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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-27 · 153 added, 146 removed, 566 unchanged (35% of the section changed)

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• Liquidity and Capital Resources

• Off-Balance Sheet Arrangements

• Forward-Looking Statements

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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 are internally managed with the principal objective of generating favorable long-term stockholder returns with a substantial yield component.

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.

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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.

We employ an active management strategy that is dynamic and responsive to evolving market conditions.

The composition of our portfolio and our investment, funding, and hedging strategies are tailored to reflect our analysis of market conditions and the relative values of available options.

Market conditions are influenced by a variety of factors, including interest rates, prepayment expectations, liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, regulations and relative returns on other assets.

Trends and Recent Market Impacts

Financial markets experienced broad-based weakness in 2022.

Persistently high inflation, coupled with macroeconomic and monetary policy uncertainty, led to a sharp decline in investor sentiment and a significant repricing in the fixed income markets.

Interest rates across the yield curve moved materially higher, as the Federal Reserve (the "Fed") raised the Federal Funds rate 425 basis points, and the yield on the 10-year U.S.

Treasury security increased nearly 250 basis points for the year, resulting in the worst annual total return for these bonds in decades.

The sharp increase in U.S.

Treasury yields drove mortgage rates to their highest level in twenty years, and, similar to the 10-year U.S.

Treasury, the total return for the unlevered Bloomberg U.S.

MBS Index, which tracks the performance of fixed-rate Agency RMBS, was -12% for the year, its worst annual performance since the Index's inception in 1976.

Agency RMBS often initially underperform other fixed income products during significant market downturns.

Investors typically sell Agency RMBS holdings prior to other less liquid fixed income asset classes to meet cash needs and redemption obligations during market disruptions and liquidity events.

This dynamic caused Agency RMBS to significantly underperform interest rate hedges and other fixed income assets during the year.

As a result, Agency RMBS spreads to benchmark interest rates across the coupon stack reached historically wide levels.

This spread widening was the primary driver of AGNC’s total comprehensive income (loss) per diluted common share of $(4.22) for fiscal year 2022, compared to $0.44 for fiscal year 2021, and economic return (loss) on tangible net book value per common share of (28.4)% for fiscal year 2022, compared to 2.9% for fiscal year 2021, comprised of dividends declared per common share and the decline in our tangible net book value per common share.

Net spread and dollar roll income, excluding "catch-up" amortization, (a non-GAAP measure) per diluted common share was $3.11 for fiscal year 2022, compared to $3.02 for fiscal year 2021, as higher asset yields and our pay-fixed/receive-variable interest rate swap portfolio offset rising repo funding costs and moderating TBA dollar roll income during the year.

Given the challenging market conditions, we prioritized risk management throughout 2022, characterized by a large interest rate hedge position and lower leverage relative to historical levels.

For the year, our interest rate hedge ratio averaged approximately 118% of our Agency repurchase agreements and net TBA position.

Our average "at risk" leverage ratio for the year was 7.8x our tangible stockholders' equity and, despite the decline in our stockholders' equity, was only slightly higher than 7.7x for fiscal year 2021, due to the combination of asset sales, portfolio runoff and capital markets transactions.

As of December 31, 2022, our interest rate hedge ratio was 124% of our funding liabilities and our "at risk" leverage ratio was 7.4x tangible equity.

Our liquidity position remained within normal operating levels during the year as a percentage of our stockholders' equity.

As of December 31, 2022, our unencumbered cash and Agency RMBS totaled $4.3 billion, or 59% of our tangible stockholders' equity, and unencumbered credit securities totaled $100 million.

While 2022 was a difficult year for investors in all asset classes, the challenging conditions in the fixed income markets peaked in September and October 2022 when monetary policy and macro-economic uncertainty was at its highest point.

A positive shift in market sentiment began to take hold in November 2022, which we believe marked the beginning of the recovery of the Agency RMBS market.

Although market shifts typically evolve over time and are not linear, we believe that the longer-term outlook for Agency RMBS has improved substantially.

