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Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-08-04 · 133 added, 134 removed, 551 unchanged (33% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended June 30, 2022.

Our MD&A is presented in the following sections:

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We are internally managed with the principal objective of providing our stockholders with favorable long-term returns on a risk-adjusted basis through attractive monthly dividends.

We generate income from the interest earned on our investments, net

of associated borrowing and hedging costs, and net realized gains and losses on our investment and hedging activities.

We generate income from the interest earned on our investments, net of associated borrowing and hedging costs, and net realized gains and losses on our investment and hedging activities.

We fund our investments primarily through collateralized borrowings structured as repurchase agreements.

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Trends and Recent Market Impacts

Financial markets have been under significant pressure since the start of the year as a result of the Federal Reserve’s intent to pursue a more aggressive path of monetary policy tightening.

Elevated inflation and the expectation of materially higher short-term rates increased the probability of a recession and drove significant interest rate volatility.

This challenging monetary policy and macro-economic environment led to broad-based financial market weakness.

As a result, the S&P 500 Index posted its worst first-half year performance in over 50 years, while the Bloomberg Aggregate Bond Index, representing more than $25 trillion in bonds, also experienced its deepest decline on record.

Agency RMBS performed largely in line with the broader fixed income market.

Concerns associated with the Federal Reserve’s balance sheet normalization drove Agency RMBS spreads significantly wider relative to interest rate swap and U.S.

Treasury hedges.

This mortgage spread widening was the primary driver of AGNC’s economic loss on tangible net book value per common share of -10.1% for the second quarter and -22.9% for the first half of the year, which consists of dividends declared per common share and the decline in our tangible net book value.

As a result of these challenging market conditions, we maintained a defensive position during the first half of the year.

AGNC’s at-risk leverage has remained below our historical operating levels, ending the second quarter at 7.4x tangible stockholders’ equity, down from 7.7x as of December 31, 2021.

We also operated with very low interest rate exposure, as evidenced by our significant hedge ratio, which totaled 126% of the outstanding balance of our Agency repurchase agreements, net TBA position and other debt as of June 30, 2022, an increase from 101% as of December 31, 2021.

Thus, as of June 30, 2022, our duration gap, which is a measure of the difference between the interest rate sensitivity of our assets and liabilities, inclusive of our interest rate hedges, was 0.4 years, compared to 0.1 years as of December 31, 2021, despite materially higher benchmark interest rates.

As of June 30, 2022, our unencumbered assets totaled $4.4 billion, or 58% of tangible equity, consisting of $3.9 billion of unencumbered cash and Agency RMBS and $0.5 billion of unencumbered credit assets.

This compares to unencumbered assets of $6.5 billion, or 67% of tangible equity, as of December 31, 2021, consisting of $5.8 billion of unencumbered cash and Agency RMBS and $0.7 billion of unencumbered credit assets.

The decline in our unencumbered assets both on an absolute basis and as a percentage of our tangible equity reflects the additional initial margin cost of maintaining our elevated interest rate hedge position and the material repricing of Agency RMBS assets.

Despite our defensive positioning, our annualized net interest spread and TBA dollar roll income, excluding "catch-up" premium amortization, increased to 2.70% for the second quarter, from 2.19% for the first quarter, averaging 2.43% for the first half of the year.

Thus, although we operated with a smaller asset base, net spread and dollar roll income per diluted common share, excluding "catch-up" premium amortization, increased to $0.83 for the second quarter, from $0.72 for the first quarter.

This improvement was largely due to exceptionally strong TBA dollar roll performance, higher asset yields as we shifted the portfolio up in coupon and stable funding costs, net of our interest rate hedges.

Although dollar roll performance has moderated following the end of the second quarter, our net spread and dollar roll income should continue to be well protected against the effects of higher short-term interest rates as a result of our significant hedge portfolio.

Financial markets experienced broad-based weakness in the third quarter of 2022.

Macroeconomic and monetary policy uncertainty both domestically and abroad intensified, leading to a sharp decline in investor sentiment and a significant repricing in the fixed income markets.

For the third quarter, the unlevered Bloomberg Aggregate Bond Index declined -4.75%, representing a year-to-date decline of -14.6%.

As the most liquid spread product within the fixed income spectrum, Agency RMBS often face greater selling pressure than other asset classes further down the liquidity and credit spectrum in the early stages of market downturns as investors seek to convert their holdings to cash.

