AGNC Investment Corp. 10-K

Item 7. 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 Annual Report on Form 10-K. Our MD&A is presented in eight sections: • Executive Overview • Financial Condition • Summary of Critical Accounting Estimates • Results of Operations • Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Aggregate Contractual Obligations • Forward-Looking Statements EXECUTIVE OVERVIEW We are a leading provider of private capital to the U.S. housing market, enhancing liquidity in the residential real estate mortgage markets and, in turn, facilitating home ownership in the U.S. We invest primarily in 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 Fannie Mae and Freddie Mac, or by a U.S. Government agency, such as Ginnie Mae. We may also invest in other assets related to the housing, mortgage or real estate markets that are not guaranteed by a GSE or U.S. Government agency. We are internally managed with the principal objective of providing 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 collateralized borrowings structured as repurchase agreements. We operate in a manner to qualify to be taxed as a REIT under the Internal Revenue Code. 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 In March 2020, the COVID-19 pandemic triggered one of the most severe and sudden financial market downturns in U.S. history. As the U.S and the world grappled with the rapidly deteriorating public health situation late in the first quarter, financial markets experienced historically rapid and severe liquidity shortfalls and declined precipitously. The Fed and the U.S. Treasury, together with their global counterparts, took decisive actions to allay the global financial crisis in late March and early April, which stabilized the financial markets and ultimately drove a recovery throughout the remainder of the year. In the U.S., the Fed's unprecedented monetary accommodation, which included substantial outright purchases of U.S. Treasury and Agency RMBS securities and a near-zero interest rate policy, and a massive fiscal stimulus package drove a rebound across substantially all asset categories. By year-end, U.S. Treasury and Agency RMBS markets had fully stabilized, equity markets had rebounded to new highs, and credit spreads had tightened to pre-COVID levels as a result of the ongoing monetary and fiscal stimulus and optimism regarding vaccine efficacy, the combination of which boosted prospects for a broad-based economic recovery that is expected to gain significant momentum in the latter half of 2021. In response to the Pandemic and resulting market disruptions and volatility, we took early action to strengthen our liquidity position and mitigate risk across our portfolio. We repositioned the portfolio and increased more efficient funding sourced from our captive broker-dealer subsidiary, benefiting AGNC’s overall liquidity position and, in turn, avoiding the need to make significant portfolio sales at distressed levels to meet margin calls. As a result, after experiencing a significant book 25 value decline in the first quarter of 2020, resulting in an economic loss for the quarter of -20.2%, AGNC posted three straight quarters of substantial economic returns: 12.2%, 8.8%, and 7.5%, respectively. This strong performance drove a full year 2020 economic return of 3.5%, comprised of $1.56 in cash dividends per common share and a ($0.95) per share decline in tangible net book value per common share. Considering the extraordinarily difficult market conditions in the first quarter, these results demonstrate the importance and value of AGNC's disciplined investment framework and risk management practices. Moreover, the experience of 2020 clearly illustrates the unique value of a predominately Agency RMBS portfolio. In times of significant market stress, the Fed has repeatedly shown a commitment to supporting and stabilizing the U.S. housing finance system because of the significant impact this market has on the broader social and economic well-being of the country. 2020 was no exception, as the Fed purchased $1.5 trillion of Agency RMBS during the year and held approximately 30% of all outstanding Agency RMBS at year end. Our portfolio management throughout the year, coupled with the Fed's continued support of the RMBS market, ultimately facilitated AGNC's recovery of substantially all of the tangible net book value decline experienced in the first quarter. Importantly, the Fed has signaled that it intends to maintain its accommodative monetary policy stance until its objectives of maximum employment and long-term average inflation targets are achieved and that it expects to continue to increase its holdings of U.S. Treasury securities and Agency RMBS until substantial further progress has been made toward achieving these goals. The Fed's actions and strong demand for Agency RMBS drove primary mortgage rates to historic lows during the year and triggered the largest mortgage refinance wave in almost 20 years. To manage the risk of increased prepayments on our portfolio, we shifted the composition of our portfolio to include a greater share to lower coupon 30 and 15-year TBA securities, while maintaining our higher coupon holdings concentrated in high quality, specified Agency RMBS pools. In this elevated prepayment environment, our higher coupon specified pools performed considerably better than more generic RMBS, while our lower coupon holdings benefited from the extremely favorable funding conditions in the TBA dollar roll market, a result of significant new Agency RMBS issuance and the Fed's high level of participation. As of December 31, 2020, our investment portfolio totaled $97.9 billion, consisting of $65.1 billion Agency RMBS, $31.5 billion TBA securities, and $1.3 billion of CRT and non-Agency securities. Our "at risk" leverage, as of December 31, 2020, was 8.5x our tangible equity, and our liquidity position, consisting of unencumbered Agency RMBS and cash, was $5.4 billion, which excludes unencumbered credit assets and assets held at our broker-dealer subsidiary. The average prepayment rate on our Agency RMBS holdings during the year peaked at an annualized rate of 27.6% for the fourth quarter, significantly below speeds for similar coupon generic securities. As of December 31, 2020, our Agency RMBS had an average remaining life CPR forecast of 17.6%. Our interest rate exposure remained limited throughout the year despite significant movements in interest rates as we actively managed the size and composition of our interest rate hedge position in response to changing market conditions. In the fourth quarter, we increased our interest