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Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-03 · 133 added, 124 removed, 558 unchanged (32% of the section changed)

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended June 30, 2023.

Our MD&A is presented in the following sections:

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Trends and Recent Market Impacts

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.

The third quarter of 2023 began relatively favorably for both U.S.

Treasuries and Agency RMBS as inflation data continued to exhibit a downward trend and stress in the regional bank sector from earlier in the year abated.

As the quarter progressed, however, a complex set of domestic and global factors, including heightened geopolitical risks, increased U.S.

Treasury issuance and a restrictive monetary policy, led to a decidedly negative shift in bond market sentiment and drove interest rates and interest rate volatility materially higher.

For the third quarter, the U.S.

Treasury yield curve steepened significantly, with the 5- and 10-year Treasury yields increasing by 45 and 73 basis points, respectively, while two-year yields moved only modestly higher.

Typically, in environments where Treasury prices drop abruptly and the market struggles to find its new equilibrium, Agency RMBS underperform.

This was the case in the third quarter, as Agency RMBS performance relative to benchmark rates lagged considerably.

Agency RMBS spreads to comparable duration U.S.

Treasuries widened 20 to 25 basis points across most of the coupon stack.

The performance of Agency RMBS also varied greatly depending on hedge position as a result of the sharp steepening of the yield curve.

The performance of Agency RMBS also varied across the coupon stack, with lower and middle coupons substantially underperforming higher coupons.

This significant rate volatility and spread widening resulted in our economic loss of (10.1)% for the third quarter, comprised of $0.36 of dividends declared per common share and a $(1.31) decline in our tangible net book value per common share.

Our investment portfolio increased modestly during the third quarter, growing from $58.0 billion at the end of the second quarter to $59.3 billion as of September 30, 2023.

We continued to move our holdings up in coupon to benefit from more attractive yields and wider spreads.

We also reduced our TBA position in favor of high-quality and low pay-up specified pools as the funding advantage of holding TBAs versus on-balance sheet Agency RMBS holdings dissipated.

The weighted average coupon on our fixed-rate Agency RMBS and TBA securities was 4.71% as of the end of the quarter, compared to 4.42% as of June 30, 2023.

Our hedge portfolio totaled $63.2 billion as of September 30, 2023, or 116% of our funding liabilities (investment securities repurchase agreements, net TBA position (at cost) and other debt outstanding), compared to 119% as of June 30, 2023.

Higher mortgage rates extended the duration of our assets, and we accordingly increased the duration of our hedge portfolio primarily by adding Treasury-based hedges at the 10-year point of the yield curve.

As a result, our duration gap, which measures the estimated difference between the interest rate sensitivity of our assets and our liabilities, inclusive of interest rate hedges, was reduced to 0.2 years as of September 30, 2023 from 0.4 years as of June 30, 2023.

Despite the decline in our tangible net book value, our "at-risk" leverage ratio experienced only a moderate increase to end the quarter at 7.9x tangible equity as of September 30, 2023, from 7.2x as of June 30, 2023, with average leverage for the third quarter at 7.5x compared to 7.2x for the second quarter.

Our liquidity position remained strong throughout the third quarter and in line with our typical operating parameters.

As of September 30, 2023, we had unencumbered cash and Agency RMBS totaling $3.6 billion, or 52% of our tangible equity.

Additionally, during the quarter, we issued $432 million of common equity through our at-the-market offering program at a price to book premium that was accretive to our tangible net book value.

Net spread and dollar roll income, excluding "catch-up" amortization, was $0.65 per common share for the third quarter, a decrease of $0.02 per common share from the second quarter, due primarily to a decline in our net interest rate spread to 303 basis points for the quarter.

The average projected life CPR on our portfolio decreased to 8.3% at the end of the third quarter from 9.8% at the end of the second quarter, reflecting the impact of higher interest rates.

Actual CPRs for the quarter averaged 7.1%, compared to 6.6% for the second quarter.

Looking ahead, although elevated interest rate and spread volatility pose near-term risks and may negatively impact our financial performance over the short-run, we continue to believe that the longer-term outlook for Agency RMBS remains favorable, with spreads likely to remain well above historical averages.

Additionally, the repo financing market for Agency RMBS remains deep and liquid.

At current spread levels, we believe our portfolio is well-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 should tighten over time.

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

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Interest Rate/Security Price 1

June 30, 2022 Sept.

30, 2022 Dec.

31, 2022 Mar.

31, 2023 June 30, 2023 June 30, 2023

31, 2023 June 30, 2023 Sept.

30, 2023 Sept.

June 30, 2023

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

Mortgage Rate/Credit Spread June 30, 2022 Sept.

Mortgage Rate/Credit Spread Sept.

30, 2022 Dec.

31, 2022 Mar.

31, 2023 June 30, 2023 June 30, 2023

31, 2023 June 30, 2023 Sept.

30, 2023 Sept.

