AGNC Investment Corp. 10-Q

Item 2. 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 September 30, 2022. Our MD&A is presented in the following sections: • Executive Overview • Financial Condition • Results of Operations • Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Forward-Looking Statements EXECUTIVE OVERVIEW We are a leading provider of private capital to the U.S. housing market, enhancing liquidity in the residential real estate mortgage markets and, in turn, facilitating home ownership in the U.S. We invest primarily in Agency residential mortgage-backed securities ("Agency RMBS") on a leveraged basis. These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise, such as Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac," and together with Fannie Mae, the "GSEs"), or by a U.S. Government agency, such as Government National Mortgage Association ("Ginnie Mae"). We may also invest in other assets related to the housing, mortgage or real estate markets that are not guaranteed by a GSE or U.S. Government agency. 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 fund our investments primarily through collateralized borrowings structured as repurchase agreements. We operate in a manner to qualify to be taxed as a REIT under the Internal Revenue Code. The size and composition of our investment portfolio depends on the investment strategies we implement, availability of attractively priced investments, suitable financing to appropriately leverage our investment portfolio and overall market conditions. Market conditions are influenced by a variety of factors, including interest rates, prepayment expectations, liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, regulations and relative returns on other assets. Trends and Recent Market Impacts 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. 26 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 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. For further discussion regarding the sensitivity of our tangible net book value to changes in interest rates and mortgage spreads, please refer to Item 3. Quantitative and Qualitative Disclosures about Market Risk in this form 10-Q. Market Information The following table summarizes benchmark interest rates and prices of generic fixed rate Agency RMBS as of each date presented below: Interest Rate/Security Price 1 Sept. 30, 2021 Dec. 31, 2021 Mar. 31, 2022 June 30, 2022 Sept. 30, 2022 Sept. 30, 2022 vs June 30, 2022 Sept. 30, 2022 vs Dec. 31, 2021 Target Federal Funds Rate: Target Federal Funds Rate - Upper Band 0.25% 0.25% 0.50% 1.75% 3.25% +150 bps +300 bps SOFR: SOFR Rate 0.05% 0.05% 0.29% 1.50% 2.98% +148 bps +293 bps SOFR Interest Rate Swap Rate: 2-Year Swap 0.24% 0.74% 2.28% 2.99% 4.25% +126 bps +351 bps 5-Year Swap 0.83% 1.12% 2.25% 2.79% 3.85% +106 bps +273 bps 10-Year Swap 1.26% 1.32% 2.13% 2.81% 3.59% +78 bps +227 bps 30-Year Swap 1.52% 1.46% 1.97% 2.66% 3.07% +41 bps +161 bps U.S. Treasury Security Rate: 2-Year U.S. Treasury 0.28% 0.73% 2.34% 2.96% 4.28% +132 bps +355 bps 5-Year U.S. Treasury 0.97% 1.26% 2.46% 3.04% 4.09% +105 bps +283 bps 10-Year U.S. Treasury 1.49% 1.51% 2.34% 3.02% 3.83% +81 bps +232 bps 30-Year U.S. Treasury 2.05% 1.90% 2.45% 3.19% 3.78% +59 bps +188 bps 30-Year Fixed Rate Agency Price: 2.0% $100.21 $99.79 $92.84 $86.96 $80.91 -$6.05 -$18.88 2.5% $103.04 $102.12 $95.45 $90.09 $83.94 -$6.15 -$18.18 3.0% $104.61 $103.68 $97.86 $93.27 $86.97 -$6.30 -$16.71 3.5% $105.80 $105.32 $100.21 $96.29 $89.95 -$6.34 -$15.37 4.0% $107.13 $106.44 $102.10 $98.74 $92.73 -$6.01 -$13.71 4.5% $108.13 $107.19 $103.73 $100.51 $95.21 -$5.30 -$11.98 15-Year Fixed Rate Agency Price: 1.5% $100.95 $100.33 $94.81 $91.16 $85.61 -$5.55 -$14.72 2.0% $102.96 $102.45 $97.11 $93.52 $88.06 -$5.46 -$14.39 2.5% $104.16 $103.45 $98.83 $95.70 $90.50 -$5.20 -$12.95 3.0% $105.14 $104.59 $100.70 $97.82 $92.89 -$4.93 -$11.70 3.5% $106.56 $105.52 $101.97 $99.52 $94.49 -$5.03 -$11.03 4.0% $106.06 $105.47 $102.50 $100.95 $96.43 -$4.52 -$9.04 ________________________________ 1. Price information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information is as of 3:00 p.m. (EST) on such date and can vary by source. Prices in the table above were obtained from Barclays. Interest rates were obtained from Bloomberg. 27 The following table summarizes mortgage and credit spreads as of each date presented below: Mortgage Rate/Credit Spread Sept. 30, 2021 Dec. 31, 2021 Mar. 31, 2022 June 30, 2022 Sept. 30, 2022 Sept. 30, 2022 vs June 30, 2022 Sept. 30, 2022 vs Dec. 31, 2021 Mortgage Rate: 1 30-Year Agency Current Coupon Yield to 5-Year U.S. Treasury Spread 100 81 103 134 159 +25 +78 30-Year Agency Current Coupon Yield 1.97% 2.07% 3.49% 4.38% 5.68% +130 bps +361 bps 30-Year Mortgage Rate 3.18% 3.27% 4.90% 5.83% 7.06% +123 bps +379 bps Credit Spread (in bps): 2 CRT M2 166 175 385 544 633 +89 +458 CMBS AAA 71 74 101 131 145 +14 +71 CDX IG 53 49 67 101 108 +7 +59 ________________________________ 1. 30-Year Current Coupon Yield represents yield on new production Agency RMBS. 30-Year Current Coupon Yield and 30-Year Mortgage Rate are sourced from Bloomberg. 2. CRT and CDX spreads sourced from JP Morgan. CMBS spreads are the average of spreads sourced from JP Morgan and Wells Fargo. 28 FINANCIAL CONDITION 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; $17.9 billion and $27.1 billion net TBA securities, at fair value, respectively; 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 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 % Fixed rate Agency RMBS and TBA securities: ≤ 15-year: ≤ 15-year RMBS $ 1,805 $ 1,661 3.25 % 3 % $ 2,570 $ 2,652 3.27 % 3 % 15-year TBA securities, net 1 3 — — % — % 2,056 2,059 1.71 % 3 % Total ≤ 15-year 1,808 1,661 3.25 % 3 % 4,626 4,711 2.57 % 6 % 20-year RMBS 1,746 1,465 2.49 % 2 % 1,948 1,942 2.52 % 2 % 30-year: 30-year RMBS 43,476 38,452 3.59 % 63 % 47,028 47,695 3.04 % 58 % 30-year TBA securities, net 1 19,113 17,902 4.42 % 29 % 25,128 25,081 2.54 % 31 % Total 30-year 62,589 56,354 3.85 % 92 % 72,156 72,776 2.87 % 89 % Total fixed rate Agency RMBS and TBA securities 66,143 59,480 3.80 % 97 % 78,730 79,429 2.84 % 97 % Adjustable rate Agency RMBS 129 127 3.66 % — % 45 47 2.23 % — % CMO Agency RMBS: CMO 144 136 3.16 % — % 182 188 3.12 % — % Interest-only strips 24 18 3.15 % — % 31 37 5.60 % — % Principal-only strips 32 30 — % — % 39 43 — % — % Total CMO Agency RMBS 200 184 2.82 % — % 252 268 4.08 % 1 % Total Agency RMBS and TBA securities 66,472 59,791 3.79 % 97 % 79,027 79,744 2.85 % 98 % Non-Agency RMBS 2 254 222 3.80 % — % 763 767 2.85 % 1 % CMBS 651 621 5.06 % 1 % 505 514 3.60 % 1 % CRT 901 860 6.93 % 1 % 955 974 3.74 % 1 % Total investment portfolio $ 68,278 $ 61,494 3.84 % 100 % $ 81,250 $ 81,999 2.85 % 100 % ________________________________ 1. TBA securities are presented net of long and short positions. For further details of our TBA securities refer to Note 5 of our Consolidated Financial Statements in this Form 10-Q. 2. 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 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 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. 29 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 Fixed Rate Agency RMBS and TBA Securities Par Value Amortized Cost Fair Value Specified Pool % 1 Amortized Cost Basis Weighted Average Projected CPR 3 WAC 2 Yield 3 Age (Months) Fixed rate ≤ 15-year: ≤ 2.5% 319 335 289 100% 105.2% 2.97% 1.30% 33 8% 3.0% - 4.0% 1,435 1,470 1,369 98% 102.2% 3.98% 2.74% 56 11% ≥ 4.5% 3 3 3 97% 102.8% 5.03% 2.71% 142 16% Total ≤ 15-year 1,757 1,808 1,661 98% 102.8% 3.80% 2.48% 52 11% 20-year: ≤ 2.5% 1,338 1,387 1,134 —% 103.6% 2.98% 1.60% 24 5% 3.0% - 4.0% 256 263 241 86% 102.8% 4.14% 2.91% 87 10% ≥ 4.5% 92 96 90 99% 105.2% 5.00% 3.18% 71 12% Total 20-year: 1,686 1,746 1,465 20% 103.6% 3.26% 1.88% 36 6% 30-year: ≤ 2.5% 8,580 8,842 7,112 41% 102.1% 3.01% 1.98% 17 6% 3.0% - 4.0% 28,068 28,906 25,798 62% 103.7% 4.15% 3.01% 57 7% ≥ 4.5% 24,348 24,841 23,444 32% 103.6% 5.32% 4.02% 23 7% Total 30-year 60,996 62,589 56,354 47% 103.3% 4.23% 3.08% 40 7% Total fixed rate $ 64,439 $ 66,143 $ 59,480 48% 103.3% 4.18% 3.01% 40 7% ________________________________ 1. 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 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. 2. WAC represents the weighted average coupon of the underlying collateral. 3. Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of September 30, 2022. December 31, 2021 Includes Net TBA Position Excludes Net TBA Position Fixed Rate Agency RMBS and TBA Securities Par Value Amortized Cost Fair Value Specified Pool % 1 Amortized Cost Basis Weighted Average Projected CPR 3 WAC 2 Yield 3 Age (Months) Fixed rate ≤ 15-year: ≤ 2.5% $ 2,410 $ 2,445 $ 2,444 16% 105.0% 2.97% 1.18% 25 13% 3.0% - 4.0% 2,132 2,176 2,262 98% 102.0% 3.97% 2.66% 53 17% ≥ 4.5% 5 5 5 97% 102.8% 5.01% 2.67% 133 21% Total ≤ 15-year 4,547 4,626 4,711 55% 102.5% 3.82% 2.44% 49 16% 20-year: ≤ 2.5% 1,472 1,522 1,496 —% 103.4% 2.98% 1.44% 15 11% 3.0% - 4.0% 302 310 325 87% 102.5% 4.15% 2.88% 79 14% ≥ 4.5% 110 116 121 100% 104.7% 5.00% 3.13% 63 16% Total 20-year: 1,884 1,948 1,942 21% 103.3% 3.29% 1.77% 28 12% 30-year: ≤ 2.5% 43,195 44,005 43,762 15% 102.1% 3.00% 1.94% 7 7% 3.0% - 4.0% 22,258 23,270 23,930 73% 104.7% 4.24% 2.69% 72 13% ≥ 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% Total fixed rate $ 76,490 $ 78,730 $ 79,429 41% 103.5% 3.70% 2.34% 38 11% 30 ________________________________ 1. See Note 1 of preceding table for specified pool composition. As of December 31, 2021, lower balance specified pools had a weighted average original loan balance of $119,000 and $117,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 127% and 138% for 15-year and 30-year securities, respectively. 2. WAC represents the weighted average coupon of the underlying collateral. 3. 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 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" 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, 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 "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. In addition, because not all companies use identical calculations, our presentation of such non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing our income tax returns, which occurs after the end of our fiscal year. 31 Selected Financial Data 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 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, December 31, Balance Sheet Data 2022 2021 (Unaudited) Investment securities, at fair value $ 43,618 $ 54,421 Total assets $ 58,524 $ 68,149 Repurchase agreements and other debt $ 40,404 $ 47,507 Total liabilities $ 51,302 $ 57,858 Total stockholders' equity $ 7,222 $ 10,291 Net book value per common share 1 $ 10.04 $ 16.76 Tangible net book value per common share 2 $ 9.08 $ 15.75 Three Months Ended September 30, Nine Months Ended September 30, Statement of Comprehensive Income Data (Unaudited) 2022 2021 2022 2021 Interest income $ 373 $ 293 $ 1,243 $ 1,099 Interest expense 196 14 303 60 Net interest income 177 279 940 1,039 Other gain (loss), net (824) (45) (2,631) (195) Operating expenses 19 22 60 68 Net income (loss) (666) 212 (1,751) 776 Dividends on preferred stock 26 25 76 75 Net income (loss) available (attributable) to common stockholders $ (692) $ 187 $ (1,827) $ 701 Net income (loss) $ (666) $ 212 $ (1,751) $ 776 Other comprehensive income (loss), net (372) 6 (1,108) (308) Comprehensive income (loss) (1,038) 218 (2,859) 468 Dividends on preferred stock 26 25 76 75 Comprehensive income (loss) available (attributable) to common stockholders $ (1,064) $ 193 $ (2,935) $ 393 Weighted average number of common shares outstanding - basic 528.7 526.7 526.4 529.0 Weighted average number of common shares outstanding - diluted 528.7 528.6 526.4 530.8 Net income (loss) per common share - basic $ (1.31) $ 0.36 $ (3.47) $ 1.33 Net income (loss) per common share - diluted $ (1.31) $ 0.35 $ (3.47) $ 1.32 Comprehensive income (loss) per common share - basic $ (2.01) $ 0.37 $ (5.58) $ 0.74 Comprehensive income (loss) per common share - diluted $ (2.01) $ 0.37 $ (5.58) $ 0.74 Dividends declared per common share $ 0.36 $ 0.36 $ 1.08 $ 1.08 32 Three Months Ended September 30, Nine Months Ended September 30, Other Data (Unaudited) * 2022 2021 2022 2021 Average investment securities - at par $ 46,863 $ 49,077 $ 49,355 $ 53,655 Average investment securities - at cost $ 48,362 $ 50,866 $ 50,897 $ 55,579 Average net TBA dollar roll position - at cost $ 20,331 $ 30,312 $ 21,184 $ 30,132 Average total assets - at fair value $ 58,701 $ 68,472 $ 63,619 $ 74,952 Average repurchase agreements and other debt outstanding 3 $ 40,530 $ 45,847 $ 43,344 $ 50,909 Average stockholders' equity 4 $ 8,040 $ 10,638 $ 8,748 $ 11,018 Average tangible net book value "at risk" leverage 5 8.1:1 7.5:1 8.1:1 7.7:1 Tangible net book value "at risk" leverage (as of period end) 6 8.7:1 7.5:1 8.7:1 7.5:1 Economic return on tangible common equity - unannualized 7 (17.4) % 2.3 % (35.5) % 4.7 % Expenses % of average total assets - annualized 0.13 % 0.13 % 0.13 % 0.12 % Expenses % of average assets, including average net TBA position - annualized 0.10 % 0.09 % 0.09 % 0.09 % Expenses % of average stockholders' equity - annualized 0.95 % 0.83 % 0.91 % 0.82 % ________________________________ * Except as noted below, average numbers for each period are weighted based on days on our books and records. 1. Net book value per common share is calculated as total stockholders' equity, less preferred stock liquidation preference, divided by number of common shares outstanding as of period end. 2. Tangible net book value per common share excludes goodwill. 3. Amount excludes U.S. Treasury repurchase agreements and TBA contracts. Other debt includes debt of consolidated VIEs. 4. Average stockholders' equity calculated as average month-ended stockholders' equity during the period. 5. Average tangible net book value "at risk" leverage is calculated by dividing the sum of daily weighted average repurchase agreements used to fund our investment securities, other debt, and TBA and forward settling securities (at cost) (collectively "mortgage borrowings") outstanding for the period by the sum of average stockholders' equity adjusted to exclude goodwill for the period. Leverage excludes U.S. Treasury repurchase agreements. 6. Tangible net book value "at risk" leverage as of period end is calculated by dividing the sum of mortgage borrowings outstanding and receivable/payable for unsettled investment securities as of period end by the sum of total stockholders' equity adjusted to exclude goodwill as of period end. Leverage excludes U.S. Treasury repurchase agreements. 7. Economic return on tangible common equity represents the sum of the change in tangible net book value per common share and dividends declared per share of common stock during the period over beginning tangible net book value per common share. Economic Interest Income and Asset Yields 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 Amount Yield Amount Yield Amount Yield Amount Yield Interest income: Cash/coupon interest income $ 409 3.49 % $ 399 3.25 % $ 1,201 3.24 % $ 1,330 3.31 % Net premium amortization benefit (cost) (36) (0.40) % (106) (0.95) % 42 0.02 % (231) (0.67) % Interest income (GAAP measure) 373 3.09 % 293 2.30 % 1,243 3.26 % 1,099 2.64 % Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast (18) (0.15) % 2 0.02 % (243) (0.64) % (140) (0.34) % Interest income, excluding "catch-up" premium amortization 355 2.94 % 295 2.32 % 1,000 2.62 % 959 2.30 % TBA dollar roll income - implied interest income 1,2 213 4.18 % 142 1.88 % 516 3.24 % 397 1.75 % Economic interest income, excluding "catch-up" amortization (non-GAAP measure) 3 $ 568 3.31 % $ 437 2.16 % $ 1,516 2.80 % $ 1,356 2.11 % Weighted average actual portfolio CPR for investment securities held during the period 9.2 % 22.5 % 12.2 % 24.5 % Weighted average projected CPR for the remaining life of investment securities held as of period end 7.0 % 10.7 % 7.0 % 10.7 % 30-year fixed rate mortgage rate as of period end 4 7.06 % 3.18 % 7.06 % 3.18 % 10-year U.S. Treasury rate as of period end 4 3.83 % 1.49 % 3.83 % 1.49 % 33 ________________________________ 1. Reported in gain (loss) on derivatives instruments and other securities, net in the accompanying consolidated statements of operations. 2. Implied interest income from TBA dollar roll transactions is computed as the sum of (i) TBA dollar roll income and (ii) estimated TBA implied funding cost (see Economic Interest Expense and Aggregate Cost of Funds below). TBA dollar roll income represents the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and is the economic equivalent to interest income on the underlying Agency securities, less an implied funding cost, over the forward settlement period. Amount is net of TBAs used for hedging purposes. Amount excludes TBA mark-to-market adjustments. 3. The combined asset yield is calculated on a weighted average basis based on our average investment and TBA balances outstanding during the period and their respective yields. 4. Source: Bloomberg 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 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 September 30, 2022 vs. September 30, 2021 Due to Change in Average Three months ended: Total Increase / (Decrease) Portfolio Size Asset Yield Interest Income (GAAP measure) $ 80 $ (14) $ 94 Estimated "catch-up" premium amortization due to change in CPR forecast (20) — (20) Interest income, excluding "catch-up" premium amortization 60 (14) 74 TBA dollar roll income - implied interest income 71 (47) 118 Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 131 $ (61) $ 192 Due to Change in Average Nine months ended: Total Increase / (Decrease) Portfolio Size Asset Yield Interest Income (GAAP measure) $ 144 $ (93) $ 237 Estimated "catch-up" premium amortization due to change in CPR forecast (103) — (103) Interest income, excluding "catch-up" premium amortization 41 (93) 134 TBA dollar roll income - implied interest income 119 (118) 237 Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 160 $ (211) $ 371 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. Leverage Our primary measure of leverage is our tangible net book value "at risk" leverage ratio, which is measured as the sum of our repurchase agreements and other debt used to fund our investment securities and net TBA and forward settling securities position (at cost) (together referred to as "mortgage borrowings") and our net receivable/payable for unsettled investment securities, divided by our total stockholders' equity adjusted to exclude goodwill. We include our net TBA position in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a TBA contract for the forward sale of Agency securities has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. (Refer to Liquidity and Capital Resources for further discussion of TBA securities and dollar roll transactions). Repurchase agreements used to fund short-term investments in U.S. Treasury securities ("U.S. Treasury repo") are excluded from our measure of leverage due to the temporary and highly liquid nature of these investments. The following table presents a summary of our leverage ratios for the periods listed (dollars in millions): 34 Repurchase Agreements and Other Debt 1 Net TBA Position Long/(Short) 2 Average Tangible Net Book Value "At Risk" Leverage during the Period 3 Tangible Net Book Value "At Risk" Leverage as of Period End 4 Quarter Ended Average Daily Amount Maximum Daily Amount Ending Amount Average Daily Amount Ending Amount 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 March 31, 2022 $ 46,570 $ 47,940 $ 44,150 $ 23,605 $ 20,152 7.8:1 7.5:1 December 31, 2021 $ 46,999 $ 48,524 $ 47,037 $ 29,014 $ 27,622 7.6:1 7.7:1 September 30, 2021 $ 45,847 $ 49,021 $ 45,723 $ 30,312 $ 28,912 7.5:1 7.5:1 June 30, 2021 $ 52,374 $ 60,186 $ 48,488 $ 28,082 $ 27,611 7.6:1 7.9:1 March 31, 2021 $ 54,602 $ 57,153 $ 55,221 $ 32,022 $ 25,355 8.0:1 7.7:1 ________________________________ 1. Other debt includes debt of consolidated VIEs. Amounts exclude U.S. Treasury repo agreements. 2. Daily average and ending net TBA position outstanding measured at cost. Includes forward settling non-Agency securities. 3. Average tangible net book value "at risk" leverage during the period represents the sum of our daily weighted average repurchase agreements and other debt used to fund acquisitions of investment securities and net TBA and forward settling securities position outstanding, divided by the sum of our average month-ended stockholders' equity, adjusted to exclude goodwill. 4. Tangible net book value "at risk" leverage as of period end represents the sum of our repurchase agreements and other debt used to fund acquisitions of investments securities, net TBA and forward settling securities position (at cost), and net receivable/payable for unsettled investment securities outstanding as of period end, divided by total stockholders' equity, adjusted to exclude goodwill as of period end. 