

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



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

Virginia

52-1549373

(State or other jurisdiction of

~~(I.R.S. Employer~~

incorporation or organization)

(IRS Employer Identification No.)

4991 Lake Brook Drive, Suite 100 ~~Glen Allen, Virginia~~

~~23060-9245~~

Glen Allen,

Virginia

23060-9245

(Address of principal executive offices)

(Zip Code)

(804)

217-5800

~~(804) 217-5800~~

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

New York Stock Exchange

7.625% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per share

DXPRB

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.

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

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.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

On October ~~31, 2017,~~30, 2020, the registrant had ~~53,219,286~~23,144,606 shares outstanding of common stock, $0.01 par value, which is the registrant’s only class of common stock.

Page

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

~~Page~~

~~PART I.~~

~~FINANCIAL INFORMATION~~

~~Item 1.~~

~~Financial Statements~~

Consolidated Balance Sheets as of September 30, ~~2017~~2020 (unaudited) and December 31, ~~2016~~2019

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2017~~2020 (unaudited) and September 30, ~~2016~~2019 (unaudited)

Consolidated ~~Statement~~Statements of Shareholders' Equity for the nine months ended

September 30, ~~2017~~2020 and September 30, 2019 (unaudited)

Consolidated Statements of Cash Flows for the nine months ended

September 30, ~~2017~~2020 (unaudited) and September 30, ~~2016~~2019 (unaudited)

Notes to the Unaudited Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2123

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

4947

Item 4.

Controls and Procedures

5451

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

~~Item 1.~~52

~~Legal Proceedings~~

Item 1A.

Risk Factors

~~Item 1A.~~52

~~Risk Factors~~

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

5552

Item 3.

Defaults Upon Senior Securities

5553

Item 4.

Mine Safety Disclosures

5553

Item 5.

Other Information

~~Item 5.~~53

~~Other Information~~

Item 6.

Exhibits

~~Item 6.~~54

~~Exhibits~~

SIGNATURES

5755

ITEM 1. FINANCIAL STATEMENTS

(amounts in thousands except share data)

September 30, 2017 December 31, 2016
ASSETS (unaudited)
Mortgage-backed securities (including pledged of $2,714,312 and $3,150,610, respectively) $ 2,921,444
$ 3,212,084
Mortgage loans held for investment, net 16,523
19,036
Cash and cash equivalents 117,702
74,120
Restricted cash 43,987
24,769
Derivative assets 368
28,534
Receivable for securities sold 13,435
—
Principal receivable on investments 3,359
11,978
Accrued interest receivable 19,267
20,396
Other assets, net 7,193
6,814
Total assets $ 3,143,278
$ 3,397,731

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities:

Repurchase agreements $ 2,519,230
$ 2,898,952
Payable for unsettled securities 77,357
—
Non-recourse collateralized financing 5,706
6,440
Derivative liabilities 133
6,922
Accrued interest payable 2,720
3,156
Accrued dividends payable 11,620
12,268
Other liabilities 2,413
2,809
Total liabilities 2,619,179
2,930,547

Shareholders’ equity:

Preferred stock, par value $.01 per share; 50,000,000 shares authorized; 5,665,101 and 4,571,937 shares issued and outstanding, respectively ($141,628 and $114,298 aggregate liquidation preference, respectively) $ 135,828
$ 110,005
Common stock, par value $.01 per share, 200,000,000 shares authorized;
51,262,350 and 49,153,463 shares issued and outstanding, respectively
513
492
Additional paid-in capital 742,845
727,369
Accumulated other comprehensive income (loss) 5,886
(32,609 )
Accumulated deficit (360,973 ) (338,073 )
Total shareholders' equity 524,099
467,184
Total liabilities and shareholders’ equity $ 3,143,278
$ 3,397,731

~~DYNEX CAPITAL, INC.~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

~~(amounts in thousands except per share data)~~

See notes to the unaudited consolidated financial statements.

($amounts in ~~thousands)~~thousands except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Interest income	$	20,088	$	44,502	$	79,764	$	128,207
Interest expense	3,375		31,256		30,327		88,345
Net interest income	16,713		13,246		49,437		39,862

Gain (loss) on derivative instruments, net	7,974		(50,709)		(196,156)		(229,941)
Gain (loss) on sale of investments, net	20,846		4,605		298,728		(5,755)
Fair value adjustments, net	194		(13)		154		(42)
Other operating (expense) income, net	(207)		25		(852)		50
General and administrative expenses:
Compensation and benefits	(2,402)		(1,786)		(7,301)		(5,430)
Other general and administrative	(2,393)		(1,972)		(6,926)		(6,547)
Net income (loss)	40,725		(36,604)		137,084		(207,803)
Preferred stock dividends	(3,252)		(3,341)		(10,346)		(9,606)
Preferred stock redemption charge	0		0		(3,914)		0
Net income (loss) to common shareholders	$	37,473	$	(39,945)	$	122,824	$	(217,409)

Other comprehensive income:
Unrealized gain on available-for-sale investments, net	$	27,844	$	59,800	$	213,651	$	247,199
Reclassification adjustment for (gain) loss on sale of investments, net	(20,846)		(4,605)		(298,728)		5,755
Reclassification adjustment for de-designated cash flow hedges	0		0		0		(165)
Total other comprehensive income (loss)	6,998		55,195		(85,077)		252,789
Comprehensive income to common shareholders	$	44,471	$	15,250	$	37,747	$	35,380

Net income (loss) per common share-basic and diluted	$	1.62	$	(1.65)	$	5.33	$	(9.12)
Weighted average common shares-basic and diluted	23,141		24,174		23,054		23,847

Preferred Stock Common Stock
Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
(Loss) Income

Accumulated
Deficit
Total Shareholders' Equity
Shares Amount Shares Amount
Balance as of December 31, 2016 4,571,937
$ 110,005
49,153,463
$ 492
$ 727,369
$ (32,609 ) $ (338,073 ) $ 467,184
Stock issuance 1,093,164
25,884
2,048,288
21
14,474
—
—
40,379
Restricted stock granted, net of amortization —
—
138,166
1
1,565
—
—
1,566
Adjustments for tax withholding on share-based compensation —
—
(77,567 ) (1 ) (520 ) —
—
(521 )
Stock issuance costs —
(61 ) —
—
(43 ) —
—
(104 )
Net income —
—
—
—
—
—
11,931
11,931
Dividends on preferred stock —
—
—
—
—
—
(7,885 ) (7,885 )
Dividends on common stock —
—
—
—
—
—
(26,946 ) (26,946 )
Other comprehensive income —
—
—
—
—
38,495
—
38,495
Balance as of September 30, 2017 5,665,101
$ 135,828
51,262,350
$ 513
$ 742,845
$ 5,886
$ (360,973 ) $ 524,099

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


	Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance as of December 31, 2019	6,788,330	$	162,807	22,945,993	$	229	$	858,347	$	173,806	$	(612,201)	$	582,988
Cumulative effect of change in accounting principle	—	—		—	—		—		—		(548)		(548)
Stock issuance	4,460,000	107,988		—	—		—		—		—		107,988
Redemption of preferred stock	(4,000,000)	(96,086)		—	—		—		—		(3,914)		(100,000)
Restricted stock granted, net of amortization	—	—		67,511	1		306		—		—		307
Stock repurchase	—	—		(18,782)	0		(206)		—		—		(206)
Adjustments for tax withholding on share-based compensation	—	—		(12,744)	0		(235)		—		—		(235)
Stock issuance costs	—	—		—	—		(9)		—		—		(9)
Net loss	—	—		—	—		—		—		(98,479)		(98,479)
Dividends on preferred stock	—	—		—	—		—		—		(3,841)		(3,841)
Dividends on common stock	—	—		—	—		—		—		(10,330)		(10,330)
Other comprehensive income	—	—		—	—		—		72,972		—		72,972
Balance as of March 31, 2020	7,248,330	$	174,709	22,981,978	$	230	$	858,203	$	246,778	$	(729,313)	$	550,607
Restricted stock granted, net of amortization	—	—		172,782	1		422		—		—		423
Stock repurchase	—	—		(14,143)	—		(166)		—		—		(166)
Stock issuance costs	—	—		—	—		(8)		—		—		(8)
Net income	—	—		—	—		—		—		194,838		194,838
Dividends on preferred stock	—	—		—	—		—		—		(3,253)		(3,253)
Dividends on common stock	—	—		—	—		—		—		(9,925)		(9,925)
Other comprehensive loss	—	—		—	—		—		(165,047)		—		(165,047)
Balance as of June 30, 2020	7,248,330	$	174,709	23,140,617	$	231	$	858,451	$	81,731	$	(547,653)	$	567,469
Stock issuance	—	—		5,219	0		85		—		—		85
Restricted stock granted, net of amortization	—	—		—	—		568		—		—		568
Adjustments for tax withholding on share-based compensation	—	—		(598)	—		(10)		—		—		(10)
Stock issuance costs	—	—		—	—		(5)		—		—		(5)
Net income	—	—		—	—		—		—		40,725		40,725
Dividends on preferred stock	—	—		—	—		—		—		(3,252)		(3,252)
Dividends on common stock	—	—		—	—		—		—		(9,025)		(9,025)
Other comprehensive income	—	—		—	—		—		6,998		—		6,998
Balance as of September 30, 2020	7,248,330	$	174,709	23,145,238	$	231	$	859,089	$	88,729	$	(519,205)	$	603,553


	Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Shareholders’ Equity
	Shares	Amount		Shares	Amount
Balance as of December 31, 2018	5,954,594	$	142,883	20,939,073	$	209	$	818,861	$	(35,779)	$	(399,021)	$	527,153
Stock issuance	213,468	5,015		3,109,047	31		53,841		—		—		58,887
Restricted stock granted, net of amortization	—	—		50,821	1		297		—		—		298
Adjustments for tax withholding on share-based compensation	—	—		(16,231)	0		(296)		—		—		(296)
Stock issuance costs	—	—		—	—		(212)		—		—		(212)
Net loss	—	—		—	—		—		��		(52,214)		(52,214)
Dividends on preferred stock	—	—		—	—		—		—		(3,059)		(3,059)
Dividends on common stock	—	—		—	—		—		—		(12,350)		(12,350)
Other comprehensive income	—	—		—	—		—		86,467		—		86,467
Balance as of March 31, 2019	6,168,062	$	147,898	24,082,710	$	241	$	872,491	$	50,688	$	(466,644)	$	604,674
Stock issuance	346,068	8,173		547,071	5		9,874		—		—		18,052
Restricted stock granted, net of amortization	—	—		17,183	0		296		—		—		296
Stock issuance costs	—	—		—	—		(28)		—		—		(28)
Net loss	—	—		—	—		—		—		(118,985)		(118,985)
Dividends on preferred stock	—	—		—	—		—		—		(3,206)		(3,206)
Dividends on common stock	—	—		—	—		—		—		(13,292)		(13,292)
Other comprehensive income	—	—		—	—		—		111,127		—		111,127
Balance as of June 30, 2019	6,514,130	156,071		24,646,964	246		882,633		161,815		(602,127)		598,638
Stock issuance	274,200	6,736		8,300	0		137		—		—		6,873
Restricted stock granted, net of amortization	—	—		0	0		306		—		—		306
Stock repurchase	—	—		(1,709,271)	(17)		(25,017)		—		—		(25,034)
Stock issuance costs	—	—		—	—		(9)		—		—		(9)
Net loss	—	—		—	—		—		—		(36,604)		(36,604)
Dividends on preferred stock	—	—		—	—		—		—		(3,341)		(3,341)
Dividends on common stock	—	—		—	—		—		—		(11,577)		(11,577)
Other comprehensive income	—	—		—	—		—		55,195		—		55,195
Balance as of September 30, 2019	6,788,330	$	162,807	22,945,993	$	229	$	858,050	$	217,010	$	(653,649)	$	584,447

See notes to the unaudited consolidated financial statements.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Dynex Capital, Inc.~~, ("Company"~~ (“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 debt securities, the majority of which are specified pools of Agency ~~and non-Agency~~ mortgage-backed securities (“MBS”) consisting of commercial MBS (“CMBS”), residential MBS (“RMBS”), ~~commercial MBS (“CMBS”)~~ and CMBS interest-only ~~("IO"~~(“IO”) securities ~~that~~and non-Agency MBS, which consist mainly of CMBS IO. Agency MBS have a guaranty of principal payment 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 U.S. Treasury. Non-Agency MBS are issued ~~or guaranteed~~ by ~~the U.S. Government or U.S. Government sponsored agencies ("Agency MBS")~~non-governmental enterprises and ~~MBS issued by others ("non-Agency MBS"). We~~do not have a guaranty of principal payment. The Company also ~~invest~~invests in other types of mortgage-related securities, such as to-be-announced securities (“~~TBA”~~TBAs” or “TBA securities”).

As a result of the economic, health and market turmoil brought about by the coronavirus (“COVID-19”) ~~forward contracts for~~pandemic, fixed income and equity markets experienced severe disruption which began in mid-March of 2020. The disruption resulted in a substantial rally in interest rates and a decline in fair value of MBS, which led to significant demands on liquidity from margin calls from derivative and repurchase agreement counterparties. During this time, the ~~purchase or sale~~Company met all margin calls and was not forced to sell any assets. Since early in the second quarter of ~~generic (also referred~~2020, fixed income markets, equity markets and Agency MBS prices have stabilized with the Federal Reserve announcing multiple programs to ~~as "non-specified"~~support economic activity and to support the smooth functioning of markets. In addition, the U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) ~~pools~~Act to provide economic relief, which included certain assistance to homeowners and renters. Though these supportive actions have helped cushion the economic damage from the disruption of ~~Agency MBS.~~the pandemic to date, the Company is not able to predict the impact these policies may have on its investments over the longer term, particularly if a resurgence in cases of COVID-19 causes further damage to the economy.

Basis of Presentation

The accompanying unaudited consolidated financial statements of ~~Dynex Capital, Inc.~~the Company and its subsidiaries (together, “Dynex” or, as appropriate, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“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.~~included; however, uncertainty over the continuing impact that COVID-19 will have on the global economy and on the Company’s business makes any estimates and assumptions as of September 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Operating results for the three and nine months ended September 30, ~~2017~~2020 are not necessarily indicative of the results that may be expected for any other interim periods or for the entire year ending December 31, ~~2017.~~2020. 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, ~~2016~~2019 (the “2019 Form 10-K”) filed with the SEC.

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

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

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

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.

The Company consolidates a securitization trust, which has residential mortgage loans included in “mortgage loans held for investment” on its consolidated balance sheet, of which a portion is pledged as collateral for one remaining bond recorded as “non-recourse collateralized financing” on its consolidated balance sheet. The Company owns the subordinate class in the trust and has been deemed the primary beneficiary.

Though the Company invests in Agency and non-Agency MBS which are generally considered to be interests in VIEs, the Company does not consolidate these entities because it does not meet the criteria necessary to be deemed a primary beneficiary.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. The most significant estimates used by management include, but are not limited to, amortization of premiums and discounts and fair value measurements of its ~~investments, and other-than-temporary impairments.~~investments. These items are discussed further below within this note to the consolidated financial statements.

The Company has elected to be taxed as a real estate investment trust ~~("REIT"~~(“REIT”) under the Internal Revenue Code of 1986 and the corresponding provisions of state law. To qualify as a REIT, the Company must meet certain tests including investing in primarily real estate-related assets and the required distribution of at least 90% of its annual REIT taxable income to ~~stockholders~~shareholders after consideration of its net operating loss ~~("NOL"~~(“NOL”) carryforward and not including taxable income retained in its taxable subsidiaries. As a REIT, the Company generally will not be subject to federal income tax on the amount of its income or capital gains that is distributed as dividends to shareholders.

The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities ~~in accordance with Accounting Standards Codification ("ASC") Topic 740. The Company~~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. The Company did not have any potentially dilutive securities outstanding during the three orand nine months ended September 30, ~~2017~~2020 or September 30, ~~2016.~~2019.

Holders of unvested shares of the ~~Company's~~Company’s issued and outstanding restricted common stock are eligible to receive non-forfeitable dividends. As such, these unvested shares are considered participating securities ~~as per ASC Topic 260-10~~ and therefore are included in the computation of basic net income ~~(loss)~~ per common share using the two-class method. Upon vesting, restrictions on transfer expire on each share of restricted stock, and each such share of restricted stock represents one unrestricted share of common stock.

Because the ~~Company's 8.50% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”) and~~Company’s 7.625% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”) and its 6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”) (collectively, the “Preferred Stock”) are redeemable at the ~~Company's~~Company’s option for cash only and may convert into shares of common stock only upon a change of control of the Company (and subject to other circumstances) as described in Article IIIB and Article IIIC of the Company’s Articles of Amendment to the Restated Articles of Incorporation (the “Restated

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

Articles of Incorporation, as amended”), the effect of those shares and their related dividends is excluded from the calculation of diluted net income ~~(loss)~~ per common share.

Cash and Cash Equivalents

Cash and cash equivalents include ~~cash on hand and~~ highly liquid investments with original maturities of three months or ~~less.~~less as well as unrestricted demand deposits at highly rated financial institutions. The Company’s cash balances fluctuate throughout the year and may exceed Federal Deposit Insurance Company 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.

Restricted cash consists of cash the Company has pledged to cover initial and variation margin with its financing and certain derivative counterparties.

~~The Company early adopted Accounting Standards Update ("ASU") No. 2016-18,~~ ~~Statement of Cash Flows (Topic 230) - Restricted Cash~~, which requires amounts generally described as restricted cash or restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. Because this ASU is to be applied retrospectively to each period presented, "net cash and cash equivalents used in financing activities" on the Company's consolidated statement of cash flows for the nine months ended September 30, 2016 now omits "increase in restricted cash" previously reported in the Quarterly Report on Form 10-Q for that period, and that increase is now included within "net increase in cash, cash equivalents, and restricted cash" for that period in order to conform to the current period's presentation.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Company's consolidated balance sheet as of September 30, ~~2017~~2020 that sum to the total of the same such amounts shown on the ~~Company's~~Company’s consolidated statement of cash flows for the nine months ended September 30, ~~2017:~~2020:


	September 30, 2020
Cash and cash equivalents	$	158,897
Restricted cash	26,006
Total cash, cash equivalents, and restricted cash shown on consolidated statement of cash flows	$	184,903

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

Mortgage-Backed Securities

The ~~Company's investments in Agency and non-Agency RMBS, CMBS, and CMBS IO securities~~Company’s MBS are designated as available-for-sale ~~("AFS"~~(“AFS”) and are recorded at fair value on the ~~Company's~~Company’s consolidated balance sheet. Changes in unrealized gain (loss) on the ~~Company's~~Company’s MBS are reported in other comprehensive income ~~("OCI"~~(“OCI”) until itthe investment is sold ~~matures,~~ or ~~is determined to be other than temporarily impaired.~~matures. Although the Company generally intends to hold its AFS securities until maturity, it may sell any of these securities as part of the overall management of its business. Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of accumulated other comprehensive income ~~("AOCI"~~(“AOCI”) into net income as a realized ~~"gain~~“gain (loss) on sale of investments, ~~net"~~net” using the specific identification method.

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

Interest Income, Premium Amortization, and Discount Accretion.Interest income on MBS is accrued based on the outstanding principal balance (or notional balance in the case of interest-only, or ~~"IO",~~“IO” securities) and their contractual terms. Premiums ~~and~~or discounts onassociated with the ~~Company's~~purchase of Agency MBS as well as any non-Agency MBS rated ~~'AA'~~‘AA’ and higher ~~at the time of purchase~~ are amortized or accreted into interest income over the ~~expected~~projected life of such securities using the effective yield method, and adjustments to premium amortization and discount accretion are made for actual cash payments. The ~~Company may also adjust premium amortization and discount accretion for changes in projected future cash payments. The Company's~~Company’s projections of future cash payments are based on input and analysis received from external sources and internal models and include assumptions about the amount and timing of loan prepayment rates, fluctuations in interest rates, credit losses, and other factors. On at least a quarterly basis, the Company reviews and makes any necessary adjustments to its cash flow projections and updates the yield recognized on these assets.

The Company does not ~~estimate future prepayments on its fixed-rate Agency RMBS.~~

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

Determination of MBS Fair Value.The Company estimates the fair value of the majority of its MBS based upon prices obtained from third-party pricing services and broker quotes. The remainder of the ~~Company's~~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~~security’s coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

rates, expected losses, and credit enhancements as well as certain other relevant information. ~~Refer~~Please refer to Note 5 for further discussion of MBS fair value measurements.

~~Other-than-Temporary Impairment.~~ AnAllowance for Credit Losses.The Company recently adopted Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses. On at least a quarterly basis, the Company evaluates any MBS ~~is considered impaired when its~~with a fair value is less than its amortized ~~cost. The Company evaluates all of its impaired MBS~~cost for other-than-temporary impairments ("OTTI") on at least a quarterly basis. An impairment is considered other-than-temporary if: (1) the Company intends to sell the MBS; (2) it is more likely than not that the Company will be required to sell the MBS before its fair value recovers; or (3) the Company does not expect to recover the full amortized cost basis of the MBS.credit losses. If either of the first two conditions is met, the entire amount of the impairment is recognized in earnings. If the impairment is solely due to the inability to fully recover the amortized cost basis, the security is further analyzed to quantify any credit loss, which is the difference between the present value of cash flows expected to be collected on the MBS ~~and~~is less than its amortized ~~cost. The~~cost, the difference is recorded as an allowance for credit loss ~~if any, is then~~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 ~~while~~in the ~~balance of impairment related to other factors is recognized~~period in ~~other comprehensive income.~~

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

Repurchase Agreements

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

Derivative Instruments

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

~~Our~~Generally, the Company enters into pay-fixed interest rate swaps, which involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap ~~agreements are privately negotiated in~~without exchange of the ~~over-the-counter ("OTC") market and the majority of these~~underlying notional amount. The Company’s interest rate swap agreements are centrally cleared through the Chicago Mercantile Exchange ~~("CME"~~(“CME”) ~~with the rest being subject to bilateral agreements between the Company and the swap counterparty.~~. The ~~Company's~~Company’s CME cleared swaps require that the Company post initial margin as ~~determined by the CME,~~collateral, and in addition, variation margin is exchanged, typically in cash, for changes in the fair value of the CME cleared swaps. ~~Beginning in January 2017, as a result of a change in the CME's rulebook, the~~The exchange of variation margin for CME cleared swaps is legally considered to be the settlement of the derivative itself as opposed to a pledge of collateral. Accordingly, ~~beginning in 2017,~~ the Company accounts for the daily exchange of variation margin associated with its CME cleared interest rate swaps as a direct increase or decrease to the carrying value of the related derivative asset or liability. ~~The carrying value~~Since December 31, 2019, the Company has significantly reduced its volume of ~~CME cleared~~ interest rate swaps due to management’s expectations of historically low financing costs for the near term and the increase in margin requirements from counterparties since the onset of the pandemic.

The Company enters into long and short positions in U.S. Treasury futures contracts, which are valued based on exchange pricing with daily margin settlements. The Company realizes gains or losses on these contracts upon expiration at an amount equal to the ~~Company's consolidated balance sheets is~~difference between the ~~unsettled~~current fair value of ~~those instruments.~~the underlying asset and the contractual price of

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

the futures contract. Unlike interest rate swaps, the Company does not treat the daily margin exchanges for its U.S. Treasury futures as legal settlement of the instrument.

The Company currently holds put options on U.S. Treasury futures which 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. Put options on U.S. Treasury futures are valued based on exchange pricing without daily exchanges of margin amounts. 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. The Company may also purchase options for interest rate swaps (“interest rate swaptions”) and defer the premium payment until the effective date. The premium payable and underlying swaption are accounted for as a single unit of account.

A TBA security is a forward contract (“TBA contract”) for the purchase (“long position”) or sale (“short position”) of a ~~generic~~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 ~~TBA~~ settlement date. The Company ~~executes TBA dollar roll transactions which effectively delay the settlement of a forward purchase of a TBA Agency RMBS by entering into an offsetting~~accounts for long and short ~~position (referred to as a "pair off"), net settling the paired-off~~ positions in cash, and simultaneously entering a similar TBA contract for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as “drop income” is the economic equivalent of net interest income on the underlying Agency securities over the roll period (interest income less implied financing cost).

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

Please refer to Note 4 for additional information regarding the ~~Company's~~Company’s derivative instruments as well as Note 5 for information on how the fair value of these instruments are calculated.

Share-Based Compensation

Pursuant to the Company’s ~~2009~~2020 Stock and Incentive Plan (the “2020 Plan”), the Company may grant share-based compensation to eligible employees, non-employee directors or consultants or ~~advisers~~advisors to the Company, including restricted stock awards, stock options, stock appreciation rights, ~~dividend equivalent rights,~~ performance ~~shares, and~~units, restricted stock ~~units.~~units, and performance cash awards. The ~~Company's~~Company’s restricted stock currently issued and outstanding ~~under this plan~~ may be settled only in shares of its common stock, and therefore are treated as equity awards with their fair value measured at the grant date and recognized as compensation cost over the requisite service period with a corresponding credit to ~~shareholders'~~shareholders’ equity. The requisite service period is the period during which ~~an employee~~a participant is required to provide service in exchange for an award, which is equivalent to the vesting period specified in the terms of the time-based restricted stock award. None of the ~~Company's~~Company’s restricted stock awards have ~~performance based~~performance-based conditions. The Company does not currently have any share-based compensation issued or outstanding other than restricted stock issued to its employees, officers, and directors.

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

~~Recent~~As previously disclosed in the 2019 Form 10-K, the receiver (the “Receiver”) for one of the plaintiffs awarded damages in a judgment (the "DCI Judgment") against Dynex Commercial, Inc. ("DCI"), a subsidiary of a former affiliate of the Company, filed a separate claim in May 2018 against the Company seeking payment of the damages awarded in connection with the DCI Judgment, alleging that the Company breached a litigation cost sharing agreement, as amended (the "Agreement"), that was initially entered into by the Company and DCI in December 2000. On November 21, 2019, the U.S. District Court, Northern District of Texas ("Northern District Court") granted in part and denied in part summary judgment on the Receiver’s claim and the Company’s claim for offset and recoupment. The Northern District Court found that the

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

Company breached the Agreement and therefore must pay damages to the Receiver. The Northern District Court simultaneously granted the Company’s motion for summary judgment finding that DCI also breached the Agreement and that the Company can recover amounts due to it from DCI under the Agreement. The Receiver subsequently filed a claim for damages with the Northern District Court of approximately $12,600, while the Company filed claims for damages ranging from $13,300 to $30,600, including interest. The Receiver filed objections (the "Objections") with the Northern District Court to, among other things, the Company recovering amounts incurred prior to entry into the Agreement and amounts incurred under the Agreement after January 31, 2006, including interest, which is the date that DCI’s corporate existence ceased under Virginia law. The Company has disputed the Receiver’s Objections, arguing, among other things, that the Receiver's Objections are not supportable under Virginia law and has further refined its damages claim to range from $13,300 based on simple interest to $17,800 based on a combination of simple and compound interest, which the Company believes is supportable under Virginia law. There have been no material developments in this matter during the three months ended September 30, 2020. After consultation with litigation counsel, the Company believes, based upon information currently available and its evaluation of Virginia law, that the likelihood of loss is not probable, and given the range of potential claims for damages by the Company to offset the Receiver's claims, the amount of possible loss cannot be reasonably estimated, and therefore, no contingent liability has been recorded.

Recently Issued and Adopted Accounting Pronouncements

The Company evaluates Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) on at least a quarterly basis to evaluate applicability and significance of any impact on its financial condition and results of operations. There were no accounting pronouncements issued ~~ASU No. 2017-08,~~ ~~Receivables-Nonrefundable Fees and Other Costs,~~ ~~which shortens~~during the ~~amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. The amendments in this ASU~~nine months ended September 30, 2020 that are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 and early adoption is permitted. The amendments in this Update should be applied using the modified-retrospective transition approach and will require disclosures for the change in accounting principle. The Company does not expect this ASUexpected to have a material impact on the ~~Company's~~Company’s financial condition or results of operations.

As of January 1, 2020, the Company elected the fair value option for its mortgage loans held for investment pursuant to the provisions of ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326) Targeted Transition Relief, which was issued in May of 2019. Management chose to elect the fair value option for its mortgage loans because the majority of the Company’s investments are represented on its consolidated balance sheet at fair value. The election of the fair value option resulted in a cumulative adjustment of $(548) to retained earnings on its consolidated balance sheet as of January 1, 2020. The election of the fair value option for its mortgage loans did not have a material impact on its consolidated financial statements.

In March 2020, FASB issued ASU ~~No. 2017-12,~~ ~~Derivatives and Hedging~~2020-04, Reference Rate Reform (Topic ~~815)~~848): ~~Targeted Improvements to Accounting for Hedging Activities,~~ which contains significant amendments to hedge accounting with the main objective of better aligning an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentationFacilitation of the ~~effects~~Effects of ~~the hedging instrument~~Reference Rate Reform on Financial Reporting, which provides optional expedients and ~~the hedged item in the financial statements. This ASU also includes certain targeted improvements~~exceptions to ~~ease the application of current guidance~~GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the ~~assessment~~expected market transition from LIBOR, and certain other floating rate benchmark indices to alternative reference rates. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of ~~hedge effectiveness~~a previous accounting determination. The guidance in ASU 2020-04 is optional and may be elected over time, through December 31, 2022, as well as changes to current disclosure requirements. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted. All transition requirements and elections will be applied to hedging relationships existing on the date of adoption. The effect of adoption will be reflected as of the beginning of the fiscal year of adoption, and the amended presentation and disclosure guidance is required only prospectively.reference rate reform activities occur. The Company does not ~~currently apply hedge accounting, but is evaluating the impact~~believe this ASU ~~would~~will have a material impact on its consolidated financial ~~statements if the Company elects to adopt hedge accounting~~statements.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in ~~the future.~~thousands except share data)

NOTE 2 – MORTGAGE-BACKED SECURITIES

The majority of the ~~Company's~~Company’s MBS are pledged as collateral for the ~~Company's secured borrowings.~~Company’s repurchase agreements. The following tables present the Company’s MBS by investment type (including securities pending settlement) as of the dates indicated:


	September 30, 2020
	Par		Net Premium (Discount)		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
Agency RMBS	$	2,159,813	$	65,064	$	2,224,877	$	56,928	$	0	$	2,281,805
Agency CMBS	271,764		3,445		275,209		23,495		0		298,704
CMBS IO (1)	0		405,736		405,736		9,497		(1,480)		413,753
Non-Agency other	1,630		(517)		1,113		333		(48)		1,398
Total MBS:	$	2,433,207	$	473,728	$	2,906,935	$	90,253	$	(1,528)	$	2,995,660

September 30, 2017
Par Net Premium (Discount) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value
WAC ⁽¹⁾
CMBS:
Agency $ 1,302,237
$ 12,688
1,314,925
$ 6,187
$ (13,623 ) 1,307,489
2.99 %
Non-Agency 40,780
(4,452 ) 36,328
2,877
—
39,205
5.48 %
1,343,017
8,236
1,351,253
9,064
(13,623 ) 1,346,694

CMBS IO ⁽²⁾:

Agency —
394,380
394,380
7,592
(164 ) 401,808
0.63 %
Non-Agency —
322,735
322,735
6,254
(330 ) 328,659
0.61 %
—
717,115
717,115
13,846
(494 ) 730,467

RMBS:
Agency fixed-rate 522,099
19,163
541,262
—
(1,903 ) 539,359
3.52 %
Agency adjustable-rate 294,254
11,011
305,265
1,263
(2,746 ) 303,782
3.05 %
Non-Agency 1,113
—
1,113
49
(20 ) 1,142
6.75 %
817,466
30,174
847,640
1,312
(4,669 ) 844,283

Total AFS securities: $ 2,160,483
$ 755,525
$ 2,916,008
$ 24,222
$ (18,786 ) $ 2,921,444


~~(1)~~	~~The weighted average coupon ("WAC") is the gross interest rate of the security weighted by the outstanding principal balance (or by notional balance in the case of an IO security).~~


~~(2)~~	~~The notional balance for Agency CMBS IO and non-Agency CMBS IO was $14,253,392 and $11,061,377, respectively, as of September 30, 2017.~~

(1) The notional balance for Agency CMBS IO and non-Agency CMBS IO was $12,344,492 and $9,485,281 respectively, as of September 30, 2020.

December 31, 2016
Par Net Premium (Discount) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value
WAC ⁽¹⁾
CMBS:
Agency $ 1,152,586
$ 13,868
$ 1,166,454
$ 6,209
$ (28,108 ) $ 1,144,555
3.12 %
Non-Agency 79,467
(6,718 ) 72,749
5,467
—
78,216
4.72 %
1,232,053
7,150
1,239,203
11,676
(28,108 ) 1,222,771

CMBS IO ⁽²⁾:

Agency —
411,737
411,737
3,523
(3,362 ) 411,898
0.67 %
Non-Agency —
346,155
346,155
1,548
(5,055 ) 342,648
0.61 %
—
757,892
757,892
5,071
(8,417 ) 754,546

RMBS:
Agency adjustable-rate $ 1,157,258
$ 57,066
$ 1,214,324
$ 2,832
$ (15,951 ) $ 1,201,205
3.05 %
Non-Agency 33,572
(24 ) 33,548
64
(50 ) 33,562
3.58 %
1,190,830
57,042
1,247,872
2,896
(16,001 ) 1,234,767

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


	December 31, 2019
	Par		Net Premium (Discount)		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
Agency RMBS	$	2,563,684	$	55,770	$	2,619,454	$	69,082	$	(462)	$	2,688,074
Agency CMBS	1,890,186		15,414		1,905,600		93,763		(6)		1,999,357
CMBS IO (1)	0		488,145		488,145		11,760		(863)		499,042
Non-Agency other	1,938		(780)		1,158		552		(20)		1,690
Total MBS:	$	4,455,808	$	558,549	$	5,014,357	$	175,157	$	(1,351)	$	5,188,163

(1) The notional balance for the Agency CMBS IO and non-Agency CMBS IO was $13,404,824 and $9,799,629, respectively, as of December 31, 2019.


~~(1)~~	~~The WAC is the gross interest rate of the pool of mortgages underlying the security weighted by the outstanding principal balance (or by notional balance in the case of an IO security).~~


~~(2)~~	~~The notional balance for the Agency CMBS IO and non-Agency CMBS IO was $13,106,912 and $10,884,964, respectively, as of December 31, 2016.~~

Actual maturities of MBS are affected by the contractual lives of the underlying mortgage collateral, periodic payments of principal, prepayments of principal, and the payment priority structure of the security; therefore, actual maturities are generally shorter than the securities' stated contractual maturities.

The following table presents information regarding the ~~sales included in "loss~~"gain (loss) on sale of investments, net" on the ~~Company's~~Company’s consolidated statements of comprehensive income (loss) for the periods indicated:


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2020				2019				2020				2019
	Proceeds Received		Realized Gain (Loss)		Proceeds Received		Realized Gain (Loss)		Proceeds Received		Realized Gain (Loss)		Proceeds Received		Realized Gain (Loss)
Agency RMBS (1)	$	0	$	1	$	591,206	$	4,458	$	2,187,956	$	75,824	$	796,699	$	506
Agency CMBS	403,095		20,845		0		0		2,215,098		222,904		213,199		(6,493)
Agency CMBS IO	—		—		9,308		147		—		—		23,168		232
	$	403,095	$	20,846	$	600,514	$	4,605	$	4,403,054	$	298,728	$	1,033,066	$	(5,755)

(1) Additional realized gain for Agency RMBS relates to change in effective rate due to paydown that occurred between trade date of sale in second quarter of 2020 and settlement date in third quarter.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

Three Months Ended
September 30,
2017 2016
Proceeds Received Realized Gain (Loss) Proceeds Received Realized Gain (Loss)
Agency RMBS $ 393,502
$ (5,160 ) $ —
$ —
Agency CMBS 13,433
(51 ) —
—
$ 406,935
$ (5,211 ) $ —
$ —

Nine Months Ended
September 30,
2017 2016
Proceeds Received Realized Gain (Loss) Proceeds Received Realized Gain (Loss)
Agency RMBS $ 716,560
$ (12,392 ) $ 54,178
$ (3,010 )
Agency CMBS 206,993
523
—
—
Non-Agency CMBS 35,705
1,199
33,640
(1,228 )
Non-Agency RMBS 16,407
42
—
—
$ 975,665
$ (10,628 ) $ 87,818
$ (4,238 )

The following table presents certain information for ~~those MBS~~the AFS securities in an unrealized loss position as of the dates indicated:


	September 30, 2020					December 31, 2019
	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	$	36,664	$	(503)	16	$	215,792	$	(1,139)	27
Non-Agency MBS	46,835		(897)		30	13,607		(146)		7

Continuous unrealized loss position for 12 months or longer:
Agency MBS	$	689	$	(107)	3	$	75,745	$	(35)	2
Non-Agency MBS	100		(21)		4	1,099		(31)		5

September 30, 2017 December 31, 2016
Fair Value Gross Unrealized Losses # of Securities Fair Value Gross Unrealized Losses # of Securities
Continuous unrealized loss position for less than 12 months:
Agency MBS $ 1,377,438
$ (13,201 ) 76 $ 1,738,094
$ (38,469 ) 133
Non-Agency MBS 38,979
(151 ) 6 205,484
(2,773 ) 48

Continuous unrealized loss position for 12 months or longer:
Agency MBS $ 206,045
$ (5,236 ) 17 $ 427,405
$ (8,952 ) 72
Non-Agency MBS 15,749
(199 ) 11 81,660
(2,332 ) 26

~~Because~~The unrealized losses on the Company’s MBS are the result of declines in market prices and are not credit related, therefore the Company’s allowance for credit losses was $0 as of September 30, 2020. The principal related to Agency MBS is guaranteed by the government-sponsored entities Fannie Mae and Freddie ~~Mac which have the implicit guarantee of the U.S. government, the Company does not consider any of the unrealized~~

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

~~The Company~~ reviews ~~any non-Agency MBS in an unrealized loss position to evaluate whether any decline in fair value represents an OTTI. The evaluation includes a review of~~ the credit ratings, ~~of the non-Agency MBS,~~ the credit characteristics of the mortgage loans collateralizing these securities, and the estimated future cash flows including projected collateral losses. The Company performed this evaluation for its non-Agency MBS in an unrealized loss position and has determined that there have not been any adverse changes in the timing or amount of estimated future cash flows that necessitate a recognition of OTTI amounts as of ~~September 30, 2017~~ ~~or December 31, 2016.~~

NOTE 3 – REPURCHASE AGREEMENTS

The Company’s repurchase agreements outstanding as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 are summarized in the following tables:


	September 30, 2020						December 31, 2019
Collateral Type	Balance (1)		Weighted Average Rate		Fair Value of Collateral Pledged		Balance		Weighted Average Rate		Fair Value of Collateral Pledged
Agency RMBS	$	1,975,736	0.24	%	$	2,069,035	$	2,594,645	1.96	%	$	2,647,638
Agency CMBS	275,473		0.23	%	296,572		1,735,848		1.98	%	1,901,452
Agency CMBS IO	221,013		1.04	%	254,886		255,912		2.30	%	282,522
Non-Agency CMBS IO	122,461		1.26	%	145,639		165,943		2.67	%	193,013
Total repurchase agreements	$	2,594,683	0.36	%	$	2,766,132	$	4,752,348	2.01	%	$	5,024,625

September 30, 2017 December 31, 2016
Collateral Type Balance
Weighted
Average Rate

Fair Value of
Collateral Pledged
Balance
Weighted
Average Rate

Fair Value of
Collateral Pledged
Agency CMBS $ 1,188,230
1.31 % $ 1,250,575
$ 1,005,726
0.82 % $ 1,095,002
Non-Agency CMBS 15,625
2.14 % 18,365
66,881
1.63 % 77,840
Agency CMBS IO 336,187
2.06 % 389,637
346,892
1.57 % 407,481
Non-Agency CMBS IO 279,981
2.15 % 327,976
291,199
1.67 % 341,139
Agency RMBS 695,841
1.31 % 727,727
1,157,302
0.82 % 1,191,147
Non-Agency RMBS —
— % —
26,149
1.98 % 31,952
Securitization financing bond 3,366
2.58 % 3,723
4,803
2.00 % 5,278
Total repurchase agreements $ 2,519,230
1.51 % $ 2,718,003
$ 2,898,952
1.03 % $ 3,149,839

The Company also had $190 and $6,180 payable to counterparties as of September 30, 2020 and December 31, 2019, respectively, for transactions pending settlement as of those respective dates.

The following table provides information on the remaining term to maturity and original term to maturity for the ~~Company's~~Company’s repurchase agreements as of the ~~periods~~dates indicated:

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)


	September 30, 2017			December 31, 2016				September 30, 2020					December 31, 2019
Remaining Term to Maturity	Balance		WAVG Original Term to Maturity	Balance		WAVG Original Term to Maturity	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	$	1,725,518	36	$	2,480,213	58	Less than 30 days	$	2,048,541	0.37	%	64	$	2,078,185	2.12	%	34
30 to 90 days	793,712		89	418,739		87	30 to 90 days	496,755		0.27	%	95	2,674,163		1.93	%	52
91 to 180 days							91 to 180 days	49,387		0.93	%	121	—		—	%	—
Total	$	2,519,230	53	$	2,898,952	63	Total	$	2,594,683	0.36	%	71	$	4,752,348	2.01	%	45

~~The following table lists the counterparties with whom the Company had over 10%~~As of ~~its shareholders' equity at risk (defined as the excess of collateral pledged over the borrowings outstanding):~~

September 30, 2017
Counterparty Name Balance Weighted Average Rate Equity at Risk
Wells Fargo Bank, N. A. and affiliates $ 349,965
2.10 % $ 57,992

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

~~As of~~ ~~September 30, 2017~~,2020, the Company had repurchase agreement amounts outstanding with 1819 of its 3437 available repurchase agreement counterparties. The ~~Company's~~Company had $475,231 outstanding and $31,917, or approximately 5%, of equity at risk with JP Morgan Chase at a weighted average borrowing rate of 0.35%. The Company did not have more than 5% of its equity at risk with any of its other counterparties as of September 30, 2020. The Company has a committed repurchase facility with Wells Fargo that has an aggregate maximum borrowing capacity of $250,000, of which it had $129,747 outstanding at a weighted average borrowing rate of 1.01% as of September 30, 2020. The facility is available to the Company until its maturity date of June 11, 2021.

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 and earnings, maximum declines in net worth in a given period, and maximum leverage requirements as well as maintaining the ~~Company's~~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, ~~2017~~.2020.

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 following tables present information regarding the Company's repurchase agreements as if the Company had presented them on a net basis as of September 30, ~~2017~~2020 and December 31, ~~2016:~~2019:


	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, 2020
Repurchase agreements	$	2,594,683	$	0	$	2,594,683	$	(2,594,683)	$	0	$	0

December 31, 2019
Repurchase agreements	$	4,752,348	$	0	$	4,752,348	$	(4,752,348)	$	0	$	0

Gross Amount of Recognized Liabilities Gross Amount Offset in the Balance Sheet Net Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet ⁽¹⁾
Net Amount
Financial Instruments Posted as Collateral Cash Posted as Collateral
September 30, 2017
Repurchase agreements $ 2,519,230
$ —
$ 2,519,230
$ (2,519,230 ) $ —
$ —

December 31, 2016:
Repurchase agreements $ 2,898,952
$ —
$ 2,898,952
$ (2,898,952 ) $ —
$ —

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

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

NOTE 4 – DERIVATIVES

Types and Uses of Derivatives Instruments

Interest Rate Derivatives. The ~~Company's derivative instruments include~~Company is currently using short positions in U.S. Treasury futures, put options on U.S. Treasury futures, and interest rate swaptions to mitigate the impact of changing interest rates on its book value. The Company has substantially reduced its notional balance of interest rate swaps since first quarter of 2020 due to the significant reduction of its MBS portfolio and management’s expectation that financing costs will remain low for the near term.

TBA ~~securities.~~ Transactions. The Company ~~utilizes interest rate swaps to~~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 ~~hedge a portion of~~hedging its book value exposure to interest rate risk in order to mitigate declines in book value resulting from fluctuations in the fair value of the Company's assets from changing interest rates and to protect some portion of the Company'sAgency RMBS as well as earnings exposure from rising ~~interest rates.~~financing costs. The Company ~~invests~~holds long and short positions in TBA securities ~~for~~by executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase ~~or sale~~(or sale) of a non-specified Agency RMBS onby entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long (or short) position with a ~~non-specified pool basis.~~later settlement date. TBA securities purchased (or sold) for a forward settlement date are ~~forward contracts which are accounted for as derivative instruments; however, management views~~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 ~~investing~~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 ~~and financing generic~~physical delivery of the underlying Agency ~~fixed-rate~~ RMBS, ~~through~~or that the ~~repurchase agreement markets. Please refer to Note 1~~individual TBA transaction will not settle in the shortest period possible.

Gain (Loss) on Derivative Instruments, Net

The table below provides detail of the Company’s “gain (loss) on derivative instruments, net” by type of derivative for ~~information related to~~ the ~~Company's accounting policy for its derivative instruments.~~periods indicated:


	Three Months				Nine Months Ended
	September 30,				September 30,
Type of Derivative Instrument	2020		2019		2020		2019
Interest rate swaps	$	911	$	(52,908)	$	(182,941)	$	(248,886)
Interest rate swaptions	411		(4,329)		(162)		(4,329)
Futures	(6,517)		1,712		(25,140)		1,501
Options on U.S. Treasury futures	(5,655)		0		(23,815)		0
TBA securities - long positions	18,824		4,652		45,943		21,609
TBA securities - short positions	0		164		(10,041)		164
Gain (loss) on derivative instruments, net	$	7,974	$	(50,709)	$	(196,156)	$	(229,941)

The table below summarizes information about the ~~fair~~carrying value by type of derivative instrument on the ~~Company's~~Company’s consolidated balance sheets as of the dates indicated:


Type of Derivative Instrument	Balance Sheet Location	Purpose	September 30, 2020		December 31, 2019
Options on U.S. Treasury futures	Derivative assets	Economic hedging	$	386	$	2,883
Interest rate swaptions	Derivative assets	Economic hedging	411		573
TBA securities - long positions	Derivative assets	Investing	3,469		834
Total derivatives assets			$	4,266	$	4,290

U.S. Treasury futures	Derivative liabilities	Economic hedging	$	(5,164)	$	0
TBA securities - short positions	Derivative liabilities	Economic hedging	0		(974)
Total derivatives liabilities			$	(5,164)	$	(974)

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

September 30, 2017 December 31, 2016
Type of Derivative Instruments Balance Sheet Location Fair Value
Fair Value ⁽¹⁾
Interest rate swaps Derivative assets $ 368
$ 28,534
TBA securities Derivative assets —
—
$ 368
$ 28,534

Interest rate swaps Derivative liabilities $ —
$ (6,922 )
TBA securities Derivative liabilities (133 ) —
$ (133 ) $ (6,922 )

~~Refer to~~ ~~Note 1~~ regarding information on a change in the CME rulebook. Amounts reported on the consolidated balance sheet as of September 30, 2017 for its interest rate swaps reflect the netting of the derivative asset or liability with the related collateral received or posted, respectively. The net amounts comparable to September 30, 2017 for the derivative asset and derivative liabilities as of December 31, 2016 were $104 and $(576), respectively.

The following ~~tables present information about the Company's interest rate swaps as~~table summarizes certain characteristics of ~~the dates indicated:~~

September 30, 2017
Weighted-Average:
Years to Maturity:
Net Notional Amount ⁽¹⁾

Pay Rate ⁽²⁾
Life Remaining (in Years) Fair Value
< 3 years
$ 3,110,000
1.39 % 0.9 $ 368
>3 and < 6 years
1,160,000
1.66 % 4.2 —
>6 and < 10 years
1,175,000
2.45 % 8.1 —
Total $ 5,445,000
1.68 % 3.2 $ 368

December 31, 2016
Weighted-Average:
Years to Maturity:
Net Notional Amount ⁽¹⁾

Pay Rate ⁽²⁾
Life Remaining (in Years) Fair Value
< 3 years
$ 595,000
0.73 % 2.3 $ 4,348
>3 and < 6 years
1,185,000
1.47 % 4.3 8,631
>6 and < 10 years
1,250,000
2.42 % 8.9 8,633
Total $ 3,030,000
1.58 % 5.3 $ 21,612

~~(2) Excluding forward starting pay-fixed interest rate swaps, the weighted average pay rate was 1.34% and 0.73%~~our derivative instruments outstanding as of September 30, ~~2017~~2020 and December 31, ~~2016, respectively.~~2019:


Interest Rate Swaptions:	Option					Underlying Payer Swap
As of:	Cost Basis		Fair Value		Average Term to Expiration	Notional Amount		Average Fixed Pay Rate		Average Term in Years
September 30, 2020	$	4,150	$	411	6 months	$	500,000	1.01%		10
December 31, 2019	6,180		573		1 month	750,000		2.07%		10

	As of September 30, 2020:					As of December 31, 2019:
	Notional Amount Long (Short)		Fair Value		Average Term to Expiration	Notional Amount Long (Short)		Fair Value		Average Term to Expiration
Options on U.S. Treasury futures	$	1,225,000	$	386	1 month	$	1,350,000	$	2,883	2 months
U.S. Treasury futures - short positions	(1,025,000)		(5,164)		3 months	—		—		—

As of September 30, 2020, the Company had one interest rate swap outstanding with a pay-fixed rate of 1.35% and a notional amount of $50,000 for which it had $(297) posted in variation margin. This instrument matured in October 2020.

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


	September 30, 2020				December 31, 2019
TBA securities	Long Positions		Short Positions		Long Positions		Short Positions
Implied market value (1)	$	1,164,000	$	0	$	442,161	$	(520,117)
Implied cost basis (2)	1,160,531		0		441,327		(519,143)
Net carrying value (3)	$	3,469	$	0	$	834	$	(974)

(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the date indicated.

(2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as of the date indicated.

(3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets (liabilities)” and represents the difference between the implied market value and the implied cost basis of the TBA security as of the date indicated.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

September 30, 2017

Notional Amount ⁽¹⁾

Cost Basis ⁽²⁾

Market Value ⁽³⁾

Net Carrying Value ⁽⁴⁾
30-year 4.0% TBA securities $ 650,000
$ 683,813
$ 683,680
$ (133 )
Volume of Activity

The tables below summarize changes in ~~our~~the Company’s derivative instruments for the ~~periods~~period indicated:


Type of Derivative Instrument	Notional Amount as of December 31, 2019		Additions		Settlements, Terminations, or Pair-Offs		Notional Amount as of September 30, 2020
Interest rate swaps	$	4,225,000	$	2,915,000	$	(7,090,000)	$	50,000
Interest rate swaptions	750,000		500,000		(750,000)		500,000
U.S. Treasury futures - short positions	0		3,637,600		(4,662,600)		(1,025,000)
Options on U.S. Treasury futures	1,350,000		4,650,000		(4,775,000)		1,225,000
TBA - long positions	435,000		9,936,000		(9,246,000)		1,125,000
TBA - short positions	500,000		3,017,000		(3,517,000)		0

Type of Derivative Instrument Notional Amount as of December 31, 2016 Additions
Settlements,
Terminations,
or Pair-Offs
Notional Amount as of September 30, 2017
Receive-fixed interest rate swaps $ 425,000
$ —
$ (325,000 ) $ 100,000
Pay-fixed interest rate swaps 3,455,000
3,010,000
(920,000 ) 5,545,000
TBA securities —
3,814,000
(3,164,000 ) 650,000

~~The table below provides detail of the Company's "gain (loss) on derivative instruments, net" by type of derivative for the periods indicated:~~

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

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

The Company's derivatives are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its derivative assets and liabilities subject to these arrangements on a gross basis. 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, ~~2017~~2020 and December 31, ~~2016:~~2019:


	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, 2020
Interest rate swaption	$	411	$	—	$	411	$	0	$	0	$	411
Options on U.S. Treasury futures	386		—		386		0		0		386
TBA - long positions	3,469		—		3,469		0		0		3,469
Derivative assets	$	4,266	$	—	$	4,266	$	0	$	0	$	4,266
December 31, 2019
Interest rate swaptions	$	573	$	—	$	573	$	0	$	0	$	573
Options on U.S. Treasury futures	2,883		—		2,883		0		0		2,883
TBA - long positions	834		—		834		(380)		0		454
Derivative assets	$	4,290	$	—	$	4,290	$	(380)	$	0	$	3,910

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

Offsetting of Assets
Gross Amount of Recognized Assets Gross Amount Offset in the Balance Sheet Net Amount of Assets Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet ⁽¹⁾
Net Amount
Financial Instruments Received as Collateral Cash Received as Collateral
September 30, 2017
Interest rate swaps $ 368
$ —
$ 368
$ —
$ —
$ 368
TBA securities —
—
—
—
—
—
Derivative assets $ 368
$ —
$ 368
$ —
$ —
$ 368
December 31, 2016:
Interest rate swaps $ 28,534
$ —
$ 28,534
$ (6,449 ) $ (22,085 ) $ —
TBA securities —
—
—
—
—
—
Derivative assets $ 28,534
$ —
$ 28,534
$ (6,449 ) $ (22,085 ) $ —


	Offsetting of Liabilities
	Gross Amount of Recognized 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, 2020
U.S. Treasury futures-short positions	$	(5,164)	—		$	(5,164)	$	0	$	0	$	(5,164)

Derivative liabilities	$	(5,164)	$	—	$	(5,164)	$	0	$	0	$	(5,164)

December 31, 2019
TBA - short positions	$	(974)	—		$	(974)	$	380	0		$	(594)
Derivative liabilities	$	(974)	$	—	$	(974)	$	380	$	0	$	(594)

(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 cash posted as collateral, which is recorded as "restricted cash," and the total fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically.

Offsetting of Liabilities
Gross Amount of Recognized Liabilities Gross Amount Offset in the Balance Sheet Net Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet ⁽¹⁾
Net Amount
Financial Instruments Posted as Collateral Cash Posted as Collateral
September 30, 2017
Interest rate swaps $ —
$ —
$ —
$ —
$ —
$ —
TBA securities 133
—
133
—
(63 ) 70
Derivative liabilities $ 133
$ —
$ 133
$ —
$ (63 ) $ 70

December 31, 2016:
Interest rate swaps $ 6,922
$ —
$ 6,922
$ (6,913 ) $ —
$ 9
TBA securities —
—
—
—
—
—
Derivative liabilities $ 6,922
$ —
$ 6,922
$ (6,913 ) $ —
$ 9

Please see Note 3 for information related to the ~~Company's~~Company’s repurchase agreements, which are also subject to underlying agreements with master netting or similar arrangements.

NOTE 5 – FAIR VALUE OF FINANCIAL INSTRUMENTS

~~ASC Topic 820 defines fair~~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. ~~ASC Topic 820 clarifies that fair~~Fair value ~~should be~~is based on the assumptions market participants would use when pricing an asset or liability and also ~~requires an entity to consider~~considers all aspects of nonperformance risk, including the ~~entity's~~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 3 – Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best estimate of how market participants would price the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The Company reviews the classification of its financial instruments within the fair value hierarchy on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future if a change in type of inputs occurs.

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

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

September 30, 2017
Fair Value Level 1 - Unadjusted Quoted Prices in Active Markets Level 2 - Observable Inputs Level 3 - Unobservable Inputs
Assets:
Mortgage-backed securities $ 2,921,444
$ —
$ 2,913,877
$ 7,567
Interest rate swaps 368
—
368
—
Total assets carried at fair value $ 2,921,812
$ —
$ 2,914,245
$ 7,567
Liabilities:

TBA securities 133
—
133
—
Total liabilities carried at fair value $ 133
$ —
$ 133
$ —

December 31, 2016
Fair Value Level 1 - Unadjusted Quoted Prices in Active Markets Level 2 - Observable Inputs Level 3 - Unobservable Inputs
Assets:
Mortgage-backed securities $ 3,212,084
$ —
$ 3,201,157
$ 10,927
Interest rate swaps 28,534
—
28,534
—
Total assets carried at fair value $ 3,240,618
$ —
$ 3,229,691
$ 10,927
Liabilities:
Interest rate swaps $ 6,922
$ —
$ 6,922
$ —
Total liabilities carried at fair value $ 6,922
$ —

$ 6,922
$ —


	September 30, 2020								December 31, 2019
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets carried at fair value:
MBS	$	2,995,660	$	0	$	2,994,262	$	1,398	$	5,188,163	$	0	$	5,186,473	$	1,690
Mortgage loans held for investment (1)	6,921		0		0		6,921		8,857		0		0		8,857
Derivative assets:
Options on U.S. Treasury futures	386		386		0		0		2,883		2,883		0		0
Interest rate swaptions	411		0		411		0		573		0		573		0
TBA securities-long positions	3,469		0		3,469		0		834		0		834		0
Total assets carried at fair value	$	3,006,847	$	386	$	2,998,142	$	8,319	$	5,201,310	$	2,883	$	5,187,880	$	10,547

Liabilities carried at fair value:
TBA-short positions	$	0	$	0	$	0	$	0	$	974	$	0	$	974	$	0
U.S. Treasury futures	5,164		5,164		0		0		0		0		0		0
Total liabilities carried at fair value	$	5,164	$	5,164	$	0	$	0	$	974	$	0	$	974	$	0

(1) Mortgage loans held for investment were carried at amortized cost of $9,405 on the Company’s consolidated balance sheet as of December 31, 2019.

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

market transactions of identical or similar securities, or an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount. The Company also reviews the assumptions and inputs utilized in the valuation techniques of its primary pricing service. Examples of these observable inputs and assumptions include market interest rates, credit spreads, and projected prepayment speeds, among other things.

The fair value of interest rate swaps are measured using the income approach with the primary input being the forward interest rate swap curve, which is considered an observable input, and thus their fair values are considered Level 2 measurements as of September 30, 2017 and December 31, 2016. The fair value of TBA securities are estimated using methods similar those used to fair value the Company's Level 2 MBS.

The Company owns ~~certain non-Agency~~ MBS ~~for~~and mortgage loans that are considered Level 3 assets because there has been no recent trading activity of similar instruments upon which ~~there are not sufficiently recent trades of substantially similar securities, and~~ their fair value ~~measurements are thus considered Level 3.~~can be measured. The ~~Company determines the~~ fair value ~~of its~~for these Level 3 ~~securities~~assets is measured by discounting the estimated future cash flows derived from cash flow models using significant inputs which are determined by the Company when market observable inputs are not available. Information utilized in those pricing models include the security’s credit rating, coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected credit losses, and credit enhancement as well as certain other relevant information. The Company used a constant prepayment rate assumption of 10%, default rate of 2%, loss severity of 20%, and a discount rate of 7.0% in measuring the fair value of its Level 3 assets as of September 30, 2020. Significant changes in any of these inputs in isolation may result in a significantly different fair value measurement. Level 3 assets are generally most sensitive to the default rate and severity assumptions.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

The activity of the ~~instruments measured at fair value on a recurring basis using~~Company’s Level 3 ~~inputs~~assets during the three and nine months ended September 30, 2020 is presented in the following ~~table~~table:


	Three Months Ended				Nine Months Ended
	September 30, 2020				September 30, 2020
	Other Non-Agency MBS		Mortgage Loans		Other Non-Agency MBS		Mortgage Loans
Balance as of beginning of period	$	1,490	$	7,366	$	1,690	$	9,405
Change in fair value (1)	(72)		213		(246)		(288)
Principal payments	(102)		(651)		(308)		(2,170)
Accretion (amortization)	82		(7)		262		(26)
Balance as of end of period	$	1,398	$	6,921	$	1,398	$	6,921

(1) Change in fair value for other non-Agency MBS is recorded as unrealized gain (loss) in “other comprehensive income”. Change in fair value for mortgage loans is recorded as unrealized gain (loss) in “fair value adjustments, net“ and the amount shown for the ~~period indicated:~~

~~The following table presents~~nine months ended September 30, 2020 is net of cumulative adjustment of $(548) made to the amortized cost as of December 31, 2019 as a ~~summary of the carrying value and estimated fair values~~result of the Company’s ~~financial instruments as~~election of the ~~dates indicated:~~fair value option for its mortgage loans effective January 1, 2020.

The fair value of interest rate swaps is measured using the income approach with the primary input being the forward interest rate swap curve, which is considered an observable input, and thus their fair values are considered Level 2 measurements. All of the Company’s interest rate swap agreements are centrally cleared through the CME. Please refer to Note 1 for information regarding the exchange of variation margin being legally considered as settlement of the derivative as opposed to a pledge of collateral. U.S. Treasury futures and options on U.S. Treasury futures are valued based on closing exchange prices on these contracts and are classified accordingly as Level 1 measurements. Unlike its interest rate swaps, the Company does not treat the exchange of variation margin for its U.S. Treasury futures as legal settlement of the instrument. The fair value of interest rate swaptions is based on the fair value of the underlying interest rate swap and time remaining until its expiration and is carried on the balance sheet net of any deferred premium to be paid upon expiration. The fair value of TBA securities is estimated using methods similar those used to fair value the Company’s Level 2 MBS.

September 30, 2017 December 31, 2016
Carrying Value Fair Value Carrying Value Fair Value
Assets:
Mortgage-backed securities $ 2,921,444
$ 2,921,444
$ 3,212,084
$ 3,212,084
Mortgage loans held for investment, net ⁽¹⁾
16,523
13,674
19,036
15,971
Derivative assets 368
368
28,534
28,534
Liabilities:

Repurchase agreements ⁽²⁾
$ 2,519,230
$ 2,519,230
$ 2,898,952
$ 2,898,952
Non-recourse collateralized financing ⁽¹⁾
5,706
5,722
6,440
6,357
Derivative liabilities 133
133
6,922
6,922

NOTE 6 – ~~SHAREHOLDERS'~~SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Stock. The Company's articles of incorporation authorize the issuance of up to 50,000,000 shares of preferred stock, par value $0.01 per ~~share, of which the Company's~~share. The Company’s Board of Directors has designated ~~8,000,000~~6,600,000 shares for issuance as 6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, and the Company sold 4,460,000 of such shares during the first quarter of 2020 through a public offering for which it received proceeds of $107,988, net of $3,512 in broker commissions and other expenses. The Company used the proceeds to redeem all 2,300,000 outstanding shares of its 8.50% Series A Cumulative Redeemable Preferred Stock at an aggregate redemption price of approximately $25.35 per share, which included accumulated and ~~7,000,000~~unpaid dividends declared as of the redemption date March 14, 2020. The Company also used the proceeds to partially redeem 1,700,000 shares of its 7.625% Series B Preferred Stock ~~(the Series A Preferred Stock~~at an aggregate redemption price of approximately $25.32 per share, which included accumulated and the Series B Preferred Stock collectively, the "Preferred Stock"). The Company had 2,300,000 shares of its Series A Preferred Stock and 3,365,101 shares of its Series B Preferred Stock issued and outstandingunpaid dividends declared as of the redemption date March 16, 2020. The excess of the $25.00 liquidation price per share over the carrying value of the preferred stock redeemed resulted in a charge of $(3,914) to net income to common shareholders for the nine months ended September 30, ~~2017 compared to 2,300,000 shares of Series A Preferred Stock and 2,271,937 shares of Series B Preferred Stock as of December 31, 2016.~~2020.

The Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and will remain outstanding indefinitely unless redeemed or otherwise repurchased or converted into common stock pursuant to the terms of the Preferred Stock. The ~~Company's~~Company had 2,788,330 shares of its Series AB Preferred Stock remaining as of September 30, 2020, which may be redeemed ~~in whole, or in part,~~ at any time and from time to time at the Company's option at a cash redemption price of $25.00 per share plus any accumulated and unpaid dividends. Except under certain limited circumstances described

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

in Article IIIC of the Company’s Restated Articles of Incorporation, as amended, the Company may not redeem the Series BC Preferred Stock prior to April ~~30, 2018.~~15, 2025. On or after ~~April 30, 2018,~~that date, the ~~Company's~~ Series BC Preferred Stock may be redeemed ~~in whole, or in part,~~ at any time and from time to time at the Company's option at a cash redemption price of $25.00 per share plus any accumulated and unpaid dividends. Because the Preferred Stock is redeemable only at the option of the issuer, it is classified as equity on the ~~Company's~~Company’s consolidated balance sheet.

The ~~Series A Preferred Stock pays a cumulative cash dividend equivalent to 8.50% of the $25.00 liquidation preference per share each year and the~~ Series B Preferred Stock pays a cumulative cash dividend equivalent to 7.625% of the $25.00 liquidation preference per share each year. 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 upon which date 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 three-month LIBOR plus a spread of 5.461%. The Company paid its regular quarterly ~~dividends on its~~dividend of $0.4765625 per share of Series B Preferred Stock ~~for the~~ ~~third~~ ~~quarter~~and $0.43125 per share of Series C Preferred Stock on October ~~16, 2017~~15, 2020 to shareholders of record as of October 1, ~~2017.~~2020.

Stock. The ~~Company declared a~~ ~~third~~ ~~quarter~~following table summarizes information regarding monthly dividend declarations on the Company’s common stock ~~dividend of $0.18 per share that was paid on October 31, 2017 to shareholders of record as of October 3, 2017.~~during the nine months ended September 30, 2020:

Nine Months Ended

September 30, 2020

Declaration Date

Amount Declared

Record Date

Payment Date

January 13, 2020

0.15

January 24, 2020

February 3, 2020

February 14, 2020

0.15

February 24, 2020

March 2, 2020

March 10, 2020

0.15

March 23, 2020

April 1, 2020

April 8, 2020

0.15

April 22, 2020

May 1, 2020

May 12, 2020

0.15

May 22, 2020

June 1, 2020

June 10. 2020

0.13

June 22, 2020

July 1, 2020

July 13, 2020

0.13

July 23, 2020

August 4, 2020

August 10, 2020

0.13

August 21, 2020

September 1, 2020

September 14, 2020

0.13

September 24, 2020

October 1, 2020

Stock and Incentive ~~Plan.~~ OfPlans. The Company’s Board adopted the ~~2,500,000~~ ~~shares of common stock authorized for issuance under its 2009~~2020 Stock and Incentive Plan, which was approved by the Company’s shareholders on June 9, 2020. The 2020 Plan, which replaced the Company’s 2018 Stock and Incentive Plan (the “2018 Plan”), reserves for issuance up to 2,300,000 common shares for eligible employees, non-employee directors, consultants, and advisors to the Company ~~had~~ ~~785,962~~ ~~available for issuance as~~to be granted in the form of ~~September 30, 2017~~.stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, and performance cash awards. Awards previously granted under the 2018 Plan or any other prior equity plan will remain outstanding and valid in accordance with their terms, but no new awards will be granted under the 2018 Plan or any other prior equity plan. Total stock-based compensation expense recognized by the Company for the three and nine months ended September 30, ~~2017~~2020 was ~~$388~~$568 and ~~$1,567,~~$1,299, respectively, compared to ~~$623~~$306 and ~~$2,066~~$899 for the three and nine months ended September 30, ~~2016~~,2019, respectively.

The following table presents a rollforward of the restricted stock activity for the periods indicated:

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.

(amounts in thousands except share data)

As of September 30, ~~2017,~~2020, the grant date fair value of the Company’s remaining nonvested restricted stock is ~~$1,505~~$3,295 which will be amortized into compensation expense over a weighted average period of ~~1.5~~2.2 years.

~~NOTE 7 – SUBSEQUENT EVENTS~~

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

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

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


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

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

The following discussion should be read in conjunction with our unaudited financial statements and the accompanying notes included in Part 1,I, Item 1. “Financial Statements” in this Quarterly Report on Form 10-Q and our audited financial statements and the accompanying notes included in Part II, Item 8 in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019 (the “2019 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 ~~Annual Report on~~2019 Form ~~10-K for the year ended December 31, 2016.~~10-K.

EXECUTIVE OVERVIEW

~~Company Overview~~

~~We are~~Dynex Capital, Inc. is an internally managed mortgage real estate investment trust, or mortgage REIT, which primarily invests in residential and commercial mortgage-backed securities (“MBS”) on a leveraged basis. ~~Our common stock is traded on the New York Stock Exchange ("NYSE")~~We finance our investments principally with borrowings under ~~the symbol "DX".~~repurchase agreements. Our objective is to provide attractive risk-adjusted returns to our shareholders over the long term that are reflective of a leveraged, high quality fixed income portfolio with a focus on capital preservation. We seek to provide returns to our shareholders primarily through the payment of regular ~~quarterly~~ dividends and also potentially through capital ~~appreciation.~~

We also have two series of preferred stock outstanding, our 8.50% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") which is traded on the NYSE under the symbol "DXPRA", and our 7.625% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock") which is traded on the NYSE under the symbol "DXPRB".

We invest in Agency and non-Agency mortgage-backed securities (“MBS”) consisting of residential MBS (“RMBS”), commercial MBS (“CMBS”) and CMBS interest-only ("IO") securities. Agency MBS have a guaranty of principal payment by an agency of the U.S. government or a U.S. government-sponsored entity ("GSE") such as Fannie Mae and Freddie Mac. Non-Agency MBS have no such guaranty of payment. Our investments in non-Agency MBS are generally higher quality senior or mezzanine classes (typically rated 'A' or better by one or more of the nationally recognized statistical rating organizations) because they are typically more liquid (i.e., they are more easily converted into cash either through sales or pledges as collateral for repurchase agreement borrowings) and have less exposure to credit losses than lower-rated non-Agency MBS.

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

~~RMBS.~~ Our Agency RMBS investments include MBS collateralized by fixed-rate mortgage loans as well as adjustable-rate mortgage loans ("ARMs"), which have interest rates that generally adjust at least annually to an increment over a specified interest rate index. Agency ARMs also include hybrid adjustable-rate mortgage loans ("hybrid ARMs"), which are loans that have a fixed rate of interest for a specified period (typically three to ten years) and then adjust their interest rate at least annually to an increment over a specified interest rate index. Substantially allappreciation of our ARMs reset based on the one-year LIBOR index. We sold the majority of our non-Agency RMBS during the second quarter of 2017 because these investments were within a year of their maturity. We are not currently re-investing capital into non-Agency RMBS due to the lack of available securities of this type with attractive risk-adjusted returns.investments.

In the second quarter of 2017, we began entering into forward contracts for the purchase of TBA securities as a means of investing in and financing non-specified fixed-rate Agency RMBS. A TBA security is a forward contract for the purchase or sale of a fixed-rate Agency MBS at a predetermined price with certain principal and interest terms and certain types of collateral, but the particular Agency securities to be delivered are not identified until shortly before the TBA settlement date. The financing for TBA securities is implied through our use of TBA dollar roll transactions whereby we enter into an offsetting short position, net settle the paired-off positions in cash, and simultaneously enter into a similar TBA contract for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as “drop income,” is the economic equivalent of net interest income on the underlying Agency securities over the roll period (interest income less implied financing cost). We account for TBA securities as derivative instruments because we cannot assert that it is probable at inception and throughout the term of an individual TBA contract that its settlement will result in physical delivery of the underlying Agency RMBS, or the individual TBA contract will not settle in the shortest time period possible.

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

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

~~Financing.~~ We finance our investments primarily through the use of uncommitted repurchase agreements which are provided principally by major financial institutions and broker-dealers. We pledge our MBS as collateral to secure the amounts borrowed from our counterparties. These repurchase agreements generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We pay interest on our repurchase agreement borrowings at a rate usually based on a spread to LIBOR and fixed for the term of the borrowing. Borrowings under these repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed roll-over terms. One of our repurchase agreement lenders provides a committed repurchase agreement financing facility to us with an aggregate borrowing capacity of $400.0 million that expires in May 2019.

TBA dollar roll transactions require us to post initial margin (though typically the amount is less than the initial margin amount for repurchase agreements) and variation margin for fluctuations in fair value of the TBA securities. These dollar roll transactions have an implied financing rate which changes with market conditions, expected prepayment speeds, and the underlying demand for Agency RMBS in a given delivery period.

~~Hedging.~~ We currently use interest rate swaps to hedge our exposure to changes in interest rates. Such exposure results from our ownership of hybrid and fixed-rate investments that are financed with repurchase agreements which have significantly shorter maturities than the weighted average life of these investments. Changes in interest rates can impact the market value of our investments and our net interest income, thereby ultimately impacting book value per common share. We frequently adjust

~~our hedging portfolio based on our expectation of future interest rates, including the absolute level of rates and the slope of the yield curve versus market expectations.~~

~~Factors that Affect Our Results of Operations and Financial Condition~~

Our financial performance is driven principally by the performance of our investment portfolio and related financing and hedging activity. Management focuses on net interest income, net income, comprehensive income, book value per common share, and core net operating income to common shareholders (a non-GAAP measure) as measurements of our financial performance. Our financial performance may be impacted by multiple factors, including but not limited to, macroeconomic conditions, geopolitical conditions, central bank and government policy, the absolute level of interest rates and the relative slope of interest rate curves, changes in market expectations of future interest rates, actual and estimated future prepayment rates on our investments, competition for investments, economic conditions and their impact on the credit performance of our investments, and market required yields as reflected by market spreads. All of these factors are influenced by market forces beyond our control and may be exacerbated during periods of market volatility.

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

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

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

For further discussion of the risks inherent in our business model, please see "Liquidity and Capital Resources" within this Item 2 and in Part I, Item 3 of this Quarterly Report on Form 10-Q as well as in Item 1A, "Risk Factors" of Part I of our Annual Report on Form 10-K for the year ended December 31, 2016.

Market Conditions and Recent Activity

~~Market volatility remained largely subdued during~~Markets continued to stabilize in the third quarter of ~~2017 and~~2020 as ~~a result~~central bank liquidity injections, in particular the Federal Reserve, supported the improving valuations of risk assets. As credit spreads ~~modestly tightened or held steady across most asset classes. As of September 30, 2017, market credit spreads in general and in sectors in which we invest were at or near their tightest levels in~~on risk assets have rallied over the last ~~year. Credit spreads~~two quarters, U.S. Treasury interest rates have settled into a tighter range and ended the third quarter virtually unchanged from June 30, 2020. Funding markets have continued to stabilize with borrowing rates moving lower for ~~fixed-rate Agency RMBS have lagged other sectors which we believe reflects market concerns over~~both repurchase agreements and TBA dollar roll transactions. U.S. GDP for the ~~announced balance sheet reduction~~third quarter of 2020 increased 33.1%, partially recovering its first and second quarter declines of 5% and 31.4%, respectively. Markets continue to expect liquidity support by the Federal Reserve and potentially additional fiscal support from the U.S. Congress. The direct impact from COVID-19 has been limited on our results and our operations. However, the impact on the U.S. and the global economy from COVID-19 continues to have the potential to materially disrupt cash flows on U.S. real estate, and in particular rents on multifamily and commercial real estate which could impact our Agency CMBS and Agency and non-Agency CMBS IO securities. To date, there has not been a material impact.

Against this backdrop, we sold an additional $382.3 million of Agency CMBS late in the third quarter, realizing a gain of $20.8 million. We sold the Agency CMBS as in our view ~~continues to make these~~asset prices are not reflecting potential cash flow disruptions that may occur over time. For the quarter we had higher leverage and a larger investment portfolio including TBA securities ~~the most attractive risk-adjusted return~~than in the ~~market.~~second quarter as market conditions stabilized. With the sales of the Agency CMBS, we ended the third quarter of 2020 with investments including TBA securities of $4.2 billion and leverage at 6.2x shareholders' equity, lower than at the end of the second quarter, but on balance our average interest earning assets were higher for the quarter than the second quarter. We also ~~believe that the macroeconomic environment continues~~adjusted our hedging strategy by shifting options on 10-Year U.S. Treasury futures to ~~be supportive for RMBS~~longer dated tenors and ~~CMBS. In particular, two major central banks (the Bank~~adding 6-month interest rate swaptions. We terminated a notional of ~~Japan~~$425.0 million in interest rate swaps and ~~the European Central Bank) continue to inject liquidity through large scale asset purchases supporting valuations across sectors.~~do not hold any of these instruments as of October 6, 2020.

Interest rates were largely unchanged during the quarter but traded in a fairly wide range generally in response to shifting economic data. As expected by the markets, the FOMC increased the target Federal Funds Rate by 0.25% in June 2017 and has now increased the target Federal Funds Rate a full 1.00% to a current targeted range of 1.00% - 1.25% since December 2015. The ~~chart~~charts below ~~shows~~show the highest and lowest U.S. Treasury and swap rates during the ~~three months~~quarter ended September 30, ~~2017~~2020 as well as the rates as of September 30, ~~2017~~2020 and June 30, ~~2017 for the indicated U.S. Treasury securities:~~2020:

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

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

~~Highlights of the~~ Third Quarter ~~of 2017~~2020 Results

~~During~~Our book value per common share increased $1.56 during the third quarter of ~~2017, we~~2020 primarily because of continued spread tightening across all MBS types. Our increase in book value and dividends declared for the third quarter and year-to-date have resulted in total economic return to ~~sell lower yielding hybrid ARMs~~our common shareholders of 11.7% and ~~reallocate capital into 30-year fixed-rate Agency RMBS through~~8.4%, respectively, as a percentage of the ~~purchase~~respective period’s book value. The resulting increase in fair value of ~~specified pools and TBA securities. Given~~our MBS was the challenging risk environment that currently exists globally, we are focusing on fixed-rate Agency RMBS because their higher liquidity gives us the ability to readjust our risk position more rapidly than other asset classes. Management believes that risk-adjusted returns on fixed-rate Agency RMBS are more favorable than other asset classes, particularly if credit spreads widen in the future. Furthermore, prepayments on fixed-rate Agency RMBS are more predictable than adjustable-rate Agency RMBS, which currently have higher riskprimary component of ~~prepayment in the flat yield curve environment.~~

~~Comprehensive~~comprehensive income to common shareholders of ~~$0.27 per common share~~$44.5 million for the third quarter of ~~2017 was comprised~~2020. As discussed above, we chose to monetize a portion of these gains on certain CMBS for which we believed risks of continued investment outweighed

potential for increased returns. Though net ~~income to common shareholders of $0.15 per common share and other comprehensive income ("OCI") of $0.12 per common share, which resulted primarily from~~interest spread remained flat at 1.96% for the ~~favorable impact of credit spread tightening on the fair value of the majority of MBS as mentioned previously. In the second~~third quarter ~~comprehensive income to common shareholders was $0.05 per common share consisting of~~versus prior quarter, net ~~loss to common shareholders of ($0.20) per common share and other comprehensive income ("OCI") of $0.25 per common share. Net~~ interest income increased quarter over quarter due primarily to lower financing costs while a larger average balance of interest earning assets contributed to a modest increase in interest income. The Company's results for the third quarter of ~~2017 declined approximately 18% compared to the second quarter of 2017 as~~2020 also include a ~~result of increasing short-term interest rates, a modest decline in average interest earning assets, and a decrease in prepayment penalty compensation from CMBS. The decline in~~ net ~~interest income was more than offset by gains~~

gain on derivative instruments ~~(both TBAs and interest rate swaps)~~of $8.0 million, the majority of which is comprised of realized gains from increased ~~from losses on derivative instruments incurred during the second quarter of 2017.~~

investment in TBA securities. Core net operating income to common shareholders, (aa non-GAAP ~~measure)~~measure, was ~~$0.19 per common share~~$14.2 million for the third quarter of ~~2017,~~2020, which includes $6.1 million in TBA drop income. An increase in TBA drop income, together with lower repo funding costs and a larger average interest earning asset basis as noted above, were the ~~same~~primary drivers of the Company's core net operating income, which increased $5.8 million, or $0.25 per common share, to $0.61 per common share, compared to the second quarter of 2020.

Current Outlook

Our macroeconomic opinion for the long-term has not materially changed from last quarter. We believe the global economy remains fragile and vulnerable to sudden exogenous shocks. The global economy is largely supported by central banks and global debt continues to increase excessively. Our current short-term view, however, has been impacted by the health crisis, the resulting economic crisis, and a host of new policy risks that have been introduced in order to support the global economy. Though the Federal Reserve has taken action to support the financial markets, and Congress and the U.S. Treasury have passed the CARES Act, the efficacy and outcome of these actions are unknown, and the risk for policy mistakes remains high. Measures of market volatility currently are low, however, notwithstanding the COVID-19 health crisis and its impact on economic activity. We believe risk factors are increasing in complexity and number, further exacerbated by the pandemic.

Because the risk of an exogenous event such as the ~~second quarter. Drop income from~~onset of the pandemic in March remains high, we continue to focus on maintaining a highly liquid position and to invest in Agency MBS where the Federal Reserve is providing material support. The low funding rate environment, including negative TBA dollar roll ~~transactions~~funding costs, is resulting in attractive returns on Agency RMBS relative to the risk of owning these securities in today’s environment. Our leverage targets, including TBA securities, remain between 6-9 times shareholders’ equity, and ~~lower net periodic interest costs from~~we will actively increase or decrease leverage based on the risk environment. We have not yet increased leverage in the fourth quarter of 2020 as we remain cautious ahead of the 2020 U.S. Presidential election. Longer term, we maintain our belief that the demographics behind the housing sector continue to support our investment thesis of investing in high quality, highly liquid U.S.-based housing assets. We intend to continue taking a balanced and measured approach to our business strategy, so that our company has the capacity to perform favorably under a variety of scenarios.

Other Factors Impacting Our Financial Condition and Results of Operations

In recent filings, we have discussed the potential for the upcoming cessation of LIBOR as a “benchmark” rate by the end of 2021 to impact our business and results of operations. Please refer to Part II, Item 1A, "Risk Factors" of our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 as well as Item 1, “Business” in our 2019 Form 10-K for more detailed information. Though our significant reduction of interest rate swaps ~~offset higher borrowing costs~~in our hedging portfolio has reduced the potential impact of the transition to alternative reference rates, we are continuing to develop a plan to facilitate an orderly transition to alternative reference rates for our remaining interest rate swaps and ~~lower prepayment penalty compensation. Please see "Non-GAAP Financial Measures" at the end of this "Executive Overview" for additional important information about non-GAAP measures.~~

~~Book value per common share increased $0.08~~other financial instruments. Our transition plan includes steps to ~~$7.46 as of September 30, 2017 from June 30, 2017 primarily because~~evaluate exposure, review contracts, assess impact to our ~~investments outperformed~~business, processes and technology and define a communication strategy with shareholders, regulators and other stakeholders. We will also be assessing how our ~~hedges~~financial instruments may be indirectly impacted as a result of ~~tightening credit spreads. Economic return on book value was 3.5% for the~~modifications made by third ~~quarter of 2017~~parties to LIBOR-based loans underlying our MBS and 11.4% for the first nine months of 2017. Economic return on book value is calculated by dividing (i) the sum of dividends declared per common share and the change in book value per common share by (ii) beginning book value per common share.other investments.

~~Management Outlook~~

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

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

Non-GAAP Financial Measures

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

Company's consolidated statements of comprehensive income, in adjusted net interest expense and in adjusted net interest income because interest rate swaps are used by the Company to economically hedge the Company's borrowing costs from repurchase agreements, and including periodic interest costs from interest rate swaps is a helpful indicator of the Company’s total cost of financing in addition to GAAP interest expense. Because these measures are used in the Company's internal analysis of financial and operating performance, management

believes that they provide greater transparency to our investors of management's view of our economic performance. Management also believes the presentation of these measures, when analyzed in conjunction with the Company's GAAP operating results, allows investors to more effectively evaluate and compare the performance of the Company to that of its ~~peers. Because these~~peers, although the Company's presentation of its non-GAAP ~~financial~~ measures ~~include or exclude, as applicable, certain items used~~may not be comparable to ~~compute GAAP~~other similarly-titled measures of other companies. Reconciliations of core net operating income to common shareholders ~~GAAP~~and adjusted net interest income orto the related GAAP financial measures are provided below and within “Results of Operations”.

Management views core net operating income to common shareholders as an estimate of the Company’s financial performance based on the effective yield of its investments, net of financing costs and other normal recurring operating income/expense, net. In addition to the non-GAAP reconciliation set forth below, which derives core net operating income to common shareholders from GAAP comprehensive income (loss) to common shareholders, core net operating income to common shareholders can also be determined by adjusting net interest income to include interest rate swap periodic interest benefit/cost, drop income on TBA securities, general and administrative expenses, and preferred dividends. 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 core net operating income and in adjusted net interest income because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. Management also includes interest rate swap periodic interest benefit/cost, which is also included in "gain (loss) on derivatives instruments, net", in adjusted net interest income because interest rate swaps are used by the Company to economically hedge the impact of changing interest rates on its borrowing costs from repurchase agreements, and therefore represent a cost of financing in addition to GAAP interest ~~expense,~~expense. However, these non-GAAP ~~financial~~measures do not provide a full perspective on our results of operations, and therefore, their usefulness is limited. For example, these non-GAAP measures do not include gains or losses from available-for-sale investments, changes in fair value of and costs of terminating interest rate swaps, as well as realized and unrealized gains or losses from other instruments used by management to economically hedge the impact of changing interest rates on the fair value of its portfolio and book value per common share. As a result, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, the Company's GAAP results as reported on its consolidated statements of comprehensive income. ~~In addition, because not all companies use identical calculations,~~


	Three Months Ended
($ in thousands, except per share amounts)	September 30, 2020		June 30, 2020
Comprehensive income to common shareholders	$	44,471	$	26,538
Less:
Change in fair value of available for sale investments	(27,844)		(28,052)
Change in fair value of derivative instruments, net (1)	(2,258)		10,252
Fair value adjustments, net	(194)		(332)
Core net operating income to common shareholders	$	14,175	$	8,406

Weighted average common shares	23,141,270		23,056,812
Comprehensive income per common share	$	1.92	$	1.15
Core net operating income per common share	$	0.61	$	0.36

(1) Amount includes unrealized gains and losses from changes in fair value of derivatives and realized gains and losses on terminated derivatives and excludes net periodic interest benefit on effective interest rate swaps outstanding during the ~~Company's presentation~~period.


	Three Months Ended
($ in thousands)	September 30, 2020		June 30, 2020
Net interest income	$	16,713	$	15,003
Add: TBA drop income (1)	6,087		1,796
Add: net periodic interest cost (2)	(371)		(107)
Adjusted net interest income	$	22,429	$	16,692
Other operating expense, net	(207)		(222)
General and administrative expenses	(4,795)		(4,811)
Preferred stock dividends	(3,252)		(3,253)
Core net operating income to common shareholders	$	14,175	$	8,406

(1) TBA drop income is calculated by multiplying the notional amount of ~~non-GAAP financial measures may not be comparable to other similarly-titled measures~~the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates. The impact of ~~other companies.~~

~~Schedules reconciling adjusted interest expense and~~TBA drop income on adjusted net interest ~~income~~spread includes the implied average funding cost of TBA dollar roll transactions during the periods indicated.

(2) Amount represents net periodic interest benefit/cost of effective interest rate swaps outstanding during the period and excludes realized and unrealized gains and losses from changes in fair value of derivatives.

FINANCIAL CONDITION

Investment Portfolio

Our investment portfolio as of September 30, 2020 was $4.2 billion including TBA securities compared to $5.1 billion including TBA securities as of December 31, 2019. As of September 30, 2020, our portfolio is predominantly comprised of Agency RMBS which have offered better liquidity and returns in 2020. The following chart compares the composition of our MBS portfolio including TBA securities as of the dates indicated:

(1) Includes TBA positions at their implied market value as if settled which are accounted for as “derivative assets (liabilities)” on our consolidated balance sheet.

RMBS.Our Agency RMBS pass-through securities are collateralized primarily by pools of fixed-rate single-family mortgage loans. Monthly payments of principal and interest made by the individual borrowers on the mortgage loans underlying the pools are "passed through" to the security holders, after deducting GSE or U.S. Government agency guarantee and servicer fees. In general, mortgage pass-through certificates distribute cash flows from the underlying collateral on a pro-rata basis among the security holders. Security holders also receive guarantor advances of principal and interest for delinquent loans in the mortgage pools.

As of September 30, 2020, we are invested in lower coupon investments to mitigate the risk of loss of premiums due to early prepayment given the lower interest rate environment in 2020 while keeping a modest allocation to specified pools of 4.0% coupon as protection in case interest rates rise. Our lower coupon investments also have lower premiums relative to higher coupon assets which further protects our earnings when prepayments occur. Additionally, since December 31, 2019, we have increased our investment in TBA securities, including 15-year fixed-rate TBA, as implied financing rates for dollar roll transactions have been lower than the financing rates for repurchase agreement borrowings we typically use to finance specified pools, and these transactions allow more flexibility should we decide or find it necessary to reduce leverage.

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


	September 30, 2020
	Par		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)
30-year fixed-rate:	($ in thousands)
2.0%	$	778,329	$	796,439	$	809,817	5	3.8	%	4.98
2.5%	981,588		1,017,624		1,037,864		7	6.0	%	3.40
4.0%	399,896		410,814		434,124		29	38.1	%	2.29
TBA 2.0%	625,000		641,736		644,434		n/a	n/a		4.10
15-year fixed-rate:
TBA 2.0%	500,000		518,795		519,566		n/a	n/a		2.75
Total	$	3,284,813	$	3,385,408	$	3,445,805	10	11.3	%	3.66

	December 31, 2019
	Par		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)
30-year fixed-rate:	($ in thousands)
2.5%	$	110,610	$	109,341	$	109,409	3	—	%	5.15
3.0%	307,380		310,486		314,159		25	9.4	%	4.04
3.5%	538,551		549,735		562,921		11	10.9	%	2.64
4.0%	1,352,730		1,384,913		1,429,547		20	23.5	%	2.28
4.5%	254,413		264,979		272,037		13	29.9	%	1.55
TBA 2.5%	135,000		133,059		133,513		n/a	n/a		5.10
TBA 3.0%	300,000		308,268		308,648		n/a	n/a		1.90
TBA 4.0%	(500,000)		(519,143)		(520,117)		n/a	n/a		1.28
Total 30-year fixed-rate	$	2,498,684	$	2,541,638	$	2,610,117	17	18.9	%	2.91

(1) Implied cost basis of TBAs represents the forward price to be paid (received) 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 4 of the Notes to the Unaudited 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. Securities with no prepayment history are excluded from this calculation.

(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.

CMBS. The majority of our Agency CMBS are backed by multifamily housing loans. Loans underlying CMBS are generally fixed-rate with scheduled principal payments generally assuming a 30-year amortization period, but typically requiring balloon payments on average approximately 10 years from origination. These loans typically have some form of prepayment protection provisions, such as yield maintenance or defeasance provisions, which provide us compensation if underlying loans prepay prior to us earning our expected return on our investment. Yield maintenance and prepayment penalty requirements are intended to create an economic disincentive for the loans to prepay, which makes the fair value of CMBS less costly to hedge relative to RMBS.

During the second and third quarters of 2020, we sold a substantial portion of our Agency CMBS, realizing gains on investments on which credit spreads had tightened and for which we believed risks of continued investment outweighed potential returns. These sales have materially reduced the size of the investment portfolio and shifted the overall composition to more seasoned investments with a higher probability of appreciation in the underlying collateral versus newer issue bonds. The following table which presents information about our CMBS investments by year of origination as of the dates indicated:


	September 30, 2020							December 31, 2019
($ in thousands)	Par Value		Amortized Cost		Months to Estimated Maturity (1)	WAC (2)		Par Value		Amortized Cost		Months to Estimated Maturity (1)	WAC (2)
Year of Origination:
Prior to 2009	$	12,724	$	12,516	24	5.60	%	$	13,441	$	13,080	30	5.74	%
2009 to 2012	12,587		13,295		47	5.49	%	28,141		29,153		34	4.99	%
2013 to 2014	11,127		11,322		50	3.65	%	11,294		11,528		59	3.65	%
2015	156,130		157,557		73	2.85	%	175,219		177,023		87	2.86	%
2016	—		—		—	—	%	19,910		19,742		109	2.62	%
2017	50,758		51,178		91	3.08	%	340,638		342,158		101	3.07	%
2018	—		—		—	—	%	330,180		329,984		127	3.68	%
2019	29,502		29,889		146	3.05	%	972,646		983,435		134	3.27	%

	$	272,828	$	275,757	80	3.20	%	$	1,891,469	$	1,906,103	120	3.30	%

(1) Months to estimated maturity is an average weighted by the amortized cost of the investment.

(2) The weighted average coupon (“WAC”) is the gross interest rate of the security weighted by the outstanding principal balance.

CMBS IO. We invest in Agency-issued and non-Agency issued CMBS IO which are interest-only securities issued as part of a CMBS securitization and represent the right to receive a portion of the monthly interest payments (but not principal cash flows) on the unpaid principal balance of the underlying pool of commercial mortgage loans, commonly referred to as the notional amount. The weighted average interest rate for our CMBS IO was 0.64% as of September 30, 2020

and 0.65% as of December 31, 2019. The loans collateralizing Agency-issued CMBS IO pools are similar in composition to the pools of loans that collateralize CMBS as discussed above. Non-Agency issued CMBS IO are backed by loans secured by a number of different property types which are shown in the table below as of September 30, 2020:


	September 30, 2020
($ in thousands)	Fair Value		Percentage of Portfolio
Property Type:
Retail	$	42,871	27.7	%
Office	33,154		21.4	%
Multifamily	27,909		18.0	%
Hotel	20,543		13.3	%
Mixed use	10,172		6.6	%
Other (1)	20,023		13.0	%
Total non-Agency CMBS IO	$	154,672	100.0	%

(1) Other property types collateralizing non-Agency CMBS IO do not comprise more than 5% individually.

Yields on CMBS IO securities are dependent upon the performance of the underlying loans. Our return on these investments may be negatively impacted if the loans default, resulting in foreclosures, or liquidations of the loan collateral. Since the economic impacts of COVID-19 began in March, servicers are reporting an increase in delinquencies on loans underlying our non-Agency CMBS IO and have taken loss mitigation actions including loan forbearance or allowing the borrower to make loan payments using replacement reserve or similar property related ~~GAAP financial~~funds. Most of the increases in delinquencies thus far have been in the retail and hotel sectors and have nominally impacted cash flows and yields on the securities.

We have generally invested in senior tranches of these securities where we have evaluated the credit profile of the underlying loan pool and can monitor credit performance in order to mitigate our exposure to losses. As of September 30, 2020 and December 31, 2019, approximately 62% of our CMBS IO are Agency-issued securities which generally contain higher credit quality loans that are expected to have a lower risk of default than non-Agency CMBS IO. In addition, the majority of our non-Agency CMBS IO investments are investment grade-rated with the majority rated ‘AAA’ by at least one of the nationally recognized statistical rating organizations. All of our non-Agency CMBS IO were originated prior to 2017, the majority of which we believe have had underlying property value appreciation, and the weighted average life of contractual cash flows currently remaining on our non-Agency CMBS IO is 24 months. Considering these characteristics of our non-Agency CMBS IO and the actions taken by servicers so far to work with borrowers through various relief measures, ~~are provided within "Results~~we have not seen evidence of ~~Operations".~~ and do not currently expect a material adverse effect on our future cash flows for non-Agency CMBS IO. However, the ultimate impact of COVID-19 on the global economy and on the loans underlying any of our securities remains uncertain and cannot be predicted at this time.

The following table presents our CMBS IO investments by year of origination as of the periods indicated:


	September 30, 2020
	Agency					Non-Agency
($ in thousands)	Amortized Cost		Fair Value		Remaining WAL (1)	Amortized Cost		Fair Value		Remaining WAL (1)
Year of Origination:
2010-2012	$	15,289	$	15,390	9	$	4,303	$	4,393	8
2013	25,622		26,484		13	12,231		12,227		14
2014	27,052		28,102		21	55,188		55,336		20
2015	34,195		35,614		26	56,416		56,898		27
2016	24,274		25,438		31	17,559		17,600		16
2017	27,439		28,539		42	8,100		8,218		34
2018	3,868		4,047		62	—		—		—
2019	90,910		92,164		60	—		—		—
2020	3,290		3,301		53	—		—		—
	$	251,939	$	259,079	38	$	153,797	$	154,672	24


	December 31, 2019
	Agency					Non-Agency
($ in thousands)	Amortized Cost		Fair Value		Remaining WAL (1)	Amortized Cost		Fair Value		Remaining WAL (1)
Year of Origination:
2010-2012	$	27,610	$	27,609	12	$	7,710	$	7,869	11
2013	35,794		37,047		16	16,401		16,629		19
2014	34,077		35,027		25	68,811		69,886		24
2015	41,549		42,987		29	66,954		69,062		30
2016	27,956		28,891		35	20,065		20,442		36
2017	30,409		31,633		46	9,304		9,529		38
2018	4,117		4,287		66	—		—		—
2019	97,388		98,144		64	—		—		—
	$	298,900	$	305,625	40	$	189,245	$	193,417	27

(1) Remaining weighted average life (“WAL”) represents an estimate of the number of months of contractual cash flows remaining for the investments by year of origination.

Repurchase Agreements

We use leverage to enhance the returns on our invested capital by pledging our investments as collateral for borrowings primarily through the use of uncommitted repurchase agreements with major financial institutions and broker-dealers. Repurchase agreements generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We pay interest on our repurchase agreement borrowings at a ~~reconciliation~~rate usually based on a spread to a short-term interest rate such as LIBOR and fixed for the term of the borrowing.

Please refer to Note 3 of the Notes to the Unaudited Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q as well as “Results of Operations” and “Liquidity and Capital Resources” contained within this Item 7 for additional information relating to our repurchase agreement borrowings.

Derivative Assets and Liabilities

We use derivative instruments to economically hedge our exposure to adverse changes in interest rates resulting from our ownership of primarily fixed-rate investments financed with short-term repurchase agreements. Changes in interest rates can impact net interest income, the market value of our investments, and book value per common share. We regularly monitor and frequently adjust our hedging portfolio in response to many factors including, but not limited to, changes in our investment portfolio as well as our expectation of future interest rates, including the absolute level of rates and the slope of the yield curve versus market expectations. Please refer to “Quantitative and Qualitative Disclosures about Market Risk” in Part I, Item 3 of this Quarterly Report on Form 10-Q for more information.

We have primarily used interest rate swaps to hedge a portion of our earnings and book value exposure to interest rate risk. As rates rallied in 2020 and we sold assets, and due to changes in margin requirements on interest rate swaps, we terminated the majority of our interest rate swaps in the first half of 2020. As we re-invested our capital over the balance of the year, we shifted to using interest rate swaptions, U.S. Treasury futures, and options on U.S. Treasury futures, which have better liquidity and more favorable margin requirements than interest rate swaps. In addition, management believes U.S. Treasury futures are a better hedge of interest rate risk profile of Agency RMBS versus interest rate swaps given our view of the potential interest rate environment over the balance of 2020. Options on U.S. Treasury futures also protect book value from rising interest rates but minimize risk of liquidity loss if interest rates fall versus interest rate swaps. Please refer to Note 4 of the Notes to the Unaudited Consolidated Financial Statements for details on our interest rate derivative instruments as of September 30, 2020 and December 31, 2019.

RESULTS OF OPERATIONS

The discussion below includes both GAAP and non-GAAP financial measures that management utilizes in its internal analysis of financial and operating performance. Please read the section “Non-GAAP Financial Measures” at the end of “Executive Overview” contained in Item 2 of this Quarterly Report on Form 10-Q for additional important information about these measures.

Net Interest Income for the Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Net interest income increased for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 because the decline in interest expense exceeded the decline in interest income. The decline in interest income was due primarily to a smaller average balance of lower yielding investments held during the third quarter of 2020 compared to the same period in the prior year. The decline in interest expense was due to a smaller average balance of borrowings at a lower financing rate for the third quarter of 2020 compared to the same period in 2019.

The following table presents certain information about our interest-earning assets and interest-bearing liabilities and their performance for the three months ended September 30, 2020 and September 30, 2019:


	Three Months Ended
	September 30,
	2020						2019
($ 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)
Interest-earning assets:
Agency RMBS	$	11,839	$	2,282,897	2.07	%	$	23,687	$	2,942,466	3.22	%
Agency CMBS	3,397		562,718		2.31	%	14,818		1,763,116		3.22	%
CMBS IO (5)	4,648		421,086		3.74	%	5,260		479,057		3.90	%
Non-Agency MBS and other investments (6)	204		8,668		7.43	%	737		11,270		7.94	%
Total:	$	20,088	$	3,275,369	2.34	%	$	44,502	$	5,195,909	3.29	%

Interest-bearing liabilities: (7)	3,375		$	2,985,914	0.38	%	$	31,256	$	4,958,857	2.47	%
Net interest income/net interest spread	$	16,713			1.96	%	$	13,246			0.82	%

(1) Average balance for assets is calculated as a simple average of the daily amortized cost and excludes unrealized gains and losses as well as 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 the sum of gross interest income and scheduled premium amortization/discount accretion (both of which are annualized for any reporting period less than 12 months) and prepayment compensation and premium amortization/discount accretion adjustments (collectively, "prepayment adjustments"), which are not annualized, by the average balance of asset type outstanding during the reporting period.

(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.

(6) Interest income for non-Agency and other investments for the three months ended September 30, 2019 includes $0.5 million of interest income from cash and cash equivalents. Average balance and yield excludes cash and cash equivalents.

(7) Interest-bearing liabilities consist primarily of repurchase agreement borrowings.

Rate/Volume Analysis. The following table presents the estimated impact on our net interest income due to changes in rate (effective yield/cost of funds) and changes in volume (average balance) of our interest-earning assets and interest-bearing liabilities for the periods indicated:


	Three Months Ended
	September 30, 2020 Compared to September 30, 2019
	Increase (Decrease) Due to Change In						Total Change in Interest Income/Expense
($ in thousands)	Rate		Volume		Prepayment Adjustments (1)
Interest-earning assets:
Agency RMBS	$	(6,527)	$	(5,321)	$	—	$	(11,848)
Agency CMBS	(1,295)		(9,792)		(334)		(11,421)
CMBS IO (2)	(232)		(538)		158		(612)
Non-Agency MBS and other investments	(40)		(476)		(17)		(533)
Change in interest income	$	(8,094)	$	(16,127)	$	(193)	$	(24,414)
Change in interest expense	(15,444)		(12,437)		—		(27,881)

Total net change in net interest income	$	7,350	$	(3,690)	$	(193)	$	3,467

(1) Prepayment adjustments represent effective interest amortization adjustments related to changes in actual prepayment speeds and prepayment compensation, net of amortization adjustments for CMBS and CMBS IO and are not annualized in the calculation of effective yield.

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

Net Interest Income for the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Net interest income increased for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 because the decline in interest expense exceeded the decline in interest income. The decline in interest income is due primarily to a smaller average balance of lower yielding investments held during the nine months ended September 30, 2020 compared to the same period in the prior year. The decline in interest expense was due to a smaller average balance of borrowings at a lower financing rate for the nine months ended September 30, 2020 compared to the same period in 2019.

The following table presents certain information about our interest-earning assets and interest-bearing liabilities and their performance for the nine months ended September 30, 2020 and September 30, 2019:


	Nine Months Ended
	September 30,
	2020						2019
($ 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)
Interest-earning assets:
Agency RMBS	$	40,734	$	2,143,728	2.53	%	$	72,776	$	2,844,044	3.41	%
Agency CMBS	23,319		1,058,847		2.89	%	35,614		1,477,749		3.17	%
CMBS IO (5)	14,616		448,254		4.18	%	16,542		496,271		4.27	%
Non-Agency MBS and other investments (6)	1,095		9,516		8.25	%	3,275		12,133		16.10	%
Total:	$	79,764	$	3,660,345	2.85	%	$	128,207	$	4,830,197	3.46	%

Interest-bearing liabilities: (7)	$	30,327	$	3,422,287	1.16	%	$	88,345	$	4,490,334	2.59	%
Net interest income/net interest spread	$	49,437			1.69	%	$	39,862			0.87	%

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

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

(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.

(6) Interest income for non-Agency and other investments for the nine months ended September 30, 2020 and September 30, 2019 includes $0.5 million and $1.6 million, respectively, of interest income from cash and cash equivalents. Average balance and yields excludes cash and cash equivalents.

(7) Interest-bearing liabilities consist primarily of repurchase agreement borrowings.


	Nine Months Ended
	September 30, 2020 Compared to September 30, 2019
	Increase (Decrease) Due to Change In						Total Change in Interest Income/Expense
($ in thousands)	Rate		Volume		Prepayment Adjustments (1)
Interest-earning assets:
Agency RMBS	$	(14,147)	$	(17,975)	$	80	$	(32,042)
Agency CMBS	(2,147)		(9,966)		(182)		(12,295)
CMBS IO (2)	(1,332)		(209)		(385)		(1,926)
Non-Agency MBS and other investments	(1,246)		(87)		(847)		(2,180)
Change in interest income	$	(18,872)	$	(28,237)	$	(1,334)	$	(48,443)
Change in interest expense	(37,073)		(20,945)		—		(58,018)

Total net change in net interest income	$	18,201	$	(7,292)	$	(1,334)	$	9,575

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

Adjusted Net Interest Income for the Three and Nine Months Ended September 30, 2020 Compared to the Three and Nine Months Ended September 30, 2019

Management includes drop income from TBA dollar roll positions and net periodic interest benefit/cost of interest rate swaps in a non-GAAP financial measure “adjusted net interest income” when evaluating the economic performance of its investments and financings. Please refer to “Non-GAAP Financial Measures” at the end of “Executive Overview” of this Item 2 of this Quarterly Report on Form 10-Q for additional information.


	Three Months Ended
	September 30,
	2020				2019
($ in thousands)	Amount		Rate		Amount		Rate
Net interest income	$	16,713	1.96	%	$	13,246	0.82	%
Add: TBA drop income (1) (2)	6,087		0.09	%	1,404		—	%
Add: net periodic interest (cost) benefit (3)	(371)		(0.05)	%	3,966		0.32	%
Adjusted net interest income	$	22,429	2.00	%	$	18,616	1.14	%

	Nine Months Ended
	September 30,
	2020				2019
	Amount		Rate		Amount		Rate
Net interest income	$	49,437	1.69	%	$	39,862	0.87	%
Add: TBA drop income (1) (2)	8,622		0.02	%	4,649		(0.03)	%
Add: net periodic interest benefit (3)	1,586		0.06	%	11,416		0.33	%
De-designated cash flow hedge accretion (4)	—		—	%	(165)		—	%
Adjusted net interest income	$	59,645	1.77	%	$	55,762	1.17	%

(1) 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.

(2) The impact of TBA drop income on adjusted net interest spread includes the implied average funding cost of TBA dollar roll transactions during the periods indicated.

(3) Amount represents net periodic interest cost/benefit of effective interest rate swaps outstanding during the period and excludes realized and unrealized gains and losses from changes in fair value of derivatives.

(4) Amount recorded as a portion of "interest expense" in accordance with GAAP related to the accretion of the balance remaining in accumulated other comprehensive loss as a result of the Company's discontinuation of cash flow hedge accounting effective June 30, 2013.

Adjusted net interest income increased for the three and nine months ended September 30, 2020 compared to the same periods in 2019 due primarily to an increase in TBA drop income. We increased our investment in TBA securities because the financing costs imputed in TBA dollar roll transactions for the three and nine months ended September 30, 2020 were lower than the average repurchase agreement financing rate, which is commonly referred to in the industry as TBA dollar rolls “trading special” or “dollar roll specialness”. Dollar roll specialness happens primarily as a result of supply/demand imbalances or volatility in market prepayment expectations, and in our view, the pace of bank and Federal Reserve

purchases was the most significant contributor during the third quarter of 2020, resulting in an implied negative financing cost. The table summarizes information related to our TBA net spreads for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
TBA implied asset yield (1)	1.73	%	3.44	%	1.85	%	3.53	%
TBA implied funding cost (2)	(0.48)	%	2.36	%	0.04	%	2.56	%
TBA net yield (3)	2.21	%	1.08	%	1.81	%	0.97	%

(1) Asset yield for TBA securities is extrapolated by adding average cost (see footnote 2) to the net yield (see footnote 3).

(2) TBA implied funding cost for dollar roll transactions is determined using the “price drop” between the near settling TBA contract and the price for the same contract with a later settlement date and market-based assumptions regarding the “cheapest-to-deliver” collateral that can satisfy the TBA contract, such as the security’s coupon, maturity, and projected prepayment rate anticipated for the collateral.

(3) TBA net yield is calculated by dividing total drop income from TBA dollar roll positions by the average TBA long position outstanding during the period.

Gain (Loss) on Sale of Investments, Net

Investments are sold in the ordinary course of business as we manage our risk, capital and liquidity profiles, and as we reallocate capital to various investments. When interest rates rallied early to mid-March of 2020 as the markets initially responded to the COVID-19 pandemic, we chose to realize gains on our Agency RMBS as asset prices began to fall and we de-levered our balance sheet. We used a portion of those proceeds to re-invest in Agency CMBS, the majority of which we have sold in subsequent quarters in order to realize gains as asset premiums increased due to spread tightening and to shift our portfolio allocation back to predominantly Agency RMBS. None of our investment sales during the three and nine months ended September 30, 2020 or September 30, 2019 were made under duress. The following tables provide information related to our realized gains (losses) on sales of investments for the periods indicated (1):


	Three Months Ended
	September 30,
	2020				2019
($ in thousands)	Amortized cost basis sold		Gain (loss) on sale of investments, net		Amortized cost basis sold		Gain (loss) on sale of investments, net
Agency RMBS	$	—	$	1	$	586,748	$	4,458
Agency CMBS	382,250		20,845		—		—
Agency CMBS IO	—		—		9,161		147
	$	382,250	$	20,846	$	595,909	$	4,605

	Nine Months Ended
	September 30,
	2020				2019
($ in thousands)	Amortized cost basis sold		Gain (loss) on sale of investments, net		Amortized cost basis sold		Gain (loss) on sale of investments, net
Agency RMBS	$	2,112,132	$	75,824	$	796,194	$	506
Agency CMBS	1,992,194		222,904		219,692		(6,493)
Agency CMBS IO	—		—		22,936		232
	$	4,104,326	$	298,728	$	1,038,822	$	(5,755)

(1) Information regarding unrealized gains (losses) on investments during the periods indicated are included under "Results

of Operations-Other Comprehensive Income (Loss)" within this Item 2.

Gain (Loss) on Derivative Instruments, Net

Changes in the fair value of derivative instruments and net periodic interest benefits/costs are impacted by changing market interest rates and adjustments that we may make to our hedging positions in any given period. Because of the changes made to our derivatives portfolio from one reporting period to the next, results of any given reporting period are generally not comparable to results of another.

The following table provides information on our financial instruments accounted for as derivative instruments for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
($ in thousands)	2020		2019		2020		2019
Interest rate derivatives:
Interest rate swaps:
Net periodic interest (cost) benefit	$	(371)	$	3,966	$	1,586	$	11,416
Change in fair value (1)	1,282		(56,874)		(184,527)		(260,302)
Total interest rate swap gain (loss), net	911		(52,908)		(182,941)		(248,886)
Interest rate swaptions:
Change in fair value (1)	411		(4,329)		(162)		(4,329)
Futures:
Change in fair value (1)	(6,517)		1,712		(25,140)		1,501
Total interest rate derivative loss, net	(5,195)		(55,525)		(208,243)		(251,714)

TBA dollar roll positions:
Change in fair value (2)	12,737		3,412		27,280		17,124
TBA drop income (3)	6,087		1,404		8,622		4,649
Total TBA dollar roll gain, net	18,824		4,816		35,902		21,773

Options on U.S. Treasury futures
Change in fair value (1)	(5,655)		—		(23,815)		—

Total gain (loss) on derivative instruments, net	$	7,974	$	(50,709)	$	(196,156)	$	(229,941)

(1) Changes in fair value for interest rate derivatives and options include unrealized gains (losses) from current and forward starting derivative instruments and realized gains (losses) from terminated derivative instruments.

(2) Changes in fair value for TBA dollar roll positions include unrealized gains (losses) from open TBA contracts and realized gains (losses) on paired off or terminated positions.

(3) TBA drop income represents a portion of the change in fair value and is calculated by multiplying the notional amount of the net TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.

Gain on derivative instruments, net for the quarter ended September 30, 2020 was driven by favorable TBA dollar roll conditions as discussed above and increased TBA investing in 2020 versus 2019. For the nine months ended September 30, 2020, the bulk of the loss on derivative instruments was incurred in the first quarter as a result of the rapid decline in interest rates during that period. As a result of terminations of interest rate swaps over 2020, our net periodic interest (cost) benefit from interest rate swaps for the three and nine months ended September 30, 2020 decreased to a net cost of $(0.4) million and net benefit of $1.6 million, respectively, compared to net benefits of $4.0 million and $11.4 million for the three and nine months ended September 30, 2019, respectively. The table below shows our interest rate swap hedge position as a percentage of our average repurchase agreement borrowings and long TBAs outstanding and details about our net receive rates for the periods indicated:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
($ in thousands)	2020			2019			2020			2019
Average repurchase agreement borrowings outstanding	$	2,984,946		$	4,955,825		$	3,420,489		$	4,487,137
Average TBA long positions outstanding - at cost (1)	1,075,352			508,329			625,209			635,243
Average borrowings and TBA long positions outstanding	4,060,298			5,464,154			4,045,698			5,122,380
Average notional amount of interest rate swaps outstanding	357,989			3,096,957			1,200,109			4,001,777
Ratio of average interest rate swaps to average borrowings and TBA long positions outstanding (1)	0.1			0.6			0.3			0.8

Average interest rate swap pay-fixed rate	(0.78)		%	(1.83)		%	(1.41)		%	(2.21)		%
Average interest rate swap receive-floating rate	0.35		%	2.30		%	1.57		%	2.57		%
Average interest rate swap net (pay) receive rate	(0.43)		%	0.47		%	0.16		%	0.36		%

(1) TBA long positions are included in this ratio because we use interest rate swaps to hedge a portion of the impact of changing interest rates on the fair value and implied financing cost of our TBA long positions and our repurchase agreement financing costs.

Changes in fair value of our derivative instruments consist of unrealized gains (losses) on instruments held as of the end of the period and realized gains (losses) from instruments terminated or paired off during the period. The following tables provide information regarding realized gains (losses) on derivative instruments for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
($ in thousands)	Realized Gain (Loss)		Realized Gain (Loss)		Realized Gain (Loss)		Realized Gain (Loss)
Interest rate swaps	$	(2,212)	$	(63,764)	$	(185,985)	$	(212,510)
Interest rate swaptions	—		(4,246)		(1,934)		(4,246)
U.S. Treasury futures	(5,562)		682		(19,976)		(645)
Options on U.S. Treasury futures	(5,736)		—		(19,724)		—
TBA long positions	20,113		2,822		43,309		25,781
TBA short positions	—		604		(11,016)		604
Total	$	6,603	$	(63,902)	$	(195,326)	$	(191,016)

Please refer to “Liquidity and Capital Resources” for information regarding recognition of deferred tax hedge losses for terminated derivative instruments.

General and Administrative Expenses

General and administrative expenses increased $1.0 million and $2.2 million for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019 due primarily to an increase in the accrual for incentive compensation related to changes to the executive compensation plan and an increase in the expected achievement of goals on which bonuses are based.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments. Additional sources may also include proceeds from the sale of investments, equity offerings, and payments received from counterparties for derivative instruments. We use our liquidity to purchase investments and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to 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 financing and 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 which were $378.0 million as of September 30, 2020 compared to $224.0 million as of December 31, 2019.

We perform sensitivity analysis on our liquidity based on changes in the fair value of our investments due to, among other things, changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds as well as changes in the fair value of our derivative instruments due to changes in the absolute level of interest rates and the shape of the yield curve. In performing this analysis, we will also consider the current state of the fixed income markets and the repurchase agreement markets in order to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. The objective of our analysis is to assess the adequacy of our liquidity to withstand potential adverse events, such as the current pandemic. We may change our leverage targets based on market conditions and our perceptions of the liquidity of our investments. Due to our recent sales of Agency CMBS which resulted in payoff of related repurchase agreement financing late in the third quarter, our leverage including TBA positions was 6.2x shareholders’ equity as of September 30, 2020. Management expects leverage to increase in the near term as we continue to increase our investment in TBA securities due to the flexibility it offers in terms of liquidity and as long as its implied financing cost remains low.

Our weighted average haircut for borrowings collateralized with CMBS IO increased to 15.6% as of September 30, 2020 compared to 12.8% as of December 31, 2019 as certain repurchase agreement counterparties have increased their required haircut for CMBS IO between 5% and 10% since the onset of the pandemic. Our weighted average haircut for borrowings collateralized with Agency CMBS or RMBS was 4.7% as of September 30, 2020 and December 31, 2019.

Our repurchase agreement borrowings are principally uncommitted with terms renewable at the discretion of our lenders and have short-term maturities. As such, we attempt to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in the event of a counterparty's failure to renew existing repurchase agreements. We have been able to renew repurchase agreement borrowings with our counterparties without exception throughout the nine months ended September 30, 2020. In addition, and as part of our continuous evaluation of counterparty risk, we reduced our exposure to favor broker dealer subsidiaries of regulated financial institutions whom we believe are better capitalized entities.

The following table presents information regarding the balances of our repurchase agreement borrowings for the periods indicated:


	Repurchase Agreements
($ in thousands)	Balance Outstanding As of Quarter End		Average Balance Outstanding For the Quarter Ended		Maximum Balance Outstanding During the Quarter Ended
September 30, 2020	$	2,594,683	$	2,984,946	$	3,314,991
June 30, 2020	3,314,991		2,580,296		4,408,106
March 31, 2020	4,408,106		4,701,010		4,917,731
December 31, 2019	4,752,348		4,806,826		4,891,341
September 30, 2019	4,872,869		4,955,825		5,191,378

The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and generally uncommitted nature of the repurchase agreement borrowings. Equity at risk 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. As of September 30, 2020, the Company had repurchase agreement amounts outstanding with 19 of its 37 available repurchase agreement counterparties. Please refer to Note 3 of the Notes to the Unaudited Consolidated Financial Statements for information regarding counterparties with whom we have the greatest amount of equity at risk as of September 30, 2020.

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

We monitor and evaluate on an ongoing basis the impact these customary financial covenants may have on our operating and financing flexibility. Currently, we do not believe we are subject to any covenants that materially restrict our financing flexibility. Although the recent market disruption caused by the global response to the COVID-19 pandemic has resulted in the industry issues described above, we were in full compliance with our debt covenants as of September 30, 2020, and we are not aware of any circumstances which could potentially result in our non-compliance in the foreseeable future.

Derivative Instruments

We are party to certain types of financial instruments that are accounted for as derivative instruments including interest rate swaps, futures, options, and long and short positions in TBA securities. Certain of these derivative instruments may require us to post initial margin at inception and daily variation margin based on subsequent changes in their fair value. In the case of interest rate swaps, our clearing counterparty has the right to require higher initial margin in volatile market conditions. The collateral posted as margin by us is typically in the form of cash or Agency MBS. Counterparties may have to post variation margin to us. Generally, as interest rates decline, we will be required to post collateral with counterparties on our interest rate derivatives and vice versa as interest rates increase. As of September 30, 2020, we had cash of $26.0 million posted as collateral under these agreements.

Our TBA contracts are subject to master securities forward transaction agreements published by the Securities Industry and Financial Markets Association as well as supplemental terms and conditions with each counterparty. Under the terms of these agreements, we may be required to pledge collateral to, or have the right to receive collateral from, our counterparties when initiated or in the event the fair value of our TBA contracts declines. Declines in the fair value of TBA

contracts are generally related to such factors as rising interest rates, increases in expected prepayment speeds, or widening spreads. Our TBA contracts generally provide that valuations for our TBA contracts and any pledged collateral are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the TBA contract and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business day.

Dividends

As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after consideration of our tax NOL carryforwards, the majority of which expire by the end of this 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 strategic reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 as well as the following sections of our 2019 Form 10-K for additional important information regarding dividends declared on our taxable income:

•"Federal Income Tax Considerations" within Part I, Item 1, "Business”

•Part II, Item 5, "Market For Registrant's Common Equity, Related Stockholder Matters, and Issuer

Purchases of Equity Securities"

There may be differences between taxable income and GAAP net income ~~(loss)~~due to ~~common shareholders~~timing differences in the recognition of certain revenues and expenses including, for example, losses we realize from terminating derivatives prior to their maturity, which occurs as part of our portfolio and hedge management activities. If any of our deferred tax hedge losses result in dividend distributions to our ~~core net operating~~shareholders in excess of REIT taxable income, the excess dividends distributed will be considered a return of capital to ~~common shareholders~~the shareholder.

Contractual Obligations and Other Matters

There have been no material changes in our contractual obligations since December 31, 2019. As of September 30, 2020, we do not believe that any off-balance sheet arrangements exist that are reasonably likely to have a material effect on our current or future financial condition, results of operations, or liquidity other than as discussed above. In addition, we do not have any material commitments for capital expenditures and have not obtained any commitments for funds to fulfill any capital obligations.

RECENT ACCOUNTING PRONOUNCEMENTS

There were no accounting pronouncements issued during the ~~periods presented:~~nine months ended September 30, 2020 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 Unaudited Consolidated Financial Statements contained within Item 1 of this Quarterly Report on Form 10-Q for additional information.

Three Months Ended
($ in thousands, except per share amounts) September 30, 2017 June 30, 2017
GAAP net income (loss) to common shareholders $ 7,503
$ (10,073 )
Less:
Accretion of de-designated cash flow hedges ⁽¹⁾
(48 ) (73 )
Change in fair value of derivative instruments, net ⁽²⁾
(3,222 ) 15,801
Loss on sale of investments, net 5,211
3,709
Fair value adjustments, net (23 ) (30 )
Core net operating income to common shareholders $ 9,421
$ 9,334

Weighted average common shares outstanding 49,832
49,218
Core net operating income per common share $ 0.19
$ 0.19


~~(1)~~	Included in GAAP interest expense and relates to the accretion of the balance remaining in accumulated other comprehensive income as a result of our discontinuation of cash flow hedge accounting effective June 30, 2013.


~~(2)~~	~~Amount represents net realized and unrealized gains and losses on derivatives and excludes net periodic interest costs related to these instruments.~~

CRITICAL ACCOUNTING POLICIES

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 policies are defined as those that require management's most difficult, subjective or complex judgments, and which may result in materially different results under different assumptions and conditions. Our ~~accounting policies that require the most significant management estimates, judgments, or assumptions, or that management believes includes the most significant uncertainties, and are considered most~~ critical ~~to our results of operations or financial position relate to fair value measurements, amortization of investment premiums, and other-than-temporary impairments. Our critical~~

accounting policies are discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of

Operations” of our ~~Annual Report on~~2019 Form 10-K ~~for the year ended December 31, 2016~~ under “Critical Accounting ~~Policies”.~~Policies.” There have been no significant changes in our critical accounting policies during the three ~~months ended September 30, 2017.~~

~~FINANCIAL CONDITION~~

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


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

~~The following table details the activity related to our MBS portfolio during the nine months ended September 30, 2017:~~

Agency CMBS Agency RMBS
CMBS IO
⁽²⁾

Non-Agency Other⁽³⁾
Total
($ in thousands)
30-Year Fixed ⁽¹⁾
Adjustable-Rate
Balance as of December 31, 2016 $ 1,144,555
$ —
$ 1,201,205
$ 754,546
$ 111,778
$ 3,212,084
Purchases 234,094
544,050
—
71,803
—
849,947
Principal payments (45,217 ) (1,549 ) (172,650 ) —
(20,263 ) (239,679 )
Sales (37,215 ) (1,111 ) (727,841 ) —
(50,871 ) (817,038 )
(Amortization) accretion (3,587 ) (128 ) (8,568 ) (112,580 ) 2,279
(122,584 )
Change in fair value 14,859
(1,903 ) 11,636
16,698
(2,576 ) 38,714
Balance as of September 30, 2017 $ 1,307,489
$ 539,359
$ 303,782
$ 730,467
$ 40,347
$ 2,921,444


~~(1)~~	~~Does not include TBA securities accounted for as "derivative assets (liabilities)" on our consolidated balance sheet.~~


~~(2)~~	~~Includes Agency and non-Agency issued securities.~~


~~(3)~~	~~Includes non-Agency CMBS and RMBS.~~

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

~~The following table provides a summary of the amortized cost and fair value of our investment portfolio as of the periods indicated:~~

September 30, 2017 December 31, 2016
Amortized Cost Fair Value Amortized Cost Fair Value
RMBS:

Agency RMBS, 30 year fixed-rate $ 541,262
$ 539,359
$ —
$ —
TBA securities, 30 year fixed-rate ⁽¹⁾
683,813
683,680
—
—
Agency RMBS - adjustable rate 305,265
303,782
1,214,324
1,201,205
Non-Agency RMBS 1,113
1,142
33,548
33,562
1,531,453
1,527,963
1,247,872
1,234,767
CMBS and CMBS IO:
Fixed-rate Agency CMBS $ 1,314,925
$ 1,307,489
$ 1,166,454
$ 1,144,555
Non-Agency CMBS 36,328
39,205
72,749
78,216
Agency CMBS IO 394,380
401,808
411,737
411,898
Non-Agency CMBS IO 322,735
328,659
346,155
342,648
2,068,368
2,077,161
1,997,095
1,977,317

Total MBS portfolio including TBA securities $ 3,599,821
$ 3,605,124
$ 3,244,967
$ 3,212,084


~~(1)~~	TBA securities are accounted for as "derivative assets (liabilities)" on our consolidated balance sheet at their net carrying value which represents the difference between the market value and the cost basis of the TBA contract as of the end of the period.

~~CMBS~~

Because Agency CMBS are guaranteed by the GSEs with respect to return of principal, our credit exposure is limited to any unamortized premium remaining on those securities. Non-Agency CMBS are not guaranteed and therefore our entire investment is exposed to credit losses from the underlying loans collateralizing the CMBS. The following table presents the par value, amortized cost, and weighted average months to estimated maturity of our CMBS investments as of the dates indicated by year of origination:

September 30, 2017 December 31, 2016
($ in thousands) Par Value Amortized Cost
Months to Estimated Maturity ⁽¹⁾
Par Value Amortized Cost
Months to Estimated Maturity ⁽¹⁾
Year of Origination:
2008 and prior $ 41,058
$ 37,869
38 $ 57,771
$ 53,161
34
2009 to 2012 135,326
138,475
26 193,061
198,916
33
2013 to 2014 20,324
20,701
85 42,760
43,176
95
2015 661,113
664,321
102 683,680
687,214
111
2016 254,375
256,161
113 254,781
256,736
122
2017 230,821
233,728
119 —
—
—
$ 1,343,017
$ 1,351,255
97 $ 1,232,053
$ 1,239,203
97


~~(1)~~	~~Months to estimated maturity is an average weighted by the amortized cost of the investment.~~

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

~~CMBS IO~~

Income earned from CMBS IO is based on interest payments received on the underlying commercial mortgage loan pools. Our return on these investments may be negatively impacted by any change in scheduled cash flows such as modifications of the mortgage loans or involuntary prepayments including defaults, foreclosures, and liquidations on or of the underlying mortgage loans prior to its contractual maturity date. In order to manage our exposure to credit performance, we generally invest in senior tranches of these securities and where we have evaluated the credit profile of the underlying loan pool and can monitor credit performance. In addition, to address changes in market fundamentals and the composition of mortgage loans collateralizing an investment, we consider the year of origination of the loans underlying CMBS IO in our selection of investments. The following table presents our CMBS IO investments as of ~~September 30, 2017~~ ~~by year of origination:~~

September 30, 2017 December 31, 2016
($ in thousands) Amortized Cost Fair Value
Remaining WAL ⁽¹⁾
Amortized Cost Fair Value
Remaining WAL ⁽¹⁾
Year of Origination:
2010 $ 7,157
$ 7,364
15
$ 9,456
$ 9,858
19
2011 27,848
29,353
20
35,130
36,897
23
2012 77,728
79,667
23
102,378
103,675
27
2013 109,705
111,451
29
128,891
129,011
33
2014 179,440
182,447
36
201,802
200,260
39
2015 177,176
180,448
41
198,016
194,886
45
2016 84,943
86,048
48
82,219
79,959
87
2017 53,118
53,689
54
—
—
—
$ 717,115
$ 730,467
37
$ 757,892
$ 754,546
42

~~(1) Remaining weighted average life ("WAL") represents an estimate of the number of months of interest earnings remaining for the investments by year of origination.~~

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

~~RMBS~~

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

September 30, 2017
Weighted Average Based on Par
Coupon Par
Fair
Value ⁽¹⁾⁽³⁾

Amortized Cost/Cost Basis⁽²⁾⁽³⁾

Loan
Balance ⁽⁴⁾

Loan Age
(in months)
⁽⁴⁾

3 Month CPR ⁽⁴⁾⁽⁵⁾

Duration⁽⁶⁾
($ in thousands)
30-year fixed-rate:
3.0% $ 248,773
$ 249,981
$ 250,632
$ 233,336
10
2.5 % 6.34
4.0% 273,326
289,378
290,630
240,621
2
— % 4.38
TBA 4.0% 650,000
683,680
683,813
n/a n/a n/a 3.32
Total 30-year fixed-rate $ 1,172,099
$ 1,223,039
$ 1,225,075
$ 237,150
6
1.2 % 4.21

Adjustable-rate:
3.1% ⁽⁷⁾
$ 294,254
$ 303,782
$ 305,265
$ 270,208
72
17.1 % 2.21

Total Agency RMBS (including TBA securities) $ 1,466,353
$ 1,526,821
$ 1,530,340
$ 249,066
30
6.9 % 3.81


~~(1)~~	~~Fair value of TBA securities is the current market value of the TBA contract and represents the estimated fair value of the underlying Agency security as of the end of the period.~~


~~(2)~~	~~Cost basis of TBA securities represents the forward price to be paid for the underlying Agency MBS as if settled.~~


~~(3)~~	The net carrying value of TBA securities, which is the difference between the market value and the cost basis of the TBA securities, was $(0.1) million as of September 30, 2017 and is included on the consolidated balance sheet within "derivative liabilities".


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


~~(5)~~	~~Constant prepayment rate ("CPR") represents the 3-month CPR of Agency RMBS held as of date indicated. Securities with no prepayment history are excluded from this calculation.~~


~~(6)~~	~~Duration is used to measure the market price volatility as interest rates change using dollar value of one basis point ("DV01") methodology.~~


~~(7)~~	~~Coupon of adjustable-rate Agency RMBS represents the weighted average coupon based on amortized cost.~~

~~We did not have any investments in specified or non-specified pools of fixed-rate Agency RMBS as of December 31, 2016.~~

As mentioned previously, we have been reallocating capital away from adjustable-rate RMBS given the likelihood these investments will underperform in the current flat yield curve environment. We have been allowing and will continue to allow this portion of our portfolio to liquidate either on its own through payoffs or by selling when attractive bids are available. The following table provides information on our adjustable-rate RMBS by months to interest rate reset as of the dates indicated:

September 30, 2017 December 31, 2016
($ in thousands) Par Value Amortized Cost Fair Value Par Value Amortized Cost Fair Value
Adjustable-rate Agency RMBS by MTR:
0-12 MTR $ 47,126
$ 48,440
$ 49,580
$ 335,476
$ 355,069
$ 353,887
13-36 MTR 2,875
3,057
3,030
225,272
237,642
235,137
37-60 MTR 157,359
164,286
162,810
151,578
160,948
157,945
Greater than 60 MTR 86,894
89,482
88,362
444,932
460,665
454,236
Total adjustable-rate Agency RMBS $ 294,254
$ 305,265
$ 303,782
$ 1,157,258
$ 1,214,324
$ 1,201,205

~~Derivative Assets and Liabilities~~

We use interest rate swaps to hedge our earnings and book value exposure to fluctuations in interest rates. We regularly monitor and adjust our hedging portfolio in response to many factors including, but not limited to, changes in our investment portfolio, shifts in the yield curve, and our expectations with respect to the future path of interest rates and interest rate volatility.

We also utilize TBA contracts as a means of investing in and financing fixed-rate Agency RMBS. These forward contracts are accounted for as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA contract that its settlement will result in physical delivery of the underlying Agency RMBS or the individual TBA contract will not settle in the shortest time period possible. Please refer to "RMBS" above for additional information about TBAs.

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

During the nine months ended September 30, 2017, we added interest rate swaps with a combined notional of $3.0 billion at a weighted average net pay-fixed rate of 1.80% and we terminated $1.1 billion in interest rate swaps with a weighted average net pay-fixed rate of 0.69%. Additionally, we had $0.2 million of interest rate swaps mature during the nine months ended September 30, 2017 with a weighted average net pay-fixed rate 0.92%. Our adjustments to the hedging portfolio were made in response to many market factors including, but not limited to, changes in our investment allocations, investing in TBA securities, shifts in the yield curve, and expectations with respect to the future path of interest rates and interest rate volatility, which is discussed further in "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of this Quarterly Report on Form 10-Q.

~~The following table summarizes the activity related to our interest rate swaps during the nine months ended September 30, 2017:~~

Nine Months Ended
($ in thousands) September 30, 2017
Balance as of December 31, 2016 ⁽¹⁾
$ 21,612
Net receipt on termination (3,126 )
Periodic net cash payments (3,364 )
Settlement of variation margin ⁽²⁾
3,300
Change in fair value (14,955 )
Accrued interest payable (3,099 )
Balance as of September 30, 2017 ⁽¹⁾
$ 368


~~(1)~~	Represents the net amount recorded in "derivative assets (liabilities)" on the Company's consolidated balance sheets as of period indicated and excludes amounts related to TBA contracts which are also recorded in "derivative assets (liabilities)".


~~(2)~~	~~As of January 2017 margin requirements from fluctuations in fair value of the Company's cleared interest rate swaps are settled daily with the Chicago Mercantile Exchange ("CME").~~

~~Repurchase Agreements~~

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

September 30, 2017 December 31, 2016
($ in thousands) Fair Value Amount Pledged Related Borrowings Fair Value Amount Pledged Related Borrowings
Non-Agency CMBS:
AAA $ —
$ —
$ —
$ 35,405
$ 35,313
$ 32,266
AA 14,013
—
—
14,127
14,105
11,665
A 18,366
18,365
15,625
18,614
18,549
15,831
Below A/Not Rated 6,826
—
—
10,070
9,873
7,119
$ 39,205
$ 18,365
$ 15,625
$ 78,216
$ 77,840
$ 66,881

Non-Agency CMBS IO:
AAA $ 273,308
$ 273,302
$ 232,717
$ 290,092
$ 289,608
$ 246,412
AA 44,474
43,797
37,694
46,986
45,995
40,026
A 753
753
663
—
—
—
Below A/Not Rated 10,124
10,124
8,907
5,570
5,536
4,761
$ 328,659

$ 327,976
$ 279,981
$ 342,648
$ 341,139
$ 291,199

Non-Agency RMBS:
Below A/Not Rated $ 1,142
$ —
$ —
$ 33,562
$ 31,952
$ 26,149
$ 1,142
$ —
$ —
$ 33,562
$ 31,952
$ 26,149

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

~~Shareholder's Equity~~

Shareholder's equity increased approximately 12% during the first nine months of 2017 primarily due to an increase of $38.5 million in the fair value of MBS, which is recorded in accumulated other comprehensive income. The increase in the fair value of MBS since December 31, 2016 resulted primarily from credit spread tightening. The following table provides the accumulated unrealized holding gains (losses) by type of MBS and the remaining balance of de-designated cash flow hedges as of the periods indicated:

($ in thousands) September 30, 2017 December 31, 2016
Agency CMBS $ (7,436 ) $ (22,295 )
Non-Agency CMBS 2,877
5,467
Agency CMBS IO 7,428
161
Non-Agency CMBS IO 5,924
(3,507 )
Agency RMBS (3,386 ) (13,119 )
Non-Agency RMBS 29
14
De-designated cash flow hedges 450
670
Accumulated other comprehensive income (loss) $ 5,886
$ (32,609 )

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

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

~~RESULTS OF OPERATIONS~~

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

~~Interest Income and Effective Yields on MBS~~

Interest income includes gross interest earned from the coupon rate on the securities, premium amortization and discount accretion, and other interest income resulting from prepayment penalty income or other yield maintenance items on CMBS and CMBS IO securities. Effective yields are calculated by dividing the sum of gross interest income and scheduled premium amortization/discount accretion (both of which are annualized for any reporting period less than 12 months) and prepayment compensation and premium amortization/discount accretion adjustments (collectively, "prepayment adjustments"), which are not annualized, by the average balance of investments outstanding during the reporting period. The following table presents details on average balances, interest income, and effective yields of MBS for the periods indicated:

Three Months Ended
September 30,
2017 2016
($ in thousands) Amount Yield Amount Yield
CMBS:
Coupon and scheduled amortization $ 9,976
2.90 % $ 7,903
3.19 %
Prepayment adjustments⁽¹⁾
176
0.01 % (154 ) (0.02 )%
$ 10,152
2.91 % $ 7,749
3.17 %
Average balance ⁽²⁾
$ 1,352,681

$ 974,240

CMBS IO:

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

RMBS:

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

$ 1,390,401

Total MBS interest income and effective yield: $ 22,771
2.94 % $ 20,897
2.75 %

Total average balance ⁽²⁾:
$ 2,943,668
$ 3,089,500

Nine Months Ended
September 30,
2017 2016
Amount Yield Amount Yield
CMBS:
Coupon and scheduled amortization $ 28,991
2.93 % $ 24,241
3.23 %
Prepayment adjustments⁽¹⁾
2,255
0.17 % 1,016
0.10 %

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

$ 990,440

CMBS IO:

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

$ 748,097

RMBS:

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

$ 1,499,309

Total MBS interest income and effective yield: $ 69,512
2.96 % $ 68,320
2.79 %

Total average balance ⁽²⁾:
$ 3,072,437
$ 3,237,846


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


~~(2)~~	~~Average balances are calculated as a simple average of the daily amortized cost and exclude unrealized gains and losses as well as securities pending settlement if applicable.~~

~~Interest income and effective yields on our total MBS portfolio for the three~~ and nine months ended September 30, 2017 increased due to higher prepayment penalty income from CMBS and CMBS IO and lower premium amortization adjustments on RMBS compared to the three and nine months ended September 30, 2016. Interest income and effective yields on MBS also increased overall as a result of our shift in investment strategy to higher yielding fixed-rate securities over the past twelve months. The following tables present the estimated impact of changes in average balances, yields, and prepayment adjustments on interest income by type of MBS for the periods indicated:2020.

Three Months Ended
September 30, 2017 vs. September 30, 2016
Increase (Decrease) in Interest Income Due to Change In
($ in thousands) Average Balance Coupon and Scheduled Amortization
Prepayment Adjustments ⁽¹⁾
CMBS $ 2,402
$ 2,013
$ 59
$ 330
CMBS IO 609
134
(188 ) 663
RMBS (1,137 ) (2,069 ) 74
858
Total $ 1,874
$ 78
$ (55 ) $ 1,851

Nine Months Ended
September 30, 2017 vs. September 30, 2016
Increase (Decrease) in Interest Income Due to Change In
($ in thousands) Average Balance Coupon and Scheduled Amortization
Prepayment Adjustments ⁽¹⁾
CMBS $ 5,989
$ 4,800
$ (50 ) $ 1,239
CMBS IO 2,036
57
(277 ) 2,256
RMBS (6,833 ) (6,488 ) 304
(649 )
Total $ 1,192
$ (1,631 ) $ (23 ) $ 2,846

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

Interest income and effective yield for CMBS IO for the three and nine months ended September 30, 2017 increased compared to the three and nine months ended September 30, 2016 due to an increase in prepayment penalty income for the three and nine months ended September 30, 2017 versus the same periods in 2016.

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

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

~~Interest Expense and Cost of Funds~~

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

The following table presents the estimated impact of the change in average balances and borrowing rates of secured borrowings and other differences in interest expense for the comparative periods presented:

($ in thousands) Three Months Ended September 30, 2017 vs. September 30, 2016 Nine Months Ended September 30, 2017 vs. September 30, 2016
Change in borrowing rates on repurchase agreements and FHLB advances $ 4,169
$ 8,927
Change in average balance of repurchase agreements and FHLB advances (402 ) (1,216 )
Decrease (increase) in accretion of de-designated cash flow hedges 51
(68 )
Decrease in non-recourse collateralized financing and other interest expense 3
1
Total change in interest expense $ 3,821
$ 7,644

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

~~Adjusted Interest Expense~~

Because we use derivative instruments as economic hedges of our interest rate risk exposure, management considers net periodic interest costs from derivative instruments to be an additional cost of financing investments. As such, management uses the non-GAAP financial measure "adjusted interest expense" which includes the net periodic interest costs of our effective derivative instruments excluded from GAAP interest expense. Please read the section "Non-GAAP Financial Measures" at the end of "Executive Overview" in Part 1, Item 2 of this Quarterly Report on Form 10-Q for additional information. The table below presents the reconciliation of GAAP interest expense to our adjusted interest expense for the periods indicated:

Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2017 2016 2017 2016
Interest expense $ 9,889
$ 6,068
$ 26,122
$ 18,478
Add: net periodic interest costs of derivative instruments ⁽¹⁾
1,131
155
3,099
2,321
Less: de-designated hedge accretion ⁽²⁾
48
99
220
152
Adjusted interest expense $ 11,068
$ 6,322
$ 29,441
$ 20,951

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

~~Net Interest Income and Net Interest Spread~~

~~The tables below present net interest income and net interest spread for our interest-earning assets and interest-bearing liabilities for the periods indicated:.~~

Three Months Ended
September 30,
2017 2016
($ in thousands) Amount Yield Amount Yield
Interest income $ 23,103
2.95 % $ 21,135
2.75 %
Interest expense 9,889
1.48 % 6,068
0.85 %
Net interest income/spread 13,214
1.47 % 15,067
1.90 %

Average interest earning assets ⁽¹⁾
$ 2,960,595
$ 3,110,884

Average balance of borrowings ⁽²⁾
$ 2,622,067
$ 2,806,948

Nine Months Ended
September 30,
2017 2016
($ in thousands) Amount Yield Amount Yield
Interest income $ 70,378
2.97 % $ 69,040
2.80 %
Interest expense 26,122
1.26 % 18,478
0.83 %
Net interest income/spread $ 44,256
1.71 % $ 50,562
1.97 %

Average interest earning assets ⁽¹⁾
$ 3,090,313
$ 3,260,510

Average balance of borrowings ⁽²⁾
$ 2,742,892
$ 2,939,139

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

~~Adjusted Net Interest Income~~

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

to finance its investments. As such, management includes drop income from TBA securities and net periodic interest costs from interest rate swaps in a non-GAAP financial measure "adjusted net interest income". The following table reconciles adjusted net interest income to GAAP net interest income for the periods indicated:

Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2017 2016 2017 2016
Net interest income $ 13,214
$ 15,067
$ 44,256
$ 50,562
Add: drop income 3,902
—
5,253
—
Add: net periodic interest costs ⁽¹⁾
(1,131 ) (155 ) (3,099 ) (2,321 )
Less: de-designated hedge accretion ⁽²⁾
(48 ) (99 ) (220 ) (152 )
Adjusted net interest income $ 15,937
$ 14,813
$ 46,190
$ 48,089

~~Loss on Derivative Instruments, Net~~

~~The following table provides information on the components of our "loss on derivative instruments, net" for the periods indicated:~~

Three Months Ended
September 30,
($ in thousands) 2017 2016
Type of Derivative Instrument Net Periodic Interest Costs
Change in
Fair Value⁽¹⁾⁽²⁾
Total Net Periodic Interest Costs
Change in Fair Value⁽¹⁾
Total
Interest rate swaps $ (1,131 ) $ 421
$ (710 ) $ (155 ) $ (266 ) $ (421 )
TBA securities —
6,703
6,703
—
—
—
Eurodollar futures —
—
—
—
2,830
2,830
Loss on derivative instruments, net $ (1,131 ) $ 7,124
$ 5,993
$ (155 ) $ 2,564
$ 2,409

Nine Months Ended
September 30,
2017 2016
Type of Derivative Instrument Net Periodic Interest Costs
Change in
Fair Value⁽¹⁾⁽²⁾
Total Net Periodic Interest Costs
Change in Fair Value⁽¹⁾
Total
Interest rate swaps $ (3,099 ) $ (14,954 ) $ (18,053 ) $ (2,321 ) $ (46,290 ) $ (48,611 )
TBA securities —
8,419
8,419
—
—
—
Eurodollar futures —
—
—
—
(13,542 ) (13,542 )
Loss on derivative instruments, net $ (3,099 ) $ (6,535 ) $ (9,634 ) $ (2,321 ) $ (59,832 ) $ (62,153 )

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

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

During the three months ended September 30, 2017, the fair value of our interest rate swaps increased $0.4 million as a result of higher swap rates (as shown in the Swap Rate Range graph under “Market Conditions and Recent Activity” within "Executive Overview"). Because we are "short" interest rate swaps (i.e., we pay a fixed rate of interest and receive a floating rate of interest based primarily on 3 month LIBOR), increases in swap rates result in increases in the fair value of the interest rate swaps. During the quarter, we also terminated interest rate swaps on which we paid net proceeds of $0.7 million.

For the nine months ended September 30. 2017, the fair value of interest rate swaps declined $15.0 million also as a result of lower swap rates during that period, specifically on the long end of the swap curve. Declines in fair value for the nine months ended September 30, 2016 were largely unfavorable as compared to the same periods in 2017 as a result of a larger declines in rates along the entire swap curve as well as changes in the composition of the hedging portfolio.

Net periodic interest costs for the three and nine months ended September 30, 2017 were higher than the same periods in 2016 due to a larger average notional balance of effective interest rate swaps outstanding at higher weighted-average pay-fixed rates as shown in the following table for the periods indicated:

Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2017 2016 2017 2016
Average notional balance $ 2,668,478
$ 305,000
$ 2,011,355
$ 549,617
Weighted average net pay-fixed rate 1.37 % 0.64 % 1.30 % 1.06 %



Large accelerated filer	o☐	Accelerated filer	x☒
Non-accelerated filer	o ~~(Do not check if a smaller reporting company)~~ ☐	Smaller reporting company	o☐
		Emerging growth company	o☐


	Nine Months Ended							Nine Months Ended
	September 30,							September 30,
	2017			2016				2020		2019
Operating activities:							Operating activities:
Net income (loss)	$	11,931		$	(25,962	)	Net income (loss)	$	137,084	$	(207,803)
Adjustments to reconcile net income (loss) to cash provided by operating activities:							Adjustments to reconcile net income (loss) to cash provided by operating activities:
Decrease in accrued interest receivable	1,129			3,263
(Decrease) increase in accrued interest payable	(436		)	420
Decrease (increase) in accrued interest receivable							Decrease (increase) in accrued interest receivable	10,869		(3,075)
Decrease in accrued interest payable							Decrease in accrued interest payable	(14,526)		(3,122)
Loss on derivative instruments, net	9,634			62,153			Loss on derivative instruments, net	196,156		229,941
Loss on sale of investments, net	10,628			4,238
(Gain) loss on sale of investments, net							(Gain) loss on sale of investments, net	(298,728)		5,755
Fair value adjustments, net	(63		)	(86		)	Fair value adjustments, net	(154)		42
Amortization of investment premiums, net	122,621			112,418			Amortization of investment premiums, net	96,018		98,327
Other amortization and depreciation, net	983			1,186			Other amortization and depreciation, net	1,428		1,186
Stock-based compensation expense	1,567			2,066			Stock-based compensation expense	1,299		899
Increase in other assets and liabilities, net	(1,905		)	(2,060		)
Change in other assets and liabilities, net							Change in other assets and liabilities, net	530		(6)
Net cash and cash equivalents provided by operating activities	156,089			157,636			Net cash and cash equivalents provided by operating activities	129,976		122,144
Investing activities:							Investing activities:
Purchase of investments	(772,590		)	(96,816		)	Purchase of investments	(2,436,953)		(2,833,348)
Principal payments received on investments	248,298			337,719			Principal payments received on investments	344,055		347,565
Proceeds from sales of investments	792,984			94,033			Proceeds from sales of investments	4,401,909		1,033,066
Principal payments received on mortgage loans held for investment, net	2,641			3,709
Distributions received from limited partnership	—			10,835
Net receipts (payments) on derivatives, including terminations	11,743			(24,483		)
Principal payments received on mortgage loans held for investment							Principal payments received on mortgage loans held for investment	2,170		1,677
Net payments on derivatives, including terminations							Net payments on derivatives, including terminations	(197,932)		(229,001)
Other investing activities	(214		)	(105		)	Other investing activities	0		(183)
Net cash and cash equivalents provided by investing activities	282,862			324,892
Net cash and cash equivalents provided by (used in) investing activities							Net cash and cash equivalents provided by (used in) investing activities	2,113,249		(1,680,224)
Financing activities:							Financing activities:
Borrowings under repurchase agreements	60,229,426			19,293,243			Borrowings under repurchase agreements	28,304,165		93,107,875
Repayments of repurchase agreement borrowings and FHLB advances	(60,609,148		)	(19,661,384		)
Repayments of repurchase agreement borrowings							Repayments of repurchase agreement borrowings	(30,461,830)		(91,502,990)
Principal payments on non-recourse collateralized financing	(747		)	(1,443		)	Principal payments on non-recourse collateralized financing	(2,107)		(517)
Proceeds from issuance of preferred stock	25,884			—			Proceeds from issuance of preferred stock	107,988		19,924
Proceeds from issuance of common stock	14,495			102			Proceeds from issuance of common stock	0		63,889
Cash paid for redemption of preferred stock							Cash paid for redemption of preferred stock	(100,000)		0
Cash paid for stock issuance costs	(61		)	—			Cash paid for stock issuance costs	0		(185)
Cash paid for repurchases of common stock	—			(310		)
Cash paid for common stock repurchases							Cash paid for common stock repurchases	(372)		(25,034)
Payments related to tax withholding for stock-based compensation	(521		)	(485		)	Payments related to tax withholding for stock-based compensation	(245)		(296)
Dividends paid	(35,479		)	(39,285		)	Dividends paid	(40,151)		(54,355)
Net cash and cash equivalents used in financing activities	(376,151		)	(409,562		)
Net cash and cash equivalents (used in) provided by financing activities							Net cash and cash equivalents (used in) provided by financing activities	(2,192,552)		1,608,311

Net increase in cash, cash equivalents, and restricted cash	62,800			72,966			Net increase in cash, cash equivalents, and restricted cash	50,673		50,231
Cash, cash equivalents, and restricted cash at beginning of period	98,889			85,125			Cash, cash equivalents, and restricted cash at beginning of period	134,230		88,704
Cash, cash equivalents, and restricted cash at end of period	$	161,689		$	158,091		Cash, cash equivalents, and restricted cash at end of period	$	184,903	$	138,935
Supplemental Disclosure of Cash Activity:							Supplemental Disclosure of Cash Activity:
Cash paid for interest	$	26,766		$	18,185		Cash paid for interest	$	44,216	$	91,624


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2017				2016					2020			2019
	Shares		Weighted Average Grant Date Fair Value Per Share		Shares		Weighted Average Grant Date Fair Value Per Share			Shares	Weighted Average Grant Date Fair Value Per Share		Shares	Weighted Average Grant Date Fair Value Per Share
Restricted stock outstanding as of beginning of period	353,103		$	7.01	561,089		$	7.54	Restricted stock outstanding as of beginning of period	119,213	$	18.56	113,904	$	19.19
Restricted stock granted	—		—		—		—		Restricted stock granted	240,293	13.88		67,997	18.09
Restricted stock vested	—		—		—		—		Restricted stock vested	(71,431)	18.25		(62,688)	19.20
Restricted stock outstanding as of end of period	353,103		$	7.01	561,089		$	7.54	Restricted stock outstanding as of end of period	288,075	$	14.74	119,213	$	18.56

	Nine Months Ended
	September 30,
	2017				2016
	Shares		Weighted Average Grant Date Fair Value Per Share		Shares		Weighted Average Grant Date Fair Value Per Share
Restricted stock outstanding as of beginning of period	553,396		$	7.55	696,597		$	8.54
Restricted stock granted	138,166		6.76		214,878		6.28
Restricted stock vested	(338,459	)	7.80		(350,386	)	8.76
Restricted stock outstanding as of end of period	353,103		$	7.01	561,089		$	7.54



	September 30, 2017			December 31, 2016
ASSETS	(unaudited)
Mortgage-backed securities (including pledged of $2,714,312 and $3,150,610, respectively)	$	2,921,444		$	3,212,084
Mortgage loans held for investment, net	16,523			19,036
Cash and cash equivalents	117,702			74,120
Restricted cash	43,987			24,769
Derivative assets	368			28,534
Receivable for securities sold	13,435			—
Principal receivable on investments	3,359			11,978
Accrued interest receivable	19,267			20,396
Other assets, net	7,193			6,814
Total assets	$	3,143,278		$	3,397,731

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements	$	2,519,230		$	2,898,952
Payable for unsettled securities	77,357			—
Non-recourse collateralized financing	5,706			6,440
Derivative liabilities	133			6,922
Accrued interest payable	2,720			3,156
Accrued dividends payable	11,620			12,268
Other liabilities	2,413			2,809
Total liabilities	2,619,179			2,930,547

Shareholders’ equity:
Preferred stock, par value $.01 per share; 50,000,000 shares authorized; 5,665,101 and 4,571,937 shares issued and outstanding, respectively ($141,628 and $114,298 aggregate liquidation preference, respectively)	$	135,828		$	110,005
Common stock, par value $.01 per share, 200,000,000 shares authorized; 51,262,350 and 49,153,463 shares issued and outstanding, respectively	513			492
Additional paid-in capital	742,845			727,369
Accumulated other comprehensive income (loss)	5,886			(32,609		)
Accumulated deficit	(360,973		)	(338,073		)
Total shareholders' equity	524,099			467,184
Total liabilities and shareholders’ equity	$	3,143,278		$	3,397,731



	September 30, 2017
Counterparty Name	Balance		Weighted Average Rate		Equity at Risk
Wells Fargo Bank, N. A. and affiliates	$	349,965	2.10	%	$	57,992



		September 30, 2017			December 31, 2016
Type of Derivative Instruments	Balance Sheet Location	Fair Value			Fair Value ⁽¹⁾
Interest rate swaps	Derivative assets	$	368		$	28,534
TBA securities	Derivative assets	—			—
		$	368		$	28,534

Interest rate swaps	Derivative liabilities	$	—		$	(6,922	)
TBA securities	Derivative liabilities	(133		)	—
		$	(133	)	$	(6,922	)



	September 30, 2017
			Weighted-Average:
Years to Maturity:	Net Notional Amount ⁽¹⁾		Pay Rate ⁽²⁾		Life Remaining (in Years)	Fair Value
< 3 years	$	3,110,000	1.39	%	0.9	$	368
>3 and < 6 years	1,160,000		1.66	%	4.2	—
>6 and < 10 years	1,175,000		2.45	%	8.1	—
Total	$	5,445,000	1.68	%	3.2	$	368

	December 31, 2016
			Weighted-Average:
Years to Maturity:	Net Notional Amount ⁽¹⁾		Pay Rate ⁽²⁾		Life Remaining (in Years)	Fair Value
< 3 years	$	595,000	0.73	%	2.3	$	4,348
>3 and < 6 years	1,185,000		1.47	%	4.3	8,631
>6 and < 10 years	1,250,000		2.42	%	8.9	8,633
Total	$	3,030,000	1.58	%	5.3	$	21,612


~~(1)~~	The net notional amounts included in the tables above represent pay-fixed interest rate swaps, net of receive-fixed interest rate swaps and include $2,425,000 and $2,725,000 of pay-fixed forward starting interest rate swaps as of September 30, 2017 and December 31, 2016, respectively.



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


~~(1)~~	~~Notional amount represents the par value (or principal balance) of the underlying Agency MBS.~~


~~(2)~~	~~Cost basis represents the forward price to be paid for the underlying Agency MBS as if settled.~~


~~(3)~~	~~Market value is the current fair value of the TBA contract and represents the estimated fair value of the underlying Agency security as of the end of the period.~~


~~(4)~~	Net carrying value represents the difference between the market value and the cost basis of the TBA contract as of the end of the period and is included on the consolidated balance sheets within "derivative assets (liabilities)".



Type of Derivative Instrument	Notional Amount as of December 31, 2016		Additions		Settlements, Terminations, or Pair-Offs			Notional Amount as of September 30, 2017
Receive-fixed interest rate swaps	$	425,000	$	—	$	(325,000	)	$	100,000
Pay-fixed interest rate swaps	3,455,000		3,010,000		(920,000		)	5,545,000
TBA securities	—		3,814,000		(3,164,000		)	650,000


~~(1)~~	Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the asset or liability presented in the balance sheet. The fair value of the actual collateral received by or posted to the same counterparty may exceed the amounts presented.



	September 30, 2017
	Fair Value		Level 1 - Unadjusted Quoted Prices in Active Markets		Level 2 - Observable Inputs		Level 3 - Unobservable Inputs
Assets:
Mortgage-backed securities	$	2,921,444	$	—	$	2,913,877	$	7,567
Interest rate swaps	368		—		368		—
Total assets carried at fair value	$	2,921,812	$	—	$	2,914,245	$	7,567
Liabilities:
TBA securities	133		—		133		—
Total liabilities carried at fair value	$	133	$	—	$	133	$	—

	December 31, 2016
	Fair Value		Level 1 - Unadjusted Quoted Prices in Active Markets		Level 2 - Observable Inputs		Level 3 - Unobservable Inputs
Assets:
Mortgage-backed securities	$	3,212,084	$	—	$	3,201,157	$	10,927
Interest rate swaps	28,534		—		28,534		—
Total assets carried at fair value	$	3,240,618	$	—	$	3,229,691	$	10,927
Liabilities:
Interest rate swaps	$	6,922	$	—	$	6,922	$	—
Total liabilities carried at fair value	$	6,922	$	—	$	6,922	$	—



	Level 3 Fair Value
	Non-Agency CMBS			Non-Agency RMBS			Total
Balance as of December 31, 2016	$	9,669		$	1,258		$	10,927
Unrealized loss included in OCI ⁽¹⁾	(1,422		)	16			(1,406		)
Principal payments	(3,896		)	(133		)	(4,029		)
Accretion	2,075			—			2,075
Balance as of September 30, 2017	$	6,426		$	1,141		$	7,567


~~(1)~~	~~Amount included in "unrealized gain on available-for-sale investments, net" on consolidated statements of comprehensive income (loss).~~



	September 30, 2017				December 31, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Mortgage-backed securities	$	2,921,444	$	2,921,444	$	3,212,084	$	3,212,084
Mortgage loans held for investment, net ⁽¹⁾	16,523		13,674		19,036		15,971
Derivative assets	368		368		28,534		28,534
Liabilities:
Repurchase agreements ⁽²⁾	$	2,519,230	$	2,519,230	$	2,898,952	$	2,898,952
Non-recourse collateralized financing ⁽¹⁾	5,706		5,722		6,440		6,357
Derivative liabilities	133		133		6,922		6,922


~~(1)~~	The Company determines the fair value of its mortgage loans held for investment, net and its non-recourse collateralized financing using internally developed cash flow models with inputs similar to those used to estimate the fair value of the Company's Level 3 non-Agency MBS.


~~(2)~~	~~The carrying value of repurchase agreements generally approximates fair value due to their short term maturities.~~



	Agency CMBS			Agency RMBS						CMBS IO ⁽²⁾			Non-Agency Other⁽³⁾			Total
($ in thousands)	Agency CMBS			30-Year Fixed ⁽¹⁾			Adjustable-Rate			CMBS IO ⁽²⁾			Non-Agency Other⁽³⁾			Total
Balance as of December 31, 2016	$	1,144,555		$	—		$	1,201,205		$	754,546		$	111,778		$	3,212,084
Purchases	234,094			544,050			—			71,803			—			849,947
Principal payments	(45,217		)	(1,549		)	(172,650		)	—			(20,263		)	(239,679		)
Sales	(37,215		)	(1,111		)	(727,841		)	—			(50,871		)	(817,038		)
(Amortization) accretion	(3,587		)	(128		)	(8,568		)	(112,580		)	2,279			(122,584		)
Change in fair value	14,859			(1,903		)	11,636			16,698			(2,576		)	38,714
Balance as of September 30, 2017	$	1,307,489		$	539,359		$	303,782		$	730,467		$	40,347		$	2,921,444



	September 30, 2017
							Weighted Average Based on Par
Coupon	Par		Fair Value ⁽¹⁾⁽³⁾		Amortized Cost/Cost Basis⁽²⁾⁽³⁾		Loan Balance ⁽⁴⁾		Loan Age (in months) ⁽⁴⁾	3 Month CPR ⁽⁴⁾⁽⁵⁾		Duration⁽⁶⁾
($ in thousands)
30-year fixed-rate:
3.0%	$	248,773	$	249,981	$	250,632	$	233,336	10	2.5	%	6.34
4.0%	273,326		289,378		290,630		240,621		2	—	%	4.38
TBA 4.0%	650,000		683,680		683,813		n/a		n/a	n/a		3.32
Total 30-year fixed-rate	$	1,172,099	$	1,223,039	$	1,225,075	$	237,150	6	1.2	%	4.21

Adjustable-rate:
3.1% ⁽⁷⁾	$	294,254	$	303,782	$	305,265	$	270,208	72	17.1	%	2.21

Total Agency RMBS (including TBA securities)	$	1,466,353	$	1,526,821	$	1,530,340	$	249,066	30	6.9	%	3.81



	$	31,246		3.10	%	$	25,257		3.33	%
Average balance ⁽²⁾	$	1,308,811				$	990,440

CMBS IO:
Coupon and scheduled amortization	$	21,059		3.75	%	$	21,279		3.79	%
Prepayment adjustments⁽¹⁾	3,619			0.48	%	1,363			0.18	%
	$	24,678		4.23	%	$	22,642		3.97	%
Average balance ⁽²⁾	$	749,343				$	748,097

RMBS:
Coupon and scheduled amortization	$	15,341		2.02	%	$	21,525		1.91	%
Prepayment adjustments⁽¹⁾	(1,753		)	(0.17	)%	(1,104		)	(0.07	)%
	$	13,588		1.84	%	$	20,421		1.84	%
Average balance ⁽²⁾	$	1,014,283				$	1,499,309

Total MBS interest income and effective yield:	$	69,512		2.96	%	$	68,320		2.79	%

Total average balance ⁽²⁾:	$	3,072,437				$	3,237,846



	Three Months Ended
	September 30, 2017 vs. September 30, 2016
	Increase (Decrease) in Interest Income			Due to Change In
($ in thousands)	Increase (Decrease) in Interest Income			Average Balance			Coupon and Scheduled Amortization			Prepayment Adjustments ⁽¹⁾
CMBS	$	2,402		$	2,013		$	59		$	330
CMBS IO	609			134			(188		)	663
RMBS	(1,137		)	(2,069		)	74			858
Total	$	1,874		$	78		$	(55	)	$	1,851

	Nine Months Ended
	September 30, 2017 vs. September 30, 2016
	Increase (Decrease) in Interest Income			Due to Change In
($ in thousands)	Increase (Decrease) in Interest Income			Average Balance			Coupon and Scheduled Amortization			Prepayment Adjustments ⁽¹⁾
CMBS	$	5,989		$	4,800		$	(50	)	$	1,239
CMBS IO	2,036			57			(277		)	2,256
RMBS	(6,833		)	(6,488		)	304			(649		)
Total	$	1,192		$	(1,631	)	$	(23	)	$	2,846


~~(1)~~	Amount recorded in accordance with GAAP related to accretion of the balance remaining in accumulated other comprehensive income as a result of our discontinuation of cash flow hedge accounting effective June 30, 2013.


~~(2)~~	~~Cost of funds is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period.~~



($ in thousands)	Three Months Ended September 30, 2017 vs. September 30, 2016			Nine Months Ended September 30, 2017 vs. September 30, 2016
Change in borrowing rates on repurchase agreements and FHLB advances	$	4,169		$	8,927
Change in average balance of repurchase agreements and FHLB advances	(402		)	(1,216		)
Decrease (increase) in accretion of de-designated cash flow hedges	51			(68		)
Decrease in non-recourse collateralized financing and other interest expense	3			1
Total change in interest expense	$	3,821		$	7,644


1)	~~Amounts represent net periodic interest costs on effective interest rate swaps outstanding during the period and exclude termination costs and changes in fair value.~~


~~(2)~~	Amount recorded as a portion of "interest expense" in accordance with GAAP related to accretion of the balance remaining in accumulated other comprehensive income as a result of our discontinuation of cash flow hedge accounting effective June 30, 2013.


~~(1)~~	Changes in fair value for interest rate swaps and Eurodollar futures include unrealized gains (losses) from current and forward starting derivative instruments and realized gains (losses) from terminated derivative instruments.


~~(2)~~	~~Change in fair value for TBA securities includes unrealized gains (losses) from open TBA contracts and realized gains (losses) on terminated positions.~~


~~(1)~~	~~Drop income is recognized in "gain (loss) on derivatives, net" on our consolidated statements of comprehensive income.~~