June 30, 2023

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FINANCIAL CONDITION

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

As of September 30, 2023 and December 31, 2022, our investment portfolio totaled $59.3 billion and $59.5 billion, respectively, consisting of:

$56.9 billion and $40.9 billion investment securities, at fair value, respectively;

$2.4 billion and $18.6 billion net TBA securities, at fair value, respectively;

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

and other mortgage credit investments of $45 million and $25 million, respectively, which we account for under the equity method of accounting.

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

September 30, 2023 December 31, 2022

Investment Securities (Includes TBAs) 1

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________________________________

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.

Table excludes other mortgage credit investments of $45 million and $25 million as of September 30, 2023 and December 31, 2022, respectively.

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 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.

As of September 30, 2023 and December 31, 2022, our TBA securities had a net carrying value of $(31) 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 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

As of September 30, 2023 and December 31, 2022, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 4.37% and 3.37%, respectively.

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

September 30, 2023

Includes Net TBA Position Excludes Net TBA Position

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4.5% - 5.5% 30,596 30,927 29,090 41% 5.05% 101.0% 4.84% 17 8%

≥ 6.0% 11,626 11,746 11,563 15% 6.10% 101.2% 5.86% 5 10%

Total 30-year 59,331 60,415 55,559 46% 4.79% 101.8% 4.39% 32 8%

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

As of June 30, 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.

As of September 30, 2023, lower balance specified pools had a weighted average original loan balance of $125,000 and $155,000 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 September 30, 2023.

December 31, 2022

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4.5% - 5.5% 31,014 31,081 30,640 30% 4.93% 102.9% 4.28% 20 7%

≥ 6.0% 635 650 653 45% 6.08% 103.9% 5.24% 6 13%

Total 30-year 57,441 58,134 54,781 46% 4.20% 103.5% 3.33% 42 7%

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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 June 30, 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 September 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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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.

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.

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

The tables below present our condensed consolidated balance sheets as of June 30, 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):

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

September 30,

Balance Sheet Data 2023

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Statement of Comprehensive Income Data (Unaudited)

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Other comprehensive income (loss), net (213) (372) (136) (1,108)

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

Comprehensive loss (605) (1,038) (393) (2,859)

Dividends on preferred stock 31 26 92 76

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

Comprehensive loss attributable to common stockholders $ (636) $ (1,064) $ (485) $ (2,935)

Weighted average number of common shares outstanding - basic 622.0 528.7 600.2 526.4

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Other Data (Unaudited) * 2023 2022 2023 2022

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Tangible net book value per common share excludes goodwill.

Amount represents the daily weighted average repurchase agreements outstanding for the period used to fund our investment securities and other debt.

Amount excludes U.S.

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Economic Interest Income and Asset Yields

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

The following table summarizes our economic interest income (a non-GAAP measure) for the three and nine months ended September 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 September 30,

Nine Months Ended September 30,

2023 2022 2023 2022

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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 and six months ended June 30, 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 nine months ended September 30, 2023 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements Impacting Economic Interest Income

Periods ended June 30, 2023 vs.

June 30, 2022

Periods ended September 30, 2023 vs.

September 30, 2022

Due to Change in Average

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Due to Change in Average

Six months ended:

Nine months ended:

Total Increase /

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 360 $ (230) $ 590

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 average investment portfolio, inclusive of TBAs (at cost), decreased 8% and 13% for the three and nine months ended September 30, 2023, respectively, compared to the prior year period, primarily due to a decline in stockholders' equity and operating with a lower "at risk" leverage ratio.

The average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization, increased 89 and 120 basis points for the three and nine months ended September 30, 2023, respectively, mostly due to changes in our asset composition as we shifted the portfolio higher in coupon to benefit from higher asset yields and wider mortgage spreads.

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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The following table presents a summary of our leverage ratios for the periods listed (dollars in millions):

Repurchase Agreements

and Other Debt 1

Investment Securities Repurchase Agreements and Other Debt 1

Net TBA Position

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Amount Ending

September 30, 2023 $ 47,073 $ 52,888 $ 51,931 $ 7,340 $ 2,407 7.5:1 7.9:1

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

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Economic Interest Expense and Aggregate Cost of Funds

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three and six months ended June 30, 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,

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, 2023 and 2022 (dollars in millions), which includes the combination of interest expense on repurchase agreements and other debt used to fund acquisitions of investment securities (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,

2023 2022 2023 2022

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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 %

Investment securities repurchase agreement and other debt - interest expense (GAAP measure) $ 646 5.37 % $ 196 1.89 % $ 1,621 4.99 % $ 303 0.92 %

TBA dollar roll income - implied interest expense (benefit) 2,3

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The average implied funding cost (benefit) for all TBA transactions is weighted based on our daily average TBA balance outstanding for the period.

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.

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 investment securities repurchase agreements, other debt and TBA securities outstanding during the period and their respective cost of funds.

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

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

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three and six months ended June 30, 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 nine months ended September 30, 2023 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements of Economic Interest Expense

Periods ended June 30, 2023 vs.

June 30, 2022

Periods ended September 30, 2023 vs.

September 30, 2022

Due to Change in Average

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

Repurchase agreements and other debt interest expense $ 446 $ (3) $ 449

Investment securities repurchase agreement and other debt interest expense $ 450 $ 32 $ 418

TBA dollar roll income - implied interest benefit/expense 5 (60) 65

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Due to Change in Average

Six months ended:

Nine months ended:

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

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

Investment securities repurchase agreement and other debt interest expense $ 1,318 $ (4) $ 1,322

TBA dollar roll income - implied interest benefit/expense 361 (28) 389

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Total change in economic interest benefit/expense $ 299 $ (19) $ 318

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).

Our average mortgage borrowings, inclusive of TBAs, decreased 11% and 15% for the three and nine months ended September 30, 2023, respectively, 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 350 and 421 basis points for the three and nine months ended September 30, 2023, respectively, due to higher short-term interest rates.

Interest rate swap periodic income increased for the three and nine months ended September 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 nine months ended September 30, 2023 (dollars in millions).

Amounts exclude forward starting swaps not yet in effect.

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

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

Average Agency repo and other debt outstanding

$ 41,546 $ 42,997 $ 40,690 $ 44,774

Average investment securities repo and other debt outstanding $ 47,073 $ 40,530 $ 42,841 $ 43,344

Average net TBA dollar roll position outstanding - at cost $ 7,340 $ 20,331 $ 11,687 $ 21,184

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(4.87) % (1.88) % (4.53) % (0.72) %

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.

For the three and nine months ended September 30, 2023, we had an average forward starting net pay and (receive) fixed rate swap balance of $(0.9) billion and $(0.3) billion, respectively, and for the three and nine months ended September 30, 2022 of zero and $31 million, respectively.

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

Net Interest Spread

The following table presents a summary of our net interest spread (including the impact of TBA dollar roll income, interest rate swaps and excluding "catch-up" premium amortization) for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30,

Six Months Ended

Three Months Ended September 30,

Nine Months Ended

September 30,

Investment and TBA Securities - Net Interest Spread 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 and six months ended June 30, 2023 and 2022 (dollars in millions):

Three Months Ended June 30,

Six Months Ended

The following table presents a reconciliation of net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) from comprehensive income (loss) available (attributable) to common stockholders (the most comparable GAAP financial measure) for the three and nine months ended September 30, 2023 and 2022 (dollars in millions):

Three Months Ended September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

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

Comprehensive loss attributable to common stockholders

$ (636) $ (1,064) $ (485) $ (2,935)

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534 560 870 1,848

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

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

1,356 1,738 1,125 5,257

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(1,574) (1,474) (2,026) (4,474)

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

Adjustment to exclude unrealized loss reported through other comprehensive income:

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

213 372 136 1,108

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Gain (Loss) on Investment Securities, Net

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

Three Months Ended June 30,

Six Months Ended

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

Three Months Ended September 30,

Nine Months Ended

September 30,

Gain (Loss) on Investment Securities, Net 1

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

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

Three Months Ended June 30,

Six Months Ended

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three and nine months ended September 30, 2023 and 2022 (in millions):

Three Months Ended September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

1 unchanged sentence

TBA securities, mark-to-market loss (148) (1,311) (196) (3,483)

Interest rate swaps, periodic cost 1

Interest rate swaps, periodic income (cost) 1

583 236 1,654 274

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

Interest rate swaps, mark-to-market gain (loss) 170 1,253 (276) 3,993

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

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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 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).

Our tangible net book value "at risk" leverage ratio was 7.9x and 7.4x as of September 30, 2023 and December 31, 2022, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of September 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.

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Mortgage Borrowings Amount % Amount %

Agency repurchase agreements 1,2

Investment securities repurchase agreements 1,2

$ 51,851 95 % $ 35,907 66 %

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E xcludes U.S.

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.

Treasury repurchase agreements totaling $256 million and $355 million as of September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023 and December 31, 2022, 43% and 48%, respectively, of our total repurchase agreements, including 43% and 48% or our investment securities 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 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 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 prevailing 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.

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

As of June 30, 2023, we had met all our margin requirements.

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

As of September 30, 2023, approximately 4% of 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 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.

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

As of September 30, 2023, the weighted average haircut on our repurchase agreements was approximately 3.7% 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 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.

As of September 30, 2023, our unencumbered assets totaled approximately $3.7 billion, or 53% 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 $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 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.

As of September 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 9% of our tangible stockholders' equity.

As of September 30, 2023, less than 12% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of September 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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OFF-BALANCE SHEET ARRANGEMENTS

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.

As of September 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 September 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

23 unchanged sentences

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