This dynamic caused Agency RMBS to significantly underperform interest rate hedges and other fixed income products in the third quarter and was the primary driver of AGNC’s economic loss on tangible net book value per common share of -17.4 % for the quarter (or -35.5% year-to-date) comprised of dividends declared and the decline in tangible net book value per common share.

As a result of these challenging market conditions, we continued to prioritize risk management and a strong liquidity position in the third quarter.

We mitigated our interest rate exposure during the quarter with a hedge portfolio totaling 118% of the outstanding balance of our Agency repurchase agreements, net TBA position and other debt as of September 30, 2022.

Further, we operated with a reduced “at-risk” leverage position, as compared to historical operating levels, averaging 8.1x tangible stockholders’ equity for the third quarter.

As of September 30, 2022, our unencumbered assets totaled $3.7 billion, or 56% of tangible equity, consisting of $3.6 billion of unencumbered cash and Agency RMBS and $0.1 billion of unencumbered credit assets.

Additionally, during the third quarter, we opportunistically issued approximately $290 million of common equity through our at-the-market offering program and $150 million of fixed-rate reset preferred equity.

AGNC generated strong net spread and dollar roll income during the first three quarters of the year.

Excluding “catch-up” amortization, net spread and dollar roll income increased to $0.84 and $2.38 per common share for the three and nine months ended September 30, 2022, respectively, from $0.75 and $2.27 per common share for the comparable prior year period, respectively, as higher asset yields and our large pay-fixed/receive-variable interest rate swap portfolio more than offset rising repo funding costs and moderating TBA dollar roll income.

Looking ahead, the longer-term outlook for Agency RMBS has improved substantially.

Although spreads could widen further and volatility may persist over the near-term, positive developments in the supply and demand outlook for Agency RMBS suggest that this period of weakness in the Agency RMBS market may be nearing its end.

Although the Federal Reserve has begun to reduce its portfolio organically, this runoff is expected to occur at a slower pace than previously anticipated as a result of higher mortgage rates and reduced prepayments.

Lower net supply expectations combined with the stock effect of the Federal Reserve holding a significant portion of the outstanding Agency RMBS market should provide a supportive backdrop for Agency RMBS.

At current valuation levels, Agency RMBS appear extremely attractive on an absolute and relative basis.

As volatility stabilizes, we believe AGNC is well-positioned to increase leverage to take advantage of this stronger risk-adjusted return environment.

Although Agency RMBS spreads relative to benchmark interest rates could potentially widen further, the historic move in these spreads that has already occurred, coupled with positive developments in the supply and demand outlook for Agency RMBS, suggest that this recent period of weakness in the Agency RMBS market may be nearing its end.

Importantly, although the Federal Reserve has begun to reduce its portfolio through prepayments, the pace of this runoff is expected to be materially slower than previously anticipated as a result of significantly higher mortgage rates.

At current valuation levels, we believe that Agency RMBS are extremely attractive on both an absolute and relative basis and that AGNC is well-positioned to take advantage of this historically favorable risk-adjusted return environment as overall financial market volatility and uncertainty subside.

For information regarding non-GAAP financial measures, including reconciliations to the most comparable GAAP measure please refer to Results of Operations included in this MD&A below.

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Interest Rate/Security Price 1

June 30, 2021 Sept.

30, 2021 Dec.

31, 2021 Mar.

31, 2022 June 30, 2022 June 30, 2022

31, 2022 June 30, 2022 Sept.

30, 2022 Sept.

June 30, 2022

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The following table summarizes mortgage and credit spreads as of each date presented below:

Mortgage Rate/Credit Spread June 30, 2021 Sept.

Mortgage Rate/Credit Spread Sept.

30, 2021 Dec.

31, 2021 Mar.

31, 2022 June 30, 2022 June 30, 2022

31, 2022 June 30, 2022 Sept.

30, 2022 Sept.

June 30, 2022

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30-Year Current Coupon Yield and 30-Year Mortgage Rate are sourced from Bloomberg.

CRT and CMBS spreads are averages of JP Morgan, Bank of America and Wells Fargo.

CRT spreads are discount margins.

CMBS spreads are spreads to the swap curve.

CDX spreads are sourced from JP Morgan.

CRT and CDX spreads sourced from JP Morgan.

CMBS spreads are the average of spreads sourced from JP Morgan and Wells Fargo.

FINANCIAL CONDITION

As of June 30, 2022 and December 31, 2021, our investment portfolio totaled $61.3 billion and $82.0 billion, respectively, consisting of:

As of September 30, 2022 and December 31, 2021, our investment portfolio totaled $61.5 billion and $82.0 billion, respectively, consisting of:

$43.6 billion and $54.4 billion investment securities, at fair value, respectively;

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and, as of December 31, 2021, $0.4 billion forward settling non-Agency securities, at fair value.

The following table is a summary of our investment portfolio as of June 30, 2022 and December 31, 2021 (dollars in millions):

June 30, 2022 December 31, 2021

The following table is a summary of our investment portfolio as of September 30, 2022 and December 31, 2021 (dollars in millions):

September 30, 2022 December 31, 2021

Investment Portfolio (Includes TBAs) Amortized Cost Fair Value Average Coupon % Amortized Cost Fair Value Average Coupon %

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For further details of our TBA securities refer to Note 5 of our Consolidated Financial Statements in this Form 10-Q.

Includes $0.4 billion of forward settling non-Agency securities as of December 31, 2021.

September 30, 2022 non-Agency RMBS balance includes mortgage credit investment fund limited partnership interest totaling approximately $27 million reported in non-Agency securities on the accompanying consolidated balance sheets.

Average coupon excludes limited partnership interest.

December 31, 2021 balance includes $0.4 billion of forward settling non-Agency securities reported in derivative assets/(liabilities) on the accompanying consolidated balance sheets.

TBA and forward settling securities are recorded as derivative instruments in our accompanying consolidated financial statements, and our TBA dollar roll transactions represent a form of off-balance sheet financing.

As of June 30, 2022 and December 31, 2021, our TBA position and forward settling securities had a net carrying value of $(108) million and $(44) million, respectively, reported in derivative assets/(liabilities) on our accompanying consolidated balance sheets.

As of September 30, 2022 and December 31, 2021, our TBA position and forward settling securities had a net carrying value of $(1.2) billion and $(44) million, respectively, reported in derivative assets/(liabilities) on our accompanying consolidated balance sheets.

The net carrying value represents the difference between the fair value of the underlying security in the TBA contract or forward purchase agreement and the price to be paid or received for the underlying security.

As of June 30, 2022 and December 31, 2021, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 2.85% and 2.43%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBA securities, as of June 30, 2022 and December 31, 2021 (dollars in millions):

June 30, 2022

As of September 30, 2022 and December 31, 2021, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 3.14% and 2.43%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBA securities, as of September 30, 2022 and December 31, 2021 (dollars in millions):

September 30, 2022

Includes Net TBA Position Excludes Net TBA Position

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≥ 4.5% 3 3 3 97% 102.8% 5.03% 2.71% 142 16%

3.5% 651 662 651 84% 102.1% 4.02% 2.81% 51 14%

4.0% 385 396 392 92% 103.1% 4.60% 2.92% 55 15%

≥ 4.5% 4 4 4 97% 102.7% 5.01% 2.68% 139 19%

Total ≤ 15-year 1,757 1,808 1,661 98% 102.8% 3.80% 2.48% 52 11%

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≥ 4.5% 92 96 90 99% 105.2% 5.00% 3.18% 71 12%

3.5% 150 153 150 81% 101.9% 4.05% 2.96% 107 11%

≥ 4.0% 182 190 187 96% 104.5% 4.74% 3.11% 67 12%

Total 20-year:

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≥ 4.5% 24,348 24,841 23,444 32% 103.6% 5.32% 4.02% 23 7%

3.5% 10,512 10,876 10,270 76% 102.9% 4.06% 3.00% 60 7%

4.0% 11,663 12,252 11,660 68% 105.7% 4.51% 3.08% 62 8%

≥ 4.5% 17,271 17,606 17,479 26% 106.8% 5.08% 3.41% 50 9%

Total 30-year 60,996 62,589 56,354 47% 103.3% 4.23% 3.08% 40 7%

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Specified pools include pools backed by lower balance loans with original loan balances of up to $200K, HARP pools (defined as pools that were issued between May 2009 and December 2018 and backed by 100% refinance loans with original LTVs ≥ 80%), and pools backed by loans 100% originated in New York and Puerto Rico.

As of June 30, 2022, lower balance specified pools had a weighted average original loan balance of $123,000 and $129,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 128% and 138% for 15-year and 30-year securities, respectively.

As of September 30, 2022, lower balance specified pools had a weighted average original loan balance of $123,000 and $136,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 128% and 138% for 15-year and 30-year securities, respectively.

WAC represents the weighted average coupon of the underlying collateral.

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of June 30, 2022.

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of September 30, 2022.

December 31, 2021

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≥ 4.5% 5 5 5 97% 102.8% 5.01% 2.67% 133 21%

3.0% 806 818 848 99% 101.5% 3.55% 2.46% 55 15%

3.5% 869 887 924 100% 102.0% 4.03% 2.73% 52 18%

≥ 4.0% 462 475 494 92% 102.9% 4.61% 2.88% 50 19%

Total ≤ 15-year 4,547 4,626 4,711 55% 102.5% 3.82% 2.44% 49 16%

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≥ 4.5% 110 116 121 100% 104.7% 5.00% 3.13% 63 16%

3.0% 35 36 37 97% 103.4% 3.78% 2.16% 29 14%

3.5% 169 172 181 81% 101.8% 4.05% 2.95% 101 13%

≥ 4.0% 209 218 229 96% 104.1% 4.74% 3.08% 61 15%

Total 20-year:

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≥ 4.5% 4,606 4,881 5,084 97% 106.0% 5.02% 3.06% 53 16%

3.5% 8,531 8,917 9,200 86% 104.5% 4.05% 2.59% 83 12%

4.0% 8,696 9,146 9,495 92% 105.2% 4.51% 2.81% 65 15%

≥ 4.5% 4,606 4,881 5,084 97% 106.0% 5.02% 3.06% 53 16%

Total 30-year 70,059 72,156 72,776 40% 103.5% 3.71% 2.36% 38 11%

70,059 72,156 72,776 40% 103.5% 3.71% 2.36% 38 11%

Total fixed rate $ 76,490 $ 78,730 $ 79,429 41% 103.5% 3.70% 2.34% 38 11%

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Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of December 31, 2021.

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of June 30, 2022 and December 31, 2021, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-Q.

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of September 30, 2022 and December 31, 2021, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-Q.

RESULTS OF OPERATIONS

Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including "economic interest income," "economic interest expense," "net spread and dollar roll income," "net spread and dollar roll income, excluding 'catch-up' premium amortization," "estimated taxable income" and the related per common share measures and certain financial metrics derived from such non-GAAP information, such as "cost of funds" and "net interest spread."

"Economic interest income" is measured as interest income (GAAP measure), adjusted (i) to exclude "catch-up" premium amortization associated with changes in CPR estimates and (ii) to include TBA dollar roll implied interest income.

In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including "economic interest income," "economic interest expense," "net spread and dollar roll income" and "net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders," "estimated taxable income (loss)" and the related per common share measures and certain financial metrics derived from such non-GAAP information.

"Economic interest income" is measured as interest income (GAAP measure), adjusted to (i) exclude retrospective "catch-up" adjustments to premium amortization cost associated with changes in projected CPR estimates and (ii) include TBA dollar roll implied interest income.

"Economic interest expense" is measured as interest expense (GAAP measure) adjusted to include TBA dollar roll implied interest expense/benefit and interest rate swap periodic cost/income.

"Net spread and dollar roll income, excluding "catch-up" premium amortization" includes (i) the components of economic interest income and economic interest expense and other interest and dividend income (referred to as "adjusted net interest and dollar roll income"), less (ii) total operating expenses (GAAP measure).

"Net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" is measured as comprehensive income (loss) available (attributable) to common stockholders (GAAP measure) adjusted to:

(i) exclude gains/losses on investment securities recognized through net income or other comprehensive income and gains/losses on derivative instruments and other securities (GAAP measures) and (ii) include interest rate swap periodic income/cost and TBA dollar roll income.

As defined "Net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" includes (i) the components of "economic interest income" and "economic interest expense" less (ii) total operating expenses and dividends on preferred stock (GAAP measures).

By providing such measures, in addition to the related GAAP measures, we believe we give greater transparency into the information used by our management in its financial and operational decision-making.

We also believe it is important for users of our financial information to consider information related to our current financial performance without the effects of certain measures and one-time events that are not necessarily indicative of our current investment portfolio performance and operations.

Specifically, in the case of "adjusted net interest and dollar roll income," we believe the inclusion of TBA dollar roll income is meaningful as TBAs, which are accounted for under GAAP as derivative instruments with gains and losses recognized in other gain (loss) in our consolidated statement of comprehensive income, are economically equivalent to holding and financing generic Agency RMBS using short-term repurchase agreements.

Similarly, we believe that the inclusion of periodic interest rate swap settlements in "economic interest expense" is meaningful as interest rate swaps are the primary instrument we use to economically hedge against fluctuations in our borrowing costs and it is more indicative of our total cost of funds than interest expense alone.

In the case of "economic interest income" and "net spread and dollar roll income, excluding 'catch-up' premium amortization," we believe the exclusion of "catch-up" adjustments to premium amortization cost or benefit is meaningful as it excludes the cumulative effect from prior reporting periods due to current changes in future prepayment expectations and, therefore, exclusion of such cost or benefit is more indicative of the current earnings potential of our investment portfolio.

In the case of estimated taxable income, we believe it is meaningful information because it directly relates to the amount of dividends that we are required to distribute to maintain our REIT qualification status.

Specifically, in the case "net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" and components of such measure, "economic interest income" and "economic interest expense," we believe the inclusion of TBA dollar roll income is meaningful as TBAs, which are accounted for under GAAP as derivative instruments with gains and losses recognized in other gain (loss) in our consolidated statement of comprehensive income, are economically equivalent to holding and financing generic Agency RMBS using short-term repurchase agreements.

Similarly, we believe that the inclusion of periodic interest rate swap settlements is meaningful as interest rate swaps are the primary instrument we use to economically hedge against fluctuations in our borrowing costs and it is more indicative of our total cost of funds than interest expense alone.

Additionally, we believe the exclusion of "catch-up" premium amortization adjustments is meaningful as it excludes the cumulative effect from prior reporting periods due to current changes in future prepayment expectations and, therefore, exclusion of such adjustments is more indicative of the current earnings potential of our investment portfolio.

In the case of "estimated taxable income (loss)", we believe it is meaningful information because it directly relates to the amount of dividends that we are required to distribute to maintain our REIT qualification status.

However, because such measures are incomplete measures of our financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, results computed in accordance with GAAP.

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The following selected financial data is derived from our interim consolidated financial statements and the notes thereto.

The tables below present our condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 and condensed consolidated statements of comprehensive income and key statistics for the three and six months ended June 30, 2022 and 2021 (in millions, except per share amounts):

The tables below present our condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 and condensed consolidated statements of comprehensive income and key statistics for the three and nine months ended September 30, 2022 and 2021 (in millions, except per share amounts):

September 30,

Balance Sheet Data 2022

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Statement of Comprehensive Income Data (Unaudited)

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Other Data (Unaudited) * 2022 2021 2022 2021

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Economic Interest Income and Asset Yields

The following table summarizes our economic interest income (a non-GAAP measure) for the three and six months ended June 30, 2022 and 2021, which includes the combination of interest income (a GAAP measure) on our holdings reported as investment securities on our consolidated balance sheets, adjusted to exclude estimated "catch-up" premium amortization adjustments for the cumulative effect from prior reporting periods due to changes in our CPR forecast, and implied interest income on our TBA securities (dollars in millions):

Three Months Ended June 30,

Six Months Ended June 30,

The following table summarizes our economic interest income (a non-GAAP measure) for the three and nine months ended September 30, 2022 and 2021, which includes the combination of interest income (a GAAP measure) on our holdings reported as investment securities on our consolidated balance sheets, adjusted to exclude estimated "catch-up" premium amortization adjustments for the cumulative effect from prior reporting periods due to changes in our CPR forecast, and implied interest income on our TBA securities (dollars in millions):

Three Months Ended September 30,

Nine Months Ended September 30,

2022 2021 2022 2021

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The principal elements impacting our economic interest income are the size of our average investment portfolio and the yield on our securities.

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three and six months ended June 30, 2022 compared to the prior year period (in millions):

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three and nine months ended September 30, 2022 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements Impacting Economic Interest Income

Periods ended June 30, 2022 vs.

June 30, 2021

Periods ended September 30, 2022 vs.

September 30, 2021

Due to Change in Average

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Due to Change in Average

Six months ended:

Nine months ended:

Total Increase /

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 160 $ (211) $ 371

Our average investment portfolio, inclusive of TBAs (at cost), decreased 17% and 16% for the three and six months ended June 30, 2022, respectively, compared to the prior year period, due to a decline in stockholders' equity.

Our average investment portfolio, inclusive of TBAs (at cost), decreased 15% and 16% for the three and nine months ended September 30, 2022, respectively, compared to the prior year period, due to a decline in stockholders' equity.

The average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization, increased 115 and 69 basis points, respectively, due to changes in asset composition and slower CPR projections.

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Amount Ending

September 30, 2022 $ 40,530 $ 41,834 $ 39,169 $ 20,331 $ 19,116 8.1:1 8.7:1

June 30, 2022 $ 42,997 $ 44,243 $ 41,406 $ 19,653 $ 16,001 7.8:1 7.4:1

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Economic Interest Expense and Aggregate Cost of Funds

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three and six months ended June 30, 2022 and 2021 (dollars in millions), which includes the combination of interest expense on Agency repurchase agreements and other debt (GAAP measure), implied financing cost (benefit) of our TBA securities and interest rate swap periodic cost (benefit):

Three Months Ended June 30,

Six Months Ended June 30,

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three and nine months ended September 30, 2022 and 2021 (dollars in millions), which includes the combination of interest expense on Agency repurchase agreements and other debt (GAAP measure), implied financing cost (benefit) of our TBA securities and interest rate swap periodic cost (benefit):

Three Months Ended September 30,

Nine Months Ended September 30,

2022 2021 2022 2021

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The principal elements impacting our economic interest expense are (i) the size of our average mortgage borrowings and interest rate swap portfolio outstanding during the period, (ii) the average interest rate on our mortgage borrowings and (iii) the average net interest rate paid/received on our interest rate swaps.

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three and six months ended June 30, 2022 compared to the prior year period (in millions):

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three and nine months ended September 30, 2022 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements of Economic Interest Expense

Periods ended June 30, 2022 vs.

June 30, 2021

Periods ended September 30, 2022 vs.

September 30, 2021

Due to Change in Average

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Due to Change in Average

Six months ended:

Nine months ended:

Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate

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Total change in economic interest benefit/expense $ 114 $ 21 $ 93

Our average mortgage borrowings, inclusive of TBAs, decreased 22% and 21% for the three and six months ended June 30, 2022, respectively, compared to the prior year period, due to a decline in stockholders' equity and smaller asset base.

The average interest rate on our mortgage borrowings for the three and six months ended June 30, 2022 increased 52 and 27 basis points, respectively, due to higher short-term rates.

The decrease in our interest rate swap periodic cost for the three and six months ended June 30, 2022 was primarily a function of higher receive rates.

The following is a summary of our average interest rate swaps outstanding and the related average swap pay and receive rates for the three and six months ended June 30, 2022 and 2021 (dollars in millions).

Our average mortgage borrowings, inclusive of TBAs, decreased 20% for the three and nine months ended September 30, 2022 compared to the prior year period due to a decline in stockholders' equity and smaller asset base.

The average interest rate on our mortgage borrowings for the three and nine months ended September 30, 2022 increased 196 and 79 basis points, respectively, due to higher short-term rates.

The decrease in our interest rate swap periodic cost for the three and nine months ended September 30, 2022 was primarily a function of higher receive rates.

The following is a summary of our average interest rate swaps outstanding and the related average swap pay and receive rates for the three and nine months ended September 30, 2022 and 2021 (dollars in millions).

Amounts exclude forward starting swaps not yet in effect.

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2022 2021 2022 2021

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(1.70) % 0.10 % (0.64) % 0.12 %

For the three and six months ended June 30, 2022, we had an average forward starting swap balance of $34 million and $46 million, respectively, and for the three and six months ended June 30, 2021, an average forward starting swap balance of zero and $141 million, respectively.

For the three and nine months ended September 30, 2022, we had an average forward starting swap balance of zero and $31 million, respectively, and for the three and nine months ended September 30, 2021, an average forward starting swap balance of $9 million and $97 million, respectively.

Forward starting interest rate swaps do not impact our economic interest expense and aggregate cost of funds until they commence accruing net interest settlements on their forward start dates.

Net Interest Spread

The following table presents a summary of our net interest spread (including the impact of TBA dollar roll income, interest rate swaps and excluding "catch-up" premium amortization) for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30,

Six Months Ended

Three Months Ended September 30,

Nine Months Ended

September 30,

Investment and TBA Securities - Net Interest Spread 2022 2021 2022 2021

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Net Spread and Dollar Roll Income

The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three and six months ended June 30, 2022 and 2021 (dollars in millions):

Three Months Ended June 30,

Six Months Ended

The following table presents a reconciliation of net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) from comprehensive income (loss) available (attributable) to common stockholders (the most comparable GAAP financial measure) for the three and nine months ended September 30, 2022 and 2021 (dollars in millions):

Three Months Ended September 30,

Nine Months Ended

September 30,

2022 2021 2022 2021

Net interest income (GAAP measure) $ 315 $ 232 $ 763 $ 760

Comprehensive income (loss) available (attributable) to common stockholders

$ (1,064) $ 193 $ (2,935) $ 393

Adjustments to exclude realized and unrealized (gains) losses reported through net income:

Realized (gain) loss on sale of investment securities, net

560 5 1,848 (7)

Unrealized loss on investment securities measured at fair value through net income, net

1,738 141 5,257 1,124

Gain on derivative instruments and other securities, net

(1,474) (101) (4,474) (922)

Adjustment to exclude unrealized (gain) loss reported through other comprehensive income

Unrealized (gain) loss on available-for-sale securities measure at fair value through other comprehensive income, net

372 (6) 1,108 308

Other adjustments

TBA dollar roll income, net 1

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211 (13) 242 (44)

Adjusted net interest and dollar roll income 546 375 1,128 1,045

Operating expense (20) (22) (41) (46)

Net spread and dollar roll income 526 353 1,087 999

Dividend on preferred stock 25 25 50 50

Net spread and dollar roll income available to common stockholders (non-GAAP measure) 462 394 1,499 1,343

Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast 2

(18) 2 (243) (140)

Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) $ 444 $ 396 $ 1,256 $ 1,203

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Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

Reported in interest income in our consolidated statements of comprehensive income.

Gain (Loss) on Investment Securities, Net

The following table is a summary of our net gain (loss) on investment securities for the three and six months ended June 30, 2022 and 2021 (in millions):

Three Months Ended June 30,

Six Months Ended

The following table is a summary of our net gain (loss) on investment securities for the three and nine months ended September 30, 2022 and 2021 (in millions):

Three Months Ended September 30,

Nine Months Ended

September 30,

Gain (Loss) on Investment Securities, Net 1

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Gain (Loss) on Derivative Instruments and Other Securities, Net

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three and six months ended June 30, 2022 and 2021 (in millions):

Three Months Ended June 30,

Six Months Ended

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three and nine months ended September 30, 2022 and 2021 (in millions):

Three Months Ended September 30,

Nine Months Ended

September 30,

2022 2021 2022 2021

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Estimated Taxable Income (Loss)

For the three months ended June 30, 2022 and 2021, we had estimated taxable income (loss) attributed to common stockholders of $22 million and $(158) million, respectively, or $0.04 and $(0.30) per diluted common share, respectively.

For the six months ended June 30, 2022 and 2021, we had estimated taxable loss attributable to common stockholders of $(21) million and $(322) million, respectively, or $(0.04) and $(0.61) per diluted common share, respectively.

For the three months ended September 30, 2022 and 2021, we had estimated taxable income (loss) attributed to common stockholders of $174 million and $45 million, respectively, or $0.33 and $0.09 per diluted common share, respectively.

For the nine months ended September 30, 2022 and 2021, we had estimated taxable income (loss) attributed to common stockholders of $153 million and $(277) million, respectively, or $0.29 and $(0.52) per diluted common share, respectively.

Income determined under GAAP differs from income determined under U.S.

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The following is a

reconciliation of our GAAP net income to our estimated taxable income (loss) for the three and six months ended June 30, 2022 and 2021 (dollars in millions, except per share amounts):

Three Months Ended June 30,

Six Months Ended

reconciliation of our GAAP net income to our estimated taxable income (loss) for the three and nine months ended September 30, 2022 and 2021 (dollars in millions, except per share amounts):

Three Months Ended September 30,

Nine Months Ended

September 30,

2022 2021 2022 2021

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Our leverage will vary depending on market conditions and our assessment of relative risks and returns, but we generally expect our leverage to be between six and twelve times the amount of our tangible stockholders' equity, measured as the sum of our total mortgage borrowings and net payable / (receivable) for unsettled investment securities, divided by the sum of our total stockholders' equity adjusted to exclude goodwill.

Our tangible net book value "at risk" leverage ratio was 7.4x and 7.7x as of June 30, 2022 and December 31, 2021, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of June 30, 2022 and December 31, 2021 (dollars in millions).

Our tangible net book value "at risk" leverage ratio was 8.7x and 7.7x as of September 30, 2022 and December 31, 2021, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of September 30, 2022 and December 31, 2021 (dollars in millions).

For additional details of our mortgage borrowings refer to Notes 2, 4 and 5 to our Consolidated Financial Statements in this Form 10-Q.

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Mortgage Borrowings Amount % Amount %

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________________________________

As of June 30, 2022 and December 31, 2021, 41% and 42%, respectively, of our repurchase agreements were funded through the Fixed Income Clearing Corporation's GCF Repo service.

As of September 30, 2022 and December 31, 2021, 48% and 42%, respectively, of our repurchase agreements were funded through the Fixed Income Clearing Corporation's GCF Repo service.

Amounts exclude U.S.

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Our agreements generally provide that in the event of a margin call, collateral must be posted on the same business day, subject to notice requirements.

As of June 30, 2022, we had met all our margin requirements.

As of September 30, 2022, we had met all our margin requirements.

The value of Agency RMBS collateral is impacted by market factors and is reduced by monthly principal pay-downs on the underlying mortgage pools.

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We attempt to manage the liquidity risk associated with principal pay-downs by monitoring conditions impacting prepayment rates and through asset selection.

As of June 30, 2022, 28% our portfolio consisted of TBA securities, which are not subject to monthly principal pay-downs.

As of September 30, 2022, approximately 29% our investment portfolio consisted of TBA securities, which are not subject to monthly principal pay-downs.

The remainder of our portfolio, primarily consisted of Agency RMBS, which had an average one-year CPR forecast of 5%.

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Haircut levels and minimum margin requirements imposed by our counterparties reduce the amount of our unencumbered assets and limit the amount we can borrow against our investment securities.

During the six months ended June 30, 2022, haircuts remained stable.

As of June 30, 2022, the weighted average haircut on our repurchase agreements was approximately 4.0% of the value of our collateral, compared to 3.8% as of December 31, 2021.

During the nine months ended September 30, 2022, haircuts on our repo funding arrangements remained stable.

As of September 30, 2022, the weighted average haircut on our repurchase agreements was approximately 3.9% of the value of our collateral, compared to 3.8% as of December 31, 2021.

To mitigate the risk of margins calls, we seek to maintain excess liquidity by holding unencumbered liquid assets that can be used to satisfy collateral requirements, collateralize additional borrowings or sold for cash.

As of September 30, 2022, our unencumbered assets totaled approximately $3.7 billion, or 56% of tangible equity, consisting of $3.6 billion of unencumbered cash and Agency RMBS and $0.1 billion of unencumbered credit assets.

This compares to $6.5 billion of unencumbered assets, or 67% of tangible equity, as of December 31, 2021, consisting of $5.8 billion of unencumbered cash and Agency RMBS and $0.7 billion of unencumbered credit assets.

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We also diversify our funding across multiple counterparties and by region.

As of June 30, 2022, our maximum amount at risk (or the excess/shortfall of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables) with any of our repurchase agreement counterparties, excluding the FICC, was less than 3% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 6% of our tangible stockholders' equity.

As of June 30, 2022, approximately 10% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of June 30, 2022, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.

As of September 30, 2022, our maximum amount at risk (or the excess/shortfall of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables) with any of our repurchase agreement counterparties, excluding the FICC, was less than 3% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 6% of our tangible stockholders' equity.

As of September 30, 2022, approximately 7% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of September 30, 2022, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.

Agency RMBS securities are among the most liquid fixed income securities, and the TBA market is the second most liquid market (after the U.S.

Treasury market).

The vitality of these markets enables us to sell assets under most market conditions to generate liquidity through direct sales or delivery into TBA contracts, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA").

Under certain market conditions, however, we may be unable to realize the full "pay-up" value of our specified pool securities, which is the incremental value in excess of equivalent coupon generic Agency RMBS.

Although market conditions fluctuate, the vitality of these markets enables us to sell assets under most conditions to generate liquidity through direct sales or delivery into TBA contracts, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA").

Under certain market conditions, however, we may be unable to realize the full carrying value of our securities.

We attempt to manage this risk by maintaining at least a minimum level of securities that trade at or near TBA values that in our estimation enhances our portfolio liquidity across a wide range of market conditions.

Please refer to Trends and Recent Market Impacts of this Management Discussion and Analysis for further information regarding Agency RMBS and TBA market conditions during the third quarter.

Capital Markets

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The availability of equity capital is dependent on market conditions and investor demand for our common and preferred stock.

We will typically not issue common stock when the price of our common stock trades below our tangible net book value or issue preferred equity when its cost exceeds acceptable hurdle rates of return on our equity.

We will typically not issue common stock at times when we believe the capital raised will not be accretive to our tangible net book value or earnings, and we will typically not issue preferred equity when its cost exceeds acceptable hurdle rates of return on our equity.

There can be no assurance that we will be able to raise additional equity capital at any particular time or on any particular terms.

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OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2022, we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Additionally, as of June 30, 2022, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

As of September 30, 2022, we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Additionally, as of September 30, 2022, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

FORWARD-LOOKING STATEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis