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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-08 · 186 added, 116 removed, 496 unchanged (38% 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 March 31, 2023.

Our MD&A is presented in the following sections:

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Trends and Recent Market Impacts

Agency RMBS performed well during the first half of the first quarter of 2023, posting one of the asset class’s strongest monthly returns on record in January.

These favorable conditions, however, gave way to a more challenging investment environment in the second half of the quarter as stronger than expected economic data, followed by regional bank instability, led to elevated interest rate volatility and an increasingly uncertain macroeconomic outlook.

At its February meeting, the Federal Reserve raised the federal funds rate by 25 basis points.

In addition, Chairman Powell indicated that more hikes were likely and that short-term rates would likely remain higher for longer to combat persistently high inflation.

By early March, the terminal federal funds rate implied by the futures market approached 6%, implying that another 100 basis points of tightening was expected, and the spread between the two-year and 10-year Treasury yield reached negative 108 basis points.

The sharply inverted yield curve and more aggressive monetary policy outlook raised serious concerns about bank earnings and unrealized losses on asset portfolios that ultimately led to the abrupt failure of Silicon Valley Bank and a dramatic repricing of monetary policy expectations.

The turbulence in the banking sector also sparked concerns about a potential supply overhang of Agency RMBS from the liquidation of banks’ bond portfolios that would have to be absorbed by the private market.

Against this backdrop, interest rate volatility increased to crisis levels, with Treasury market volatility reaching a 15-year high during the quarter.

Short-term interest rates experienced the greatest volatility, with the two-year Treasury yield dropping 61 basis points in a single day, exceeding the worst decline experienced during the Great Financial Crisis.

Longer-term Treasury rates were also volatile, with the 10-year Treasury yield increasing 60 basis points in February and falling by a similar amount in March.

The spike in volatility and the possibility of sales of banks’ bond holdings, which became a reality after the Federal Deposit Insurance Corporation's seizure of Silicon Valley Bank and Signature Bank’s assets, weighed on Agency RMBS performance.

This underperformance relative to interest rate hedges late in the quarter was the primary driver of AGNC’s economic loss on tangible common equity of -0.7% for the quarter, comprised of a decline in tangible net book value per common share of $(0.43), or -4.4%, and $0.36 of dividends declared per common share for the quarter.

In light of a more uncertain supply and demand outlook for Agency RMBS and continued interest rate volatility, we maintained our relatively conservative positioning during the first quarter.

With the Fed tightening cycle likely nearing an end, we reduced our interest rate hedge position from 124% of our mortgage funding liabilities, as of December 31, 2022, to 114%, as of March 31, 2023, and shifted a larger portion of our hedges further out the yield curve.

We reduced our mortgage holdings by $2.7 billion during the quarter and maintained our “at risk” leverage ratio towards the lower end of our longer-term historical average at 7.2x tangible stockholders’ equity as of March 31, 2023.

Despite the intra-quarter rate volatility, our liquidity position remained strong throughout the quarter.

As of March 31, 2023, our unencumbered assets totaled $4.2 billion, or 58% of our tangible stockholders' equity, which consisted of $4.1 billion of cash and unencumbered Agency RMBS and $70 million of unencumbered CRT and non-Agency securities.

During the quarter, we continued to shift our portfolio higher in coupon, increasing the weighted average coupon on our fixed rate Agency RMBS and TBA securities to 4.24%, compared to 4.13% as of December 31, 2022, and reducing our exposure to the lowest Agency RMBS coupons, which represent the bulk of banks’ Agency RMBS holdings.

The average projected life CPR on our portfolio increased to 10.0% as of March 31, 2023, from 7.4% as of the prior quarter-end, consistent with our higher average coupon and moderately lower forward mortgage rate expectations.

Actual CPRs for the first quarter averaged less than 5.5%.