Our favorable outlook is based on several positive dynamics.

First, we expect Agency RMBS spreads to benchmark interest rates to remain wider than historical standards as the Fed’s outsized ownership of Agency RMBS gradually diminishes.

Second, we expect the demand for Agency RMBS to outpace supply, even without Fed asset purchases.

Higher interest rates and a slower housing market will likely limit the supply of new mortgages, while lower refinance activity should limit runoff of the Fed’s portfolio.

Third, we expect that interest rate volatility will decline as the Fed slows the pace of interest rate hikes and the tightening of monetary conditions reaches an inflection point.

Collectively, these factors create a favorable macroeconomic backdrop for Agency RMBS investors and could prove durable over the intermediate to long-term.

We believe AGNC is well-positioned with our tangible net book value "at risk" leverage at the lower end of our historical operating range and a conservative hedge profile to take advantage of favorable investment opportunities as they arise.

The Federal Reserve continued its unprecedented dual-track approach to monetary policy tightening in 2023.

Since the beginning of this cycle in 2022, the Federal Reserve has raised the Federal Funds rate by 525 basis points and reduced its balance sheet by $1.3 trillion.

This aggressive Federal Reserve campaign and a number of other macroeconomic and geopolitical factors, including persistent inflation, regional bank failures and fears of broader financial contagion, political uncertainty regarding the U.S.

debt ceiling and gross supply of U.S.

Treasury securities, and significant global geopolitical events, led to sharply higher interest rate and Agency RMBS spread volatility throughout the year.

While a number of the risks related to these factors remain and will continue to influence Agency RMBS performance going forward, market uncertainty about many of them has declined considerably from peak levels experienced during the year.

The 10-year U.S.

Treasury increased 170 basis points from the April 2023 low of 3.3% to nearly 5.0% in mid-October before declining 110 basis points to 3.9% at year end, ending the year unchanged.

The current coupon Agency RMBS spread to a blend of 5- and 10-year Treasuries began the year at 145 basis points and reached 190 basis points in May and again in October, approximating levels that Agency RMBS spreads had previously reached since 2000 only during extreme financial market dislocations - the Great Financial Crisis and the peak of the Covid pandemic - before declining to 139 basis points at year end.

Challenging fixed income environments underscore the importance of active portfolio management and prioritization of risk management.

To that end, AGNC maintained a large interest rate hedge position, averaging over 115% of our repo funding and TBA position for 2023 and 2022, and a reduced leverage profile, averaging 7.4x and 7.8x of our tangible stockholders' equity for 2023 and 2022, respectively.

In addition, our liquidity as a percentage of our stockholders' equity remained within normal operating levels despite the difficult environment, with unencumbered cash and Agency RMBS growing to $5.1 billion, or 66% of our tangible stockholders' equity, as of the end of 2023, up from $4.3 billion, or 59% of tangible stockholders’

equity, the previous year-end.

To capitalize on higher asset yields and wider spreads, in 2023, we continued to shift our asset portfolio away from TBA and lower coupon holdings toward a greater share of higher coupon, high-quality specified pools.

As a result, the weighted average coupon on our fixed-rate Agency RMBS and TBA securities increased to 4.83% as of December 31, 2023 from 4.13% as of the previous year-end.

Additionally, we opportunistically issued $1.1 billion and $0.5 billion in 2023 and 2022, respectively, of accretive common equity through our At-the-Market offering program to capitalize on our material price to book premium.

AGNC earned total comprehensive income of $0.30 per diluted common share for fiscal year 2023, versus a loss of $4.22 in fiscal year 2022.

Our total economic return on tangible common equity was 3.0% for 2023, comprised of $1.44 dividends declared per common share and a $1.14 decline in tangible net book value per common share, compared to a loss of 28.4% for 2022.

Net spread and dollar roll income (a non-GAAP measure) per diluted common share totaled $2.61 for fiscal year 2023, compared to $3.11 for 2022, as higher asset yields and our pay-fixed / receive-variable interest rate swap portfolio largely offset rising repo funding costs and declining TBA dollar roll income during the year.

