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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q

☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023
or

☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-09819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)

Virginia |  | 52-1549373
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
4991 Lake Brook Drive, Suite 100 |  |  |
Glen Allen, | Virginia |  | 23060-9245
(Address of principal executive offices) |  | (Zip Code)
|  |  | (804) | 217-5800 |
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: |  |
Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
Common Stock, par value $0.01 per share |  | DX |  | New York Stock Exchange
6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share |  | DXPRC |  | New 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No ☐
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 filer | ☐ | Accelerated filer | ☒
Non-accelerated filer | ☐ | Smaller reporting company | ☐
|  | Emerging growth company | ☐

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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
On October 25, 2023, the registrant had 56,645,168 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 INFORMATION |
| Item 1. | Financial Statements |
|  | Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 | 1
|  | Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 (unaudited) and September 30, 2022 (unaudited) | 2
|  | Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2023 (unaudited) and September 30, 2022 (unaudited) | 3
|  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 (unaudited) and September 30, 2022 (unaudited) | 5
|  | Notes to the Consolidated Financial Statements | 6
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 35
| Item 4. | Controls and Procedures | 38
PART II. OTHER INFORMATION |
| Item 1. | Legal Proceedings | 39
| Item 1A. | Risk Factors | 39
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 39
| Item 3. | Defaults Upon Senior Securities | 40
| Item 4. | Mine Safety Disclosures | 40
| Item 5. | Other Information | 40
| Item 6. | Exhibits | 41
SIGNATURES | 42

i

DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
($s in thousands except per share data)

| September 30, 2023 |  | December 31, 2022
ASSETS | (unaudited) |  |
Cash and cash equivalents | $ | 271,168 |  |  | $ | 332,035 |
Cash collateral posted to counterparties | 145,268 |  |  | 117,842 |
Mortgage-backed securities (including pledged of $5,279,554 and $2,810,957, respectively), at fair value | 5,583,758 |  |  | 3,112,705 |
Due from counterparties | — |  |  | 10,348 |
Derivative assets | 4,594 |  |  | 7,102 |
Accrued interest receivable | 26,756 |  |  | 15,260 |
Other assets, net | 9,238 |  |  | 9,942 |
Total assets | $ | 6,040,782 |  |  | $ | 3,605,234 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |
Liabilities: |  |  |
Repurchase agreements | $ | 5,002,230 |  |  | $ | 2,644,405 |
Due to counterparties | 152,955 |  |  | 4,159 |
Derivative liabilities | 22,029 |  |  | 22,595 |
Cash collateral posted by counterparties | — |  |  | 435 |
Accrued interest payable | 43,168 |  |  | 16,450 |
Accrued dividends payable | 9,972 |  |  | 9,103 |
Other liabilities | 6,082 |  |  | 6,759 |
Total liabilities | 5,236,436 |  |  | 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; 56,555,574 and 53,637,095 shares issued and outstanding, respectively | 566 |  |  | 536 |
Additional paid-in capital | 1,397,268 |  |  | 1,357,514 |
Accumulated other comprehensive loss | (217,770) |  |  | (181,346) |
Accumulated deficit | (483,561) |  |  | (383,219) |
Total shareholders’ equity | 804,346 |  |  | 901,328 |
Total liabilities and shareholders’ equity | $ | 6,040,782 |  |  | $ | 3,605,234 |

See notes to the consolidated financial statements.
1

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

| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
INTEREST INCOME (EXPENSE) |  |  |  |  |  |  |
Interest income | $ | 63,271 |  |  | $ | 20,404 |  |  | $ | 136,329 |  |  | $ | 56,167 |
Interest expense | (65,533) |  |  | (13,282) |  |  | (141,983) |  |  | (19,292) |
Net interest (expense) income | (2,262) |  |  | 7,122 |  |  | (5,654) |  |  | 36,875 |
OTHER GAINS (LOSSES) |  |  |  |  |  |  |
Realized loss on sales of investments, net | — |  |  | (70,967) |  |  | (74,916) |  |  | (89,517) |
Unrealized loss on investments, net | (179,100) |  |  | (69,197) |  |  | (121,491) |  |  | (245,551) |
Gain on derivative instruments, net | 146,953 |  |  | 96,947 |  |  | 195,698 |  |  | 423,570 |
Total other (losses) gains, net | (32,147) |  |  | (43,217) |  |  | (709) |  |  | 88,502 |
EXPENSES |  |  |  |  |  |  |
Compensation and benefits | (4,572) |  |  | (6,104) |  |  | (11,939) |  |  | (12,972) |
Other general and administrative | (3,269) |  |  | (4,042) |  |  | (10,471) |  |  | (11,484) |
Other operating expenses | (801) |  |  | (433) |  |  | (1,662) |  |  | (1,049) |
Total operating expenses | (8,642) |  |  | (10,579) |  |  | (24,072) |  |  | (25,505) |
Net (loss) income | (43,051) |  |  | (46,674) |  |  | (30,435) |  |  | 99,872 |
Preferred stock dividends | (1,923) |  |  | (1,923) |  |  | (5,770) |  |  | (5,770) |
Net (loss) income to common shareholders | $ | (44,974) |  |  | $ | (48,597) |  |  | $ | (36,205) |  |  | $ | 94,102 |
Other comprehensive income: |  |  |  |  |  |  |
Unrealized loss on available-for-sale investments, net | $ | (41,774) |  |  | $ | (65,133) |  |  | $ | (36,424) |  |  | $ | (217,383) |
Reclassification of realized loss on available-for-sale investments, net | — |  |  | 14,025 |  |  | — |  |  | 14,025 |
Total other comprehensive loss | (41,774) |  |  | (51,108) |  |  | (36,424) |  |  | (203,358) |
Comprehensive loss to common shareholders | $ | (86,748) |  |  | $ | (99,705) |  |  | $ | (72,629) |  |  | $ | (109,256) |
Weighted average common shares-basic | 54,556,853 |  |  | 45,347,852 |  |  | 54,175,367 |  |  | 40,452,740 |
Weighted average common shares-diluted | 54,556,853 |  |  | 45,347,852 |  |  | 54,175,367 |  |  | 40,740,690 |
Net (loss) income per common share-basic | $ | (0.82) |  |  | $ | (1.07) |  |  | $ | (0.67) |  |  | $ | 2.33 |
Net (loss) income per common share-diluted | $ | (0.82) |  |  | $ | (1.07) |  |  | $ | (0.67) |  |  | $ | 2.31 |
Dividends declared per common share | $ | 0.39 |  |  | $ | 0.39 |  |  | $ | 1.17 |  |  | $ | 1.17 |

See notes to the consolidated financial statements.
2

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
($s in thousands)
For the Three Months Ended September 30, 2023 and September 30, 2022

| Preferred Stock |  | Common Stock |  | Additional Paid-in Capital |  | Accumulated Other Comprehensive Loss |  | Accumulated Deficit |  | Total Shareholders’ Equity
| Shares | Amount | Shares | Amount
Balance as of June 30, 2023 | 4,460,000 |  | $ | 107,843 |  |  | 54,204,319 |  | $ | 542 |  |  | $ | 1,365,484 |  |  | $ | (175,996) |  |  | $ | (416,911) |  |  | $ | 880,962 |
Stock issuance | — |  | — |  |  | 2,351,255 |  | 24 |  |  | 30,340 |  |  | — |  |  | — |  |  | 30,364 |
Restricted stock granted, net of amortization | — |  | — |  |  | — |  | — |  |  | 285 |  |  | — |  |  | — |  |  | 285 |
Other share-based compensation, net of amortization | — |  | — |  |  | — |  | — |  |  | 1,175 |  |  | — |  |  | — |  |  | 1,175 |
Stock issuance costs | — |  | — |  |  | — |  | — |  |  | (16) |  |  | — |  |  | — |  |  | (16) |
Net loss | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (43,051) |  |  | (43,051) |
Dividends on preferred stock | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (1,923) |  |  | (1,923) |
Dividends on common stock | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (21,676) |  |  | (21,676) |
Other comprehensive loss | — |  | — |  |  | — |  | — |  |  | — |  |  | (41,774) |  |  | — |  |  | (41,774) |
Balance as of September 30, 2023 | 4,460,000 |  | $ | 107,843 |  |  | 56,555,574 |  | $ | 566 |  |  | $ | 1,397,268 |  |  | $ | (217,770) |  |  | $ | (483,561) |  |  | $ | 804,346 |
Balance as of June 30, 2022 | 4,460,000 |  | $ | 107,843 |  |  | 43,517,234 |  | $ | 435 |  |  | $ | 1,218,298 |  |  | $ | (145,521) |  |  | $ | (338,689) |  |  | $ | 842,366 |
Stock issuance | — |  | — |  |  | 2,786,877 |  | 28 |  |  | 45,011 |  |  | — |  |  | — |  |  | 45,039 |
Restricted stock granted, net of amortization | — |  | — |  |  | — |  | — |  |  | 604 |  |  | — |  |  | — |  |  | 604 |
Other share-based compensation, net of amortization | — |  | — |  |  | 99,297 |  | 1 |  |  | 1,554 |  |  | — |  |  | — |  |  | 1,555 |
Adjustments for tax withholding on share-based compensation | — |  | — |  |  | (53,278) |  | (1) |  |  | (620) |  |  | — |  |  | — |  |  | (621) |
Stock issuance costs | — |  | — |  |  | — |  | — |  |  | (16) |  |  | — |  |  | — |  |  | (16) |
Net loss | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (46,674) |  |  | (46,674) |
Dividends on preferred stock | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (1,923) |  |  | (1,923) |
Dividends on common stock | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (17,955) |  |  | (17,955) |
Other comprehensive loss | — |  | — |  |  | — |  | — |  |  | — |  |  | (51,108) |  |  | — |  |  | (51,108) |
Balance as of September 30, 2022 | 4,460,000 |  | $ | 107,843 |  |  | 46,350,130 |  | $ | 463 |  |  | $ | 1,264,831 |  |  | $ | (196,629) |  |  | $ | (405,241) |  |  | $ | 771,267 |

3

For the Nine Months Ended September 30, 2023 and September 30, 2022

| Preferred Stock |  | Common Stock |  | Additional Paid-in Capital |  | Accumulated Other Comprehensive Loss |  | Accumulated Deficit |  | Total Shareholders’ Equity
| Shares | Amount | Shares | Amount
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 issuance | — |  | — |  |  | 2,847,129 |  | 28 |  |  | 36,648 |  |  | — |  |  | — |  |  | 36,676 |
Restricted stock granted, net of amortization | — |  | — |  |  | 74,017 |  | 1 |  |  | 940 |  |  | — |  |  | — |  |  | 941 |
Other share-based compensation, net of amortization | — |  | — |  |  | 33,213 |  | 1 |  |  | 2,659 |  |  | — |  |  | — |  |  | 2,660 |
Adjustments for tax withholding on share-based compensation | — |  | — |  |  | (35,880) |  | — |  |  | (446) |  |  | — |  |  | — |  |  | (446) |
Stock issuance costs | — |  | — |  |  | — |  | — |  |  | (47) |  |  | — |  |  | — |  |  | (47) |
Net loss | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (30,435) |  |  | (30,435) |
Dividends on preferred stock | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (5,770) |  |  | (5,770) |
Dividends on common stock | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (64,137) |  |  | (64,137) |
Other comprehensive loss | — |  | — |  |  | — |  | — |  |  | — |  |  | (36,424) |  |  | — |  |  | (36,424) |
Balance as of September 30, 2023 | 4,460,000 |  | $ | 107,843 |  |  | 56,555,574 |  | $ | 566 |  |  | $ | 1,397,268 |  |  | $ | (217,770) |  |  | $ | (483,561) |  |  | $ | 804,346 |
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 | — |  | — |  |  | 9,593,650 |  | 96 |  |  | 154,387 |  |  | — |  |  | — |  |  | 154,483 |
Restricted stock granted, net of amortization | — |  | — |  |  | 71,216 |  | — |  |  | 1,495 |  |  | — |  |  | — |  |  | 1,495 |
Other share-based compensation, net of amortization | — |  | — |  |  | 118,390 |  | 1 |  |  | 2,550 |  |  | — |  |  | — |  |  | 2,551 |
Adjustments for tax withholding on share-based compensation | — |  | — |  |  | (98,931) |  | (1) |  |  | (1,345) |  |  | — |  |  | — |  |  | (1,346) |
Stock issuance costs | — |  | — |  |  | — |  | — |  |  | (48) |  |  | — |  |  | — |  |  | (48) |
Net income | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | 99,872 |  |  | 99,872 |
Dividends on preferred stock | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (5,770) |  |  | (5,770) |
Dividends on common stock | — |  | — |  |  | — |  | — |  |  | — |  |  | — |  |  | (47,891) |  |  | (47,891) |
Other comprehensive loss | — |  | — |  |  | — |  | — |  |  | — |  |  | (203,358) |  |  | — |  |  | (203,358) |
Balance as of September 30, 2022 | 4,460,000 |  | $ | 107,843 |  |  | 46,350,130 |  | $ | 463 |  |  | $ | 1,264,831 |  |  | $ | (196,629) |  |  | $ | (405,241) |  |  | $ | 771,267 |

See notes to the consolidated financial statements.
4

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
($s in thousands)

| Nine Months Ended
| September 30,
| 2023 |  | 2022
Operating activities: |  |  |
Net (loss) income | $ | (30,435) |  |  | $ | 99,872 |
Adjustments to reconcile net (loss) income to cash provided by operating activities: |  |  |
Realized loss on sale of investments, net | 74,916 |  |  | 89,517 |
Unrealized loss on investments, net | 121,491 |  |  | 245,551 |
Gain on derivative instruments, net | (195,698) |  |  | (423,570) |
Amortization of investment premiums, net | 58,102 |  |  | 77,403 |
Other amortization and depreciation, net | 1,739 |  |  | 1,709 |
Share-based compensation expense | 3,600 |  |  | 4,031 |
Increase in accrued interest receivable | (11,496) |  |  | (1,906) |
Increase in accrued interest payable | 26,718 |  |  | 3,544 |
Change in other assets and liabilities, net | (3,308) |  |  | 127 |
Net cash provided by operating activities | 45,629 |  |  | 96,278 |
Investing activities: |  |  |
Purchases of investments | (3,208,774) |  |  | (1,537,663) |
Principal payments received on trading securities | 70,155 |  |  | 87,136 |
Principal payments received on available-for-sale investments | 152,339 |  |  | 195,855 |
Proceeds from sales of trading securities | 348,091 |  |  | 327,700 |
Principal payments received on mortgage loans held for investment | 701 |  |  | 1,163 |
Net receipts on derivatives, including terminations | 209,209 |  |  | 656,172 |
Decrease (increase) in cash collateral posted by counterparties | 24,192 |  |  | (1,834) |
Net cash used in investing activities | (2,404,087) |  |  | (271,471) |
Financing activities: |  |  |
Borrowings under repurchase agreements | 16,345,414 |  |  | 12,735,123 |
Repayments of repurchase agreement borrowings | (13,987,589) |  |  | (12,575,770) |
Proceeds from issuance of common stock | 36,676 |  |  | 154,483 |
Payments related to tax withholding for share-based compensation | (446) |  |  | (1,346) |
Dividends paid | (69,038) |  |  | (52,051) |
Net cash provided by financing activities | 2,325,017 |  |  | 260,439 |
Net (decrease) increase in cash including cash posted to counterparties | (33,441) |  |  | 85,246 |
Cash including cash posted to counterparties at beginning of period | 449,877 |  |  | 421,307 |
Cash including cash posted to counterparties at end of period | $ | 416,436 |  |  | $ | 506,553 |
Supplemental Disclosure of Cash Activity: |  |  |
Cash paid for interest | $ | 115,266 |  |  | $ | 15,748 |

See notes to the 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. (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 Agency 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 September 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 CMBS interest-only (“CMBS IO”). Non-Agency MBS do not have a GSE guaranty of principal or interest payments.
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company and its subsidiaries (together, “Dynex” or, as appropriate, the “Company”) have been prepared in accordance with U.S. generally accepted accounting 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 September 30, 2023 are not necessarily indicative of the results that may be expected for any other interim periods or for the entire year ending December 31, 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, 2022 (the “2022 Form 10-K”) filed with the SEC.
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, 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 September 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”) 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 asset, 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 property, and the Company must distribute at least 90% of its annual REIT taxable income to shareholders. The Company’s income will generally not be subject to federal income tax to the extent 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 and 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 currently has unvested restricted stock, service-based restricted stock units (“RSUs”) and performance-based stock units (“PSUs”) issued and outstanding. Restricted stock awards are considered participating securities and therefore are included in the computation of basic net income per common share using the two-class 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, restrictions on transfer expire on each share of restricted stock, RSU, and PSU, and each such share or unit becomes one unrestricted share of common stock and is included in the computation of basic net income per common share.
Because the Company’s 6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”) is redeemable at the Company’s option for cash only and convertible 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 are excluded from the calculation of diluted net income per common share for the periods presented.
Cash and Cash Equivalents
Cash includes unrestricted demand deposits at highly rated financial institutions and highly liquid investments with original maturities of three months or less. The Company’s cash balances fluctuate throughout the year and may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits from time to time. Although the Company bears 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 margin requirements related to the Company’s financing and derivative 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 counterparties”, and if the amount received from a counterparty exceeds the amount pledged to a counterparty, the net
7

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)
amount is recorded as a liability within “cash collateral posted by counterparties” on the Company’s consolidated balance sheets.
The following table provides a reconciliation of “cash” and “cash posted to counterparties” reported on the Company's consolidated balance sheet as of September 30, 2023, that sum to the total of the same such amounts shown on the Company’s consolidated statement of cash flows for the nine months ended September 30, 2023:

| September 30, 2023
Cash and cash equivalents | $ | 271,168 |
Cash collateral posted to counterparties | 145,268 |
Total cash including cash posted to counterparties shown on consolidated statement of cash flows | $ | 416,436 |

Mortgage-Backed Securities
The Company’s MBS are recorded at fair value on the Company’s consolidated balance sheet. Changes in fair 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”) as an unrealized gain (loss) until the security is sold or matures. Effective January 1, 2021, the Company elected 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 the security is sold or matures. Upon the sale of an MBS, any unrealized gain or loss within OCI or net income is reclassified to “realized gain (loss) on sale of investments, net” within net income using the specific identification method.
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 IO securities) and the contractual terms. Premiums or discounts associated with the purchase of Agency MBS as well as any non-Agency MBS are amortized or accreted into interest income over the projected life of such securities using the effective interest method, and adjustments to premium amortization and discount accretion are made for actual cash payments. The Company’s projections of future cash payments are based on input 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.
Determination of MBS Fair Value. The Company estimates the fair value of the majority of its MBS based upon prices obtained from pricing services and broker quotes. The remainder of the Company’s MBS are valued by discounting the estimated future cash flows derived from cash flow models that utilize information such as the security’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. Please refer to Note 6 for further discussion of MBS fair value measurements.
Allowance for Credit Losses. On at least a quarterly basis, the Company evaluates any MBS designated as AFS with a fair value less than its amortized cost for credit losses. If the difference between the present value of cash flows expected to be collected on the MBS is less than its amortized cost, the difference is recorded as an allowance for credit loss through 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 in the period in which they occur. Because the majority of the 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 its MBS recorded on its consolidated balance sheet.
8

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)
Repurchase Agreements
The Company’s repurchase agreements are used to finance its purchases of MBS and are accounted for as secured borrowings. The Company pledges its securities as collateral to secure a loan, which is equal to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged 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.
Derivative Instruments
Changes in the fair value of derivative instruments, including gains and losses realized upon termination, maturity, or settlement, are recorded in “gain (loss) on derivative instruments, net” on the Company’s consolidated statements of comprehensive income (loss). Cash receipts and payments related to derivative instruments are classified in the investing activities section of the consolidated statements of cash flows in accordance with the underlying nature or purpose of the derivative transactions.
The Company’s short positions in U.S. Treasury futures contracts are valued 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 account. 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 contractual price of the futures 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 future and are valued based on exchange pricing. The Company records the premium paid for the option contract as a derivative asset on its consolidated balance sheet and adjusts the 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 underlying 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 predetermined notional amount with a stated term and pay and receive rates in the future. The accounting for swaptions is similar to options on U.S. Treasury futures.
A TBA security is a forward contract (“TBA contract”) for the purchase (“long position”) or sale (“short position”) of a non-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 settlement date. The Company accounts for long and short positions in TBAs as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in physical delivery of the underlying Agency RMBS or that the individual TBA transaction will settle in the shortest time period possible.
Please refer to Note 5 for additional information regarding the Company’s derivative instruments as well as Note 6 for information on how the fair value of these instruments is calculated.
9

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)
Share-Based Compensation
The Company’s 2020 Stock and Incentive Plan (the “2020 Plan”) reserves for issuance up to 2,300,000 common shares for eligible employees, non-employee directors, consultants, and advisors to the Company to be granted in the form of stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, performance-based stock units (“PSUs”), and performance-based cash awards (collectively, “awards”). As of September 30, 2023, 863,259 common shares are available for issuance under the 2020 Plan.
The Company has issued restricted stock and RSUs, which are treated as equity awards and recorded at their fair value using the closing stock price on the grant date. Compensation expense is generally recognized over a service period specified within each award with a corresponding credit to shareholders’ equity using the straight-line method until the vesting date.
The Company also has PSUs issued and outstanding which contain Company performance-based and market performance-based conditions. PSUs subject to Company performance-based conditions are initially recognized as equity at their fair value which is measured 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 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 award 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 a straight-line basis over the vesting period even if the market performance-based conditions are not achieved.
The Company does not estimate 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 pending lawsuits, claims, or other contingencies as of September 30, 2023 or December 31, 2022.
Recently Issued Accounting Pronouncements
The Company evaluates Accounting Standards Updates issued by the Financial Accounting Standards Board 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 during the nine months ended September 30, 2023, that are expected to have a material impact on the Company’s financial condition or results of operations.
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 stock awards in the calculation of its basic and diluted net income or loss per common share and to Note 7 for information
10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)
regarding the Company’s stock award activity for the periods presented. The following table presents the computations of basic and diluted net income or loss per common share for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Weighted average number of common shares outstanding - basic | 54,556,853 |  | 45,347,852 |  | 54,175,367 |  | 40,452,740
Incremental common shares-unvested RSUs | — |  | — |  | — |  | 86,666
Incremental common shares-unvested PSUs | — |  | — |  | — |  | 201,284
Weighted average number of common shares outstanding - diluted | 54,556,853 |  | 45,347,852 |  | 54,175,367 |  | 40,740,690
Net (loss) income to common shareholders | $ | (44,974) |  |  | $ | (48,597) |  |  | $ | (36,205) |  |  | $ | 94,102 |
Net (loss) income per common share-basic | $ | (0.82) |  |  | $ | (1.07) |  |  | $ | (0.67) |  |  | $ | 2.33 |
Net (loss) income per common share-diluted | $ | (0.82) |  |  | $ | (1.07) |  |  | $ | (0.67) |  |  | $ | 2.31 |

The calculation of diluted net loss per common share for the three and nine months ended September 30, 2023 and the three months ended September 30, 2022 excludes unvested RSUs and PSUs of 441,587, 372,579, and 287,950, respectively, which would have been anti-dilutive for those periods.
NOTE 3 – MORTGAGE-BACKED SECURITIES
The following tables provide details on the Company’s MBS by investment type as of the dates indicated:

| September 30, 2023 |  | December 31, 2022
| Par Value |  | Amortized Cost |  | Fair Value |  | Par Value |  | Amortized Cost |  | Fair Value
Agency RMBS | $ | 5,853,691 |  |  | $ | 5,844,730 |  |  | $ | 5,298,271 |  |  | $ | 3,104,498 |  |  | $ | 3,150,873 |  |  | $ | 2,762,878 |
Agency CMBS | 121,617 |  |  | 122,171 |  |  | 112,396 |  |  | 131,578 |  |  | 132,333 |  |  | 124,690 |
CMBS IO (1) | n/a |  | 184,187 |  |  | 172,987 |  |  | n/a |  | 238,841 |  |  | 224,985 |
Non-Agency other | 159 |  |  | 159 |  |  | 103 |  |  | 209 |  |  | 209 |  |  | 152 |
Total | $ | 5,975,467 |  |  | $ | 6,151,247 |  |  | $ | 5,583,757 |  |  | $ | 3,236,285 |  |  | $ | 3,522,256 |  |  | $ | 3,112,705 |
(1) The notional balance for Agency CMBS IO and non-Agency CMBS IO was $7,814,762 and $4,159,373, respectively, as of September 30, 2023, and $9,711,981 and $6,280,761, respectively, as of December 31, 2022.

| September 30, 2023
| Amortized Cost |  | Gross Unrealized Gain |  | Gross Unrealized Loss |  | Fair Value
MBS measured at fair value through OCI: |  |  |  |  |  |  |
Agency RMBS | $ | 914,900 |  |  | $ | — |  |  | $ | (202,677) |  |  | $ | 712,223 |
Agency CMBS | 106,892 |  |  | — |  |  | (7,791) |  |  | 99,101 |
CMBS IO | 142,314 |  |  | 1,275 |  |  | (8,521) |  |  | 135,068 |
Non-Agency other | 159 |  |  | — |  |  | (56) |  |  | 103 |
Total | $ | 1,164,265 |  |  | $ | 1,275 |  |  | $ | (219,045) |  |  | $ | 946,495 |

11

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

MBS measured at fair value through net income: |  |  |  |  |  |  |
Agency RMBS | $ | 4,929,830 |  |  | $ | — |  |  | $ | (343,782) |  |  | $ | 4,586,048 |
Agency CMBS | 15,279 |  |  | — |  |  | (1,984) |  |  | 13,295 |
CMBS IO | 41,873 |  |  | — |  |  | (3,954) |  |  | 37,919 |
Total | $ | 4,986,982 |  |  | $ | — |  |  | $ | (349,720) |  |  | $ | 4,637,262 |
| December 31, 2022
| Amortized Cost |  | Gross Unrealized Gain |  | Gross Unrealized Loss |  | Fair Value
MBS measured at fair value through OCI: |  |  |  |  |  |  |
Agency RMBS | $ | 977,624 |  |  | $ | — |  |  | $ | (164,949) |  |  | $ | 812,675 |
Agency CMBS | 117,031 |  |  | — |  |  | (6,474) |  |  | 110,557 |
CMBS IO | 193,405 |  |  | 507 |  |  | (10,373) |  |  | 183,539 |
Non-Agency other | 209 |  |  | — |  |  | (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 CMBS | 15,302 |  |  | — |  |  | (1,169) |  |  | 14,133 |
CMBS IO | 45,436 |  |  | — |  |  | (3,990) |  |  | 41,446 |
Total | $ | 2,233,987 |  |  | $ | — |  |  | $ | (228,205) |  |  | $ | 2,005,782 |

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 unrealized gains and losses on investments reported within net income (loss) on the Company’s consolidated statements of comprehensive income (loss) for the periods indicated:

| Three Months Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Agency RMBS | $ | (177,768) |  |  | $ | (65,723) |  |  | $ | (120,735) |  |  | $ | (240,322) |
Agency CMBS | (777) |  |  | (1,432) |  |  | (815) |  |  | (1,432) |
CMBS IO | (591) |  |  | (2,033) |  |  | 36 |  |  | (3,874) |
Other assets | 36 |  |  | (9) |  |  | 23 |  |  | 77 |
Total unrealized loss on investments, net | $ | (179,100) |  |  | $ | (69,197) |  |  | $ | (121,491) |  |  | $ | (245,551) |

12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)
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 Ended |  | Nine Months Ended
| September 30, |  | September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Realized losses on sales of MBS - AFS | $ | — |  |  | $ | (14,025) |  |  | $ | — |  |  | $ | (14,025) |
Realized losses on sales of MBS - FVO | — |  |  | (56,942) |  |  | (74,916) |  |  | (75,492) |
Total realized loss on sales of investments, net | $ | — |  |  | $ | (70,967) |  |  | $ | (74,916) |  |  | $ | (89,517) |

The following table presents certain information for MBS designated as AFS that were in an unrealized loss position as of the dates indicated:

| September 30, 2023 |  | December 31, 2022
| 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 | $ | 5,316 |  |  | $ | 69 |  |  | 4 |  | $ | 346,064 |  |  | $ | 22,808 |  |  | 79
Non-Agency MBS | 2,487 |  |  | 59 |  |  | 8 |  | 42,162 |  |  | 1,787 |  |  | 56
Continuous unrealized loss position for 12 months or longer: |  |  |  |  |  |  |  |  |  |  |
Agency MBS | $ | 903,296 |  |  | $ | 217,559 |  |  | 84 |  | $ | 697,514 |  |  | $ | 156,411 |  |  | 17
Non-Agency MBS | 26,615 |  |  | 1,358 |  |  | 45 |  | 12,195 |  |  | 847 |  |  | 22

The unrealized losses on the Company’s MBS designated as AFS were the result of rising interests rates and declines in market prices and were not credit related; therefore, the Company did not have any allowance for credit losses as of September 30, 2023 or December 31, 2022. Although the unrealized losses are not credit related, the Company assesses its ability and intent to hold any MBS with an unrealized loss until the recovery in its 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. In addition, for its non-Agency MBS, the Company reviews the credit ratings, the credit characteristics of the mortgage loans collateralizing these securities, and the estimated future cash flows including projected collateral losses.
13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)
NOTE 4 – REPURCHASE AGREEMENTS
The Company’s repurchase agreements outstanding as of September 30, 2023 and December 31, 2022 are summarized in the following tables:

|  | September 30, 2023 |  | December 31, 2022
Collateral Type |  | Balance |  | Weighted Average Rate |  | Fair Value of Collateral Pledged |  | Balance |  | Weighted Average Rate |  | Fair Value of Collateral Pledged
Agency RMBS |  | $ | 4,743,159 |  |  | 5.46 | % |  | $ | 5,003,785 |  |  | $ | 2,349,181 |  |  | 4.15 | % |  | $ | 2,496,781 |
Agency CMBS |  | 107,663 |  |  | 5.41 | % |  | 110,557 |  |  | 108,580 |  |  | 3.76 | % |  | 108,146 |
Agency CMBS IO |  | 121,956 |  |  | 5.82 | % |  | 132,580 |  |  | 137,569 |  |  | 4.62 | % |  | 150,517 |
Non-Agency CMBS IO |  | 29,452 |  |  | 6.18 | % |  | 32,632 |  |  | 49,075 |  |  | 5.26 | % |  | 55,513 |
Total repurchase agreements |  | $ | 5,002,230 |  |  | 5.47 | % |  | $ | 5,279,554 |  |  | $ | 2,644,405 |  |  | 4.18 | % |  | $ | 2,810,957 |

The repurchase facilities available to the Company are uncommitted with no guarantee of renewal. The Company had borrowings outstanding under 27 different repurchase agreements as of September 30, 2023, and its equity at risk did not exceed 10% with any counterparty as of that date. The Company also had $152,955 and $4,159 payable to counterparties for transactions pending settlement as of September 30, 2023 and December 31, 2022, respectively.
The following table provides information on the remaining term to maturity and original term to maturity for the Company’s repurchase agreements as of the dates indicated:

|  | September 30, 2023 |  | December 31, 2022
Remaining Term to Maturity |  | Balance |  | Weighted Average Rate |  | WAVG Original Term to Maturity |  | Balance |  | Weighted Average Rate |  | WAVG Original Term to Maturity
Less than 30 days |  | $ | 2,096,037 |  |  | 5.46 | % |  | 77 |  |  | $ | 858,161 |  |  | 4.44 | % |  | 42 |
30 to 90 days |  | 2,374,991 |  |  | 5.44 | % |  | 102 |  |  | 1,786,244 |  |  | 4.06 | % |  | 104 |
91 to 180 days |  | 531,202 |  |  | 5.64 | % |  | 113 |  |  | — |  |  | — | % |  | — |
Total |  | $ | 5,002,230 |  |  | 5.47 | % |  | 93 |  |  | $ | 2,644,405 |  |  | 4.18 | % |  | 84 |

The increase in the Company’s weighted average rate for its borrowings as of September 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 $43,168 as of September 30, 2023 compared to $16,450 as of December 31, 2022.
The Company’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, maximum declines in net worth in a given period, and maximum leverage requirements as well as maintaining the Company’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 September 30, 2023.
The Company's repurchase agreements 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 repurchase agreements to these arrangements on a gross basis. The
14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)
following table presents information regarding the Company's repurchase agreements as if the Company had presented them on a net basis as of September 30, 2023 and December 31, 2022:

| 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, 2023: |  |  |  |  |  |  |  |  |  |  |
Repurchase agreements | $ | 5,002,230 |  |  | $ | — |  |  | $ | 5,002,230 |  |  | $ | (5,002,230) |  |  | $ | — |  |  | $ | — |
December 31, 2022: |  |  |  |  |  |  |  |  |  |  |
Repurchase agreements | $ | 2,644,405 |  |  | $ | — |  |  | $ | 2,644,405 |  |  | $ | (2,644,405) |  |  | $ | — |  |  | $ | — |

(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 5 for information related to the Company’s derivatives, which are also subject to underlying agreements with master netting or similar arrangements.
NOTE 5 – DERIVATIVES
Types 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 swaptions, and call options on U.S. Treasury futures to mitigate the impact of changing interest rates on its repurchase agreement financing costs and the fair value of its investments.
TBA Transactions. The Company purchases 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 by executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase (or sale) of a non-specified Agency RMBS by 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 later settlement date. TBA securities purchased (or sold) for a forward settlement date are generally 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 net 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 physical delivery of the underlying Agency RMBS, or that the individual TBA transaction will settle in the shortest period possible.
The table below provides detail of the Company’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 Ended |  | Nine Months Ended
|  | September 30, |  | September 30,
Type of Derivative Instrument |  | 2023 |  | 2022 |  | 2023 |  | 2022
U.S. Treasury futures |  | $ | 210,227 |  |  | $ | 281,827 |  |  | $ | 275,073 |  |  | $ | 721,236 |
Interest rate swaptions |  | — |  |  | (4,202) |  |  | — |  |  | 47,738 |
Options on U.S. Treasury futures |  | 6,523 |  |  | 630 |  |  | 1,055 |  |  | 630 |
TBA securities-long positions |  | (69,797) |  |  | (181,308) |  |  | (80,430) |  |  | (346,034) |
Gain on derivative instruments, net |  | $ | 146,953 |  |  | $ | 96,947 |  |  | $ | 195,698 |  |  | $ | 423,570 |

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

Type of Derivative Instrument |  | Balance Sheet Location |  | Purpose |  | September 30, 2023 |  | December 31, 2022
Options on U.S. Treasury futures |  | Derivative assets |  | Economic hedging |  | $ | 3,946 |  |  | $ | 5,859 |
TBA securities |  | Derivative assets |  | Investing |  | 648 |  |  | 1,243 |
Total derivatives assets |  |  |  |  |  | $ | 4,594 |  |  | $ | 7,102 |
TBA securities |  | Derivative liabilities |  | Investing |  | $ | 22,029 |  |  | $ | 22,595 |
Total derivatives liabilities |  |  |  |  |  | $ | 22,029 |  |  | $ | 22,595 |

The Company held short positions in U.S. Treasury futures with a fair value of $106,172 as of September 30, 2023, but because these instruments are considered legally settled on a daily basis, the carrying value on the Company’s consolidated balance sheet nets to $0. As of September 30, 2023, the amount of cash posted by the Company to cover required initial margin for its U.S. Treasury futures was $110,997, which is recorded within “cash collateral posted to counterparties.” The Company had a margin deficit of $18,050 as of September 30, 2023, which is recorded within “due to counterparties.”
The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:

|  | September 30, 2023 |  | December 31, 2022
Implied market value (1) |  | $ | 1,569,011 |  |  | $ | 2,751,568 |
Implied cost basis (2) |  | 1,590,392 |  |  | 2,772,920 |
Net carrying value (3) |  | $ | (21,381) |  |  | $ | (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)
Volume of Activity
The table below summarizes changes in the Company’s derivative instruments for the nine months ended September 30, 2023:

Type of Derivative Instrument |  | Beginning Notional Amount-Long (Short) |  | Additions |  | Settlements, Terminations, or Pair-Offs |  | Ending Notional Amount-Long (Short)
U.S. Treasury futures |  | $ | (4,920,000) |  |  | $ | (16,040,000) |  |  | $ | 15,460,000 |  |  | $ | (5,500,000) |
Options on U.S. Treasury futures |  | 250,000 |  |  | 600,000 |  |  | (700,000) |  |  | 150,000 |
TBA securities |  | 2,869,000 |  |  | 24,861,000 |  |  | (26,060,000) |  |  | 1,670,000 |

Offsetting
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 September 30, 2023 and December 31, 2022:

| 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, 2023 |  |  |  |  |  |  |  |  |  |  |
Options on U.S. Treasury futures | $ | 3,946 |  |  | $ | — |  |  | $ | 3,946 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,946 |
TBA securities | 648 |  |  | — |  |  | 648 |  |  | (648) |  |  | — |  |  | — |
Derivative assets | $ | 4,594 |  |  | $ | — |  |  | $ | 4,594 |  |  | $ | (648) |  |  | $ | — |  |  | $ | 3,946 |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
Options on U.S. Treasury futures | $ | 5,859 |  |  | $ | — |  |  | $ | 5,859 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,859 |
TBA securities | 1,243 |  |  | — |  |  | 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 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, 2023 |  |  |  |  |  |  |  |  |  |  |
TBA securities | $ | 22,029 |  |  | $ | — |  |  | $ | 22,029 |  |  | $ | (648) |  |  | $ | (21,299) |  |  | $ | 82 |
Derivative liabilities | $ | 22,029 |  |  | $ | — |  |  | $ | 22,029 |  |  | $ | (648) |  |  | $ | (21,299) |  |  | $ | 82 |
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 |

(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 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 is shown parenthetically, and the total cash pledged or received as collateral which is disclosed in “cash collateral posted to/by counterparties.”
NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair 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. Fair value is based on the assumptions market participants would use when pricing an asset or liability and also considers all aspects of nonperformance risk, including the entity’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 following table presents the Company’s financial instruments that are measured at fair value on the 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, 2023 |  | December 31, 2022
| Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
MBS | $ | 5,583,758 |  |  | $ | — |  |  | $ | 5,583,655 |  |  | $ | 103 |  |  | $ | 3,112,705 |  |  | $ | — |  |  | $ | 3,112,553 |  |  | $ | 152 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Options on U.S. Treasury futures | 3,946 |  |  | 3,946 |  |  | — |  |  | — |  |  | 5,859 |  |  | 5,859 |  |  | — |  |  | — |
TBA securities-long position | 648 |  |  | — |  |  | 648 |  |  | — |  |  | 1,243 |  |  | — |  |  | 1,243 |  |  | — |
Total assets carried at fair value | $ | 5,588,352 |  |  | $ | 3,946 |  |  | $ | 5,584,303 |  |  | $ | 103 |  |  | $ | 3,119,807 |  |  | $ | 5,859 |  |  | $ | 3,113,796 |  |  | $ | 152 |
Liabilities carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
TBA securities-long position | $ | 22,029 |  |  | $ | — |  |  | $ | 22,029 |  |  | $ | — |  |  | $ | 22,595 |  |  | $ | — |  |  | $ | 22,595 |  |  | $ | — |
Total liabilities carried at fair value | $ | 22,029 |  |  | $ | — |  |  | $ | 22,029 |  |  | $ | — |  |  | $ | 22,595 |  |  | $ | — |  |  | $ | 22,595 |  |  | $ | — |

The fair value measurements for most of the Company's MBS are considered Level 2 because there are substantially similar securities actively trading or for which there has been recent trading activity in their respective markets and are based on prices received from pricing services and quotes from brokers. In valuing a security, the 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 such as discounted cash flow modeling. The Company reviews the prices it receives from its pricing sources as well as the assumptions and inputs utilized by its pricing sources for reasonableness. Examples of the observable inputs and assumptions include market interest rates, credit spreads, and projected prepayment speeds, among other things.
Options on U.S. Treasury futures are valued based on closing exchange prices on these contracts and are classified accordingly as Level 1 measurements. The fair value of TBA securities is estimated using methods similar to those used to fair value the Company’s Level 2 MBS.
NOTE 7 – SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
Preferred Stock. The Company’s Board of Directors has designated 6,600,000 shares of the Company’s preferred stock for issuance as Series C Preferred Stock, of which the Company has 4,460,000 of such shares outstanding as of September 30, 2023. The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and will remain outstanding indefinitely unless redeemed, repurchased or converted into common stock pursuant to the terms of the Series C Preferred Stock. Except under certain limited circumstances described in Article IIIC of the Company’s Restated Articles of Incorporation, the Company may not redeem the Series C Preferred Stock prior to April 15, 2025. On or after that date, the Series C Preferred Stock may be redeemed 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’s consolidated balance sheet.
The Series C Preferred Stock pays a cumulative cash dividend equivalent to 6.900% of the $25.00 liquidation preference per share each year until April 15, 2025. The terms of the Series C Preferred Stock state that upon April 15, 2025 and thereafter, the Company will pay cumulative cash dividends at a percentage of the $25.00 liquidation value per share 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 dividend of $0.43125 per share of Series C Preferred Stock on October 16, 2023 to shareholders of record as of October 1, 2023.
Common Stock. During the nine months ended September 30, 2023, the Company issued 2,847,129 shares of its common stock through its at-the-market (“ATM”) program at an aggregate value of $36,676, 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 on 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 the Series C Preferred Stock, along with other factors that the Board of Directors may deem relevant from time to time.
Share-Based Compensation. The following tables present a rollforward of share-based awards for the periods indicated:

|  | Nine Months Ended
|  | September 30,
|  | 2023 |  | 2022
Type of Award |  | Shares |  | Weighted Average Grant Date Fair Value Per Share |  | Shares |  | Weighted Average Grant Date Fair Value Per Share
Restricted stock: |  |  |  |  |  |  |  |
Awards outstanding, beginning of period |  | 133,951 |  |  | $ | 15.22 |  |  | 197,804 |  |  | $ | 15.27 |
Granted |  | 74,017 |  |  | 11.27 |  |  | 71,216 |  |  | 15.60 |
Vested |  | (36,573) |  |  | 16.75 |  |  | (135,069) |  |  | 15.49 |
Awards outstanding, end of period |  | 171,395 |  |  | $ | 13.19 |  |  | 133,951 |  |  | $ | 15.22 |
RSUs: |  |  |  |  |  |  |  |
Awards outstanding, beginning of period |  | 86,666 |  |  | $ | 16.57 |  |  | 55,019 |  |  | $ | 19.40 |
Granted |  | 341,044 |  |  | 12.55 |  |  | 73,767 |  |  | 15.19 |
Vested |  | (33,213) |  |  | 16.96 |  |  | (42,120) |  |  | 17.85 |
Awards outstanding, end of period |  | 394,497 |  |  | $ | 13.06 |  |  | 86,666 |  |  | $ | 16.57 |
PSUs: |  |  |  |  |  |  |  |
Awards outstanding, beginning of period |  | 201,284 |  |  | $ | 16.60 |  |  | 110,040 |  |  | $ | 19.40 |
Granted |  | 160,277 |  |  | 11.97 |  |  | 147,542 |  |  | 15.19 |
Vested |  | — |  |  | — |  |  | (56,298) |  |  | 17.09 |
Awards outstanding, end of period |  | 361,561 |  |  | $ | 14.55 |  |  | 201,284 |  |  | $ | 16.96 |

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 September 30, 2023, the Company expects 72% of the PSUs outstanding will be settled on their vesting dates. The Company has DERs accrued for RSUs and PSUs of $283 and $713, respectively, as of September 30, 2023 compared to $152 and $354, respectively, as of December 31, 2022, which is included on the Company’s consolidated balance sheet within “accrued dividends payable.”
20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
($s in thousands except per share data)
Total share-based compensation expense recognized by the Company for the three and nine months ended September 30, 2023 was $1,460 and $3,600 compared to $2,158 and $4,031 for the three and nine months ended September 30, 2022. The following table discloses the Company’s remaining compensation expense related to stock awards it has granted as of September 30, 2023, which will be amortized over the period disclosed:

| September 30, 2023
| Remaining Compensation Cost |  | WAVG Period of Recognition
Restricted stock | $ | 838 |  |  | 1.5 years
RSUs | 3,922 |  |  | 2.6 years
PSUs | 1,302 |  |  | 1.7 years
Total | $ | 6,062 |  |  | 2.2 years

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 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 2022 Form 10-K. References herein to “Dynex,” the “Company,” “we,” “us,” and “our” include Dynex Capital, Inc. and its consolidated subsidiaries, unless the context otherwise requires. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition or results of operations, see “Forward-Looking Statements” at the end of this discussion and analysis.
For more information about our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Part I, Item 1 of our 2022 Form 10-K.
EXECUTIVE OVERVIEW
During the third quarter of 2023, the Federal Reserve increased the Federal Funds Target Rate (“Fed Funds rate”) by 25 basis points. This was the fourth 25 basis point increase in 2023, bringing the Fed Funds rate to 5.50%. The increase was in response to continued tight labor markets with historically robust wage growth and still-elevated consumer price inflation above the Federal Reserve’s desired target of 2%. Longer-term bond yields rose in the third quarter in response to the rate hike, the Federal Reserve’s messaging that rates will be higher for longer, the need for the U.S. government to issue debt, and the lack of demand from traditional buyers. The 10-year U.S. Treasury yield showed significant movement, increasing from 4.11% to 4.57% in September alone. Since September 30, 2023, the U.S. Treasury yield has continued to climb. The 30-year U.S. Treasury yield also rose dramatically during the third quarter and, in early October, was more than 100 basis points higher than at June 30, 2023. Market spreads as of September 30, 2023 were also wider relative to June 30, 2023, and remain wide into the beginning of the fourth quarter of 2023.
The charts below show the range of U.S. Treasury rates for the past nine months and information regarding market spreads as of and for the periods indicated:
21

|  | Market Spreads as of: |  | Change in Spreads Third Quarter |  | Change in Spreads YTD
Investment Type: |  | September 30, 2023 |  | June 30, 2023 |  | December 31, 2022 |  |
Agency RMBS: (1) |  |  |  |  |  |  |  |  |  |
2.0% coupon |  | 84 |  | 67 |  | 62 |  | 17 |  | 22
2.5% coupon |  | 88 |  | 72 |  | 68 |  | 16 |  | 20
3.0% coupon |  | 88 |  | 74 |  | 70 |  | 14 |  | 18
3.5% coupon |  | 87 |  | 73 |  | 72 |  | 14 |  | 15
4.0% coupon |  | 87 |  | 73 |  | 62 |  | 14 |  | 25
4.5% coupon |  | 84 |  | 71 |  | 60 |  | 13 |  | 24
5.0% coupon |  | 86 |  | 75 |  | 53 |  | 11 |  | 33
5.5% coupon |  | 87 |  | 76 |  | 50 |  | 11 |  | 37
6.0% coupon |  | 87 |  | 74 |  | 57 |  | 13 |  | 30
Agency DUS (Agency CMBS)(2) |  | 80 |  | 72 |  | 74 |  | 8 |  | 6
Freddie K AAA IO (Agency CMBS IO)(2) |  | 185 |  | 175 |  | 235 |  | 10 |  | (50)
AAA CMBS IO (Non-Agency CMBS IO)(2) |  | 275 |  | 301 |  | 315 |  | (26) |  | (40)

(1)Option adjusted spreads (“OAS”) are based on Company estimates using third-party models and market data. OAS shown for prior periods may differ from previous disclosures because.the Company regularly updates the third-party model used.
(2)Data represents the spread to swap rate on newly issued securities and is sourced from J.P. Morgan.
Summary of Results
For the third quarter of 2023, our total economic loss of $(1.56) per common share was driven by asset losses exceeding hedge gains and dividends declared during the quarter. Our derivative instruments used to hedge interest rate risk (“interest rate hedges”) gained $216.8 million, and we declared $21.7 million in common dividends, but our
22

investments lost $(290.7) million, primarily as a result of the higher interest rates and spread widening discussed previously.
The following table provides details about the changes in our financial position during the three months ended September 30, 2023:

| Net Change in Fair Value |  | Components of Comprehensive Loss |  | Common Book Value Rollforward |  | Per Common Share
Balance as of June 30, 2023 (1) |  |  |  |  | $ | 769,462 |  |  | $ | 14.20 |
Net interest income |  |  | $ | (2,262) |  |  |  |  |
G & A and other operating expenses |  |  | (8,642) |  |  |  |  |
Preferred stock dividends |  |  | (1,923) |  |  |  |  |
Changes in fair value: |  |  |  |  |  |  |
MBS and loans | $ | (220,874) |  |  |  |  |  |  |
TBAs | (69,797) |  |  |  |  |  |  |
U.S. Treasury futures | 210,227 |  |  |  |  |  |  |
Options on U.S. Treasury futures | 6,523 |  |  |  |  |  |  |
Total net change in fair value |  |  | (73,921) |  |  |  |  |
Comprehensive loss to common shareholders |  |  |  |  | (86,748) |  |  | (1.59) |
Capital transactions: |  |  |  |  |  |  |
Net proceeds from stock issuance (2) |  |  |  |  | 31,808 |  |  | 0.03 |
Common dividends declared |  |  |  |  | (21,676) |  |  | (0.39) |
Balance as of September 30, 2023 (1) |  |  |  |  | $ | 692,846 |  |  | $ | 12.25 |

(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 $30.4 million from common stock ATM program and $1.4 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 included 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 nine months of 2023 includes an estimated benefit of approximately $56.8 million, or $1.05 per average common share outstanding, from the amortization of accumulated deferred tax hedge gains, which were estimated to be $830.5 million as of September 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
Thus far, 2023 has been challenging to navigate as quantitative tightening has continued, interest rate volatility remains high, and bank failures, debt ceiling debates and looming government shutdowns have provided a backdrop of uncertainty. Despite these challenges, spread widening provides an appealing investment opportunity for Agency MBS, offering the potential to earn a higher risk premium over time. We seek to maintain flexibility and higher levels of liquidity in preparation for unexpected events while continuing to purchase MBS with attractive yields. 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 complex global macroeconomic and geopolitical conditions. We remain disciplined and prepared to adjust our investment and hedging portfolios as well as leverage levels to suit multiple scenarios.
FINANCIAL CONDITION
Investment Portfolio
Our investment portfolio (including TBAs) as of September 30, 2023 increased 23% (based on amortized cost) compared to December 31, 2022. During the nine months ended September 30, 2023, we have been deploying capital during periods of wider spreads into higher coupon Agency RMBS with higher forward returns relative to the investments held as of December 31, 2022.
The following charts compare the composition of our MBS portfolio including TBA securities as of the dates indicated:
We frequently change the coupon distribution in our Agency RMBS and TBA portfolios in order to minimize losses due to spread volatility. During the nine months ended September 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.
24

The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:

|  | September 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% |  | $ | 721,068 |  |  | $ | 733,479 |  |  | $ | 555,260 |  |  | 36 |  | 6.7 | % |  | 6.69 |  | 5.66 | %
2.5% |  | 619,348 |  |  | 643,747 |  |  | 498,213 |  |  | 37 |  | 6.9 | % |  | 6.53 |  | 5.64 | %
4.0% |  | 361,219 |  |  | 361,837 |  |  | 325,009 |  |  | 31 |  | 6.8 | % |  | 6.04 |  | 5.61 | %
4.5% |  | 1,356,558 |  |  | 1,327,962 |  |  | 1,252,437 |  |  | 12 |  | 5.4 | % |  | 5.95 |  | 5.67 | %
5.0% |  | 1,883,657 |  |  | 1,863,109 |  |  | 1,782,628 |  |  | 6 |  | 4.6 | % |  | 5.46 |  | 5.81 | %
5.5% |  | 911,842 |  |  | 914,596 |  |  | 884,725 |  |  | 5 |  | 3.7 | % |  | 4.92 |  | 5.97 | %
TBA 4.0% |  | 262,000 |  |  | 239,157 |  |  | 233,446 |  |  | n/a |  | n/a |  | 6.89 |  | 5.44 | %
TBA 4.5% |  | 273,000 |  |  | 257,227 |  |  | 250,797 |  |  | n/a |  | n/a |  | 6.22 |  | 5.61 | %
TBA 5.0% |  | 735,000 |  |  | 701,540 |  |  | 693,939 |  |  | n/a |  | n/a |  | 5.33 |  | 5.80 | %
TBA 5.5% |  | 200,000 |  |  | 192,711 |  |  | 193,359 |  |  | n/a |  | n/a |  | 4.65 |  | 6.00 | %
TBA 6.0% |  | 200,000 |  |  | 199,758 |  |  | 197,469 |  |  | n/a |  | n/a |  | 4.08 |  | 6.22 | %
Total |  | $ | 7,523,692 |  |  | $ | 7,435,123 |  |  | $ | 6,867,282 |  |  | 15 |  | 5.1 | % |  | 5.68 |  |  | 5.77 | %

|  | 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 |  |  | 23 |  | 5.2 | % |  | 7.14 |  | 4.53 | %
2.5% |  | 659,181 |  |  | 685,838 |  |  | 566,525 |  |  | 28 |  | 5.9 | % |  | 6.67 |  | 4.59 | %
4.0% |  | 325,726 |  |  | 329,725 |  |  | 309,940 |  |  | 25 |  | 7.2 | % |  | 5.56 |  | 4.75 | %
4.5% |  | 803,043 |  |  | 799,786 |  |  | 782,319 |  |  | 4 |  | 4.4 | % |  | 5.02 |  | 4.89 | %
5.0% |  | 123,204 |  |  | 125,460 |  |  | 121,707 |  |  | 4 |  | 7.2 | % |  | 3.99 |  | 5.19 | %
TBA 4.0% |  | 1,539,000 |  |  | 1,454,263 |  |  | 1,447,286 |  |  | n/a |  | n/a |  | 5.47 |  | 4.80 | %
TBA 4.5% |  | 380,000 |  |  | 371,173 |  |  | 366,759 |  |  | n/a |  | n/a |  | 4.79 |  | 4.99 | %
TBA 5.0% |  | 950,000 |  |  | 947,484 |  |  | 937,523 |  |  | n/a |  | n/a |  | 4.24 |  | 5.20 | %
Total |  | $ | 5,973,498 |  |  | $ | 5,923,794 |  |  | $ | 5,514,446 |  |  | 18 |  | 5.4 | % |  | 5.54 |  |  | 4.83 | %

(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.
25

(6)Duration measures the sensitivity of a security's price to the change in interest rates and represents the percent change in price of a security for a 100-basis point increase in interest rates. We calculate duration using third-party financial models and empirical data. Different models and methodologies can produce different estimates of duration for the same securities.
(7)Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the date indicated and assuming zero volatility.
Less than 5% of our MBS portfolio as of September 30, 2023 is comprised of Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO. Our Agency CMBS and Agency CMBS IO are backed by loans collateralized by multifamily properties, which have performed well for the last decade versus other sectors of the commercial real estate market. Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation. According to Freddie Mac, 99.8% of the loans in K-deals are current as of June 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:

| September 30, 2023
| Amortized Cost |  | Fair Value |  | WAVG Life Remaining (1) |  | WAVG Market Yield (3)
Agency CMBS | $ | 122,171 |  |  | $ | 112,396 |  |  | 4.3 |  | 5.40 | %
Agency CMBS IO | 150,574 |  |  | 139,781 |  |  | 6.0 |  | 5.30 | %
Non-Agency CMBS IO | 33,614 |  |  | 33,206 |  |  | 1.6 |  | 11.18 | %
Total | $ | 306,359 |  |  | $ | 285,383 |  |  |  |  |
| December 31, 2022
| Amortized Cost |  | Fair Value |  | WAVG Life Remaining (1) |  | WAVG Market Yield (3)
Agency CMBS | $ | 132,333 |  |  | $ | 124,690 |  |  | 4.8 |  | 4.50 | %
Agency CMBS IO | 179,734 |  |  | 168,147 |  |  | 6.3 |  | 5.32 | %
Non-Agency CMBS IO | 59,107 |  |  | 56,839 |  |  | 2.1 |  | 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.
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Derivative Assets and Liabilities
The table below discloses details on the Company's interest rate hedges held as of September 30, 2023, which all have a contractual maturity date in December 2023, compared to hedging portfolio held as of December 31, 2022:

Notional Amount Long (Short) |  | September 30, 2023 |  | December 31, 2022
($s in thousands) |  |  |  |
30-year U.S. Treasury futures |  | $ | (420,000) |  |  | $ | — |
10-year U.S. Treasury futures |  | (4,180,000) |  |  | (4,180,000) |
5-year U.S. Treasury futures |  | (900,000) |  |  | (740,000) |
Put options on 10-year U.S. Treasury futures |  | 150,000 |  |  | 250,000 |

Please refer to Note 5 of the Notes to the Consolidated Financial Statements for details on our interest rate hedging instruments as well as “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2023 Compared to the Three Months Ended June 30, 2023
The following table summarizes the results of operations for the periods indicated:

| Three Months Ended
$s in thousands | September 30, 2023 |  | June 30, 2023
Net interest expense | $ | (2,262) |  |  | $ | (2,930) |
Realized loss on sales of investments, net | — |  |  | (51,601) |
Unrealized (loss) gain on investments, net | (179,100) |  |  | 488 |
Gain (loss) on derivative instruments, net | 146,953 |  |  | 116,012 |
General and administrative expenses | (7,841) |  |  | (7,197) |
Other operating expenses, net | (801) |  |  | (435) |
Preferred stock dividends | (1,923) |  |  | (1,923) |
Net (loss) income to common shareholders | (44,974) |  |  | 52,414 |
Other comprehensive loss | (41,774) |  |  | (9,443) |
Comprehensive (loss) income to common shareholders | $ | (86,748) |  |  | $ | 42,971 |

Net Interest Income (Expense)
Interest income and effective yields on our investments increased for the three months ended September 30, 2023 relative to the three months ended June 30, 2023 due to our recent purchases of higher coupon Agency RMBS. Interest expense exceeded interest income for the three months ended September 30, 2023 and for the three months ended June 30, 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. The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:
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| Three Months Ended
| September 30, 2023 |  | June 30, 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 | $ | 55,654 |  |  | $ | 5,393,642 |  |  | 4.13 | % |  | $ | 34,699 |  |  | $ | 3,931,617 |  |  | 3.53 | %
Agency CMBS | 946 |  |  | 122,315 |  |  | 3.03 | % |  | 960 |  |  | 123,843 |  |  | 3.06 | %
CMBS IO (5) | 2,258 |  |  | 192,797 |  |  | 4.66 | % |  | 2,241 |  |  | 211,398 |  |  | 4.41 | %
Non-Agency MBS and other investments | 29 |  |  | 2,272 |  |  | 4.91 | % |  | 32 |  |  | 2,479 |  |  | 4.93 | %
MBS and loans | $ | 58,887 |  |  | $ | 5,711,026 |  |  | 4.12 | % |  | $ | 37,932 |  |  | $ | 4,269,337 |  |  | 3.56 | %
Cash equivalents | 4,384 |  |  |  |  |  |  | 4,280 |  |  |  |  |
Total interest income | $ | 63,271 |  |  |  |  |  |  | $ | 42,212 |  |  |  |  |
Repurchase agreement financing | (65,533) |  |  | 4,773,435 |  |  | (5.37) | % |  | (45,142) |  |  | 3,447,406 |  |  | (5.18) | %
Net interest expense/net interest spread | $ | (2,262) |  |  |  |  | (1.25) | % |  | $ | (2,930) |  |  |  |  | (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
As discussed in Executive Overview, increasing interest rates and spread widening resulted in losses on our investment portfolio of $(290.7) million for the three months ended September 30, 2023. The fair value of our interest rate hedges increased $216.8 million during the three months ended September 30, 2023, mitigating the losses on investments due to higher interest rates.
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
|  | September 30, 2023
($s in thousands) |  | Realized Gain (Loss) Recognized in Net Income |  | Unrealized Gain (Loss) Recognized in Net Income |  | Unrealized Gain (Loss) Recognized in OCI |  | Total Change in Fair Value
Investment portfolio: |  |  |  |  |  |  |  |
Agency RMBS |  | $ | — |  |  | $ | (177,768) |  |  | $ | (41,017) |  |  | $ | (218,785) |
Agency CMBS |  | — |  |  | (777) |  |  | (1,619) |  |  | (2,396) |
CMBS IO |  | — |  |  | (591) |  |  | 862 |  |  | 271 |
Other non-Agency and loans |  | — |  |  | 36 |  |  | — |  |  | 36 |
Subtotal |  | — |  |  | (179,100) |  |  | (41,774) |  |  | (220,874) |

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TBA securities (1) |  | (71,864) |  |  | 2,067 |  |  | — |  |  | (69,797) |
Net loss on investments |  | $ | (71,864) |  |  | $ | (177,033) |  |  | $ | (41,774) |  |  | $ | (290,671) |
Interest rate hedging portfolio: |  |  |  |  |  |  |  |
U.S. Treasury futures |  | $ | 198,692 |  |  | $ | 11,535 |  |  | $ | — |  |  | $ | 210,227 |
Options on U.S. Treasury futures |  | 5,250 |  |  | 1,273 |  |  | — |  |  | 6,523 |
Net gain on interest rate hedges |  | $ | 203,942 |  |  | $ | 12,808 |  |  | $ | — |  |  | $ | 216,750 |
Total net gain (loss) |  | $ | 132,078 |  |  | $ | (164,225) |  |  | $ | (41,774) |  |  | $ | (73,921) |

|  | Three Months Ended
|  | June 30, 2023
($s in thousands) |  | Realized Gain (Loss) Recognized in Net Income |  | Unrealized Gain (Loss) Recognized in Net Income |  | Unrealized Gain (Loss) Recognized in OCI |  | Total Change in Fair Value
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) |
Interest rate hedging portfolio: |  |  |  |  |  |  |  |
U.S. Treasury futures |  | $ | (92,096) |  |  | $ | 263,315 |  |  | $ | — |  |  | $ | 171,219 |
Options on U.S. Treasury futures |  | (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 |

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.
Operating Expenses
Operating expenses for the three months ended September 30, 2023 increased $1.0 million compared to the three months ended June 30, 2023 due to higher salary, bonus, and share-based compensation expenses resulting from new employees and changes made to executive officers’ compensation.
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022
Net Interest Income (Expense)
Net interest income and net interest spread declined for the nine months ended September 30, 2023 compared to nine months ended September 30, 2022 due to higher borrowing costs resulting from the Federal Reserve’s increases in the Fed Funds rate since September 2022. The increase in our borrowing costs has been partially offset by
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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:

| Nine Months Ended
| September 30,
| 2023 |  | 2022
($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 | $ | 113,879 |  |  | $ | 4,184,642 |  |  | 3.63 | % |  | $ | 40,165 |  |  | $ | 2,751,460 |  |  | 1.95 | %
Agency CMBS | 2,789 |  |  | 124,905 |  |  | 2.95 | % |  | 2,650 |  |  | 171,380 |  |  | 2.24 | %
CMBS IO (5) | 7,041 |  |  | 211,273 |  |  | 4.41 | % |  | 11,686 |  |  | 275,032 |  |  | 5.36 | %
Non-Agency MBS and other investments | 101 |  |  | 2,482 |  |  | 5.34 | % |  | 318 |  |  | 4,386 |  |  | 8.68 | %
MBS and loans | $ | 123,810 |  |  | $ | 4,523,302 |  |  | 3.65 | % |  | $ | 54,819 |  |  | $ | 3,202,258 |  |  | 2.26 | %
Cash equivalents | 12,519 |  |  |  |  |  |  | 1,348 |  |  |  |  |
Total interest income | $ | 136,329 |  |  |  |  |  |  | $ | 56,167 |  |  |  |  |
Repurchase agreement financing | (141,983) |  |  | 3,652,320 |  |  | (5.13) | % |  | (19,292) |  |  | 2,562,072 |  |  | (0.99) | %
Net interest (expense) income/net interest spread | $ | (5,654) |  |  |  |  | (1.48) | % |  | $ | 36,875 |  |  |  |  | 1.27 | %

(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 fair value of our investment portfolio declined $(313.3) million during the nine months ended September 30, 2023 and $(884.5) million during the nine months ended September 30, 2022 primarily as a result of higher interest rates and significant spread widening across most asset classes. These losses were mitigated by net gains from our interest rate hedges of $276.1 million and $769.6 million during the nine months ended September 30, 2023 and nine months ended September 30, 2022, respectively.
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The following tables provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:

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

|  | Nine Months Ended
|  | September 30, 2022
($s in thousands) |  | Realized Gain (Loss) Recognized in Net Income |  | Unrealized Gain (Loss) Recognized in Net Income |  | Unrealized Gain (Loss) Recognized in OCI |  | Total Change in Fair Value
Investment portfolio: |  |  |  |  |  |  |  |
Agency RMBS |  | $ | (89,517) |  |  | $ | (240,322) |  |  | $ | (167,884) |  |  | $ | (497,723) |
Agency CMBS |  | — |  |  | (1,432) |  |  | (13,807) |  |  | (15,239) |
CMBS IO |  | — |  |  | (3,874) |  |  | (21,596) |  |  | (25,470) |
Other non-Agency and loans |  | — |  |  | 77 |  |  | (71) |  |  | 6 |
Subtotal |  | (89,517) |  |  | (245,551) |  |  | (203,358) |  |  | (538,426) |
TBA securities (1) |  | (252,414) |  |  | (93,619) |  |  | — |  |  | (346,033) |
Net loss on investments |  | $ | (341,931) |  |  | $ | (339,170) |  |  | $ | (203,358) |  |  | $ | (884,459) |
Interest rate hedging portfolio: |  |  |  |  |  |  |  |
U.S. Treasury futures |  | $ | 435,020 |  |  | $ | 286,216 |  |  | $ | — |  |  | $ | 721,236 |
Interest rate swaptions |  | 50,940 |  |  | (3,202) |  |  | — |  |  | 47,738 |
Options on U.S. Treasury futures |  | — |  |  | 630 |  |  | — |  |  | 630 |
Net gain on interest rate hedges |  | $ | 485,960 |  |  | $ | 283,644 |  |  | $ | — |  |  | $ | 769,604 |
Total net gain (loss) |  | $ | 144,029 |  |  | $ | (55,526) |  |  | $ | (203,358) |  |  | $ | (114,855) |

1)Realized and unrealized gains (losses) on TBA securities are recorded within “gain (loss) on derivative instruments, net” on
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the Company’s consolidated statements of comprehensive income.
Operating Expenses
Operating expenses for the nine months ended September 30, 2023 decreased $(1.4) million compared to the nine months ended September 30, 2022 primarily due to lower severance expense and lower legal and consulting fees.
Non-GAAP Financial Measures
In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include the following: 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 measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and, with respect to EAD, net of other normal recurring operating income/expenses. Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in these non-GAAP financial measures because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. 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: |  | September 30, 2023 |  | June 30, 2023 |  |
($s in thousands except per share data) |  |  |  |  |  |
Comprehensive (loss) income to common shareholders |  | $ | (86,748) |  |  | $ | 42,971 |  |  |
Less: |  |  |  |  |  |
Change in fair value of investments (1) |  | 220,874 |  |  | 60,556 |  |  |
Change in fair value of derivative instruments, net (2) |  | (149,512) |  |  | (118,164) |  |  |
EAD to common shareholders |  | $ | (15,386) |  |  | $ | (14,637) |  |  |
Average common shares outstanding |  | 54,556,853 |  |  | 54,137,327 |  |  |
EAD per common share |  | $ | (0.28) |  |  | $ | (0.27) |  |  |
Net interest expense |  | $ | (2,262) |  |  | $ | (2,930) |  |  |
TBA drop loss (3) |  | (2,559) |  |  | (2,152) |  |  |
Adjusted net interest (expense) income |  | $ | (4,821) |  |  | $ | (5,082) |  |  |
General and administrative expenses |  | (7,841) |  |  | (7,197) |  |  |
Other operating expense, net |  | (801) |  |  | (435) |  |  |
Preferred stock dividends |  | (1,923) |  |  | (1,923) |  |  |
EAD to common shareholders |  | $ | (15,386) |  |  | $ | (14,637) |  |  |

(1)Amount includes realized and unrealized gains and losses due to changes in the fair value of the Company’s MBS.
(2)Amount includes unrealized gains and losses from changes in fair value of derivatives (including TBAs accounted for as derivative instruments) and realized gains and losses on terminated derivatives and excludes TBA drop loss.
(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.
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 in the same reporting period in which the derivative instrument matures or is terminated, but are not included in EAD or adjusted net interest income during any reporting period. Furthermore, because the majority of the U.S. Treasury futures and other derivative instruments are designated as hedges for tax purposes, the realized gains are not distributable to our shareholders 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 September 30, 2023, our most liquid assets were $452.8 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 potential for a government shutdown, the impact on global markets stemming from global central bank policies, and the war between Russia and Ukraine as well as the war between Israel and Hamas.
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 8.5 times shareholders’ equity as of September 30, 2023. We include the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment. Leverage based on repurchase agreement amounts outstanding was 6.2 times shareholders’ equity as of September 30, 2023.
Our repurchase agreement borrowings are principally uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We seek to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in the event of a counterparty's failure to renew existing repurchase agreements. As part of our continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker dealer subsidiaries of regulated financial institutions or primary dealers.
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon a number of factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in dollar roll transactions versus buying specified pools. The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:

| Repurchase Agreements
($s in thousands) | Balance Outstanding As of Quarter End |  | Average Balance Outstanding For the Quarter Ended |  | Maximum Balance Outstanding During the Quarter Ended
September 30, 2023 | $ | 5,002,230 |  |  | $ | 4,773,435 |  |  | $ | 5,037,440 |
June 30, 2023 | 4,201,901 |  |  | 3,447,406 |  |  | 4,203,788 |
March 31, 2023 | 2,937,124 |  |  | 2,713,481 |  |  | 2,959,263 |
December 31, 2022 | 2,644,405 |  |  | 2,727,274 |  |  | 3,072,483 |
September 30, 2022 | 2,991,876 |  |  | 2,398,268 |  |  | 3,082,138 |
June 30, 2022 | 2,202,648 |  |  | 2,486,217 |  |  | 2,949,918 |
March 31, 2022 | 2,952,802 |  |  | 2,806,212 |  |  | 2,973,475 |
December 31, 2021 | 2,849,916 |  |  | 2,701,191 |  |  | 2,873,523 |
September 30, 2021 | 2,527,065 |  |  | 2,529,023 |  |  | 2,590,185 |
June 30, 2021 | 2,321,043 |  |  | 2,155,200 |  |  | 2,415,037 |
March 31, 2021 | 2,032,089 |  |  | 2,158,121 |  |  | 2,437,163 |
December 31, 2020 | 2,437,163 |  |  | 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 September 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 September 30, 2023, the Company had amounts outstanding under 27 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.
We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. Currently, we do not believe we are subject to any covenants that materially restrict our financing flexibility. We were in full compliance with our debt covenants as of September 30, 2023, and we are not aware of circumstances which could potentially result in our non-compliance in the foreseeable future.
Derivative Instruments
Derivative instruments we enter into may require us to post initial margin at inception and daily variation margin based on subsequent changes in their fair value. Daily variation margin requirements also entitle us to receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral posted as margin by us is typically in the form of cash. As of September 30, 2023, we had cash collateral posted to our counterparties of $145.3 million under these agreements.
Collateral requirements for interest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in excess of the clearing exchange. Collateral requirements for our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income Clearing Corporation and, if applicable, by our third-party brokerage agreements, which may establish margin levels in excess of the MBSD. Our TBA contracts, which are subject to master securities forward transaction agreements published by the Securities Industry and Financial Markets Association as well as supplemental terms and conditions with each counterparty, generally provide that valuations for our TBA contracts and any pledged collateral are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the TBA contract and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business day.
Dividends
As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions. When declaring dividends, our Board of Directors considers the Company’s taxable income, the REIT distribution requirements of the Tax Code, financial performance measures, and maintaining compliance with dividend requirements of the Series C Preferred Stock, along with other factors that the Board of Directors may deem relevant from time to time.
Currently, we are primarily using U.S. Treasury futures to hedge the impact of increasing interest rates on our financing costs and fair value of our investments. Realized and unrealized gains (losses) on these derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company, but are not included in EAD to common shareholders during any reporting period. Furthermore, because we designate the majority of our derivative instruments as interest 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 net deferred tax hedge gains as of September 30, 2023 that we expect to be recognized as taxable income over the periods indicated:

Period of Recognition for Remaining Hedge Gains, Net |  | September 30, 2023
|  | ($ in thousands)
Fourth quarter 2023 |  | $ | 23,745 |
Fiscal year 2024 |  | 97,205 |
Fiscal year 2025 |  | 98,915 |
Fiscal year 2026 and thereafter |  | 610,599 |
|  | $ | 830,464 |

As of September 30, 2023, we also had $558.7 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 these amounts
and other temporary and permanent differences between GAAP net income and REIT taxable income coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 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 Regulatory Structure" within Part I, Item 1, "Business" as well as Part I, Item 1A, “Risk Factors” of our 2022 Form 10-K for additional important information regarding dividends declared on our taxable income.
RECENT ACCOUNTING PRONOUNCEMENTS
There were no accounting pronouncements issued during the nine months ended September 30, 2023 that are expected to have a material impact on the Company’s financial condition or results of operations. Please refer to Note 1 of the Notes to the Consolidated Financial Statements contained within Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual results, however, may differ from the estimated amounts we have recorded.
Critical accounting estimates are defined as those that require management's most difficult, subjective or complex judgments, and which may result in materially different results under different assumptions and conditions. Our critical accounting estimates are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K under “Critical Accounting Estimates.” There have been no significant changes in our critical accounting estimates during the three months ended September 30, 2023.
FORWARD-LOOKING STATEMENTS
Certain written statements in this Quarterly Report on Form 10-Q that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act, 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,” “could” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statement whether as a result of new information, future events, or otherwise.
Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to statements about:
•Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations, and our views on the future performance of MBS and other investments;
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•Our views on the macroeconomic environment, monetary and fiscal policy, and conditions in the investment, credit, interest rate and derivatives markets;
•Our views on inflation, market interest rates and market spreads;
•Our views on the effect of actual or proposed actions of the Federal Reserve or other central banks with respect to monetary policy (including the targeted Fed Funds rate), and the potential impact of these actions on interest rates, borrowing costs, inflation or unemployment;
•The effect of regulatory initiatives of the Federal Reserve, the Federal Housing Finance Agency, other financial regulators, and other central banks;
•Our financing strategy including our target leverage ratios, our use of TBA dollar roll transactions, and anticipated trends in financing costs including TBA dollar roll transaction costs, and our hedging strategy including changes to the derivative instruments to which we are a party, and changes to government regulation of hedging instruments and our use of these instruments;
•Our investment portfolio composition and target investments;
•Our investment portfolio performance, including the fair value, yields, and forecasted prepayment speeds of our investments;
•Our liquidity and ability to access financing, and the anticipated availability and cost of financing;
•Our capital stock activity including the impact of stock issuances and repurchases;
•The amount, timing, and funding of future dividends;
•Our use of our tax NOL carryforward and other tax loss carryforwards;
•Future competition for, and availability of, investments, financing and capital;
•Estimates of future interest expenses, including related to the Company’s repurchase agreements and derivative instruments;
•The status and effect of legislative reforms and regulatory rule-making or review processes, and the status of reform efforts and other business developments in the repurchase agreement financing market;
•Market, industry and economic trends, and how these trends and related economic data may impact the behavior of market participants and financial regulators;
•The impact of recent bank failures, potential new regulations and the potential for other bank failures this year:
•The impact of debt ceiling negotiations on interest rates, spreads, the U.S. Treasury market as well as the impact more broadly on fixed income and equity markets:
•Uncertainties regarding the war between Russia and 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.
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While it is not possible to identify all factors that may cause actual results to differ from historical results or from any results expressed or implied by forward-looking statements, or that may cause our projections, assumptions, expectations or beliefs to change, some of those factors include the following:
•the risks and uncertainties referenced in this Quarterly Report on Form 10-Q, especially those incorporated by reference into Part II, Item 1A, “Risk Factors,”;
•our ability to find suitable reinvestment opportunities;
•changes in domestic economic conditions;
•geopolitical events, such as terrorism, war or other military conflict, including increased uncertainty regarding the war between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict;
•changes in interest rates and credit spreads, including the repricing of interest-earning assets and interest-bearing liabilities;
•our investment portfolio performance particularly as it relates to cash flow, prepayment rates and credit performance;
•the impact on markets and asset prices from changes in the Federal Reserve’s policies regarding the purchases of Agency RMBS, Agency CMBS, and U.S. Treasuries;
•actual or anticipated changes in Federal Reserve monetary policy or the monetary policy of other central banks;
•adverse reactions in U.S. financial markets related to actions of foreign central banks or the economic performance of foreign economies including in particular China, Japan, the European Union, and the United Kingdom;
•uncertainty concerning the long-term fiscal health and stability of the United States;
•the cost and availability of financing, including the future availability of financing due to changes to regulation of, and capital requirements imposed upon, financial institutions;
•the cost and availability of new equity capital;
•changes in our leverage and use of leverage;
•changes to our investment strategy, operating policies, dividend policy or asset allocations;
•the quality of performance of third-party service providers, including our sole third-party service provider for our critical operations and trade functions;
•the loss or unavailability of our third-party service provider’s service and technology that supports critical functions of our business related to our trading and borrowing activities due to outages, interruptions, or other failures;
•the level of defaults by borrowers on loans underlying MBS;
•changes in our industry;
•increased competition;
•changes in government regulations affecting our business;
•changes or volatility in the repurchase agreement financing markets and other credit markets;
•changes to the market for interest rate swaps and other derivative instruments, including changes to margin requirements on derivative instruments;
•uncertainty regarding continued government support of the U.S. financial system and U.S. housing and real estate markets, or to reform the U.S. housing finance system including the resolution of the conservatorship of Fannie Mae and Freddie Mac;
•the composition of the Board of Governors of the Federal Reserve;
•the political environment in the U.S.;
•systems failures or cybersecurity incidents; and
•exposure to current and future claims and litigation.
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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, credit, liquidity, and reinvestment risks. These risks can and do cause fluctuations in our liquidity, comprehensive income and book value as discussed below.
Interest Rate Risk
Investing in interest-rate sensitive investments such as MBS and TBA securities subjects us to interest rate risk. Interest rate risk results from investing in securities that have a fixed coupon or a floating coupon that may not immediately adjust for changes in interest rates. Interest rate risk also results from the mismatch between the duration of our assets versus the duration of our liabilities and hedges. The amount of the impact will depend on the composition of our portfolio, our hedging strategy, the effectiveness of our hedging instruments as well as the magnitude and the duration of the change in interest rates.
We manage interest rate risk within tolerances set by our Board of Directors. We use interest rate hedging instruments to mitigate the impact of changing interest rates on the market value of our assets and on our interest expense from repurchase agreements used to finance our investments. Our hedging methods are based on many factors, including, but not limited to, our estimates with regard to future interest rates and expected levels of prepayments of our assets. If prepayments are slower or faster than assumed, the maturity of our investments will also differ from our expectations, which could reduce the effectiveness of our hedging strategies and may cause losses that adversely affect our cash flow. Estimates of prepayment speeds can vary significantly by investor for the same security, and therefore estimates of security and portfolio duration can vary significantly between market participants.
We continuously monitor market conditions, economic conditions, interest rates and other market activity and frequently adjust the composition of our investments and hedges throughout any given period. As such, the projections for changes in market value provided below are limited in usefulness because the modeling assumes no changes to the composition of our investment portfolio or hedging instruments as of the dates indicated. Changes in types of our investments, the returns earned on these investments, future interest rates, credit spreads, the shape of the yield curve, the availability of financing, and/or the mix of our investments and financings including derivative instruments may cause actual results to differ significantly from the modeled results shown in the tables below. There can be no assurance that assumed events used to model the results shown below will occur, or that other events will not occur, that will affect the outcomes; therefore, the modeled results shown in the tables below and all related disclosures constitute forward-looking statements.
Management considers changes in the shape of the interest rate curves in assessing and managing portfolio interest rate risk on the market value of its investments and common equity. Because interest rates do not typically move in a parallel fashion from period to period (as can be seen by the graph for U.S. Treasury rates in Item 2, “Executive Overview”), the tables below show the projected sensitivity of the market value of our financial instruments and the percentage change in shareholders’ equity assuming instantaneous parallel shifts and non-parallel shifts in market interest rates.

|  | September 30, 2023
|  | Parallel Decrease in Interest Rates of |  | Parallel Increase in Interest Rates of
|  | 100 Basis Points |  | 50 Basis Points |  | 50 Basis Points |  | 100 Basis Points
Type of Instrument (1) |  | % of Market Value |  | % of Common Equity |  | % of Market Value |  | % of Common Equity |  | % of Market Value |  | % of Common Equity |  | % of Market Value |  | % of Common Equity
RMBS |  | 4.1 | % |  | 43.3 | % |  | 2.1 | % |  | 22.1 | % |  | (2.1) | % |  | (22.4) | % |  | (4.3) | % |  | (44.7) | %
CMBS |  | — | % |  | 0.5 | % |  | — | % |  | 0.2 | % |  | — | % |  | (0.2) | % |  | — | % |  | (0.4) | %
CMBS IO |  | 0.1 | % |  | 0.6 | % |  | — | % |  | 0.3 | % |  | — | % |  | (0.3) | % |  | (0.1) | % |  | (0.6) | %
TBAs |  | 1.1 | % |  | 11.4 | % |  | 0.6 | % |  | 6.1 | % |  | (0.6) | % |  | (6.5) | % |  | (1.3) | % |  | (13.3) | %
Interest rate hedges |  | (5.2) | % |  | (54.8) | % |  | (2.6) | % |  | (27.2) | % |  | 2.6 | % |  | 27.3 | % |  | 5.2 | % |  | 54.8 | %

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Total |  | 0.1 | % |  | 1.0 | % |  | 0.1 | % |  | 1.5 | % |  | (0.2) | % |  | (2.2) | % |  | (0.4) | % |  | (4.2) | %
|  | December 31, 2022
|  | Parallel Decrease in Interest Rates of |  | Parallel Increase in Interest Rates of
|  | 100 Basis Points |  | 50 Basis Points |  | 50 Basis Points |  | 100 Basis Points
Type of Instrument (1) |  | % of Market Value |  | % of Common Equity |  | % of Market Value |  | % of Common Equity |  | % of Market Value |  | % of Common Equity |  | % of Market Value |  | % of Common Equity
RMBS |  | 2.8 | % |  | 20.9 | % |  | 1.4 | % |  | 10.6 | % |  | (1.4) | % |  | (10.6) | % |  | (2.8) | % |  | (21.0) | %
CMBS |  | 0.1 | % |  | 0.5 | % |  | — | % |  | 0.3 | % |  | — | % |  | (0.3) | % |  | (0.1) | % |  | (0.5) | %
CMBS IO |  | 0.1 | % |  | 0.7 | % |  | — | % |  | 0.4 | % |  | — | % |  | (0.4) | % |  | (0.1) | % |  | (0.7) | %
TBAs |  | 2.0 | % |  | 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) | % |  | (0.3) | % |  | (1.0) | % |  | 0.1 | % |  | (0.2) | % |  | (0.1) | % |  | (1.0) | %

Non-Parallel Shifts |  | September 30, 2023 |  | December 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
+25 |  | 0 |  | 0.1 | % |  | 1.0 | % |  | 0.2 | % |  | 1.7 | %
+25 |  | +50 |  | (0.2) | % |  | (2.4) | % |  | (0.1) | % |  | (1.0) | %
+50 |  | +25 |  | (0.1) | % |  | (1.3) | % |  | 0.1 | % |  | 0.6 | %
+50 |  | +100 |  | (0.4) | % |  | (4.7) | % |  | (0.4) | % |  | (2.9) | %
0 |  | -25 |  | 0.1 | % |  | 1.2 | % |  | 0.1 | % |  | 0.4 | %
-10 |  | -50 |  | 0.2 | % |  | 1.8 | % |  | — | % |  | 0.1 | %
-25 |  | -75 |  | 0.1 | % |  | 1.1 | % |  | (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 as of September 30, 2023 consists of higher coupon assets compared to December 31, 2022, which increased the duration risk in our investment portfolio. To mitigate, we moved to a longer duration hedge position as of September 30, 2023 relative to that as of December 31, 2022.
Spread Risk
Spread risk is the risk of loss from an increase in the market spread between the yield on an investment versus its benchmark index. Changes in market spreads represent the market's valuation of the perceived riskiness of an asset relative to risk-free rates. Widening spreads reduce the market value of our investments as market participants require additional yield to hold riskier assets. Market spreads could change based on macroeconomic or systemic factors as well as the factors specific to a particular security such as prepayment performance or credit performance. Other factors that could impact credit spreads include technical issues such as supply and demand for a particular type of security or Federal Reserve monetary policy. We do not hedge spread risk given the complexity of hedging credit spreads and in our opinion, the lack of liquid instruments available to use as hedges.
Fluctuations in spreads typically vary based on the type of investment. Sensitivity to changes in market spreads is derived from models that are dependent on various assumptions, and actual changes in market value in
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response to changes in market spreads could differ materially from the projected sensitivity if actual conditions differ from these assumptions.
The table below shows the projected sensitivity of the market value of our investments given the indicated change in market spreads as of the dates indicated:

|  | September 30, 2023 |  | December 31, 2022
|  | Percentage Change in |  | Percentage 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) | % |  | (12.5) | % |  | (1.2) | % |  | (9.1) | %
+10 |  | (0.6) | % |  | (6.2) | % |  | (0.6) | % |  | (4.5) | %
-10 |  | 0.6 | % |  | 6.2 | % |  | 0.6 | % |  | 4.5 | %
-20/-50 (2) |  | 1.2 | % |  | 12.5 | % |  | 1.2 | % |  | 9.1 | %

(1) Includes changes in market value of our MBS investments, including TBA securities.
(2) Assumes a 20-basis point shift in Agency and non-Agency RMBS and CMBS and a 50-basis point shift in Agency
and non-Agency CMBS IO.
Prepayment Risk
Prepayment risk is the risk of an early, unscheduled return of principal on an investment. We are subject to prepayment risk from premiums paid on investments, which are amortized as a reduction in interest income using the effective interest method under GAAP. Our prepayment risk as of September 30, 2023 has declined relative to December 31, 2022 and prior periods as the majority of our MBS portfolio consists of securities owned near or below par and prepayment speeds have declined in the current higher interest rate environment.
If higher yielding investments prepay at a faster rate than anticipated, we may be unable to reinvest the repayments at comparable yields. Our net interest income may be negatively impacted if the proceeds from prepayments are reinvested into assets with lower yields.
In an increasing interest rate environment, lower yielding assets with a fixed rate may extend or prepay slower than anticipated. Because we finance our investments with short-term repurchase agreement financing, we may be required to finance our investments at a higher rate without the ability to reinvest principal into higher yielding securities. As a result of rising financing costs, our net interest income could fall.
For additional information regarding the factors that impact prepayment risk as well as how we seek to mitigate prepayment risk, please refer to Items 1A and 7A of our 2022 Form 10-K.
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.
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Agency and non-Agency CMBS IO represent the right to excess interest (and not principal) on the underlying loans. These securities are exposed to the loss of investment basis in the event a loan collateralizing the security liquidates without paying yield maintenance or prepayment penalty. This will typically occur when the underlying loan is in default and proceeds from the disposition of the loan collateral are insufficient to pay the prepayment consideration. To mitigate credit risk of investing in CMBS IO, we invest in primarily AAA-rated securities that are stripped off senior tranches, which means we receive the highest payment priority and are the last to absorb losses in the event of a shortfall in cash flows. Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation, which is the triggering event that disrupts the Agency CMBS IO cash flow. For non-Agency CMBS IO, the servicer and master servicer will determine if interest will continue to be advanced upon default of a loan based on their estimate of liquidation proceeds. Senior non-Agency CMBS IO may benefit from changes in contractual cash flows, including modifications or loan extensions as the senior classes can remain outstanding beyond the original maturity date.
Liquidity Risk
We have liquidity risk principally from the use of recourse repurchase agreements to finance our ownership of securities. Our repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed roll-over terms. If we fail to repay the lender at maturity, the lender has the right to immediately sell the collateral and pursue us for any shortfall if the sales proceeds are inadequate to cover the repurchase agreement financing. In addition, declines in the market value of our investments pledged as collateral for repurchase agreement borrowings and for our derivative instruments may result in counterparties initiating margin calls for additional collateral.
Our use of TBA long positions as a means of investing in and financing Agency RMBS also exposes us to liquidity risk in the event that we are unable to roll or terminate our TBA contracts prior to their settlement date. If we are unable to roll or terminate our TBA long positions, we could be required to take physical delivery of the underlying securities and settle our obligations for cash, which could negatively impact our liquidity position or force us to sell assets under adverse conditions if financing is not available to us on acceptable terms.
For further information, including how we attempt to mitigate liquidity risk and monitor our liquidity position, please refer to “Liquidity and Capital Resources” in Item 2 of this Quarterly Report on Form 10-Q as well as within Item 7 of our 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 or if financing costs are higher, our net interest income will decline. In addition, based on market conditions, our leverage, and our liquidity profile, we may decide to not reinvest the cash flows we receive from our investment portfolio even when attractive reinvestment opportunities are available, or we may decide to reinvest in assets with lower yield but greater liquidity. If we retain capital or pay dividends to return capital to shareholders rather than reinvest capital, or if we invest capital in lower yielding assets for liquidity reasons, the size of our investment portfolio and the amount of income generated by our investment portfolio will likely decline.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures designed to provide reasonable assurance as to disclosures included in this report. Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures, as defined in Exchange Act
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Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2023 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
To the Company’s knowledge, there are no pending or threatened legal proceedings, which, in management’s opinion, individually or in the aggregate, could 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 2022 Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Forward-Looking Statements” contained in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q as well as Part I, Item 1A, “Risk Factors” in our 2022 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The Company’s Board of Directors has authorized a share repurchase program (the “Program”) of up to $60 million of the Company’s outstanding shares of common stock and up to $30 million of the Company’s Series C Preferred Stock through 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 C Preferred Stock, as 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 under the Program will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases. The Program is authorized through March 31, 2024, although it may be modified or terminated by the Board of Directors at any time.
The Company did not repurchase any shares of its common stock or Series C Preferred Stock during the three months ended September 30, 2023.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
During the three months ended September 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).
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ITEM 6. EXHIBITS

Exhibit No. | Description
3.1 | Restated Articles of Incorporation, effective May 14, 2021 (incorporated herein by reference to Exhibit 3.1 to Dynex's Current Report on Form 8-K filed May 18, 2021).
3.1.1 | Articles of Amendment of the Restated Articles of Incorporation, effective May 18, 2023 (incorpor ated herein by reference to Exhibit 3.1.1 to Dynex’s Quarterly Re port on Form 10-Q for the quarter ended June 30, 2023).
3.2 | Amended and Restated Bylaws, effective as of May 11, 2021 (incorporated herein by reference to Exhibit 3.2 to Dynex’s Current Report on Form 8-K filed May 12, 2021).
4.1 | Specimen of Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to Dynex's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019).
4.2 | Specimen of 6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock Certificate (incorporated herein by reference to Exhibit 4.4 to Dynex's Registration Statement on Form 8-A12B filed February 18, 2020).
10.1* | Amended and Restated Employment Agreement for Smriti L. Popenoe, dated as of October 27, 2023 (inc orporated herein by re fere n c e to Exhibit 10.1 to Dyn ex’s Current Re port on Form 8-K filed October 30, 2023).
10.2* | Amended and Restated Employment Agreement for Byron L. Boston, dated as of October 27, 2023 (incorporated herein by reference to Exhibit 1 0.2 to Dynex’s Current Report on Form 8-K filed October 30, 2023).
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 quarterly period ended September 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements.
104 | The cover page from Dynex Capital, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2023, formatted in iXBRL (Inline Extensible Business Reporting Language) (included with Exhibit 101).

* Denotes a management contract or compensatory plan or arrangement.
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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: | November 6, 2023 |  | /s/ Byron L. Boston
|  |  | Byron L. Boston
|  |  | Chief Executive Officer, Co-Chief Investment Officer, and Director
|  |  | (Principal Executive Officer)
Date: | November 6, 2023 |  | /s/ Robert S. Colligan
|  |  | Robert S. Colligan
|  |  | Executive Vice President, Chief Financial Officer, and Secretary
|  |  | (Principal Financial Officer)

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