Net spread and dollar roll income, excluding “catch-up” premium amortization, (a non-GAAP measure) declined during the first quarter to $0.70 per diluted common share, compared to $0.74 per diluted common share for fourth quarter 2022 and $0.72 per diluted common share for the first quarter 2022.

The decline was largely due to higher funding costs and the addition of longer dated pay fixed interest rate swap hedges, which more than offset higher asset yields.

Despite the volatility that we experienced in March, our longer-run outlook for Agency RMBS continues to be very positive.

A key element of this optimism is our belief that Agency RMBS spreads to Treasury and swap rates will remain meaningfully wider than historical averages, providing a durable opportunity to generate highly attractive returns while maintaining a conservative risk position.

For much of the last 15 years, we have competed for investment assets with the world's largest and most price insensitive buyer of Agency MBS, the Federal Reserve.

With the Fed gradually repositioning its balance sheet and banks also now expected to reduce their bond portfolios, Agency RMBS valuations are historically attractive and appear poised to remain that way for some time.

As a result, we believe AGNC is well-positioned for this favorable investment environment, which, over the long term, will benefit both our earnings profile and franchise value.

Macroeconomic factors continued to have a significant impact on Agency RMBS performance during the second quarter of 2023.

First, following the Federal Deposit Insurance Corporation’s seizure of the assets of Silicon Valley Bank and Signature Bank late in the first quarter, fears of contagion throughout the regional banking sector and potential liquidations of bank portfolios created significant pressure on Agency RMBS prices as a result of the uncertain supply dynamic.

Second, the U.S.

debt ceiling standoff caused rampant speculation about the possibility of a government default and potential impacts on financial markets, especially fixed income markets.

Third and finally, the Federal Reserve, reacting to persistently high inflation metrics, maintained a hawkish public stance and publicly expressed its intent to continue on a tightening cycle that the market had previously expected to conclude earlier in 2023 (and potentially reverse late in the year).

Collectively, these factors caused mortgage spreads to benchmark rates to increase by late May 2023 to levels not seen since the Great Financial Crisis.

Subsequent events – the debt ceiling resolution, the return of stability to the banking sector, and the FDIC’s successful liquidation of assets from seized bank portfolios – ultimately reduced a significant amount of the volatility and uncertainty from the fixed income and Agency RMBS markets, improving valuations modestly by the end of the quarter from late May 2023 lows.

Despite the challenging macroeconomic backdrop, AGNC generated an economic return of 3.6% for the quarter, comprised of $0.36 of dividends declared per common share and a slight decline in tangible net book value of $0.02 per common share, ending the quarter with a tangible net book value per common share of $9.39.

The price performance of Agency RMBS varied considerably across the coupon stack during the second quarter, with lower coupon RMBS significantly outperforming higher coupons due to strong money manager demand stemming from bond fund inflows.

From a total return perspective, however, the performance differences across the coupon stack were much more muted given the significantly higher yield associated with higher coupon RMBS.

As a result, we continued to shift our portfolio

higher in coupon during the quarter.

The weighted average coupon on our fixed rate Agency RMBS and TBA securities increased 18 basis points to 4.42% as of the end of the quarter, compared to 4.24% as of March 31, 2023.

The average projected life CPR on our portfolio was largely unchanged at 9.8% as of June 30, 2023, compared to 10.0% for the first quarter.

Actual CPRs increased modestly for the quarter due primarily to seasonal factors, averaging 6.6% for the second quarter compared to 5.2% for the first quarter.

The short-term funding markets for Agency RMBS and U.S.

Treasuries remained strong in the second quarter despite the debt ceiling concerns and significant U.S.

Treasury issuance following the debt ceiling resolution.

The Fed’s firmly established reverse repo and standing repo facilities together set clear upper and lower bounds for short term repo rates and provide significant liquidity and stability to the U.S.

Government security funding markets.

The significant Treasury issuance following the debt ceiling resolution was readily absorbed and largely offset by a decline in the Fed’s reverse repo facility balance, leaving the funding market for Agency MBS largely unaffected.

In light of continued elevated interest rate volatility, we maintained our disciplined risk management strategy throughout the second quarter.

Our “at risk” leverage ratio remained at the lower end of our longer-term historical average and was unchanged at 7.2x tangible stockholders’ equity as of June 30, 2023, compared to March 31, 2023, while our average leverage decreased from 7.7x for the first quarter to 7.2x for the second quarter.

In addition, our interest rate hedge position remained in excess of our Agency RMBS funding liabilities and increased slightly to 119% as of June 30, 2023, from 114% as of March 31, 2023.

We continued to maintain significant liquidity throughout the second quarter.

As of June 30, 2023, our unencumbered assets totaled $4.3 billion, or 59% of our tangible stockholders' equity, which consisted of $4.3 billion of cash and unencumbered Agency RMBS and $81 million of unencumbered CRT and non-Agency securities.

Net spread and dollar roll income, excluding “catch-up” premium amortization, (a non-GAAP measure) declined $0.03 per common share to $0.67 per common share for the second quarter due to a modestly smaller average portfolio size during the quarter.

Our net interest spread increased to 3.26% for the second quarter, compared to 2.88% for the prior quarter.

The increase was largely due to a higher ratio of legacy, low fixed pay rate interest rate swap hedges to our funding liabilities for the quarter.

Looking ahead, we believe that one of the most favorable Agency RMBS investment environments in our fifteen-year history is now emerging.

The dramatic repricing of the Agency RMBS and U.S.

Treasury markets as the Fed transitioned from an ultra-accommodative monetary policy stance to its current restrictive stance appears largely complete.

In addition, the interest rate environment has correspondingly begun to show signs of improvement with interest rate volatility declining from the highs of last year as the Fed approaches its terminal rate level.

Declining interest rate volatility is beneficial to Agency RMBS valuations and, over time, lowers the cost of interest rate related rebalancing.

Furthermore, mortgage spreads to benchmark rates appear poised to remain well above their historical average as the Fed reduces its balance sheet holdings of Agency MBS and net supply of Agency RMBS is expected to remain consistent for the foreseeable future.

At current spread levels, we believe our portfolio is positioned to generate attractive returns, either through strong earnings if mortgage spreads remain at these elevated levels or a combination of favorable earnings and net book value appreciation if mortgage spreads tighten over time.

With the macroeconomic and interest rate environment still unsettled, short term deviations from this promising path are possible, but we believe that AGNC is well-positioned for this favorable investment environment.

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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31, 2022 Mar.

31, 2023 Mar.

31, 2023 June 30, 2023 June 30, 2023

June 30, 2023

Target Federal Funds Rate:

Target Federal Funds Rate - Upper Band

0.50% 1.75% 3.25% 4.50% 5.00% +50 bps

SOFR Rate 0.29% 1.50% 2.98% 4.30% 4.87% +57 bps

1.75% 3.25% 4.50% 5.00% 5.25% +25 bps +75 bps

SOFR Rate 1.50% 2.98% 4.30% 4.87% 5.09% +22 bps +79 bps

SOFR Interest Rate Swap Rate:

2.28% 2.99% 4.25% 4.45% 4.06% -39 bps

2.25% 2.79% 3.85% 3.75% 3.34% -41 bps

2.13% 2.81% 3.59% 3.56% 3.17% -39 bps

1.97% 2.66% 3.07% 3.21% 2.93% -28 bps

2.99% 4.25% 4.45% 4.06% 4.82% +76 bps +37 bps

2.79% 3.85% 3.75% 3.34% 3.94% +60 bps +19 bps

2.81% 3.59% 3.56% 3.17% 3.58% +41 bps +2 bps

2.66% 3.07% 3.21% 2.93% 3.20% +27 bps -1 bps

Treasury Security Rate:

2.34% 2.96% 4.28% 4.43% 4.03% -40 bps

2.46% 3.04% 4.09% 4.01% 3.58% -43 bps

2.34% 3.02% 3.83% 3.88% 3.47% -41 bps

2.45% 3.19% 3.78% 3.97% 3.65% -32 bps

2.96% 4.28% 4.43% 4.03% 4.90% +87 bps +47 bps

3.04% 4.09% 4.01% 3.58% 4.16% +58 bps +15 bps

3.02% 3.83% 3.88% 3.47% 3.84% +37 bps -4 bps

3.19% 3.78% 3.97% 3.65% 3.86% +21 bps -11 bps

30-Year Fixed Rate Agency Price:

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

Mortgage Rate/Credit Spread Mar.

31, 2022 June 30, 2022 Sept.

Mortgage Rate/Credit Spread June 30, 2022 Sept.

30, 2022 Dec.

31, 2022 Mar.

31, 2023 Mar.

31, 2023 June 30, 2023 June 30, 2023

June 30, 2023

Mortgage Rate:

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Treasury Spread 136 171 145 152 163 +11 +18

30-Year Agency Current Coupon Yield 3.49% 4.38% 5.68% 5.39% 5.05% -34 bps

30-Year Mortgage Rate 4.79% 5.79% 6.72% 6.52% 6.40% -12 bps

30-Year Agency Current Coupon Yield 4.38% 5.68% 5.39% 5.05% 5.63% +58 bps +24 bps

30-Year Mortgage Rate 5.79% 6.72% 6.52% 6.40% 6.78% +38 bps +26 bps

Credit Spread (in bps):

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FINANCIAL CONDITION

As of March 31, 2023 and December 31, 2022, our investment portfolio totaled $56.7 billion and $59.5 billion, respectively, consisting of:

As of June 30, 2023 and December 31, 2022, our investment portfolio totaled $58.0 billion and $59.5 billion, respectively, consisting of:

$47.8 billion and $40.9 billion investment securities, at fair value, respectively;

$10.2 billion and $18.6 billion net TBA securities, at fair value, respectively.

The following table is a summary of our investment securities as of March 31, 2023 and December 31, 2022 (dollars in millions):

March 31, 2023 December 31, 2022

The following table is a summary of our investment securities as of June 30, 2023 and December 31, 2022 (dollars in millions):

June 30, 2023 December 31, 2022

Investment Securities (Includes TBAs) 1

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≤ 15-year RMBS $ 1,509 $ 1,392 3.22 % 2 % $ 1,718 $ 1,597 3.25 % 3 %

15-year TBA securities, net 1

— — — % — % — — — % — %

15-year TBA securities 389 387 5.00 % 1 % — — — % — %

Total ≤ 15-year

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Non-Agency RMBS 1

55 43 4.90 % — % 111 90 4.52 % — %

CMBS 309 282 6.90 % — % 605 567 6.06 % 1 %

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________________________________

Table excludes other mortgage credit investments of $25 million as of March 31, 2023 and December 31, 2022 accounted for under the equity method of accounting.

Table excludes other mortgage credit investments of $28 million and $25 million as of June 30, 2023 and December 31, 2022, respectively, accounted for under the equity method of accounting.

TBA securities are presented net of long and short positions.

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TBA 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 March 31, 2023 and December 31, 2022, our TBA securities had a net carrying value of $10 million and $167 million, respectively, reported in derivative assets/(liabilities) on our accompanying consolidated balance sheets.

As of June 30, 2023 and December 31, 2022, our TBA securities had a net carrying value of $(92) million and $167 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 and the price to be paid or received for the underlying security.

As of March 31, 2023 and December 31, 2022, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 3.55% and 3.37%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBA securities, as of March 31, 2023 and December 31, 2022 (dollars in millions):

March 31, 2023

As of June 30, 2023 and December 31, 2022, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 3.78% and 3.37%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBA securities, as of June 30, 2023 and December 31, 2022 (dollars in millions):

June 30, 2023

Includes Net TBA Position Excludes Net TBA Position

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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 March 31, 2023, lower balance specified pools had a weighted average original loan balance of $123,000 and $142,000 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.

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of March 31, 2023.

As of June 30, 2023, lower balance specified pools had a weighted average original loan balance of $123,000 and $146,000 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.

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of June 30, 2023.

December 31, 2022

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Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of December 31, 2022.

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of March 31, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-Q.

RESULTS OF OPERATIONS

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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 March 31, 2023 and December 31, 2022 and condensed consolidated statements of comprehensive income and key statistics for the three months ended March 31, 2023 and 2022 (in millions, except per share amounts):

The tables below present our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 and condensed consolidated statements of comprehensive income and key statistics for the three and six months ended June 30, 2023 and 2022 (in millions, except per share amounts):

Balance Sheet Data 2023

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Three Months Ended

Six Months Ended

Statement of Comprehensive Income Data (Unaudited)

2023 2022 2023 2022

Interest income $ 457 $ 395 $ 808 $ 870

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Dividends on preferred stock 31 25 61 50

Net loss attributable to common stockholders $ (181) $ (676)

Net income (loss) available (attributable) to common stockholders $ 255 $ (459) $ 74 $ (1,135)

Net income (loss) $ 286 $ (434) $ 135 $ (1,085)

Other comprehensive income (loss), net (65) (245) 77 (736)

Comprehensive loss (9) (1,142)

Comprehensive income (loss) 221 (679) 212 (1,821)

Dividends on preferred stock 31 25 61 50

Comprehensive loss attributable to common stockholders $ (39) $ (1,167)

Comprehensive income (loss) available (attributable) to common stockholders $ 190 $ (704) $ 151 $ (1,871)

Weighted average number of common shares outstanding - basic 598.8 526.2 589.1 525.3

Weighted average number of common shares outstanding - diluted 599.7 526.2 590.1 525.3

Net loss per common share - basic $ (0.31) $ (1.29)

Net loss per common share - diluted $ (0.31) $ (1.29)

Net income (loss) per common share - basic $ 0.43 $ (0.87) $ 0.13 $ (2.16)

Net income (loss) per common share - diluted $ 0.43 $ (0.87) $ 0.13 $ (2.16)

Comprehensive income (loss) per common share - basic $ 0.32 $ (1.34) $ 0.26 $ (3.56)

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Three Months Ended

Six Months Ended

Other Data (Unaudited) * 2023 2022 2023 2022

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Average tangible net book value "at risk" leverage 5

7.2:1 7.8:1 7.4:1 7.8:1

Tangible net book value "at risk" leverage (as of period end) 6

7.2:1 7.4:1 7.2:1 7.4:1

Economic return on tangible common equity - unannualized 7

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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 months ended March 31, 2023 and 2022, 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 March 31,

Amount Yield Amount Yield

The following table summarizes our economic interest income (a non-GAAP measure) for the three and six months ended June 30, 2023 and 2022, 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,

2023 2022 2023 2022

Amount Yield Amount Yield Amount Yield Amount Yield

Interest income:

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The principal elements impacting our economic interest income are the average size of our investment portfolio and the average 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 months ended March 31, 2023 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 six months ended June 30, 2023 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements Impacting Economic Interest Income

Three Months Ended March 31, 2023 vs.

March 31, 2022

Periods ended June 30, 2023 vs.

June 30, 2022

Due to Change in Average

Three months ended:

Total Increase /

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 66 $ (104) $ 170

Our average investment portfolio, inclusive of TBAs (at cost), decreased 15% for the three months ended March 31, 2023 primarily 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 162 basis points for the three months ended March 31, 2023 largely due to changes in our asset composition as we shifted our portfolio higher in coupon.

Due to Change in Average

Six months ended:

Total Increase /

(Decrease) Portfolio

Interest Income (GAAP measure) $ (62) $ (63) $ 1

Estimated "catch-up" premium amortization due to change in CPR forecast 283 — 283

Interest income, excluding "catch-up" premium amortization 221 (63) 284

TBA dollar roll income - implied interest income 46 (108) 154

Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 267 $ (171) $ 438

Our average investment portfolio, inclusive of TBAs (at cost), decreased 16% for the three and six months ended June 30, 2023 compared to the respective prior year periods primarily 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 101 and 133 basis points for the three and six months ended June 30, 2023, respectively, mostly due to changes in our asset composition as we shifted the portfolio higher in coupon.

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.

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Amount Ending

June 30, 2023 $ 41,546 $ 42,408 $ 40,962 $ 9,985 $ 10,320 7.2:1 7.2:1

March 31, 2023 $ 39,824 $ 42,919 $ 42,022 $ 17,851 $ 10,385 7.7:1 7.2:1

December 31, 2022 $ 35,486 $ 39,399 $ 36,002 $ 18,988 $ 18,407 7.8:1 7.4:1

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

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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 months ended March 31, 2023 and 2022 (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 March 31,

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, 2023 and 2022 (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,

2023 2022 2023 2022

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 Amount Cost of Funds Amount Cost of Funds

Repurchase agreement and other debt - interest expense (GAAP measure) $ 526 5.01 % $ 80 0.74 % $ 975 4.77 % $ 107 0.48 %

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Interest rate swap periodic cost (benefit) is measured as a percent of average mortgage borrowings outstanding for the period.

In 2023, we began reporting price alignment interest income (expense) ("PAI") on interest swap margin deposits posted by or (to) us in other interest income (expense), net.

PAI was previously reported in interest rate swap periodic cost (benefit).

Both current and former categorizations are components of net spread and dollar roll income.

Prior year amounts have been reclassified and our economic interest expense and cost of funds have been restated to conform to the current period's presentation.

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 months ended March 31, 2023 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 six months ended June 30, 2023 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements of Economic Interest Expense

Three Months Ended March 31, 2023 vs.

March 31, 2022

Periods ended June 30, 2023 vs.

June 30, 2022

Due to Change in Average

Three months ended:

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

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Total change in economic interest benefit/expense $ 60 $ — $ 60

Our average mortgage borrowings, inclusive of TBAs, decreased 18% for the three months ended March 31, 2023 due to a decline in our asset base.

The average interest rate on our mortgage borrowings increased 453 basis points for the three months ended March 31, 2023 due to higher short-term interest rates.

The decrease in our interest rate swap periodic cost for March 31, 2023 was primarily attributable to higher receive rates on our pay-fixed swaps.

The following is a summary of our average interest rate swaps outstanding and the related average swap pay and receive rates for the three months ended March 31, 2023 and 2022 (dollars in millions).

Due to Change in Average

Six months ended:

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

Repurchase agreements and other debt interest expense $ 868 $ (10) $ 878

TBA dollar roll income - implied interest benefit/expense 356 11 345

Interest rate swap periodic income/cost (1,033) 2 (1,035)

Total change in economic interest benefit/expense $ 191 $ 3 $ 188

Our average mortgage borrowings, inclusive of TBAs, decreased 18% for the three and six months ended June 30, 2023 due to a decline in our asset base.

The average interest rate on our mortgage borrowings, excluding the impact interest rate swap period income/cost, increased 449 and 451 basis points for the three and six months ended June 30, 2023, respectively, due to higher short-term interest rates.

Interest rate swap periodic income increased for the three and six months ended June 30, 2023 primarily due to higher receive rates on our pay-fixed swaps.

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, 2023 (dollars in millions).

Amounts exclude forward starting swaps not yet in effect.

Three Months Ended

Six Months Ended

Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2023 2022 2023 2022

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$ 51,531 $ 62,650 $ 54,586 $ 66,392

Average notional amount of interest rate swaps outstanding (excluding forward starting swaps)

$ 49,243 $ 52,543

Average notional amount of interest rate swaps outstanding (excluding forward starting swaps), net $ 48,436 $ 49,800 $ 48,837 $ 51,164

Ratio of average interest rate swaps to mortgage borrowings outstanding

94 % 79 % 89 % 77 %

Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.44 % 0.27 % 0.45 % 0.25 %

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(4.63) % (0.44) % (4.36) % (0.15) %

For the three months ended March 31, 2023 and 2022, we had an average forward starting swap balance of $101 million and $59 million, respectively.

For the three and six months ended June 30, 2023, we had an average forward starting net pay and (receive) fixed rate swap balance of $(12) million and $45 million, respectively, and for the three and six months ended June 30, 2022 of $34 million and $46 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 months ended March 31, 2023 and 2022:

Three Months Ended

Three Months Ended June 30,

Six Months Ended

Investment and TBA Securities - Net Interest Spread 2023 2022 2023 2022

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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 months ended March 31, 2023 and 2022 (dollars in millions):

Three Months Ended

Comprehensive loss attributable to common stockholders

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 six months ended June 30, 2023 and 2022 (dollars in millions):

Three Months Ended June 30,

Six Months Ended

2023 2022 2023 2022

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

$ 190 $ (704) $ 151 $ (1,871)

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

Realized loss on sale of investment securities, net

255 946 336 1,288

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

(Gain) loss on derivative instruments and other securities, net

363 987 (231) 3,519

Gain on derivative instruments and other securities, net

(996) (1,204) (452) (3,000)

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

65 245 (77) 736

Other adjustments:

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Interest rate swap periodic income (cost), net 1,4

567 56 1,071 38

Other interest income (expense), net 1,3,4

(35) (7) (68) (7)

Net spread and dollar roll income available to common stockholders (non-GAAP measure) 415 501 754 1,037

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

(11) (66) 58 (225)

Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) $ 404 $ 435 $ 812 $ 812

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and other miscellaneous interest income (expense).

In 2023, we began reporting PAI in other interest income (expense), net.

PAI was previously reported in interest rate swap periodic income (cost).

Prior year amounts have been reclassified to conform to the current period's presentation.

Gain (Loss) on Investment Securities, Net

The following table is a summary of our net gain (loss) on investment securities for the three months ended March 31, 2023 and 2022 (in millions):

Three Months Ended

The following table is a summary of our net gain (loss) on investment securities for the three and six months ended June 30, 2023 and 2022 (in millions):

Three Months Ended June 30,

Six Months Ended

Gain (Loss) on Investment Securities, Net 1

2023 2022 2023 2022

Loss on sale of investment securities, net $ (255) $ (946) $ (336) $ (1,288)

Unrealized loss on investment securities measured at fair value through net income, net 2

Unrealized loss on investment securities measured at fair value through other comprehensive income, net 142 (491)

Unrealized (loss) gain on investment securities measured at fair value through net income, net 2

(363) (987) 231 (3,519)

Unrealized (loss) gain on investment securities measured at fair value through other comprehensive income, net (65) (245) 77 (736)

Total loss on investment securities, net $ (683) $ (2,178) $ (28) $ (5,543)

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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 months ended March 31, 2023 and 2022 (in millions):

Three Months Ended

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, 2023 and 2022 (in millions):

Three Months Ended June 30,

Six Months Ended

2023 2022 2023 2022

TBA securities, dollar roll income $ 6 $ 182 $ 24 $ 334

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Interest rate swaps, periodic cost 1

567 56 1,071 38

Interest rate swaps, mark-to-market gain 290 765 (446) 2,740

Credit default swaps - CDX IG - buy protection (3) —

Credit default swaps - buy protection (5) 21 (8) 21

Payer swaptions 26 309 (40) 672

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Other interest income (expense), net 1

(35) (7) (68) (7)

Other gain (loss), net (11) 17 (13) (20)

Total gain (loss) on derivative instruments and other securities, net $ 996 $ 1,204 $ 452 $ 3,000

________________________________

In 2023, we began reporting PAI in other interest income (expense), net.

PAI was previously reported in interest rate swap periodic income (cost).

Prior year amounts have been reclassified to conform to the current period's presentation.

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.

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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 7.2x and 7.4x as of March 31, 2023 and December 31, 2022, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of March 31, 2023 and December 31, 2022 (dollars in millions).

Our tangible net book value "at risk" leverage ratio was 7.2x and 7.4x as of June 30, 2023 and December 31, 2022, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of June 30, 2023 and December 31, 2022 (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.

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

Mortgage Borrowings Amount % Amount %

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E xcludes U.S.

Treasury repurchase agreements totaling $6,454 million and $355 million as of March 31, 2023 and December 31, 2022, respectively.

As of March 31, 2023 and December 31, 2022, 38% and 48%, respectively, of our repurchase agreements, including 44% and 48% or our Agency repurchase agreements, respectively, were funded through the Fixed Income Clearing Corporation's GCF Repo service.

Treasury repurchase agreements totaling $1,154 million and $355 million as of June 30, 2023 and December 31, 2022, respectively.

As of June 30, 2023 and December 31, 2022, 43% and 48%, respectively, of our repurchase agreements, including 44% and 48% or our Agency repurchase agreements, respectively, were funded through the Fixed Income Clearing Corporation's GCF Repo service.

Our primary financing sources are collateralized borrowings structured as repurchase agreements.

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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 manage our repurchase agreement funding position through a variety of methods, including diversification of counterparties, maintaining a suitable maturity profile and utilization of interest rate hedging strategies.

We also use TBA dollar roll transactions as a means of synthetically financing Agency RMBS.

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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 March 31, 2023, we had met all our margin requirements.

As of June 30, 2023, 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 March 31, 2023, approximately 18% our investment portfolio consisted of TBA securities, which are not subject to monthly principal pay-downs.

As of June 30, 2023, approximately 18% 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 6%.

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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 three months ended March 31, 2023, haircuts on our repo funding arrangements remained stable.

As of March 31, 2023, the weighted average haircut on our repurchase agreements was approximately 3.6% of the value of our collateral, compared to 3.7% as of December 31, 2022.

During the six months ended June 30, 2023, haircuts on our repo funding arrangements remained stable.

As of June 30, 2023, the weighted average haircut on our repurchase agreements was approximately 3.6% of the value of our collateral, compared to 3.7% as of December 31, 2022.

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 March 31, 2023, our unencumbered assets totaled approximately $4.2 billion, or 58% of tangible equity, consisting of $4.1 billion of unencumbered cash and Agency RMBS and $0.1 billion of unencumbered credit assets.

As of June 30, 2023, our unencumbered assets totaled approximately $4.3 billion, or 59% of tangible equity, consisting of $4.3 billion of unencumbered cash and Agency RMBS and $0.1 billion of unencumbered credit assets.

This compares to $4.4 billion of unencumbered assets, or 60% of tangible equity, as of December 31, 2022, consisting of $4.3 billion of unencumbered cash and Agency RMBS and $0.1 billion of unencumbered credit assets.

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

As of March 31, 2023, 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 4% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 8% of our tangible stockholders' equity.

As of March 31, 2023, less than 8% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of March 31, 2023, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.

As of June 30, 2023, 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 4% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 8% of our tangible stockholders' equity.

As of June 30, 2023, less than 8% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of June 30, 2023, 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.

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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.

We may also be unable to raise additional equity capital at suitable times or on favorable 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.

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OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2023, 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 March 31, 2023, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

As of June 30, 2023, 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, 2023, 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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• fluctuations in mortgage prepayment rates on the loans underlying our Agency RMBS;

• 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 availability and terms of financing and our hedge positions;

• changes in the market value of our assets, including from changes in net interest spreads, market liquidity or depth, and changes in our "at risk" leverage or hedge positions;

• the effectiveness of our risk mitigation strategies;

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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