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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-11 · 314 added, 188 removed, 394 unchanged (56% of the section changed)

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended March 31, 2020 .

Our MD&A is presented in six sections:

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Trends and Recent Market Impacts

On March 11, 2020, the World Health Organization characterized COVID-19, a respiratory disease caused by a novel coronavirus, as a pandemic, and, on March 13, 2020, President Trump declared the COVID-19 outbreak (the "Pandemic") in the U.S.

a national emergency.

The Pandemic resulted in stay-at-home orders, school closures and widespread business shutdowns globally, significantly adversely affecting worldwide economies.

Extensive shutdowns and business reductions in the U.S.

were expected to substantially increase unemployment levels and sparked concerns that the U.S.

GDP could contract at Depression-era levels.

Reactions to the human and economic impacts of the Pandemic led to swift and severe financial market dislocations that had a significant impact on our business and financial results during the first quarter.

government has taken actions to reduce the negative impact of the Pandemic.

For example, Congress passed multiple rounds of legislation increasing and expanding unemployment benefits, providing direct cash payments to eligible taxpayers, and allocating funds to assist businesses.

In March, the Federal Reserve (the "Fed") lowered the federal funds rate target by 150 basis points to the zero-bound range.

Importantly, the Fed also committed its unlimited support of the U.S.

Treasury and Agency MBS markets through unprecedented levels of asset purchases.

The Fed also significantly increased its support for

the repurchase agreement ("repo") funding markets for Treasury and Agency mortgage backed securities by offering to provide up to an additional $1 trillion of daily liquidity to the overnight repo market, in addition to its ongoing open market repo operations.

The Federal Housing Finance Administration ("FHFA") also announced large-scale mortgage forbearance programs, and some states enacted bans on foreclosures to protect borrowers and avoid a steep decline in the housing market.

The financial market dislocations during March resulted in a significant decline in the valuations of Agency MBS and other fixed-income products, causing spreads to widen to levels unseen since the depths of 2008 before the Fed's bold and decisive actions began to take hold and stabilized the broader fixed income markets.

Despite the Fed's actions, the extreme intra-quarter volatility, coupled with significantly weaker valuations on our holdings of specified pools, drove a 22.9% decline in our tangible net book value per common share, resulting in a negative economic return on tangible common equity of 20.2% for the quarter.

In March, we transitioned to a fully remote work force, ensuring the safety and well-being of our employees.

Our prior investments in technology, business continuity planning and cyber security protocols enabled a seamless transition to this new paradigm.

Benefit plans offered to all our employees have also helped to ensure their well-being, including comprehensive health insurance benefits, access to 24/7 Teladoc services, on-call family support and mental health services, short and long-term disability benefits and others.

During the first quarter, we prioritized liquidity and risk management in response to adverse market conditions, and, as such, took several actions to mitigate the impact of the severe market volatility and disruptions on our business.

Specifically, we repositioned our assets, strategically managed our liquidity and funding exposure, and adjusted our hedge positions.

In aggregate, we reduced our investment portfolio by $15 billion to $93 billion as of quarter-end.

The net decline in our asset base consisted of principal pay-downs of $4 billion and sales of approximately $25 billion of lower coupon, relatively generic Agency MBS, which were partially replaced with $14 billion of current production coupon TBA securities.

Importantly, our sales of these lower coupon generic MBS enabled us to build liquidity while maintaining our higher quality specified pools, as the premiums, or "pay-up" values, for these securities had declined in mid-March to severely depressed levels.

Pay-up values improved somewhat prior to quarter-end but still contributed to about half of the decline in our net book value per common share for the quarter.

To further strengthen our liquidity position, we maintained our entire TBA position at our broker-dealer subsidiary, Bethesda Securities, LLC ("BES") and shifted a larger portion of our Agency repo funding to the General Collateral Finance Repo service offered by the Fixed Income Clearing Corporation ("FICC") through BES to 54% of our Agency repo funding, as of March 31, 2020, compared to 38% as of December 31, 2019.

The result was a significant reduction in "haircut" levels, and in turn, margin requirements on our funding obligations compared to traditional bi-lateral repo agreements.

Our leverage and liquidity position at the end of March was at normal operating levels.

Our "at risk" leverage ratio was 9.4x and our unencumbered assets totaled 54% of our tangible equity, unchanged from December 31, 2019.

(See Liquidity and Capital Resources for additional discussion of unencumbered assets as of March 31, 2020).

With the Fed lowering short term rates to near zero, treasury bond yields fell substantially, and interest rate swaps also repriced dramatically lower during the quarter.

The decline in interest rates reduced the duration of our assets, which in turn reduced our near term hedging requirements.

As such, we reduced our shorter-dated interest rate swap position and our short U.S.

Treasury position but also added some longer-dated swaps at very low pay-rates.

In aggregate, our interest rate hedge position decreased to 70% of our funding liabilities, inclusive of our net TBA position (at cost), as of March 31, 2020, from 102% as of December 31, 2019, and the average pay-rate on our fixed to floating rate interest rate swaps declined 35 basis points to 0.94% as of March 31, 2020, from December 31, 2019.

Our duration gap, which is a measure of the mismatch between the interest rate sensitivity of our assets and liabilities, inclusive of interest rate hedges, ended the quarter near zero.

With interest rates at historically low absolute levels, there is significantly more extension risk in our portfolio and in the mortgage market as a whole.

Although negative interest rates are certainly possible, we believe the Fed would likely utilize all its monetary policy tools, including asset purchases, providing forward guidance and other measures, before lowering the Fed funds target to a level materially below zero.

Given this asymmetric risk profile and the low cost of longer-dated hedges, we anticipate operating with a flat or even negative duration gap in the current environment.

Additionally, as we look ahead, we believe liquidity concerns will give way to fundamental performance metrics, with prepayments and funding being the key determinants of AGNC's prospective returns.

Although tremendous uncertainty remains regarding the extent to which the federal government's actions will mitigate the short and long-term negative impacts of the Pandemic on the U.S.

economy, we believe our portfolio composition is favorably positioned for the current environment.

We have minimal credit exposure, and the GSE guarantee provides timely payment of principal and interest on our Agency holdings.

On the prepayment front, we believe social distancing, operational headwinds, and negative credit conditions arising from the Pandemic are likely to persist over the near term, causing meaningful disruptions to the mortgage origination and refinance process.

We expect that these disruptions will mitigate increases in aggregate prepayment speeds resulting from today's very low interest

rate environment over the next several quarters.

These disruptions, coupled with historically low funding costs, should benefit our net interest spread, offsetting some of the negative impact of our smaller asset base.

As conditions ease, we anticipate prepayment activity increasing, assuming rates remain near current levels, but we believe our portfolio will perform relatively well despite faster aggregate prepayments given the concentration of our holdings in low coupon TBA securities and high quality specified pool positions, which have slower prepayment characteristics.

Longer-term risks remain, however.

The Fed could prematurely reduce its support of the mortgage and funding markets, and the eventual unwind of its asset purchases could result in renewed strains on the mortgage and broader fixed income markets.

Despite the favorable prepayment profile of our portfolio holdings, we could experience a higher than anticipated level of prepayment activity.

In addition, after extended forbearance periods, borrower delinquencies could eventually lead to large scale GSE buyouts of delinquent loans from mortgage pools.

Increased market volatility could also negatively impact mortgage spreads and reduce liquidity.

Although any one of these events could negatively impact our financial position, we believe Agency MBS continue to provide the most attractive risk adjusted returns within the fixed income markets.

For additional information regarding our interest rate and spread sensitivity please refer to Quantitative and Qualitative Disclosures about Market Risk and regarding risks associated with the economic and financial market turbulence resulting from the COVID-19 Pandemic to Risk Factors in this Form 10-Q.

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic (the "Pandemic"), with President Trump declaring the health crisis a national emergency shortly thereafter on March 13, 2020.

Stay-at-home orders, school closures and widespread business shutdowns adversely affected worldwide economies and sparked concerns that containment measures could lead to severe unemployment and a contraction of U.S.

gross domestic product output at rates not experienced since the Great Depression.

The ensuing financial market turmoil had a material negative impact on our business and financial results for the first quarter, resulting in a first quarter economic loss on our tangible common equity of -20.2%.

Market conditions improved considerably during the second quarter, as unprecedented monetary and fiscal stimulus drove a broad rebound in most asset categories.

Market liquidity improved substantially after declining to unprecedented levels in March.

Equity markets retraced much of their March decline, and credit spreads for most fixed income products recovered a substantial portion of their first quarter widening.

Since the peak of the financial crisis in March, the Federal Reserve’s ongoing purchases of Agency RMBS have been supportive of the Agency mortgage market.

The performance of Agency RMBS, however, was somewhat mixed during the second quarter.

Lower coupon generic Agency RMBS outperformed higher coupon generic securities, with the latter being negatively impacted by elevated prepayment concerns.

Meanwhile, specified Agency RMBS significantly outperformed generic securities as specified pool "pay-up" values recovered a substantial portion of their March decline, which was the primary driver of the increase in our tangible net book value for the second quarter.

For the second quarter, our tangible net book value increased 9.5% to $14.92 per common share as of June 30, 2020, from $13.62 per common share as of March 31, 2020.

Including dividends per common share, our economic return on tangible common equity was 12.2% for the second quarter.

After a steep drop in rates during the first quarter, interest rate volatility was muted during the second quarter.

The 10-year U.S.

Treasury rate ended the second quarter nearly unchanged from March 31, 2020, while the short end of the yield curve shifted lower as the U.S.

Federal Reserve communicated its intention to hold the federal funds rate near zero for several years.

Contrary to earlier expectations and despite widespread Pandemic related lockdowns and social distancing measures, refinancing activity and housing turnover were robust during the second quarter and led to a significant increase in prepayment rates for the quarter.

Our weighted average portfolio CPR increased to 19.9% for the second quarter, compared to 12.2% for the first quarter, while our weighted average projected CPR for the remaining life of our securities increased to 16.6% as of June 30, 2020, from 14.5% as of March 31, 2020 and 10.8% as of December 31, 2019, as mortgage rates declined to historically low levels during the quarter.

During the second quarter, we reduced our holdings of higher quality specified pools after their relative outperformance earlier in the quarter and we reduced our holdings of higher coupon, generic RMBS in favor of lower coupon, new production Agency RMBS.

We also shifted a larger portion of our holdings from 30-year to 15-year fixed rate Agency RMBS.

As of June 30, 2020, the weighted average coupon on our fixed rate securities, inclusive of TBA securities, was 3.40%, compared to 3.62% as of March 31, 2020 and 3.60% as of December 31, 2019.

Additionally, the combination of heavy origination volume and large-scale Fed purchases during the second quarter favored the TBA dollar roll market.

With implied financing rates in the dollar roll market well below comparable repo levels for most coupons, we increased our average TBA position to $15.7 billion for the second quarter, from $7.5 billion for the first quarter.

As of June 30, 2020, our net TBA position totaled $20.5 billion.

The repo markets continued to perform very well during the second quarter.

The Fed’s open market repo operations, strong demand for Agency RMBS collateral and the Fed’s apparent willingness to keep the fed funds rate near the zero bound range, have led to a meaningful repricing of repo across all tenors.

As a result, our weighted average repo rate for the second quarter declined to 0.766% from 1.80% for the first quarter, and our weighted average repo rate as of June 30, 2020 declined to 0.41%, as an increasing portion of our repo have reset to lower prevailing rates.

With our near-term hedging requirements somewhat lower given the shorter duration of our assets and muted interest rate volatility, our interest rate hedge position decreased to 66% of our funding liabilities, inclusive of our net TBA position (at cost), as of June 30, 2020, compared to 70% as of March 31, 2020 and 102% as of December 31, 2019.

With swap rates declining to historically low levels, we have also continued to adjust the composition of our interest rate swap portfolio, terminating shorter-term swaps and replacing them with longer-dated swaps.

The average pay rate on our interest rate swaps decreased to 0.39% as of June 30, 2020, from 0.94% as of March 31, 2020 and 1.29% as of December 31, 2019, while the average maturity of our interest rate swap portfolio increased to 5.1 years as of June 30, 2020, from 4.5 years as of March 31, 2020 and 2.7 years as of December 31, 2019.

Our duration gap, which is a measure of the difference between the interest rate sensitivity of our assets and liabilities, inclusive of interest rate hedges, was -0.1 year as of June 30, 2020, compared to 0.0 and 0.4 years, as of March 31, 2020 and December 31, 2019, respectively.

Our aggregate cost of funds for the second quarter, inclusive of TBA implied financing rates and interest rate swaps, decreased to 0.88%, from 1.67% for the first quarter, more than offsetting lower asset yields.

Our net interest spread, inclusive of TBAs and swaps and excluding catch-up premium amortization, increased to 1.68% for the second quarter, from 1.30% for the first quarter.

The improvement in our net interest margin offset the decline in our average portfolio balance and tangible leverage for the second quarter, driving the slight increase in our net spread and dollar roll income to $0.58 per common share for the second quarter, excluding catch-up amortization, compared to $0.57 per common share for the first quarter.

Our average leverage for the second quarter declined to 8.8x tangible equity, compared to 9.9x for the first quarter.

As of June 30, 2020, our leverage was 9.2x tangible equity, compared to 9.4x as of March 31, 2020 and December 31, 2019.

Following the actions we took during the first quarter to prioritize liquidity and risk management, our liquidity position remained strong during the second quarter with cash and unencumbered Agency RMBS totaling $4.5 billion as of June 30, 2020, which excludes unencumbered CRT and non-Agency securities as well as assets held at our broker-dealer subsidiary Bethesda Securities, LLC.

As we look ahead, we believe liquidity concerns during the first quarter have given way to fundamental performance metrics.

Although prepayments are likely to somewhat negatively impact earnings, the broad availability of funding at rates near zero and muted interest rate volatility are positives for our business, and we expect the earnings environment for Agency RMBS to remain favorable for the foreseeable future despite the ongoing economic uncertainties associated with the COVID-19 pandemic.

Nonetheless, longer-term risks remain, and you should carefully review our Risk Factors and additional information regarding our interest rate and spread sensitivity in our Quantitative and Qualitative Disclosures about Market Risk located in this Form 10-Q.

Market Information

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Interest Rate/Security Price 1

June 30, 2019 Sept.

30, 2019 Dec.

31, 2019 Mar.

31, 2020 June 30, 2020 June 30, 2020

June 30, 2020

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Target Federal Funds Rate - Upper Band

2.50% 2.00% 1.75% 0.25% 0.25% — bps -150 bps

2.40% 2.02% 1.76% 0.99% 0.16% -83 bps -160 bps

2.32% 2.09% 1.91% 1.45% 0.30% -115 bps -161 bps

Treasury Security Rate:

1.75% 1.62% 1.57% 0.25% 0.15% -10 bps -142 bps

1.77% 1.54% 1.69% 0.38% 0.29% -9 bps -140 bps

2.01% 1.66% 1.92% 0.67% 0.66% -1 bps -126 bps

2.53% 2.11% 2.39% 1.32% 1.41% +9 bps -98 bps

Interest Rate Swap Rate:

1.81% 1.63% 1.70% 0.49% 0.23% -26 bps -147 bps

1.77% 1.50% 1.73% 0.52% 0.33% -19 bps -140 bps

1.96% 1.56% 1.90% 0.72% 0.64% -8 bps -126 bps

2.21% 1.71% 2.09% 0.88% 0.92% +4 bps -117 bps

30-Year Fixed Rate Agency Price:

$99.36 $99.55 $98.89 $103.59 $104.26 +$0.67 +$5.37

$100.84 $101.51 $101.42 $104.83 $105.33 +$0.50 +$3.91

$102.24 $102.58 $102.86 $105.70 $105.18 -$0.52 +$2.32

$103.36 $103.77 $104.01 $106.67 $105.98 -$0.69 +$1.97

$104.49 $105.29 $105.29 $107.47 $107.46 -$0.01 +$2.17

15-Year Fixed Rate Agency Price:

$100.67 $100.85 $100.91 $103.72 $104.70 +$0.98 +$3.79

$101.95 $102.21 $102.50 $104.61 $105.09 +$0.48 +$2.59

$103.20 $103.42 $103.69 $105.19 $105.06 -$0.13 +$1.37

$103.84 $104.08 $104.28 $105.56 $105.75 +$0.19 +$1.47

________________________________

Price information is for generic instruments only and is not reflective of our specific portfolio holdings.

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FINANCIAL CONDITION

As of March 31, 2020 and December 31, 2019 , our investment portfolio consisted of $71.8 billion and $100.4 billion of investment securities, at fair value, respectively, and $21.2 billion and $7.4 billion of TBA securities, at fair value, respectively.

The following table is a summary of our investment portfolio as of March 31, 2020 and December 31, 2019 (dollars in millions):

March 31, 2020

December 31, 2019

Investment Portfolio (Includes TBAs)

Amortized Cost

Average Coupon

Amortized Cost

Average Coupon

As of June 30, 2020 and December 31, 2019, our investment portfolio consisted of $77.1 billion and $100.4 billion of investment securities, at fair value, respectively, and $20.5 billion and $7.4 billion of TBA securities, at fair value, respectively.

The following table is a summary of our investment portfolio as of June 30, 2020 and December 31, 2019 (dollars in millions):

June 30, 2020 December 31, 2019

Investment Portfolio (Includes TBAs) Amortized Cost Fair Value Average Coupon % Amortized Cost Fair Value Average Coupon %

Fixed rate Agency RMBS and TBA securities:

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15-year TBA securities, net 1

7,601 7,636 2.11 % 8 % 2,222 2,226 2.91 % 2 %

Total ≤ 15-year

11,811 12,027 2.56 % 12 % 8,362 8,465 3.19 % 8 %

2,743 2,786 2.88 % 3 % 752 773 3.87 % 1 %

30-year RMBS 64,932 67,988 3.73 % 70 % 89,483 91,062 3.67 % 84 %

30-year TBA securities, net 1

12,812 12,907 2.59 % 13 % 5,182 5,203 2.92 % 5 %

Total 30-year

77,744 80,895 3.54 % 83 % 94,665 96,265 3.63 % 89 %

Total fixed rate Agency RMBS and TBA securities 92,298 95,708 3.40 % 98 % 103,779 105,503 3.60 % 98 %

Adjustable rate Agency RMBS 109 112 2.66 % — % 160 163 3.04 % — %

Multifamily 17 19 3.31 % — % 37 39 3.37 % — %

CMO Agency RMBS:

CMO 365 381 3.39 % — % 441 447 3.44 % 1 %

Interest-only strips 56 73 5.55 % — % 63 77 4.22 % — %

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Non-Agency RMBS 221 222 4.15 % — % 198 209 4.05 % 1 %

CMBS 361 377 4.20 % 1 % 352 370 4.49 % — %

CRT 742 712 3.46 % 1 % 961 976 5.07 % 1 %

Total investment portfolio $ 94,241 $ 97,686 3.41 % 100 % $ 106,074 $ 107,871 3.61 % 100 %

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TBA securities are presented net of long and short positions.

As of March 31, 2020 , 30-year TBA securities consisted of $21.4 billion long and $(0.3) billion short TBA securities (at fair value) at an average coupon of 3.03% and 3.00% , respectively, and 15-year TBA securities consisted of entirely long TBA securities at an average coupon of 2.50% .

As of June 30, 2020, 30-year TBA securities consisted of $12.9 billion long and $(26.0) million short TBA securities (at fair value) at an average coupon of 2.59% and 2.50%, respectively, and 15-year TBA securities consisted of entirely long TBA securities at an average coupon of 2.11%.

As of December 31, 2019, 30-year TBA securities consisted of $6.8 billion long and $(1.6) billion short TBA securities at an average coupon of 3.17% and 4.00%, respectively, and 15-year TBA securities consisted entirely of long TBA securities at an average coupon of 2.91%.

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

As of March 31, 2020 and December 31, 2019 , our TBA positions had a net carrying value of $574 million and $25 million , respectively, reported in derivative assets /(liabilities) on our accompanying consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, our TBA positions had a net carrying value of $130 million and $25 million, respectively, reported in derivative assets /(liabilities) on our accompanying consolidated balance sheets.

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

As of March 31, 2020 and December 31, 2019 , the weighted average yield on our investment securities (excluding TBA securities) was 2.93% and 3.07% , respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBAs, as of March 31, 2020 and December 31, 2019 (dollars in millions):

March 31, 2020

Includes Net TBA Position

Excludes Net TBA Position

Fixed Rate Agency RMBS and TBA Securities

Specified Pool % 1

Weighted Average

As of June 30, 2020 and December 31, 2019, the weighted average yield on our investment securities (excluding TBA securities) was 2.64% and 3.07%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBAs, as of June 30, 2020 and December 31, 2019 (dollars in millions):

June 30, 2020

Includes Net TBA Position Excludes Net TBA Position

Fixed Rate Agency RMBS and TBA Securities Par Value Amortized

Cost Fair Value Specified Pool % 1

Cost Basis Weighted Average Projected

2.0% $ 5,885 $ 6,048 $ 6,081 —% —% —% —% — —%

2.5% 1,751 1,824 1,832 3% 103.3% 3.11% 1.48% 17 17%

3.0% 1,421 1,447 1,506 88% 101.6% 3.55% 2.50% 38 12%

3.5% 1,465 1,497 1,567 100% 102.2% 4.03% 2.81% 34 14%

4.0% 864 890 933 91% 103.0% 4.60% 3.00% 32 16%

≥ 4.5% 102 105 108 97% 103.1% 4.89% 2.98% 118 16%

Total ≤ 15-year 11,488 11,811 12,027 33% 102.3% 3.94% 2.64% 36 14%

2.5% 1,776 1,847 1,855 —% 103.9% 3.37% 1.15% 3 24%

3.0% 257 270 272 21% 104.9% 3.81% 0.98% 7 28%

3.5% 259 263 277 81% 101.8% 4.05% 2.94% 82 15%

4.0% 175 180 189 92% 103.1% 4.45% 3.08% 40 17%

≥ 4.5% 175 183 193 100% 104.5% 5.01% 3.16% 44 17%

Total 20-year:

2,642 2,743 2,786 23% 103.8% 3.66% 1.56% 16 23%

≤ 2.5% 15,102 15,583 15,716 —% 103.4% 3.41% 1.65% 2 18%

3.0% 7,909 8,209 8,369 10% 103.7% 3.80% 1.95% 19 19%

3.5% 17,594 18,334 19,167 84% 104.2% 4.07% 2.54% 56 14%

4.0% 23,367 24,429 25,723 89% 104.5% 4.51% 2.90% 44 16%

≥ 4.5% 10,646 11,189 11,920 98% 105.1% 5.00% 3.19% 32 18%

Total 30-year 74,618 77,744 80,895 64% 104.3% 4.32% 2.66% 39 17%

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Specified pools include pools backed by lower balance loans with original loan balances of up to $200K, HARP pools (defined as pools that were issued between May 2009 and December 2018 and backed by 100% refinance loans with original LTVs ≥ 80%), and pools backed by loans 100% originated in New York and Puerto Rico.

As of March 31, 2020 , lower balance specified pools had a weighted average original loan balance of $116,000 and $119,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 119% and 136% for 15-year and 30-year securities, respectively.

As of June 30, 2020, lower balance specified pools had a weighted average original loan balance of $118,000 and $118,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 126% and 136% for 15-year and 30-year securities, respectively.

WAC represents the weighted average coupon of the underlying collateral.

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of March 31, 2020 .

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of June 30, 2020.

December 31, 2019

Includes Net TBA Position

Excludes Net TBA Position

Fixed Rate Agency RMBS and TBA Securities

Specified Pool % 1

Weighted Average

Includes Net TBA Position Excludes Net TBA Position

Fixed Rate Agency RMBS and TBA Securities Par Value Amortized

Cost Fair Value Specified Pool % 1

Cost Basis Weighted Average Projected

≤ 2.5% $ 1,720 $ 1,735 $ 1,738 40% 101.0% 2.98% 2.11% 86 11%

3.0% 2,985 3,041 3,067 59% 101.7% 3.52% 2.45% 58 10%

3.5% 2,299 2,354 2,401 71% 102.2% 4.04% 2.86% 25 13%

4.0% 1,075 1,109 1,135 84% 103.1% 4.60% 3.05% 26 14%

4.5% 117 122 123 98% 103.5% 4.87% 3.00% 111 13%

≥ 5.0% 1 1 1 100% 101.9% 6.55% 4.55% 146 15%

Total ≤ 15-year

8,197 8,362 8,465 63% 102.0% 3.82% 2.65% 47 12%

3.5% 284 289 297 81% 102.0% 4.05% 2.97% 77 12%

4.0% 196 202 209 92% 103.3% 4.45% 3.18% 34 13%

4.5% 194 204 210 100% 104.8% 5.00% 3.23% 37 15%

≥ 5.0% 1 1 1 —% 105.1% 5.95% 3.33% 141 18%

Total 20-year:

675 696 717 90% 103.2% 4.40% 3.05% 49 13%

≤ 3.0% 27,864 28,218 28,252 3% 101.4% 3.85% 2.73% 8 9%

3.5% 23,760 24,525 24,902 60% 103.3% 4.05% 2.97% 49 10%

4.0% 26,934 28,062 28,795 84% 104.2% 4.51% 3.25% 37 11%

4.5% 12,730 13,381 13,831 93% 105.1% 4.98% 3.45% 23 13%

5.0% 380 410 416 94% 108.0% 5.50% 3.28% 39 14%

≥ 5.5% 63 69 69 49% 109.6% 6.18% 3.33% 158 13%

Total 30-year

91,731 94,665 96,265 55% 103.3% 4.29% 3.07% 31 11%

Total fixed rate $ 100,603 $ 103,723 $ 105,447 56% 103.3% 4.26% 3.04% 32 11%

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Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of December 31, 2019.

As of March 31, 2020 and December 31, 2019 , our investments in CRT and non-Agency securities had the following credit ratings:

March 31, 2020

December 31, 2019

As of June 30, 2020 and December 31, 2019, our investments in CRT and non-Agency securities had the following credit ratings:

June 30, 2020 December 31, 2019

CRT and Non-Agency Security Credit Ratings 1

RMBS CMBS CRT 2

AAA $ — $ — $ 34 $ — $ — $ 43

AA — 69 223 — 81 214

A — 32 31 13 25 34

BBB 99 80 59 67 71 69

BB 244 26 30 471 21 10

B 251 5 — 308 4 —

Not Rated 118 10 — 117 7 —

Total $ 712 $ 222 $ 377 $ 976 $ 209 $ 370

________________________________

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The following selected financial data is derived from our interim consolidated financial statements and the notes thereto.

The tables below present our condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 and our condensed consolidated statements of comprehensive income and key statistics for the three months ended March 31, 2020 and 2019 (in millions, except per share amounts):

The tables below present our condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019 and our condensed consolidated statements of comprehensive income and key statistics for the three and six months ended June 30, 2020 and 2019 (in millions, except per share amounts):

($ in Millions, Except Per Share Amounts)

Balance Sheet Data

March 31, 2020

Balance Sheet Data June 30,

December 31, 2019

Investment securities, at fair value $ 77,143 $ 100,442

Total assets $ 89,853 $ 113,082

Repurchase agreements and other debt $ 69,889 $ 89,410

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Net book value per common share 1

$ 15.86 $ 18.63

Tangible net book value per common share 2

Three Months Ended March 31,

Statement of Comprehensive Income Data

$ 14.92 $ 17.66

Three Months Ended

Six Months Ended

Statement of Comprehensive Income Data (Unaudited) 2020 2019 2020 2019

Interest income $ 429 $ 693 $ 920 $ 1,398

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Dividends declared per common share $ 0.36 $ 0.50 $ 0.84 $ 1.04

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Other Data (Unaudited) * 2020 2019 2020 2019

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Average repurchase agreements and other debt outstanding 3

$ 69,552 $ 86,147 $ 81,545 $ 84,120

Average stockholders' equity 4

$ 10,262 $ 10,371 $ 10,598 $ 10,247

Average tangible net book value "at risk" leverage 5

8.8:1 10.0:1 9.2:1 9.7:1

Tangible net book value "at risk" leverage (as of period end) 6

9.2:1 9.8:1 9.2:1 9.8:1

Economic return on tangible common equity 7

12.2 % (0.9) % (10.8) % 6.4 %

Expenses % of average total assets 0.11 % 0.07 % 0.09 % 0.07 %

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Economic Interest Income and Asset Yields

The following table summarizes our economic interest income (a non-GAAP measure) for the three months ended March 31, 2020 and 2019 , which includes the combination of interest income (a GAAP measure) on our holdings reported as investment securities on our consolidated balance sheets, adjusted to exclude estimated "catch-up" premium amortization adjustments for the cumulative effect from prior reporting periods of changes in our CPR forecast, and implied interest income on our TBA securities (dollars in millions):

Three Months Ended March 31,

The following table summarizes our economic interest income (a non-GAAP measure) for the three and six months ended June 30, 2020 and 2019, which includes the combination of interest income (a GAAP measure) on our holdings reported as investment securities on our consolidated balance sheets, adjusted to exclude estimated "catch-up" premium amortization adjustments for the cumulative effect from prior reporting periods of changes in our CPR forecast, and implied interest income on our TBA securities (dollars in millions):

Three Months Ended June 30,

Six Months Ended June 30,

2020 2019 2020 2019

Amount Yield Amount Yield Amount Yield Amount Yield

Interest income:

Cash/coupon interest income

$ 652 3.77 % $ 876 3.88 % $ 1,527 3.72 % $ 1,723 3.88 %

Net premium amortization

(223) (1.38) % (183) (0.89) % (607) (1.55) % (325) (0.82) %

Interest income (GAAP measure) 429 2.39 % 693 2.99 % 920 2.17 % 1,398 3.06 %

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TBA dollar roll income - implied interest income 1,2

74 1.90 % 96 3.21 % 122 2.11 % 167 3.35 %

Economic interest income, excluding "catch-up" amortization (non-GAAP measure) 3

$ 560 2.56 % $ 847 3.24 % $ 1,342 2.78 % $ 1,662 3.28 %

Weighted average actual portfolio CPR for investment securities held during the period 19.9 % 10.0 % 15.4 % 8.2 %

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Average 30-year fixed rate mortgage rate as of period end 4

3.13 % 3.73 % 3.13 % 3.73 %

Treasury rate as of period end 0.66 % 2.01 % 0.66 % 2.01 %

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The principal elements impacting our economic interest income are the size of our average investment portfolio and the yield (actual and implied) on our securities.

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three months ended March 31, 2020 compared to the prior year period (in millions):

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three and six months ended June 30, 2020 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements Impacting Economic Interest Income

Three Months Ended March 31, 2020 vs.

March 31, 2019

Periods ended June 30, 2020 vs.

June 30, 2019

Due to Change in Average

Total Increase /

(Decrease) Portfolio

Three months ended:

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (287) $ (125) $ (162)

Our average investment portfolio, inclusive of TBAs, increased 8% (at cost) for the three months ended March 31, 2020 , compared to the prior year period, largely due to a larger capital base from equity capital raises.

The decrease in our average asset yield was due to the combination of changes in asset composition and higher premium amortization cost resulting from faster prepayment expectations.

Six months ended:

Interest Income (GAAP measure) $ (478) $ (98) $ (380)

Estimated "catch-up" premium amortization due to change in CPR forecast 203 — 203

Interest income, excluding "catch-up" premium amortization (275) (98) (177)

TBA dollar roll income - implied interest income (46) 27 (73)

Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (321) $ (71) $ (250)

Our average investment portfolio, inclusive of TBAs, decreased -16% and -5% (at cost) for the three and six months ended June 30, 2020, respectively, compared to the prior year periods primarily due to lower operating leverage.

The decrease in our average asset yield for the three and six months ended June 30, 2020 was due to the combination of changes in asset composition and higher premium amortization cost resulting from faster prepayment expectations.

Our primary measure of leverage is our tangible net book value "at risk" leverage ratio, which is measured as the sum of our repurchase agreements and other debt used to fund our investment securities and net TBA position (at cost) (together referred to as "mortgage borrowings") and our net receivable/payable for unsettled investment securities, divided by our total stockholders' equity adjusted to exclude goodwill and other intangible assets.

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and Other Debt 1

Net TBA Position

Long/(Short) 2

Net TBA Position Long/(Short) 2

Average Tangible Net Book Value

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Tangible Net Book Value "At Risk" Leverage

Quarter Ended

Average Daily

Quarter Ended Average Daily

Amount Maximum

Daily Amount Ending

Amount Average Daily

Amount Ending

June 30, 2020 $ 69,552 $ 72,399 $ 69,370 $ 15,662 $ 20,413 8.8:1 9.2:1

March 31, 2020 $ 93,538 $ 104,773 $ 63,241 $ 7,487 $ 20,648 9.9:1 9.4:1

December 31, 2019 $ 88,677 $ 92,672 $ 89,313 $ 7,038 $ 7,404 9.5:1 9.4:1

September 30, 2019 $ 87,938 $ 92,420 $ 90,462 $ 10,146 $ 1,820 10.0:1 9.8:1

June 30, 2019 $ 86,147 $ 86,969 $ 85,367 $ 11,864 $ 11,086 10.0:1 9.8:1

March 31, 2019 $ 82,070 $ 87,877 $ 86,590 $ 8,002 $ 6,885 9.3:1 9.4:1

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Economic Interest Expense and Aggregate Cost of Funds

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three months ended March 31, 2020 and 2019 (dollars in millions), which includes the combination of interest expense on Agency repurchase agreements and other debt (GAAP measure), implied interest expense on our TBA securities and interest rate swap periodic interest (income) cost:

Three Months Ended March 31,

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three and six months ended June 30, 2020 and 2019 (dollars in millions), which includes the combination of interest expense on Agency repurchase agreements and other debt (GAAP measure), implied financing cost (benefit) of our TBA securities and interest rate swap periodic interest (income) cost:

Three Months Ended June 30,

Six Months Ended June 30,

2020 2019 2020 2019

Economic Interest Expense and Aggregate Cost of Funds 1

Cost of Funds

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

Repurchase agreement and other debt - interest expense (GAAP measure) $ 134 0.76 % $ 570 2.62 % $ 560 1.36 % $ 1,111 2.63 %

TBA dollar roll income - implied interest expense 2,3

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

(4) (0.09) % 74 2.47 % 28 0.48 % 126 2.51 %

Economic interest expense - before interest rate swap periodic (income) costs, net 4

130 0.61 % 644 2.60 % 588 1.25 % 1,237 2.61 %

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

59 0.27 % (88) (0.36) % 28 0.06 % (171) (0.36) %

Total economic interest expense (non-GAAP measure)

$ 189 0.88 % $ 556 2.24 % $ 616 1.31 % $ 1,066 2.25 %

________________________________

Amounts exclude interest rate swap termination fees and variation margin settlements paid or received, forward starting swaps and the impact of other supplemental hedges, such as swaptions and U.S.

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

The implied funding cost of TBA dollar roll transactions is determined using the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and market based assumptions regarding the "cheapest-to-deliver" collateral that can be delivered to satisfy the TBA contract, such as the anticipated collateral’s weighted average coupon, weighted average maturity and projected 1-month CPR.

The average implied funding cost for all TBA transactions is weighted based on our daily average TBA balance outstanding for the period.

The implied funding cost (benefit) of TBA dollar roll transactions is determined using the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and market based assumptions regarding the "cheapest-to-deliver" collateral that can be delivered to satisfy the TBA contract, such as the anticipated collateral’s weighted average coupon, weighted average maturity and projected 1-month CPR.

The average implied funding cost (benefit) for all TBA transactions is weighted based on our daily average TBA balance outstanding for the period.

The combined cost of funds for total mortgage borrowings outstanding, before interest rate swap costs, is calculated on a weighted average basis based on average repo, other debt and TBA balances outstanding during the period and their respective cost of funds.

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The principal elements impacting our economic interest expense are (i) the size of our average mortgage borrowings and interest rate swap portfolio outstanding during the period, (ii) the average interest rate (actual and implied) on our mortgage borrowings and (iii) the average net interest rate paid/received on our interest rate swaps.

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three months ended March 31, 2020 compared to the prior year period (in millions):

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three and six months ended June 30, 2020 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements of Economic Interest Expense

Three Months Ended March 31, 2020 vs.

March 31, 2019

Periods ended June 30, 2020 vs.

June 30, 2019

Due to Change in Average

Total Increase / (Decrease)

Borrowing / Swap Balance

Borrowing / Swap Rate

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

Three months ended:

Repurchase agreements and other debt interest expense $ (437) $ (110) $ (327)

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Total change in economic interest expense $ (368) $ (73) $ (295)

Our average mortgage borrowings, inclusive of TBAs, increased by 12% for the three months ended March 31, 2020 compared to the prior year period largely as a function of our higher asset base.

The decrease in the average interest rate (actual and implied) on our mortgage borrowings was largely due to decreases in the Federal Funds rate.

The decrease in our interest rate swap periodic interest income was due a decline in the average rate received on our interest rate swaps as the receive leg of our pay-fixed interest rate swaps reset to lower prevailing rates, which was partially offset by a decline in our average pay-rate.

The increase in our average interest rate swap position outstanding was due to hedge recomposition.

The following table presents a summary of the ratio of our average interest rates swaps outstanding, excluding forward starting swaps, to our average mortgage borrowings and the weighted average pay-fixed / receive-floating rates on our interest rate swaps for the three months ended March 31, 2020 and 2019 (dollars in millions):

Three Months Ended March 31,

Six months ended:

Repurchase agreements and other debt interest expense $ (552) $ (34) $ (518)

TBA dollar roll income - implied interest expense (98) 21 (119)

Interest rate swap periodic interest income/cost 199 (33) 232

Total change in economic interest expense $ (451) $ (46) $ (405)

Our average mortgage borrowings, inclusive of TBAs, decreased by -13% and -1% for the three and six months ended June 30, 2020, respectively, due to lower operating leverage.

The decline in our average interest rate (actual and implied) on our mortgage borrowings for the three and six month periods was due to lower short-term interest rates.

Additionally, during the three months ended June 30, 2020, we terminated $3.7 billion of repurchase agreements with a weighted average interest rate of 2.11% and a weighted average remaining maturity of 2.2 years.

The terminated agreements were replaced with shorter duration repurchase agreements at lower prevailing market rates.

We recognized losses on debt extinguishment of $146 million in other gain (loss), net for the three and six months ended June 30, 2020 associated with the terminated repurchase agreements.

The increase in our interest rate swap periodic cost for the three and six months ended June 30, 2020 was due to declines in the average rate received on our interest rate swaps as the receive leg of our pay-fixed interest rate swaps reset to lower prevailing rates, which were partially offset by a decline in our average pay-rate.

The following table presents a summary of the ratio of our average interest rates swaps outstanding, excluding forward starting swaps, to our average mortgage borrowings and the weighted average pay-fixed / receive-floating rates on our interest rate swaps for the three and six months ended June 30, 2020 and 2019 (dollars in millions):

Three Months Ended

Six Months Ended

Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2020 2019 2020 2019

Average Agency repo and other debt outstanding

$ 69,552 $ 86,147 $ 81,545 $ 84,120

Average net TBA portfolio outstanding - at cost

$ 15,662 $ 11,864 $ 11,575 $ 9,944

Average mortgage borrowings outstanding

$ 85,214 $ 98,011 $ 93,120 $ 94,064

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

$ 44,173 $ 52,035 $ 57,916 $ 48,616

Ratio of average interest rate swaps to mortgage borrowings outstanding

52 % 53 % 62 % 52 %

Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.65 % 1.90 % 1.00 % 1.93 %

Average interest rate swap receive-floating rate

(0.11) % (2.58) % (0.90) % (2.64) %

Average interest rate swap net pay/(receive) rate

For the three months ended March 31, 2020 and 2019 , we had an average forward starting swap balance of $1.5 billion and $5.9 billion , respectively.

0.54 % (0.68) % 0.10 % (0.71) %

For the three and six months ended June 30, 2020, we had an average forward starting swap balance of $0.9 billion and $1.2 billion, respectively.

For the three and six months ended June 30, 2019, we had an average forward starting swap balance of $3.5 billion and $4.3 billion, respectively.

Forward starting interest rate swaps do not impact our economic interest expense and aggregate cost of funds until they commence accruing net interest settlements on their forward start dates.

Including forward starting swaps, our average ratio of interest rate swaps outstanding to our average mortgage borrowings for the three months ended March 31, 2020 and 2019 was 72% and 57% , respectively .

Including forward starting swaps, our average ratio of interest rate swaps outstanding to our average mortgage borrowings for the three and six months ended June 30, 2020 was 53% and 63%, respectively, and 57% and 56%, respectively, for the corresponding prior year periods.

Net Interest Spread

The following table presents a summary of our net interest spread (including the impact of TBA dollar roll income, interest rate swaps and excluding "catch-up" premium amortization) for the three months ended March 31, 2020 and 2019 :

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended

Investment and TBA Securities - Net Interest Spread 2020 2019 2020 2019

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Net Spread and Dollar Roll Income

The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three months ended March 31, 2020 and 2019 (dollars in millions):

Three Months Ended March 31,

The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three and six months ended June 30, 2020 and 2019 (dollars in millions):

Three Months Ended June 30,

Six Months Ended

2020 2019 2020 2019

Net interest income (GAAP measure) $ 295 $ 123 $ 360 $ 287

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Interest rate swap periodic interest income (cost), net 1

(59) 88 (28) 171

Other interest and dividend income 1

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Gain (Loss) on Investment Securities, Net

The following table is a summary of our net gain (loss) on investment securities for the three months ended March 31, 2020 and 2019 (in millions):

Three Months Ended March 31,

The following table is a summary of our net gain (loss) on investment securities for the three and six months ended June 30, 2020 and 2019 (in millions):

Three Months Ended June 30,

Six Months Ended

Gain (Loss) on Investment Securities, Net 1

2020 2019 2020 2019

Gain on sale of investment securities, net $ 153 $ 132 $ 647 $ 192

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

679 759 876 1,819

Unrealized gain (loss) on investment securities measured at fair value through other comprehensive income, net 203 379 667 779

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Gain (Loss) on Derivative Instruments and Other Securities, Net

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three months ended March 31, 2020 and 2019 (in millions):

Three Months Ended March 31,

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three and six months ended June 30, 2020 and 2019 (in millions):

Three Months Ended June 30,

Six Months Ended

2020 2019 2020 2019

Interest rate swap periodic interest income (cost), net $ (59) $ 88 $ (28) $ 171

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TBA securities - mark-to-market net gain (loss)

584 126 713 191

Payer swaptions

(8) (17) (30) (27)

Treasury securities - long position

Treasury securities - short position

(79) (551) (713) (617)

Treasury futures - short position

(74) (50) (95) (95)

Interest rate swaps - termination fees and variation margin settlements, net

(320) (940) (3,126) (1,639)

Losses on debt extinguishment

(146) — (146) —

Total realized gain (loss) on derivative instruments and other securities, net 62 (1,411) (3,189) (2,153)

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TBA securities - mark-to-market net gain (loss)

(442) 15 106 14

Interest rate swaps

— (167) (20) (147)

Payer swaptions

(6) (8) (118) (25)

Treasury securities - long position

Treasury securities - short position

19 46 (284) (313)

Treasury futures - short position

66 (7) (17) 7

Total unrealized gain (loss) on derivative instruments and other securities, net (388) (115) (322) (456)

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Estimated Taxable Income

For the three months ended March 31, 2020 and 2019 , we had estimated taxable income available to common stockholders of $111 million and $196 million (or $0.20 and $0.36 per diluted common share), respectively.

For the three months ended June 30, 2020 and 2019, we had estimated taxable income (loss) available (attributable) to common stockholders of $(4) million and $171 million, or $(0.01) and $0.32 per diluted common share, respectively.

For the six months ended June 30, 2020 and 2019, we had estimated taxable income available to common stockholders of $107 million and $367 million, or $0.19 and $0.68 per diluted common share, respectively.

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

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

The following is a reconciliation of our GAAP net income to our estimated taxable income for the three months ended March 31, 2020 and 2019 (dollars in millions, except per share amounts):

Three Months Ended March 31,

The following is a reconciliation of our GAAP net income to our estimated taxable income for the three and six months ended June 30, 2020 and 2019 (dollars in millions, except per share amounts):

Three Months Ended June 30,

Six Months Ended

2020 2019 2020 2019

Net income (loss) $ 718 $ (444) $ (1,703) $ (179)

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Unrealized (gain)/loss, net (291) (644) (554) (1,363)

Other (2) (1) (10) (10)

Total book to tax differences

(697) 628 1,856 569

Estimated REIT taxable income 21 184 153 390

Dividends on preferred stock 25 13 46 23

Estimated REIT taxable income available to common stockholders

Estimated REIT taxable income (loss) available (attributable) to common stockholders $ (4) $ 171 $ 107 $ 367

Weighted average number of common shares outstanding - basic 560.3 537.8 554.2 537.2

Weighted average number of common shares outstanding - diluted 560.3 538.4 555.0 537.8

Estimated REIT taxable income per common share - basic

Estimated REIT taxable income per common share - diluted

Estimated REIT taxable income (loss) per common share - basic $ (0.01) $ 0.32 $ 0.19 $ 0.68

Estimated REIT taxable income (loss) per common share - diluted $ (0.01) $ 0.32 $ 0.19 $ 0.68

Beginning cumulative non-deductible net capital loss $ 426 $ 170 $ 394 $ 182

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LIQUIDITY AND CAPITAL RESOURCES

Our business is dependent on our ability to maintain adequate levels of liquidity to fund day-to-day operations, fulfill collateral requirements under our funding and derivative agreements, and to satisfy our dividend distribution requirement of at least 90% of our taxable income to maintain our qualification as a REIT.

Our primary sources of liquidity are unencumbered cash and securities, borrowings available under repurchase agreements, monthly receipts of principal and interest payments, asset sales and equity offerings.

We may also utilize TBA dollar roll transactions to finance Agency RMBS investments.

Our business is dependent on our ability to maintain adequate levels of liquidity and capital resources to fund day-to-day operations, fulfill collateral requirements under our funding and derivative agreements, and to satisfy our dividend distribution requirement of at least 90% of our taxable income to maintain our qualification as a REIT.

Our primary sources of liquidity are unencumbered cash and securities, borrowings available under repurchase agreements, TBA dollar roll financing and monthly receipts of principal and interest payments.

We may also conduct asset sales, change our asset or funding mix, issue equity or undertake other capital enhancing actions to maintain adequate levels of liquidity and capital resources.

We believe that we have sufficient liquidity and capital resources available to meet our obligations and execute our business strategy.

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Our leverage will vary depending on market conditions and our assessment of relative risks and returns, but we generally would expect our leverage to be between six and twelve times the amount of our tangible stockholders' equity, measured as the sum of our total mortgage borrowings and net payable / (receivable) for unsettled investment securities, divided by the sum of our total stockholders' equity adjusted to exclude goodwill.

As of March 31, 2020 , our tangible net book value "at risk" leverage ratio was 9.4 x and, despite the decline in our tangible net book value during the first quarter, was unchanged from December 31, 2019 .

The following table includes a summary of our mortgage borrowings outstanding, as of March 31, 2020 and December 31, 2019 (dollars in millions).

Our tangible net book value "at risk" leverage ratio was 9.2x and 9.4x as of June 30, 2020 and December 31, 2019, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of June 30, 2020 and December 31, 2019 (dollars in millions).

For additional details of our mortgage borrowings refer to Notes 3, 5 and 6 to our Consolidated Financial Statements in this Form 10-Q.

March 31, 2020

December 31, 2019

Mortgage Borrowings

June 30, 2020 December 31, 2019

Mortgage Borrowings Amount % Amount %

Repurchase agreements 1

$ 69,166 77 % $ 89,085 92 %

Debt of consolidated variable interest entities, at fair value 204 — % 228 — %

Total debt 69,370 77 % 89,313 92 %

Net TBA position, at cost 20,413 23 % 7,404 8 %

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Amount excludes $519 million and $97 million of repurchase agreements used to fund purchases of U.S.

Treasury securities as of March 31, 2020 and December 31, 2019 , respectively.

Treasury securities as of June 30, 2020 and December 31, 2019, respectively.

Repurchase arrangements involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date and are accounted for as collateralized financing transactions.

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None of our repo counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of our existing borrowings.

The use of TBA dollar roll transactions increases our funding diversification, expands our available pool of assets, and increases our overall liquidity position, as TBA contracts have lower implied haircuts relative to Agency MBS pools held on balance sheet and funded with repo financing.

However, if it were to become uneconomical to roll our TBA contracts into future months we could be required to take physical delivery of the underlying securities and fund those assets with cash or other financing sources, which could reduce our liquidity position, as the liquidity benefit of TBA contracts would be eliminated.

The use of TBA dollar roll transactions increases our funding diversification, expands our available pool of assets, and increases our overall liquidity position, as TBA contracts have lower implied haircuts relative to Agency RMBS pools held on balance sheet and funded with repo financing.

However, if it were to become uneconomical to roll our TBA contracts into future months it may be necessary to take physical delivery of the underlying securities and fund those assets with cash or other financing sources, which could reduce our liquidity position.

The collateral requirements under our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC and by our brokerage agreements, which may establish margin levels in excess of the MBSD.

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Amounts available to be borrowed under our repurchase agreements are dependent upon lender collateral requirements and the lender's determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries.

In response to declines in the fair value of pledged securities due to changes in market conditions or the publishing of monthly security pay-down factors, lending counterparties typically require that we post additional securities as collateral, pay-down borrowings or fund cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as "margin calls." Similarly, if the estimated fair value of our investment securities increases due to changes in interest rates or other factors, counterparties may release collateral back to us.

If the fair value of our collateral declines due to changes in market conditions or the publishing of monthly security pay-down factors, our counterparties will typically require that we post additional collateral to re-establish the agreed-upon collateral requirements, referred to as "margin calls." Similarly, if the estimated fair value of our investment securities increases due to changes in interest rates or other factors, we may request that counterparties release collateral back to us.

Our derivative agreements also require that we maintain a minimum collateral balance regardless of the value of the derivative instrument based on our counterparties' assessment of risk specific to the derivative instrument and clearing exchange rules.

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Our agreements generally provide that in the event of a margin call, collateral must be posted on the same business day, subject to notice requirements.

As of March 31, 2020 , we had met all our margin requirements.

As of June 30, 2020, we had met all our margin requirements.

The value of Agency RMBS is reduced by principal pay-downs on the mortgage pools underlying them.

Fannie Mae and Freddie Mac publish monthly security pay-down factors for their mortgage pools on the fifth day after month-end and remit payment based on these factors generally on the 25th day after month-end.

Counterparties to our bi-lateral repurchase agreements typically assess margin to account for these principal pay-downs when pool level principal payment data becomes available and prior to our receipt of the principal repayment.

Counterparties to our bi-lateral repurchase agreements typically assess margin to account for these principal pay-downs prior to our receipt of the principal repayment when pool level principal payment data becomes available.

The FICC assesses margin based on its internally projected pay-down rates on the last day of each month (referred to as the "blackout period exposure adjustment" or "blackout margin").

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We attempt to manage the liquidity risk associated with principal pay-downs by monitoring conditions impacting prepayment rates and through asset selection.

As of March 31, 2020 , given the current market conditions and elevated prepayment risk associated with historically low interest rates, our portfolio largely consisted of higher coupon specified pool securities, which have a lower risk of prepayment compared to generic Agency RMBS, and TBA securities, which do not expose us to margin calls due to prepayments.

As of June 30, 2020, given the current market conditions and elevated prepayment risk associated with historically low interest rates, our portfolio largely consisted of higher coupon specified pool securities, which have a lower risk of prepayment compared to generic Agency RMBS, and TBA securities, which do not expose us to margin calls due to prepayments.

Haircut levels and minimum margin requirements imposed by counterparties reduce the amount of our unencumbered assets and limit the amount we can borrow against our investment securities.

As of March 31, 2020 , the weighted average haircut on our repurchase agreements was approximately 4.0% of the value of our collateral, inclusive of collateral funded through BES, compared to 4.4% as of December 31, 2019 .

During the first quarter, haircuts on our Agency RMBS collateral remained stable.

Financing for less liquid, credit-oriented securities was significantly impacted by the dislocation in the financial markets in the first quarter;

such assets were either not financeable through certain lenders, or haircuts and pricing for such assets increased substantially.

To enhance our liquidity position during the first quarter, we sold lower coupon Agency RMBS securities funded by repurchase agreements and partially replaced them with TBA securities.

We maintained our entire TBA position at our broker-dealer subsidiary,

BES, and we shifted a larger portion of our Agency repo funding to the FICC through BES, increasing it to 54% of our Agency repo funding, as of March 31, 2020 , from 38% as of December 31, 2019 .

These actions reduced our average "haircut" level and lowered our aggregate margin requirement compared to our traditional bi-lateral repo agreements.

As of March 31, 2020 , our unencumbered assets totaled 54% of our tangible net equity, unchanged from December 31, 2019 , or $5.0 billion in the aggregate.

The majority of our liquidity is held at AGNC, which included $3.5 billion of unencumbered cash and Agency RMBS and $0.3 billion of unencumbered CRT and non-agency securities as of March 31, 2020.

We also maintain capital and excess liquidity at BES for regulatory standards, risk management purposes, and to meet expectations of counterparties, its clearing bank and clearing organizations.

As of March 31, 2020, our unencumbered assets held at BES totaled approximately $1.2 billion, after being temporarily reduced for “blackout margin” charges posted by BES at the end of the month.

For the six months ended June 30, 2020, haircuts on Agency RMBS collateral remained stable.

Haircuts and funding levels for our less liquid, credit-oriented securities, however, were adversely impacted by the dislocation in the financial markets in the first quarter, but improved to more normal levels during the second quarter.

As of June 30, 2020, the weighted average haircut on our repurchase agreements was approximately 4.4% of the value of our collateral, inclusive of collateral funded through BES, unchanged from December 31, 2019.

As of June 30, 2020, our unencumbered assets totaled 54% of our tangible net equity, unchanged from December 31, 2019.

The majority of our liquidity is held at AGNC, but we also maintain capital and excess liquidity at BES for regulatory standards, risk management purposes, and to meet expectations of its counterparties, clearing banks and clearing organizations.

As of June 30, 2020, we had cash and unencumbered Agency RMBS totaling $4.5 billion, which excludes unencumbered CRT and non-Agency securities and assets held at BES.

Collateral haircuts and minimum margin requirements imposed by counterparties subject us to counterparty credit risk.

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

As of March 31, 2020 , we had master repurchase agreements with 47 financial institutions located throughout North America, Europe and Asia, including repo counterparties accessed through BES.

As of June 30, 2020, we had master repurchase agreements with 47 financial institutions located throughout North America, Europe and Asia, including repo counterparties accessed through BES.

BES' direct access to the General Collateral Finance Repo service offered by the FICC and other triparty and bi-lateral repo funding provides us greater depth and diversity of funding at favorable terms relative to traditional bilateral repurchase agreement funding.

As of March 31, 2020 , $35.4 billion of our repurchase agreement funding was sourced through BES.

The table below includes a summary of our Agency RMBS repurchase agreement funding by number of repo counterparties and counterparty region as of March 31, 2020 .

March 31, 2020

Counter-Party Region

Number of Counter-Parties

Percent of Repurchase Agreement Funding 1

As of June 30, 2020, $33.3 billion of our repurchase agreement funding was sourced through BES.

The table below includes a summary of our Agency RMBS repurchase agreement funding by number of repo counterparties and counterparty region as of June 30, 2020.

June 30, 2020

Counter-Party Region Number of Counter-Parties Percent of Repurchase Agreement Funding 1

North America:

Total North America 28 87%

Europe 14 10%

Total 47 100%

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Treasury repurchase agreements.

As of March 31, 2020 , our maximum amount at risk (or the excess value of collateral pledged over our repurchase liabilities) with any of our repurchase agreement counterparties, excluding the FICC, was less than 6% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing less than 12% of our tangible stockholders' equity.

As of March 31, 2020 , approximately 10% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of March 31, 2020 , our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.

Asset Sales and TBA Eligible Securities

As of June 30, 2020, our maximum amount at risk (or the excess value of collateral pledged over our repurchase liabilities) with any of our repurchase agreement counterparties, excluding the FICC, was less than 3% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing less than 9% of our tangible stockholders' equity.

As of June 30, 2020, approximately 11% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of June 30, 2020, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.

Agency RMBS securities are among the most liquid fixed income securities, and the TBA market is the second most liquid market (after the U.S.

Treasury market).

The vitality of these markets enables us to sell assets under most market conditions to generate liquidity through direct sales or delivery into TBA contracts, subject to "good delivery" provisions promulgated by Securities Industry and Financial Markets Association ("SIFMA") .

As of March 31, 2020 , approximately 93% of our fixed rate Agency RMBS portfolio was eligible for TBA delivery, although we will typically conduct outright sales of specified securities when they trade at a premium to generic securities due to their unique attributes.

Equity Capital

The equity capital markets serve as a source of capital to grow our business and to generate liquidity to meet our business objectives.

The availability of equity capital is dependent on conditions in the equity capital markets and investor demand for our common and preferred stock.

We will typically not issue common stock when the price of our common stock trades below our tangible net book value or issue preferred equity when its cost of capital exceeds acceptable hurdle rates of return on our equity.

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

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

Please refer to Notes 10 and 11 to our Consolidated Financial Statements in this Form 10-Q for further details regarding our recent equity capital transactions.

The vitality of these markets enables us to sell assets under most market conditions to generate liquidity through direct sales or delivery into TBA contracts, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA").

Under certain market conditions, however, we may be unable to realize the full "pay-up" value, or premium relative to generic Agency RMBS, of our specified pool securities;

consequently, we seek to operate with a minimum level of securities that trade at or near TBA values that in our estimation enhances portfolio liquidity across a wide range of market conditions.

Capital Markets

The equity capital markets serve as a source of capital to grow our business and to meet potential liquidity needs of our business.

The availability of equity capital is dependent on market conditions and investor demand for our common and preferred stock.

We will typically not issue common stock when the price of our common stock trades below our tangible net book value or issue preferred equity when its cost exceeds acceptable hurdle rates of return on our equity.

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

Furthermore, when the trading price of our common stock is less than our estimate of our current tangible net book value per common share,

among other conditions, we may repurchase shares of our common stock.

Please refer to Note 10 of our Consolidated Financial Statements in this Form 10-Q for further details regarding our recent equity capital transactions.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2020 , we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Additionally, as of March 31, 2020 , we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

As of June 30, 2020, we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Additionally, as of June 30, 2020, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

FORWARD-LOOKING STATEMENTS

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What changed 10-Q

Item 2. Management’s Discussion and Analysis