AGNC Investment Corp. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended September 30, 2023. Our MD&A is presented in the following sections: • Executive Overview • Financial Condition • Results of Operations • Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Forward-Looking Statements EXECUTIVE OVERVIEW We are a leading provider of private capital to the U.S. housing market, enhancing liquidity in the residential real estate mortgage markets and, in turn, facilitating home ownership in the U.S. We invest primarily in Agency residential mortgage-backed securities ("Agency RMBS") on a leveraged basis. These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise, such as Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac," and together with Fannie Mae, the "GSEs"), or by a U.S. Government agency, such as Government National Mortgage Association ("Ginnie Mae"). We may also invest in other assets related to the housing, mortgage or real estate markets that are not guaranteed by a GSE or U.S. Government agency. We are internally managed with the principal objective of providing our stockholders with favorable long-term returns on a risk-adjusted basis through attractive monthly dividends. We generate income from the interest earned on our investments, net of associated borrowing and hedging costs, and net realized gains and losses on our investment and hedging activities. We fund our investments primarily through collateralized borrowings structured as repurchase agreements. We operate in a manner to qualify to be taxed as a REIT under the Internal Revenue Code. The size and composition of our investment portfolio depends on the investment strategies we implement, availability of attractively priced investments, suitable financing to appropriately leverage our investment portfolio and overall market conditions. Market conditions are influenced by a variety of factors, including interest rates, prepayment expectations, liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, regulations and relative returns on other assets. Trends and Recent Market Impacts 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. 25 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. For information regarding the sensitivity of our tangible net book value per common share to changes in interest rates and mortgage spreads, please refer to Item 3. Quantitative and Qualitative Disclosures about Market Risk in this form 10-Q. 26 Market Information The following table summarizes benchmark interest rates and prices of generic fixed rate Agency RMBS as of each date presented below: Interest Rate/Security Price 1 Sept. 30, 2022 Dec. 31, 2022 Mar. 31, 2023 June 30, 2023 Sept. 30, 2023 Sept. 30, 2023 vs June 30, 2023 Sept. 30, 2023 vs Dec. 31, 2022 Target Federal Funds Rate: Target Federal Funds Rate - Upper Band 3.25% 4.50% 5.00% 5.25% 5.50% +25 bps +100 bps SOFR: SOFR Rate 2.98% 4.30% 4.87% 5.09% 5.31% +22 bps +101 bps SOFR Interest Rate Swap Rate: 2-Year Swap 4.25% 4.45% 4.06% 4.82% 4.97% +15 bps +52 bps 5-Year Swap 3.85% 3.75% 3.34% 3.94% 4.38% +44 bps +63 bps 10-Year Swap 3.59% 3.56% 3.17% 3.58% 4.27% +69 bps +71 bps 30-Year Swap 3.07% 3.21% 2.93% 3.20% 4.01% +81 bps +80 bps U.S. Treasury Security Rate: 2-Year U.S. Treasury 4.28% 4.43% 4.03% 4.90% 5.05% +15 bps +62 bps 5-Year U.S. Treasury 4.09% 4.01% 3.58% 4.16% 4.61% +45 bps +60 bps 10-Year U.S. Treasury 3.83% 3.88% 3.47% 3.84% 4.57% +73 bps +69 bps 30-Year U.S. Treasury 3.78% 3.97% 3.65% 3.86% 4.70% +84 bps +73 bps 30-Year Fixed Rate Agency Price: 2.5% $83.94 $84.96 $86.16 $84.77 $79.39 -$5.38 -$5.57 3.0% $86.97 $88.02 $89.63 $88.01 $82.75 -$5.26 -$5.27 3.5% $89.95 $91.10 $92.82 $91.11 $86.02 -$5.09 -$5.08 4.0% $92.73 $94.03 $95.59 $93.84 $89.09 -$4.75 -$4.94 4.5% $95.21 $96.59 $97.92 $96.14 $91.85 -$4.29 -$4.74 5.0% $97.39 $98.80 $99.69 $98.00 $94.39 -$3.61 -$4.41 5.5% $99.46 $100.47 $101.00 $99.55 $96.68 -$2.87 -$3.79 6.0% $101.61 $101.69 $102.08 $100.88 $98.74 -$2.14 -$2.95 6.5% $102.83 $102.57 $103.23 $102.12 $100.52 -$1.60 -$2.05 15-Year Fixed Rate Agency Price: 1.5% $85.61 $86.84 $87.95 $86.30 $83.27 -$3.03 -$3.57 2.0% $88.06 $89.28 $90.36 $88.61 $85.81 -$2.80 -$3.47 2.5% $90.50 $91.80 $92.83 $90.98 $88.21 -$2.77 -$3.59 3.0% $92.89 $93.85 $94.83 $93.32 $90.54 -$2.78 -$3.31 3.5% $94.49 $95.93 $96.68 $95.14 $92.52 -$2.62 -$3.41 4.0% $96.43 $97.75 $98.41 $96.59 $94.42 -$2.17 -$3.33 ________________________________ 1. Price information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information is as of 3:00 p.m. (EST) on such date and can vary by source. Price information is sourced from Barclays. Interest rate information is sourced from Bloomberg. 27 The following table summarizes mortgage and credit spreads as of each date presented below: Mortgage Rate/Credit Spread Sept. 30, 2022 Dec. 31, 2022 Mar. 31, 2023 June 30, 2023 Sept. 30, 2023 Sept. 30, 2023 vs June 30, 2023 Sept. 30, 2023 vs Dec. 31, 2022 Mortgage Rate: 1 30-Year Agency Current Coupon Yield to 5-Year U.S. Treasury Spread 159 138 147 147 175 +28 +37 30-Year Agency Current Coupon Yield to 10-Year U.S. Treasury Spread 185 151 158 179 179 — +28 30-Year Agency Current Coupon Yield to 5/10-Year U.S. Treasury Spread 171 145 152 163 177 +14 +32 30-Year Agency Current Coupon Yield 5.68% 5.39% 5.05% 5.63% 6.36% +73 bps +97 bps 30-Year Mortgage Rate 6.72% 6.52% 6.40% 6.78% 7.41% +63 bps +89 bps Credit Spread (in bps): 2 CRT M2 633 514 423 360 252 -108 -262 CMBS AAA 143 125 171 151 137 -14 +12 CDX IG 108 82 76 66 74 +8 -8 ________________________________ 1. 30-Year Current Coupon Yield represents yield on new production Agency RMBS. 30-Year Current Coupon Yields are sourced from Bloomberg and 30-Year Mortgage Rates are sourced from Clear Blue. 2. CRT and CDX spreads sourced from JP Morgan. CMBS spreads are the average of spreads sourced from JP Morgan and Wells Fargo. 28 FINANCIAL CONDITION As of September 30, 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; 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 Amortized Cost Fair Value Average Coupon % Amortized Cost Fair Value Average Coupon % Fixed rate Agency RMBS and TBA securities: ≤ 15-year: ≤ 15-year RMBS $ 1,020 $ 931 3.31 % 2 % $ 1,718 $ 1,597 3.25 % 3 % 15-year TBA securities 89 87 5.00 % — % — — — % — % Total ≤ 15-year 1,109 1,018 3.45 % 2 % 1,718 1,597 3.25 % 3 % 20-year RMBS 1,484 1,207 2.50 % 2 % 1,601 1,365 2.51 % 2 % 30-year: 30-year RMBS 58,097 53,270 4.72 % 90 % 39,727 36,207 3.89 % 61 % 30-year TBA securities, net 2 2,318 2,289 6.46 % 4 % 18,407 18,574 4.84 % 31 % Total 30-year 60,415 55,559 4.79 % 94 % 58,134 54,781 4.20 % 92 % Total fixed rate Agency RMBS and TBA securities 63,008 57,784 4.71 % 97 % 61,453 57,743 4.13 % 97 % Adjustable rate Agency RMBS 298 288 4.65 % — % 126 122 3.72 % — % CMO Agency RMBS: CMO 133 123 3.26 % — % 136 129 3.20 % — % Interest-only strips 41 34 1.77 % — % 46 41 2.15 % — % Principal-only strips 29 25 — % — % 31 29 — % — % Total CMO Agency RMBS 203 182 2.03 % — % 213 199 2.25 % 1 % Total Agency RMBS and TBA securities 63,509 58,254 4.69 % 98 % 61,792 58,064 4.12 % 98 % Non-Agency RMBS 1 54 40 4.87 % — % 111 90 4.52 % — % CMBS 298 268 7.03 % — % 605 567 6.06 % 1 % CRT 702 736 10.28 % 1 % 779 757 8.48 % 1 % Total investment securities $ 64,563 $ 59,298 4.76 % 100 % $ 63,287 $ 59,478 4.18 % 100 % ________________________________ 1. Table excludes other mortgage credit investments of $45 million and $25 million as of September 30, 2023 and December 31, 2022, respectively. 2. TBA securities are presented net of long and short positions. For further details of our TBA securities refer to Note 5 of our Consolidated Financial Statements in this Form 10-Q 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 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 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. 29 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 Fixed Rate Agency RMBS and TBA Securities Par Value Amortized Cost Fair Value Specified Pool % 1 Weighted Average Coupon Amortized Cost Basis Weighted Average Projected CPR 2 Yield 2 Age (Months) Fixed rate ≤ 15-year: ≤ 2.5% 61 62 54 100% 2.16% 101.8% 1.81% 63 8% 3.0% - 4.0% 937 956 875 98% 3.38% 102.1% 2.70% 68 11% ≥ 4.5% 92 91 89 2% 4.99% 101.9% 2.68% 152 20% Total ≤ 15-year 1,090 1,109 1,018 90% 3.45% 102.1% 2.65% 67 10% 20-year: ≤ 2.5% 1,138 1,178 931 —% 2.15% 103.5% 1.60% 37 4% 3.0% - 4.0% 219 225 202 85% 3.60% 102.6% 2.91% 99 10% ≥ 4.5% 77 81 74 99% 4.50% 105.0% 3.19% 82 12% Total 20-year: 1,434 1,484 1,207 20% 2.50% 103.5% 1.89% 48 6% 30-year: ≤ 2.5% 3,122 3,101 2,445 48% 2.24% 99.5% 2.26% 27 6% 3.0% - 4.0% 13,987 14,641 12,461 89% 3.71% 104.5% 2.95% 81 8% 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% Total fixed rate $ 61,855 $ 63,008 $ 57,784 47% 4.71% 101.8% 4.30% 33 8% ________________________________ 1. Specified pools include pools backed by lower balance loans with original loan balances of up to $200K, HARP pools (defined as pools that were issued between May 2009 and December 2018 and backed by 100% refinance loans with original LTVs ≥ 80%), and pools backed by loans 100% originated in New York and Puerto Rico. As of September 30, 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. 2. Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of September 30, 2023. 30 December 31, 2022 Includes Net TBA Position Excludes Net TBA Position Fixed Rate Agency RMBS and TBA Securities Par Value Amortized Cost Fair Value Specified Pool % 1 Weighted Average Coupon Amortized Cost Basis Weighted Average Projected CPR 2 Yield 2 Age (Months) Fixed rate ≤ 15-year: ≤ 2.5% $ 307 $ 322 $ 281 100% 2.42% 105.2% 1.30% 36 8% 3.0% - 4.0% 1,363 1,393 1,313 98% 3.43% 102.2% 2.75% 59 11% ≥ 4.5% 3 3 3 97% 4.55% 102.4% 2.65% 144 17% Total ≤ 15-year 1,673 1,718 1,597 98% 3.25% 102.7% 2.47% 55 11% 20-year: ≤ 2.5% 1,213 1,257 1,044 —% 2.15% 103.6% 1.60% 28 5% 3.0% - 4.0% 246 252 235 86% 3.60% 102.7% 2.91% 90 10% ≥ 4.5% 87 92 86 99% 4.50% 105.1% 3.18% 74 12% Total 20-year: 1,546 1,601 1,365 21% 2.51% 103.6% 1.89% 40 6% 30-year: ≤ 2.5% 7,017 7,032 5,883 33% 2.25% 102.0% 1.98% 20 6% 3.0% - 4.0% 18,775 19,371 17,605 78% 3.66% 104.6% 2.95% 70 7% 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% Total fixed rate $ 60,660 $ 61,453 $ 57,743 46% 4.13% 103.5% 3.25% 43 7% ________________________________ 1. See Note 1 of preceding table for specified pool composition. As of December 31, 2022, lower balance specified pools had a weighted average original loan balance of $123,000 and $140,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 128% and 138% for 15-year and 30-year securities, respectively. 2. 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 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 Non-GAAP Financial Measures In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including "economic interest income," "economic interest expense," "net spread and dollar roll income" and "net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders," and the related per common share measures and certain financial metrics derived from such non-GAAP information. "Economic interest income" is measured as interest income (GAAP measure), adjusted to (i) exclude retrospective "catch-up" adjustments to premium amortization cost associated with changes in projected CPR estimates and (ii) include TBA dollar roll implied interest income. "Economic interest expense" is measured as interest expense (GAAP measure) adjusted to include TBA dollar roll implied interest expense/benefit and interest rate swap periodic cost/income. "Net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" is measured as comprehensive income (loss) available (attributable) to common stockholders (GAAP measure) adjusted to: (i) exclude gains/losses on investment securities recognized through net income and other comprehensive income and gains/losses on derivative instruments and other securities (GAAP measures) and (ii) include interest rate swap periodic income/cost, TBA dollar roll income and other miscellaneous interest income/expense. As defined "Net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" includes (i) the components of "economic interest income" and "economic interest expense", plus (ii) other interest income/expense, and less (iii) total operating expenses and dividends on preferred stock (GAAP measures). By providing such measures, in addition to the related GAAP measures, we believe we give greater transparency into the information used by our management in its financial and operational decision-making. We also believe it is important for users of our financial information to consider information related to our current financial performance without the effects of certain 31 measures and one-time events that are not necessarily indicative of our current investment portfolio performance and operations. Specifically, in the case "net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" and components of such measure, "economic interest income" and "economic interest expense," we believe the inclusion of TBA dollar roll income is meaningful as TBAs, which are accounted for under GAAP as derivative instruments with gains and losses recognized in other gain (loss) in our consolidated statement of comprehensive income, are economically equivalent to holding and financing generic Agency RMBS using short-term repurchase agreements. Similarly, we believe that the inclusion of periodic interest rate swap settlements is meaningful as interest rate swaps are the primary instrument we use to economically hedge against fluctuations in our borrowing costs and it is more indicative of our total cost of funds than interest expense alone. Additionally, we believe the exclusion of "catch-up" premium amortization adjustments is meaningful as it excludes the cumulative effect from prior reporting periods due to current changes in future prepayment expectations and, therefore, exclusion of such adjustments is more indicative of the current earnings potential of our investment portfolio. However, because such measures are incomplete measures of our financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, results computed in accordance with GAAP. In addition, because not all companies use identical calculations, our presentation of such non-GAAP measures may not be comparable to other similarly titled measures of other companies. Selected Financial Data The following selected financial data is derived from our interim consolidated financial statements and the notes thereto. The tables below present our condensed consolidated balance sheets as of September 30, 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, December 31, Balance Sheet Data 2023 2022 Investment securities, at fair value of $56,922 and $40,904, respectively, and other mortgage credit investments $ 56,967 $ 40,929 Total assets $ 69,991 $ 51,748 Repurchase agreements and other debt $ 52,187 $ 36,357 Total liabilities $ 62,541 $ 43,878 Total stockholders' equity $ 7,450 $ 7,870 Net book value per common share 1 $ 8.89 $ 10.76 Tangible net book value per common share 2 $ 8.08 $ 9.84 32 Three Months Ended September 30, Nine Months Ended September 30, Statement of Comprehensive Income Data (Unaudited) 2023 2022 2023 2022 Interest income $ 593 $ 373 $ 1,401 $ 1,243 Interest expense 646 196 1,621 303 Net interest income (53) 177 (220) 940 Other gain (loss), net (316) (824) 31 (2,631) Operating expenses 23 19 68 60 Net income (loss) (392) (666) (257) (1,751) Dividends on preferred stock 31 26 92 76 Net income (loss) available (attributable) to common stockholders $ (423) $ (692) $ (349) $ (1,827) Net income (loss) $ (392) $ (666) $ (257) $ (1,751) Other comprehensive income (loss), net (213) (372) (136) (1,108) Comprehensive loss (605) (1,038) (393) (2,859) Dividends on preferred stock 31 26 92 76 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 Weighted average number of common shares outstanding - diluted 622.0 528.7 600.2 526.4 Net income (loss) per common share - basic $ (0.68) $ (1.31) $ (0.58) $ (3.47) Net income (loss) per common share - diluted $ (0.68) $ (1.31) $ (0.58) $ (3.47) Comprehensive income (loss) per common share - basic $ (1.02) $ (2.01) $ (0.81) $ (5.58) Comprehensive income (loss) per common share - diluted $ (1.02) $ (2.01) $ (0.81) $ (5.58) Dividends declared per common share $ 0.36 $ 0.36 $ 1.08 $ 1.08 Three Months Ended September 30, Nine Months Ended September 30, Other Data (Unaudited) * 2023 2022 2023 2022 Average investment securities - at par $ 54,387 $ 46,863 $ 49,491 $ 49,355 Average investment securities - at cost $ 55,665 $ 48,362 $ 50,921 $ 50,897 Average net TBA dollar roll position - at cost $ 7,340 $ 20,331 $ 11,687 $ 21,184 Average total assets - at fair value $ 65,025 $ 58,701 $ 61,964 $ 63,619 Average repurchase agreements and other debt outstanding 3 $ 47,073 $ 40,530 $ 42,841 $ 43,344 Average stockholders' equity 4 $ 7,758 $ 8,040 $ 7,843 $ 8,748 Average tangible net book value "at risk" leverage 5 7.5:1 8.1:1 7.5:1 8.1:1 Tangible net book value "at risk" leverage (as of period end) 6 7.9:1 8.7:1 7.9:1 8.7:1 Economic return on tangible common equity - unannualized 7 (10.1) % (17.4) % (6.9) % (35.5) % Expenses % of average total assets - annualized 0.14 % 0.13 % 0.15 % 0.13 % Expenses % of average assets, including average net TBA position - annualized 0.13 % 0.10 % 0.12 % 0.09 % Expenses % of average stockholders' equity - annualized 1.19 % 0.95 % 1.16 % 0.91 % ________________________________ * Except as noted below, average numbers for each period are weighted based on days on our books and records. 1. Net book value per common share is calculated as total stockholders' equity, less preferred stock liquidation preference, divided by number of common shares outstanding as of period end. 2. Tangible net book value per common share excludes goodwill. 3. Amount represents the daily weighted average repurchase agreements outstanding for the period used to fund our investment securities and other debt. Amount excludes U.S. Treasury repurchase agreements and TBA contracts. Other debt includes debt of consolidated VIEs. 4. Average stockholders' equity calculated as average month-ended stockholders' equity during the period. 5. Average tangible net book value "at risk" leverage is calculated by dividing the sum of daily weighted average repurchase agreements used to fund our investment securities, other debt, and TBA and forward settling securities (at cost) (collectively "mortgage borrowings") outstanding for the period by the sum of average stockholders' equity adjusted to exclude goodwill for the period. Leverage excludes U.S. Treasury repurchase agreements. 6. Tangible net book value "at risk" leverage as of period end is calculated by dividing the sum of mortgage borrowings outstanding and receivable/payable for unsettled investment securities as of period end by the sum of total stockholders' equity adjusted to exclude goodwill as of period end. Leverage excludes U.S. Treasury repurchase agreements. 33 7. Economic return on tangible common equity represents the sum of the change in tangible net book value per common share and dividends declared per share of common stock during the period over beginning tangible net book value per common share. Economic Interest Income and Asset Yields The following table summarizes our economic interest income (a non-GAAP measure) for the three and nine months ended September 30, 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 Amount Yield Amount Yield Amount Yield Amount Yield Interest income: Cash/coupon interest income $ 613 4.51 % $ 409 3.49 % $ 1,586 4.27 % $ 1,201 3.24 % Net premium amortization benefit (cost) (20) (0.25) % (36) (0.40) % (185) (0.60) % 42 0.02 % Interest income (GAAP measure) 593 4.26 % 373 3.09 % 1,401 3.67 % 1,243 3.26 % Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast (31) (0.22) % (18) (0.15) % 27 0.07 % (243) (0.64) % Interest income, excluding "catch-up" premium amortization 562 4.04 % 355 2.94 % 1,428 3.74 % 1,000 2.62 % TBA dollar roll income - implied interest income 1,2 99 5.40 % 213 4.18 % 448 5.12 % 516 3.24 % Economic interest income, excluding "catch-up" amortization (non-GAAP measure) 3 $ 661 4.20 % $ 568 3.31 % $ 1,876 4.00 % $ 1,516 2.80 % Weighted average actual portfolio CPR for investment securities held during the period 7.1 % 9.2 % 6.3 % 12.2 % Weighted average projected CPR for the remaining life of investment securities held as of period end 8.3 % 7.0 % 8.3 % 7.0 % 30-year fixed rate mortgage rate as of period end 4 7.41 % 6.72 % 7.41 % 6.72 % 10-year U.S. Treasury rate as of period end 4 4.57 % 3.83 % 4.57 % 3.83 % ________________________________ 1. Reported in gain (loss) on derivatives instruments and other securities, net in the accompanying consolidated statements of operations. 2. Implied interest income from TBA dollar roll transactions is computed as the sum of (i) TBA dollar roll income and (ii) estimated TBA implied funding cost (see Economic Interest Expense and Aggregate Cost of Funds below). TBA dollar roll income represents the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and is the economic equivalent to interest income on the underlying Agency securities, less an implied funding cost, over the forward settlement period. Amount is net of TBAs used for hedging purposes. Amount excludes TBA mark-to-market adjustments. 3. The combined asset yield is calculated on a weighted average basis based on our average investment and TBA balances outstanding during the period and their respective yields. 4. 30-year fixed rate mortgage rates are sourced from Clear Blue. 10-year U.S. Treasury rates are sourced from Bloomberg. 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 nine months ended September 30, 2023 compared to the prior year period (in millions): 34 Impact of Changes in the Principal Elements Impacting Economic Interest Income Periods ended September 30, 2023 vs. September 30, 2022 Due to Change in Average Three months ended: Total Increase / (Decrease) Portfolio Size Asset Yield Interest Income (GAAP measure) $ 220 $ 56 $ 164 Estimated "catch-up" premium amortization due to change in CPR forecast (13) — (13) Interest income, excluding "catch-up" premium amortization 207 56 151 TBA dollar roll income - implied interest income (114) (136) 22 Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 93 $ (80) $ 173 Due to Change in Average Nine months ended: Total Increase / (Decrease) Portfolio Size Asset Yield Interest Income (GAAP measure) $ 158 $ 1 $ 157 Estimated "catch-up" premium amortization due to change in CPR forecast 270 — 270 Interest income, excluding "catch-up" premium amortization 428 1 427 TBA dollar roll income - implied interest income (68) (231) 163 Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 360 $ (230) $ 590 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. Leverage Our primary measure of leverage is our tangible net book value "at risk" leverage ratio, which is measured as the sum of our repurchase agreements and other debt used to fund our investment securities and net TBA and forward settling securities position (at cost) (together referred to as "mortgage borrowings") and our net receivable/payable for unsettled investment securities, divided by our total stockholders' equity adjusted to exclude goodwill. We include our net TBA position in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a TBA contract for the forward sale of Agency securities has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. (Refer to Liquidity and Capital Resources for further discussion of TBA securities and dollar roll transactions). Repurchase agreements used to fund short-term investments in U.S. Treasury securities ("U.S. Treasury repo") are excluded from our measure of leverage due to the temporary and highly liquid nature of these investments. The following table presents a summary of our leverage ratios for the periods listed (dollars in millions): Investment Securities Repurchase Agreements and Other Debt 1 Net TBA Position Long/(Short) 2 Average Tangible Net Book Value "At Risk" Leverage during the Period 3 Tangible Net Book Value "At Risk" Leverage as of Period End 4 Quarter Ended Average Daily Amount Maximum Daily Amount Ending Amount Average Daily Amount Ending Amount September 30, 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 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 ________________________________ 1. Other debt includes debt of consolidated VIEs. Amounts exclude U.S. Treasury repo agreements. 2. Daily average and ending net TBA position outstanding measured at cost. Includes forward settling non-Agency securities. 3. Average tangible net book value "at risk" leverage during the period represents the sum of our daily weighted average repurchase agreements and other debt used to fund acquisitions of investment securities and net TBA and forward settling securities position outstanding, divided by the sum of our average month-ended stockholders' equity, adjusted to exclude goodwill. 35 4. Tangible net book value "at risk" leverage as of period end represents the sum of our repurchase agreements and other debt used to fund acquisitions of investments securities, net TBA and forward settling securities position (at cost), and net receivable/payable for unsettled investment securities outstanding as of period end, divided by total stockholders' equity, adjusted to exclude goodwill as of period end. Economic Interest Expense and Aggregate Cost of Funds The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three and nine months ended September 30, 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 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 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 99 5.28 % 94 1.80 % 424 4.79 % 63 0.38 % Economic interest expense - before interest rate swap periodic cost (income), net 4 745 5.36 % 290 1.86 % 2,045 4.95 % 366 0.74 % Interest rate swap periodic cost (benefit), net 2,5,6 (583) (4.19) % (236) (1.52) % (1,654) (4.00) % (274) (0.56) % Total economic interest expense (non-GAAP measure) $ 162 1.17 % $ 54 0.34 % $ 391 0.95 % $ 92 0.18 % ________________________________ 1. Amounts exclude interest rate swap termination fees and variation margin settlements paid or received, forward starting swaps and the impact of other supplemental hedges, such as swaptions and U.S. Treasury positions. 2. Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. 3. The implied funding cost (benefit) of TBA dollar roll transactions is determined using the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and market based assumptions regarding the "cheapest-to-deliver" collateral that can be delivered to satisfy the TBA contract, such as the anticipated collateral’s weighted average coupon, weighted average maturity and projected 1-month CPR. The average implied funding cost (benefit) for all TBA transactions is weighted based on our daily average TBA balance outstanding for the period. 4. The combined cost of funds for total mortgage borrowings outstanding, before interest rate swap costs, is calculated on a weighted average basis based on average investment securities repurchase agreements, other debt and TBA securities outstanding during the period and their respective cost of funds. 5. Interest rate swap periodic cost (benefit) is measured as a percent of average mortgage borrowings outstanding for the period. 6. 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 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 September 30, 2023 vs. September 30, 2022 Due to Change in Average Three months ended: Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate Investment securities repurchase agreement and other debt interest expense $ 450 $ 32 $ 418 TBA dollar roll income - implied interest benefit/expense 5 (60) 65 Interest rate swap periodic income/cost (347) 11 (358) Total change in economic interest benefit/expense $ 108 $ (17) $ 125 Due to Change in Average Nine months ended: Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate 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 Interest rate swap periodic income/cost (1,380) 13 (1,393) Total change in economic interest benefit/expense $ 299 $ (19) $ 318 36 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 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 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 Average mortgage borrowings outstanding $ 54,413 $ 60,861 $ 54,528 $ 64,528 Average notional amount of interest rate swaps outstanding (excluding forward starting swaps), net $ 46,808 $ 49,147 $ 48,153 $ 50,484 Ratio of average interest rate swaps to mortgage borrowings outstanding 86 % 81 % 88 % 78 % Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.64 % 0.25 % 0.51 % 0.25 % Average interest rate swap receive-floating rate (5.51) % (2.13) % (5.04) % (0.97) % Average interest rate swap net pay/(receive) rate (4.87) % (1.88) % (4.53) % (0.72) % 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 nine months ended September 30, 2023 and 2022: Three Months Ended September 30, Nine Months Ended September 30, Investment and TBA Securities - Net Interest Spread 2023 2022 2023 2022 Average asset yield, excluding "catch-up" premium amortization 4.20 % 3.31 % 4.00 % 2.80 % Average aggregate cost of funds (1.17) % (0.34) % (0.95) % (0.18) % Average net interest spread, excluding "catch-up" premium amortization 3.03 % 2.97 % 3.05 % 2.62 % 37 Net Spread and Dollar Roll Income The following table presents a reconciliation of net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) from comprehensive income (loss) available (attributable) to common stockholders (the most comparable GAAP financial measure) for the three and nine months ended September 30, 2023 and 2022 (dollars in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Comprehensive loss attributable to common stockholders $ (636) $ (1,064) $ (485) $ (2,935) Adjustments to exclude realized and unrealized (gains) losses reported through net income: Realized loss on sale of investment securities, net 534 560 870 1,848 Unrealized loss on investment securities measured at fair value through net income, net 1,356 1,738 1,125 5,257 Gain on derivative instruments and other securities, net (1,574) (1,474) (2,026) (4,474) 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 Other adjustments: TBA dollar roll income, net 1 — 119 24 453 Interest rate swap periodic income (cost), net 1,4 583 236 1,654 274 Other interest income (expense), net 1,3,4 (42) (25) (111) (32) Net spread and dollar roll income available to common stockholders (non-GAAP measure) 434 462 1,187 1,499 Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast 2 (31) (18) 27 (243) Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) $ 403 $ 444 $ 1,214 $ 1,256 Weighted average number of common shares outstanding - basic 622.0 528.7 600.2 526.4 Weighted average number of common shares outstanding - diluted 623.3 529.8 601.3 527.5 Net spread and dollar roll income per common share - basic $ 0.70 $ 0.87 $ 1.98 $ 2.85 Net spread and dollar roll income per common share - diluted $ 0.70 $ 0.87 $ 1.97 $ 2.84 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - basic $ 0.65 $ 0.84 $ 2.02 $ 2.39 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - diluted $ 0.65 $ 0.84 $ 2.02 $ 2.38 ________________________________ 1. Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. 2. Reported in interest income in our consolidated statements of comprehensive income. 3. Other interest income (expense), net includes interest income on cash and cash equivalents; price alignment interest income (expense) ("PAI") on interest rate swap margin deposits posted by or (to) the Company; and other miscellaneous interest income (expense). 4. 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 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 2023 2022 2023 2022 Loss on sale of investment securities, net $ (534) $ (560) $ (870) $ (1,848) Unrealized (loss) gain on investment securities measured at fair value through net income, net 2 (1,356) (1,738) (1,125) (5,257) Unrealized (loss) gain on investment securities measured at fair value through other comprehensive income, net (213) (372) (136) (1,108) Total loss on investment securities, net $ (2,103) $ (2,670) $ (2,131) $ (8,213) ________________________________ 1. Amounts exclude gain (loss) on TBA securities, which are reported in gain (loss) on derivative instruments and other securities, net in our Consolidated Statements of Comprehensive Income. 2. Investment securities acquired after fiscal year 2016 are measured at fair value through net income (see Note 2 of our Consolidated Financial Statements in this Form 10-Q). 38 Gain (Loss) on Derivative Instruments and Other Securities, Net The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three and nine months ended September 30, 2023 and 2022 (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 TBA securities, dollar roll income $ — $ 119 $ 24 $ 453 TBA securities, mark-to-market loss (148) (1,311) (196) (3,483) Interest rate swaps, periodic income (cost) 1 583 236 1,654 274 Interest rate swaps, mark-to-market gain (loss) 170 1,253 (276) 3,993 Credit default swaps - buy protection — — (8) 21 Payer swaptions 89 194 49 866 U.S. Treasury securities - short position 537 532 614 1,620 U.S. Treasury securities - long position (20) (3) (75) (32) U.S. Treasury futures contracts - short position 412 483 389 818 SOFR futures contracts - long position (6) — (25) — Other interest income (expense), net 1 (42) (25) (110) (32) Other gain (loss), net (1) (4) (14) (24) Total gain (loss) on derivative instruments and other securities, net $ 1,574 $ 1,474 $ 2,026 $ 4,474 ________________________________ 1. 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. 39 LIQUIDITY AND CAPITAL RESOURCES Our business is dependent on our ability to maintain adequate levels of liquidity and capital resources to fund day-to-day operations, fulfill collateral requirements under our funding and derivative agreements, and to satisfy our dividend distribution requirement of at least 90% of our taxable income to maintain our qualification as a REIT. Our primary sources of liquidity are unencumbered cash and securities, borrowings available under repurchase agreements, TBA dollar roll financing and monthly receipts of principal and interest payments. We may also conduct asset sales, change our asset or funding mix, issue equity or undertake other capital enhancing actions to maintain adequate levels of liquidity and capital resources. There are various risks and uncertainties that can impact our liquidity, such as those described in Item 1A. Risk Factors of our most recent Annual Report on Form 10-K and Item 3. Quantitative and Qualitative Disclosures of Market Risks in this Form 10-Q. In assessing our liquidity, we consider a number of factors, including our current leverage, collateral levels, access to capital markets, overall market conditions, and the sensitivity of our tangible net book value over a range of scenarios. We believe that we have sufficient liquidity and capital resources available to meet our obligations and execute our business strategy. Leverage and Financing Sources Our leverage will vary depending on market conditions and our assessment of relative risks and returns, but we generally expect our leverage to be between six and twelve times the amount of our tangible stockholders' equity, measured as the sum of our total mortgage borrowings and net payable / (receivable) for unsettled investment securities, divided by the sum of our total stockholders' equity adjusted to exclude goodwill. Our tangible net book value "at risk" leverage ratio was 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. September 30, 2023 December 31, 2022 Mortgage Borrowings Amount % Amount % Investment securities repurchase agreements 1,2 $ 51,851 95 % $ 35,907 66 % Debt of consolidated variable interest entities, at fair value 80 — % 95 — % Total debt 51,931 96 % 36,002 66 % TBA and forward settling non-Agency securities, at cost 2,407 4 % 18,407 34 % Total mortgage borrowings $ 54,338 100 % $ 54,409 100 % ________________________________ 1. Includes Agency RMBS, CRT and non-Agency MBS repurchase agreements. E xcludes U.S. Treasury repurchase agreements totaling $256 million and $355 million as of September 30, 2023 and December 31, 2022, respectively. 2. 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. We enter into repurchase agreements, or "repo," through bi-lateral arrangements with financial institutions and independent dealers. We also enter into third-party repurchase agreements through our wholly-owned registered broker-dealer subsidiary, Bethesda Securities, LLC, such as tri-party repo offered through the FICC's GCF Repo service. We manage our repurchase agreement funding position through a variety of methods, including diversification of counterparties, maintaining a 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. 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. Interest rates are generally fixed based on prevailing rates corresponding to the term of the borrowing. None of our repo counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of our existing borrowings. The use of TBA dollar roll transactions increases our funding diversification, expands our available pool of assets, and increases our overall liquidity position, as TBA contracts typically have lower implied haircuts relative to Agency RMBS pools funded with repo financing. TBA dollar roll transactions may also have a lower implied cost of funds than comparable repo funded transactions (referred to as "dollar roll specialness") offering incremental return potential. However, if it were to become uneconomical to roll our TBA contracts into future months it may be necessary to take physical delivery of the underlying securities and fund those assets with cash or other financing sources, which could reduce our liquidity position. 40 Collateral Requirements and Unencumbered Assets Amounts available to be borrowed under our repurchase agreements are dependent upon prevailing interest rates, the lender’s "haircut" requirements and collateral value. Each of these elements may fluctuate with changes in interest rates, credit quality and liquidity conditions within the financial markets. To help manage the adverse impact of interest rate changes on our borrowings, we utilize an interest rate risk management strategy involving the use of derivative financial instruments. In particular, we attempt to mitigate the risk of the cost of our short-term funding liabilities increasing at a faster rate than the earnings of our long-term fixed rate assets during a period of rising interest rates. The collateral requirements, or haircut levels, under our repo agreements are typically determined on an individual transaction basis or by the prevailing requirements established by the FICC for GCF tri-party repo. Consequently, haircut levels and minimum margin requirements can change over time and may increase during periods of elevated market volatility. If the fair value of our collateral declines, our counterparties will typically require that we post additional collateral to re-establish the agreed-upon collateral levels, referred to as "margin calls." Similarly, if the estimated fair value of our investment securities increases, we may request that counterparties release collateral back to us. Our counterparties typically have the sole discretion to determine the value of pledged collateral but are required to act in good faith in making determinations of value. Our agreements generally provide that in the event of a margin call, collateral must be posted on the same business day, subject to notice requirements. As of September 30, 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. Fannie Mae and Freddie Mac publish monthly security pay-down factors for their mortgage pools on the fifth day after month-end, but do not remit payment to security holders until generally the 25th day after month-end. Bi-lateral repo counterparties assess margin to account for the reduction in value of Agency collateral when factors are released. The FICC assesses margin on the last day of each month, prior to the factor release date, based on its internally projected pay-down rates (referred to as the "blackout period exposure adjustment" or "blackout margin"). On the factor release date, the blackout margin is released and collateralization requirements are adjusted to actual factor data. Due to the timing difference between associated margin calls and our receipt of principal pay-downs, our liquidity is temporarily reduced each month for principal repayments. We attempt to manage the liquidity risk associated with principal pay-downs by monitoring conditions impacting prepayment rates and through asset selection. As of September 30, 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%. Collateral requirements under our derivative agreements are subject to our counterparties' assessment of their maximum risk of loss associated with the derivative instrument, referred to as the initial or minimum margin requirement, and may be adjusted based on changes in market volatility and other factors. We are also subject to daily variation margin requirements based on changes in the value of the derivative instrument and/or collateral pledged. Daily variation margin requirements also entitle us to receive collateral if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral requirements under our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC. Collateral levels for interest rate derivative agreements are typically governed by the central clearing exchange and the associated futures commission merchants ("FCMs"), which may establish margin levels in excess of the clearing exchange. Collateral levels for interest rate derivative agreements not subject to central clearing are established by the counterparty financial institution. Haircut levels and minimum margin requirements imposed by our counterparties reduce the amount of our unencumbered assets and limit the amount we can borrow against our investment securities. During the nine months ended September 30, 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 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. Counterparty Risk Collateral requirements imposed by counterparties subject us to the risk that the counterparty does not return pledged assets to us as and when required. We attempt to manage this risk by monitoring our collateral positions and limiting our counterparties to registered clearinghouses and major financial institutions with acceptable credit ratings. We also diversify our funding across multiple counterparties and by region. 41 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. Asset Sales Agency RMBS securities are among the most liquid fixed income securities, and the TBA market is the second most liquid market (after the U.S. Treasury market). Although market conditions fluctuate, the vitality of these markets enables us to sell assets under most conditions to generate liquidity through direct sales or delivery into TBA contracts, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA"). Under certain market conditions, however, we may be unable to realize the full carrying value of our securities. We attempt to manage this risk by maintaining at least a minimum level of securities that trade at or near TBA values that in our estimation enhances our portfolio liquidity across a wide range of market conditions. Please refer to Trends and Recent Market Impacts of this Management Discussion and Analysis for further information regarding Agency RMBS and TBA market conditions. Capital Markets The equity capital markets serve as a source of capital to grow our business and to meet potential liquidity needs of our business. The availability of equity capital is dependent on market conditions and investor demand for our common and preferred stock. We will typically not issue common stock at times when we believe the capital raised will not be accretive to our tangible net book value or earnings, and we will typically not issue preferred equity when its cost exceeds acceptable hurdle rates of return on our equity. 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. Please refer to Note 9 of our Consolidated Financial Statements in this Form 10-Q for further details regarding our recent equity capital transactions, if any. OFF-BALANCE SHEET ARRANGEMENTS As of September 30, 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 The statements contained in this Quarterly Report that are not historical facts, including estimates, projections, beliefs, expectations concerning conditions, events, or the outlook for our business, strategy, performance, operations or the markets or industries in which we operate, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “intend,” “outlook,” “potential,” “forecast,” “estimate,” “will,” “could,” “should,” “likely” and other similar, correlative or comparable words and expressions. Forward-looking statements are based on management’s assumptions, projections and beliefs as of the date of this Quarterly Report, but they involve a number of risks and uncertainties. Actual results may differ materially from those anticipated in forward-looking statements, as well as from historical performance. Factors that could cause actual results to vary from our forward-looking statements include, but are not limited to, the following: • changes in U.S. monetary policy or interest rates, including actions taken by the Federal Reserve to normalize monetary policy and to reduce the size of its U.S. Treasury and Agency RMBS bond portfolio; • fluctuations in the yield curve; • fluctuations in mortgage prepayment rates on the loans underlying our Agency RMBS; • 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; 42 • conditions in the market for Agency RMBS and other mortgage securities, including changes in the available supply of such securities or investor appetite therefor; • actions by the federal, state, or local governments that affect the economy, the housing sector or financial markets; • the ongoing availability of personnel and systems to conduct our operations; • changes to laws, regulations, rules or policies that affect U.S. housing finance activity, the GSE's or the markets for Agency RMBS; and • legislative or regulatory changes that affect our status as a REIT, our exemption from the Investment Company Act of 1940 or the mortgage markets in which we participate. Forward-looking statements speak only as of the date made, and we do not assume any duty and do not undertake to update forward-looking statements. A further discussion of risks and uncertainties that could cause actual results to differ from any of our forward-looking statements is included in our most recent Annual Report on Form 10-K and this document under Item 1A. Risk Factors . We caution readers not to place undue reliance on our forward-looking statements.