AGNC Investment Corp. 10-Q

Item 2. 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 September 30, 2020. Our MD&A is presented in six sections: • Executive Overview • Financial Condition • Results of Operations • Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Forward-Looking Statements EXECUTIVE OVERVIEW We are an internally managed Real Estate Investment Trust ("REIT"). We commenced operations on May 20, 2008 following the completion of our initial public offering. Our common stock is traded on The Nasdaq Global Select Market under the symbol "AGNC." As a REIT, we are required to distribute annually 90% of our taxable income, and we will generally not be subject to U.S. federal or state corporate income tax to the extent that we distribute all our annual taxable income to our stockholders on a timely basis. It is our intention to distribute 100% of our taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year. We invest primarily in Agency residential mortgage-backed securities ("Agency RMBS") on a leveraged basis. These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise, such as Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac," and together with Fannie Mae, the "GSEs"), or by a U.S. Government agency, such as Government National Mortgage Association ("Ginnie Mae"). We also invest in other types of mortgage and mortgage-related residential and commercial mortgage-backed securities where repayment of principal and interest is not guaranteed by a GSE or U.S. Government agency and in other investments in, or related to, the housing, mortgage or real estate markets. Our principal objective is to provide our stockholders with attractive risk-adjusted returns through a combination of monthly dividends and tangible net book value accretion. We generate income from the interest earned on our investments, net of associated borrowing and hedging costs, and net realized gains and losses on our investment and hedging activities. We fund our investments primarily through borrowings structured as repurchase agreements. The size and composition of our investment portfolio depends on the investment strategies we implement, availability of attractively priced investments, suitable financing to appropriately leverage our investment portfolio and overall market conditions. Market conditions are influenced by a variety of factors, including interest rates, prepayment expectations, liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, regulations and relative returns on other assets. Trends and Recent Market Impacts Despite continued uncertainty regarding the COVID-19 virus and the broader macroeconomic outlook, financial markets posted significant gains for the second quarter in a row since the peak of the financial dislocations in March, driven in large part by the monetary support provided by global central banks. During the third quarter, stable interest rates and incremental purchases of Agency RMBS by the Federal Reserve (the "Fed") of approximately $40 billion per month, supplementing its reinvestment of paydowns on its existing portfolio, were supportive of the Agency mortgage market. As mortgage rates maintain historically low levels, the prepayment risk for mortgage investors remains elevated but appears to have plateaued for several cohorts. The size of our investment portfolio, including TBA securities, for the third quarter was largely unchanged at $97.6 billion as of September 30, 2020, compared to $97.7 billion as of the end of the second quarter. We continued to shift the composition of our portfolio to lower coupon 30- and 15-year TBA securities with our higher coupon holdings concentrated in high quality, specified Agency RMBS pools, which have slower prepayment characteristics than similar coupon generic securities. Inclusive of TBA securities, the weighted average coupon on our fixed rate securities declined to 3.08% as of September 30, 2020 from 3.40% as of June 30, 2020. 24 Our investment portfolio outperformed relative to our interest rate hedges during the third quarter. As a result, our tangible net book value per common share increased to $15.88 per share as of September 30, 2020 from $14.92 per share as of June 30, 2020, an increase of 6.4%. The increase in book value was the primary driver of a decline in our “at risk” leverage to 8.8x from 9.2x tangible common equity as of September 30 and June 30, 2020, respectively. Our economic return on tangible common equity was 8.8% for the quarter, which includes both the increase in our tangible net asset value and dividends declared of $0.36 per common share. The TBA dollar roll market benefited in the third quarter from the combination of heavy origination volume and ongoing Fed purchases. As such, implied financing rates in the dollar roll market were well below comparable repo levels for most coupons. Given these favorable financing terms, we increased our average TBA position to $27.8 billion for the quarter from $15.7 billion for the second quarter. As of September 30, 2020, our TBA position totaled $29.5 billion, or approximately 30% of our investment portfolio. Our weighted average repo rate for the third quarter declined to 0.40% from 0.76% for the second quarter. Our aggregate cost of funds, which includes the implied funding cost associated with our TBA position and interest rate swap costs, declined to 0.15% for the third quarter, compared to 0.88% for the second quarter. The combination of strong TBA dollar roll performance and very low funding rates more than offset lower asset yields on our portfolio for the quarter and drove a significant increase in our net spread and dollar roll income, excluding "catch-up" premium amortization cost, a non-GAAP measure, to $0.81 per common share for the third quarter from $0.58 per common share for the second quarter. (Refer to Results of Operations below for further information regarding non-GAAP measures.) Our net interest margin, including TBA securities and interest rate swaps and excluding "catch-up" premium amortization, increased to 2.15% for the third quarter from 1.68% for the second quarter. Looking ahead, the Fed's recently announced policy shift to average inflation targeting should cause the current low cost funding environment to persist for a prolonged period and continue to benefit our net interest margin. Notwithstanding this, our net interest margin is likely biased marginally lower, as we expect the implied funding advantage of TBA dollar rolls to contract over time to more modest levels and our average asset yield to decline as portfolio turnover is reinvested at lower prevailing asset yields. Our investment portfolio, excluding TBA holdings, prepaid at an annualized rate of 24.3% during the third quarter, compared to 19.9% during the second quarter. Our weighted average projected CPR for the remaining life of our securities decreased to 15.9% as of September 30, 2020 from 16.6% as of June 30, 2020 largely due to changes in asset composition. Our liquidity position, consisting of unencumbered Agency RMBS and cash, totaled $5.2 billion at the end of the third quarter, which excludes unencumbered CRT securities, non-Agency securities and assets held at our broker-dealer subsidiary. Our interest rate hedge position increased to 71% of our funding liabilities, inclusive of our net TBA position (at cost), as of September 30, 2020, compared to 66% as of June 30, 2020. Our duration gap, which is a measure of the difference between the interest rate sensitivity of our assets and liabilities, inclusive of all of our interest rate hedges, was largely unchanged during the third quarter at 0.0 years as of September 30, 2020 compared to -0.1 year as of June 30, 2020. Our interest rate swap portfolio totaled $43.0 billion as of September 30, 2020, largely unchanged from $42.1 billion as of June 30, 2020. We continued to alter the composition of our swap portfolio during the third quarter, shifting to SOFR-indexed swaps and extending the maturity profile to 5.3 years as of September 30, 2020 from 5.1 years as of June 30, 2020. SOFR-indexed swaps are expected to highly correlate to changes in repo funding levels. As of September 30, 2020, 69% of our interest rate swaps were indexed to SOFR and the remainder to OIS. As of June 30, 2020, 16%, 79% and 5% of our interest rate swaps were indexed to SOFR, OIS and 3M LIBOR, respectively. Our interest rate swap repositioning in recent quarters also led to a decline in our average swap cost, as the majority of our interest swaps now reflect prevailing market rates. For the third quarter, the average pay rate on our interest rates swaps decreased to 0.15% as of September 30, 2020 from 0.39% as of June 30, 2020. Although the ongoing economic uncertainties associated with the COVID-19 pandemic and U.S. fiscal policy continue as risks to the financial markets and prepayments will likely remain elevated, our earnings profile should continue to benefit from the broad availability of repo funding at rates near zero, muted interest rate volatility and continued Fed acquisitions of Agency RMBS. As such, in the current environment, we remain optimistic about our ability to generate positive risk-adjusted returns for our stockholders through a combination of dividends and book value growth over the near term. 25 Market Information The following table summarizes interest rates and prices of generic fixed rate Agency RMBS as of each date presented below: Interest Rate/Security Price 1 Sept. 30, 2019 Dec. 31, 2019 Mar. 31, 2020 June 30, 2020 Sept. 30, 2020 Sept. 30, 2020 vs June 30, 2020 Sept. 30, 2020 vs Dec. 31, 2019 Target Federal Funds Rate: Target Federal Funds Rate - Upper Band 2.00% 1.75% 0.25% 0.25% 0.25% — bps -150 bps LIBOR: 1-Month 2.02% 1.76% 0.99% 0.16% 0.15% -1 bps -161 bps 3-Month 2.09% 1.91% 1.45% 0.30% 0.23% -7 bps -168 bps U.S. Treasury Security Rate: 2-Year U.S. Treasury 1.62% 1.57% 0.25% 0.15% 0.13% -2 bps -144 bps 5-Year U.S. Treasury 1.54% 1.69% 0.38% 0.29% 0.28% -1 bps -141 bps 10-Year U.S. Treasury 1.66% 1.92% 0.67% 0.66% 0.69% +3 bps -123 bps 30-Year U.S. Treasury 2.11% 2.39% 1.32% 1.41% 1.46% +5 bps -93 bps Interest Rate Swap Rate: 2-Year Swap 1.63% 1.70% 0.49% 0.23% 0.22% -1 bps -148 bps 5-Year Swap 1.50% 1.73% 0.52% 0.33% 0.35% +2 bps -138 bps 10-Year Swap 1.56% 1.90% 0.72% 0.64% 0.71% +7 bps -119 bps 30-Year Swap 1.71% 2.09% 0.88% 0.92% 1.12% +20 bps -97 bps 30-Year Fixed Rate Agency Price: 2.0% $95.49 $94.89 $100.91 $102.33 $103.39 +$1.06 +$8.50 2.5% $99.55 $98.89 $103.59 $104.26 $104.90 +$0.64 +$6.01 3.0% $101.51 $101.42 $104.83 $105.33 $104.75 -$0.58 +$3.33 3.5% $102.58 $102.86 $105.70 $105.18 $105.40 +$0.22 +$2.54 4.0% $103.77 $104.01 $106.67 $105.98 $106.64 +$0.66 +$2.63 15-Year Fixed Rate Agency Price: 2.0% $99.11 $98.68 $102.66 $103.46 $103.95 +$0.49 +$5.27 2.5% $100.85 $100.91 $103.72 $104.70 $104.44 -$0.26 +$3.53 3.0% $102.21 $102.50 $104.61 $105.09 $104.94 -$0.15 +$2.44 3.5% $103.42 $103.69 $105.19 $105.06 $105.81 +$0.75 +$2.12 4.0% $104.08 $104.28 $105.56 $105.75 $106.15 +$0.40 +$1.87 ________________________________ 1. Price information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information is as of 3:00 p.m. (EST) on such date and can vary by source. Prices and interest rates in the table above were obtained from Barclays. LIBOR rates were obtained from Bloomberg. 26 FINANCIAL CONDITION As of September 30, 2020 and December 31, 2019, our investment portfolio consisted of $68.0 billion and $100.4 billion of investment securities, at fair value, respectively, and $29.5 billion and $7.4 billion of TBA securities, at fair value, respectively. The following table is a summary of our investment portfolio as of September 30, 2020 and December 31, 2019 (dollars in millions): September 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: ≤ 15-year: ≤ 15-year RMBS $ 4,772 $ 4,970 3.12 % 5 % $ 6,140 $ 6,239 3.29 % 6 % 15-year TBA securities, net 1 11,421 11,456 1.86 % 12 % 2,222 2,226 2.91 % 2 % Total ≤ 15-year 16,193 16,426 2.23 % 17 % 8,362 8,465 3.19 % 8 % 20-year RMBS 2,395 2,445 2.67 % 3 % 752 773 3.87 % 1 % 30-year: 30-year RMBS 56,140 58,863 3.63 % 60 % 89,483 91,062 3.67 % 84 % 30-year TBA securities, net 1 18,039 18,080 2.19 % 18 % 5,182 5,203 2.92 % 5 % Total 30-year 74,179 76,943 3.28 % 79 % 94,665 96,265 3.63 % 89 % Total fixed rate Agency RMBS and TBA securities 92,767 95,814 3.08 % 98 % 103,779 105,503 3.60 % 98 % Adjustable rate Agency RMBS 96 99 2.54 % — % 160 163 3.04 % — % Multifamily 17 19 3.31 % — % 37 39 3.37 % — % CMO Agency RMBS: CMO 327 341 3.35 % — % 441 447 3.44 % 1 % Interest-only strips 51 66 5.58 % — % 63 77 4.22 % — % Principal-only strips 66 76 — % — % 83 87 — % — % Total CMO Agency RMBS 444 483 4.11 % — % 587 611 3.48 % 1 % Total Agency RMBS and TBA securities 93,324 96,415 3.09 % 99 % 104,563 106,316 3.59 % 99 % Non-Agency RMBS 172 177 4.20 % — % 198 209 4.05 % 1 % CMBS 310 335 4.13 % 1 % 352 370 4.49 % — % CRT 678 653 3.31 % 1 % 961 976 5.07 % 1 % Total investment portfolio $ 94,484 $ 97,580 3.09 % 100 % $ 106,074 $ 107,871 3.61 % 100 % ________________________________ 1. TBA securities are presented net of long and short positions. For further details of our TBA securities refer to Note 6 of the accompanying consolidated financial statements. 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 September 30, 2020 and December 31, 2019, our TBA positions had a net carrying value of $76 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 September 30, 2020 and December 31, 2019, the weighted average yield on our investment securities (excluding TBA securities) was 2.56% and 3.07%, respectively. 27 The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBAs, as of September 30, 2020 and December 31, 2019 (dollars in millions): September 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 Amortized Cost Basis Weighted Average Projected CPR 3 WAC 2 Yield 3 Age (Months) Fixed rate ≤ 15-year: ≤ 2.0% $ 11,135 $ 11,456 $ 11,493 —% 103.8% 2.62% 1.09% — 12% 2.5% 1,114 1,165 1,164 10% 104.0% 3.08% 1.42% 22 15% 3.0% 1,264 1,285 1,348 94% 101.6% 3.55% 2.49% 41 13% 3.5% 1,357 1,386 1,474 100% 102.2% 4.03% 2.79% 37 15% 4.0% 784 807 850 91% 103.0% 4.60% 2.97% 35 16% ≥ 4.5% 92 94 97 97% 102.9% 4.89% 2.98% 121 17% Total ≤ 15-year 15,746 16,193 16,426 23% 102.6% 3.69% 2.33% 31 14% 20-year: ≤ 2.5% 1,697 1,757 1,767 —% 103.6% 3.07% 1.36% 1 15% 3.0% 54 55 58 98% 102.9% 3.78% 2.14% 14 19% 3.5% 242 247 263 81% 101.8% 4.05% 2.94% 85 15% 4.0% 159 164 175 92% 103.1% 4.45% 3.06% 43 17% ≥ 4.5% 164 172 182 100% 104.5% 5.01% 3.15% 47 18% Total 20-year: 2,316 2,395 2,445 25% 103.4% 3.42% 1.79% 17 15% 30-year: 2.0% 13,375 13,749 13,801 —% 102.8% 2.92% 1.60% — 8% 2.5% 11,713 12,254 12,302 —% 104.5% 3.40% 1.61% 2 14% 3.0% 4,131 4,259 4,368 15% 102.9% 3.74% 2.21% 32 18% 3.5% 15,475 16,131 16,949 84% 104.2% 4.07% 2.50% 61 15% 4.0% 17,014 17,784 18,841 93% 104.5% 4.51% 2.86% 50 17% ≥ 4.5% 9,514 10,002 10,682 98% 105.1% 5.01% 3.14% 35 19% Total 30-year 71,222 74,179 76,943 56% 104.4% 4.23% 2.58% 42 16% Total fixed rate $ 89,284 $ 92,767 $ 95,814 49% 104.2% 4.16% 2.53% 40 16% ________________________________ 1. 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 September 30, 2020, lower balance specified pools had a weighted average original loan balance of $115,000 and $117,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 126% and 137% for 15-year and 30-year securities, respectively. 2. WAC represents the weighted average coupon of the underlying collateral. 3. Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of September 30, 2020. 28 December 31, 2019 Includes Net TBA Position Excludes Net TBA Position Fixed Rate Agency RMBS and TBA Securities Par Value Amortized Cost Fair Value Specified Pool % 1 Amortized Cost Basis Weighted Average Projected CPR 3 WAC 2 Yield 3 Age (Months) Fixed rate ≤ 15-year: ≤ 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% 20-year: 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% 30-year: ≤ 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% ________________________________ 1. See Note 1 of preceding table for specified pool composition. As of December 31, 2019, lower balance specified pools had a weighted average original loan balance of $115,000 and $118,000 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. 2. WAC represents the weighted average coupon of the underlying collateral. 3. Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of December 31, 2019. As of September 30, 2020 and December 31, 2019, our investments in CRT and non-Agency securities had the following credit ratings: September 30, 2020 December 31, 2019 CRT and Non-Agency Security Credit Ratings 1 CRT 2 RMBS CMBS CRT 2 RMBS CMBS AAA $ — $ — $ 39 $ — $ — $ 43 AA — 20 181 — 81 214 A — 33 22 13 25 34 BBB 42 82 55 67 71 69 BB 204 27 34 471 21 10 B 252 5 4 308 4 — Not Rated 155 10 — 117 7 — Total $ 653 $ 177 $ 335 $ 976 $ 209 $ 370 ________________________________ 1. Represents the lowest of Standard and Poor's ("S&P"), Moody's, Fitch, DBRS, Kroll Bond Rating Agency ("KBRA") and Morningstar credit ratings, stated in terms of the S&P equivalent rating as of each date. 2. CRT securities reference the performance of loans underlying Agency RMBS issued by Fannie Mae or Freddie Mac, each of which were subject to Fannie Mae and Freddie Mac's underwriting standards. 29 RESULTS OF OPERATIONS Non-GAAP Financial Measures In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including "economic interest income," "economic interest expense," "net spread and dollar roll income," "net spread and dollar roll income, excluding 'catch-up' premium amortization," "estimated taxable income" and the related per common share measures and certain financial metrics derived from such non-GAAP information, such as "cost of funds" and "net interest spread." "Economic interest income" is measured as interest income (GAAP measure), adjusted (i) to exclude "catch-up" premium amortization associated with changes in CPR estimates and (ii) to include TBA dollar roll implied interest income. "Economic interest expense" is measured as interest expense (GAAP measure) adjusted to include TBA dollar roll implied interest expense and interest rate swap periodic income/(cost). "Net spread and dollar roll income, excluding "catch-up" premium amortization" includes (i) the components of economic interest income and economic interest expense and other interest and dividend income (referred to as "adjusted net interest and dollar roll income"), less (ii) total operating expenses (GAAP measure). By providing such measures, in addition to the related GAAP measures, we believe we give greater transparency into the information used by our management in its financial and operational decision-making. We also believe it is important for users of our financial information to consider information related to our current financial performance without the effects of certain measures and one-time events that are not necessarily indicative of our current investment portfolio performance and operations. Specifically, in the case of "adjusted net interest and dollar roll income," we believe the inclusion of TBA dollar roll income is meaningful as TBAs, which are accounted for under GAAP as derivative instruments with gains and losses recognized in other gain (loss) in our consolidated statement of comprehensive income, are economically equivalent to holding and financing generic Agency RMBS using short-term repurchase agreements. Similarly, we believe that the inclusion of periodic interest rate swap settlements in "economic interest expense" is meaningful as interest rate swaps are the primary instrument we use to economically hedge against fluctuations in our borrowing costs and it is more indicative of our total cost of funds than interest expense alone. In the case of "economic interest income" and "net spread and dollar roll income, excluding 'catch-up' premium amortization," we believe the exclusion of "catch-up" adjustments to premium amortization cost or benefit is meaningful as it excludes the cumulative effect from prior reporting periods due to current changes in future prepayment expectations and, therefore, exclusion of such cost or benefit is more indicative of the current earnings potential of our investment portfolio. In the case of estimated taxable income, we believe it is meaningful information because it directly relates to the amount of dividends we are required to distribute to maintain our REIT qualification status. However, because such measures are incomplete measures of our financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, results computed in accordance with GAAP. In addition, because not all companies use identical calculations, our presentation of such non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing our income tax returns, which occurs after the end of our fiscal year. Selected Financial Data 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 September 30, 2020 and December 31, 2019 and our condensed consolidated statements of comprehensive income and key statistics for the three and nine months ended September 30, 2020 and 2019 (in millions, except per share amounts): 30 ($ in Millions, Except Per Share Amounts) Balance Sheet Data September 30, 2020 December 31, 2019 (Unaudited) Investment securities, at fair value $ 68,044 $ 100,442 Total assets $ 79,968 $ 113,082 Repurchase agreements and other debt $ 54,758 $ 89,410 Total liabilities $ 69,248 $ 102,041 Total stockholders' equity $ 10,720 $ 11,041 Net book value per common share 1 $ 16.84 $ 18.63 Tangible net book value per common share 2 $ 15.88 $ 17.66 Three Months Ended September 30, Nine Months Ended September 30, Statement of Comprehensive Income Data (Unaudited) 2020 2019 2020 2019 Interest income $ 364 $ 676 $ 1,284 $ 2,074 Interest expense 62 557 622 1,668 Net interest income 302 119 662 406 Other gain (loss), net 381 (104) (1,635) (531) Operating expenses 21 19 68 58 Net income (loss) 662 (4) (1,041) (183) Dividends on preferred stock 25 13 71 36 Net income (loss) available (attributable) to common stockholders $ 637 $ (17) $ (1,112) $ (219) Net income (loss) $ 662 $ (4) $ (1,041) $ (183) Other comprehensive income, net 70 246 737 1,025 Comprehensive income (loss) 732 242 (304) 842 Dividends on preferred stock 25 13 71 36 Comprehensive income (loss) available (attributable) to common stockholders $ 707 $ 229 $ (375) $ 806 Weighted average number of common shares outstanding - basic 553.2 546.4 553.8 540.3 Weighted average number of common shares outstanding - diluted 554.3 546.4 553.8 540.3 Net income (loss) per common share - basic $ 1.15 $ (0.03) $ (2.01) $ (0.41) Net income (loss) per common share - diluted $ 1.15 $ (0.03) $ (2.01) $ (0.41) Comprehensive income (loss) per common share - basic $ 1.28 $ 0.42 $ (0.68) $ 1.49 Comprehensive income (loss) per common share - diluted $ 1.28 $ 0.42 $ (0.68) $ 1.49 Dividends declared per common share $ 0.36 $ 0.48 $ 1.20 $ 1.52 31 Three Months Ended September 30, Nine Months Ended September 30, Other Data (Unaudited) * 2020 2019 2020 2019 Average investment securities - at par $ 61,398 $ 89,741 $ 75,108 $ 88,783 Average investment securities - at cost $ 63,893 $ 92,764 $ 77,783 $ 91,736 Average net TBA portfolio - at cost $ 27,785 $ 10,146 $ 17,017 $ 10,012 Average total assets - at fair value $ 80,058 $ 104,819 $ 93,541 $ 111,059 Average repurchase agreements and other debt outstanding 3 $ 61,008 $ 87,938 $ 74,649 $ 85,406 Average stockholders' equity 4 $ 10,527 $ 10,347 $ 10,595 $ 10,277 Average tangible net book value "at risk" leverage 5 8.9:1 10.0:1 9.1:1 9.8:1 Tangible net book value "at risk" leverage (as of period end) 6 8.8:1 9.8:1 8.8:1 9.8:1 Economic return on tangible common equity 7 8.8 % 2.7 % (3.3) % 9.1 % Expenses % of average total assets 0.10 % 0.07 % 0.10 % 0.07 % Expenses % of average assets, including average net TBA position 0.08 % 0.07 % 0.08 % 0.06 % Expenses % of average stockholders' equity 0.80 % 0.73 % 0.86 % 0.75 % ________________________________ * Except as noted below, average numbers for each period are weighted based on days on our books and records. 1. Net book value per common share is calculated as total stockholders' equity, less preferred stock liquidation preference, divided by number of common shares outstanding as of period end. 2. Tangible net book value per common share excludes goodwill. 3. Amount excludes U.S. Treasury repurchase agreements and TBA contracts. Other debt includes debt of consolidated VIEs. 4. Average stockholders' equity calculated as average month-ended stockholders' equity during the period. 5. Average tangible net book value "at risk" leverage is calculated by dividing the sum of daily weighted average mortgage borrowings outstanding (Agency and non-Agency MBS repurchase agreements, other debt and TBA securities (at cost)) for the period by the sum of average stockholders' equity adjusted to exclude goodwill for the period. Leverage excludes U.S. Treasury repurchase agreements. 6. "At risk" leverage as of period end is calculated by dividing the sum of mortgage borrowings outstanding and receivable/payable for unsettled investment securities as of period end (at cost) by the sum of total stockholders' equity adjusted to exclude goodwill as of period end. Leverage excludes U.S. Treasury repurchase agreements. 7. Economic return on tangible common equity represents the sum of the change in tangible net book value per common share and dividends declared per share of common stock during the period over beginning tangible net book value per common share. Economic Interest Income and Asset Yields The following table summarizes our economic interest income (a non-GAAP measure) for the three and nine months ended September 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 September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Amount Yield Amount Yield Amount Yield Amount Yield Interest income: Cash/coupon interest income $ 573 3.73 % $ 868 3.87 % $ 2,100 3.72 % $ 2,591 3.87 % Net premium amortization (209) (1.45) % (192) (0.96) % (816) (1.52) % (517) (0.86) % Interest income (GAAP measure) 364 2.28 % 676 2.91 % 1,284 2.20 % 2,074 3.01 % Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast 50 0.31 % 55 0.24 % 350 0.60 % 152 0.23 % Interest income, excluding "catch-up" premium amortization 414 2.59 % 731 3.15 % 1,634 2.80 % 2,226 3.24 % TBA dollar roll income - implied interest income 1,2 114 1.64 % 81 3.19 % 236 1.86 % 248 3.28 % Economic interest income, excluding "catch-up" amortization (non-GAAP measure) 3 $ 528 2.30 % $ 812 3.16 % $ 1,870 2.63 % $ 2,474 3.24 % Weighted average actual portfolio CPR for investment securities held during the period 24.3 % 13.5 % 18.0 % 10.0 % Weighted average projected CPR for the remaining life of investment securities held as of period end 15.9 % 13.4 % 15.9 % 13.4 % Average 30-year fixed rate mortgage rate as of period end 4 2.90 % 3.64 % 2.90 % 3.64 % 10-year U.S. Treasury rate as of period end 0.69 % 1.66 % 0.69 % 1.66 % 32 ________________________________ 1. Reported in gain (loss) on derivatives instruments and other securities, net in the accompanying consolidated statements of operations. 2. Implied interest income from TBA dollar roll transactions is computed as the sum of (i) TBA dollar roll income and (ii) estimated TBA implied funding cost (see Economic Interest Expense and Aggregate Cost of Funds below). TBA dollar roll income represents the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and is the economic equivalent to interest income on the underlying Agency securities, less an implied funding cost, over the forward settlement period. Amount is net of TBAs used for hedging purposes. Amount excludes TBA mark-to-market adjustments. 3. The combined asset yield is calculated on a weighted average basis based on our average investment and TBA balances outstanding during the period and their respective yields. 4. Source: Freddie Mac Primary Fixed Mortgage Rate Mortgage Market Survey 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 and nine months ended September 30, 2020 compared to the prior year period (in millions): Impact of Changes in the Principal Elements Impacting Economic Interest Income Periods ended September 30, 2020 vs. September 30, 2019 Due to Change in Average Total Increase / (Decrease) Portfolio Size Asset Yield Three months ended: Interest Income (GAAP measure) $ (312) $ (211) $ (101) Estimated "catch-up" premium amortization due to change in CPR forecast (5) — (5) Interest income, excluding "catch-up" premium amortization (317) (211) (106) TBA dollar roll income - implied interest income 33 141 (108) Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (284) $ (70) $ (214) Nine months ended: Interest Income (GAAP measure) $ (790) $ (315) $ (475) Estimated "catch-up" premium amortization due to change in CPR forecast 198 — 198 Interest income, excluding "catch-up" premium amortization (592) (315) (277) TBA dollar roll income - implied interest income (12) 174 (186) Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (604) $ (141) $ (463) Our average investment portfolio, inclusive of TBAs (at cost), decreased -11% and -7% for the three and nine months ended September 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 nine months ended September 30, 2020 was due to the combination of changes in asset composition and higher premium amortization cost resulting from faster prepayment expectations. Leverage 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. We include our net TBA position in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a TBA contract for the forward sale of Agency securities has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. (Refer to Liquidity and Capital Resources for further discussion of TBA securities and dollar roll transactions). Repurchase agreements used to fund short-term investments in U.S. Treasury securities ("U.S. Treasury repo") are excluded from our measure of leverage due to the temporary and highly liquid nature of these investments. The following table presents a summary of our leverage ratios for the periods listed (dollars in millions): 33 Repurchase Agreements and Other Debt 1 Net TBA Position Long/(Short) 2 Average Tangible Net Book Value "At Risk" Leverage during the Period 3 Tangible Net Book Value "At Risk" Leverage as of Period End 4 Quarter Ended Average Daily Amount Maximum Daily Amount Ending Amount Average Daily Amount Ending Amount September 30, 2020 $ 61,008 $ 69,628 $ 54,558 $ 27,785 $ 29,460 8.9:1 8.8:1 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 ________________________________ 1. Other debt includes debt of consolidated VIEs. Amounts exclude U.S. Treasury repo agreements. 2. Daily average and ending net TBA position outstanding measured at cost. 3. Average tangible net book value "at risk" leverage during the period represents the sum of our daily weighted average repurchase agreements and other debt used to fund acquisitions of investment securities and net TBA position outstanding divided by the sum of our average month-ended stockholders' equity, adjusted to exclude goodwill. 4. Tangible net book value "at risk" leverage as of period end represents the sum of our repurchase agreements and other debt used to fund acquisitions of investments securities, net TBA position (at cost) and net receivable/payable for unsettled investment securities outstanding as of period end divided by total stockholders' equity, adjusted to exclude goodwill as of period end. 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 and nine months ended September 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 cost (income): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Economic Interest Expense and Aggregate Cost of Funds 1 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) $ 62 0.40 % $ 557 2.48 % $ 622 1.09 % $ 1,668 2.58 % TBA dollar roll income - implied interest expense (benefit) 2,3 (41) (0.58) % 52 2.00 % (13) (0.10) % 178 2.32 % Economic interest expense - before interest rate swap periodic cost (income), net 4 21 0.09 % 609 2.43 % 609 0.87 % 1,846 2.55 % Interest rate swap periodic interest cost (income), net 2,5 13 0.06 % (146) (0.58) % 41 0.06 % (317) (0.44) % Total economic interest expense (non-GAAP measure) $ 34 0.15 % $ 463 1.85 % $ 650 0.93 % $ 1,529 2.11 % ________________________________ 1. 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. Treasury positions. 2. Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. 3. 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. 4. 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. 5. Interest rate swap periodic interest (income) cost is measured as a percent of average mortgage borrowings outstanding for the period. 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 and nine months ended September 30, 2020 compared to the prior year period (in millions): 34 Impact of Changes in the Principal Elements of Economic Interest Expense Periods ended September 30, 2020 vs. September 30, 2019 Due to Change in Average Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate Three months ended: Repurchase agreements and other debt interest expense $ (495) $ (170) $ (325) TBA dollar roll income - implied interest expense (93) 90 (183) Interest rate swap periodic interest income/cost 159 69 90 Total change in economic interest expense $ (429) $ (11) $ (418) Nine months ended: Repurchase agreements and other debt interest expense $ (1,046) $ (210) $ (836) TBA dollar roll income - implied interest expense (191) 125 (316) Interest rate swap periodic interest income/cost 358 34 324 Total change in economic interest expense $ (879) $ (51) $ (828) Our average mortgage borrowings, inclusive of TBAs, decreased by -9% and -4% for the three and nine months ended September 30, 2020, respectively, largely due to lower operating leverage. The decline in our average interest rate (actual and implied) on our mortgage borrowings these periods was due to lower short-term interest rates. Additionally, during the nine months ended September 30, 2020, we terminated $3.7 billion of longer-dated repurchase agreements and replaced them with shorter duration repurchase agreements at lower prevailing market rates. We recognized losses on debt extinguishment totaling $146 million in other gain (loss) during the period associated with the terminated agreements. We did not terminate any repurchase agreements during the three months ended September 30, 2020 or the prior year periods. The increase in our interest rate swap periodic cost for the three and nine months ended September 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 nine months ended September 30, 2020 and 2019 (dollars in millions): Three Months Ended September 30, Nine Months Ended September 30, 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 $ 61,008 $ 87,938 $ 74,649 $ 85,406 Average net TBA portfolio outstanding - at cost $ 27,785 $ 10,146 $ 17,017 $ 10,012 Average mortgage borrowings outstanding $ 88,793 $ 98,084 $ 91,666 $ 95,418 Average notional amount of interest rate swaps outstanding (excluding forward starting swaps) $ 41,094 $ 77,824 $ 52,268 $ 58,459 Ratio of average interest rate swaps to mortgage borrowings outstanding 46 % 79 % 57 % 61 % Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.22 % 1.52 % 0.80 % 1.75 % Average interest rate swap receive-floating rate (0.09) % (2.26) % (0.70) % (2.48) % Average interest rate swap net pay/(receive) rate 0.13 % (0.74) % 0.10 % (0.73) % For the three and nine months ended September 30, 2020, we had an average forward starting swap balance of $0.7 billion and $1.0 billion, respectively. For the three and nine months ended September 30, 2019, we had an average forward starting swap balance of $2.4 billion and $3.7 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 and nine months ended September 30, 2020 was 47% and 58%, respectively, and 82% and 65%, respectively, for the corresponding prior year periods. 35 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 and nine months ended September 30, 2020 and 2019: Three Months Ended September 30, Nine Months Ended September 30, Investment and TBA Securities - Net Interest Spread 2020 2019 2020 2019 Average asset yield, excluding "catch-up" premium amortization 2.30 % 3.16 % 2.63 % 3.24 % Average aggregate cost of funds (0.15) % (1.85) % (0.93) % (2.11) % Average net interest spread, excluding "catch-up" premium amortization 2.15 % 1.31 % 1.70 % 1.13 % 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 and nine months ended September 30, 2020 and 2019 (dollars in millions): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net interest income (GAAP measure) $ 302 $ 119 $ 662 $ 406 TBA dollar roll income, net 1 155 29 249 70 Interest rate swap periodic interest (cost) income, net 1 (13) 146 (41) 317 Other interest and dividend income 1 — 4 3 11 Adjusted net interest and dollar roll income 444 298 873 804 Operating expense (21) (19) (68) (58) Net spread and dollar roll income 423 279 805 746 Dividend on preferred stock 25 13 71 36 Net spread and dollar roll income available to common stockholders (non-GAAP measure) 398 266 734 710 Estimated "catch-up" premium amortization cost due to change in CPR forecast 50 55 350 152 Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) $ 448 $ 321 $ 1,084 $ 862 Weighted average number of common shares outstanding - basic 553.2 546.4 553.8 540.3 Weighted average number of common shares outstanding - diluted 554.3 547.1 554.8 540.9 Net spread and dollar roll income per common share - basic $ 0.72 $ 0.49 $ 1.33 $ 1.31 Net spread and dollar roll income per common share - diluted $ 0.72 $ 0.49 $ 1.32 $ 1.31 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - basic $ 0.81 $ 0.59 $ 1.96 $ 1.60 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - diluted $ 0.81 $ 0.59 $ 1.95 $ 1.59 ________________________________ 1. Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income Gain (Loss) on Investment Securities, Net The following table is a summary of our net gain (loss) on investment securities for the three and nine months ended September 30, 2020 and 2019 (in millions): Three Months Ended September 30, Nine Months Ended September 30, Gain (Loss) on Investment Securities, Net 1 2020 2019 2020 2019 Gain on sale of investment securities, net $ 346 $ 89 $ 993 $ 281 Unrealized gain (loss) on investment securities measured at fair value through net income, net 2 (365) 355 511 2,174 Unrealized gain (loss) on investment securities measured at fair value through other comprehensive income, net 70 246 737 1,025 Total gain (loss) on investment securities, net $ 51 $ 690 $ 2,241 $ 3,480 ________________________________ 36 1. Amounts exclude gain (loss) on TBA securities, which are reported in gain (loss) on derivative instruments and other securities, net in our Consolidated Statements of Comprehensive Income. 2. Investment securities acquired after fiscal year 2016 are measured at fair value through net income (see Note 3 of our Consolidated Financial Statements in this Form 10-Q). 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 and nine months ended September 30, 2020 and 2019 (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Interest rate swap periodic interest income (cost), net $ (13) $ 146 $ (41) $ 317 Realized gain (loss) on derivative instruments and other securities, net: TBA securities - dollar roll income, net 155 29 249 70 TBA securities - mark-to-market net gain (loss) 183 151 896 342 Payer swaptions (33) (3) (63) (30) U.S. Treasury securities - long position 18 6 104 7 U.S. Treasury securities - short position (32) (203) (745) (820) U.S. Treasury futures - short position (2) (94) (97) (189) Interest rate swaps - termination fees and variation margin settlements, net 113 (653) (3,013) (2,292) Losses on debt extinguishment — — (146) — Other — — 28 (8) Total realized gain (loss) on derivative instruments and other securities, net 402 (767) (2,787) (2,920) Unrealized gain (loss) on derivative instruments and other securities, net: TBA securities - mark-to-market net gain (loss) (55) (36) 51 (22) Interest rate swaps 40 25 20 (122) Payer swaptions 32 (16) (86) (41) U.S. Treasury securities - long position (17) (1) (2) 4 U.S. Treasury securities - short position 17 49 (267) (264) U.S. Treasury futures - short position (3) 54 (20) 61 Other (3) (2) (7) 1 Total unrealized gain (loss) on derivative instruments and other securities, net 11 73 (311) (383) Total gain (loss) on derivative instruments and other securities, net $ 400 $ (548) $ (3,139) $ (2,986) For further details regarding our use of derivative instruments and related activity refer to Notes 3 and 6 of our Consolidated Financial Statements in this Form 10-Q. Estimated Taxable Income For the three months ended September 30, 2020 and 2019, we had estimated taxable income (loss) available (attributable) to common stockholders of $508 million and $156 million, or $0.92 and $0.29 per diluted common share, respectively. For the nine months ended September 30, 2020 and 2019, we had estimated taxable income available to common stockholders of $615 million and $523 million, or $1.11 and $0.97 per diluted common share, respectively. Income determined under GAAP differs from income determined under U.S. federal income tax rules because of both temporary and permanent differences in income and expense recognition. The primary differences are (i) unrealized gains and losses on investment securities and derivative instruments marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized, settled or amortized over the instrument's original term, (ii) timing differences, both temporary and potentially permanent, in the recognition of certain realized gains and losses and (iii) temporary differences related to the amortization of premiums and discounts on investments. 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 and nine months ended September 30, 2020 and 2019 (dollars in millions, except per share amounts): 37 Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Net income (loss) $ 662 $ (4) $ (1,041) $ (183) Estimated book to tax differences: Premium amortization, net (11) 47 248 168 Realized gain/loss, net (472) 521 2,083 2,034 Net capital loss/(utilization of net capital loss carryforward) — 34 (394) 342 Unrealized (gain)/loss, net 354 (428) (200) (1,791) Other — (1) (10) (11) Total book to tax differences (129) 173 1,727 742 Estimated REIT taxable income 533 169 686 559 Dividends on preferred stock 25 13 71 36 Estimated REIT taxable income (loss) available (attributable) to common stockholders $ 508 $ 156 $ 615 $ 523 Weighted average number of common shares outstanding - basic 553.2 546.4 553.8 540.3 Weighted average number of common shares outstanding - diluted 554.3 547.1 554.8 540.9 Estimated REIT taxable income (loss) per common share - basic $ 0.92 $ 0.29 $ 1.11 $ 0.97 Estimated REIT taxable income (loss) per common share - diluted $ 0.92 $ 0.29 $ 1.11 $ 0.97 Beginning cumulative non-deductible net capital loss $ — $ 490 $ 394 $ 182 Increase (decrease) in net capital loss carryforward — 34 (394) 342 Ending cumulative non-deductible net capital loss $ — $ 524 $ — $ 524 Ending cumulative non-deductible net capital loss per common share $ — $ 0.97 $ — $ 0.97 38 LIQUIDITY AND CAPITAL RESOURCES 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. In assessing our liquidity, we consider a number of factors, including our current leverage, haircut and minimum collateral levels, access to capital markets, overall market conditions, and the sensitivity of our tangible net book value over a range of scenarios. However, these and other factors impacting our liquidity are subject to numerous risks and uncertainties, including as described in the Quantitative and Qualitative Disclosures of Market Risks and Risk Factors sections of our Annual Report on Form 10-K for the year ended December 31, 2019, as amended (our "2019 Form 10-K") and this Form 10-Q. Leverage 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. Our tangible net book value "at risk" leverage ratio was 8.8x and 9.4x as of September 30, 2020 and December 31, 2019, respectively. The following table includes a summary of our mortgage borrowings outstanding as of September 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. September 30, 2020 December 31, 2019 Mortgage Borrowings Amount % Amount % Repurchase agreements 1 $ 54,366 65 % $ 89,085 92 % Debt of consolidated variable interest entities, at fair value 192 — % 228 — % Total debt 54,558 65 % 89,313 92 % Net TBA position, at cost 29,460 35 % 7,404 8 % Total mortgage borrowings $ 84,018 100 % $ 96,717 100 % ________________________________ 1. Amount excludes $200 million and $97 million of repurchase agreements used to fund purchases of U.S. Treasury securities as of September 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. We maintain a beneficial interest in the specific securities pledged during the term of each repurchase arrangement and we receive the related principal and interest payments. The terms and conditions of secured borrowings are negotiated on a transaction-by-transaction basis when each such borrowing is initiated or renewed. The amount borrowed is generally equal to the fair value of the securities pledged, as determined by the lending counterparty, less an agreed-upon discount, referred to as a "haircut." This haircut reflects the underlying risk of the specific collateral and protects our counterparty against a change in its value, but conversely subjects us to counterparty credit risk and limits the amount we can borrow against our investment securities. Interest rates are generally fixed based on prevailing rates corresponding to the terms of the borrowings. Interest may be paid monthly or at the termination of a borrowing at which time we may enter into a new borrowing at prevailing haircuts and rates with the same lending counterparty or repay that counterparty and negotiate financing with a different lending counterparty. 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 RMBS pools held on balance sheet 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. 39 To help manage the adverse impact of interest rate changes on the value of our investment portfolio as well as our cash flows, we utilize an interest rate risk management strategy involving the use of derivative financial instruments. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities increasing at a faster rate than the earnings of our long-term fixed rate assets during a period of rising interest rates. Collateral levels for interest rate derivative agreements are typically governed by the central clearing exchange and the associated futures commission merchants ("FCMs"), which may establish margin levels in excess of the clearing exchange. Collateral levels for interest rate derivative agreements not subject to central clearing are established by the counterparty financial institution. Collateral Requirements and Unencumbered Assets 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. 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. Collateral requirements under our repurchase and derivative agreements are dependent on our counterparties' determination of the fair value of securities pledged and the "haircut" levels they apply against the value of our securities. Haircuts under repo agreements are typically determined on an individual transaction basis and reflect our counterparties' assessment of the underlying risk associated with the specific collateral. Haircut levels and minimum margin requirements can change overtime and could be expected to increase during periods of elevated market volatility. We are also subject to daily variation margin requirements based on changes in the value of our collateral and, in the case of derivative agreements, changes in the value of the derivative instrument. Daily variation margin requirements under our interest rate derivative agreements also entitle us to receive collateral if the value of amounts owed to us under the derivative instrument exceeds a minimum margin requirement. Our agreements may provide that the valuations of securities securing our obligations under the agreement are to be obtained from a generally recognized source agreed to by both parties to the agreement. Other agreements provide that our counterparty has the sole discretion to determine the value of pledged collateral, but is required to act in good faith in making determinations of value. 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 September 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 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"). On the fifth day of the month, the blackout margin is released and collateralization requirements are adjusted to the actual published factor data. Consequently, our liquidity is temporarily reduced each month until we receive payment of the pay-down amounts. We attempt to manage the liquidity risk associated with principal pay-downs by monitoring conditions impacting prepayment rates and through asset selection. As of September 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. For the nine months ended September 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 have since improved to more normal levels. As of September 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, largely unchanged from December 31, 2019. As of September 30, 2020, our unencumbered assets totaled 60% of our tangible net equity, compared to 54% as of 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 September 30, 2020, we had cash and unencumbered Agency RMBS totaling $5.2 billion, which excludes unencumbered CRT securities, non-Agency securities and assets held at BES. 40 Collateral haircuts and minimum margin requirements imposed by counterparties subject us to counterparty credit risk. We attempt to manage this risk by monitoring our collateral positions and limiting our counterparties to registered clearinghouses and major financial institutions with acceptable credit ratings. We also diversify our funding across multiple counterparties and by region. Additionally, 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 September 30, 2020, $26.2 billion of our repurchase agreement funding was sourced through BES. As of September 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 2% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing less than 6% of our tangible stockholders' equity. As of September 30, 2020, approximately 10% of our tangible stockholder's equity was at risk with the FICC. Excluding central clearing exchanges, as of September 30, 2020, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity. Asset Sales 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 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 our 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 Notes 10 and 11 of our Consolidated Financial Statements in this Form 10-Q for further details regarding our recent equity capital transactions and our stock repurchase plan. OFF-BALANCE SHEET ARRANGEMENTS As of September 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 September 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 The statements contained in this Quarterly Report that are not historical facts, including estimates, projections, beliefs, expectations concerning conditions, events, or the outlook for our business, strategy, performance, operations or the markets or industries in which we operate, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “intend,” “outlook,” “potential,” “forecast,” “estimate,” “will,” “could,” “should,” “likely” and other similar, correlative or comparable words and expressions. Forward looking statements are based on management’s assumptions, projections and beliefs as of the date of this Quarterly Report, but they involve a number of risks and uncertainties. Actual results may differ materially from those anticipated in forward-looking statements, as well as from historical performance. Factors that could cause actual results to vary from our forward-looking statements include, but are not limited to, the following: • the impact of the COVID-19 pandemic and of measures taken in response to the COVID-19 pandemic by various governmental authorities, businesses and other third parties; • actions by the federal, state, or local governments to stabilize the economy, the housing sector or financial markets; 41 • changes in U.S. monetary policy or interest rates; • fluctuations in the yield curve; • fluctuations in mortgage prepayment rates on the loans underlying our Agency RMBS; • the availability and terms of financing; • changes in the market value of our assets, including from changes in net interest spreads, and changes in market liquidity or depth; • the effectiveness of our risk mitigation strategies; • conditions in the market for Agency RMBS and other mortgage securities; • legislative or regulatory changes that affect our status as a REIT, our exemption from the Investment Company Act of 1940 or the mortgage markets in which we participate; and • other risks discussed under the heading “Risk Factors” herein and in our Annual Report on Form 10-K. Forward-looking statements speak only as of the date made, and we do not assume any duty and do not undertake to update forward-looking statements. A further discussion of risks and uncertainties that could cause actual results to differ from any of our forward-looking statements is included in our most recent Annual Report on Form 10-K and this document under Item 1A. Risk Factors . We caution readers not to place undue reliance on our forward-looking statements.