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NLY Annaly Capital Management

Filed: 5 Aug 21, 8:00pm

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
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)
Maryland22-3479661
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
  
1211 Avenue of the Americas 
New York,New York10036
(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 ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per shareNLYNew York Stock Exchange
6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred StockNLY.FNew York Stock Exchange
6.50% Series G Fixed-to-Floating Rate Cumulative Redeemable Preferred StockNLY.GNew York Stock Exchange
6.75% Series I Fixed-to-Floating Rate Cumulative Redeemable Preferred StockNLY.INew 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 filerAccelerated
filer
Non-accelerated filerSmaller reporting companyEmerging 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
  
Page
Item 1.  Financial Statements
Note 9. Sale of Commercial Real Estate Business
26
 



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 MSR49,035 
Assets transferred or pledged to securitization vehicles4,073,156 6,910,020 
Real estate, net656,314 
Assets of disposal group held for sale (includes pledged assets of $2,185,727 and $0, respectively) (5)
3,302,001 
Derivative assets181,889 171,134 
Receivable for unsettled trades14,336 15,912 
Principal and interest receivable250,210 268,073 
Goodwill and intangible assets, net26,502 127,341 
Other assets300,761 225,494 
Total assets$82,376,305 $88,455,103 
Liabilities and stockholders’ equity  
Liabilities  
Repurchase agreements$60,221,067 $64,825,239 
Other secured financing909,655 917,876 
Debt issued by securitization vehicles3,315,087 5,652,982 
Participations issued315,810 39,198 
Mortgages payable426,256 
Liabilities of disposal group held for sale2,362,690 
Derivative liabilities900,259 1,033,345 
Payable for unsettled trades154,405 884,069 
Interest payable173,721 191,116 
Dividends payable317,714 307,613 
Other liabilities66,721 155,613 
Total liabilities68,737,129 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 outstanding1,536,569 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, respectively14,442 13,982 
Additional paid-in capital20,178,692 19,750,818 
Accumulated other comprehensive income (loss)1,780,275 3,374,335 
Accumulated deficit(9,892,863)(10,667,388)
Total stockholders’ equity13,617,115 14,008,316 
Noncontrolling interests22,061 13,480 
Total equity13,639,176 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.
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 June 30,For The Six Months Ended June 30,
 2021202020212020
Net interest income  
Interest income$383,906 $584,812 $1,147,284 $1,139,838 
Interest expense61,047 186,032 137,020 689,505 
Net interest income322,859 398,780 1,010,264 450,333 
Realized and unrealized gains (losses)  
Net interest component of interest rate swaps(83,087)(64,561)(162,834)(78,541)
Realized gains (losses) on termination or maturity of interest rate swaps0 (1,521,732)0 (1,919,293)
Unrealized gains (losses) on interest rate swaps(141,067)1,494,628 631,195 (1,333,095)
Subtotal(224,154)(91,665)468,361 (3,330,929)
Net gains (losses) on disposal of investments and other16,223 246,679 (49,563)453,262 
Net gains (losses) on other derivatives and financial instruments(357,808)170,916 119,060 377,342 
Net unrealized gains (losses) on instruments measured at fair value through earnings3,984 254,772 108,175 (475,388)
Loan loss (provision) reversal(494)(68,751)139,126 (168,077)
Business divestiture-related gains (losses)1,527 (248,036)
Subtotal(336,568)603,616 68,762 187,139 
Total realized and unrealized gains (losses)(560,722)511,951 537,123 (3,143,790)
Other income (loss)1,675 12,328 15,143 19,490 
General and administrative expenses
Compensation and management fee32,013 37,036 63,531 77,861 
Other general and administrative expenses21,513 27,734 37,900 56,774 
Total general and administrative expenses53,526 64,770 101,431 134,635 
Income (loss) before income taxes(289,714)858,289 1,461,099 (2,808,602)
Income taxes5,134 2,055 4,813 (24,647)
Net income (loss)(294,848)856,234 1,456,286 (2,783,955)
Net income (loss) attributable to noncontrolling interests794 32 1,115 98 
Net income (loss) attributable to Annaly(295,642)856,202 1,455,171 (2,784,053)
Dividends on preferred stock26,883 35,509 53,766 71,018 
Net income (loss) available (related) to common stockholders$(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 $(2.00)
Weighted average number of common shares outstanding  
Basic1,410,239,138 1,423,909,112 1,404,755,496 1,427,451,716 
Diluted1,410,239,138 1,423,909,112 1,405,764,272 1,427,451,716 
Other comprehensive income (loss)  
Net income (loss)$(294,848)$856,234 $1,456,286 $(2,783,955)
Unrealized gains (losses) on available-for-sale securities(191,541)986,146 (1,620,468)2,360,942 
Reclassification adjustment for net (gains) losses included in net income (loss)(30,415)(265,443)26,408 (657,059)
Other comprehensive income (loss)(221,956)720,703 (1,594,060)1,703,883 
Comprehensive income (loss)(516,804)1,576,937 (137,774)(1,080,072)
Comprehensive income (loss) attributable to noncontrolling interests794 32 1,115 98 
Comprehensive income (loss) attributable to Annaly(517,598)1,576,905 (138,889)(1,080,170)
Dividends on preferred stock26,883 35,509 53,766 71,018 
Comprehensive income (loss) attributable to common stockholders$(544,481)$1,541,396 $(192,655)$(1,151,188)
See notes to consolidated financial statements.


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 June 30,For The Six Months Ended June 30,
2021202020212020
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 
Issuance456 456 
Buyback of common stock0 (228)0 (228)
Stock-based award activity1 4 
Direct purchase and dividend reinvestment0 0 
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 
Issuance419,970 419,970 
Buyback of common stock0 (143,436)0 (143,436)
Stock-based award activity3,896 1,876 7,904 3,325 
Direct purchase and dividend reinvestment0 404 0 404 
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)$(8,309,424)
Cumulative effect of change in accounting principle for credit losses
0 0 (39,641)
Beginning of period - adjusted(9,251,804)(12,382,648)(10,667,388)(8,349,065)
Net income (loss) attributable to Annaly(295,642)856,202 1,455,171 (2,784,053)
Dividends declared on preferred stock (1)
(26,883)(35,509)(53,766)(71,018)
Dividends and dividend equivalents declared on common stock and stock-based awards (1)
(318,534)(309,972)(626,880)(667,791)
End of period$(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 interests794 32 1,115 98 
Equity contributions from (distributions to) noncontrolling interests9,479 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.



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)
 For The Six Months Ended June 30,
 20212020
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, net313,306 881,012 
Amortization of securitized debt premiums and discounts and deferred financing costs(4,269)(4,554)
Depreciation, amortization and other noncash expenses17,718 16,895 
Net (gains) losses on disposal of investments and other49,563 (453,262)
Net (gains) losses on investments and derivatives(858,430)3,350,434 
Net (gains) losses on business divestitures248,036 
Income from unconsolidated joint ventures5,889 (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 sale84,991 95,551 
Net receipts (payments) on derivatives606,454 (2,538,137)
Net change in  
Other assets(121,876)238,119 
Interest receivable18,677 139,240 
Interest payable(16,165)(295,392)
Other liabilities(40,425)(62,684)
Net cash provided by (used in) operating activities1,571,043 (1,340,292)
Cash flows from investing activities  
Payments on purchases of securities(12,581,731)(17,684,740)
Proceeds from sales of securities6,350,647 46,806,424 
Principal payments on securities10,228,935 9,328,755 
Payments on purchases and origination of loans(2,754,376)(1,588,531)
Proceeds from sales of loans116,570 510,407 
Principal payments on loans1,498,768 1,040,569 
Payments on purchases of MSR(98,983)
Proceeds from sales of MSR376 
Payments on purchases of interests in MSR(47,098)
Investments in real estate(1,815)(820)
Proceeds from sales of real estate53,910 
Proceeds from reverse repurchase agreements12,084,313 37,100,000 
Payments on reverse repurchase agreements(12,084,313)(37,100,000)
Distributions in excess of cumulative earnings from unconsolidated joint ventures290 6,332 
Proceeds from sale of equity securities6,957 
Cash acquired in asset acquisition0 3,793 
Net cash provided by (used in) investing activities2,772,450 38,422,189 
Cash flows from financing activities  
Proceeds from repurchase agreements and other secured financing1,129,837,127 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 debt969,165 1,423,925 
Principal payments on securitized debt(863,095)(540,928)
Payment of deferred financing cost0 (553)
Net proceeds from stock offerings, direct purchases and dividend reinvestments420,426 405 
Proceeds from participations issued499,864 
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 interests7,466 (288)
Net payment on share repurchase0 (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 period1,243,703 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.
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 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 GroupsDescription
Annaly Agency GroupInvests 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 GroupInvests primarily in non-Agency residential whole loans and securitized products within the residential and commercial markets.
Annaly Middle Market Lending GroupProvides 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.

5


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.
6


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Compensation expense is recognized ratably over the vesting or requisite service period of the award. Compensation expense for awards with performance conditions is recognized based on the probable outcome of the performance condition at each reporting date. Compensation expense for awards with market conditions is recognized irrespective of the probability of the market condition being achieved and is not reversed if the market condition is not met. Stock-based awards that do not require future service (i.e., vested awards) are expensed immediately. Forfeitures are recorded when they occur. The Company generally issues new shares of common stock upon delivery of stock-based awards.
Interest Income - The Company recognizes interest income primarily on Residential Securities (as defined in the “Securities” Note), residential mortgage loans, commercial investments and reverse repurchase agreements. Interest accrued but not paid is recognized as Interest receivable on the Consolidated Statements of Financial Condition. Interest income is presented as a separate line item on the Consolidated Statements of Comprehensive Income. Refer to the “Interest Income and Interest Expense” Note for further discussion.
For its securities, the Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the financial instruments and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than interest-only securities, multifamily and reverse mortgages), taking into account estimates of future principal prepayments in the calculation of the effective yield.  The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.
Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis.
Premiums and discounts associated with the purchase of residential mortgage loans and with those transferred or pledged to securitization trusts are primarily amortized or accreted into interest income over their estimated remaining lives using the effective interest rates inherent in the estimated cash flows from the mortgage loans. Amortization of premiums and accretion of discounts are presented in Interest income in the Consolidated Statements of Comprehensive Income (Loss).
If collection of a loan’s principal or interest is in doubt or the loan is 90 days or more past due, interest income is not accrued. For nonaccrual status loans carried at fair value or held for sale, interest is not accrued but is recognized on a cash basis. For nonaccrual status loans carried at amortized cost, if collection of principal is not in doubt but collection of interest is in doubt, interest income is recognized on a cash basis. If collection of principal is in doubt, any interest received is applied against principal until collectability of the remaining balance is no longer in doubt; at that point, any interest income is recognized on a cash basis. Generally, a loan is returned to accrual status when the borrower has resumed paying the full amount of the scheduled contractual obligation, if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period of time and there is a sustained period of repayment performance by the borrower. Refer to the “Interest Income and Interest Expense” Note for further discussion on interest.
The Company has made an accounting policy election not to measure an allowance for loans losses for accrued interest receivable. If interest receivable is deemed to be uncollectible or not collected within 90 days of its contractual due date for commercial loans or 120 days for corporate debt carried at amortized cost, it is written off through a reversal of interest income. Any interest written off that is recovered is recognized as interest income.
Refer to the “Interest Income and Interest Expense” Note for further discussion of interest income.
Income Taxes – The Company has elected to be taxed as a REIT and intends to comply with the provisions of the Code, with respect thereto. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. The Company and certain of its direct and indirect subsidiaries have made separate joint elections to treat these subsidiaries as taxable REIT subsidiaries (“TRSs”).  As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon its taxable income. Refer to the “Income Taxes” Note for further discussion on income taxes.
7


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.
StandardDescriptionEffective DateEffect 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, 2020The 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 June 30, 2021 and December 31, 2020.
Financial Instruments (1)
Balance Sheet Line ItemType / FormMeasurement BasisJune 30, 2021December 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 earnings569,544 504,087 
SecuritiesResidential credit risk transfer securitiesFair value, with unrealized gains (losses) through earnings827,328 532,403 
SecuritiesNon-agency mortgage-backed securitiesFair value, with unrealized gains (losses) through earnings1,582,323 972,192 
Securities
Commercial real estate debt investments - CMBS(4)
Fair value, with unrealized gains (losses) through other comprehensive income0 31,603 
Securities
Commercial real estate debt investments - CMBS (4)(5)
Fair value, with unrealized gains (losses) through earnings150,005 45,254 
SecuritiesCommercial real estate debt investments - credit risk transfer securitiesFair value, with unrealized gains (losses) through earnings4,160 3,885 
Total securities69,032,335 75,652,396 
Loans, netResidential mortgage loansFair value, with unrealized gains (losses) through earnings1,029,929 345,810 
Loans, net
Commercial real estate debt and preferred equity, held for investment (4)
Amortized cost0 498,081 
Loans, netCorporate debt, held for investmentAmortized cost2,066,709 2,239,930 
Loans, netCorporate debt, held for saleLower of amortized cost or fair value466,370 
Total loans, net3,563,008 3,083,821 
Interests in MSRInterest in net servicing cash flowsFair value, with unrealized gains (losses) through earnings49,035 
Assets transferred or pledged to securitization vehiclesAgency mortgage-backed securitiesFair value, with unrealized gains (losses) through other comprehensive income605,163 620,347 
Assets transferred or pledged to securitization vehiclesResidential mortgage loansFair value, with unrealized gains (losses) through earnings3,467,993 3,249,251 
Assets transferred or pledged to securitization vehicles
Commercial mortgage loans (4)
Fair value, with unrealized gains (losses) through earnings0 2,166,073 
Assets transferred or pledged to securitization vehicles
Commercial mortgage loans (4)
Amortized cost0 874,349 
Total assets transferred or pledged to securitization vehicles4,073,156 6,910,020 
Liabilities
Repurchase agreementsRepurchase agreementsAmortized cost60,221,067 64,825,239 
Other secured financingLoansAmortized cost909,655 917,876 
Debt issued by securitization vehiclesSecuritiesFair value, with unrealized gains (losses) through earnings3,315,087 5,652,982 
Participations issuedParticipations issuedFair value, with unrealized gains (losses) through earnings315,810 39,198 
Mortgages payable
Loans (6)
Amortized cost0 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.




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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
5. SECURITIES
The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt securities are classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with changes in fair value recognized in other comprehensive income, unless the fair value option is elected in which case changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Transactions for regular-way securities are recorded on trade date, including 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 0 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.






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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following represents a rollforward of the activity for the Company’s securities, excluding securities transferred or pledged to securitization vehicles, for the six months ended June 30, 2021:
Residential SecuritiesCommercial SecuritiesTotal
(dollars in thousands)
Beginning balance January 1, 2021$75,571,654 $80,742 $75,652,396 
Purchases11,684,613 150,006 11,834,619 
Sales and transfers (1)
(6,265,442)(78,770)(6,344,212)
Principal paydowns(10,228,923)0 (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.
11


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 PremiumRemaining DiscountAmortized
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-through375,657 1,972 (3,286)374,343 20,677 0 395,020 
CMO127,620 2,016 0 129,636 6,720 0 136,356 
Interest-only2,398,620 519,494 0 519,494 781 (157,583)362,692 
Multifamily(1)
2,769,722 169,915 (1,005)777,380 35,262 (1,260)811,382 
Reverse mortgages40,939 3,892 0 44,831 0 (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-A78,793 52 (17,019)61,826 4,031 (6)65,851 
Prime191,516 5,527 (15,517)181,526 12,914 (367)194,073 
Prime interest-only97,065 1,378 0 1,378 0 (854)524 
Subprime189,138 460 (17,102)172,496 10,120 (20)182,596 
NPL/RPL1,056,963 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-only175,420 5,418 0 5,418 0 (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 PremiumRemaining DiscountAmortized
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-through455,675 2,869 (3,369)455,175 22,341 477,516 
CMO139,664 2,177 141,841 7,926 149,767 
Interest-only2,790,537 564,297 564,297 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 mortgages47,585 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-A93,001 51 (17,368)75,684 4,644 80,328 
Prime177,852 5,126 (15,999)166,979 14,607 (77)181,509 
Prime interest-only194,687 1,882 1,882 (642)1,240 
Subprime197,779 584 (18,181)180,182 8,312 (61)188,433 
NPL/RPL475,108 821 (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-only291,624 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.
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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, 2021December 31, 2020
Investment Type(dollars in thousands)
Fannie Mae$52,611,769 $56,218,033 
Freddie Mac13,762,498 17,735,041 
Ginnie Mae94,252 113,985 
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, 2021December 31, 2020
Estimated Fair ValueAmortized
Cost
Estimated Fair ValueAmortized
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 years17,843,706 17,273,287 45,643,138 43,404,877 
Greater than five years through ten years50,258,367 49,253,011 28,509,058 27,610,923 
Greater than ten years541,299 526,494 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, 2021December 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 more0 0 0 
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.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
 Gross Realized GainsGross Realized LossesNet 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
14


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:
ResidentialCommercial
Corporate Debt
Corporate Debt Held for Sale (1)
Total
(dollars in thousands)
Beginning balance January 1, 2021$345,810 $498,081 $2,239,930 $0 $3,083,821 
Purchases / originations1,466,056 123,939 859,759 466,370 2,916,124 
Sales and transfers (2)
(745,442)(525,436)(581,428)0 (1,852,306)
Principal payments(20,340)(84,929)(464,933)0 (570,202)
Gains / (losses) (3)
(12,733)(12,199)5,693 0 (19,239)
(Amortization) / accretion(3,422)544 7,688 0 4,810 
Ending balance June 30, 2021$1,029,929 $0 $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, 2021December 31, 2020
 (dollars in thousands)
Fair value$4,497,922 $3,595,061 
Unpaid principal balance$4,317,278 $3,482,865 

15


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 EndedFor the Six Months Ended
June 30, 2021June 30, 2020June 30, 2021June 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 earnings14,456 110,545 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, 2021December 31, 2020
Property location% of BalanceProperty location% of Balance
California52.6%California48.9%
New York11.7%New York14.0%
Florida5.9%Florida6.0%
All other (none individually greater than 5%)29.8%All other (none individually greater than 5%)31.1%
Total100.0%100.0%
The following table provides additional data on the Company’s residential mortgage loans, including loans transferred or pledged to securitization vehicles, at June 30, 2021 and December 31, 2020:
 June 30, 2021December 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 rate0.50% - 9.24%4.55%0.50% - 9.24%4.89%
Maturity7/1/2029 - 7/1/206110/21/20497/1/2029 - 1/1/20614/17/2046
FICO score at loan origination604 - 829758505 - 829755
Loan-to-value ratio at loan origination8% - 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
16


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 5 commercial loans with a carrying value of $243.8 million at December 31, 2020. The maturity dates on 4 commercial loans were extended and 1 commercial loan was granted a 120 day forebearance. Additionally, as part of the restructuring, 2 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, 2021December 31, 2020
 Carrying Value% of Loan PortfolioCarrying Value% of Loan Portfolio
 (dollars in thousands)
Office$581,039 43.3 %$650,034 47.4 %
Retail249,676 18.6 %256,493 18.7 %
Multifamily220,331 16.4 %250,095 18.2 %
Industrial116,125 8.7 %60,097 4.4 %
Hotel100,942 7.5 %115,536 8.4 %
Other54,441 4.1 %20,302 1.5 %
Healthcare19,145 1.4 %19,873 1.4 %
Total$1,341,699 100.0 %$1,372,430 100.0 %


17


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Commercial real estate investments held for sale at June 30, 2021 and held for investment at December 31, 2020 were comprised of the following:
 June 30, 2021December 31, 2020
 Outstanding Principal
Carrying
Value
(1)
Percentage
of Loan
Portfolio
(2)
Outstanding Principal
Carrying
Value
(1)
Percentage
of Loan
Portfolio
(2)
 (dollars in thousands)
Senior mortgages$388,293 $364,974 26.4 %$387,124 $373,925 25.7 %
Senior securitized mortgages (3)
908,006 863,425 61.9 %938,859 874,349 62.3 %
Mezzanine loans171,979 113,300 11.7 %181,261 124,156 12.0 %
Total$1,468,278 $1,341,699 100.0 %$1,507,244 $1,372,430 100.0 %
(1)    Carrying value includes unamortized origination fees of $5.3 million and $4.9 million at June 30, 2021 and December 31, 2020, respectively.
(2)    Based on outstanding principal.
(3)    Represents assets of consolidated VIEs.

The following tables represent a rollforward of the activity for the Company’s commercial real estate investments held for sale at June 30, 2021 and held for investment at December 31, 2020:
June 30, 2021
 Senior
Mortgages
Senior
Securitized Mortgages
(1)
Mezzanine
Loans
Total
 (dollars in thousands)
Beginning balance (January 1, 2021) (2)
$373,925 $874,349 $124,156 $1,372,430 
Originations & advances (principal)124,701 69 641 125,411 
Principal payments(75,007)(79,447)(9,922)(164,376)
Transfers (3)
(68,654)5,819 (58,491)(121,326)
Net (increase) decrease in origination fees(1,403)0 0 (1,403)
Amortization of net origination fees501 486 43 1,030 
Allowance for loan losses
          Beginning allowance(10,911)(62,149)(56,873)(129,933)
          Current period (allowance) reversal10,911 62,149 56,873 129,933 
          Ending allowance0 0 0 0 
Net carrying value (June 30, 2021)$364,974 $863,425 $113,300 $1,341,699 
18


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
December 31, 2020
Senior
Mortgages
Senior
Securitized Mortgages
(1)
Mezzanine
Loans
Total
 (dollars in thousands)
Beginning balance (January 1, 2020) (2)
$499,690 $936,378 $182,726 $1,618,794 
Originations & advances (principal)206,090 12,374 218,464 
Principal payments(77,344)(144,308)(78)(221,730)
Principal write off(7,000)(7,000)
Transfers (3)
(245,120)142,621 (7,100)(109,599)
Net (increase) decrease in origination fees(1,055)(653)(80)(1,788)
Realized gain204 204 
Amortization of net origination fees2,371 2,460 187 5,018 
 Allowance for loan losses
        Beginning allowance, prior to CECL adoption(12,703)(12,703)
        Impact of adopting CECL(2,263)(4,166)(1,336)(7,765)
        Current period (allowance) reversal(8,648)(57,983)(66,521)(133,152)
        Write offs23,687 23,687 
        Ending allowance(10,911)(62,149)(56,873)(129,933)
Net carrying value (December 31, 2020)$373,925 $874,349 $124,156 $1,372,430 
(1)    Represents assets of consolidated VIEs.
(2)    Excludes loan loss allowances.
(3)    Includes transfers to securitization vehicles.

Corporate Debt  
The Company’s investments in corporate loans typically take the form of senior secured loans primarily in first or second lien positions. The Company’s senior secured loans generally have stated maturities of five to eight years. In connection with these senior secured loans, the Company receives a security interest in certain assets of the borrower and such assets support repayment of such loans. Senior secured loans are generally exposed to less credit risk than more junior loans given their seniority to scheduled principal and interest and priority of security in the assets of the borrower. Interest income from coupon payments is accrued based upon the outstanding principal amounts of the debt and its contractual terms. Premiums and discounts are amortized or accreted into interest income using the effective interest method.
The Company’s internal risk rating rubric for corporate debt has nine categories as depicted below:
Risk Rating - Corporate DebtDescription
1-5 / PerformingMeets all present contractual obligations.
6 / Performing - Closely MonitoredMeets all present contractual obligations but exhibits a defined weakness in either leverage or liquidity, but not both. Loans at this rating will require closer monitoring, but where we expect no loss of interest or principal.
7 / SubstandardA loan that has a defined weakness in either leverage and/or liquidity, and which may require substantial changes to strengthen the asset. Loans at this rating level have a higher probability of loss, although no determination of the amount or timing of a loss is yet possible.
8 / DoubtfulA loan that has missed a scheduled principal or interest payment or is otherwise deemed a non-earning account. The probability of loss is increasingly certain due to significant performance issues.
9 / LossConsidered uncollectible.
Management assesses each loan at least quarterly and assigns an internal risk rating based on its evaluation of the most recent financial information produced by the borrower and consideration of economic conditions. See below for a tabular disclosure of the amortized cost basis of the Company’s corporate debt held for investment by year of origination and internal risk rating.
There was 0 provision for loan loss recorded on corporate loans using a discounted cash flow methodology for the six months ended June 30, 2021. For the six months ended June 30, 2020, the Company recorded a loan loss provision of $10.0 million on impaired corporate loans using a discounted cash flow methodology with a principal balance and carrying value, net of
19


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
allowances of $29.3 million and $4.3 million, respectively. During the six months ended June 30, 2020, a loan was restructured and the Company received $2.8 million of second lien debt and $4.8 million of equity. As a result of the restructuring, $19.6 million of first lien debt was written off and the related allowance of $11.9 million was charged off.
For the three and six months ended June 30, 2021 the Company recorded a net loan loss (provision) reversal on corporate loans of ($0.5) million and $5.7 million, respectively, based upon its Loss Given Default methodology. For the three and six months ended June 30, 2020 the Company recorded a net loan loss provision on corporate loans of $7.6 million and $21.7 million, respectively, based upon its Loss Given Default methodology. As a result of the implementation of the Loss Given Default methodology under the modified retrospective method, a cumulative effect loan loss allowance on corporate loans of $29.7 million was recorded on January 1, 2020.
At June 30, 2021 and December 31, 2020, the Company had unfunded corporate loan commitments of $228.2 million and $87.3 million, respectively. At June 30, 2021 and December 31, 2020, the liability related to the expected credit losses on the unfunded corporate loan commitments was $1.2 million and $0.7 million, respectively.
The Company invests in corporate loans through its Annaly Middle Market Lending Group. The industry and rate attributes of the portfolio at June 30, 2021 and December 31, 2020 are as follows:
 Industry Dispersion
 June 30, 2021December 31, 2020
 
Total (1)
Total (1)
 (dollars in thousands)
Computer Programming, Data Processing & Other Computer Related Services$457,776 $483,142 
Management & Public Relations Services291,404 300,869 
Industrial Inorganic Chemicals156,642 156,391 
Public Warehousing & Storage121,314 132,397 
Metal Cans & Shipping Containers116,098 115,670 
Surgical, Medical & Dental Instruments & Supplies81,821 83,161 
Electronic Components & Accessories78,365 78,129 
Engineering, Architectural, and Surveying75,625 77,308 
Offices & Clinics of Doctors of Medicine73,532 104,781 
Telephone Communications58,100 58,450 
Specialty Outpatient Facilities, not elsewhere classified56,304 
Miscellaneous Industrial and Commercial53,120 77,163 
Miscellaneous Equipment Rental & Leasing49,693 49,587 
Research, Development & Testing Services45,558 62,008 
Insurance Agents, Brokers and Service43,978 67,193 
Electric Work42,347 41,128 
Petroleum and Petroleum Products33,784 33,890 
Medical & Dental Laboratories30,609 30,711 
Schools & Educational Services, not elsewhere classified29,172 29,040 
Metal Forgings & Stampings27,340 27,523 
Legal Services26,382 26,399 
Grocery Stores22,130 22,895 
Coating, Engraving and Allied Services19,535 19,484 
Chemicals & Allied Products14,720 14,686 
Drugs12,409 12,942 
Mailing, Reproduction, Commercial Art and Photography and Stenographic12,277 12,733 
Machinery, Equipment & Supplies11,708 12,096 
Sanitary Services10,763 
Offices and Clinics of Other Health Practitioners10,092 9,730 
Miscellaneous Business Services4,111 12,980 
Miscellaneous Food Preparations0 58,857 
Home Health Care Services0 28,587 
Total$2,066,709 $2,239,930 
(1)     All middle market lending positions are floating rate.
20


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The table below reflects the Company’s aggregate positions by their respective place in the capital structure of the borrowers at June 30, 2021 and December 31, 2020.
 
 June 30, 2021December 31, 2020
 (dollars in thousands)
First lien loans$1,395,995 $1,489,125 
Second lien loans670,714 750,805 
Total$2,066,709 $2,239,930 

The following tables represent a rollforward of the activity for the Company’s corporate debt investments held for investment at June 30, 2021 and December 31, 2020:
June 30, 2021
First LienSecond LienTotal
 (dollars in thousands)
Beginning balance (January 1, 2021) (1)
$1,489,125 $750,805 $2,239,930 
Originations & advances793,278 66,481 859,759 
Sales and transfers (2)
(556,980)(24,448)(581,428)
Principal payments(336,054)(128,879)(464,933)
Amortization & accretion of (premium) discounts4,989 2,699 7,688 
Allowance for loan losses
         Beginning allowance(18,767)(20,785)(39,552)
         Current period (allowance) reversal1,637 4,056 5,693 
         Ending allowance(17,130)(16,729)(33,859)
Net carrying value (June 30, 2021)$1,395,995 $670,714 $2,066,709 


December 31, 2020
 First LienSecond LienTotal
 (dollars in thousands)
Beginning balance (January 1, 2020) (1)
$1,403,503 $748,710 $2,152,213 
 Originations & advances834,211 227,433 1,061,644 
Sales (2)
(273,887)(79,203)(353,090)
Principal payments(444,759)(132,000)(576,759)
Amortization & accretion of (premium) discounts8,374 3,832 12,206 
Loan restructuring(19,550)2,818 (16,732)
Allowance for loan losses
         Beginning allowance, prior to CECL adoption(7,363)0 (7,363)
Impact of adopting CECL(10,787)(18,866)(29,653)
         Current period (allowance) reversal(12,510)(1,919)(14,429)
         Write offs11,893 0 11,893 
Ending allowance(18,767)(20,785)(39,552)
Net carrying value (December 31, 2020)$1,489,125 $750,805 $2,239,930 
    (1) Excludes loan loss allowances.
    (2) Includes syndications and the period ended June 30, 2021 includes transfers to held for sale.




21


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

The following table provides the amortized cost basis of corporate debt held for investment as of June 30, 2021 by vintage year and internal risk rating.
Amortized Cost Basis by Risk Rating and Vintage (1)
Risk RatingVintage
Total2021202020192018201720162015
(dollars in thousands)
1-5 / Performing$1,617,470 $325,936 $432,931 $301,054 $385,586 $119,939 $23,432 $28,592 
6 / Performing - Closely Monitored369,773 2,933 26,382 0 259,500 80,958 0 0 
7 / Substandard79,466 0 11,708 25,481 42,277 0 0 0 
8 / Doubtful0 0 0 0 0 0 0 0 
9 / Loss0 0 0 0 0 0 0 0 
Total$2,066,709 $328,869 $471,021 $326,535 $687,363 $200,897 $23,432 $28,592 

(1) The amortized cost basis excludes accrued interest and includes deferred fees on unfunded loans. As of June 30, 2021, the Company had $8.7 million of accrued interest receivable on corporate loans which is reported in Principal and interest receivable in the Consolidated Statements of Financial Condition and $3.3 million of deferred loan fees on unfunded loans, which is reported in Loans, net in the Consolidated Statements of Financial Condition.

7. MORTGAGE SERVICING RIGHTS
The Company owns variable interests in entities that invest in MSR and Interests in MSR. Refer to the “Variable Interest Entities” Note for a detailed discussion on this topic.
MSR represent the rights and obligations associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSR. The Company intends to hold the MSR as investments and elected to account for all of its investments in MSR at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Servicing income, net of servicing expenses, is reported in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party acts as a master servicer for the loans providing the net servicing cash flows represented by the Interests in MSR. The Company accounts for its Interests in MSR at fair value with change in fair value presented in Net unrealized gains (losses) on instruments measured at fair value through earnings in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

The following tables presents activity related to MSR and Interests in MSR for the three and six months ended June 30, 2021 and 2020:  
22


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Three Months EndedSix Months Ended
 Mortgage Servicing RightsJune 30, 2021June 30, 2020June 30, 2021June 30, 2020
 (dollars in thousands)
Fair value, beginning of period$113,080 $280,558 $100,895 $378,078 
Purchases (1)
98,983 98,983 
Sales(376)(376)
Change in fair value due to:
Changes in valuation inputs or assumptions (2)
4,621 (27,629)32,296 (106,854)
Other changes, including realization of expected cash flows(13,692)(25,529)(29,182)(43,824)
Fair value, end of period$202,616 $227,400 $202,616 $227,400 
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.
(2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates.

Interests in MSRSix Months Ended
June 30, 2021
(dollars in thousands)
Beginning balance$0 
Purchases (1)
47,098 
Gain (loss) included in net income1,937 
Ending balance June 30, 2021$49,035 
(1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable.

For the three and six months ended June 30, 2021, the Company recognized $7.9 million and $14.8 million, respectively, and for the three and six months ended June 30, 2020, the Company recognized $16.4 million and $39.2 million, respectively, of net servicing income from MSR in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).
For the three and six months ended June 30, 2021, the Company recognized $2.0 million, and for the three and six months ended June 30, 2020, the Company did 0t recognize net income from Interests in MSR in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

8. VARIABLE INTEREST ENTITIES
At June 30, 2021, commercial trusts, commercial securitizations and the collateralized loan obligation are reported in Assets of disposal group held for sale in the Consolidated Statements of Financial Condition. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.
Multifamily Securitization
In November 2019, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $1.0 billion and retained interest-only securities with a notional balance of $1.0 billion and senior securities with a principal balance of $28.5 million. In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cut-off balance of $0.5 billion and retained interest-only securities with a notional balance of $0.5 billion. At the inception of the arrangements, the Company determined that it was the primary beneficiary based upon its involvement in the design of these VIEs and through the retention of a significant variable interest in the VIEs. The Company elected the fair value option for the financial liabilities of these VIEs in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. In 2020, the Company deconsolidated the 2019 multifamily VIE since it sold all of its interest-only securities and no longer retains a significant variable interest in the entity. The Company incurred $1.1 million of costs in connection with the 2020 multifamily securitization that were expensed as incurred during the six months ended June 30, 2020.
Residential Trusts
The Company consolidates a securitization trust, which is included in “Residential Trusts” in the tables below, that issued residential mortgage-backed securities that are collateralized by residential mortgage loans that had been transferred to the trust by one of the Company’s subsidiaries. The Company owns the subordinate securities, and a subsidiary of the Company
23


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
continues to be the master servicer. As such, the Company is deemed to be the primary beneficiary of the residential mortgage trust and consolidates the entity. The Company has elected the fair value option for the financial assets and liabilities of this VIE, but has not elected to apply the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trust are available from third party pricing services. The contractual principal amount of the residential mortgage trust’s debt held by third parties was $14.4 million and $23.0 million at June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, a total of $14.5 million of bonds were held by third parties and the Company retained $12.6 million of mortgage-backed securities, which were eliminated in consolidation.
Residential Securitizations
The Company also invests in residential mortgage-backed securities issued by entities that are VIEs because they do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties, but the Company is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact the VIEs’ economic performance. For these entities, the Company’s maximum exposure to loss is the amortized cost basis of the securities it owns and it does not provide any liquidity arrangements, guarantees or other commitments to these VIEs. See the “Securities” Note for further information on Residential Securities.
OBX Trusts
The entities in the table below are referred to collectively as the “OBX Trusts.” These securitizations represent financing transactions which provide non-recourse financing to the Company that are collateralized by residential mortgage loans purchased by the Company.
SecuritizationDate of ClosingFace Value at Closing
(dollars in thousands)
OBX 2018-1March 2018$327,162 
OBX 2018-EXP1August 2018$383,451 
OBX 2018-EXP2October 2018$384,027 
OBX 2019-INV1January 2019$393,961 
OBX 2019-EXP1April 2019$388,156 
OBX 2019-INV2June 2019$383,760 
OBX 2019-EXP2July 2019$463,405 
OBX 2019-EXP3October 2019$465,492 
OBX 2020-INV1January 2020$374,609 
OBX 2020-EXP1February 2020$467,511 
OBX 2020-EXP2July 2020$489,352 
OBX 2020-EXP3September 2020$514,609 
OBX 2021-NQM1March 2021$257,135 
OBX 2021-J1April 2021$353,840 
OBX 2021-NQM2June 2021$376,004 

As of June 30, 2021, a total of $2.7 billion of bonds were held by third parties and the Company retained $642.3 million of mortgage-backed securities, which were eliminated in consolidation. The Company is deemed to be the primary beneficiary and consolidates the OBX Trusts because it has power to direct the activities that most significantly impact the OBX Trusts’ performance and holds a variable interest that could be potentially significant to these VIEs. The Company has elected the fair value option for the financial assets and liabilities of these VIEs, but has not elected the practical expedient under ASU 2014-13 as prices of both the financial assets and financial liabilities of the residential mortgage trusts are available from third party pricing services. The Company incurred $1.2 million and $0.0 million of costs during the three months ended June 30, 2021 and 2020, respectively, and $1.8 million and $3.7 million of costs during the six months ended June 30, 2021 and 2020, respectively, in connection with these securitizations that were expensed as incurred. The contractual principal amount of the OBX Trusts’ debt held by third parties was $2.7 billion at June 30, 2021.
Although the residential mortgage loans have been sold for bankruptcy and state law purposes, the transfers of the residential mortgage loans to the OBX Trusts did not qualify for sale accounting and are reflected as intercompany secured borrowings that are eliminated upon consolidation.
Credit Facility VIEs
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
In June 2016, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of June 30, 2021, the borrowing limit on this facility was $675.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as collateral manager and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $670.4 million at June 30, 2021. The transfers did not qualify for sale accounting and are reflected as an intercompany secured borrowing that is eliminated upon consolidation. At June 30, 2021, the subsidiary had an intercompany receivable of $441.4 million, which eliminates upon consolidation and a secured financing of $441.4 million to the third party financial institution.
In July 2017, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of June 30, 2021, the borrowing limit on this facility was $400.0 million. The subsidiary was deemed to be a VIE and the Company was determined to be the primary beneficiary due to its role as servicer and because it holds a variable interest in the entity that could potentially be significant to the entity. The Company has transferred corporate loans to the subsidiary with a carrying amount of $366.4 million at June 30, 2021, which continue to be reflected in the Company’s Consolidated Statements of Financial Condition under Loans, net. At June 30, 2021, the subsidiary had a secured financing of $239.2 million to the third party financial institution.
In January 2019, a consolidated subsidiary of the Company entered into a credit facility with a third party financial institution. As of June 30, 2021, the borrowing limit on this facility was $400.0 million. The Company has pledged as collateral for this facility corporate loans with a carrying amount of $341.2 million at June 30, 2021. As of June 30, 2021, the subsidiary had a secured financing of $229.1 million to the third party financial institution.
MSR VIEs
The Company owns variable interests in an entity that invests in MSR and has structured its operations, funding and capitalization into pools of assets and liabilities, each referred to as a “silo.” Owners of variable interests in a given silo are entitled to all of the returns and subjected to the risk of loss on the investments and operations of that silo and have no substantive recourse to the assets of any other silo. While the Company previously held 100% of the voting interests in this entity, in August 2017, the Company sold 100% of such interests, and entered into an agreement with the entity’s affiliated portfolio manager giving the Company the power over the silo in which it owns all of the beneficial interests. As a result, the Company is considered to be the primary beneficiary and consolidates this silo.
The Company also owns variable interests in entities that invest in Interests in MSR. These entities are VIEs because they do not have sufficient equity at risk to finance their activities and the Company is the primary beneficiary because it has power to remove the decision makers with or without cause and holds substantially all of the variable interests in the entities.

The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $2.3 billion at June 30, 2021. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method.
The statements of financial condition of the Company’s VIEs, excluding the multifamily securitization, credit facility VIEs and OBX Trusts as the transfers of loans or securities did not meet the criteria to be accounted for as sales, that are reflected in the Company’s Consolidated Statements of Financial Condition at June 30, 2021 and December 31, 2020 are as follows:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
June 30, 2021
 Residential TrustsMSR VIEs
Assets(dollars in thousands)
Cash and cash equivalents$0 $17,240 
Loans0 3,709 
Assets transferred or pledged to securitization vehicles28,151 0 
Mortgage servicing rights0 89,546 
Interests in MSR0 49,035 
Principal and interest receivable173 0 
Other assets0 14,764 
Total assets$28,324 $174,294 
Liabilities  
Debt issued by securitization vehicles (non-recourse)$14,547 $0 
Payable for unsettled trades0 1,716 
Interest payable34 0 
Other liabilities410 10,038 
Total liabilities$14,991 $11,754 
 
December 31, 2020
 Residential TrustsMSR VIEs
Assets(dollars in thousands)
Cash and cash equivalents$$22,241 
Loans47,048 
Assets transferred or pledged to securitization vehicles40,035 
Mortgage servicing rights100,895 
Principal and interest receivable226 
Total assets$40,261 $170,184 
Liabilities 
Debt issued by securitization vehicles (non-recourse)$23,351 $
Other secured financing30,420 
Payable for unsettled trades3,076 
Interest payable55 
Other liabilities246 13,345 
Total liabilities$23,652 $46,841 
 
The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the Company’s VIEs, excluding the multifamily securitization, OBX Trusts and credit facility VIEs, at June 30, 2021 are as follows:

Securitized Loans at Fair Value Geographic Concentration of Credit Risk
Residential Trusts
Property LocationPrincipal Balance% of Balance
California$14,222 51.4 %
Illinois3,542 12.8 %
Texas2,938 10.6 %
Other (1)
6,983 25.2 %
Total$27,685 100.0 %
        (1) No individual state greater than 5%.

Corporate Debt Transfers
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The Company manages parallel funds investing in senior secured first and second lien corporate loans (the “Fund Entities”). The Fund Entities are considered VIEs because the investors do not have substantive liquidation, kick-out or participating rights. The fees that the Company earns are not considered variable interests of the VIE. The Company is not the primary beneficiary of the Fund Entities and therefore does not consolidate the Fund Entities. During the three and six months ended June 30, 2021, the Company transferred $59.9 million and $75.0 million of loans for cash. The loan transfers were accounted for as sales.

Residential Credit Fund
The Company manages a fund investing in participations in residential mortgage loans. The residential credit fund is deemed to be a VIE because the entity does not have sufficient equity at risk to permit the legal entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders, as capital commitments are not considered equity at risk. The Company is not the primary beneficiary and does not consolidate the residential credit fund as its only interest in the fund is the management and performance fees that it earns, which are not considered variable interests in the entity. As of June 30, 2021 and December 31, 2020, the Company has issued participating interests in residential mortgage loans in the amount of $315.8 million and $39.2 million, respectively. These transfers do not meet the criteria for sale accounting and are accounted for as secured borrowings, thus the residential loans are reported as Loans, net and the associated liability is reported as Participations issued in the Consolidated Statements of Financial Condition. The Company elected to fair value the participations issued through earnings to more accurately reflect the economics of the transfers as the underlying loans are carried at fair value through earnings.

9. SALE OF COMMERCIAL REAL ESTATE BUSINESS
On March 25, 2021, the Company entered into a definitive agreement to sell substantially all of the assets that comprise its CRE business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”) for $2.33 billion. The transaction includes equity interests, loan assets and associated liabilities, and CMBS (other than commercial CRTs). The Company also intends to sell nearly all of the remaining CRE business assets that are not included in the transaction with Slate. A real estate property that was held for sale, which is not included in the transaction with Slate, was sold during the quarter ended June 30, 2021 and resulted in the recognition of a gain of $4.8 million in Business divestiture-related gains (losses) in the Consolidated Statements of Comprehensive Income (Loss). As of June 30, 2021, the Company met the conditions for held-for-sale accounting which requires that assets and liabilities be carried at the lower of cost or fair value less costs to sell on the Consolidated Statements of Financial Condition. In connection with the execution of the definitive agreement to sell the CRE business, during the three months ended March 31, 2021 the Company performed an assessment of goodwill, which was related to the Company’s 2013 acquisition of CreXus Investment Corp., and recognized an impairment of $71.8 million. During the three and six months ended June 30, 2021, the Company reported Business divestiture-related gains (losses) of $1.5 million and ($248.0) million, respectively, in its Consolidated Statements of Comprehensive Income (Loss) which includes the aforementioned goodwill impairment as well as valuation adjustments resulting from classifying the assets as held for sale and estimated transaction costs. In addition, as a result of classifying the loans as held for sale, the previously recognized allowance for loan losses of $135.0 million, which includes $5.1 million on unfunded loan commitments, was reversed during the three months ended March 31, 2021. Since assets held for sale are recorded at lower of cost or fair value, any gains on sale will not be recorded until such sale closes. The pretax income (loss) of the CRE business was $42.0 million and ($30.7) million for the three and six months ended June 30, 2021, respectively and ($66.9) million and ($162.3) million for the three and six months ended June 30, 2020, respectively. Certain employees who primarily support the CRE business will join Slate in connection with the sale. Subject to customary closing conditions, including applicable regulatory approvals, the disposition of the CRE business is expected to be completed in the second half of 2021.

The carrying values of the major classes of assets and liabilities of the disposal group held for sale as of June 30, 2021 are presented in the table below:
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
June 30, 2021
(dollars in thousands)
Cash and cash equivalents$14,175 
Securities55,172 
Loans, net478,274 
Assets transferred or pledged to securitization vehicles2,139,944 
Real estate, net566,477 
Intangible assets, net14,528 
Other assets33,431 
Total assets of disposal group held for sale$3,302,001 
Repurchase agreements$270,650 
Debt issued by securitization vehicles1,610,109 
Mortgages payable425,873 
Interest payable1,230 
Other liabilities54,828 
Total liabilities of disposal group held for sale$2,362,690 

Certain assets and liabilities of the disposal group held for sale are in VIEs that are consolidated by the Company because it is the primary beneficiary.
The securities in the disposal group held for sale are carried at fair value and are categorized in Level 2 of the fair value measurement hierarchy as the valuation is based upon quoted prices in active markets for similar assets. The loans and assets pledged to securitization vehicles held for sale are carried at lower of cost or fair value and as such those loans that required a valuation allowance had a nonrecurring fair value measurement at June 30, 2021. These fair value measurements are categorized as Level 2 if they are based upon quoted prices in active markets for similar assets. If quotes were unavailable, a discounted cash flow or market based valuation technique based upon the underlying property to project property cash flows was used. 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 categorized as Level 3 of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value. The real estate held for sale is carried at lower of cost or fair value and was based upon the sale price and allocated to individual properties to determine if a valuation allowance was necessary. These fair value measurements are considered Level 3 of the fair value measurement hierarchy as there are unobservable inputs, which are significant to the overall fair value. The repurchase agreements and debt issued by securitization vehicles are categorized in Level 2 of the fair value measurement hierarchy as the valuation is based upon quoted market prices for similar liabilities. The mortgage loans payable fair value measurement are valued using Level 3 inputs.
At June 30, 2021, the repurchase agreements included in the liabilities of disposal group held for sale had remaining maturities of over 119 days with commercial loans pledged as collateral.

10. DERIVATIVE INSTRUMENTS
Derivative instruments include, but are not limited to, interest rate swaps, options to enter into interest rate swaps (“swaptions”), TBA derivatives, options on TBA securities (“MBS options”), U.S. Treasury and Eurodollar futures contracts and certain forward purchase commitments.  The Company may also enter into other types of mortgage derivatives such as interest-only securities, credit derivatives referencing the commercial mortgage-backed securities index and synthetic total return swaps. 
In connection with the Company’s investment/market rate risk management strategy, the Company economically hedges a portion of its interest rate risk by entering into derivative financial instrument contracts, which include interest rate swaps, swaptions and futures contracts. The Company may also enter into TBA derivatives, MBS options and U.S. Treasury or Eurodollar futures contracts, certain forward purchase commitments and credit derivatives to economically hedge its exposure to market risks. The purpose of using derivatives is to manage overall portfolio risk with the potential to generate additional income for distribution to stockholders. These derivatives are subject to changes in market values resulting from changes in interest rates, volatility, Agency mortgage-backed security spreads to U.S. Treasuries and market liquidity. The use of derivatives also creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the stated contract. Additionally, the Company may have to pledge cash or
28


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
assets as collateral for the derivative transactions, the amount of which may vary based on the market value and terms of the derivative contract. In the case of market agreed coupon (“MAC”) interest rate swaps, the Company may make or receive a payment at the time of entering into such interest rate swaps, which represents fair value of these swaps, to compensate for the out of market nature of such interest rate swaps. Subsequent changes in fair value from inception of these interest rate swaps are reflected within Unrealized gains (losses) on interest rate swaps in the Consolidated Statements of Comprehensive Income (Loss). Similar to other interest rate swaps, the Company may have to pledge cash or assets as collateral for the MAC interest rate swap transactions. In the event of a default by the counterparty, the Company could have difficulty obtaining its pledged collateral as well as receiving payments in accordance with the terms of the derivative contracts.
Derivatives are accounted for in accordance with FASB ASC 815, Derivatives and Hedging, which requires recognition of all derivatives as either assets or liabilities at fair value in the Consolidated Statements of Financial Condition with changes in 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. 
The Company also maintains collateral in the form of cash on margin with counterparties to its interest rate swaps and other derivatives. In accordance with a clearing organization’s rulebook, the Company presents the fair value of centrally cleared interest rate swaps net of variation margin pledged under such transactions. At June 30, 2021 and December 31, 2020, $1.1 billion and $1.5 billion, respectively, of variation margin was reported as an adjustment to interest rate swaps, at fair value.
Interest Rate Swap Agreements – Interest rate swap agreements are the primary instruments used to mitigate interest rate risk.  In particular, the Company uses interest rate swap agreements to manage its exposure to changing interest rates on its repurchase agreements by economically hedging cash flows associated with these borrowings. The Company may enter into interest rate swap agreements where the floating leg is linked to the London Interbank Offered Rate (“LIBOR”), the overnight index swap rate or another index. Interest rate swap agreements may or may not be cleared through a derivatives clearing organization (“DCO”). Uncleared interest rate swaps are fair valued using internal pricing models and compared to the counterparty market values. Centrally cleared interest rate swaps, including MAC interest rate swaps, are generally fair valued using the DCO’s market values. If an interest rate swap is terminated, the realized gain (loss) on the interest rate swap would be equal to the difference between the cash received or paid and fair value.
Swaptions – Swaptions are purchased or sold to mitigate the potential impact of increases or decreases in interest rates.  Interest rate swaptions provide the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future.  The Company’s swaptions are not centrally cleared.  The premium paid or received for swaptions is reported as an asset or liability in the Consolidated Statements of Financial Condition. If a swaption expires unexercised, the realized gain (loss) on the swaption would be equal to the premium received or paid. If the Company sells or exercises a swaption, the realized gain (loss) on the swaption would be equal to the difference between the cash received or the fair value of the underlying interest rate swap received and the premium paid. The fair value of swaptions are estimated using internal pricing models and compared to the counterparty market values.
TBA Dollar Rolls – TBA dollar roll transactions are accounted for as a series of derivative transactions. The fair value of TBA derivatives is based on methods similar to those used to value Agency mortgage-backed securities.
MBS Options – MBS options are generally options on TBA contracts, which help manage mortgage market risks and volatility while providing the potential to enhance returns.  MBS options are over-the-counter traded instruments and those written on current-coupon mortgage-backed securities are typically the most liquid.  MBS options are measured at fair value using internal pricing models and compared to the counterparty market value at the valuation date.
Futures Contracts – Futures contracts are derivatives that track the prices of specific assets or benchmark rates. Short sales of futures contracts help to mitigate the potential impact of changes in interest rates on the portfolio performance. The Company maintains margin accounts which are settled daily with Futures Commission Merchants (“FCMs”). The margin requirement varies based on the market value of the open positions and the equity retained in the account. Futures contracts are fair valued based on exchange pricing.
Forward Purchase Commitments – The Company may enter into forward purchase commitments with counterparties whereby the Company commits to purchasing residential mortgage loans at a particular price, provided the residential mortgage loans close with the counterparties. The counterparties are required to deliver the committed loans on a “best efforts” basis.
Credit Derivatives – The Company may enter into credit derivatives referencing a commercial mortgage-backed securities index, such as the CMBX index, and synthetic total return swaps.

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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The table below summarizes fair value information about our derivative assets and liabilities at June 30, 2021 and December 31, 2020:
Derivatives InstrumentsJune 30, 2021December 31, 2020
Assets(dollars in thousands)
Interest rate swaptions$134,434 $74,470 
TBA derivatives31,944 96,109 
Futures contracts8,141 506 
Purchase commitments3,174 49 
Credit derivatives (1)
4,196 
Total derivative assets$181,889 $171,134 
Liabilities 
Interest rate swaps$806,952 $1,006,492 
TBA derivatives2,837 
Futures contracts87,814 19,413 
Purchase commitments2,656 
Credit derivatives (1)
0 7,440 
Total derivative liabilities$900,259 $1,033,345 
    
(1) The maximum potential amount of future payments is the notional amount of credit derivatives in which the Company sold protection of $445.0 million and $504.0 million at June 30, 2021 and December 31, 2020, respectively, plus any coupon shortfalls on the underlying tranche. As of June 30, 2021 and December 31, 2020 the credit derivative tranches referencing the basket of bonds had a range of ratings between AAA and A.

The following table summarizes certain characteristics of the Company’s interest rate swaps at June 30, 2021 and December 31, 2020:
June 30, 2021
Maturity
Current Notional (1)(2)
Weighted Average Pay RateWeighted Average Receive Rate
Weighted Average Years to Maturity (3)
(dollars in thousands)
0 - 3 years$31,164,200 0.24 %0.09 %1.55
3 - 6 years3,100,000 0.13 %0.08 %3.88
6 - 10 years5,730,500 1.25 %0.61 %8.18
Greater than 10 years1,984,000 2.68 %0.28 %17.50
Total / Weighted average$41,978,700 0.81 %0.34 %3.38
December 31, 2020
Maturity
Current Notional (1)(2)
Weighted Average
Pay Rate
Weighted Average Receive Rate
Weighted Average Years to Maturity (3)
(dollars in thousands)
0 - 3 years$23,680,150 0.27 %0.11 %1.96
3 - 6 years3,600,000 0.18 %0.09 %4.21
6 - 10 years5,565,500 1.40 %0.62 %7.76
Greater than 10 years1,484,000 3.06 %0.36 %20.52
Total / Weighted average$34,329,650 0.92 %0.37 %3.94
(1)     As of June 30, 2021, 13%, 59% and 28% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively. As of December 31, 2020, 17%, 72% and 11% of the Company’s interest rate swaps were linked to LIBOR, the Federal funds rate and the Secured Overnight Financing Rate, respectively.
(2)     There were 0 forward starting swaps at June 30, 2021 and December 31, 2020.
(3)     At June 30, 2021 and December 31, 2020, the weighted average years to maturity of payer interest rate swaps is offset by the weighted average years to maturity of receiver interest rate swaps. As such, the net weighted average years to maturity for each maturity bucket may fall outside of the range listed.




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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents swaptions outstanding at June 30, 2021 and December 31, 2020.
June 30, 2021
Current Underlying NotionalWeighted Average Underlying Fixed RateWeighted Average Underlying Floating RateWeighted Average Underlying Years to MaturityWeighted Average Months to Expiration
(dollars in thousands)
Long pay$4,550,0001.35%3M LIBOR10.142.80
Long receive$1,500,0001.51%3M LIBOR11.4016.93
December 31, 2020
Current Underlying NotionalWeighted Average Underlying Fixed RateWeighted Average Underlying Floating RateWeighted Average Underlying Years to MaturityWeighted Average Months to Expiration
(dollars in thousands)
Long pay$8,050,0001.27%3M LIBOR10.405.42
Long receive$250,0001.66%3M LIBOR10.020.13

The following table summarizes certain characteristics of the Company’s TBA derivatives at June 30, 2021 and December 31, 2020:
June 30, 2021
Purchase and sale contracts for derivative TBAsNotionalImplied Cost BasisImplied Market ValueNet Carrying Value
(dollars in thousands)
Purchase contracts$17,314,000 $17,662,043 $17,691,150 $29,107 
December 31, 2020
Purchase and sale contracts for derivative TBAsNotionalImplied Cost BasisImplied Market ValueNet Carrying Value
(dollars in thousands)
Purchase contracts$19,635,000 $20,277,088 $20,373,197 $96,109 
The following table summarizes certain characteristics of the Company’s futures derivatives at June 30, 2021 and December 31, 2020:
 
June 30, 2021
 Notional - Long
Positions
Notional - Short
Positions
Weighted Average
Years to Maturity
 (dollars in thousands)
U.S. Treasury futures - 5 year0 (2,884,000)4.42
U.S. Treasury futures - 10 year and greater$0 $(10,227,500)7.47
Total$0 $(13,111,500)6.80
December 31, 2020
 Notional - Long
Positions
Notional - Short
Positions
Weighted Average
Years to Maturity
 (dollars in thousands)
U.S. Treasury futures - 5 year(1,240,000)4.40
U.S. Treasury futures - 10 year and greater(9,183,800)6.90
Total$$(10,423,800)6.60
 



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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The Company presents derivative contracts on a gross basis on the Consolidated Statements of Financial Condition. Derivative contracts may contain legally enforceable provisions that allow for netting or setting off receivables and payables with each counterparty.
The following tables present information about derivative assets and liabilities that are subject to such provisions and can be offset on our Consolidated Statements of Financial Condition at June 30, 2021 and December 31, 2020, respectively.
June 30, 2021
 Amounts Eligible for Offset 
 Gross AmountsFinancial InstrumentsCash CollateralNet Amounts
Assets(dollars in thousands)
Interest rate swaptions, at fair value$134,434 $0 $0 $134,434 
TBA derivatives, at fair value31,944 (2,596)0 29,348 
Futures contracts, at fair value8,141 (8,141)0 0 
Purchase commitments3,174 0 0 3,174 
Credit derivatives4,196 0 0 4,196 
Liabilities 
Interest rate swaps, at fair value$806,952 $0 $(83,737)$723,215 
TBA derivatives, at fair value2,837 (2,596)0 241 
Futures contracts, at fair value87,814 (8,141)(79,673)0 
Purchase commitments2,656 0 0 2,656 
December 31, 2020
 Amounts Eligible for Offset 
 Gross AmountsFinancial InstrumentsCash CollateralNet Amounts
Assets(dollars in thousands)
Interest rate swaptions, at fair value$74,470 $$$74,470 
TBA derivatives, at fair value96,109 96,109 
Futures contracts, at fair value506 (506)
Purchase commitments49 49 
Liabilities 
Interest rate swaps, at fair value$1,006,492 $$(108,757)$897,735 
Futures contracts, at fair value19,413 (506)(18,907)
Credit derivatives7,440 (7,440)
The effect of interest rate swaps on the Consolidated Statements of Comprehensive Income (Loss) is as follows:
Location on Consolidated Statements of Comprehensive Income (Loss)
 Net Interest Component of Interest Rate SwapsRealized Gains (Losses) on Termination of Interest Rate SwapsUnrealized Gains (Losses) on Interest Rate Swaps
For the three months ended(dollars in thousands)
June 30, 2021$(83,087)$0 $(141,067)
June 30, 2020$(64,561)$(1,521,732)$1,494,628 
For the six months ended
June 30, 2021$(162,834)$0 $631,195 
June 30, 2020$(78,541)$(1,919,293)$(1,333,095)






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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The effect of other derivative contracts on the Company’s Consolidated Statements of Comprehensive Income (Loss) is as follows:
Three Months Ended June 30, 2021
Derivative InstrumentsRealized Gain (Loss)Unrealized Gain (Loss)Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments
(dollars in thousands)
Net TBA derivatives$10,045 $275,226 $285,271 
Net interest rate swaptions(22,787)(232,860)(255,647)
Futures183,383 (577,899)(394,516)
Purchase commitments0 2,376 2,376 
Credit derivatives2,777 1,931 4,708 
Total$(357,808)
 
Three Months Ended June 30, 2020
Derivative InstrumentsRealized Gain (Loss)Unrealized Gain (Loss)Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives and Financial Instruments
(dollars in thousands)
Net TBA derivatives$250,525 $(46,363)$204,162 
Net interest rate swaptions(29,880)(22,634)(52,514)
Futures246 (17,579)(17,333)
Purchase commitments9,666 9,666 
Credit derivatives1,203 25,732 26,935 
Total$170,916 
Six Months Ended June 30, 2021
Derivative InstrumentsRealized Gain (Loss)Unrealized Gain (Loss)Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives$(277,844)$(67,002)$(344,846)
Net interest rate swaptions(44,997)73,130 28,133 
Futures479,547 (60,766)418,781 
Purchase commitments0 469 469 
Credit derivatives4,408 10,954 15,362 
Total$117,899 
Six Months Ended June 30, 2020
Derivative InstrumentsRealized Gain (Loss)Unrealized Gain (Loss)Amount of Gain/(Loss) Recognized in Net Gains (Losses) on Other Derivatives
(dollars in thousands)
Net TBA derivatives$521,610 $114,331 $635,941 
Net interest rate swaptions21,566 47,499 69,065 
Futures(279,230)(10,687)(289,917)
Purchase commitments(1,143)(1,143)
Credit derivatives3,128 (39,732)(36,604)
Total$377,342 
Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events such as (i) a decline in stockholders’ equity in excess of specified thresholds or dollar amounts over set periods of time, (ii) the Company’s failure to maintain its REIT status, (iii) the
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
Company’s failure to comply with limits on the amount of leverage, and (iv) the Company’s stock being delisted from the New York Stock Exchange.
Upon the occurrence of any one of items (i) through (iv), or another default under the agreement, the counterparty to the applicable agreement has a right to terminate the agreement in accordance with its provisions. The aggregate fair value of all derivative instruments with the aforementioned features that are in a net liability position at June 30, 2021 was approximately $725.2 million, which represents the maximum amount the Company would be required to pay upon termination. This amount is fully collateralized.


11. FAIR VALUE MEASUREMENTS
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Refer to the “Sale of Commercial Real Estate Business” Note for fair value measurements related to the assets and liabilities of the disposal group held for sale as of June 30, 2021.
GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
If the inputs used to measure the financial instruments and MSR fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value.
The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis.
The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level.
Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.
Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities.
Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.
For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information.
The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. 
The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented.
June 30, 2021
 Level 1Level 2Level 3Total
Assets(dollars in thousands)
Securities
Agency mortgage-backed securities$0 $66,468,519 $0 $66,468,519 
Credit risk transfer securities0 827,328 0 827,328 
Non-Agency mortgage-backed securities0 1,582,323 0 1,582,323 
   Commercial mortgage-backed securities0 154,165 0 154,165 
Loans
Residential mortgage loans0 1,029,928 0 1,029,928 
Mortgage servicing rights0 0 202,616 202,616 
Interests in MSR0 0 49,035 49,035 
Assets transferred or pledged to securitization vehicles0 4,073,156 0 4,073,156 
Derivative assets
Other derivatives8,141 173,748 0 181,889 
Total assets$8,141 $74,309,167 $251,651 $74,568,959 
Liabilities
Debt issued by securitization vehicles0 3,315,087 0 3,315,087 
Participations issued0 315,810 0 315,810 
Derivative liabilities
Interest rate swaps0 806,952 0 806,952 
Other derivatives87,814 5,493 0 93,307 
Total liabilities$87,814 $4,443,342 $0 $4,531,156 
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
December 31, 2020
 Level 1Level 2Level 3Total
Assets(dollars in thousands)
Securities
Agency mortgage-backed securities$$74,067,059 $$74,067,059 
Credit risk transfer securities532,403 532,403 
Non-Agency mortgage-backed securities972,192 972,192 
   Commercial mortgage-backed securities80,742 80,742 
Loans
Residential mortgage loans345,810 345,810 
Mortgage servicing rights100,895 100,895 
Assets transferred or pledged to securitization vehicles6,035,671 6,035,671 
Derivative assets
Other derivatives506 170,628 171,134 
Total assets$506 $82,204,505 $100,895 $82,305,906 
Liabilities
Debt issued by securitization vehicles$$5,652,982 $$5,652,982 
Participations issued39,198 39,198 
Derivative liabilities
Interest rate swaps1,006,492 1,006,492 
Other derivatives19,413 7,440 26,853 
Total liabilities$19,413 $6,706,112 $$6,725,525 

Qualitative and Quantitative Information about Level 3 Fair Value Measurements
The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSR and Interests in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interests in MSR. Refer to the “Mortgage Servicing Rights” Note for additional information, including rollforwards.

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.
June 30, 2021
Unobservable Input (1) / Range (Weighted Average) (2)
Discount ratePrepayment rateDelinquency rateCost to service
MSR consolidated with VIE9.0% - 12.0% (9.0%)9.4% - 30.7% (20.2%)0.0% - 6.0% (2.4%)$84 - $114 ($99)
MSR held directly1.8% - 21.7% (9.0%)6.7% - 14.4% (7.5%)0.9% - 1.8% (1.1%)$99 - $106 ($101)
Interests in MSR9.5% - 11.4% (10.0%)4.8% - 14.6% (9.0%)0.6% - 5.0% (1.8%)$78 - $86 ($85)
December 31, 2020
Unobservable Input (1) / Range (Weighted Average) (2)
Discount ratePrepayment rateDelinquency rateCost to service
MSR consolidated with VIE9.0% - 12.0% (9.4%)19.3% - 55.5% (42.0%)0.0% - 6.0% (2.5%)$83 - $108 ($98)
(1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets.
(2) Weighted average discount rate computed based on the fair value of MSR, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSR.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at June 30, 2021 and December 31, 2020.
 June 30, 2021December 31, 2020
 Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Financial assets(dollars in thousands)
Loans
Commercial real estate debt and preferred equity, held for investment (1)
$0$0$1,372,430$1,442,071
Corporate debt, held for investment2,066,7092,080,0022,239,9302,226,045
Assets transferred or pledged to securitization vehicles00874,349928,732
Corporate debt, held for sale466,370466,37000
Financial liabilities
Repurchase agreements$60,221,067$60,221,067$64,825,239$64,825,239
Other secured financing909,655909,655917,876917,876
Mortgages payable00426,256474,779
(1)    Includes assets of consolidated VIEs.
 
Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment, corporate debt, held for sale and mortgages payable are valued using Level 3 inputs. The carrying values of repurchase agreements and short term other secured financing approximates fair value and are considered Level 2 fair value measurements. Long term other secured financing are valued using Level 2 inputs.

12.  GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company’s acquisitions are accounted for using the acquisition method if the acquisition is deemed to be a business. Under the acquisition method, net assets and results of operations of acquired companies are included in the consolidated financial statements from the date of acquisition. The purchase prices are allocated to the assets acquired, including identifiable intangible assets, and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired is recognized as goodwill. Conversely, any excess of the fair value of the net assets acquired over the purchase price is recognized as a bargain purchase gain.
The Company tests goodwill for impairment on an annual basis or more frequently when events or circumstances may make it more likely than not that an impairment has occurred. If a qualitative analysis indicates that there may be an impairment, a quantitative analysis is performed. The quantitative impairment test for goodwill compares the fair value of a reporting unit with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. At June 30, 2021 and December 31, 2020, goodwill totaled $0 and $71.8 million, respectively. The change reflects the goodwill impairment in connection with the sale of the CRE business. Refer to the “Sale of Commercial Real Estate Business” Note for additional information.
Intangible assets, net
Finite life intangible assets are amortized over their expected useful lives. As part of the Internalization, which closed on June 30, 2020, the Company recognized an intangible asset for the acquired assembled workforce of approximately $41.2 million based on the replacement cost of the employee base acquired by the Company. During the three months ended June 30, 2021, the Company recognized an impairment of $4.3 million in Other income (loss) and $5.2 million in Business divestiture-related gains (losses) in the Consolidated Statements of Comprehensive Income (Loss) for changes to the assembled workforce.









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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
The following table presents the activity of finite lived intangible assets for the six months ended June 30, 2021.
Intangible Assets, net
(dollars in thousands)
Balance at December 31, 2020$55,526 
Impairment(9,549)
Intangible assets included in disposal group held for sale(14,528)
Less: amortization expense(4,947)
Balance at June 30, 2021$26,502 


13. SECURED FINANCING
Reverse Repurchase and Repurchase Agreements – The Company finances a significant portion of its assets with repurchase agreements. At the inception of each transaction, the Company assessed each of the specified criteria in ASC 860, Transfers and Servicing, and has determined that each of the financing agreements should be treated as a securing financing.
The Company enters into reverse repurchase agreements to earn a yield on excess cash balances. The Company receives collateral for reverse repurchase agreements and is required to post collateral for repurchase agreements. To mitigate credit exposure, the Company monitors the market value of these securities and delivers or obtains additional collateral based on changes in market value of these securities. Generally, the Company receives or posts collateral with a fair value approximately equal to or greater than the value of the secured financing.
Reverse repurchase agreements and repurchase agreements with the same counterparty and the same maturity are presented net in the Consolidated Statements of Financial Condition when the terms of the agreements meet the criteria to permit netting. The Company reports cash flows on repurchase agreements as financing activities and cash flows on reverse repurchase agreements as investing activities in the Consolidated Statements of Cash Flows.
The Company had outstanding $60.2 billion and $64.8 billion of repurchase agreements with weighted average remaining maturities of 88 days and 64 days at June 30, 2021 and December 31, 2020, respectively. The Company has select arrangements with counterparties to enter into repurchase agreements for select credit assets for $1.6 billion with remaining capacity of $1.4 billion at June 30, 2021.
At June 30, 2021 and December 31, 2020, the repurchase agreements had the following remaining maturities, collateral types and weighted average rates: 
June 30, 2021
 Agency Mortgage-Backed SecuritiesCRTsNon-Agency Mortgage-Backed SecuritiesResidential Mortgage Loans
Commercial Mortgage-Backed Securities (1)
Total Repurchase AgreementsWeighted Average Rate  
 (dollars in thousands)
1 day$10,052,550 $0 $0 $0 $142,617 $10,195,167 0.09 %
2 to 29 days15,688,201 178,719 290,174 0 64,188 16,221,282 0.14 %
30 to 59 days5,981,872 66,309 212,087 177,401 0 6,437,669 0.27 %
60 to 89 days4,495,510 3,147 126,747 0 14,549 4,639,953 0.16 %
90 to 119 days5,873,992 0 0 0 0 5,873,992 0.16 %
Over 119 days (2)
16,713,446 0 98,417 41,141 0 16,853,004 0.18 %
Total$58,805,571 $248,175 $727,425 $218,542 $221,354 $60,221,067 0.16 %
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
December 31, 2020
 Agency Mortgage-Backed SecuritiesCRTsNon-Agency Mortgage-Backed SecuritiesResidential Mortgage LoansCommercial
Loans
Commercial Mortgage-Backed SecuritiesTotal Repurchase AgreementsWeighted
Average
Rate
 (dollars in thousands)
1 day$$$$$$$%
2 to 29 days30,151,875 129,993 354,904 $76,799 128,267 30,841,838 0.29 %
30 to 59 days10,247,972 16,073 161,274 $142,336 10,567,655 0.42 %
60 to 89 days8,181,410 99,620 259,401 $28,406 8,568,837 0.30 %
90 to 119 days2,154,733 $2,154,733 0.23 %
Over 119 days (2)
12,008,920 274,860 $107,924 271,801 28,671 12,692,176 0.36 %
Total$62,744,910 $245,686 $1,050,439 $184,723 $271,801 $327,680 $64,825,239 0.32 %
 (1)    Includes commercial mortgage-backed securities held for sale.
 (2)    NaN repurchase agreements had a remaining maturity over 1 year at June 30, 2021. Less than 1% of the total repurchase agreements had a remaining maturity over 1 year at December 31, 2020.
 
The following table summarizes the gross amounts of reverse repurchase agreements and repurchase agreements, amounts offset in accordance with netting arrangements and net amounts of repurchase agreements and reverse repurchase agreements as presented in the Consolidated Statements of Financial Condition at June 30, 2021 and December 31, 2020. Refer to the “Derivative Instruments” Note for information related to the effect of netting arrangements on the Company’s derivative instruments.
 June 30, 2021December 31, 2020
 Reverse Repurchase AgreementsRepurchase AgreementsReverse Repurchase AgreementsRepurchase Agreements
 (dollars in thousands)
Gross amounts$0 $60,221,067 $250,000 $65,075,239 
Amounts offset0 0 (250,000)(250,000)
Netted amounts$0 $60,221,067 $$64,825,239 

The fair value of mortgage-backed securities received as collateral in connection with reverse repurchase agreements was approximately $0 and $250.0 million, which the Company fully repledged, at June 30, 2021 and December 31, 2020, respectively.
Other Secured Financing - Refer to the “Variable Interest Entities” Note for additional information on the Company’s other secured financing arrangements.
Investments pledged as collateral under secured financing arrangements and interest rate swaps, excluding residential and senior securitized commercial mortgage loans of consolidated VIEs, had an estimated fair value and accrued interest of $65.2 billion and $176.8 million, respectively, at June 30, 2021 and $70.6 billion and $196.9 million, respectively, at December 31, 2020.

14. CAPITAL STOCK
(A)    Common Stock

The following table provides a summary of the Company’s common shares authorized, and issued and outstanding at June 30, 2021 and December 31, 2020.
Shares authorizedShares issued and outstanding
June 30, 2021December 31, 2020June 30, 2021December 31, 2020Par Value
Common stock2,936,500,000 2,914,850,000 1,444,156,029 1,398,240,618 $0.01
In June 2019, the Company announced that its board of directors (“Board”) had authorized the repurchase of up to $1.5 billion of its outstanding shares of common stock, which expired on December 31, 2020 (the “Prior Share Repurchase Program”). In
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 1. Financial Statements
December 2020, the Company announced that its Board authorized the repurchase of up to $1.5 billion of its outstanding common shares through December 31, 2021 (the “Current Share Repurchase Program”). The Current Share Repurchase Program replaced the Prior Share Repurchase Program. During the three and six months ended June 30, 2021, 0 shares were purchased under the Current Share Repurchase Program. During the three and six months ended June 30, 2020, the Company repurchased 22.9 million shares of its common stock for an aggregate amount of $143.3 million, excluding commission costs, under the Prior Share Repurchase Program. All common shares were purchased in open-market transactions.
In January 2018, the Company entered into separate Distribution Agency Agreements (as amended and restated on August 6, 2020, collectively, the “Sales Agreements”) with each of Wells Fargo Securities, LLC, BofA Securities, Inc. (formerly known as Merrill Lynch, Pierce, Fenner & Smith, Incorporated), Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Keefe, Bruyette & Woods, Inc., RBC Capital Markets, LLC and UBS Securities LLC (the “Sales Agents”). The Company may offer and sell shares of its common stock, having an aggregate offering price of up to $1.5 billion from time to time through any of the Sales Agents. During the three and six months ended June 30, 2021, the Company issued 45.5 million shares, for proceeds of $420.4 million, net of commissions and fees under the at-the-market sales program. NaN shares were issued under the at-the-market sales program during the three and six months ended June 30, 2020.

(B)    Preferred Stock

The following is a summary of the Company’s cumulative redeemable preferred stock outstanding at June 30, 2021 and December 31, 2020. In the event of a liquidation or dissolution of the Company, the Company’s then outstanding preferred stock takes precedence over the Company’s common stock with respect to payment of dividends and the distribution of assets.
Shares AuthorizedShares Issued And OutstandingCarrying ValueContractual Rate
Earliest Redemption Date (1)
Date At Which Dividend Rate Becomes FloatingFloating Annual Rate
June 30, 2021December 31, 2020June 30, 2021December 31, 2020June 30, 2021December 31, 2020
Fixed-rate(dollars in thousands)
Series D0 18,400,000 0 0 7.50%9/13/2017NANA
Fixed-to-floating rate
Series F28,800,000 28,800,000 28,800,000 28,800,000 696,910 696,910 6.95%9/30/20229/30/20223M LIBOR + 4.993%
Series G17,000,000 19,550,000 17,000,000 17,000,000 411,335 411,335 6.50%3/31/20233/31/20233M LIBOR + 4.172%
Series I17,700,000 18,400,000 17,700,000 17,700,000 428,324 428,324 6.75%6/30/20246/30/20243M LIBOR + 4.989%
Total63,500,000 85,150,000 63,500,000 63,500,000 $1,536,569 $1,536,569 
(1) Subject to the Company’s right under limited circumstances to redeem preferred stock earlier in order to preserve its qualification as a REIT or under limited circumstances related to a change in control of the Company.

Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus accrued and unpaid dividends through their redemption date. Through June 30, 2021, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.
The Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, Series G Preferred Stock and Series I Preferred Stock rank senior to the common stock of the Company.













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


(C)    Distributions to Stockholders

The following table provides a summary of the Company’s dividend distribution activity for the periods presented:
 For the Three Months EndedFor the Six Months Ended
 June 30, 2021June 30, 2020June 30, 2021June 30, 2020
 (dollars in thousands, except per share data)
Dividends and dividend equivalents declared on common stock and share-based awards$318,534 $309,972 $626,880 $667,791 
Distributions declared per common share$0.22 $0.22 $0.44 $0.47 
Distributions paid to common stockholders after period end$317,714 $309,686 $317,714 $309,686 
Distributions paid per common share after period end$0.22 $0.22 $0.22 $0.22 
Date of distributions paid to common stockholders after period endJuly 30, 2021July 31, 2020July 30, 2021July 31, 2020
Dividends declared to series D preferred stockholders$0 $8,625 $0 $17,250 
Dividends declared per share of series D preferred stock$0 $0.469 $0 $0.938 
Dividends declared to series F preferred stockholders$12,510 $12,510 $25,020 $25,020 
Dividends declared per share of series F preferred stock$0.434 $0.434 $0.869 $0.869 
Dividends declared to series G preferred stockholders$6,906 $6,906 $13,812 $13,812 
Dividends declared per share of series G preferred stock$0.406 $0.406 $0.813 $0.813 
Dividends declared to series I preferred stockholders$7,467 $7,468 $14,934 $14,936 
Dividends declared per share of series I preferred stock$0.422 $0.422 $0.844 $0.844 



15.  INTEREST INCOME AND INTEREST EXPENSE
Refer to the “Significant Accounting Policies” Note for details surrounding the Company’s accounting policy related to net interest income on securities and loans.
The following table summarizes the interest income recognition methodology for Residential Securities:
 Interest Income Methodology
Agency 
Fixed-rate pass-through (1)
Effective yield (3)
Adjustable-rate pass-through (1)
Effective yield (3)
Multifamily (1)
Contractual Cash Flows
CMO (1)
Effective yield (3)
Reverse mortgages (2)
Prospective
Interest-only (2)
Prospective
Residential credit 
CRT (2)
Prospective
Alt-A (2)
Prospective
Prime (2)
Prospective
Subprime (2)
Prospective
NPL/RPL (2)
Prospective
Prime jumbo (2)
Prospective
Prime jumbo interest-only (2)
Prospective
(1) Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying Consolidated Statements of Comprehensive Income (Loss).
(2) Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss).
(3) Effective yield is recalculated for differences between estimated and actual prepayments and the amortized cost is adjusted as if the new effective yield had been applied since inception.


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

The following presents the components of the Company’s interest income and interest expense for the three and six months ended June 30, 2021 and June 30, 2020.
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2021202020212020
Interest income(dollars in thousands)
Residential Securities (1)
$275,278 $457,684 $919,912 $868,064 
Residential mortgage loans (1)
38,963 42,871 76,072 90,428 
Commercial investment portfolio (1) (2)
69,663 84,208 151,264 179,884 
Reverse repurchase agreements2 49 36 1,462 
Total interest income$383,906 $584,812 $1,147,284 $1,139,838 
Interest expense  
Repurchase agreements29,140 136,962 71,725 570,983 
Debt issued by securitization vehicles23,216 38,757 49,492 80,876 
Participations issued1,739 2,336 
Other6,952 10,313 13,467 37,646 
Total interest expense61,047 186,032 137,020 689,505 
Net interest income$322,859 $398,780 $1,010,264 $450,333 
(1) Includes assets transferred or pledged to securitization vehicles.
(2 ) Includes commercial real estate debt and preferred equity and corporate debt.

16.  NET INCOME (LOSS) PER COMMON SHARE
The following table presents a reconciliation of net income (loss) and shares used in calculating basic and diluted net income (loss) per share for the three and six months ended June 30, 2021 and June 30, 2020.
 For the Three Months EndedFor the Six Months Ended
 June 30, 2021June 30, 2020June 30, 2021June 30, 2020
 (dollars in thousands, except per share data)
Net income (loss)$(294,848)$856,234 $1,456,286 $(2,783,955)
Net income (loss) attributable to noncontrolling interests794 32 1,115 98 
Net income (loss) attributable to Annaly(295,642)856,202 1,455,171 (2,784,053)
Dividends on preferred stock26,883 35,509 53,766 71,018 
Net income (loss) available (related) to common stockholders$(322,525)$820,693 $1,401,405 $(2,855,071)
Weighted average shares of common stock outstanding-basic1,410,239,138 1,423,909,112 1,404,755,496 1,427,451,716 
Add: Effect of stock awards, if dilutive0 1,008,776 
Weighted average shares of common  stock outstanding-diluted1,410,239,138 1,423,909,112 1,405,764,272 1,427,451,716 
Net income (loss) per share available (related) to common share
Basic$(0.23)$0.58 $1.00 $(2.00)
Diluted$(0.23)$0.58 $1.00 $(2.00)
The computations of diluted net income (loss) per share available (related) to common share for the three months ended June 30, 2021 excludes 3.2 million and the three and six months ended June 30, 2020 excludes 0.5 million and 0.4 million, respectively, of potentially dilutive restricted stock units because their effect would have been anti-dilutive.

17.  INCOME TAXES
For the three months ended June 30, 2021 the Company was qualified to be taxed as a REIT under Code Sections 856 through 860. As a REIT, the Company will not incur federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements that relate to, among other things, assets it may hold, income it may generate and its stockholder composition. It is generally the Company’s policy to distribute 100% of its REIT taxable income.
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Item 1. Financial Statements
To the extent there is any undistributed REIT taxable income at the end of a year, the Company distributes such shortfall within the next year as permitted by the Code.
The Company and certain of its direct and indirect subsidiaries, including Annaly TRS, Inc. and certain subsidiaries of Mountain Merger Sub Corp., have made separate joint elections to treat these subsidiaries as TRSs.  As such, each of these TRSs is taxable as a domestic C corporation and subject to federal, state and local income taxes based upon their taxable income.
The provisions of ASC 740, Income Taxes (“ASC 740”), clarify the accounting for uncertainty in income taxes recognized in financial statements and prescribe a recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken on a tax return. ASC 740 also requires that interest and penalties related to unrecognized tax benefits be recognized in the financial statements. The Company does not have any unrecognized tax benefits that would affect its financial position. Thus, no accruals for penalties and interest were deemed necessary at June 30, 2021 and December 31, 2020.
The state and local tax jurisdictions for which the Company is subject to tax-filing obligations recognize the Company’s status as a REIT, and therefore, the Company generally does not pay income tax in such jurisdictions. The Company may, however, be subject to certain minimum state and local tax filing fees as well as certain excise, franchise or business taxes. The Company’s TRSs are subject to federal, state and local taxes.
During the three and six months ended June 30, 2021, the Company recorded $5.1 million and $4.8 million, respectively, of income tax expense attributable to its TRSs. During the three and six months ended June 30, 2020, the Company recorded $2.1 million and ($24.6) million, respectively, of income tax expense (benefit) attributable to its TRSs. The Company’s federal, state and local tax returns from 2017 and forward remain open for examination.

18.  RISK MANAGEMENT
The primary risks to the Company are capital, liquidity and funding risk, investment/market risk, credit risk and operational risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company’s control. Changes in the general level of interest rates can affect net interest income, which is the difference between the interest income earned on interest earning assets and the interest expense incurred in connection with the interest bearing liabilities, by affecting the spread between the interest earning assets and interest bearing liabilities. Changes in the level of interest rates can also affect the value of the interest earning assets and the Company’s ability to realize gains from the sale of these assets. A decline in the value of the interest earning assets pledged as collateral for borrowings under repurchase agreements and derivative contracts could result in the counterparties demanding additional collateral or liquidating some of the existing collateral to reduce borrowing levels.
The Company may seek to mitigate the potential financial impact by entering into interest rate agreements such as interest rate swaps, interest rate swaptions and other hedges.
Weakness in the mortgage market, the shape of the yield curve, changes in the expectations for the volatility of future interest rates and deterioration of financial conditions in general may adversely affect the performance and market value of the Company’s investments. This could negatively impact the Company’s book value. Furthermore, if many of the Company’s lenders are unwilling or unable to provide additional financing, the Company could be forced to sell its investments at an inopportune time when prices are depressed. The Company has established policies and procedures for mitigating risks, including conducting scenario and sensitivity analyses and utilizing a range of hedging strategies.

The payment of principal and interest on the Freddie Mac and Fannie Mae Agency mortgage-backed securities, which exclude CRT securities issued by Freddie Mac and Fannie Mae, is guaranteed by those respective agencies and the payment of principal and interest on Ginnie Mae Agency mortgage-backed securities is backed by the full faith and credit of the U.S. government. Substantially all of the Company’s Agency mortgage-backed securities have an actual or implied “AAA” rating.
The Company faces credit risk on the portions of its portfolio which are not guaranteed by the respective Agency or by the full faith and credit of the U.S. government. The Company is exposed to credit risk on CRE Debt and Preferred Equity Investments, real estate investments, commercial mortgage-backed securities, residential mortgage loans, CRT securities, other non-Agency mortgage-backed securities and corporate debt. MSR values may also be adversely impacted by rising borrower delinquencies which would reduce servicing income and increase the overall costs to service the underlying mortgage loans. The Company is exposed to risk of loss if an issuer, borrower, tenant or counterparty fails to perform its obligations under contractual terms. The Company has established policies and procedures for mitigating credit risk, including reviewing and establishing limits for credit exposure, limiting transactions with specific counterparties, pre-purchase due diligence, maintaining qualifying collateral and continually assessing the creditworthiness of issuers, borrowers, tenants and counterparties, credit rating monitoring and active servicer oversight.

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Item 1. Financial Statements
The Company depends on third-party service providers to perform various business processes related to its operations, including mortgage loan servicers and sub-servicers. The Company’s vendor management policy establishes procedures for engaging, onboarding and monitoring the performance of third-party vendors. These procedures include assessing a vendor’s financial health as well as oversight of its compliance with applicable laws and regulations, cybersecurity and business continuity programs and security of personally identifiable information.

19.  RELATED PARTY TRANSACTIONS
Closing of the Internalization and Termination of Management Agreement
On February 12, 2020, the Company entered into an internalization agreement (the “Internalization Agreement”) with the Former Manager and certain affiliates of the Former Manager. Pursuant to the Internalization Agreement, the Company agreed to acquire all of the outstanding equity interests of the Former Manager and the Former Manager’s direct and indirect parent companies from their respective owners (the “Internalization”) for nominal cash consideration ($1.00). In connection with the closing of the Internalization, on June 30, 2020, the Company acquired all of the assets and liabilities of the Former Manager (the net effect of which was immaterial in amount), and the Company transitioned from an externally-managed REIT to an internally-managed REIT. At the closing, all employees of the Former Manager became employees of the Company. The parties also terminated the Amended and Restated Management Agreement by and between the Company and the Former Manager (the “Management Agreement”) and therefore the Company no longer pays a management fee to, or reimburses expenses of, the Former Manager. Pursuant to the Internalization Agreement, the Former Manager waived any Acceleration Fee (as defined in the Management Agreement).
Prior to the closing of the Internalization, the Former Manager, under the Management Agreement and subject to the supervision and direction of the Board, was responsible for (i) the selection, purchase and sale of assets for the Company’s investment portfolio; (ii) recommending alternative forms of capital raising; (iii) supervising the Company’s financing and hedging activities; and (iv) day to day management functions. The Former Manager also performed such other supervisory and management services and activities relating to the Company’s assets and operations as appropriate. In exchange for the management services, the Company paid the Former Manager a monthly management fee, and the Former Manager was responsible for providing personnel to manage the Company. Prior to the closing of the Internalization, the Company had paid the Former Manager a monthly management fee for its management services in an amount equal to 1/12th of the sum of (i) 1.05% of Stockholders' Equity (as defined in the Management Agreement) up to $17.28 billion, and (ii) 0.75% of Stockholders' Equity (as defined in the Management Agreement) in excess of $17.28 billion. The Company did not pay the Former Manager any incentive fees.
For the three and six months ended June 30, 2020, the compensation and management fee computed in accordance with the Management Agreement was $37.0 million and $77.9 million, respectively, and reimbursement payments to the Former Manager were $7.1 million and $14.2 million, respectively.

20.  LEASE COMMITMENTS AND CONTINGENCIES
The Company’s operating leases are primarily comprised of a corporate office lease with a remaining lease term of approximately four years. The corporate office lease includes an option to extend for up to five years, however the extension term was not included in the operating lease liability calculation. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The lease cost for the three and six months ended June 30, 2021 was $0.7 million and $1.6 million, respectively.
Supplemental information related to leases as of and for the six months ended June 30, 2021 was as follows:
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Item 1. Financial Statements
Operating LeasesClassificationJune 30, 2021
Assets(dollars in thousands)
Operating lease right-of-use assetsOther assets$11,843 
Liabilities
Operating lease liabilities (1)
Other liabilities$15,437 
Lease term and discount rate
Weighted average remaining lease term4.2 years
Weighted average discount rate (1)
2.9%
Cash paid for amounts included in the measurement of lease liabilities
   Operating cash flows from operating leases$1,983 
(1)     As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at adoption date in determining the present value of lease payments.

The following table provides details related to maturities of lease liabilities:
Maturity of Lease Liabilities
Years ending December 31,(dollars in thousands)
2021 (remaining)$1,935 
20223,862 
20233,862 
20243,862 
20252,895 
Total lease payments$16,416 
Less imputed interest979 
Present value of lease liabilities$15,437 
Contingencies
From time to time, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company’s consolidated financial statements. There were 0 material contingencies at June 30, 2021 and December 31, 2020.

21.  ARCOLA REGULATORY REQUIREMENTS
Arcola is the Company’s wholly owned and consolidated broker-dealer. Arcola is subject to regulations of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees. 
Arcola is a member of various clearing organizations with which it maintains cash required to conduct its day-to-day clearance activities. Arcola enters into reverse repurchase agreements and repurchase agreements as part of its matched book trading activity. Reverse repurchase agreements are recorded on settlement date at the contractual amount and are collateralized by mortgage-backed or other securities. Arcola generates income from the spread between what is earned on the reverse repurchase agreements and what is paid on the matched repurchase agreements. Arcola’s policy is to obtain possession of collateral with a market value in excess of the principal amount loaned under reverse repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily, and Arcola will require counterparties to deposit additional collateral, when necessary.  All reverse repurchase activities are transacted under master repurchase agreements or other documentation that give Arcola the right, in the event of default, to liquidate collateral held and in some instances, to offset receivables and payables with the same counterparty.
As a member of the Financial Industry Regulatory Authority (“FINRA”), Arcola is required to maintain a minimum net capital balance. At June 30, 2021, Arcola had a minimum net capital requirement of $0.3 million. Arcola consistently operates with capital in excess of its regulatory capital requirements. Arcola’s regulatory net capital as defined by SEC Rule 15c3-1 at June 30, 2021 was $516.9 million with excess net capital of $516.6 million.



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Item 1. Financial Statements
22.  SUBSEQUENT EVENTS
In July 2021, the Company completed and closed the securitization of residential mortgage loans, OBX 2021-J2 Trust, with a face value of $382.5 million. The securitization represented a financing transaction which provided non-recourse financing to the Company collateralized by residential mortgage loans purchased by the Company.
In July 2021, in the previously announced divestiture of the Company’s CRE business, a significant majority of the assets, including the platform, were transferred to Slate as part of the first closing of the transaction with remaining assets expected to be transferred in the second half of 2021.

In July 2021, the Company syndicated $466.4 million of corporate loans, which were classified as held for sale as of June 30, 2021.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements contained in this quarterly report, and certain statements contained in our future filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain); changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; our ability to grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt; risks related to investments in MSR; our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act; and the timing and ultimate completion of the sale of our commercial real estate business. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in our most recent annual report on Form 10-K and Item 1A “Risk Factors” in this quarterly report on Form 10-Q. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our most recent annual report on Form 10-K. All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company.  Refer to the section titled “Glossary of Terms” located at the end of this Item 2 for definitions of commonly used terms in this quarterly report on Form 10-Q.

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Item 2. Management’s Discussion and Analysis
INDEX TO ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Page
Earnings available for distribution, earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity
Unrealized Gains and Losses - Available-for-Sale Investments
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
Overview
We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Prior to the closing of the Internalization (as defined in the “Related Party Transactions” Note located within Item 1) on June 30, 2020, we were externally managed by Annaly Management Company LLC (the “Former Manager”). Our common stock is listed on the New York Stock Exchange under the symbol “NLY.”
We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities.
For a full discussion of our business, refer to the section titled “Business Overview” in our most recent Annual Report on Form 10-K.

Recent Developments
Sale of Commercial Real Estate Business
On March 25, 2021, we announced that we entered into a definitive agreement to sell and exit our Commercial Real Estate (“CRE”) business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”). The transaction represents the sale of substantially all of the assets that comprise our CRE business, which include equity interests, loan assets and commercial mortgage-backed securities (other than commercial CRTs). Certain employees who primarily support the CRE business will join Slate in connection with the sale. Subject to customary closing conditions, including applicable regulatory approvals, the transfer of the CRE business is expected to be completed in the second half of 2021. Revenues and expenses associated with the CRE business will be reflected in our results of operations and key financial metrics through closing. Refer to the “Sale of Commercial Real Estate Business” and “Subsequent Events” Notes located within Item 1 for additional information related to the announced transaction.

Business Environment and COVID-19 
The second quarter of 2021 saw 10-year Treasury rates decline by nearly 30 basis points despite peak economic reopening momentum and a meaningful acceleration in inflation readings. Spreads on Agency mortgage-backed securities (“MBS”), which entered the quarter at tight levels signaling full valuations, widened while credit sector spreads remained well supported. The challenging environment led us to generate a (4.0%) economic return (loss) and tangible economic return (loss), during the quarter on ($0.23) in GAAP net income (loss) per common share, and a $0.58 decline in our book value to $8.37 per common share as of June 30, 2021. Our total portfolio net of securitized debt (which includes market value of TBA purchase contracts and CMBX derivatives and excludes held for sale assets) decreased during the quarter to $92.9 billion, while credit investments as a share of the aggregate portfolio rose from 27% to 29% during the quarter.
The rally in interest rates during the quarter was somewhat contradictory relative to the strong economy seen during the period. Despite the economic reopening and inflation at multi-year highs, the yield curve flattened as rate markets viewed the pace of the current economic expansion as likely to fade, with growth and inflation expected to slow back to pre-pandemic levels in the medium-term. Meanwhile, the Federal Reserve (“Fed”) began signaling a shift in its reaction function at the June Federal Open Market Committee (“FOMC”) meeting. Having become concerned around an upside surprise in inflation, the FOMC signaled that it might raise short-term interest rates sooner than previously anticipated should inflation remain elevated.
Agency MBS, meanwhile, underperformed its rate hedges in this environment as banks slowed their purchases from record pace, investors recalibrated their taper expectations, and mortgage supply continued to remain elevated. More specifically, higher coupon Agency MBS, those with coupons of or above 3.5 percent, continued to face elevated prepayment speeds, which led investors to adjust their models to reflect this reality, thereby lowering the valuations of these securities. Faced with this challenging operating environment in Agency MBS, Annaly continued to prudently manage its portfolio, reducing leverage and hedging incremental moves in interest rates, while allocating capital towards credit investments with more attractive risk-adjusted returns.
As such, our residential credit business experienced another active quarter as we took advantage of opportunities in the unrated non- and re-performing securities market, as well as non-qualified loan market, activity which was boosted by the initiation of our in-house aggregation through Onslow Bay’s correspondent channel. Launched in April 2021, the program offers a diversified suite of mortgage products to purchase residential mortgage loans on a best-efforts flow basis that adhere to our credit standards. Outside of residential credit, we committed to increase our exposure to MSR during the quarter, through direct
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
purchases and third party partnerships bringing Annaly’s total MSR economic exposure (for both portfolios already settled and those committed to be settled at a future date) to approximately $409 million market value as of June 30, 2021. Finally, we also saw considerable portfolio activity in our Middle Market Lending business, which originated six deals for a total of approximately $450 million during the quarter, net of originations subsequently classified as held for sale at the end of the quarter.
The previously announced sale of our Commercial Real Estate business remains on track to be completed in the second half of 2021. After quarter end, the bulk of the platform – including a number of Annaly employees who supported the business – was successfully transferred as part of the first closing of the transaction. A significant majority of the assets were sold during this first close and we have received over 80% of the capital by the time of this filing.
Business Continuity
Our well-established Business Continuity Plan (“BCP”) has been designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise.
The BCP is regularly updated and tested. Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management. Key tenets of the plan include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations.
Historical tabletop exercises have included use of Center for Disease Control and Prevention Influenza Pandemic exercise materials. That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19. We took proactive actions, which included canceling non-essential travel and instituting 100% remote working, ahead of New York State-mandated requirements. To protect the health and well-being of our employees, their families and communities remote work requirements began in phases in early March 2020, culminating with a company-wide exercise on March 13, 2020 to test connectivity and functionality. All employees were able to successfully perform their duties in this testing and we have operated largely remotely since that time.
Business activities continue to be performed primarily remotely, though we have seen a number of employees return to the office on a voluntary and periodic basis. At the present, we expect employees to return to the office more regularly starting in the fourth quarter of 2021 subject to continued successful vaccine rollout and accomodative guidance from federal, state and local authorities.

Economic Environment
The pace of growth accelerated in the second quarter, with U.S. gross domestic product (“GDP”) rising 6.5% percent on a seasonally adjusted annualized rate. Growth was boosted as the U.S. economy reopened and service sector consumption rose strongly, while consumers, supported by healthy balance sheets and recent stimulus payments, continued to spend on goods as well.
The unemployment rate fell 0.1 percentage points in the second quarter to 5.9% in June according to the Bureau of Labor Statistics. Meanwhile, seasonally adjusted total non-farm payroll employment rose by an average 567 thousand workers per month to 145.8 million employees, but remains roughly 6.7 million employees below the number of employed in February 2020 at the onset of the COVID-19 pandemic. Employment gains generally disappointed expectations for even better gains into the economic reopening, yet a number of factors including lingering COVID-19 fears, job skill mismatches, and elevated employment benefits appear to have held back employment growth. Wage growth, as measured by the year-over-year change in private sector average hourly earnings, contracted further during the quarter, reading 3.6% in June compared to 4.3% in March 2021. The slowdown in wage growth remains mostly a statistical anomaly, driven by a relatively larger share of job losses among lower-paid employees at the height of the pandemic, which inflated wage gains for most of 2020. As these wage gains fall out of year-over-year calculations, wage gains tend to be somewhat depressed on these metrics. Of note, wage growth has been relatively strong in reopening sectors of late. For example, average hourly earnings in the leisure and hospitality sector have exceeded 1.0% month-over-month growth for four consecutive months, suggesting healthy earnings growth in a sector that is seeing strong demand for labor in the middle of the economic reopening.
Inflation readings, as measured by the year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”), have risen sharply from their pandemic lows and are currently running meaningfully above the Fed’s 2% inflation target. The headline PCE measure increased by 3.99% year-over-year in June 2021, while the more stable core PCE measure, which excludes volatile food and energy prices, registered 3.54% year-over-year increase, above the 1.97% year-over-year
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Item 2. Management’s Discussion and Analysis
growth measured in March 2021. The acceleration in price increases was driven by the combination of strong demand for goods and services and simultaneous supply bottlenecks. For example, consumers, wary of COVID-19 related risks on public transportation but supported by excess savings from financial stimulus, opted to purchase increased amounts of cars. Car manufacturers, meanwhile, were unable to meet increased demand as the pandemic led to disruptions to supply chains and a shortage in microchip production limited total production of new cars. These bottlenecks are likely to ease in months ahead as production catches up to demand, thereby lowering price pressures.
Disregarding the current sharp rise in inflation measures for now, the FOMC maintained the Federal Funds Target Rate in the 0.00% - 0.25% range and continued to signal that it will maintain the rate at current levels for an extended period of time. In addition, the FOMC continued its quantitative easing program. The combined Fed actions have continued to support financial conditions and market functioning, which in turn has helped the economic recovery.

The following table below presents interest rates and spreads at each date presented:
 June 30, 2021December 31, 2020June 30, 2020
30-Year mortgage current coupon1.83%1.34%1.57%
Mortgage basis36 bps43 bps91 bps
10-Year U.S. Treasury rate1.47%0.91%0.66%
LIBOR
1-Month0.10%0.14%0.15%
6-Month0.16%0.26%0.26%
 
London Interbank Offered Rate (“LIBOR”) Transition Working Group
On March 5, 2021, the United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincides with the March 5, 2021 announcement of LIBOR's administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate.

We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates. Our plan includes steps to evaluate exposure, review contracts, assess impact to our business, process and technology and define a communication strategy with shareholders, regulators and other stakeholders. The committee also continues to engage with industry working groups and other market participants regarding the transition. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability. Similar to the rest of the market, the bulk of our exposure is in derivatives contracts. Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements require bilateral amendments with transition currently in process and adequate time left to resolve.

Results of Operations
The results of our operations are affected by various factors, many of which are beyond our control. Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A. “Risk Factors” of our most recent Annual Report on Form 10-K and in Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q.
This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements. To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers.
Refer to the “Non-GAAP Financial Measures” section for additional information.
Commencing with our financial results for the quarter ended June 30, 2021 and for subsequent reporting periods, we relabeled “Core Earnings (excluding PAA)” as “Earnings Available for Distribution” (“EAD”). Earnings Available for Distribution, which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with U.S.
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Item 2. Management’s Discussion and Analysis
generally accepted accounting principles (“GAAP”), has replaced our prior presentation of Core Earnings (excluding PAA). In addition, Core Earnings (excluding PAA) results from prior reporting periods has been relabeled Earnings Available for Distribution. In line with evolving industry practices, we believe the term Earnings Available for Distribution more accurately reflects the principal purpose of the measure than the term Core Earnings (excluding PAA) and will serve as a useful indicator for investors in evaluating our performance and our ability to pay dividends.
The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods. As such, Earnings Available for Distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities.
Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income. Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution.
Beginning with the quarter ended June 30, 2021, we began classifying certain portfolio activity-related or volume-related expenses as Other income (loss) rather than Other general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss) to better reflect the nature of the items. As such, prior periods have been conformed to the current presentation. Refer to the “General and Administrative Expenses” section for additional information.
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis

Net Income (Loss) Summary
The following table presents financial information related to our results of operations as of and for the three and six months ended June 30, 2021 and 2020.
 As of and for the Three Months Ended June 30,As of and for the Six Months Ended June 30,
 2021202020212020
 (dollars in thousands, except per share data)
Interest income$383,906 $584,812 $1,147,284 $1,139,838 
Interest expense61,047 186,032 137,020 689,505 
Net interest income322,859 398,780 1,010,264 450,333 
Realized and unrealized gains (losses)(560,722)511,951 537,123 (3,143,790)
Other income (loss)1,675 12,328 15,143 19,490 
Less: Total general and administrative expenses53,526 64,770 101,431 134,635 
Income (loss) before income taxes(289,714)858,289 1,461,099 (2,808,602)
Income taxes5,134 2,055 4,813 (24,647)
Net income (loss)(294,848)856,234 1,456,286 (2,783,955)
Less: Net income (loss) attributable to noncontrolling interests794 32 1,115 98 
Net income (loss) attributable to Annaly(295,642)856,202 1,455,171 (2,784,053)
Less: Dividends on preferred stock26,883 35,509 53,766 71,018 
Net income (loss) available (related) to common stockholders$(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
Basic1,410,239,138 1,423,909,112 1,404,755,496 1,427,451,716 
Diluted1,410,239,138 1,423,909,112 1,405,764,272 1,427,451,716 
Other information
Investment portfolio at period-end$80,222,151 $90,442,332 $80,222,151 $90,442,332 
Average total assets$83,872,947 $95,187,964 $85,400,332 $106,890,336 
Average equity$13,853,386 $13,252,567 $13,909,522 $14,100,492 
GAAP leverage at period-end (1)
4.7:15.5:14.7:15.5:1
GAAP capital ratio at period-end (2)
16.6 %14.8 %16.6 %14.8 %
Annualized return on average total assets(1.41 %)3.60 %3.41 %(5.21 %)
Annualized return on average equity(8.51 %)25.84 %20.94 %(39.49 %)
Net interest margin (3)
1.66 %1.89 %2.54 %0.90 %
Average yield on interest earning assets (4)
1.97 %2.77 %2.89 %2.27 %
Average GAAP cost of interest bearing liabilities (5)

0.35 %0.96 %0.39 %1.48 %
Net interest spread1.62 %1.81 %2.50 %0.79 %
Weighted average experienced CPR for the period26.4 %19.5 %25.2 %16.6 %
Weighted average projected long-term CPR at period-end12.9 %18.0 %12.9 %18.0 %
Common stock book value per share$8.37 $8.39 $8.37 $8.39 
Non-GAAP metrics (6)
Interest income (excluding PAA)$537,513 $636,554 $1,086,321 $1,482,302 
Economic interest expense (5)
$144,134 $250,593 $299,854 $768,046 
Economic net interest income (excluding PAA)$393,379 $385,961 $786,467 $714,256 
Premium amortization adjustment cost (benefit)$153,607 $51,742 $(60,963)$342,464 
Earnings available for distribution (7)
$451,358 $424,580 $890,877 $754,798 
Earnings available for distribution per common share$0.30 $0.27 $0.59 $0.48 
Annualized EAD return on average equity (excluding PAA)13.05 %12.82 %12.82 %10.71 %
Economic leverage at period-end (1)
5.8:16.4:15.8:16.4:1
Economic capital ratio at period-end (2)
14.3 %13.0 %14.3 %13.0 %
Net interest margin (excluding PAA) (3)
2.09 %1.88 %2.00 %1.50 %
Average yield on interest earning assets (excluding PAA) (4)
2.76 %3.01 %2.73 %2.96 %
Average economic cost of interest bearing liabilities (5)
0.83 %1.29 %0.85 %1.65 %
Net interest spread (excluding PAA)1.93 %1.72 %1.88 %1.31 %
 
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
(1) GAAP leverage is computed as the sum of repurchase agreements, other secured financing, debt issued by securitization vehicles, participations issued and mortgages payable divided by total equity. Economic leverage is computed as the sum of recourse debt, cost basis of to-be-announced (“TBA”) and CMBX derivatives outstanding, and net forward purchases (sales) of investments divided by total equity. Recourse debt consists of repurchase agreements and other secured financing (excluding certain non-recourse credit facilities). Certain credit facilities (included within other secured financing), debt issued by securitization vehicles, participations issued, and mortgages payable are non-recourse to the Company and are excluded from economic leverage.
(2) GAAP capital ratio is computed as total equity divided by total assets. Economic capital ratio is computed as total equity divided by total economic assets. Total economic assets include the implied market value of TBA derivatives and net of debt issued by securitization vehicles.
(3) Net interest margin represents our interest income less interest expense divided by the average interest earning assets. Net interest margin (excluding PAA) represents the sum of our interest income (excluding PAA) plus TBA dollar roll income and CMBX coupon income less interest expense and the net interest component of interest rate swaps divided by the sum of average interest earning assets plus average outstanding TBA contract and CMBX balances.
(4) Average yield on interest earning assets represents annualized interest income divided by average interest earning assets. Average interest earning assets reflects the average amortized cost of our investments during the period. Average yield on interest earning assets (excluding PAA) is calculated using annualized interest income (excluding PAA).
(5) Average GAAP cost of interest bearing liabilities represents annualized interest expense divided by average interest bearing liabilities. Average interest bearing liabilities reflects the average balances during the period. Average economic cost of interest bearing liabilities represents annualized economic interest expense divided by average interest bearing liabilities. Economic interest expense is comprised of GAAP interest expense and the net interest component of interest rate swaps.
(6) Represents a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information.
(7) Excludes dividends on preferred stock.
GAAP
Net income (loss) was ($294.8) million, which includes $0.8 million attributable to noncontrolling interests, or ($0.23) per average basic common share, for the three months ended June 30, 2021 compared to $856.2 million, which includes $0.0 million attributable to noncontrolling interests, or $0.58 per average basic common share, for the same period in 2020. We attribute the majority of the change in net income (loss) to unfavorable changes in unrealized gains (losses) on interest rate swaps, net gains (losses) on other derivatives and financial instruments, net unrealized gains (losses) on instruments measured at fair value through earnings and net gains (losses) on disposal of investments and other, partially offset by a favorable change in realized gains (losses) on termination or maturity of interest rate swaps. Net unrealized gains (losses) on interest rate swaps was ($141.1) million for the three months ended June 30, 2021 compared to $1.5 billion for the same period in 2020. Net gains (losses) on other derivatives and financial instruments was ($357.8) million for the three months ended June 30, 2021 compared to $170.9 million for the same period in 2020. Net unrealized gains (losses) on instruments measured at fair value through earnings was $4.0 million for the three months ended June 30, 2021 compared to $254.8 million for the same period in 2020. Net gains (losses) on disposal of investments and other was $16.2 million for the three months ended June 30, 2021 compared to $246.7 million for the same period in 2020. Realized gains (losses) on termination or maturity of interest rate swaps was $0 for the three months ended June 30, 2021 compared to ($1.5) billion for the same period in 2020. Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.
Net income (loss) was $1.5 billion, which includes $1.1 million attributable to noncontrolling interests, or $1.00 per average basic common share, for the six months ended June 30, 2021 compared to ($2.8) billion which includes $0.1 million attributable to noncontrolling interests, or ($2.00) per average basic common share, for the same period in 2020. We attribute the majority of the change in net income (loss) to favorable changes in unrealized gains (losses) on interest rate swaps, realized gains (losses) on termination or maturity of interest rate swaps, net unrealized gains (losses) on instruments measured at fair value through earnings and net interest income, partially offset by unfavorable changes in net gains (losses) on disposal of investments and other and net gains (losses) on other derivatives and financial instruments. Realized losses on termination or maturity of interest rate swaps was $0 for the six months ended June 30, 2021 compared to ($1.9) billion for the same period in 2020. Net unrealized gains (losses) on interest rate swaps was $631.2 million for the six months ended June 30, 2021 compared to ($1.3) billion for the same period in 2020. Net unrealized gains (losses) on instruments measured at fair value through earnings for the six months ended June 30, 2021 was $108.2 million compared to ($475.4) million for the same period in 2020. Net interest income for the six months ended June 30, 2021 was $1.0 billion compared to $450.3 million for the same period in 2020. Net gains (losses) on disposal of investments and other was ($49.6) million for the six months ended June 30, 2021 compared to $453.3 million for the same period in 2020. Net gains (losses) on other derivatives was $119.1 million for the six months ended June 30, 2021 compared to $377.3 million for the same period in 2020. Refer to the section titled “Realized and Unrealized Gains (Losses)” located within this Item 2 for additional information related to these changes.
Non-GAAP
Earnings available for distribution were $451.4 million, or $0.30 per average common share, for the three months ended June 30, 2021, compared to $424.6 million, or $0.27 per average common share, for the same period in 2020. The change in earnings available for distribution during the three months ended June 30, 2021 compared to the same period in 2020 was primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities, and higher TBA dollar roll
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
income, partially offset by lower coupon income resulting from lower average interest earning assets and unfavorable changes in the net interest component of interest rate swaps.
Earnings available for distribution were $890.9 million, or $0.59 per average common share, for the six months ended June 30, 2021, compared to $754.8 million, or $0.48 per average common share, for the same period in 2020. The change in earnings available for distribution during the six months ended June 30, 2021 compared to the same period in 2020 was primarily due to lower interest expense from lower borrowing rates and average interest bearing liabilities and higher TBA dollar roll income, partially offset by unfavorable changes in the net interest component of interest rate swaps.

Non-GAAP Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide the following non-GAAP financial measures:
earnings available for distribution (“EAD”);
earnings available for distribution attributable to common stockholders;
earnings available for distribution per average common share;
annualized EAD return on average equity;
economic leverage;
economic capital ratio;
interest income (excluding PAA);
economic interest expense;
economic net interest income (excluding PAA);
average yield on interest earning assets (excluding PAA);
average economic cost of interest bearing liabilities;
net interest margin (excluding PAA); and
net interest spread (excluding PAA).

These measures should not be considered a substitute for, or superior to, financial measures computed in accordance with GAAP. While intended to offer a fuller understanding of our results and operations, non-GAAP financial measures also have limitations. For example, we may calculate our non-GAAP metrics, such as earnings available for distribution, or the PAA, differently than our peers making comparative analysis difficult. Additionally, in the case of non-GAAP measures that exclude the PAA, the amount of amortization expense excluding the PAA is not necessarily representative of the amount of future periodic amortization nor is it indicative of the term over which we will amortize the remaining unamortized premium. Changes to actual and estimated prepayments will impact the timing and amount of premium amortization and, as such, both GAAP and non-GAAP results.
These non-GAAP measures provide additional detail to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers. Additional information pertaining to our use of these non-GAAP financial measures, including discussion of how each such measure may be useful to investors, and reconciliations to their most directly comparable GAAP results are provided below.
Earnings available for distribution, earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity
Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We generate net income by earning a net interest spread on our investment portfolio, which is a function of interest income from our investment portfolio less financing, hedging and operating costs. Earnings available for distribution, which is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation and amortization expense on real estate and related intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items), and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items), and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities, is used by management and, we believe, used by analysts and investors to measure our progress in achieving our principal business objective. 
We seek to fulfill our principal business objective through a variety of factors including portfolio construction, the degree of market risk exposure and related hedge profile, and the use and forms of leverage, all while operating within the parameters of our capital allocation policy and risk governance framework.
We believe these non-GAAP measures provide management and investors with additional details regarding our underlying operating results and investment portfolio trends by (i) making adjustments to account for the disparate reporting of changes in fair value where certain instruments are reflected in GAAP net income (loss) while others are reflected in other comprehensive income (loss), and (ii) by excluding certain unrealized, non-cash or episodic components of GAAP net income (loss) in order to
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ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis
provide additional transparency into the operating performance of our portfolio. In addition, EAD serves as a useful indicator for investors in evaluating the Company's performance and ability to pay dividends. Annualized EAD return on average equity, which is calculated by dividing earnings available for distribution over average stockholders’ equity, provides investors with additional detail on the earnings available for distribution generated by our invested equity capital.
The following table presents a reconciliation of GAAP financial results to non-GAAP earnings available for distribution for the periods presented:
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2021202020212020
 (dollars in thousands, except per share data)
GAAP net income (loss)$(294,848)$856,234 $1,456,286 $(2,783,955)
Net income (loss) attributable to noncontrolling interests794 32 1,115 98 
Net income (loss) attributable to Annaly(295,642)856,202 1,455,171 (2,784,053)
Adjustments to exclude reported realized and unrealized (gains) losses
Realized (gains) losses on termination or maturity of interest rate swaps 1,521,732  1,919,293 
Unrealized (gains) losses on interest rate swaps141,067 (1,494,628)(631,195)1,333,095 
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 instruments357,808 (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) (1)
1,078 72,544 (143,792)172,537 
Business divestiture-related (gains) losses(1,527)— 248,036 — 
Other adjustments
Depreciation expense related to commercial real estate and amortization of intangibles (2)
5,635 8,714 12,959 16,648 
Non-EAD (income) loss allocated to equity method investments (3)
3,141 4,218 (6,539)23,616 
Transaction expenses and non-recurring items (4)
1,150 1,075 1,845 8,320 
Income tax effect of non-EAD income (loss) items7,147 3,353 11,481 (20,509)
TBA dollar roll income and CMBX coupon income (5)
111,592 97,524 210,525 142,428 
MSR amortization (6)
(13,491)(25,529)(28,979)(43,825)
Plus:
Premium amortization adjustment cost (benefit)153,607 51,742 (60,963)342,464 
Earnings available for distribution (7)
451,358 424,580 890,877 754,798 
Dividends on preferred stock26,883 35,509 53,766 71,018 
Earnings available for distribution attributable to common stockholders (7)
$424,475 $389,071 $837,111 $683,780 
GAAP net income (loss) per average common share$(0.23)$0.58 $1.00 $(2.00)
Earnings available for distribution per average common share (7)
$0.30 $0.27 $