rate hedge ratio to 80% of our funding liabilities (compared to our intra-year low of 66% at the end of the second quarter) as the macroeconomic outlook became more favorable and the risk of higher longer term interest rates increased. Our duration gap, which is a measure of the difference between the interest rate sensitivity of our assets and liabilities, inclusive of our interest rate hedges, was -0.5 years as of December 31, 2020, consistent with the reduction of our asset durations and our bias in the current environment to operate with incrementally more up-rate protection. The funding environment for Agency RMBS remained favorable throughout the year. The Agency MBS repo market remained highly liquid and functioned normally, even during the broad financial market turmoil experienced in March. Our average funding cost moved steadily lower over the course of the year as the Fed acted quickly to reduce the Fed Funds rate to the zero bound range early in the crisis. As of December 31, 2020, our average repo rate was 0.24%, down substantially from 2.17 % at the start of the year. These favorable repo rates, even lower implied financing rates in the TBA dollar roll market, and reduced interest rate swap costs collectively drove a substantial improvement in our aggregate cost of funds, which declined to 0.05% in the fourth quarter from 1.67% in the first quarter. This very favorable funding dynamic more than offset the decline in asset yields on our portfolio and drove a significant improvement in our net interest spread. As a result of our materially higher net interest spread, net spread and dollar roll income (a non-GAAP measure) totaled $2.70 per common share, excluding "catch-up" amortization cost, for the year. (Refer to Results of Operations below for further information regarding non-GAAP measures.) Looking ahead, valuations of all financial assets have become elevated and, in many cases, are now above pre-COVID levels. With Agency RMBS valuations similarly elevated, the expected return profile on new investments has correspondingly declined. As a result, the net interest spread on our investment portfolio is likely to compress moderately as asset cash flows are reinvested at lower prevailing asset yields and the implied funding advantage of TBAs reverts to more historical norms. Nevertheless, we believe Agency RMBS remain attractive on a relative basis for levered investors given the dual benefits of low funding costs and the likelihood of ongoing Fed purchases. We believe that the near zero short-term interest rate environment is likely to remain in place through at least 2023, the Fed is unlikely to begin tapering its Agency RMBS purchases before 2022, and any such tapering will likely be gradual over a multi-month period. Although any decisions by the Fed to taper 26 its investments in Agency RMBS could occur earlier or later than our current expectation, the Fed has indicated that it will seek to communicate its intentions well in advance of taking any such action so as to reduce market uncertainty. Importantly, even after the Fed completes the taper process, it has indicated an intention to continue to reinvest portfolio paydowns for an extended period of time, likely until it begins to raise the Federal Funds target. Nonetheless, we may experience periods of increased volatility as markets begin to price in an eventual shift in the Fed's monetary policy. In the current environment with asset valuations elevated, we may choose to operate at comparatively lower leverage for periods of time to mitigate the potential downside risk to our tangible net book value associated with a reduced Fed presence, as well as to afford us the ability to increase leverage opportunistically when expected return levels are more favorable. That said, the recent increase in longer term interest rates, if it continues, should ultimately lead to a more benign prepayment environment for mortgage assets. Although Agency RMBS valuations have increased along with the vast majority of financial assets over the past several quarters, we believe significant ongoing Fed purchases, potentially slower prepayments, and attractive funding levels should continue to be positive factors for AGNC. Net Interest Spread Information The following table summarizes the components of our average net interest spread the four quarters ended December 31, 2020: Quarter Ended Year Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2020 Net interest spread, excluding "catch-up" amortization: Average asset yield: Investment securities - average asset yield 1.64 % 2.28 % 2.39 % 2.01 % 2.09 % Estimated "catch-up" premium amortization cost due to change in CPR forecast 0.75 % 0.31 % 0.32 % 0.99 % 0.63 % Investment securities average asset yield, excluding "catch-up" premium amortization 2.39 % 2.59 % 2.71 % 3.00 % 2.72 % TBA securities - average implied asset yield 1 1.53 % 1.64 % 1.90 % 2.54 % 1.73 % Average asset yield, excluding "catch-up" premium amortization 2 2.07 % 2.30 % 2.56 % 2.97 % 2.50 % Average total cost of funds: Repurchase agreements and other debt - average funding cost 0.38 % 0.40 % 0.76 % 1.80 % 0.96 % TBA securities - average implied funding (benefit) cost 3 (0.54) % (0.58) % (0.09) % 1.67 % (0.27) % Average cost of funds, before interest rate swap periodic cost (income), net 2 0.02 % 0.09 % 0.61 % 1.79 % 0.67 % Interest rate swap periodic cost (income), net 4 0.03 % 0.06 % 0.27 % (0.12) % 0.05 % Average total cost of funds 5 0.05 % 0.15 % 0.88 % 1.67 % 0.72 % Average net interest spread, excluding "catch-up" premium amortization 2.02 % 2.15 % 1.68 % 1.30 % 1.78 % ________________________________ 1. The average implied asset yield for TBA dollar roll transactions is extrapolated by adding the average TBA implied funding cost (benefit) (Note 3) to the net dollar roll yield. The net dollar roll yield is calculated by dividing dollar roll income by the average net TBA balance (cost basis) outstanding for the period. 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. Amount includes dollar roll income (loss) on long and short TBA securities. Amount excludes TBA mark-to-market adjustments. 2. Amount calculated on a weighted average basis based on average balances outstanding during the period and their respective asset yield/funding cost. 3. The implied funding cost/(benefit) of TBA dollar roll transactions is determined using the "price drop" 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 the daily average TBA balance outstanding for the period. 4. Represents interest rate swap periodic cost/(income) measured as a percent of total mortgage funding (Agency repurchase agreements, other debt and net TBA securities). Amount excludes interest rate swap termination fees and mark-to-market adjustments. 5. Cost of funds excludes other supplemental hedges used to hedge a portion of the Company's interest rate risk (such as swaptions and U.S. Treasury positions) and U.S. Treasury repurchase agreements. 27 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 Dec. 31, 2019 Mar. 31, 2020 June 30, 2020 Sept. 30, 2020 Dec. 31, 2020 Dec. 31, 2020 vs Dec. 31, 2019 Target Federal Funds Rate: Target Federal Funds Rate - Upper Band 1.75% 0.25% 0.25% 0.25% 0.25% -150 bps LIBOR: 1-Month 1.76% 0.99% 0.16% 0.15% 0.14% -162 bps 3-Month 1.91% 1.45% 0.30% 0.23% 0.24% -167 bps U.S. Treasury Security Rate: 2-Year U.S. Treasury 1.57% 0.25% 0.15% 0.13% 0.12% -145 bps 5-Year U.S. Treasury 1.69% 0.38% 0.29% 0.28% 0.36% -133 bps 10-Year U.S. Treasury 1.92% 0.67% 0.66% 0.69% 0.92% -100 bps 30-Year U.S. Treasury 2.39% 1.32% 1.41% 1.46% 1.65% -74 bps Interest Rate Swap Rate: 2-Year Swap 1.70% 0.49% 0.23% 0.22% 0.20% -150 bps 5-Year Swap 1.73% 0.52% 0.33% 0.35% 0.43% -130 bps 10-Year Swap 1.90% 0.72% 0.64% 0.71% 0.93% -97 bps 30-Year Swap 2.09% 0.88% 0.92% 1.12% 1.40% -69 bps 30-Year Fixed Rate Agency Price: 1.5% N/A N/A N/A $100.66 $101.05 N/A 2.0% $94.89 $100.91 $102.33 $103.39 $103.88 +$8.99 2.5% $98.89 $103.59 $104.26 $104.90 $105.41 +$6.52 3.0% $101.42 $104.83 $105.33 $104.75 $104.77 +$3.35 3.5% $102.86 $105.70 $105.18 $105.40 $105.66 +$2.80 4.0% $104.01 $106.67 $105.98 $106.64 $106.78 +$2.77 15-Year Fixed Rate Agency Price: 1.5% N/A N/A $101.83 $102.31 $102.89 N/A 2.0% $98.68 $102.66 $103.46 $103.95 $104.55 +$5.87 2.5% $100.91 $103.72 $104.70 $104.44 $104.30 +$3.39 3.0% $102.50 $104.61 $105.09 $104.94 $104.97 +$2.47 3.5% $103.69 $105.19 $105.06 $105.81 $106.03 +$2.34 4.0% $104.28 $105.56 $105.75 $106.15 $106.28 +$2.00 ________________________________ 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 in the table above were obtained from Barclays. Interest and LIBOR rates were obtained from Bloomberg. 28 FINANCIAL CONDITION As of December 31, 2020 and 2019, our investment portfolio consisted of $66.4 billion and $100.4 billion of investment securities, at fair value, respectively, and $31.5 billion and $7.4 billion of TBA securities, at fair value, respectively. The following table is a summary of our investment portfolio as of December 31, 2020 and 2019 (dollars in millions): December 31, 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 $ 9,256 $ 9,482 2.48 % 10 % $ 6,140 $ 6,239 3.29 % 6 % 15-year TBA securities, net 1 6,916 6,980 1.74 % 7 % 2,222 2,226 2.91 % 2 % Total ≤ 15-year 16,172 16,462 2.16 % 17 % 8,362 8,465 3.19 % 8 % 20-year RMBS 2,409 2,470 2.58 % 3 % 752 773 3.87 % 1 % 30-year: 30-year RMBS 50,312 52,663 3.55 % 54 % 89,483 91,062 3.67 % 84 % 30-year TBA securities, net 1 24,288 24,499 2.05 % 25 % 5,182 5,203 2.92 % 5 % Total 30-year 74,600 77,162 3.06 % 79 % 94,665 96,265 3.63 % 89 % Total fixed rate Agency RMBS and TBA securities 93,181 96,094 2.89 % 98 % 103,779 105,503 3.60 % 98 % Adjustable rate Agency RMBS 69 70 2.35 % — % 160 163 3.04 % — % Multifamily 17 19 3.31 % — % 37 39 3.37 % — % CMO Agency RMBS: CMO 289 301 3.30 % 1 % 441 447 3.44 % 1 % Interest-only strips 45 59 5.57 % — % 63 77 4.22 % — % Principal-only strips 60 67 — % — % 83 87 — % — % Total CMO Agency RMBS 394 427 4.10 % 1 % 587 611 3.48 % 1 % Total Agency RMBS and TBA securities 93,661 96,610 2.90 % 99 % 104,563 106,316 3.59 % 99 % Non-Agency RMBS 178 188 4.28 % — % 198 209 4.05 % 1 % CMBS 333 358 4.13 % — % 352 370 4.49 % — % CRT 733 737 3.43 % 1 % 961 976 5.07 % 1 % Total investment portfolio $ 94,905 $ 97,893 2.91 % 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 5 of our Consolidated Financial Statements in this Form 10-K.. 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 December 31, 2020 and 2019, our TBA positions had a net carrying value of $275 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 December 31, 2020 and 2019, the weighted average yield on our investment securities (excluding TBA securities) was 2.33% and 3.07%, respectively. 29 The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBAs, as of December 31, 2020 and 2019 (dollars in millions): December 31, 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: 1.5% $ 5,001 $ 5,107 $ 5,144 —% 102.4% 2.28% 0.91% 1 13% 2.0% 6,718 6,958 7,023 —% 103.8% 2.62% 1.01% 2 15% 2.5% 795 836 840 59% 105.5% 3.07% 1.10% 13 15% 3.0% 1,168 1,186 1,248 94% 101.5% 3.55% 2.46% 44 16% 3.5% 1,249 1,275 1,356 100% 102.1% 4.03% 2.75% 40 18% ≥ 4.0% 788 810 851 92% 102.8% 4.63% 2.92% 47 19% Total ≤ 15-year 15,719 16,172 16,462 23% 103.1% 3.09% 1.59% 17 16% 20-year: ≤ 2.0% 1,168 1,202 1,215 —% 103.0% 2.87% 1.29% 3 15% 2.5% 597 620 630 —% 103.9% 3.28% 1.33% 6 20% 3.0% 48 50 52 98% 103.0% 3.78% 2.10% 17 19% 3.5% 226 230 246 81% 101.6% 4.05% 2.93% 89 18% ≥ 4.0% 296 307 327 96% 103.6% 4.73% 3.05% 48 20% Total 20-year: 2,335 2,409 2,470 23% 103.2% 3.34% 1.70% 18 17% 30-year: ≤ 2.0% 23,805 24,445 24,628 —% 103.2% 2.89% 1.51% — 11% 2.5% 8,995 9,423 9,506 4% 105.2% 3.43% 1.35% 4 16% 3.0% 3,507 3,619 3,709 17% 102.9% 3.74% 2.03% 33 22% 3.5% 12,913 13,428 14,151 88% 104.0% 4.07% 2.48% 66 17% 4.0% 14,245 14,847 15,734 92% 104.2% 4.51% 2.81% 52 19% ≥ 4.5% 8,417 8,838 9,434 98% 105.0% 5.01% 3.04% 38 21% Total 30-year 71,882 74,600 77,162 48% 104.3% 4.17% 2.43% 42 18% Total fixed rate $ 89,936 $ 93,181 $ 96,094 43% 104.0% 3.98% 2.28% 37 18% ________________________________ 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 December 31, 2020, lower balance specified pools had a weighted average original loan balance of $117,000 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 December 31, 2020. 30 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. For additional details regarding our CRT and non-Agency securities, including credit ratings, as of December 31, 2020 and 2019, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-K. SUMMARY OF CRITICAL ACCOUNTING ESTIMATES Our critical accounting estimates involve estimates that require management to make judgments that are subjective in nature. We rely on our experience and analysis of historical and current market data to arrive at what we believe to be reasonable estimates. Under different conditions, we could report materially different amounts based on such estimates. For additional information regarding our significant accounting policies please refer to Note 2 to our Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K. Interest Income The effective yield on our Agency RMBS and non-Agency securities of high credit quality is highly impacted by our estimate of future prepayments. We accrue interest income based on the outstanding principal amount and contractual terms of these securities, and we amortize or accrete premiums and discounts associated with our purchase of these securities into interest income over their projected lives, taking into account scheduled contractual payments and estimated prepayments, using the interest method. The weighted average cost basis of our securities as of December 31, 2020 was 104.0% of par value; therefore, faster actual or projected prepayments than our estimates could significantly reduce the yield on our assets. Future prepayment rates are difficult to predict, and we rely on a third-party service provider and our experience and analysis of historical and current market data to arrive at what we believe to be reasonable estimates. Our third-party service provider estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, mortgage 31 rates on the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, interest rate volatility and other factors. We review the prepayment speeds estimated and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the third-party estimates and, based on our judgment, we may adjust the estimates. We review our actual and anticipated prepayment experience on at least a quarterly basis, and effective yields are recalculated when differences arise between (i) our previous estimate of future prepayments and (ii) actual prepayments to date and current estimates of future prepayments. If the actual and estimated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date. The most significant factor impacting prepayment rates on our securities is changes to long-term interest rates. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise. However, there are a variety of other factors that may impact the rate of prepayments on our securities. Consequently, under different conditions, we could report materially different amounts. Item 7A. Quantitative and Qualitative Disclosures About Market Risk in this Form 10-K includes the estimated change in the weighted average projected CPR of our investments and in the corresponding weighted average yield on our investments should interest rates instantaneously go up or down by 50, 75 and 100 basis points. At the time we purchase non-Agency securities that are not of high credit quality, we determine an effective interest rate based on our estimate of the timing and amount of cash flows and our cost basis. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, timing and amount of estimated credit losses, and other factors. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any. 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/(benefit) and interest rate swap periodic cost/(income). "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 that we are required to distribute to maintain our REIT qualification status. 32 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 annual financial statements for the three years ended December 31, 2020. The selected financial data should be read in conjunction with the more detailed information contained in Item 8. Financial Statements and in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (in millions, except per share amounts): December 31, Balance Sheet Data 2020 2019 2018 Investment securities, at fair value $ 66,414 $ 100,442 $ 84,287 Total assets $ 81,817 $ 113,082 $ 109,241 Repurchase agreements and other debt $ 52,543 $ 89,410 $ 75,992 Total liabilities $ 70,738 $ 102,041 $ 99,335 Total stockholders' equity $ 11,079 $ 11,041 $ 9,906 Net book value per common share 1 $ 17.68 $ 18.63 $ 17.54 Tangible net book value per common share 2 $ 16.71 $ 17.66 $ 16.56 Fiscal Year Statement of Comprehensive Income Data 2020 2019 2018 Interest income $ 1,519 $ 2,842 $ 1,949 Interest expense 674 2,149 1,173 Net interest income 845 693 776 Other gain (loss), net (1,018) 78 (547) Operating expenses 93 83 100 Net income (loss) (266) 688 129 Dividends on preferred stock 96 54 36 Issuance cost of redeemed preferred stock — 6 — Net income (loss) available (attributable) to common stockholders $ (362) $ 628 $ 93 Net income (loss) $ (266) $ 688 $ 129 Other comprehensive income (loss), net 622 1,040 (598) Comprehensive income (loss) 356 1,728 (469) Dividends on preferred stock 96 54 36 Issuance cost of redeemed preferred stock — 6 — Comprehensive income (loss) available (attributable) to common stockholders $ 260 $ 1,668 $ (505) Weighted average number of common shares outstanding - basic 551.6 540.6 441.1 Weighted average number of common shares outstanding - diluted 551.6 541.4 441.4 Net income (loss) per common share - basic $ (0.66) $ 1.16 $ 0.21 Net income (loss) per common share - diluted $ (0.66) $ 1.16 $ 0.21 Comprehensive income (loss) per common share - basic $ 0.47 $ 3.09 $ (1.14) Comprehensive income (loss) per common share - diluted $ 0.47 $ 3.08 $ (1.14) Dividends declared per common share $ 1.56 $ 2.00 $ 2.16 33 Fiscal Year Other Data (Unaudited) * 2020 2019 2018 Average investment securities - at par $ 70,077 $ 89,234 $ 60,733 Average investment securities - at cost $ 72,543 $ 92,207 $ 63,348 Net TBA dollar roll position - at par (as of period end) $ 30,364 $ 7,322 $ 7,152 Net TBA dollar roll position - at cost (as of period end) $ 31,204 $ 7,404 $ 7,252 Net TBA dollar roll position - at market value (as of period end) $ 31,479 $ 7,429 $ 7,322 Net TBA dollar roll position - at carrying value (as of period end) 3 $ 275 $ 25 $ 70 Average net TBA portfolio - at cost $ 21,224 $ 9,262 $ 14,697 Average total assets - at fair value $ 88,403 $ 110,112 $ 79,094 Average repurchase agreements and other debt outstanding 4 $ 69,370 $ 86,231 $ 55,592 Average stockholders' equity 5 $ 10,684 $ 10,380 $ 9,050 Average tangible net book value "at risk" leverage 6 8.9:1 9.7:1 8.3:1 Tangible net book value "at risk" leverage (as of period end) 7 8.5:1 9.4:1 9.0:1 Economic return on tangible common equity 8 3.5 % 18.7 % (4.9) % Expenses % of average total assets 9 0.11 % 0.08 % 0.09 % Expenses % of average assets, including average net TBA position 9 0.08 % 0.07 % 0.08 % Expenses % of average stockholders' equity 9 0.87 % 0.80 % 0.81 % ________________________________ * 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. The carrying value of our net TBA position represents the difference between the market value and the cost basis of the TBA contract as of period-end and is reported in derivative assets/(liabilities), at fair value on our accompanying consolidated balances sheets. 4. Amount excludes U.S. Treasury repurchase agreements and TBA contracts. Other debt includes debt of consolidated VIEs. 5. Average stockholders' equity calculated as average month-ended stockholders' equity during the period. 6. Average tangible net book value "at risk" leverage is calculated by dividing the sum of daily weighted average repurchase agreements used to fund our investment securities, other debt and TBA securities (at cost) (together "mortgage borrowings") outstanding for the period by the sum of average stockholders' equity adjusted to exclude goodwill for the period. Leverage excludes U.S. Treasury repurchase agreements. 7. "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. 8. 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. 9. Expenses for fiscal year 2018 have been adjusted to exclude $27 million of non-recurring expenses associated with the sale of MTGE Investment Corp., an entity we previously managed, and corresponding termination of MTGE's management agreement. Excluded amounts include the write-off of our intangible asset associated with our acquisition of the MTGE management agreement and other miscellaneous expenses. 34 Economic Interest Income and Asset Yields The following table summarizes our economic interest income (a non-GAAP measure) for fiscal years 2020, 2019 and 2018, 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): Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 Amount Yield Amount Yield Amount Yield Interest income: Cash/coupon interest income $ 2,601 3.71 % $ 3,443 3.84 % $ 2,280 3.76 % Net premium amortization (1,082) (1.62) % (601) (0.76) % (331) (0.68) % Interest income (GAAP measure) 1,519 2.09 % 2,842 3.08 % 1,949 3.08 % Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast 457 0.63 % 104 0.11 % (23) (0.04) % Interest income, excluding "catch-up" premium amortization 1,976 2.72 % 2,946 3.19 % 1,926 3.04 % TBA dollar roll income - implied interest income 1,2 365 1.73 % 306 3.30 % 500 3.40 % Economic interest income, excluding "catch-up" amortization (non-GAAP measure) 3 $ 2,341 2.50 % $ 3,252 3.20 % $ 2,426 3.11 % Weighted average actual portfolio CPR for investment securities held during the period 19.9 % 11.4 % 8.7 % Weighted average projected CPR for the remaining life of investment securities held as of period end 17.6 % 10.8 % 7.9 % Average 30-year fixed rate mortgage rate as of period end 4 2.67 % 3.74 % 4.55 % 10-year U.S. Treasury rate as of period end 0.92 % 1.92 % 2.68 % ________________________________ 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 fiscal years 2020 and 2019 compared to the prior year period (in millions): Impact of Changes in the Principal Elements Impacting Economic Interest Income Due to Change in Average Fiscal Year 2020 vs 2019 Total Increase / (Decrease) Portfolio Size Asset Yield Interest Income (GAAP measure) $ (1,323) $ (606) $ (717) Estimated "catch-up" premium amortization due to change in CPR forecast 353 — 353 Interest income, excluding "catch-up" premium amortization (970) (606) (364) TBA dollar roll income - implied interest income 59 395 (336) Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (911) $ (211) $ (700) Due to Change in Average Fiscal Year 2019 vs 2018 Total Increase / (Decrease) Portfolio Size Asset Yield Interest Income (GAAP measure) $ 893 $ 888 $ 5 Estimated "catch-up" premium amortization due to change in CPR forecast 127 — 127 Interest income, excluding "catch-up" premium amortization 1,020 888 132 TBA dollar roll income - implied interest income (194) (185) (9) Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 826 $ 703 $ 123 Our average investment portfolio, inclusive of TBAs (at cost), decreased 8% for fiscal year 2020 and increased 30% for fiscal year 2019, compared to the prior year periods, largely due to shifts in our targeted operating leverage and changes to our 35 total stockholders equity outstanding as a result of new equity issuances, a preferred stock redemption and common stock repurchases. (See Note 9 of our Consolidated Financial Statements in this Form 10-K for additional information regarding our equity capital markets transactions). The decrease in our average investment portfolio for fiscal year 2020 was in particular impacted by the decline in our tangible net stockholders' equity in the first quarter due to the COVID-19 financial crisis and our decision to operate with somewhat lower leverage for the balance of the year as compared to 2019. The decrease in our average asset yield for fiscal year 2020 was due to changes in asset composition and faster actual and projected CPRs resulting from historically low mortgage rates resulting from the Fed's unprecedented monetary stimulus measures. The moderate increase in our asset yield during 2019 was due to changes in asset composition and somewhat slower CPR projections. 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): 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 December 31, 2020 $ 53,645 $ 55,249 $ 52,543 $ 33,753 $ 31,204 8.4:1 8.5:1 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 December 31, 2018 $ 68,499 $ 77,442 $ 75,992 $ 8,066 $ 7,252 8.4:1 9.0:1 September 30, 2018 $ 56,265 $ 66,969 $ 65,975 $ 18,270 $ 9,436 8.5:1 8.2:1 June 30, 2018 $ 47,823 $ 49,892 $ 49,152 $ 16,912 $ 19,898 8.0:1 8.3:1 March 31, 2018 $ 49,567 $ 50,645 $ 49,292 $ 15,585 $ 13,529 8.2:1 8.2:1 ________________________________ 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 fiscal years 2020, 2019 and 2018 (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): 36 Fiscal Year 2020 Fiscal Year 2019 Fiscal Year 2018 Economic Interest Expense and Aggregate Cost of Funds 1 Amount Cost of Funds Amount Cost of Funds Amount Cost of Funds Repurchase agreement and other debt - interest expense (GAAP measure) $ 674 0.96 % $ 2,149 2.46 % $ 1,173 2.11 % TBA dollar roll income - implied interest expense (benefit) 2,3 (60) (0.27) % 212 2.26 % 273 1.85 % Economic interest expense - before interest rate swap periodic cost (income), net 4 614 0.67 % 2,361 2.44 % 1,446 2.06 % Interest rate swap periodic interest cost (income), net 2,5 48 0.05 % (402) (0.42) % (151) (0.22) % Total economic interest expense (non-GAAP measure) $ 662 0.72 % $ 1,959 2.02 % $ 1,295 1.84 % ________________________________ 1. Amounts exclude interest rate swap termination fees and variation margin settlements paid or received, repurchase agreement termination fees, 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 fiscal years 2020 and 2019 compared to the prior year period (in millions): Impact of Changes in the Principal Elements of Economic Interest Expense Due to Change in Average Fiscal Year 2020 vs 2019 Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate Repurchase agreements and other debt interest expense $ (1,475) $ (415) $ (1,060) TBA dollar roll income - implied interest expense (272) 274 (546) Interest rate swap periodic interest income/cost 450 87 363 Total change in economic interest expense $ (1,297) $ (54) $ (1,243) Due to Change in Average Fiscal Year 2019 vs 2018 Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate Repurchase agreements and other debt interest expense $ 976 $ 641 $ 335 TBA dollar roll income - implied interest expense (61) (101) 40 Interest rate swap periodic interest income/cost (251) (73) (178) Total change in economic interest expense $ 664 $ 467 $ 197 Our average mortgage borrowings, inclusive of TBAs, decreased 5% and increased 36% for fiscal years 2020 and 2019, respectively, largely due to shifts in our targeted operating leverage and changes to our total stockholders equity outstanding due to equity capital markets transactions. The decline in our average interest rate (actual and implied) on our mortgage borrowings during fiscal year 2020 was largely due to a decline in the Fed Funds target rate to the zero bound range early in the COVID-19 financial crisis, compared to moderate increases in the Fed Funds rate in the prior two year periods. TBA implied funding rates particularly benefited from a significant volume of new Agency RMBS issuance and the Fed's purchases of Agency RMBS through the TBA market. Additionally, during fiscal year 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, which is excluded from economic interest expense in the tables above. We did not terminate any repurchase agreements during fiscal years 2019 or 2018. The increase in our interest rate swap periodic cost for fiscal year 2020 was largely due to a decline in the average floating rate received, consistent with lower short-term interest rates, which was partly offset by a decline in the average fixed rate paid on our interest rate swaps and a decline in our average swap balance outstanding. The decrease in our interest rate swap cost during fiscal year 2019, was largely due to the combination of an increase in the average floating rate received and a decrease in the average fixed-rate paid on our interest rate swaps. During fiscal years 2020 and 2019, we also adjusted the duration and 37 composition of our interest rates swaps, taking advantage of favorable repricing events in the interest rate swap markets, benefiting our interest rate swap cost. For additional details regarding our interest rate swaps as of December 31, 2020 and 2019, please refer to Note 5 of our Consolidated Financial Statements in this Form 10-K. 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 fiscal years 2020, 2019 and 2018 (dollars in millions): Fiscal Year Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2020 2019 2018 Average Agency repo and other debt outstanding $ 69,370 $ 86,231 $ 55,592 Average net TBA portfolio outstanding - at cost $ 21,224 $ 9,262 $ 14,697 Average mortgage borrowings outstanding $ 90,594 $ 95,493 $ 70,289 Average notional amount of interest rate swaps outstanding (excluding forward starting swaps) $ 49,978 $ 63,890 $ 43,137 Ratio of average interest rate swaps to mortgage borrowings outstanding 55 % 67 % 61 % Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.66 % 1.61 % 1.83 % Average interest rate swap receive-floating rate (0.56) % (2.24) % (2.18) % Average interest rate swap net pay/(receive) rate 0.10 % (0.63) % (0.35) % For fiscal years 2020, 2019 and 2018, we had an average forward starting swap balance of $0.8 billion, $3.0 billion and $4.5 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 fiscal years 2020, 2019 and 2018 was 56%, 70% and 68%, respectively. 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 fiscal years 2020, 2019 and 2018: Fiscal Year Investment and TBA Securities - Net Interest Spread 2020 2019 2018 Average asset yield, excluding "catch-up" premium amortization 2.50 % 3.20 % 3.11 % Average aggregate cost of funds (0.72) % (2.02) % (1.84) % Average net interest spread, excluding "catch-up" premium amortization 1.78 % 1.18 % 1.27 % 38 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 fiscal years 2020, 2019 and 2018 (dollars in millions): Fiscal Year 2020 2019 2018 Net interest income (GAAP measure) $ 845 $ 693 $ 776 TBA dollar roll income, net 1 425 94 227 Interest rate swap periodic (cost) income, net 1 (48) 402 151 Other interest and dividend income 1 3 14 3 Adjusted net interest and dollar roll income 1,225 1,203 1,157 Other operating income (expense) Operating expense (93) (83) (100) Less non-recurring write-off of intangible asset and other expenses associated with termination of management agreement — — 27 Management fee income — — 54 Less non-recurring management agreement termination fee income — — (42) Adjusted other operating income (expense), net (93) (83) (61) Net spread and dollar roll income 1,132 1,120 1,096 Dividend on preferred stock 96 54 36 Net spread and dollar roll income available to common stockholders (non-GAAP measure) 1,036 1,066 1,060 Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast 457 104 (23) Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) $ 1,493 $ 1,170 $ 1,037 Weighted average number of common shares outstanding - basic 551.6 540.6 441.1 Weighted average number of common shares outstanding - diluted 552.7 541.4 441.4 Net spread and dollar roll income per common share - basic $ 1.88 $ 1.97 $ 2.40 Net spread and dollar roll income per common share - diluted $ 1.87 $ 1.97 $ 2.40 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - basic $ 2.71 $ 2.16 $ 2.35 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - diluted $ 2.70 $ 2.16 $ 2.35 ________________________________ 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 fiscal years 2020, 2019 and 2018 (in millions): Fiscal Year Gain (Loss) on Investment Securities, Net 1 2020 2019 2018 Gain (loss) on sale of investment securities, net $ 1,126 $ 388 $ (137) Unrealized gain (loss) on investment securities measured at fair value through net income, net 2 319 2,014 (297) Unrealized gain (loss) on investment securities measured at fair value through other comprehensive income, net 622 1,040 (598) Total gain (loss) on investment securities, net $ 2,067 $ 3,442 $ (1,032) ________________________________ 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-K). 39 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 fiscal years 2020, 2019 and 2018 (in millions): Fiscal Year 2020 2019 2018 Interest rate swap periodic income (cost), net $ (48) $ 402 $ 151 Realized gain (loss) on derivative instruments and other securities, net: TBA securities - dollar roll income, net 425 94 227 TBA securities - mark-to-market net gain (loss) 822 362 (592) Payer swaptions (87) (37) 67 U.S. Treasury securities - long position 104 11 1 U.S. Treasury securities - short position (760) (885) 125 U.S. Treasury futures - short position (90) (166) 112 Interest rate swaps - termination fees and variation margin settlements, net (2,698) (1,932) (44) Losses on debt extinguishment (146) — — Other 28 3 7 Total realized gain (loss) on derivative instruments and other securities, net (2,402) (2,550) (97) Unrealized gain (loss) on derivative instruments and other securities, net: TBA securities - mark-to-market net gain (loss) 250 (45) 66 Interest rate swaps (20) (115) 33 Payer swaptions (69) 11 23 U.S. Treasury securities - long position (2) — — U.S. Treasury securities - short position (145) (82) (286) U.S. Treasury futures - short position (16) 57 (64) Other (11) (2) 7 Total unrealized gain (loss) on derivative instruments and other securities, net (13) (176) (221) Total gain (loss) on derivative instruments and other securities, net $ (2,463) $ (2,324) $ (167) For further details regarding our use of derivative instruments and related activity refer to Notes 2 and 5 of our Consolidated Financial Statements in this Form 10-K. Estimated Taxable Income For the fiscal years 2020, 2019 and 2018, we had estimated taxable income available to common stockholders of $745 million, $620 million and $490 million, or $1.35, $1.15 and $1.11 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 fiscal years 2020, 2019 and 2018 (dollars in millions, except per share amounts): 40 Fiscal Year 2020 2019 2018 Net income (loss) $ (266) $ 688 $ 129 Estimated book to tax differences: Premium amortization, net 292 91 (51) Realized gain/loss, net 1,535 1,530 (236) Net capital loss/(utilization of net capital loss carryforward) (394) 212 182 Unrealized (gain)/loss, net (321) (1,838) 518 Other (5) (9) (16) Total book to tax differences 1,107 (14) 397 Estimated REIT taxable income 841 674 526 Dividends on preferred stock 96 54 36 Estimated REIT taxable income available to common stockholders $ 745 $ 620 $ 490 Weighted average number of common shares outstanding - basic 551.6 540.6 441.1 Weighted average number of common shares outstanding - diluted 552.7 541.4 441.4 Estimated REIT taxable income per common share - basic $ 1.35 $ 1.15 $ 1.11 Estimated REIT taxable income per common share - diluted $ 1.35 $ 1.15 $ 1.11 Beginning cumulative non-deductible net capital loss $ 394 $ 182 $ 357 Increase (decrease) in net capital loss carryforward (394) 212 (175) Ending cumulative non-deductible net capital loss $ — $ 394 $ 182 Ending cumulative non-deductible net capital loss per common share $ — $ 0.73 $ 0.34 As of December 31, 2020, 2019 and 2018, we had distributed all our estimated taxable income for fiscal years 2020, 2019 and 2018, respectively. Accordingly, we do not expect to incur an income tax or excise tax liability on our 2020 taxable income, nor did we incur such liabilities on our 2019 and 2018 taxable income. Please refer to Note 9 to our Consolidated Financial Statements included in this Form 10-K for a summary of dividends declared on our common and preferred stock during fiscal years 2020, 2019 and 2018. 41 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, 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 this Form 10-K. Leverage and Financing Sources Our leverage will vary depending on market conditions and our assessment of relative risks and returns, but we generally 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 8.5x and 9.4x as of December 31, 2020 and 2019, respectively. The following table includes a summary of our mortgage borrowings outstanding as of December 31, 2020 and 2019 (dollars in millions). For additional details of our mortgage borrowings refer to Notes 2, 4 and 5 to our Consolidated Financial Statements in this Form 10-K. December 31, 2020 December 31, 2019 Mortgage Borrowings Amount % Amount % Repurchase agreements 1,2 $ 52,366 63 % $ 89,085 92 % Debt of consolidated variable interest entities, at fair value 177 — % 228 — % Total debt 52,543 63 % 89,313 92 % Net TBA position, at cost 31,204 37 % 7,404 8 % Total mortgage borrowings $ 83,747 100 % $ 96,717 100 % ________________________________ 1. Amount excludes $97 million of repurchase agreements used to fund purchases of U.S. Treasury securities as of December 31, 2019. 2. As of December 31, 2020 and 2019, 46% and 38%, respectively, of our repurchase agreement funding was through the GCF Repo service. Our primary financing sources are collateralized borrowings structured as repurchase agreements. We enter into repurchase agreements, or "repo," through bi-lateral arrangements with financial institutions and independent dealers. We also enter into third-party repurchase agreements through our wholly-owned registered broker-dealer subsidiary, Bethesda Securities, LLC, such as tri-party repo offered through the FICC's GCF Repo service. We manage our repurchase agreement funding position through a variety of methods, including diversification of counterparties, maintaining a staggered maturity profile and utilization of interest rate hedging strategies. We also use TBA dollar roll transactions as a means of synthetically financing Agency RMBS. The terms and conditions of our repurchase agreements are determined on a transaction-by-transaction basis when each such borrowing is initiated or renewed and, in the case of GCF Repo, by the variable margin requirements calculated by the FICC, which acts as the central counterparty. 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," which reflects the underlying risk of the specific collateral and protects the counterparty against a change in its value. Interest rates are generally fixed based on prevailing rates corresponding to the term of the borrowing. 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 typically have lower implied haircuts relative to Agency RMBS pools 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. 42 Collateral Requirements and Unencumbered Assets Amounts available to be borrowed under our repurchase agreements are dependent upon prevailing interest rates, the lender’s "haircut" requirements and collateral value. Each of these elements may fluctuate with changes in interest rates, credit quality and liquidity conditions within the financial markets. To help manage the adverse impact of interest rate changes on our borrowings, 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 short-term funding liabilities increasing at a faster rate than the earnings of our long-term fixed rate assets during a period of rising interest rates. The collateral requirements, or haircut levels, under our repo agreements are typically determined on an individual transaction basis or by the prevailing requirements established by the FICC for GCF tri-party repo. Consequently, haircut levels and minimum margin requirements can change over time and may increase during periods of elevated market volatility. If the fair value of our collateral declines, our counterparties will typically require that we post additional collateral to re-establish the agreed-upon collateral levels, referred to as "margin calls." Similarly, if the estimated fair value of our investment securities increases, we may request that counterparties release collateral back to us. Our counterparties typically have the sole discretion to determine the value of pledged collateral but are 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 December 31, 2020, we had met all our margin requirements. The value of Agency RMBS collateral is impacted by market factors and is reduced by monthly principal pay-downs on the underlying mortgage pools. Fannie Mae and Freddie Mac publish monthly security pay-down factors for their mortgage pools on the fifth day after month-end, but do not remit payment to security holders until generally the 25th day after month-end. Bi-lateral repo counterparties assess margin to account for the reduction in value of Agency collateral when factors are released. The FICC assesses margin on the last day of each month, prior to the factor release date, based on its internally projected pay-down rates (referred to as the "blackout period exposure adjustment" or "blackout margin"). On the factor release date, the blackout margin is released and collateralization requirements are adjusted to actual factor data. Due to the timing difference between associated margin calls and our receipt of principal pay-downs, our liquidity is temporarily reduced each month for principal repayments. We attempt to manage the liquidity risk associated with principal pay-downs by monitoring conditions impacting prepayment rates and through asset selection. As of December 31, 2020, our portfolio largely consisted of lower coupon 30 and 15-year TBA securities, which are not subject to monthly principal pay-downs, and higher coupon holdings concentrated in high quality, specified Agency RMBS pools, which have a lower risk of prepayment than similar coupon generic Agency RMBS. Collateral requirements under our derivative agreements are subject to our counterparties' assessment of their maximum risk of loss associated with the derivative instrument measured over a certain period of time, referred to as the initial or minimum margin requirement. We are also subject to daily variation margin requirements based on changes in the value of the derivative instrument and/or collateral pledged. Daily variation margin requirements also entitle us to receive collateral if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral requirements under our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC and, if applicable, by our third-party brokerage agreements, which may establish margin levels in excess of the MBSD. 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. Haircut levels and minimum margin requirements imposed by our counterparties reduce the amount of our unencumbered assets and limit the amount we can borrow against our investment securities. During fiscal year 2020, haircuts on Agency RMBS collateral remained stable. Haircuts and funding levels for our less liquid, credit-oriented securities were adversely impacted by the dislocation in the financial markets in the first quarter, but subsequently rebounded to levels consistent with historical norms. As of December 31, 2020, the weighted average haircut on our repurchase agreements was approximately 4.6% of the value of our collateral, largely unchanged from December 31, 2019. To mitigate the risk of future margins calls, we seek to maintain excess liquidity by holding unencumbered liquid assets that can be used to satisfy collateral requirements, collateralize additional borrowings or sold for cash. As of December 31, 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 Bethesda Securities to meet regulatory standards, satisfy counterparty and clearing organization expectations, and for risk management purposes. As of December 31, 2020, we had cash and unencumbered Agency RMBS totaling $5.4 billion, which excludes unencumbered CRT securities, non-Agency securities and assets held at Bethesda Securities. 43 Counterparty Risk Collateral requirements imposed by counterparties subject us to the risk that the counterparty does not return pledged assets to us as and when required. 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. As of December 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 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 December 31, 2020, approximately 9% of our tangible stockholder's equity was at risk with the FICC. Excluding central clearing exchanges, as of December 31, 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 of our specified pool securities, or premium relative to generic Agency RMBS. We attempt to manage this risk by maintaining 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 Note 9 of our Consolidated Financial Statements in this Form 10-K for further details regarding our recent equity capital transactions and our stock repurchase plan. OFF-BALANCE SHEET ARRANGEMENTS As of December 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 December 31, 2020, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities. AGGREGATE CONTRACTUAL OBLIGATIONS The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase agreements and related interest expense (in millions): Fiscal Year 2021 2022 2023 2024 2025 Total Repurchase agreements $ 52,366 $ — $ — $ — $ — $ 52,366 Interest expense 1 19 — — — — 19 Total $ 52,385 $ — $ — $ — $ — $ 52,385 ________________________________ 1. Interest expense is calculated based on the weighted average interest rates on our repurchase agreements as of December 31, 2020. FORWARD-LOOKING STATEMENTS The statements contained in this Annual 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,” 44 “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 Annual 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; • changes in U.S. monetary policy or interest rates, including Fed purchases of Agency RMBS; • 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 this document under Item 1A. Risk Factors . We caution readers not to place undue reliance on our forward-looking statements.