Quarterly Report (10-q)

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

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED: June 30, 2021

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

FOR THE TRANSITION PERIOD FROM _______________ TO _________________

COMMISSION FILE NUMBER: 1-13447

ANNALY CAPITAL MANAGEMENT INC

(Exact Name of Registrant as Specified in its Charter)


Maryland		22-3479661
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1211 Avenue of the Americas
New York,	New York	10036
(Address of principal executive offices)		(Zip Code)

(212) 696-0100

(Registrant’s telephone number, including area code)

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


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share	NLY	New York Stock Exchange




6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	NLY.F	New York Stock Exchange
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	NLY.G	New York Stock Exchange
6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	NLY.I	New York Stock Exchange

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

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

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

Large accelerated filer

☑

Accelerated
filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

The number of shares of the registrant’s Common Stock outstanding on July 23, 2021 was 1,444,273,077.


ANNALY CAPITAL MANAGEMENT, INC.
FORM 10-Q
TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION			Page
Item 1. Financial Statements			1
Consolidated Statements of Financial Condition at June 30, 2021 (Unaudited) and December 31, 2020 (Derived from the audited consolidated financial statements at December 31, 2020)			1
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six months ended June 30, 2021 and 2020			2
Consolidated Statements of Stockholders’ Equity (Unaudited) for the three and six months ended June 30, 2021 and 2020			3
Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2021 and 2020			4
Notes to Consolidated Financial Statements (Unaudited)			5
Note 1. Description of Business			5
Note 2. Basis of Presentation			5
Note 3. Significant Accounting Policies			6
Note 4. Financial Instruments			9
Note 5. Securities			10
Note 6. Loans			14
Note 7. Mortgage Servicing Rights			22
Note 8. Variable Interest Entities			23
Note 9. Sale of Commercial Real Estate Business			26
Note 10. Derivative Instruments			28
Note 11. Fair Value Measurements			34
Note 12. Goodwill and Intangible Assets			37
Note 13. Secured Financing			38
Note 14. Capital Stock			39
Note 15. Interest Income and Interest Expense			41
Note 16. Net Income (Loss) per Common Share			42
Note 17. Income Taxes			42
Note 18. Risk Management			43
Note 19. Related Party Transactions			44
Note 20. Lease Commitments and Contingencies			44
Note 21. Arcola Regulatory Requirements			45
Note 22. Subsequent Events			46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
Special Note Regarding Forward-Looking Statements			47
Overview			49
Business Environment and COVID-19			49
Results of Operations			51
Financial Condition			66
Capital Management			70
Risk Management			71
Critical Accounting Policies and Estimates			81
Glossary of Terms			83
Item 3. Quantitative and Qualitative Disclosures about Market Risk			92
Item 4. Controls and Procedures			92
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			93
Item 1A. Risk Factors			93
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			93
Item 5. Other Information			93
Item 6. Exhibits			93
SIGNATURES			95

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

PART I - FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share data)
	June 30,		December 31,
	2021		2020 (1)
	(Unaudited)
Assets
Cash and cash equivalents (includes pledged assets of $1,207,566 and $1,137,809, respectively) (2)	$	1,380,456	$	1,243,703
Securities (includes pledged assets of $62,625,413 and $67,471,074, respectively) (3)	69,032,335		75,652,396
Loans, net (includes pledged assets of $1,669,699 and $2,231,035, respectively) (4)	3,563,008		3,083,821
Mortgage servicing rights (includes pledged assets of $0 and $5,541, respectively)	202,616		100,895
Interests in MSR	49,035		—
Assets transferred or pledged to securitization vehicles	4,073,156		6,910,020
Real estate, net	—		656,314
Assets of disposal group held for sale (includes pledged assets of $2,185,727 and $0, respectively) (5)	3,302,001		—


Derivative assets	181,889		171,134


Receivable for unsettled trades	14,336		15,912
Principal and interest receivable	250,210		268,073


Goodwill and intangible assets, net	26,502		127,341
Other assets	300,761		225,494

Total assets	$	82,376,305	$	88,455,103
Liabilities and stockholders’ equity
Liabilities
Repurchase agreements	$	60,221,067	$	64,825,239
Other secured financing	909,655		917,876

Debt issued by securitization vehicles	3,315,087		5,652,982
Participations issued	315,810		39,198
Mortgages payable	—		426,256
Liabilities of disposal group held for sale	2,362,690		—


Derivative liabilities	900,259		1,033,345
Payable for unsettled trades	154,405		884,069
Interest payable	173,721		191,116

Dividends payable	317,714		307,613
Other liabilities	66,721		155,613
Total liabilities	68,737,129		74,433,307
Stockholders’ equity







