Change in Interest Rate (1) Estimated Percentage Change in Portfolio Value (2) Estimated Change as a % on NAV (2)(3) Projected Percentage Change in Economic Net Interest Income (4) -75 Basis points (0.3%) (2.2%) 8.1% -50 Basis points (0.1)% (0.9)% 5.7% -25 Basis points —% (0.2)% 3.0% +25 Basis points —% (0.4%) (3.2%) +50 Basis points (0.1%) (1.2%) (6.7%) +75 Basis points (0.3%) (2.4%) (10.5%) MBS Spread Shock (1) Estimated Change in Portfolio Market Value (2) Estimated Change as a % on NAV (2)(3) -25 Basis points 1.3% 10.1% -15 Basis points 0.8% 6.0% -5 Basis points 0.3% 2.0% +5 Basis points (0.3%) (2.0%) +15 Basis points (0.7%) (6.0%) +25 Basis points (1.2%) (9.9%) (1) Interest rate and MBS spread sensitivity are based on results from third party models in conjunction with inputs from our internal investment professionals. Actual results could differ materially from these estimates. (2) Scenarios include securities, residential mortgage loans, MSR and derivative instruments. (3) NAV represents book value of equity. (4) Scenarios include securities, residential mortgage loans, repurchase agreements, other secured financing and interest rate swaps. Economic net interest income includes the net interest component of interest rate swaps. Credit Risk Management Key risk parameters have been established to specify our credit risk appetite. We seek to manage credit risk by making investments which conform to the firm’s specific investment policy parameters and optimize risk-return attributes. While we do not expect to encounter credit risk in our Agency mortgage-backed securities, we face credit risk on the nonAgency mortgage-backed securities and CRT securities in our portfolio. In addition, we are also exposed to credit risk on residential mortgage loans and commercial real estate investments. MSR values may also be impacted through reduced servicing fees and higher costs to service the underlying mortgage loans due to borrower performance. Generally, we are subject to risk of loss if an issuer or borrower fails to perform its contractual obligations. We have established policies and procedures for mitigating credit risk, including establishing and reviewing limits for credit exposure. In the case of residential mortgage loans and MSR, we may engage a third party to perform due diligence on a sample of loans that we believe sufficiently represents the entire pool. Once an investment is made, our ongoing surveillance process includes regular reviews, analysis and oversight of investments by our investment personnel and appropriate committee. We review credit and other risks of loss associated with each investment. Our management monitors the overall portfolio risk and determines estimates of provision for loss. Additionally, ALCO has oversight of our credit risk exposure. Our portfolio composition, based on balance sheet values, at December 31, 2023 and 2022 was as follows: December 31, 2023 December 31, 2022 Category Agency mortgage-backed securities 75.9 % 79.4 % Credit risk transfer securities 1.1 % 1.3 % Non-agency mortgage-backed securities 2.4 % 2.5 % Residential mortgage loans (1) 17.9 % 13.9 % Mortgage servicing rights 2.4 % 2.2 % Commercial real estate (1) 0.3 % 0.7 % (1) Includes assets transferred or pledged to securitization vehicles. Counterparty Risk Management Our use of repurchase and derivative agreements and trading activities create exposure to counterparty risk relating to potential losses that could be recognized if the counterparties to these agreements fail to perform their obligations under the contracts. In the event of default by a counterparty, we could have difficulty obtaining our assets pledged as collateral. A significant portion of our investments are financed with repurchase agreements by pledging our Residential Securities as collateral to the ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis 75
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