As a levered investor in Agency RMBS, AGNC's performance is primarily driven by changes in Agency RMBS spreads to benchmark interest rates and interest rate volatility.

Looking ahead, although risk measures for volatility remain elevated by historical standards, we believe a more favorable investment environment for Agency RMBS is emerging, supported by three key developments.

First, the Fed adopted a more neutral monetary policy stance in the fourth quarter and indicated that multiple rate cuts are possible in 2024 if inflation continues to improve as expected.

Second, many of the factors that drove the high levels of interest rate volatility in 2023 have now largely subsided, which should, in turn, enhance the attractiveness of Agency RMBS and reduce the cost of our interest rate risk management activities.

Third, Agency RMBS spreads appear to have settled into a new trading range, providing us additional confidence in our view that the secular spread widening associated with the Federal Reserve’s reduced presence in the Agency RMBS market has reached its conclusion.

Importantly, the higher end of this recent trading range has held on several repeated occasions, as the nearly 2.0% yield benefit for Agency RMBS relative to Treasury securities at these wide spread levels led to strong incremental demand for Agency RMBS.

These developments collectively position Agency RMBS as an attractive investment option, both on an absolute and relative basis, in our view, and form the basis for our positive investment outlook.

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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(EST) on such date and can vary by source.

Prices in the table above were obtained from Barclays.

Interest rates were obtained from Bloomberg.

Price information is sourced from Barclays.

Interest rate information is sourced from Bloomberg.

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

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Treasury Spread 138 147 147 175 140 +2

30-Year Agency Current Coupon Yield to 10-Year U.S.

Treasury Spread 151 158 179 179 137 -14

30-Year Agency Current Coupon Yield to 5/10-Year U.S.

Treasury Spread 145 152 163 177 139 -6

30-Year Agency Current Coupon Yield 5.39% 5.05% 5.63% 6.36% 5.25% -14 bps

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30-Year Current Coupon Yield represents yield on new production Agency RMBS.

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

30-Year Current Coupon Yields are sourced from Bloomberg and 30-Year Mortgage Rates are sourced from Clear Blue.

CRT and CDX spreads sourced from JP Morgan.

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

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

FINANCIAL CONDITION

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$5.4 billion and $18.6 billion net TBA securities, at fair value, respectively;

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

and other mortgage credit investments of $44 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 December 31, 2023 and 2022 (dollars in millions):

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≤ 15-year RMBS $ 759 $ 718 3.25 % 1 % $ 1,718 $ 1,597 3.25 % 3 %

15-year TBA securities, net 1

— — — % — % 2,056 2,059 1.71 % 3 %

15-year TBA securities 89 91 5.00 % — % — — — % — %

Total ≤ 15-year

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Adjustable rate Agency RMBS 293 290 4.67 % — % 126 122 3.72 % — %

Multifamily 161 162 4.47 % — % — — — % — %

CMO Agency RMBS:

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________________________________

Table excludes other mortgage credit investments of $44 million and $25 million as of December 31, 2023 and 2022, respectively.

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-K

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

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

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

As of December 31, 2022 and 2021, our TBA position and forward settling securities had a net carrying value of $0.2 billion and $(44) million, respectively, reported in derivative assets/(liabilities) on our accompanying consolidated balance sheets.

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

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 December 31, 2023 and 2022, our TBA securities had a net carrying value of $66 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 December 31, 2023 and 2022, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 4.41% and 3.37%, respectively.

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3.5% 14 14 13 100% 3.50% 101.5% 2.60% 126 14%

4.0% 229 235 227 95% 4.00% 102.8% 2.98% 70 13%

4.5% 1 1 1 99% 4.50% 101.7% 2.70% 154 21%

5.0% 90 89 91 —% 5.00% 100.9% 2.54% 168 41%

Total ≤ 15-year 834 848 809 87% 3.44% 101.9% 2.62% 71 11%

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3.0% 27 28 25 97% 3.00% 103.6% 2.28% 53 8%

3.5% 117 119 113 79% 3.50% 101.7% 2.96% 125 10%

≥ 4.0% 142 148 141 96% 4.26% 104.3% 3.14% 83 11%

Total 20-year:

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4.0% 6,586 6,960 6,358 92% 4.00% 105.7% 3.08% 80 8%

4.5% 6,542 6,763 6,426 64% 4.50% 103.9% 3.83% 46 8%

5.0% 9,696 9,719 9,657 39% 5.00% 100.5% 4.91% 14 9%

5.5% 12,352 12,391 12,486 25% 5.50% 100.6% 5.39% 10 12%

6.0% 9,305 9,384 9,507 22% 6.00% 101.0% 5.71% 7 19%

≥ 6.5% 3,889 3,968 4,011 29% 6.50% 102.3% 5.78% 6 21%

Total 30-year 57,766 58,857 56,938 46% 4.88% 102.2% 4.41% 35 11%

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3.0% 531 540 504 99% 3.00% 101.6% 2.54% 60 10%

3.5% 490 501 473 100% 3.50% 102.2% 2.83% 57 12%

4.0% 342 352 336 93% 4.00% 103.2% 2.96% 60 13%

≥ 4.5% 3 3 3 97% 4.55% 102.8% 2.65% 144 17%

Total ≤ 15-year 1,673 1,718 1,597 98% 3.25% 102.7% 2.47% 55 11%

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3.0% 30 31 28 97% 3.00% 103.8% 2.28% 41 8%

3.5% 137 139 131 81% 3.50% 101.9% 2.96% 113 10%

≥ 4.0% 166 174 163 96% 4.27% 104.5% 3.12% 72 11%

Total 20-year:

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4.0% 8,587 9,012 8,243 83% 4.00% 105.8% 3.08% 68 8%

4.5% 11,663 11,850 11,364 52% 4.50% 103.5% 3.94% 28 7%

5.0% 11,762 11,674 11,641 19% 5.00% 101.7% 4.71% 8 7%

5.5% 7,589 7,558 7,635 12% 5.50% 102.0% 5.15% 6 9%

6.0% 532 543 547 50% 6.00% 103.8% 5.22% 6 12%

≥ 6.5% 103 107 106 21% 6.50% 104.3% 5.32% 9 18%

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

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Prepayment rates generally increase when interest rates fall and decrease when interest rates rise.

Quantitative and Qualitative Disclosures About Market Risk in this Form 10-K includes the estimated change in the weighted average projected CPR of our investments and in the corresponding weighted average yield on our investments should interest rates instantaneously go up or down by 25, 50, and 75 basis points.

Quantitative and Qualitative Disclosures About Market Risk in this Form 10-K includes the estimated weighted average projected CPR of our investments and the corresponding weighted average yield on our investments should interest rates instantaneously go up or down by 25, 50, and 75 basis points.

However, there are a variety of other factors that may impact the rate of prepayments on our securities.

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Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including "economic interest income," "economic interest expense," "net spread and dollar roll income" and "net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common

stockholders," "estimated taxable income (loss)" and the related per common share measures and certain financial metrics derived from such non-GAAP information.

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," and "net spread and dollar roll income available to common stockholders" 1 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 miscellaneous interest income/expense, and less (iii) total operating expenses and dividends on preferred stock (GAAP measures).

"Net spread and dollar roll income 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);

(ii) exclude retrospective "catch-up" adjustments to premium amortization cost associated with changes in projected CPR estimates;

and (iii) include interest rate swap periodic income/cost, TBA dollar roll income and other interest income/expense.

As defined "Net spread and dollar roll income 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 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.

Specifically, in the case "net spread and dollar roll income available to common stockholders" and components of such measure, "economic interest income" and "economic interest expense," we believe the inclusion of TBA dollar roll income is meaningful as TBAs, which are accounted for under GAAP as derivative instruments with gains and losses recognized in other

gain (loss) in our consolidated statement of comprehensive income, are economically equivalent to holding and financing generic Agency RMBS using short-term repurchase agreements.

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

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

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

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

In addition, because not all companies use identical calculations, our presentation of such non-GAAP measures may not be comparable to other similarly titled measures of other companies.

Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing our income tax returns, which occurs after the end of our fiscal year.

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"Net spread and dollar roll income available to common stockholders" was previously referred to as "net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders".

"Net spread and dollar roll income available to common stockholders" continues to exclude "catch-up" premium amortization.

Selected Financial Data

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Balance Sheet Data 2023

Investment securities, at fair value of $40,904, $54,421, $66,414, respectively, and other mortgage credit investments $ 40,929 $ 54,421 $ 66,414

Investment securities, at fair value of $54,824, $40,904 and $54,421, respectively, and other mortgage credit investments

$ 54,868 $ 40,929 $ 54,421

Total assets $ 71,596 $ 51,748 $ 68,149

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Tangible net book value per common share excludes goodwill.

Includes net TBA dollar roll position and, if applicable, forward settling securities.

The carrying value of our net TBA position represents the difference between the market value and the cost basis of the TBA contract as of period-end and is reported in derivative assets/(liabilities), at fair value on our accompanying consolidated balances sheets.

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 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.

Includes net TBA dollar roll position and, if applicable, forward settling securities.

Economic Interest Income and Asset Yields

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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.

30-year fixed rate mortgage rates are sourced from Optimal Blue.

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.

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 305 $ (304) $ 609

Our average investment portfolio, inclusive of TBAs (at cost), decreased 18% and 10% for fiscal years 2022 and 2021, respectively, primarily due to declines in stockholders' equity.

The average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization, increased 88 basis points for fiscal year 2022.

The increase was due to the combination of a higher average coupon on our portfolio as a result of portfolio repositioning up in coupon during the year and slower CPR projections due to higher interest rates.

For fiscal year 2021, our average yield decreased 38 basis points due to a lower average coupon and faster CPR projections.

Our average investment portfolio, inclusive of TBAs (at cost), decreased 11% and 18% for fiscal years 2023 and 2022, respectively, primarily due to a decline in our average stockholders' equity and lower "at risk" leverage.

The average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization, increased 111 and 88 basis points for fiscal years 2023 and 2022, respectively, largely as a result of shifting our asset portfolio away from TBA and lower coupon holdings toward a greater share of higher coupon, high-quality specified pools to capitalize on higher asset yields and wider 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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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).

(Refer to Liquidity and Capital Resources in this Form 10-K for further discussion of TBA securities and dollar roll transactions).

Repurchase agreements used to fund short-term investments in U.S.

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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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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 fiscal years 2022, 2021 and 2020 (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):

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for fiscal years 2023, 2022 and 2021 (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):

2023 2022 2021

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Amount Cost of Funds Amount Cost of Funds Amount Cost of Funds

Repurchase agreement and other debt - interest expense (GAAP measure) $ 625 1.49 % $ 75 0.15 % $ 674 0.96 %

Investment securities repurchase agreement and other debt - interest expense (GAAP measure) $ 2,287 5.12 % $ 625 1.49 % $ 75 0.15 %

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

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2,780 5.07 % 853 1.35 % (53) (0.06) %

Interest rate swap periodic cost (income), net 2,5

Interest rate swap periodic cost (benefit), net 2,5,6

(2,202) (4.02) % (675) (1.08) % 60 0.07 %

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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.

Interest rate swap periodic income/cost is measured as a percent of average mortgage borrowings 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 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.

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.

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

Repurchase agreements and other debt interest expense $ 550 $ (13) $ 563

Investment securities repurchase agreement and other debt interest expense $ 1,662 $ 40 $ 1,622

TBA dollar roll income - implied interest benefit/expense 265 (117) 382

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

Repurchase agreements and other debt interest expense $ (599) $ (189) $ (410)

Investment securities repurchase agreement and other debt interest expense $ 550 $ (13) $ 563

TBA dollar roll income - implied interest benefit/expense 356 40 316

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Our average mortgage borrowings, inclusive of TBAs, decreased 13% and 22% for fiscal years 2023 and 2022, respectively, due to a decline in our asset base.

The average interest rate on our mortgage borrowings increased 141 basis points

and decreased 73 basis points during fiscal years 2022 and 2021, respectively, primarily as a function of changes in short-term interest rates.

The decrease in our interest rate swap periodic cost for fiscal year 2022 was primarily due to higher receive rates on our pay-fixed swaps.

The modest increase in our interest rate swap periodic cost for fiscal year 2021 was due to lower receive rates, which was partly offset by a decline in our average pay rate.

The average interest rate on our mortgage borrowings, excluding the impact interest rate swap period income/cost, increased 372 and 141 basis points for fiscal years 2023 and 2022, respectively, due to higher short-term interest rates.

Interest rate swap periodic income increased for fiscal years 2023 and 2022 primarily due to higher receive rates on our pay-fixed swaps, as the average pay rate on our swaps increased marginally and the average notional balance remained largely unchanged despite the decline in our average mortgage borrowings.

The following is a summary of our average interest rate swaps outstanding and the related average swap pay and receive rates for fiscal years 2023, 2022 and 2021 (dollars in millions).

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Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2023 2022 2021

Average Agency repo and other debt outstanding

$ 41,363 $ 49,923 $ 69,370

Average investment securities repo and other debt outstanding $ 44,027 $ 41,363 $ 49,923

Average net TBA dollar roll position outstanding - at cost $ 10,000 $ 20,631 $ 29,851

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$ 54,027 $ 61,994 $ 79,774

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

$ 49,334 $ 48,634 $ 49,978

Average notional amount of interest rate swaps outstanding (excluding forward starting swaps), net $ 47,012 $ 49,334 $ 48,634

Ratio of average interest rate swaps to mortgage borrowings outstanding

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(4.62) % (1.35) % 0.12 %

For fiscal years 2022, 2021 and 2020, we had an average forward starting swap balance of $48 million, $149 million and $784 million, respectively.

For fiscal years 2023, 2022 and 2021, we had an average forward starting net pay and (receive) fixed rate swap balance of $(0.5) billion, $48 million and $149 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.

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Investment and TBA Securities - Net Interest Spread 2023 2022 2021

Average asset yield, excluding "catch-up" premium amortization 3.00 % 2.12 % 2.50 %

Average asset yield 4.11 % 3.00 % 2.12 %

Average aggregate cost of funds (1.05) % (0.27) % (0.01) %

Average net interest spread, excluding "catch-up" premium amortization 2.60 % 2.11 % 1.78 %

Average net interest spread 3.06 % 2.73 % 2.11 %

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 fiscal years 2022, 2021 and 2020 (dollars in millions):

The following table presents a reconciliation of net spread and dollar roll income available to common stockholders (non-GAAP measure) from comprehensive income (loss) available (attributable) to common stockholders (the most comparable GAAP financial measure) for fiscal years 2023, 2022 and 2021 (dollars in millions):

2023 2022 2021

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

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

Realized loss on sale of investment securities, net

1,567 2,916 57

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(1,678) 3,795 1,502

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

Gain on derivative instruments and other securities, net

(386) (4,630) (1,110)

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Other adjustments:

Estimated "catch-up" premium amortization benefit due to change in CPR forecast 1

(5) (238) (96)

TBA dollar roll income, net 2

Interest rate swap periodic (cost) income, net 1

Interest rate swap periodic income (cost), net 2,4

2,202 675 (60)

Other interest income, net 1

Other interest income (expense), net 2,3,4

Net spread and dollar roll income available to common stockholders (non-GAAP measure) 5

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

1,617 1,676 1,598

Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) $ 1,676 $ 1,598 $ 1,493

Weighted average number of common shares outstanding - basic 618.4 537.0 528.1

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Net spread and dollar roll income per common share - diluted $ 2.61 $ 3.11 $ 3.02

Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - basic $ 3.12 $ 3.03 $ 2.71

Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - diluted $ 3.11 $ 3.02 $ 2.70

________________________________

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

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

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

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).

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.

This measure was previously referred to as "net spread and dollar roll income, excluding 'catch-up' premium amortization cost/benefit, per common share." Though it continues to exclude "catch-up" premium amortization cost/benefit, its title has been condensed to its revised title in the table above.

Gain (Loss) on Investment Securities, Net

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2023 2022 2021

Gain (loss) on sale of investment securities, net $ (2,916) $ (57) $ 1,126

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

Loss on sale of investment securities, net $ (1,567) $ (2,916) $ (57)

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

1,678 (3,795) (1,502)

Unrealized loss on investment securities measured at fair value through other comprehensive income, net (973) (418) 622

Unrealized (loss) gain on investment securities measured at fair value through other comprehensive income, net 155 (973) (418)

Total loss on investment securities, net $ 266 $ (7,684) $ (1,977)

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Forward settling non-Agency securities, mark-to-market gain/(loss) — — 5

Interest rate swaps, periodic cost 598 (60) (48)

Interest rate swaps, mark-to-market gain 3,802 1,177 (2,718)

Credit default swaps - CDX IG - buy protection 21 — —

Interest rate swaps, periodic income (cost) 1

2,202 675 (60)

Interest rate swaps, mark-to-market gain (loss) (1,532) 3,802 1,177

Credit default swaps - buy protection (13) 21 —

Payer swaptions (21) 857 23

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Treasury futures contracts - short position (42) 811 42

Other (49) 56 (129)

SOFR futures contracts - long position (10) — —

Other interest income (expense), net 1

Other gain (loss), net (17) (49) 56

Total gain (loss) on derivative instruments and other securities, net $ 386 $ 4,630 $ 1,110

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-K.

Estimated Taxable Income (Loss)

For fiscal years 2022, 2021 and 2020, we had estimated taxable income (loss) attributed to common stockholders of $353 million, $(488) million and $745 million, respectively, or $0.66, $(0.92) and $1.35 per diluted common share, respectively.

Taxable income for fiscal year 2022 excludes $4.3 billion of capital losses.

Capital losses can be carried forward for up to five years and applied against future capital gains.

We did not incur an income tax liability for fiscal years 2021 and 2020.

As of December 31, 2022, we had distributed all of our estimated taxable income for fiscal year 2022.

Accordingly, we do not expect to incur an income tax liability on our 2022 taxable income.

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

federal income tax rules because of both temporary and permanent differences in income and expense recognition.

The primary differences are (i) unrealized gains and losses on investment securities and derivative instruments marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized, settled or amortized over the instrument's remaining term, (ii) timing differences, both temporary and potentially permanent, in the recognition of certain realized gains and losses and (iii) temporary differences related to the amortization of premiums and discounts on investments.

Furthermore, our estimated taxable income is subject to potential adjustments up to the time of filing our appropriate tax returns, which occurs after the end of our fiscal year.

following is a reconciliation of our GAAP net income to our estimated taxable income (loss) for fiscal years 2022, 2021 and 2020 (dollars in millions, except per share amounts):

________________________________

Net income (loss) $ (1,190) $ 749 $ (266)

Book to tax differences:

Premium amortization, net (249) (300) 292

Realized gain/loss, net (5,143) (2,363) 1,535

Capital loss/(utilization of capital loss carryforward) 4,328 — (394)

Unrealized loss, net 2,734 1,428 (321)

Other (22) (2) (5)

Total book to tax differences 1,648 (1,237) 1,107

REIT taxable income (loss) 458 (488) 841

REIT taxable income attributed to preferred stock 105 — 96

REIT taxable income (loss) attributed to common stock $ 353 $ (488) $ 745

Weighted average common shares outstanding - basic 537.0 528.1 551.6

Weighted average common shares outstanding - diluted 538.1 528.1 552.7

REIT taxable income (loss) per common share - basic $ 0.66 $ (0.92) $ 1.35

REIT taxable income (loss) per common share - diluted $ 0.66 $ (0.92) $ 1.35

Beginning capital loss carryforward $ — $ — $ 394

Increase (decrease) in capital loss carryforward 4,328 — (394)

Ending capital loss carryforward $ 4,328 $ — $ —

Ending capital loss carryforward per common share $ 7.53 $ — $ —

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-K.

LIQUIDITY AND CAPITAL RESOURCES

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Mortgage Borrowings Amount % Amount %

Repurchase agreements 1,2

Investment securities repurchase agreements 1,2

$ 48,879 90 % $ 35,907 66 %

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________________________________

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

Amounts exclude U.S.

Treasury repurchase agreements.

Includes Agency RMBS, CRT and non-Agency MBS repurchase agreements.

E xcludes U.S.

Treasury repurchase agreements totaling $1,547 million and $355 million as of December 31, 2023 and 2022, respectively.

As of December 31, 2023 and 2022, 43% and 48%, respectively, of our total repurchase agreements, including 45% 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 enter into third-party repurchase agreements through our wholly-owned registered broker-dealer subsidiary, Bethesda Securities, LLC, such as tri-party repo offered through the FICC's GCF Repo service.

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

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

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

The terms and conditions of our repurchase agreements are determined on a transaction-by-transaction basis when each such borrowing is initiated or renewed and, in the case of GCF Repo, by the variable margin requirements calculated by the FICC, which acts as the central counterparty.

The amount borrowed is generally equal to the fair value of the securities pledged, as determined by the lending counterparty, less an agreed-upon discount, referred to as a "haircut," which reflects the underlying risk of the specific collateral and protects the counterparty against a change in its value.

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 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 assessed discount, referred to as a "haircut," that 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.

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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 December 31, 2022, approximately 31% our investment portfolio consisted of TBA securities, which are not subject to monthly principal pay-downs.

As of December 31, 2023, approximately 9% 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 9%.

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

As of December 31, 2022, our maximum amount at risk (or the excess/shortfall of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables) with any of our repurchase agreement counterparties, excluding the FICC, was approximately 4% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 7% of our tangible stockholders' equity.

As of December 31, 2022, approximately 6% of our tangible stockholder's equity was at risk with the FICC.

As of December 31, 2023, our maximum amount at risk (or the excess/shortfall of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables) with any of our repurchase agreement counterparties, excluding the FICC, was less than 3% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 7% of our tangible stockholders' equity.

As of December 31, 2023, less than 7% of our tangible stockholder's equity was at risk with the FICC.

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

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

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

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

Furthermore, when the trading price of our common stock is less than our estimate of our current tangible net book value per common share, among other conditions, we may repurchase shares of our common stock.

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• fluctuations in the yield curve;

• the level, degree and extent of volatility in interest rates or the yield on our assets relative to interest rate benchmarks;

• fluctuations in mortgage prepayment rates on the loans underlying our Agency RMBS;

• the availability and terms of financing;

• changes in the market value of our assets, including from changes in net interest spreads, and changes in market liquidity or depth;

• the availability and terms of financing and our hedge positions;

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

• the effectiveness of our risk mitigation strategies;

• conditions in the market for Agency RMBS and other mortgage securities;

• actions by the federal, state, or local governments to stabilize the economy, the housing sector or financial markets;

• 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 direct or indirect effects of geopolitical events, including war, terrorism, civil discord, embargos, trade or other disputes, or natural disasters, on conditions in the markets for Agency RMBS or other mortgage securities, the terms or availability of funding for our business, or our ongoing business operations;

• the availability of personnel, operational resources, information technology and other systems to conduct our operations;

• changes to laws, regulations, rules or policies that affect U.S.

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• 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.

• other risks discussed under Item 1A.

Risk Factors .

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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis