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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:  September 30, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER:  1-13447

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ANNALY CAPITAL MANAGEMENT INC
(Exact Name of Registrant as Specified in its Charter)

Maryland
22-3479661
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
   
1211 Avenue of the Americas  
New York,
New York
10036
(Address of principal executive offices) (Zip Code)
(212) 696-0100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share NLY New York Stock Exchange
6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock NLY.F New York Stock Exchange
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock NLY.G New York Stock Exchange
6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock NLY.I New York Stock Exchange








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

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

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

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

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

The number of shares of the registrant’s Common Stock outstanding on October 31, 2022 was 467,865,540.



ANNALY CAPITAL MANAGEMENT, INC.
FORM 10-Q
TABLE OF CONTENTS
   
Page
Item 1.  Financial Statements
1
1
2
3
4
5
5
5
6
9
9
Note 9. Sale of Commercial Real Estate Business
 



ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except per share data)
  September 30, December 31,
2022
2021 (1)
(Unaudited)
Assets    
Cash and cash equivalents (includes pledged assets of $1,169,631 and $1,222,505, respectively) (2)
$ 1,466,171  $ 1,342,090 
Securities (includes pledged assets of $55,889,039 and $56,675,447, respectively) (3)
66,839,353  63,655,674 
Loans, net (includes pledged assets of $1,279,960 and $2,462,776, respectively) (4)
1,551,707  4,242,043 
Mortgage servicing rights (includes pledged assets of $727,927 and $0, respectively)
1,705,254  544,562 
Interests in MSR   69,316 
Assets transferred or pledged to securitization vehicles 9,202,014  6,086,308 
Assets of disposal group held for sale 11,371  194,138 
Derivative assets 1,949,530  170,370 
Receivable for unsettled trades 2,153,895  2,656 
Principal and interest receivable 262,542  234,983 
Goodwill and intangible assets, net 17,437  24,241 
Other assets 247,490  197,683 
Total assets $ 85,406,764  $ 76,764,064 
Liabilities and stockholders’ equity    
Liabilities    
Repurchase agreements $ 54,160,731  $ 54,769,643 
Other secured financing 250,000  903,255 
Debt issued by securitization vehicles 7,844,518  5,155,633 
Participations issued 745,729  1,049,066 
Liabilities of disposal group held for sale 1,151  154,956 
Derivative liabilities 764,535  881,537 
Payable for unsettled trades 9,333,646  147,908 
Interest payable 30,242  91,176 
Dividends payable 411,762  321,142 
Other liabilities 912,895  94,423 
Total liabilities 74,455,209  63,568,739 
Stockholders’ equity    
Preferred stock, par value $0.01 per share, 63,500,000 authorized, issued and outstanding
1,536,569  1,536,569 
Common stock, par value $0.01 per share, 2,936,500,000 authorized, 467,911,144 and 364,934,065 issued and outstanding, respectively
4,679  3,649 
Additional paid-in capital 22,967,665  20,324,780 
Accumulated other comprehensive income (loss) (5,431,436) 958,410 
Accumulated deficit (8,211,358) (9,653,582)
Total stockholders’ equity 10,866,119  13,169,826 
Noncontrolling interests 85,436  25,499 
Total equity 10,951,555  13,195,325 
Total liabilities and equity $ 85,406,764  $ 76,764,064 
(1)Derived from the audited consolidated financial statements at December 31, 2021.
(2)Includes cash of consolidated Variable Interest Entities (“VIEs”) of $3.5 million and $16.2 million at September 30, 2022 and December 31, 2021, respectively.
(3)Excludes $27.3 million and $44.2 million at September 30, 2022 and December 31, 2021, respectively, of Agency mortgage-backed securities and $1.0 billion and $350.4 million at September 30, 2022 and December 31, 2021, respectively, of non-Agency mortgage-backed securities in consolidated VIEs pledged as collateral and eliminated from the Company’s Consolidated Statements of Financial Condition. 
(4)Includes $1.4 million and $2.3 million of residential mortgage loans held for sale at September 30, 2022 and December 31, 2021, respectively.
See notes to consolidated financial statements.
1


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share data)
(Unaudited)
  For The Three Months Ended September 30, For The Nine Months Ended September 30,
  2022 2021 2022 2021
Net interest income    
Interest income $ 678,488  $ 412,972  $ 1,979,953  $ 1,560,256 
Interest expense 400,491  50,438  645,888  187,458 
Net interest income 277,997  362,534  1,334,065  1,372,798 
Net servicing income
Servicing and related income 74,486  17,948  164,886  37,696 
Servicing and related expense 7,780  3,012  17,486  7,912 
Net servicing income 66,706  14,936  147,400  29,784 
Other income (loss)
Net gains (losses) on investments and other (2,702,512) 102,819  (3,477,532) 161,431 
Net gains (losses) on derivatives 2,117,240  84,950  4,774,911  672,371 
Loan loss (provision) reversal 1,613  6,134  27,918  145,260 
Business divestiture-related gains (losses) (2,936) (14,009) (27,245) (262,045)
Other, net 1,526  1,285  (902) 1,580 
Total other income (loss) (585,069) 181,179  1,297,150  718,597 
General and administrative expenses
Compensation expense 27,744  27,859  82,989  91,390 
Other general and administrative expenses 10,178  16,023  36,735  53,923 
Total general and administrative expenses 37,922  43,882  119,724  145,313 
Income (loss) before income taxes (278,288) 514,767  2,658,891  1,975,866 
Income taxes (4,311) (6,767) 45,657  (1,954)
Net income (loss) (273,977) 521,534  2,613,234  1,977,820 
Net income (loss) attributable to noncontrolling interests 1,287  2,290  (453) 3,405 
Net income (loss) attributable to Annaly (275,264) 519,244  2,613,687  1,974,415 
Dividends on preferred stock 26,883  26,883  80,649  80,649 
Net income (loss) available (related) to common stockholders $ (302,147) $ 492,361  $ 2,533,038  $ 1,893,766 
Net income (loss) per share available (related) to common stockholders    
Basic $ (0.70) $ 1.36  $ 6.46  $ 5.34 
Diluted $ (0.70) $ 1.36  $ 6.45  $ 5.34 
Weighted average number of common shares outstanding    
Basic 429,858,876  361,328,979  392,172,655  354,606,052 
Diluted 429,858,876  361,589,467  392,445,034  354,875,551 
Other comprehensive income (loss)    
Net income (loss) $ (273,977) $ 521,534  $ 2,613,234  $ 1,977,820 
Unrealized gains (losses) on available-for-sale securities (2,578,509) (113,451) (8,650,438) (1,733,919)
Reclassification adjustment for net (gains) losses included in net income (loss) 1,457,999  (28,186) 2,260,592  (1,778)
Other comprehensive income (loss) (1,120,510) (141,637) (6,389,846) (1,735,697)
Comprehensive income (loss) (1,394,487) 379,897  (3,776,612) 242,123 
Comprehensive income (loss) attributable to noncontrolling interests 1,287  2,290  (453) 3,405 
Comprehensive income (loss) attributable to Annaly (1,395,774) 377,607  (3,776,159) 238,718 
Dividends on preferred stock 26,883  26,883  80,649  80,649 
Comprehensive income (loss) attributable to common stockholders $ (1,422,657) $ 350,724  $ (3,856,808) $ 158,069 
See notes to consolidated financial statements.


2


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
(Unaudited)
For The Three Months Ended September 30, For The Nine Months Ended September 30,
2022 2021 2022 2021
Preferred stock
Beginning of period
$ 1,536,569  $ 1,536,569  $ 1,536,569  $ 1,536,569 
End of period $ 1,536,569  $ 1,536,569  $ 1,536,569  $ 1,536,569 
Common stock
Beginning of period
$ 4,023  $ 3,610  $ 3,649  $ 3,496 
Issuance
655  14  1,027  128 
Stock-based award activity
1  3 
End of period $ 4,679  $ 3,625  $ 4,679  $ 3,625 
Additional paid-in capital
Beginning of period
$ 21,293,146  $ 20,189,524  $ 20,324,780  $ 19,761,304 
Issuance
1,670,825  48,894  2,626,052  469,206 
Stock-based award activity
3,694  822  16,833  8,730 
End of period $ 22,967,665  $ 20,239,240  $ 22,967,665  $ 20,239,240 
Accumulated other comprehensive income (loss)
Beginning of period
$ (4,310,926) $ 1,780,275  $ 958,410  $ 3,374,335 
Unrealized gains (losses) on available-for-sale securities
(2,578,509) (113,451) (8,650,438) (1,733,919)
Reclassification adjustment for net gains (losses) included in net income (loss)
1,457,999  (28,186) 2,260,592  (1,778)
End of period $ (5,431,436) $ 1,638,638  $ (5,431,436) $ 1,638,638 
Accumulated deficit
Beginning of period $ (7,496,061) $ (9,892,863) $ (9,653,582) $ (10,667,388)
Net income (loss) attributable to Annaly
(275,264) 519,244  2,613,687  1,974,415 
Dividends declared on preferred stock (1)
(26,883) (26,883) (80,649) (80,649)
Dividends and dividend equivalents declared on common stock and stock-based awards (1)
(413,150) (319,768) (1,090,814) (946,648)
End of period $ (8,211,358) $ (9,720,270) $ (8,211,358) $ (9,720,270)
Total stockholder’s equity $ 10,866,119  $ 13,697,802  $ 10,866,119  $ 13,697,802 
Noncontrolling interests
Beginning of period
$ 63,149  $ 22,061  $ 25,499  $ 13,480 
Net income (loss) attributable to noncontrolling interests
1,287  2,290  (453) 3,405 
Equity contributions from (distributions to) noncontrolling interests
21,000  (4,286) 60,390  3,180 
End of period $ 85,436  $ 20,065  $ 85,436  $ 20,065 
Total equity $ 10,951,555  $ 13,717,867  $ 10,951,555  $ 13,717,867 
(1) Refer to the “Capital Stock” Note for dividends per share for each class of shares.
See notes to consolidated financial statements.



3


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
  For The Nine Months Ended September 30,
  2022 2021
Cash flows from operating activities    
Net income (loss) $ 2,613,234  $ 1,977,820 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Amortization of premiums and discounts of investments, net 43,676  555,659 
Amortization of securitized debt premiums and discounts and deferred financing costs (3,829) (4,129)
Depreciation, amortization and other noncash expenses 15,879  21,084 
Net (gains) losses on investments and derivatives (1,217,818) (1,051,047)
Business divestiture-related (gains) losses 27,245  262,045 
Income (loss) from unconsolidated joint ventures (11,985) 5,889 
Loan loss provision (reversal) (27,918) (145,260)
Payments on purchases of loans held for sale   (51,403)
Proceeds from sales and repayments of loans held for sale 3,946  88,050 
Net receipts (payments) on derivatives 2,799,188  608,184 
Net change in    
Other assets (6,511) 22,441 
Interest receivable (28,718) 34,881 
Interest payable (61,285) (81,183)
Other liabilities 1,025,727  (27,750)
Net cash provided by (used in) operating activities 5,170,831  2,215,281 
Cash flows from investing activities    
Payments on purchases of securities (30,851,614) (18,334,872)
Proceeds from sales of securities 16,744,864  11,146,996 
Principal payments on securities 7,864,869  14,638,456 
Payments on purchases and origination of loans (5,165,059) (4,710,425)
Proceeds from sales of loans 1,918,996  879,147 
Principal payments on loans 1,357,018  2,016,373 
Payments on purchases of MSR (866,767) (416,149)
Proceeds from sales of MSR 9,076  376 
Payments on purchases of interests in MSR (4,913) (53,034)
Investments in real estate   (1,815)
Proceeds from sales of real estate   53,910 
Proceeds from reverse repurchase agreements 18,450,024  15,184,313 
Payments on reverse repurchase agreements (18,450,024) (15,184,313)
Distributions in excess of cumulative earnings from unconsolidated joint ventures   290 
Proceeds from sale of equity securities   6,957 
Net proceeds from business divestiture   1,118,100 
Net cash provided by (used in) investing activities (8,993,530) 6,344,310 
Cash flows from financing activities    
Proceeds from repurchase agreements and other secured financing 2,581,103,609  1,702,497,310 
Payments on repurchase agreements and other secured financing (2,582,371,537) (1,712,035,449)
Proceeds from issuances of securitized debt 4,876,814  2,005,080 
Principal payments on securitized debt (1,059,955) (1,270,367)
Payments on purchases of securitized debt (8,495) — 
Net proceeds from stock offerings, direct purchases and dividend reinvestments 2,627,079  469,334 
Proceeds from participations issued 1,637,231  1,036,800 
Payments on repurchases of participations issued (1,796,643) (434,873)
Principal payments on participations issued (40,241) (10,420)
Net principal receipts (payments) on mortgages payable   (1,019)
Net contributions (distributions) from (to) noncontrolling interests 60,390  3,180 
Settlement of stock-based awards in satisfaction of withholding tax requirements (4,039) (2,773)
Dividends paid (1,077,433) (1,013,797)
Net cash provided by (used in) financing activities 3,946,780  (8,756,994)
Net (decrease) increase in cash and cash equivalents 124,081  (197,403)
Cash and cash equivalents including cash pledged as collateral, beginning of period 1,342,090  1,243,703 
Cash and cash equivalents including cash pledged as collateral, end of period $ 1,466,171  $ 1,046,300 
Supplemental disclosure of cash flow information    
Interest received $ 1,751,099  $ 2,107,854 
Dividends received $   $ 51 
Interest paid (excluding interest paid on interest rate swaps) $ 457,122  $ 228,875 
Net interest received (paid) on interest rate swaps $ (57,302) $ (258,061)
Taxes received (paid) $ (2,170) $ (780)
Noncash investing and financing activities
Receivable for unsettled trades $ 2,153,895  $ 42,482 
Payable for unsettled trades $ 9,333,646  $ 571,540 
Net change in unrealized gains (losses) on available-for-sale securities, net of reclassification adjustment $ (6,389,846) $ (1,735,697)
Dividends declared, not yet paid $ 411,762  $ 318,986 
Derecognition of assets of consolidated VIEs $   $ 3,052,280 
Derecognition of securitized debt of consolidated VIEs $   $ 2,496,118 
Derecognition of mortgages payable $   $ 314,485 
See notes to consolidated financial statements.
4


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS
Annaly Capital Management, Inc. (the “Company” or “Annaly”) is a Maryland corporation that commenced operations on February 18, 1997.  The Company is a leading diversified capital manager with investment strategies across mortgage finance. The Company owns a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations, credit risk transfer (“CRT”) securities, other securities representing interests in or obligations backed by pools of mortgage loans, residential mortgage loans and mortgage servicing rights (“MSR”). The Company’s principal business objective is to generate net income for distribution to its stockholders and optimize its returns through prudent management of its diversified investment strategies.
The Company is an internally-managed company that has elected to be taxed as a Real Estate Investment Trust (“REIT”) as defined under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).
The Company’s investment groups are primarily comprised of the following:
Investment Groups Description
Annaly Agency Group Invests in Agency mortgage-backed securities (“MBS”) collateralized by residential mortgages which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae and complementary investments within the Agency market, including Agency commercial mortgage-backed securities.
Annaly Residential Credit Group Invests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets.
Annaly Mortgage Servicing Rights Group Invests in MSR, which provide the right to service residential loans in exchange for a portion of the interest payments made on the loans.
In March 2021, the Company announced that it had entered into a definitive agreement to sell and exit its Commercial Real Estate (“CRE”) business. As of September 30, 2022, the CRE assets held for sale and the associated liabilities were transferred. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.
In April 2022, the Company announced that it had entered into a definitive agreement to sell substantially all of the assets that comprise the Annaly Middle Market Lending (“MML”) portfolio, including assets held on balance sheet as well as assets managed for third parties. The vast majority of these assets were legally transferred at the end of the third quarter of 2022 and the remaining assets are expected to be transferred by the end of the fourth quarter of 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).
The accompanying consolidated financial statements and related notes are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”). The consolidated financial information as of December 31, 2021 has been derived from audited consolidated financial statements included in the Company’s 2021 Form 10-K.
The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported balance sheet amounts and/or disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.
Beginning with the quarter ended March 31, 2022, in light of the continued growth of its mortgage servicing rights portfolio, the Company enhanced its financial disclosures by separately reporting servicing income and servicing expense in its Consolidated Statements of Comprehensive Income (Loss). Servicing income and servicing expense were previously included within Other income (loss). As a result of this change, prior periods have been adjusted to conform to the current presentation.
In addition, beginning with the quarter ended March 31, 2022, the Company consolidated certain line items in its Consolidated Statements of Comprehensive Income (Loss) in an effort to streamline and simplify its financial presentation. Amounts previously reported under Net interest component of interest rate swaps, Realized gains (losses) on termination or maturity of interest rate swaps, Unrealized gains (losses) on interest rate swaps and Net gains (losses) on other derivatives are combined into a single line item titled Net gains (losses) on derivatives. Similarly, amounts previously reported under Net gains (losses) on disposal of investments and other and Net unrealized gains (losses) on instruments measured at fair value through earnings
5



are combined into a single line item titled Net gains (losses) on investments and other. As a result of these changes, prior periods have been adjusted to conform to the current presentation.
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.
Reverse Stock Split
On September 8, 2022, the Company announced that its Board of Directors had unanimously approved a reverse stock split of the Company’s common stock at a ratio of 1-for-4 (the “Reverse Stock Split”). The Reverse Stock Split was effective following the close of business on September 23, 2022 (the “Effective Time”). Accordingly, at the Effective Time, every four issued and outstanding shares of the Company’s common stock were converted into one share of the Company’s common stock. No fractional shares were issued in connection with the Reverse Stock Split. Instead, each stockholder that would have held fractional shares as a result of the Reverse Stock Split received cash in lieu of such fractional shares. The par value per share of the Company’s common stock remained unchanged at $0.01 per share after the Reverse Stock Split. Accordingly, for all historical periods presented, an amount equal to the par value of the reduced number of shares resulting from the Reverse Stock Split was reclassified from Common stock to Additional paid in capital in the Company’s Consolidated Statements of Financial Condition. All other references made to share or per share amounts in the accompanying consolidated financial statements and disclosures have also been retroactively adjusted, where applicable, to reflect the effects of the Reverse Stock Split.

3. SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are described below or are included elsewhere in these notes to the consolidated financial statements.
Principles of Consolidation – The consolidated financial statements include the accounts of the entities where the Company has a controlling financial interest. In order to determine whether the Company has a controlling financial interest, it first evaluates whether an entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”). All intercompany balances and transactions have been eliminated in consolidation.
Voting Interest Entities – A VOE is an entity that has sufficient equity and in which equity investors have a controlling financial interest. The Company consolidates VOEs where it has a majority of the voting equity of such VOE.
Variable Interest Entities – A VIE is defined as an entity in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, which is defined as the party that has both (i) the power to control the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE causes the Company’s consolidation conclusion to change. Refer to the “Variable Interest Entities” Note for further information.
Equity Method Investments - For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of joint ventures accounted for under the equity method. These investments are included in Other assets with income or loss included in Other, net.
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, cash held in money market funds on an overnight basis and cash pledged as collateral with counterparties. Cash deposited with clearing organizations is carried at cost, which approximates fair value. Cash and securities deposited with clearing organizations and collateral held in the form of cash on margin with counterparties to the Company’s interest rate swaps and other derivatives totaled $1.2 billion and $1.2 billion at September 30, 2022 and December 31, 2021, respectively.
Fair Value Measurements and the Fair Value Option – The Company reports various investments at fair value, including certain eligible financial instruments elected to be accounted for under the fair value option (“FVO”). The Company chooses to elect the FVO in order to simplify the accounting treatment for certain financial instruments. Items for which the FVO has been elected are presented at fair value in the Consolidated Statements of Financial Condition and any change in fair value is recorded in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). For
6


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
additional information regarding financial instruments for which the Company has elected the FVO see the table in the “Financial Instruments” Note.
Refer to the “Fair Value Measurements” Note for a complete discussion on the methodology utilized by the Company to estimate the fair value of certain financial instruments.
Offsetting Assets and Liabilities - The Company elected to present all derivative instruments on a gross basis as discussed in the “Derivative Instruments” Note. Reverse repurchase and repurchase agreements are presented net in the Consolidated Statements of Financial Condition if they meet the offsetting criteria. Please see below and refer to the “Secured Financing” Note for further discussion on reverse repurchase and repurchase agreements.
Derivative Instruments – Derivatives are recognized as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in fair value recognized in the Consolidated Statements of Comprehensive Income (Loss). The changes in the estimated fair value are presented within Net gains (losses) on derivatives. None of the Company’s derivative transactions have been designated as hedging instruments for accounting purposes. Refer to the “Derivative Instruments” Note for further discussion.
Stock-Based Compensation – The Company measures compensation expense for stock-based awards at fair value, which is generally based on the grant-date fair value of the Company’s common stock. Compensation expense is recognized ratably over the vesting or requisite service period of the award. Stock-based awards that contain market-based conditions are valued using a model.
Compensation expense for awards with performance conditions is recognized based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market conditions is recognized irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. Forfeitures are recorded when they occur. The Company generally issues new shares of common stock upon delivery of stock-based awards.
Interest Income - The Company recognizes interest income primarily on Residential Securities (as defined in the “Securities” Note), residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income (Loss). Refer to the “Interest Income and Interest Expense” Note for further discussion.
For its securities, the Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), taking into account estimates of future principal prepayments in the calculation of the effective yield.  The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.
Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis.
Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss).
If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower. Refer to the “Interest Income and Interest Expense” Note for further discussion on interest.
7


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The Company has made an accounting policy election not to measure an allowance for loans losses on corporate debt for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income.
Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income.
Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“TRSs”).  As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”).  ASUs not listed below were not applicable, not expected to have a significant impact on the Company’s consolidated financial statements when adopted or did not have a significant impact on the Company’s consolidated financial statements upon adoption.
Standard Description Effective Date Effect on the Financial Statements or Other Significant Matters
Standard that has been adopted
ASU 2020-04
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
This ASU provides optional, temporary relief to accounting for contract modifications resulting from reference rate reform.
January 1, 2020 The Company has elected to retrospectively apply the practical expedients to modifications of qualifying contracts as continuation of the existing contract rather than as a new contract. The adoption had no immediate impact and is not expected to have a material impact on the Company’s consolidated financial statements as the guidance continues to be applied to contract modifications until the ASU’s termination date.
8


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
4. FINANCIAL INSTRUMENTS
The following table presents characteristics for certain of the Company’s financial instruments at September 30, 2022 and December 31, 2021.
Financial Instruments (1)
Balance Sheet Line Item Type / Form Measurement Basis September 30, 2022 December 31, 2021
Assets (dollars in thousands)
Securities
Agency mortgage-backed securities (2)
Fair value, with unrealized gains (losses) through other comprehensive income $ 41,042,640  $ 59,939,383 
Securities
Agency mortgage-backed securities (3)
Fair value, with unrealized gains (losses) through earnings 21,994,601  586,222 
Securities Residential credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 1,056,906  936,228 
Securities Non-agency mortgage-backed securities Fair value, with unrealized gains (losses) through earnings 2,156,706  1,663,336 
Securities Commercial real estate debt investments - CMBS Fair value, with unrealized gains (losses) through earnings 570,633  521,440 
Securities Commercial real estate debt investments - credit risk transfer securities Fair value, with unrealized gains (losses) through earnings 17,867  9,065 
Total securities 66,839,353  63,655,674 
Loans, net Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 1,551,637  2,272,072 
Loans, net Residential mortgage loan warehouse facility Fair value, with unrealized gains (losses) through earnings 70  980 
Loans, net Corporate debt, held for investment Amortized cost   1,968,991 
Total loans, net 1,551,707  4,242,043 
Interests in MSR Interest in net servicing cash flows Fair value, with unrealized gains (losses) through earnings   69,316 
Assets transferred or pledged to securitization vehicles Agency mortgage-backed securities Fair value, with unrealized gains (losses) through other comprehensive income 431,388  589,873 
Assets transferred or pledged to securitization vehicles Residential mortgage loans Fair value, with unrealized gains (losses) through earnings 8,770,626  5,496,435 
Total assets transferred or pledged to securitization vehicles 9,202,014  6,086,308 
Liabilities
Repurchase agreements Repurchase agreements Amortized cost 54,160,731  54,769,643 
Other secured financing Loans Amortized cost 250,000  903,255 
Debt issued by securitization vehicles Securities Fair value, with unrealized gains (losses) through earnings 7,844,518  5,155,633 
Participations issued Participations issued Fair value, with unrealized gains (losses) through earnings 745,729  1,049,066 
(1) Receivable for unsettled trades, Principal and interest receivable, Payable for unsettled trades, Interest payable and Dividends payable are accounted for at cost. Interests in MSR are considered financial assets whereas directly held MSR are servicing assets or obligations.
(2) Includes Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities purchased prior to July 1, 2022.
(3) Includes interest-only securities and reverse mortgages and, effective July 1, 2022, newly purchased Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities.
5. SECURITIES
The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Effective July 1, 2022, the Company elected the fair value option for any newly purchased Agency mortgage-backed securities in order to simplify the accounting for these securities. Agency mortgage-backed securities purchased prior to July 1, 2022, are still classified as available-for-sale with changes in fair value recognized in other comprehensive income. Transactions for regular-way securities are recorded on trade date, including to-be-announced (“TBA”) securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method.
9


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Impairment – Management evaluates available-for-sale securities where the fair value option has not been elected 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). When the fair value of a held-to-maturity security is less than the cost, the Company performs an analysis to determine whether it expects to recover the entire cost basis of the security. For the nine months ended September 30, 2021, the Company recognized a $0.4 million impairment on a commercial mortgage-backed security that was sold subsequently in 2021.
Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other MBS representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”). 
Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis. TBA securities without intent to accept delivery (“TBA derivatives”) are accounted for as derivatives as discussed in the “Derivative Instruments” Note.
CRT Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors.
Non-Agency Mortgage-Backed Securities - The Company invests in non-Agency mortgage-backed securities such as those issued in prime loan, prime jumbo loan, Alt-A loan, subprime loan, non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.
Agency mortgage-backed securities, non-Agency mortgage-backed securities and residential CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio.
Commercial Mortgage-Backed Securities (“Commercial Securities”) - The Company invests in Commercial securities such as conduit, credit CMBS, single-asset single borrower and collateralized loan obligations.
The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the nine months ended September 30, 2022:
Agency Securities Residential Credit Securities Commercial Securities Total
(dollars in thousands)
Beginning balance January 1, 2022
$ 60,525,605  $ 2,599,564  $ 530,505  $ 63,655,674 
Purchases 37,900,732  1,655,685  247,746  39,804,163 
Sales and transfers
(20,616,137) (377,648) (169,224) (21,163,009)
Principal paydowns (7,343,579) (444,738) (3,514) (7,791,831)
(Amortization) / accretion (12,815) 4,662  425  (7,728)
Fair value adjustment (7,416,565) (223,913) (17,438) (7,657,916)
Ending balance September 30, 2022
$ 63,037,241  $ 3,213,612  $ 588,500  $ 66,839,353 







10


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements

The following tables present the Company’s securities portfolio, excluding securities transferred or pledged to securitization vehicles, that were carried at their fair value at September 30, 2022 and December 31, 2021:
  September 30, 2022
  Principal /
Notional
Remaining Premium Remaining Discount Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated Fair Value
Agency (dollars in thousands)
Fixed-rate pass-through $ 65,429,709  $ 2,561,532  $ (727,852) $ 67,263,389  $ 7,680  $ (6,289,954) $ 60,981,115 
Adjustable-rate pass-through 243,262  14,340  (98) 257,504  3,738  (11,738) 249,504 
CMO 103,521  1,795    105,316    (12,996) 92,320 
Interest-only 1,576,498  400,101    400,101  259  (227,515) 172,845 
Multifamily(1)
8,610,998  301,545  (1,045) 1,664,017    (151,917) 1,512,100 
Reverse mortgages 29,090  3,368    32,458    (3,101) 29,357 
Total agency securities $ 75,993,078  $ 3,282,681  $ (728,995) $ 69,722,785  $ 11,677  $ (6,697,221) $ 63,037,241 
Residential credit              
Credit risk transfer (2)
$ 1,100,944  $ 7,170  $ (4,385) $ 1,103,729  $ 900  $ (47,723) $ 1,056,906 
Alt-A 145,718  31  (20,012) 125,737  1,731  (9,624) 117,844 
Prime (3)
2,038,622  21,762  (25,159) 300,186  5,440  (42,791) 262,835 
Subprime 206,413  207  (19,387) 187,233  3,242  (12,656) 177,819 
NPL/RPL 1,456,013  1,695  (15,580) 1,442,128    (58,640) 1,383,488 
Prime jumbo (>=2010 vintage) (4)
2,165,973  17,327  (29,512) 254,297  2,114  (41,691) 214,720 
Total residential credit securities $ 7,113,683  $ 48,192  $ (114,035) $ 3,413,310  $ 13,427  $ (213,125) $ 3,213,612 
Total Residential Securities $ 83,106,761  $ 3,330,873  $ (843,030) $ 73,136,095  $ 25,104  $ (6,910,346) $ 66,250,853 
Commercial
Commercial Securities $ 611,581  $   $ (3,205) $ 608,376  $   $ (19,876) $ 588,500 
Total securities $ 83,718,342  $ 3,330,873  $ (846,235) $ 73,744,471  $ 25,104  $ (6,930,222) $ 66,839,353 
  December 31, 2021
  Principal /
Notional
Remaining Premium Remaining Discount Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated Fair Value
Agency (dollars in thousands)
Fixed-rate pass-through $ 54,432,252  $ 3,008,185  $ (18,314) $ 57,422,123  $ 1,349,125  $ (474,643) $ 58,296,605 
Adjustable-rate pass-through 305,211  1,965  (2,124) 305,052  16,223  (2) 321,273 
CMO 114,533  1,888  —  116,421  5,277  —  121,698 
Interest-only 1,912,415  456,683  —  456,683  428  (163,197) 293,914 
Multifamily (1)
5,671,138  273,553  —  1,453,946  15,330  (16,563) 1,452,713 
Reverse mortgages 36,807  3,550  —  40,357  —  (955) 39,402 
Total agency investments $ 62,472,356  $ 3,745,824  $ (20,438) $ 59,794,582  $ 1,386,383  $ (655,360) $ 60,525,605 
Residential credit              
Credit risk transfer (2)
$ 924,101  $ 8,754  $ (1,176) $ 927,555  $ 9,641  $ (968) $ 936,228 
Alt-A 83,213  31  (17,133) 66,111  3,627  (251) 69,487 
Prime (3)
323,062  9,841  (14,757) 268,117  10,853  (3,529) 275,441 
Subprime 170,671  349  (16,111) 154,909  8,285  (118) 163,076 
NPL/RPL 987,415  950  (1,698) 986,667  2,739  (5,968) 983,438 
Prime jumbo (>=2010 vintage) (4)
299,783  5,680  (6,410) 172,598  4,272  (4,976) 171,894 
Total residential credit securities $ 2,788,245  $ 25,605  $ (57,285) $ 2,575,957  $ 39,417  $ (15,810) $ 2,599,564 
Total Residential Securities $ 65,260,601  $ 3,771,429  $ (77,723) $ 62,370,539  $ 1,425,800  $ (671,170) $ 63,125,169 
Commercial
Commercial Securities $ 533,071  $ —  $ (127) $ 532,944  $ 165  $ (2,604) $ 530,505 
Total securities $ 65,793,672  $ 3,771,429  $ (77,850) $ 62,903,483  $ 1,425,965  $ (673,774) $ 63,655,674 
(1) Principal/Notional amount includes $7.2 billion and $4.5 billion of Agency Multifamily interest-only securities as of September 30, 2022 and December 31, 2021, respectively.
(2) Principal/Notional amount includes $0.0 million and $4.1 million of a CRT interest-only security as of September 30, 2022 and December 31, 2021, respectively.
(3) Principal/Notional amount includes $1.7 billion and $50.0 million of Prime interest-only securities as of September 30, 2022 and December 31, 2021, respectively.
(4) Principal/Notional amount includes $1.9 billion and $126.5 million of Prime Jumbo interest-only securities as of September 30, 2022 and December 31, 2021, respectively.

11


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents the Company’s Agency mortgage-backed securities portfolio, excluding securities transferred or pledged to securitization vehicles, by issuing Agency at September 30, 2022 and December 31, 2021: 
September 30, 2022 December 31, 2021
Investment Type (dollars in thousands)
Fannie Mae $ 54,755,114  $ 48,404,991 
Freddie Mac 8,222,761  10,880,033 
Ginnie Mae 59,366  1,240,581 
Total $ 63,037,241  $ 60,525,605 
Actual maturities of the Company’s Residential Securities are generally shorter than stated contractual maturities because actual maturities of the portfolio are affected by periodic payments and prepayments of principal on the underlying mortgages.
The following table summarizes the Company’s Residential Securities, excluding securities transferred or pledged to securitization vehicles, at September 30, 2022 and December 31, 2021, according to their estimated weighted average life classifications:
  September 30, 2022 December 31, 2021
Estimated Fair Value Amortized
Cost
Estimated Fair Value Amortized
Cost
Estimated weighted average life (dollars in thousands)
Less than one year $ 284,752  $ 290,114  $ 253,129  $ 250,689 
Greater than one year through five years 3,324,677  3,524,087  16,155,017  15,766,307 
Greater than five years through ten years 53,054,872  58,412,350  45,470,212  45,102,607 
Greater than ten years 9,586,552  10,909,544  1,246,811  1,250,936 
Total $ 66,250,853  $ 73,136,095  $ 63,125,169  $ 62,370,539 
The estimated weighted average lives of the Residential Securities at September 30, 2022 and December 31, 2021 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected.
The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at September 30, 2022 and December 31, 2021.
  September 30, 2022 December 31, 2021
 
Estimated Fair Value (1)
Gross Unrealized Losses (1)
Number of Securities (1)
Estimated Fair Value (1)
Gross Unrealized Losses (1)
Number of Securities (1)
  (dollars in thousands)
Less than 12 months $ 38,312,990  $ (4,825,625) 2,722  $ 22,828,156  $ (475,064) 571 
12 Months or more 2,505,823  (587,391) 137  383,815  (10,960) 19 
Total $ 40,818,813  $ (5,413,016) 2,859  $ 23,211,971  $ (486,024) 590 
(1) Excludes interest-only mortgage-backed securities and reverse mortgages and effective July 1, 2022, newly purchased Agency pass-through, collateralized mortgage obligation (“CMO”) and multifamily securities.
The decline in value of these securities is solely due to market conditions and not the quality of the assets.  Substantially all of the Agency mortgage-backed securities have an actual or implied credit rating that is the same as that of the U.S. government. An impairment has not been recognized in earnings related to these investments because the decline in value is not related to credit quality, the Company currently has not made a decision to sell the securities nor is it more likely than not that the securities will be required to be sold before recovery.
During the three and nine months ended September 30, 2022, the Company disposed of $11.6 billion and $21.0 billion of Residential Securities, respectively. During the three and nine months ended September 30, 2021, the Company disposed of $4.8 billion and $11.1 billion of Residential Securities, respectively. The following table presents the Company’s net gains (losses) from the disposal of Residential Securities for the three and nine months ended September 30, 2022 and 2021.
12


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)
September 30, 2022 $ 17,324  $ (1,491,325) $ (1,474,001)
September 30, 2021 $ 30,368  $ (3,636) $ 26,732 
For the nine months ended
September 30, 2022 $ 46,152  $ (2,321,940) $ (2,275,788)
September 30, 2021 $ 87,499  $ (86,657) $ 842 
6. LOANS
The Company invests in residential loans. Loans are classified as either held for investment or held for sale. Loans are eligible to be accounted for under the fair value option. If loans are elected under the fair value option, they are carried at fair value with changes in fair value recognized in earnings. Otherwise, loans held for investment are carried at cost less impairment and loans held for sale are accounted for at the lower of cost or fair value.
Excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, as of September 30, 2022 and December 31, 2021, the Company reported $1.6 billion and $2.3 billion, respectively, of loans for which the fair value option was elected. If the Company intends to sell or securitize the loans and the securitization vehicle is not expected to be consolidated, the loans are classified as held for sale. If loans are held for sale and the fair value option was not elected, they are accounted for at the lower of cost or fair value. Any origination fees and costs or purchase premiums or discounts are deferred and recognized upon sale. The Company determines the fair value of loans held for sale on an individual loan basis. The carrying value of the Company’s residential loans held for sale was $1.4 million and $2.3 million at September 30, 2022 and December 31, 2021, respectively.
Allowance for Losses – The Company evaluates the need for a loss reserve on each of its loans classified as held-for-investment, which primarily include corporate debt, where the fair value option is not elected. Allowance for loan losses are written off in the period the loans are deemed uncollectible.
Given the unique nature of each underlying borrower and any collateral, the Company assesses an allowance for each individual loan held for investment. An allowance is established at origination or acquisition that reflects management’s estimate of the total expected credit loss over the expected life of the loan. In estimating the lifetime expected credit losses, management utilizes a probability of default and loss given default methodology (“Loss Given Default methodology”), which considers projected economic conditions over the reasonable and supportable forecast period. The forecast incorporates primarily market-based assumptions including, but not limited to, forward interest rate curves, unemployment rate estimates and certain indexes sourced from third party vendors. For any remaining period of the expected life of the loan after the reasonable and supportable period, the Company reverts to historical losses on a straight-line basis. Management uses third party vendors’ loan pool data for loans with similar risk characteristics to estimate historical losses given the limited loss history of the Company’s loan portfolio. Changes in the lifetime expected credit loss are reflected in Loan loss (provision) reversal in the Consolidated Statements of Comprehensive Income (Loss). For loans experiencing credit deterioration, the Company may use a different methodology to determine the expected credit losses such as a discounted cash flow analysis.
Management assesses the credit quality of the portfolio and adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, the Company considers the estimated net recoverable value of the loans as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the competitive landscape where the borrower conducts business. To determine if loan loss allowances are required on investments in corporate debt, the Company reviews the monthly and/or quarterly financial statements of the borrowers, verifies loan compliance packages, if applicable, and analyzes current results relative to budgets and sensitivities performed at inception of the investment.  Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date.
The Company may be exposed to various levels of credit risk depending on the nature of its investments and credit enhancements, if any, supporting its assets. The Company’s core investment process includes procedures related to the initial approval and periodic monitoring of credit risk and other risks associated with each investment.  The Company’s investment underwriting procedures include evaluation of the underlying borrowers’ ability to manage and operate their respective properties or companies.  Management reviews loan-to-value metrics at origination or acquisition of a new investment and if events occur that trigger re-evaluation by management.
The Company recorded net loan loss (provisions) reversals of $1.6 million and $27.9 million for the three and nine months ended September 30, 2022, respectively. The Company recorded net loan loss (provisions) reversals of $6.1 million and $145.3
13


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
million for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022 and December 31, 2021, the Company’s loan loss allowance was $0.0 million and $27.9 million, respectively.
The following table presents the activity of the Company’s loan investments, excluding loans transferred or pledged to securitization vehicles and loan warehouse facilities, for the nine months ended September 30, 2022:
Residential
Corporate Debt
Total
(dollars in thousands)
Beginning balance January 1, 2022
$ 2,272,072  $ 1,968,991  $ 4,241,063 
Purchases / originations 5,008,390  185,269  5,193,659 
Sales and transfers (1)
(5,470,437) (1,902,444) (7,372,881)
Principal payments (86,329) (231,190) (317,519)
Gains / (losses) (2)
(166,111) (23,320) (189,431)
(Amortization) / accretion (5,948) 2,694  (3,254)
Ending balance September 30, 2022
$ 1,551,637  $   $ 1,551,637 
(1) Includes securitizations, syndications, transfers to securitization vehicles and corporate debt transfers to assets of disposal group held for sale and other assets. Includes transfer of residential loans to securitization vehicles with a carrying value of $5.5 billion during the nine months ended September 30, 2022.
(2) Includes loan loss allowances.

Residential
The Company’s residential mortgage loans are primarily comprised of performing adjustable-rate and fixed-rate whole loans. The Company’s residential loans are accounted for under the fair value option with changes in fair value reflected in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). The Company also consolidates securitization trusts in which it had purchased subordinated securities because it also has certain powers and rights to direct the activities of such trusts. Refer to the “Variable Interest Entities” Note for further information related to the Company’s consolidated residential mortgage loan trusts.
The following table presents the fair value and the unpaid principal balances of the residential mortgage loan portfolio, including loans transferred or pledged to securitization vehicles and excluding loan warehouse facilities, at September 30, 2022 and December 31, 2021:
September 30, 2022 December 31, 2021
  (dollars in thousands)
Fair value $ 10,322,263  $ 7,768,507 
Unpaid principal balance $ 11,469,486  $ 7,535,855 

The following table provides information regarding the line items and amounts recognized in the Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021 for these investments, excluding loan warehouse facilities:
For the Three Months Ended For the Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
  (dollars in thousands)
Interest income $ 109,973  $ 45,799  $ 275,083  $ 121,871 
Net gains (losses) on disposal of investments (1)
1,103  (7,154) (11,555) (34,095)
Net unrealized gains (losses) on instruments measured at fair value through earnings (1)
(541,771) 12,525  (1,281,501) 49,436 
Total included in net income (loss) $ (430,695) $ 51,170  $ (1,017,973) $ 137,212 
(1) These amounts are presented in the line item Net gains (losses) on investments and other on the Consolidated Statements of Comprehensive Income (Loss)

The following table provides the geographic concentrations based on the unpaid principal balances at September 30, 2022 and December 31, 2021 for the residential mortgage loans, including loans transferred or pledged to securitization vehicles:
14


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Geographic Concentrations of Residential Mortgage Loans
September 30, 2022 December 31, 2021
Property location % of Balance Property location % of Balance
California 46.1% California 50.2%
New York 10.2% New York 10.9%
Florida 8.1% Florida 6.1%
All other (none individually greater than 5%) 35.6% All other (none individually greater than 5%) 32.8%
Total 100.0% 100.0%
The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at September 30, 2022 and December 31, 2021:
  September 30, 2022 December 31, 2021
 
Portfolio
Range
Portfolio Weighted
Average
Portfolio
Range
Portfolio Weighted Average
  (dollars in thousands)
Unpaid principal balance
$2 - $4,396
$501
$1 - $4,382
$513
Interest rate
2.00% - 15.00%
4.41%
0.75% - 9.24%
4.04%
Maturity 7/1/2029 - 9/1/2062 8/29/2051 7/1/2029 - 12/1/2061 12/22/2050
FICO score at loan origination
588 - 831
760
604 - 831
762
Loan-to-value ratio at loan origination
5% - 100%
67%
8% - 103%
66%
At September 30, 2022 and December 31, 2021, approximately 11% and 16%, respectively, of the carrying value of the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, were adjustable-rate.
The Company participates in an arrangement that provides a residential mortgage loan warehouse facility to a third-party originator. The Company has elected to apply the fair value option to this lending facility in order to simplify the accounting and keep the accounting consistent with other residential credit financial instruments with similar characteristics. At September 30, 2022 and December 31, 2021, the fair value and carrying value of this warehouse facility was $0.1 million and $1.0 million, respectively, and reported as Loans, net in the Consolidated Statements of Financial Condition. As of September 30, 2022, the lending facility was not on nonaccrual status nor past due.

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

Corporate Debt
In April 2022, the Company entered into a definitive agreement to sell substantially all of the corporate loan interests held by the MML business operated by the Company, as well as assets managed for third parties (collectively, the “MML Portfolio”), to Ares Capital Management LLC (“Ares”). The vast majority of these assets were legally transferred to Ares at the end of the third quarter and the remaining assets are expected to be transferred by the end of the fourth quarter of 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.


7. MORTGAGE SERVICING RIGHTS
The Company owns variable interests in entities that invest in MSR and Interests in MSR. Refer to the “Variable Interest Entities” Note for a detailed discussion on this topic.
15


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
MSR represent the rights and obligations associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSR. The Company generally intends to hold the MSR as investments and elected to account for all of its investments in MSR at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss).
Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party acts as a master servicer for the loans providing the net servicing cash flows represented by the Interests in MSR. The Company accounts for its Interests in MSR at fair value with change in fair value presented in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other, net in the Consolidated Statements of Comprehensive Income (Loss).
The following tables present activity related to MSR and Interests in MSR for the three and nine months ended September 30, 2022 and 2021:  
 Mortgage Servicing Rights Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
  (dollars in thousands)
Fair value, beginning of period $ 1,421,420  $ 202,616  $ 544,562  $ 100,895 
Purchases (1)
182,784  312,327  866,767  411,309 
Transfers (2)
82,650  —  82,650  — 
Sales   —  (9,076) (376)
Change in fair value due to:
Changes in valuation inputs or assumptions (3)
43,274  76,107  281,843  108,403 
Other changes, including realization of expected cash flows (24,874) (18,791) (61,492) (47,972)
Fair value, end of period $ 1,705,254  $ 572,259  $ 1,705,254  $ 572,259 
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.
(2) Transfers from Interests in MSR - Refer to the “Variable Interest Entities” Note for additional information.
(3) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates.

Interests in MSR Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
(dollars in thousands)
Beginning balance $ 83,622  $ 49,035  $ 69,316  $  
Purchases (1)
  5,936  4,860  53,034 
Transfers (2)
(82,650) —  (82,650) — 
Gain (loss) included in net income (972) 2,559  8,474  4,496 
Ending balance September 30, 2022
$   $ 57,530  $   $ 57,530 
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.
(2) Transfers to MSR - Refer to the “Variable Interest Entities” Note for additional information









16


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
8. VARIABLE INTEREST ENTITIES
The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $1.1 billion at September 30, 2022. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method.
Multifamily Securitization
In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $0.5 billion and retained interest-only securities with a notional balance of $0.5 billion. At the inception of this arrangement, the Company determined that it was the primary beneficiary based upon its involvement in the design of this VIE and through the retention of a significant variable interest in the VIE. The Company elected the fair value option for the financial liabilities of this VIE in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase.
Residential Securitizations
The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. The Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities.
OBX Trusts
Residential securitizations are issued by entities generally referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company. Residential securitizations closed during the year are included in the table below.
Securitization Date of Closing Face Value at Closing
(dollars in thousands)
OBX 2022-NQM1 January 2022 $ 556,696 
OBX 2022-INV1 January 2022 $ 377,275 
OBX 2022-INV2 February 2022 $ 466,686 
OBX 2022-NQM2 February 2022 $ 439,421 
OBX 2022-INV3 March 2022 $ 330,823 
OBX 2022-NQM3 March 2022 $ 315,843 
OBX 2022-NQM4 May 2022 $ 457,285 
OBX 2022-J1 May 2022 $ 389,334 
OBX 2022-NQM5 June 2022 $ 390,775 
OBX 2022-INV4 June 2022 $ 335,900 
OBX 2022-NQM6 June 2022 $ 387,913 
OBX 2022-J2 August 2022 $ 305,969 
OBX 2022-NQM7 August 2022 $ 358,931 
OBX 2022-NQM8 September 2022 $ 397,470 

As of September 30, 2022 and December 31, 2021, a total carrying value of $7.4 billion and $4.6 billion, respectively, of bonds were held by third parties and the Company retained $1.0 billion and $780.8 million, respectively, of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but had not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third party pricing services. Effective August 1, 2022, upon initial consolidation of new securitization entities, the Company elected to apply the measurement alternative for consolidated collateralized financing entities in order to simplify its accounting and valuation processes. The liabilities of these securitization entities are deemed to be more observable and are used to measure the fair
17


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
value of the assets. The Company incurred $1.7 million and $2.2 million of costs during the three months ended September 30, 2022 and 2021, respectively, and $6.8 million and $4.0 million of costs during the nine months ended September 30, 2022 and 2021, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $8.6 billion and $4.6 billion at September 30, 2022 and December 31, 2021, respectively.

Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation.
Credit Facility VIEs
In connection with the sale of substantially all of the assets that comprise the MML Portfolio, the credit facilities which provided financing for the Company’s corporate debt were paid-off and terminated during the three months ended June 30, 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.
MSR VIEs
The Company owns variable interests in an entity that invests in MSR and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo.
The Company owned variable interests in entities that invested in Interests in MSR. These entities were VIEs because they did not have sufficient equity at risk to finance their activities and the Company was the primary beneficiary because it had power to remove the decision makers with or without cause and held substantially all of the variable interests in the entities. During the quarter ended September 30, 2022, the Company terminated its contracts previously classified as Interests in MSR on its Consolidated Statements of Financial Condition and purchased the underlying mortgage servicing rights. As a result, consolidated VIEs holding the Interests in MSR and related assets and liabilities were liquidated. No gain or loss was recognized upon deconsolidation. The underlying mortgage servicing rights were initially recognized at fair value and subsequent changes in fair value are recognized in earnings. See the “Mortgage Servicing Rights” Note and “Fair Value Measurements” Note for further information regarding MSR.

The statements of financial condition of the Company’s VIEs, excluding the multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at September 30, 2022 and December 31, 2021 are as follows:
September 30, 2022
  MSR VIEs
Assets
Cash and cash equivalents $ 3,533 
Loans 1,378 
Mortgage servicing rights 37 
Interests in MSR  
Other assets 4,068 
Total assets $ 9,016 
Liabilities  
Payable for unsettled trades $ 2,152 
Other liabilities 3,636 
Total liabilities $ 5,788 
 
18


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
December 31, 2021
  MSR VIEs
Assets
Cash and cash equivalents $ 16,187 
Loans 2,347 
Mortgage servicing rights 7,254 
Interests in MSR 69,316 
Other assets 10,406 
Total assets $ 105,510 
Liabilities  
Payable for unsettled trades $ 1,911 
Other liabilities 14,582 
Total liabilities $ 16,493 
 
Corporate Debt Funds
The Company managed parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities were considered VIEs because the investors did not have substantive liquidation, kick-out or participating rights. The fees that the Company earned were not considered variable interests of the VIE. The Company was not the primary beneficiary of the Fund Entities and therefore did not consolidate the Fund Entities. The corporate loans in the Fund Entities were assets managed for third parties and were part of the MML Portfolio transferred to Ares during the three months ended June 30, 2022. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information on the transaction.
Residential Credit Fund
The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of September 30, 2022 and December 31, 2021, the Company had outstanding participating interests in residential mortgage loans of $0.7 billion and $1.0 billion, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected t