INDEX TO ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 49 Reverse Stock Split 49 Business Environment 49 Economic Environment 50 London Interbank Offered Rate (“LIBOR”) Transition 51 Results of Operations 51 Net Income (Loss) Summary 52 Non-GAAP Financial Measures 54 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 54 Premium Amortization Expense 56 Economic Leverage and Economic Capital Ratios 56 Interest Income (excluding PAA), Economic Interest Expense and Economic Net Interest Income (excluding PAA) 57 Experienced and Projected Long-term CPR 58 Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA), and Average Economic Cost of Interest Bearing Liabilities 58 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 59 Other Income (Loss) 60 General and Administrative Expenses 61 Return on Average Equity 62 Unrealized Gains and Losses - Available-for-Sale Investments 62 Financial Condition 63 Residential Securities 63 Contractual Obligations 65 Commitments and Contractual Obligations with Unconsolidated Entities 66 Capital Management 66 Stockholders’ Equity 66 Capital Stock 66 Leverage and Capital 67 Risk Management 67 Risk Appetite 68 Governance 68 Description of Risks 69 Liquidity and Funding Risk Management 70 Funding 70 Excess Liquidity 71 Maturity Profile 72 Stress Testing 73 Liquidity Management Policies 74 Investment/Market Risk Management 74 Credit Risk Management 75 Counterparty Risk Management 75 Operational Risk Management 76 Compliance, Regulatory and Legal Risk Management 77 Critical Accounting Estimates 78 Valuation of Financial Instruments 78 Residential Securities 78 Residential Mortgage Loans 78 MSR 78 Interest Rate Swaps 79 Revenue Recognition 79 Consolidation of Variable Interest Entities 79 Use of Estimates 79 Glossary of Terms 80 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis 48
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