UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
FORM 10-Q
x
☒		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 20172023
or
o
☐		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-9819001-09819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia52-1549373
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)(I.R.S. Employer Identification No.)
4991 Lake Brook Drive, Suite 100 Glen Allen, Virginia23060-9245
Glen Allen,Virginia23060-9245
(Address of principal executive offices)(Zip Code)
(804)217-5800
(804) 217-5800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareDXNew York Stock Exchange
6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per shareDXPRCNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes          x☒         No           o☐


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes           x☒             No           o☐


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filero☐Accelerated filerx☒
Non-accelerated filer
o (Do not check if a smaller reporting company)
☐		Smaller reporting companyo☐
Emerging growth companyo☐


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes           o☐           No            x☒


On October 31, 2017,July 26, 2023, the registrant had 53,219,28654,204,319 shares outstanding of common stock, $0.01 par value, which is the registrant’s only class of common stock.





DYNEX CAPITAL, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATIONPage
PART I.
FINANCIAL INFORMATION
Item 1.		Financial Statements
Item 1.
Financial Statements
Consolidated Balance Sheets as of SeptemberJune 30, 20172023 (unaudited) and December 31, 20162022
1
Consolidated Statements of Comprehensive Income (Loss) for the three and ninesix months ended SeptemberJune 30, 20172023 (unaudited) and SeptemberJune 30, 20162022 (unaudited)
2
Consolidated StatementStatements of Shareholders' Equity for the ninethree and six months ended September
June 30, 20172023 (unaudited) and June 30, 2022 (unaudited)
3
Consolidated Statements of Cash Flows for the ninesix months ended September
June 30, 20172023 (unaudited) and SeptemberJune 30, 20162022 (unaudited)
45
Notes to the Unaudited Consolidated Financial Statements
56
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
4934
Item 4.
Controls and Procedures
5438
PART II.
OTHER INFORMATION
Item 1.
Legal Proceedings
Item 1.39
Legal Proceedings
55
Item 1A.
Risk Factors
Item 1A.39
Risk Factors
55
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
5539
Item 3.
Defaults Upon Senior Securities
5540
Item 4.
Mine Safety Disclosures
5540
Item 5.
Other Information
Item 5.40
Other Information
55
Item 6.
Exhibits
Item 6.41
Exhibits
56
SIGNATURES
5742







PART I.        FINANCIAL INFORMATION
i
ITEM 1.    FINANCIAL STATEMENTS


DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts$s in thousands except per share data)
 September 30, 2017 December 31, 2016
ASSETS(unaudited) 
Mortgage-backed securities (including pledged of $2,714,312 and $3,150,610, respectively)$2,921,444
 $3,212,084
Mortgage loans held for investment, net16,523
 19,036
Cash and cash equivalents117,702
 74,120
Restricted cash43,987
 24,769
Derivative assets368
 28,534
Receivable for securities sold13,435
 —
Principal receivable on investments3,359
 11,978
Accrued interest receivable19,267
 20,396
Other assets, net7,193
 6,814
Total assets$3,143,278
 $3,397,731
    
LIABILITIES AND SHAREHOLDERS’ EQUITY

  
Liabilities: 
  
Repurchase agreements$2,519,230
 $2,898,952
Payable for unsettled securities77,357
 —
Non-recourse collateralized financing5,706
 6,440
Derivative liabilities133
 6,922
Accrued interest payable2,720
 3,156
Accrued dividends payable11,620
 12,268
Other liabilities2,413
 2,809
 Total liabilities2,619,179
 2,930,547
 

  
Shareholders’ equity: 
  
Preferred stock, par value $.01 per share; 50,000,000 shares authorized; 5,665,101 and 4,571,937 shares issued and outstanding, respectively ($141,628 and $114,298 aggregate liquidation preference, respectively)$135,828
 $110,005
Common stock, par value $.01 per share, 200,000,000 shares authorized;
51,262,350 and 49,153,463 shares issued and outstanding, respectively
513
 492
Additional paid-in capital742,845
 727,369
Accumulated other comprehensive income (loss)5,886
 (32,609)
Accumulated deficit(360,973) (338,073)
 Total shareholders' equity524,099
 467,184
 Total liabilities and shareholders’ equity$3,143,278
 $3,397,731

 June 30, 2023December 31, 2022
ASSETS(unaudited)
Cash and cash equivalents$300,108 $332,035 
Cash collateral posted to counterparties132,646 117,842 
Mortgage-backed securities (including pledged of $4,441,105 and $2,810,957, respectively), at fair value5,059,308 3,112,705 
Due from counterparties1,364 10,348 
Derivative assets174 7,102 
Accrued interest receivable22,988 15,260 
Other assets, net9,367 9,942 
Total assets$5,525,955 $3,605,234 
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Liabilities:  
Repurchase agreements$4,201,901 $2,644,405 
Due to counterparties371,576 4,159 
Derivative liabilities23,621 22,595 
Cash collateral posted by counterparties— 435 
Accrued interest payable33,794 16,450 
Accrued dividends payable9,440 9,103 
Other liabilities4,661 6,759 
 Total liabilities4,644,993 2,703,906 
Shareholders’ equity:  
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; 4,460,000 and 4,460,000 shares issued and outstanding, respectively ($111,500 and $111,500 aggregate liquidation preference, respectively)107,843 107,843 
Common stock, par value $0.01 per share, 180,000,000 shares authorized;
54,204,319 and 53,637,095 shares issued and outstanding, respectively
542 536 
Additional paid-in capital1,365,484 1,357,514 
Accumulated other comprehensive loss(175,996)(181,346)
Accumulated deficit(416,911)(383,219)
 Total shareholders’ equity880,962 901,328 
 Total liabilities and shareholders’ equity$5,525,955 $3,605,234 
See notes to the unaudited consolidated financial statements.



1

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)(unaudited)
(amounts$s in thousands except per share data)

 Three Months Ended Nine Months Ended
 September 30, September 30,
 2017 2016 2017 2016
Interest income$23,103
 $21,135
 $70,378
 69,040
Interest expense9,889
 6,068
 26,122
 18,478
  Net interest income13,214
 15,067
 44,256
 50,562
        
Gain (loss) on derivative instruments, net5,993
 2,409
 (9,634) (62,153)
Loss on sale of investments, net(5,211) —
 (10,628) (4,238)
Fair value adjustments, net23
 34
 63
 86
Other (loss) income, net(109) 545
 (150) 898
General and administrative expenses:    

  
Compensation and benefits(2,070) (1,736) (6,356) (5,829)
Other general and administrative(1,529) (1,619) (5,620) (5,288)
Net income (loss)10,311
 14,700
 11,931
 (25,962)
Preferred stock dividends(2,808) (2,294) (7,885) (6,882)
Net income (loss) to common shareholders$7,503
 $12,406
 $4,046
 $(32,844)
        
Other comprehensive income:    

  
Unrealized gain on available-for-sale investments, net$981
 $769
 $28,087
 $61,260
Reclassification adjustment for loss on sale of investments, net5,211
 —
 10,628
 4,238
Reclassification adjustment for de-designated cash flow hedges(48) (99) (220) (152)
Total other comprehensive income6,144
 670
 38,495
 65,346
Comprehensive income to common shareholders$13,647
 $13,076
 $42,541
 $32,502
        
Net income (loss) per common share-basic and diluted$0.15
 $0.25
 $0.08
 $(0.67)
Weighted average common shares-basic and diluted49,832
 49,147
 49,411
 49,102
Three Months EndedSix Months Ended
June 30,June 30,
 2023202220232022
INTEREST INCOME (EXPENSE)
Interest income$42,212 $18,335 $73,058 $35,762 
Interest expense(45,142)(4,262)(76,450)(6,010)
Net interest (expense) income(2,930)14,073 (3,392)29,752 
OTHER GAINS (LOSSES)
Realized loss on sales of investments, net(51,601)(18,550)(74,916)(18,550)
Unrealized gain (loss) on investments, net488 (65,103)57,609 (176,354)
Gain on derivative instruments, net116,012 106,412 48,745 326,623 
Total other gains, net64,899 22,759 31,438 131,719 
EXPENSES
Compensation and benefits(3,617)(3,402)(7,367)(6,868)
Other general and administrative(3,580)(3,799)(7,202)(7,441)
Other operating expenses(435)(295)(861)(616)
Total operating expenses(7,632)(7,496)(15,430)(14,925)
Net income54,337 29,336 12,616 146,546 
Preferred stock dividends(1,923)(1,923)(3,847)(3,847)
Net income to common shareholders$52,414 $27,413 $8,769 $142,699 
Other comprehensive income:
Unrealized (loss) gain on available-for-sale investments, net$(9,443)$(60,910)$5,350 $(152,250)
Total other comprehensive (loss) gain(9,443)(60,910)5,350 (152,250)
Comprehensive income (loss) to common shareholders$42,971 $(33,497)$14,119 $(9,551)
Weighted average common shares-basic54,137,327 39,190,251 53,981,463 37,964,617 
Weighted average common shares-diluted54,585,082 39,558,462 54,327,385 38,332,828 
Net income per common share-basic$0.97 $0.70 $0.16 $3.76 
Net income per common share-diluted$0.96 $0.69 $0.16 $3.72 
Dividends declared per common share$0.39 $0.39 $0.78 $0.78 
See notes to the unaudited consolidated financial statements.

2


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)(unaudited)
($s in thousands)

Preferred StockCommon StockAdditional
Paid-in
Capital		Accumulated Other Comprehensive LossAccumulated
Deficit		Total Shareholders’ Equity
Preferred Stock Common Stock 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Accumulated
Deficit
 Total Shareholders' EquitySharesAmountSharesAmount
SharesAmountSharesAmount
Balance as of December 31, 20164,571,937
$110,005
 49,153,463
$492
 $727,369
 $(32,609) $(338,073) $467,184
Balance as of
December 31, 2022		Balance as of
December 31, 2022		4,460,000 $107,843 53,637,095 $536 $1,357,514 $(181,346)$(383,219)$901,328 
Stock issuance1,093,164
25,884
 2,048,288
21
 14,474
 —
 —
 40,379
Stock issuance— — 199,274 2 2,769 — — 2,771 
Restricted stock granted, net of amortization—
—
 138,166
1
 1,565
 —
 —
 1,566
Restricted stock granted, net of amortization— — 27,932 — 360 — — 360 
Other share-based compensation, net of amortizationOther share-based compensation, net of amortization— — 33,213 1 649 — — 650 
Adjustments for tax withholding on share-based compensation—
—
 (77,567)(1) (520) —
 —
 (521)Adjustments for tax withholding on share-based compensation— — (20,600)— (276)— — (276)
Stock issuance costs—
(61) —
—
 (43) —
 —
 (104)Stock issuance costs— — — — (16)— — (16)
Net income—
—
 —
—
 —
 —
 11,931
 11,931
Net lossNet loss— — — — — — (41,722)(41,722)
Dividends on preferred stock—
—
 —
—
 —
 —
 (7,885) (7,885)Dividends on preferred stock— — — — — — (1,923)(1,923)
Dividends on common stock—
—
 —
—
 —
 —
 (26,946) (26,946)Dividends on common stock— — — — — — (21,137)(21,137)
Other comprehensive income—
—
 —
—
 —
 38,495
 —
 38,495
Other comprehensive income— — — — — 14,793 — 14,793 
Balance as of September 30, 20175,665,101
$135,828
 51,262,350
$513
 $742,845
 $5,886
 $(360,973) $524,099
Balance as of
March 31, 2023		Balance as of
March 31, 2023		4,460,000 $107,843 53,876,914 $539 $1,361,000 $(166,553)$(448,001)$854,828 
Stock issuanceStock issuance— — 296,600 3 3,540 — — 3,543 
Restricted stock granted, net of amortizationRestricted stock granted, net of amortization— — 46,085 — 296 — — 296 
Other share-based compensation, net of amortizationOther share-based compensation, net of amortization— — — — 833 — — 833 
Adjustments for tax withholding on share-based compensationAdjustments for tax withholding on share-based compensation— — (15,280)— (169)— — (169)
Stock issuance costsStock issuance costs— — — — (16)— — (16)
Net lossNet loss— — — — — — 54,337 54,337 
Dividends on preferred stockDividends on preferred stock— — — — — — (1,923)(1,923)
Dividends on common stockDividends on common stock— — — — — — (21,324)(21,324)
Other comprehensive incomeOther comprehensive income— — — — — (9,443)— (9,443)
Balance as of
June 30, 2023		Balance as of
June 30, 2023		4,460,000 $107,843 54,204,319 $542 $1,365,484 $(175,996)$(416,911)$880,962 
3

Preferred StockCommon StockAdditional
Paid-in
Capital		Accumulated Other Comprehensive LossAccumulated
Deficit		Total Shareholders’ Equity
SharesAmountSharesAmount
Balance as of
December 31, 2021		4,460,000 $107,843 36,665,805 $367 $1,107,792 $6,729 $(451,452)$771,279 
Stock issuance— — 267,288 3 4,242 — — 4,245 
Restricted stock granted, net of amortization— — 40,196 — 451 — — 451 
Other share-based compensation, net of amortization— — — — 395 — — 395 
Adjustments for tax withholding on share-based compensation— — (15,407)— (236)— — (236)
Stock issuance costs— — — — (16)— — (16)
Net income— — — — — — 117,209 117,209 
Dividends on preferred stock— — — — — — (1,923)(1,923)
Dividends on common stock— — — — — — (14,431)(14,431)
Other comprehensive loss— — — — — (91,340)— (91,340)
Balance as of
March 31, 2022		4,460,000 $107,843 36,957,882 $370 $1,112,628 $(84,611)$(350,597)$785,633 
Stock issuance— — 6,539,485 65 105,134 — — 105,199 
Restricted stock granted, net of amortization— — 31,020 — 440 — — 440 
Other share-based compensation, net of amortization— — 19,093 — 601 — — 601 
Adjustments for tax withholding on share-based compensation— — (30,246)— (489)— — (489)
Stock issuance costs— — — — (16)— — (16)
Net income— — — — — — 29,336 29,336 
Dividends on preferred stock— — — — — — (1,923)(1,923)
Dividends on common stock— — — — — — (15,505)(15,505)
Other comprehensive loss— — — — — (60,910)— (60,910)
Balance as of
June 30, 2022		4,460,000 $107,843 43,517,234 $435 $1,218,298 $(145,521)$(338,689)$842,366 
See notes to the unaudited consolidated financial statements.

4


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)(unaudited)
($s in thousands)
 Nine Months Ended
 September 30,
 2017 2016
Operating activities:   
Net income (loss)$11,931
 $(25,962)
Adjustments to reconcile net income (loss) to cash provided by operating activities: 
  
Decrease in accrued interest receivable1,129
 3,263
(Decrease) increase in accrued interest payable(436) 420
Loss on derivative instruments, net9,634
 62,153
Loss on sale of investments, net10,628
 4,238
Fair value adjustments, net(63) (86)
Amortization of investment premiums, net122,621
 112,418
Other amortization and depreciation, net983
 1,186
Stock-based compensation expense1,567
 2,066
Increase in other assets and liabilities, net(1,905) (2,060)
Net cash and cash equivalents provided by operating activities156,089
 157,636
Investing activities: 
  
Purchase of investments(772,590) (96,816)
Principal payments received on investments248,298
 337,719
Proceeds from sales of investments792,984
 94,033
Principal payments received on mortgage loans held for investment, net2,641
 3,709
Distributions received from limited partnership—
 10,835
Net receipts (payments) on derivatives, including terminations11,743
 (24,483)
Other investing activities(214) (105)
Net cash and cash equivalents provided by investing activities282,862
 324,892
Financing activities: 
  
Borrowings under repurchase agreements60,229,426
 19,293,243
Repayments of repurchase agreement borrowings and FHLB advances(60,609,148) (19,661,384)
Principal payments on non-recourse collateralized financing(747) (1,443)
Proceeds from issuance of preferred stock25,884
 —
Proceeds from issuance of common stock14,495
 102
Cash paid for stock issuance costs(61) —
Cash paid for repurchases of common stock—
 (310)
Payments related to tax withholding for stock-based compensation(521) (485)
Dividends paid(35,479) (39,285)
Net cash and cash equivalents used in financing activities(376,151) (409,562)
    
Net increase in cash, cash equivalents, and restricted cash62,800
 72,966
Cash, cash equivalents, and restricted cash at beginning of period98,889
 85,125
Cash, cash equivalents, and restricted cash at end of period$161,689
 $158,091
Supplemental Disclosure of Cash Activity: 
  
Cash paid for interest$26,766
 $18,185
Six Months Ended
 June 30,
 20232022
Operating activities:  
Net income$12,616 $146,546 
Adjustments to reconcile net income to cash provided by operating activities: 
Realized loss on sale of investments, net74,916 18,550 
Unrealized (gain) loss on investments, net(57,609)176,354 
Gain on derivative instruments, net(48,745)(326,623)
Amortization of investment premiums, net38,924 51,988 
Other amortization and depreciation, net1,193 1,135 
Share-based compensation expense2,140 1,873 
(Increase) decrease in accrued interest receivable(7,728)1,087 
Increase in accrued interest payable17,344 446 
Change in other assets and liabilities, net2,176 (614)
Net cash provided by operating activities35,227 70,742 
Investing activities:  
Purchases of investments(2,109,585)(372,815)
Principal payments received on trading securities73,849 168,321 
Principal payments received on available-for-sale investments47,919 — 
Proceeds from sales of trading securities348,091 327,700 
Principal payments received on mortgage loans held for investment502 828 
Net receipts on derivatives, including terminations64,290 334,910 
Decrease in cash collateral posted by counterparties5,190 57,400 
Net cash (used in) provided by investing activities(1,569,744)516,344 
Financing activities:  
Borrowings under repurchase agreements10,999,164 7,039,210 
Repayments of repurchase agreement borrowings(9,441,668)(7,686,478)
Proceeds from issuance of common stock6,314 109,444 
Payments related to tax withholding for share-based compensation(445)(725)
Dividends paid(45,971)(32,716)
Net cash provided by (used in) financing activities1,517,394 (571,265)
Net (decrease) increase in cash including cash posted to counterparties(17,123)15,821 
Cash including cash posted to counterparties at beginning of period449,877 421,307 
Cash including cash posted to counterparties at end of period$432,754 $437,128 
Supplemental Disclosure of Cash Activity:  
Cash paid for interest$59,105 $5,564 
See notes to the unaudited consolidated financial statements.

5


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization


Dynex Capital, Inc., ("Company" (the “Company”) was incorporated in the Commonwealth of Virginia on December 18, 1987 and commenced operations in February 1988. The Company is an internally managed mortgage real estate investment trust, or mortgage REIT, which primarily earns income from investing on a leveraged basis in specified poolsAgency mortgage-backed securities (“Agency MBS”) and in to-be-announced securities (“TBAs” or “TBA securities”). Agency MBS have a guaranty of principal and interest payments by a U.S. government-sponsored entity (“GSE”) such as Fannie Mae and Freddie Mac, which are in conservatorship and are currently supported by a senior preferred stock purchase agreement from the U.S. Treasury. As of June 30, 2023, the majority of the Company’s Agency MBS are secured by residential real property (“Agency RMBS”). The remainder of the Company’s investments are in Agency commercial MBS (“Agency CMBS”) and in both Agency and non-Agency mortgage-backed securities (“MBS”) consisting of residential MBS (“RMBS”), commercial MBS (“CMBS”) and CMBS interest-only ("IO"(“CMBS IO”) securities that are issued. Non-Agency MBS do not have a GSE guaranty of principal or guaranteed by the U.S. Government or U.S. Government sponsored agencies ("Agency MBS") and MBS issued by others ("non-Agency MBS"). We also invest in other types of mortgage-related securities, such as to-be-announced (“TBA”) forward contracts for the purchase or sale of generic (also referred to as "non-specified") pools of Agency MBS.interest payments.


Basis of Presentation


The accompanying unaudited consolidated financial statements of Dynex Capital, Inc.the Company and its subsidiaries (together, “Dynex” or, as appropriate, the “Company”) have been prepared in accordance with accounting principlesU.S. generally accepted in the United States of Americaaccounting principles (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all significant adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the consolidated financial statements have been included. Operating results for the three months ended SeptemberJune 30, 20172023 are not necessarily indicative of the results that may be expected for any other interim periods or for the entire year ending December 31, 2017.2023. The unaudited consolidated financial statements included herein should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162022 (the “2022 Form 10-K”) filed with the SEC.

Consolidation
The consolidated financial statements include the accounts of the Company and the accounts of its majority owned subsidiaries and variable interest entities ("VIE") for which it is the primary beneficiary. As a primary beneficiary, the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE. The Company consolidates certain trusts through which it has securitized mortgage loans as a result of not meeting the sale criteria under GAAP at the time the financial assets were transferred to the trust. All intercompany accounts and transactions have been eliminated in consolidation.


Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. The most significant estimates used by management include, but are not limited to, amortization of premiums and discounts and fair value measurements of its investments, and other-than-temporary impairments.including TBA securities accounted for as derivative instruments. These items are discussed further below within this note to the consolidated financial statements. The Company believes the estimates and assumptions underlying the consolidated financial statements included herein are reasonable and supportable based on the information available as of June 30, 2023.



Consolidation and Variable Interest Entities

The consolidated financial statements include the accounts of the Company and the accounts of its majority owned subsidiaries and variable interest entities (“VIE”) for which it is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

The Company consolidates a VIE if the Company is determined to be the VIE’s primary beneficiary, which is defined as the party that has both: (i) the power to control the activities that most significantly impact the VIE’s financial performance and (ii) the right to receive benefits or absorb losses that could potentially be significant to the VIE. The Company reconsiders its evaluation of whether to consolidate a VIE on an ongoing basis, based on changes in the facts and circumstances pertaining to the VIE. Though the Company invests in Agency and non-Agency MBS
6

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

which are generally considered to be interests in VIEs, the Company does not consolidate these entities because it does not meet the criteria to be deemed a primary beneficiary.

Income Taxes


The Company has elected to be taxed as a real estate investment trust ("REIT"(“REIT”) under the Internal Revenue Code of 1986 (the “Tax Code”) and the corresponding provisions of state law. To qualify as a REIT, the Company must meet certain tests including investing in primarilyasset, income, ownership, and distribution tests. To meet these requirements, the Company’s main source of income is interest earned from obligations secured by mortgages on real estate-related assetsproperty, and the required distribution ofCompany must distribute at least 90% of its annual REIT taxable income to stockholders after consideration of its net operating loss ("NOL") carryforward and not including taxableshareholders. The Company’s income retained in its taxable subsidiaries. As a REIT, the Companywill generally will not be subject to federal income tax onto the amount of its income or capital gains thatextent it is distributed as dividends to shareholders.


The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities in accordance with Accounting Standards Codification ("ASC") Topic 740. The Companyand records these liabilities, if any, to the extent they are deemed more likely than not to have been incurred.


Net Income (Loss) Per Common Share


The Company calculates basic net income (loss) per common share by dividing net income (loss) to common shareholders for the period by weighted-average shares of common stock outstanding for that period. Please see Note 2 for the calculation of the Company’s basic and diluted net income (loss) per common share for the periods indicated.

The Company did not have any potentially dilutive securities outstanding during the three or nine months ended September 30, 2017 or September 30, 2016.

Holders ofcurrently has unvested shares of the Company'srestricted stock, service-based restricted stock units (“RSUs”) and performance-based stock units (“PSUs”) issued and outstanding restricted commonoutstanding. Restricted stock are eligible to receive non-forfeitable dividends. As such, these unvested sharesawards are considered participating securities as per ASC Topic 260-10 and therefore are included in the computation of basic net income (loss) per common share using the two-class method.method because holders of unvested shares of restricted stock are eligible to receive non-forfeitable dividends. Holders of RSUs and PSUs accrue forfeitable dividend equivalent rights over the period outstanding, receiving dividend payments only upon the settlement date if the requisite service-based and performance-based conditions have been achieved, as applicable. As such, RSUs and PSUs are excluded from the computation of basic net income per common share, but are included in the computation of diluted net income per common share unless the effect is to reduce a net loss or increase the net income per common share (also known as “anti-dilutive”). Upon vesting (or settlement, in the case of units), restrictions on transfer expire on each share of restricted stock, RSU, and PSU, and each such share of restricted stock representsor unit becomes one unrestricted share of common stock.stock and is included in the computation of basic net income per common share.


Because the Company's 8.50%Company’s 6.900% Series AC Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series AC Preferred Stock”) and 7.625% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”) areis redeemable at the Company'sCompany’s option for cash only and may convertconvertible into shares of common stock only upon a change of control of the Company (and subject to other circumstances) as described in Article IIIC of the Company’s Restated Articles of Incorporation, the effect of those shares and their related dividends iswere excluded from the calculation of diluted net income (loss) per common share.share for the periods presented.


Cash and Cash Equivalents


Cash and cash equivalents include cash on handincludes unrestricted demand deposits at highly rated financial institutions and highly liquid investments with original maturities of three months or less.

Restricted Cash

Restricted The Company’s cash consists of cashbalances fluctuate throughout the year and may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits from time to time. Although the Company has pledgedbears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result due to the financial position and creditworthiness of the depository institutions in which those deposits are held.

Cash Collateral Posted To/By Counterparties

Cash collateral posted to/by counterparties represents amounts pledged/received to cover initial and variation margin with itsrequirements related to the Company’s financing and derivative counterparties.instruments. If the amount pledged to a counterparty exceeds the amount received from a counterparty, the net amount is recorded as an asset within “cash collateral posted to

7

The Company early adopted Accounting Standards Update ("ASU") No. 2016-18, Statement of Cash Flows (Topic 230) - Restricted CashNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

counterparties”, which requires amounts generally describedand if the amount received from a counterparty exceeds the amount pledged to a counterparty, the net amount is recorded as restricted cash or restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts showna liability within “cash collateral posted by counterparties” on the statement of cash flows. Because this ASU is to be applied retrospectively to each period presented, "net cash and cash equivalents used in financing activities" on the Company'sCompany’s consolidated statement of cash flows for the nine months ended September 30, 2016 now omits "increase in restricted cash" previously reported in the Quarterly Report on Form 10-Q for that period, and that increase is now included within "net increase in cash, cash equivalents, and restricted cash" for that period in order to conform to the current period's presentation.balance sheets.


The following table provides a reconciliation of cash, cash equivalents,“cash” and restricted cash“cash posted to counterparties” reported on the Company's consolidated balance sheet as of SeptemberJune 30, 20172023, that sum to the total of the same such amounts shown on the Company'sCompany’s consolidated statement of cash flows for the ninesix months ended SeptemberJune 30, 2017:2023:

June 30, 2023
Cash and cash equivalents$300,108 
Cash collateral posted to counterparties132,646 
Total cash including cash posted to counterparties shown on consolidated statement of cash flows$432,754 

  September 30, 2017
Cash and cash equivalents $117,702
Restricted cash 43,987
Total cash, cash equivalents, and restricted cash shown on consolidated statement of cash flows $161,689


Mortgage-Backed Securities
 
The Company's investments in Agency and non-Agency RMBS, CMBS, and CMBS IO securities are designated as available-for-sale ("AFS") andCompany’s MBS are recorded at fair value on the Company'sCompany’s consolidated balance sheet. Changes in unrealized gain (loss) on the Company'sfair value of MBS purchased prior to January 1, 2021 are designated as available-for-sale (“AFS”) with changes in fair value reported in other comprehensive income ("OCI"(“OCI”) as an unrealized gain (loss) until itthe security is sold matures, or is determined to be other than temporarily impaired. Althoughmatures. Effective January 1, 2021, the Company generally intends to hold its AFS securitieselected the fair value option (“FVO”) for all MBS purchased on or after that date with changes in fair value reported in net income as “unrealized gain (loss) on investments, net” until maturity, it may sell any of these securities as part of the overall management of its business.security is sold or matures. Upon the sale of an AFS security,MBS, any unrealized gain or loss within OCI or net income is reclassified out of accumulated other comprehensive income ("AOCI") into net income as a realized "gainto “realized gain (loss) on sale of investments, net"net” within net income using the specific identification method.


The Company’s MBS pledged as collateral against repurchase agreements and derivative instruments are included in MBS on the consolidated balance sheets with the fair value of the MBS pledged as collateral disclosed parenthetically.

Interest Income, Premium Amortization, and Discount Accretion.Interest income on MBS is accrued based on the outstanding principal balance (or notional balance in the case of interest-only, or "IO",IO securities) and theirthe contractual terms. Premiums andor discounts onassociated with the Company'spurchase of Agency MBS as well as any non-Agency MBS rated 'AA' and higher at the time of purchase are amortized or accreted into interest income over the expectedprojected life of such securities using the effective yieldinterest method, and adjustments to premium amortization and discount accretion are made for actual cash payments. The Company may also adjust premium amortization and discount accretion for changes in projected future cash payments. The Company'sCompany’s projections of future cash payments are based on input and analysis received from external sources and internal models and may include assumptions about the amount and timing of loan prepayment rates, fluctuations in interest rates, credit losses, and other factors. On at least a quarterly basis, the Company reviews and makes any necessary adjustments to its cash flow projections and updates the yield recognized on these assets. The Company does not estimate future prepayments on its fixed-rate Agency RMBS.


The Company holds certain non-Agency MBS that had credit ratings of less than 'AA' at the time of purchase or were not rated by any of the nationally recognized credit rating agencies. A portion of these non-Agency MBS were purchased at discounts to their par value, which management does not believe to be substantial. The discount is accreted into income over the security's expected life based on management's estimate of the security's projected cash flows. Future changes in the timing of projected cash flows or differences arising between projected cash flows and actual cash flows received may result in a prospective change in the effective yield on those securities.

Determination of MBS Fair Value.The Company estimates the fair value of the majority of its MBS based upon prices obtained from third-party pricing services and broker quotes. The remainder of the Company'sCompany’s MBS are valued by discounting the estimated future cash flows derived from cash flow models that utilize information such as the security'ssecurity’s coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected losses, and credit enhancements as well as certain other relevant information. ReferPlease refer to Note 56 for further discussion of MBS fair value measurements.


Other-than-Temporary Impairment. AnAllowance for Credit Losses.On at least a quarterly basis, the Company evaluates any MBS is considered impaired when itsdesignated as AFS with a fair value is less than its amortized cost. The Company evaluates all of its impaired MBScost for other-than-temporary impairments ("OTTI") on at least a quarterly basis. An impairment is considered other-than-temporary if: (1) the Company intends to sell the MBS; (2) it is more likely than not that the Company will be required to sell the MBS before its fair value recovers; or (3) the Company does not expect to recover the full amortized cost basis of the MBS.credit losses. If either of the first two conditions is met, the entire amount of the impairment is recognized in earnings. If the impairment is solely due to the inability to fully recover the amortized cost basis, the security is further analyzed to quantify any credit loss, which is the difference between the present value of cash flows expected to be collected on the MBS andis less than its amortized cost. Thecost, the difference is recorded as an allowance for credit loss if any, is thenthrough net income up to and not exceeding the amount that the amortized cost exceeds current fair value. Subsequent changes in credit loss estimates are recognized in earnings whilein the balanceperiod in which they occur. Because the majority of impairmentthe Company’s investments are higher credit quality and most are guaranteed by a GSE, the Company is not likely to have an allowance for credit losses related to other factors is recognizedits MBS recorded on its consolidated balance sheet.

8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in other comprehensive income.thousands except per share data)



Following the recognition of an OTTI through earnings, a new cost basis is established for the security. Any subsequent recoveries in fair value may be accreted back into the amortized cost basis of the MBS on a prospective basis through interest income. Please see Note 2 for additional information related to the Company's evaluation for OTTI.


Repurchase Agreements
 
The Company'sCompany’s repurchase agreements which are used to finance its purchases of MBS and are accounted for as secured borrowings under which theborrowings. The Company pledges its securities as collateral to secure a loan, which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral.collateral, which is disclosed parenthetically on the Company’s consolidated balance sheets. At the maturity of a repurchase agreement borrowing, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew the agreement at the then prevailing financing rate. A repurchase agreement lender may require the Company to pledge additional collateral in the event of a decline in the fair value of the collateral pledged. Repurchase agreement financing is recourse to the Company and the assets pledged. Most of the Company’s repurchase agreements are based on the September 1996 version of the Bond Market Association Master Repurchase Agreement, which generally provides that the lender, as buyer, is responsible for obtaining collateral valuations from a generally recognized source agreed to by both the Company and the lender, or, in an instance when such source is not available, the value determination is made by the lender.


Derivative Instruments


The Company's derivative instruments include interest rate swaps and forward contracts forChanges in the purchase or sale of generic Agency RMBS, commonly referred to as "TBA securities" or "TBA contracts". Derivative instruments are accounted for at the fair value of their unit of account. Derivative instruments in a gain position are reported as derivative assets and derivative instruments in a loss position are reported as derivative liabilities on the Company's consolidated balance sheet. All periodic interest costs and changes in fair value of derivative instruments, including gains and losses realized upon termination, maturity, or settlement, are recorded in "gain“gain (loss) on derivative instruments, net"net” on the Company'sCompany’s consolidated statementstatements of comprehensive income.income (loss). Cash receipts and payments related to derivative instruments are classified in the investing activities section of ourthe consolidated statements of cash flows in accordance with the underlying nature or purpose of the derivative transactions.


Our interest rate swap agreementsThe Company’s short positions in U.S. Treasury futures contracts are privately negotiatedvalued based on exchange pricing with daily margin settlements. The margin requirement varies based on the market value of the open positions and the equity retained in the over-the-counter ("OTC") marketaccount. Any margin excess or deficit outstanding is recorded as a receivable or payable as of the date of the Company’s consolidated balance sheets. The Company realizes gains or losses on these contracts upon expiration at an amount equal to the difference between the current fair value of the underlying asset and the majoritycontractual price of these agreements are centrally cleared through the Chicago Mercantile Exchange ("CME") with the rest being subject to bilateral agreements betweenfutures contract.

The Company’s options on U.S. Treasury futures provide the Company the right, but not an obligation, to buy U.S. Treasury futures at a predetermined notional amount and stated term in the swap counterparty.future and are valued based on exchange pricing. The Company's CME cleared swaps require thatCompany records the Company post initial marginpremium paid for the option contract as determined bya derivative asset on its consolidated balance sheet and adjusts the CME, and in addition, variation margin is exchanged, typically in cash,balance for changes in fair value through “gain (loss) on derivative instruments” until the option is exercised or the contract expires. If the option contract expires unexercised, the realized loss is limited to the premium paid. If exercised, the realized gain or loss on the options is equal to the difference between the fair value of the CME cleared swaps. Beginning in January 2017, asunderlying U.S. Treasury future and the premium paid for the option contract.

The Company may also purchase swaptions, which provide the Company the right, but not an obligation, to enter into an interest rate swap at a result ofpredetermined notional amount with a changestated term and pay and receive rates in the CME's rulebook, the exchange of variation marginfuture. The accounting for CME cleared swapsswaptions is legally consideredsimilar to be the settlement of the derivative itself as opposed to a pledge of collateral. Accordingly, beginning in 2017, the Company accounts for the daily exchange of variation margin associated with its CME cleared interest rate swaps as a direct increase or decrease to the carrying value of the related derivative asset or liability. The carrying value of CME cleared interest rate swapsoptions on the Company's consolidated balance sheets is the unsettled fair value of those instruments.U.S. Treasury futures.


A TBA security is a forward contract (“TBA contract”) for the purchase (“long position”) or sale (“short position”) of a genericnon-specified Agency MBS at a predetermined price with certain principal and interest terms and certain types of collateral, but the particular Agency securities to be delivered are not identified until shortly before the TBA settlement date. The Company executes TBA dollar roll transactions which effectively delay the settlement of a forward purchase of a TBA Agency RMBS by entering into an offsettingaccounts for long and short position (referred to as a "pair off"), net settling the paired-off positions in cash, and simultaneously entering a similar TBA contract for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as “drop income” is the economic equivalent of net interest income on the underlying Agency securities over the roll period (interest income less implied financing cost).

The Company accounts for TBA securitiesTBAs as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA contracttransaction that its settlement will result in physical delivery of the underlying Agency RMBS or that the individual TBA contracttransaction will not settle in the shortest time period possible.



Please refer to Note 45 for additional information regarding the Company'sCompany’s derivative instruments as well as Note 56 for information on how the fair value of these instruments areis calculated.


9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

Share-Based Compensation


Pursuant to theThe Company’s 20092020 Stock and Incentive Plan the Company may grant share-based compensation(the “2020 Plan”) reserves for issuance up to 2,300,000 common shares for eligible employees, non-employee directors, or consultants, or advisersand advisors to the Company includingto be granted in the form of stock awards,options, restricted stock, options,restricted stock units (“RSUs”), stock appreciation rights, dividend equivalent rights, performanceperformance-based stock units (“PSUs”), and performance-based cash awards (collectively, “awards”). As of June 30, 2023, 1,097,453 common shares andare available for issuance under the 2020 Plan.

Currently, the Company has shares of restricted stock units. The Company's restricted stock currentlyand RSUs issued and outstanding under this plan may be settled only in shares of its common stock, and thereforewhich are treated as equity awards withand recorded at their fair value measured atusing the closing stock price on the grant date and recognized asdate. The compensation cost is recognized over the requisite servicevesting period with a corresponding credit to shareholders' equity. shareholders’ equity using the straight-line method.

The requisite service period is the period duringCompany also has PSUs issued and outstanding which an employee is requiredcontain Company performance-based and market performance-based conditions. PSUs subject to provide service in exchange for an award,Company performance-based conditions are initially recognized as equity at their fair value which is equivalentmeasured using the closing stock price on the grant date multiplied by the number of units expected to vest based on an assessment of the probability of achievement of the Company performance-based conditions as of the grant date. The grant date fair value is recognized as expense on the Company’s consolidated statements of comprehensive income within “Compensation and benefits” on a straight-line basis over the vesting period and adjusted if necessary based on any change in probability of achievement which is re-assessed as of each reporting date and on at least a quarterly basis.

PSUs subject to market performance-based conditions are recognized as equity at their grant date fair value determined through a Monte-Carlo simulation of the Company’s common stock total shareholder return (“TSR”) relative to the common stock TSR of the group of peer companies specified in the termsaward agreement. Awards subject to market performance-based conditions are not assessed for probability of achievement and are not remeasured subsequent to issuance. The grant date fair value is recognized as expense on the time-based restricted stock award. NoneCompany’s consolidated statements of comprehensive income within “Compensation and benefits” on a straight-line basis over the Company's restricted stock awards have performance based conditions. vesting period even if the market performance-based conditions are not achieved.

The Company does not currentlyestimate forfeitures for any of its share-based compensation awards, but adjusts for actual forfeitures in the periods in which they occur. Because RSUs and PSUs have forfeitable dividend equivalent rights that are paid only upon settlement, any accrued dividend equivalent rights (“DERs”) on forfeited units are reversed with a corresponding credit to “Compensation and benefits.”

Please see Note 7 for additional information about the Company’s share-based compensation awards.

Contingencies

The Company did not have any share-based compensation issued or outstanding other than restricted stock issued to its employees, officers, and directors.

Contingencies

In the normal course of business, there may be variouspending lawsuits, claims, andor other contingencies pending against the Company. On a quarterly basis, theas of June 30, 2023 or December 31, 2022.
Recently Issued Accounting Pronouncements

The Company evaluates whether to establish provisions for estimated losses from those matters. The Company recognizes a liability for a contingent loss when: (a)Accounting Standards Updates issued by the underlying causal event has occurred prior to the balance sheet date; (b) it is probable that a loss has been incurred; and (c) there is a reasonable basis for estimating that loss. A liability is not recognized for a contingent loss when it is only possible or remotely possible that a loss has been incurred, however, possible contingent losses shall be disclosed. If the contingent loss (or an additional loss in excess of any accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible material loss, or range of loss, then that fact is disclosed.

Recent Accounting Pronouncements

The Financial Accounting Standards Board ("FASB")on at least a quarterly basis to evaluate applicability and significance of any impact on its financial condition and results of operations. There were no accounting pronouncements issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs, which shortensduring the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The amendments in this ASUsix months ended June 30, 2023, that are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The amendments in this Update should be applied using the modified-retrospective transition approach and will require disclosures for the change in accounting principle. The Company does not expect this ASUexpected to have a material impact on the Company's consolidatedCompany’s financial statements.condition or results of operations.


FASB issued ASU No. 2017-12, Derivatives
NOTE 2 – NET INCOME (LOSS) PER COMMON SHARE

Please refer to Note 1 for information regarding the Company’s treatment of its preferred stock and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which contains significant amendments to hedge accounting with the main objective of better aligning an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged itemstock awards in the financial statements. This ASU also includes certain targeted improvementscalculation of its basic and diluted net income or loss per common share and to easeNote 7 for information
10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

regarding the applicationCompany’s stock award activity for the periods presented. The following table presents the computations of current guidance related tobasic and diluted net income or loss per common share for the assessment of hedge effectiveness as well as changes to current disclosure requirements. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted. All transition requirements and elections will be applied to hedging relationships existing on the date of adoption. The effect of adoption will be reflected as of the beginning of the fiscal year of adoption, and the amended presentation and disclosure guidance is required only prospectively. The Company does not currently apply hedge accounting, but is evaluating the impact this ASU would have on its consolidated financial statements if the Company elects to adopt hedge accounting in the future.indicated:

Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Weighted average number of common shares outstanding - basic54,137,32739,190,25153,981,46337,964,617
Incremental common shares-unvested RSUs160,303110,629119,570110,629
Incremental common shares-unvested PSUs287,452257,582226,352257,582
Weighted average number of common shares outstanding - diluted54,585,08239,558,46254,327,38538,332,828
Net income to common shareholders$52,414 $27,413 $8,769 $142,699 
Net income per common share-basic$0.97 $0.70 $0.16 $3.76 
Net income per common share-diluted$0.96 $0.69 $0.16 $3.72 




NOTE 23 – MORTGAGE-BACKED SECURITIES
 
The majority of the Company's MBS are pledged as collateral for the Company's secured borrowings. The following tables presentprovide details on the Company’s MBS by investment type as of the dates indicated:
June 30, 2023December 31, 2022
Par ValueAmortized CostFair ValuePar ValueAmortized CostFair Value
Agency RMBS$5,060,491 $5,080,710 $4,753,037 $3,104,498 $3,150,873 $2,762,878 
Agency CMBS121,931 122,514 115,136 131,578 132,333 124,690 
CMBS IO (1)
n/a202,489 191,017 n/a238,841 224,985 
Non-Agency other173 173 118 209 209 152 
Total$5,182,595 $5,405,886 $5,059,308 $3,236,285 $3,522,256 $3,112,705 
(1) The notional balance for Agency CMBS IO and non-Agency CMBS IO was $8,342,158 and $4,332,365, respectively, as of June 30, 2023, and $9,711,981 and $6,280,761, respectively, as of December 31, 2022.
June 30, 2023
Amortized CostGross Unrealized GainGross Unrealized LossFair Value
MBS measured at fair value through OCI:
Agency RMBS$937,727 $— $(161,660)$776,067 
Agency CMBS107,227 — (6,172)101,055 
CMBS IO159,318 902 (9,011)151,209 
Non-Agency other173 — (55)118 
Total$1,204,445 $902 $(176,898)$1,028,449 
MBS measured at fair value through net income:
Agency RMBS$4,142,983 $1,030 $(167,043)$3,976,970 
11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

 September 30, 2017
 Par Net Premium (Discount) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value 
WAC (1)
CMBS:             
Agency$1,302,237
 $12,688
 1,314,925
 $6,187
 $(13,623) 1,307,489
 2.99%
Non-Agency40,780
 (4,452) 36,328
 2,877
 —
 39,205
 5.48%
 1,343,017
 8,236
 1,351,253
 9,064
 (13,623) 1,346,694
  
CMBS IO (2):
             
Agency—
 394,380
 394,380
 7,592
 (164) 401,808
 0.63%
Non-Agency—
 322,735
 322,735
 6,254
 (330) 328,659
 0.61%
 —
 717,115
 717,115
 13,846
 (494) 730,467
  
RMBS:             
Agency fixed-rate522,099
 19,163
 541,262
 —
 (1,903) 539,359
 3.52%
Agency adjustable-rate294,254
 11,011
 305,265
 1,263
 (2,746) 303,782
 3.05%
Non-Agency1,113
 —
 1,113
 49
 (20) 1,142
 6.75%
 817,466
 30,174
 847,640
 1,312
 (4,669) 844,283
  
             

Total AFS securities:$2,160,483
 $755,525
 $2,916,008
 $24,222
 $(18,786) $2,921,444
  
(1)The weighted average coupon ("WAC") is the gross interest rate of the security weighted by the outstanding principal balance (or by notional balance in the case of an IO security).
(2)The notional balance for Agency CMBS IO and non-Agency CMBS IO was $14,253,392 and $11,061,377, respectively, as of September 30, 2017.
Agency CMBS15,287 — (1,206)14,081 
CMBS IO43,170 — (3,362)39,808 
Total$4,201,440 $1,030 $(171,611)$4,030,859 
December 31, 2022
Amortized CostGross Unrealized GainGross Unrealized LossFair Value
MBS measured at fair value through OCI:
Agency RMBS$977,624 $— $(164,949)$812,675 
Agency CMBS117,031 — (6,474)110,557 
CMBS IO193,405 507 (10,373)183,539 
Non-Agency other209 — (57)152 
Total$1,288,269 $507 $(181,853)$1,106,923 
MBS measured at fair value through net income:
Agency RMBS$2,173,249 $— $(223,046)$1,950,203 
Agency CMBS15,302 — (1,169)14,133 
CMBS IO45,436 — (3,990)41,446 
Total$2,233,987 $— $(228,205)$2,005,782 
 December 31, 2016
 Par Net Premium (Discount) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value 
WAC (1)
CMBS:             
Agency$1,152,586
 $13,868
 $1,166,454
 $6,209
 $(28,108) $1,144,555
 3.12%
Non-Agency79,467
 (6,718) 72,749
 5,467
 —
 78,216
 4.72%
 1,232,053
 7,150
 1,239,203
 11,676
 (28,108) 1,222,771
  
CMBS IO (2):
             
Agency—
 411,737
 411,737
 3,523
 (3,362) 411,898
 0.67%
Non-Agency—
 346,155
 346,155
 1,548
 (5,055) 342,648
 0.61%
 —
 757,892
 757,892
 5,071
 (8,417) 754,546
  
RMBS:             
Agency adjustable-rate$1,157,258
 $57,066
 $1,214,324
 $2,832
 $(15,951) $1,201,205
 3.05%
Non-Agency33,572
 (24) 33,548
 64
 (50) 33,562
 3.58%
 1,190,830
 57,042
 1,247,872
 2,896
 (16,001) 1,234,767
  



   

 

   

  
Total AFS securities:$2,422,883
 $822,084
 $3,244,967
 $19,643
 $(52,526) $3,212,084
 




(1)The WAC is the gross interest rate of the pool of mortgages underlying the security weighted by the outstanding principal balance (or by notional balance in the case of an IO security).
(2)The notional balance for the Agency CMBS IO and non-Agency CMBS IO was $13,106,912 and $10,884,964, respectively, as of December 31, 2016.

The majority of the Company’s MBS are pledged as collateral for the Company’s repurchase agreements, which are disclosed in Note 4. Actual maturities of MBS are affected by the contractual lives of the underlying mortgage collateral, periodic payments of principal, prepayments of principal, and the payment priority structure of the security; therefore, actual maturities are generally shorter than the securities' stated contractual maturities.

The following table presents information regarding the sales included in "lossunrealized gains and losses on sale of investments net"reported within net income (loss) on the Company'sCompany’s consolidated statements of comprehensive income (loss) for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Agency RMBS$1,254 $(64,398)$57,033 $(174,599)
Agency CMBS(275)— (37)— 
CMBS IO(466)(711)626 (1,841)
Other assets(25)6 (13)86 
Total unrealized gain (loss) on investments, net$488 $(65,103)$57,609 $(176,354)


12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

 Three Months Ended
 September 30,
 2017 2016
 Proceeds Received Realized Gain (Loss) Proceeds Received Realized Gain (Loss)
Agency RMBS$393,502
 $(5,160) $—
 $—
Agency CMBS13,433
 (51) —
 —
 $406,935
 $(5,211) $—
 $—
        
 Nine Months Ended
 September 30,
 2017 2016
 Proceeds Received Realized Gain (Loss) Proceeds Received Realized Gain (Loss)
Agency RMBS$716,560
 $(12,392) $54,178
 $(3,010)
Agency CMBS206,993
 523
 —
 —
Non-Agency CMBS35,705
 1,199
 33,640
 (1,228)
Non-Agency RMBS16,407
 42
 —
 —
 $975,665
 $(10,628) $87,818
 $(4,238)
The following table presents information regarding realized gains and losses on sales of MBS reported in the Company’s consolidated statements of comprehensive income (loss) for the periods indicated:


Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Realized gains on sales of MBS - AFS$— $— $— $— 
Realized losses on sales of MBS - AFS— — — — 
Realized gains on sales of MBS - FVO— — — — 
Realized losses on sales of MBS - FVO(51,601)(18,550)(74,916)(18,550)
Total realized loss on sales of investments, net$(51,601)$(18,550)$(74,916)$(18,550)

The following table presents certain information for those MBS designated as AFS that were in an unrealized loss position as of the dates indicated:
 June 30, 2023December 31, 2022
Fair ValueGross Unrealized Losses# of SecuritiesFair ValueGross Unrealized Losses# of Securities
Continuous unrealized loss position for less than 12 months:    
Agency MBS$63,933 $3,117 24$346,064 $22,808 79
Non-Agency MBS6,172 208 1542,162 1,787 56
Continuous unrealized loss position for 12 months or longer:
Agency MBS$918,195 $171,896 65$697,514 $156,411 17
Non-Agency MBS31,780 1,677 5512,195 847 22
 September 30, 2017 December 31, 2016
 Fair Value Gross Unrealized Losses # of Securities Fair Value Gross Unrealized Losses # of Securities
Continuous unrealized loss position for less than 12 months:           
Agency MBS$1,377,438
 $(13,201) 76 $1,738,094
 $(38,469) 133
Non-Agency MBS38,979
 (151) 6 205,484
 (2,773) 48
            
Continuous unrealized loss position for 12 months or longer:           
Agency MBS$206,045
 $(5,236) 17 $427,405
 $(8,952) 72
Non-Agency MBS15,749
 (199) 11 81,660
 (2,332) 26


BecauseThe unrealized losses on the principal related to AgencyCompany’s MBS is guaranteed bydesignated as AFS were the government-sponsored entities Fannie Maeresult of rising interests rates and Freddie Mac which have the implicit guarantee of the U.S. government,declines in market prices and were not credit related; therefore, the Company doesdid not considerhave any allowance for credit losses as of the unrealized


losses on its Agency MBS to be credit related.June 30, 2023 or December 31, 2022. Although the unrealized losses are not credit related, the Company assesses its ability and intent to hold any Agency MBS with an unrealized loss until the recovery in its value in accordance with GAAP.value. This assessment is based on the amount of the unrealized loss and significance of the related investment as well as the Company’s leverage and liquidity position. Based on this analysis,In addition, for its non-Agency MBS, the Company has determined that the unrealized losses on its Agency MBS as of September 30, 2017 and December 31, 2016 were temporary.

The Company reviews any non-Agency MBS in an unrealized loss position to evaluate whether any decline in fair value represents an OTTI. The evaluation includes a review of the credit ratings, of the non-Agency MBS, the credit characteristics of the mortgage loans collateralizing these securities, and the estimated future cash flows including projected collateral losses. The Company performed this evaluation for its non-Agency MBS

13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in an unrealized loss position and has determined that there have not been any adverse changes in the timing or amount of estimated future cash flows that necessitate a recognition of OTTI amounts as of September 30, 2017 or December 31, 2016.thousands except per share data)


NOTE 34 – REPURCHASE AGREEMENTS

The Company’s repurchase agreements outstanding as of SeptemberJune 30, 20172023 and December 31, 20162022 are summarized in the following tables:
 June 30, 2023December 31, 2022
Collateral TypeBalanceWeighted
Average Rate		Fair Value of
Collateral Pledged		BalanceWeighted
Average Rate		Fair Value of
Collateral Pledged
Agency RMBS$3,924,082 5.25 %$4,146,397 $2,349,181 4.15 %$2,496,781 
Agency CMBS109,129 5.16 %113,281 108,580 3.76 %108,146 
Agency CMBS IO132,611 5.57 %141,541 137,569 4.62 %150,517 
Non-Agency CMBS IO36,079 6.00 %39,885 49,075 5.26 %55,513 
Total repurchase agreements$4,201,901 5.26 %$4,441,104 $2,644,405 4.18 %$2,810,957 
The Company had borrowings outstanding under 25 different repurchase agreements as of June 30, 2023, and its equity at risk did not exceed 5% with any counterparty as of that date. The Company also had $371,576 and $4,159 payable to counterparties for transactions pending settlement as of June 30, 2023 and December 31, 2022, respectively.
  September 30, 2017 December 31, 2016
Collateral Type Balance 
Weighted
Average Rate
 
Fair Value of
Collateral Pledged
 Balance 
Weighted
Average Rate
 
Fair Value of
Collateral Pledged
Agency CMBS $1,188,230
 1.31% $1,250,575
 $1,005,726
 0.82% $1,095,002
Non-Agency CMBS 15,625
 2.14% 18,365
 66,881
 1.63% 77,840
Agency CMBS IO 336,187
 2.06% 389,637
 346,892
 1.57% 407,481
Non-Agency CMBS IO 279,981
 2.15% 327,976
 291,199
 1.67% 341,139
Agency RMBS 695,841
 1.31% 727,727
 1,157,302
 0.82% 1,191,147
Non-Agency RMBS —
 —% —
 26,149
 1.98% 31,952
Securitization financing bond 3,366
 2.58% 3,723
 4,803
 2.00% 5,278
Total repurchase agreements $2,519,230
 1.51% $2,718,003
 $2,898,952
 1.03% $3,149,839


The following table provides information on the remaining term to maturity and original term to maturity for the Company'sCompany’s repurchase agreements as of the periodsdates indicated:
June 30, 2023December 31, 2022
Remaining Term to MaturityBalanceWeighted
Average Rate		WAVG Original Term to MaturityBalanceWeighted
Average Rate		WAVG Original Term to Maturity
Less than 30 days$1,069,565 5.27 %50 $858,161 4.44 %42 
30 to 90 days2,039,943 5.24 %130 1,786,244 4.06 %104 
91 to 180 days1,092,393 5.30 %175 — — %— 
Total$4,201,901 5.26 %122 $2,644,405 4.18 %84 
  September 30, 2017 December 31, 2016
Remaining Term to Maturity Balance WAVG Original Term to Maturity Balance WAVG Original Term to Maturity
Less than 30 days $1,725,518
 36
 $2,480,213
 58
30 to 90 days 793,712
 89
 418,739
 87
Total $2,519,230
 53
 $2,898,952
 63


The following table listsincrease in the counterparties with whomCompany’s weighted average rate for its borrowings as of June 30, 2023 compared to December 31, 2022 resulted from the increase in the U.S. Federal Funds Target rate (“Fed Funds rate”) set by the Federal Reserve. The Company’s accrued interest payable related to its repurchase agreement borrowings was $33,794 as of June 30, 2023 compared to $16,450 as of December 31, 2022.

The repurchase facilities available to the Company are uncommitted with no guarantee of renewal or terms of renewal. The Company had over 10% of its shareholders' equity at risk (defined as the excess of collateral pledged over the borrowings outstanding):
  September 30, 2017
Counterparty Name Balance Weighted Average Rate Equity at Risk
Wells Fargo Bank, N. A. and affiliates $349,965
 2.10% $57,992


Of the amount outstandinga committed repurchase facility with Wells Fargo Bank, N.A. and affiliates, $343,780 is under a committed repurchase facility which has an aggregate maximum borrowing capacity of $400,000 and is scheduled to maturematured on May 12, 2019, subject to early termination provisions contained in the master repurchase agreement. The facility is collateralized primarily by CMBS IO, and its weighted average borrowing rate as of September 30, 2017 was 2.10%.

As of September 30, 2017,June 8, 2023, which the Company had repurchase agreement amounts outstanding with 18 of its 34 available repurchase agreement counterparties. decided to not extend.

The Company'sCompany’s counterparties, as set forth in the master repurchase agreement with the counterparty, require the Company to comply with various customary operating and financial covenants, including, but not limited to, minimum net worth, and earnings, maximum declines in net worth in a given period, and maximum leverage requirements as well as maintaining the Company'sCompany’s REIT status. In addition, some of the agreements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that the Company fails to comply with the covenants contained in these financing agreements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the master repurchase agreement. The Company believes it was in full compliance with all covenants in master repurchase agreements under which there were amounts outstanding as of SeptemberJune 30, 2017.2023.


The Company's repurchase agreements are subject to underlying agreements with master netting or similar
14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its repurchase agreements to these arrangements on a gross basis. The following tables presenttable presents information regarding the Company's repurchase agreements as if the Company had presented them on a net basis as of SeptemberJune 30, 20172023 and December 31, 2016:2022:
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as Collateral
June 30, 2023:
Repurchase agreements$4,201,901 $— $4,201,901 $(4,201,901)$— $— 
December 31, 2022:
Repurchase agreements$2,644,405 $— $2,644,405 $(2,644,405)$— $— 
 Gross Amount of Recognized Liabilities Gross Amount Offset in the Balance Sheet Net Amount of Liabilities Presented in the Balance Sheet 
Gross Amount Not Offset in the Balance Sheet (1)
 Net Amount
Financial Instruments Posted as Collateral Cash Posted as Collateral
September 30, 2017           
Repurchase agreements$2,519,230
 $—
 $2,519,230
 $(2,519,230) $—
 $—
            
December 31, 2016:           
Repurchase agreements$2,898,952
 $—
 $2,898,952
 $(2,898,952) $—
 $—
(1)Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the asset or liability presented in the balance sheet. The fair value of the actual(1) Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the repurchase agreement liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented.


Please see Note 4 5for information related to the Company'sCompany’s derivatives, which are also subject to underlying agreements with master netting or similar arrangements.


NOTE 45 – DERIVATIVES


     The Company's derivative instruments includeTypes and Uses of Derivatives Instruments

Interest Rate Derivatives. During the periods presented herein, the Company used short positions in U.S. Treasury futures, interest rate swapsswaptions, and TBA securities. The Company utilizes interest rate swaps to economically hedge a portion of its exposure to interest rate risk in ordercall options on U.S. Treasury futures to mitigate declines in book value resulting from fluctuations inthe impact of changing interest rates on its repurchase agreement financing costs and the fair value of the Company's assets from changing interest rates and to protect some portion of the Company's earnings from rising interest rates. its investments.

TBA Transactions. The Company investspurchases TBA securities as a means of investing in non-specified fixed-rate Agency RMBS and may also periodically sell TBA securities as a means of economically hedging its exposure to Agency RMBS. The Company holds long and short positions in TBA securities forby executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase or sale(or sale) of a non-specified Agency RMBS onby entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long (or short) position with a non-specified pool basis.later settlement date. TBA securities purchased (or sold) for a forward settlement date are forward contracts which are accounted for as derivative instruments; however, management viewsgenerally priced at a discount relative to TBA securities settling in the current month. This discount, often referred to as “drop income” represents the economic equivalent of investingnet interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. The Company accounts for all TBAs (whether net long or net short positions, or collectively “TBA dollar roll positions”) as derivative instruments because it cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in and financing genericphysical delivery of the underlying Agency fixed-rate RMBS, throughor that the repurchase agreement markets. Please refer to Note 1 for information related toindividual TBA transaction will settle in the Company's accounting policy for its derivative instruments.shortest period possible.

The table below summarizes information aboutprovides detail of the fair valueCompany’s “gain (loss) on derivative instruments, net” by type of
15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

derivative instrument for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,
Type of Derivative Instrument2023202220232022
U.S. Treasury futures$171,219 $150,475 $64,846 $439,408 
Interest rate swaptions— 26,502 — 51,940 
Options on U.S. Treasury futures(1,211)— (5,468)— 
TBA securities-long positions(53,996)(70,565)(10,633)(164,725)
Gain on derivative instruments, net$116,012 $106,412 $48,745 $326,623 

The table below provides the carrying amount by type of derivative instrument comprising the Company’s derivative assets and liabilities on the Company'sits consolidated balance sheets as of the dates indicated:

Type of Derivative InstrumentBalance Sheet LocationPurposeJune 30, 2023December 31, 2022
Options on U.S. Treasury futuresDerivative assetsEconomic hedging$— $5,859 
TBA securitiesDerivative assetsInvesting174 1,243 
Total derivatives assets$174 $7,102 
TBA securitiesDerivative liabilitiesInvesting$23,621 $22,595 
Total derivatives liabilities$23,621 $22,595 

    September 30, 2017 December 31, 2016
Type of Derivative Instruments Balance Sheet Location Fair Value 
Fair Value (1)
Interest rate swaps Derivative assets $368
 $28,534
TBA securities Derivative assets —
 —
    $368
 $28,534
       
Interest rate swaps Derivative liabilities $—
 $(6,922)
TBA securities Derivative liabilities (133) —
    $(133) $(6,922)
(1)
Refer to Note 1 regarding information on a change in the CME rulebook. Amounts reported on the consolidated balance sheet as of September 30, 2017 for its interest rate swaps reflect the netting of the derivative asset or liability with the related collateral received or posted, respectively. The net amounts comparable to September 30, 2017 for the derivative asset and derivative liabilities as of December 31, 2016 were $104 and $(576), respectively.


The following tables present information aboutCompany’s short positions in U.S. Treasury futures are considered legally settled on a daily basis, therefore the Company's interest rate swapscarrying value on the Company’s consolidated balance sheet nets to $0. As of June 30, 2023, the amount of cash posted by the Company to cover required initial margin for its U.S. Treasury futures was $96,600, which is recorded within “cash collateral posted to counterparties.” The Company had excess margin receivable of $5,625 as of the dates indicated:June 30, 2023, which is recorded within “due to counterparties.”
  September 30, 2017
    Weighted-Average:  
Years to Maturity: 
Net Notional Amount (1)
 
Pay Rate (2)
 Life Remaining (in Years) Fair Value
< 3 years
 $3,110,000
 1.39% 0.9 $368
>3 and < 6 years
 1,160,000
 1.66% 4.2 —
>6 and < 10 years
 1,175,000
 2.45% 8.1 —
Total $5,445,000
 1.68% 3.2 $368
         
  December 31, 2016
    Weighted-Average:  
Years to Maturity: 
Net Notional Amount (1)
 
Pay Rate (2)
 Life Remaining (in Years) Fair Value
< 3 years
 $595,000
 0.73% 2.3 $4,348
>3 and < 6 years
 1,185,000
 1.47% 4.3 8,631
>6 and < 10 years
 1,250,000
 2.42% 8.9 8,633
Total $3,030,000
 1.58% 5.3 $21,612
(1)The net notional amounts included in the tables above represent pay-fixed interest rate swaps, net of receive-fixed interest rate swaps and include $2,425,000 and $2,725,000 of pay-fixed forward starting interest rate swaps as of September 30, 2017 and December 31, 2016, respectively.
(2) Excluding forward starting pay-fixed interest rate swaps, the weighted average pay rate was 1.34% and 0.73% as of September 30, 2017 and December 31, 2016, respectively.


The following table summarizes information about the Company's long positions in TBA securities as of September 30, 2017:the dates indicated:

June 30, 2023December 31, 2022
Implied market value (1)
$2,115,641 $2,751,568 
Implied cost basis (2)
2,139,089 2,772,920 
Net carrying value (3)
$(23,448)$(21,352)

(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the dates indicated.
(2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as of the dates indicated.
(3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets” and “derivative liabilities” and represents the difference between the implied market value and the implied cost basis of the TBA securities as of the dates indicated.
16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

  September 30, 2017
  
Notional Amount (1)
 
Cost Basis (2)
 
Market Value (3)
 
Net Carrying Value (4)
30-year 4.0% TBA securities $650,000
 $683,813
 $683,680
 $(133)

(1)Notional amount represents the par value (or principal balance) of the underlying Agency MBS.
(2)Cost basis represents the forward price to be paid for the underlying Agency MBS as if settled.
(3)Market value is the current fair value of the TBA contract and represents the estimated fair value of the underlying Agency security as of the end of the period.
(4)Net carrying value represents the difference between the market value and the cost basis of the TBA contract as of the end of the period and is included on the consolidated balance sheets within "derivative assets (liabilities)".

Volume of Activity

The tablestable below summarizesummarizes changes in ourthe Company’s derivative instruments for the periods indicated:six months ended June 30, 2023:
Type of Derivative InstrumentBeginning
Notional Amount-Long (Short)		AdditionsSettlements,
Terminations,
or Pair-Offs		Ending
Notional Amount-Long (Short)
U.S. Treasury futures$(4,920,000)$(10,440,000)$10,460,000 $(4,900,000)
Options on U.S. Treasury futures250,000 250,000 (500,000)— 
TBA securities2,869,000 19,045,000 (19,738,000)2,176,000 
Type of Derivative Instrument Notional Amount as of December 31, 2016 Additions 
Settlements,
Terminations,
or Pair-Offs
 Notional Amount as of September 30, 2017
Receive-fixed interest rate swaps $425,000
 $—
 $(325,000) $100,000
Pay-fixed interest rate swaps 3,455,000
 3,010,000
 (920,000) 5,545,000
TBA securities —
 3,814,000
 (3,164,000) 650,000


Offsetting
The table below provides detail of the Company's "gain (loss) on derivative instruments, net" by type of derivative for the periods indicated:
  Three Months Ended Nine Months Ended
  September 30, September 30,
Type of Derivative Instrument 2017 2016 2017 2016
Receive-fixed interest rate swaps $(99) $(2,976) $746
 $11,301
Pay-fixed interest rate swaps (611) 2,555
 (18,799) (59,912)
TBA securities 6,703
 —
 8,419
 —
Eurodollar futures —
 2,830
 —
 (13,542)
Gain (loss) on derivative instruments, net $5,993
 $2,409
 $(9,634) $(62,153)

There is a net unrealized gain of $450 remaining in AOCI on the Company's consolidated balance sheet as of September 30, 2017 which represents the activity related to interest rate swap agreements while they were previously designated as cash flow hedges, and this amount will be recognized in the Company's net income as an adjustment to "interest expense" over the remaining contractual life of the agreements. The Company estimates a credit of $210 will be reclassified to net income as a reduction of "interest expense" within the next 12 months.

A portion of the Company's interest rate swaps were entered into under bilateral agreements which contain cross-default provisions with other agreements between the parties. In addition, these bilateral agreements contain financial and operational covenants similar to those contained in our repurchase agreements as described in Note 3. The Company was in compliance with all covenants with respect to bilateral agreements under which interest rate swaps were entered into as of September 30, 2017.

The Company's derivatives are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its derivative assets and liabilities subject to these arrangements on a gross basis. Please see Note 4 for information related to the Company’s repurchase agreements, which are also subject to underlying agreements with master netting or similar arrangements. The following tables present information regarding those derivative assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of SeptemberJune 30, 20172023 and December 31, 2016:2022:


Offsetting of Assets
Gross Amount of Recognized AssetsGross Amount Offset in the Balance SheetNet Amount of Assets Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Received as CollateralCash Received as Collateral
June 30, 2023
TBA securities$174 $— $174 $(174)$— $— 
Derivative assets$174 $— $174 $(174)$— $— 
December 31, 2022
Options on U.S. Treasury futures$5,859 $— $5,859 $— $— $5,859 
TBA securities1,243 — 1,243 (1,243)— — 
Derivative assets$7,102 $— $7,102 $(1,243)$— $5,859 
17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

 Offsetting of Assets
 Gross Amount of Recognized Assets Gross Amount Offset in the Balance Sheet Net Amount of Assets Presented in the Balance Sheet 
Gross Amount Not Offset in the Balance Sheet (1)
 Net Amount
Financial Instruments Received as Collateral Cash Received as Collateral
September 30, 2017           
Interest rate swaps$368
 $—
 $368
 $—
 $—
 $368
TBA securities—
 —
 —
 —
 —
 —
Derivative assets$368
 $—
 $368
 $—
 $—
 $368
December 31, 2016:           
Interest rate swaps$28,534
 $—
 $28,534
 $(6,449) $(22,085) $—
TBA securities—
 —
 —
 —
 —
 —
Derivative assets$28,534
 $—
 $28,534
 $(6,449) $(22,085) $—
Offsetting of Liabilities
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as Collateral
June 30, 2023
TBA securities$23,621 $— $23,621 $(174)$(23,407)$40 
Derivative liabilities$23,621 $— $23,621 $(174)$(23,407)$40 
December 31, 2022
TBA securities$22,595 $— $22,595 $(1,243)$(16,639)$4,713 
Derivative liabilities$22,595 $— $22,595 $(1,243)$(16,639)$4,713 

 Offsetting of Liabilities
 Gross Amount of Recognized Liabilities Gross Amount Offset in the Balance Sheet Net Amount of Liabilities Presented in the Balance Sheet 
Gross Amount Not Offset in the Balance Sheet (1)
 Net Amount
Financial Instruments Posted as Collateral Cash Posted as Collateral
September 30, 2017           
Interest rate swaps$—
 $—
 $—
 $—
 $—
 $—
TBA securities133
 —
 133
 —
 (63) 70
Derivative liabilities$133
 $—
 $133
 $—
 $(63) $70
            
December 31, 2016:           
Interest rate swaps$6,922
 $—
 $6,922
 $(6,913) $—
 $9
TBA securities—
 —
 —
 —
 —
 —
Derivative liabilities$6,922
 $—
 $6,922
 $(6,913) $—
 $9
(1)(1) Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the asset or liability presented in the balance sheet. The fair value of the actual collateral received by or posted to the same counterparty may exceed the amounts presented.
Please see Note 3 for information related to the Company'ssame counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the derivative asset or liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented. Please refer to the consolidated balance sheets for the total fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which are also subject to underlying agreements with master nettingis shown parenthetically, and the total cash pledged or similar arrangements.received as collateral which is disclosed in “cash collateral posted to/by counterparties.”



NOTE 56 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
ASC Topic 820 defines fairFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 clarifies that fairFair value should beis based on the assumptions market participants would use when pricing an asset or liability and also requires an entity to considerconsiders all aspects of nonperformance risk, including the entity'sentity’s own credit standing, when measuring fair value of a liability. ASC Topic 820 established a valuation hierarchy of three levels as follows:

•Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date.


•Level 2 – Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs either directly observable or indirectly observable through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
•Level 3 – Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best estimate of how market participants would price the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The Company reviews the classification of its financial instruments within the fair value hierarchy on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future if a change in type of inputs occurs. 


The following table presents the fair value of the Company’s financial instruments segregated by the hierarchy level of the fair value estimate that are measured at fair value on a recurring basisthe Company’s consolidated balance sheet by their valuation hierarchy levels as of the dates indicated:
18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

 September 30, 2017
 Fair Value Level 1 - Unadjusted Quoted Prices in Active Markets Level 2 - Observable Inputs Level 3 - Unobservable Inputs
Assets:       
Mortgage-backed securities$2,921,444
 $—
 $2,913,877
 $7,567
Interest rate swaps368
 —
 368
 —
Total assets carried at fair value$2,921,812
 $—
 $2,914,245
 $7,567
Liabilities: 
  
  
  
TBA securities133
 —
 133
 —
Total liabilities carried at fair value$133
 $—
 $133
 $—
        
 December 31, 2016
 Fair Value Level 1 - Unadjusted Quoted Prices in Active Markets Level 2 - Observable Inputs Level 3 - Unobservable Inputs
Assets:       
Mortgage-backed securities$3,212,084
 $—
 $3,201,157
 $10,927
Interest rate swaps28,534
 —
 28,534
 —
Total assets carried at fair value$3,240,618
 $—
 $3,229,691
 $10,927
Liabilities:       
Interest rate swaps$6,922
 $—
 $6,922
 $—
Total liabilities carried at fair value$6,922
 $—

$6,922
 $—
June 30, 2023December 31, 2022
 Fair ValueLevel 1Level 2Level 3Fair ValueLevel 1Level 2Level 3
Assets carried at fair value:    
MBS$5,059,308 $— $5,059,190 $118 $3,112,705 $— $3,112,553 $152 
Derivative assets:
Options on U.S. Treasury futures— — — — 5,859 5,859 — — 
TBA securities-long position174 — 174 — 1,243 — 1,243 — 
Total assets carried at fair value$5,059,482 $— $5,059,364 $118 $3,119,807 $5,859 $3,113,796 $152 
Liabilities carried at fair value:
TBA securities-long position$23,621 $— $23,621 $— $22,595 $— $22,595 $— 
Total liabilities carried at fair value$23,621 $— $23,621 $— $22,595 $— $22,595 $— 


The fair value measurements for a majoritymost of the Company's MBS are considered Level 2. These Level 2 securitiesbecause there are substantially similar to securities that either are actively tradedtrading or havefor which there has been recently tradedrecent trading activity in their respective markets. The Company determines the fair value of its Level 2 securitiesmarkets and are based on prices received from the Company's primary pricing service as well as other pricing services and brokers. The Company evaluates the third party prices it receives to assess their reasonableness. Although the Company does not adjust third party prices, they may be excludedquotes from use in the determination of a security's fair value if they are significantly different from other observable market data.brokers. In valuing a security, the primary pricing service uses either a market approach, which uses observable prices and other relevant information that is generated by


market transactions of identical or similar securities, or an income approach, which uses valuation techniques to convert future amounts to a single,such as discounted present value amount.cash flow modeling. The Company also reviews the prices it receives from its pricing sources as well as the assumptions and inputs utilized in the valuation techniques ofby its primary pricing service.sources for reasonableness. Examples of thesethe observable inputs and assumptions include market interest rates, credit spreads, and projected prepayment speeds, among other things.


The fair value of interest rate swapsOptions on U.S. Treasury futures are measured using the income approach with the primary input being the forward interest rate swap curve, which is considered an observable input,valued based on closing exchange prices on these contracts and thus their fair values are consideredclassified accordingly as Level 2 measurements as of September 30, 2017 and December 31, 2016.1 measurements. The fair value of TBA securities areis estimated using methods similar to those used to fair value the Company'sCompany’s Level 2 MBS.


The Company owns certain non-Agency MBS for which there are not sufficiently recent trades of substantially similar securities, and their fair value measurements are thus considered Level 3. The Company determines the fair value of its Level 3 securities by discounting the estimated future cash flows derived from cash flow models using significant inputs which are determined by the Company when market observable inputs are not available. Information utilized in those pricing models include the security’s credit rating, coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected credit losses, and credit enhancement as well as certain other relevant information. Significant changes in any of these inputs in isolation may result in a significantly different fair value measurement. Level 3 assets are generally most sensitive to the default rate and severity assumptions.

The activity of the instruments measured at fair value on a recurring basis using Level 3 inputs is presented in the following table for the period indicated:
 Level 3 Fair Value
 Non-Agency CMBS Non-Agency RMBS Total
Balance as of December 31, 2016$9,669
 $1,258
 $10,927
Unrealized loss included in OCI (1)
(1,422) 16
 (1,406)
Principal payments(3,896) (133) (4,029)
Accretion2,075
 —
 2,075
Balance as of September 30, 2017$6,426
 $1,141
 $7,567
(1)Amount included in "unrealized gain on available-for-sale investments, net" on consolidated statements of comprehensive income (loss).



The following table presents a summary of the carrying value and estimated fair values of the Company’s financial instruments as of the dates indicated:
 September 30, 2017 December 31, 2016
 Carrying Value Fair Value Carrying Value Fair Value
Assets:       
Mortgage-backed securities$2,921,444
 $2,921,444
 $3,212,084
 $3,212,084
Mortgage loans held for investment, net (1)
16,523
 13,674
 19,036
 15,971
Derivative assets368
 368
 28,534
 28,534
Liabilities: 
  
  
  
Repurchase agreements (2)
$2,519,230
 $2,519,230
 $2,898,952
 $2,898,952
Non-recourse collateralized financing (1)
5,706
 5,722
 6,440
 6,357
Derivative liabilities133
 133
 6,922
 6,922
(1)The Company determines the fair value of its mortgage loans held for investment, net and its non-recourse collateralized financing using internally developed cash flow models with inputs similar to those used to estimate the fair value of the Company's Level 3 non-Agency MBS.
(2)The carrying value of repurchase agreements generally approximates fair value due to their short term maturities.

NOTE 67 – SHAREHOLDERS'SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION


Preferred Stock

Stock. The Company's articles of incorporation authorize the issuance of up to 50,000,000 shares of preferred stock, par value $0.01 per share, of which the Company'sCompany’s Board of Directors has designated 8,000,0006,600,000 shares of 8.50%the Company’s preferred stock for issuance as Series AC Preferred Stock, and 7,000,000of which the Company has 4,460,000 of such shares of 7.625% Series B Preferred Stock, (the Series A Preferred Stock and the Series B Preferred Stock collectively, the "Preferred Stock"). The Company had 2,300,000 shares of its Series A Preferred Stock and 3,365,101 shares of its Series B Preferred Stock issued and outstanding as of SeptemberJune 30, 2017 compared to 2,300,000 shares of2023. The Series A Preferred Stock and 2,271,937 shares of Series B Preferred Stock as of December 31, 2016.

TheC Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and will remain outstanding indefinitely unless redeemed, or otherwise repurchased or converted into common stock pursuant to the terms of the Series C Preferred Stock. The Company's Series A Preferred Stock may be redeemed in whole, or in part, at any time and from time to time at the Company's option at a cash redemption price of $25.00 per share plus any accumulated and unpaid dividends. Except under certain limited circumstances described in Article IIIC of the Company’s Restated Articles of Incorporation, the Company may not redeem the Series BC Preferred Stock prior to April 30, 2018.15, 2025. On or after April 30, 2018,that date, the Company's Series BC Preferred Stock may be redeemed in whole, or in part, at any time and from time to time at the Company's option at a cash redemption price of $25.00 per share plus any accumulated and unpaid dividends. Because the Series C Preferred Stock is redeemable only at the option of the issuer, it is classified as equity on the Company'sCompany’s consolidated balance sheet.

The Series AC Preferred Stock pays a cumulative cash dividend equivalent to 8.50%6.900% of the $25.00 liquidation preference per share each year anduntil April 15, 2025. The terms of the Series BC Preferred Stock pays astate that upon April 15, 2025 and thereafter, the Company will pay cumulative cash dividend equivalent to 7.625%dividends at a percentage of the $25.00 liquidation preferencevalue per share each year.equal to an annual floating rate of 3-month LIBOR plus a spread of 5.461%. When 3-month LIBOR ceases
19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

to be a published, the fallback provision provided in the terms of the Series C Preferred Stock will allow for the Company to appoint a third-party independent financial institution of national standing to select an industry accepted alternative base rate. The Company paid its regular quarterly dividends on itsdividend of $0.43125 per share of Series C Preferred Stock for the third quarter on October 16, 2017July 17, 2023 to shareholders of record as of OctoberJuly 1, 2017.2023.

Common Stock
Stock. During the six months ended June 30, 2023, the Company issued 495,874 shares of its common stock through its at-the-market (“ATM”) program at an aggregate value of $6,313, net of broker commissions and fees. The Company currently pays a monthly dividend on its common stock. The Company’s timing, frequency, and amount of dividends declared a third quarteron its common stock are determined by its Board of Directors. When declaring dividends, the Board of Directors considers the Company’s taxable income, the REIT distribution requirements of the Tax Code, and maintaining compliance with dividend requirements of $0.18 per sharethe Series C Preferred Stock, along with other factors that was paid on October 31, 2017the Board of Directors may deem relevant from time to shareholders of record as of October 3, 2017.time.

2009 Stock and Incentive Plan. Of the 2,500,000 shares of common stock authorized for issuance under its 2009 Stock and Incentive Plan, the Company had 785,962 available for issuance as of September 30, 2017. Share-Based Compensation. Total stock-basedshare-based compensation expense recognized by the Company was $1,129 and $2,140 for the three and ninesix months ended SeptemberJune 30, 2017 was $388 and $1,567, respectively,2023 compared to $623$1,026 and $2,066$1,873 for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2022.



The following table presentstables present a rollforward of the restricted stock activityshare-based awards for the periods indicated:
Six Months Ended
June 30,
 20232022
Type of AwardSharesWeighted Average
Grant Date Fair Value
Per Share		SharesWeighted Average
Grant Date Fair Value
Per Share
Restricted stock:
Awards outstanding, beginning of period133,951 $15.22 197,804 $15.27 
Granted74,017 11.27 71,216 15.60 
Vested(36,573)16.75 (116,234)15.78 
Awards outstanding, end of period171,395 $13.19 152,786 $15.04 
RSUs:
Awards outstanding, beginning of period86,666 $16.57 55,019 $19.40 
Granted106,850 11.97 73,767 15.19 
Vested(33,213)16.96 (18,157)19.40 
Awards outstanding, end of period160,303 $13.42 110,629 $16.59 
PSUs:
Awards outstanding, beginning of period201,284 $16.60 110,040 $19.40 
Granted160,277 11.97 147,542 15.19 
Vested— — — — 
Awards outstanding, end of period361,561 $16.60 257,582 $16.99 
 Three Months Ended
 September 30,
 2017 2016
 Shares Weighted Average Grant Date Fair Value Per Share Shares Weighted Average Grant Date Fair Value Per Share
Restricted stock outstanding as of beginning of period353,103
 $7.01
 561,089
 $7.54
Restricted stock granted—
 —
 —
 —
Restricted stock vested—
 —
 —
 —
Restricted stock outstanding as of end of period353,103
 $7.01
 561,089
 $7.54
        
 Nine Months Ended
 September 30,
 2017 2016
 Shares Weighted Average Grant Date Fair Value Per Share Shares Weighted Average Grant Date Fair Value Per Share
Restricted stock outstanding as of beginning of period553,396
 $7.55
 696,597
 $8.54
Restricted stock granted138,166
 6.76
 214,878
 6.28
Restricted stock vested(338,459) 7.80
 (350,386) 8.76
Restricted stock outstanding as of end of period353,103
 $7.01
 561,089
 $7.54


The number of RSUs that will potentially settle may range from 0% if the recipient’s service-based vesting condition is not met to 100% if the service-based vesting condition is met. The number of PSUs that will potentially settle may range from 0% to 200% based on the achievement of the performance goals defined in the grant award. As of SeptemberJune 30, 2017,2023, the Company expects 80% of the PSUs outstanding will be settled on their vesting dates. The Company has DERs accrued for RSUs and PSUs of $190 and $579, respectively, as of June 30, 2023 compared to
20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)

$152 and $354, respectively, as of December 31, 2022, which is included on the Company’s consolidated balance sheet within “accrued dividends payable.”

The following table discloses the grant date fair value of the Company’s remaining nonvested restricted stock is $1,505unvested awards as of June 30, 2023, which will be amortized into compensation expense over a weighted averagethe period of 1.5 years.disclosed:

June 30, 2023
Remaining Compensation CostWAVG Period of Recognition
Restricted stock$1,122 1.6 years
RSUs1,828 2.2 years
PSUs3,187 1.9 years
Total$6,137 1.9 years

NOTE 7 – SUBSEQUENT EVENTS

Management has evaluated events and circumstances occurring as of and through the date this Quarterly Report on Form 10-Q was filed with the SEC and made available to the public and has determined that there have been no significant events or circumstances that qualify as a "recognized" subsequent event as defined by ASC Topic 855.

Management has determined that the following significant event, which occurred subsequent to September 30, 2017 and before the date this Quarterly Report on Form 10-Q was filed with the SEC and made available to the public, qualifies as a "nonrecognized" subsequent event as defined by ASC Topic 855:

The Company has received $14,078 in net proceeds from at-the-market issuances of 1,956,936 shares of its common stock since September 30, 2017 and $2,169 in net proceeds from at-the-market issuance of 89,313 shares of Series B Preferred Stock.



ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes included in Part 1,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 in our Annual Report on2022 Form 10-K for the year ended December 31, 2016.10-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 of our Annual Report on2022 Form 10-K for the year ended December 31, 2016.10-K.


EXECUTIVE OVERVIEW


Company Overview

We areIn the first half of 2023, quantitative tightening continued, and interest rate and spread volatility remained elevated, which provided for an internally managed mortgage real estateuncertain investment trust, or mortgage REIT, which investsenvironment. After several bank failed in residentialMarch 2023, interest rates trended down following a brief flight to safety. Following bank acquisitions in May 2023 and commercial mortgage-backed securitiesthe U.S. debt ceiling resolution in June 2023, markets began to refocus on a leveraged basis. Our common stock is traded oninflation and the New York Stock Exchange ("NYSE") under the symbol "DX". Our objective is to provide attractive risk-adjusted returns to our shareholders over the long term that are reflective of a leveraged, high quality fixed income portfolio with a focus on capital preservation. We seek to provide returns to our shareholders primarily through regular quarterly dividends, and also through capital appreciation.

We also have two series of preferred stock outstanding, our 8.50% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") which is traded on the NYSE under the symbol "DXPRA", and our 7.625% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock") which is traded on the NYSE under the symbol "DXPRB".
We invest in Agency and non-Agency mortgage-backed securities (“MBS”) consisting of residential MBS (“RMBS”), commercial MBS (“CMBS”) and CMBS interest-only ("IO") securities. Agency MBS have a guaranty of principal payment by an agencyresilience of the U.S. government or a U.S. government-sponsored entity ("GSE"economy. The Federal Reserve increased Federal Funds Target Rate (“Fed Funds rate”) suchby 25 basis points during the second quarter. Interest rates rose higher across the curve as Fannie Maeadditional Fed Funds rate increases are anticipated, and Freddie Mac. Non-Agencythe messaging for higher for longer appears to be getting some traction. Mortgage spreads hit their widest point in late May due to Agency MBS have no such guaranty of payment. Our investments in non-Agency MBS are generally higher quality senior or mezzanine classes (typically rated 'A' or better by one or more ofportfolio liquidations from the nationally recognized statistical rating organizations) because they are typically more liquid (i.e., they are more easily converted into cash either through sales or pledges as collateral for repurchase agreement borrowings) and have less exposure to credit losses than lower-rated non-Agency MBS.

We invest and manage our capital pursuant to Operating Policies approved by our Board of Directors. We use leverage to enhance the returns on our invested capital by pledging our investments as collateral for borrowings such as repurchase agreements as discussed further below. We also use derivative instruments to attempt to mitigate our exposure to adverse changes in interest rates as discussed further below.

RMBS. Our Agency RMBS investments include MBS collateralized by fixed-rate mortgage loansfailed banks as well as adjustable-rate mortgage loans ("ARMs"), which haveuncertainty about the U.S. debt ceiling; however, spreads tightened through mid-June after the U.S. debt ceiling issue was resolved. The end of the second quarter followed a standard market paradigm of interest rates that generally adjust at least annually to an increment over a specifiedup and spreads wider. Despite the interest rate index. Agency ARMs also include hybrid adjustable-rate mortgage loans ("hybrid ARMs"volatility and negative market technicals this quarter, the Company’s book value increased as hedge gains offset losses on our MBS.
The charts below show the range of U.S. Treasury rates for the past six months and information regarding market spreads as of and for the periods indicated:

21

2276
Market Spreads as of:
Change in Spreads
Second Quarter		Change in Spreads
YTD
Investment Type:June 30, 2023March 31, 2023December 31, 2022
Agency RMBS: (1)
2.0% coupon22 32 14 (10)8 
2.5% coupon28 34 21 (6)7 
3.0% coupon31 34 24 (3)7 
3.5% coupon31 32 28 (1)3 
4.0% coupon33 34 22 (1)11 
4.5% coupon34 41 26 (7)8 
5.0% coupon40 36 28 4 12 
5.5% coupon44 38 33 6 11 
Agency DUS (Agency CMBS)(2)
72 78 74 (6)(2)
Freddie K AAA IO (Agency CMBS IO)(2)
175 210 235 (35)(60)
AAA CMBS IO (Non-Agency CMBS IO)(2)
301 350 315 (49)(14)
(1)Option adjusted spreads (“OAS”), which are loans that havebased 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

For the second quarter of 2023, our total economic return of $0.79 per common share was comprised of dividends declared of $0.39 and an increase in book value of $0.40 to $14.20 per common share as of June 30, 2023. Interest rates were volatile, particularly the 5-year U.S. Treasury rate, ending the second quarter higher relative to March 31, 2023. As a fixed rate of interest for a specified period (typically three to ten years) and then adjust theirresult, our interest rate at least annually to an increment overhedges gained a specifiednet $170.0 million, offsetting the impact of higher interest rates on the fair value of our investment portfolio. Though spreads on higher coupon assets widened during the
22

second quarter, the impact on the fair value of our investment portfolio was muted by spread tightening on our lower coupon assets. The increase in the fair value of our interest rate index. Substantially allhedges, net of our ARMs reset based oninvestments, was $55.5 million, making it the one-year LIBOR index. We sold the majorityprimary component of our non-Agency RMBScomprehensive income to common shareholders of $43.0 million. While our net interest earnings continue to be impacted by higher borrowing costs arising from the increases in the U.S. Fed Funds rate as the Federal Reserve continues its efforts to tame inflation, we are maintaining our focus on protecting book value through disciplined risk management. Book value lost in the first quarter of 2023 as a result of spread widening was partially recovered during the second quarter of 2017 because these investments were within2023, leading to a yearyear-to-date total economic return of their maturity. We1.70%.

The following table provides details about the changes in our financial position during the three months ended June 30, 2023:
Net Change in Fair ValueComponents of Comprehensive IncomeCommon Book Value RollforwardPer Common Share
Balance as of March 31, 2023 (1)
$743,328 $13.80 
Net interest income$(2,930)
G & A and other operating expenses(7,632)
Preferred stock dividends(1,923)
Changes in fair value:
MBS and loans$(60,556)
TBAs(53,996)
U.S. Treasury futures171,219 
Options on U.S. Treasury futures(1,211)
Total net change in fair value55,456 
Comprehensive income to common shareholders42,971 0.79 
Capital transactions:
Net proceeds from stock issuance (2)
4,487 — 
Common dividends declared(21,324)(0.39)
Balance as of June 30, 2023 (1)
$769,462 $14.20 
(1)Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's preferred stock, in thousands and on a per common share basis.
(2)Net proceeds from stock issuance include $3.5 million from common stock ATM program and $1.0 million from share-based compensation grants, net of amortization. The amount shown for “per common share” includes the impact of the increase in the number of common shares outstanding.

Realized gains and losses on interest rate hedges are recognized in GAAP net income in the same reporting period in which the derivative instrument matures or is terminated, but are not currently re-investing capitalincluded in our earnings available for distribution ("EAD"), a non-GAAP measure, during any reporting period. On a tax basis, realized gains and losses on derivative instruments designated for tax purposes as interest rate hedges are amortized into the our REIT taxable income over the original periods hedged by those derivatives. Our estimated REIT taxable income for the first six months of 2023 includes an estimated benefit of approximately $38.8 million, or $0.72 per average common share outstanding, from the amortization of accumulated deferred tax hedge gains, which were estimated to be $649.7 million as of June 30, 2023 compared to $695.2 million as of December 31, 2022. This benefit will be distributable to common shareholders as part of our taxable ordinary income in future periods. Additional information regarding the estimated impact of deferred tax hedge amortization on our estimated REIT taxable income is discussed in “Liquidity and Capital Resources” within this Item 2.

23

Current Outlook
The first half of 2023 was challenging to navigate as quantitative tightening continued, banks failed, interest rate volatility remained high, and debt ceiling debates provided a backdrop of uncertainty. Despite a challenging first half of 2023, spread widening has provided an appealing investment opportunity for Agency MBS investors, and we expect that trend to continue in the short to intermediate term. Going into the second half of 2023, we seek to maintain flexibility and higher levels of liquidity in preparation for unexpected events while continuing to purchase MBS with attractive yields. The debt ceiling issue has been resolved and sales of failed banks’ assets have been well absorbed by the market, which we believe may somewhat alleviate recent market volatility. Longer term, we believe there will be opportunities to deliver compelling investment returns to our investors, particularly as spreads tighten and the value of our Agency RMBS increases. While we believe we are in a highly favorable investing environment, we continue to operate with a deep respect for the complexity of global macroeconomic conditions. We remain flexible, disciplined, and prepared to adjust our investment and hedging portfolios as well as leverage levels to suit multiple scenarios.


FINANCIAL CONDITION

Investment Portfolio
The following charts compare the composition of our MBS portfolio including TBA securities as of the dates indicated:
166167

We frequently change the coupon distribution in our Agency RMBS and TBA portfolios in order to minimize losses due to spread volatility. During the six months ended June 30, 2023, we have shifted into higher coupon Agency RMBS and reduced our investment in TBA securities. We expect spreads will remain volatile and range-bound in the intermediate term while the Federal Reserve continues reducing MBS from its balance sheet. Longer term, as investors return to the MBS market and demand improves, we expect the fair value of our investment portfolio to increase and our book value to trend higher.
The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:
24

June 30, 2023
Par/Notional
Amortized Cost/
Implied Cost
Basis (1)(3)
Fair
Value (2)(3)
Weighted Average
Coupon
Loan Age
(in months)(4)
3 Month
CPR (4)(5)
Estimated Duration (6)
Market Yield (7)
30-year fixed-rate:($s in thousands)
2.0%$738,366 $751,210 $607,450 335.4 %6.934.66 %
2.5%634,256 659,469 542,554 346.8 %6.714.70 %
4.0%368,367 369,050 348,785 285.3 %5.724.83 %
4.5%1,117,339 1,104,123 1,078,938 94.8 %5.265.04 %
5.0%1,554,427 1,544,909 1,528,286 41.2 %4.625.27 %
5.5%647,735 651,949 647,024 31.0 %4.085.51 %
TBA 4.0%357,000 337,183 337,357 n/an/a6.064.83 %
TBA 4.5%440,000 429,905 422,881 n/an/a5.005.05 %
TBA 5.0%1,102,000 1,094,936 1,079,702 n/an/a3.975.32 %
TBA 5.5%277,000 277,065 275,701 n/an/a3.425.58 %
Total$7,236,490 $7,219,799 $6,868,678 143.6 %5.02 5.12 %
December 31, 2022
Par/Notional
Amortized Cost/
Implied Cost
Basis (1)(3)
Fair
Value (2)(3)
Weighted Average
Coupon
Loan Age
(in months)(4)
3 Month
CPR (4)(5)
Estimated Duration (6)
Market Yield (7)
30-year fixed-rate:($s in thousands)
2.0%$1,193,344 $1,210,065 $982,387 235.2 %7.144.53 %
2.5%659,181 685,838 566,525 285.9 %6.674.59 %
4.0%325,726 329,725 309,940 257.2 %5.564.75 %
4.5%803,043 799,786 782,319 44.4 %5.024.89 %
5.0%123,204 125,460 121,707 47.2 %3.995.19 %
TBA 4.0%1,539,000 1,454,263 1,447,286 n/an/a5.474.80 %
TBA 4.5%380,000 371,173 366,759 n/an/a4.794.99 %
TBA 5.0%950,000 947,484 937,523 n/an/a4.245.20 %
Total$5,973,498 $5,923,794 $5,514,446 185.4 %5.54 4.88 %
(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.

25

Less than 5% of our MBS portfolio as of June 30, 2023 is comprised of Agency CMBS, Agency CMBS IO, and non-Agency RMBSCMBS 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, 99.9% of the loans in K-deals are current as of May 2023. 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: 29% retail, 24% office, 14% multifamily, 13% hotel and 20% 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:
June 30, 2023
Amortized CostFair Value
WAVG Life Remaining (1)
WAVG Coupon (2)
WAVG Market Yield (3)
Agency CMBS$122,514 $115,136 4.63.15 %4.74 %
Agency CMBS IO160,558 150,328 6.10.59 %4.93 %
Non-Agency CMBS IO41,931 40,689 1.80.96 %10.87 %
Total$325,003 $306,153 
December 31, 2022
Amortized CostFair Value
WAVG Life Remaining (1)
WAVG Coupon (2)
WAVG Market Yield (3)
Agency CMBS$132,333 $124,690 4.83.22 %4.50 %
Agency CMBS IO179,734 168,147 6.30.41 %5.32 %
Non-Agency CMBS IO59,107 56,839 2.10.83 %8.54 %
Total$371,174 $349,676 
(1) Represents the weighted average life remaining in years based on contractual cash flows as of the dates indicated.
(2) Represents the weighted average coupon based on par/notional as of the dates indicated.
(3) 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 7 for additional information relating to our repurchase agreement borrowings.

Derivative Assets and Liabilities
As of June 30, 2023, the Company held short positions of $4.0 billion in 10-year U.S. Treasury futures and $0.9 million in 5-year U.S. Treasury futures. We have reduced our hedge position relative to December 31, 2022 to match our higher coupon asset profile and position our interest rate sensitivity modestly towards lower interest rates. Please refer to Note 5 of the Notes to the Consolidated Financial Statements for details on our interest rate derivative instruments as well as “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this Quarterly Report on Form 10-Q.
26



RESULTS OF OPERATIONS

Three Months Ended June 30, 2023 Compared to the Three Months Ended March 31, 2023
The following table summarizes the results of operations for the periods indicated:
Three Months Ended
$s in thousandsJune 30, 2023March 31, 2023
Net interest expense$(2,930)$(462)
Realized loss on sales of investments, net(51,601)(23,315)
Unrealized gain on investments, net488 57,120 
Gain (loss) on derivative instruments, net116,012 (67,267)
General and administrative expenses(7,197)(7,372)
Other operating expenses, net(435)(426)
Preferred stock dividends(1,923)(1,923)
Net income (loss) to common shareholders52,414 (43,645)
Other comprehensive (loss) income(9,443)14,793 
Comprehensive income (loss) to common shareholders$42,971 $(28,852)
Net Interest Income (Expense)
Interest expenses exceeded interest income for the three months ended June 30, 2023 and for the three months ended March 31, 2023 due to higher borrowing costs resulting from the increase in the Fed Funds rate as the Federal Reserve continues in its efforts to tame inflation. Interest income for the three months ended June 30, 2023 increased relative to the three months ended March 31, 2023 due to our recent purchases of higher coupon Agency RMBS. The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:
27

Three Months Ended
June 30, 2023March 31, 2023
($s in thousands)Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Cost of
Funds (3)(4)
Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Cost of
Funds (3)(4)
Agency RMBS$34,699 $3,931,617 3.53 %$23,526 $3,204,610 2.94 %
Agency CMBS960 123,843 3.06 %884 128,625 2.80 %
CMBS IO (5)
2,241 211,398 4.41 %2,542 230,033 4.04 %
Non-Agency MBS and other investments32 2,479 4.93 %40 2,700 4.98 %
MBS and loans$37,932 $4,269,337 3.56 %$26,992 $3,565,968 3.00 %
Cash equivalents4,280 3,854 
Total interest income$42,212 $30,846 
Repurchase agreement financing(45,142)3,447,406 (5.18)%(31,308)2,713,481 (4.62)%
Net interest (expense) income/net interest spread$(2,930)(1.62)%$(462)(1.62)%
(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)Cost of funds 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
The following tables provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:
Three Months Ended
June 30, 2023
($s in thousands)Realized Gain (Loss) Recognized in Net IncomeUnrealized Gain (Loss) Recognized in Net IncomeUnrealized Gain (Loss) Recognized in OCITotal Change in Fair Value
Investment portfolio:
Agency RMBS$(51,601)$1,254 $(7,949)$(58,296)
Agency CMBS— (275)(745)(1,020)
CMBS IO— (466)(749)(1,215)
Other non-Agency and loans— (25)— (25)
Subtotal(51,601)488 (9,443)(60,556)
TBA securities (1)
4,950 (58,946)— (53,996)
Net loss on investments$(46,651)$(58,458)$(9,443)$(114,552)
28

Interest rate hedging portfolio:
U.S. Treasury futures$(92,096)$263,315 $— $171,219 
Options on U.S. Treasury futures (2)
(3,565)2,354 — (1,211)
Net (loss) gain on interest rate hedges$(95,661)$265,669 $— $170,008 
Total net (loss) gain$(142,312)$207,211 $(9,443)$55,456 
Three Months Ended
March 31, 2023
($s in thousands)Realized Gain (Loss) Recognized in Net IncomeUnrealized Gain (Loss) Recognized in Net IncomeUnrealized Gain (Loss) Recognized in OCITotal Change in Fair Value
Investment portfolio:
Agency RMBS$(23,315)$55,779 $11,238 $43,702 
Agency CMBS— 237 1,046 1,283 
CMBS IO— 1,092 2,507 3,599 
Other non-Agency and loans— 12 2 14 
Subtotal(23,315)57,120 14,793 48,598 
TBA securities (1)
(13,488)56,852 — 43,364 
Net (loss) gain on investments$(36,803)$113,972 $14,793 $91,962 
Interest rate hedging portfolio:
U.S. Treasury futures$88,871 $(195,244)$— $(106,373)
Options on U.S. Treasury futures152 (4,410)— (4,258)
Net gain (loss) on interest rate hedges$89,023 $(199,654)$— $(110,631)
Total net gain (loss)$52,220 $(85,682)$14,793 $(18,669)
1)Realized and unrealized gains (losses) on TBA securities are recorded within “gain (loss) on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.
2)The Company did not hold any options on U.S. Treasury futures as of June 30, 2023. The unrealized gain of $2.4 million shown for the three months ended June 30, 2023 represents the reversal of the unrealized loss recorded prior to the maturity date of the contract.
As discussed in Executive Overview, increasing interest rates during the three months ended June 30, 2023 resulted in gains of $170.0 million from our interest rate hedges, primarily our 5-year U.S. Treasury futures, which offset the impact of higher interest rates on the fair value of our investment portfolio. The increase in the fair value of our interest rate hedges, net of our investments, was $55.5 million for the three months ended June 30, 2023. Conversely, longer term interest rates declined during the three months ended March 31, 2023, but spread widening on our assets partially offset the gains in fair value on our investment portfolio. As a result, the decline in 5-year and 10-year U.S. Treasury rates during the first quarter of 2023 resulted in losses on our interest rate hedges exceeding the net gains on our investment portfolio by $(18.7) million.
Operating Expenses
Operating expenses for the three months ended June 30, 2023 were largely unchanged compared to the three months ended March 31, 2023. Compensation and benefits expenses were higher due to the lackhiring of availabletwo new
29

employees and higher amortization of stock-based compensation expense, but were mostly offset by lower consulting expenses.

Six Months Ended June 30, 2023 Compared to the Six Months Ended June 30, 2022
Net Interest Income (Expense)
Net interest income and net interest spread declined for the six months ended June 30, 2023 compared to six months ended June 30, 2022 due to higher borrowing costs resulting from the Federal Reserve’s increases in the Fed Funds rate from June 2022 to June 2023. The increase in our borrowing costs has been partially offset by an increase in our average balance of investments with higher yields and our increased investment in cash equivalents. The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:
Six Months Ended
June 30,
20232022
($s in thousands)Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Cost of
Funds (3)(4)
Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Cost of
Funds (3)(4)
Agency RMBS$58,225 $3,570,122 3.26 %$25,345 $2,737,073 1.85 %
Agency CMBS1,844 126,221 2.92 %2,552 174,480 2.89 %
CMBS IO (5)
4,783 220,664 4.25 %7,560 279,873 4.81 %
Non-Agency MBS and other investments72 2,589 5.45 %178 4,663 6.87 %
MBS and loans$64,924 $3,919,596 3.31 %$35,635 $3,196,089 2.17 %
Cash equivalents8,134 127
Total interest income$73,058 $35,762 
Repurchase agreement financing(76,450)3,082,471 (4.93)%(6,010)2,645,331 (0.45)%
Net interest (expense) income/net interest spread$(3,392)(1.62)%$29,752 1.72 %
(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 typecalculation.
(4)Cost of funds is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with attractive risk-adjusted returns.an assumption of 360 days in a year.

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



Gains (Losses) on Investments and Derivative Instruments

The following tables provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:
Six Months Ended
30

June 30, 2023
($s in thousands)Realized Gain (Loss) Recognized in Net IncomeUnrealized Gain (Loss) Recognized in Net IncomeUnrealized Gain (Loss) Recognized in OCITotal Change in Fair Value
Investment portfolio:
Agency RMBS$(74,916)$57,033 $3,289 $(14,594)
Agency CMBS— (37)302 265 
CMBS IO— 626 1,757 2,383 
Other non-Agency and loans— (13)2 (11)
Subtotal(74,916)57,609 5,350 (11,957)
TBA securities (1)
(8,538)(2,095)— (10,633)
Net (loss) gain on investments$(83,454)$55,514 $5,350 $(22,590)
Interest rate hedging portfolio:
U.S. Treasury futures$(3,224)$68,070 $— $64,846 
Options on U.S. Treasury futures (2)
(3,413)(2,056)— (5,469)
Net (loss) gain on interest rate hedges$(6,637)$66,014 $— $59,377 
Total net (loss) gain$(90,091)$121,528 $5,350 $36,787 

Six Months Ended
June 30, 2022
($s in thousands)Realized Gain (Loss) Recognized in Net IncomeUnrealized Gain (Loss) Recognized in Net IncomeUnrealized Gain (Loss) Recognized in OCITotal Change in Fair Value
Investment portfolio:
Agency RMBS$(18,550)$(174,599)$(125,772)$(318,921)
Agency CMBS— — (12,565)(12,565)
CMBS IO— (1,841)(13,849)(15,690)
Other non-Agency and loans— 86 (64)22 
Subtotal(18,550)(176,354)(152,250)(347,154)
TBA securities (1)
(174,177)9,452 — (164,725)
Net loss on investments$(192,727)$(166,902)$(152,250)$(511,879)
Interest rate hedging portfolio:
U.S. Treasury futures$336,360 $103,048 $— $439,408 
Interest rate swaptions— 51,940 — 51,940 
Options on U.S. Treasury futures— — — — 
Net gain on interest rate hedges$336,360 $154,988 $— $491,348 
Total net gain (loss)$143,633 $(11,914)$(152,250)$(20,531)
1)Realized and unrealized gains (losses) on TBA securities are recorded within “gain (loss) on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.
31

2)The Company did not hold any options on U.S. Treasury futures as of June 30, 2023. The unrealized loss of $(2.1) million shown for the six months ended June 30, 2023 represents the reversal of the unrealized gain recorded prior to the maturity date of the contract.
The fair value of our investment portfolio declined $(22.6) million during the six months ended June 30, 2023 primarily as a result of spread widening, particularly in higher coupon Agency RMBS. Though interest rates were volatile during the six month period and the back end of the yield curve declined late in first quarter of 2023 which resulted in net losses of $(110.6) million for the three months ended March 31, 2023, longer-term rates ended the six- month period only slightly higher or unchanged versus December 31, 2022, As a result, and partially due to the timing of when we rolled our interest rate hedges, we recovered first quarter interest rate hedge losses and recognized net gains of $59.4 million for the six months ended June 30, 2023.
For the six months ended June 30, 2022, the fair value of our investment portfolio declined $(511.9) million due to increasing interest rates and significant spread widening across all asset classes. These losses were mostly offset by net gains of $491.3 million during the six months ended June 30, 2022 from our interest rate hedges.

Operating Expenses
Operating expenses for the six months ended June 30, 2023 increased $0.5 million compared to the six months ended June 30, 2022. Compensation and benefits increased due to the hiring of two new employees and higher amortization of stock-based compensation expense while other general and administrative expenses declined due to lower legal and consulting expenses.

Non-GAAP Financial Measures
In evaluating the second quarter of 2017, we began entering into forward contracts forCompany’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 certain non-GAAP financial measures, which include the purchase of TBA securitiesfollowing: EAD to common shareholders (including per common share), adjusted net interest income and the related metric adjusted net interest spread. Management believes these non-GAAP financial measures may be useful to investors because they are viewed by management as a meansmeasure of investing inthe investment portfolio’s return based on the effective yield of its investments, net of financing costs and, financing non-specified fixed-rate Agency RMBS. A TBA security is a forward contract for the purchase or salewith respect to EAD, net of a fixed-rate Agency MBS at a predetermined price with certain principal and interest terms and certain types of collateral, but the particular Agency securities to be delivered are not identified until shortly before the TBA settlement date. The financing for TBA securities is implied through our use ofother normal recurring operating income/expenses. Drop income generated by TBA dollar roll transactions whereby we enter into an offsetting short position, net settlepositions, which is included in "gain (loss) on derivatives instruments, net" on the paired-off positionsCompany's consolidated statements of comprehensive income, is included in cash, and simultaneously enter into a similar TBA contract for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred tothese non-GAAP financial measures because management views drop income as “drop income,” is the economic equivalent of net interest income on the underlying Agency securities over the roll period (interest income less implied financing cost). We account on the underlying Agency security from trade date to settlement date.
However, these 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 and adjusted net interest income to the related GAAP financial measures are provided below.
Three Months Ended
Reconciliations of GAAP to Non-GAAP Financial Measures:June 30, 2023March 31, 2023
($s in thousands except per share data)
Comprehensive (loss) income to common shareholders$42,971 $(28,852)
Less:
Change in fair value of investments (1)
60,556 (48,599)
Change in fair value of derivative instruments, net (2)
(118,164)68,725 
EAD to common shareholders$(14,637)$(8,726)
Average common shares outstanding54,137,327 53,823,866 
EAD per common share$(0.27)$(0.16)
Net interest (expense) income$(2,930)$(462)
TBA drop income (3)
(2,152)1,457 
Adjusted net interest (expense) income$(5,082)$995 
General and administrative expenses(7,197)(7,372)
Other operating expense, net(435)(426)
Preferred stock dividends(1,923)(1,923)
EAD to common shareholders$(14,637)$(8,726)
Adjusted net interest spread (4)
(1.17)%(0.75)%
(1)Amount includes realized and unrealized gains and losses recorded in net income and other comprehensive income due to changes in the fair value of the Company’s MBS and other investments.
(2)Amount includes unrealized gains and losses from changes in fair value of derivatives and realized gains and losses on terminated derivatives and excludes TBA drop income.
(3)TBA drop income 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.
(4)The reconciliation for adjusted net interest spread to net interest spread is shown in “Results of Operations - Adjusted Net Interest Income”.

We primarily use U.S. Treasury futures to hedge the impact of increasing interest rates on our borrowing costs and the fair value of our investments. In the past, we used interest rate swaps to hedge interest rate risk and included the net periodic interest benefit/cost of those instruments in each of the non-GAAP measures mentioned above. Management is using U.S. Treasury futures instead of interest rate swaps because U.S. Treasury futures generally have lower margin requirements and offer more liquidity and flexibility in the current rapidly changing interest rate environment. The Company’s realized gains on its U.S. Treasury futures as well as other interest rate hedges are included in GAAP earnings, but are not included in EAD or adjusted net interest income. Furthermore, because these U.S. Treasury futures and other derivative instruments are designated as hedges for tax purposes, the realized gains are not distributable until amortized into REIT taxable income over the period originally hedged. Additional information regarding the expected impact of deferred tax hedge amortization on our estimated REIT taxable income is discussed in “Executive Overview” and “Liquidity and Capital Resources.”

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.
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 most liquid assets include unrestricted cash and cash equivalents and unencumbered Agency RMBS, CMBS, and CMBS IO. As of June 30, 2023, our most liquid assets were $561.5 million compared to $632.3 million as of December 31, 2022. We are continuing to maintain higher levels of available liquidity to protect our book value and to provide us greater financial flexibility against market volatility, which we believe is likely to continue for the near-term, especially given potential risk events on the horizon, such as the Federal Reserve’s quantitative tightening measures, the pending deadline to raise U.S. debt ceiling, the impact on global markets stemming from global central bank policies, and the war between Russia and Ukraine.
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 7.7 times shareholders’ equity as of June 30, 2023. We include the cost basis of our TBA securities in evaluating our leverage because we cannot assertit is possible under certain market conditions that it is probable at inception and throughout the term of an individualmay be uneconomical for us to roll a TBA contract that its settlement willlong position into future months, which may result in us having to take physical delivery of the underlying Agency RMBS,securities and use cash or other financing sources to fund our total purchase commitment. Leverage based on repurchase agreement amounts outstanding was 4.8 times shareholders’ equity as of June 30, 2023.
Our repurchase agreement borrowings are principally uncommitted with terms renewable at the individual TBA contract will not settle in the shortest time period possible.

CMBS. The majoritydiscretion of our CMBS investments are fixed-rate Agency-issued securities backed by multifamily housing loans. The remainder of our CMBS portfolio contains both Agencylenders and non-Agency issued securities backed by other commercial real estate property types such as office building, retail, hospitality, and health care. Loans underlying CMBS generally are geographically diverse, are fixed-rate, mature in eight to eighteen years and have amortization terms of up to 30 years. Typically these loans have some form of prepayment protection provisions (such as prepayment lock-out) or prepayment compensation provisions (such as yield maintenance or prepayment penalty). Yield maintenance and prepayment penalty requirements are intended to create an economic disincentive for the loans to prepay.

CMBS IO. CMBS IO are interest-only securities issued as part of a CMBS securitization and represent the right to receive a portion of the monthly interest payments (but not principal cash flows) on the unpaid principal balance of the underlying pool of commercial mortgage loans. We invest in both Agency-issued and non-Agency issued CMBS IO. The loans collateralizing CMBS IO pools are very similar in composition to the pools of loans that generally collateralize CMBS as discussed above. Since CMBS IO securities have no principal associated with them, the interest payments received are based on the unpaid principal balance of the underlying pool of mortgage loans, which is often referred to as the notional amount. Most loans in these securities have some form of prepayment protection from early repayment including absolute loan prepayment lock-outs, loan prepayment penalties, or yield maintenance requirements similar to CMBS described above. There are no prepayment protections, however, if the loan defaults and is partially or wholly repaid earlier as a result of loss mitigation actions taken by the underlying loan servicer, and therefore yields on CMBS IO investments are dependent upon the underlying loan performance. Because Agency-issued MBS generally contain higher credit quality loans, Agency CMBS IO are expected to have a lower risk of default than non-Agency CMBS IO. Our CMBS IO investments are investment grade-rated with the majority rated 'AAA' by at least one of the nationally recognized statistical rating organizations.

Financing. We finance our investments primarily through the use of uncommitted repurchase agreements which are provided principally by major financial institutions and broker-dealers. We pledge our MBS as collateral to secure the amounts borrowed from our counterparties. These repurchase agreements 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 pay interest onseek 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 atwill typically fluctuate in any given period as it is dependent upon a rate usually based on a spreadnumber of factors, but particularly the extent to LIBORwhich we are active in buying and fixed forselling securities, including the termvolume of activity in dollar roll transactions versus buying specified pools. The following table presents information regarding the borrowing. Borrowings under these repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed roll-over terms. Onebalances of our repurchase agreement lenders provides a committedborrowings as of and for the periods indicated:
Repurchase Agreements
($s in thousands)Balance Outstanding As of
Quarter End		Average Balance Outstanding For the Quarter EndedMaximum Balance Outstanding During the Quarter Ended
June 30, 2023$4,201,901 $3,447,406 $4,203,788 
March 31, 20232,937,124 2,713,481 2,959,263 
December 31, 20222,644,405 2,727,274 3,072,483 
September 30, 20222,991,876 2,398,268 3,082,138 
June 30, 20222,202,648 2,486,217 2,949,918 
March 31, 20222,952,802 2,806,212 2,973,475 
December 31, 20212,849,916 2,701,191 2,873,523 
September 30, 20212,527,065 2,529,023 2,590,185 
June 30, 20212,321,043 2,155,200 2,415,037 
March 31, 20212,032,089 2,158,121 2,437,163 
December 31, 20202,437,163 2,500,639 2,594,683 

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 June 30, 2023 was consistent with prior periods, which has typically averaged less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 12-16% 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 June 30, 2023, the Company had amounts outstanding under 25 different repurchase agreements and did not have more than 5% 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 facilityflexibility. Currently, we do not believe we are subject to usany covenants that materially restrict our financing flexibility. We were in full compliance with an aggregate borrowing capacityour debt covenants as of $400.0 million that expiresJune 30, 2023, and we are not aware of circumstances which could potentially result in May 2019.our non-compliance in the foreseeable future.


TBA dollar roll transactionsDerivative Instruments
Derivative instruments we enter into may require us to post initial margin (though typically the amount is less than the initial margin amount for repurchase agreements)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 June 30, 2023, we had cash collateral posted to our counterparties of $132.6 million under these agreements.
Collateral requirements for fluctuationsinterest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in fairexcess 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 securities. These dollar roll transactions have an implied financing rate which changescontract 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 market conditions, expected prepayment speeds, anddividend requirements of the underlying demand for Agency RMBS in a given delivery period.Series C Preferred Stock, along with other factors that the Board of Directors may deem relevant from time to time.

Hedging. We currently use interest rate swapsCurrently, we are primarily using U.S. Treasury futures to hedge our exposure to changes in interest rates. Such exposure results from our ownershipthe impact of hybrid and fixed-rate investments that are financed with repurchase agreements which have significantly shorter maturities than the weighted average life of these investments. Changes inincreasing interest rates can impact the marketon our financing costs and fair value of our investmentsinvestments. Realized and our net interest income, thereby ultimately impacting book value per common share. We frequently adjust


our hedging portfolio basedunrealized gains (losses) on our expectation of future interest rates, includingthese derivative instruments are included in GAAP earnings in the absolute level of rates andsame reporting period in which the slope of the yield curve versus market expectations.

Factors that Affect Our Results of Operations and Financial Condition

Our financial performancederivative instrument matures or is driven principallyterminated by the performance of our investment portfolio and related financing and hedging activity. Management focuses on net interest income, net income, comprehensive income, book value per common share, and core net operating incomeCompany, but are not included in EAD to common shareholders (a non-GAAP measure)during any reporting period. Furthermore, because we designate these derivative instruments as measurementsinterest rate hedges for tax purposes, realized gains and losses recognized in GAAP net income are generally not recognized in REIT taxable income until future periods. The following table provides the projected amortization of our financial performance. Our financial performance maynet deferred tax hedge gains as of June 30, 2023 that we expect to be impacted by multiple factors, including but not limitedrecognized as taxable income over the periods indicated:
Period of Recognition for Remaining Hedge Gains, NetJune 30, 2023
($ in thousands)
Third quarter 2023$17,970 
Fourth quarter 202318,096 
Fiscal year 202474,607 
Fiscal year 2025 and thereafter539,070 
$649,743 
As of June 30, 2023, we also had $475.0 million in capital loss carryforwards, the majority of which expire in 2027, and NOL carryforwards of $9.3 million, which will expire over the next 3 years. Due to macroeconomic conditions, geopolitical conditions, central bankthese amounts and government policy,other temporary and permanent differences between GAAP net income and REIT taxable income coupled with the absolute leveldegree 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 2023 or in any given year.
We generally fund our dividend distributions through our cash flows from operations. If we make dividend distributions in excess of our operating 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 the relative slopeRegulatory Structure" within Part I, Item 1, "Business" as well as Part I, Item 1A, “Risk Factors” of interest rate curves, changes in market expectations of future interest rates, actual and estimated future prepayment ratesour 2022 Form 10-K for additional important information regarding dividends declared on our investments, competition for investments, economic conditions and theirtaxable income.

RECENT ACCOUNTING PRONOUNCEMENTS
There were no accounting pronouncements issued during the six months ended June 30, 2023 that are expected to have a material impact on the credit performanceCompany’s financial condition or results of our investments, and market required yields as reflected by market spreads. All of these factors are influenced by market forces beyond our control and may be exacerbated during periods of market volatility.

Our performance may also be impacted by other factors such as the availability and cost of financing and the stateoperations. Please refer to Note 1 of the overall credit markets. Reductions in or limitations of financing for our investments could force us to sell assets, potentially at losses particularly if there is a period of stress in the funding markets as was experienced by the industry during the 2008 financial crisis. Other factors that could also impact our business include changes in regulatory requirements, including requirements to qualify for registration under the 1940 Act and REIT requirements.

We believe that regulatory impacts on financial institutions, many of which are our trading and financing counterparties, continue to pose a threatNotes to the overall liquidity in the capital markets. Restrictions on market-making activities of large U.S. financial institutions could result in reduced liquidity in times of market stress. The Federal Reserve has begun curtailing its reinvestment of principal payments received on its Agency RMBS and U.S. Treasury portfolios, which could result in volatile asset prices. Other foreign central bank asset purchases have also favorably impacted asset prices in the U.S., including securities in which we invest. Finally, the market liquidity of our investments and the financing markets could be negatively impacted if the Federal Reserve's Federal Open Market Committee (or "FOMC") suddenly changes market expectations of the target Federal Funds Rate or takes other actions which have the effect of tightening monetary policy.

To complement the performance of our investment portfolio, we regularly review our existing operations to determine whether our investment strategy or business model should change, including through a change in our investment portfolio, our targeted investments, and our risk position. We may also consider reallocating our capital resources to other assets or portfolios that better align with our long-term strategy, expanding our capital base, or merger, acquisition, or divestiture opportunities. We analyze and evaluate potential business opportunities that we identify or are presented to us that might be a strategic fit for our investment strategy or asset allocation or otherwise maximize value for our shareholders. Pursuing such an opportunity or transaction could require us to issue additional equity or debt securities.

For further discussion of the risks inherent in our business model, please see "Liquidity and Capital Resources"Consolidated Financial Statements contained within this Item 2 and in Part I, Item 31 of this Quarterly Report on Form 10-Q as well as in Item 1A, "Risk Factors" of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016.

Market Conditions and Recent Activity
Market volatility remained largely subdued during the third quarter of 2017 and as a result credit spreads modestly tightened or held steady across most asset classes. As of September 30, 2017, market credit spreads in general and in sectors in which we invest were at or near their tightest levels in the last year. Credit spreads for fixed-rate Agency RMBS have lagged other sectors which we believe reflects market concerns over the announced balance sheet reduction by the Federal Reserve and in our view continues to make these securities the most attractive risk-adjusted return in the market. We also believe that the macroeconomic environment continues to be supportive for RMBS and CMBS. In particular, two major central banks (the Bank of Japan and the European Central Bank) continue to inject liquidity through large scale asset purchases supporting valuations across sectors.



Interest rates were largely unchanged during the quarter but traded in a fairly wide range generally in response to shifting economic data. As expected by the markets, the FOMC increased the target Federal Funds Rate by 0.25% in June 2017 and has now increased the target Federal Funds Rate a full 1.00% to a current targeted range of 1.00% - 1.25% since December 2015. The chart below shows the highest and lowest rates during the three months ended September 30, 2017 as well as the rates as of September 30, 2017 and June 30, 2017 for the indicated U.S. Treasury securities:
     a1q17form10-_chartx17331a02.jpg


The interest rate swap curve was slightly higher during the quarter and volatility was reasonably muted. The chart below shows the highest and lowest swap rates during the three months ended September 30, 2017 as well as the swap rates as of September 30, 2017 and June 30, 2017:
a1q17form10-_chartx19947a02.jpg

In general, global fundamentals have improved; however, we continue to view the economic environment as fragile for a number of reasons, including high levels of global debt, the uncertain geopolitical environment, and the uncertain regulatory environment, including potential shifts in Federal Reserve policy that could result from leadership changes at the Federal Reserve. We believe these conditions can create an environment of intermittent volatility, and there is potential for a rapid reversal in current monetary policy in the U.S. Given this backdrop, we will continue to invest in high credit quality and highly liquid assets for the near term. We also are mindful of potential developments that could impact our view. In particular, changes in inflation or in the expectation of future inflation or performance could cause a sharp increase in volatility and changes in monetary policy.

Highlights of the Third Quarter of 2017

During the third quarter of 2017, we continued to sell lower yielding hybrid ARMs and reallocate capital into 30-year fixed-rate Agency RMBS through the purchase of specified pools and TBA securities. Given the challenging risk environment that currently exists globally, we are focusing on fixed-rate Agency RMBS because their higher liquidity gives us the ability to readjust our risk position more rapidly than other asset classes. Management believes that risk-adjusted returns on fixed-rate Agency RMBS are more favorable than other asset classes, particularly if credit spreads widen in the future. Furthermore, prepayments on fixed-rate Agency RMBS are more predictable than adjustable-rate Agency RMBS, which currently have higher risk of prepayment in the flat yield curve environment.

Comprehensive income to common shareholders of $0.27 per common share for the third quarter of 2017 was comprised of net income to common shareholders of $0.15 per common share and other comprehensive income ("OCI") of $0.12 per common share, which resulted primarily from the favorable impact of credit spread tightening on the fair value of the majority of MBS as mentioned previously. In the second quarter, comprehensive income to common shareholders was $0.05 per common share consisting of net loss to common shareholders of ($0.20) per common share and other comprehensive income ("OCI") of $0.25 per common share. Net interest income for the third quarter of 2017 declined approximately 18% compared to the second quarter of 2017 as a result of increasing short-term interest rates, a modest decline in average interest earning assets, and a decrease in prepayment penalty compensation from CMBS. The decline in net interest income was more than offset by gains


on derivative instruments (both TBAs and interest rate swaps) which increased from losses on derivative instruments incurred during the second quarter of 2017.

Core net operating income to common shareholders (a non-GAAP measure) was $0.19 per common share for the third quarter of 2017, the same as the second quarter. Drop income from TBA dollar roll transactions and lower net periodic interest costs from interest rate swaps offset higher borrowing costs and lower prepayment penalty compensation. Please see "Non-GAAP Financial Measures" at the end of this "Executive Overview" for additional important information about non-GAAP measures.information.

Book value per common share increased $0.08 to $7.46 as of September 30, 2017 from June 30, 2017 primarily because our investments outperformed our hedges as a result of tightening credit spreads. Economic return on book value was 3.5% for the third quarter of 2017 and 11.4% for the first nine months of 2017. Economic return on book value is calculated by dividing (i) the sum of dividends declared per common share and the change in book value per common share by (ii) beginning book value per common share.

Management Outlook

The environment remains conducive to generating net interest income from high quality investments due to low realized volatility and a benign outlook for central bank withdrawal of stimulus. We believe that fixed-rate Agency MBS continue to offer the most attractive relative return currently and will be the predominant marginal use of our capital for the foreseeable future. We expect to maintain leverage including TBA securities at cost as if settled at levels modestly higher than where they were at the end of the third quarter of 2017, but we remain concerned about sudden spikes in market volatility and may quickly reduce leverage should conditions warrant. Global central bank policies are the dominating factors for interest rates and credit spreads, and global central banks are seeking to minimize market volatility to encourage recovery in global economic growth. Should market volatility increase, our book value is likely to decline, but we would view this volatility as a potential investment opportunity given our views of expected central bank behavior. Our expectation is that our net interest spread should remain relatively flat for the fourth quarter of 2017, and that performance beyond the fourth quarter of 2017 will be highly dependent on Federal Reserve monetary policy and our hedging strategy.

Longer term we continue to believe that the outlook for our business model is very positive. Demographic trends in the U.S. are driving a significant increase in household formation, creating more demand in multifamily and single-family housing. As government participation in the housing market shrinks, there will be an increased need for private capital and expertise in the housing finance system. Global demographic aging trends are driving demand for assets that generate income. Fundamentally, this supports the assets in which we invest and also could be a source of capital for us to potentially grow our portfolio. We also intend to capitalize on opportunities for investing capital as government and regulatory policies shift while realizing that such shifts may occur over a period of several years. We will also continue seeking ways to diversify funding sources if the regulatory environment becomes more favorable, and we will also actively manage our hedge instruments to attempt to mitigate the impact on our costs of funds if the Federal Funds rate continues to increase.

Non-GAAP Financial Measures

In addition to the Company's operating results presented in accordance with GAAP, the information presented within Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q contains the following non-GAAP financial measures: core net operating income to common shareholders (including per common share), adjusted interest expense, adjusted net interest income, and the related metrics adjusted cost of funds and adjusted net interest spread. Management views core net operating income to common shareholders as an estimate of the net interest earnings and drop income from our investments after operating expenses and preferred stock dividends. In addition to the reconciliation set forth below, which derives core net operating income to common shareholders from GAAP net income to common shareholders as the nearest GAAP equivalent measure, core net operating income to common shareholders can also be determined by adjusting net interest income to include interest rate swap periodic interest costs, drop income on TBA securities, general and administrative expenses (GAAP), and preferred dividends. Management includes drop income in core net operating income to common shareholders and in adjusted net interest income because TBA securities are viewed by management as economically equivalent to holding and financing Agency RMBS using short-term repurchase agreements. Management also includes periodic interest costs from its interest rate swaps, which are included in "gain (loss) on derivative instruments" on the


Company's consolidated statements of comprehensive income, in adjusted net interest expense and in adjusted net interest income because interest rate swaps are used by the Company to economically hedge the Company's borrowing costs from repurchase agreements, and including periodic interest costs from interest rate swaps is a helpful indicator of the Company’s total cost of financing in addition to GAAP interest expense. Because these measures are used in the Company's internal analysis of financial and operating performance, management believes that they provide greater transparency to our investors of management's view of our economic performance. Management also believes the presentation of these measures, when analyzed in conjunction with the Company's GAAP operating results, allows investors to more effectively evaluate and compare the performance of the Company to that of its peers. Because these non-GAAP financial measures include or exclude, as applicable, certain items used to compute GAAP net income to common shareholders, GAAP net interest income, or GAAP interest expense, these non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, the Company's GAAP results as reported on its consolidated statements of comprehensive income. In addition, because not all companies use identical calculations, the Company's presentation of non-GAAP financial measures may not be comparable to other similarly-titled measures of other companies.

Schedules reconciling adjusted interest expense and adjusted net interest income to their related GAAP financial measures are provided within "Results of Operations". The following table presents a reconciliation of our GAAP net income (loss) to common shareholders to our core net operating income to common shareholders for the periods presented:
 Three Months Ended
($ in thousands, except per share amounts)September 30, 2017 June 30, 2017
GAAP net income (loss) to common shareholders$7,503
 $(10,073)
Less:   
Accretion of de-designated cash flow hedges (1)
(48) (73)
Change in fair value of derivative instruments, net (2)
(3,222) 15,801
Loss on sale of investments, net5,211
 3,709
Fair value adjustments, net(23) (30)
Core net operating income to common shareholders$9,421
 $9,334
 
 
Weighted average common shares outstanding49,832
 49,218
Core net operating income per common share$0.19
 $0.19
(1)Included in GAAP interest expense and relates to the accretion of the balance remaining in accumulated other comprehensive income as a result of our discontinuation of cash flow hedge accounting effective June 30, 2013.
(2)Amount represents net realized and unrealized gains and losses on derivatives and excludes net periodic interest costs related to these instruments.


CRITICAL ACCOUNTING POLICIESESTIMATES


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 policiesestimates 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 accounting policies that require the most significant management estimates, judgments, or assumptions, or that management believes includes the most significant uncertainties, and are considered most critical to our results of operations or financial position relate to fair value measurements, amortization of investment premiums, and other-than-temporary impairments. Our critical accounting policiesestimates are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of


Operations” of our Annual Report on2022 Form 10-K for the year ended December 31, 2016 under “Critical Accounting Policies”.Estimates.” There have been no significant changes in our critical accounting policiesestimates during the three months ended SeptemberJune 30, 2017.2023.



FINANCIAL CONDITION

Throughout the nine months ended September 30, 2017, we have been deploying available capital into specified and generic fixed-rate Agency RMBS and Agency CMBS. These assets generally have longer durations and higher yields than other assets of similar credit quality which management believes offer better risk-adjusted returns in the current environment. In addition, prepayments on fixed-rate Agency RMBS are more predictable than adjustable-rate Agency RMBS, which currently have a higher risk of prepayment in the flat yield curve environment. The following charts show the composition of our investment portfolio as of September 30, 2017 compared to December 31, 2016:

a3q17form10-_chartx57296.jpga3q17form10-_chartx58269.jpg
(1)Includes TBA securities, which are accounted for as "derivative assets (liabilities)" on our consolidated balance sheet, at their if-settled cost basis as of the end of the period.

The following table details the activity related to our MBS portfolio during the nine months ended September 30, 2017:
 Agency CMBS Agency RMBS 
CMBS IO
(2)
 
Non-Agency Other (3)
 Total
($ in thousands) 
30-Year Fixed (1)
 Adjustable-Rate   
Balance as of December 31, 2016$1,144,555
 $—
 $1,201,205
 $754,546
 $111,778
 $3,212,084
Purchases234,094
 544,050
 —
 71,803
 —
 849,947
Principal payments(45,217) (1,549) (172,650) —
 (20,263) (239,679)
Sales(37,215) (1,111) (727,841) —
 (50,871) (817,038)
(Amortization) accretion(3,587) (128) (8,568) (112,580) 2,279
 (122,584)
Change in fair value14,859
 (1,903) 11,636
 16,698
 (2,576) 38,714
Balance as of September 30, 2017$1,307,489
 $539,359
 $303,782
 $730,467
 $40,347
 $2,921,444
(1)Does not include TBA securities accounted for as "derivative assets (liabilities)" on our consolidated balance sheet.
(2)Includes Agency and non-Agency issued securities.


(3)Includes non-Agency CMBS and RMBS.

We sold over 50% of our investments in adjustable-rate Agency RMBS since December 31, 2016 as we expect these assets to underperform other asset classes in the current flat yield curve environment. During the same period, we also sold the majority of our non-Agency RMBS because these investments were generally within a year of their expected maturity. We also sold approximately half of our non-Agency CMBS investments because their risk-adjusted returns were lower relative to other assets.

The following table provides a summary of the amortized cost and fair value of our investment portfolio as of the periods indicated:
  September 30, 2017 December 31, 2016
  Amortized Cost Fair Value Amortized Cost Fair Value
RMBS:   
    
Agency RMBS, 30 year fixed-rate $541,262
 $539,359
 $—
 $—
TBA securities, 30 year fixed-rate (1)
 683,813
 683,680
 —
 —
Agency RMBS - adjustable rate 305,265
 303,782
 1,214,324
 1,201,205
Non-Agency RMBS 1,113
 1,142
 33,548
 33,562
  1,531,453
 1,527,963
 1,247,872
 1,234,767
CMBS and CMBS IO:        
Fixed-rate Agency CMBS $1,314,925
 $1,307,489
 $1,166,454
 $1,144,555
Non-Agency CMBS 36,328
 39,205
 72,749
 78,216
Agency CMBS IO 394,380
 401,808
 411,737
 411,898
Non-Agency CMBS IO 322,735
 328,659
 346,155
 342,648
  2,068,368
 2,077,161
 1,997,095
 1,977,317
         
Total MBS portfolio including TBA securities $3,599,821
 $3,605,124
 $3,244,967
 $3,212,084
(1)TBA securities are accounted for as "derivative assets (liabilities)" on our consolidated balance sheet at their net carrying value which represents the difference between the market value and the cost basis of the TBA contract as of the end of the period.

CMBS

Because Agency CMBS are guaranteed by the GSEs with respect to return of principal, our credit exposure is limited to any unamortized premium remaining on those securities. Non-Agency CMBS are not guaranteed and therefore our entire investment is exposed to credit losses from the underlying loans collateralizing the CMBS. The following table presents the par value, amortized cost, and weighted average months to estimated maturity of our CMBS investments as of the dates indicated by year of origination:
 September 30, 2017 December 31, 2016
($ in thousands)Par Value Amortized Cost 
Months to Estimated Maturity (1)
 Par Value Amortized Cost 
Months to Estimated Maturity (1)
Year of Origination:           
2008 and prior$41,058
 $37,869
 38 $57,771
 $53,161
 34
2009 to 2012135,326
 138,475
 26 193,061
 198,916
 33
2013 to 201420,324
 20,701
 85 42,760
 43,176
 95
2015661,113
 664,321
 102 683,680
 687,214
 111
2016254,375
 256,161
 113 254,781
 256,736
 122
2017230,821
 233,728
 119 —
 —
 —
 $1,343,017
 $1,351,255
 97 $1,232,053
 $1,239,203
 97
(1)Months to estimated maturity is an average weighted by the amortized cost of the investment.


As of September 30, 2017, the majority of the collateral underlying our non-Agency CMBS is comprised of multifamily properties. The portion of our non-Agency CMBS collateralized with single-family rental properties were sold during the second quarter of 2017. The collateral underlying our non-Agency CMBS investments is geographically dispersed in order to mitigate exposure to any particular region of the country. The U.S. state with the largest percentage of collateral underlying our non-Agency CMBS was Maryland at 23% as of September 30, 2017 and Texas at 16.0% as of December 31, 2016.

CMBS IO

Income earned from CMBS IO is based on interest payments received on the underlying commercial mortgage loan pools. Our return on these investments may be negatively impacted by any change in scheduled cash flows such as modifications of the mortgage loans or involuntary prepayments including defaults, foreclosures, and liquidations on or of the underlying mortgage loans prior to its contractual maturity date. In order to manage our exposure to credit performance, we generally invest in senior tranches of these securities and where we have evaluated the credit profile of the underlying loan pool and can monitor credit performance. In addition, to address changes in market fundamentals and the composition of mortgage loans collateralizing an investment, we consider the year of origination of the loans underlying CMBS IO in our selection of investments. The following table presents our CMBS IO investments as of September 30, 2017 by year of origination:
 September 30, 2017 December 31, 2016
($ in thousands)Amortized Cost Fair Value 
Remaining WAL  (1)
 Amortized Cost Fair Value 
Remaining WAL  (1)
Year of Origination:           
2010$7,157
 $7,364
 15
 $9,456
 $9,858
 19
201127,848
 29,353
 20
 35,130
 36,897
 23
201277,728
 79,667
 23
 102,378
 103,675
 27
2013109,705
 111,451
 29
 128,891
 129,011
 33
2014179,440
 182,447
 36
 201,802
 200,260
 39
2015177,176
 180,448
 41
 198,016
 194,886
 45
201684,943
 86,048
 48
 82,219
 79,959
 87
201753,118
 53,689
 54
 —
 —
 —
 $717,115
 $730,467
 37
 $757,892
 $754,546
 42
(1) Remaining weighted average life ("WAL") represents an estimate of the number of months of interest earnings remaining for the investments by year of origination.

Approximately 67% of the collateral underlying our non-Agency CMBS IO is comprised of retail, office, and multifamily properties as of September 30, 2017, and there have been no material changes to the characteristics or distribution of collateral type underlying these securities since December 31, 2016. The collateral underlying our non-Agency CMBS IO investments is geographically dispersed in order to mitigate exposure to any particular region of the country. The U.S. state with the largest percentage of collateral underlying our non-Agency CMBS IO was California at 14% as of September 30, 2017, unchanged compared to December 31, 2016.

RMBS

In addition to purchasing specified pools of fixed-rate Agency RMBS, we also utilize TBA contracts to purchase generic pools of fixed-rate Agency RMBS. Although these instruments are accounted for as derivatives, management views TBA securities as the economic equivalent of investing in and financing generic fixed-rate Agency RMBS through the repurchase agreement market and, therefore, evaluates the economics of these transactions in its assessment of the performance of its Agency RMBS portfolio. The following table provides information on our Agency RMBS investments including TBA securities as of September 30, 2017:


  September 30, 2017
        Weighted Average Based on Par
Coupon Par 
Fair
Value (1)(3)
 
Amortized Cost/Cost Basis (2)(3)
 
Loan
Balance (4)
 
Loan Age
(in months)
 (4)
 
3 Month CPR (4)(5)
 
Duration (6)
($ in thousands)              
30-year fixed-rate:              
3.0% $248,773
 $249,981
 $250,632
 $233,336
 10
 2.5% 6.34
4.0% 273,326
 289,378
 290,630
 240,621
 2
 —% 4.38
TBA 4.0% 650,000
 683,680
 683,813
 n/a n/a n/a 3.32
Total 30-year fixed-rate $1,172,099
 $1,223,039
 $1,225,075
 $237,150
 6
 1.2% 4.21
               
Adjustable-rate:              
3.1% (7)
 $294,254
 $303,782
 $305,265
 $270,208
 72
 17.1% 2.21
               
Total Agency RMBS (including TBA securities) $1,466,353
 $1,526,821
 $1,530,340
 $249,066
 30
 6.9% 3.81
(1)Fair value of TBA securities is the current market value of the TBA contract and represents the estimated fair value of the underlying Agency security as of the end of the period.
(2)Cost basis of TBA securities represents the forward price to be paid for the underlying Agency MBS as if settled.
(3)The net carrying value of TBA securities, which is the difference between the market value and the cost basis of the TBA securities, was $(0.1) million as of September 30, 2017 and is included on the consolidated balance sheet within "derivative liabilities".
(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. Securities with no prepayment history are excluded from this calculation.
(6)Duration is used to measure the market price volatility as interest rates change using dollar value of one basis point ("DV01") methodology.
(7)Coupon of adjustable-rate Agency RMBS represents the weighted average coupon based on amortized cost.

We did not have any investments in specified or non-specified pools of fixed-rate Agency RMBS as of December 31, 2016.
As mentioned previously, we have been reallocating capital away from adjustable-rate RMBS given the likelihood these investments will underperform in the current flat yield curve environment. We have been allowing and will continue to allow this portion of our portfolio to liquidate either on its own through payoffs or by selling when attractive bids are available. The following table provides information on our adjustable-rate RMBS by months to interest rate reset as of the dates indicated:
 September 30, 2017 December 31, 2016
($ in thousands)Par Value Amortized Cost Fair Value Par Value Amortized Cost Fair Value
Adjustable-rate Agency RMBS by MTR:           
0-12 MTR$47,126
 $48,440
 $49,580
 $335,476
 $355,069
 $353,887
13-36 MTR2,875
 3,057
 3,030
 225,272
 237,642
 235,137
37-60 MTR157,359
 164,286
 162,810
 151,578
 160,948
 157,945
Greater than 60 MTR86,894
 89,482
 88,362
 444,932
 460,665
 454,236
Total adjustable-rate Agency RMBS$294,254
 $305,265
 $303,782
 $1,157,258
 $1,214,324
 $1,201,205



Derivative Assets and Liabilities
We use interest rate swaps to hedge our earnings and book value exposure to fluctuations in interest rates. We regularly monitor and adjust our hedging portfolio in response to many factors including, but not limited to, changes in our investment portfolio, shifts in the yield curve, and our expectations with respect to the future path of interest rates and interest rate volatility.     
We also utilize TBA contracts as a means of investing in and financing fixed-rate Agency RMBS. These forward contracts are accounted for as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA contract that its settlement will result in physical delivery of the underlying Agency RMBS or the individual TBA contract will not settle in the shortest time period possible. Please refer to "RMBS" above for additional information about TBAs.

    The following graphs present the effective notional balance outstanding and net weighted average pay-fixed rate for our interest rate swaps for the periods indicated:

a1q17form10-_chartx30150a02.jpg
a1q17form10-_chartx32398a02.jpg


During the nine months ended September 30, 2017, we added interest rate swaps with a combined notional of $3.0 billion at a weighted average net pay-fixed rate of 1.80% and we terminated $1.1 billion in interest rate swaps with a weighted average net pay-fixed rate of 0.69%. Additionally, we had $0.2 million of interest rate swaps mature during the nine months ended September 30, 2017 with a weighted average net pay-fixed rate 0.92%. Our adjustments to the hedging portfolio were made in response to many market factors including, but not limited to, changes in our investment allocations, investing in TBA securities, shifts in the yield curve, and expectations with respect to the future path of interest rates and interest rate volatility, which is discussed further in "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of this Quarterly Report on Form 10-Q.
The following table summarizes the activity related to our interest rate swaps during the nine months ended September 30, 2017:
 Nine Months Ended
($ in thousands)September 30, 2017
Balance as of December 31, 2016 (1)
$21,612
Net receipt on termination(3,126)
Periodic net cash payments(3,364)
Settlement of variation margin (2)
3,300
Change in fair value(14,955)
Accrued interest payable(3,099)
Balance as of September 30, 2017 (1)
$368
(1)Represents the net amount recorded in "derivative assets (liabilities)" on the Company's consolidated balance sheets as of period indicated and excludes amounts related to TBA contracts which are also recorded in "derivative assets (liabilities)".
(2)As of January 2017 margin requirements from fluctuations in fair value of the Company's cleared interest rate swaps are settled daily with the Chicago Mercantile Exchange ("CME").

Repurchase Agreements
The majority of our repurchase agreement borrowings are collateralized with Agency MBS which have historically had lower liquidity risk than non-Agency MBS. The following table presents the amount pledged and leverage against the fair value of our non-Agency MBS investments by credit rating as of September 30, 2017 and December 31, 2016:


 September 30, 2017 December 31, 2016
($ in thousands)Fair Value Amount Pledged Related Borrowings Fair Value Amount Pledged Related Borrowings
Non-Agency CMBS:           
AAA$—
 $—
 $—
 $35,405
 $35,313
 $32,266
AA14,013
 —
 —
 14,127
 14,105
 11,665
A18,366
 18,365
 15,625
 18,614
 18,549
 15,831
Below A/Not Rated6,826
 —
 —
 10,070
 9,873
 7,119
   $39,205
 $18,365
 $15,625
 $78,216
 $77,840
 $66,881
            
Non-Agency CMBS IO:           
AAA$273,308
 $273,302
 $232,717
 $290,092
 $289,608
 $246,412
AA44,474
 43,797
 37,694
 46,986
 45,995
 40,026
A753
 753
 663
 —
 —
 —
Below A/Not Rated10,124
 10,124
 8,907
 5,570
 5,536
 4,761
 $328,659

$327,976
 $279,981
 $342,648
 $341,139
 $291,199
            
Non-Agency RMBS:           
Below A/Not Rated$1,142
 $—
 $—
 $33,562
 $31,952
 $26,149
 $1,142
 $—
 $—
 $33,562
 $31,952
 $26,149

Please refer to Note 3 of the Notes to the Unaudited Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q as well as "Interest Expense and Cost of Funds" within "Results of Operations" and “Liquidity and Capital Resources” contained within this Item 2 for additional information relating to our borrowings.


Shareholder's Equity

Shareholder's equity increased approximately 12% during the first nine months of 2017 primarily due to an increase of $38.5 million in the fair value of MBS, which is recorded in accumulated other comprehensive income. The increase in the fair value of MBS since December 31, 2016 resulted primarily from credit spread tightening. The following table provides the accumulated unrealized holding gains (losses) by type of MBS and the remaining balance of de-designated cash flow hedges as of the periods indicated:
($ in thousands)September 30, 2017 December 31, 2016
Agency CMBS$(7,436) $(22,295)
Non-Agency CMBS2,877
 5,467
Agency CMBS IO7,428
 161
Non-Agency CMBS IO5,924
 (3,507)
Agency RMBS(3,386) (13,119)
Non-Agency RMBS29
 14
De-designated cash flow hedges450
 670
Accumulated other comprehensive income (loss)$5,886
 $(32,609)

During the nine months ended September 30, 2017, we issued 1,093,164 shares of Series B Preferred Stock under our preferred stock ATM program at a discount of approximately 5% to the liquidation value of $25.00 per share. Cash proceeds were $25.9 million, net of 2% broker commissions and other fees. On March 31, 2017, the Company entered into an amended and restated equity distribution agreement pursuant to which the Company may offer and sell up to 7,416,520 shares of common stock of the Company from time to time through its sales agent in at-the-market ("ATM") offerings. We issued 2,027,857 shares of common stock pursuant to this agreement during the nine months ended September 30, 2017 at a discount of approximately


5% to book value of $7.46 per common share at September 30, 2017. We are using the cash proceeds from these capital raises in combination with repurchase agreement borrowings to purchase additional interest earning assets for our investment portfolio.


RESULTS OF OPERATIONS

The discussions below provide information on items on our consolidated statements of comprehensive income. These discussions include both GAAP and non-GAAP financial measures which management utilizes in its internal analysis of financial and operating performance. Please read the section "Non-GAAP Financial Measures" at the end of "Executive Overview" in Part 1, Item 2 of this Quarterly Report on Form 10-Q for additional important information about these measures.

Interest Income and Effective Yields on MBS
Interest income includes gross interest earned from the coupon rate on the securities, premium amortization and discount accretion, and other interest income resulting from prepayment penalty income or other yield maintenance items on CMBS and CMBS IO securities. Effective yields are calculated by dividing the sum of gross interest income and scheduled premium amortization/discount accretion (both of which are annualized for any reporting period less than 12 months) and prepayment compensation and premium amortization/discount accretion adjustments (collectively, "prepayment adjustments"), which are not annualized, by the average balance of investments outstanding during the reporting period. The following table presents details on average balances, interest income, and effective yields of MBS for the periods indicated:
 Three Months Ended
 September 30,
 2017 2016
($ in thousands)Amount Yield Amount Yield
CMBS:       
Coupon and scheduled amortization$9,976
 2.90 % $7,903
 3.19 %
Prepayment adjustments (1)
176
 0.01 % (154) (0.02)%
 $10,152
 2.91 % $7,749
 3.17 %
Average balance (2)
$1,352,681
 

 $974,240
 

        
CMBS IO:

      
Coupon and scheduled amortization$6,841
 3.73 % $6,895
 3.81 %
Prepayment adjustments (1)
1,209
 0.16 % 546
 0.07 %
 $8,050
 3.89 % $7,441
 3.88 %
Average balance (2)
$734,282
   $724,859
  
        
RMBS:

      
Coupon and scheduled amortization$4,693
 2.19 % $6,689
 1.92 %
Prepayment adjustments (1)
(124) (0.01)% (982) (0.07)%
 $4,569
 2.18 % $5,707
 1.85 %
Average balance (2)
$856,705
 

 $1,390,401
  
 

      
Total MBS interest income and effective yield:$22,771
 2.94 % $20,897
 2.75 %
        
Total average balance (2):
$2,943,668
   $3,089,500
  
        
 Nine Months Ended
 September 30,
 2017 2016
 Amount Yield Amount Yield
CMBS:       
Coupon and scheduled amortization$28,991
 2.93 % $24,241
 3.23 %
Prepayment adjustments (1)
2,255
 0.17 % 1,016
 0.10 %


 $31,246
 3.10 % $25,257
 3.33 %
Average balance (2)
$1,308,811
 

 $990,440
  
 

      
CMBS IO:

   

  
Coupon and scheduled amortization$21,059
 3.75 % $21,279
 3.79 %
Prepayment adjustments (1)
3,619
 0.48 % 1,363
 0.18 %
 $24,678
 4.23 % $22,642
 3.97 %
Average balance (2)
$749,343
 

 $748,097
  
        
RMBS:

   

 

Coupon and scheduled amortization$15,341
 2.02 % $21,525
 1.91 %
Prepayment adjustments (1)
(1,753) (0.17)% (1,104) (0.07)%
 $13,588
 1.84 % $20,421
 1.84 %
Average balance (2)
$1,014,283
 

 $1,499,309
  
 

   

  
Total MBS interest income and effective yield:$69,512
 2.96 % $68,320
 2.79 %
        
Total average balance (2):
$3,072,437
   $3,237,846
  
(1)Prepayment adjustments represent effective interest amortization adjustments related to changes in actual and projected prepayment speeds for RMBS and prepayment compensation, net of amortization for CMBS and CMBS IO.
(2)Average balances are calculated as a simple average of the daily amortized cost and exclude unrealized gains and losses as well as securities pending settlement if applicable.

Interest income and effective yields on our total MBS portfolio for the three and nine months ended September 30, 2017 increased due to higher prepayment penalty income from CMBS and CMBS IO and lower premium amortization adjustments on RMBS compared to the three and nine months ended September 30, 2016. Interest income and effective yields on MBS also increased overall as a result of our shift in investment strategy to higher yielding fixed-rate securities over the past twelve months. The following tables present the estimated impact of changes in average balances, yields, and prepayment adjustments on interest income by type of MBS for the periods indicated:
 Three Months Ended
 September 30, 2017 vs. September 30, 2016
 Increase (Decrease) in Interest Income Due to Change In
($ in thousands) Average Balance Coupon and Scheduled Amortization 
Prepayment Adjustments (1)
CMBS$2,402
 $2,013
 $59
 $330
CMBS IO609
 134
 (188) 663
RMBS(1,137) (2,069) 74
 858
Total$1,874
 $78
 $(55) $1,851
        
 Nine Months Ended
 September 30, 2017 vs. September 30, 2016
 Increase (Decrease) in Interest Income Due to Change In
($ in thousands) Average Balance Coupon and Scheduled Amortization 
Prepayment Adjustments (1)
CMBS$5,989
 $4,800
 $(50) $1,239
CMBS IO2,036
 57
 (277) 2,256
RMBS(6,833) (6,488) 304
 (649)
Total$1,192
 $(1,631) $(23) $2,846


(1)Prepayment adjustments represent effective interest amortization adjustments related to changes in actual and projected prepayment speeds for RMBS and prepayment compensation, net of amortization for CMBS and CMBS IO.

Interest income from CMBS increased for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 due to a higher average balance and higher prepayment penalty income while the effective yield earned on our CMBS portfolio was lower for three and nine months ended September 30, 2017 due primarily to lower average coupons on our current CMBS portfolio versus the same periods in the prior year.

Interest income and effective yield for CMBS IO for the three and nine months ended September 30, 2017 increased compared to the three and nine months ended September 30, 2016 due to an increase in prepayment penalty income for the three and nine months ended September 30, 2017 versus the same periods in 2016.
Interest income declined on RMBS for the three and nine months ended September 30, 2017 primarily due to a decrease in the average balance of approximately (38)% and (32)% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The increase of 33 basis points in the effective yield on RMBS for the three months ended September 30, 2017 compared to the same period in 2016 is due to the addition of $544.1 million in specified pools of 30-year fixed-rate Agency RMBS during the third quarter of 2017. Because these fixed-rate securities are newer issues, they have higher coupons than the adjustable-rate RMBS we have sold since September 30, 2016. Premium amortization was lower for the three and nine months ended September 30, 2017 as a result of the sales of adjustable-rate RMBS. The rate at which we amortize the premiums on adjustable-rate Agency RMBS is impacted by actual and forecasted prepayments, which is measured by the constant prepayment rate ("CPR"). The following graph shows our actual 3 month average CPRs for our adjustable-rate Agency RMBS for the periods indicated:
a1q17form10-_chartx19534a02.jpg

Premium amortization on our fixed-rate Agency RMBS is adjusted when actual prepayments are received. The CPR for our fixed-rate Agency RMBS was 1.3% for the third quarter of 2017. We do not forecast prepayments on our fixed-rate Agency RMBS.         

Interest Expense and Cost of Funds

The following table summarizes the components of interest expense as well as average balances and cost of funds for the periods indicated:


 Three Months Ended Nine Months Ended
 September 30, September 30,
($ in thousands)2017 2016 2017 2016
Interest expense on repurchase agreement borrowings$9,910
 $5,800
 $26,269
 $17,440
Interest expense on FHLB advances—
 343
 —
 1,118
Accretion of de-designated cash flow hedges (1)
(48) (99) (220) (152)
Non-recourse collateralized financing27
 24
 73
 72
Total interest expense$9,889
 $6,068
 $26,122
 $18,478
 

   

  
Average balance of repurchase agreements$2,616,250
 $2,536,562
 $2,736,834
 $2,623,225
Average balance of FHLB advances—
 263,000
 —
 308,022
Average balance of non-recourse collateralized financing5,817
 7,386
 6,058
 7,892
Average balance of borrowings$2,622,067
 $2,806,948
 $2,742,892
 $2,939,139
Cost of funds (2)
1.48% 0.85% 1.26% 0.83%
(1)Amount recorded in accordance with GAAP related to accretion of the balance remaining in accumulated other comprehensive income as a result of our discontinuation of cash flow hedge accounting effective June 30, 2013.
(2)Cost of funds is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period.

The following table presents the estimated impact of the change in average balances and borrowing rates of secured borrowings and other differences in interest expense for the comparative periods presented:
($ in thousands)Three Months Ended September 30, 2017 vs. September 30, 2016 Nine Months Ended September 30, 2017 vs. September 30, 2016
Change in borrowing rates on repurchase agreements and FHLB advances$4,169
 $8,927
Change in average balance of repurchase agreements and FHLB advances(402) (1,216)
Decrease (increase) in accretion of de-designated cash flow hedges51
 (68)
Decrease in non-recourse collateralized financing and other interest expense3
 1
Total change in interest expense$3,821
 $7,644

Increases in interest expense for the three and nine months ended September 30, 2017 compared to the same periods in 2016 were due to higher borrowing rates on our repurchase agreements. Our borrowing rates are based primarily on one-month LIBOR which has increased approximately 70 basis points since September 30, 2016.

Adjusted Interest Expense

Because we use derivative instruments as economic hedges of our interest rate risk exposure, management considers net periodic interest costs from derivative instruments to be an additional cost of financing investments. As such, management uses the non-GAAP financial measure "adjusted interest expense" which includes the net periodic interest costs of our effective derivative instruments excluded from GAAP interest expense. Please read the section "Non-GAAP Financial Measures" at the end of "Executive Overview" in Part 1, Item 2 of this Quarterly Report on Form 10-Q for additional information. The table below presents the reconciliation of GAAP interest expense to our adjusted interest expense for the periods indicated:
 Three Months Ended Nine Months Ended
 September 30, September 30,
($ in thousands)2017 2016 2017 2016
Interest expense$9,889
 $6,068
 $26,122
 $18,478
Add: net periodic interest costs of derivative instruments (1)
1,131
 155
 3,099
 2,321
Less: de-designated hedge accretion (2)
48
 99
 220
 152
Adjusted interest expense$11,068
 $6,322
 $29,441
 $20,951


1)Amounts represent net periodic interest costs on effective interest rate swaps outstanding during the period and exclude termination costs and changes in fair value.
(2)Amount recorded as a portion of "interest expense" in accordance with GAAP related to accretion of the balance remaining in accumulated other comprehensive income as a result of our discontinuation of cash flow hedge accounting effective June 30, 2013.

Of the $1.1 million and $3.1 million in net periodic interest costs incurred during the three and nine months ended September 30, 2017, respectively, $0.8 million and $1.3 million, respectively, relates to interest rate swaps we added to our hedging portfolio in order to mitigate the potential impact of changing interest rates on our TBA securities.

Net Interest Income and Net Interest Spread

The tables below present net interest income and net interest spread for our interest-earning assets and interest-bearing liabilities for the periods indicated:.
 Three Months Ended
 September 30,
 2017 2016
($ in thousands)Amount Yield Amount Yield
Interest income$23,103
 2.95% $21,135
 2.75%
Interest expense9,889
 1.48% 6,068
 0.85%
Net interest income/spread13,214
 1.47% 15,067
 1.90%
        
Average interest earning assets (1)
$2,960,595
   $3,110,884
  
Average balance of borrowings (2)
$2,622,067
   $2,806,948
  
        
 Nine Months Ended
 September 30,
 2017 2016
($ in thousands)Amount Yield Amount Yield
Interest income$70,378
 2.97% $69,040
 2.80%
Interest expense26,122
 1.26% 18,478
 0.83%
Net interest income/spread$44,256
 1.71% $50,562
 1.97%
        
Average interest earning assets (1)
$3,090,313
   $3,260,510
  
Average balance of borrowings (2)
$2,742,892
   $2,939,139
  
(1)Average balances are calculated as a simple average of the daily amortized cost and exclude unrealized gains and losses as well as securities pending settlement if applicable.
(2)Average balances are calculated as a simple average of the daily borrowings outstanding for both repurchase agreement and non-recourse collateralized financing.

Net interest income and net interest spread declined due to higher borrowing costs during the three and nine months ended September 30, 2017 compared to the respective periods in 2016. Higher borrowings costs were partially mitigated by an increase in interest income for the three and nine months ended September 30, 2017 compared to the respective periods in 2016, which resulted from replacing lower yielding adjustable-rate RMBS with higher yielding fixed-rate MBS during the past twelve months. Please refer to "Interest Income and Effective Yields" and "Interest Expense and Cost of Funds" for additional information.

Adjusted Net Interest Income

Drop income from TBA securities and net periodic interest costs from interest rate swaps effective during the period are included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income. Drop income is the difference in price between the near settling TBA contract and the price for the same contract with a later settlement date. Management believes drop income represents 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 views net periodic interest costs from interest rate swaps used to hedge interest rate risk as an additional cost of using repurchase agreements


to finance its investments. As such, management includes drop income from TBA securities and net periodic interest costs from interest rate swaps in a non-GAAP financial measure "adjusted net interest income". The following table reconciles adjusted net interest income to GAAP net interest income for the periods indicated:
 Three Months Ended Nine Months Ended
 September 30, September 30,
($ in thousands)2017 2016 2017 2016
Net interest income$13,214
 $15,067
 $44,256
 $50,562
Add: drop income3,902
 —
 5,253
 —
Add: net periodic interest costs (1)
(1,131) (155) (3,099) (2,321)
Less: de-designated hedge accretion (2)
(48) (99) (220) (152)
Adjusted net interest income$15,937
 $14,813
 $46,190
 $48,089
(1)Amounts represent net periodic interest costs on effective interest rate swaps outstanding during the period and exclude termination costs and changes in fair value.
(2)Amount recorded in accordance with GAAP related to accretion of the balance remaining in accumulated other comprehensive income as a result of our discontinuation of cash flow hedge accounting effective June 30, 2013.

Loss on Derivative Instruments, Net

The following table provides information on the components of our "loss on derivative instruments, net" for the periods indicated:
  Three Months Ended
  September 30,
($ in thousands) 2017 2016
Type of Derivative Instrument Net Periodic Interest Costs 
Change in
Fair Value (1)(2)
 Total Net Periodic Interest Costs 
Change in Fair Value (1)
 Total
Interest rate swaps $(1,131) $421
 $(710) $(155) $(266) $(421)
TBA securities —
 6,703
 6,703
 —
 —
 —
Eurodollar futures —
 —
 —
 —
 2,830
 2,830
Loss on derivative instruments, net $(1,131) $7,124
 $5,993
 $(155) $2,564
 $2,409
             
  Nine Months Ended
  September 30,
  2017 2016
Type of Derivative Instrument Net Periodic Interest Costs 
Change in
Fair Value (1)(2)
 Total Net Periodic Interest Costs 
Change in Fair Value (1)
 Total
Interest rate swaps $(3,099) $(14,954) $(18,053) $(2,321) $(46,290) $(48,611)
TBA securities —
 8,419
 8,419
 —
 —
 —
Eurodollar futures —
 —
 —
 —
 (13,542) (13,542)
Loss on derivative instruments, net $(3,099) $(6,535) $(9,634) $(2,321) $(59,832) $(62,153)
(1)Changes in fair value for interest rate swaps and Eurodollar futures include unrealized gains (losses) from current and forward starting derivative instruments and realized gains (losses) from terminated derivative instruments.
(2)Change in fair value for TBA securities includes unrealized gains (losses) from open TBA contracts and realized gains (losses) on terminated positions.

Changes in the fair value of interest rate swaps and Eurodollar futures and net periodic interest costs are impacted by changing market interest rates in any given period. In addition, because we continually monitor our hedge positioning and make changes based on our investment portfolio and related financings, management's view of the future path of interest rates, and where


we believe hedges will be most effective in relation to our capital allocation and interest rate risk, gains and losses on derivative instruments will also fluctuate based on the notional amount, maturity, and interest rate of the derivative instruments held during the period. Because of the changes made to our hedging portfolio from one reporting period to the next, results of any given reporting period are generally not comparable to results of another.

During the three months ended September 30, 2017, the fair value of our interest rate swaps increased $0.4 million as a result of higher swap rates (as shown in the Swap Rate Range graph under “Market Conditions and Recent Activity” within "Executive Overview"). Because we are "short" interest rate swaps (i.e., we pay a fixed rate of interest and receive a floating rate of interest based primarily on 3 month LIBOR), increases in swap rates result in increases in the fair value of the interest rate swaps. During the quarter, we also terminated interest rate swaps on which we paid net proceeds of $0.7 million.
For the nine months ended September 30. 2017, the fair value of interest rate swaps declined $15.0 million also as a result of lower swap rates during that period, specifically on the long end of the swap curve. Declines in fair value for the nine months ended September 30, 2016 were largely unfavorable as compared to the same periods in 2017 as a result of a larger declines in rates along the entire swap curve as well as changes in the composition of the hedging portfolio.
Net periodic interest costs for the three and nine months ended September 30, 2017 were higher than the same periods in 2016 due to a larger average notional balance of effective interest rate swaps outstanding at higher weighted-average pay-fixed rates as shown in the following table for the periods indicated:
 Three Months Ended Nine Months Ended
 September 30, September 30,
($ in thousands)2017 2016 2017 2016
Average notional balance$2,668,478
 $305,000
 $2,011,355
 $549,617
Weighted average net pay-fixed rate1.37% 0.64% 1.30% 1.06%

As mentioned previously, we execute TBA dollar roll transactions which effectively delay the settlement of a forward purchase of an Agency RMBS by entering into an offsetting short position (referred to as a "pair off"), net settling the paired-off positions in cash, and simultaneously entering a similar TBA contract for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as “drop income” is the economic equivalent of net interest income on the underlying Agency securities over the roll period (interest income less implied financing cost). The average if-settled cost basis of the TBA securities, which represents the basis on which we earned drop income during the three and nine months ended September 30, 2017, and the related drop income are presented in the following table:
  Three Months Ended Nine Months Ended
  September 30, 2017 September 30, 2017
($ in thousands) Average Cost Basis 
Drop
Income (1)
 Average Cost Basis 
Drop
Income (1)
TBA securities:        
3.0% 30-year $119,528
 $563
 $69,539
 $960
4.0% 30-year 677,956
 3,339
 287,298
 4,293
Total TBA securities $797,484
 $3,902
 $356,837
 $5,253
(1)Drop income is recognized in "gain (loss) on derivatives, net" on our consolidated statements of comprehensive income.

Loss on Sale of Investments, Net

Sales of our investments occur in the ordinary course of business as we manage our risk, capital and liquidity profiles, and as we reallocate capital to various investments. As mentioned previously, we have been reallocating our capital from adjustable-rate Agency RMBS to generic and specified pools of fixed-rate Agency RMBS, which we believe to be more liquid and less vulnerable to loss in book value from credit spread widening versus other investments in the current macroeconomic environment. The following tables provide information related to our loss on sale of investments, net for the periods indicated:


 Three Months Ended
 September 30,
 2017 2016
($ in thousands)Amortized cost basis sold Gain (loss) on sale of investments, net Amortized cost basis sold Gain (loss) on sale of investments, net
Agency RMBS$398,662
 $(5,160) $—
 $—
Agency CMBS13,484
 (51) —
 —
 $412,146
 $(5,211) $—
 $—
        
 Nine Months Ended
 September 30,
 2017 2016
($ in thousands)Amortized cost basis sold Gain (loss) on sale of investments, net Amortized cost basis sold Gain (loss) on sale of investments, net
Agency RMBS$728,952
 $(12,392) $57,188
 $(3,010)
Agency CMBS206,470
 523
 —
 —
Non-Agency CMBS34,506
 1,199
 34,868
 (1,228)
Non-Agency RMBS16,365
 42
 —
 —
 $986,293
 $(10,628) $92,056
 $(4,238)

General and Administrative Expenses

Compensation and benefits expense was $0.3 million and $0.5 million higher for the three and nine months ended September 30, 2017 compared to the same periods in 2016 primarily due to the timing of bonus expense accrual and the related payments. Other general and administrative expenses were $0.5 million higher for the nine months ended September 30, 2017 compared to the same period in 2016 due primarily to higher legal expenses related to a lawsuit filed in 2017 which is discussed in more detail in Item 1 of Part II of this Quarterly Report on Form 10-Q.

Other Comprehensive Income

The following table provides detail on the changes in fair value by type of MBS which are recorded as unrealized gains (losses) in other comprehensive income on our consolidated statements of operations for the periods indicated:
 Three Months Ended Nine Months Ended
 September 30, September 30,
($ in thousands)2017 2016 2017 2016
Agency CMBS$2,334
 $(1,226) $14,859
 $40,093
Non-Agency CMBS(403) (377) (2,591) 2,036
Agency CMBS IO1,032
 1,616
 7,268
 4,187
Non-Agency CMBS IO1,101
 2,131
 9,431
 5,832
Agency RMBS2,120
 (1,765) 9,734
 12,548
Non-Agency RMBS8
 390
 14
 802
   Unrealized gain on available-for-sale investments$6,192
 $769
 $38,715
 $65,498

Credit spreads tightened during the three months ended September 30, 2017 and September 30, 2016 which increased the fair value of MBS in our portfolio during those periods and more than offset the impact of slightly higher interest rates during those same periods. The increase in fair value of MBS of $38.7 million during the nine months ended September 30, 2017 was primarily due to credit spread tightening during the period. The increase in fair value of MBS of $65.5 million during the nine


months ended September 30, 2016 was primarily due to declining interest rates during the period, which favorably impacted the longer duration investments such as Agency CMBS.

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 payments received from counterparties from interest rate swap agreements. We use our liquidity to purchase investments and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to post initial margin and variation margin on our repurchase agreements and derivative transactions, including TBA contracts, when required under the terms of the related agreements. We may also use liquidity to repurchase shares of our stock.
Our liquid assets fluctuate based on our investment activities, our financing and capital raising activities, and changes in the fair value of our MBS and derivative instruments. We seek to maintain sufficient liquidity to support our operations and to meet our anticipated liquidity demands, including potential margin calls from lenders (as discussed further below). We measure, manage, and forecast our liquidity on a daily basis. Our available liquid assets include unrestricted cash and cash equivalents, unencumbered Agency MBS, and certain unencumbered non-Agency MBS that can be pledged as collateral for margin calls or converted reasonably quickly into cash. As of September 30, 2017, our available liquid assets were $239.2 million, which consisted of unrestricted cash and cash equivalents of $117.7 million and unencumbered Agency MBS of $121.5 million, compared to $138.1 million as of December 31, 2016. Unencumbered Agency MBS excludes purchases and sales of MBS pending settlement. The increase in available liquid assets since December 31, 2016 is primarily due to our shift in investment mix.

We perform sensitivity analysis on our liquidity based on changes in the fair value of our investments due to changes in interest rates, credit spreads, lender haircuts, and prepayment speeds as well as changes in the fair value of our derivative instruments due to changes in interest rates. In performing this analysis 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. The objective of our analysis is to assess the adequacy of our liquidity to withstand potential adverse events. We may change our leverage targets based on market conditions and our perceptions of the liquidity of our investments.

We closely monitor our debt-to-invested equity ratio (which is the ratio of debt financing to invested equity for any investment) as part of our liquidity management process as well as our overall enterprise level debt-to-equity ratio. We also monitor the ratio of our available liquidity to outstanding repurchase agreement borrowings, which fluctuates due to changes in the fair value of collateral we have pledged to our lenders. On an enterprise level basis, our current operating policies limit our total liabilities-to-shareholders' equity to 8 times our shareholders' equity. Including our TBA position at cost (if settled), which was $683.8 million as of September 30, 2017, our leverage was 6.3 times shareholders' equity. The financing for TBA securities is implied through our use of TBA dollar roll transactions whereby we enter into an offsetting TBA contract and net settle the paired off position in cash. It is possible under certain market conditions that it may be uneconomical for us to roll our TBA contracts into future months, which may result in us having to take physical delivery of the underlying securities. Because under those circumstances we would have to fund our total purchase commitment with cash or other financing sources, which may impact our liquidity position, management includes our TBA position at cost (if settled) in evaluating the Company's leverage.

The following table presents information regarding the balances of our repurchase agreement borrowings and our net TBA position for the periods indicated:
 Repurchase Agreements 
Net TBA Position (1)
($ in thousands)Balance Outstanding As of Quarter End Average Balance Outstanding For the Quarter Ended Maximum Balance Outstanding During the Quarter Ended Balance Outstanding As of Quarter End Average Balance Outstanding For the Quarter Ended
September 30, 2017$2,519,230
 $2,616,250
 $2,801,418
 $683,813
 $745,270
June 30, 20172,540,759
 2,753,019
 2,826,005
 416,312
 305,720
March 31, 20172,825,945
 2,843,733
 2,913,617
 —
 —
December 31, 20162,898,952
 2,768,769
 2,938,745
 —
 —
September 30, 20162,478,278
 2,536,562
 2,599,491
 —
 —


(1)Balance outstanding as of quarter end and average balance outstanding for the quarter ended for net TBA position are reported at cost (as if settled).

Repurchase Agreements

 Our repurchase agreement borrowings are generally renewable at the discretion of our lenders without guaranteed roll-over terms. Given the short-term and uncommitted nature of most of our repurchase agreement financing, we attempt 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 either with favorable terms or at all. As of September 30, 2017, we had repurchase agreement borrowings outstanding with 18 of our 34 available repurchase agreement counterparties at a weighted average borrowing rate of 1.51% compared to 1.03% as of December 31, 2016. Our repurchase agreement borrowings generally carry a rate of interest based on a spread to an index such as LIBOR.

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 financing) in order to support the amount of the financing. This excess collateral is often referred to as a "haircut" (and which we also refer to as equity at risk). As the collateral pledged is generally MBS, the fair value of the collateral can fluctuate with changes in market conditions. If the fair value of the collateral falls below the haircut required by the lender, the lender has the right to demand additional margin, or collateral, to increase the haircut back to the initial amount. These demands are typically referred to as "margin calls". Declines in the value of investments occur for any number of reasons including but not limited to changes in interest rates, changes in ratings on an investment, changes in actual or perceived liquidity of the investment, or changes in overall market risk perceptions. Additionally, values in Agency RMBS will also decline from the payment delay feature of those securities. Agency RMBS have a payment delay feature whereby Fannie Mae and Freddie Mac announce principal payments on Agency RMBS but do not remit the actual principal payments and interest for 20 days in the case of Fannie Mae and 40 days in the case of Freddie Mac. Because these securities are financed with repurchase agreements, the repurchase agreement lender generally makes a margin call for an amount equal to the product of their advance rate on the repurchase agreement and the announced principal payments on the Agency RMBS. This causes a temporary use of our liquidity to meet the margin call until we receive the principal payments and interest 20 to 40 days later. 

The following table presents the weighted average minimum haircut contractually required by our counterparties for MBS pledged as collateral for our repurchase agreement borrowings as of the dates indicated:
 September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 September 30, 2016
Agency CMBS and RMBS5.0% 5.0% 5.0% 5.0% 5.1%
Non-Agency CMBS and RMBS15.0% 18.0% 15.8% 16.3% 17.0%
CMBS IO15.0% 15.0% 15.3% 15.4% 15.4%

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. Equity at risk is defined as the amount pledged as collateral to the counterparty in excess of the borrowed amount outstanding. This equity at risk 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 following tables present the counterparties with whom we had greater than 5% of our equity at risk as of September 30, 2017 and December 31, 2016:
 September 30, 2017
($ in thousands)Amount Outstanding Equity at Risk
Well Fargo Bank, N.A. and affiliates$349,965
 $57,992
JP Morgan Securities, LLC270,883
 30,803
 $620,848
 $88,795


 December 31, 2016
($ in thousands)Amount Outstanding Equity at Risk
Well Fargo Bank, N.A. and affiliates$342,160
 $62,041
South Street Financial Corporation597,394
 38,770
JP Morgan Securities, LLC212,921
 35,658
 $1,152,475
 $136,469

The following table discloses our repurchase agreement amounts outstanding and the value of the related collateral pledged by geographic region of our counterparties as of September 30, 2017 and December 31, 2016:
 September 30, 2017 December 31, 2016
($ in thousands)Amount Outstanding Market Value of Collateral Pledged Amount Outstanding Market Value of Collateral Pledged
North America$1,685,493

$1,840,749
 $2,105,337
 $2,309,391
Asia521,832

548,717
 421,991
 443,098
Europe311,905

328,537
 371,624
 397,351
 $2,519,230
 $2,718,003
 $2,898,952
 $3,149,840

Certain of our repurchase agreement counterparties require us to comply with various operating and financial covenants. The financial covenants include requirements that we maintain minimum shareholders' equity (usually a set minimum, or a percentage of the highest amount of shareholders' equity since the date of the agreement), maximum decline in shareholders' equity (expressed as a percentage decline in any given period), and limits on maximum leverage (as a multiple of shareholders' equity). Operating requirements include, among other things, requirements to maintain our status as a REIT and to maintain our listing on the NYSE. Violations of one or more of these covenants could result in the lender declaring an event of default which would result in the termination of the repurchase agreement and immediate acceleration of amounts due thereunder. In addition, some of the agreements contain cross default features, whereby default with one lender simultaneously causes default under agreements with other lenders. Violations could also restrict us from paying dividends or engaging in other transactions that are necessary for us to maintain our REIT status.

We monitor and evaluate on an ongoing basis the impact these customary financial 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.

Derivative Instruments

Our derivative instruments may require us to post initial margin at inception and variation margin based on subsequent changes in the fair value of the derivatives. The collateral posted as margin by us is typically in the form of cash or Agency MBS. Generally, as interest rates decline due to market changes, we will be required to post collateral with counterparties on our pay-fixed derivative instruments and receive collateral from our counterparties on our receive-fixed derivative instruments, and vice versa as interest rates increase. As of September 30, 2017, we had cash of $44.0 million posted as initial margin under these agreements.

As of September 30, 2017, approximately $160 million of the Company's interest rate swaps were entered into under bilateral agreements which contain cross-default provisions with other agreements between the parties. In addition, these bilateral agreements contain financial and operational covenants similar to those contained in our repurchase agreements, as described above. Currently, we do not believe we are subject to any covenants that materially restrict our hedging flexibility.
Our TBA contracts 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. Under the terms of these agreements, we may be required to pledge collateral to our counterparty when initiated or in the event the fair value of our TBA contracts declines and such counterparty demands collateral through a margin call. Declines in the fair value of TBA contracts are generally related to such factors as rising interest rates, increases in expected prepayment speeds, or widening spreads. Our TBA contracts 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 consideration of our tax NOL carryforwards. We generally fund our dividend distributions through our cash flows from operations. If we make dividend distributions in excess of our operating cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other strategic 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). 

We have a net operating tax loss ("NOL") carryforward that we could use to offset our REIT taxable income distribution requirement. This NOL carryforward had an estimated balance of approximately $89.8 million as of September 30, 2017. We also have deferred tax hedge losses on terminated derivative instruments, which will be recognized over the original periods being hedged by those terminated derivatives. These losses have already been recognized in our GAAP earnings but will reduce taxable income over the next ten years as noted in the following table:
($ in thousands)Tax Hedge Loss Deduction
2017$21,542
201821,175
201916,937
2020 - 202612,383
 $72,037

If any of the deferred tax hedge losses for the years noted in the table above result in dividend distributions to our shareholders in excess of REIT taxable income, the excess dividends distributed will be considered a return of capital to the shareholder. As of September 30, 2017, we estimated that approximately 75% of our common stock dividends declared during the nine months ended September 30, 2017 will represent a return of capital to shareholders and not a distribution of REIT taxable income, principally as a result of the amount of the tax hedge loss deduction.

Contractual Obligations
The following table summarizes our contractual obligations by payment due date as of September 30, 2017:
($ in thousands) Payments due by period
Contractual Obligations: Total < 1 year 1-3 years 3-5 years > 5 years
Repurchase agreements (1)
 $2,557,279
 $2,557,279
 $—
 $—
 $—
Non-recourse collateralized financing (2)
 5,786
 1,669
 2,199
 1,207
 711
Operating lease obligations 544
 214
 330
 —
 —
Total $2,563,609
 $2,559,162
 $2,529
 $1,207
 $711
(1) Includes estimated interest payments calculated using interest rates in effect as of September 30, 2017.
(2) Amounts shown are for principal only and exclude interest obligations as those amounts are not significant. Non-recourse collateralized financing represents securitization financing that is payable solely from loans and securities pledged as collateral. Payments due by period were estimated based on the principal repayments forecasted for the underlying loans and securities, substantially all of which is used to repay the associated financing outstanding.

Other Matters

As of September 30, 2017, we do not believe that any off-balance sheet arrangements exist that are reasonably likely to have a material effect on our current or future financial condition, results of operations, or liquidity other than as discussed above. In addition, we do not have any material commitments for capital expenditures and have not obtained any commitments for funds to fulfill any capital obligations.

RECENT ACCOUNTING PRONOUNCEMENTS


Please refer to Note 1 to the Notes to the Unaudited Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q for information regarding recently issued accounting pronouncements.

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 1933Securities Act, as amended, and Section 21E of 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”,“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:to statements about:

•Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations;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 U.S. Federal Reserve and the FOMCor other central banks with respect to monetary policy (including the targeted FederalFed Funds Rate)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, (including the FOMC)Federal Housing Finance Agency, other financial regulators, and other financial regulators;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
32

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 repurchase activity andincluding the impact of stock issuances and repurchases;
•The amount, timing, and funding of future dividends;
•Our use of and restrictions on using our tax NOL carryforward;carryforward and other tax loss carryforwards;
The status of pending litigation;
The competitive environment in the future, including•Future competition for, investments and the availability of, financing;investments, financing and capital;
•Estimates of future interest expenses, including related to the Company'sCompany’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:
Market•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 market spreads.equity markets:

•Uncertainties regarding the war between Russia and the Ukraine 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 of 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, some of the 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, particularlyespecially those set forth under and incorporated by reference into Part II, Item 1A, “Risk Factors”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 war between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict;
33

•changes in interest rates and interest ratecredit 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 balance sheet normalization process throughReserve’s policies regarding the reduction in its holdingspurchases of Agency RMBS, Agency CMBS, and U.S. TreasuriesTreasuries;
•actual or anticipated changes in Federal Reserve monetary policy;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 servicerservice providers, including our sole third-party service provider for our critical operations and trade functions;
•the loss or unavailability of our loansthird-party service provider’s service and loans underlyingtechnology that supports critical functions of our securities;business related to our trading and borrowing activities due to outages, interruptions, or other failures;
•the level of defaults by borrowers on loans we have securitized;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 interest rate swaps and other derivative instruments, including changes to margin requirements on derivative instruments;
•uncertainty regarding continued government support of the U.SU.S. financial system and U.S. housing and real estate markets;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 System;Reserve;
ownership shifts under Section 382 that further limit •the use of our tax NOL carryforward;political environment in the U.S.;
•systems failures or cybersecurity incidents; and
•exposure to current and future claims and litigation.



ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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, reinvestment, credit, liquidity, and liquidity reinvestment
34

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. With respect to MBS, mismatch in duration is usually the result of interest-rate reset or maturity dates and differing cash flow profiles of our assets versus our liabilities. Borrowing costs on our liabilities are generally based on prevailing short-term market rates and reset more frequently than interest rates on our assets. Changes in interest rates and changes in the forward curve also impact the market value of our investment portfolio and our derivative instruments (including TBA securities and interest rate swaps).

The measures of an instrument's price sensitivity to interest rate fluctuations are its duration and convexity. Duration measures the percentage change in projected market value of our investments and derivative instruments given a change in interest rates. The duration of our RMBS and TBA securities tend to increase when interest rates rise and decrease when interest rates fall, which is commonly referred to as negative convexity. This occurs because prepayments of the mortgage loans underlying the RMBS tend to decline when interest rates rise (which extends the life of the security) and increase when interest rates fall (which shortens the life of the security). The fair value of TBA securities react similarly to RMBS to changes in interest rates as they are based on an underlying generic pool of fixed-rate RMBS securities. CMBS and CMBS IO, however, generally have little convexity because the mortgage loans underlying the securities contain some form of prepayment protection provision (such as prepayment lock-outs) or prepayment compensation provisions (such as yield maintenance or prepayment penalties) which create an economic disincentive for the loans to prepay.

We attempt to manage our exposure to changes in interest rates that results from the duration mismatch between our assets and liabilities by entering into interest rate swaps to hedge this risk. We manage interest rate risk within tolerances set by our Board of Directors. Our portfolio duration changes based on the composition of our investment portfolio and our hedge positions as well as market factors. We calculate our portfolio duration based on model projected cash flows, and such calculated duration can be an imprecise measure of actual interest rate risk. In the case of Agency RMBS and TBA securities, the primary input to the calculated duration is the anticipated prepayment speed of the underlying mortgage loans, which is sensitive to future interest rates and borrowers' behavior. Estimates of prepayment speeds can vary significantly by investor for the same security and therefore estimates of security and portfolio duration can vary significantly.

During a period of rising interest rates (particularly short term rates in a flattening yield curve environment), our borrowing costs will increase faster than our asset yields, negatively impacting our net interest income. 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 increasechange in interest rates. In addition, our adjustable-rate Agency RMBS reset based on one-year LIBOR and have limits or caps on the initial, aggregate, or periodic amount that an
We manage interest rate may reset whilerisk within tolerances set by our liabilities do not haveBoard of Directors. We use interest rate reset caps. Ashedging instruments to mitigate the impact of September 30, 2017, we had a positive net duration gap in our investment portfolio, which means our liabilities mature or reset sooner than our investments, and we had not fully hedged this difference. Therefore, increases inchanging interest rates particularly rapid increases, will negatively impacton the market value of our investments, thereby reducing our book value. In addition to the information set forth in the tables below, see "Spread Risk" below for further discussion of the risks to the market value of our investments. For further discussion of the reset features of our hybrid ARMs, please refer to "Financial Condition-RMBS" within Part I, Item 2 of this Quarterly Report on Form 10-Q.

The table below shows the projected sensitivity of our net interest incomeassets and net periodic interest costs on our interest rate swaps;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 projected sensitivitymaturity 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 valueparticipants.
We continuously monitor market conditions, economic conditions, interest rates and other market activity and frequently adjust the composition of our investments and derivativehedges 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 (including TBA securities); and the percentage change in shareholders' equity as they existed as of the periods indicated based on an instantaneous parallel shift in market interest rates as set forth in the table below. In light of the low interest rate environment at September 30, 2017, the only declining rate scenario that we present is a downward shift of 50 basis points.



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.results shown in the tables below. There can be no assurance that assumed events used forto model the modelresults 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.
  September 30, 2017 December 31, 2016
  Percentage Change in Percentage Change in
Parallel Shift in Interest Rates 
Market Value of Investments (1)
 Shareholders' Equity 
Net Interest Income and Net Periodic Interest Costs (2)
 
Market Value of Investments (1)
 Shareholders' Equity 
Net Interest Income and Net Periodic Interest Costs (2)
+100 (1.3)% (9.1)%
10.3% (0.6)% (4.4)% (42.4)%
+50 (0.5)% (3.7)% 5.6% (0.3)% (1.9)% (20.7)%
-50 0.3% 2.1% (7.2)% 0.2% 1.2% 18.7%
(1)Includes changes in market value of our investments and derivative instruments, including TBA securities, but excludes changes in market value of our financings because they are not carried at fair value on our balance sheet. The projections for market value do not assume any change in credit spreads.
(2)Includes changes in net interest income as well as net periodic interest costs on our interest rate swaps recorded in "gain (loss) on derivatives instruments, net".

The projected impact on interest related earnings in an increasing interest rate environment changed from a projected decline as of December 31, 2016 to a projected increase as of September 30, 2017 because we made adjustments to our hedging portfolio during the nine months ended September 30, 2017. When the yield curve flattened during the second quarter of 2017, we entered into approximately $1.0 billion of interest rate swaps in order to "lock-in" our financing costs over the near term in an attempt to avoid potential volatility in our net interest earnings. We also entered into additional interest rate swaps to hedge the interest rate risk related to our TBA securities we began investing in during the second quarter of 2017.
Management also considers changes in the shape of the interest rate curves in assessing and managing portfolio interest rate risk. Oftenrisk on the market value of its investments and common equity. Because interest rates do not typically move in a parallel fashion from quarterperiod to quarter. The tableperiod (as can be seen by the graph for U.S. Treasury rates in Item 2, “Executive Overview”), the tables below showsshow the projected sensitivity of the market value of our financial instruments and the percentage change in projectedshareholders’ equity assuming instantaneous parallel shifts and non-parallel shifts in market interest rates.
June 30, 2023
Parallel Decrease in Interest Rates ofParallel Increase in Interest Rates of
100 Basis Points50 Basis Points50 Basis Points100 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
RMBS3.3 %30.8 %1.7 %16.0 %(1.8)%(16.9)%(3.7)%(34.2)%
CMBS0.1 %0.5 %0.03 %0.2 %(0.02)%(0.2)%— %(0.4)%
CMBS IO0.1 %0.6 %0.03 %0.3 %(0.03)%(0.3)%(0.1)%(0.6)%
TBAs1.1 %9.9 %0.6 %5.5 %(0.7)%(6.6)%(1.5)%(13.9)%
Interest rate hedges(4.4)%(41.1)%(2.2)%(20.3)%2.1 %19.7 %4.2 %38.8 %
Total0.1 %0.7 %0.2 %1.8 %(0.5)%(4.3)%(1.1)%(10.3)%
December 31, 2022
Parallel Decrease in Interest Rates ofParallel Increase in Interest Rates of
35

100 Basis Points50 Basis Points50 Basis Points100 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
RMBS2.8 %20.9 %1.4 %10.6 %(1.4)%(10.6)%(2.8)%(21.0)%
CMBS0.1 %0.5 %0.04 %0.3 %(0.03)%(0.3)%(0.1)%(0.5)%
CMBS IO0.1 %0.7 %0.05 %0.4 %(0.05)%(0.4)%(0.1)%(0.7)%
TBAs2.0 %15.2 %1.1 %8.2 %(1.2)%(9.1)%(2.5)%(18.9)%
Interest rate hedges(5.6)%(41.3)%(2.8)%(20.5)%2.7 %20.2 %5.4 %40.1 %
Total(0.6)%(4.0)%(0.2)%(1.0)%— %(0.2)%(0.1)%(1.0)%

Non-Parallel ShiftsJune 30, 2023December 31, 2022
Basis Point Change in
2-year UST		Basis Point Change in
10-year UST
% of Market Value (1)
% of Common
Equity
% of Market Value (1)
% of Common
Equity
+2500.1 %0.5 %0.2 %1.7 %
+25+50(0.5)%(4.3)%(0.1)%(1.0)%
+50+25(0.3)%(2.4)%0.1 %0.6 %
+50+100(1.1)%(10.4)%(0.4)%(2.9)%
0-250.1 %1.1 %0.1 %0.4 %
-10-500.2 %1.6 %0.01 %0.1 %
-25-750.1 %0.7 %(0.2)%(1.4)%
(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.

Our investment portfolio netas of derivative instruments for instantaneous changesJune 30, 2023 consists of higher coupon assets compared to December 31, 2022, which increased the duration risk in the shapeour investment portfolio. To mitigate, we moved to a longer duration position as of theJune 30, 2023 relative to that as of December 31, 2022. As a result, our investment portfolio and book value are projected to experience greater declines in an increasing interest rate environment and increase in value in a declining rate environment. In addition, as of December 31, 2022, we held $250.0 million notional in put options on 10-year U.S. Treasury ("UST") curve (with similar changes tofutures, which would have increased in fair value in an increasing rate environment. Without those put options at June 30, 2023, stress runs for higher rates, such as the interest rate swap curves) as of the periods indicated:+50/+100 shift, show a greater decline in market value and book value.
  September 30, 2017 December 31, 2016
Basis Point Change in Percentage Change in
2-year UST 10-year UST 
Market Value of Investments (1)
 Shareholders' Equity 
Market Value of Investments (1)
 Shareholders' Equity
+25 +50 (0.5)% (3.6)% 0.1% 0.5%
+25 +0 (0.1)% (0.6)% (0.4)% (2.5)%
+50 +25 (0.3)% (2.3)% (0.5)% (3.2)%
+50 +100 (1.2)% (8.1)% 0.1% 0.4%
-10 -50 (0.2)% 1.5% (0.3)% (2.3)%
(1)Includes changes in market value of our investments and derivative instruments, including TBA securities, but excludes changes in market value of our financings because they are not carried at fair value on our balance sheet. The projections for market value do not assume any change in credit spreads.





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, and wideningrates. 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 FOMCFederal Reserve monetary policy. Likewise, mostWe do not hedge spread risk given the complexity of hedging credit spreads and in our investments are fixed-rate or reset in rate over a periodopinion, the lack of time, andliquid instruments available to use as interest rates rise, we would expect the market value of these investments to decrease.

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
36

response to changes in market spreads could differ materially from the projected sensitivity if actual conditions differ from these assumptions.

The table below is an estimateshows the projected sensitivity of the percentage change in projected market value of our investments (including TBA securities) given the indicated change in market spreads as of the periodsdates indicated:
June 30, 2023December 31, 2022
Percentage Change inPercentage Change in
Basis Point Change in Market Spreads
Market Value of Investments (1)
% of Common
Equity
Market Value of Investments (1)
% of Common
Equity
+20/+50 (2)
(1.2)%(10.8)%(1.2)%(9.1)%
+10(0.6)%(5.4)%(0.6)%(4.5)%
-100.6 %5.4 %0.6 %4.5 %
-20/-50 (2)
1.2 %10.8 %1.2 %9.1 %
Basis Point Change in Market Spreads 
Percentage Change in Projected
Market Value of Investments
  September 30, 2017 December 31, 2016
+50 (2.6)% (2.2)%
+25 (1.3)% (1.1)%
-25 1.3% 1.1%
-50 2.6% 2.3%
(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 and Reinvestment 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 yieldinterest method under GAAP. 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.

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). Yield maintenance and prepayment penalty requirements are intended to create an economic disincentive for the loans to prepay; however, the amount of the prepayment penalty required to be paid may decline over time, and as loans age, interest rates decline, or market values of collateral supporting the loans increase, prepayment penalties may lessen as an economic disincentive to the borrower. Generally, our experience has been that prepayment lock-out and yield maintenance provisions result in stable prepayment performance from period to period. There are no prepayment protections, however, if the loan defaults and is partially or wholly repaid earlier as a result of loss mitigation actions taken by the underlying loan servicer. Historically, we have experienced low default rates on loans underlying CMBS and CMBS IO.

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,Our prepayment risk on these securities would be particularly acute without these prepayment protection provisions. CMBS IO prepayment protectionas of June 30, 2023 has declined relative to December 31, 2022 and compensation provisions vary by issuer ofprior periods as the security (i.e. Freddie Mac, Fannie Mae, Ginnie Mae, or non-Agency). The majority of our Agency CMBS IO are issued by Freddie MacMBS portfolio consists of securities owned near or below par and these securities generallyprepayment speeds have initial prepayment lock-outs followed by a defeasance period which on average extends to within six months of the stated maturities of the underlying loans. Non-Agency CMBS IO generally have prepayment protectiondeclined in the form ofcurrent higher interest rate environment.
For additional information regarding the factors that impact prepayment lock-outsrisk as well as how we seek to mitigate prepayment risk, please refer to Items 1A and defeasance provisions. The following table details the fair value7A of our CMBS IO portfolio by issuer as of the end of the periods indicated:2022 Form 10-K.


($ in thousands)September 30, 2017 December 31, 2016
Fannie Mae$11,200
 $18,957
Freddie Mac390,608
 392,941
Non-Agency CMBS IO328,659
 342,648
 $730,467
 $754,546

Prepayments on the loans underlying our RMBS generally accelerate in a declining interest rate environment, as the loans age, and, with respect to ARMS, as the loans near their respective interest rate reset dates, particularly the initial reset date, or if expectations are that interest rates will rise in the future. Our prepayment models anticipate an acceleration of prepayments in these events. To the extent the actual prepayments exceed our modeled prepayments, or, with respect to adjustable-rate RMBS, if we change our future prepayment expectations, we will record adjustments to our premium amortization which may negatively impact our net interest income. In addition, changes in market expectations of prepayments could impact the fair value of our RMBS.

As an indication of our prepayment risk on our RMBS portfolio, the following table summarizes information for our Agency RMBS portfolio regarding the net premium and weighted average coupon by months to reset ("MTR") or until maturity in the case of fixed-rate securities as of the end of the past four quarters:     
 September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016
($ in thousands)Net Premium WAC Net Premium WAC Net Premium WAC Net Premium WAC
0-12 MTR$1,313
 3.44% $7,637
 3.36% $17,671
 3.24% $19,593
 3.17%
13-36 MTR182
 4.52% 3,278
 3.14% 7,307
 3.07% 12,369
 3.18%
37-60 MTR6,928
 3.16% 11,074
 3.07% 11,651
 3.38% 10,441
 3.51%
> 60 MTR2,588
 2.58% 7,085
 2.57% 11,744
 2.68% 14,663
 2.73%
30-year fixed-rate19,163
 3.52% —
 —% —
 —% —
 —%
Total$30,174
 3.35% $29,074
 2.98% $48,373
 3.04% $57,066
 3.05%
Par balance$816,353
   $715,015
   $1,033,735
   $1,157,258
  
Premium, net as a % of par value3.7%   4.1%   4.7%   4.9%  

We seek to manage our prepayment risk on our MBS by diversifying our investments, seeking investments which we believe will have superior prepayment performance, and investing in securities which have some sort of prepayment prohibition or yield maintenance (as is the case with CMBS and CMBS IO). With respect to RMBS, when we invest in RMBS at a premium to the security's par value, we tend to favor securities in which we believe the underlying borrowers have some disincentive to refinance as a result of the size of each loan's principal balance, credit characteristics of the borrower, or geographic location of the property, among other factors.

We are also 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. If we are unable to find suitable reinvestment opportunities or if yields on assets in which we reinvest are lower than yields on existing assets, our results and cash flows could be negatively impacted. 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 rather than reinvest capital or if we invest it 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.



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. Since
Agency and non-Agency CMBS IO represent the right to excess interest and(and not principalprincipal) on the underlying loans, theseloans. 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, whichpenalty. This will typically occursoccur when an involuntarily liquidatingthe underlying loan repays all or a portionis in default and proceeds from the disposition of its related principal balance.

Wethe loan collateral are exposedinsufficient to pay the prepayment consideration. To mitigate credit risk on our non-Agency securities and we attempt to mitigate our credit risk through asset selection and by purchasing higher quality non-Agency MBS. Our non-Agency MBS are typically investment grade rated securities which we believe will have strong credit performance. We do not currently seek to purchase heavily discounted, credit sensitive MBS. The majority of our non-Agency securities are CMBS and CMBS IO and the return we earn on these securities is dependent on the credit performance of the underlying commercial loans. In particular, since investmentsinvesting in CMBS IO, pay interest fromwe invest in primarily AAA-rated securities that are stripped off senior tranches, which means we receive the underlying commercial mortgage loan pools, returns generallyhighest payment priority and are more negatively impacted by liquidations of loansthe 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 pool. Please refer to "Financial Condition-Repurchase Agreements" within Item 2based on their estimate of this Quarterly Report on Form 10-Q for information regardingliquidation proceeds. Senior non-Agency CMBS IO may benefit from changes in contractual cash flows, including modifications or loan extensions as the credit ratings on our non-Agency MBS.senior classes can remain outstanding beyond the original maturity date.


37

Liquidity Risk

We have liquidity risk principally from the use of recourse repurchase agreements to finance our ownership of securities. In general, our repurchase agreements provide a source of uncommitted short-term financing for longer-term assets, thereby creating a mismatch between the maturities of the asset and the associated financing. 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 .

collateral.
Our use of TBA dollar roll transactionslong 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 dollar roll transactionscontracts prior to their settlement date. If we are unable to roll or terminate our TBA dollar roll transactions,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, please refer to “Liquidity and Capital Resources” in Part I, Item 2 of this Quarterly Report on Form 10-Q.10-Q as well as within Item 7 of our 2022 Form10-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, our 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.


ITEM 4.CONTROLS AND PROCEDURES
ITEM 4.    CONTROLS AND PROCEDURES
Disclosure controlsControls and procedures.

Procedures
Our management evaluated, with the participation of our Principal Executive Officerprincipal executive officer and Principal Financial Officer,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 Officerprincipal executive officer and Principal Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 20172023 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 Officerprincipal executive officer and Principal Financial Officer,principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal controlInternal Control over financial reporting.Financial Reporting

Our management is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). There were no changes in our internal control over financial reporting during the three months ended SeptemberJune 30, 20172023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



38



PART II.OTHER INFORMATION
PART II.    OTHER INFORMATION

ITEM 1.
ITEM 1.    LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to various legal proceedings. As of September 30, 2017, neither the Company nor any of its subsidiaries were a party to any material legal proceedings.

There have been no material changes during the three months ended September 30, 2017 with respect to the garnishment action related to DCI Commercial, Inc. (“DCI”), a former affiliate of the Company and formerly known as Dynex Commercial, Inc., discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, or the suit against the Company and DCI, as co-defendants, discussed in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017. Other than as previously disclosed in the Company's periodic reports, toTo the Company’s knowledge, there are no pending or threatened legal proceedings, which, in management’s opinion, individually or in the aggregate, wouldcould have a material adverse effect on the Company’s results of operations or financial condition.


ITEM 1A.    RISK FACTORS


There have been no material changes from the risk factors discussed in Part I, Item 1A, “Risk Factors” of our 2022 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 Annual Report on2022 Form 10-K for the year ended December 31, 2016 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” withinin this Quarterly Report on Form 10-Q as well as Part I, Item 1A, “Risk Factors” in our Annual Report on2022 Form 10-K for the year ended December 31, 2016, and Part II, Item 1A, "Risk Factors" in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017.10-K.


ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Issuer Purchases of Equity Securities


The Company has been authorized by itsCompany’s Board of Directors tohas authorized a share repurchase program (the “Program”) of up to $40$60 million of itsthe Company’s outstanding shares of common stock through December 31, 2018. Subjectand up to applicable securities laws and the terms$30 million of the Company’s Series AC Preferred Stock designationthrough open market transactions, privately negotiated transactions, trading plans adopted in accordance with Rule 10b5-1 under the Exchange Act, block transactions or otherwise. The Program permits the Company to repurchase shares of common stock or Series C Preferred Stock at any time or from time-to-time at management’s discretion. The actual means and timing of any shares purchased under the Program will depend on a variety of factors, including, but not limited to, the market prices of the common stock and the Series BC Preferred Stock, designation, both of which are contained in our Articles of Incorporation, futureas applicable, general market and economic conditions, and applicable legal and regulatory requirements. The Program does not obligate the Company to purchase any shares, and any open market repurchases of common stockunder the Program will be made at timesin accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and in amounts as the Company deems appropriate, provided that the repurchase price per sharevolume of open market stock repurchases. The Program is less than the Company's estimate of the current net book value of a share of common stock. Repurchasesauthorized through March 31, 2024, although it may be suspendedmodified or discontinuedterminated by the Board of Directors at any time. During

The Company has not repurchased any shares of its Series C Preferred Stock. The following table summarizes repurchases of our common stock that occurred during the three months ended SeptemberJune 30, 20172023:
Issuer Purchases of Equity Securities
Total Number of SharesAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
($s in thousands)
April 1 - 30, 2023— $— — $60,000 
May 1 - 31, 2023 (1)
15,280 — — 60,000 
June 1 - 30, 2023— — — 60,000 
15,280 $— — 
(1) These shares were withheld from certain employees to satisfy tax withholding obligations arising upon the Company didvesting of restricted stock issued for share-based compensation. Accordingly, these shares are not repurchase anyincluded in the
39

calculation of approximate dollar value of shares that may yet be purchased under the Program authorized by the Company's Board of common stock under this repurchase authorization.Directors.




ITEM 3.    DEFAULTS UPON SENIOR SECURITIES


None.


ITEM 4.    MINE SAFETY DISCLOSURES
        
None.


ITEM 5.    OTHER INFORMATION


None.During the three months ended June 30, 2023, none of the Company’s directors or Section 16 officers adopted or terminated any “Rule 10b5-1 trading arrangements” or any “non-Rule 10b5-1 trading arrangements” (in each case, as defined in Item 408 of Regulation S-K).





40

ITEM 6.    EXHIBITS


Exhibit No.Description
3.1
Restated Articles of Incorporation, effective June 2, 2014May 14, 2021 (incorporated herein by reference to Exhibit 3.1 to Dynex's Registration StatementCurrent Report on Form S-88-K filed September 17, 2014)May 18, 2021).
3.23.1.1
Articles of Amendment of the Restated Articles of Incorporation, effective May 18, 2023 (filed herewith).
3.2
Amended and Restated Bylaws, of the Company, effective as of May 16, 201711, 2021 (incorporated herein by reference to Exhibit 3.2 to Dynex’s Quarterly Report on Form 10-Q filed August 8, 2017).
10.23.4
Amendment No. 4 to Master Repurchase and Securities Contract dated as of May 12, 2017 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.23.4 to Dynex’s Current Report on Form 8-K filed May 17, 2017)12, 2021).
10.344.1
Amended and Restated Equity Distribution Agreement between Dynex Capital, Inc. and JMP Securities LLC, dated March 31, 2017Specimen of Common Stock Certificate (incorporated herein by reference to Exhibit 10.344.1 to Dynex's CurrentQuarterly Report on Form 8-K filed April 3, 2017)10-Q for the quarter ended September 30, 2019).
12.14.2
Statement Regarding ComputationSpecimen of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock Dividends (filed herewith)Certificate (incorporated herein by reference to Exhibit 4.4 to Dynex's Registration Statement on Form 8-A12B filed February 18, 2020).
31.1
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1
Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

101
The following materials from Dynex Capital, Inc.'s Quarterly Report on Form 10-Q for the three monthsquarterly period ended SeptemberJune 30, 2017,2023, formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets, (unaudited), (ii) Consolidated Statements of Comprehensive Income, (unaudited), (iii) Consolidated StatementStatements of Shareholders'Shareholders’ Equity, (unaudited), (iv) Consolidated Statements of Cash Flows, (unaudited), and (v) Notes to the Unaudited Consolidated Financial Statements.
104The cover page from Dynex Capital, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language) (included with Exhibit 101).





41

SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DYNEX CAPITAL, INC.
Date:July 28, 2023/s/ Byron L. Boston
Byron L. Boston
Chief Executive Officer, Co-Chief Investment Officer, and Director
(Principal Executive Officer)
Date:July 28, 2023DYNEX CAPITAL, INC./s/ Robert S. Colligan
Robert S. Colligan
Date:November 3, 2017/s/ Byron L. Boston
Byron L. Boston
Chief Executive Officer, President,
Co-Chief Investment Officer, and Director
(Principal Executive Officer)
Date:November 3, 2017/s/ Stephen J. Benedetti
Stephen J. Benedetti
Executive Vice President, Chief Financial Officer, and Chief Operating OfficerSecretary
(Principal Financial Officer)




42