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 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 Economic Interest Expense and Aggregate Cost of Funds 1 Amount Cost of Funds Amount Cost of Funds Amount Cost of Funds Amount Cost of Funds Repurchase agreement and other debt - interest expense (GAAP measure) $ 196 1.89 % $ 14 0.12 % $ 303 0.92 % $ 60 0.16 % TBA dollar roll income - implied interest expense (benefit) 2,3 94 1.80 % (33) (0.42) % 63 0.38 % (94) (0.41) % Economic interest expense - before interest rate swap periodic cost (income), net 4 290 1.86 % (19) (0.10) % 366 0.74 % (34) (0.05) % Interest rate swap periodic cost (income), net 2,5 (211) (1.36) % 13 0.07 % (242) (0.49) % 44 0.07 % Total economic interest expense (non-GAAP measure) $ 79 0.50 % $ (6) (0.03) % $ 124 0.25 % $ 10 0.02 % ________________________________ 1. Amounts exclude interest rate swap termination fees and variation margin settlements paid or received, forward starting swaps and the impact of other supplemental hedges, such as swaptions and U.S. Treasury positions. 2. Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. 3. The implied funding cost (benefit) of TBA dollar roll transactions is determined using the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and market based assumptions regarding the "cheapest-to-deliver" collateral that can be delivered to satisfy the TBA contract, such as the anticipated collateral’s weighted average coupon, weighted average maturity and projected 1-month CPR. The average implied funding cost (benefit) for all TBA transactions is weighted based on our daily average TBA balance outstanding for the period. 4. The combined cost of funds for total mortgage borrowings outstanding, before interest rate swap costs, is calculated on a weighted average basis based on average repo, other debt and TBA balances outstanding during the period and their respective cost of funds. 5. Interest rate swap periodic income/cost is measured as a percent of average mortgage borrowings outstanding for the period. 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 nine months ended September 30, 2022 compared to the prior year period (in millions): 35 Impact of Changes in the Principal Elements of Economic Interest Expense Periods ended September 30, 2022 vs. September 30, 2021 Due to Change in Average Three months ended: Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate Repurchase agreements and other debt interest expense $ 182 $ (2) $ 184 TBA dollar roll income - implied interest benefit/expense 127 11 116 Interest rate swap periodic income/cost (224) — (224) Total change in economic interest benefit/expense $ 85 $ 9 $ 76 Due to Change in Average Nine months ended: Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate Repurchase agreements and other debt interest expense $ 243 $ (9) $ 252 TBA dollar roll income - implied interest benefit/expense 157 28 129 Interest rate swap periodic income/cost (286) 2 (288) Total change in economic interest benefit/expense $ 114 $ 21 $ 93 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 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 Average Agency repo and other debt outstanding $ 40,530 $ 45,847 $ 43,344 $ 50,909 Average net TBA dollar roll position outstanding - at cost $ 20,331 $ 30,312 $ 21,184 $ 30,132 Average mortgage borrowings outstanding $ 60,861 $ 76,159 $ 64,528 $ 81,041 Average notional amount of interest rate swaps outstanding (excluding forward starting swaps) $ 49,147 $ 49,268 $ 50,484 $ 48,108 Ratio of average interest rate swaps to mortgage borrowings outstanding 81 % 65 % 78 % 59 % Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.25 % 0.17 % 0.25 % 0.17 % Average interest rate swap receive-floating rate (1.95) % (0.07) % (0.89) % (0.05) % Average interest rate swap net pay/(receive) rate (1.70) % 0.10 % (0.64) % 0.12 % 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 nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, Investment and TBA Securities - Net Interest Spread 2022 2021 2022 2021 Average asset yield, excluding "catch-up" premium amortization 3.31 % 2.16 % 2.80 % 2.11 % Average aggregate cost of funds (0.50) % 0.03 % (0.25) % (0.02) % Average net interest spread, excluding "catch-up" premium amortization 2.81 % 2.19 % 2.55 % 2.09 % 36 Net Spread and Dollar Roll Income 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 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 1 119 175 453 491 Interest rate swap periodic (cost) income, net 1 211 (13) 242 (44) 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 Weighted average number of common shares outstanding - basic 528.7 526.7 526.4 529.0 Weighted average number of common shares outstanding - diluted 529.8 528.6 527.5 530.8 Net spread and dollar roll income per common share - basic $ 0.87 $ 0.75 $ 2.85 $ 2.54 Net spread and dollar roll income per common share - diluted $ 0.87 $ 0.75 $ 2.84 $ 2.53 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - basic $ 0.84 $ 0.75 $ 2.39 $ 2.27 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - diluted $ 0.84 $ 0.75 $ 2.38 $ 2.27 ________________________________ 1. Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. 2. 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 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 2022 2021 2022 2021 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 2 (1,738) (141) (5,257) (1,124) Unrealized loss on investment securities measured at fair value through other comprehensive income, net (372) 6 (1,108) (308) Total loss on investment securities, net $ (2,670) $ (140) $ (8,213) $ (1,425) ________________________________ 1. Amounts exclude gain (loss) on TBA securities, which are reported in gain (loss) on derivative instruments and other securities, net in our Consolidated Statements of Comprehensive Income. 2. Investment securities acquired after fiscal year 2016 are measured at fair value through net income (see Note 2 of our Consolidated Financial Statements in this Form 10-Q). 37 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 nine months ended September 30, 2022 and 2021 (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 TBA securities, dollar roll income $ 119 $ 175 $ 453 $ 491 TBA securities, mark-to-market loss (1,311) (145) (3,483) (991) Interest rate swaps, periodic cost 211 (13) 242 (44) Interest rate swaps, mark-to-market gain 1,253 70 3,993 825 Credit default swaps - CDX IG - buy protection — — 21 — Payer swaptions 194 28 866 102 U.S. Treasury securities - short position 532 (11) 1,620 463 U.S. Treasury securities - long position (3) (8) (32) (19) U.S. Treasury futures contracts - short position 483 5 818 37 Other (4) (3) (24) 55 Total gain (loss) on derivative instruments and other securities, net $ 1,474 $ 101 $ 4,474 $ 922 For further details regarding our use of derivative instruments and related activity refer to Notes 2 and 5 of our Consolidated Financial Statements in this Form 10-Q. Estimated Taxable Income (Loss) 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. federal income tax rules because of both temporary and permanent differences in income and expense recognition. The primary differences are (i) unrealized gains and losses on investment securities and derivative instruments marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized, settled or amortized over the instrument's original term, (ii) timing differences, both temporary and potentially permanent, in the recognition of certain realized gains and losses and (iii) temporary differences related to the amortization of premiums and discounts on investments. Furthermore, our estimated taxable income is subject to potential adjustments up to the time of filing our appropriate tax returns, which occurs after the end of our fiscal year. The following is a 38 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 Net income (loss) $ (666) $ 212 $ (1,751) $ 776 Book to tax differences: Premium amortization, net (15) (45) (269) (313) Realized gain/loss, net (1,454) (342) (5,029) (1,793) Net capital loss/(utilization of net capital loss carryforward) 353 (141) 2,887 — Unrealized loss, net 2,034 358 4,406 1,055 Other (2) 3 (15) (2) Total book to tax differences 916 (167) 1,980 (1,053) REIT taxable income (loss) 250 45 229 (277) REIT taxable income attributed to preferred stock 76 — 76 — REIT taxable income (loss) attributed to common stock $ 174 $ 45 $ 153 $ (277) Weighted average common shares outstanding - basic 528.7 526.7 526.4 529.0 Weighted average common shares outstanding - diluted 529.8 528.6 527.5 529.0 REIT taxable income (loss) per common share - basic $ 0.33 $ 0.09 $ 0.29 $ (0.52) REIT taxable income (loss) per common share - diluted $ 0.33 $ 0.09 $ 0.29 $ (0.52) Beginning net capital loss carryforward $ 2,534 $ 141 $ — $ — Increase (decrease) in net capital loss carryforward 353 (141) 2,887 — Ending net capital loss carryforward $ 2,887 $ — $ 2,887 $ — Ending net capital loss carryforward per common share $ 5.24 $ — $ 5.24 $ — 39 LIQUIDITY AND CAPITAL RESOURCES Our business is dependent on our ability to maintain adequate levels of liquidity and capital resources to fund day-to-day operations, fulfill collateral requirements under our funding and derivative agreements, and to satisfy our dividend distribution requirement of at least 90% of our taxable income to maintain our qualification as a REIT. Our primary sources of liquidity are unencumbered cash and securities, borrowings available under repurchase agreements, TBA dollar roll financing and monthly receipts of principal and interest payments. We may also conduct asset sales, change our asset or funding mix, issue equity or undertake other capital enhancing actions to maintain adequate levels of liquidity and capital resources. There are various risks and uncertainties that can impact our liquidity, such as those described in Item 1A. Risk Factors of our most recent Annual Report on Form 10-K and Item 3. Quantitative and Qualitative Disclosures of Market Risks in this Form 10-Q. In assessing our liquidity, we consider a number of factors, including our current leverage, collateral levels, access to capital markets, overall market conditions, and the sensitivity of our tangible net book value over a range of scenarios. We believe that we have sufficient liquidity and capital resources available to meet our obligations and execute our business strategy. Leverage and Financing Sources 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 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. September 30, 2022 December 31, 2021 Mortgage Borrowings Amount % Amount % Repurchase agreements 1,2 $ 39,071 67 % $ 46,911 63 % Debt of consolidated variable interest entities, at fair value 98 — % 126 — % Total debt 39,169 67 % 47,037 63 % TBA and forward settling non-Agency securities, at cost 19,116 33 % 27,622 37 % Total mortgage borrowings $ 58,285 100 % $ 74,659 100 % ________________________________ 1. 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. 2. Amounts exclude U.S. Treasury repurchase agreements. Our primary financing sources are collateralized borrowings structured as repurchase agreements. We enter into repurchase agreements, or "repo," through bi-lateral arrangements with financial institutions and independent dealers. We also enter into third-party repurchase agreements through our wholly-owned registered broker-dealer subsidiary, Bethesda Securities, LLC, such as tri-party repo offered through the FICC's GCF Repo service. We manage our repurchase agreement funding position through a variety of methods, including diversification of counterparties, maintaining a staggered maturity profile and utilization of interest rate hedging strategies. We also use TBA dollar roll transactions as a means of synthetically financing Agency RMBS. The terms and conditions of our repurchase agreements are determined on a transaction-by-transaction basis when each such borrowing is initiated or renewed and, in the case of GCF Repo, by the variable margin requirements calculated by the FICC, which acts as the central counterparty. The amount borrowed is generally equal to the fair value of the securities pledged, as determined by the lending counterparty, less an agreed-upon discount, referred to as a "haircut," which reflects the underlying risk of the specific collateral and protects the counterparty against a change in its value. Interest rates are generally fixed based on prevailing rates corresponding to the term of the borrowing. None of our repo counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of our existing borrowings. The use of TBA dollar roll transactions increases our funding diversification, expands our available pool of assets, and increases our overall liquidity position, as TBA contracts typically have lower implied haircuts relative to Agency RMBS pools funded with repo financing. TBA dollar roll transactions may also have a lower implied cost of funds than comparable repo funded transactions (referred to as "dollar roll specialness") offering incremental return potential. However, if it were to become uneconomical to roll our TBA contracts into future months it may be necessary to take physical delivery of the underlying securities and fund those assets with cash or other financing sources, which could reduce our liquidity position. 40 Collateral Requirements and Unencumbered Assets Amounts available to be borrowed under our repurchase agreements are dependent upon prevailing interest rates, the lender’s "haircut" requirements and collateral value. Each of these elements may fluctuate with changes in interest rates, credit quality and liquidity conditions within the financial markets. To help manage the adverse impact of interest rate changes on our borrowings, we utilize an interest rate risk management strategy involving the use of derivative financial instruments. In particular, we attempt to mitigate the risk of the cost of our short-term funding liabilities increasing at a faster rate than the earnings of our long-term fixed rate assets during a period of rising interest rates. The collateral requirements, or haircut levels, under our repo agreements are typically determined on an individual transaction basis or by the prevailing requirements established by the FICC for GCF tri-party repo. Consequently, haircut levels and minimum margin requirements can change over time and may increase during periods of elevated market volatility. If the fair value of our collateral declines, our counterparties will typically require that we post additional collateral to re-establish the agreed-upon collateral levels, referred to as "margin calls." Similarly, if the estimated fair value of our investment securities increases, we may request that counterparties release collateral back to us. Our counterparties typically have the sole discretion to determine the value of pledged collateral but are required to act in good faith in making determinations of value. 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 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. Fannie Mae and Freddie Mac publish monthly security pay-down factors for their mortgage pools on the fifth day after month-end, but do not remit payment to security holders until generally the 25th day after month-end. Bi-lateral repo counterparties assess margin to account for the reduction in value of Agency collateral when factors are released. The FICC assesses margin on the last day of each month, prior to the factor release date, based on its internally projected pay-down rates (referred to as the "blackout period exposure adjustment" or "blackout margin"). On the factor release date, the blackout margin is released and collateralization requirements are adjusted to actual factor data. Due to the timing difference between associated margin calls and our receipt of principal pay-downs, our liquidity is temporarily reduced each month for principal repayments. We attempt to manage the liquidity risk associated with principal pay-downs by monitoring conditions impacting prepayment rates and through asset selection. 