Preferred stock, par value $0.01 per share, 63,500,000 and 85,150,000 authorized, respectively, 63,500,000 issued and outstanding	1,536,569		1,536,569
Common stock, par value $0.01 per share, 2,936,500,000 and 2,914,850,000 authorized, respectively, 1,444,156,029 and 1,398,240,618 issued and outstanding, respectively	14,442		13,982
Additional paid-in capital	20,178,692		19,750,818
Accumulated other comprehensive income (loss)	1,780,275		3,374,335
Accumulated deficit	(9,892,863)		(10,667,388)
Total stockholders’ equity	13,617,115		14,008,316
Noncontrolling interests	22,061		13,480
Total equity	13,639,176		14,021,796
Total liabilities and equity	$	82,376,305	$	88,455,103

(1)Derived from the audited consolidated financial statements at December 31, 2020.

(2)Includes cash of consolidated Variable Interest Entities (“VIEs”) of $17.2 million and $22.2 million at June 30, 2021 and December 31, 2020, respectively.

(3)Excludes $48.4 million and $81.5 million at June 30, 2021 and December 31, 2020, respectively, of Agency mortgage-backed securities, $191.8 million and $576.6 million at June 30, 2021 and December 31, 2020, respectively, of non-Agency mortgage-backed securities and $0 and $391.0 million at June 30, 2021 and December 31, 2020, respectively, of commercial mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition.

(4)Includes $3.7 million and $47.0 million of residential mortgage loans held for sale at June 30, 2021 and December 31, 2020, respectively, and $466.4 million and $0 of corporate loans held for sale at June 30, 2021 and December 31, 2020, respectively.

(5)Excludes $251.0 million at June 30, 2021 of commercial mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition.

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (dollars in thousands, except per share data) (Unaudited)
	For The Three Months Ended June 30,				For The Six Months Ended June 30,
	2021		2020		2021		2020
Net interest income
Interest income	$	383,906	$	584,812	$	1,147,284	$	1,139,838
Interest expense	61,047		186,032		137,020		689,505
Net interest income	322,859		398,780		1,010,264		450,333
Realized and unrealized gains (losses)
Net interest component of interest rate swaps	(83,087)		(64,561)		(162,834)		(78,541)
Realized gains (losses) on termination or maturity of interest rate swaps	—		(1,521,732)		—		(1,919,293)
Unrealized gains (losses) on interest rate swaps	(141,067)		1,494,628		631,195		(1,333,095)
Subtotal	(224,154)		(91,665)		468,361		(3,330,929)
Net gains (losses) on disposal of investments and other	16,223		246,679		(49,563)		453,262
Net gains (losses) on other derivatives and financial instruments	(357,808)		170,916		119,060		377,342
Net unrealized gains (losses) on instruments measured at fair value through earnings	3,984		254,772		108,175		(475,388)
Loan loss (provision) reversal	(494)		(68,751)		139,126		(168,077)
Business divestiture-related gains (losses)	1,527		—		(248,036)		—


Subtotal	(336,568)		603,616		68,762		187,139
Total realized and unrealized gains (losses)	(560,722)		511,951		537,123		(3,143,790)
Other income (loss)	1,675		12,328		15,143		19,490
General and administrative expenses
Compensation and management fee	32,013		37,036		63,531		77,861
Other general and administrative expenses	21,513		27,734		37,900		56,774
Total general and administrative expenses	53,526		64,770		101,431		134,635
Income (loss) before income taxes	(289,714)		858,289		1,461,099		(2,808,602)
Income taxes	5,134		2,055		4,813		(24,647)
Net income (loss)	(294,848)		856,234		1,456,286		(2,783,955)
Net income (loss) attributable to noncontrolling interests	794		32		1,115		98
Net income (loss) attributable to Annaly	(295,642)		856,202		1,455,171		(2,784,053)
Dividends on preferred stock	26,883		35,509		53,766		71,018
Net income (loss) available (related) to common stockholders	$	(322,525)	$	820,693	$	1,401,405	$	(2,855,071)
Net income (loss) per share available (related) to common stockholders
Basic	$	(0.23)	$	0.58	$	1.00	$	(2.00)
Diluted	$	(0.23)	$	0.58	$	1.00	$	(2.00)
Weighted average number of common shares outstanding
Basic	1,410,239,138		1,423,909,112		1,404,755,496		1,427,451,716
Diluted	1,410,239,138		1,423,909,112		1,405,764,272		1,427,451,716

Other comprehensive income (loss)
Net income (loss)	$	(294,848)	$	856,234	$	1,456,286	$	(2,783,955)
Unrealized gains (losses) on available-for-sale securities	(191,541)		986,146		(1,620,468)		2,360,942
Reclassification adjustment for net (gains) losses included in net income (loss)	(30,415)		(265,443)		26,408		(657,059)
Other comprehensive income (loss)	(221,956)		720,703		(1,594,060)		1,703,883
Comprehensive income (loss)	(516,804)		1,576,937		(137,774)		(1,080,072)
Comprehensive income (loss) attributable to noncontrolling interests	794		32		1,115		98
Comprehensive income (loss) attributable to Annaly	(517,598)		1,576,905		(138,889)		(1,080,170)
Dividends on preferred stock	26,883		35,509		53,766		71,018
Comprehensive income (loss) attributable to common stockholders	$	(544,481)	$	1,541,396	$	(192,655)	$	(1,151,188)


See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands) (Unaudited)
	For The Three Months Ended June 30,				For The Six Months Ended June 30,
	2021		2020		2021		2020
Preferred stock
Beginning of period	$	1,536,569	$	1,982,026	$	1,536,569	$	1,982,026



End of period	$	1,536,569	$	1,982,026	$	1,536,569	$	1,982,026
Common stock
Beginning of period	$	13,985	$	14,304	$	13,982	$	14,301
Issuance	456		—		456		—
Buyback of common stock	—		(228)		—		(228)
Stock-based award activity	1		—		4		3

Direct purchase and dividend reinvestment	—		1		—		1
End of period	$	14,442	$	14,077	$	14,442	$	14,077
Additional paid-in capital
Beginning of period	$	19,754,826	$	19,968,372	$	19,750,818	$	19,966,923
Issuance	419,970		—		419,970		—
Buyback of common stock	—		(143,436)		—		(143,436)
Stock-based award activity	3,896		1,876		7,904		3,325


Direct purchase and dividend reinvestment	—		404		—		404
End of period	$	20,178,692	$	19,827,216	$	20,178,692	$	19,827,216
Accumulated other comprehensive income (loss)
Beginning of period	$	2,002,231	$	3,121,371	$	3,374,335	$	2,138,191
Unrealized gains (losses) on available-for-sale securities	(191,541)		986,146		(1,620,468)		2,360,942
Reclassification adjustment for net gains (losses) included in net income (loss)	(30,415)		(265,443)		26,408		(657,059)
End of period	$	1,780,275	$	3,842,074	$	1,780,275	$	3,842,074
Accumulated deficit
Beginning of period - unadjusted	$	(9,251,804)	$	(12,382,648)	$	(10,667,388)	$	(8,309,424)
Cumulative effect of change in accounting principle for credit losses	—		—		—		(39,641)
Beginning of period - adjusted	(9,251,804)		(12,382,648)		(10,667,388)		(8,349,065)
Net income (loss) attributable to Annaly	(295,642)		856,202		1,455,171		(2,784,053)
Dividends declared on preferred stock (1)	(26,883)		(35,509)		(53,766)		(71,018)
Dividends and dividend equivalents declared on common stock and stock-based awards (1)	(318,534)		(309,972)		(626,880)		(667,791)

End of period	$	(9,892,863)	$	(11,871,927)	$	(9,892,863)	$	(11,871,927)
Total stockholder’s equity	$	13,617,115	$	13,793,466	$	13,617,115	$	13,793,466
Noncontrolling interests
Beginning of period	$	11,788	$	4,105	$	13,480	$	4,327
Net income (loss) attributable to noncontrolling interests	794		32		1,115		98
Equity contributions from (distributions to) noncontrolling interests	9,479		—		7,466		(288)
End of period	$	22,061	$	4,137	$	22,061	$	4,137
Total equity	$	13,639,176	$	13,797,603	$	13,639,176	$	13,797,603

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

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
	For The Six Months Ended June 30,
	2021		2020
Cash flows from operating activities
Net income (loss)	$	1,456,286	$	(2,783,955)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities








Amortization of premiums and discounts of investments, net	313,306		881,012
Amortization of securitized debt premiums and discounts and deferred financing costs	(4,269)		(4,554)
Depreciation, amortization and other noncash expenses	17,718		16,895
Net (gains) losses on disposal of investments and other	49,563		(453,262)
Net (gains) losses on investments and derivatives	(858,430)		3,350,434
Net (gains) losses on business divestitures	248,036		—
Income from unconsolidated joint ventures	5,889		(1,349)

Loan loss provision (reversal)	(139,126)		168,077













Payments on purchases of loans held for sale	(49,586)		(90,287)









Proceeds from sales and repayments of loans held for sale	84,991		95,551














Net receipts (payments) on derivatives	606,454		(2,538,137)
Net change in

Other assets	(121,876)		238,119




Interest receivable	18,677		139,240
Interest payable	(16,165)		(295,392)
Other liabilities	(40,425)		(62,684)
Net cash provided by (used in) operating activities	1,571,043		(1,340,292)
Cash flows from investing activities
Payments on purchases of securities	(12,581,731)		(17,684,740)
Proceeds from sales of securities	6,350,647		46,806,424
Principal payments on securities	10,228,935		9,328,755
Payments on purchases and origination of loans	(2,754,376)		(1,588,531)

Proceeds from sales of loans	116,570		510,407
Principal payments on loans	1,498,768		1,040,569






Payments on purchases of MSR	(98,983)		—
Proceeds from sales of MSR	376		—
Payments on purchases of interests in MSR	(47,098)		—




Investments in real estate	(1,815)		(820)












Proceeds from sales of real estate	53,910		—





Proceeds from reverse repurchase agreements	12,084,313		37,100,000
Payments on reverse repurchase agreements	(12,084,313)		(37,100,000)
Distributions in excess of cumulative earnings from unconsolidated joint ventures	290		6,332



Proceeds from sale of equity securities	6,957		—
Cash acquired in asset acquisition	—		3,793



Net cash provided by (used in) investing activities	2,772,450		38,422,189
Cash flows from financing activities
Proceeds from repurchase agreements and other secured financing	1,129,837,127		1,910,919,740


Payments on repurchase agreements and other secured financing	(1,134,179,055)		(1,948,434,517)



Proceeds from issuances of securitized debt	969,165		1,423,925

Principal payments on securitized debt	(863,095)		(540,928)
Payment of deferred financing cost	—		(553)
Net proceeds from stock offerings, direct purchases and dividend reinvestments	420,426		405







Proceeds from participations issued	499,864		—
Payments on repurchases of participations issued	(223,828)		—
Principal payments on participations issued	(4,015)		—
Net principal receipts (payments) on mortgages payable	(659)		23,373
Net contributions (distributions) from (to) noncontrolling interests	7,466		(288)


Net payment on share repurchase	—		(143,664)
Settlement of stock-based awards in satisfaction of withholding tax requirements	(992)		—
Dividends paid	(669,144)		(786,209)
Net cash provided by (used in) financing activities	(4,206,740)		(37,538,716)
Net (decrease) increase in cash and cash equivalents	$	136,753	$	(456,819)
Cash and cash equivalents including cash pledged as collateral, beginning of period	1,243,703		1,850,729
Cash and cash equivalents including cash pledged as collateral, end of period	$	1,380,456	$	1,393,910
Supplemental disclosure of cash flow information
Interest received	$	1,478,377	$	3,354,991
Dividends received	$	51	$	6,180


Interest paid (excluding interest paid on interest rate swaps)	$	183,952	$	1,498,708
Net interest paid on interest rate swaps	$	137,018	$	358,218
Taxes received (paid)	$	333	$	603

Noncash investing and financing activities
Receivable for unsettled trades	$	14,336	$	747,082
Payable for unsettled trades	$	154,405	$	2,122,735


Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment	$	(1,594,060)	$	1,703,883




Dividends declared, not yet paid	$	317,714	$	309,686

Derecognition of assets of consolidated VIEs	$	976,690	$	—
Derecognition of securitized debt of consolidated VIEs	$	893,500	$	—

See notes to consolidated financial statements.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


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


1. DESCRIPTION OF BUSINESS

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

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

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


Investment Groups			Description
Annaly Agency Group			Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including MSR and Agency commercial mortgage-backed securities.
Annaly Residential Credit Group			Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets.

Annaly Middle Market Lending Group			Provides financing to private equity backed middle market businesses, focusing primarily on senior debt within select industries.

In March 2021, the Company announced that it had entered into a definitive agreement to sell and exit its Commercial Real Estate (“CRE”) business. Subject to customary closing conditions, including applicable regulatory approvals, the sale of the CRE business is expected to be completed in the second half of 2021. Refer to the “Sale of Commercial Real Estate Business” and “Subsequent Events” Notes for additional information.


2. BASIS OF PRESENTATION

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

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

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

Beginning with the quarter ended June 30, 2021, the Company began classifying certain portfolio activity- or volume-related expenses (including but not limited to brokerage and commission fees, due diligence costs and securitization expenses) as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Other general and administrative expenses for the three months ended March 31, 2021 decreased by $1.8 million and for the three and six months ended June 30, 2020 decreased by $2.9 million and $10.7 million, respectively, and Other income (loss) decreased by the same amounts for the three months ended March 31, 2021 and three and six months ended June 30, 2020, respectively.

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


3. SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled $1.2 billion and $1.1 billion at June 30, 2021 and December 31, 2020, respectively.

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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

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

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

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

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

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

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

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

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Recent Accounting Pronouncements

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

Standard

Description

Effective Date

Effect on the Financial Statements or Other Significant Matters

Standards that have been adopted

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

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

January 1, 2020

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

ASU 2020-04

Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

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

January 1, 2020

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

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


4. FINANCIAL INSTRUMENTS

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

Financial Instruments (1)

Balance Sheet Line Item

Type / Form

Measurement Basis

June 30, 2021

December 31, 2020

Assets

(dollars in thousands)

Securities

Agency mortgage-backed securities (2)

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

65,898,975

73,562,972

Securities

Agency mortgage-backed securities (3)

Fair value, with unrealized gains (losses) through earnings

569,544

504,087

Securities

Residential credit risk transfer securities

Fair value, with unrealized gains (losses) through earnings

827,328

532,403

Securities

Non-agency mortgage-backed securities

Fair value, with unrealized gains (losses) through earnings

1,582,323

972,192

Securities

Commercial real estate debt investments - CMBS(4)

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

—

31,603

Securities

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

Fair value, with unrealized gains (losses) through earnings

150,005

45,254

Securities

Commercial real estate debt investments - credit risk transfer securities

Fair value, with unrealized gains (losses) through earnings

4,160

3,885

Total securities

69,032,335

75,652,396

Loans, net

Residential mortgage loans

Fair value, with unrealized gains (losses) through earnings

1,029,929

345,810

Loans, net

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

Amortized cost

—

498,081

Loans, net

Corporate debt, held for investment

Amortized cost

2,066,709

2,239,930

Loans, net

Corporate debt, held for sale

Lower of amortized cost or fair value

466,370

—

Total loans, net

3,563,008

3,083,821

Interests in MSR

Interest in net servicing cash flows

Fair value, with unrealized gains (losses) through earnings

49,035

—

Assets transferred or pledged to securitization vehicles

Agency mortgage-backed securities

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

605,163

620,347

Assets transferred or pledged to securitization vehicles

Residential mortgage loans

Fair value, with unrealized gains (losses) through earnings

3,467,993

3,249,251

Assets transferred or pledged to securitization vehicles

Commercial mortgage loans (4)

Fair value, with unrealized gains (losses) through earnings

—

2,166,073

Assets transferred or pledged to securitization vehicles

Commercial mortgage loans (4)

Amortized cost

—

874,349

Total assets transferred or pledged to securitization vehicles

4,073,156

6,910,020

Liabilities

Repurchase agreements

Amortized cost

60,221,067

64,825,239

Other secured financing

Loans

Amortized cost

909,655

917,876

Debt issued by securitization vehicles

Securities

Fair value, with unrealized gains (losses) through earnings

3,315,087

5,652,982

Participations issued

Fair value, with unrealized gains (losses) through earnings

315,810

39,198

Mortgages payable

Loans (6)

Amortized cost

—

426,256

(1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. Interests in MSR are considered financial assets whereas MSR are servicing assets or obligations.

(2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities.

(3) Includes interest-only securities and reverse mortgages.

(4) Excludes Assets of disposal group held for sale at June 30, 2021.

(5) Includes single-asset / single-borrower CMBS.

(6) Excludes Liabilities of disposal group held for sale at June 30, 2021.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


5. SECURITIES

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

Impairment – Management evaluates available-for-sale securities and held-to-maturity debt securities for impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation. When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss) as a Securities Loss Provision and reflected as an Allowance for Credit Losses on Securities on the Consolidated Statements of Financial Condition, while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). For the three months ended March 31, 2021, the Company recognized a $0.4 million impairment on a commercial mortgage-backed security that it intends to sell. There was no impairment recognized for the three and six months ended June 30, 2020.

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

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

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

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

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

Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities (“CMBS”) are classified as available-for-sale and reported at fair value with any credit loss recognized through an allowance for credit losses and any other unrealized gains and losses reported as a component of Other comprehensive income (loss). Management evaluates its Commercial Securities for impairment at least quarterly. The Company elected the fair value option for all other Commercial Securities, including conduit and credit CMBS, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through earnings. As of June 30, 2021 and December 31, 2020, CMBS included in the announced sale of the Company’s CRE business are reported in Assets of disposal group held for sale and Securities, respectively, in the Consolidated Statements of Financial Condition. Refer to the “Sale of Commercial Real Estate Business” Note for additional information on the announced transaction.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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


	Residential Securities		Commercial Securities		Total
	(dollars in thousands)
Beginning balance January 1, 2021	$	75,571,654	$	80,742	$	75,652,396
Purchases	11,684,613		150,006		11,834,619
Sales and transfers (1)	(6,265,442)		(78,770)		(6,344,212)
Principal paydowns	(10,228,923)		—		(10,228,923)
(Amortization) / accretion	(307,987)		288		(307,699)
Fair value adjustment	(1,575,745)		1,899		(1,573,846)
Ending balance June 30, 2021	$	68,878,170	$	154,165	$	69,032,335

(1) Includes transfers to assets of disposal group held for sale.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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


	June 30, 2021
	Principal / Notional		Remaining Premium		Remaining Discount		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	59,813,415	$	3,280,197	$	(20,729)	$	63,072,883	$	1,905,748	$	(259,706)	$	64,718,925
Adjustable-rate pass-through	375,657		1,972		(3,286)		374,343		20,677		—		395,020
CMO	127,620		2,016		—		129,636		6,720		—		136,356
Interest-only	2,398,620		519,494		—		519,494		781		(157,583)		362,692
Multifamily(1)	2,769,722		169,915		(1,005)		777,380		35,262		(1,260)		811,382
Reverse mortgages	40,939		3,892		—		44,831		—		(687)		44,144
Total agency securities	$	65,525,973	$	3,977,486	$	(25,020)	$	64,918,567	$	1,969,188	$	(419,236)	$	66,468,519
Residential credit
CRT (2)	$	824,024	$	6,925	$	(1,868)	$	818,842	$	10,215	$	(1,729)	$	827,328
Alt-A	78,793		52		(17,019)		61,826		4,031		(6)		65,851
Prime	191,516		5,527		(15,517)		181,526		12,914		(367)		194,073
Prime interest-only	97,065		1,378		—		1,378		—		(854)		524
Subprime	189,138		460		(17,102)		172,496		10,120		(20)		182,596
NPL/RPL	1,056,963		1,281		(2,482)		1,055,762		8,887		(565)		1,064,084
Prime jumbo (>=2010 vintage)	74,981		530		(5,287)		70,224		4,180		(102)		74,302
Prime jumbo (>=2010 vintage) Interest-only	175,420		5,418		—		5,418		—		(4,525)		893
Total residential credit securities	$	2,687,900	$	21,571	$	(59,275)	$	2,367,472	$	50,347	$	(8,168)	$	2,409,651
Total Residential Securities	$	68,213,873	$	3,999,057	$	(84,295)	$	67,286,039	$	2,019,535	$	(427,404)	$	68,878,170
Commercial
Commercial Securities	$	154,000	$	6	$	(107)	$	153,899	$	267	$	(1)	$	154,165
Total securities	$	68,367,873	$	3,999,063	$	(84,402)	$	67,439,938	$	2,019,802	$	(427,405)	$	69,032,335


	December 31, 2020
	Principal / Notional		Remaining Premium		Remaining Discount		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	64,800,235	$	3,325,020	$	(22,143)	$	68,103,112	$	3,200,542	$	(1,076)	$	71,302,578
Adjustable-rate pass-through	455,675		2,869		(3,369)		455,175		22,341		—		477,516
CMO	139,664		2,177		—		141,841		7,926		—		149,767

Interest-only	2,790,537		564,297		—		564,297		3,513		(145,901)		421,909
Multifamily (1)	1,910,384		50,148		(1,057)		1,604,913		59,548		(954)		1,663,507
Reverse mortgages	47,585		4,183		—		51,768		252		(238)		51,782
Total agency investments	$	70,144,080	$	3,948,694	$	(26,569)	$	70,921,106	$	3,294,122	$	(148,169)	$	74,067,059
Residential credit
CRT (2)	$	544,780	$	7,324	$	(2,430)	$	538,941	$	3,062	$	(9,600)	$	532,403
Alt-A	93,001		51		(17,368)		75,684		4,644		—		80,328
Prime	177,852		5,126		(15,999)		166,979		14,607		(77)		181,509
Prime interest-only	194,687		1,882		—		1,882		—		(642)		1,240
Subprime	197,779		584		(18,181)		180,182		8,312		(61)		188,433
NPL/RPL	475,108		821		(2,416)		473,513		3,782		(1,448)		475,847
Prime jumbo (>=2010 vintage)	44,696		207		(5,300)		39,603		3,680		—		43,283
Prime jumbo (>=2010 vintage) Interest-only	291,624		6,803		—		6,803		—		(5,251)		1,552
Total residential credit securities	$	2,019,527	$	22,798	$	(61,694)	$	1,483,587	$	38,087	$	(17,079)	$	1,504,595
Total Residential Securities	$	72,163,607	$	3,971,492	$	(88,263)	$	72,404,693	$	3,332,209	$	(165,248)	$	75,571,654
Commercial
Commercial Securities	$	89,858	$	—	$	(7,471)	$	82,387	$	54	$	(1,699)	$	80,742
Total securities	$	72,253,465	$	3,971,492	$	(95,734)	$	72,487,080	$	3,332,263	$	(166,947)	$	75,652,396

(1) Principal/Notional amount includes $2.2 billion and $354.6 million of Agency CMBS interest-only securities as of June 30, 2021 and December 31, 2020, respectively.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

(2) Principal/Notional amount includes $10.2 million and $10.7 million of a CRT interest-only security as of June 30, 2021 and December 31, 2020, respectively.

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


	June 30, 2021		December 31, 2020
Investment Type	(dollars in thousands)
Fannie Mae	$	52,611,769	$	56,218,033
Freddie Mac	13,762,498		17,735,041
Ginnie Mae	94,252		113,985
Total	$	66,468,519	$	74,067,059

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

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


	June 30, 2021				December 31, 2020
	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Estimated weighted average life	(dollars in thousands)
Less than one year	$	234,798	$	233,247	$	110,203	$	109,540
Greater than one year through five years	17,843,706		17,273,287		45,643,138		43,404,877
Greater than five years through ten years	50,258,367		49,253,011		28,509,058		27,610,923
Greater than ten years	541,299		526,494		1,309,255		1,279,353
Total	$	68,878,170	$	67,286,039	$	75,571,654	$	72,404,693

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

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


	June 30, 2021					December 31, 2020
	Estimated Fair Value (1)		Gross Unrealized Losses (1)		Number of Securities (1)	Estimated Fair Value (1)		Gross Unrealized Losses (1)		Number of Securities (1)
	(dollars in thousands)
Less than 12 months	$	17,620,478	$	(260,373)	364	$	777,586	$	(2,030)	30
12 Months or more	—		—		—	—		—		—
Total	$	17,620,478	$	(260,373)	364	$	777,586	$	(2,030)	30

(1) Excludes interest-only mortgage-backed securities and reverse mortgages.

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

During the three and six months ended June 30, 2021, the Company disposed of $3.3 billion and $6.2 billion of Residential Securities, respectively. During the three and six months ended June 30, 2020, the Company disposed of $5.5 billion and $47.4 billion of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three and six months ended June 30, 2021 and 2020.

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements


	Gross Realized Gains		Gross Realized Losses		Net Realized Gains (Losses)
For the three months ended	(dollars in thousands)
June 30, 2021	$	52,485	$	(17,680)	$	34,805
June 30, 2020	$	272,382	$	(12,496)	$	259,886
For the six months ended
June 30, 2021	$	57,131	$	(83,021)	$	(25,890)
June 30, 2020	$	811,637	$	(284,494)	$	527,143


6. LOANS

The Company invests in residential and corporate loans. Loans are classified 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 June 30, 2021 and December 31, 2020, the Company reported $1.0 billion and $345.8 million, 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 for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value and prior reserves are reversed. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis.

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

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

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

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

The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

approval and periodic monitoring of credit risk and other risks associated with each investment. The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies. Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management.

The Company recorded net loan loss (provisions) reversals of ($0.5) million and $139.1 million for the three and six months ended June 30, 2021, respectively. The Company recorded net loan loss (provisions) reversals of ($68.8) million and ($168.1) million for the three and six months ended June 30, 2020, respectively. As of June 30, 2021 and December 31, 2020, the Company’s loan loss allowance was $33.9 million and $169.5 million, respectively.

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


	Residential		Commercial		Corporate Debt		Corporate Debt Held for Sale (1)		Total
	(dollars in thousands)
Beginning balance January 1, 2021	$	345,810	$	498,081	$	2,239,930	$	—	$	3,083,821

Purchases / originations	1,466,056		123,939		859,759		466,370		2,916,124
Sales and transfers (2)	(745,442)		(525,436)		(581,428)		—		(1,852,306)



Principal payments	(20,340)		(84,929)		(464,933)		—		(570,202)
Gains / (losses) (3)	(12,733)		(12,199)		5,693		—		(19,239)
(Amortization) / accretion	(3,422)		544		7,688		—		4,810

Ending balance June 30, 2021	$	1,029,929	$	—	$	2,066,709	$	466,370	$	3,563,008


(1) Represents loans the Company originated during the three months ended June 30, 2021 and subsequently syndicated and closed. At June 30, 2021, these loans were held at the lower of cost or fair value.
(2) Includes securitizations, syndications, transfers to securitization vehicles and commercial loan transfers to assets of disposal group held for sale. Includes transfer of residential loans to securitization vehicles with a carrying value of $987.0 million during the six months ended June 30, 2021.
(3) Includes loan loss allowances.

The carrying value of the Company’s residential loans held for sale was $3.7 million and $47.0 million at June 30, 2021 and December 31, 2020, respectively.

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

Residential

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

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


	June 30, 2021		December 31, 2020
	(dollars in thousands)
Fair value	$	4,497,922	$	3,595,061
Unpaid principal balance	$	4,317,278	$	3,482,865

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

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


	For the Three Months Ended				For the Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
	(dollars in thousands)
Interest income	$	38,963	$	42,872	$	76,072	$	90,429
Net gains (losses) on disposal of investments and other	(21,721)		(5,376)		(26,941)		(17,376)
Net unrealized gains (losses) on instruments measured at fair value through earnings	14,456		110,545		36,911		(82,218)
Total included in net income (loss)	$	31,698	$	148,041	$	86,042	$	(9,165)

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

Geographic Concentrations of Residential Mortgage Loans

June 30, 2021

December 31, 2020

Property location

% of Balance

Property location

% of Balance

California

52.6%

California

48.9%

New York

11.7%

New York

14.0%

Florida

5.9%

Florida

6.0%

All other (none individually greater than 5%)

29.8%

All other (none individually greater than 5%)

31.1%

Total

100.0%

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


	June 30, 2021		December 31, 2020
	Portfolio Range	Portfolio Weighted Average	Portfolio Range	Portfolio Weighted Average
	(dollars in thousands)
Unpaid principal balance	$0 - $3,500	$525	$1 - $3,448	$473
Interest rate	0.50% - 9.24%	4.55%	0.50% - 9.24%	4.89%
Maturity	7/1/2029 - 7/1/2061	10/21/2049	7/1/2029 - 1/1/2061	4/17/2046
FICO score at loan origination	604 - 829	758	505 - 829	755
Loan-to-value ratio at loan origination	8% - 103%	66%	8% - 104%	67%

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

Commercial

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

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

Management generally reviews the most recent financial information and metrics derived therefrom produced by the borrower, which may include, but is not limited to, net operating income (“NOI”), debt service coverage ratios, property debt yields (net cash flow or NOI divided by the amount of outstanding indebtedness), loan per unit and rent rolls relating to each of the

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

Item 1. Financial Statements

Company’s commercial real estate loans and preferred equity interests (“CRE Debt and Preferred Equity Investments”), and may consider other factors management deems important. Management also reviews market pricing to determine each borrower’s ability to refinance their respective assets at the maturity of each loan, economic trends (both macro and those affecting the property specifically), and the supply and demand of competing projects in the sub-market in which each subject property is located. Management monitors the financial condition and operating results of its borrowers and continually assesses the future outlook of the borrower’s financial performance in light of industry developments, management changes and company-specific considerations.

The Company’s commercial loans are collateral-dependent and, as such, for loans experiencing credit deterioration, the Company is required to record an allowance for loans held for investment based upon the fair value of the underlying collateral if foreclosure is probable or if the practical expedient is elected. For the six months ended June 30, 2021, the Company reversed the loan loss allowance resulting in a loan loss reversal on impaired commercial loans of $67.4 million as the loans are classified as held for sale and are carried at lower of cost or fair value. For the three and six months ended June 30, 2020, the Company recorded a loan loss provision on impaired commercial loans of $22.0 million and $74.1 million, respectively based upon the fair value of the underlying collateral. The Company uses a discounted cash flow or market based valuation technique based upon the underlying property to project property cash flows. In projecting these cash flows, the Company reviewed the borrower financial statements, rent rolls, economic trends and other factors management deems important. These nonrecurring fair value measurements are considered to be in Level 3 of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value.

For the six months ended June 30, 2021, the Company reversed the loan loss allowance based upon its Loss Given Default methodology resulting in a loan loss reversal on commercial loans of $62.5 million as the loans are classified as held for sale and are carried at lower of cost or fair value. For the three and six months ended June 30, 2020, the Company recorded a net loan loss provision of $39.1 million and $62.3 million, respectively, based upon its Loss Given Default methodology. As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect loan loss allowance of $7.8 million was recorded on January 1, 2020.

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

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

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

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

The sector attributes of the Company’s commercial real estate investments held for sale at June 30, 2021 and held for investment at December 31, 2020 were as follows:


	Sector Dispersion
	June 30, 2021				December 31, 2020
	Carrying Value		% of Loan Portfolio		Carrying Value		% of Loan Portfolio
	(dollars in thousands)
Office	$	581,039	43.3	%	$	650,034	47.4	%
Retail	249,676		18.6	%	256,493		18.7	%
Multifamily	220,331		16.4	%	250,095		18.2	%
Industrial	116,125		8.7	%	60,097		4.4	%
Hotel	100,942		7.5	%	115,536		8.4	%
Other	54,441		4.1	%	20,302		1.5	%
Healthcare	19,145		1.4	%	19,873		1.4	%
Total	$	1,341,699	100.0	%

NLY-F

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