantly reduced d and the nature of their guarantees limited relative to historical measurements. The U.S. Treasury could also stop providing could be eliminated or considerablya ff 27 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES to Fannie Mae and Freddie Mac in the future. credit support Any changes to the nature of the guarantees provided by Fannie u Mae and Freddie Mac could redefine what constitutes an Agency mortgage-backed security and could have broad adverse market implim cations. If Fannie Mae or Freddie Mac was eliminated, or their structures were to change in a material manner that is not compatible with our business model, we would not be able to acquire Agency mortgage-backed securities from these entities, which could adversely affeff ct our business operations. t The recent U.S. elections may result in changes in federal policy with significant impacts on the legal and regulatory framework affecting the mortgage industry. These changes, including personnel changes at the appa regulatory agencies, may alter the nature and scope of oversight affecff ting the mortgage finance industry generally (particularly with respect to the future role of Fannie Mae and Freddie Mac). licablea Risks Related To Our Credit Assets We invest in s ii ecuritiii es in the credit risk transfer sector that are subject to mtt ortgage credit risk. We invest in securities in the credit risk transfer CRT sector. The CRT sector is comprised of the risk sharing transactions issued by Fannie Mae (“CAS”) and Freddie Mac (“STACR”), and similarly structured transactions arranged by third party market participants. The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors. The holder of the securities in the CRT sector has the risk that the borrowers Investments in securities in the may default on their obligations to make full and timely payments of principal and interest. CRT sector could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are defaults of principal and/or interest on the pool of mortgages referenced in the transaction. The holder of the CRT may also bear the risk of the defaul t of the issuer of the security. ff A prolonged economic slowdowdd ll results. operatingtt dd n or declinin g real estate values could impaim r t ii hett assets we may oa wn and adversely affect our Our non-Agency mortgage-backed securities, mortgage loans, and mortgage loans for which we own the servicing rights, along with our commercial real estate debt, preferred equity, and real estate assets may be susceptible to economic slowdowns or recessions, which could lead to financial losses in our assets and a decrease in revenues, net income and asset values. Investors should consider the impact that the current recession resulting from the COVID-19 pandemic will have on the mortgage market and ability of mortgagors to make timely payments on their mortgage loans. Furthermore, the economic impact of the COVID-19 pandemic may result in a decline in real estate values (particularly in certain geographic areas). a Owners of Agency mortgage-backed securities are protected fromff the risk of default on the underlying mortgages by guarantees from Fannie Mae, Freddie Mac or, in the case of the Ginnie Mae, the U.S. Government. A default on those underlying mortgages exposes us to prepayment risk described above, but not a credit loss. However, we also acquire CRTs, non-Agency mortgage-backed securities and residential loans, which are backed by residential real property but, in contrast to Agency mortgage-backed securities, the principal and interest payments are not guaranteed by GSEs or the U.S. Government. Our CRT, non-Agency mortgage-backed securities and residential loan investments are therefore particularly sensitive to recessions and declining real estate values. ff on one of our commercial mortgage loans or other commercial real estate debt or residential mortgage In the event of a default loans that we hold in our portfolio or a mortgage loan underlying CRT or non-Agency mortgage-backed securities in our portfolio, we bear the risk of loss as a result of the potential deficiency between the value of the collateral and the debt owed, as well as the costs and delays of foreclosure or other remedies, and the costs of maintaining and ultimately selling a property after foreclosure. Delinquencies and defaults on mortgage loans for which we own the servicing rights will adversely affect the amount of servicing fee income we receive and may result in increased servicing costs and operational risks due to the increased complexity of servicing delinquent and defaulted mortgage loans. Geographic concentration exposes investors ii to gtt reatett r risk of default e and loss. Repayments by borrowers and the market value of the related assets could be affect ed by economic conditions generally or specific to geographic areas or regions of the United States, and concentrations of mortgaged commercial and residential properties in particular geographic areas may increase the risk that adverse economic or other developments (including events of conditions related to the COVID-19 pandemic) or natural or man-made disasters affecting a particular region of the country could increase the frequency and severity of losses on mortgage loans or other real estate debt secured by those properties. From time to time, regions of the United States experience significant real estate downturns when others do not. Regional economic declines or conditions in regional real estate markets could adversely affect the income from, and market value of, the ted to a greater degree than other areas of mortgaged properties. In addition, local or regional economies may be adversely affecff a ff s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 28 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors the country by developments affecting industries concentrated in such area. A decline in the general economic condition in the region in which mortgaged properties securing the related mortgage loans are located would result in a decrease in consumer demand in the region, and the income from and market value of the mortgaged properties may be adversely affect ed. ff ff Other regional factors – e.g., rising sea levels, earthquakes, floods, s forest fires, hurricanes or changes in governmental rulerr (including rules related to the COVID-19 pandemic) or fiscal policies – also may adversely affect the mortgaged properties. s or Assets in certain regional areas may be more susceptible to certain hazards (such as earthquakes, widespread fires hurricanes) than properties in other parts of the country and collateral properties located in coastal states may be more susceptible to hurricanes than properties in other parts of the country. As a result, areas affected by such events often experience disruptions in travel, transportation and tourism, loss of jobs and an overall decrease in consumer activity, and oftenff a decline in real estate-related investments. There can be no assurance that the economies in such impacted areas will recover sufficiently to support income producing real estate at pre-event levels or that the costs of the related clean-up will not have a material adverse effecff t on the local or national economy. , flood ff ff Inadequate property insurance coverage could have an adverse impactm on our operatingii results.tt Commercial and residential real estate assets may suffer casualty losses dued to risks (including acts of terrorism) that are not covered by insurance or forff which insurance coverage requirements have been contractually limited by the related loan documents. Moreover, if reconstruction or majora owing a casualty, changes in laws that have occurred since the time of original construction may materially impair the borrower’s ability to effect such reconstruction or majora repairs or may materially increase the cost thereof. repairs are required foll ff There is no assurance that borrowers have maintained or will maintain the insurance required under the applicable loan documents or that such insurance will be adequate. In addition, since the residential mortgage loans generally do not require maintenance of terrorism insurance, we cannot assure you that any property will be covered by terrorism insurance. Therefore, damage to a collateral property caused by acts of terror may not be covered by insurance and may result in substantial losses to us. We may ia ncii ur losses when a borrower default e s ott n a loanll and the underlyill ngii tt collat eral ll value is less than the amount due. q If a borrower defaults on a non-recourse loan, we will only have recourse to the real estate-related assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we may suffer a loss. Conversely, some of our loans may be unsecured or are secured only by equity interests in the borrowing entities. These loans are subject to the risk that other lenders al stack may be directly secured by the real estate assets of the borrower or may otherwise have a superior right to in the capita repayment. Upon a default, those collateralized senior lenders would have priority over us with respect to the proceeds of a sale of the underlying real estate. In cases described above , we may lack control over the underlying asset collateralizing our loan or the underlying assets of the borrower before a default, and, as a result, the value of the collateral may be reduced by acts or ted by omissions by owners or managers of the assets. In addition, the value of the underlying real estate may be adversely affecff some or all of the risks referenced below with respect to our owned real estate. a Some of our loans may be backed or supported by individual or corporate guarantees fromff borrowers or their affiliates that are not secured. If the guarantees are not fully or partially secured, we typically rely on financial covenants from borrowers and guarantors that are designed to require the borrower or guarantor to maintain certain levels of creditworthiness. Where we do not have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, we will only have recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged as collateral for other lenders. There can be no assurance that a borrower or guarantor will comply with its finff ancial covenants, or that sufficient assets will be available to pay amounts owed to us under our loans and guarantees. As a result of these factors, we may suffer additional losses that could have a material adverse effect on our financial performance. ff Upon a borrower bankruptcy, we may not have full recourse to the assets of the borrower to satisfy our loan. In addition, certain of our loans are subordinate to other debt. If a borrower defaults on our loan or on debt senior to our loan, or upon a borrower bankruptcy, our loan will be satisfied only after the senior debt holder receives payment. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings. Bankruptcy and borrower litigation can significantly increase collection costs and the time needed for us to acquire title to the licable), during which time the collateral and/odd r a borrower’s financial condition may decline in underlying collateral (if appa value, causing us to suffer additional losses. If the value of collateral underlying a loan declines or interest rates increase during the term of a loan, a borrower may not be to repay our loan at maturity through refinancing because the underlying property revenue ff able to obtain the necessary f unds rr 29 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturi ty, we could suffer additional loss that may adversely impact our financial performance. t Our assets mtt to performingii loans. ay become non-performingii or sub-performingii assets in the future, we hich are subject to i tt ncii reased risks relati ll ve Our assets may in the near or the long term become non-performing or sub-performing assets, which are subject to increased risks relative to performing assets. Commercial loans and residential mortgage loans may become non-performing or sub- performing for a variety of reasons that result in the borrower being unablea to meet its debt service and/or repayment obligations, such as the underlying property being too highly leveraged, the financial distress of the borrower, or in the case of a commercial loan, decreasing income generated from the underlying property. Such non-performing or sub-performing assets may require a substantial amount of workout negotiations and/or restructuring, which may involve substantial cost and divert the attention of our management from other activities and may entail, among other things, a substantial reduction in interest rate, the capitalization of interest payments and/odd r a substantial write-down of the principal of the loan. Even if a restructuring payments or refinance the t were successfully accomplished, the borrower may not be able or willing to maintain the restruct ured t restructured loan upon maturity. r ff tt t ff From time to time we may find it necessary or desirable to forec lose the liens of loans we acquire or originate, and the ff foreclosure process may be lengthy and expensive. Borrowers may resist foreclosure actions by asserting numerous claims, counterclaims and defenses to payment against us (such as lender liabia lity claims and defenses) even when such assertions may t or law, in an effort to prolong the foreclosure action and force the lender into a modification of the loan or have no basis in facff buy-out of the borrower’s position. In some states, foreclosure actions can take several years or more to litigate. At a favora blea any time prior to or during the foreclosure proceedings, the borrower may filff e forff bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the resolution of our claims. Foreclosure may create a negative publu ic perception of the related property,tt resulting in a diminution of its value. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Furthermore, any costs or delays involved in the foreclosure of a loan or a liquidation of the underlying property r reduce the proceeds and thus increase our loss. Any such reductions could materially and adversely affect the value ff will furthe of the commercial loans in which we invest. It is anticipated that as a result of financial difficulties dued to the COVID-19 pandemic, borrowers will continue to request forbearance or other relief with respect to their mortgage payments. In addition, across the country, moratoriums are in place in ncial burden created by the COVID-19 pandemic certain states to stop evictions and foreclosures in an effort to lessen the finaff and various states have even promulgated guidance to regulated servicers requiring them to formulate policies to assist mortgagors in need as a result of the COVID-19 pandemic. It is anticipated that other forbearance programs, foreclosure moratoriums or other programs or mandates will be imposed or extended, including those that will impact mortgage related assets. Moratoriums on foreclosures may significantly impair the servicer’s abilities or our abili ty to pursue loss mitigation strategies in a timely and effective manner. a Whether or not we have participated in the negotiation of the terms of a loan, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests. Furthermore, claims may be asserted that might interfere with enforce losure, we may assume direct ownership of the underlying real estate. The ff liquidation proceeds upon sale of that real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Any costs or delays involved in the effectuat losure of the loan or a liquidation of the underlying property will further reduced ment of our rights. In the event of a forec the proceeds and increase our loss. tion of a forec ff ff Whole loan mortgages are also subjeu ct to “special hazard” risk (property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies), and to bankruptcy risk (reduction in a borrower’s mortgage debt by a bankruptcy court). In addition, claims may be assessed against us on account of our position as mortgage holder or property owner, as appl icable, including responsibility for tax payments, environmental hazards and other liabilities, which could have a material adverse effect on our results of operations, financial condition and our ability to make distributions to our stockholders. a We may be required to repurchas representations and warranties, which could have a negativett tt e commercial or residentdd ial impactm ee tt mortgage on our earnings.n loans or indemnifyi tt investors if we breach When we sell or securitize loans, we will be required to make customary representations and warranties about such loans to the loan purchaser. Our mortgage loan sale agreements will require us to repurchase or substitutet loans in the event we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of 30 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES ff loans if we breach a representation or warranty in connection with our securitizations. The remedies availablea on a mortgage loan. Likewise, we may be required to repurchase or borrower fraud or in the event of early payment default to a substitutet purchaser of mortgage loans are generally broader than those availablea to us against the originating broker or correspondent. Further, if a purchaser enforces its remedies against us, we may not be able to enforff ce the remedies we have against the sellers. The repurchased loans typically can only be financed at a steep discount to their repurchase price, if at all. They are also typically sold at a significant discount to the unpaid principal balance. Significant repurchase activity could adversely affect our cash flow, results of operations, financial condition and business prospects. Our and our thirdii associatedtt with such assets att party service provideii rs’ and servicers’rr due diligll ence of po otentiatt nd may na ot reveal other tt weaknesses in such assets, which could l l assets may not reveal all of the liabll ll osses. tt eall d to l ll ilities Before acquiring a commercial or residential real estate debt asset, we will assess the strengths and weaknesses of the borrower, originator or issuer of the asset as well as other fact ors and characteristics that are material to the performance of the asset. In making the assessment and otherwise conducting customary due diligence, we will rely on resources available to us, including our third party service providers and servicers. This process is particularly important with respect to newly formed originators or issuers because there may be little or no information publicly available about these entities and assets. There can be no assurance that our due diligence process will uncover all relevant facff ts or that any asset acquisition will be successful. ff lose on an asset, wtt When we forec .yy the risks inherent in that activityii ff e may come to own and operate t tt hett property securing the loan, ll which would expose us to When we foreclose on a commercial or residential real estate asset, we may take title to the property s ecuring that asset, and if we do not or cannot sell the property, we would then come to own and operate it as “real estate owned.” Owning and operating real property involves risks that are different (and in many ways more significant) than the risks faced in owning a debt instrument secured by that property. In addition, we may end up owning a property that we would not otherwi se have decided to acquire directly at the price of our original investment or at all. Further, some of the properties underlying the assets we are acquiring are of a different type or class than property we have had experience operating directly, including properties such as hotels, hospitals, and skilled nursing facilities. Accordingly, we may not manage these properties as well as they might be managed by another owner, and our returns to investors could suffer. If we foreclose on and come to own property, our financial performance and returns to investors could suffer. rr t t t Financi ii alii covenants could all dversely affect our abilitll y t tt o ctt onduct our business. The commercial mortgages on our equity properties generally contain customary negative covenants that limit our ability to further mortgage the properties, to enter into material leases or other agreements or materially modify existing leases or other agreements without lender consent, to access cash flow in certain circumstances, and to discontinue insurance coverage, among other things. With respect to the long-term, fixed rate mortgage loans secured by certain of our healthcare properties and insured by the U.S. Department of Housing and Urban Development (“HUD”), the approval of HUD is also required for certain actions. These restrictions could adversely affect operations, and our ability to pay debt obligations. In addition, in some instances guaranties given by Annaly entities as further security for these mortgage loans contain affirmative covenants to maintain a minimum net worth and liquidity. Proposals t ll o att cquire mortgage loans by eminenii t domai dd n mii ay adversely affect thett value of oo ur assets. Local governments have taken steps to consider how the power of eminent domain could be used to acquire residential hether any mortgage loans sought to be purchased will be mortgage loans held in mortgage loans and there can be no certainty wt securitization trusts and what purchase price would be paid forff any such mortgage loans. Any such actions could have a on the market value of our mortgage-backed securities, mortgage loans and MSRs. There is also no material adverse effect certainty as to whether any such action without the consent of investors would face legal challenge, and, if so, the outcome of any such challenge. ff Our investments in corporate loans and debt securitiii es for middl e mll i m arket companies carry risks. ii We invest a percentage of our assets directly in the ownership of corporate loans and debt securities for middle market companim es. Non-investment grade or unrated loans to middle market businesses may carry more inherent risks than loans to larger, investment grade publicly traded entities. These middle market companies generally have less access to public capital 31 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES markets, and generally have higher financing costs. Such companies, particularly in an economic slowdown or recession, may al to expand or compete, and may be unable to obtain financing from be in a weaker financial position, may need more capita their respective private capital providers, public capa ital markets or from traditional sources, such as commercial banks. In an economic downturn, middle market loan obligors, which may be highly leveraged, may be unable to meet their debt service requirements. Middle market businesses may have narrower product lines, be more vulnerablea to exogenous events and maintain smaller market shares than large businesses. Therefore, they may be more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Middle market businesses may have more difficff ulties implementing enterprise resource plans and may facff e greater challenges integrating acquisitions than large businesses. These businesses may r also experience variations in operating results. The success of a middle market company may depend on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons may have a material adverse impact on such middle market company and its ability to repay its obligations. A deterioration in the value of our investments in corporate loans and debt securities for middle market companies could have an adverse impactm on our results of operations. Risks Related To Commercial Real Estate Debt, Preferred Equity Investments, Net Lease Real Estate Assets and Other Equity Ownership of Real Estate Assets The real estate att certain assets and our abiliii tyii to make distribu ii tions to our stockholders. ssets we acquire are subject to risks ii particular to real property, wyy hich may adversely affect our returns from We own assets secured by real estate and own real estate directly through direct purchases or realization or upon a default of mortgage loans. Real estate assets are subju ect to various risks, including: • • • including earthquakes, hurricanes, acts of God, floods and other natural disasters, which may result in uninsured losses; acts of war or terrorism, including the consequences of terrorist attacks; adverse changes in national and local economic and market conditions; • • • changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of complim ance with laws and regulations, fiscal policies and ordinances; the potential for uninsured or under-insured propertytt losses; and environmental conditions of the real estate. Under various U.S. federal, state and local environmental laws, ordinances and regulations, a current or previous owner of real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. liable forff If any of these or similar events occurs, it may reduce our returnt eliminate our ability to make distributions to stockholders. from an affected property or investment and reduce or The commercial loan assets we originate from operatingtt the property. Fyy ii ailFF ure to do so may ra and/or// acquireii esult ill n dii eldd inll quency ac nd/or// f to hett foreclosure.ee depend on the abilitll y ott property ott wner to generate net income Commercial loans are secured by real property and are subject to risks of delinquency and foreclosure, and risks of loss that may be greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful the existence of independent income or assets of the borrower. In light of the operation of such property rather than uponu COVID-19 pandemic and related stay-at-home orders, certain businesses may not be able to open or to open at full to customers, which may have an effect on their ability to generate income. If the income of the property is reduced, the borrower’s ability to repay the loan may be impaired. The income of an income-producing property can be adversely affeff cted by, among other things, a capacity ff • • • • • changes in national, regional or local economic conditions or specific industry segments, including the credit and securitization markets; declines in regional or local real estate values; declines in regional or local rental or occupancy rates; increases in interest rates, real estate tax rates and other operating expenses; tenant mix; • • • • • • success of tenant businesses and the tenant’s ability to meet their lease obligations; property management decisions; property location, condition and design; competition from comparable types of properties; government orders regulating the operation of a tenant’s business; changes in laws that increase operating expenses or limit rents that may be charged; 32 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES • • • • a eviction moratoriums; costs of remediation, and liabilities environmental conditions; the potential forff losses; changes in governmental laws and regulations, including fiscal policies, zoning ordinances and uninsured or underinsured property associated with terrorist attacks, pandemics, social environmental legislation and the related costs of compliance; acts of God, unrest and civil disturt bar nces; litigation and condemnation proceedings regarding the properties; and bankruptcy proceedings. • • • In the event of any default under a loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest (and other unpaid sums) under the loan, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankrupr tcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or losure of a commercial real debtor-in-possession to the extent the lien is unenforceablea estate loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated returnt on such commercial real estate. under state law. Workouts and/odd r forec ff Commercial and non-Agency mortgagtt ll e-backed securities we acquire may be subject to l tt osse s. In general, losses on a mortgaged property securing a mortgage loan included in a securitization will be borne first by the equity holder of the property,tt then by the holder of a mezzanine loan or B-Note, if any, then by the “first loss” subordinated security holder generally, the “B-Piece” buyer, and then by the holder of a higher-rated security. In the event of default and the exhaustion of any equity support, mezzanine loans or B-Notes, and any classes of securities junior to those that we acquire, we may not be able to recover all of our capita al in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline, less collateral is available to satisfy interest and on the related mortgage-backed securities. The prices of lower credit quality mortgage-backed securities principal payments dued are generally less sensitive to interest rate changes than more highly rated mortgage-backed securities, but more sensitive to adverse economic downturns or individual issuer developments. The projection of an economic downturn, for example, could cause a decline in the price of lower credit quality mortgage-backed securities because the abila f obligors of mortgages underlying mortgage-backed securities to make principal and interest payments may be impaired. In such event, existing credit may be insufficient to protect us against loss of our principal and interest on these support in the securitization structuret securities. ity ot Borrowers mrr ay be unable t ll o rtt epay the remaining ii ii princi pal ii ll balance on the maturityii date.ee Many commercial loans are non-amortizing balloon loans that provide for substantial payments of principal dued at their stated maturities. Commercial loans with substantial remaining principal balances at their stated maturity date involve greater risk ff than full y-amortizing loans. This is because the borrower may be unable to repay the loan at that time. A borrower’s ability to repay a mortgage loan on its stated maturity date typically will depend upon its abia lity either to refinance the mortgage loan or to sell the mortgaged property at a price sufficient to permit repayment. A borrower’s ability to achieve either of these goals will be affect ed by a number of factors, including: u ff • • • • • • • over t the availabia lity of, aff nd competition for, credit for commercial real estate projects, which fluff ctuate time; the prevailing interest rates; the net operating income generated by the related mortgaged properties; the fair market value of the related mortgaged properties; the borrower’s equity in the related mortgaged properties; significant tenant rollover at the related mortgaged properties; the borrower’s financial condition; the operating history and occupancy level of the related mortgaged properties; a cablea government assistance/rent reductions in appli subsidy programs; changes in zoning or tax laws; changes in competition in the relevant location; changes in rental rates in the relevant location; changes in government regulation and fiscal policy; the state of fixeff the availability of credit for multi-family and commercial properties; d income and mortgage markets; • • • • • • • • 33 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES • • prevailing general and regional economic conditions; and the availabili a fluctuates over time. ty of funds in the credit markets which Whether or not losses are ultimately sustained, any delay in the collection of a balloon payment on the maturity date will likely extend the weighted average life of our investment. The B-NoteNN s that terms of to hett tt we originate att transaction, which may ra ll esult ill n l ii osses to us. nd acquireii may be subject to additional tt riskii s rkk elatell d to t tt hett privateltt y nll tt egotiat edtt structure and q We may originate and acquire B-Notes. A B-Note is a mortgage loan interest typically (1) secured by a first mortgage on a single large commercial property or group of related properties and (2) subordinated to an A-Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-Note holders after payment to the A-Note holders. However, because each transaction is privately negotiated, B-Notes can vary in their structural characteristics and risks. For example, the rights of holders of B-Notes to control the process following a borrower default may vary f roff m transaction to transaction. Further, B-Notes may be secured by a single property and so reflect the risks associated with significant concentration. Significant losses related to our B-Notes would result in operating losses for us and may limit our ability to make distributions to our stockholders. rr The mezzani ee than senior loans. neii loan assets att nd other subordinate dtt ebtdd positiii ons that tt we originaii te and acquire involve greater risks okk ll f lo oss ff We originate and acquire mezzanine loans, which take the form of subordinated loans secured by a pledge of the ownership interests by an entity that directly or indirectly owns the property-owning entity. We also make commercial real estate preferred equity investments, which, unlike mezzanine loans, generally are not secured by a pledge of equity interests and may be less liquid investments. Although as a holder of preferred equity we may protect our position with covenants that limit the activities of the entity in which we hold an interest and protect our equity by obtaining a contractual right to control the underlying property or force a sale after an event of default, should such a default occur, we would only be able to proceed against the entity in which we hold an interest, and not the real property owned by such entity and ultimately underlying the investment. These types of subordinate debt assets involve a higher degree of risk than senior mortgage lending secured by income- closure by the senior producing real property, because the loan may become unsecured or unrecoverable as a result of foreff lender on its mortgage or the exercise of remedies by a lender holding a mezzanine loan that is senior to our subordinate debt. In the event of a bankruptcy of the entity providing the pledge of ownership interests as security forff a mezzanine loan, we may not have full recourse to the assets of such entity,t or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan, preferred equity investment, or debt senior to our loan, or in the event of a only after the senior debt. As a result, we may not recover some or borrower bankruptcy, our subordinate debt will be satisfiedff all of our investment. In addition, mezzanine loans and preferred equity investments may have higher loan-to-value ratios than conventional mortgage loans, resulting in the borrower having less equity in the property and increasing the risk of loss of principal. Further, any subordinate debt investment may give rise to sudden liquidity needs in order for us to protect our position. Significant losses related to our mezzanine loans and/or preferred equity positions would result in operating losses for us and may limit our ability to make distributions to our stockholders. We are subject to addidd tionii al risks associatett d with loan participati ii ons and co-lending an rrangements.tt Some of our loans may be participation interests or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings upon a default and the instituti on to take actions to which we object but of, and control over, foreclosure proceedings. Similarly, certain participants may be ablea to which we will be bound if our participation interest represents a minority interest. We may be adversely affecff ted by this lack of control. t Construction loans involve an incii reased risk of loss. originate construction loans. If we fail to fund our entire commitment We have in the past and may in the future acquire and/ordd on a construct ion loan or if a borrower otherwise fails to complem te the construction of a project, there could be adverse consequences associated with the loan, including: a loss of the value of the property securing the loan, especially if the r 34 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors borrower is unable to raise funds to complete it from other sources; a borrower claim against us for failure to perform under the by the borrower; and loan documents; increased costs to the borrower that the borrower is unable to pay; a bankruptcy filing abana donment by the borrower of the collateral for the loan. ff If we do not have an adequate completion guarantee backed by a person or entity with sufficient creditworthiness, risks of cost overruns and non-complem tion of renovation of the properties underlying rehabila itation loans may result in significant losses. The renovation, refurbishment or expansion of a mortgaged property by a borrower involves risks of cost overruns and non- completion. Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. Other risks may include rehabila itation costs exceeding original estimates, possibly making a project uneconomical, environmental risks and rehabila itation and subsequent leasing of the property not being completed on schedule. If such renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of net operating income and may not be able to make payments on our investment, which could result in significant losses. xx We may experienc ons. i obligati ll e losse s if t i hett tt creditwor thiness of our tenants deteriorates and they ae re unable to meet their lease We own properties leased to tenants and receive rents fromff tenants during the contracted term of such leases. Such leases include space leases and operating leases. A tenant’s ability to pay rent is determined by its creditworthiness, among other factors. If a tenant’s credit deteriorates, the tenant may default on its obligations under our lease and may also become bankrupt. The bankruptcy or insolvency of our tenants or other failure to pay is likely to adversely affect the income produced by our real estate assets. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. If a tenant files for bankruptcy, we may not be able to evict the tenant solely because of such bankruptcy or failure to pay. A court, furthermore, may authorize a tenant to reject and terminate its lease with us. In such a case, our claim against the tenant for hat might be substantially less than the remaining rent owed under the unpaid, future rent would be subject to a statutory cap ta lease. In addition, certain amounts paid to us within 90 days prior to the tenant’s bankruptc y filff ing could be required to be returned to the tenant’s bankruptcy estate. In any event, it is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under a lease that it intends to reject. In other circumstances, where a tenant’s financial condition has become impaired, we may agree to partially or wholly terminate the lease in advance of the termination date in consideration rental amount. Without regard to the manner in which the for a lease termination fee that is likely less than the total contractual lease termination occurs, we are likely to incur additional costs in the formff of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant. r t t ting an operating tenant of one or more of our healthcare properties, there can be no With respect to a deterioration affecff replacement tenants or enter into leases with new tenants on terms as assurance that we would be able to identify suitablea to us as the current leases or that we would be able to lease those properties at all. Our abia lity to reposition our favorablea properties with a suitablea replacement tenant or operator could be significantly delayed or limited by state licensing, receivership or other laws, as well as by the Medicare and Medicaid change-of-ownership rulr es, and we could incur substantial additional expenses in connection with any licensing, receivership or change-of-ownership proceedings. Our ability t o locate and attract suitablea restrictions on use of the properties, and we may be forced to spend substantial amounts to adapta the properties to other uses. If we are not replacements on a timely basis we may be required to fund certain expenses and obligations successful in identifying m (e.g., real estate taxes, debt costs and maintenance expenses) to preserve the value of, and avoid the imposit ion of liens on, our ties, including obligations properties while they are being repositioned. In addition, we may incur certain obligations and liabili to indemnify the replacement tenant or operator, which could adversely affect our business, results of operations and finaff ncial condition. replacement tenants also could be impaired by the specialized healthcare uses or contractual suitablea a ff t t The risks associated with properties leased to tenants are more acute during periods of economic slowdown or recession, especially if these periods are accompanied by high unemployment and declining real estate values. A weakening economy, high unemployment and declining real estate values significff antly increase the likelihood that a tenant’s creditworthiness may deteriorate, which in turn may adversely affecff t us. In any of the foregoi ff ng circumstances, our financial performance could be materially adversely affecff ted. xx Lease expirati ons, lease defaultsll and lease terminations may aa rr dversel a y all ffec t our revenue.ee Lease expirations and lease terminations may result in reducd ed revenues if the lease payments received from replacement tenants are less than the lease payments received from the expiring or terminating tenants. In addition, lease defauff lts or lease terminations by one or more significant tenants or the failure of tenants under expiring leases to elect to renew their leases, al could cause us to experience long periods of vacancy with no revenue from a faci lity and to incur substantial capita ff 35 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGE Item 1A. Risk Factors A MENT, INC. ANDAA SUBSIDIARIES expenditures and/or lease concessions to obtain replacement tenants. The risk of lease expirations and lease terminations is more acute during periods of economic slowdown or recession, especially if these periods are accompanied by high unemploym ent and declining real estate values. m Our real estate investments are illill quid.ii Because real estate investments are relatively illiquid, our ability to adjust the portfolio promptly in response to economic or other conditions will be limited. Certain significant expenditures generally do not change in response to economic or other conditions, including: (i) debt service (if any), (ii) real estate taxes, and (iii) operating and maintenance costs. This combination of variable revenue and relatively fixed expenditures may result, under certain market conditions, in reduced earnings and could t have an adverse effect on our financial condition. We may na which we invii ot control s the spec ial servicingii est and, in such cases,ee the spes of the mortgage cialii tt tt loans included in t ii hett commercialii mortgage-backed securitiestt in servicer may take actions tt that could adversely affect our interests. With respect to the commercial mortgage-backed securities in which we may invest, overall control over the special servicing of the related underlying mortgage loans will be held by a “directing certificate holder” or a “controlling class representative,” which is appointed by the holders of the most subordinate class of commercial mortgage-backed securities in such series. To the extent that we acquire classes of existing series of commercial mortgage-backed securities originally rated AAA, for example, we will not have the right to appoint the directing certificate holder. In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificate holder, take actions with respect to the specially serviced mortgage loans that could adversely affeff ct our interests. Joint venture investments ctt venturer’s financial conditiii on. ould bll e adversely affectedtt by our lack of so ole dll ecdd ision-making authority tt ll and reliance upon a co- relationship, in some circumstances (such as majora We co-invest with third parties through joint ventures. Although we generally retain control and decision-making authority in a decisions) we may not be permitted to exercise sole decision- joint venturet or the subject property. Investments in joint ventures may involve risks not making authority regarding such joint venturet might become bankrupt or otherwise fail to present were a third party not involved, including the possibility that co-venturers fund their share of required capital contributions. Additionally, our co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals, and we may in certain circumstances be Consequently, actions by any such co-venturer might result in subjecting properties liable forff owned by the joint venture to additional risk, although these risks are mitigated by transaction structuret and the terms and conditions of agreements governing the relationship. the actions of our co-venturers. t t t Risks Related To Our Residential Credit Business Our investments in non-Agency mortgage-backe (“NPL”) which we have acquired in recent periods) or other invii investmett could mll nts in MSRs or seasoned re-performing and non-performingii atertt iallyll adversely affect our results ott d securities (incl tt perat ions. o f oo tt ii uding re-performingii loans (“RPL”)PP / non-performingii estment assets of lower credit quality,tt residential tt whole loans, involve credit risk, ii loans including our which Our current investment strategy includes seeking growth in our residential credit business. The holder of a mortgage or mortgage-backed securities assumes the risk that the related borrowers may default on their obligations to make full and timely payments of principal and interest. Under our investment policy, we have the abia lity to acquire non-Agency mortgage-backed securities, residential whole loans, MSRs and other investment assets of lower credit quality. In general, non-Agency mortgage-backed securities carry greater investment risk than Agency mortgage-backed securities because they are not guaranteed as to principal or interest by the U.S. Government, any federal agency or any federally chartered corporation. Non- investment grade, non-Agency securities tend to be less liquid, may have a higher risk of default and may be more difficult to value than investment grade bonds. Higher-than-expected rates of defaulta and/or higher-than-expected loss severities on the mortgages underlying our non-Agency mortgage-backed securities, MSRs or on our residential whole loan investments may adversely affecff t the value of those assets. Accordingly, defaults in the payment of principal and/or interest on our non-Agency mortgage-backed securities, residential whole loan investments, MSRs and other investment assets of less-than-high credit quality would likely result in our incurring losses of income from, and/or losses in market value relating to, these assets. 36 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES We have investments i investmett risk of losses. tt ll nts collateral ized ll n nii on-Agency mortgage-bac ked securities collall teralizii ed by non-prime loans by subprimeii mortgage loans, which, due to lower underwritingii ll and may also have standards, are subject to increased tt tt s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S We have certain investments in non-Agency mortgage-backed securities backed by collateral pools containing mortgage loans that were originated under underwriting standards that were less strict than those used in underwriting “prime mortgage loans.” These lower standards permitted mortgage loans, often with LTV ratios in excess of 80%, to be made to borrowers having impaired credit histories, lower credit scores, higher debt-to-income ratios and/or unverified income. Difficult economic conditions, including increased interest rates and lower home prices, can result in non-prime and subprim e mortgage loans having increased rates of delinquency, foreclosure, bankruptcy and loss (including such as during the credit crisis of 2007-2008 and the housing crisis that foll owed), and are likely to otherwise experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of higher delinquency rates and losses associated with non-prime and subprim e mortgage loans, the performance of our non-Agency mortgage-backed securities that are backed by these types of loans could be correspondingly adversely affected, which could materially adversely impact our results of operations, financial condition and business. u u ff Our investments may include subordinatett d trantt right of po ayment to more senior securities. tt ches of no on-Agency mortgage-backed securitiii es, ws hich are subordinate in uret Our investments may include subordinated tranches of non-Agency mortgage-backed securities, which are subordinated classes of securities collateralized by a pool of mortgage loans and, accordingly, are the first or among the of securities in a struct rr or liquidation of the underlying collateral and the last to receive payment of interest first to bear the loss upon a restructuring r values of these subordinated interests tend to be more sensitive to changes in and principal. Additionally, estimated faiff economic conditions than more senior securities. As a result, such subordinated interests generally are not actively traded and may not be liquid investments. t We are subject to counterpart y rtt ee whole loans if they breach repre tt isk and may be unable to seek inde tt sentati ons and warranties, which could cause us to stt uffer losses. ii mnityii or require counterparties tott repurchase ee residentiali When selling or securitizing mortgage loans, sellers typically make customary representations and warranr ties aboa ut such loans. Residential mortgage loan purchase agreements may entitle the purchaser of the loans to seek indemnity or demand repurchase or substitution of the loans in the event the seller of the loans breaches a representation or warranty given to the purchaser. ties, There can be no assurance that a mortgage loan purchase agreement will contain appropri ate representations and warranr that we or the trust that purchases the mortgage loans would be able to enforff ce a contractual right to repurchase or substituti on, or that the seller of the loans will remain solvent or otherwise be able to honor its obligations under its mortgage loan purchase ity to obtain or enforce an indemnity or require repurchase of a significant number of loans could agreements. The inabila adversely affecff t our results of operations, financial condition and business. a t Our investments in residentiali whole loans subject us to stt ervicing-relat ett d risks, including tn hose tt ii associatett d with foreclosure. ll In connection with the acquisition and securitization of residential whole loans, we rely on unaffiliated servicing companie s to service and manage the mortgages underlying our Non-Agency mortgage-backed securities and our residential whole loans. If a servicer is not vigilant in seeing that borrowers make their required monthly payments, borrowers may be less likely to make these payments, resulting in a higher frequency of default. If a servicer takes longer to liquidate non-performing mortgages, our losses related to those loans may be higher than originally anticipated. m Any failure by servicers to service these mortgages and related real estate owned (“REO”) properties could negatively impact the value of these investments and our financial performance. In addition, while we have contracted, and will continue to l servicing of the loans we purchase together with the contract, with unaffiliated servicing companies to carry out the actuat related MSRs (including all direct interface with the borrowers), we are nevertheless ultimately responsible, vis-à-visii the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related abla e law and regulation. In light of the current regulatory environment, such exposure could be notes and mortgages and applic any failure to service the loans to the significant even though we might have contractual claims against our servicers forff required standard. a When a residential whole loan we own is foreclosed upon, title to the underlying property would be taken by one of our closure states such as New York, Florida and New Jersey can be subsidiaries. The foreclosure process, especially in judicial foreff losure, and then liquidating the property through lengthy and expensive, and the delays and costs involved in complem ting a forec ff 37 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors sale, may materially increase any related loss. Finally, at such time as title is taken to a forec extensive rehabila that would require expensive and time-consuming remediation. losed property, it may require more itation than we estimated at acquisition or a previously unknown environmental liabia lity may be discovered ff r The COVID-19 pandemic and the resulting economic disrupti on it has caused may result in liquidity pressures on servicers and other third-party vendors that we rely upon. For instance, as a result of an increase in mortgagors requesting relief in the form of forbearance plans and/or other loss mitigation, servicers and other parties responsible in capia tal markets securitization transactions for funding advances with respect to delinquent mortgagor payments of principal and interest may begin to experience financial difficulties if mortgagors do not make monthly payments as a result of the COVID-19 pandemic. The negative impacm t on the business and operations of such servicers or other parties responsible for funding such advances could be significant. Sources of liquidity typically available to servicers and other relevant parties for the purpose of funding advances ons, may not be sufficient to meet the of monthly mortgage payments, especially entities that are not depository instituti increased need that could result froff m significantly higher delinquency and/or forbearance rates. The extent of such liquidity pressures in the futff uret is not known at this time and is subject to continual change. t Challenges ll conditiii on. to the MERS®EE tt System could materially and adversely affect our business, results of operat ions o and financialii MERSCORP, Inc. is a privately held company that maintains an electronic registry, referred to as the MERS System, that tracks cer. Mortgage ownership of residential mortgage loans in the U.S., as well as the identity of the associated servicer and subservi Electronic Registration Systems, Inc., or MERS, a wholly-owned subsidiary of MERSCORP, Inc., can serve as a nominee for the owner of a mortgage loan and in that role initiate foreclosures and/or become the mortgagee of record for the loan in local land records. We, or other parties with whom we contract to do business or from whom we acquire assets, may choose to use MERS as a nominee. The MERS System is widely used by participants throughout the mortgage finance industry. The MERS System allows us to foreclose on delinquent loans more efficff iently than we otherwise could ourselves. u Over the last several years, there have been legal challenges disputing MERS’s legal standing to initiate foreclosures and/or act as nominee in local land records. It is possible that these challenges could negatively affect MERS’s ability to serve as the mortgagee of record in some jurisdictions. In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and closure proceedings. As a result, investigations by governmental authorities and other legal documents in connection with foreff others into a servicer’s possible foreclosure process deficiencies may impact MERS. Failures by MERS to apply prudent and effective process controls and to comply with legal and other requirements in the foreclosure process could pose operational, reputational and legal risks that may materially and adversely affect our business, results of operations and finaff ncial condition. a espect to mortgage loans we own, or which we have purchased and subsequentlytt tt laii r consumer protectiontt nding or other of truth-in-le tt violations ii simi ii laws and regulations, tt sold, we may be subject to l iall bilitll ytt tt rr which could adversely With r tt for potentialii impact our business ii and financialii ll results. q Federal consumer protection laws and regulations regulate residential mortgage loan underwriting and originators’ lending processes, standards, and disclosures to borrowers. These laws and regulations include, among others, the Consumer Financial ed mortgage” regulations. In addition, there are various other federal, state, Protection Bureau’s “abia lity-to-repay” and “qualifi and local laws and regulations that are intended to discourage predatory lending practices by residential mortgage loan originators. For example, the federal Home Ownership and Equity Protection Act of 1994 (“HOEPA”) which was expanded under the Dodd Frank Act, prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases may impose restrictions and requirements greater than those in place under federal laws and regulations. In addition, under the anti-predatory lending laws of some states, the origination of certain residential mortgage loans, including loans that are classified as “high cost” loans under applicable law, must satisfy a net tangible benefits test with respect to the borrower. This test, as well as certain standards set forth in the “ability-to-repay” and “qualified mortgage” regulations, may be highly subjective and open to interpretation. As a result, a court may determine that a residential mortgage loan did not meet the appl icable standard or test even if the originator reasonably believed such standard or test had been satisfied. Failure of residential mortgage loan originators or servicers to ral consumer protection laws and regulations could subject us, as an assignee or purchaser of these loans (or as complym with fede losure, including by recoupment or an investor in securities backed by these loans), to monetary penalties and defenses to forec setoff of damages and costs, which for some violations included the sum of all finance charges and fees paid by the consumer, and could result in rescission of the affect ed residential mortgage loans, which could adversely impact our business and financial results. On December 10, 2020, the Consumer Financial Protection Bureau adopted a set of “bright-line” loan pricing thresholds to replace the previous qualified mortgage 43% debt-to-income threshold calculated in accordance with “Appendix a ff ff ff 38 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors Q”. The Consumer Financial Protection Bureau also created a new category of a qualifiedff mortgage, referred to as a “Seasoned QM”, which consists of first-lien, fixed rate loans that met certain performance requirements over a seasoning period of at least 36 months, are held in portfolio until the end of the seasoning period by the originating creditor or first purchaser, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements. At this time, however, there can be no assurance what impact the final rulr es will have on the mortgage market and the “abilit y-to-repay” rules. Furthermore, the temporary qualified mortgage provision applicable to certain mortgage loans eligible for purchase or pay, commonly referred to as the “GSE patch,” is scheduled to expire on the guarantee by the GSEs under the ability-to-re earlier of (i) the mandatory complim ance date of the final ruler amending the general qualified mortgage definition described above (which is July 1, 2021) or (ii) the date that the GSEs exit conservatorship. We cannot predict the impact of its expiration on the mortgage market. a t We may not be able to obtain oii we may fail to complm y wll tt mortgage loans and servicing right ith various statett i s.tt r maintii aintt the governmentaltt to operate ott ur Residential ff and fede ral laws aw nd regulations applicable to our business of acquiringii licenses requiredii tt tt Creditdd business and tt resident ial ii While we are not required to obtain licenses to purchase mortgage-backed securities, the purchase of residential mortgage loans and certain business purpose mortgage loans in the secondary market may, in some circumstances, require us to maintain various state licenses. Acquiring the right to service residential mortgage loans and certain business purpose mortgage loans may also, in some circumstances, require us to maintain various state licenses even though we currently do not expect to directly engage in loan servicing ourselves. As a result, we could be delayed in conducting certain business if we were first required to obtain a state license. We cannot assure you that we will be able to obtain all of the licenses we need or that we would not experience significant delays in obtaining these licenses. Furthermore, once licenses are issued we are requiq red to with various information reporting and other regulatory requirements to maintain those licenses, and there is no complym assurance that we will be ablea to satisfy those requirements or other regulatory requirements applicable to our business of acquiring mortgage loans on an ongoing basis. Our failure to obtain or maintain required licenses or our failure to complym with regulatory requirements that are applicable to our business of acquiring mortgage loans may restrict our residential credit business and investment options and could harm our business and expose us to penalties or other claims. o ptt tt rofitably tt tt mortgage ial tt Our abilitll y t of resident ii ityll profitabil tt ave a material adverse impactm could hll execute or participat loans, is dependen or if we are unable to execute or participate ii on our business utuff ee ii ii in future securitizat alii ii results.tt ii and financi ii e i tt n f t on numerous factors and if we are not able to achieve our desiredii transactions, including, re securitizations in particular, srr ii ii iontt s, os r incii ur losses in connection therewith,tt tt ecuritiii zat ions ii level ofo it ff d tors including the availabila securitizations in this space. Another factor that impacts the profitabila ors that can have a significant impact on whether we are able to execute or participate in a There are a number of fact securitization transaction, and whether such a transaction is profitable to us or results in a loss. One of these factors is the price we pay for the mortgage loans that we securitize, which, in the case of residential mortgage loans, is impacted by the level of competition in the marketplace for acquiring mortgage loans and the relative desirability to originators of retaining mortgage loans as investments or selling them to third parties such as us. As such, we can provide no assurance that we will be able to t our identify and make investments in residential mortgage loans at attractive levels and pricing, which could adversely affecff ability to execute futuret ity of a securitization transaction ilities that we use to finance our holdings of mortgage loans prior to is the cost to us of the short-term warehouse financing facff securitization, which cost is affected by a number of facff ity of this type of financing to us, the interest ion of the financing we incur, and the percentage of our mortgage loans for which third rate on this type of financing, the durat parties are willing to provide short-term financing. After we acquire mortgage loans that we intend to securitize, we can also suffer losses if the value of those loans declines prior to securitization. Declines in the value of a mortgage loan, for example, can be dued to, among other things, changes in interest rates, changes in the credit quality of the loan, changes in the projected yields required by investors to invest in securitization transactions and changes in the mark-to-market value of the loan. To the extent we seek to hedge against a decline in loan value due to changes in interest rates, there is a cost of hedging that also affeff cts whether a securitization is profitablea . Other factors that can significantly affeff ct whether a securitization transaction is profitable to us include the criteria and conditions that rating agencies apply and require when they assign ratings to the mortgage-backed securities issued in our securitization transactions, including the percentage of mortgage-backed securities issued in a securitization transaction that the rating agencies will assign a triple-A rating to, which is also referred to as a rating agency subordination level. Rating agency subordination levels can be impacted by numerous factors, including, without limitation, the credit quality of the loans securitized, the geographic distribution of the loans to be securitized, and the structure of the securitization transaction and other applicablea rating agency criteria. All other factors being equal, the greater the percentage of the mortgage-backed securities issued in a securitization transaction that the rating agencies will assign a triple-A rating to, the more profitablea the transaction will be to us. The price that investors in mortgage-backed securities will pay for securities issued in our securitization transactions also has a significant impact on the profitability of the transactions to us, and these prices are impacted by numerous market forces and factors. In addition, the underwriter(s) or placement agent(s) we select for securitization transactions, and the terms of their 39 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES the profitability of our securitization transactions. Also, transaction costs incurred in executing engagement, can also impactm ty that we may incur, or may be required to a transactions impactm reserve for, in connection with executing a transaction can cause a loss to us. To the extent that we are not able to profitably execute future securitizations of residential mortgage loans or other assets, including for the reasons described above or for other reasons, it could have a material adverse impacm t on our business and finaff ity of our securitization transactions and any liabili the profitabila ncial results. a Risks Related to Our Business Structure On June 30, 2020, we closed our Internalization. Pursuant to the Internalization Agreement, we acquired the equitq y interests of our Former Manager and its affiff liates, which were owned by certain of our executive officers, for a nominal cash purchase price ($1.00), and transitioned from an externally-managed REIT to an internally-managed REIT. We may ba e exposed ee to risks to which we have not historic ii ally been exposed ee tt izat ion. ll as a result of the Internal tt The Internalization which closed on June 30, 2020, may expose us to risks to which we have not historically been exposed. Pursuant to the Internalization Agreement, we acquired our Former Manager, including any potential future liabilities our Former Manager may have, which may be unforeseen. As a result of the Internalization, we now emplom y all the personnel who provide services to the Company, the majorit by our Former Manager. Following the closing of the Internalization, we assumed responsibility for all employee compensation costs. In addition, we are now subject to those potential liabilities that are commonly facff ed by employe ity and compensation claims, potential labor disputes and other emplom yee-related liabilities and grievances, and we bear the costs of the establishment and maintenance of employee benefit plans. f whom were previously employed rs, such as workers’ disabila y ot m m a a The depadd rture of ao ny of our key pe ersonnel could materiall y all i nd adversely affect us. Our success and our ability to manage anticipated future growth depend, in large part, upon the efforts of our key personnel. Our executive officers have extensive experience and strong reputations in the sectors in which we operate and have been ntal in setting our strategic direction, operating our business, identifying, recruiting, and training our key personnel, instrume r ity to attract and retain highly and arranging necessary financing. The departure of any of our executive officff ers, or our inabila qualified personnel, could adversely affect ities, and weaken our relationships with lenders, business partners and industry personnel, which could materially and adversely affect us. our business, diminish our investment opportunt ff ff Risks Related to Our Taxation as a REIT ii Our faiff lure to maintaintt our qualificat iontt ll as a REITRR would have adverserr tax caa onsequences. We believe that since 1997 we have qualified forff taxation as a REIT forff U.S. federal income tax purposes under Sections 856 through 860 of the Code. We plan to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control. For example, to maintain our qualification as a REIT, at least 75% of our gross income must come from real estate sources and 95% of our gross income must come from real estate sources and certain other sources that are itemized in the REIT tax laws. Additionally, our ability to satisfy the REIT asset tests depends upon our analysis of the characterization and faiff r market values of our assets, some of which are not susceptible to precise determination, and for which we will not obtain independent appraisals. The proper classification of an instrument as debt or equity forff U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements. We are also required to distribute to for dividends paid and by stockholders at least 90% of our REIT taxable income (determined without regard to the deduction excluding any net capita Furthermore, Congress and the Internal Revenue Service (“IRS”) might make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult or impossible for us to remain qualified as a REIT. al gain). Even a technical or inadvertent mistake could jeopardize our REIT status. d t We also indirectly own interests in entities that have elected to be taxed as REITs under the U.S. federal income tax laws, or “Subsidiary REITs.” Subsidiary REITs are subject to the various REIT qualification requirements that are appa licable to us. If any Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to regular U.S. federal, state, and local corporate income tax, (ii) our interest in such Subsidiary REIT would cease to be a qualifying asset forff purposes of the REIT asset tests, and (iii) it is possible that we would fail certain of the REIT asset tests, in which event we also would fail to maintain our qualification as a REIT unless we could avail ourselves of certain relief provisions. While we believe that the Subsidiary REITs have qualified as REITs under the Code, we have joined each Subsidiary REIT in filing “protective” TRS elections under Section 856(l) of the Code. We cannot assure you that such “protective” TRS elections would 40 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES u be effective to avoid adverse consequences to us. Moreover, even if the “protective” elections were to be effective, the ry REITs would be subject to regular corporate income tax, and we cannot assure you that we would not fail to satisfy Subsidia ent that not more than 20% of the value of our total assets may be represented by the securities of one or more the requiremq TRSs. If we fail to maintain our qualification as a REIT, we would be subjec l income tax at regular corporate rates. Also, unless the IRS were to grant us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first faiff l to qualify. If we fail to maintain our qualification as a REIT, we would have to investments or for distributions to our pay significant income taxes and would therefore have less money available forff stockholders. This would likely have a significant adverse effect on the value of our equity. In addition, the tax law would no longer require us to make distributions to our stockholders. t to U.S. federa u ff A REIT that faiff ls the quarterly asset tests forff one or more quarters will not lose its REIT status as a result of such failure if lure is regarded as a de minimis failure under standards set out in the Code, or (ii) the failure is greater than a de either (i) the faiff minimis failure but is attributable to reasonable cause and not willful neglect. In the case of a greater than de minimis failure, however, the REIT must pay a tax and must remedy the failure within six months of the close of the quarter in which the failure was identified. In addition, the Code provides relief for failures of other tests imposed as a condition of REIT qualification, as long as the failures are attributable to reasonable cause and not willful neglect. A REIT would be required to pay a penalty of $50,000, however, in the case of each faiff lure. We have certaintt ii distri buti ii on requirements, which could all dversely affect our abilitll y t ee tt o ett xec ute our business ii ll plan. As a REIT, we must distribute at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain). The required distribution limits the amount we have availablea for other business purposes, including amounts to fund our growth. Also, it is possible that because of the differences between the time we actually receive revenue or pay expenses and the period we report those items for distribution purposes, we may have to borrow funds on a short-term basis to meet the 90% distribution requirement. ff ff To the extent that we satisfy t his distribution requirement, but distribute less than 100% of our taxable income, we will be subju ect to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a non- deductible 4% excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our stockholders to comply with the REIT qualification requirements of the Code. in these situations we could be required to (i) borrow funds on unfavorablea From time to time, we may generate taxablea income greater than our income for financial reporting purposes prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, if we purchase Agency or non-Agency securities at a discount, we generally are required to accrete the discount into taxable income prior to receiving the cash proceeds of the accreted discount at maturity, and in some cases, ted in our financial statements. If we do not potentially recognize the discount in taxable income once such amounts are reflecff terms, (ii) sell have other funds availablea investments at disadvantageous prices, (iii) distribute our own stock, see below, or (iv) distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid the corporate income tax and 4% excise tax in a particular year. Also, we or our subsidiaries may hold debt investments that could require subsequent modifications. If an amendment to an outstanding debt is a “significant modification” for U.S. federal income tax purposes, the modified debt may be deemed to have been reissued in a debt-for-debt taxable exchange with the borrower. This deemed reissuance could result in a portion of the modified debt not qualifying as a good REIT asset if the underlying security has declined in value, and would cause us to recognize income to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt. These scenarios could increase our costs or reduce our stockholders’ equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our stock. ff Conversely, from time to time, we may generate taxable income less than our income for financial reporting purposes due to GAAP and tax accounting differences or, as mentioned above, the timing between the recognition of taxablea income and the In such circumstances we may make distributions according to our business plan that are within our actual receipt of cash. wherewithal from an economic or cash management perspective, but that are label ed as returt n of capital for tax reporting purposes, as they are in excess of taxable income in that period. a tt Distributi aa ons to tax-exem ptm investors may be class ll ified as unrelated business taxable i ll ncomii e. Neither ordinary nor capita constitutet particular: unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this ruler al gain distributions with respect to our stock nor gain from the sale of our stock are anticipated to . In 41 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors • • • if m income shares of our part of the income and gain recognized by certain qualified emplom yee pension trusts with respect to our stock may be treated as unrelated business stock are taxable predominantly held by qualified employee pension trusts, and we are required to rely on a special look- through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income; part of the income and gain recognized by a tax- exempt investor with respect to our stock would constitutet income if the unrelated business taxablea investor incurs debt in order to acquire the stock; part or all of the income or gain recognized with to our stock by social clubsu , voluntary respect associations, benefit ent benefit supplemental employe e m trusts and qualified group m unemploym legal services plans which are exempt froff m U.S. federal income taxation under the Code may be treated as unrelated business taxablea to the extent that we (or a part of us, or a disregarded subsidiary of ours) are a “taxablea mortgage pool,” or if we hold residual interests in a real estate mortgage investment conduit or a CLO; a portion of the distributions paid to a tax-exempt is allocable to excess inclusion stockholder that income may be treated as unrelated business taxable income. income; • • future choose to pay dividends idd n oii We may ia n t ii of the cash dividends ee xcess income taxes in eii hett they receive.ee ii ur own stock, in wii hich case thett stockholders ll may be required to pay We may in the future distribute taxable dividends that are payablea in cash or shares of our stock at the election of each stockholder. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits forff U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect to all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock. Our inabiliii tyii tt distribut ions tt to deduct for tax purposes certain c tt level taxes to stockholders or pay entityii ii m ompensat to maintii aintt our REIT status. iott n paid to our executives could r ll equire us to increase our ity to deduct forff Our inabila tax purposes certain compensation paid to our executives could require us to increase our distributions to stockholders or pay entity level taxes to maintain our REIT status. Section 162(m) of the Code prohibits annual compensation in excess of $1 million paid to any of the publicly held corporations from taking a tax deduction forff corporation’s “covered emplm oyees,” which, under current law, includes a corpor ration’s chief executive offiff cer, chief financial officer and the three other most highly compensated executive officers. In addition, under the Tax Cuts and Jobs Act of 2017 (“TCJA”), once an individual becomes a covered employe e after December 31, 2016, that individual will remain a covered years including after termination or death. If we were to pay compensation to “covered employees” in m employe excess of the Section 162(m) deductibility limit, then our taxable income would be greater than it otherwise would have been had the compensation been fulff ly deductible, and, as a result, we would be required to distribute a larger amount of dividends to our stockholders to maintain our REIT status and/or to avoid U.S. federal and state income tax, which could adversely affect our financial condition. ff all future e forff m on ownership of our stock could hll tsii Limi ii premium on our stock. ll ave adverse consequences to you and could l ll imi t yii tt our opportunity t o r tt eceive a To maintain our qualification as a REIT for U.S. federal income tax purposes, not more than 50% in value of the outstanding al stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal tax laws shares of our capita to include certain entities). Primarily to facff ilitate maintenance of our qualification as a REIT forff U.S. federal income tax purposes, our charter prohibits ownership, directly or by the attribution provisions of the federal tax laws, by any person of more than 9.8% of the lesser of the number or value of the issued and outstanding shares of any class of our capita al stock. Our Board, in its sole and absolute discretion, may waive or modify the ownership limit with respect to one or more persons who would not be treated as “individuad ls” if it is satisfieff d that ownership in excess of this limit will not otherwise jeopardize our status as a REIT for U.S. federal income tax purposes. rr 42 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES The ownership limit may have the effect of delaying, deferring or preventing a change in control and, therefore, could adversely affect our stockholders’ ability to realize a premium over the then-prevailing market price for our stock in connection with a change in control. ff A REIRR T cannot invest more than 20% of its t 20% of our totaltt cannot constitute more thantt assets. tt ottt altt assets in the stock or securities of oo ne or more TRSsTT ; thett refore, our TRSs A TRS is a corporat ion, other than a REIT or a qualified REIT subsidiary, in which a REIT owns stock and with which the REIT jointly elects TRS status. The term also includes a corporate subsidiary in which the TRS owns more than a 35% interest. r A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if it was earned directly by the parent REIT. Overall, at the close of any calendar quarter, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. The stock and securities of our TRSs are expected to represent less than 20% of the value of our total assets. Furthermore, we intend to monitor the value of our investments in the stock and securities of our TRSs to ensure compliance with the above- described limitation. We cannot assure you, however, that we will always be able to comply with the limitation so as to maintain REIT status. t TRSs are subject to tax aaa TRS can pay to its ptt arent REITEE may be limi teii d byb REITEE gross income test ii s.tt are not requiredii tt t thett regularll corporate rates, tt tt to distribute dividends, and the amount of dividends a A TRS must pay income tax at regular corporate rates on any income that it earnsr . In certain circumstances, the ability of our TRSs to deduct interest expenses for U.S. federal income tax may be limited. Such income, however, is not required to be distributed. Our TRSs will pay corporate income tax on their taxablea income, and their after-tax net income will be available for distribution to us. Moreover, the annual gross income tests that must be satisfied to maintain our REIT qualification may limit the amount of our TRSs. Generally, not more than 25% of our gross income can be derived from non-real dividends that we can receive fromff estate related sources, such as dividends from a TRS. If, for any taxable year, the dividends we receive from our TRSs, when added to our other items of non-real estate related income, were to represent more than 25% of our total gross income for the year, we could be denied REIT status, unless we were abla e to demonstrate, among other things, that our failure of the gross income test was due to reasonable cause and not willful neglect. The limitations imposed by the REIT gross income tests may impede our abila form of dividends. Certain asset transfers may, therefore, have to be structured our TRSs recognize a taxable gain. t ity to distribute assets from our TRSs to us in the as purchase and sale transactions upon which If interest accrues on indebtedness owed by a TRSTT or if transactions subject to a penalty tax.xx between a REIRR T and a TRSTT tt to its parent REIT at a rate i n other thantt ii o ott d int are enterett xcee ess of a commercially ermtt tt arm’s-lengt h t ll ii s, then thett reasonable rll ate,e REITEE may be tt n eii If interest accrues on an indebtedness owed by a TRS to its parent REIT at a rate in excess of a commercially reasonablea rate, then the REIT would be subject to tax at a rate of 100% on the excess of (i) interest payments made by a TRS to its parent REIT over (ii) the amount of interest that would have been payablea had interest accrued on the indebtedness at a commercially d on any transaction between a TRS and its parent REIT to the extent the reasonable rate. A tax at a rate of 100% is also imposem transaction gives rise to deductions to the TRS that are in excess of the deductions that would have been allowable had the transaction been entered into on arm’s-length terms. While we will scrutinize all of our transactions with our TRSs in an effort to ensure that we do not become subject to these taxes, there is no assurance that we will be successful. We may not be able to avoid application of these taxes. Even if wi e remain qualifi ll ed as a REIRR T, we may face other tax liabiliii tieii s thatt t reduce our cash flow. ll Even if we remain qualified for taxation as a REIT, we may be subju ect to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conductd ed as a result of a foreclosure, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes. In addition, in order to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, dealer property or inventory, we or to avert the imposition of a 100% tax that appl ies to certain gains derived by a REIT fromff a 43 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES may hold some of our assets through our TRSs or other subsidiary corporations that will be subjeb ct to corporate level income tax at regular rates. ll Complying with Rtt EIRR T requiremii ents may ca ause us to forgo otherw tt ise attractt tive opportunitiett s. To remain qualified as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concernr ing, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, complim ance with the REIT requirements may hinder our ability to make and, in certain cases, to maintain ownership of, certain attractive investments. Complym ing withii REITEE requiremii ff ents may fa orc ii iqui date ll e us to l tt otherwise attratt ctivett investments. To remain qualified as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, U.S. Government securities and qualified real estate assets. The remainder of our investment in securities (other than U.S. Government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than U.S. Government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 20% of the value of our total assets can be represented by securities of one or more TRSs. Changes in the tures of our assets could cause inadvertent violations of the REIT requirements. If we fail to complym with the values or other feaff REIT requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our investment portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. ff ii Liquidati on of assets may jeopardize our REITEE qualifi tt ll cation or create additdd ional tax liabilityll for us. To remain qualified as a REIT, we must complym with requirements regarding the composition of our assets and our sources of income. If we are compellm ed to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory. The failure of assets subject to r remain qualifiell d as a REIRR T. tt epurchase agreements t tt o qtt ualifyi as real estate att ssets could all ott dversely affect our abilitll y t tt r rr We enter into certain financing arrang as sale and repurchase agreements pursuant to which we t ements that are struct ured nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto, and we treat them as such forff U.S. federal income tax purposes. We believe that we would be treated forff REIT asset and income test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the assets to the counterpart the term of the It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and agreement. repurchase agreement, in which case we could fail to remain qualified as a REIT. y during d r Complym ing withii REITEE requiremii ents may limit ii our abiliii tyii to hedge effeff ctively and may cause us to incur tax laa iall bilitll iett s. The REIT provisions of the Code could substantially limit our ability to hedge our liabilities. Any income from a properly designated hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute “gross income” forff purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may have to limit our use of advantageous hedging techniques or implement those hedges through our TRSs. This could increase the cost of our hedging activities because our TRSs would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In up to five years (for addition, losses in our TRSs generally will not provide any tax benefit, except forff being carried back forff 44 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES losses incurred after 2017 but prior to 2021) or carried forward periods. ff potentially to offset taxabla e income in the TRSs forff such The failure of a mezzzz anine loan or simi a REIT. RR ii larii debt to qualifyi as a real estattt e att rr sset could adverdd sel a y all ffec t our abilitll y t tt o qtt ualifyi as y investments that we treat as mezzanine loans for U.S. We invest in mezzanine loans and similar debt (including preferred equitq federal income tax purposes), for which the IRS has provided a safe harbor but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived fromff the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. We may acquire mezzanine loans or similar debt that do not meet all of the requirements of this safe harbor. In the event we own a mezzanine loan or similar debt that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a challenge were sustained, we could fail to maintain our qualification as a REIT. Qualifying as a REITRR involvell s highlygg technical and complexm ii provisions of the Code.ee Qualification as a REIT involves the application of highly technical and complexm Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our continued qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the REIT qualificat ion requirements depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership forff U.S. federal income tax purposes. ff The tax oaa CMOs. n prohibitedtt transactions willii ii limi t oii ur abilitll y t o ett tt ngage in transactions, includingii certaintt methods of structuring The 100% tax on prohibited transactions will limit our abia lity to engage in transactions, including certain methods of structuring CMOs, which would be treated as prohibited transactions for U.S. federal income tax purposes. t losure property, as discussed below) that is held primarily forff The term “prohibited transaction” generally includes a sale or other disposition of property (including mortgage loans, but other sale to customers in the ordinary course of a trade or ff than forec business by us or by a borrower that has issued a shared appre ciation mortgage or similar debt instrument to us. We could be subject to this tax if we were to dispose of or structure CMOs in a manner that was treated as a prohibited transaction for U.S. federal income tax purposes. a We intend to conduct our operations at the REIT level so that no asset that we own (or are treated as owning) will be treated as or as having been, held forff sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain transactions at the REIT level, and may limit the structures we utilize for our CMO transactions, even though the sales or structures might otherwise be beneficial to us. In addition, whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Code that would prevent such treatment. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structuret our activities to avoid the prohibited transaction tax. rr Certain financing activtt stockholders. ll itiett s may subject us to Utt .S.UU federal income tax and could have negative taxtt consequences for our We may enter into securitization transactions and other financing transactions that could result in us, or a portion of our assets, being treated as a taxable mortgage pool for U.S. federal income tax purposes. If we enter into such a transaction in the futff ure, we could be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool, referred to as "excess inclusion income," that is allocable to the percentage of our shares held in record name by disqualified organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state pension plans and charitable remainder trusts and government entities). In that case, we could reduce distributions to such stockholders by the amount of tax paid by us that is attributablea to such stockholder's ownership. r t 45 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES If we were to realize excess inclusion income, IRS guidance indicates that the excess inclusion income would be allocated among our stockholders in proportion to the dividends paid. Excess inclusion income cannot be offset by losses of a stockholder. If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Code. If the stockholder is a forei gn person, it would be subject to U.S. fede ral income tax at the maximum tax rate and withholding will be required on this income without reduction or exemption pursuant to any otherwise applicablea income tax treaty. ff ff The lease of qualifi ll ed healthcare tt propertiestt to a TRSTT b is subject to special requirements.tt We lease certain qualified healthcare properties we acquired from MTGE Investment Corp. (“MTGE”) to a TRS, which hires a manager to manage the healthcare operations at these properties. The lease revenues from this structure are treated as rents from real property if (1) they are paid pursuant to an arms-length lease of a qualified healthcare property with a TRS and (2) the manager qualifies as an “eligible independent contractor,” as defined If any of these conditions is not satisfieff d, ff then the rents may not be treated as revenues from real property forff purposes of the REIT gross income tests. in the Code. Uncertaintt ty exists wtt tt ith r espect to the treat tt mett nt of our TBAs for purposes of to hett REITEE asset and income tests. ff We purchase and sell Agency mortgage-backed securities through TBAs and recognize income or gains from the disposition of . While there is no direct those TBAs, through dollar roll transactions or otherwise, and may continue to do so in the future authority with respect to the qualification of TBAs as real estate assets or U.S. Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property)tt or other qualifying income for purposes of the 75% gross purposes of the REIT asset tests, and we treat income and gains from income test, we treat our TBAs as qualifying assets forff our TBAs as qualifying income forff purposes of the 75% gross income test, based on an opinion of counsel subsu tantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of real estate assets, purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our and (ii) forff the sale or disposition of an interest in mortgages on real property. Opinions of counsel are TBAs should be treated as gain fromff not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, it must be emphasized that the opinion of counsel is based on various assumptim ons relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income. If the IRS l to remain qualified were to successfully challenge the opinion of counsel, we could be subject to a penalty tax or we could faiff as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs. Dividends payable by REITs gTT enerally rll eceive differe i nt tax treatmett nt than dividend ii income fromff regular corporations. tt to capita al gains. Dividends payablea d t to the reduced Qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is subjec maximum tax rate applicablea by REITs, however, generally are not eligible for the reduced qualified dividend rates. Under current law, non-corporate taxpayers may deduct up to 20% of certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as al gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S. capita icable to qualified federal income tax rate of 29.6% on such income. Although the reduced rates dividend income does not adversely affecff applicablea to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock. Tax rates could be changed in future legislation. t the taxation of REITs or dividends payablea U.S. federal income tax rate appl the more favorablea by REITs, u d a ation New legisl ll e ii r impossi difficult oll tt or administ rati ii for us to remain qualifi ve or judicial action, bleii tt ll ed as a REIRR T. tt in each inst ance ii potentially ii withii retroactive effeff ct, could mll ake it more The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect judicial or administrative action at any time, which could affect The U.S. federal income tax ruler process, the IRS and the U.S. Treasury, which results in statutory changes as well as freque , by legislative, the U.S. federal income tax treatment of an investment in us. s dealing with REITs constantly are under review by persons involved in the legislative nt revisions to regulations and ff ff ff 46 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES interpret ations. Additional future r investments and commitments and affect ff ff the tax considerations of an investment in us. revisions in federal tax laws and interpretations thereof could affect or cause us to change our Risks of Ownership of Our Common Stock s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S The market price and tradingii shares of oo ur common stocktt volume of oo ur shares of co could cause the market price of our common stock to decline. ommon stott ck may be volatileii ii and issii uances of lo arge ll amounts of If we issue a significant number of shares of common stock or securities convertible into common stock in a short period of time, there could be a dilution of the existing common stock and a decrease in the market price of the common stock. The market price of our shares of common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our shares of common stock may fluff ctuate price variations to occur. We cannot assure you that the market price of our shares of common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluff ctuations in the price or trading volume of our shares of common stock include those set forth under “Special Note Regarding Forward-Looking Statements” as well as: and cause significant ff t • • • • • • • • ity to meet or exceed securities analysts’ actual or anticipated variations in our quarterly operating results or business prospects; changes in our earnings estimates or publication of research reports about us or the real estate industry; an inabila estimates or expectations; increases in market interest rates; hedging or arbitrage trading activity in our shares of common stock; capital commitments; changes in market valuations of similar companies; adverse market reaction indebtedness we incur in the future; increased any to • • t t of management personnel; onal stockholders or activist additions or departures actions by instituti investors; speculation in the press or investment community; changes in our distribution policy; government action or regulation; general market and economic conditions; • • • • • market dislocations pandemic; and future ff securities convertible into, or exchangeablea exercisablea sales of our shares of common stock or or for, our shares of common stock. related to the COVID-19 • d e t c e l e S a t a D l a i c n a n i F Holders of our shares of common stock will be subject to the risk of volatile market prices and wide fluctuations in the market price of our shares of common stock. These factors may cause the market price of our shares of common stock to decline, regardless of our financial condition, results of operations, business or prospects. It is impossible to assure you that the market prices of our shares of common stock will not fall in the future. s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S Under our charter, we have 3,000,000,000 authorized shares of capital stock, par value of $0.01 per share. Sales of a substantial number of shares of our common stock or other equity-related securities in the public market, or any hedging or arbit rage trading activity that may develop involving our common stock, could depress the market price of our common stock and impair our ability to raise capita l through the sale of additional equity securities. a r does not permit ownership of over 9.8%, 99 in number of shares oee ptsm to acquire our common stock or preferred stock in excess of to hett r value, of our common stock or preferred stock without prior approval from our 9.8% limit ii Our chartertt and attemtt Board are void. For the purpose of preserving our REIT qualification and for other reasons, our charter prohibits direct or constructive ownership by any person of more than 9.8% of the total number or value of any class of our outstanding common stock or preferred stock. Our charter’s constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding shares of any class of common stock or preferred stock by an individual or entity could cause that individual or entity to own constructively in excess of 9.8% of the outstanding shares of such class of stock and thus be subject to our charter’s ownership limit. Any attempt to own or transfer shares of our common stock or preferred stock in excess of the ownership limit without the consent of the Board shall be void, or, alternatively, will result in the shares being transferred by operation of law to a charitablea trust. 47 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 1A. Risk Factors Provisions contained in Mii potentially preventingtt e aryMM land law that are reflec tt rol a “cont roff m receivingii investors frr “ ii ted in our charter and bylaws premium” for their shares. ll may have anti-tii akeov tt er effee cts,tt Provisions contained in our charter and bylaws, as well as the Maryland General Corporation Law (the “MGCL”) corporate ts that delay, defer or prevent a takeover attempt, which may prevent stockholders from law, may have anti-takeover effecff their shares. For example, these provisions may defer or prevent tender offers for our receiving a “control premium” forff our stockholders to common stock or purchases of large blocks of our common stock, thereby limiting the opportunit receive a premium for their common stock over then-prevailing market prices. These provisions include the folff lowing: ies forff t • • rr • Maryland ff l. i“interest ded sto kckh lholdder” (d fi Ownership limit. The ownership limit in our charter limits related investors including, among other things, any voting group, from acquirq ing over 9.8% of any class our common stock or of our preferred stock, in each case, in number of shares or value, without the consent of our Board. Preferred Stock. Our charter authorizes our Board to issue preferre d stock in one or more classes and to h the preferences and rights of any class of a establis preferred stock issued. These actions can be taken without soliciting stockholder approva ivoti gng power off our outst di fof ours ffiliate or ass iperi dod iim dimediatelyly ywo-year ie in questiion, was hthe bbe ivoti gng power tock) or an faffilifili fff rohibited fd forff hiwhichh thhe a Business Combination Act. The Maryland subject to providdes hthat, subjec Business Combination Act provi imita itions, certaiin b ibusiness cert iain excep itions a dnd lili dnd corporatiion a dnd combibina itions bbetween a Marylaylarr rallyy as an finefi ici lallyly owns 10% or more fof yany person ivoti gng stockk or hthe yany itime an affili iprior to hthe iwithihin hthe t fof 10% or ddat andi gng more fof hthe ate off a yny iinterest ded hshares off s fafter thhe stockh ld br becomes most recent ddate on ir imposes an iinterestedd s requirements i kholder v ioti gng a yty stockh ld two super-majori jori am gong hother on lunless, combinatiions, bi hthese ckholdders receiive a onditions, our common sto kh l c di i imi inimum priice, a ds d fiefin ded iin thhe MGCL, ffor h i their ktock andd thhe co idnsideratiion iis rec iei dved iin hshares off s idpaid byby hthe ca hsh or iin hthe same fform as fof stockk. We iintere iBusiness hhave Combibina ition Act iin our hcharter. However, ifif we fifive yyears kk k stockh ldholde tockh ldolder, andd thhereaffte dsted st kh l ockholdder ffor iits shhares out opted d finefici lial owner fof our thhen outst di kholder are p hibi (defi dned ggene ll rr yland hthe Maryland ously i previously hwho, at hwho bbe andi gng iociate kh fof k) to st khockh loldder app am dend our hcharter to opt bba kck iin to hthe statute, subjbju ect thhe Marylaryla dnd iBusiness Combibinatiion Act couldld hhave hthe effffect off dand fof iincreasingsing iquire us ouragi gng ffoffers to ac didiscouragi lcultyy off consummatiingg a yny suchh offffers, even hth de diffi iffi ifif our acq iuisi iition w ldould bbe iin our stockh ld kholders’ bbest iinterests. roval, l ll hi lrol (defi dned as iwithh allll othher hshares con kholder, entiitlle hthe sto kh l subje subject lrol hshares” (d fi to cert iain excep itions, h ldholders ownership or contr lol ntrol hshares”) h) have no l approved byby our stockh ld ie increasiingg r ganges off v ioti gng power )ors) acqui dired iin a “cont hthe didirect or (defi dned as • Maryland Control Share Acquisition Act. The Maryland Control Share Acquisition Act providdes i hthat, fof “cont ivoti gng hshares hthat, hwhen ggaggreggat ded trolled bd byy thhe stockh ld ckholdder to exe ircise one fof hthre iin lelec iti gng didirect hshare iqui i isition” (d fi ac indirect i di ac iqui i isition fof fof iissuedd a dnd outstandingding “co ivoti gng rights rights kholders byby except to thhe extent hthe ffaffiifff rmatiive vote fof at lleast two-thihi drds off allll hthe votes enti l ditled to bbe cast on thhe matter, excludidi gng l ffiofficers, or byby hshares owned bd byy thhe ac lalso didirectors our employee fof our m ployee subject to hthe MarylaMaryla dnd co Cont T itle 3, Subtu itle 8 of the MGCL: These provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board or increasing the vote required to remove a director. ympany. We are currentlyly subje lrol hShare Acq iuisi iition Act. iquirer, byby our s whho are d • Broad market fluct ff uations could nll ii egativtt ely i ll mpac t thett market price of our shares of common stock. ted the market price of many ff t The stock market has experienced extreme price and volume fluct companim es in industries similar or related to ours and that have been unrelated to these companies’ operating performance. These broad market fluctuations could reduce the market price of our shares of common stock. Furthermore, our operating results and prospects may be below the expectations of publiu c market analysts and investors or may be lower than those of izations, which could lead to a material decline in the market price of our shares of companim common stock. es with comparable market capital ions that have affecff uat a We have not established the future. ll a minimum dividend payment level and cannot assure stockholders ll of our abilityii to ptt ay divideii nds in income in each year (subjec We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxablea s us to qualify for the tax benefits accorded to a REIT under the Code. We have not establa ished a minimum dividend payment level and our ability to pay the reasons described in this section. All distributions will be made at the discretion of dividends may be adversely affecff our Board and will depend on our earnings, our financial condition, maintenance of our REIT status and such other fact ors as our Board may deem relevant from time to time. t to certain adjd ustments) is distributed. This enablea ted forff u ff 48 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 1A. Risk Factors SUBSIDIARIES Our reported GAAGG P finff ancial results dtt dd iffer ur GAAP results mtt requirements and, therefore, oe tt distribut ions. tt e resultsll ll from the taxabl e i ay not be an accurate indicatortt ncomii tt impactm that aa of future taxable our dividend distritt buti on income and dividend ii Generally, the cumulative net income we report over the life of an asset will be the same forff GAAP and tax purposes, although the timing of this income recognition over the life off nces exist in the accounting for GAAP net income and REIT taxable income that can lead to significant variances in the amount and timing of when income and losses are recognized under these two measures. Due to these differences, our reported GAAP finaff ncial results could materially differ fromff f the asset could be materially different. Differeff our determination of taxable income. Regulatory Risks Loss of Investment Companym Act exemptm iontt from registrati ii on would adversely affect us. We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If we were to become subject to the Investment Company Act, our abia lity to use leverage would be substantially reduced, and we would be unable to conduct our business as we currently conduct it. We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets in “mortgages and other liens on and interest in real estate” (“Qualifying Real Estate Assets”) and at least 80% of our assets in Qualifying Real Estate Assets plus our interests in MSRs and other real estate related assets. The assets that we acquire, therefore, are limited by this provision of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act. We rely on a SEC interpretation that “whole pool certificates” that are issued or guaranteed by Fannie Mae, Freddie Mac or tation Ginnie Mae (“Agency Whole Pool Certificates was promulgated by the SEC staff in a no-action letter over 30 years ago, was reaffirmed by the SEC in 1992 and has been commonly relied upon by mortgage REITs. ”) are Qualifying Real Estate Assets under Section 3(c)(5)(C). This interprerr ff On August 31, 2011, the SEC issued a concept release titled “Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments” (SEC Release No. IC-29778). In this concept release, the SEC announced it was reviewing interpretive issues related to the Section 3(c)(5)(C) exemptim on. Among other things, the SEC requested comments on whether it should revisit whether Agency Whole Pool Certificates may be treated as interests in real estate (and presumably Qualifying Real Estate Assets) and whether companim es, such as us, whose primary business consists of investing in Agency Whole Pool Certificates are the type of entities that Congress intended to be encompassed by the exclusion provided by Section 3(c)(5)(C). The potential outcomes of the SEC’s actions are unclear as is the SEC’s timetable forff its review and actions. If the SEC changes its views regarding which securities are Qualifying Real Estate Assets or real estate related assets, adopts a contrary interpretation with respect to Agency Whole Pool Certificates or otherwise believes we do not satisfy the exemption of these under Section 3(c)(5)(C), we could be required to restructure our activities or sell certain of our assets. The net effect factors will be to lower our net interest income. If we fail to qualify for exemption from registration as an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described. Our business will be materially and adversely affecff l to qualify for this exemption. ted if we faiff ff Changes in laws ow r regulati adversely affect our business. ii ll ons governing our operations tt or our failure to complym withii those laws oww r regulations tt may ral level, including securities and tax laws and financial ff We are subject to regulation by laws at the local, state and fede accounting and reporting standards. These laws and regulations, as well as their interpretation, may be changed from time to time. Accordingly, any change in these laws or regulations or the failur material adverse impactm ff on our business. Certain of these laws and regulations pertain specifically to REITs. e to comply with these laws or regulations could have a s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 49 ANNALY CAPITAL MANAGEMENT, INC. ANDAA SUBSIDIARIES ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our executive and administrative office is located at 1211 Avenue of the Americas New York, New York 10036, telephone 212-696-0100. This offiff ce is leased under a non-cancelablea lease expiring September 30, 2025. For a description of the commercial real estate properties we own as part of our investment portfolio, refer to the section titled “Schedule III – Real Estate and Accumulated Depreciation” of Item 15. “Exhibits, Financial Statement Schedules.” ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. At December 31, 2020, we were not party to any pending material legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES None. 50 ANNALY CAPITAL MANAGEMENT, INC. ANDAA SUBSIDIARIES Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock began trading publicly on October 8, 1997 and is traded on the New York Stock Exchange under the trading symbol “NLY.” As of February 2, 2021, we had 1,398,502,906 shares of common stock issued and outstanding which were roximately 433,000 beneficial holders. The equity compensation plan information called for by Item 201(d) of held by appa tion Plan Information.” Regulation S-K is set forth in Item 12 of Part III of this Form 10-K under the heading “Equity Compensa m Dividends ct to certain adjustments) consistent with the distribution requirements applicabla e to REITs. This will enablea We intend to pay quarterly dividends and to distribute to our stockholders all or substantially all of our taxable income in each us to year (subjeu qualify for the tax benefits accorded to a REIT under the Code. We have not established a minimum dividend payment level by factors beyond our control. In addition, unrealized changes in the and our ability to pay dividends may be adversely affected estimated fair value of available-for-sale investments may have a direct effect on dividends. All distributions will be made at the discretion of our Board and will depend on our earnings, our financial condition, maintenance of our REIT status and such tors as our Board may deem relevant from time to time. See also Item 1A. “Risk Factors.” No dividends can be paid other facff on our common stock unless we have paid full cumulative dividends on our preferred stock. From the date of issuance of our preferred stock through December 31, 2020, we have paid full cumulative dividends on our preferred stock. ff ff Share Performance Graph ff certain information comparim ng the yearly percentage change in cumulative total returnt The following graph and table set forth on our common stock to the cumulative total returnt of the Standard & Poor’s Composite 500 stock Index or S&P 500 Index, and the Bloomberg Mortgage REIT Index, or BBG REIT index, an industry index of mortgage REITs. The comparison is for the five-year period ended December 31, 2020 and assumes the reinvestment of dividends. The grapha and table assume that $100 was invested in our common stock and the two other indices on the last trading day of the initial year shown in the graph. Upon written request we will provide stockholders with a list of the REITs included in the BBG REIT Index. 51 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA SUBSIDIARIES Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities Five-Year Share Performance 225 200 175 150 125 100 75 50 25 12/31/15 12/30/16 12/29/17 12/31/18 12/31/19 12/31/20 Annaly Capital Management, Inc. S&P 500 Index BBG Reit Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 Annaly Capital Management, Inc. S&P 500 Index BBG REIT Index 100 100 100 119 112 122 157 136 147 146 130 143 156 171 177 160 203 137 The information in the share performance graph and table has been obtained froff m sources believed to be reliablea accuracy nor complem teness can be guaranteed. The historical information set forth above performance. Accordingly, we do not make or endorse any predictions as to futuret a share performance. , but neither the is not necessarily indicative of futuret The above performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subju ect to Regulation 14A or 14C under the Securities Exchange Act or to the liabila ities of Section 18 of the Securities Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act, except to the extent that we specifically incorporate it by reference into such a filff ing. Share Repurchase In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares, which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2021 (the “New Share Repurchase Program”). The New Share Repurchase Program replaced the Prior Share Repurchase Program. The following tablea the quarter ended December 31, 2020. sets forth information with respect to the Prior Share Repurchase Program forff 52 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities Total Number of Shares Purchased Average Price Paid Per Share (1) The Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plan (1) (dollars in thousands) 4,699,987 $ 4,699,987 7.29 4,699,987 $ 4,699,987 $ 1,067,886 1,067,886 October 1, 2020 - October 31, 2020 Total (1) Excludes commission costs. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 53 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 6. Selected Financial Data SUBSIDIARIES ITEM 6. SELECTED FINANCIAL DATA Not required. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 54 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements ff Certain statements contained in this annual report, and certain statements contained in our futuret filings with the SEC, in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” to a futff uret l results could differff “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actuat materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market o grow our commercial, residential value of our assets; changes in business conditions and the general economy; our abila credit and middle market businesses; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt; risks related to investments in MSRs; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT forff U.S. federal income tax purposes; our ability to maintain our exemption fromff Act; and risks and uncertainties related to Coronavirus Disease 2019 (“COVID-19”), including as related to adverse economic conditions on real- estate related assets and financing conditions. For a discussion of the risks and uncertainties which could cause actual results to differ froff m those contained in the forward-looking statements, see “Risk Factors” in this annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q or current reports on Form 8-K. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. registration under the Investment Companym t ity t nces to “Annaly,”ll All refereff where it is made clear thatt the end of this Iii 7 forff temII t thett defie nitions of commonly ull “we,” “us,” or “our” mean Annaly Cll MM apCC ital Manageme term means only the parent company. Refee r to thett II nt, It nc. and all entities owned by us, excepte section titled “Glossary of Terms” located at sed terms in this aii nnual report on FormFF 10-K.KK This section of our Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons betwett Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Fii be found in Part II, Item 7. “Management’s Discussion and Analysi year ended December 31, 2019. annual report inFF ancial Condition and Results ott on Form 10-K for thett O f Oo f Fo s oii e ll en 2020 and 2019. 10-K can ons” of our perati ormFF 55 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis INDEX TO ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Business Environment and COVID-19 Economic Environment London Interbank Offered Rate (“LIBOR”) Transition Working Group Results of Operations Net Income (Loss) Summary Non-GAAP Financial Measures Core earnings (excluding PAA), core earnings (excluding PAA) attributable to common stockholders, core earnings (excluding PAA) per average common share and annualized core return on average equity (excluding PAA) Premium Amortization Expense Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA) Experienced and Projected Long-term CPR Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA) and Average Economic Cost of Interest Bearing Liabilities Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities Realized and Unrealized Gains (Losses) Other Income (Loss) General and Administrative Expenses Return on Average Equity Unrealized Gains and Losses - Available-for-Sale Investments Financial Condition Residential Securities Contractual Obligations Off-Balance Sheet Arrangements Capital Management Stockholders’ Equity Capital Stock Leverage and Capital Risk Management Risk Appetite Governance Description of Risks Capital, Liquidity and Funding Risk Management Funding Excess Liquidity Maturity Profile Stress Testing Liquidity Management Policies Investment/Market Risk Management Credit Risk Management Counterparty Risk Management Operational Risk Management Compliance, Regulatory and Legal Risk Management Critical Accounting Policies and Estimates Valuation of Financial Instruments Residential Securities Residential Mortgage Loans MSRs Commercial Real Estate Investments Interest Rate Swaps Revenue Recognition Consolidation of Variable Interest Entities Use of Estimates Glossary of Terms 56 Page 57 57 58 59 59 60 61 62 64 64 65 66 66 67 68 69 69 69 70 71 73 73 74 74 75 75 76 76 76 77 78 78 80 81 82 82 83 83 85 85 86 86 86 86 87 87 87 87 87 88 88 89 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Overview We are a leading diversified capital manager that invests in and finances residential and commercial assets. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Prior to the closing of the Internalization (as defined in Item 1 under “Closing of the Internalization and Termination of the Management Agreement”) on June 30, 2020, we were externally managed by Annaly Management Company LLC (our “Former Manager”). Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” t We use our capital between the yield on our assets and the cost of our borrowings and hedging activities. coupled with borrowed funds to invest primarily in real estate related investments, earning the spread a For a fulff l discussion of our business, refer to the section titled “Business Overview” of Part I, Item 1. “Business.” Business Environment and COVID-19 The themes that have dominated financial markets since the elevated volatility seen in March and April 2020 remain unchanged. Fiscal stimulus has supported ed by COVID-19 while the Federal Reserve’s (“Fed”) unprecedented monetary policy actions eased finff ancial conditions and contained interest rate volatility. These of 5.1% for the fourth quarter and factors drove our strong performance to close out the year, delivering an economic returnt 1.8% for 2020. Throughout $1.4 billion aggregate in common and preferred dividends to our shareholders, signaling meaningful resilience following the historic disruption seen in March and April. businesses and consumers most negatively impactm the year, we returned u t Interest rates ended 2020 near their highest levels since the onset of the COVID-19 pandemic reflecting optimism about the post-COVID recovery in spite of negative developments of record U.S. virus cases, tighter restrictions and resulting lackluster economic growth particularly in the U.S. service sector. The rapid COVID-19 vaccine development and plans for deployment, combined with the relatively healthy consumer balance sheets, suggest that the U.S. economy may rebound at a faster pace than during traditional economic downturns once a majority of the population reaches immunity, though meaningful uncertainties remain about both the timing of immunity and the subsequent recovery pace. a a ff ff al allocation remained tilted towards Agency mortgage-backed securities (“MBS”), representing At the end of 2020, our capita 78% of the aggregate portfoli to 74% one year ago. However, this year-over-year snapshot masks more recent m o, compared increases in activity in our residential credit and middle market lending businesses, which saw strong investor sponsorship and improving fundamentals as markets signal a cyclical recovery. As Agency MBS spreads have continued to tighten given Fed ies. While and bank sector demand for the product, select credit sectors have allowed for targeted, attractive opportunit opportunistic, Annaly continues with its disciplined and defensive-minded credit focus, which is necessary grr iven overall tight asset spreads. t r uret Somewhat offsetting the effect from tight asset spreads, current financing conditions are among the most favorable seen in low level of rates and a Annaly’s history. The liquidity created through the Fed’s monetary policy actions have led to absolute flat term struct ncing conditions have allowed us to increase our net interest margin (excluding PAA) from 1.41% at the end of 2019 to 1.98% at the end of 2020, as cheaper finff ancing more than offset the decline in asset yields driven by the aforementioned spread compression. Additionally, securitization markets have rebounded substantially, resulting in better execution levels than one year ago, and provide attractive non-recourse term financing to bolster our residential credit asset investment strategy and diversify financing for our whole loan business. of the repo curve. Favorable finaff a Business Continuity Our well-established Business Continuity Planning (“BCP”) was designed to ensure continued, effecff tive operations through a variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise. The BCP is regularly updau top exercise scenarios with management. Key tenets of the planning include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of funct ions, and our internal and external stakeholders to affordff efficient, thoughtful, effective responses to evolving emergency situations ted and tested. Annual testing includes extensive, remote Disaster Recovery testing and tablea ff t . Historical tabletop exercises have included use of CDC Influenza Pandemic exercise materials. That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/ impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19. We took proactive actions, which included canceling non-essential travel and ng 100% remote working, ahead of New York State-mandated requirements. To protect the health and well-being of our instituti t ilies and communities remote work requirements began in phases in early March, culminating with a es, their famff m employe 57 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES company-wide exercise on March 13, 2020 to test connectivity and functionality. All emplom yees were abla e to successfully perform their duties in this testing and we have operated largely remotely since that time. A majority of our business activities continues to be performed remotely, though we have seen a limited number of employees returnt nd periodic basis. We continue to monitor guidance from federal, state and local authorities to gauge how to further proceed in any efforts to the office on a voluntary arr to the office. to returnt ff Economic Environment The pace of economic growth in 2020 slowed sharply, not only in the United States but worldwide, as the outbreak of the COVID-19 pandemic affecff ted nearly all ways of life and disrupted many aspects of the economy. The far-reaching consequences of the COVID-19 pandemic led U.S. gross domestic product (“GDP”) to decline by 3.5% year-over-year in 2020, in turn marking the largest decline in economic activity during a calendar year in more than 70 years. The disruptu ions caused by the pandemic were unique in that they primarily impacted the service sector of the economy, a sector that has been a source of relative stabila ity during prior economic downturns. Other parts of the economy, including goods consumption and housing, have recovered froff m the initial pandemic-driven downturn and these sectors are now above 2019 output levels. All of this suggests that the economy is currently relatively bifurcated, requiring U.S. health officials to work to defeat the virus before economic activity can returnt to pre-pandemic levels in aggregate. m ent rate seen in Decemberm 2019 according to the Bureau of Labor The sharp economic contraction led the unemployment rate to rise to 6.7% in December 2020, nearly twice as high as the ent rate unemploym likely understates the number of jobs lost in 2020 as the employm ment-to-population ratio fell to 57.4%, suggesting that 3.5% of the population, or roughly 9 million people, no longer held a job at the end of 2020 compared to one year ago. Wage growth, as measured by the year-over-year change in private sector average hourly earnings rose sharply, reading 5.1% in the month of December 2020 compared to 3.0% in December 2019. The sharp increase in wages, however, appears to be driven by changes in the underlying composition of employees by industry, as sectors with generally lower wages, such as leisure and hospitality services, have seen outsized job losses relative to sectors with higher wages. Alternative measures of wage growth, such as the Employment Cost Index or the Federal Reserve Bank of Atlanta’s Wage Tracker show meaningfulff Statistics. The rise in the unemploym ly less wage growth. m a Inflation remained muted into the economic downturn as measured by the year-over-year changes in the Personal Consumption Chain Price Index (“PCE”). The headline PCE measure increased by 1.3% year-over-year in December 2020. The Expendituret more stablea core PCE measure, which excludes volatile food and energy prices, registered a similar 1.5% year-over-year increase. Although both inflation measures remain somewhat below the Fed’s 2.0% inflation target, the Fed expects inflation to recover towards its target in coming years as the economy begins to recover from the economic downturn. ff a ment and price stabila olicy with a duald mandate: full The Fed conducts monetary prr ity. Given the contraction in economic employm activity witnessed following the outbreak of the COVID-19 pandemic, the Fed increased its monetary policy support at unprecedented speed and size. The target range for the Federal Funds rate was cut fromff 2019 to 0.0% - 0.25% in March 2020. Following the interest rate cuts, the Fed provided guidance that short-term interest rates will remain near current levels “until labor market conditions have reached levels consistent with the Fed assessments of maximum employm ent and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time” as stated in the m December 2020 Federal Open Market Committee meeting statement. In addition to the zero-interest rate policy, the Fed restarted its asset purchase programs, increasing its holdings of Treasury securities and Agency MBS by a total of $2.0 trillion and $631 billion, respectively. Asset purchases continued at the end of 2020 at a pace of $80 billion per month in Treasury securities and $40 billion per month in MBS. Beyond rate policy and asset purchases, the Fed also announced several lending programs to various other market sectors, such as corpora te bonds, municipals, and small businesses, among others. These lending programs largely concluded their activities at the end of December 2020 but could be revived should the economic t situati 1.50% - 1.75% in Decemberm on deteriorate. r During the year ended December 31, 2020, yields on the 10-year U.S. Treasury note declined by 101 bps primarily in the first half of the year as a sharp slowdown in global economic growth and heightened uncertainties around the economic recovery led to strong demand for interest rate products and the aforeff mentioned unprecedented fiscal and monetary stimulus. The mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, had a volatile year, rising meaningfully in the first quarter before retracing given strong demand for MBS in the second half of the year. 58 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES The folff lowing table below presents interest rates and spreads at each date presented: 30-Year mortgage current coupou n Mortgage basis 10-Year U.S. Treasury rate LIBOR 1-Month 6-Month As of December 31, 2020 1.34% 43 bps 0.91% 0.14% 0.26% 2019 2.71% 79 bps 1.92% 1.76% 1.91% 2018 3.50% 82 bps 2.68% 2.50% 2.88% London Interbank Offered Rate ( tt “LIBOR”) Transitiii on Working Group We have establa ished a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates. Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders. The committee also continues to engage with industry working groups and other market participants regarding the transition. In October 2020, as part of the transition from LIBOR, we participated in the Chicago Mercantile Exchange (“CME”) Group’s transitioning for price alignment and discounting for USD OTC cleared swaps from the daily effective federal funds rate to the secured overnight financing rate (“SOFR”). As a result of this activity, our existing swap aa nd swaption positions have been ng this transition were sold in the CME updated with the new SOFR discounting curve and basis swaps entered into durid Group’s auction on October 19, 2020. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability. Most U.S. LIBOR tenors have been extended from December 31, 2021 to June 2023. Similar to the rest of the market, the bulk of our exposure is in derivatives contracts. Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments with transition currently in process and adequate time left tff o resolve. See “Risks Related to Our Investing, Portfolio Management and Financing Activities-Changes in the method pursuant to which LIBOR is determined and potential discontinuation of LIBOR may affect our results.” Results of Operations The results of our operations are affected by various factors, many of which are beyond our control. Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A. “Risk Factors”. This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements. To supplu ement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers. Referff to the “Non-GAAP Financial Measures” section for additional information. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 59 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Net Income (Loss ) Ss (( ummaryr owing tablea The foll ff 31, 2020, 2019 and 2018. presents financial information related to our results of operations as of and for the years ended December As of and for the Years Ended December 31, 2020 2019 2018 (dollars in thousands, except per share data) $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2,229,625 899,112 1,330,513 (2,062,824) 53,314 239,198 (918,195) (28,423) (889,772) 1,391 (891,163) 142,036 (1,033,199) (0.73) (0.73) 1,414,659,439 1,414,659,439 86,403,446 99,663,704 14,103,589 5.1:1 6.2:1 13.6 % (0.89)% (6.31)% 1.46 % 2.44 % 1.09 % 1.35 % 20.2 % 16.4 % 8.92 2,645,069 1,106,989 1,538,080 415,444 1,696,167 1.10 12.03 % 1.74 % 2.90 % 1.34 % 1.56 % $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 3,787,297 2,784,875 1,002,422 (3,011,127) 136,413 301,634 (2,173,926) (10,835) (2,163,091) (226) (2,162,865) 136,576 (2,299,441) (1.60) (1.60) 1,434,912,682 1,434,912,682 127,402,106 123,202,411 15,325,340 7.1:1 7.2:1 % 12.0 (1.76)% (14.11)% 0.83 % % 3.15 2.57 % 0.58 % 12.7 % 13.9 % 9.66 4,042,191 2,433,500 1,608,691 254,894 1,575,396 1.00 10.28 % % 1.32 3.36 % 2.25 % 1.11 % 3,332,563 1,897,860 1,434,703 (1,162,984) 109,927 329,873 51,773 (2,375) 54,148 (260) 54,408 129,312 (74,904) (0.06) (0.06) 1,209,601,809 1,209,601,809 102,340,249 102,544,922 14,332,404 6.3:1 7.0:1 2.1 % 1 0.05 % 0.38 % 1.39 % .23 % 3 2.15 % .08 % 1 9.3 % 1 0.1 % 9.39 3,270,542 1,797,307 1,473,235 (62,021) 1,574,920 1.20 10.99 % .52 % 1 3.17 % 2 .04 % 1.13 % s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S Interest income Interest expense Net interest income Realized and unrealized gains (losses) Other income (loss) Less: Total general and administrative expenses e income taxes Income (loss) beforff Income taxes Net income (loss) Less: Net income (loss) attributable to noncontrolling interests Net income (loss) attributable to Annaly Less: Dividends on preferred stock Net income (loss) available (related) to common stockholders Net income (loss) per share available (related) to common stockholders Basic Diluted Weighted average number of common shares outstanding Basic Diluted Other information Asset portfolio at period-end Average total assets Average equity Leverage at period-end (1) Economic leverage at period-end (2) Capital ratio (3) Annualized return on average total assets Annualized return on average equity Net interest margin (4) Average yield on interest earning assets (5) Average GAAP cost of interest bearing liabilities (6) Net interest spread Weighted average experienced CPR for the period Weighted average projected long-term CPR at period-end Common stock book value per share Non-GAAP metrics (7) Interest income (excluding PAA) Economic interest expense Economic net interest income (excluding PAA) Premium amortization adjustment cost (benefit) Core earnings (excluding PAA) (8) Core earnings (excluding PAA) per common share Annualized core return on average equity (excluding PAA) Net interest margin (excluding PAA) (4) Average yield on interest earning assets (excluding PAA) (5) Average economic cost of interest bearing liabilities (6) Net interest spread (excluding PAA) 60 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES (1) (2) (3) (4) (5) (6) (7) (8) Debt consists of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable. Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued and mortgages payable are non-recourse to us. Computed as the sum of Recourse Debt, cost basis of TBA and CMBX derivatives outstanding and net forward purchases (sales) of investments divided by total equity. Calculated as total stockholders’ equity divided by total assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs. Net interest margin represents our interest income less interest expense divided by the average interest earning assets. Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances. Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA). Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. Excludes dividends on preferred stock. d GAAP to noncontrolling interests, or ($1.60) per average basic common share, forff Net income (loss) was ($889.8) million, which includes $1.4 million attributable to noncontrolling interests, or ($0.73) per the year ended December 31, 2020 compared to ($2.2) billion, which includes ($0.2) million average basic common share, forff attributablea the same period in 2019. We attribute ty of the change in net income (loss) to favff orable changes in net gains (losses) on other derivatives, net gains (losses) a the majori changes in the net interest on disposal of investments and other and net interest income, partially offset by unfavorablea component of interest rate swaps and net unrealized gains (losses) on instruments measured at faiff r value through earnings and realized gains (losses) on termination or maturi ty of interest rate swaps. Net gains (losses) on other derivatives was $756.3 million for the year ended December 31, 2020 compared to ($680.8) million for the same period in 2019. Net gains (losses) on disposal of investments and other was $661.5 million forff the year ended December 31, 2020 compared to ($47.9) million for the year ended December 31, 2020 was $1.3 billion compared to $1.0 billion the same period in 2019. Net interest income forff for the same period in 2019. The net interest component of interest rate swaps was ($207.9) million forff the year ended December 31, 2020 compared to $351.4 million forff the same period in 2019. Realized gains (losses) on termination or maturity to ($1.4) billion for the same period of interest rate swaps was ($1.9) billion for the year ended December 31, 2020 compared in 2019. Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 7 for additional information related to these changes. m t Non-GAAP Core earnings (excluding premium amortization adjustment (“PAA”)) were $1.7 billion, or $1.10 per average common share, the same period in for the year ended December 31, 2020, compared to $1.6 billion, or $1.00 per average common share, forff to the same period in 2019. The changes in core earnings (excluding PAA) for the year ended December 31, 2020 compared ities, and 2019 were primarily dued n income resulting from a decrease in the average yield on higher TBA dollar roll income, partially offset by lower coupou interest earnings assets and lower average interest earning assets, and unfavorablea changes in the net interest component of interest rate swaps.a to lower interest expense from lower borrowing rates and average interest bearing liabila m Non-GAAP Financi ii alii Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide the following non-GAAP financial measures: • • • • • (excluding PAA) attributablea core earnings (excluding PAA); core earnings common stockholders; core earnings (excluding PAA) per average common share; annualized core returnt PAA); interest income (excluding PAA); on average equity (excluding to • • • • • • economic interest expense; economic net interest income (excluding PAA); average yield on interest earning assets (excluding PAA); average economic cost of interest bearing liabia lities; net interest margin (excluding PAA); and net interest spread (excluding PAA). 61 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES ff ff or superior to, financ ial measures computed in accordance with These measures should not be considered a substitute for, GAAP. While intended to offer a full er understanding of our results and operations, non-GAAP financial measures also have limitations. For example, we may calculate our non-GAAP metrics, such as core earnings (excluding PAA), or the PAA, differently than our peers making comparam tive analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results. ff These non-GAAP measures provide additional detail to enhance investor understanding of our period-over-period operating performance and business trends, as well as forff assessing our performance versus that of industry peers. Additional information pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below. Core earnings (excluding PAA),A core earnings (excluding PAA) aA ttrit butable to common stockhol ll ders, ex(( cluding PAA)PP PAA) per average common share and annualizedii core return on average equity ( kk tt core earnings (excluding ff u through Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns prudent management of our diversified investment strategies. We generate net income by earning a net interest spread on our investment portfolio, which is a funct ion of interest income from our investment portfolio less financing, hedging and operating costs. Core earnings (excluding PAA), which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation and amortization expense on real estate and related intangibles, non-core income allocated to equity method investments and other non-core components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non- recurring items), and (f) income taxes (excluding the income tax effect of non-core income (loss) items), and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective. ff t We seek to fulff fill our principal business objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of our capita al allocation policy and risk governance framework. We believe these non-GAAP measures provide management and investors with additional details regarding our underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in ted in GAAP net income (loss) while others are reflected in other comprehensive fair value where certain instrume income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to on average equityt provide additional transparency into the operating performance of our portfolio. Annualized core returnt (excluding PAA), which is calculated by dividing core earnings (excluding PAA) over average stockholders’ equity, provides investors with additional detail on the core earnings generated by our invested equity capa ital. nts are reflecff q rr 62 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES The folff lowing table presents a reconciliation of GAAP finaff ncial results to non-GAAP core earnings for the periods presented: s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S GAAP net income (loss) Net income (loss) attributable to noncontrolling interests Net income (loss) attributable to Annaly Adjustments to exclude reported realized and unrealized (gains) losses Realized (gains) losses on termination or maturity of interest rate swaps Unrealized (gains) losses on interest rate swaps Net (gains) losses on disposal of investments and other Net (gains) losses on other derivatives Net unrealized (gains) losses on instruments measured at fair value through earnings Loan loss provision (1) Other adjustments Depreciation expense related to commercial real estate and amortization of intangibles (2) Non-core (income) loss allocated to equity method investments (3) Non-core other (income) loss (4) Transaction expenses and non-recurring items (5) Income tax effect of non-core income (loss) items TBA dollar roll income and CMBX coupon income (6) MSR amortization (7) Plus: Premium amortization adjustment cost (benefit) Core earnings (excluding PAA) (8) Dividends on preferred stock Core earnings (excluding PAA) attributable to common stockholders (8) GAAP net income (loss) per average common share Core earnings (excluding PAA) per average common share (8) GAAP return (loss) on average equity Core return on average equity (excluding PAA) (8) For the Years Ended December 31, 2020 2019 2018 (dollars in thousands, except per share data) $ (889,772) $ (2,163,091) $ 54,148 1,391 (226) (891,163) (2,162,865) (260) 54,408 1,917,628 904,532 (661,513) (756,305) 303,024 151,188 39,108 22,493 — 11,293 (17,603) 355,547 (97,506) 415,444 1,696,167 142,036 1,554,131 (0.73) 1.10 (6.31)% 12.03 % $ $ $ $ 1,442,964 1,210,276 47,944 680,770 (36,021) 16,569 40,058 21,385 — 19,284 (5,961) 123,818 (77,719) 254,894 1,575,396 136,576 1,438,820 (1.60) 1.00 (14.11)% 10.28 % $ $ $ $ (1,409) (424,081) 1,124,448 403,001 158,082 3,496 20,278 (12,665) 44,525 65,416 4,220 276,986 (79,764) (62,021) 1,574,920 129,312 1,445,608 (0.06) 1.20 0.38 % 10.99 % $ $ $ $ (1) Includes $3.6 million of loss provision on the Company’s unfunded loan commitments for the year ended December 31, 2020, which is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). Includes depreciation and amortization expense related to equity method investments. (2) (3) Represents unrealized (gains) losses allocated to equity interests in a portfolio of MSR which is a component of Other income (loss). (4) Represents the amount of consideration paid for the acquisition of MTGE in excess of the fair value of net assets acquired. This amount is primarily attributable to a decline in portfolio valuation between the pricing and closing dates of the transaction and is consistent with changes in market values observed for similar instruments over the same period. Includes costs incurred in connection with securitizations of residential whole loans. The year ended December 31, 2020 also includes costs incurred in connection with the Internalization, the CEO search process and a securitization of Agency mortgage-backed securities. The year ended December 31, 2019 also includes costs incurred in connection with the securitization of commercial loans and Agency mortgage-backed securities. The year ended December 31, 2018 also includes costs incurred in connection with the acquisition of MTGE Investment Corp. (5) (6) TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income totaled $5.8 million, $4.6 million and $2.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. (7) MSR amortization represents the portion of changes in fair value that is attributable to the realization of estimated cash flows on the Company’s MSR portfolio and is reported as a component of Net unrealized gains (losses) on instruments measured at fair value. (8) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures. From time to time, we enter into TBA forward contracts as an alternate means of investing in and financing Agency mortgage- an Agency mortgage-backed security backed securities. A TBA contract is an agreement to purchase or sell, for future delivery,rr with a specified issuer, term and coupon. A TBA dollar roll represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. The drop is a reflection of the expected net interest income froff m an investment in similar Agency mortgage-backed securities, net of an implied financing cost, that would be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the party providing the financing is the party that would retain all principal and interest payments accrued 63 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis during the financing period. Accordingly, TBA dollar roll income generally represents the economic equq ivalent of the net interest income earned on the underlying Agency mortgage-backed security less an implied financ ing cost. ff TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities. We record TBA derivatives at fair value on our Consolidated Statements of Financial Condition and recognize periodic changes in fair value in Net gains (losses) on other derivatives in our Consolidated Statements of Comprehensive Income (Loss), which includes both unrealized and realized gains and losses on derivatives (excluding interest rate swaps). nce in price between two TBA contracts with the same terms but diffeff rent TBA dollar roll income is calculated as the differeff settlement dates multiplied by the notional amount of the TBA contract. Although accounted forff as derivatives, TBA dollar rolls capture the economic equivalent of net interest income, or carry, on the underlying Agency mortgage-backed securitytt (interest income less an implied cost of financing). TBA dollar roll income is reported as a component of Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensive Income (Loss). The CMBX index is a synthetic tradablea index referencing a basket of 25 commercial mortgage-backed securities of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position t (referred to as purchasing protection) on the respective basket of commercial mortgage-backed securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized runni ng coupon on the contracted notional amount. Additionally, the protection seller is obligated to pay to the protection buyer the amount of principal losses and/dd or coupon shortfalls on the underlying commercial mortgage-backed securities as they occur. We report income (expense) on CMBX positions in Net gains (losses) on other derivatives in the Consolidated Statements of Comprehensi alent to interest income (expense) and therefore included in core earnings (excluding PAA). ve Income (Loss). The coupon payments received or paid on CMBX positions is equivq m r Premium Amortization ii Expex nse In accordance with GAAP, we amortize or accrete premiums or discounts into interest income for our Agency mortgage-backed securities, excluding interest-only securities, multifamily and reverse mortgages, taking into account estimates of futuret principal prepayments in the calculation of the effective yield. We recalculate the effective yield as differences between anticipated and actual prepayments occur. Using third-party model and market information to project future cash flows and expected remaining lives of securities, the effecti ve interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period. ff Our GAAP metrics include the unadjusted impact of amortization and accretion associated with this method. Certain of our t of the PAA, which quantifies the component of premium amortization representing the non-GAAP metrics exclude the effecff cumulative impactm on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term Constant Prepayment Rate (“CPR”). The following tablea and residential securities transferred or pledged to securitization vehicles, for the periods presented: of the PAA on premium amortization expense for our Residential Securities portfolio illustrates the impactm For the Years Ended December 31, 2020 2019 2018 (dollars in thousands) Premium amortization expense Less: PAA cost (benefit) Premium amortization expense (excluding PAA) $ $ 1,375,461 415,444 960,017 $ $ 1,113,786 254,894 858,892 $ $ 705,926 (62,021) 767,947 Interest income (excluding PAA), economic interest expense x and economic net interest income (excluding PAA)A Interest income (excluding PAA) represents interest income excluding the effect of the premium amortization adjd ustment, and serves as the basis forff deriving average yield on interest earning assets (excluding PAA), net interest spread (excluding PAA) and net interest margin (excluding PAA), which are discussed below. We believe this measure provides management and investors with additional detail to enhance their understanding of our operating results and trends by excluding the component of quarter-over-quarter changes in estimated long-term of premium amortization expense representing the cumulative effect ff 64 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES prepayment speeds related to our Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), which can obscure underlying trends in the performance of the portfolio. Economic interest expense is comprisem d of GAAP interest expense and the net interest component of interest rate swaps.a We use interest rate swaps to manage our exposure to changing interest rates on repurchase agreements by economically hedging cash flows associated with these borrowings. Accordingly, adding the net interest component of interest rate swapsa to interest expense, as computed in accordance with GAAP, reflects the total contractual interest expense and thus, provides investors with additional information about the cost of our financing strategy. We may use market agreed coupon (“MAC”) interest rate swaps in which we may receive or make a payment at the time of entering into such interest rate swap to compensate for the off-ff In accordance with GAAP, upfront payments associated with MAC interest rate swaps market nature of such interest rate swap.a are not reflecff nsive Income in the Consolidated Statements of Comprehe during the years ended December 31, 2020 and December 31, 2019. (Loss). We did not enter into any MAC interest rate swapsa ted in the net interest component of interest rate swapsa m Similarly, economic net interest income (excluding PAA), as computed below, provides investors with additional information to enhance their understanding of the net economics of our primary business operations. The following tables the aforementioned line items on a non-GAAP basis for each respective period: a provide GAAP measures of interest expense and net interest income and details with respect to reconciling ) Interest Income (excluding PAA) ( g For the years ended December 31, 2020 December 31, 2019 GAAP Interest Income PAA Cost (Benefit) Interest Income (excluding PAA) (1) (dollars in thousands) $ $ 2,229,625 3,787,297 $ $ 415,444 254,894 $ $ 2,645,069 4,042,191 December 31, 2018 (1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for (62,021) $ 3,332,563 $ $ 3,270,542 additional information on non-GAAP financial measures. ) Economic Interest Expense and Economic Net Interest Income (excluding PAA) p g ( Add: Net Interest Component of Interest Rate Swaps Economic Interest Expense (1) GAAP Interest Expense Less: Net Interest Component of Interest Rate Swaps GAAP Net Interest Income (dollars in thousands) Economic Net Interest Income (1) Add: PAA Cost (Benefit) Economic Net Interest Income (excluding PAA) (1) $ $ $ 899,112 2,784,875 1,897,860 $ $ $ 207,877 $ 1,106,989 (351,375) $ 2,433,500 (100,553) $ 1,797,307 $ $ $ 1,330,513 1,002,422 1,434,703 $ $ $ 207,877 $ 1,122,636 (351,375) $ 1,353,797 (100,553) $ 1,535,256 $ $ $ 415,444 254,894 $ $ 1,538,080 1,608,691 (62,021) $ 1,473,235 For the years ended December 31, 2020 December 31, 2019 December 31, 2018 (1) Represents a non-GAAP financial measure. Refer to disclosures within this section above for additional information on non-GAAP financial measures. Experienced and Projectedtt Long-Tgg ermTT CPR Prepayment speeds, as reflected by the CPR and interest rates vary according to the type of investment, conditions in financial markets, compem tition and other facff tors, none of which can be predicted with any certainty. In general, as prepayment speeds and expectations of prepayment speeds on our Agency mortgage-backed securities portfolio increase, related purchase premium amortization increases, presents the weighted average experienced CPR and weighted average projected long-term CPR on our Agency mortgage-backed securities portfolio as of and for the periods presented. thereby reducing the yield on such assets. The following tablea For the years ended 31, 2020 December 31, 2019 December 31, 2018 Experienced CPR (1) Long-term CPR (2) 20.2% 12.7% 9.3% 16.4% 13.9% 10.1% (1) (2) For the years ended December 31, 2020, 2019 and 2018, respectively. At December 31, 2020, 2019 and 2018, respectively. 65 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Averagea (excludingii (( Yield on Intertt est Earning Assets ( tt exc ludingii PAA),A Net Intertt est Spread (excluding PAA), Net Interett st Margin PAA) and Average Economic Cost of Interest Bearing Ln ii iabilities Net interest spread (excluding PAA), which is the difference between the average yield on interest earning assets (excluding PAA) and the average economic cost of interest bearing liabilities, which represents annualized economic interest expense divided by average interest bearing liabilities, and net interest margin (excluding PAA), which is calculated as the sum of interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swapsa divided by the sum of average interest earning assets plus average TBA contract and CMBX balances, provide management with additional measures of our profitability that management relies upon in monitoring the performance of the business. Disclosure of these measures, which are presented below, provides investors with additional detail regarding how management evaluates our performance. ) Net Interest Spread (excluding PAA) p g ( Average Interest Earning Assets (1) Interest Income (excluding PAA) (2) Average Yield on Interest Earning Assets (excluding PAA) (2) Average Economic Cost of Interest Bearing Liabilities (2)(3) Average Interest Bearing Liabilities Economic Interest Expense (2)(3) (dollars in thousands) For the years ended December 31, 2020 $91,198,821 $2,645,069 December 31, 2019 $120,389,507 $4,042,191 December 31, 2018 $103,227,574 $3,270,542 2.90% 3.36% 3.17% $82,719,182 $1,106,989 $108,355,575 $2,433,500 $88,216,125 $1,797,307 1.34% 2.25% 2.04% Economic Net Interest Income (excluding PAA) (2) $1,538,080 $1,608,691 $1,473,235 Net Interest Spread (excluding PAA) (2) 1.56 % 1.11 % 1.13 % (1) Based on amortized cost. (2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. (3) Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps. ) Net Interest Margin (excluding PAA) g g ( Interest Income (excluding PAA) (1) TBA Dollar Roll and CMBX Coupon Income (2) Net Interest Component of Interest Rate Swaps Interest Expense Subtotal Average Interest Earnings Assets Average TBA Contract and CMBX Balances Subtotal For the years ended (dollars in thousands) December 31, 2020 $2,645,069 December 31, 2019 $4,042,191 December 31, 2018 $3,270,542 355,547 123,818 276,986 (899,112) (207,877) $1,893,627 $91,198,821 17,442,023 $108,640,844 (2,784,875) (1,897,860) 351,375 100,553 $1,732,509 $120,389,507 10,953,117 $131,342,624 $1,750,221 $103,227,574 12,115,869 $115,343,443 Net Interest Margin (excluding PAA) (1) 1.74% 1.32% 1.52% (1) (2) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. TBA dollar roll income and CMBX coupon income each represent a component of Net gains (losses) on other derivatives. CMBX coupon income totaled $5.8 million, $4.6 million and $2.3 million for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively. Economic Intertt est ExpeEE nse and Average Economic Cost of Interest Bearing Liabilities Typically, our largest expense is the cost of interest bearing liabilities and the net interest component of interest rate swaps. The table below shows our average interest bearing liabilities and average economic cost of interest bearing liabilities as compared to average one-month and average six-month LIBOR for the periods presented. 66 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Economic Cost of Funds on Average Interest Bearing Liabilities g g Average Interest Bearing Liabilities Interest Bearing Liabilities at Period End Economic Interest Expense Average Cost of Interest Bearing Liabilities (1) Average One- Month LIBOR Average Six- Month LIBOR Average One- Month LIBOR Relative to Average Six- Month LIBOR Average Cost of Interest Bearing Liabilities Relative to Average One- Month LIBOR Average Cost of Interest Bearing Liabilities Relative to Average Six-Month LIBOR For the years ended (dollars in thousands) December 31, 2020 $ 82,719,182 December 31, 2019 $ 108,355,575 December 31, 2018 $ 88,216,125 $ 71,435,295 $ 1,106,989 $ 111,819,229 $ 2,433,500 $ 88,646,247 $ 1,797,307 1.34% 2.25% 2.04% 0.52% 2.22% 2.02% 0.69% 2.32% 2.49% (0.17%) (0.10%) (0.47%) 0.82% 0.03% 0.02% 0.65% (0.07%) (0.45%) (1) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information. 2020 Compared with 2019 Economic interest expense decreased by $1.3 billion for the year ended December 31, 2020 compared to the same period in 2019. The change was dued to lower borrowing rates and decreases in average interest bearing liabilities, partially offset by the change in the net interest component of interest rate swaps,a which was ($207.9) million for the year ended December 31, 2020 compared to $351.4 million forff the same period in 2019. ff We do not manage our portfolio to have a pre-designated amount of borrowings at quarter or year end. Our borrowings at period end are a snapshot of our borrowings as of a date, and this number may differ from average borrowings over the period for a number of reasons. The mortgage-backed securities we own pay principal and interest towards the end of each month and the mortgage-backed securities we purchase are typically settled during the beginning of the month. As a result, depending on the amount of mortgage-backed securities we have committed to purchase, we may retain the principal and interest we receive in the prior month, or we may use it to pay down our borrowings. Moreover, we generally use interest rate swaps, swaptia ons and other derivative instruments to hedge our portfolio, and as we pledge or receive collateral under these agreements, our borrowings on any given day may be increased or decreased. Our average borrowings during a quarter may differ froff m period end borrowings as we implem ment our portfolio management strategies and risk management strategies over changing market conditions by increasing or decreasing leverage. Additionally, these numbers may differ during periods when we conduct equity capia tal raises, as in certain instances we may purchase additional assets and increase leverage in anticipation of an equity capital raise. Since our average borrowings and period end borrowings can be expected to differ, we believe our average borrowings during a period provide a more accurate representation of our exposure to the risks associated with leverage than our period end borrowings. ff s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A ity of our debt represented repurchase agreements and other secured financing At December 31, 2020 and 2019, the majora arrangements collateralized by a pledge of our Residential Securities, residential mortgage loans, commercial real estate investments and corporate loans. All of our Residential Securities are currently accepted as collateral forff these borrowings. However, we limit our borrowings, and thus our potential asset growth, in order to maintain unused borrowing capacity and maintain the liquidity and strength of our balance sheet. Realizedii and Unrealized ll Gains (Losses) Realized and unrealized gains (losses) is comprised of net gains (losses) on interest rate swapsa , net gains (losses) on disposal of investments and other, net gains (losses) on other derivatives and net unrealized gains (losses) on instruments measured at fair value through earnings. These components of realized and unrealized gains (losses) for the years ended December 31, 2020, 2019 and 2018 were as follows: ff x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 67 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis For the Years Ended December 31, 2020 2019 2018 (dollars in thousands) Net gains (losses) on interest rate swaps (1) $ (3,030,037) $ (2,301,865) $ 526,043 Net gains (losses) on disposal of investments and other Net gains (losses) on other derivatives Net unrealized gains (losses) on instruments measured at fair value through earnings Loan loss provision Total 661,513 756,305 (303,024) (147,581) (47,944) (680,770) 36,021 (16,569) (1,124,448) (403,001) (158,082) (3,496) $ (2,062,824) $ (3,011,127) $ (1,162,984) (1)(1) l d Includes hthe net iinterest component rate swaps unrealized gains li d gains (l fof iinterest rate swaps, (losses) on iinterest rate swaps. dand ) realized gains gains (l li d (losses) on ) termination or maturity maturity fof iinterest i i 2020 Compared with 2019 Net gains (losses) on interest rate swaps for the year ended December 31, 2020 was ($3.0) billion compared to ($2.3) billion for the same period in 2019, attributable to an unfavorablea change in the net interest component of interest rate swaps and higher realized losses on termination or maturity of interest rate swaps, partially offset by lower unrealized losses on interest rate swaps. The net interest component of interest rate swaps was ($207.9) million for the year ended December 31, 2020, compared to $351.4 million for the same period in 2019, reflecting a decrease in rates combined with the timing of rate resets during the period and changes in notional balance. Realized gains (losses) on termination or maturity of interest rate swapsa was ($1.9) billion resulting from interest rate swaps with a notional amount of $104.1 billion for the year ended December 31, 2020 comparem d to ($1.4) billion resulting from the termination or maturity of interest rate swaps with a notional amount of $88.6 billion for the same period in 2019. Unrealized gains (losses) on interest rate swaps was ($0.9) billion for the year ended December 31, 2020 compared to ($1.2) billion for the same period in 2019, which reflected a steeper decline in forward interest rates during the earlier period. ff Net gains (losses) on disposal of investments and other was $661.5 million forff the year ended December 31, 2020 compared with ($47.9) million for the same period in 2019. For the year ended December 31, 2020, we disposed of Residential Securities with a carrying value of $51.8 billion for an aggregate net gain of $637.0 million. For the same period in 2019, we disposed of Residential Securities with a carrying value of $25.5 billion for an aggregate net loss of ($37.8) million. Net gains (losses) on other derivatives was $756.3 million for the year ended December 31, 2020 compared to ($680.8) million for the same period in 2019. The change in net gains (losses) on other derivatives was primarily comprised of changes in net gains (losses) on futures contracts, which was ($280.1) million for the year ended December 31, 2020 compared to ($962.7) million for the same period in 2019 and higher net gains on TBA derivatives, which was $985.4 million for the year ended the same period in 2019. December 31, 2020 comparem d to $326.8 million forff m r value through earnings was ($303.0) million for the year ended Net unrealized gains (losses) on instruments measured at faiff December 31, 2020 compared to $36.0 million for the same period in 2019, primarily due to unfavorablea changes in unrealized gains (losses) on Agency interest-only securities, non-Agency mortgage-backed securities, commercial securitized loans of consolidated VIEs and residential credit risk transfer securities, partially offset by favora bla e changes in unrealized gains (losses) on commercial debt issued by securitization vehicles for the year ended December 31, 2020 compared to the same period in 2019. ff For the year ended December 31, 2020, a loan loss provision of ($147.6) million was recorded on commercial mortgage and the same period in 2019. Refer to the “Loans” Note located within Item 15 for corporate loans compared additional information related to these loan loss provisions. to ($16.6) million forff m II Other Income (Loss) Other income (loss) includes certain revenues and costs associated with our investments in commercial real estate, including rental income and recoveries, net servicing income on MSRs, operating costs as well as depreciation and amortization expense. We report in Other income (loss) items whose amounts, either individually or in the aggregate, would not, in the opinion of management, be meaningful to readers of the financial statements. Given the nature of certain components of this line item, balances may fluctuate from period to period. t 68 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis General and Administrativtt e Expenses EE General and administrative (“G&A”) expenses consist of compensation and management fee (until closing of the Internalization on June 30, 2020) and other expenses. The following table shows our total G&A expenses as compared to average total assets and average equity for the periods presented. p G&A Expenses and Operating Expense Ratios p p g For the years ended 31, 2020 December 31, 2019 December 31, 2018 Total G&A Expenses (1) Total G&A Expenses/ Average Assets (1) (dollars in thousands) Total G&A Expenses/ Average Equity (1) $ $ $ 239,198 301,634 329,873 0.24 % 0.24 % 0.32 % 1.70 % 1.97 % 2.30 % (1) Includes $11.3 million of transaction costs incurred in connection with securitizations of residential whole loans and Agency mortgage-backed securities as well as costs incurred in connection with the Internalization and costs incurred in connection with the CEO search process for the year ended December 31, 2020. Includes $19.3 million of transaction costs incurred in connection with securitizations of residential whole loans, commercial loans and Agency mortgage-backed securities for the year ended December 31, 2019. Excluding these transaction costs, G&A expenses as a percentage of average total assets and as a percentage of average equity were 0.23% and 1.62%, respectively, and 0.23% and 1.84%, respectively, for the years ended December 31, 2020 and 2019, respectively. 2020 Compared with 2019 G&A expenses decreased $62.4 million to $239.2 million for the year ended December 31, 2020 compared to the same period in 2019. The change was primarily due to lower compensation costs, reflecting cost savings related to the Internalization and lower management fees and expense reimbursements to our Former Manager in the first half of 2020 reflecting lower adjusted stockholders’ equity balances compared to the same period in 2019, and lower transaction costs during the year ended December 31, 2020 compared to the same period in 2019. Return on Average Equityii The following tablea shows the component m s of our annualized return on average equity q for the periods presented. y Components of Annualized Return on Average Equity q p g Economic Net Interest Income/ Average Equity (1) Realized and Unrealized Gains and Losses/ Average Equity (2) Other Income (Loss)/Average Equity G&A Expenses/ Average Equity Income Taxes/ Average Equity Return on Average Equity For the years ended December 31, 2020 December 31, 2019 7.96 % 8.83 % (13.15%) (21.93%) 0.38 % 0.89 % December 31, 2018 0.76% 10.71 % (1) Economic net interest income includes the net interest component of interest rate swaps. (2) Realized and unrealized gains and losses excludes the net interest component of interest rate swaps. (8.81%) (1.70%) (1.97%) (2.30%) 0.20% 0.07% 0.02% (6.31%) (14.11%) 0.38% Unrealizll ed Gainsii ll and Losses - Availabl e-for-Sale ll Investmentstt With our available-for-sale accounting treatment on our Agency mortgage-backed securities, which represent the largest portion of assets on balance sheet, as well as certain commercial mortgage-backed securities, unrealized fluctuations in market values of assets do not impactm ted on our balance sheet by changing the carrying value of the asset and stockholder nder accumulated other comprehensive income (loss). As a result of this fair value k accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used amortized cost accounting. As a result, comparisons with companies that use amortized cost accounting for some or all of their balance sheet may not be meaningful. our GAAP net income (loss) but rather are reflecff s’ equity ut The tabla e below shows cumulative unrealized gains and losses on our availablea Consolidated Statements of Financial Condition. -for-sale investments reflected in the 69 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis gain Unrealized loss Accumulated other comprehensive income (loss) December 31, 2020 December 31, 2019 (dollars in thousands) 3,378,523 $ 2,267,577 (4,188) (129,386) 3,374,335 $ 2,138,191 $ $ Unrealized changes in the estimated fair value of availablea on our potential earnings and dividends: positive changes will increase our equity base and allow us to increase our borrowing capaa city while -sale negative changes tend to redud ce borrowing capac Residential Securities might impair our liquidity position, requiring us to sell assets with the potential result of realized losses upon sale. ity. A very large negative change in the net fair value of our available-forff -for-sale investments may have a direct effect a ff The fair value of these securities being less than amortized cost at December 31, 2020 is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied we currently have the abia lity “AAA” rating. The investments are not considered to be other-than-temporm arily impaired becausea and intent to hold the investments to maturi casted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that we will be required to sell the investments before ty. Also, we are guaranteed payment of the principal and interest t recovery of the amortized cost bases, which may be maturi amounts of the securities by the respective issuing Agency. ty or for a period of time sufficient for a foreff t Financial Condition Total assets were $88.5 billion and $130.3 billion at December 31, 2020 and 2019, respectively. The change, consistent with our portfolio repositioning to strengthen our balance sheet in the first quarter of 2020, was primarily due to a decrease in including assets transferred or pledged to securitization vehicles, Agency mortgage-backed securities of $39.3 billion, investments of $0.4 billion. Our portfolio residential mortgage loans of $0.7 billion and commercial real estate debt m composit allocation and debt-to-net equity ratio by asset class were as follows at December 31, 2020: ion, net equity q Residential Commercial Agency MBS and MSRs TBAs (1) Residential CRTs Assets Non- Agency MBS and Residential Mortgage Loans (2) CRE Debt & Preferred Equity Investments (dollars in thousands) Investments in CRE Corporate Debt Total (3) Fair value/carrying value $74,788,301 $20,373,197 $ 532,403 $ 4,567,253 $ 3,619,245 $ 656,314 $ 2,239,930 $ 86,403,446 Debt Repurchase agreements Other secured financing Debt issued by securitization vehicles Participations issued Net forward purchases Mortgages payable Net equity allocated Net equity allocated (%) Debt/net equity ratio 62,744,910 20,277,088 245,686 1,235,162 599,481 4,434 573,413 — 865,081 — — — — — — — — — — — 25,987 — 2,617,000 2,462,569 39,198 3,076 — — — — — — — — — 426,256 — 64,825,239 887,455 917,876 — — — — 5,652,982 39,198 868,157 426,256 $10,600,463 $ 96,109 $ 286,717 $ 646,830 $ 557,195 $ 230,058 $ 1,352,475 $ 13,673,738 (4) 78 % 6.1:1 1 % NM 2 % 0.9:1 5 % 6.1:1 4 % 5.5:1 1 % 1.9:1 10 % 0.7:1 100 % 5.1:1 (5) (1) (2) (3) (4) Fair value/carrying value represents implied market value and repurchase agreements represent the cost basis. Includes loans held for sale, net. Excludes the TBA asset, debt and equity balances. Net Equity Allocated, as disclosed in the above table, excludes non-portfolio related activity and may differ from stockholders’ equity per the Consolidated Statements of Financial Condition. Represents the debt/net equity ratio as determined using amounts on the Consolidated Statements of Financial Condition. (5) NM Not meaningful. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 70 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis dd Residentia l Secur SS ities u ially all of our Agency mortgage-backed securities at December 31, 2020 and December 31, 2019 were backed by Substant single-family residential mortgage loans and were secured with a first lien position on the underlying single-family properties. ff Our mortgage-backed securities were largely Freddie Mac, Fannie Mae or Ginnie Mae pass through certificates or CMOs, which carry an actual or implied “AAA” rating. We carry arr value on the Consolidated Statements of Financial Condition. ll of our Agency mortgage-backed securities at fair ff We accrete discount balances as an increase to interest income over the expected life of the related interest earning assets and we amortize premium balances as a decrease to interest income over the expected life of the related interest earning assets. At December 31, 2020 and December 31, 2019 we had on our Consolidated Statements of Financial Condition a total of $88.3 million and $156.9 million, respectively, of unamortized discount (which is the difference between the remaining principal value and current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price below principal value) and a total of $4.0 billion and $5.3 billion, respectively, of unamortized premium (which is the differeff nce between the remaining principal value and the current amortized cost of our Residential Securities, excluding securities transferred or pledged to securitization vehicles, acquired at a price above principal value). a The weighted average experienced prepayment speed on our Agency mortgage-backed securities portfolio forff the years ended December 31, 2020 and 2019 was 20.2% and 12.7%, respectively. The weighted average projected long-term prepayment speed on our Agency mortgage-backed securities portfolio as of December 31, 2020 and 2019 was 16.4% and 13.9%, respectively. Given our current portfolio composition, if mortgage principal prepayment rates were to increase over the life of our mortgage- backed securities, all other facff tors being equal, our net interest income would decrease during the life of these mortgage-backed securities as we would be required to amortize our net premium balance into income over a shorter time period. Similarly, if mortgage principal prepayment rates were to decrease over the life off f our mortgage-backed securities, all other factors being equal, our net interest income would increase during the life of these mortgage-backed securities as we would amortize our net premium balance over a longer time period. lowing tables present our Residential Securities, excluding securities transferred or pledged to securitization vehicles, The folff that were carried at faiff r value at December 31, 2020 and December 31, 2019. Agency Fixed-rate pass-through Adjustable-rate pass-through CMO Interest-only Multifamily Reverse mortgages Total agency securities Residential credit Residential CRT Alt-A Prime Prime Interest-only Subprime NPL/RPL Prime jumbo (>= 2010 vintage) Prime jumbo (>= 2010 vintage) interest-only Total residential credit securities Total Residential Securities December 31, 2020 December 31, 2019 Estimated Fair Value (dollars in thousands) 71,302,578 477,516 149,767 421,909 1,663,507 51,782 74,067,059 532,403 80,328 181,509 1,240 188,433 475,847 43,283 1,552 1,504,595 75,571,654 $ $ $ $ $ 108,723,414 1,524,331 160,016 708,562 1,717,197 59,847 112,893,367 531,322 151,383 276,257 3,167 348,979 164,268 184,664 7,150 1,667,190 114,560,557 $ $ $ $ $ 71 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis The folff lowing tabla e summarizes certain characteristics of our Residential Securities (excluding interest-only mortgage-backed securities) and interest-only mortgage-backed securities, excluding securities transferred or pledged to securitization vehicles, at December 31, 2020 and December 31, 2019. Residential Securities (1) Principal amount Net premium Amortized cost Amortized cost / principal amount Carrying value Carrying value / principal amount Weighted average coupou n rate Weighted average yield Adjustable-rate Residential Securities (1) Principal amount Weighted average coupon rate Weighted average yield Weighted average term to next adjustment Weighted average lifetime cap (2) Principal amount at period end as % of total residential securities Fixed-rate Residential Securities (1) Principal amount Weighted average coupon rate Weighted average yield Principal amount at period end as % of total residential securities Interest-only Residential Securities Notional amount Net premium Amortized cost Amortized cost / notional amount Carrying value Carrying value / notional amount Weighted average coupon rate Weighted average yield December 31, 2020 December 31, 2019 (dollars in thousands) $ $ 68,521,464 3,280,439 71,801,903 104.79 % 75,116,466 109.62 % 3.58 % 2.86 % 107,412,143 4,309,668 111,721,811 104.01 % 113,841,402 105.99 % 3.91 % 3.07 % $ 1,257,966 $ 2,513,310 $ $ 3.20 % 5.20 % 15 Months 0.41 % 1.84 % 4.13 % 3.52 % 13 Months 8.24 % 2.34 % 67,263,498 $ 104,898,833 3.58 % 2.82 % 98.16 % $ 3,642,143 602,790 602,790 16.55 % 455,188 12.50 % 3.99 % NM 3.90 % 3.06 % 97.66 % 5,447,193 876,129 876,129 16.08 % 719,155 13.20 % 3.29 % 1.73 % (1) Excludes interest-only mortgage-backed securities. (2) Excludes non-Agency mortgage-backed securities and CRT securities as this attribute is not applicable to these asset classes. NM Not meaningful. The following tablea s summarize certain characteristics of our Residential Credit portfolio at December 31, 2020. Product Total Senior (dollars in thousands) Subordinate Coupon Credit Enhancement 60+ Delinquencies 3M VPR (1) Payment Structure Investment Characteristics Agency credit risk transfer Private label credit risk transfer Alt-A Prime Prime interest-only Subprime Re-performing loan securitizations Non-performing loan securitizations Prime jumbo (>=2010 vintage) Prime jumbo (>=2010 vintage) interest-only Total/weighted average (2) $ 508,685 $ — $ 508,685 23,718 80,328 181,509 1,240 188,433 467,702 8,145 43,283 1,552 — 25,286 12,128 1,240 96,468 227,558 8,145 — 1,552 23,718 55,042 169,381 4.03 % 4.81 % 3.73 % 4.44 % — 0.47 % 91,965 240,144 1.85 % 4.34 % — 3.67 % 43,283 3.87 % — 0.35 % 1.28 % 0.97 % 9.70 % 7.02 % — % 17.95 % 30.93 % 32.18 % 3.35 % — $1,504,595 $ 372,377 $ 1,132,218 3.88 % 13.86 % 4.66 % 0.86 % 17.40 % 8.94 % 5.21 % 14.08 % 28.12 % 82.18 % 4.23 % 4.59 % 14.62 % 44.40 % 43.63 % 18.86 % 30.73 % 45.03 % 8.80 % 9.95 % 3.70 % 51.33 % 53.22 % 28.20 % s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S (1)(1) (2) Represents hthe 3 m honth voluntary voluntary pre ypayment rate ( (“VPR”). ) Total investment characteristics exclude the impact of IOs. 72 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Product ARM Fixed Floater Interest-Only Bond Coupon Agency credit risk transfer Private label credit risk transfer Alt-A Prime Prime interest-only Subprime Re-performing loan securitizations Non-performing loan securitizations Prime jumbo (>=2010 vintage) Prime jumbo (>=2010 vintage) interest-only (dollars in thousands) $ — $ — 18,133 40,859 — 7,486 — — — — — $ 508,594 $ — 48,629 135,887 — 71,776 467,702 8,145 43,283 — 23,718 13,566 4,763 — 108,939 — — — — 91 — — — 1,240 232 — — — 1,552 Estimated Fair Value $ 508,685 23,718 80,328 181,509 1,240 188,433 467,702 8,145 43,283 1,552 Total $ 66,478 $ 775,422 $ 659,580 $ 3,115 $ 1,504,595 Contractual Obligati i ons The following tablea The tablea will fluct ff of ($1.0) billion. summarizes the effecff from contractual obligations at December 31, 2020. does not include the effect of net interest rate payments on our interest rate swap aa greements. The net swap payments uate based on monthly changes in the receive rate. At December 31, 2020, the interest rate swaps had a net fair value t on our liquidity and cash flows ff Within One Year One to Three Years Three to Five Years (dollars in thousands) More than Five Years Total Repurchase agreements Interest expense on repurchase agreements (1) Other secured financing Interest expense on other secured financing (1) Debt issued by securitization vehicles (principal) $ 64,641,177 $ 184,062 $ 41,588 30,420 20,112 — 2,861 — 39,190 — Interest expense on debt issued by securitization vehicles 133,669 267,338 Participations issued (principal) Interest expense on participations issued Mortgages payable (principal) Interest expense on mortgages payable Long-term operating lease obligations Total — 1,669 9,706 18,426 3,918 — 3,338 41,325 34,211 7,724 — $ — 887,456 15,868 167,670 267,338 — 3,338 289,124 26,184 6,757 — $ 64,825,239 — — — 5,481,520 2,833,063 37,365 44,989 89,495 58,885 — 44,449 917,876 75,170 5,649,190 3,501,408 37,365 53,334 429,650 137,706 18,399 $ 64,900,685 $ 580,049 $ 1,663,735 $ 8,545,317 $ 75,689,786 (1) Interest expense on repurchase agreements and other secured financing calculated based on rates at December 31, 2020. In the coming periods, we expect to continue to finance our Residential Securities in a manner that is largely consistent with our , mortgages payable or other current operations via repurchase agreements. We may use securitization structures, credit facilities term financing structures to finance certain of our assets. During the year ended December 31, 2020, we received $19.6 billion from principal repayments and $52.6 billion in cash from disposal of Residential Securities. During the year ended December 31, 2019, we received $17.2 billion from principal repayments and $25.5 billion in cash from disposal of Residential Securities. ff t ll Off-Balance Sheet Arrangements We do not have any relationships with unconsolidated entities or financial partnerships which would have been establa ished forff the sole purpose of facilitating off-balance sheet arrangements or other contractuat lly narrow or limited purposes. We have limited future funding commitments related to certain of our unconsolidated joint ventures. In addition, we have provided customary non-recourse carve-out and environmental guarantees (or underlying indemnities with respect thereto) with respect to mortgage loans held by subsidiaries of these unconsolidated joint ventures. We believe that the likelihood of making any payments under these guarantees is remote, and have not accrued a related liability at December 31, 2020. t 73 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Capital Management Maintaining a strong balance sheet that can support the business even in times of economic stress and market volatility is of critical importance to our business strategy. A strong and robust capital position is essential to executing our investment al position, which enables us to execute our investment strategy strategy. Our capita ng a comprehensive regardless of the market environment. Our capita capia tal management practice. al policy defines the parameters and principles supporti l strategy is predicated on a strong capita u a a risks impacm ting capita The majora al, liquidity and funding risk, investment/market risk, credit risk, counterparty risk, operational risk and complim ance, regulatory and legal risk. For further discussion of the risks we are subject to, please see Part I, Item 1A. “Risk Factors” of this annual report on Form 10-K. al are capita al requirements are based on maintaining levels above approved thresholds, ensuring the quality of our capita Capita al appropriately reflects our asset mix, market and funding structure. In the event we fall short of our internal thresholds, we will ate actions which may include asset sales, changes in asset mix, reductions in asset purchases or originations, a consider appropri issuance of capital al enhancing or risk reduction strategies. or other capita a Stockholders’ Equity The following tablea provides a summary of total stockholders’ equity at December 31, 2020 and 2019: Stockholders’ equity 7.50% Series D cumulative redeemable preferred stock 6.95% Series F fixff ed-to-floating rate cumulative redeemable preferred stock ff 6.50% Series G fixed-to-floating rate cumulative redeemable preferred stock ff 6.75% Series I fixed-to-floating rate cumulative redeemable preferred stock Common stock Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders’ equity December 31, 2020 December 31, 2019 (dollars in thousands) — 696,910 411,335 428,324 13,982 19,750,818 3,374,335 (10,667,388) $ 14,008,316 $ 445,457 696,910 411,335 428,324 14,301 19,966,923 2,138,191 (8,309,424) 15,792,017 74 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGE A Item 7. Management’s Discussion and Analysis MENT, INC. ANDAA SUBSIDIARIES ii Capital Stock Common Stock SS The following tablea presented: provides activity related to our Direct Purchase and Dividend Reinvestment Program for the periods Shares issued through direct purchase and dividend reinvestment program Amount raised from direct purchase and dividend reinvestment program $ For the Years Ended December 31, 2020 December 31, 2019 (dollars in thousands) 166,000 1,175 $ 180,000 1,795 During the year ended December 31, 2019, we closed the public offeff ring of an original issuance of 75.0 million shares of g, we granted common stock forff the underwriters a thirty-day option to purchase up to an additional 11.3 million shares of common stock, which the underwriters exercised in full resulting in an additional $109.6 million in proceeds before deducting offering expenses. proceeds of $730.5 million before deducting offering expenses. In connection with the offerin ff In June 2019, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding shares of common stock, which expired on December 31, 2020 (“the Prior Share Repurchase Program”). In December 2020, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2021 (the “New Share Repurchase Program”). The New Share Repurchase Program replaced the Prior Share Repurchase Program. During the years ended December 31, 2020 and 2019, we repurchased 32.4 million and 26.2 million shares of our an aggregate amount of $208.9 million and $223.2 million, excluding commission costs, respectively. All common stock forff common shares purchased were part of a publicly announced plans in open-market transactions. No shares were issued under the at-the-market sales program durid ng the year ended December 31, 2020. During the years ended December 31, 2019, we issued 56.0 million shares of common stock for proceeds of $569.1 million, net of commissions and fees, under the at-the-market sales program. No options were exercised during d the years ended December 31, 2020, and 2019. ff Preferre k d StocSS During the year ended December 31, 2020, the Company redeemed all 18.4 million of its issued and outstanding shares of 7.50% Series D Cumulative Redeemable Preferred Stock (“Series D Preferred Stock”) for $460.0 million. The cash redemptim on amount for each share of Series D Preferred Stock was $25.00. ff During the year ended December 31, 2019, we redeemed all 7.0 million of our issued and outstanding shares of 7.625% Series C Cumulative Redeemable Preferff red Stock (“Series C Preferred Stock”) for $175.0 million. The cash redemption amount for each share of Series C Preferred Stock was $25.00 plus accrued and unpaid dividends to, but not including, the redemptim on date of July 21, 2019. During the year ended December 31, 2019, we redeemed all 2.2 million of our issued and outstanding shares of 8.125% Series H Cumulative Redeemable Preferred Stock (“Series H Preferred Stock”) forff $55.0 million. The cash redemption amount for each share of Series H Preferred Stock was $25.00 plus accruedrr and unpaid dividends to, but not including, the redemptim on date of May 31, 2019. During the year ended December 31, 2019, we issued 17.7 million shares of our 6.750% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock forff gross proceeds of $442.5 million before deducting the underwriting discount and other estimated offering costs. Leverage and Capital We believe that it is prudent to maintain conservative debt-to-equity and economic leverage ratios as there may be continued l policy governs our capital and leverage position including setting volatility in the mortgage and credit markets. Our capita limits. Based on the guidelines, we generally expect to maintain an economic leverage ratio of less than 10:1. Our actual economic leverage ratio varies from time to time based upon various factors, including our management’s opinion of the level of risk of our assets and liabila ty of credit, over- ities, our liquidity position, our level of unused borrowing capacity,t collateralization levels required by lenders when we pledge assets to secure borrowings and our assessment of domestic and the availabili a a s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 75 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis international market conditions. Our debt-to-equity ratio at December 31, 2020 and 2019 was 5.1:1 and 7.1:1, respectively. Our economic leverage ratio, which is computed as the sum of Recourse Debt, cost basis of TBA derivative and CMBX notional outstanding, and net forward purchases (sales) of investments divided by total equity, at December 31, 2020 and 2019 was 6.2:1 and 7.2:1, respectively. Our capia tal ratio, which represents our ratio of stockholders’ equity to total assets (inclusive of total market value of TBA derivatives and shown net of debt issued by securitization vehicles), was 13.6% and 12.0% at December 31, 2020 and 2019, respectively. Risk Management For more information on COVID-19, including actions we have taken in response, please refer to the section titled “Business Environment and COVID-19” within this Item 7. We are subject to a variety of risks in the ordinary conduct of our business. The effective management of these risks is of critical importance to the overall success of Annaly. The objecb tive of our risk management framework is to identify, measure and monitor these risks. Our risk management framework is intended to facilitate a holistic, enterprise wide view of risk. We have built a strong and throughout Annaly focused on awareness which supports appropriate understanding and collaborative risk management culturet management of our key risks. Each employee is accountabla e forff identifying, monitoring and managing risk within their area of responsibility. Riskii Appetiteii ff ide risk appetite statement which defines the types and levels of risk we are willing to take in order to We maintain a firm-w achieve our business objectives, and reflects our risk management philosophy. We engage in risk activities based on our core expertise that aim to enhance value for our stockholders. Our activities focus on income generation and capita al preservation through proactive portfolio management, supported by a conservative liquidity and leverage posture. The risk appetite statement asserts the following key risk parameters to guide our investment management activities: Risk Parameter Description Portfolio Composition We will maintain a portfolio comprised of target assets approved by our Board and in accordance with our capital allocation policy. Leverage We generally expect to maintain an economic leverage ratio no greater than 10:1. Liquidity Risk We will seek to maintain an unencumbered asset portfolio sufficient to meet our liquidity needs under adverse market conditions. Interest Rate Risk We will seek to manage interest rate risk to protect the portfolio from adverse rate movements utilizing derivative instruments targeting both income and capital preservation. Credit Risk We will seek to manage credit risk by making investments which conform within our specific investment policy parameters and optimize risk-adjusted returns. Capital Preservation We will seek to protect our capital a base through disciplined risk management practices. Compliance We will seek to comply with regulatory requirements needed to maintain our REIT status and our exemption from registration under the Investment Company Act. Governance ework, and executive Risk management begins with our Board, through the review and oversight of the risk management framff management, through the ongoing formulation of risk management practices and related execution in managing risk. The Board exercises its oversight of risk management primarily through the Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”) with support from the other Board Committees. The BRC is responsible for oversight of our risk governance struct t ure, r risk management and risk assessment guidelines and policies and our risk appetite. The BAC is responsible forff oversight of the ial reporting practices, including independent auditor quality and integrity of our accounting, internal controls and financ ion. The Management Development and selection, evaluation and review, and oversight of Compensation Committee is responsible forff rate Responsibility Committee assists the Board in its oversight of any matters that may present reputational or ESG risk to us, and oversight of risk related to our compensation policies and practices. The Corpor ff the internal audit ff funct s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 76 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES the Nominating/Corporate Governance Committee assists the Board in its oversight of our corporate governance framew and the annual self-evaluation of the Board. ff ork Risk assessment and risk management are the responsibility of our management. A series of management committees has oversight or decision-making responsibilities for risk management activities. Membership of these committees is reviewed regularly to ensure the appropriate personnel are engaged in the risk management process. Four primary management committees have been established to provide a comprehensive framework for risk management. The management committees responsible forff include the Enterprise Risk Committee (“ERC”), Asset and Liability Committee (“ALCO”), Investment Committee and the Financial Reporting and Disclosure Committee (“FRDC”). Each of these committees reports to our management Operating Committee which is responsible for oversight and management of our operations, including oversight and approva l authority over all aspects of our enterprise risk management. our risk management a Audit Services is an independent function with reporting lines to the BAC. Audit Services is responsible forff performing our internal audit activities, which includes independently assessing and validating key controls within the risk management framework. Our complim ance group is responsible for oversight of our regulatory complim ance. Our Chief Compliance Officer has reporting lines to the BAC. Description of Risks ii We are subject to a variety of risks due to the business we operate. Risk categories are an important component of a robust enterprise wide risk management framework. We have identified the foll ff owing primary categories that we utilize to identify, assess, measure and monitor risk. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 77 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Risk Description Capital, Liquidity and Funding Risk Investment/Market Risk Credit Risk Counterparty Risk Operational Risk Compliance, Regulatory and Legal Risk Risk to earnings, capital or business resulting from our inability to meet our obligations when they come due without incurring unacceptable losses because of inability to liquidate assets or obtain adequate funding. Risk to earnings, capital or business resulting in the decline in value of our assets or an increase in the costs of financing caused by changes in market variables, such as interest rates, which affect the values of investment securities and other investment instruments. Risk to earnings, capital or business resulting from an obligor’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in lending and investing activities. Risk to earnings, capital or business resulting from a counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. This risk is present in funding, hedging and investing activities. Risk to earnings, capital, reputation or business arising from inadequate or failed internal processes or systems (including proprietary and third party models), human factors or external events. ff Risk to earnings, capital, reputation or conduct of business arising from violations of, or nonconformance with internal and external applicable rules and regulations, losses resulting from lawsuits or adverse judgments, or from changes in the regulatory environment that may impact our business model. ii Capital , Lll iquiditydd and Fundingii Risk Manage MM ment al, liquidity and funding risk management strategy is designed to ensure the availability of sufficff Our capita ient resources to support our business and meet our financial obligations under both normal and adverse market and business environments. Our risk management practices consist of the following primary elements: capia tal, liquidity and funding ff Element Funding Excess Liquidity Maturity Profile Stress Testing Description Availability of diverse and stable sources of funds. Excess liquidity primarily in the form of unencumbered assets and cash. Diversity and tenor of liabilities and modest use of leverage. Scenario modeling to measure the resiliency of our liquidity position. Liquidity Management Policies Comprehensive policies including monitoring, risk limits and an escalation protocol. Funding Our primary financing sources are repurchase agreements provided through counterparty arrangements and through Arcola, other secured financing, debt issued by securitization vehicles, mortgages, credit facilities, note sales and various forms of equity. We maintain excess liquidity by holding unencumbered liquid assets that could be either used to collateralize additional borrowings or sold. We seek to conservatively manage our repurchase agreement funding position through a variety of methods including diversity,t breadth and depth of counterparties and maintaining a staggered maturity profile. Our wholly-owned subsidiary, Arcola, provides direct access to third party funding ember broker-dealer. Arcola borrows funds through the General Collateral Finance Repo service offered by the FICC, with FICC acting as the central counterparty. In addition, Arcola has borrowed funds through direct repurchase agreements. as a FINRA mRR ff To reduce our liquidity risk we maintain a laddered appa December 31, 2019, the weighted average days to maturity was 64 days and 65 days, respectively. roach to our repurchase agreements. At December 31, 2020 and Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made. Should prepayment speeds on the mortgages underlying our Agency and Residential mortgage-backed securities and/or market interest rates or other facff tors move suddenly and cause declines in the market value of assets posted as collateral, resulting margin calls may cause an adverse change in our liquidity position. ncial assets and cash pledged against existing liabilities of $71.7 billion. The weighted At December 31, 2020, we had total finaff average haircut was approximately 4% on repurchase agreements. The quality and character of the Residential Securities and commercial real estate investments that we pledge as collateral under the repurchase agreements and interest rate swapsa did not materially change at December 31, 2020 compared to the same period in 2019. While haircut and margin requirements related the year to the Agency collateral we pledge under repurchase agreements and interest rate swaps were largely unchanged during d 78 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis ended December 31, 2020, our counterparties did increase haircuts and margin requirements on credit assets beginning in March 2020, as a result of market disruptions brought on by COVID-19, which have since returner d closer to pre-pandemic levels. The following table presents our quarterly average and quarter-end repurchase agreement and reverse repurchase agreement balances outstanding forff the periods presented: Repurchase Agreements Reverse Repurchase Agreements Average Daily Amount Outstanding Ending Amount Outstanding Average Daily Amount Outstanding Ending Amount Outstanding For the three months ended (dollars in thousands) 31, 2020 $ 65,528,297 $ 64,825,239 $ 210,484 $ September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 December 31, 2018 67,542,187 68,468,813 96,756,341 102,760,107 108,389,796 101,983,828 87,781,404 83,984,254 64,633,447 67,163,598 72,580,183 101,740,728 102,682,104 105,181,241 88,554,170 81,115,874 286,792 183,423 461,123 1,006,487 1,459,070 3,478,510 3,937,769 2,741,022 — — — — — — — 523,449 650,040 The following tablea ty date at December 31, 2020. The weighted average remaining maturity on our repurchase agreements and other secured financing was 82 days at December 31, 2020: provides information on our repurchase agreements and other secured financing by maturi t 1 day 2 to 29 days 30 to 59 days 60 to 89 days 90 to 119 days Over 119 days (1) Total December 31, 2020 Principal Balance Weighted Average Rate % of Total (dollars in thousands) $ — 30,841,837 10,567,655 8,568,836 2,154,733 13,610,054 $ 65,743,115 — % 0.29 % 0.42 % 0.30 % 0.23 % 0.49 % 0.35 % — % 46.9 % 16.1 % 13.0 % 3.3 % 20.7 % 100.0 % (1) Approximately 2% of the total repurchase agreements and other secured financing had a remaining maturity over 1 year. The tablea December 31, 2020: below presents our outstanding debt balances and associated weighted average rates and days to maturity at Weighted Average Rate Principal Balance As of Period End For the Quarter Weighted Average Days to Maturity (1) agreements $ 64,825,239 Other secured financing (2) Debt issued by securitization vehicles (3) Participations issued (3) Mortgages payable (3) 917,876 5,649,190 37,365 429,650 Total indebtedness $ 71,859,320 (dollars in thousands) 0.32 % 2.22 % 2.13 % 4.47 % 4.41 % 0.35 % 2.96 % 1.95 % 4.70 % 4.07 % 64 1,353 9,013 11,664 2,982 (1) (2) (3) Determined based on estimated weighted-average lives of the underlying debt instruments. Includes financing under credit facilities. Non-recourse to Annaly. 79 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Excess Liquidity Our primary source of liquidity is the availability of unencumbered assets which may be provided as collateral to support additional funding needs. We target minimum thresholds of available, unencumbered assets to maintain excess liquidity. The following tablea o available to support potential collateral obligations and funding illustrates our asset portfoli needs. ff ff to Assets are considered encumbered if pledged as collateral against an existing liability, and therefore are no longer availablea support additional funding. An asset is considered unencumbered if it has not been pledged or securitized. The following tablea also provides the carrying amount of our encumbered and unencumbered financial assets at Decemberm 31, 2020: Financial assets Cash and cash equivalents Investments, at carrying value (1) Agency mortgage-backed securities (2) Credit risk transfer securities Non-agency mortgage-backed securities Residential mortgage loans (2) MSRs Commercial real estate debt investments (2) Commercial real estate debt and preferred equity, held for investment (2) Corporate debt, held for investment Other assets (3) Total financial assets Encumbered Assets Unencumbered Assets Total $ 1,137,809 (dollars in thousands) $ 105,894 $ 66,929,821 349,323 735,420 3,438,972 5,541 2,052,642 1,217,329 1,596,536 6,874,366 183,080 236,772 156,089 95,354 194,173 155,101 643,394 — 77,463,393 $ $ 69,472 8,713,695 $ 1,243,703 73,804,187 532,403 972,192 3,595,061 100,895 2,246,815 1,372,430 2,239,930 69,472 86,177,088 (1) (2) (3) The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. Includes assets transferred or pledged to securitization vehicles Includes interests in certain joint ventures and equity instruments. We maintain liquid assets in order to satisfy our current and futuret obligations in normal and stressed operating environments. These are held as the primary means of liquidity risk mitigation. The composition of our liquid assets is also considered and is ct to certain parameters. The composition is monitored for concentration risk and asset type. We believe the assets we subjeu consider liquid can be readily converted into cash, through liquidation or by being used as collateral in financing arrangements (including as additional collateral to support existing financial arrangements). Our balance sheet also generates liquidity on an on-going basis through mortgage principal and interest repayments and net earnings held prior to payment of dividends. The following tablea presents our liquid assets as a percentage of total assets at December 31, 2020: u Carrying Value (1) (dollars in thousands) $ $ 1,243,703 74,688,203 345,810 80,742 498,081 1,724,789 78,581,328 99.13 % Liquid assets Cash and cash equivalents Residential Securities (2) (3) Residential mortgage loans (4) Commercial real estate debt investments (5) Commercial real estate debt and preferred equity, held forff Corporate debt, held for investment (7) investment (6) Total liquid assets Percentage of liquid assets to carrying amount of encumbered and unencumbered financial assets (8) (1) Carrying value approximates the market value of assets. The assets listed in this table include $71.7 billion of assets that have been pledged as collateral against existing liabilities at December 31, 2020. Please refer to the Encumbered and Unencumbered Assets table for related information. The amounts reflected in the table above are on a settlement date basis and may differ from the total positions reported on the Consolidated Statements of Financial Condition. Excludes securitized Agency mortgage-backed securities of consolidated VIEs carried at fair value of $0.6 billion Excludes securitized residential mortgage loans transferred or pledged to consolidated VIEs carried at fair value of $3.2 billion. Excludes securitized commercial mortgage loans of consolidated VIEs carried at fair value of $2.2 billion. Excludes senior securitized commercial mortgage loans of consolidated VIEs carried at fair value of $0.9 billion. Excludes certain second lien loans. Denominator is computed based on the carrying amount of encumbered and encumbered financial assets, excluding assets transferred or pledged to securitization vehicles of $6.9 billion. (2) (3) (4) (5) (6) (7) (8) 80 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Maturity Profilff e a and derivatives when managing both liquidity risk as well as investment/market We consider the profile of our assets, liabilities risk employi ng a measurement of both the maturity gap and interest rate sensitivity gap. We determine the amount of liquid m assets that are required to be held by monitoring several liquidity metrics. We utilize several modeling techniques to analyze our current and potential obligations including the expected cash flows from our assets, liabilities and derivatives. The ities and cash flows of our assets, liabilities and derivatives. The tabla e is following table illustrates the expected finaff l maturt based on a static portfolio and assumes no reinvestment of asset cash floff ws and no futff uret liabilities are entered into. In assessing the maturity of our assets, liabilities and off balance sheet obligations, we use the stated maturities, or our prepayment expectations for assets and liabilities that exhibit prepayment characteristics. Cash and cash equivalents are included in the ‘Less than 3 Months’ maturity bucket, as they are typically held forff a short period of time. t ff ty bucket, our maturity gap is considered negative when the amount of maturing liabilities exceeds With respect to each maturi t liabilities. Our interest the amount of maturing assets. A negative gap increases our liquidity risk as we must enter into futff uret ence between interest earning assets and interest bearing liabilities maturing or re-pricing within rate sensitivity gap is the differ a given time period. Unlike the calculation of maturt ity gap, interest rate sensitivity gap includes the effect of our interest rate swaps. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate ities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive liabila t net interest income, while sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affecff ould tend to result in an increase in net interest income. During a period of falling interest rates, a negative gapa a positive gap wa t net interest income would tend to result in an increase in net interest income, while a positive gap wa adversely. Because different types of assets and liabia lities with the same or similar maturities may react differen tly to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if assets and liabilities were perfectly matched in each maturity category. The amount of assets and liabilities utilized to compute our interest rate sensitivity gap was determined in accordance with the contractuat l terms of the assets and liabilities, except that adjustablea -rate loans and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature. The effects of interest rate swaps, whereby we generally pay a fixed ing rate and effectively lock in our financing costs forff a longer term, are also reflected in our interest rate sensitivity gap. rate and receive a float ould tend to affecff ff ff ff The interest rate sensitivity of our assets and liabilities in the following tablea based on actuat l prepayment experience. at December 31, 2020 could vary substantially 81 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Financial assets Cash and cash equivalents Agency mortgage-backed securities (principal) Residential credit risk transfer securities (principal) Non-agency mortgage-backed securities (principal) Commercial mortgage-backed securities (principal) Total securities Residential mortgage loans (principal) Commercial real estate debt and preferred equity (principal) Corporate debt (principal) Total loans Assets transferred or pledged to securitization vehicles (principal) Total financial assets - maturity Effect of utilizing reset dates (1) Total financial assets - interest rate sensitive Financial liabilities Repurchase agreements Other secured financing Debt issued by securitization vehicles (principal) Participations issued (principal) Total financial liabilities - maturity Effect of utilizing reset dates (1)(2) Total financial liabilities - interest rate sensitive Maturity gap Cumulative maturity gap Interest rate sensitivity gap Less than 3 Months 3-12 Months More than 1 Year to 3 Years 3 Years and Over Total (dollars in thousands) $ 1,243,703 $ — $ — $ — $ 1,726,132 65,264,228 — — — — — — 63,890 — 63,890 — 1,307,593 8,179,336 8,621 12,954 87,746 — 109,321 — 81,460 30,686 112,146 — 221,467 1,276,252 $ $ $ 9,486,929 $ 1,497,719 $ 49,978,329 — $ 14,662,848 30,420 — — 49,978,329 — — 14,693,268 219,121 475,874 — 2,421,127 — 423,035 408,983 832,018 — 3,253,145 (976,713) 2,276,432 184,062 — — — 184,062 (29,253,956) $ 20,724,373 (241,423) $ 14,451,845 $ 23,235,886 23,419,948 $ (48,670,736) $ (14,471,801) $ 3,069,083 301,972 424,816 89,858 66,080,874 336,525 — 1,869,188 2,205,713 6,916,406 75,202,993 (8,478,875) $ $ $ $ — $ 887,456 5,649,190 37,365 6,574,011 6,259,493 12,833,504 68,628,982 1,243,703 66,998,981 534,047 988,436 89,858 68,611,322 336,525 568,385 2,308,857 3,213,767 6,916,406 79,985,198 64,825,239 917,876 5,649,190 37,365 71,429,670 $ $ 71,429,670 8,555,528 66,724,118 $ 79,985,198 $ (48,670,736) $ (63,142,537) $ (60,073,454) $ 8,555,528 $ (11,237,444) $ (12,954,126) $ (21,143,516) $ 53,890,614 $ 8,555,528 Cumulative rate sensitivity gap $ (11,237,444) $ (24,191,570) $ (45,335,086) $ 8,555,528 (1) Maturity gap utilizes stated maturities, or prepayment expectations for assets that exhibit prepayment characteristics, while interest rate sensitivity gap (2) utilizes reset dates, if applicable. Includes effect of interest rate swaps. The methodologies we employ for evaluating interest rate risk include an analysis of our interest rate “gap,” measurement of the duration and convexity ott f our portfolio and sensitivities to interest rates and spreads. Stress Testing t tress testing to ensure we have sufficient liquidity under a variety of scenarios and stresses. These stress We utilize liquidity s tests assist with the management of our pool of liquid assets and influence our current and future funding plans. Our stress tests are modeled over both short term and longer time horizons. The stresses applied include market-wide and firm-specific stresses. MM Liquidity Mtt anageme nt Policies We utilize a comprehensive liquidity policy structure to inform our liquidity risk management practices including monitoring and measurement, along with well-defined key risk indicators. Both quantitative and qualitative targets are utilized to measure ity and condition of the liquidity position, and include the level and composition of unencumbered assets, as the ongoing stabila well as both short-term and long-term sustainability of the funding composition under stress conditions. We also monitor early warning metrics designed to measure the quality and depth of liquidity sources based upon both company-spe cific and market conditions. The metrics assist in assessing our liquidity conditions and are integrated into our escalation protocol. m 82 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Investmett nt/Market // Riskii Management s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S arket risk. Changes in the level of interest rates can affect our net One of the primary risks we are subject to is investment/mtt interest income, which is the difference between the income we earn on our interest earning assets and the interest expense incurred from interest bearing liabilities and derivatives. Changes in the level of interest rates and spreads can also affect the value of our securities and potential realization of gains or losses fromff the sale of these assets. We may utilize a variety of financial instruments, including interest rate swapsa , swaptions, options, futures and other hedges, in order to limit the adverse effects of interest rates on our results. In the case of interest rate swaps, we utilize contracts linked to LIBOR but may also enter into interest rate swaps where the floating leg is linked to the overnight index swap rate or another index, particularly in light of a potential transition away froff m LIBOR. In addition, we may use MAC interest rate swaps in which we may receive or make a payment at the time of entering such interest rate swap ta of such interest rate swap. MAC on which is interest rate swaps offer price transparency, flexibility and more efficie the process of reducing the number of unique interest rate swap contracts and replacing them with fewer contracts containing market defined terms. Our portfolio and the value of our portfolio, including derivatives, may be adversely affected as a result of changing interest rates and spreads. nt portfolio administration through compressi o compensate for the off-market naturet m ff ff a We simulate a wide variety of interest rate scenarios in evaluating our risk. Scenarios are run to capture our sensitivity to changes in interest rates, spreads and the shape of the yield curve. We also consider the assumptions affecting our analysis such as those related to prepayments. In addition to predefined interest rate scenarios, we utilize Value-at-Risk measures to estimate estimate the potential losses in the portfolio over various time horizons utilizing various confidence levels. The following tables potential changes in economic net interest income over a twelve month period and the immediate effecff t on our portfolio market value (inclusive of derivative instruments), should interest rates instantaneously increase or decrease by 25, 50 or 75 basis points, and the effect of portfolio market value if mortgage option-adjusted spreads instantaneously increase or decrease by 5, 15 or 25 basis points (assuming shocks are parallel and instantaneous). All changes to income and portfolio market value are measured as percentage changes from the projected net interest income and portfolio value at the base interest rate scenario. The net interest income simulations incorporate the interest expense effect of rate resets on liabia lities and derivatives as well as the amortization expense and reinvestment of principal based on the prepayments on our securities, which varies based on the level of rates. The results assume no management actions in response to the rate or spread changes. The following tablea presents estimates at December 31, 2020. Actual results could differ materially from these estimates. a Change in Interest Rate (1) -75 Basis points Projected Percentage Change in Economic Net Interest Income (2) (34.3%) Estimated Percentage Change in Portfolio Value (3) (0.2)% Estimated Change as a % on NAV (3)(4) (1.3%) -50 Basis points -25 Basis points +25 Basis points +50 Basis points +75 Basis points MBS Spread Shock (1) -25 Basis points -15 Basis points -5 Basis points +5 Basis points +15 Basis points +25 Basis points (22.7%) (11.2%) 7.1% 13.5% 20.2% —% 0.1% (0.1%) (0.2%) (0.4%) (0.2)% 0.7% (0.5%) (1.3%) (2.7%) Estimated Change in Portfolio Market Value 1.5% Estimated Change as a % on NAV (3)(4) 9.0% 0.9% 0.3% (0.3%) (0.9%) (1.5%) 5.4% 1.8% (1.8%) (5.3%) (8.9%) (1) (2) (3) (4) Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment professionals. Actual results could differ materially from these estimates. Scenarios include Residential Securities, commercial real estate investments, corporate debt, repurchase agreements, other secured financing and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps. Scenarios include Residential Securities, residential mortgage loans, MSRs and derivative instruments. NAV represents book value of equity. Credit Risk Manage MM ment Key risk parameters have been established to specify our credit risk appetite. We seek to manage credit risk by making investments which conform within the firm’s specific investment policy parameters and optimize risk-return attributes. ff While we do not expect to encounter credit risk in our Agency mortgage-backed securities, we face credit risk on the non- Agency mortgage-backed securities and CRT securities in our portfolio. In addition, we are also exposed to credit risk on 83 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES residential mortgage loans, commercial real estate investments and corporate debt. MSR values may also be impacted if overall ct to risk of loss if an issuer costs to service the underlying mortgage loans increase due to borrower performance. We are subjeu or borrower faiff ls to perform its contractual obligations. We have established policies and procedurd es for mitigating credit risk, including establishing and reviewing limits for credit exposure. We will originate or purchase commercial investments that ve underwriting process and credit standards and are approved by the appropriate committee. Once a meet our comprehensi commercial is made, our ongoing surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate committee. We review credit and other risks of loss associated with each investment. Our management monitors the overall portfoli loss. Additionally, ALCO has oversight of our credit risk exposure. o risk and determines estimates of provision forff m investment ff Our portfolio composition, based on balance sheet values, at December 31, 2020 and 2019 was as folff lows: Category Agency mortgage-backed securities Credit risk transfer securities Non-agency mortgage-backed securities Residential mortgage loans(1) Mortgage servicing rights Commercial real estate (1) (2) Corporate debt December 31, 2020 December 31, 2019 86.4 % 0.6 % 1.1 % 4.2 % 0.1 % 5.0 % 2.6 % 89.5 % 0.4 % 0.9 % 3.3 % 0.3 % 3.9 % 1.7 % (1) (2) Includes assets transferred or pledged to securitization vehicles. Net of unamortized origination fees. 84 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Counterptt arty Rtt isk Managem MM ent Our use of repurchase and derivative agreements and trading activities create exposure to counterparty risk relating to potential losses that could be recognized if the counterparties to these agreements fail to perform their obligations under the contracts. In the event of default by a counterparty, we could have difficulty ot btaining our assets pledged as collateral. A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities and certain commercial real abla e lender. The collateral we pledge generally exceeds the amount of the estate investments as collateral to the applic borrowings under each agreement. If the counterparty to the repurchase agreement defaults on its obligations and we are not able to recover our pledged asset, we are at risk of losing the over-collateralization or haircut. The amount of this exposure is the differeff value of the collateral pledged by us to the lender including accrued interest receivable on such collateral. nce between the amount loaned to us plus interest due to the counterparty and the fair a ff We also use interest rate swaps and other derivatives to manage interest rate risk. Under these agreements, we pledge securities and cash as collateral or settle variation margin payments as part of a margin arrangement. If a counterparty were to default on its obligations, we would be exposed to a loss to a derivative counterparty to the extent that the amount of our securities or cash pledged exceeded the unrealized loss on the associated derivative and we were not able to recover the excess collateral. Additionally, we would be exposed to a loss to a derivative counterparty to the extent that our unrealized gains on derivative instruments exceeded the amount of the counterparty’s securities or cash pledged to us. t We monitor our exposure to counterparties across several dimensions including by type of arrangement, collateral type, counterparty type, ratings and geography. Additionally, ALCO has oversight of our counterparty exposure. ff The foll owing tablea summarizes our exposure to counterparties by geography at December 31, 2020: Geography North America Europe Japan Total Number of Counterparties Secured Financing (1) Interest Rate Swaps at Fair Value (dollars in thousands) Exposure - Secured Financing (2) Exposure - Interest Rate Swaps (2) 24 10 4 38 $ $ 52,983,020 $ (361,964) $ 3,920,875 $ 9,044,400 3,715,695 (644,528) — 1,894,424 205,019 (1,620,846) (905,245) — 65,743,115 $ (1,006,492) $ 6,020,318 $ (2,526,091) (1) Includes repurchase agreements and other secured financing. (2) Represents the amount of cash and/or securities pledged as collateral to each counterparty less the aggregate of repurchase agreement and other secured financing and unrealized loss on swaps for each counterparty. rr Operational Risk Management a We are subject to operational risk in each of our business and support functions. Operational risk may arise from internal or external sources including human error, fraud, systems issues, process change, vendors, business interruptions and other external events. Model risk considers potential errors with a model’s results dued to uncertainty in model parameters and te methodologies used. The result of these risks may include financial loss and reputational damage. We manage inappropria operational risk through a variety of tools including policies and procedures that cover topics such as business continuity, personal conduct, cybersecurity and vendor management. Other tools include testing, including disaster recovery testing; systems controls, including access controls; training, including cybersecurity awareness training; and monitoring, which includes the use of key risk indicators. Employee se against operational risk include proper segregation of incompatible duties, activity-level internal controls over financial reporting, the empowerment of business units to identify and mitigate operational risk sources, testing by our internal audit staff, and our overall governance framework. -level lines of defenff m We have established a Cybersecurity Committee to help mitigate cybersecurity risks. The role of the committee is to oversee cyber risk assessments, monitor applicable key risk indicators, review cybersecurity training procedures, oversee our Cybersecurity Incident Response Plan and engage third parties to conduct periodic penetration testing. Our cybersecurity risk assessment includes an evaluation of cyber risk related to sensitive data held by third parties on their systems. The Cybersecurity Committee periodically reports to the ERC, and the Board via the BRC and the BAC. There is no assurance that these efforts rts are not an assurance that no cybersecurity incidents will occur. We currently maintain cybersecurity insurance, however, there is no assurance that the insurance policy will cover all cybersecurity breaches or that the policy will cover all losses. ively mitigate cybersecurity risk and mitigation effoff will effect ff ff s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 85 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Compliance, Regulatory ll and Legal e Riskii Management Our business is organized as a REIT, and we seek to continue to meet the requirements for taxation as a REIT. The determination that we are a REIT requires an analysis of various factual matters and circumstances. Accordingly, we closely monitor our REIT status within our risk management program. We also regularly assess our risk management in respect of our regulated and licensed subsidiaries, which include our registered broker-dealer subsidiary Arcola and our subsidi ary that is registered with the SEC as an investment adviser under the Investment Advisers Act. u The finaff ncial services industry is highly regulated and receives significant attention from regulators, which may impact both our company as well as our business strategy. We proactively monitor the potential impact regulation may have both directly and indirectly on us. We maintain a process to actively monitor both actual and potential legal action that may affect us. Our risk management framework is designed to identify, measure and monitor these risks under the oversight of the ERC. Act, and we We currently rely on the exemption from registration provided by Section 3(c)(5)(C) of the Investment Companym seek to continue to meet the requirements forff this exemption from registration. The determination that we qualify for this exemption from registration depends on various factual matters and circumstances. Accordingly, in conjunction with our legal department, we closely monitor our complim ance with Section 3(c)(5)(C) within our risk management program. The monitoring of this risk is also under the oversight of the ERC. As a result of the Dodd-Frank Act, the U.S. Commodity Futures Trading Commission (“CFTC”) gained jurisdiction over the regulation of interest rate swaps. The CFTC has asserted that this causes the operators of mortgage real estate investment trusts that use swaps as part of their business model to fall within the statutory definition of Commodity Pool Operator (“CPO”), and, ealer and Intermediary Oversight or the CFTC, to register as CPOs. On December 7, absent relief from the Division of Swap Da no-action relief from the CPO registration requirement for operators of mortgage real 2012, as a result of numerous requests forff estate investment trusts, the Division of Swap Da ealer and Intermediary Oversight of the CFTC issued no-action relief entitled the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain “No-Action Relief fromff Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” that permits a CPO to receive relief by filing a claim to perfect the use of the relief. A claim submu itted by a CPO will be effective upon filing, so long as the claim is materially complete. The conditions that must be met relate to initial margin and premiums requirements, net income derived annually froff m commodity interest positions that are not qualifying hedging transactions, marketing of interests in the mortgage real estate investment trust to the public, and identification of the entity as a mortgage real estate investment trust in its federal tax filff ings with the Internal Revenue Service. While we disagree with the CFTC’s position that mortgage REITs that use swaps as part of their business model fall within the statutory definition of a CPO, we have submitted a claim for the relief set forth in the no-action relief entitled “No-Action Relief from the Commodity Pool Operator Registration Requirement for Commodity Pool Operators of Certain Pooled Investment Vehicles Organized as Mortgage Real Estate Investment Trusts” and believe we meet the criteria for such relief set forth therein. rr Critical Accounting Policies and Estimates Our critical accounting policies that require us to make significant judgments or estimates are described below. For more information on these critical accounting policies and other significant accounting policies, see “Significant Accounting Policies” in the Notes to the Consolidated Financial Statements. Valuation of Financ ii ial Instruments Residential Securities There is an active market for our Agency mortgage-backed securities, CRT securities and non-Agency mortgage-backed securities. Since we primarily invest in securities that can be valued using actively quoted prices for actively traded assets, there is a high degree of observablea inputs and less subjectivity in measuring fair value. Internal fair values are determined using quoted prices from the TBA securities market, the Treasury curve and the underlying characteristics of the individual securities, aps, reset dates and the expected life of the security. While prepayment rates may which may include coupon, periodic and life cff be difficult to predict and require estimation and judgment in the valuation of Agency mortgage-backed securities, we use several third party models to validate prepayment speeds used in fair value measurements of residential securities. All internal fair values are compared to external pricing sources and/or dealer quotes to determine reasonableness. Additionally, securities repurchase agreements are priced daily by counterparties to ensure sufficient collateralization, providing used as collateral forff additional verification of our internal pricing. q 86 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Residendd tial Mortgage Loans s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S There is an active market for the residential whole loans in which we invest. Since we primarily invest in residential loans that can be valued using actively quoted prices for similar assets, there are observable inputs in measuring fair value. Internal fair values are determined using quoted prices for similar market transactions, the swap curve and the underlying characteristics of the individual loans, which may include loan term, coupou n, and reset dates. While prepayment rates may be difficult to predict and are a significant estimate requiring judgment in the valuation of residential whole loans, we validate prepayment speeds against those provided by independent pricing analytic providers specializing in residential mortgage loans. Internal fair values are generally compared to external pricing sources to determine reasonablene ss. a MSRs inputs in their Fair value estimates for our investment in MSRs are obtained from models, which use significff ant unobservablea valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputn s including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained froff m third-party pricing providers. Management reviews the valuations received from third-party pricing providers and uses them as a point of comparim son to modeled values. The valuation of MSRs requires significant judgment by management and the third-party pricing providers. stt ment tt Commercial Real Estate Invest II quoted prices The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. These securities must also be evaluated for impairmm ent if the fair value of the security is lower than its amortized cost. Determining whether there is an impairment may require us to exercise significant judgment and make estimates to determine expected cash flows incorporating assumptim ons such as changes in interest rates and loss expectations. For y investments classified as held for investment, we apply significant judgment commercial real estate loans and preferred equitq in evaluating the need for a loss reserve. Estimated net recoverablea value of the commercial real estate loans and preferred equity investments and other factors such as the fair value of any collateral, the amount and status of senior debt, the prospects of the borrower and the competitive landscapea where the borrower conducts business must be considered in determining the sale, significant judgment may need to be applied in allowance forff determining the fair value of the loans and whether a valuation allowance is necessary. Factors that may need to be considered to determine the fair value of a loan held forff sale include the borrower’s credit quality, liquidity and other market factors and the fair value of the underlying collateral. loan losses. For commercial real estate loans held forff u Interest Rate Swap SS s We use the overnight indexed swap (“OIS”) curve as an input to value substantially all of our uncleared interest rate swaps. We s us to most accurately believe using the OIS curve, which reflects the interest rate typically paid on cash collateral, enablea determine the fair value of uncleared interest rate swaps. Consistent with market practice, we exchange collateral (also called margin) based on the fair values of our interest rate swaps.a Through this margining process, we may be abla e to compare our recorded fair value with the faiff r value calculated by the counterparty or derivatives clearing organization, providing additional verification of our recorded fair value of the uncleared interest rate swaps. We value our cleared interest rate swaps using the prices provided by the derivatives clearing organization. Revenue Recognigg tii on based on the outstanding principal amounts of the Residential Securities and Interest income from coupon payments is accruedrr their contractuat l terms. Premiums and discounts associated with the purchase of the Residential Securities are amortized or accreted into interest income over the projected lives of the securities using the interest method. To aid in determining projected lives of the securities, we use third-party model and market information to project prepayment speeds. Our prepayment speed projections incorporate underlying loan characteristics (i.e., coupon, term, original loan size, original loan-to-value ratio, etc.) casts and expert judgment. Prepayment speeds vary according and market data, including interest rate and home price index foreff to the type of investment, conditions in the financial markets and other facff tors and cannot be predicted with any certainty. Changes to model assumptions, including interest rates and other market data, as well as periodic revisions to the model will tive yield. cause changes in the results. Adjustments are made for actual prepayment activity as it relates to calculating the effecff Gains or losses on sales of Residential Securities are recorded on trade date based on the specific identification method. 87 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Consolidation of Vo arVV iable Intertt est Entitiii es Determining whether an entity has a controlling financial interest in a VIE requires significant judgment related to assessing the purpose and design of the VIE and determination of the activities that most significantly impact its economic perforff mance. We must also identify explicit and implicit variablea interests in the entity and consider our involvement in both the design of the VIE and its ongoing activities. To determine whether consolidation of the VIE is required, we must apply judgment to assess whether we have the power to direct the most significff ant activities of the VIE and whether we have either the rights to receive benefits or the obligation to absorb losses that could be potentially significant to the VIE. Use of Estimaii tes The use of GAAP requires management to make estimates and assumptions that affecff liabilities and disclosure of contingent assets and liabilities at the date of the finaff revenues and expenses during the reporting period. Actual t results could differ materially from those estimates. t the reported amounts of assets and ncial statements and the reported amounts of s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 88 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Glossary of Terms A Adjustable-Rate Loan / Security A loan / security on which interest rates are adjud sted at regular intervals according to predetermined criteria. The adjusd table interest rate is tied to an objective, published interest rate index. ff Agency Refers to a fede rally chartered corporation, such as the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporat ion, or an agency of the U.S. Government, such as the Government National Mortgage Association. r yield. For example, a bond’s yield that changed from 3.00% to 3.50% would be said to have moved 50 basis points. Benchmark A bond or an index referencing a basket of bonds whose terms are used for comparison with other bonds of similar maturi ty. The global financial market typically looks to t U.S. Treasury securities as benchmarks. Beneficial Owner One who benefits from owning a security, even if the security’s title of ownership is in the name of a broker or bank. Agency Mortgage-Backed Securities Refers to residential mortgage-backed securities that are issued or guaranteed by an Agency. B-Note Subordinate mortgage notes and/or subordinate mortgage loan participations. Amortization Liquidation of a debt through installment payments. Amortization also refers to the process of systematically reducing a recognized asset or liability (e.g., a purchase premium or discount for a debt security) with an offset to earnings. Average GAAP Cost of Interest Bearing Liabilities and Average Economic Cost of Interest Bearing Liabilities Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabila ities. Average Life On a mortgage-backed security, the average time to receipt of each dollar of principal, weighted by the amount of each principal prepayment, based on prepayment assumptions. Average Yield on Interest Earnings Assets and Average Yield on Interest Earnings Assets (excluding PAA) represents Average yield on interest earning assets annualized interest income divided by average interest earning assets. Average interest earning assets refleff cts the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) income is calculated using annualized interest (excluding PAA). B Basis Point (“bp”) One hundredth of one percent, used in expressing differences in interest rates. One basis point is 0.01% of 89 B-Piece The most security bond class. subordinate commercial mortgage-backed Board Referff s to the board of directors of Annaly. Bond The written evidence of debt, bearing a stated rate or stated rates of interest, or stating a formul determining that ff rate, and maturing on a date certain, on which date and d sum of money plus interest upon presentation a fixeff (usually represented by interest coupons attached to the bond) is payablea to the holder or owner. Bonds are long- term securities with an original maturity of greater than one year. a forff Book Value Per Share Calculated by summing common stock, additional paid-in al, accumulated other comprehensive income (loss) capita and accumulated deficit and dividing that number by the total common shares outstanding. Broker Generic name for a securities firm engaged in both buying and selling securities on behalf of customers or its own account. C Capital Buffer Includes unencumbered financial assets which can be either sold or utilized as collateral to meet liquidity needs. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES Capital Ratio divided by total Calculated as total stockholders’ equity assets inclusive of outstanding market value of TBA positions and exclusive of consolidated VIEs. q Carry ncing The amount an asset earns over its hedging and finaff costs. A positive carry happens when the rate on the securities being financed is greater than the rate on the funds borrowed. A negative carry is when the rate on the funds borrowed is greater than the rate on the securities that are being financed. CMBX The CMBX index is a synthetic tradable index referencing a basket of 25 CMBS of a particular rating and vintage. The CMBX index allows investors to take a long position (referred to as selling protection) or short position (referred to as purchasing protection) on the respective basket of CMBS securities and is structured as a “pay-as-you-go” contract whereby the protection seller receives and the protection buyer pays a standardized running coupon on the the protection seller is obligated to pay to the protection buyer the amount of principal losses and/or coupon shortfalls on the underlying CMBS securities as they occur. amount. Additionally, contracted notional Collateral Securities, cash or property pledged by a borrower or partyt to a derivative contract to secure payment of a loan or derivative. If the borrower fails to repay the loan or defaults under the derivative contract, the secured party may take ownership of the collateral. Collateralized Loan Obligation (“CLO”) A securitization collateralized by loans and other debt instruments. Collateralized Mortgage Obligation (“CMO”) A multiclass bond backed by a pool of mortgage pass- through securities or mortgage loans. t Commodity Futures Trading Commission (“CFTC”) An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The and options CFTC regulates the swaps, commodity futures markets. Its goals include the promotion of competitive and efficien s markets and the protection of investors against manipulation, abusive trade practices and fraud. t future ff ff ff t Commercial Mortgage-Backed Security Securities collateralized by a pool of mortgages on commercial real estate in which all principal and interest from the mortgages flow to certificate holders in a defined sequence or manner. Constant Prepayment Rate (“CPR”) The percentage of outstanding mortgage loan principal that prepays in one year, based on the annualization of the 90 Single Monthly Mortality, which reflects the outstanding mortgage loan principal that prepays in one month. Convexity A measure of the change in a security’s duration with respect to changes in interest rates. The more convex a ion will change with interest security is, the more its durat rate changes. d Core Earnings (excluding PAA) and Core Earnings (excluding PAA) Per Average Common Share Core earnings (excluding PAA) is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSRs, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-core income allocated to equity method investments and other non-core components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of the non-core income (loss) premium amortization the on prior periods, but not the current cumulative impactm period, of quarter-over-quarter changes in estimated long- term prepayment speeds related to our Agency mortgage- backed securities. Core earnings (excluding PAA) per average common share is calculated by dividing core earnings (excluding PAA) by average basic common shares forff items) and excludes (g) representing adjustment the period. Corporate Debt Non-government debt instruments issued by corporat Long-term corporate debt can be issued as bonds or loans. r ions. Counterparty One of two entities in a transaction. For example, in the bond market a counterparty can be a state or local government, a broker-dealer or a corporation. Coupon The interest rate on a bond that is used to compute the amount of interest dued on a periodic basis. Credit and Counterparty Risk Risk to earnings, capital or business, resulting fromff an obligor’s or counterparty’s failure to meet the terms of any contract or otherwise failure to perform as agreed. Credit and counterparty risk is present investing, funding and hedging activities. in lending, Credit Derivatives Derivative instruments that have one or more underlyings related to the credit risk of a specified entity (or group of entities) or an index that exposes the seller to potential loss from specified credit-risk related events. An example is credit derivatives referff encing the commercial mortgage- backed securities index. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES (“CRT”) Securities Credit Risk Transferff Credit Risk Transfer securities are risk sharing transactions issued by Fannie Mae and Freddie Mac and similarly structured transactions arranged by third party market participants. The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae, Freddie Mac and/odd r third parties to private investors. Current Face The current remaining monthly principal on a mortgage security. Current face is computed by multiplying the original facff e value of the security by the current principal balance facff tor. D Dealer Person or organization that underwrites, trades and sells securities, e.g., a principal market-maker in securities. Default Risk Possibility that a bond issuer will faiff interest when due.d l to pay principal or Derivative A finff ancial product that derives its value from the price, uations and price expectations of an underlying ff price fluct instrument, index or reference pool (e.g. futures contracts, options, interest rate swaps, interest rate swaptia ons and certain to-be-announced securities). purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, are non- recourse to us and are excluded from this measure. and mortgages payablea Economic Net Interest Income Non-GAAP financial measure that is composed of GAAP net interest income less Economic Interest Expense. Encumbered Assets Assets on the company’s balance sheet which have been pledged as collateral against a liabia lity. Eurodollar A U.S. dollar deposit held in Europe or elsewhere outside the United States. F Face Amount The par value (i.e., principal or maturi a security appeari ng on the face of the instrument. t ty value) of a Factor the A decimal value outstanding principal balance of a mortgage security, which changes over in relation to its original principal value. ting the proportion of reflecff time, Discount Price When the dollar price is below face value, it is said to be selling at a discount. Fannie Mae Federal National Mortgage Association. Duration The weighted maturi ty of a fixff ed-income investment’s cash flows, used in the estimation of the price sensitivity of fixed-income securities for a given change in interest rates. t E Economic Capital A measure of the risk a firff m is subject to. It is the amount al a firff m needs as a buffer to protect against risk. It of capita is a probabilistic measure of potential futuret losses at a given confidence level over a given time horizon. Economic Interest Expense Non-GAAP financial measure that is comprisem d of GAAP interest expense and the net interest component of interest rate swaps.a Economic Leverage Ratio (Economic Debt-to-Equity Ratio) Calculated as the sum of recourse debt, cost basis of TBA forward and CMBX derivatives outstanding and net 91 Federal Deposit Insurance Corporation (“FDIC”) An independent agency created by the U.S. Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial instituti ons for safety and soundness t and consumer protection, and managing receiverships. Federal Funds Rate The interest rate charged by banks on overnight loans of their excess reserve funds to other banks. Federal Home Loan Banks (“FHLB”) U.S. Government-sponsored banks that generally provide reliablea to support housing finance and community investment. liquidity to member institutions ncial finaff Federal Housing Financing Agency (“FHFA”) The FHFA is an independent regulatory agency that oversees vital components of the secondary mortgage market including Fannie Mae, Freddie Mac and the Federal Home Loan Banks. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Industry Regulatory Authority, Financial (“FINRA”) FINRA iRR s a non-governmental organization tasked with regulating all business dealings conducted between dealers, brokers and all public investors. Inc. Fixed-Rate Mortgage A mortgage featuring level monthly payments, determined at the outset, which remain constant over the life of the mortgage. Fixed Income Clearing Corporation (“FICC”) The FICC is an agency that deals with the confirmation, settlement and delivery of fixed-income assets in the U.S. The agency ensures the systematic and efficient settlement of U.S. Government securities and mortgage-backed security transactions in the market. Floating Rate Bond A bond for which the interest rate is adjud sted periodically according to a predetermined formul a, usually linked to an ff index. Floating Rate CMO A CMO tranche which pays an adjustable rate of interest tied to a representative interest rate index such as the LIBOR, the Constant Maturity Treasury or the Cost of Funds Index. Freddie Mac Federal Home Loan Mortgage Corporation. Futures Contract A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon at the initiation of the contract by the buyer and seller. Futures contracts are standardized according to the quality, quantity, and delivery time and location for each commodity. A future rs from an option in that an option gives one of the counterparties a right and s the other an obligation to buy or sell, while a future contract represents an obligation of both counterparties, one to deliver and the other to accept delivery. A future s contract is part of a class of finff ancial instruments called derivatives. s contract diffeff ff ff ff G GAAP U.S. generally accepted accounting principles. Ginnie Mae Government National Mortgage Association. 92 H Hedge An investment made with the intention of minimizing the impact of adverse movements in interest rates or securities prices. I In-the-Money Description for an option that has intrinsic value and can be sold or exercised for a profit; a call option is in-the- money when the strike price (execution price) is below the market price of the underlying security. Interest Bearing Liabilities Refers repurchase securitization vehicles and credit interest bearing liabila agreements, to ities is based on daily balances. debt by issued ilities. Average facff Interest Earning Assets Refers to Residential Securities, U.S. Treasury securities, reverse repurchase agreements, commercial real estate debt and preferred equity interests, residential mortgage loans and corporate debt. Average interest earning assets is based on daily balances. Interest-Only (IO) Bond The interest portion of mortgage, Treasury or bond payments, which is separated and sold individually from the principal portion of those same payments. Interest Rate Risk The risk that an investment’s value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. As market interest rates rise, the value of current fixed income investment holdings declines. Diversifying, hedging techniques are utilized to mitigate this risk. Interest rate risk is a formff of market risk. deleveraging and Interest Rate Swap A binding agreement between counterparties to exchange periodic interest payments on some predetermined dollar principal, which is called the notional principal amount. For example, one party will pay fixed and receive a variable rate. Interest Rate Swaption Options on interest rate swaps. The buyer of a swaption has the right to enter into an interest rate swap a greement at some specified date in the future. The swaption agreement on will be a will specify whether the buyer of the swaptia fixed-rate receiver or a fixeff d-rate payer. a s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis International Swaps and Derivatives Association (“ISDA”) Master Agreement Standardized contract developed by ISDA used as an umbrella under which bilateral derivatives contracts are entered into. Inverse IO Bond An interest-only bond whose coupon is determined by a formula expressing an inverse relationship to a benchmark rate, such as LIBOR. As the benchmark rate changes, the IO coupon adjusts in the opposite direction. When the benchmark rate is relatively low, the IO pays a relatively high coupon payment, and vice versa. Investment/Market Risk Risk to earnings, capita al or business resulting in the decline in value of our assets caused from changes in market variables, such as interest rates, which affect the values of Residential Securities and other investment instruments. Investment Advisers Act Refers to the Investment Advisers Act of 1940, as amended. Investment Company Act Refers to the Investment Companym amended. Act of 1940, as L Leverage The use of borrowed money to increase investing power . and economic returt nsr Leverage Ratio (Debt-to-Equity Ratio) Calculated as total debt to total stockholders’ equity. For includes purposes of calculating this ratio total debt repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and (included Certain credit mortgages payable. by ing), ff financ within securitization vehicles, participations issued and mortgages payablea are non-recourse to us. a secured facilities ff debt issued other Long-Term CPR Our projected prepayment speeds for certain Agency mortgage-backed securities using third-party model and market information. Our prepayment speed projections incorporate underlying loan characteristics (e.g., coupon, term, original loan size, original loan-to-value ratio, etc.) and market data, including interest rate and home price index forec asts. Changes to model assumptim ons, including ff interest rates and other market data, as well as periodic revisions to the model will cause changes in the results. Long-Term Debt Debt which maturet s in more than one year. M Market Agreed Coupon (“MAC”) Interest Rate Swap An interest rate swap contract strucrr ture with pre-defined, market agreed terms, developed by SIFMA and ISDA with the purpose of promoting liquidity and simplified administration. Monetary Policy Action taken by the Federal Open Market Committee of the Federal Reserve System to influence the money supply or interest rates. Mortgage-Backed Security (“MBS”) in a pool of A security representing a direct mortgage loans. The pass-through issuer or servicer collects the payments on the loans in the pool and “passes through” the principal and interest to the security holders on a pro rata basis. interest Mortgage Loan A mortgage loan granted by a bank, thrift or other financial on that is based solely on real estate as security and t instituti is not insured or guaranteed by a government agency. t Mortgage Servicing Rights (“MSRs”) ng the right to service an t Contractual existing mortgage where the holder receives the benefits and bears the costs and risks of servicing the mortgage. agreements constituti ff LIBOR (London Interbank Offered Rate) short-term Eurodollar The rate banks charge each other forff loans. LIBOR is frequently used as the base for resetting rates on floating-rate securities and the floaff ting-rate legs of interest rate swaps.a N NAV Net asset value. Liquidity Risk Risk to earnings, capita inabila without incurring unacceptablea to liquidate assets or obtain adequate funding. l or business arising from our ity to meet our obligations when they come dued losses because of inability a 93 Net Interest Income Represents interest investments, less interest expense paid forff income earned on our portfolio borrowings. Interest Margin and Net Net (excluding PAA) Net interest margin represents our interest income less interest expense divided by average interest earning assets. Net interest margin (excluding PAA) represents the sum of Interest Margin s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances. Over-The-Counter (“OTC”) Market A securities market that is conducted by dealers throughout the country through negotiation of price rather than through the use of an auction system as represented by a stock exchange. Net Interest Spread and Net Interest Spread (excluding PAA) Net interest spread represents the average yield on interest earning assets less the average GAAP cost of interest bearing liabilities. Net interest spread (excluding PAA) represents the average yield on interest earning assets (excluding PAA) less the average economic cost of interest bearing liabilities. Non-Performing Loan (“NPL”) A loan that is close to defaulting or is in default. Notional Amount A stated principal amount in a derivative contract on which the contract is based. O Operational Risk Risk to earnings, capita al, reputation or business arising from inadequate or failed internal processes or systems, human facff tors or external events. Option Contract A contract in which the buyer has the right, but not the obligation, to buy or sell an asset at a set price on or before a given date. Buyers of call options bet that a security will be worth more than the price set by the option (the strike price), plus the price they pay for the option itself. Buyers of put options bet that the security’s price will drop below the price set by the option. An option is part of a class of financial instruments called derivatives, which means these financial instruments derive their value from the worth of an underlying investment. Original Face The face value or original principal amount of a security on its issue date. Out-of-the-Money Description for an option that has no intrinsic value and would be worthless if it expired today; for a call option, this situation occurs when the strike price is higher than the market price of the underlying security; for a put option, this situation occurs when the strike price is less than the market price of the underlying security. Overnight Index Swaps (“OIS”) An interest rate swap in which a fixed rate is exchanged forff an overnight floating rate. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S P Par Price equal to the face amount of a security; 100%. Par Amount The principal amount of a bond or note due at maturity. Also known as par value. Pass-Through Security A securitization structuret where a GSE or other entityt “passes” the amount collected from the borrowers every month to the investor, afteff r deducd ting fees and expenses. Pool A collection of mortgage loans assembled by an originator or master servicer as the basis for a security. In the case of Ginnie Mae, Fannie Mae, or Freddie Mac mortgage pass- through securities, pools are identified by a number assigned by the issuing agency. Premium The amount by which the price of a security exceeds its principal amount. When the dollar price of a bond is above its face value, it is said to be selling at a premium. d Premium Amortization Adjustment The cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long- term prepayment speeds related to our Agency mortgage- backed securities. (“PAA”) Prepayment The unscheduled partial or complem te payment of the principal amount outstanding on a mortgage loan or other debt before it is due. Prepayment Risk The risk that falling interest rates will lead to increased forcing the prepayments of mortgage or other investor to reinvest at lower prevailing rates. loans, Prepayment Speed The estimated rate at which mortgage borrowers will pay off the mortgages that underlie an MBS. Prime Rate The indicative interest rate on loans that banks quote to their best commercial customers. 94 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S Principal and Interest The term used to refer to regularly scheduled payments or prepayments of principal and payments of interest on a mortgage or other security. R Rate Reset The adjud stment of the interest rate on a floating-rate security according to a prescribed formff ula. Real Estate Investment Trust (“REIT”) A special purpose investment vehicle that provides investors with the ability to participate directly in the ing of real-estate related assets by ownership or financ pooling their capita al to purchase and manage mortgage loans and/or income property.tt ff Recourse Debt Debt on which the economic borrower is obligated to repay the entire balance regardless of the value of the pledged collateral. By contrast, the economic borrower’s obligation to repay non-recourse debt is limited to the value of the pledged collateral. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities (included within other secured financing), debt issued by and securitization mortgages payablea are non-recourse to us and are excluded from this measure. lities). Certain credit participations vehicles, issued, ff faci Reinvestment Risk The risk that interest income or principal repayments will have to be reinvested at lower rates in a declining rate environment. Re-Performing Loan (“RPL”) A type of delinquent by at least 90 days but have resumed. loan in which payments were previously Repurchase Agreement The sale of securities to investors with the agreement to buy them back at a higher price after a specified time period; a formff of short-term borrowing. For the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement. Residential Securities Refers securities and non-Agency mortgage-backed securities. to Agency mortgage-backed securities, CRT Residual In securitizations, the residual is the tranche that collects any cash flow from the collateral remains after obligations to the other tranches have been met. that 95 Return on Average Equity Calculated by taking earnings divided by average stockholders’ equity. Reverse Repurchase Agreement Refer to Repurchase Agreement. The buyer of securities effectively provides a collateralized loan to the seller. Risk Appetite Statement Defines the types and levels of risk we are willing to take in order to achieve our business objectives, and reflects our risk management philosophy. S Secondary Market Ongoing market for bonds previously offered or sold in the primary mrr arket. Secured Overnight Financing Rate (“SOFR”) Broad measure of the cost of borrowing cash overnight collateralized by Treasury srr ecurities and was chosen by the Alternative Reference Rate Committee as the preferred benchmark rate to replace dollar LIBOR in coming years. Settlement Date The date securities must be delivered and paid for to complem te a transaction. Short-Term Debt Generally, debt which matures in one year or However, certain securities that maturet may be considered short-term debt. less. in up to three years Spread When buying or selling a bond through a brokerage firm, investors will be charged a commission or spread, which is the difference between the market price and cost of purchase, and sometimes a service fee. Spreads differ based on several factors including liquidity. T Target Assets to-be- Includes Agency mortgage-backed announced forward contracts, CRT securities, MSRs, non- Agency mortgage-backed securities, residential mortgage loans, commercial real estate investments, and corporate debt. securities, Taxable REIT Subsidiary (“TRS”) An entity that is owned directly or indirectly by a REIT and has jointly elected with the REIT to be treated as a tax purposes. Annaly and certain of its direct and TRS forff indirect subsidiaries have made separate joint elections to treat these subsidiaries as TRSs. ANNALY CAPITAL MANAGEMENT, INC. ANDAA Item 7. Management’s Discussion and Analysis SUBSIDIARIES To-Be-Announced Securities (“TBAs”) A contract for the purchase or sale of a mortgage-backed security to be delivered at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed- upon future date but does not include a specified pool number and number of pools. TBA Dollar Roll Income TBA dollar roll income is defined as the difference in price between two TBA contracts with the same terms but different settlement dates. The TBA contract settling in the later month typically prices at a discount to the earlier month contract with the difference in price commonly referred to as the “drop”. TBA dollar income income on the represents underlying security less an implied cost of financing. q the equivale interest nt of roll Total Return Investment performance measure over a stated time period interest, interest on interest, and which includes coupon any realized and unrealized gains or losses. u Total Return Swap A derivative instrument where one party makes payments at a predetermined rate (either fixed or variable) while receiving a returnt on a specific asset (generally an equity index, loan or bond) held by the counterparty. a U Unencumbered Assets Assets on our balance sheet which have not been pledged as collateral against an existing liability. U.S. Government-Sponsored Enterprise (“GSE”) Obligations Obligations of Agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress, such as Fannie Mae and Freddie Mac; explicitly guaranteed as to the timely payment of principal and and credit of the U.S. government. interest by the fulff these obligations are not l faithff Variation Margin Cash or securities provided by a party to collateralize its obligations under a transaction as a result of a change in value of such transaction since the trade was executed or the last time collateral was provided. Volatility A statistical measure of the variance of price or yield over time. Volatility is low if the price does not change very much over a short period of time, and high if there is a greater change. Voting Interest Entity (“VOE”) q An entity that has sufficient equity to finance its activities ted finff ancial support from without additional subordina other parties and in which equity investors have a controlling financial interest. u W Warehouse Lending A line of credit extended to a loan originator to fund mortgages extended by the loan originators to propertytt purchasers. The loan typically lasts froff m the time the mortgage is originated to when the mortgage is sold into the secondary market, whether directly or through a securitization. Warehouse lending can provide liquidity to the loan origination market. ff Weighted Average Coupon The weighted average interest mortgage loans or pools that serve as collateral forff security, weighted by the size of balances. the underlying a loan the principal rate of ff Weighted Average Life ( “WAL”) The assumed weighted average amount of time that will elapse from the date of a security’s issuance until each dollar of principal is repaid to the investor. The WAL will change as the security ages and depending on the actual and realized unscheduled, is paid on the loans underlying the MBS. at which scheduled principal, rate V Y Value-at-Risk (“VaR”) A statistical technique which measures the potential loss in value of an asset or portfolio over a defined period for a given confidence interval. Variable Interest Entity (“VIE”) An entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/odd r (ii) the entity to finance do not have sufficient equity at risk forff its activities without additional subordinated financial support from other parties. Yield-to-Maturity The expected rate of returnt of a bond if it is held to its maturity date; calculated by taking into account the current market price, stated redemption value, coupon payments ns are and time to maturity and assuming all coupou reinvested at the same rate; equivalent to the internal rate of return. 96 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA SUBSIDIARIES ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosures about market risk are contained within the section titled “Risk Management” of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements and the related notes, together with the Report of Independent Registered Public Accounting Firm thereon, are set forth beginning on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Our management, including our Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), reviewed and evaluated the effecff tiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the period covered by this report. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed, (1) were ts under the Securities effective in ensuring that information required to be disclosed by Annaly in reports it files Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropri ate to allow timely decisions regarding required disclosure and (2) were effective in ensuring that information required to be disclosed by Annaly in reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. u or submi a ff ff There have been no changes in our internal controls over financial reporting that occurred during the three months ended December 31, 2020 that have materially affected, or are reasonably likely to materially affeff ct our internal control over financial reporting. Management’s Annual Report On Internal Control Over Financial Reporting Management of Annaly is responsible for establishing and maintaining adequate internal control over financ ial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is a process designed by, or under the supervision of, Annaly’s CEO and CFO and effected by the Annaly’s board of directors, management and other personnel to provide reasonable assurance regarding the reliabila ity of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: ff • • records that in rly reflect the the assets of pertain to the maintenance of reasonable detail accurately and faiff transactions and dispositions of Annaly; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and • t expenditures of Annaly are being made only in accordance with authorizations of management and directors of Annaly; and assurance regarding prevention provide reasonablea or timely detection of unauthorized acquisition, use or disposition of Annaly’s assets that could have a material consolidated financial statements. effect on the Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As a result, even systems determined to be effective can provide only reasonable assurance regarding the preparation and periods are subject to the presentation of financial statements. Moreover, projections of any evaluation of effecff risks that controls may become inadequate becausea of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. tiveness to futff uret 97 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES veness of the Company’s internal control over financial reporting as of December 31, In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Annaly’s management assessed the effecti 2020. Organizations of the Treadway Commission’s (“COSO”) Internal Control-Integrated Framework (2013). ff Based on the Annaly’s management’s evaluation under the framework in Internal Control—Integrated Framework (2013), Annaly’s management concluded that its internal control over financial reporting was effecff tive as of December 31, 2020. Annaly’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on Annaly’s internal control over financial reporting, which is included herein. 98 ANNALY CAPITAL MANAGEMENT, INC. ANDAA SUBSIDIARIES Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Annaly Capia tal Management, Inc. and Subsidiaries Opinion on Internal Control Over Financial Reporting We have audited Annaly Capital Management, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Annaly Capital Management, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. a We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2020 and 2019, the related nd cash flows for each of the three years in the consolidated statements of comprehe period ended December 31, 2020, the related notes and financial statement schedules III and IV as of December 31, 2020, and our report dated February 18, 2021 expressed an unqualified opinion thereon. nsive income (loss), stockholders’ equity att m Basis forff Opinion management is responsible forff maintaining effective internal control over financial reporting and for its The Company’s m assessment of the effecff tiveness of internal control over financial reporting included in the accompam nying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the appa licable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonablea whether effective internal control over financial reporting was maintained in all material respects. assurance about a Our audit included obtaining an understanding of internal control over finff ancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting ity of finff ancial reporting and the preparation of financial statements forff A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the external purposes in accordance with generally reliabila accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonablea detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonablea assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effecff t on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. d /s/ Ernst & Young LLP New York, NY February 18, 2021 99 ANNALY CAPITAL MANAGEMENT, INC. ANDAA SUBSIDIARIES ITEM 9B. OTHER INFORMATION None. 100 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Item 10 as to our directors is incorporated herein by reference to the proxy statement to be filed d by Item 10 with the SEC within 120 days after December 31, 2020. The information regarding our executive officers require appears in Part I of this Form 10-K. The information required by Item 10 as to our complim ance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2020. q We have adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b) of Regulation S-K. This Code of Business Conduct and Ethics applies to our principal executive officer , principal finff ancial officer and principal accounting officer. This Code of Business Conduct and Ethics is publicly available on our website at www.annaly.com. We intend to satisfy the disclosure requirements regarding amendments to, or waivers from, certain provisions of this Code of Business Conduct and Ethics by posting on our website. ff The information regarding certain matters pertaining to our corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after ff December 31, 2020. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days afteff r December 31, 2020. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Equity Compensation Plan Information On May 20, 2020, at our 2020 Annual Meeting of Stockholders, our stockholders approved the 2020 Equity Incentive Plan. The 2020 Equity Incentive Plan authorizes us to grant options, stock appreciation rights, dividend equivalent rights, or other share- based awards, including restricted shares up to an aggregate of 125,000,000 shares, subject to adjustments for any awards that were outstanding under our 2010 Equity Incentive Plan (the “Prior Incentive Plan,” together with the 2020 Equity Incentive Plan, the “Incentive Plans”) on the effecff y Incentive Plan and subsequently expire, terminate, or are surrendered or forfeited. tive date of the 2020 Equitq Since the adoption of the 2020 Equity Incentive Plan, no further awards will be made under the Prior Incentive Plan, although existing awards will remain effective. The following tablea issuance under the Incentive Plans. provides information as of December 31, 2020 concerning shares of our common stock authorized for Plan Category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total (a) (b) (c) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under the Incentive Plans (excluding securities in column ‘a’) — $ — — $ — — — 124,798,986 — 124,798,986 Information with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days after December 31, 2020. 101 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days afteff r December 31, 2020. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is incorporated herein by reference to the proxy statement to be filed with the SEC within 120 days afteff r December 31, 2020. 102 ANNALY CAPITAL MANAGEMENT, INC. ANDAA SUBSIDIARIES PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this report: 1. 2. Financial Statements. See Index to Financial Statements below. Schedules to Financial Statements. See Index to Financial Statements below All financial istatement schedules not included have been omitted because they are either inapplicable or the information required is provided in our Financial Statements and Notes thereto. 3. Exhibits. See Exhibit Index below. EXHIBIT INDEX Exhibit Number Exhibit Description 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 Articles of Amendment and Restatement of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed August 5, 1997). Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form S-3 (Registration Statement 333-74618) filed June 12, 2002). Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed August 3, 2006). Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.4 of the Registrant’s Quarterly Report on Form 10-Q filed May 7, 2008). Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed June 23, 2011). Articles of Amendment of the Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed May 23, 2019). Form of Articles Supplementary designating the Registrant’s 7.875% Series A Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A filed April 1, 2004). Articles Supplementary of the Registrant’s designating an additional 2,750,000 shares of the Company’s 7.875% Series A Cumulative Redeemable Preferred Stock, as filed with the State Department of Assessments and Taxation of Maryland on October 15, 2004 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed October 18, 2004). Articles Supplementary designating the Registrant’s 6% Series B Cumulative Convertible Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on 8-K filed April 10, 2006). Articles Supplementary designating the Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed May 16, 2012). Articles Supplementary designating the Registrant’s 7.50% Series D Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed September 13, 2012). Articles Supplementary designating the Registrant’s 7.625% Series E Cumulative Redeemable Preferred liquidation preference $25.00 (incorporated by reference to Exhibit 3.12 to the Registrant’s Stock, Registration Statement on Form 8-A filed July 12, 2016). Articles Supplementary reclassifying the Registrant’s 6% Series B Cumulative Convertible Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.13 to the Registrant’s Registration Statement on Form 8-A filed July 27, 2017). Articles Supplementary designating the Registrant’s 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.14 to the Registrant’s Registration Statement on Form 8-A filed July 27, 2017). 103 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 3.15 3.16 3.17 3.18 3.19 3.20 3.21 3.22 3.23 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Articles Supplementary reclassifying and designating (1) 7,412,500 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of undesignated Common Stock; (2) 650,000 authorized but unissued shares of the Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock; and (3) 3,400,000 authorized but unissued shares of the Registrant’s 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of undesignated Common Stock. (incorporated by reference to Exhibit 3.15 of the Registrant’s Quarterly Report on Form 10-Q filed November 3, 2017). Articles Supplementary designating Annaly’s 6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.16 to the Registrant’s Registration Statement on Form 8-A filed January 10, 2018). Articles Supplementary reclassifying and designating (i) 11,500,000 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of Registrant’s undesignated common stock and (ii) 5,000,000 authorized but unissued shares of Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of Registrant’s undesignated common stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed August 3, 2018). Form of Articles Supplementary designating Annaly’s 8.125% Series H Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.17 to the Registrant’s Registration Statement on Form 8-A filed September 7, 2018). Articles Supplementary reclassifying and designating 2,200,000 authorized but unissued shares of the Registrant’s preferred stock, $0.01 par value per share, without designation as to series or class, as shares of undesignated Common Stock (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed June 3, 2019). Articles Supplementary designating Annaly’s 6.750% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.20 to the Registrant’s Registration Statement on Form 8-A filed June 26, 2019). Articles Supplementary reclassifying and designating 7,000,000 authorized but unissued shares of Registrant’s 7.625% Series C Cumulative Redeemable Preferred Stock, $0.01 par value per share, as shares of Registrant’s undesignated common stock (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed July 22, 2019). Articles Supplementary filed with the State Department of Assessments and Taxation of Maryland effective on January 4, 2021 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed January 5, 2021). Amended and Restated Bylaws of the Registrant, December 13, 2018 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed December 13, 2018). Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed September 17, 1997). Specimen Preferred Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-3 (Registration No. 333-74618) filed on December 5, 2001). Specimen Series E Preferred Stock Certificate (incorporated by reference to Exhibit 4.7 to the Registrant’s Registration Statement (Registration No. 333-211140) on Form S-4/A filed May 27, 2016). Specimen Series F Preferred Stock Certificate (incorporated by reference to Exhibit 4.8 to the Registrant’s Registration Statement on Form 8-A filed July 27, 2017). Specimen Series G Preferred Stock Certificate (incorporated by reference to Exhibit 4.9 to the Registrant’s Registration Statement on Form 8-A filed January 10, 2018). Specimen Series H Preferred Stock Certificate (incorporated by reference to Exhibit 4.10 to the Registrant’s Registration Statement on Form S-4A filed May 31, 2018). Specimen Series I Preferred Stock Certificate (incorporated by reference to Exhibit 4.7 to the Registrant’s Registration Statement on Form 8-A filed June 26, 2019). Indenture, dated as of February 12, 2010, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed February 12, 2010). Indenture, dated as of February 1, 2019, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.7 to the Registrant’s Current Report on Form S-3 filed February 1, 2019). s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 104 ANNALY CAPITAL MANAGE A MENT, INC. ANDAA SUBSIDIARIES 4.10 4.11 4.12 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 21.1 23.1 31.1 31.2 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S Supplemental Indenture, dated as of February 12, 2010, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed February 12, 2010). Second Supplemental Indenture, dated as of May 14, 2012, between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed May 14, 2012). Description of Securities. † Form of Master Repurchase Agreement (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-11 (Registration No. 333-32913) filed August 5, 1997). Registrant’s 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 1, 2010).* Registrant’s Deferred Compensation Plan for Directors (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K filed February 23, 2017).* Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 20, 2017). Internalization Agreement, dated February 12, 2020, by and among the Registrant, Annaly Management Company LLL, AMCO Acquisition LLC, AMCO Holding Management Company LLC, the Persons named on Schedule 1 thereto, AMCO OpCo Holding Company LLC, AMCO LP Holding Company LP and AMCO Manager Holdings LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 12, 2020). Severance Rights Agreement between Timothy P. Coffey and the Registrant, dated as of February 12, 2020 (incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed February 12, 2020).* Severance Rights Agreement between Anthony C. Green and the Registrant, dated as of February 12, 2020 (incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed February 12, 2020).* Restricted Stock Unit Award Agreement between Glenn A. Votek and the Registrant, dated February 11, 2020 (incorporated by reference to Exhibit 10.9 to the Registrant’s Current Report on Form 8-K filed February 12, 2020).* 2020 Equity Incentive Plan (incorporated herein by reference to Annex A to the Registrant’s proxy statement dated April 8, 2020).* Form of Deferred Stock Unit Award for Directors (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed May 21, 2020).* Annaly Capital Management, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 1, 2020).* Form of Performance Stock Unit Award (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed July 1, 2020).* Form of Restricted Stock Unit Award (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed July 1, 2020).* Employment Agreement between David L. Finkelstein and the Company, dated as of November 9, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed November 10, 2020).* Employment Agreement between Serena Wolfe and the Company, dated as of November 9, 2020 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed November 10, 2020).* Employment Agreement between Timothy P. Coffey and the Company, dated as of November 9, 2020 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed November 10, 2020).* Employment Agreement between Anthony C. Green and the Company, dated as of November 9, 2020 (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed November 10, 2020).* Subsidiaries of Registrant. † Consent of Ernst & Young LLP. † Certification of David L. Finkelstein, Chief Executive Officer and Chief Investment Officer (Principal Executive Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. † Certification of Serena Wolfe, Chief Financial Officer (Principal Financial Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. † 105 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES 32.1 32.2 101.INS XBRL Certification of David L. Finkelstein, Chief Executive Officer and Chief Investment Officer (Principal Executive Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † Certification of Serena Wolfe, Chief Financial Officer (Principal Financial Officer) of the Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. † because its Extensible Business The instance document does not appear in the interactive data fileff Reporting Language (XBRL) tags are embedded within the Inline XBRL document. The following documents are forma tted in Inline XBRL: (i) Consolidated Statements of Financial Condition at December 31, 2020 and 2019; (ii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018; (iii) Consolidated Statements of Stockholders’ Equity forff the years ended December 31, 2020, 2019 and 2018; (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018; and (v) Notes to Consolidated Financial Statements. ff 101.SCH XBRL Taxonomy Extension Schema Document † 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document † 101.DEF XBRL Additional Taxonomy Extension Definition Linkbase Document Created† 101.LAB XBRL Taxonomy Extension Labea l Linkbase Document † 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document † 104 * † The cover page for the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2020 (formatted in Inline XBRL and contained in Exhibit 101). Exhibit Numbers 10.2, 10.3, 10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12, 10.13, 10.14, 10.15, 10.16 and 10.17 are management contracts or compensatory plans required to be filed as Exhibits to this Form 10-K. Submitted electronically herewith. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 106 ANNALY CAPITAL MANAGEMENT, INC. ANDAA SUBSIDIARIES ITEM 16. FORM 10-K SUMMARY None. 107 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Report of Independent Registered Public Accounting Firm Page F-1 Consolidated Financial Statements as of December 31, 2020 and 2019 and forff the Years Ended December 31, 2020, 2019 and 2018 F-3 F-4 F-5 F-6 F-7 F-7 F-7 F-11 F-11 F-15 F-24 F-24 F-29 F-30 F-35 F-38 F-39 F-42 F-44 F-45 F-46 F-46 F-47 F-48 F-49 F-49 Consolidated Statements of Financial Condition Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes To Consolidated Financial Statements Note 1. Note 2. Note 3. Note 4. Note 5. Note 6. Note 7. Note 8. Note 9. Description of Business Basis of Presentation Significant Accounting Policies Financial Instruments Securities Loans Mortgage Servicing Rights Variable Interest Entities Real Estate Note 10. Derivative Instruments Note 11. Fair Value Measurements Note 12. Goodwill and Intangible Assets Note 13. Secured Financing Note 14. Capital Stock Note 15. Long-Term Stock Incentive Plan Note 16. Interest Income and Interest Expense Note 17. Net Income (Loss) Per Common Share Note 18. Income Taxes Note 19. Risk Management Note 20. Related Party Transactions Note 21. Lease Commitments and Contingencies Note 22. Arcola Regulatory Requirements 108 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Annaly Capia tal Management, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompam nying consolidated statements of financial condition of Annaly Capital Management, Inc. and Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income (loss), stockholders' equity at nd cash flows for each of the three years in the period ended December 31, 2020, the related notes, and finaff ncial statement schedules III and IV as of December 31, 2020, (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash floff ws for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 18, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicablea rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the to audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether dued error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether dued to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the finaff ncial statements and (2) involved our especially challenging, subjective or complem x judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for loan losses Description of the Matter Allowance forff loan losses on commercial real estate loans totaled $129.9 million and allowance for loan losses on corporate debt totaled $39.6 million as of Decembem r 31, 2020. As disclosed in Note 6 to the ncial statements, the Company establishes an allowance at origination or acquisition consolidated finaff f the loan. In that reflects management's estimate of the total expected credit loss over the expected life off ity of default and loss given estimating the lifetime expected credit losses, management utilizes a probabila the reasonable and default methodology, which considers projected economic conditions over supporta rent u methodology such as discounted cash flow model analysis or faiff r value of the collateral to determine the expected credit losses. forecast period. For loans experiencing credit deterioration, management may use a diffeff blea F-1 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Auditing the allowance for loan losses on commercial real estate loans and corporate debt is complex dued to the high degree of judgment in management’s assumptim ons used in the estimation process including borrower risk ratings, unemploym collateral- ent rate, certain indexes, and faiff dependent loans, where foreclosure is probable. These factors could have a significant effect on the allowance for loan losses. r value of collateral forff m How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s processes to estimate the allowance for loan losses on its commercial real estate loans and corporate debt, including controls over management’s review of the loan losses methodology, the completeness and accuracy of key inputs used in the estimation process, management’s review of the risk ratings, reasonableness of unemploym r value of collateral) based on current industry and market data, and management’s review of the expected credit losses. the assumptions used in the estimation process (i.e., borrower ent rate, certain indexes, and faiff m To test the allowance for loan losses, our audit procedures included, among others, utilizing the support of an internal specialist to independently evaluate the reasonableness of the Company’s expected loan loss methodology, which considered the results of various sensitivity analyses and analytical procedures. We compared management’s inputs and assumptim ons related to borrower risk ratings, unemploym ent rate estimates and certain indexes to the inpn uts and assumptim ons developed by our specialists using internal and external data. In cases for loans for which an allowance has been developed based on fair value of the collateral, we engaged internal specialists to independently value the underlying collateral and compared that valuation to management’s valuation. m Amortization of net premiums on residential securities Description of the Matter Amortization of net premiums on residential securities totaled $1.4 billion for the year ended Decemberm 31, 2020. As disclosed in Note 3 to the consolidated finaff ncial statements, the Company amortizes or accretes premiums or discounts into interest income for its residential mortgage-backed securities. Amortization or accretion is derived taking into account estimates of future principal prepayments, which are derived using third-party model and market information, in the calculation of the effective yield. Auditing the amortization of net premiums on Agency residential mortgage-backed securities is complex due to the high degree of judgment in management's assumptions used in the measurement process including prepayment rates which are uncertain in nature. t on t the amortization of net premiums on securities. These assumptions have a significaff nt effecff How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effecti veness of controls over the Company’s processes to calculate amortization of net premiums on its Agency mortgage-backed securities, including management’s review of third party models and assumptions (i.e., prepayment rates) and the completeness and accuracy of data used in the cash flow models and the calculation of projected cash flows. ff To test the amortization of net premiums, our audit procedures included, among others, evaluating the Company's methodology and utilizing the support of internal specialists to independently develop ranges of prepayment rates for a samplem of securities based on current industry, market and economic data. We compared management’s prepayment rates to the ranges developed by the internal specialist to assess management’s estimate. We also recalculated management’s projected cash flows and the amortization of premiums or accretion of discounts for a samplem of securities. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2012. New York, NY February 18, 2021 F-2 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data) Assets Cash and cash equivalents (includes pledged assets of $1,137,809 and $1,648,545, respectively) (1) Securities (includes pledged assets of $67,471,074 and $108,809,569, respectively) (2) Loans, net (includes pledged assets of $2,231,035 and $3,240,583, respectively) (3) Mortgage servicing rights (includes pledged assets of $5,541 and $3,336, respectively) Assets transferred or pledged to securitization vehicles Real estate, net Derivative assets Receivable for unsettled trades Principal and interest receivable Goodwill and intangible assets, net Other assets Total assets Liabilities and stockholders’ equity Liabilities Repurchase agreements Other secured financing Debt issued by securitization vehicles Participations issued Mortgages payable Derivative liabilities Payable for unsettled trades Interest payable Dividends payable Other liabilities Total liabilities Stockholders’ equity December 31, December 31, 2020 2019 $ 1,243,703 $ 1,850,729 75,652,396 114,833,580 3,083,821 100,895 6,910,020 656,314 171,134 15,912 268,073 127,341 225,494 4,462,350 378,078 7,002,460 725,638 113,556 4,792 449,906 92,772 381,220 $ 88,455,103 $ 130,295,081 $ 64,825,239 $ 101,740,728 917,876 5,652,982 39,198 426,256 1,033,345 884,069 191,116 307,613 155,613 4,455,700 5,622,801 — 485,005 803,866 463,387 476,335 357,527 93,388 74,433,307 114,498,737 Preferred stock, par value $0.01 per share, 85,150,000 authorized, 63,500,000 and 81,900,000 issued and outstanding, respectively 1,536,569 1,982,026 Common stock, par value $0.01 per share, 2,914,850,000 authorized, 1,398,240,618 and 1,430,106,199 issued and outstanding, respectively Additional paid-in capital Accumulated other comprehensive income (loss) Accumulated deficit Total stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity 13,982 14,301 19,750,818 19,966,923 3,374,335 2,138,191 (10,667,388) (8,309,424) 14,008,316 15,792,017 13,480 4,327 14,021,796 15,796,344 $ 88,455,103 $ 130,295,081 (1) (2) (3) Includes cash of consolidated Variable Interest Entities (“VIEs”) of $22.2 million and $67.5 million at December 31, 2020 and 2019, respectively. Excludes $81.5 million and $102.5 million at December 31, 2020 and 2019, respectively, of agency mortgage-backed securities, $576.6 million and $468.0 million at December 31, 2020 and 2019, respectively, of non-Agency mortgage-backed securities and $391.0 million and $500.3 million at December 31, 2020 and December 31, 2019, respectively, of commercial mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated froff m the Company’s Consolidated Statements of Financial Condition. Includes $47.0 million and $66.7 million of residential mortgage loans held for sale. See notes to consolidated financial statements. F-3 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) For The Years Ended December 31, 2020 2019 2018 Net interest income Interest income Interest expense Net interest income Realized and unrealized gains (losses) Net interest component of interest rate swaps Realized gains (losses) on termination or maturity of interest rate swaps Unrealized gains (losses) on interest rate swaps Subtotal Net gains (losses) on disposal of investments Net gains (losses) on other derivatives Net unrealized gains (losses) on instruments measured at fair value through earnings Loan loss provision Subtotal Total realized and unrealized gains (losses) Other income (loss) General and administrative expenses Compensation and management fee Other general and administrative expenses Total general and administrative expenses Income (loss) before income taxes Income taxes Net income (loss) Net income (loss) attributable to noncontrolling interests Net income (loss) attributable to Annaly Dividends on preferred stock Net income (loss) available (related) to common stockholders Net income (loss) per share available (related) to common stockholders Basic Diluted Weighted average number of common shares outstanding Basic Diluted Other comprehensive income (loss) Net income (loss) Unrealized gains (losses) on available-for-sale securities Reclassification adjustment for net (gains) losses included in net income (loss) Other comprehensive income (loss) Comprehensive income (loss) Comprehensive income (loss) attributable to noncontrolling interests Comprehensive income (loss) attributable to Annaly Dividends on preferred stock $ 2,229,625 $ 3,787,297 $ 899,112 1,330,513 2,784,875 1,002,422 (207,877) (1,917,628) (904,532) (3,030,037) 661,513 756,305 (303,024) (147,581) 967,213 (2,062,824) 53,314 131,685 107,513 239,198 (918,195) (28,423) (889,772) 1,391 (891,163) 142,036 351,375 (1,442,964) (1,210,276) (2,301,865) (47,944) (680,770) 36,021 (16,569) (709,262) (3,011,127) 136,413 170,628 131,006 301,634 (2,173,926) (10,835) (2,163,091) (226) (2,162,865) 136,576 $ $ $ (1,033,199) $ (2,299,441) $ (0.73) $ (0.73) $ (1.60) $ (1.60) $ 3,332,563 1,897,860 1,434,703 100,553 1,409 424,081 526,043 (1,124,448) (403,001) (158,082) (3,496) (1,689,027) (1,162,984) 109,927 179,841 150,032 329,873 51,773 (2,375) 54,148 (260) 54,408 129,312 (74,904) (0.06) (0.06) 1,414,659,439 1,434,912,682 1,209,601,809 1,414,659,439 1,434,912,682 1,209,601,809 $ (889,772) $ (2,163,091) $ 54,148 2,012,878 (776,734) 1,236,144 346,372 1,391 344,981 142,036 4,135,862 (17,806) 4,118,056 1,954,965 (226) 1,955,191 136,576 (2,004,166) 1,150,321 (853,845) (799,697) (260) (799,437) 129,312 Comprehensive income (loss) attributable to common stockholders $ 202,945 $ 1,818,615 $ (928,749) See notes to consolidated financial statements. F-4 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands) For The Years Ended December 31, 2020 2019 2018 1,982,026 $ 1,778,168 $ 1,720,381 — — (445,457) 1,536,569 14,301 — (324) — 3 2 13,982 19,966,923 (93) (209,094) — 6,452 (14,543) 1,173 19,750,818 2,138,191 2,012,878 (776,734) $ $ $ $ $ $ $ $ $ $ 428,324 — (224,466) 1,982,026 13,138 1,422 (261) — — 2 14,301 18,794,331 1,397,484 (223,313) — 2,162 (5,534) 1,793 411,335 55,000 (408,548) 1,778,168 11,596 1,103 — 436 — 3 13,138 17,221,265 1,116,409 — 455,507 1,961 (3,952) 3,141 19,966,923 $ 18,794,331 (1,979,865) $ (1,126,020) 4,135,862 (17,806) (2,004,166) 1,150,321 3,374,335 $ 2,138,191 $ (1,979,865) (8,309,424) $ (4,493,660) $ (2,961,749) (39,641) (8,349,065) (891,163) (142,036) (1,285,124) — (4,493,660) (2,162,865) (136,576) (1,516,323) — (2,961,749) 54,408 (129,312) (1,457,007) (10,667,388) $ (8,309,424) $ (4,493,660) 14,008,316 4,327 1,391 7,762 13,480 14,021,796 $ $ $ $ 15,792,017 5,689 (226) (1,136) 4,327 15,796,344 $ $ $ $ 14,112,112 6,100 (260) (151) 5,689 14,117,801 $ $ $ $ $ $ $ $ $ $ $ $ $ $ Preferred stock Beginning of period Issuance Acquisition of subsidiary Redemption End of period Common stock Beginning of period Issuance Buyback of common stock Acquisition of subsidiary Stock-based award activity Direct purchase and dividend reinvestment End of period Additional paid-in capital Beginning of period Issuance Buyback of common stock Acquisition of subsidiary Stock-based award activity Redemption of preferred stock Direct purchase and dividend reinvestment End of period Accumulated other comprehensive income (loss) Beginning of period Unrealized gains (losses) on available-for-sale securities Reclassification adjustment for net gains (losses) included in net income (loss) End of period Accumulated deficit Beginning of period - unadjusted Cumulative effect of change in accounting principle for credit losses Beginning of period - adjusted Net income (loss) attributable to Annaly Dividends declared on preferred stock (1) Dividends and dividend equivalents declared on common stock and share-based awards (1) End of period Total stockholder’s equity Noncontrolling interests Beginning of period Net income (loss) attributable to noncontrolling interests Equity contributions from (distributions to) noncontrolling interests End of period Total equity (1) Refer to the “Capital Stock” Note for dividends per share for each class of shares. See notes to consolidated financial statements. F-5 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) For The Years Ended December 31, 2019 2018 2020 Cash flows from operating activities income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities of premiums and discounts of investments, net ing costs ff Amortization of securitized debt premiums and discounts and deferred financ Depreciation, amortization and other noncash expenses Net (gains) losses on disposals of investments and other Net (gains) losses on investments and derivatives Income from unconsolidated joint ventures Loan loss provision Payments on purchases of loans held for sale Proceeds from sales and repayments of loans held for sale Net receipts (payments) on derivatives Net change in Other assets Interest receivable Interest payable Other liabilities Net cash provided by (used in) operating activities Cash flows from investing activities Payments on purchases of securities Proceeds from sales of securities Principal payments on securities Payments on purchases and origination of loans Proceeds from sales of loans Principal payments on loans Payments on purchases of MSRs Proceeds from sales of MSRs Investments in real estate Proceeds from sales of real estate Proceeds from reverse repurchase agreements Payments on reverse repurchase agreements Distributions in excess of cumulative earnings from unconsolidated joint ventures Cash acquired (paid) in asset acquisition, net Net cash provided by (used in) investing activities Cash flows from financing activities Proceeds from repurchase agreements and other secured financing Principal payments on repurchase agreements and other secured financing Proceeds from issuances of securitized debt Principal repayments on securitized debt Payment of deferred financing ff Net proceeds from stock offerings, direct purchases and dividend reinvestments Redemptions of preferred stock Proceeds from participations issued Net principal receipts (payments) on mortgages payable Net contributions (distributions) from (to) noncontrolling interests Net payments on share repurchases Dividends paid cost Net cash provided by (used in) financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents including cash pledged as collateral, beginning of period Cash and cash equivalents including cash pledged as collateral, end of period Supplemental disclosure of cash flow information Interest received Dividends received Interest paid (excluding interest paid on interest rate swaps) Net interest received (paid) on interest rate swaps Taxes received (paid) Noncash investing and financing activities Receivable for unsettled trades Payable for unsettled trades Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjd ustment Dividends declared, not yet paid Derecognition of assets of consolidated VIEs Derecognition of securitized debt of consolidated VIEs See notes to consolidated financial statements. F-6 $ (889,772) $ (2,163,091) $ 54,148 1,371,178 (11,576) 41,357 (661,513) 2,368,879 7,072 147,581 (147,833) 168,716 (1,958,131) 249,778 159,320 (285,219) (31,870) 527,967 (32,676,856) 52,639,778 19,571,476 (2,257,314) 624,026 2,222,500 — 72,160 (7,450) 149,600 58,800,000 (58,800,000) 7,590 6,264 40,351,774 1,113,273 (11,854) 31,559 47,944 1,855,025 6,893 16,569 (250,348) 282,693 (1,939,634) (39,880) (85,951) (94,593) 31,838 (1,199,557) (63,465,822) 25,606,504 17,199,893 (4,126,123) 365,787 3,139,084 — — (39,144) 24,955 98,339,755 (97,689,715) 3,155 — (20,641,671) 692,811 (3,439) 72,364 1,123,969 136,673 2,840 3,496 (227,871) 97,913 480,216 98,104 (19,563) 295,640 (185,283) 2,622,018 (44,795,176) 33,256,888 11,488,342 (3,149,224) 150,059 2,107,689 (381) — (22,722) — 85,318,562 (85,030,351) 26,228 (258,334) (908,420) 2,776,331,362 (2,816,805,618) 2,385,374 (1,238,962) (553) 1,175 (460,000) 38,741 (60,980) 7,762 (209,418) (1,475,650) (41,486,767) (607,026) 1,850,729 , , 1,243,703 , , 3,681,826 , , , , 4,643 , , , , 1,166,977 296,621 ,, ,, 1,515 , , 15,912 , , , , 884,069 1,236,144 307,613 ,, 1,222,221 , , , , 1,141,311 , , , , $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 5,470,733,256 (5,449,836,013) 3,444,055 (2,031,959) (12,228) 1,829,025 (230,000) — (26,202) (1,136) (223,574) (1,689,016) 21,956,208 114,980 1,735,749 , , 1,850,729 , , 4,811,218 , , , , 8,395 , , , , 2,902,644 , , (323,028) ) , ( ) , ( ,, 2,284 4,792 , , ,, , 463,387 4,118,056 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ ,, 357,527 $ — $ — $ 5,117,155,986 (5,116,952,444) 920,142 (1,384,333) (1,072) 1,532,356 (412,500) — (716) (971) — (1,540,886) (684,438) 1,029,160 706,589 , , 1,735,749 , , 3,894,478 , , , , 7,564 , , , , 1,726,887 (1,894) ) ( , ) ( , ) ( (295) ) ( , , 68,779 , , ,, , 583,036 (853,845) ,, 394,129 — — $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ ANNALY CAPITAL MANAA Financial Statements GEMENT, INC. AND SUBSIDIARIES ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED December 31, 2020, 2019 and 2018 ________________________________________________________________________________________________________________________________ 1. DESCRIPTION OF BUSINESS tion that commenced operations on Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corpora February 18, 1997. The Company is a leading diversified capital manager that invests in and finances residential and commercial assets. 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 (“MSRs”), commercial real estate assets 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. r The Company’s four investment groups are primarily comprim sed of the folff lowing: Investment Groups Description Annaly Agency Group Annaly Residential Credit Group Annaly Commercial Real Estate Group Annaly Middle Market Lending Group Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Invests primarily in non-Agency residential mortgage assets within securitized product and whole loan markets. Originates and invests in commercial mortgage loans, securities, and other commercial real estate debt and equity investments. Provides financing to private equity-backed middle market businesses, primarily on senior debt within select industries. focusing r The Company is an internally-m 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 Note 19) on June 30, 2020, the Company was externally managed by Annaly Management Company LLC (the “Former Manager”). anaged companym 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 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 durid results could differ materially from those estimates. ng the reporting period. Actual t Certain line items in the Company’s periods have been adjusted to conform to the current presentation. m Consolidated Statements of Cash Flows were aggregated to simplify presentation. Prior 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. ii esll of Consolidatidd on – The consolidated financ Principl ial 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 firff st 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. ff Interett VoVV tingii financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE. st Entittt iett s – A VOE is an entity that has sufficient equity and in which equity investors have a controlling tt ll nteII rest EntEE ities – A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a Variable I controlling financial interest, and/or (ii) do not have sufficient equitq e its activities without y at risk forff 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 significff antly impact the VIE’s the entity to financ ff s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-7 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 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. Referff Interest Entities” Note for further information. to the “Variablea tt etMM hod Investmentstt - For entities that are not consolidated, but where the Company has significaff nt influence over the Equity Mtt operating or financial decisions of the entity, the Companym y 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- under the equity method. These investments are included in real than-temporary impairmm estate, net and Other assets with income or loss included in Other income (loss). accounts for the investment under the equitq ent of joint ventures accounted forff Cash and cash equivq Cash and Cash Equivalents –tt alents 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, of cash roximates fair value. Cash and securities deposited with clearing organizations and collateral held in the formff which appa on margin with counterparties to the Company’s interest rate swapsa and other derivatives totaled $1.1 billion and $1.6 billion at December 31, 2020 and December 31, 2019, respectively. – The Company may invest in equity securities that are not accounted forff Equityii Securitiestt under the equity method or do not r value with unrealized gains and losses reported result in consolidation. These equity securities are required to be reported at faiff in the Consolidated Statements of Comprehensive Income (Loss) as Net unrealized gains (losses) on instruments measured at fair value through earnings, unless the securities do not have readily determinabla e fair values. For such equity securities fair values, the Company has elected to carry the securities at cost less impairment, if any, plus or without readily determinablea the identical or similar investment of the price changes in orderly transactions forff minus changes resulting from observablea same issuer. For equity securities carried at fair value through earnings, dividends are recorded in earnings on the declaration date. Dividends from equity securities without readily determinable fair values are recognized as income when received to the extent they are distributed fromff net accumulated earnings. ff alVV ue Measurements and the Fair Value Option – The Company reports various investments at faiff r value, including Fair Vii r value option (“FVO”). The Company chooses to certain eligible financial instruments elected to be accounted forff r ents. Items for which the faiff elect the fair value option in order to simplify t r value in the Consolidated Statements of Financial Condition and any change value option has been elected are presented at faiff value through earnings in the in fair value is recorded in Net unrealized gains (losses) on instruments measured at fair Consolidated Statements of Comprehensive Income (Loss). For additional information regarding financial instruments for which the Company has elected the fair value option see the tablea he accounting treatment for certain financial instrumr in the “Financial Instruments” Note. under the faiff ff ff 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. ii Assets and Liabil Offsettingtt 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 are subject to netting agreements and they meet the offsetting criteria. Please see below and refer to the “Secured Financing” Note forff further discussion on reverse repurchase and repurchase agreements. - The Companym itll iestt Derivative Instruments – Derivatives are accounted forff in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in faiff r 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 with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments forff accounting purposes. Refer to the “Derivative Instruments” Note for further discussion. m – The Company measures compensa tion expense for stock-based awards at fair value, which is Stock-Based Compensation generally based on the grant-date fair value of the Company’s common stock. Compensation expense is recognized ratably over the vesting or requisite service period of the award. Compensation expense for awards with performance conditions is ance condition at each reporting date. Stock-based awards that do not recognized based on the probable outcome of the performff are recorded when they occur. The Companym require future service (i.e., vested awards) are expensed immediately. Forfeitures generally issues new shares of common stock uponu delivery of stock-based awards. m t F-8 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES Interestee Income - The Company recognizes interest income primarily on Residential Securities, residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion. ff m of interest income, based upon the For its securities, the Company recognizes coupon income, which is a component terms. In addition, the Company amortizes or outstanding principal amounts of the financial instruments and their contractual 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 effect ive 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, ed as if it had been in place from the date of the security’s the effective interest rate determined for each security is appli acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effeff ctive yield been applie d 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 impactm prepayment speed projections and the amount of premium amortization recognized in any given period. a a t 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 adjusd tment 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 ff discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss). r value or held forff 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 faiff 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 ity of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a principal until collectabila cash basis. Generally, a loan is returned amount of the to accrual status when the borrower has resumed paying the full 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. ff t accrued interest The Company has made an accounting policy election not to measure an allowance forff receivable. If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual dued date for commercial loans or 120 days for corporate debt carrir ed 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. loans losses forff Referff to the “Interest Income and Interest Expense” Note for further discussion of interest income. – The Company has elected to be taxed as a REIT and intends to complym Income Taxesaa 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 aries as taxable REIT subsidiaries (“TRSs”). As such, each of these TRSs is taxable as a domestic C corporation and subsidi u subject to federa r l, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for furthe discussion on income taxes. ff ff Recent Accounting Pronouncements The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not listed below not expected to have a significant impact on the Company’s consolidated financial statements when were not applicable, adopted or did not have a significant impact on the Company’s consolidated finaff ncial statements upon adoption. a F-9 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 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”) pp ASU 2020-04 Reference Rate ( Reform (Topic 848): Facilitation ) of the Effects of Reference Rate Reform on Financial Reporting 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 liaba ility of $2.2 million for unfunded loan commitments, which reduced beginning retained earnings by $39.6 million as of January 1, 2020. u forff fair at earnings. 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 value The through amendments affect cash and cash reverse repurchase equivalents, 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. 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. F-10 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES 4. FINANCIAL INSTRUMENTS The following tablea 2019. presents characteristics for certain of the Company’s financial instruments at December 31, 2020 and Financial Instruments (1) Balance Sheet Line Item Type / Form Assets Agency mortgage-backed securities (2) Agency mortgage-backed securities (3) Residential credit risk transfer securities Non-agency mortgage-backed securities Measurement Basis (dollars in thousands) Fair value, with unrealized gains (losses) through other comprehensive income Fair value, with unrealized gains (losses) through earnings Fair value, with unrealized gains (losses) through earnings Fair value, with unrealized gains (losses) through earnings Commercial real estate debt investments - CMBS Fair value, with unrealized gains (losses) through other comprehensive income Commercial real estate debt investments - CMBS (4) Commercial real estate debt investments - credit risk transfer securities Fair value, with unrealized gains (losses) through earnings Fair value, with unrealized gains (losses) through earnings Residential mortgage loans Commercial real estate debt and preferred equity, held for investment Fair value, with unrealized gains (losses) through earnings 345,810 1,647,787 Amortized cost 498,081 669,713 Corporate debt held for investment, net Amortized cost Securities Securities Securities Securities Securities Securities Securities Total securities Loans, net Loans, net Loans, net Total loans, net Assets transferred or pledged to securitization vehicles Assets transferred or pledged to securitization vehicles Assets transferred or pledged to securitization vehicles Assets transferred or pledged to securitization vehicles Agency mortgage-backed securities Residential mortgage loans Commercial mortgage loans Fair value, with unrealized gains (losses) through other comprehensive income Fair value, with unrealized gains (losses) through earnings Fair value, with unrealized gains (losses) through earnings Commercial mortgage loans Amortized cost Total assets transferred ff or pledged to securitization vehicles Repurchase agreements Repurchase agreements Liabilities Other secured financing Loans Debt issued by securitization vehicles Securities Participations issued Mortgages payable Participations issued Loans Amortized cost Amortized cost Fair value, with unrealized gains (losses) through earnings Fair value, with unrealized gains (losses) through earnings Amortized cost December 31, 2020 December 31, 2019 $ 73,562,972 $ 112,124,958 504,087 768,409 532,403 531,322 972,192 1,135,868 31,603 64,655 45,254 208,368 3,885 — 75,652,396 114,833,580 2,239,930 3,083,821 2,144,850 4,462,350 620,347 1,122,588 3,249,251 2,598,374 2,166,073 2,345,120 874,349 6,910,020 936,378 7,002,460 64,825,239 101,740,728 917,876 4,455,700 5,652,982 5,622,801 39,198 426,256 — 485,005 (1) (2) (3) (4) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted forff at cost. Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities. Includes interest-only securities and reverse mortgages. Includes single-asset / single borrower CMBS. 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 securities are carried at fair value, with changes in faiff ve 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 ve Income (Loss). Transactions for securities are recorded on trade date, including the Consolidated Statements of Comprehensi r value recognized in other comprehensi m m ff F-11 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES 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. nt – Management evaluates availabla e-for-sale securities and held-to-maturity debt securities forff Impairme ent at least ii 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 beforeff 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 Comprehensi ve Income (Loss) as a Securities Loss Provision and reflected as an Allowance forff Credit Losses on Securities on the Consolidated Statements of Financial Condition, while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). When the fair value of a held-to-maturity security is less than the cost, the Companym performs an analysis to determine whether it expects to recover the entire cost basis of the security. There was no impairment recognized for the years ended December 31, 2020, 2019 and 2018. impairmm m m 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 Corpor ration (“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”). TBA securities without intent to accept delivery (“TBA derivatives”), are accounted for as derivatives as discussed in the “Derivative Instruments” Note. CRT SecSS uritiestt - 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. rr - The Company invests in non-Agency mortgage-backed securities such as those Non-Agency Mortgage-Backed Securitiestt 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. m Commercialii Mortgage-Backed Securitiii es (“Commercial Securities”) -” Certain commercial mortgage-backed securities are classified as availablea -for-sale and reported at faiff r value with unrealized gains and losses reported as a component of Other comprehe nsive income (loss). Management evaluates such Commercial Securities for impairment at least quarterly. The commercial mortgage-backed Companym elected the fair securities, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through earnings. value option on certain Commercial Securities, including conduitd ff The following represents a rollforward of the activity forff to securitization vehicles, for the year ended December 31, 2020: the Company’s securities, excluding securities transferred or pledged Residential Securities Commercial Securities Total (dollars in thousands) $ Beginning balance January 1, 2020 Purchases Sales and transfers (1) Principal paydowns (Amortization) / accretion Fair value adjustment $ 114,560,557 33,082,119 (52,367,095) (19,531,705) (1,374,490) 1,202,268 $ 273,023 25,285 (204,061) (4,933) 652 (9,224) Ending balance December 31, 2020 $ 75,571,654 $ 80,742 $ 114,833,580 33,107,404 (52,571,156) (19,536,638) (1,373,838) 1,193,044 75,652,396 (1) Includes transfers to securitization vehicles with a carrying value of $533.3 million during the year ended December 31, 2020. F-12 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES owing tables The foll ff vehicles, that was carried at their fair value at December 31, 2020 and 2019: a present the Company’s securities portfolio, excluding securities transferred or pledged to securitization December 31, 2020 Principal / Notional Remaining Premium Remaining Discount Unrealized Gains Unrealized Losses Estimated Fair Value Amortized Cost (dollars in thousands) $ 64,800,235 455,675 $ 3,325,020 2,869 $ (22,143) $ 68,103,112 455,175 (3,369) $ 3,200,542 22,341 $ (1,076) $ 71,302,578 477,516 — Agency Fixed-rate pass-through Adjustable-rate pass-through CMO Interest-only Multifamily (1) Reverse mortgages Total agency securities Residential credit CRT (2) Alt-A Prime Prime interest-only Subprime NPL/RPL Prime jumbo (>=2010 vintage) Prime jumbo (>=2010 vintage) Interest-only Total residential credit securities Total Residential Securities Commercial 139,664 2,790,537 1,910,384 47,585 $ 70,144,080 $ 544,780 $ $ 93,001 177,852 194,687 197,779 475,108 44,696 2,177 564,297 50,148 4,183 3,948,694 7,324 51 5,126 1,882 584 821 207 — — 141,841 564,297 (1,057) 1,604,913 — 51,768 (26,569) $ 70,921,106 (2,430) $ 538,941 $ $ (17,368) (15,999) — (18,181) (2,416) (5,300) 75,684 166,979 1,882 180,182 473,513 39,603 291,624 2,019,527 $ $ 72,163,607 6,803 22,798 3,971,492 $ $ $ $ — (61,694) $ 6,803 1,483,587 (88,263) $ 72,404,693 7,926 3,513 59,548 252 3,294,122 3,062 4,644 14,607 — 8,312 3,782 3,680 — 38,087 3,332,209 54 3,332,263 $ $ $ $ $ $ Principal / Notional Remaining Premium Remaining Discount Unrealized Gains Commercial Securities $ 89,858 — $ (7,471) $ 82,387 Total securities $ 72,253,465 $ 3,971,492 $ (95,734) $ 72,487,080 Agency Fixed-rate pass-through Adjustable-rate pass-through CMO Interest-only Multifamily Reverse mortgages Total agency investments Residential credit CRT (2) Alt-A Prime Prime interest-only Subprime NPL/RPL Prime jumbo (>=2010 vintage) Prime jumbo (>=2010 vintage) Interest-only Total residential credit securities Total Residential Securities Commercial Commercial Securities Total securities $ 102,448,565 1,474,818 156,937 4,486,845 1,619,900 54,553 $ 110,241,618 $ 517,110 160,957 277,076 391,234 370,263 164,180 182,709 554,189 $ 2,617,718 $ 112,859,336 $ 263,965 $ 113,123,301 $ 4,345,053 72,245 $ 2,534 862,905 19,981 5,053 5,307,771 15,850 250 3,362 3,757 1,356 351 1,026 9,001 34,953 5,342,724 10,873 5,353,597 $ $ $ $ $ $ $ $ $ $ $ $ December 31, 2019 Amortized Cost (dollars in thousands) $ (46,614) $ 106,747,004 1,545,663 (1,400) — — (2,280) 159,471 862,905 1,637,601 — 59,606 (50,294) $ 111,012,250 (2,085) $ (22,306) (17,794) — (59,727) (440) (4,281) 515,950 138,901 262,644 3,757 311,892 164,091 179,454 9,001 — (106,633) $ 1,585,690 (156,927) $ 112,597,940 (9,393) $ 265,445 (166,320) $ 112,863,385 $ $ $ $ $ $ 2,071,583 10,184 545 2,787 82,292 550 2,167,941 16,605 12,482 14,142 — 37,205 191 5,360 — 85,985 2,253,926 7,710 2,261,636 — (145,901) (954) (238) 149,767 421,909 1,663,507 51,782 (148,169) $ 74,067,059 (9,600) $ 532,403 — (77) (642) (61) (1,448) — 80,328 181,509 1,240 188,433 475,847 43,283 (5,251) (17,079) $ 1,552 1,504,595 (165,248) $ 75,571,654 (1,699) $ 80,742 (166,947) $ 75,652,396 Unrealized Losses Estimated Fair Value (95,173) $ 108,723,414 1,524,331 (31,516) — (157,130) (2,696) 160,016 708,562 1,717,197 (309) 59,847 (286,824) $ 112,893,367 (1,233) $ — (529) (590) (118) (14) (150) 531,322 151,383 276,257 3,167 348,979 164,268 184,664 (1,851) (4,485) $ 7,150 1,667,190 (291,309) $ 114,560,557 (132) $ 273,023 (291,441) $ 114,833,580 $ $ $ $ $ $ $ $ $ $ $ $ $ (1) Principal/Notional amount includes $354.6 million and $0 million of an Agency CMBS interest-only security as of December 31, 2020 and December 31, 2019, respectively. F-13 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES (2) Principal/Notional amount includes $10.7 million and $14.9 million of a CRT interest-only security as of December 31, 2020 and December 31, 2019, respectively. The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferredr pledged to securitization vehicles, by issuing Agency at December 31, 2020 and 2019: or Investment Type Fannie Mae Freddie Mac Ginnie Mae Total December 31, 2020 December 31, 2019 (dollars in thousands) $ $ 56,218,033 $ 17,735,041 113,985 74,067,059 $ 76,656,831 36,087,100 149,436 112,893,367 Actual maturities of the portfolio are affecff t maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual ted by periodic payments and prepayments of principal on the underlying mortgages. The following tablea securitization vehicles, at December 31, 2020 and 2019, according to their estimated weighted average life classifications: summarizes the Company’s Residential Securities, excluding securities transferred or pledged to Estimated weighted average life ss than one year Greater than one year through five years Greater than five years through ten years Greater than ten years Total December 31, 2020 December 31, 2019 Estimated Fair Value Amortized Cost Estimated Fair Value Amortized Cost (dollars in thousands) $ 110,203 $ 109,540 $ 3,997 $ 4,543 45,643,138 28,509,058 1,309,255 43,404,877 27,610,923 1,279,353 36,290,254 77,732,756 533,550 35,581,833 76,504,845 506,719 $ 75,571,654 $ 72,404,693 $ 114,560,557 $ 112,597,940 The estimated weighted average lives of the Residential Securities at December 31, 2020 and 2019 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 tablea securities, accounted for as available-forff securities have been in a continuous unrealized loss position at December 31, 2020 and 2019. presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed -sale where the fair value option has not been elected, by length of time that such December 31, 2020 December 31, 2019 Estimated Fair Value (1) Gross Unrealized Losses (1) Number of Securities (1) Estimated Fair Value (1) (dollars in thousands) Gross Unrealized Losses (1) Number of Securities (1) $ $ 777,586 — 777,586 $ $ (2,030) — (2,030) 30 — 30 $ $ 7,388,239 11,619,280 19,007,519 $ $ (24,056) (105,329) (129,385) 139 352 491 Less than 12 months 12 Months or more Total (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. Substa ntially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating. The investments are not considered ty or for a period of to be impaired because the Company currently has the abia lity and intent to hold the investments to maturi time sufficient for a foreca sted 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. u ff t During the years ended December 31, 2020 and 2019, the Company disposed of $51.8 billion and $25.5 billion, respectively, of Residential Securities. The foll presents the Company’s net gains (losses) from the disposal of Residential Securities for the years ended December 31, 2020 and 2019. owing tablea ff F-14 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES For the year ended December 31, 2020 December 31, 2019 6. LOANS Gross Realized Gains Gross Realized Losses (dollars in thousands) Net Realized Gains (Losses) $ $ 942,450 172,518 $ $ (305,449) (210,317) $ $ 637,001 (37,799) rate loans. Loans are classifiedff The Company invests in residential, commercial and corpor as either held for investment or held for sale. Loans are also eligible to be accounted for under the fair value option. Excluding loans transferred or pledged to securitization vehicles, as of December 31, 2020 and 2019, the Company reported $0.3 billion and $1.6 billion, respectively, of loans for which the fair value option was elected. If loans are held for investment and the fair value option has not been elected, they are accounted for at amortized cost less impairment. 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 forff sale. If loans are held for sale and the fair value option was not elected, they are accounted forff at the lower of cost or fair value. Any origination fees and costs or and recognized upon sale. The Company determines the fair value of loans held purchase premiums or discounts are deferredr for sale on an individual loan basis. ll e forff Losses – The Company evaluates the need forff Allowanc investment where the fair value option is not elected. Allowance forff deemed uncollectible. a loss reserve on each of its loans classified as held-for- loan losses are written off in the period the loans are ity of defaul 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 of the total expected credit loss over the expected life off ff me expected credit losses, management t and loss given default methodology (“Loss Given Default methodology”), which considers ff utilizes a probabila projected economic conditions over the reasonable and supportablea ast incorporates primarily market- forecast period. The forec based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced fromff 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 in the Consolidated Statements of Comprehensi f the loan. In estimating the lifeti ve Income (Loss). m m ff ent methodology to determine the expected credit For loans experiencing credit deterioration, the Company may use a differ losses such as a discounted cash floff w 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 appa licable. Additionally, the Company may elect the practical expedient for a finaff ncial 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. ff Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary.rr 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 fact ors, 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 landscapea 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 , and analyzes current results relative to budgets and sensitivities perforff med at inception of the packages, if applicablea investment. Because these determinations are based upon projections of futuret economic events, which are inherently subjective, the amounts ultimately realized may differ materially fromff the carrying value as of the reporting date. ff 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. F-15 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES The Company recorded loan loss provisions of $147.6 million, $16.6 million and $3.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020 and 2019, the Company’s loan loss allowance was $169.5 million and $20.1 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, for the year ended December 31, 2020: Beginning balance January 1, 2020 $ 1,647,787 $ 669,713 $ 2,144,850 $ 4,462,350 Residential Commercial Corporate Total (dollars in thousands) Impact of adopting CECL Purchases / originations Sales and transfers (1) Principal payments Gains / (losses) (2) (Amortization) / accretion — 1,168,830 (2,298,391) (154,864) (11,854) (5,698) (3,599) 217,329 (235,533) (77,422) (74,965) 2,558 (29,653) 1,061,644 (357,930) (576,759) (14,429) 12,207 (33,252) 2,447,803 (2,891,854) (809,045) (101,248) 9,067 Ending balance December 31, 2020 $ 345,810 $ 498,081 $ 2,239,930 $ 3,083,821 (1) (2) Includes securitizations, syndications and transfers to securitization vehicles or REO. Includes transfer of residential loans to securitization vehicles with a carrying value of $1.9 billion during the year ended December 31, 2020. Includes loan loss allowances. The carrying value of the Company’s residential loans held for sale was $47.0 million and $66.7 million at December 31, 2020 and 2019, respectively. The Company also has off-balance-sheet credit exposures related to unfunded loan commitments, including revolvers, delayed funding commitments that are not unconditionally cancelable by the Company. The Company draw term loans and futuret utilizes the same methodology in calculating the liability related to the expected credit losses on these exposures as it does forff 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 liabia lities on m the Company’s Consolidated Statements of Financial Condition. Residential tt d-rate whole loans. The Company’s residential mortgage loans are primarily comprisem The Company’s residential loans are accounted forff ted in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Statements of Comprehensive Income. Additionally, the Company consolidates a collateralized finff ancing entity that securitized prime adjd ustable-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 forff further information related to the Company’s consolidated residential mortgage loan trusts. under the fair value option with changes in faiff d of performing adjud stable-rate and fixeff r value reflecff The following tablea including loans transferred or pledged to securitization vehicles, at December 31, 2020 and 2019: presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, December 31, 2020 December 31, 2019 (dollars in thousands) Fair value Unpaid principal balance $ $ 3,595,061 $ 3,482,865 $ 4,246,161 4,133,149 F-16 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The foll ff m Comprehensi owing table provides information regarding the line items and amounts recognized in the Consolidated Statements of ve Income (Loss) for December 31, 2020 and 2019 for these investments: s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S Interest income Net gains (losses) on disposal of investments Net unrealized gains (losses) on instruments measured at fair value through earnings Total included in net income (loss) For the Years Ended December 31, 2020 December 31, 2019 (dollars in thousands) $ $ 170,259 $ (38,372) 37,693 169,580 $ 150,066 (18,619) 51,290 182,737 The following tablea 2019 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles: provides the geographic concentrations based on the unpaid principal balances at December 31, 2020 and Geographic Concentrations of Residential Mortgage Loans December 31, 2020 December 31, 2019 Property location California New York Florida All other (none individually greater than 5%) Total % of Balance 48.9% 14.0% 6.0% 31.1% 100.0% Property location California New York Florida All other (none individually greater than 5%) % of Balance 52.1% 10.5% 5.3% 32.1% 100.0% The following tablea pledged to securitization vehicles, at December 31, 2020 and 2019: provides additional data on the Company’s residential mortgage loans, including loans transferred or December 31, 2020 December 31, 2019 Portfolio Range Portfolio Weighted Average Portfolio Range Unpaid principal balance Interest rate Maturity FICO score at loan origination Loan-to-value ratio at loan origination $1 - $3,448 0.50% - 9.24% 7/1/2029 - 1/1/2061 505 - 829 8% - 104% (dollars in thousands) $473 4.89% 4/17/2046 755 67% $1 - $3,448 2.00% - 8.38% 1/1/2028 - 12/1/2059 505 - 829 8% - 105% Portfolio Weighted Average $459 4.94% 12/29/2047 758 67% At December 31, 2020 and 2019, approximately 37% and 36%, respectively, of the carryirr ng value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjud stable-rate. Commercial 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 are designated as held forff investment and are originated or purchased by the Company are 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. Management generally reviews the most recent financial informff ation 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 commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and Company’s ors management deems important. Management also reviews market pricing to assess each borrower’s may consider other fact abia lity to refinance their respective assets at the maturity of each loan, in addition to 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 m ff t F-17 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 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 internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating rubri commercial loans has nine categories as depicted below: c forff r Risk Rating - Commercial Loans Description 1-4 / Performing Meets all present contractual obligations. 5 / Performing - Closely Monitored Meets all present contractual obligations, but are transitional or could be exhibiting some weaknesses in both leverage and liquidity. 6 / Performing - Special Mention 7 / Substandard 8 / Doubtful 9 / Loss Meets all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and, in deterioration of repayment prospects. if uncorrected, may result Inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Considered uncollectible. Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent a tabular disclosure of ff financi the amortized cost basis of the Company’s al information produced by the borrower and consideration of economic conditions. See below forff commercial loans by year of origination and internal risk rating. m r The Company’s commercial loans are collateral-dependent and, as such, for loans experiencing credit deterioration, the Companym is required to record an allowance based upon the fair value of the underlying collateral if foreclosure is probable or if the practical expedient is elected. For the year ended December 31, 2020, the Company recorded a loan loss provision on impaired commercial loans of $78.4 million with a principal balance and carrying value, net of allowances of $181.2 million and $113.6 million, respectively, based upon the fair value of the underlying collateral. The Company uses a discounted cash flow or market based valuation technique based uponu the underlying property to project property cash floff ws. In projecting these ors management cash flows, the Company reviewed the borrower financial statements, rent rolls, economic trends and other fact deems important. These nonrecurring fair value measurements are considered to be in level three of the fair value measurement hierarchy as there are unobservabla e inputs, which are significant to the overall fair value. For the year ended December 31, 2019, the Company recorded a loan loss provision of $9.2 million on commercial loans with a principal balance and carrying value, net of allowances of $43.6 million and $30.9 million, respectively. ff As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect the Companym Loan loss provision in the Consolidated Statements of Comprehensive Income (Loss). ff recorded a net loan loss provision of $54.8 million based upon its Loss Given Default methodology recorded in loan loss allowance of $7.8 million was recorded on January 1, 2020. For the year ended December 31, 2020, During the year ended December 31, 2020, 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 forbearance. 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. Futuret funding commitments on the restrucr the Company modified five commercial turt ed loans total $4.1 million. At December 31, 2020 and December 31, 2019, the amortized cost basis of commercial loans on nonaccrual status was $46.8 million and $175.2 million, respectively. For the years ended December 31, 2020 and 2019, the Company recognized interest income on commercial loans on nonaccrual statust of $2.1 million and ($0.1) million, respectively. rr At December 31, 2020 and December 31, 2019, the Company had unfunded commercial real estate loan commitments of $99.3 million and $181.4 million respectively. At December 31, 2020, the liabia lity related to the expected credit losses on the unfunded commercial loan commitments was $5.1 million. At December 31, 2020 and 2019, approximately 94% and 92%, respectively, of the carrying value of the Company’s CRE Debt and Preferred Equity Investments, including loans transferred or pledged to securitization vehicles and excluding commercial loans held forff sale, were adjustable-rate. F-18 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES The sector attributes of the Company’s commercial real estate investments held forff pledged to securitization vehicles, at December 31, 2020 and December 31, 2019 were as follows: investment, including loans transferred or Office Retail Multifamily Hotel Industrial Other Healthcare Total Sector Dispersion December 31, 2020 December 31, 2019 Carrying Value % of Loan Portfolio Carrying Value (dollars in thousands) % of Loan Portfolio $ 650,034 256,493 250,095 115,536 60,097 20,302 19,873 47.4% $ 18.7% 18.2% 8.4% 4.4% 1.5% 1.4% 681,129 389,076 262,302 135,681 82,441 36,589 18,873 42.4% 24.2% 16.3% 8.4% 5.1% 2.3% 1.3% $ 1,372,430 100.0% $ 1,606,091 100.0% At December 31, 2020 and 2019, commercial real estate investments held for investment were comprised of the following: December 31, 2020 December 31, 2019 Outstanding Principal Carrying Value (1) Percentage of Loan Portfolio (2) Outstanding Principal Carrying Value (1) Percentage of Loan Portfolio (2) (dollars in thousands) Senior mortgages Senior securitized mortgages (3) Mezzanine loans Total $ $ 387,124 $ 938,859 181,261 373,925 874,349 124,156 25.7 % $ 503,499 $ 62.3 % 12.0 % 940,546 183,064 499,690 936,378 170,023 1,507,244 $ 1,372,430 100.0 % $ 1,627,109 $ 1,606,091 30.9 % 57.8 % 11.3 % 100.0 % (1) (2) (3) Carrying value includes unamortized origination fees of $4.9 million and $8.3 million at December 31, 2020 and 2019, respectively. Based on outstanding principal. Assets of consolidated VIEs. The following tablea investment at December 31, 2020 and 2019: s represent a rollforward of the activity for the Company’s commercial real estate investments held forff Beginning balance (January 1, 2020) (2) Originations & advances (principal) Principal payments Principal write off Transfers (3) Net (increase) decrease in origination fees Realized gain Amortization of net origination fees Allowance for loan losses Beginning allowance, prior to CECL adoption Impact of adopting CECL Current period allowance Write offs Ending allowance December 31, 2020 Senior Mortgages Senior Securitized Mortgages (1) Mezzanine Loans (dollars in thousands) Total $ 499,690 $ 936,378 $ 182,726 $ 1,618,794 206,090 (77,344) — (245,120) (1,055) 204 2,371 — (2,263) (8,648) — — (144,308) — 142,621 (653) — 2,460 — (4,166) (57,983) — (10,911) (62,149) 12,374 (78) (7,000) (7,100) (80) — 187 (12,703) (1,336) (66,521) 23,687 (56,873) 218,464 (221,730) (7,000) (109,599) (1,788) 204 5,018 (12,703) (7,765) (133,152) 23,687 (129,933) Net carrying value (December 31, 2020) $ 373,925 $ 874,349 $ 124,156 $ 1,372,430 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-19 ANNALY CAPITAL MANAGE Financial Statements A MENT, INC. AND SUBSIDIARIES Net carrying value (January 1, 2019) Originations & advances (principal) Principal payments Transfers (3) Net (increase) decrease in origination fees Amortization of net origination fees Net (increase) decrease in allowance December 31, 2019 Senior Mortgages Senior Securitized Mortgages (1) Mezzanine Loans Total (dollars in thousands) $ 981,202 $ — $ 315,601 $ 1,296,803 572,204 (16,785) (1,034,754) (4,200) 2,023 — — (150,245) 1,083,487 — 3,136 21,709 (149,633) (8,675) (184) 412 — $ (9,207) 593,913 (316,663) 40,058 (4,384) 5,571 (9,207) Net carrying value (December 31, 2019) $ 499,690 $ 936,378 $ 170,023 $ 1,606,091 (1) (2) (3) Represents assets of consolidated VIEs. Excludes loan loss allowances. Includes transfers to securitization vehicles or REO. The following tablea December 31, 2020. provides the internal loan risk ratings of commercial real estate investments held for investment as of Amortized Cost Basis by Risk Rating and Vintage (1) Risk Rating Total 2020 2019 (dollars in thousands) Vintage 2018 2017 2016 Prior / Performing $ 300,623 $ 111,177 $ 134,923 $ — $ 12,972 $ — $ 41,551 5 / Performing - Closely Monitored 6 / Performing - Special Mention 7 / Substandard 8 / Doubtful 9 / Loss (2) Total 145,231 628,224 205,026 93,326 — — 58,648 9,368 — — 145,231 135,868 78,407 — — — 267,555 66,294 39,704 — — 96,982 — 53,622 — — 69,171 — — — — — 50,957 — — $ 1,372,430 $ 179,193 $ 494,429 $ 373,553 $ 163,576 $ 69,171 $ 92,508 (1) (2) The amortized cost basis excludes accrued interest. As of December 31, 2020, the Company had $3.8 million of accrued interest receivable on commercial loans which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition. Includes two commercial mezzanine loans for which the Company recorded a full loan loss allowance of $46.6 million. ff Corporate Dtt ebt 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 seven 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 froff m coupou n the outstanding principal amounts of the debt and its contractual terms. Premiums and payments is accrued based uponu ive interest method. discounts are amortized or accreted into interest income using the effect ff ff s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-20 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES The Company’s internal risk rating rubric for corporate debt has nine categories as depicted below: Risk Rating - Corporate Debt 1-5 / Performing 6 / Performing - Closely Monitored 7 / Substandard 8 / Doubtful 9 / Loss Description Meets all present contractual obligations. 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. 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. 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. Considered uncollectible. Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financi a tabular disclosure of ff the amortized cost basis of the Company’s al information produced by the borrower and consideration of economic conditions. See below forff investment by year of origination and internal risk rating. corporate debt held forff m For the year ended December 31, 2020, the Company recorded a loan loss provision of $4.5 million on impaim red corporate loans using a discounted cash flow methodology. During the year ended December 31, 2020, the 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 year ended December 31, 2019, the Company recorded a loan loss provision of $7.4 million on a corpor rate loan with a principal balance and carrying value of $19.6 million and $12.2 million, respectively. There was no provision for loan loss recorded for the year ended December 31, 2018. 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. For the year ended December 31, 2020, the Company recorded a net loan loss provision on corporate loans of $9.9 million, based upon its Loss Given Defaul t methodology. u ff As of December 31, 2020 and December 31, 2019, the amortized cost basis of corporate loans on nonaccrual status was $0.0 and $12.2 million, respectively. For the years ended December 31, 2020 and 2019, the Company recognized interest income on corporate loans on nonaccrual status of $0.0 million and $1.5 million, respectively. At December 31, 2020 and December 31, 2019, the Company had unfunded corporate loan commitments of $87.3 million and $81.2 million, respectively. At December 31, 2020, the liabila ity related to the expected credit losses on the unfunded corporate loan commitments was $0.7 million. F-21 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at December 31, 2020 and 2019 are as follows: Industry Dispersion December 31, 2020 December 31, 2019 Total (1) Total (1) (dollars in thousands) Computer programming, data processing & other computer related services Management and public relations services Industrial Inorganic Chemical Public warehousing and storage Metal cans & shipping containers Offices and clinics of doctors of medicine Surgical, medical, and dental instruments and supplies Electronic components & accessories Engineering, architectural & surveying Miscellaneous Industrial & Commercial Insurance agents, brokers and services Research, development and testing services Miscellaneous Food Preparations Telephone communications Miscellaneous equipment rental and leasing Electrical work Petroleum and petroleum products Medical and dental laboratories Schools and educational services, not elsewhere classified Home health care services Metal Forgings and Stampings Legal Services Grocery stores Coating, engraving and allied services Chemicals & Allied Products Miscellaneous business services Drugs Mailing, reproduction, commercial art and photography, and stenographic Machinery, Equipment & Supplies Offices of clinics and other health practitioners Nonferrous foundries (castings) Motor vehicles and motor vehicle parts and supplies 483,142 300,869 156,391 132,397 115,670 104,781 83,161 78,129 77,308 77,163 67,193 62,008 58,857 58,450 49,587 41,128 33,890 30,711 29,040 28,587 27,523 26,399 22,895 19,484 14,686 12,980 12,942 12,733 12,096 9,730 — — 394,193 339,179 — 107,029 118,456 106,993 102,182 24,000 124,201 78,908 75,410 45,610 — 61,210 49,776 43,175 24,923 41,344 19,586 29,361 — — 23,248 47,249 15,002 164,033 15,923 14,755 — 10,098 30,191 28,815 Miscellaneous plastic products Total $ — 2,239,930 $ 10,000 2,144,850 (1) All middle market lending positions are floating rate. The tabla e below reflects the Company’s aggregate positions by their respective place in the capita December 31, 2020 and 2019. a l structure r of the borrowers at rst lien loans Second lien loans Total $ $ December 31, 2020 December 31, 2019 (dollars in thousands) 1,489,125 750,805 2,239,930 $ $ 1,396,140 748,710 2,144,850 F-22 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES lowing tables represent a rollforward of the activity for the Company’s corporate debt investments held forff The folff December 31, 2020 and December 31, 2019: investment at s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S Beginning balance (January 1, 2020) (1) Originations & advances Principal payments Amortization & accretion of (premium) discounts Loan restructuring Sales (2) Allowance for loan losses Beginning allowance, prior to CECL adoption Impact of adopting CECL Current period allowance Write offs Ending allowance December 31, 2020 First Lien Second Lien (dollars in thousands) Total $ 1,403,503 $ 748,710 $ 834,211 (444,759) 8,374 (19,550) (273,887) (7,363) (10,787) (12,510) 11,893 (18,767) 227,433 (132,000) 3,832 2,818 (79,203) — (18,866) (1,919) — (20,785) 2,152,213 1,061,644 (576,759) 12,206 (16,732) (353,090) (7,363) (29,653) (14,429) 11,893 (39,552) Net carrying value (December 31, 2020) $ 1,489,125 $ 750,805 $ 2,239,930 (1) Excludes loan loss allowances. (2) Includes syndications. Net carrying value (January 1, 2019) Originations & advances Principal payments Amortization & accretion of (premium) discounts Sales Net (increase) decrease in allowance Net carrying value (December 31, 2019) December 31, 2019 First Lien Second Lien (dollars in thousands) Total $ 1,346,356 $ 540,826 $ 542,463 (228,302) 5,960 (262,974) (7,363) 345,573 (140,625) 2,936 — — $ 1,396,140 $ 748,710 $ 1,887,182 888,036 (368,927) 8,896 (262,974) (7,363) 2,144,850 The following tablea year and internal risk rating. provides the amortized cost basis of corporate debt held forff investment as of December 31, 2020 by vintage Amortized Cost Basis by Risk Rating and Vintage (1) Risk Rating Total 2020 (dollars in thousands) 2019 Vintage 2018 2017 2016 2015 1-5 / Performing $1,760,669 $ 499,186 $ 400,873 $ 402,712 $ 355,369 $ 68,191 $ 34,338 6 / Performing - Closely Monitored 7 / Substandard 8 / Doubtful 9 / Loss Total 337,386 141,875 — — 38,495 — — — — 47,742 — — 283,464 43,206 — — 15,427 50,927 — — — — — — — — — — $2,239,930 $ 537,681 $ 448,615 $ 729,382 $ 421,723 $ 68,191 $ 34,338 (1) The amortized cost basis excludes accrued interest and includes deferred loan fees on unfunded loans. As of December 31, 2020, the Company had $11.0 million of accrued interest receivable on corporate loans, which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition, and $1.4 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition. F-23 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES 7. MORTGAGE SERVICING RIGHTS The Company owns variable interests in an entity that invests in MSRs. Refer to the “Variable Interest Entities” Note forff detailed discussion on this topic. a MSRs represent the rights 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 MSRs. The Company intends to hold the MSRs as investments and elected to account for all of its investments in MSRs at fair value. As such, they are recognized at fair value on the accompam nying 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). m The following tablea presents activity related to MSRs for the years ended December 31, 2020 and 2019: Fair value, beginning of period Sales Change in fair value due to Changes in valuation inputs or assumptions (1) Other changes, including realization of expected cash flows Fair value, end of period December 31, 2020 December 31, 2019 (dollars in thousands) $ $ 378,078 $ (72,160) (107,517) (97,506) 100,895 $ 557,813 — (102,016) (77,719) 378,078 (1) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily dued changes in interest rates. to For the years ended December 31, 2020 and 2019, the Company recognized $66.6 million and $108.0 million of net servicing income from MSRs in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). 8. VARIABLE INTEREST ENTITIES Commercialii Trusts The Company has invested in subordinate mortgage-backed securities issued by commercial securitization trusts (“Commercial eneficiary as a result of its abia lity to replace the special servicer without cause Trusts”) and determined that it is the primary brr through its ownership of the subordinate securities and its current designation as the directing certificate holder. Information regarding these securitization trusts are summarized in the tablea below. Type of Underlying Collateral Settlement Date Cut-off Date Principal Balance Face Value of Company’s Variable Interest at Settlement Date Multifamily Hotels Multifamily Office Building Multifamily Multifamily April 2015 June 2018 August 2019 October 2019 October 2019 December 2019 $ $ $ $ $ $ (dollars in thousands) 1,192,607 $ 982,000 $ 271,700 $ 60,000 $ 415,000 $ 394,000 $ 89,446 93,500 20,270 60,000 75,359 110,350 Upon consolidation, the Company elected the fair value option for the financi ties of the Commercial Trusts in order to avoid an accounting mismatch, and to represent more faithfully the economics of its interest in the entities. The fair r value be reflected in the Company’s Consolidated Statements of Comprehensive value option requires that changes in faiff lied the practical expedient under ASU 2014-07, whereby the Company determines whether Income (Loss). The Company appa ties is more observable as a basis forff measuring the less observablea the faiff financial instruments. The Company has determined that the fair value of the financial liabilities of the Commercial Trusts are since the prices for these liabilities are primarily available from third-party pricing services utilized forff more observable, r value of the financial assets or financial liabili al assets and liabili a a a r ff s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-24 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES multifamily ff precise measurement given their illiquid naturet m the Company’s the faiff r value of the financial liabilities, the Companym entirety should be classified in Level 2 of the fair value measurement hierarchy. and commercial mortgage-backed securities, while the individual assets of the trusts are inherently less capaba le of and the limitations on available information related to these assets. Given that methodology for valuing the financial assets of the Commercial Trusts are an aggregate fair value derived fromff has determined that the fair value of each of the finff ancial assets in their r mortgage loans had an aggregate unpaid principal balance of $2.3 billion and $2.3 billion at December The Commercial Trusts 31, 2020 and 2019, respectively. At December 31, 2020 and 2019, there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or debt issued by securitization vehicles at December 31, 2020 and 2019 based upon the Company’s process of monitoring events of default on the underlying mortgage loans. rr Commercialii Securitiii zations ii The Company also invests in commercial mortgage-backed securities issued by entities that are VIEs because they do not have the entities to finance their activities without additional subordinated financial support from other sufficient equity at risk forff is not the primary beneficiary because it does not have the power to direct the activities that most parties, but the Companym 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 Commercial Securities. tt Collat eral ll izell d Loan Obligationtt In February 2019, the Company closed NLY 2019-FL2, a managed commercial real estate collateralized loan obligation (“CLO”) securitization with a facff e value of $857.3 million, which provides non-recourse financing to the Company collateralized by certain commercial real estate mortgage loans originated by the Company. As of December 31, 2020 a total of $625.8 million of notes were held by third parties and the Company retained or purchased $202.4 million of subordinated notes and preferred shares, which eliminate uponu consolidation. The Company has determined that it is the primary beneficiary because it has the right to direct the servicer as well as remove the special servicer without cause and it holds variable interests s of loans to the CLO did not qualify for sale accounting because that could be potentially significant to the CLO. The transferff ities the Companym issued by the CLO in order to simplify the accounting; however, the commercial loans continue to be carried at amortized cost as they were not eligible for the fair value option as it was not elected at origination of the loans. The Company incurred $8.3 million of costs in connection with the CLO that were expensed as incurred during the year ended December 31, 2019. The aggregate unpaid principal balance of loans in the CLO was $856.9 million at December 31, 2020 and there were no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the debt securities at December 31, 2020 based uponu the Company’s process of monitoring events of default on the underlying mortgage loans. The contractual principal amount of the CLO debt held by third parties was $633.9 million at December 31, 2020. maintains effeff ctive control over the loans. The Company elected the fair value option for the financial liabila i Multifami lyii Securitization In November 2019, the Compam ny 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 eneficiary based balance of $0.5 billion. At the inception of the arranr upon its involvement in the design of these VIEs and through the retention of a significant variablea interest in the VIEs. The Companym 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. During the year ended December 31, 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. As a result of the deconsolidation of this VIE, the Company derecognized approximately $1.2 billion of securities and approximately $1.1 billion of debt issued by securitization vehicles and recognized a realized gain of $104.8 million, which is included in Net gains (losses) on disposal of investments and other in the Consolidated Statements of Comprehensive Income (Loss). The Company incurred $1.1 million of costs in connection with the 2020 multifamily securitization that were expensed as incurred during the year ended December 31, 2020. gements, the Company determined that it was the primary brr tt Resident ial i Truststt which is included in “Residential Trusts” in the tables below, that issued The Company consolidates a securitization trust, 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 r F-25 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ncial assets and financial VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the finaff principal amount of t liabilities of the residential mortgage trust are availablea the residential mortgage trust’s debt held by third parties was $23.0 million and $57.3 million at December 31, 2020 and 2019, respectively. from third-party pricing services. The contractual Residential Securitizationtt s The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have y at risk for the entities to finance their activities without additional subordinated financial support from other sufficient equitq parties, but the Companym 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. TT OBX TBB rusts d to collectively as the “OBX Trusts.” These securitizations represent financing The entities in the table below are referre transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company. ff Securitization Date of Closing Face Value at Closing (dollars in thousands) 2018-1 OBX 2018-EXP1 OBX 2018-EXP2 OBX 2019-INV1 OBX 2019-EXP1 OBX 2019-INV2 OBX 2019-EXP2 OBX 2019-EXP3 OBX 2020-INV1 OBX 2020-EXP1 OBX 2020-EXP2 OBX 2020-EXP3 March 2018 August 2018 October 2018 January 2019 April 2019 June 2019 July 2019 October 2019 January 2020 February 2020 July 2020 September 2020 $ $ $ $ $ $ $ $ $ $ $ $ 327,162 383,451 384,027 393,961 388,156 383,760 463,405 465,492 374,609 467,511 489,352 514,609 is deemed to be the primary brr As of December 31, 2020 and 2019, a total of $2.6 billion and $2.0 billion, respectively, of bonds were held by third parties and retained $653.0 million and $565.7 million, respectively, of mortgage-backed securities, which were eliminated in the Companym ary and consolidates the OBX Trusts because it has power to consolidation. The Companym ’ performance and holds a variable interest that could be direct the activities that most significantly impact the OBX Trusts potentially significant to these VIEs. The Company has elected the fair value option for the financ ial 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 s are available from third-party pricing services. During the years ended December liabilities of the residential mortgage trust 31, 2020 and 2019, the Company incurred $7.2 million and $9.0 million, respectively, of costs in connection with these securitizations that were expensed as incurred. The contractual debt held by third parties was $2.5 billion and $1.9 billion at December 31, 2020 and 2019, respectively. principal amount of the OBX Trusts’ ff enefici rr r ff r t Although the residential mortgage loans have been sold forff mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflecff that are eliminated uponu consolidation. bankruptcy and state law purposes, the transfers of the residential ted as intercompany secured borrowings Credit Facility Vtt IEsVV ial institution. As In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financ of December 31, 2020 and 2019, the borrowing limit on this facff ility was $625.0 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 te loans with a carrying amount of $786.9 million and $741.3 million at December 31, 2020 and 2019, facility corpora respectively. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At December 31, 2020 and 2019, the subsidiary had an intercompany receivablea of $441.1 million and $426.6 million, respectively, which eliminates upon consolidation and an Other secured financing of $441.1 million u and $426.6 million, respectively, to the third party financial institution. r ff s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-26 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements u ary of the Company entered into a credit facff on. As ility with a third party financ In July 2017, a consolidated subsidi ility was $320.0 million. The subsidiary was deemed to be a of December 31, 2020 and 2019, the borrowing limit on this facff was determined to be the primary beneficiary due to its role as servicer and because it holds a variable VIE and the Companym e loans to the interest in the entity that could potentially be significaff ith a carrying amount of $400.4 million and $413.7 million at December 31, 2020 and 2019, respectively, which subsidiary wrr continue to be reflecff ted in the Company’s Consolidated Statements of Financial Condition under Loans, net. At December 31, 2020 and 2019, the subsidiary had an Other secured financing of $209.7 million and $244.2 million, respectively, to the third ff party financi nt to the entity. The Company has transferred corporat al institution. ial instituti r ff t In January 2019, a consolidated subsidiary of the Company (the “Borrower”) entered into a $300.0 million credit facility with a third party financial institution. At of December 31, 2020 and 2019, the Borrower had an Other secured financing of $236.6 million and $157.5 million, respectively, to the third party finaff ncial institution. MSR Siloii The Company also owns variablea interests in an entity that invests in MSRs and has structured its operations, funding and capia talization 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,t 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. t The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $2.5 billion at December 31, 2020. 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 CLO, multifamily securitizations, 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 December 31, 2020 and 2019 are as follows: Assets Cash and cash equivalents Loans Assets transferred or pledged to securitization vehicles Mortgage servicing rights Principal and interest receivable Other assets Total assets Liabilities Debt issued by securitization vehicles (non-recourse) Other secured financing Payable for unsettled trades Interest payable Other liabilities Total liabilities December 31, 2020 Commercial Trusts Residential Trusts MSR Silo (dollars in thousands) $ $ $ $ — $ — 2,166,073 — 5,509 — 2,171,582 1,836,785 $ $ — — 1,697 — — $ — 40,035 — 226 — 40,261 23,351 $ $ — — 55 246 1,838,482 $ 23,652 $ 22,241 47,048 — 100,895 — — 170,184 — 30,420 3,076 — 13,345 46,841 F-27 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements December 31, 2019 Commercial Trusts Residential Trusts MSR Silo Assets Cash and cash equivalents Loans Assets transferred or pledged to securitization vehicles Mortgage servicing rights Principal and interest receivable Other assets Total assets Liabilities Debt issued by securitization vehicles (non-recourse) Other secured financing Payable for unsettled trades Interest payable Other liabilities Total liabilities $ $ $ $ (dollars in thousands) — $ — $ — 2,345,120 — 7,085 — 2,352,205 1,967,523 $ $ — — 3,008 — — 75,924 — 408 — 76,332 57,905 $ $ — — 137 78 1,970,531 $ 58,120 $ 67,455 66,722 — 378,078 — 27,021 539,276 — 38,981 18,364 — 2,393 59,738 The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the credit facility VIEs, multifamily securitizations, OBX Trusts and CLO, at December 31, 2020 are as follows: Securitized Loans at Fair Value Geographic Concentration of Credit Risk Commercial Trusts Residential Trusts Property Location Principal Balance % of Balance Property Location Principal Balance % of Balance (dollars in thousands) California Texas New York Florida Washington Arizona Other (1) Total $ $ 1,051,276 459,256 369,691 196,865 182,000 171,102 811,282 3,241,472 (1) No individual state greater than 5%. 32.4 % 14.2 % 11.4 % 6.1 % 5.6 % 5.3 % 25.0 % 100.0 % $ California Illinois Texas Massachusetts Other (1) 18,692 5,356 4,972 2,265 8,174 47.4 % 13.6 % 12.6 % 5.7 % 20.7 % $ 39,459 100.0 % Corporate Dtt srr ebt Transferff 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 year ended December 31, 2020, the Companym transferred $159.3 million of loans for cash. The loan transfers were accounted for as sales. Residentia i l CredCC itdd Fund ff investing in participations in residential mortgage loans. The residential credit fund is deemed to The Company manages a fund e its activities without be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to financ additional subordinated financial support provided by any parties, including equity holders, as capita al 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 r fund s that it earns, which are not considered variable interests in the entity. During the year ended December 31, 2020 the Company issued participating interests in residential mortgage loans of $39.2 million to the residential credit fund. These transfers do not meet the criteria forff sale accounting and are accounted for as secured borrowing, thus the residential loans are reported as Loans, net and the associated liabia lity is reported as Participations issued in the Consolidated Statements of Financial Condition at December 31, 2020. 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. is the management and performance feeff ff ff s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-28 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES 9. REAL ESTATE Real estate investments are carried at historical cost less accumulated depreciation. Historical cost includes all costs necessaryrr to bring the asset to the condition and location necessary f its intended use, including financing during the construction period. Costs directly related to acquisitions deemed to be business combinations are expensed. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements that extend the useful life of the asset are capita alized and depreciated over their useful life. orff rr Real estate investments are depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows: Category Building and building improvements Furniture and fixtures Term 1 - 44 years 1 - 4 years There was no real estate acquired in settlement of residential mortgage loans at December 31, 2020 or December 31, 2019 other than real estate held by securitization trusts that the Company was required to consolidate. The Company would be considered to have received physical possession of residential real estate property collateralizing a residential mortgage loan, so that the loan is derecognized and the real estate property would be recognized, if either (i) the Company obtains legal title to the losure or (ii) the borrower conveys all interest in the residential real residential real estate property uponu completm ion of a forec estate property to the Company to satisfy the loan through completion of a deed in lieu of forec losure or through a similar legal agreement. ff ff Real estate investments, including REO, that do not meet the criteria to be classified as held for sale are classifiedff in the Consolidated Statements of Financial Condition as held for investment. Real estate held for sale is reported at the lower of its carrying value or its estimated fair value less estimated costs to sell. Once a property is determined to be held for sale, depreciation is no longer recorded. investment) is reviewed on a quarterly basis, or more The Company’s real estate portfolio (REO and real estate held forff frequently as necessary,rr to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the undiscounted cash flows to be generated by the property is less than the carrying value of the property. In aggregate future conducting this review, the Company considers U.S. macroeconomic facff tors, including real estate sector conditions, together with asset specific and other facff tors. To the extent impaim rment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property. rr ff During the year ended December 31, 2020, the Company took title of two commercial real estate properties for $79.8 million through foreclosure or deed-in-lieu of foreclosure. There were no new acquisitions of real estate holdings during the year ended December 31, 2019. A portfolio of health care properties with a carrying value of $124.5 million, including intangible assets, ldsold two was sold during the year ended December 31, 2020 and a gain on sale of $19.7 million was recognized. hThe Compa yny ognizedd a fof iits wh llhollyy ownedd t iriplle net lleas ded propertiies during gaigain on s lale of $7.5 million. during hthe yyear e dnd ded December 31, 2019 ffor $25.2 million dand recognize The weighted average amortization period for intangible assets and liabia lities at December 31, 2020 is 5.5 years. Above market leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in Other liabilities in the Consolidated Statements of Financial Condition. Real estate, net Land Buildings and improvements Furniture, fixtures and equipment Subtotal Less: accumulated depreciation Total real estate held for investment, at amortized cost, net Equity in unconsolidated joint ventures Total real estate, net December 31, 2020 December 31, 2019 (dollars in thousands) $ 164,240 $ 493,432 6,240 663,912 (100,147) 563,765 92,549 $ 656,314 $ 121,720 571,396 11,238 704,354 (87,532) 616,822 108,816 725,638 F-29 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES Depreciation expense was $22.7 million and $23.7 million for the years ended December 31, 2020 and 2019, respectively and is included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). Rentaltt Income The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse the Company for certain operating costs. Rental income is included in Other income (loss) in the Company’s Consolidated Statements of Comprehe nsive Income (Loss). m ff Approximate future effect at December 31, 2020 for consolidated investments in real estate are as follows: minimum rents to be received over the next five years and thereafter for non-cancelablea ff operating leases in December 31, 2020 (dollars in thousands) $ $ 44,267 39,981 36,161 30,645 24,362 60,971 236,387 2021 2022 2023 2024 2025 Later years Total 10. DERIVATIVE INSTRUMENTS Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptia ons”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments. The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. t ff contracts, certain forward In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or t purchase commitments and credit derivatives to economically hedge its exposure Eurodollar futff ures to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupou n (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the Subsequent changes in fair value from inception of these interest rate swaps are out of market nature of such interest rate swaps.a reflected within Unrealized gains (losses) on interest rate swapsa in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral, as well as, receiving payments in accordance with the terms of the derivative contracts. Derivatives are accounted for in accordance with FASB ASC 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in faiff r 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 with the exception of interest rate swaps which are separately presented. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the faiff r value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At December 31, 2020 and 2019, $1.5 billion and $517.8 million, respectively, of variation margin was reported as an adjust d ment to interest rate swaps, at fair value. Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk. In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase F-30 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements ff agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate ing leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap swap agreements where the float rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market including MAC interest rate swaps, are generally fair valued using the DCO’s values. Centrally cleared interest rate swaps,a market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap wa ould be equal to the difference between the cash received or paid and fair value. ons provide the option to enter into an interest rate swap agreement forff Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates. Interest rate swaptia a predetermined notional amount, stated term and pay and receive interest rates in the future swaptions are not centrally cleared. The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaptia rence between the cash received or the fair value of the underlying interest rate swap ra on would be equal to the diffeff eceived and the premium paid. . The Company’s m ff ff The fair value of swaptia ons are estimated using internal pricing models and compared to the counterparty market values. TBA Dollar Rolls – TBA dollar roll transactions are accounted forff derivatives is based on methods similar to those used to value Agency mortgage-backed securities. as a series of derivative transactions. The fair value of TBA MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns. MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid. MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date. t ts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of CC Futures Contrac futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing. t Forward Purchase Commitments – The Company may enter into forwar d purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis. ff Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total returnt swaps. The tablea below summarizes faiff r value information about our derivative assets and liabia lities at December 31, 2020 and 2019: Derivatives Instruments December 31, 2020 December 31, 2019 Assets Interest rate swaps Interest rate swaptions TBA derivatives Futures contracts Purchase commitments Credit derivatives (1) Liabilities Interest rate swaps TBA derivatives Futures contracts Purchase commitments Credit derivatives (1) $ $ $ $ (dollars in thousands) — $ 74,470 96,109 506 49 — 171,134 1,006,492 — 19,413 — 7,440 $ $ 1,033,345 $ 1,199 11,580 15,181 77,889 2,050 5,657 113,556 706,862 11,316 84,781 907 — 803,866 (1) The notional amount of the credit derivatives in which the Company purchased protection was $0.0 and $10.0 million at December 31, 2020 and December 31, 2019, respectively. The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $504.0 million and $345.0 million at December 31, 2020 and December 31, 2019, respectively, plus any coupon shortfalls on the underlying tranche. As of December 31, 2020 and 2019, the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and A, and AA and BBB-, respectively. F-31 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES The folff lowing table summarizes certain characteristics of the Company’s interest rate swapsa at December 31, 2020 and 2019: Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity (3) December 31, 2020 0 - 3 years 3 - 6 years 6 - 10 years Greater than 10 years Total / Weighted average (dollars in thousands) $ 23,680,150 3,600,000 5,565,500 1,484,000 $ 34,329,650 0.27 % 0.18 % 1.40 % 3.06 % 0.92 % 0.11 % 0.09 % 0.62 % 0.36 % 0.37 % 1.96 4.21 7.76 20.52 3.94 Maturity Current Notional (1)(2) Weighted Average Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity December 31, 2019 0 - 3 years 3 - 6 years 6 - 10 years Greater than 10 years Total / Weighted average (dollars in thousands) $ 38,942,400 16,097,450 16,176,500 2,930,000 $ 74,146,350 1.60 % 1.77 % 2.20 % 3.76 % 1.84 % 1.84 % 1.87 % 2.02 % 1.86 % 1.89 % 1.29 4.30 9.00 17.88 4.23 (1) As of December 31, 2020, 17%, 72% and 11% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2019, 75% and 25% of the Company’s interest rate swaps were linked to LIBOR and the overnight index swap rate, respectively. (2) There were no forward starting swaps at December 31, 2020 and December 31, 2019. (3) As of December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed. The following tablea presents swaptions outstanding at December 31, 2020 and 2019. December 31, 2020 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay Long receive $8,050,000 $250,000 1.27% 1.66% 3M LIBOR 3M LIBOR 10.40 10.02 5.42 0.13 December 31, 2019 Current Underlying Notional Weighted Average Underlying Fixed Rate Weighted Average Underlying Floating Rate Weighted Average Underlying Years to Maturity Weighted Average Months to Expiration (dollars in thousands) Long pay Long receive $4,675,000 $2,000,000 2.53% 1.49% 3M LIBOR 3M LIBOR 9.22 10.29 4.66 3.40 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-32 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES The folff lowing table summarizes certain characteristics of the Company’s TBA derivatives at December 31, 2020 and 2019: Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value Purchase contracts $ 19,635,000 $ 20,277,088 $ 20,373,197 $ 96,109 (dollars in thousands) December 31, 2020 December 31, 2019 Purchase and sale contracts for derivative TBAs Notional Implied Cost Basis Implied Market Value Net Carrying Value (dollars in thousands) Purchase contracts Sale contracts Net TBA derivatives $ $ 10,043,000 (3,144,000) 6,899,000 $ $ 10,182,891 (3,294,486) 6,888,405 $ $ 10,192,038 (3,299,768) 6,892,270 $ 9,147 (5,282) 3,865 The following tablea summarizes certain characteristics of the Company’s futures derivatives at December 31, 2020 and 2019: December 31, 2020 Notional - Long Positions (dollars in thousands) Notional - Short Positions Weighted Average Years to Maturity U.S. Treasury futures - 5 year U.S. Treasury futures - 10 year and greater Total $ — — — $ (1,240,000) (9,183,800) (10,423,800) 4.40 6.90 6.60 December 31, 2019 Notional - Long Positions (dollars in thousands) Notional - Short Positions Weighted Average Years to Maturity U.S. Treasury futures - 2 year U.S. Treasury futures - 5 year U.S. Treasury futures - 10 year and greater Total $ $ — $ — 2,600,000 2,600,000 $ (180,000) (2,953,300) (5,806,400) (8,939,700) 1.96 4.42 9.74 8.26 The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceablea with each counterparty. provisions that allow for netting or setting off receivables and payables a a s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-33 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES owing tables The foll ff offset on our Consolidated Statements of Financial Condition at December 31, 2020 and 2019, respectively. present information about derivative assets and liabilities that are subject to such provisions and can be a December 31, 2020 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaptions, at fair value $ 74,470 $ — $ — $ TBA derivatives, at fair value Futures contracts, at fair value Purchase commitments Liabilities 96,109 506 49 — (506) — — — — 74,470 96,109 — 49 Interest rate swaps, at fair value $ 1,006,492 $ — $ (108,757) $ 897,735 Futures contracts, at fair value Credit derivatives 19,413 7,440 (506) — (18,907) (7,440) — — December 31, 2019 Amounts Eligible for Offset Gross Amounts Financial Instruments Cash Collateral Net Amounts Assets (dollars in thousands) Interest rate swaps, at fair value $ 1,199 $ (951) $ — $ Interest rate swaptions, at fair value TBA derivatives, at fair value Futures contracts, at fair value Purchase commitments Credit derivatives Liabilities 11,580 15,181 77,889 2,050 5,657 — (5,018) (10,902) — — — — — — — 248 11,580 10,163 66,987 2,050 5,657 Interest rate swaps, at fair value $ 706,862 $ (951) $ (104,205) $ 601,706 TBA derivatives, at fair value Futures contracts, at fair value Purchase commitments 11,316 84,781 907 (5,018) (10,902) — — (73,879) — 6,298 — 907 The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows: Location on Consolidated Statements of Comprehensive Income (Loss) Net Interest Component of Interest Rate Swaps Realized Gains (Losses) on Termination of Interest Rate Swaps (dollars in thousands) Unrealized Gains (Losses) on Interest Rate Swaps For the years ended December 31, 2020 December 31, 2019 December 31, 2018 $ $ $ (207,877) $ 351,375 100,553 $ $ (1,917,628) $ (1,442,964) $ 1,409 $ (904,532) (1,210,276) 424,081 F-34 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows: Year Ended December 31, 2020 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) (dollars in thousands) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives TBA derivatives $ 893,120 $ 92,244 $ Net interest rate swaptions Futures Purchase commitments Credit derivatives Total 11,730 (268,084) — 6,068 46,301 (12,015) (1,093) (11,966) $ 985,364 58,031 (280,099) (1,093) (5,898) 756,305 Derivative Instruments Realized Gain (Loss) Unrealized Gain (Loss) Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives Year Ended December 31, 2019 Net TBA derivatives $ Net interest rate swaptions Futures Purchase commitments Credit derivatives Total (dollars in thousands) 464,575 $ (137,823) $ (47,863) (1,418,143) — 8,077 (15,961) 455,417 333 10,618 $ 326,752 (63,824) (962,726) 333 18,695 (680,770) Certain of the Company’s derivative contracts are subject and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicablea the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the Company’s failure to complym with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange. to International Swapsa agreement upon m u s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty t o the r value of all applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate faiff derivative instruments with the aforementioned features that are in a net liability position at December 31, 2020 was approximately $0.9 billion, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized. t x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S 11. FAIR VALUE MEASUREMENTS The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSRs that are and MSR is the amount that would be received to sell an accounted for at fair value. The fair value of a financ asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. rr ial instrument ff GAAP requires classificat ion of financial instruments and MSRs into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabila ities (Level 1) and the lowest priority to unobservable inputs (Level 3). ff If the inputs used to measure the financial instruments and MSRs fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and r value on the Consolidated Statements of Financial Condition or disclosed in the related notes are liabilities recorded at faiff categorized based on the inputs to the valuation techniques as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabia lities in active markets. F-35 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and term of the financial inputs that are observablea instrument. for the asset or liability, either directly or indirectly, for substantially the full ff Level 3 – inputs to the valuation methodology are unobservablea and significant to overall fair ff value. The Company designates its securities as trading, available-foff r-sale or held-to-maturity depending upon the type of security and as available-for-sale and trading are the Company’s intent and ability to hold such security to maturity. Securities classifiedff reported at faiff r value on a recurring basis. The following is a description of the valuation methodologies used for instruments carried at faiff are applied to assets and liabilities across the three-level faiff r value hierarchy, with the observabila appropriate level. r value. These methodologies ity of inputs determining the Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1. Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally es common market pricing methods, estimated prices for similar assets using internal models. The Company incorporat including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps,a rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparim ng its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed- rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities. r ff Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate f the Company’s securities to those actively swaps, swaptions, TBA derivatives and MBS options markets and the similarity ot traded enablea formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swapsa , swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy. the Company to observe quoted prices in the market and utilize those prices as a basis forff quoted prices The fair value of commercial mortgage-backed securities classified as availablea of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at faiff -for-sale is determined based upon r value are classified as Level 2. u For the fair value of debt issued by securitization vehicles, refer to the Note titled “Variable Interest Entities” forff information. additional its investments in MSRs as Level 3 in the fair value measurements hierarchy. Fair value estimates for The Company classifiesff inputs in their valuations. These valuations these investments are obtained from models, which use significant unobservablea market data inputs including prepayment rates, primarily utilize discounted cash flow models that incorporate unobservablea to valuations obtained from third- delinquency levels, costs to service and discount rates. Model valuations are then compared party pricing providers. Management reviews the valuations received froff m third-party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSRs requires significant judgment by management and the third- party pricing providers. Assumptions used for which there is a lack of observablea ntly impact the resulting fair value and therefore the Company’s financial statements. inputs may significaff m The following tables basis. There were no transfers between levels of the faiff a present the estimated fair values of financial instruments and MSRs measured at fair ff value on a recurring r value hierarchy during the periods presented. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-36 ANNAA ALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Assets Securities December 31, 2020 Level 1 Level 2 Level 3 Total (dollars in thousands) Agency mortgage-backed securities $ — $ 74,067,059 $ — $ 74,067,059 Credit risk transfer securities Non-Agency mortgage-backed securities Commercial mortgage-backed securities Loans Residential mortgage loans Mortgage servicing rights Assets transferred or pledged to securitization vehicles Derivative assets Other derivatives Total assets Liabilities Debt issued by securitization vehicles $ Participations issued Derivative liabilities Interest rate swaps Other derivatives Total liabilities Assets Securities — — — — — — 506 506 — — — 19,413 532,403 972,192 80,742 345,810 — 6,035,671 170,628 — — — — 100,895 — — 532,403 972,192 80,742 345,810 100,895 6,035,671 171,134 $ 82,204,505 $ 100,895 $ 82,305,906 5,652,982 39,198 1,006,492 7,440 — — — — 5,652,982 39,198 1,006,492 26,853 $ 19,413 $ 6,706,112 $ — $ 6,725,525 December 31, 2019 Level 1 Level 2 Level 3 Total (dollars in thousands) Agency mortgage-backed securities $ — $ 112,893,367 $ — $ 112,893,367 Credit risk transfer securities Non-Agency mortgage-backed securities Commercial mortgage-backed securities Loans Residential mortgage loans Mortgage servicing rights Assets transferred or pledged to securitization vehicles Derivative assets Interest rate swaps Other derivatives Total assets Liabilities Debt issued by securitization vehicles Derivative liabilities Interest rate swaps Other derivatives Total liabilities — — — — — — — 77,889 531,322 1,135,868 273,023 1,647,787 — — — — — 378,078 6,066,082 1,199 34,468 — — — 531,322 1,135,868 273,023 1,647,787 378,078 6,066,082 1,199 112,357 $ $ $ 77,889 $ 122,583,116 — $ 5,622,801 $ $ 378,078 $ 123,039,083 — $ 5,622,801 — 84,781 706,862 12,223 — — 706,862 97,004 84,781 $ 6,341,886 $ — $ 6,426,667 Quantitaii tive Information about Level 3 FairFF Value MeMM asurementstt a inputs to be those for which market data is not available and that are developed using the The Company considers unobservablea the assumptions that market participants would use when pricing the asset. Relevant best information available to us about value. The sensitivities of significant unobservablea inputs vary depending on the nature of the instrument being measured at fair inputs and their impact on the fair value inputs along with interrel measurements are described below. The effecff t of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not and always have a linear effecff t on the inputs discussed below. Interrelationships may also exist between observablea ationships between and among the significant unobservablea r ff F-37 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES inputs. Such relationships have not been included in the discussion below. For each of the individual relationships unobservablea y. For MSRs, in general, increases in the discount, described below, the inverse relationship would also generally appl prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower faiff r value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSRs, which in turnt to the Note titled “Mortgage Servicing Rights” for additional information. could result in a decline in the estimated fair value of MSRs. Referff a The tablea Level 3 MSRs. The table does not give effecff these Level 3 investments. below presents information about the significant unobservable inputs used forff recurring fair value measurements forff t to the Company’s risk management practices that might offset risks inherent in December 31, 2020 December 31, 2019 Valuation Technique Discounted cash flow Unobservable Input (1) Discount rate Prepayment rate Delinquency rate Cost to service Range (Weighted Average ) (2) 9.0% - 12.0% (9.4%) 19.3% - 55.5% (42.0%) 0.0% - 6.0% (2.5%) $83 - $108 ($98) Unobservable Input (1) Discount rate Range (Weighted Average ) (2) 9.0% - 12.0% (9.3%) Prepayment rate 6.3% - 26.6% (13.7%) Delinquency rate 0.0% - 4.0% (2.2%) Cost to service $81 - $135 ($107) (1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets. (2) Weighted average discount rate computed based on the fair value of MSRs, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSRs. The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at faiff December 31, 2020 and 2019. r value at Financial assets Loans December 31, 2020 December 31, 2019 Carrying Value Fair Value Carrying Value Fair Value (dollars in thousands) Commercial real estate debt and preferred equity, held for investment (1) $ 1,372,430 $ 1,442,071 $ 1,606,091 $ 1,619,018 Corporate debt held for investment Assets transferred or pledged to securitization vehicles 2,239,930 874,349 2,226,045 928,732 2,144,850 936,378 2,081,327 944,618 Financial liabilities Repurchase agreements Other secured financing Mortgage payable (1) Includes assets of consolidated VIEs. $ 64,825,239 $ 64,825,239 $ 101,740,728 $ 101,740,728 917,876 426,256 917,876 474,779 4,455,700 485,005 4,455,700 515,994 investment, corporate debt, held for investment and mortgages are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing value measurements. Long term other secured financing are valued Commercial real estate debt and preferred equq ity, held forff payablea approximates fair value and are considered Level 2 fair using Level 2 inputs. ff 12. GOODWILL AND INTANGIBLE ASSETS Goodwillll using the acquisition method if the acquisition is deemed to be a business. Under The Company’s acquisitions are accounted forff ial the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financ statements fromff the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiablea intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain. ff F-38 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company tests goodwill for impairmm ent on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impaim rment test for goodwill compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its faiff loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. At December 31, 2020 and 2019, goodwill totaled $71.8 million. r value, an impairment r Intangible all ssets, net Finite life intangible assets are amortized over their expected useful lives. The following tablea lived intangible assets for the year ended December 31, 2020. presents the activity of finite Intangible Assets, net (dollars in thousands) Balance at December 31, 2019 Intangible assets acquired Intangible assets divested Less: amortization expense Balance at December 31, 2020 $ $ 20,957 50,360 (5,320) (10,471) 55,526 13. SECURED FINANCING Reverse Repurchase and Repurchase finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing, and has determined that each of the finff ancing agreements meet the specified criteria in this guidance. Agreementstt – The Companym ee ff The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company obtains collateral in connection with the reverse repurchase agreements in order to mitigate credit risk exposure to its counterparties. Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturt ity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash floff ws on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows. The Company had outstanding $64.8 billion and $101.7 billion of repurchase agreements with weighted average borrowing rates of 0.82% and 1.99%, after giving effect to the Company’s interest rate swaps used to hedge cost of funds, and weighted ies of 64 days and 65 days at December 31, 2020 and 2019, respectively. The Company has select average remaining maturit arrangements with counterparties to enter into repurchase agreements for $2.4 billion with remaining capacity of $1.9 billion at December 31, 2020. ff t At December 31, 2020 and 2019, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: December 31, 2020 Agency Mortgage- Backed Securities Non-Agency Mortgage- Backed Securities CRTs Residential Mortgage Loans Commercial Loans (dollars in thousands) Commercial Mortgage- Backed Securities Total Repurchase Agreements Weighted Average Rate 1 day 2 to 29 days 30 to 59 days 60 to 89 days 90 to 119 days Over 119 days (1) $ — $ — $ — $ — $ — $ — $ — 30,151,875 10,247,972 8,181,410 2,154,733 12,008,920 129,993 16,073 99,620 — — 354,904 161,274 259,401 — 76,799 — — — — — — — 128,267 142,336 28,406 — 30,841,838 10,567,655 8,568,837 2,154,733 274,860 107,924 271,801 28,671 12,692,176 Total $ 62,744,910 $ 245,686 $ 1,050,439 $ 184,723 $ 271,801 $ 327,680 $ 64,825,239 — % 0.29 % 0.42 % 0.30 % 0.23 % 0.36 % 0.32 % F-39 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES December 31, 2019 Agency Mortgage- Backed Securities Non-Agency Mortgage- Backed Securities Commercial Loans Commercial Mortgage- Backed Securities CRTs U.S. Treasury Securities Total Repurchase Agreements Weighted Average Rate (dollars in thousands) 1 day 2 to 29 days 30 to 59 days 60 to 89 days 90 to 119 days Over 119 days (1) $ — $ — $ — $ — $ — $ — $ — 36,030,104 15,079,989 21,931,335 9,992,914 16,557,123 237,897 — 30,841 — — 698,091 115,805 151,920 — 58,712 — — — — 303,078 416,439 104,363 3,639 — 28,478 — — — — — 37,382,531 15,300,157 22,117,735 9,992,914 16,947,391 Total $ 99,591,465 $ 268,738 $ 1,024,528 $ 303,078 $ 552,919 $ — $101,740,728 — % 2.15 % 2.00 % 1.97 % 1.97 % 1.90 % 2.03 % (1) Less than 1% of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2020. No repurchase agreements had a remaining maturity over one year at December 31, 2019. The following tablea summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at December 31, 2020 and 2019. Refeff r to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments. December 31, 2020 December 31, 2019 Reverse Repurchase Agreements Repurchase Agreements Reverse Repurchase Agreements Repurchase Agreements (dollars in thousands) Gross amounts Amounts offset Netted amounts $ $ 250,000 $ (250,000) — $ 65,075,239 (250,000) 64,825,239 $ $ 100,000 $ 101,840,728 (100,000) (100,000) — $ 101,740,728 ff Financing - The Company previously financ Other Secured ed a portion of its financial assets with advances froff m the Federal SS Home Loan Bank of Des Moines (“FHLB Des Moines”). Borrowings from FHLB Des Moines are reported in Other secured financing in the Company’s Consolidated Statements of Financial Condition. At December 31, 2020, the Company did not hold advances from the FHLB Des Moines. At December 31, 2019, $1.4 billion of advances from the FHLB Des Moines maturet d in less than one year and $2.1 billion matured between one to three years. The weighted average rate of the advances from the FHLB Des Moines was 2.16% at December 31, 2019. The Company held $4.4 million and $147.9 million of stock in the FHLB Des Moines at December 31, 2020 and December 31, 2019, respectively, which is reported at cost and included in Other assets on the Company’s Consolidated Statements of Financial Condition. Referff to the Note titled “Variable Interest Entities” for additional information on the Company’s other secured financing arrangements. excluding residential and Investments pledged as collateral under secured financing arrangements and interest rate swaps,a senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $70.6 billion and $0.2 billion, respectively, at December 31, 2020 and $112.8 billion and $357.9 million, respectively, at December 31, 2019. F-40 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements Mortgage loans payablea at December 31, 2020 and 2019, were as follows: Property Mortgage Carrying Value Mortgage Principal December 31, 2020 Interest Rate (dollars in thousands) Fixed/Floating Rate Maturity Date Priority Joint Ventures $ 316,686 $ 318,302 4.03% - 4.96% Fixed 2024 - 2029 First liens Joint Ventures Virginia Texas Utah Utah Minnesota Wisconsin Total 16,607 24,464 31,127 9,706 6,969 13,039 7,658 16,325 25,000 32,582 9,706 6,986 13,072 7,677 L+2.15% L+2.85% 3.28% L+2.75% 3.69% 3.69% 3.69% Floating Floating Fixed Floating Fixed Fixed Fixed 2/27/2022 5/1/2023 2048 - 2053 1/31/2021 6/1/2053 6/1/2053 6/1/2053 First liens First liens First liens First liens First liens First liens First liens $ 426,256 $ 429,650 December 31, 2019 Property Mortgage Carrying Value Mortgage Principal Interest Rate Fixed/Floating Rate Maturity Date Priority (dollars in thousands) Joint Ventures $ 316,566 $ 318,562 4.03% - 4.96% Fixed 2024 - 2029 First liens Joint Ventures Virginia Texas Utah Utah Minnesota Wisconsin Total 16,029 82,940 31,667 9,706 7,077 13,243 7,777 16,325 84,702 33,167 9,706 7,096 13,276 7,797 L+2.15% Floating 2.34% - 4.55% 3.28% L+3.50% 3.69% 3.69% 3.69% Fixed Fixed Floating Fixed Fixed Fixed 2/27/2022 2036 - 2053 2048 - 2053 1/31/2020 6/1/2053 6/1/2053 6/1/2053 First liens First liens First liens First liens First liens First liens First liens $ 485,005 $ 490,631 The following tablea details futuret mortgage loan principal payments at December 31, 2020: Mortgage Loan Principal Payments (dollars in thousands) 2021 2022 2023 2024 2025 Later years Total $ $ 11,123 17,890 26,626 105,635 186,929 81,447 429,650 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-41 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES 14. CAPITAL STOCK (A) Common Stock The following tablea 31, 2020 and 2019. provides a summary of the Company’s common shares authorized and issued and outstanding at December Shares authorized Shares issued and outstanding December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Par Value Common stock 2,914,850,000 2,914,850,000 1,398,240,618 1,430,106,199 $0.01 During the year ended December 31, 2019, the Company closed the public offeff ring of an original issuance of 75.0 million shares of common stock for proceeds of $730.5 million before deducting offering expenses. In connection with the offering, the Companym granted the underwriters a thirty-day option to purchase up to an additional 11.3 million shares of common stock, which the underwriters exercised in full resulting in an additional $109.6 million in proceeds before deducting offering expenses. In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $1.5 billion of its outstanding shares of common stock, which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In December 2020, the Company announced that its Board authorized the repurchase of up to $1.5 billion of its outstanding common shares through December 31, 2021 (the “New Share Repurchase Program”). The New Share Repurchase Program replaced the Prior Share Repurchase Program. During the year ended December 31, 2020, repurchased 32.4 million shares of its common stock for an aggregate amount of $208.9 million, excluding commission costs. During the year ended December 31, 2019, the Company repurchased 26.2 million shares of its common stock for an aggregate amount of $223.2 million, excluding commission costs. All common shares purchased were part of a publicly announced plan in open- market transactions. the Companym The following table provides a summary orr Program. f activity related to the Company’s Direct Purchase and Dividend Reinvestment Shares issued through direct purchase and dividend reinvestment program Amount raised from direct purchase and dividend reinvestment program $ (dollars in thousands) 166,000 1,175 $ 180,000 1,795 December 31, 2020 December 31, 2019 In January 2018, the Company entered into separate Distribution Agency Agreements (collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Barclays Capita l Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe,ff Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares of its common stock, having an aggregate offering price of up tu o $1.5 billion from time to time through any of the Sales Agents. No shares were issued under the at-the-market sales program during the year ended December 31, 2020. During the year ended December 31, 2019, the Company issued 56.0 million shares of common stock forff proceeds of $569.1 million, net of commissions and fees, under the at-the-market sales program. a (B) Preferred Stock The following is a summary orr f the Company’s cumulative redeemable preferred stock outstanding at December 31, 2020 and 2019. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-42 ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES Shares Authorized Shares Issued And Outstanding Carrying Value December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019 Contractual Rate Fixed-rate (dollars in thousands) Date At Which Dividend Rate Becomes Floating Floating Annual Rate Earliest Redemption Date (1) Series D 18,400,000 18,400,000 — 18,400,000 — 445,457 7.50% 9/13/2017 NA NA Fixed-to-floating rate Series F 28,800,000 28,800,000 28,800,000 28,800,000 696,910 696,910 6.95% 9/30/2022 9/30/2022 Series G 19,550,000 19,550,000 17,000,000 17,000,000 411,335 411,335 6.50% 3/31/2023 3/31/2023 Series I 18,400,000 18,400,000 17,700,000 17,700,000 428,324 428,324 6.75% 6/30/2024 6/30/2024 3M LIBOR + 4.993% 3M LIBOR + 4.172% 3M LIBOR + 4.989% Total (1) 85,150,000 85,150,000 63,500,000 81,900,000 $ 1,536,569 $ 1,982,026 Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company. Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus accrued and unpaid dividends through their redemption date. Through December 31, 2020, the Company had declared and paid all required quarterly dividends on the Company’s preferredr stock. During the year ended December 31, 2020, the Company redeemed all 18.4 million of its issued and outstanding shares of 7.50% Series D Cumulative Redeemable Preferre d Stock (“Series D Preferred Stock”) for $460.0 million. The cash redemptim on amount for each share of Series D Preferred Stock was $25.00. ff During the year ended December 31, 2019, the Companym redeemed all 7.0 million of its issued and outstanding shares of 7.625% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) for $175.0 million. The cash redemption amount for each share of Series C Preferred Stock was $25.00 plus accruedrr and unpaid dividends to, but not including, the redemption date of July 21, 2019. During the year ended December 31, 2019, the Company redeemed all 2.2 million of its issued and outstanding shares of d Stock (“Series H Preferred Stock”) for $55.0 million. The cash redemption 8.125% Series H Cumulative Redeemable Preferre amount for each share of Series H Preferred Stock was $25.00 plus accruedr and unpaid dividends to, but not including, the redemption date of May 31, 2019. ff During the year ended December 31, 2019, the Company issued 17.7 million shares of its 6.750% Series I Fiixedd-to-Flloa iti gng Rate drred Stock )k”) ffor ggross proceedds ofo $442.5 million before iative l Cumul d ddeduc iti gng hthe u d nderwri iti gng didiscount andd o hther e istima dted fofffefff dd Sto kck ((“Seriies I P frefe ringring expenses. dRedeem blable ff fPreferre i The Series D Cumulative Redeemable Preferred Stock, Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company. F-43 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements (C) Distributions to Stockholders The following tablea provides a summary of the Company’s dividend distribution activity for the periods presented: Dividends and dividend equivalents declared on common stock and share-based awards Distributions declared per common share Distributions paid to common stockholders after period end Distributions paid per common share after period end Date of distributions paid to common stockholders after period end Dividends declared to series C preferred stockholders Dividends declared per share of series C preferred stock Dividends declared to series D preferred stockholders Dividends declared per share of series D preferred stock Dividends declared to series F preferred stockholders Dividends declared per share of series F preferred stock Dividends declared to series G preferred stockholders Dividends declared per share of series G preferred stock Dividends declared to series H preferred stockholders Dividends declared per share of series H preferred stock Dividends declared to series I preferred stockholders Dividends declared per share of series I preferred stock For the Years Ended December 31, 2020 December 31, 2019 (dollars in thousands, except per share data) 1,285,124 0.91 307,613 0.22 $ $ $ $ 1,516,323 1.05 357,527 0.25 January 29, 2021 January 31, 2020 — $ — $ 34,500 1.875 50,040 1.738 27,625 1.625 $ $ $ $ $ $ — $ — $ 29,871 1.688 $ $ 7,414 1.060 34,500 1.875 50,040 1.738 27,624 1.625 1,862 0.846 15,135 0.86 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 15. LONG-TERM STOCK INCENTIVE PLAN Employees, Directors and other service providers of the Company are eligible to participate in the Company’s 2020 Equity of stock options, share appreciation Incentive Plan (the “Plan”), which provides for equity-based rights, dividend equivalent rights, restricted shares, restricted stock units (“RSUs”), and other share-based awards. The Companym has the ability to award up to an aggregate of 125,000,000 shares under the terms of the Plan, subject to adjustment for any awards that were outstanding under the Company’s 2010 Equity Incentive Plan (the “Prior Plan”, collectively the tive date of the Plan and subsu equently expire, terminate, or are surrendered or forfeited. No new awards are “Plans") on the effecff permitted to be made under the Prior Plan, although existing awards remain effective. compensation in the formff tt Restrict ted Stock UnitsUU The Company grants RSUs (including RSUs subject to performance conditions (“PSUs”)) to employees, which are generally valued based on the closing price of the underlying shares on the date of grant. For RSUs that vest, the underlying shares of common stock are delivered (net of required withholding tax) as outlined in the applicable award agreements. PSUs are subject to the Company’s achievement of specified performance criteria and the number of awards that vest can range from zero to 150% of the grant amount. Award agreements generally provide that vesting is accelerated in certain circumstances, such as ity. Delivery of the underlying shares of common stock, which generally occurs over a three-year period, is death and disabila conditioned on the grantees satisfying certain vesting and other requirements outlined in the award agreements. F-44 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The folff lowing table sets forth activity related to the Company’s RSUs and PSUs awarded under the Plans: For the year ended December 31, 2020 Number of Shares Weighted Average Grant Date Fair Value (dollars in thousands) — $ 1,790,759 (100,100) (19,921) 1,670,738 — $7.24 $9.99 $9.59 $7.05 Beginning balance Granted (1) Vested Forfeited (1) Ending balance (2) (1) Includes dividend equivalent rights. (2) The ending balance includes 404,589 PSUs and related dividend equivalent rights subject to performance conditions and future service requirements, and represents the target amount of such PSUs that may be earned. The Company recognized stock based compensation expense of $3.7 million forff the year ended December 31, 2020. As of December 31, 2020, there was $9.0 million of total unrecognized compensation cost related to non-vested share-based compensa tion arrangements. This cost is expected to be recognized over a weighted average period of 2.24 years. m 16. INTEREST INCOME AND INTEREST EXPENSE Refer to the note titled “Significant Accounting Policies” for details surrounding the Company’s accounting policy related to net interest income on securities and loans. The following tablea summarizes the interest income recognition methodology for Residential Securities: Agency ate pass-through (1)( ) Adjustable-rate pass-through ( )(1) Multifamily (1)( ) CMO ( )(1) Reverse mortgages (2)( ) Interest-only ( )(2) Residential credit CRT (2)( ) Alt-A ( )(2) Prime (2)( ) Subprime ( )(2) NPL/RPL (2)( ) Prime jumbo ( )(2) Prime jumbo interest-only (2)( ) Interest Income Methodology Effecff Effecff tive yield (3)( ) tive yield ( )(3) Contractual Cash Flows Effecff tive yield ( )(3) Prospective Prospective Prospective Prospective Prospective Prospective Prospective Prospective Prospective (1) (2) (3) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss). Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss). Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception. F-45 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES owing presents the components of the Company’s interest income and interest expense for the years ended December ff The foll 31, 2020, 2019 and 2018. Interest income Residential Securities (1) Residential mortgage loans (1) Commercial investment portfolio (1) (2) U.S. Treasury securities Reverse repurchase agreements Total interest income Interest expense Repurchase agreements Debt issued by securitization vehicles Participations issued Other Total interest expense Net interest income 2020 For the Years Ended December 31, 2019 (dollars in thousands) 2018 $ $ $ 1,718,960 170,259 338,763 — 1,643 2,229,625 705,218 142,602 78 51,214 899,112 1,330,513 $ $ $ 3,195,546 150,066 378,395 — 63,290 3,787,297 2,513,282 141,981 — 129,612 2,784,875 1,002,422 $ $ $ 2,830,521 83,260 356,981 160 61,641 3,332,563 1,698,930 98,013 — 100,917 1,897,860 1,434,703 (1) (2) Includes assets transferred or pledged to securitization vehicles. Includes commercial real estate debt and preferred equity and corporate debt. 17. NET INCOME (LOSS) PER COMMON SHARE The following tablea (loss) per share for the years ended December 31, 2020, 2019 and 2018. presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income Net income (loss) Net income (loss) attributable to noncontrolling interests Net income (loss) attributable to Annaly Dividends on preferred stock Net income (loss) available (related) to common stockholders Weighted average shares of common stock outstanding-basic Add: Effect of stock awards, if dilutive Weighted average shares of common stock outstanding-diluted Net income (loss) per share available (related) to common share Basic Diluted $ $ $ $ December 31, 2020 December 31, 2019 December 31, 2018 For the Years Ended (dollars in thousands, except per share data) (889,772) $ (2,163,091) $ 1,391 (891,163) 142,036 (226) (2,162,865) 136,576 (1,033,199) $ (2,299,441) $ 54,148 (260) 54,408 129,312 (74,904) 1,414,659,439 1,434,912,682 1,209,601,809 — — — 1,414,659,439 1,434,912,682 1,209,601,809 (0.73) $ (0.73) $ (1.60) $ (1.60) $ (0.06) (0.06) The computations of diluted net income (loss) per share availablea (related) to common share for the year ended December 31, 2020 excludes 1.0 million of potentially dilutive restricted stock units and performance stock units because their effect would have been anti-dilutive. 18. INCOME TAXES For the year ended December 31, 2020 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100% of its REIT taxable income. To the extent there is any undistributed REIT taxablea income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code. s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-46 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements The Company and certain of its direct and indirect subsiu diaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs. As such, each of these TRSs is taxable as a domestic C corporat ral, state and local income taxes based upon their taxable ff income. ion and subject to fede r The provisions of ASC 740, Income Taxes (“ASC 740”), clarify t uncertainty in income taxes recognized in ff financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at December 31, 2020 and 2019. he accounting forff t The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filff ing feeff s as well as certain excise, franchise or business taxes. The ff Company’s ral, state and local taxes. TRSs are subject to fede m During the years ended December 31, 2020, 2019 and 2018 the Company recorded ($28.4) million, ($10.8) million and ($2.4) million, respectively, of income tax benefit attributable to its TRSs. The Company’s federal, state and local tax returns from 2017 and forward remain open forff examination. t 19. RISK MANAGEMENT The primary risks to the Company are capia tal, liquidity and funding risk, investment/market risk and credit risk. Interest rates are highly sensitive to many factors, including governmental monetary arr l economic tors beyond the Company’s control. Changes in the general level of interest rates can and political considerations and other facff affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the existing collateral to reduce borrowing levels. nd tax policies, domestic and internationa ff r The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges. Weakness in the mortgage market, the shape of the yield curve and changes in the expectations for the volatility of future k interest rates may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide time when prices are depressed. The additional financing, the Company could be forced to sell its investments at an inopportune Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging strategies. t The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. Substantially all of the Company’s Agency mortgage-backed securities have an actual or implied “AAA” rating. The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted if overall costs to service the underlying mortgage loans increase due to borrower performance. The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits forff credit exposure, limiting transactions with specific counterparties, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties. F-47 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements 20. RELATED PARTY TRANSACTIONS Closing of the IntII ernalization and Termination of Management Agreeg ment r es from their respective owners (the “Internalization”) forff On February 12, 2020, the Company entered into an internaliz ation agreement (the “Internalization Agreement”) with the Former Manager and certain affiliates of the Former Manager. Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent companim nominal cash consideration ($1.00). In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager (the net effect of which was immaterial in amount), and the Company transitioned fromff an externally-managed real estate investment trust (“REIT”) to an internally-managed REIT. At the closing, all employees of the Former Manager became es of the Company. The parties also terminated the Amended and Restated Management Agreement by and between m employe the Company and the Former Manager (the “Management Agreement”) and therefore the Companym no longer pays a management fee to, or reimburses expenses of, the Former Manager. Pursuant to the Internalization Agreement, the Former Manager waived any Acceleration Fee (as defined in the Management Agreement). Prior to the closing of the Internalization, the Former Manager, under the Management Agreement and subject to the sion and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s supervi u investment portfolio; (ii) recommending alternative forms of capita al raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The Former Manager also performed such other supervisory and ropriate. In exchange for the management services and activities relating to the Company’s assets and operations as appa management services, the Company paid the Former Manager a monthly management fee, and the Former Manager was responsible forff providing personnel to manage the Company. Prior to the closing of the Internalization, the Company had paid the Former Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i) o $17.28 billion, and (ii) 0.75% of Stockholders' 1.05% of Stockholders' Equity (as defined in the Management Agreement) up tu Equity (as defined in the Management Agreement) in excess of $17.28 billion. The Company did not pay the Former Manager any incentive fees. For the six months ended June 30, 2020 prior to the closing of the Internalization, the compensation and management fee d in accordance with the Management Agreement was $77.9 million. For the year ended Decembem r 31, 2019, the computem m compensa tion and management fee was $170.6 million. reimbursed the Former Manager forff Prior to the closing of the Internalization, the Companym certain services in connection with the management and operations of the Company and its subsidiaries as permitted under the terms of the Management Agreement. Such reimbursable expenses included the cost for certain legal, tax, accounting and other support and advisory services provided by employees of the Former Manager to the Company. Pursuant to the Management Agreement, until the closing of the Internalization, the Company reimbursed the Former Manager for the cost of such services, provided such costs were no greater than those that would be payable to comparable third party providers. Expense reimbursements and related waivers were routinely reviewed with the Audit Committee of the Board in conformance with established policies. For the years ended December 31, 2020 and December 31, 2019, reimbursement payments to the Former Manager were $14.2 million and $21.4 million, respectively. None of the reimbursement payments were attributable to compensation of the Company’s executive officers. At December 31, 2020 and December 31, 2019 the Company had amounts payable to the Former Manager of $0 and $15.8 million, respectively. F-48 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES 21. LEASE COMMITMENTS AND CONTINGENCIES m s of equity. The Company’s operating leases are primarily comprisem to retained earnings or other The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019 with no impactm d of a corporate offiff ce lease with a remaining component lease term of fivff e years. The corporat e office lease includes an option to extend for up to five years, however the extension term was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the year ended December 31, 2020 was $3.2 million. r Supplemental information related to leases as of and for the year ended Decemberm 31, 2020 was as folff lows: Operating Leases Classification December 31, 2020 Assets (dollars in thousands) Operating lease right-of-use assets Other assets Liabilities Operating lease liabilities (1) Lease term and discount rate Weighted average remaining lease term Weighted average discount rate (1) Other liabilities Cash paid for amounts included in the measurement of lease liabilities $ $ 13,167 17,184 4.7 years 2.9% (1) Operating cash flows from operating leases 3,799 As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments. $ The following tablea provides details related to maturities of lease liabilities: Years ended December 31, Maturity of Lease Liabilities (dollars in thousands) 2022 2023 2024 2025 Later years Total lease payments Less imputed interest Present value of lease liabilities $ $ $ 3,918 3,862 3,862 3,862 2,895 — 18,399 1,215 17,184 ii Contingenc ies From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were no material contingencies at December 31, 2020 and 2019. ff 22. ARCOLA REGULATORY REQUIREMENTS Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capia tal structure, recordkeeping and conduct of directors, officers and employees. F-49 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S ANNALY CAPITAL MANAGEMENT, INC. ANDAA Financial Statements SUBSIDIARIES Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income fromff the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary. All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of defauff lt, to liquidate collateral held and in some instances, to offset receivablea s and payables with the same counterparty.tt t Arcola is required to maintain a minimum net capital As a member of the Financial Industry Regulatory Authority (“FINRA”), balance. At December 31, 2020, Arcola had a minimum net capital requirement of $0.3 million. Arcola consistently operates with capital in excess of its regulatory capita by SEC Rule 15c3-1 at December 31, 2020 was $422.3 million with excess net capital of $422.0 million. ents. Arcola’s regulatory net capital al requiremq ff as defined RR a s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S F-50 I I I E L U D E H C S - d e t h g i e W e g a r e v A e l b a i c e r p e D ) s r a e y n i ( e f i L e t a D d e r i u q c A f o r a e Y n o i t c u r t s n o C d e t a l u m u c c A n o i t a i c e r p e D ) 1 ( l a t o T n o i t a i c e r p e D d e t a l u m u c c A d n a e t a t s E l a e R - I I I e l u d e h c S ) s d n a s u o h t n i s r a l l o d ( 0 2 0 2 , 1 3 r e b m e c e D t a d e i r r a C s t n u o m A s s o r G 0 2 / 1 3 / 2 1 d o i r e P f o e s o l C d e z i l a t i p a C t s o C o t t n e u q e s b u S n o i t i s i u q c A y n a p m o C o t t s o C l a i t i n I d n a s g n d i l i u B d n a s g n d i l i u B s t n e m e v o r p m I d n a L s t n e m e v o r p m I s t n e m e v o r p m I d n a L s e c n a r b m u c n E $ 2 4 6 , 8 1 $ 2 7 6 , 4 1 $ 0 7 9 , 3 $ 9 $ 2 7 6 , 4 1 $ 1 6 9 , 3 $ 5 7 8 , 2 1 $ 8 3 8 3 8 3 8 3 8 3 8 3 8 3 8 3 7 2 5 2 8 2 4 2 2 3 5 2 8 2 1 3 7 2 9 2 9 2 1 3 6 2 8 2 5 2 4 3 7 2 8 3 4 4 6 3 8 1 8 3 3 3 8 3 4 3 7 3 8 1 2 2 1 3 5 1 0 2 / 5 2 / 1 1 5 1 0 2 / 5 2 / 1 1 5 1 0 2 / 5 2 / 1 1 5 1 0 2 / 5 2 / 1 1 5 1 0 2 / 5 2 / 1 1 5 1 0 2 / 5 2 / 1 1 5 1 0 2 / 5 2 / 1 1 5 1 0 2 / 5 2 / 1 1 5 1 0 2 / 4 1 / 8 5 1 0 2 / 7 2 / 0 1 6 9 9 1 4 9 9 1 8 9 9 1 9 9 9 1 4 9 9 1 2 9 9 1 6 9 9 1 5 9 9 1 8 8 9 1 8 8 9 1 ) 6 4 5 , 3 ( ) 8 6 3 , 3 ( ) 3 2 1 , 3 ( ) 1 6 4 , 3 ( ) 1 0 4 , 2 ( ) 4 2 4 , 2 ( ) 4 7 7 , 1 ( ) 6 4 0 , 2 ( ) 5 5 2 , 3 ( ) 9 7 9 , 7 ( 5 1 0 2 / 0 2 / 0 1 8 0 0 2 , 8 7 9 1 ) 5 7 5 , 8 ( 4 1 0 2 / 0 1 / 1 1 7 5 9 1 ) 7 3 0 , 8 ( 4 1 0 2 / 0 1 / 1 1 0 0 0 2 , 7 9 9 1 ) 4 4 3 , 5 ( 4 1 0 2 / 0 1 / 1 1 4 1 0 2 / 0 1 / 1 1 4 1 0 2 / 0 1 / 1 1 4 1 0 2 / 0 1 / 1 1 4 1 0 2 / 0 1 / 1 1 4 1 0 2 / 0 1 / 1 1 4 1 0 2 / 0 1 / 1 1 8 7 9 1 6 8 9 1 8 9 9 1 2 7 9 1 7 9 9 1 7 9 9 1 8 9 9 1 ) 7 1 3 , 3 ( ) 1 7 8 , 2 ( ) 9 8 1 , 2 ( ) 4 2 8 , 4 ( ) 9 2 7 , 1 ( ) 3 8 7 , 1 ( ) 6 1 2 , 1 ( 4 1 0 2 / 0 1 / 1 1 8 9 9 1 , 1 8 9 1 ) 2 7 8 , 2 ( 4 1 0 2 / 0 1 / 1 1 5 1 0 2 / 2 2 / 7 4 1 0 2 / 9 / 4 0 2 0 2 / 3 2 / 3 0 2 0 2 / 8 2 / 8 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 6 9 9 1 5 9 9 1 2 0 0 2 0 9 9 1 7 7 9 1 2 1 0 2 4 0 0 2 3 8 9 1 6 0 0 2 1 0 0 2 6 0 0 2 2 0 0 2 5 0 0 2 6 8 9 1 0 0 0 2 9 9 9 1 ) 4 6 4 , 2 ( ) 7 0 4 , 2 ( ) 0 8 9 , 2 ( ) 1 7 5 , 1 ( ) 1 8 ( — — — — — — — — — 2 1 5 , 7 1 9 4 8 , 8 1 4 5 4 , 9 1 5 1 9 , 3 1 6 5 2 , 0 1 0 7 0 , 2 1 7 8 0 , 6 1 7 0 , 8 1 1 3 0 , 9 3 7 7 7 , 5 7 0 8 0 , 8 2 5 4 0 , 5 2 5 6 4 , 4 1 4 6 0 , 3 1 5 1 4 , 7 8 5 0 , 9 1 1 0 7 , 5 5 3 7 , 5 0 3 5 , 4 8 3 1 , 2 1 7 0 2 , 2 1 7 5 0 , 2 1 2 1 2 , 7 1 9 6 7 , 5 3 9 9 4 , 4 4 — — — — — — — — — 6 9 8 , 2 1 6 3 1 , 4 1 1 9 4 , 4 1 3 8 9 , 9 0 6 5 , 7 9 9 4 , 8 8 2 6 , 4 8 9 0 , 3 1 9 5 1 , 9 2 8 7 7 , 3 4 8 5 9 , 3 2 6 5 8 , 0 2 6 2 5 , 2 1 2 3 9 , 0 1 1 4 8 , 6 0 2 6 , 6 1 8 5 3 , 5 5 1 9 , 4 3 2 1 , 4 6 7 8 , 0 1 0 9 9 , 8 5 7 7 , 9 9 0 7 , 3 1 9 6 2 , 2 2 9 9 4 , 6 — — — — — — — — — 6 1 6 , 4 3 1 7 , 4 3 6 9 , 4 2 3 9 , 3 6 9 6 , 2 1 7 5 , 3 9 5 4 , 1 3 7 9 , 4 2 7 8 , 9 9 9 9 , 1 3 2 2 1 , 4 9 8 1 , 4 9 3 9 , 1 2 3 1 , 2 4 7 5 8 3 4 , 2 3 4 3 0 2 8 7 0 4 2 6 2 , 1 7 1 2 , 3 2 8 2 , 2 3 0 5 , 3 0 0 5 , 3 1 0 0 0 , 8 3 — — — — — — — — — ) 8 2 8 ( ) 2 5 4 , 1 ( 8 5 6 , 1 1 0 2 4 , 8 8 5 8 , 0 1 0 2 4 , 7 0 0 8 0 0 0 , 1 5 0 2 8 4 2 4 1 1 1 9 0 2 9 1 2 5 9 6 8 2 9 7 4 5 5 1 , 1 6 4 5 , 1 4 2 2 5 4 2 3 9 1 , 1 7 2 5 0 4 6 3 9 , 1 — 6 7 5 4 0 6 9 0 2 0 0 4 4 7 3 — ) 1 3 4 , 5 1 ( ) 4 5 0 , 2 1 ( ) 0 4 9 , 1 2 ( ) 4 6 3 , 5 1 ( ) 9 3 7 , 1 1 ( ) 1 8 0 , 6 1 ( ) 3 9 9 , 2 1 ( ) 1 4 7 , 2 1 ( ) 8 7 0 , 6 ( — — 1 9 6 , 2 1 8 8 8 , 3 1 7 7 4 , 4 1 2 7 9 , 9 1 5 3 , 7 0 8 2 , 8 3 3 5 , 4 2 1 8 , 2 1 0 8 6 , 8 2 3 2 6 , 2 4 3 1 4 , 2 2 7 1 6 , 0 2 9 5 2 , 2 1 0 4 7 , 9 3 1 8 , 6 4 8 6 , 4 1 2 2 9 , 4 5 1 9 , 4 7 1 1 , 4 9 1 8 , 0 1 6 8 3 , 8 6 6 5 , 9 9 0 3 , 3 1 5 9 8 , 1 2 9 9 4 , 6 1 6 0 , 5 1 4 9 8 , 1 1 0 3 8 , 8 1 4 9 8 , 3 1 9 4 5 , 1 1 1 4 0 , 4 1 3 2 6 , 2 1 1 8 1 , 2 1 8 6 3 , 5 8 5 8 , 0 1 0 2 4 , 7 6 1 6 , 4 3 1 7 , 4 3 6 9 , 4 2 3 9 , 3 6 9 6 , 2 1 7 5 , 3 9 5 4 , 1 3 7 9 , 4 2 7 8 , 9 9 9 9 , 1 3 1 2 1 , 4 4 0 2 , 4 1 6 9 , 1 1 3 1 , 2 5 7 5 8 3 4 , 2 4 7 3 0 2 8 7 0 4 2 6 2 , 1 7 1 2 , 3 2 8 2 , 2 3 0 5 , 3 0 0 5 , 3 1 0 0 0 , 8 3 0 7 3 0 6 1 0 1 1 , 3 0 7 4 , 1 0 9 1 0 4 0 , 2 0 7 3 0 6 5 0 1 7 0 0 8 0 0 0 , 1 7 1 8 , 1 1 2 9 6 , 2 1 5 8 0 , 3 1 7 9 7 , 9 2 9 4 , 7 9 2 9 , 8 7 3 6 , 4 0 5 7 , 2 1 0 0 9 , 5 2 0 0 5 , 7 5 8 5 5 , 3 2 8 8 8 , 2 1 7 4 4 , 9 0 7 2 , 8 6 0 4 , 5 0 0 0 , 5 1 2 9 4 , 3 6 5 3 , 7 5 1 4 , 3 7 8 8 , 7 0 3 2 , 7 0 0 7 , 7 — 0 0 0 , 5 2 — — — — — — — — — — 7 4 8 , 8 9 5 5 , 6 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 f o r e b m u N s e i t r e p o r P n o i t a c o L X T , n o t l l o r r a C - l i a t e R X T , o n a l P - l i a t e R X T , e n i v e p a r G - l i a t e R X T , d n u o M r e w o l F - l i a t e R X T , d n u o M r e w o l F - l i a t e R X T , d n u o M r e w o l F - l i a t e R X T , e n i v e p a r G - l i a t e R X T , o n a l P - l i a t e R L F , o g r a L - l i a t e R C D , n o t g n i h s a W - y l i m a f i t l u M A C , y e l l a V s s a r G - l i a t e R Y N , k r a P d r a h c r O - l i a t e R Y N , a g a w o t k e e h C - l i a t e R Y N , d l e i ff f n e P - l i a t e R Y N , t s r e h m A - l i a t e R Y N , o i r a t n O - l i a t e R Y N , t i o u q e d n o r I - l i a t e R Y N , n w o t s e m a J - l i a t e R H O , e h t o c i l l i h C - l i a t e R A G , e l l i v n a g o L - l i a t e R H O , e h t o c i l l i h C - l i a t e R N T , e l l i v x o n KK K - l i a t e R Y N , w a s r a W - l i a t e R Y N , y o R e L - l i a t e R A V , h c r u h C s l l a F - e c i ff f f O C D n o t g n i h s a W - l i a t e R A V , n o d g n i b A - e r a c h t l a e H A V , y t i C e s a h C - e r a c h t l a e H A V , g r u b s k c i r e d e r F - e r a c h t l a e H A V , e l l i v s e n i a G - e r a c h t l a e H A V , p a G n o t g n i n n e P - e r a c h t l a e H A V , s a s s a n a M - e r a c h t l a e H A V , d r o f d a R - e r a c h t l a e H A V , l l e w e p o H - e r a c h t l a e H A V , e g r o F n o t f i l C - e r a c h t l a e H X T , n e l l A - e r a c h t l a e H X T , o c s i r F - e r a c h t l a e H F-51 I I I E L U D E H C S 6 3 9 1 6 2 4 3 1 2 1 3 6 3 3 3 1 3 8 3 2 3 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 8 1 0 2 / 7 / 9 4 0 0 2 2 9 9 1 4 0 0 2 3 1 0 2 , 9 0 0 2 4 0 0 2 4 1 0 2 4 1 0 2 1 1 0 2 9 0 0 2 5 0 9 1 / 8 / 7 5 0 9 1 / 7 / 7 ) 0 0 0 , 1 ( ) 8 7 0 , 1 ( ) 7 8 8 ( ) 7 9 7 ( ) 9 7 5 ( ) 8 0 1 , 1 ( ) 1 3 0 , 1 ( ) 5 6 6 ( ) 4 4 7 , 1 ( ) 7 0 4 , 1 ( ) 4 3 9 , 1 ( 5 4 4 , 1 1 5 0 7 , 0 1 7 7 1 , 7 0 9 8 , 7 4 4 1 , 9 0 0 7 , 9 8 2 0 , 7 2 7 4 , 4 1 0 6 3 , 8 8 2 0 , 0 2 7 7 6 , 9 1 4 7 2 , 2 2 7 2 5 , 6 0 2 0 , 7 4 0 9 , 8 0 4 0 , 9 8 1 6 , 6 2 2 4 , 3 1 0 7 6 , 7 8 1 6 , 9 1 7 4 0 , 9 1 6 7 6 , 1 2 0 4 7 0 5 6 0 7 8 0 4 2 0 6 6 0 1 4 0 9 6 0 1 4 0 3 6 8 9 5 0 5 0 , 1 — — — — — — — — 2 0 4 3 7 1 1 7 4 , 3 5 0 7 , 0 1 7 2 5 , 6 0 2 0 , 7 4 0 9 , 8 0 4 0 , 9 8 1 6 , 6 2 2 4 , 3 1 0 7 6 , 7 6 1 2 , 9 1 6 7 5 , 5 1 1 0 5 , 1 2 0 4 7 0 5 6 0 7 8 0 4 2 0 6 6 0 1 4 0 9 6 0 1 4 0 3 6 0 0 6 0 5 0 , 1 9 9 9 , 8 1 1 2 , 4 6 6 9 , 3 7 7 6 , 7 2 7 3 , 7 0 0 7 , 5 6 0 7 , 9 6 8 9 , 6 0 9 2 , 6 1 9 8 8 , 2 1 7 2 3 , 6 1 1 1 1 1 1 1 1 1 1 1 1 X T , d n a l r a G - e r a c h t l a e H X T , n o s i n e D - e r a c h t l a e H X T , e l l i v s i w e L - e r a c h t l a e H I W , a n u a k u a K - e r a c h t l a e H N M , o t a k n a M - e r a c h t l a e H N M , o t a k n a M - e r a c h t l a e H T U , e g r o e G . t S - e r a c h t l a e H T U , e g r o e G . t S - e r a c h t l a e H A L , n o t g n i v o C - e r a c h t l a e H A G , e g d i R e u l B - e r a c h t l a e H S K , n o i s s i M - e r a c h t l a e H ) 7 4 1 , 0 0 1 ( $ 2 1 9 , 3 6 6 $ 2 7 6 , 9 9 4 $ 0 4 2 , 4 6 1 $ ) 9 1 2 , 0 1 1 ( $ 1 5 8 , 0 0 6 $ 0 8 2 , 3 7 1 $ 2 5 6 , 9 2 4 $ 8 4 . ) d e t i d u a n u ( n o i l l i m 5 . 1 8 6 $ s a w 0 2 0 2 , 1 3 r e b m e c e D t a s e s o p r u p x a t e m o c n i l a r e d e F r o f , n o i t a i c e r p e d e r o f e b , s t n e m e v o r p m i d n a s g n i d l i u b , d n a l f o t s o c e t a g e r g g a e h T ) 1 ( : d e t n e s e r p s d o i r e p e h t g n i r u d d y t t i v i t c a e t a t s e l a e r r u o s t n e s e r p e l b a t g n i w o l l o f ff e h T — , 1 7 9 1 4 4 3 9 6 9 7 2 , , 4 6 6 1 2 7 0 2 9 8 4 , — 6 0 1 8 1 , 6 2 0 7 6 , 8 1 0 2 9 1 0 2 0 2 0 2 ) s d n a s u o h t n i s r a l l o d ( $ 4 6 6 , 1 2 7 $ 4 5 3 , 4 0 7 $ $ 1 1 8 , 5 ) 1 2 1 , 3 2 ( 4 5 3 , 4 0 7 6 2 0 , 7 6 ) 6 6 1 , 3 ( 2 7 6 , 3 2 $ $ 9 7 9 , 3 8 ) 1 2 4 , 4 2 1 ( 2 1 9 , 3 6 6 2 3 5 , 7 8 ) 8 9 0 , 0 1 ( 3 1 7 , 2 2 $ 2 3 5 , 7 8 $ 7 4 1 , 0 0 1 $ $ $ $ s t n e m e v o r p m i d n a s n o i t i s i u q c A n o i t a i c e r p e D d e t a l u m u c c A d l o s y t r e p o r P e c n a l a b g n i d n E e c n a l a b g n i n n i g e B e t a t s E l a e R e c n a l a b g n i n n i g e B d l o s y t r e p o r P n o i t a i c e r p e D e c n a l a b g n i d n E F-52 V I E L U D E H C S 0 2 0 2 , 1 3 r e b m e c e D e t a t s E l a e R l a i c r e m m o C n o s n a o L e g a g t r o M - V I e l u d e h c S ) 3 ( e t a D y t i r u t a M s m r e T t n e m y a P r o o l F R O B I L ) 2 ( e t a R t s e r e t n I t n u o m A g n i y r r a C t n u o m A e c a F ) 1 ( s n e i L r o i r P n o i t a c o L n o i t p i r c s e D ) s d n a s u o h t n i s r a l l o d ( s t n e m t s e v n i t b e d e n i n a z z e M 3 2 0 2 / 6 / 9 3 2 0 2 / 1 / 0 1 3 2 0 2 / 1 / 2 1 0 2 0 2 / 5 1 / 9 2 2 0 2 / 3 / 1 2 2 0 2 / 3 / 1 2 2 0 2 / 9 / 9 2 2 0 2 / 8 / 1 1 3 2 0 2 / 9 / 5 3 2 0 2 / 9 / 8 4 2 0 2 / 5 / 3 4 2 0 2 / 9 / 3 6 2 0 2 / 9 / 1 0 2 0 2 / 5 1 / 9 3 2 0 2 / 9 / 8 3 2 0 2 / 9 / 0 1 4 2 0 2 / 5 / 3 4 2 0 2 / 9 / 3 4 2 0 2 / 5 / 3 3 2 0 2 / 1 / 0 1 3 2 0 2 / 8 / 1 1 4 2 0 2 / 9 / 2 1 4 2 0 2 / 9 / 2 1 5 2 0 2 / 9 / 1 5 2 0 2 / 9 / 1 6 2 0 2 / 9 / 1 y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n I y l n O t s e r e t n 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I L % 0 4 . 3 + R O B I L % 0 9 . 2 + R O B I L % 0 5 . 3 + R O B I L % 5 8 . 2 + R O B I L % 5 2 . 3 + R O B I L 6 5 3 , 5 3 3 7 8 , 9 1 7 5 2 , 1 3 2 7 8 , 4 1 1 4 6 , 4 1 2 6 0 , 6 3 % 5 2 . 3 + R O B I L 2 3 2 % 0 0 . 3 + R O B I L 3 4 4 , 4 8 1 8 0 , 8 9 4 0 0 7 , 8 3 0 6 , 6 3 2 2 9 , 9 3 1 0 , 3 2 1 8 2 , 0 1 0 0 8 , 4 1 6 3 4 , 3 3 6 3 , 8 1 6 3 4 , 9 1 0 0 0 , 5 1 2 9 2 , 3 5 1 4 , 8 8 6 9 , 3 5 1 8 2 , 7 6 8 3 0 , 8 0 0 0 , 2 1 3 9 3 9 2 0 , 0 4 2 5 1 , 0 2 9 6 4 , 1 3 2 1 2 , 5 1 4 7 8 , 5 1 3 0 4 , 7 3 8 3 2 7 6 0 , 5 8 $ $ — — — — — — — — — — — — — — — — — — — $ 0 0 0 , 0 1 $ 9 2 3 , 1 6 2 1 2 , 0 6 0 5 7 , 4 2 1 — — 0 0 2 , 1 8 2 8 6 , 4 0 1 $ $ A M A L H O J N A C A C A L O C L F X T X T C N A C J N X T X T X T C N A C A W E D Z A C N Y N Y N L F l i a t e R e c i f f O l i a t e R e c i f f O e c i f f O e c i f f O l e t o H l i a t e R e c i f f O e c i f f O e c i f f O l i a t e R e c i f f O s e g a g t r o m t s r i F e c i f f O e c i f f O l e t o H e c i f f O l i a t e R l i a t e R y l i m a f i t l u M e r a c h t l a e H y l i m a f i t l u M y l i m a f i t l u M e c i f f O l a i r t s u d n I l a i r t s u d n I F-53 $ 5 8 3 , 8 6 5 $ . e t a R r e f ff f O k n a b r e t n I n o d n o L h t n o m e n o e h t s t n e s e r p e r R O B I L . d e s i c r e x e e r a s n o i t p o n o i s n e t x e l l a s e m u s s A . s n e i l y t i r o i r p y t r a p - d r i h t s t n e s e r p e R ) 1 ( ) 2 ( ) 3 ( SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto dulyd authorized, in the city of New York, State of New York. ANNALY CAPITAL MANAAA GEMENT, INC. Date: February 18, 2021 By: /s/ David L. Finkelstein David L. Finkelstein Chief Executive Officer and Chief Investment Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capaci ties and on the date indicated. a Signature /s/ David L. Finkelstein David L. Finkelstein /s/ Serena Wolfe Serena Wolfe /s/ Francine J. Bovich Francine J. Bovich /s/ Wellington J. Denahan g Wellington J. Denahan /s/ Katherine Beirne Fallon Katherine Beirne Fallon /s/ Thomas Edward Hamilton Thomas Edward Hamilton p /s/ Kathy Hopinkah Hannan Kathy Hopinkah Hannan y / s/ Michael E. Haylony Michael E. Haylon /s/ John H. Schaefer John H. Schaefer /s/ Donnell A. Segalas g Donnell A. Segalas /s/ Glenn A. Votek Glenn A. Votek /s/ Vicki Williams Vicki Williams Title Date Chief Executive Officer and Chief Investment Officer (Principal Executive Officer) February 18, 2021 Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) February 18, 2021 Director February 18, 2021 Director, Vice Chair of the Board February 18, 2021 Director Director Director February 18, 2021 February 18, 2021 February 18, 2021 Director, Chair of the Board February 18, 2021 Director Director Director Director February 18, 2021 February 18, 2021 February 18, 2021 February 18, 2021 II-1 s s e n i s u B s r o t c a F k s i R d e t a l e R , y t i u q E n o m m o C s ’ t n a r t s i g e R r o F t e k r a M y t i u q E f o s e s a h c r u P r e u s s I d n a s e i t i r u c e S s r e t t a M r e d l o h k c o t S d e t c e l e S a t a D l a i c n a n i F s ’ t n e m e g a n a M d n A n o i s s u c s i D s i s y l a n A x e d n I t i b i h x E l a i c n a n i F s t n e m e t a t S s e r u t a n g i S [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] Glossary of Terms ACREG: AMML: ARC: BBREMTG: Refers to Annaly Commercial Real Estate Group Refers to Annaly Middle Market Lending Group Refers to Annaly Residential Credit Group Represents the Bloomberg Mortgage REIT Index as of January 29, 2021, including Annaly Continuing Directors: Represents the eleven members of the Board following the 2021 Annual Meeting (assuming all nominees are elected) CRE CLO: Refers to Commercial Real Estate Collateralized Loan Obligation CRT: Refers to Credit Risk Transfer Securities Dedicated Capital: Represents the capital allocation for each of the four investment strategies calculated as the difference between each investment strategies’ assets and related financing. This calculation includes TBA purchase contracts and excludes non- portfolio related activity and will vary from total stockholders’ equity ESG: Refers to Environmental, Social and Governance Ginnie Mae: Refers to the Government National Mortgage Association GSE: Refers to government sponsored enterprise mREITs or mREIT Peers: Represents constituents of the BBREMTG Index, excluding Annaly, as of January 29, 2021 Non-QM: Refers to a Non-Qualified Mortgage OBX Securities: Refers to Onslow Bay Securities. Onslow Bay is a wholly owned subsidiary of Annaly Capital Management, Inc. TBA Securities: To-Be-Announced securities Unencumbered Assets: Represents Annaly’s excess liquidity and defined as assets that have not been pledged or securitized (generally including cash and cash equivalents, Agency MBS, CRT, Non-Agency MBS, residential mortgage loans, MSRs, reverse repurchase agreements, CRE debt and preferred equity, corporate debt, other unencumbered financial assets and capital stock) 17 Annaly Capital Management Inc. 2020 Annual Report Endnotes Annaly | Progressive Approach, Proven Resultss Source: Company filings and Bloomberg. Market data as of January 29, 2021. Financial data as of December 31, 2020. 1. Permanent capital represents Annaly’s total stockholders’ equity as of December 31, 2020. 2. Represents total shareholder return for the period beginning October 7, 1997 through January 29, 2021. 3. Data shown since Annaly’s initial public offering in October 1997 through January 29, 2021 and includes common and preferred dividends declared. Annaly | Power, Proven, People 1. On March 25, 2021, Annaly announced the planned divestiture of its Commercial Real Estate business. Subject to customary closing conditions, including applicable regulatory approvals, the transaction is expected to be completed by Q3 2021. Annaly Inveestment Strategies (cont’d) 4. On March 25, 2021, Annaly announced the planned divestiture of its Commercial Real Estate business, which is expected to have an immaterial impact on key financial metrics, including book value, core earnings and the Company’s dividend. Subject to customary closing conditions, including applicable regulatory approvals, the transaction is expected to be completed by Q3 2021. Percentages are based on economic interest and exclude the effects of consolidated VIEs. The Company’s limited and general partnership interests in a commercial loan investment fund that are accounted for under the equity method for GAAP are included within mezzanine investments. Equity includes preferred equity and joint venture interests in a social impact loan investment fund that is accounted for under the equity method for GAAP. Whole loans includes mezzanine loans for which Annaly Commercial Real Estate Group is also the corresponding first mortgage lender. Power of Annaly Source: Company filings and Bloomberg. Market data as of January 29, 2021. Financial data as of December 31, 2020. 1. Representative of the BBREMTG Index. Excludes Annaly. 2. Permanent capital represents Annaly’s total stockholders’ equity as of December 31, 2020. Our Investment Straategies | Agency Source: Company filings. Financial data as of December 31, 2020. 1. Includes TBA purchase contracts (market value) of $20.4bn and is shown net of debt issued by securitization vehicles of $0.6bn. 2. Represents Agency's hedging profile and does not reflect Annaly's full hedging activity. Proven Results Source: Company filings and Bloomberg. Market data as of January 29, 2021. Financial data as of December 31, 2020. 1. Data shown since Annaly’s initial public offering in October 1997 through January 29, 2021 and includes common and preferred dividends declared. People First Employee composition statistics as of December 31, 2020. Board composition as of April 2021. Message from Our CEO Source: Company filings. Financial data as of December 31, 2020. 1. Includes four residential whole loan securitizations totaling $1.8bn in 2020 and one $257mm residential whole loan securitization in 2021. Intex data as of December 31, 2020. Does not include deals backed by non-performing, re-performing or seasoned collateral. 2. Represents a non-GAAP financial measure. Refer to the “Non- GAAP Financial Measures” section of the 10-K for additional information. 3. Excludes fees and commissions. 4. Annaly’s current authorized share repurchase program expires in December 2021. Annaly Investment Strategies Source: Company filings. Financial data as of December 31, 2020. 1. Permanent capital represents Annaly’s total stockholders’ equity 2. as of December 31, 2020. Includes TBA purchase contracts and MSRs. Other includes ARM, HECM, CMO, IO, IIO and MSR securities, each equating to less than 1% of the portfolio. 3. Shown exclusive of securitized residential mortgage loans of a consolidated VIE and loans held by a master servicer in an MSR silo that is consolidated by the Company. CRT includes both Agency and Private CRT. Prime includes $1.2mm of Prime IO. OBX Retained includes $74.4mm of Prime and Prime Jumbo IO. Prime Jumbo includes both regular AM and IO. Our Investmment Strrategies | Residential Credit Source: Company filings. Financial data as of December 31, 2020. 1. Shown net of debt issued by securitization vehicles of $2.6bn. Our Inveestmment Strrategies | Middle Market Lending Source: Company filings. Financial data as of December 31, 2020. 1. Average Investment Size based on AMML principal balance outstanding as of December 31, 2020. 2. Represents leverage rather than economic leverage and includes non-recourse debt. Commercial Real Estate | Planned Divestiture Source: Company filings. Financial data as of December 31, 2020. 1. Financial data as of year end for each respective period and shown net of debt issued by securitization vehicles. 2018, 2019 and 2020 portfolio values include CMBX derivatives (market value) of $416.6mm, $340.7mm and $496.6mm, respectively. Finaanccingg, Capital & Liquidity Source: Company filings. Financial data as of December 31, 2020. 1. During Q4 2020, Annaly redeemed all outstanding shares of the $460mm 7.50% Series D preferred stock and repurchased $34mm of common stock, excluding fees and commissions. 2. Residential whole loan securitizations since the beginning of 2020 include: (1) a $375mm residential whole loan securitization in January 2020; (2) a $468mm residential whole loan securitization in February 2020; (3) a $489mm residential whole loan securitization in July 2020; (4) a $515mm residential whole loan securitization in September 2020; and (5) a $257mm residential whole loan securitization in March 2021. 3. Amount excludes fees and commissions. Annaly’s current authorized share repurchase program expires in December 2021. Annaly Capital Management Inc. 2020 Annual Report 18 Endnotes (cont’d) Operational Effiiciency Source: Company filings. Financial data as of December 31, 2020. 1. Represents management’s estimates of long-term operating expense projections for the internalization and planned divestiture of the Commercial Real Estate business based on historical experience and other factors, including expectations of future operational events and obligations, that are believed to be reasonable. The Company’s actual operating expenses and timeframe for achieving any operating expense savings may differ materially from management’s projections. Management’s projections are based on a number of factors and uncertainties and actual results may vary based on changes to our expected general and administrative expenses, changes to the Company’s equity base, changes to the Company’s business composition and strategy, and other circumstances which may be out of management’s control. 2. Represents operating expense as a percentage of average equity for the year ended December 31, 2020. Operating expense is defined as: (i) for internally-managed peers, the sum of compensation and benefits, G&A and other operating expenses, less any one-time or transaction related expenses and (ii) for externally-managed peers, the sum of net management fees, compensation and benefits (if any), G&A and other operating expenses, less any one-time or transaction related expenses. Boaard Commpossition & Shareholder Engagement Efforrts Board composition as of April 2021. 1. Representative of outreach during 2020-2021 proxy season and shareholder base as of December 31, 2020. Shareholder data per Ipreo. Boaard of Directors Board composition as of April 2021. 1. Donnell A. Segalas has not been renominated as a Director and will step down from the Board following the Annual Meeting in line with the Board’s refreshment policy. 19 Annaly Capital Management Inc. 2020 Annual Report Safe Harbor Notice Annual Report is issued by Annaly Capital Management, Inc. ("Annaly"), an internally-managed, publicly traded company that has elected to be taxed as a real estate investment trust for federal income tax purposes. This Annual Report is provided for investors in Annaly for informational purposes only and is not an offer to sell, or a solicitation of an offer to buy, any security or instrument. CCaauuttiioonnaarryy NNoottee RReeggggggggggaarrddiinngggggggggg FFoorrwwaarrdd--LLooookkiinngggggggggg SSttaatteemmeennttss This Annual Report contains certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Such statements include those relating to the Company’s future performance, macro outlook, the interest rate and credit environments, tax reform and future opportunities. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions; changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities (“MBS”) and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of the Company’s assets; changes in business conditions and the general economy; the Company’s ability to grow our commercial real estate business; the Company’s ability to grow its residential credit business; the Company’s ability to grow its middle market lending business; credit risks related to the Company’s investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, commercial real estate assets and corporate debt; risks related to investments in mortgage servicing rights; the Company’s ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting the Company’s business; the Company’s ability to maintain its qualification as a REIT for U.S. federal income tax purposes; and the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law. We routinely post important information for investors on our website, www.annaly.com. We intend to use this webpage as a means of disclosing material information, for complying with our disclosure obligations under Regulation FD and to post and update investor presentations and similar materials on a regular basis. Annaly encourages investors, analysts, the media and others interested in Annaly to monitor the Investors section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations, webcasts and other information we post from time to time on our website. To sign-up for email-notifications, please visit the “Email Alerts” section of our website, www.annaly.com, under the “Investors” section and enter the required information to enable notifications. The information contained on, or that may be accessed through, our webpage is not incorporated by reference into, and is not a part of, this document. Past performance is no guarantee of future results. There is no guarantee that any investment strategy referenced herein will work under all market conditions. Prior to making any investment decision, you should evaluate your ability to invest for the long-term, especially during periods of downturns in the market. You alone assume the responsibility of evaluating the merits and risks associated with any potential investment or investment strategy referenced herein. To the extent that this material contains reference to any past specific investment recommendations or strategies which were or would have been profitable to any person, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of such past investment recommendations or strategies. The information contained herein is not intended to provide, and should not be relied upon for accounting, legal or tax advice or investment recommendations for Annaly or any of its affiliates. Regardless of source, information is believed to be reliable for purposes used herein, but Annaly makes no representation or warranty as to the accuracy or completeness thereof and does not take any responsibility for information obtained from sources outside of Annaly. Certain information contained in the presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. RR 

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