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%. Collateral requirements under our derivative agreements are subject to our counterparties' assessment of their maximum risk of loss associated with the derivative instrument, referred to as the initial or minimum margin requirement, and may be adjusted based on changes in market volatility and other factors. We are also subject to daily variation margin requirements based on changes in the value of the derivative instrument and/or collateral pledged. Daily variation margin requirements also entitle us to receive collateral if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral requirements under our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC and, if applicable, by third-party brokerage agreements, which may establish margin levels in excess of the MBSD. Collateral levels for interest rate derivative agreements are typically governed by the central clearing exchange and the associated futures commission merchants ("FCMs"), which may establish margin levels in excess of the clearing exchange. Collateral levels for interest rate derivative agreements not subject to central clearing are established by the counterparty financial institution. 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 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. Counterparty Risk Collateral requirements imposed by counterparties subject us to the risk that the counterparty does not return pledged assets to us as and when required. We attempt to manage this risk by monitoring our collateral positions and limiting our 41 counterparties to registered clearinghouses and major financial institutions with acceptable credit ratings. We also diversify our funding across multiple counterparties and by region. 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. Asset Sales 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). 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 The equity capital markets serve as a source of capital to grow our business and to meet potential liquidity needs of our business. 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 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. Furthermore, when the trading price of our common stock is less than our estimate of our current tangible net book value per common share, among other conditions, we may repurchase shares of our common stock. Please refer to Note 10 of our Consolidated Financial Statements in this Form 10-Q for further details regarding our recent equity capital transactions, if any. OFF-BALANCE SHEET ARRANGEMENTS 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 The statements contained in this Quarterly Report that are not historical facts, including estimates, projections, beliefs, expectations concerning conditions, events, or the outlook for our business, strategy, performance, operations or the markets or industries in which we operate, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “intend,” “outlook,” “potential,” “forecast,” “estimate,” “will,” “could,” “should,” “likely” and other similar, correlative or comparable words and expressions. Forward looking statements are based on management’s assumptions, projections and beliefs as of the date of this Quarterly Report, but they involve a number of risks and uncertainties. Actual results may differ materially from those anticipated in forward-looking statements, as well as from historical performance. Factors that could cause actual results to vary from our forward-looking statements include, but are not limited to, the following: • changes in U.S. monetary policy or interest rates, including actions taken by the Federal Reserve to normalize monetary policy, to terminate its purchases of Agency RMBS and to reduce the size of its U.S. Treasury and Agency RMBS bond portfolio; • fluctuations in the yield curve; • fluctuations in mortgage prepayment rates on the loans underlying our Agency RMBS; 42 • the availability and terms of financing; • changes in the market value of our assets, including from changes in net interest spreads, and changes in market liquidity or depth; • the effectiveness of our risk mitigation strategies; • conditions in the market for Agency RMBS and other mortgage securities; • the impact of the COVID-19 pandemic and of measures taken in response to the COVID-19 pandemic by various governmental authorities, businesses and other third parties; • actions by the federal, state, or local governments to stabilize the economy, the housing sector or financial markets; • changes to laws, regulations, rules or policies that affect U.S. housing finance activity, the GSE's or the markets for Agency RMBS • legislative or regulatory changes that affect our status as a REIT, our exemption from the Investment Company Act of 1940 or the mortgage markets in which we participate; and • other risks discussed under the heading “Risk Factors” herein and in our Annual Report on Form 10-K. Forward-looking statements speak only as of the date made, and we do not assume any duty and do not undertake to update forward-looking statements. A further discussion of risks and uncertainties that could cause actual results to differ from any of our forward-looking statements is included in our most recent Annual Report on Form 10-K and this document under Item 1A. Risk Factors . We caution readers not to place undue reliance on our forward-looking statements.