# Dynex Capital Inc: Form 10-Q for the period ended Sep 30, 2024

- Company: [Dynex Capital Inc](/companies/dx.md) (CIK 826675)
- Form: 10-Q
- Filed: 2024-10-28
- Accepted by EDGAR: Oct 28, 2024, 16:36 ET
- Period: 2024-09-30
- Accession: 0000826675-24-000128
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/826675/000082667524000128/dx-20240930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/826675/000082667524000128/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $31.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $62.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.38 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.84 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.38 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.85 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 76,366,487 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 67,808,892 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | −$750.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $83.1m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2024-09-30 | $268.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-09-30 | $7.82bn | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $6.67bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $1.14bn | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 56,855 characters.

*The following discussion should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes included in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the accompanying notes included in Part II, Item 8, “Financial Statements and Supplementary Data” in our 2023 Form 10-K. References herein to “Dynex,” the “Company,” “we,” “us,” and “our” include Dynex Capital, Inc. and its consolidated subsidiaries, unless the context otherwise requires. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition, or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition, or results of operations, see “Forward-Looking Statements” at the end of this discussion and analysis.*

*For more information about our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Part I, Item 1, “Business” of our 2023 Form 10-K.*

### EXECUTIVE OVERVIEW

The headline for the third quarter of 2024 was the 50 basis point cut to the U.S. Federal Funds rate at the September Federal Open Market Committee meeting; the first rate cut since the Federal Reserve started raising rates in 2022. The rate cut was long awaited and was in reaction to weakening labor market conditions. The Federal Reserve is signaling its desire make proactive adjustments while labor markets are still generally strong and to deliver on its goal of price stability. The anticipated and actual cuts drove the 10-year U.S. Treasury down from 4.40% at the end of the second quarter of 2024 to 3.78% at the end of the third quarter. MBS spreads were broadly tighter during the third quarter of 2024, but had an upswing from mid-September through the end of the quarter.

### Market Data

The charts below show the range of U.S. Treasury rates for the past nine months and information regarding market spreads as of and for the periods indicated:

| Investment Type: Agency RMBS: (1) | Market Spreads as of: September 30, 2024 | June 30, 2024 | March 31, 2024 | December 31, 2023 | Change in Spreads YTD |
| --- | ---: | ---: | ---: | ---: | ---: |
| 2.0% coupon | 80 | 86 | 84 | 76 | 4 |
| 2.5% coupon | 80 | 87 | 84 | 78 | 2 |
| 4.0% coupon | 68 | 78 | 74 | 74 | (6) |
| 4.5% coupon | 66 | 73 | 71 | 73 | (7) |
| 5.0% coupon | 61 | 67 | 68 | 69 | (8) |
| 5.5% coupon | 59 | 68 | 65 | 66 | (7) |
| 6.0% coupon | 49 | 65 | 62 | 60 | (11) |
| Agency DUS (Agency CMBS)(2) | 75 | 66 | 65 | 76 | (1) |
| Freddie K AAA IO (Agency CMBS IO)(2) | 135 | 150 | 165 | 180 | (45) |
| AAA CMBS IO (Non-Agency CMBS IO)(2) | 122 | 135 | 168 | 225 | (103) |

*(1) Option adjusted spreads (“OAS”) are based on Company estimates using third-party models and market data. OAS shown for prior periods may differ from previous disclosures because the Company regularly updates the third-party model used.*

*(2) Data represents the spread to swap rate on newly issued securities and is sourced from J.P. Morgan.*

### Summary of Results

The Company increased book value by $0.50 per common share this quarter driven by the outperformance of MBS and TBAs over losses on the hedge book. Rates trended down for most of the quarter, and MBS spreads were broadly tighter during the third quarter, with significant performance divergence between coupons. In addition, we added $56.8 million of new capital to deploy into MBS opportunities. We added $1.5 billion of swaps during the quarter on which we received net periodic interest benefit of $4.2 million to offset financing costs.

The following table summarizes the changes in the Company's financial position during the third quarter of 2024:

*($s in thousands except per share data)*

|  | Net Change in Fair Value | Components of Comprehensive Income | Common Book Value Rollforward | Per Common Share |
| --- | ---: | ---: | ---: | ---: |
| **Balance as of June 30, 2024 (1)** |  |  | $933,763 | $12.50 |
| Net interest income |  | $894 |  |  |
| G & A and other operating expenses |  | (8,707) |  |  |
| Preferred stock dividends |  | (1,923) |  |  |
| Changes in fair value: |  |  |  |  |
| MBS and loans | $234,541 |  |  |  |
| TBAs | 72,191 |  |  |  |
| U.S. Treasury futures | (216,189) |  |  |  |
| Interest rate swaps | (10,066) |  |  |  |
| Total net change in fair value |  | 80,477 |  |  |
| **Comprehensive income to common shareholders** |  |  | 70,741 |  |
| **Capital transactions:** |  |  |  |  |
| Net proceeds from stock issuance (2) |  |  | 56,753 |  |
| Common dividends declared |  |  | (30,197) |  |
| **Balance as of September 30, 2024 (1)** |  |  | $1,031,060 | $13.00 |

*(1) Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's preferred stock of $111.5 million, in thousands and on a per common share basis.*

*(2) Net proceeds from stock issuance include $56.2 million from the common stock ATM program and $0.5 million from amortization of share-based compensation, net of grants.*

### Current Outlook

Global economic conditions, geopolitical risk and the U.S. election continue to be a focus for the Company. U.S. economic growth remains modest, inflation has declined closer to the Federal Reserve’s target, and monetary policy appears likely to be less restrictive. The broader investment environment remains favorable with mortgage spreads near historic wides. With a steeper yield curve, the opportunities to earn carry and experience appreciation on our bonds are growing. The yield curve shows forward financing costs declining well into 2025. We also expect the environment will be favorable for our hedging portfolio and to continue to lock in more compelling yields on our hedges as SOFR swap rates offer increasing returns. In the intermediate term, we believe equilibrium Agency RMBS spreads will be significantly tighter than market levels available today.

### FINANCIAL CONDITION

### Investment Portfolio

Our investment portfolio (including TBAs) as of September 30, 2024 has increased approximately 26% compared to December 31, 2023. The following charts compare the composition of our MBS portfolio including TBA securities as of the dates indicated:

We have purchased approximately $1.6 billion of Agency RMBS during the nine months ended September 30, 2024. The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:

*($s in thousands)*

| Coupon 30-year fixed-rate: | September 30, 2024 Par/Notional | Amortized Cost/ Implied Cost Basis (1)(3) Loan Age (in months)(4) | Fair Value (2)(3) 3 Month CPR (4)(5) | Weighted Average Estimated Duration (6) | Market Yield (7) |  |  |
| ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| 2.0% | $668,416 | $679,489 | $559,167 | 48 | 5.60% | 6.69 | 4.50% |
| 2.5% | 571,513 | 593,234 | 499,128 | 49 | 5.70% | 6.52 | 4.44% |
| 4.0% | 331,722 | 332,220 | 321,575 | 42 | 8.10% | 5.49 | 4.48% |
| 4.5% | 1,354,851 | 1,321,972 | 1,337,957 | 24 | 7.70% | 4.86 | 4.69% |
| 5.0% | 2,062,913 | 2,029,005 | 2,074,274 | 18 | 6.40% | 3.92 | 4.90% |
| 5.5% | 1,950,064 | 1,964,571 | 1,987,567 | 11 | 4.60% | 3.18 | 5.10% |
| 6.0% | 315,455 | 319,374 | 325,422 | 10 | 6.60% | 2.16 | 5.06% |
| TBA 4.0% | 462,000 | 445,304 | 443,447 | n/a | n/a | 5.57 | 4.55% |
| TBA 4.5% | 183,000 | 181,058 | 179,819 | n/a | n/a | 4.51 | 4.75% |
| TBA 5.0% | 767,000 | 765,296 | 766,161 | n/a | n/a | 3.63 | 5.02% |
| TBA 5.5% | 592,000 | 596,045 | 598,752 | n/a | n/a | 2.42 | 5.09% |
| Total | $9,258,934 | $9,227,568 | $9,093,269 | 22 | 6.10% | 4.17 | 4.86% |

26

*($s in thousands)*

| Coupon 30-year fixed-rate: | December 31, 2023 Par/Notional | Amortized Cost/ Implied Cost Basis (1)(3) Loan Age (in months)(4) | Fair Value (2)(3) 3 Month CPR (4)(5) | Weighted Average Estimated Duration (6) | Market Yield (7) |  |  |
| ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| 2.0% | $708,528 | $720,611 | $586,361 | 39 | 4.4% | 6.81 | 4.60% |
| 2.5% | 608,580 | 632,343 | 525,018 | 40 | 4.5% | 6.62 | 4.59% |
| 4.0% | 354,382 | 354,965 | 339,212 | 34 | 5.5% | 5.65 | 4.67% |
| 4.5% | 1,383,019 | 1,350,697 | 1,348,108 | 15 | 5.0% | 5.08 | 4.88% |
| 5.0% | 2,070,473 | 2,035,088 | 2,057,309 | 9 | 4.7% | 4.24 | 5.10% |
| 5.5% | 897,520 | 900,218 | 907,524 | 8 | 5.0% | 3.58 | 5.29% |
| TBA 4.0% | 262,000 | 240,641 | 248,040 | n/a | n/a | 5.89 | 4.72% |
| TBA 4.5% | 223,000 | 210,940 | 216,415 | n/a | n/a | 4.75 | 4.92% |
| TBA 5.0% | 518,000 | 490,466 | 512,982 | n/a | n/a | 3.98 | 5.15% |
| TBA 5.5% | 200,000 | 191,926 | 201,047 | n/a | n/a | 2.81 | 5.36% |
| TBA 6.0% | 200,000 | 193,369 | 203,219 | n/a | n/a | 2.15 | 5.37% |
| Total | $7,425,502 | $7,321,264 | $7,145,235 | 17 | 4.8% | 4.72 | 4.98% |

*(1) Implied cost basis of TBAs represents the forward price to be paid for the underlying Agency MBS.*

*(2) Fair value of TBAs is the implied market value of the underlying Agency security as of the end of the period.*

*(3) TBAs are included on the consolidated balance sheet within “derivative assets/liabilities” at their net carrying value which is the difference between their implied market value and implied cost basis. Please refer to Note 5 of the Notes to the Consolidated Financial Statements for additional information.*

*(4) TBAs are excluded from this calculation as they do not have a defined weighted-average loan balance or age until mortgages have been assigned to the pool.*

*(5) Constant prepayment rate (“CPR”) represents the 3-month CPR of Agency RMBS held as of date indicated.*

*(6) Duration measures the sensitivity of a security's price to the change in interest rates and represents the percent change in price of a security for a 100-basis point increase in interest rates. We calculate duration using third-party financial models and empirical data. Different models and methodologies can produce different estimates of duration for the same securities.*

*(7) Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the date indicated and assuming zero volatility.*

Less than 3% of our MBS portfolio as of September 30, 2024 is comprised of Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO. Our Agency CMBS and Agency CMBS IO are backed by loans collateralized by multifamily properties, which have performed well for the last decade versus other sectors of the commercial real estate market. Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation. According to Freddie Mac, 99.8% of the loans in K-deals are current as of August 2024. Our non-Agency CMBS IO were all originated prior to 2018 with a weighted average remaining life of less than 2 years. The underlying loans for the non-Agency CMBS IO securities are collateralized by a number of different property types including: 27% retail, 26% office, 17% multifamily, 11% hotel and 19% all other real estate categories. In the current macroeconomic environment, we are not actively purchasing CMBS or CMBS IO as current risk versus reward remains unattractive relative to Agency RMBS.

The following table provides certain information regarding our CMBS and CMBS IO as of the dates indicated:

*($s in thousands)*

|  | September 30, 2024 Amortized Cost | Fair Value | WAVG Life Remaining (1) | WAVG Market Yield (2) |
| --- | ---: | ---: | ---: | ---: |
| Agency CMBS | $101,169 | $98,026 | 2.9 | 4.44% |
| Agency CMBS IO | 116,006 | 111,774 | 5.8 | 6.59% |
| Non-Agency CMBS IO | 11,525 | 12,754 | 1.3 | 26.63% |
| Total | $228,700 | $222,554 |  |  |
|  | **December 31, 2023** |  |  |  |
| ($s in thousands) | **Amortized Cost** | **Fair Value** | **WAVG Life Remaining (1)** | **WAVG Market Yield (2)** |
| Agency CMBS | $121,799 | $115,595 | 4.1 | 4.74% |
| Agency CMBS IO | 140,824 | 133,302 | 5.9 | 5.19% |
| Non-Agency CMBS IO | 26,490 | 26,416 | 1.1 | 13.32% |
| Total | $289,113 | $275,313 |  |  |
| (1) Represents the weighted average life remaining in years based on contractual cash flows as of the dates indicated. |  |  |  |  |
| (2) Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the dates indicated and assuming zero volatility. |  |  |  |  |

### Repurchase Agreements

We have not experienced any difficulty in securing financing with any of our counterparties, and our repurchase agreement counterparties have not indicated any concerns regarding leverage or credit. Please refer to Note 4 of the Notes to the Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q as well as “Results of Operations” and “Liquidity and Capital Resources” contained within this Item 2 for additional information relating to our repurchase agreement borrowings.

### Derivative Assets and Liabilities

The table below discloses details on the Company's interest rate hedges held as of September 30, 2024 compared to hedging portfolio held as of December 31, 2023:

*($s in thousands)*

| Notional Amount Long (Short) | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| 30-year U.S. Treasury futures | $(505,000) | $(700,000) |
| 10-year U.S. Treasury futures | (3,850,000) | (4,180,000) |
| 5-year interest rate swaps | (260,000) |  |
| 7-year interest rate swaps | (1,275,000) | — |

Please refer to Note 5 of the Notes to the Consolidated Financial Statements for details on our interest rate hedging instruments as well as “Quantitative and Qualitative Disclosures about Market Risk” in Item 3 of this Quarterly Report on Form 10-Q.

### RESULTS OF OPERATIONS

### Three Months Ended September 30, 2024 Compared to the Three Months Ended June 30, 2024

The following table summarizes the results of operations for the periods discussed in this section:

*$s in thousands*

|  | Three Months Ended September 30, 2024 | June 30, 2024 |
| --- | ---: | ---: |
| Net interest income | $894 | $1,287 |
| Realized loss on sales of investments, net | — | (1,506) |
| Unrealized gain (loss) on investments, net | 192,874 | (41,977) |
| (Loss) gain on derivative instruments, net | (154,064) | 41,135 |
| Operating expenses, net | (8,707) | (7,243) |
| Preferred stock dividends | (1,923) | (1,923) |
| Net income (loss) to common shareholders | 29,074 | (10,227) |
| Other comprehensive income (loss) | 41,667 | (1,786) |
| Comprehensive income (loss) to common shareholders | $70,741 | $(12,013) |

### Net Interest Income

Interest income and effective yield for the three months ended September 30, 2024 increased compared to the three months ended June 30, 2024 due primarily to the addition of higher coupon Agency RMBS. We expect this trend to continue as our higher yielding Agency RMBS comprise a larger portion of our interest income and as our lower yielding Agency RMBS continue to pay down. Our interest expense increased compared to the prior quarter due to the increase in our average balance of repurchase agreement borrowings, although our financing cost as a percentage of our average borrowing declined for the third quarter of 2024 compared to the prior quarter.

The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:

*($s in thousands)*

|  | Three Months Ended September 30, 2024 Interest Income/Expense | Average Balance (1)(2) | Effective Yield/ Financing Cost (3)(4) | June 30, 2024 Interest Income/Expense | Average Balance (1)(2) | Effective Yield/ Financing Cost (3)(4) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Agency RMBS | $75,083 | $6,627,198 | 4.53% | $67,927 | $6,153,663 | 4.42% |
| Agency CMBS | 770 | 101,771 | 2.96% | 792 | 105,321 | 2.97% |
| CMBS IO (5) | 2,902 | 133,172 | 8.20% | 2,868 | 146,161 | 7.25% |
| Non-Agency MBS and other investments | 17 | 1,298 | 5.05% | 19 | 1,437 | 5.00% |
| MBS and loans | $78,772 | $6,863,439 | 4.58% | $71,606 | $6,406,582 | 4.46% |
| Cash equivalents | 4,686 |  |  | 4,448 |  |  |
| **Total interest income** | $83,458 |  |  | $76,054 |  |  |
| Repurchase agreement financing | (82,564) | 5,943,805 | (5.44)% | (74,767) | 5,410,282 | (5.47)% |
| **Net interest income/net interest spread** | $894 |  | (0.86)% | $1,287 |  | (1.01)% |

*(1) Average balance for assets is calculated as a simple average of the daily amortized cost and excludes securities pending settlement if applicable.*

*(2) Average balance for liabilities is calculated as a simple average of the daily borrowings outstanding during the period.*

*(3) Effective yield is calculated by dividing interest income by the average balance of asset type outstanding during the reporting period. Unscheduled adjustments to premium/discount amortization/accretion, such as for prepayment compensation, are not annualized in this calculation.*

*(4) Financing cost is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year.*

#### (5) Includes Agency and non-Agency issued securities.

In addition to lower financing costs for our repurchase agreement borrowings, we recognized a net periodic interest benefit of $4.2 million from short positions in interest rate swaps during the third quarter of 2024, which we expect will continue to partially offset our repurchase agreement financing costs in the coming months.

### Gains (Losses) on Investments and Derivative Instruments

During the three months ended September 30, 2024, the fair value of our investment portfolio increased as a result of spread tightening and the decline in the 10-year U.S. Treasury rate as investors gained confidence that the Federal Reserve is on a path of lowering the Federal Funds rate. The resulting gains on our investment portfolio outpaced the losses on our interest rate hedges created by the decline in rates.

During the three months ended June 30, 2024, the 10-year U.S. Treasury rate increased 20 basis points. The impact of this rate increase on our investments was mitigated by the resulting gains on our interest rate hedges of $64.1 million. The net loss of $(2.6) million on our investments, net of our interest rate hedges, was primarily driven by spread widening on Agency RMBS versus U.S. Treasuries.

The following provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:

*($s in thousands)*

| Investment portfolio: | Three Months Ended September 30, 2024 Realized Gain (Loss) Recognized in Net Income | Unrealized Gain (Loss) Recognized in Net Income | Unrealized Gain (Loss) Recognized in OCI | Total Change in Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Agency RMBS | $— | $191,786 | $37,089 | $228,875 |
| Agency CMBS | — | — | 1,891 | 1,891 |
| CMBS IO | — | 1,066 | 2,687 | 3,753 |
| Other non-Agency and loans | — | 22 | — | 22 |
| Subtotal | — | 192,874 | 41,667 | 234,541 |
| TBA securities (1) | 78,144 | (5,953) | — | 72,191 |
| Net gain on investments | $78,144 | $186,921 | $41,667 | $306,732 |
| **Interest rate hedging portfolio:** |  |  |  |  |
| U.S. Treasury futures | $(255,997) | $39,808 | $— | $(216,189) |
| Interest rate swaps (2) | 4,162 | (14,228) | — | (10,066) |
| Net gain (loss) on interest rate hedges | $(251,835) | $25,580 | $— | $(226,255) |
| **Total net gain (loss)** | $(173,691) | $212,501 | $41,667 | $80,477 |

*($s in thousands)*

| Investment portfolio: | Three Months Ended June 30, 2024 Realized Gain (Loss) Recognized in Net Income | Unrealized Gain (Loss) Recognized in Net Income | Unrealized Gain Recognized in OCI | Total Change in Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Agency RMBS | $— | $(43,705) | $(2,505) | $(46,210) |
| Agency CMBS | — | 1,263 | 414 | 1,677 |
| CMBS IO | — | 351 | 305 | 656 |
| Other non-Agency and loans | — | 114 | — | 114 |
| Subtotal | — | (41,977) | (1,786) | (43,763) |
| TBA securities (1) | (22,343) | (642) | — | (22,985) |
| Net loss on investments | $(22,343) | $(42,619) | $(1,786) | $(66,748) |
| **Interest rate hedging portfolio:** |  |  |  |  |
| U.S. Treasury futures | $43,961 | $20,249 | $— | $64,210 |
| Interest rate swaps (2) | 17 | (107) | — | (90) |
| Net gain on interest rate hedges | $43,978 | $20,142 | $— | $64,120 |
| **Total net gain (loss)** | $21,635 | $(22,477) | $(1,786) | $(2,628) |

*1) Realized and unrealized gains (losses) on TBA securities are recorded within “gain on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.*

*2) Realized gain (loss) for interest rate swaps includes net periodic interest benefit earned as well as amounts recognized or incurred upon maturity or termination, if applicable, during the period indicated.*

### Operating Expenses

Operating expenses for the three months ended September 30, 2024 increased $1.5 million compared to the three months ended June 30, 2024 primarily due to an increase in the Company’s performance based bonus accrual for employees based on projected results for the year.

### Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

### Net Interest Expense

Net interest expense and net interest spread improved for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Though our interest expense increased due to a higher average balance of repurchase agreement borrowings at a higher financing rate, additions of higher yielding Agency RMBS to our investment portfolio over the past year increased our interest income for the nine months ended September 30, 2024 by approximately 76% compared to the nine months ended September 30, 2023.

The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:

*($s in thousands)*

|  | Nine Months Ended September 30, 2024 Interest Income/Expense | Average Balance (1)(2) | Effective Yield/ Financing Cost (3)(4) | 2023 Interest Income/Expense | Average Balance (1)(2) | Effective Yield/ Financing Cost (3)(4) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Agency RMBS | $207,291 | $6,241,078 | 4.43% | $113,879 | $4,184,642 | 3.63% |
| Agency CMBS | 2,487 | 108,767 | 3.00% | 2,789 | 124,905 | 2.95% |
| CMBS IO (5) | 8,424 | 146,482 | 7.51% | 7,041 | 211,273 | 4.41% |
| Non-Agency MBS and other investments | 59 | 1,502 | 4.83% | 101 | 2,482 | 5.34% |
| MBS and loans | $218,261 | $6,497,829 | 4.47% | $123,810 | $4,523,302 | 3.65% |
| Cash equivalents | 12,777 |  |  | 12,519 |  |  |
| **Total interest income** | $231,038 |  |  | $136,329 |  |  |
| Repurchase agreement financing | (232,048) | 5,574,573 | (5.47)% | (141,983) | 3,652,320 | (5.13)% |
| **Net interest expense/net interest spread** | $(1,010) |  | (1.00)% | $(5,654) |  | (1.48)% |

*(1) Average balance for assets is calculated as a simple average of the daily amortized cost and excludes securities pending settlement if applicable.*

*(2) Average balance for liabilities is calculated as a simple average of the daily borrowings outstanding during the period.*

*(3) Effective yield is calculated by dividing interest income by the average balance of asset type outstanding during the reporting period. Unscheduled adjustments to premium/discount amortization/accretion, such as for prepayment compensation, are not annualized in this calculation.*

*(4) Financing cost is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year.*

#### (5) Includes Agency and non-Agency issued securities.

### Gains (Losses) on Investments and Derivative Instruments

During the nine months ended September 30, 2024, gains on our investment portfolio exceeded losses on our interest rate hedging portfolio by $115.2 million primarily because we purchased higher coupon investments during the nine months ended September 30, 2024 when spreads were wider versus spreads as of September 30, 2024.

During the nine months ended September 30, 2023, the fair value of our investment portfolio declined $(313.3) million primarily as a result of higher interest rates and significant spread widening across most asset classes. These losses were mitigated by net gains from our interest rate hedges of $276.1 million during the nine months ended September 30, 2023.

The following provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:

*($s in thousands)*

| Investment portfolio: | Nine Months Ended September 30, 2024 Realized Gain (Loss) Recognized in Net Income | Unrealized Gain (Loss) Recognized in Net Income | Unrealized Gain (Loss) Recognized in OCI | Total Change in Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Agency RMBS | $— | $78,405 | $17,207 | $95,612 |
| Agency CMBS | — | 1,073 | 1,989 | 3,062 |
| CMBS IO | — | 1,222 | 3,370 | 4,592 |
| Other non-Agency and loans | — | 173 | 47 | 220 |
| Subtotal | — | 80,873 | 22,613 | 103,486 |
| TBA securities (1) | 87,916 | (53,885) | — | 34,031 |
| Net gain on investments | $87,916 | $26,988 | $22,613 | $137,517 |
| **Interest rate hedging portfolio:** |  |  |  |  |
| U.S. Treasury futures | $(237,694) | $225,525 | $— | $(12,169) |
| Interest rate swaps (2) | 4,179 | (14,334) | — | (10,155) |
| Net (loss) gain on interest rate hedges | $(233,515) | $211,191 | $— | $(22,324) |
| **Total net gain (loss)** | $(145,599) | $238,179 | $22,613 | $115,193 |

33

*($s in thousands)*

| Investment portfolio: | Nine Months Ended September 30, 2023 Realized Gain (Loss) Recognized in Net Income | Unrealized Gain (Loss) Recognized in Net Income | Unrealized Gain (Loss) Recognized in OCI | Total Change in Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Agency RMBS | $(74,916) | $(120,735) | $(37,727) | $(233,378) |
| Agency CMBS | — | (815) | (1,318) | (2,133) |
| CMBS IO | — | 36 | 2,619 | 2,655 |
| Other non-Agency and loans | — | 23 | 2 | 25 |
| Subtotal | (74,916) | (121,491) | (36,424) | (232,831) |
| TBA securities (1) | (80,402) | (28) | — | (80,430) |
| Net loss on investments | $(155,318) | $(121,519) | $(36,424) | $(313,261) |
| **Interest rate hedging portfolio:** |  |  |  |  |
| U.S. Treasury futures | $195,468 | $79,605 | $— | $275,073 |
| Put options on U.S. Treasury futures | 1,837 | (782) | — | 1,055 |
| Net gain on interest rate hedges | $197,305 | $78,823 | $— | $276,128 |
| **Total net gain (loss)** | $41,987 | $(42,696) | $(36,424) | $(37,133) |

*1) Realized and unrealized gains (losses) on TBA securities are recorded within “gain on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.*

*2) Realized gain (loss) for interest rate swaps includes net periodic interest benefit earned as well as amounts recognized or incurred upon maturity or termination, if applicable, during the period indicated.*

### Operating Expenses

Operating expenses for the nine months ended September 30, 2024 increased $3.2 million compared to the nine months ended September 30, 2023 primarily due to accelerated recognition of share-based compensation expense for certain stock incentive awards granted in March 2024 to a retirement eligible employee.

### Non-GAAP Financial Measures

In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as earnings available for distribution (“EAD”) to common shareholders (including per common share), a non-GAAP financial measure. Management believes this non-GAAP financial measure is useful to investors because management uses it as a measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and other normal recurring operating income/expenses. Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in EAD because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. Management also includes periodic interest benefit/cost from its interest rate swaps, which are included in "gain (loss) on derivatives instruments, net", in EAD because interest rate swaps are used by the Company to economically hedge the impact of changing interest rates on its borrowing costs from repurchase agreements, and including periodic interest benefit/cost from interest rate swaps is a helpful indicator of the Company’s total financing cost in addition to GAAP interest expense. However, non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled

measures of other REITs because they may not be calculated in the same manner. Furthermore, though EAD is one of several factors our management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company’s REIT taxable income or its distribution requirements in accordance with the Tax Code.

Reconciliations of EAD to common shareholders to certain GAAP financial measures are provided below.

*($s in thousands except per share data)*

| Reconciliations of GAAP to Non-GAAP Financial Measures: | Three Months Ended September 30, 2024 | June 30, 2024 |
| --- | ---: | ---: |
| Comprehensive income (loss) to common shareholders | $70,741 | $(12,013) |
| Less: |  |  |
| Change in fair value of investments (1) | (234,541) | 45,269 |
| Change in fair value of derivative instruments, net (2) | 156,572 | (41,351) |
| EAD to common shareholders | $(7,228) | $(8,095) |
| Average common shares outstanding | 75,792,527 | 66,954,870 |
| EAD per common share | $(0.10) | $(0.12) |
| Net interest income | $894 | $1,287 |
| Net periodic interest benefit of interest rate swaps | 4,162 | 17 |
| TBA drop loss (3) | (1,654) | (233) |
| Total operating expenses | (8,707) | (7,243) |
| Preferred stock dividends | (1,923) | (1,923) |
| EAD to common shareholders | $(7,228) | $(8,095) |

*(1) Amount includes realized and unrealized gains and losses due to changes in the fair value of the Company’s MBS.*

*(2) Amount includes unrealized gains and losses from changes in fair value of derivatives (including TBAs accounted for as derivative instruments) and realized gains and losses on terminated derivatives and excludes TBA drop loss and net periodic interest benefit/cost from interest rate swaps.*

*(3) TBA drop income (loss) is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.*

### LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments. Additional sources may also include proceeds from the sale of investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to meet margin requirements for our repurchase agreements and derivative transactions, including TBA contracts, under the terms of the related agreements. We may also periodically use liquidity to repurchase shares of the Company’s stock.

During the nine months ended September 30, 2024, we issued 10,500,000 shares of common stock through a public offering, resulting in proceeds of $124.5 million, net of issuance costs. We also issued 11,559,359 shares of common stock through our ATM program, resulting in proceeds of $143.2 million, net of broker commissions and fees. We partially deployed these proceeds into purchases of specified pools of higher coupon Agency RMBS. We are reserving a portion of the proceeds in order to navigate through potential volatility and to deploy into additional investments as spreads widen during the remainder of 2024.

Our liquidity fluctuates based on our investment activities, our leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our

consolidated balance sheet. We also include in our measure of liquidity the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement. Though the fair value of this noncash collateral is not recorded on our consolidated balance sheet, we include this amount in our liquidity measure because we have the right to repledge the noncash collateral pledged to us by our counterparties. Our liquidity as of September 30, 2024 was $708.7 million, which consisted of unrestricted cash of $268.3 million, unencumbered Agency MBS with a fair value of $392.9 million, margin receivable on derivatives of $26.0 million, and noncash collateral received from our counterparties, which consisted of U.S. Treasuries and Agency RMBS, with a fair value of $21.4 million. Our liquidity as of December 31, 2023 was $453.6 million.

We continuously monitor our liquidity, especially with potential risk events on the horizon, such as uncertainty regarding Federal Reserve policy decisions, the size of the Federal Reserve’s balance sheet, quantitative tightening or easing measures, frequent potential for a government shutdown, and the impact on global markets stemming from global central bank policies. We are also monitoring the wars between Russia and Ukraine and between Israel and Hamas, and the broadening of conflict across the Middle East. We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds, which in turn have an impact on derivative margin requirements. In performing these analyses, we will also consider the current state of the fixed income markets and the repurchase agreement markets in order to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. We also communicate frequently with our counterparties. We have not experienced any material changes in the terms of our repurchase agreements with our counterparties, and they have not indicated to us any concerns regarding access to liquidity.

Our perception of the liquidity of our investments and market conditions significantly influences our targeted leverage. In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 7.6 times shareholders’ equity as of September 30, 2024. We include the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment. Leverage based on repurchase agreement amounts outstanding was 5.6 times shareholders’ equity as of September 30, 2024.

Our repurchase agreement borrowings are uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We seek to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in the event of a counterparty's failure to renew existing repurchase agreements. As part of our continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker dealer subsidiaries of regulated financial institutions or primary dealers.

The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon a number of factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in TBA dollar roll transactions versus buying specified pools. The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:

*($s in thousands)*

|  | Repurchase Agreements Balance Outstanding As of Quarter End | Average Balance Outstanding For the Quarter Ended | Maximum Balance Outstanding During the Quarter Ended |
| --- | ---: | ---: | ---: |
| September 30, 2024 | $6,423,890 | $5,943,805 | $6,461,475 |
| June 30, 2024 | 5,494,428 | 5,410,282 | 5,529,856 |
| March 31, 2024 | 5,284,708 | 5,365,575 | 5,469,434 |
| December 31, 2023 | 5,381,104 | 5,168,821 | 5,381,354 |
| September 30, 2023 | 5,002,230 | 4,773,435 | 5,037,440 |
| June 30, 2023 | 4,201,901 | 3,447,406 | 4,203,788 |
| March 31, 2023 | 2,937,124 | 2,713,481 | 2,959,263 |
| December 31, 2022 | 2,644,405 | 2,727,274 | 3,072,483 |
| September 30, 2022 | 2,991,876 | 2,398,268 | 3,082,138 |

For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement borrowing) in order to support the amount of the financing. This excess collateral is often referred to as a “haircut” and is intended to provide the lender protection against fluctuations in fair value of the collateral and/or the failure by us to repay the borrowing at maturity. Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged. If the fair value of the collateral falls below the amount required by the lender, the lender has the right to demand additional margin, or collateral. These demands are referred to as “margin calls,” and if we fail to meet any margin call, our lenders have the right to terminate the repurchase agreement and sell any collateral pledged. The weighted average haircut for our borrowings as of September 30, 2024 was consistent with prior periods, which has typically averaged less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 10-14% for borrowings collateralized with CMBS IO.

The collateral we post in excess of our repurchase agreement borrowing with any counterparty is also typically referred to by us as “equity at risk,” which represents the potential loss to the Company if the counterparty is unable or unwilling to return collateral securing the repurchase agreement borrowing at its maturity. The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and generally uncommitted nature of the repurchase agreement borrowings. As of September 30, 2024, we had amounts outstanding under 28 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.

We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. Currently, we do not believe we are subject to any covenants that materially restrict our financing flexibility. We were in full compliance with our debt covenants as of September 30, 2024, and we are not aware of circumstances which could potentially result in our non-compliance in the foreseeable future.

### Derivative Instruments

Derivative instruments we enter into may require us to post initial margin at inception and daily variation margin based on subsequent changes in their fair value. Daily variation margin requirements also entitle us to receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds

the minimum margin requirement. The collateral posted as margin by us is typically in the form of cash. As of September 30, 2024, we had cash collateral posted to our counterparties of $137.3 million under these agreements.

Collateral requirements for interest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in excess of the clearing exchange. Collateral requirements for our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income Clearing Corporation and, if applicable, by our third-party brokerage agreements, which may establish margin levels in excess of the MBSD. Our TBA contracts, which are subject to master securities forward transaction agreements published by the Securities Industry and Financial Markets Association as well as supplemental terms and conditions with each counterparty, generally provide that valuations for our TBA contracts and any pledged collateral are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the TBA contract and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business day.

### Dividends

As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions. When declaring dividends, our Board of Directors considers the Company’s taxable income, the REIT distribution requirements of the Tax Code, financial performance measures, and maintaining compliance with dividend requirements of the Series C Preferred Stock, along with other factors that the Board of Directors may deem relevant from time to time.

We designate the majority of our derivative instruments as interest rate hedges for tax purposes. Realized gains (losses) resulting from the difference in fair value and the amount of cash received or paid upon termination or maturity of derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company but are generally not recognized in REIT taxable income until future periods. The following table provides the projected amortization of our net deferred tax hedge gains as of September 30, 2024 that will be recognized as taxable income over the periods indicated, though recognition of deferred tax hedge gains and losses may be accelerated if the underlying instrument originally hedged is terminated or paid off:

*($ in thousands)*

| Period of Recognition for Remaining Hedge Gains, Net | September 30, 2024 |
| --- | ---: |
| Fourth quarter 2024 | $21,981 |
| Fiscal year 2025 | 88,583 |
| Fiscal year 2026 and thereafter | 514,845 |
|  | $625,409 |

As of September 30, 2024, we also had $583.6 million in capital loss carryforwards, the majority of which expire before 2028, and NOL carryforwards of $8.1 million, of which $4.6 million will expire on December 31, 2024 and the remainder in 2025. Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 2024 or in any given year.

We generally fund dividend distributions through portfolio cash flows. If we make dividend distributions in excess of our portfolio cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business" as well as Part I, Item 1A, “Risk Factors” of our 2023 Form 10-K for additional important information regarding dividends declared on our taxable income.

### RECENT ACCOUNTING PRONOUNCEMENTS

Please refer to Note 1 of the Notes to the Consolidated Financial Statements contained within Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

### CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual results, however, may differ from the estimated amounts we have recorded.

Critical accounting estimates are defined as those that require management's most difficult, subjective, or complex judgments, and which may result in materially different results under different assumptions and conditions. Our critical accounting estimates are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K under “Critical Accounting Estimates.” There have been no significant changes in our critical accounting estimates during the three and nine months ended September 30, 2024.

### FORWARD-LOOKING STATEMENTS

Certain written statements in this Quarterly Report on Form 10-Q that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, taking into account all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update, or revise any forward-looking statement whether as a result of new information, future events, or otherwise.

Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to statements about:

- Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations, and our views on the future performance of MBS and other investments;
- Our views on the macroeconomic environment, monetary and fiscal policy, and conditions in the investment, credit, interest rate and derivatives markets;
- Our views on inflation, market interest rates and market spreads;
- Our views on the effect of actual or proposed actions of the Federal Reserve or other central banks with respect to monetary policy (including the targeted Fed Funds rate), and the potential impact of these actions on interest rates, borrowing costs, inflation or unemployment;
- The effect of regulatory initiatives of the Federal Reserve, the Federal Housing Finance Agency, other financial regulators, and other central banks;
- Our financing strategy including our target leverage ratios, our use of TBA dollar roll transactions, and anticipated trends in financing costs including TBA dollar roll transaction costs, and our hedging strategy including changes to the derivative instruments to which we are a party, and changes to government regulation of hedging instruments and our use of these instruments;
- Our investment portfolio composition and target investments;
- Our investment portfolio performance, including the fair value, yields, and forecasted prepayment speeds of our investments;
- Our liquidity and ability to access financing, and the anticipated availability and cost of financing;
- Our capital stock activity including the impact of stock issuances and repurchases;
- The amount, timing, and funding of future dividends;
- Our use of our tax NOL carryforward and other tax loss carryforwards;
- Future competition for, and availability of, investments, financing and capital;
- Estimates of future interest expenses, including related to the Company’s repurchase agreements and derivative instruments;
- The status and effect of legislative reforms and regulatory rule-making or review processes, and the status of reform efforts and other business developments in the repurchase agreement financing market;
- Market, industry and economic trends, and how these trends and related economic data may impact the behavior of market participants and financial regulators;
- The impact of recent bank failures, potential new regulations and the potential for other bank failures this year;
- The impact of debt ceiling negotiations on interest rates, spreads, the U.S. Treasury market as well as the impact more broadly on fixed income and equity markets:
- Uncertainties regarding the war between Russia and Ukraine or Israel and Hamas and the related impacts on macroeconomic conditions, including, among other things, interest rates;
- The financial position and credit worthiness of the depository institutions in which the Company’s MBS and cash deposits are held;
- The impact of applicable tax and accounting requirements on us including our tax treatment of derivative instruments such as TBAs, interest rate swaps, options and futures;
- Our future compliance with covenants in our master repurchase agreements, ISDA agreements, and debt covenants in our other contractual agreements;
- Our reliance on a single service provider for our trading, portfolio management, risk reporting and accounting services systems;
- The implementation in a timely and cost-effective manner of our operating platform, which includes trading, portfolio management, risk reporting, and accounting services systems, and the anticipated benefits thereof; and
- Possible future effects of the COVID-19 pandemic or any global health crisis.

Forward-looking statements are inherently subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Not all of these risks and other factors are known to us. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. The projections, assumptions, expectations, or beliefs upon which the forward-looking statements are based can also change as a result of these risks or other factors. If such a risk or other factor materializes in future periods, our business, financial condition, liquidity, and results of operations may vary materially from those expressed or implied in our forward-looking statements.

While it is not possible to identify all factors that may cause actual results to differ from historical results or from any results expressed or implied by forward-looking statements, or that may cause our projections, assumptions, expectations, or beliefs to change, some of those factors include the following:

- the risks and uncertainties referenced in this Quarterly Report on Form 10-Q, especially those incorporated by reference into Part II, Item 1A, “Risk Factors”;
- our ability to find suitable reinvestment opportunities;
- changes in domestic economic conditions;
- geopolitical events, such as terrorism, war or other military conflict, including increased uncertainty regarding the wars between Russia and Ukraine and between Israel and Hamas, and the related impact on macroeconomic conditions as a result of such conflict;
- changes in interest rates and credit spreads, including the repricing of interest-earning assets and interest-bearing liabilities;
- our investment portfolio performance particularly as it relates to cash flow, prepayment rates and credit performance;
- the impact on markets and asset prices from changes in the Federal Reserve’s policies regarding the purchases of Agency RMBS, Agency CMBS, and U.S. Treasuries;
- actual or anticipated changes in Federal Reserve monetary policy or the monetary policy of other central banks;
- adverse reactions in U.S. financial markets related to actions of foreign central banks or the economic performance of foreign economies including in particular China, Japan, the European Union, and the United Kingdom;
- uncertainty concerning the long-term fiscal health and stability of the United States;
- the cost and availability of financing, including the future availability of financing due to changes to regulation of, and capital requirements imposed upon, financial institutions;
- the cost and availability of new equity capital;
- changes in our leverage and use of leverage;
- changes to our investment strategy, operating policies, dividend policy or asset allocations;
- the quality of performance of third-party service providers, including our sole third-party service provider for our critical operations and trade functions;
- the loss or unavailability of our third-party service provider’s service and technology that supports critical functions of our business related to our trading and borrowing activities due to outages, interruptions, or other failures;
- the level of defaults by borrowers on loans underlying MBS;
- changes in our industry;
- increased competition;
- changes in government regulations affecting our business;
- changes or volatility in the repurchase agreement financing markets and other credit markets;
- changes to the market for derivative instruments, including changes to margin requirements on derivative instruments;
- uncertainty regarding continued government support of the U.S. financial system and U.S. housing and real estate markets, or to reform the U.S. housing finance system including the resolution of the conservatorship of Fannie Mae and Freddie Mac;
- the composition of the Board of Governors of the Federal Reserve;
- the political environment in the U.S.;
- systems failures or cybersecurity incidents; and
- exposure to current and future claims and litigation.

## Market risk

As filed, 17,276 characters.

Market risk is the exposure to losses resulting from changes in market factors. Our business strategy exposes us to a variety of market risks, including interest rate, spread, prepayment, credit, liquidity, and reinvestment risks. These risks can and do cause fluctuations in our liquidity, comprehensive income and book value as discussed below.

### Interest Rate Risk

Investing in interest-rate sensitive investments such as MBS and TBA securities subjects us to interest rate risk. Interest rate risk results from investing in securities that have a fixed coupon or a floating coupon that may not immediately adjust for changes in interest rates. Interest rate risk also results from the mismatch between the duration of our assets versus the duration of our liabilities and hedges. The amount of the impact will depend on the composition of our portfolio, our hedging strategy, the effectiveness of our hedging instruments as well as the magnitude and the duration of the change in interest rates.

We manage interest rate risk within tolerances set by our Board of Directors. We use interest rate hedging instruments to mitigate the impact of changing interest rates on the market value of our assets and on our interest expense from repurchase agreements used to finance our investments. Our hedging methods are based on many factors, including, but not limited to, our estimates with regard to future interest rates and expected levels of prepayments of our assets. If prepayments are slower or faster than assumed, the maturity of our investments will also differ from our expectations, which could reduce the effectiveness of our hedging strategies and may cause losses that adversely affect our cash flow. Estimates of prepayment speeds can vary significantly by investor for the same security, and therefore estimates of security and portfolio duration can vary significantly between market participants.

We continuously monitor market conditions, economic conditions, interest rates and other market activity and frequently adjust the composition of our investments and hedges throughout any given period. As such, the projections for changes in market value provided below are limited in usefulness because the modeling assumes no changes to the composition of our investment portfolio or hedging instruments as of the dates indicated. Changes in types of our investments, the returns earned on these investments, future interest rates, credit spreads, the shape of the yield curve, the availability of financing, and/or the mix of our investments and financings including derivative instruments may cause actual results to differ significantly from the modeled results shown in the tables below. There can be no assurance that assumed events used to model the results shown below will occur, or that other events will not occur, that will affect the outcomes; therefore, the modeled results shown in the tables below and all related disclosures constitute forward-looking statements.

Management considers changes in the shape of the interest rate curves in assessing and managing portfolio interest rate risk on the market value of its investments and common equity. Because interest rates do not typically move in a parallel fashion from period to period (as can be seen by the graph for U.S. Treasury rates in Item 2, “Executive Overview”), the tables below show the projected sensitivity of the market value of our financial instruments and the percentage change in shareholders’ equity assuming instantaneous parallel shifts and non-parallel shifts in market interest rates.

| Type of Instrument (1) | September 30, 2024 Parallel Decrease in Interest Rates of 100 Basis Points 50 Basis Points % of Market Value % of Common Equity % of Market Value % of Common Equity | Parallel Increase in Interest Rates of 50 Basis Points 100 Basis Points % of Market Value % of Common Equity % of Market Value % of Common Equity |
| --- | ---: | ---: |
| RMBS | 2.8% 25.1% 1.5% 13.8% | (1.7)% (15.8)% (3.6)% (32.9)% |
| CMBS/ CMBS IO | 0.1% 0.9% —% 0.4% | —% (0.4)% (0.1)% (0.9)% |
| TBAs | 0.6% 5.4% 0.4% 3.2% | (0.5)% (4.1)% (1.0)% (8.8)% |
| Interest rate hedges | (4.5)% (40.6)% (2.2)% (20.0)% | 2.1% 19.2% 4.2% 38.2% |
| Total | (1.0)% (9.2)% (0.3)% (2.6)% | (0.1)% (1.1)% (0.5)% (4.4)% |
|  | **December 31, 2023** |  |
|  | **Parallel Decrease in Interest Rates of** | **Parallel Increase in Interest Rates of** |
|  | **100 Basis Points** **50 Basis Points** | **50 Basis Points** **100 Basis Points** |
| **Type of Instrument (1)** | **% of Market Value** **% of Common Equity** **% of Market Value** **% of Common Equity** | **% of Market Value** **% of Common Equity** **% of Market Value** **% of Common Equity** |
| RMBS | 3.5% 33.8% 1.8% 17.9% | (2.0)% (19.4)% (4.1)% (39.6)% |
| CMBS/ CMBS IO | 0.1% 0.9% —% 0.5% | —% (0.5)% (0.1)% (0.9)% |
| TBAs | 0.6% 5.9% 0.3% 3.3% | (0.4)% (4.0)% (0.9)% (8.5)% |
| Interest rate hedges | (5.3)% (51.6)% (2.6)% (25.3)% | 2.5% 24.6% 5.0% 48.7% |
| Total | (1.1)% (11.0)% (0.4)% (3.6)% | 0.1% 0.8% —% (0.3)% |

| Non-Parallel Shifts |  | Basis Point Change in 2-year UST |  | Basis Point Change in 10-year UST |  | September 30, 2024 % of Market Value (1) |  | % of Common Equity |  | December 31, 2023 % of Market Value (1) |  | % of Common Equity |
| --- | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Bearish | Steepening | +25 |  | +50 |  | (0.1)% |  | (0.5)% |  | 0.1% |  | 1.4% |
| +50 |  | +100 |  | (0.4)% |  | (3.2)% |  | 0.1% |  | 0.8% |  |  |
| Flattening | +50 |  | +25 |  | (0.1)% |  | (1.0)% |  | —% |  | (0.5)% |  |
| +100 |  | +50 |  | (0.2)% |  | (1.9)% |  | —% |  | (0.3)% |  |  |
| Bullish | Steepening | -25 |  | +0 |  | 0.1% |  | 1.1% |  | 0.3% |  | 2.5% |
| -50 |  | -10 |  | 0.2% |  | 1.7% |  | 0.4% |  | 3.6% |  |  |
| -75 |  | -25 |  | 0.2% |  | 1.6% |  | 0.4% |  | 3.8% |  |  |
| Flattening | +0 |  | -25 |  | (0.1)% |  | (1.3)% |  | (0.2)% |  | (2.0)% |  |
| -10 |  | -50 |  | (0.4)% |  | (3.2)% |  | (0.5)% |  | (4.7)% |  |  |
| -25 |  | -75 |  | (0.7)% |  | (6.6)% |  | (0.9)% |  | (8.8)% |  |  |

*(1) Includes changes in market value of our investments and derivative instruments, including TBA securities, but excludes changes in market value of our financings which are not carried at fair value on our balance sheet due to their short-term maturities. The projections for market value do not assume any change in credit spreads.*

In bearish-rate shifts where interest rates are increasing, models project the market value of our investments, net of hedges and our common equity as of September 30, 2024, will decline versus that as December 31, 2023, primarily as a result of having a larger portfolio as of September 30, 2024 with higher coupon assets which carry more extension risk in higher interest rate scenarios.

In bullish-rate shifts where the yield curve flattens due to declining interest rates, models projected the market value of our investments, net of hedges and our common equity as of September 30, 2024 will decline less versus that as of December 31, 2023, because of the additional duration of the aggregate portfolio resulting from the assets extending. In bullish-rate shifts where the yield curve steepens due to declining interest rates, models project higher increases in market value of our investments, net of hedges and common equity due to having a larger portfolio as of September 30, 2024 versus December 31, 2023.

### Spread Risk

Spread risk is the risk of loss from an increase in the market spread between the yield on an investment versus its benchmark index. Changes in market spreads represent the market's valuation of the perceived riskiness of an asset relative to risk-free rates. Widening spreads reduce the market value of our investments as market participants require additional yield to hold riskier assets. Market spreads could change based on macroeconomic or systemic factors as well as the factors specific to a particular security such as prepayment performance or credit performance. Other factors that could impact credit spreads include technical issues such as supply and demand for a particular type of security or Federal Reserve monetary policy. We do not hedge spread risk given the complexity of hedging credit spreads and in our opinion, the lack of liquid instruments available to use as hedges.

Fluctuations in spreads typically vary based on the type of investment. Sensitivity to changes in market spreads is derived from models that are dependent on various assumptions, and actual changes in market value in response to changes in market spreads could differ materially from the projected sensitivity if actual conditions differ from these assumptions.

The table below shows the projected sensitivity of the market value of our investments given the indicated change in market spreads as of the dates indicated:

| Basis Point Change in Market Spreads | September 30, 2024 Percentage Change in Market Value of Investments (1) | % of Common Equity | December 31, 2023 Percentage Change in Market Value of Investments (1) | % of Common Equity |
| --- | ---: | ---: | ---: | ---: |
| +20/+50 (2) | (1.1)% | (9.2)% | (1.1)% | (10.8)% |
| +10 | (0.5)% | (4.6)% | (0.5)% | (5.4)% |
| -10 | 0.5% | 4.6% | 0.5% | 5.4% |
| -20/-50 (2) | 1.1% | 9.2% | 1.1% | 10.8% |

*(1) Includes changes in market value of our MBS investments, including TBA securities.*

#### (2) Assumes a 20-basis point shift in Agency and non-Agency RMBS and CMBS and a 50-basis point shift in Agency

#### and non-Agency CMBS IO.

### Prepayment Risk

Prepayment risk is the risk of an early, unscheduled return of principal on an investment. We are subject to prepayment risk from premiums paid on investments, which are amortized as a reduction in interest income using the effective interest method under GAAP. Our comprehensive income and book value per common share may also be negatively impacted by prepayments if the fair value of the investment materially exceeds the par balance of the underlying security. Principal prepayments on our investments are influenced by changes in market interest rates and a variety of economic, geographic, government policy and other factors beyond our control, including GSE policy with respect to loan forbearance and delinquent loan buy-outs.

We seek to manage our prepayment risk on our MBS by diversifying our investments and investing in securities which either contain loans for which the underlying borrowers have disincentive to refinance or have some provision of prepayment prohibition or yield maintenance as is the case with CMBS and CMBS IO. Loans underlying our CMBS and CMBS IO securities typically have some form of prepayment protection provisions (such as prepayment lock-outs) or prepayment compensation provisions (such as yield maintenance or prepayment penalties). Because CMBS IO consist of rights to interest on the underlying commercial mortgage loan pools and do not have rights to principal payments on the underlying loans, prepayment risk on these securities is particularly acute without these prepayment protection provisions. There are no prepayment protections if the loan defaults and is partially or wholly repaid earlier as a result of loss mitigation actions taken by the underlying loan servicer.

Our prepayment risk as of September 30, 2024 has declined relative to prior periods as the majority of our MBS portfolio consists of securities owned near or below par and prepayment speeds have declined in the current higher interest rate environment. However, if higher yielding investments prepay at a faster rate than anticipated, we may be unable to reinvest the repayments at comparable yields. Our net interest income may be negatively impacted if the proceeds from prepayments are reinvested into assets with lower yields. In an increasing interest rate environment, lower yielding assets with a fixed rate may extend or prepay slower than anticipated. Because we finance our investments with short-term repurchase agreement financing, we may be required to finance our investments at a higher interest rate without the ability to reinvest principal into higher yielding securities. As a result of rising financing costs, our net interest income could fall or could be negative for extended periods of time.

### Credit Risk

Credit risk is the risk that we will not receive all contractual amounts due on investments that we own due to default by the borrower or due to a deficiency in proceeds from the liquidation of the collateral securing the obligation. Credit losses on loans could result in lower or negative yields on our investments.

Agency RMBS and Agency CMBS have credit risk to the extent that Fannie Mae or Freddie Mac fails to remit payments on the MBS for which they have issued a guaranty of payment. Given the improved financial performance and conservatorship of these entities and the continued support of the U.S. government, we believe this risk is low.

Agency and non-Agency CMBS IO represent the right to excess interest (and not principal) on the underlying loans. These securities are exposed to the loss of investment basis in the event a loan collateralizing the security liquidates without paying yield maintenance or prepayment penalty. This will typically occur when the underlying loan is in default and proceeds from the disposition of the loan collateral are insufficient to pay the prepayment consideration. To mitigate credit risk of investing in CMBS IO, we invest in primarily AAA-rated securities that are stripped off senior tranches, which means we receive the highest payment priority and are the last to absorb losses in the event of a shortfall in cash flows. Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation, which is the triggering event that disrupts the Agency CMBS IO cash flow. For non-Agency CMBS IO, the servicer and master servicer will determine if interest will continue to be advanced upon default of a loan based on their estimate of liquidation proceeds. Senior non-Agency CMBS IO may benefit from changes in contractual cash flows, including modifications or loan extensions as the senior classes can remain outstanding beyond the original maturity date.

In addition, bilateral agreements expose us to increased credit risk related to our counterparties, and we may be at risk of loss of any collateral held by a repurchase or derivative counterparty if the counterparty becomes insolvent or files for bankruptcy.

### Liquidity Risk

We have liquidity risk principally from the use of recourse repurchase agreements to finance our ownership of securities. Our repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed roll-over terms. If we fail to repay the lender at maturity, the lender has the right to immediately sell the collateral and pursue us for any shortfall if the sales proceeds are inadequate to cover the repurchase agreement financing. In addition, declines in the market value of our investments pledged as collateral for repurchase agreement borrowings and for our derivative instruments may result in counterparties initiating margin calls for additional collateral.

Our use of TBA long positions as a means of investing in and financing Agency RMBS also exposes us to liquidity risk in the event that we are unable to roll or terminate our TBA contracts prior to their settlement date. If we are unable to roll or terminate our TBA long positions, we could be required to take physical delivery of the underlying securities and settle our obligations for cash, which could negatively impact our liquidity position or force us to sell assets under adverse conditions if financing is not available to us on acceptable terms.

For further information, including how we attempt to mitigate liquidity risk and monitor our liquidity position, and in particular, during the current macroeconomic environment, please refer to “Liquidity and Capital Resources” in Item 2 of this Quarterly Report on Form 10-Q as well as within Item 7 of our 2023 Form 10-K.

### Reinvestment Risk

We are subject to reinvestment risk as a result of the prepayment, repayment and sales of our investments. In order to maintain our investment portfolio size and our earnings, we need to reinvest capital received from these events into new interest-earning assets or TBA securities, and if market yields on new investments are lower or if financing costs are higher, our net interest income will decline. In addition, based on market conditions, our leverage, and our liquidity profile, we may decide to not reinvest the cash flows we receive from our investment portfolio even when attractive reinvestment opportunities are available, or we may decide to reinvest in assets with lower yield but greater liquidity. If we retain capital or pay dividends to return capital to shareholders rather than reinvest capital, or if we invest capital in lower yielding assets for liquidity reasons, the size of our investment portfolio and the amount of income generated by our investment portfolio will likely decline.

## Controls and procedures

As filed, 1,246 characters.

#### Disclosure Controls and Procedures

Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2024, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

#### Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 708 characters.

There have been no material changes from the risk factors discussed in Part I, Item 1A, “Risk Factors” of our 2023 Form 10-K. Risks and uncertainties identified in our forward-looking statements contained in this Quarterly Report on Form 10-Q together with those previously disclosed in the 2023 Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Forward-Looking Statements” contained in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q as well as Part I, Item 1A, “Risk Factors” in our 2023 Form 10-K.

Filed Oct 28, 2024.
Source: SEC EDGAR, the filing index for accession 0000826675-24-000128. Last ingested by Listed: Oct 27, 2026, 16:51 ET. No prices; not investment advice.