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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-05 · 197 added, 278 removed, 428 unchanged (53% of the section changed)

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended September 30, 2020.

Our MD&A is presented in six sections:

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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 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 residential mortgage-backed securities ("Agency RMBS") on a leveraged basis.

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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 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 borrowings structured as repurchase agreements.

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.

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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.

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.

Optimism regarding the potential for a strong economic recovery in the second half of 2021 pushed most risk-asset prices higher in the first quarter of 2021.

The improved economic outlook and additional fiscal stimulus led to a substantial increase in longer term interest rates and a material steepening of the yield curve during the quarter, with the 10-year U.S.

Treasury yield increasing 82 basis points to close the first quarter at 1.74%, nearly 125 basis points above its historical low in August 2020.

Despite the sharp rise in rates, Agency RMBS performed well during the quarter, outperforming interest rate hedges.

Residential credit performance was mixed and ranged from largely flat to modest increases in valuations.

For the first quarter, we earned an economic return of 8.2%, comprised of $1.01 increase in tangible net book value per common share and $0.36 of dividends per common share.

Our performance in the first quarter marks our fourth consecutive quarter of economic returns of 7.5% or more and brings our last twelve-month cumulative economic return to 40.7%.

Asset positioning remained an important factor in driving our favorable performance during the first quarter.

Similar to prior quarters, we benefited from the differing risk profiles of the two primary components of our asset portfolio:

low coupon generic securities and higher coupon specified pool securities, which together have bolstered our performance across a wide range of interest rate and spread scenarios over the past twelve months.

During the first quarter, our higher coupon specified pools benefited from the steep rise in rates and corresponding reduction in prepayment expectations.

This contrasts with the third and fourth quarters of 2020, during which our lower coupon generic securities outperformed as mortgage rates declined to historic lows and drove mortgage prepayment rates to a 20-year high.

Our hedge portfolio, which was mainly comprised of intermediate and longer-term hedges, also contributed significantly to our positive first quarter results as hedge gains exceeded the aggregate price declines on our asset portfolio.

As of March 31, 2021, our investment portfolio totaled $90.3 billion, compared to $97.9 billion as of December 31, 2020 and consisted of $63.6 billion Agency RMBS, $24.8 billion net TBA securities, and $1.9 billion of CRT and non-Agency securities.

Our "at risk" leverage, as of March 31, 2021, was 7.7x our tangible equity, compared to 8.5x as of December 31, 2020.

Our liquidity position, consisting of unencumbered Agency RMBS, US Treasury securities and cash and excluding both unencumbered credit assets and assets held at our broker-dealer subsidiary, was largely unchanged during the first quarter at $5.2 billion as of March 31, 2021, compared to $5.4 billion as of December 31, 2020, or 48% and 51%, respectively, of our tangible equity.

The average prepayment rate on our Agency RMBS holdings during the first quarter was 24.6%, down from 27.6% for the fourth quarter of 2020.

Consistent with the significant increase in primary mortgage rates of approximately 50 basis points over the first quarter, our average CPR forecast for the remaining life of our Agency RMBS decreased to 11.3% as of March 31, 2021, from 17.6% as of December 31, 2020.

Our interest rate exposure remained limited during the first quarter as we managed the size and composition of our hedge position in response to changing market conditions.

We proactively increased our interest rate hedge portfolio during the first quarter to $79 billion through the addition of interest rate swaps, swaptions and U.S.

Treasury hedges to provide incremental protection against rising interest rates.

As of March 31, 2021, our interest rate hedges totaled 98% of our funding liabilities, up from 80% as of December 31, 2020 and from a twelve-month low of 66% at the end of the second quarter of 2020.

As of March 31, 2021, 72% of our hedges had a maturity of four years or more, which was a significant contributor to our first quarter hedge performance given the sharp rise in longer term rates.

Consistent with the increase in interest rates and the corresponding extension of mortgage durations during the quarter, 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, increased to 0.6 years as of March 31, 2021 from -0.5 years as of December 31, 2020.

Net spread and dollar roll income (a non-GAAP measure) was $0.76 per diluted common share for the first quarter, which excludes a "catch-up" premium amortization benefit of $0.40 per diluted common share due to changes in CPR projections for securities acquired prior to the first quarter.

This compares to net spread and dollar roll income of $0.75 and $0.57 per diluted common share for the fourth and first quarters of 2020, respectively, excluding $0.44 and $0.20 of "catch-up" premium amortization expense, respectively.

The marginal improvement in net spread and dollar roll income for the first quarter was due to the combination of lower funding costs, the sharp decline in CPR projections, and earnings accretion due to common stock share repurchases, which more than offset our lower operating leverage and an overall decline in asset yields during the quarter.

(Please refer to Results of Operations below for further information regarding non-GAAP measures.)

Our average asset yield, excluding "catch-up" amortization and including the implied yield on our TBA securities, declined to 2.02% for the first quarter, compared to 2.07% for the fourth quarter and to 2.97% for the first quarter 2020, as lower prevailing yields on new asset purchases outweighed the yield improvement due to lower CPR projections.

The funding environment for Agency RMBS remained very favorable during the first quarter, with our average repo funding cost declining to 21 basis points from 38 basis points for the fourth quarter and 180 basis points for the first quarter 2020.

As of March 31, 2021, our average repo rate was 0.15%, compared to 0.24% as of December 31, 2020.

Favorable repo rates, and even lower implied financing rates in the TBA dollar roll market, more than offset a modest increase in our interest rate swap costs during the first quarter.

Our aggregate cost of funds, including implied TBA dollar roll funding and interest rate swap costs, for the first quarter was 0.02%, compared to 0.05% for the fourth quarter and 1.67% for the first quarter of 2020.

Looking ahead, we expect that the near zero short-term interest rate environment is likely to remain in place through at least 2023 and the Federal Reserve ("Fed") is unlikely to begin tapering its Agency RMBS purchases before 2022, with any such tapering likely to gradually occur over a multi-month period.

The Fed has also indicated it will communicate its intentions well in advance of taking any such action to reduce market uncertainty.

Importantly, even after the Fed completes the taper

process, it has indicated that it intends to continue to reinvest portfolio paydowns for an extended period of time.

Against this backdrop, we believe the Agency RMBS sector remains attractive, particularly when compared on a relative value basis to other asset classes.

Nonetheless, given the significant spread tightening that has occurred in the sector relative to benchmark interest rates, we chose to operate with sequentially lower leverage in recent quarters.

Going forward, we may choose to operate at somewhat lower leverage levels than the first quarter of 2021 to mitigate the potential downside risk to our tangible net book value associated with reduced Fed purchases and future spread widening, as well as to provide capacity for us to increase leverage opportunistically when expected return levels are more favorable.

Market Information

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Interest Rate/Security Price 1

31, 2020 June 30, 2020 Sept.

30, 2020 Dec.

31, 2020 Mar.

31, 2020 June 30, 2020 Sept.

30, 2020 Sept.

June 30, 2020

31, 2021 Mar.

Target Federal Funds Rate:

Target Federal Funds Rate - Upper Band

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

2.02% 1.76% 0.99% 0.16% 0.15% -1 bps -161 bps

2.09% 1.91% 1.45% 0.30% 0.23% -7 bps -168 bps

0.25% 0.25% 0.25% 0.25% 0.25% — bps

SOFR Rate 0.01% 0.10% 0.08% 0.07% 0.01% -6 bps

SOFR Interest Rate Swap Rate:

0.09% —% 0.03% 0.06% 0.12% +6 bps

0.24% 0.08% 0.13% 0.24% 0.82% +58 bps

0.45% 0.38% 0.47% 0.71% 1.52% +81 bps

0.61% 0.63% 0.86% 1.15% 1.92% +77 bps

Treasury Security Rate:

1.62% 1.57% 0.25% 0.15% 0.13% -2 bps -144 bps

1.54% 1.69% 0.38% 0.29% 0.28% -1 bps -141 bps

1.66% 1.92% 0.67% 0.66% 0.69% +3 bps -123 bps

2.11% 2.39% 1.32% 1.41% 1.46% +5 bps -93 bps

Interest Rate Swap Rate:

1.63% 1.70% 0.49% 0.23% 0.22% -1 bps -148 bps

1.50% 1.73% 0.52% 0.33% 0.35% +2 bps -138 bps

1.56% 1.90% 0.72% 0.64% 0.71% +7 bps -119 bps

1.71% 2.09% 0.88% 0.92% 1.12% +20 bps -97 bps

0.25% 0.15% 0.13% 0.12% 0.16% +4 bps

0.38% 0.29% 0.28% 0.36% 0.94% +58 bps

0.67% 0.66% 0.69% 0.92% 1.74% +82 bps

1.32% 1.41% 1.46% 1.65% 2.41% +76 bps

30-Year Fixed Rate Agency Price:

1.5% N/A N/A $100.66 $101.05 $96.59 -$4.46

2.0% $100.91 $102.33 $103.39 $103.88 $99.70 -$4.18

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15-Year Fixed Rate Agency Price:

1.5% N/A N/A $102.31 $102.89 $100.40 -$2.49

2.0% $102.66 $103.46 $103.95 $104.55 $102.61 -$1.94

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(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.

Prices in the table above were obtained from Barclays.

Interest and LIBOR rates were obtained from Bloomberg.

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

As of March 31, 2021 and December 31, 2020, our investment portfolio consisted of $65.5 billion and $66.4 billion of investment securities, at fair value, respectively, and $24.8 billion and $31.5 billion of TBA securities, at fair value, respectively.

The following table is a summary of our investment portfolio as of March 31, 2021 and December 31, 2020 (dollars in millions):

March 31, 2021 December 31, 2020

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

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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.

For further details of our TBA securities refer to Note 5 of our Consolidated Financial Statements in this Form 10-Q.

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.

As of March 31, 2021 and December 31, 2020, our TBA positions had a net carrying value of $(576) million and $275 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.

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

As of March 31, 2021 and December 31, 2020, the weighted average yield on our investment securities (excluding TBA securities) was 2.39% and 2.33%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBAs, as of March 31, 2021 and December 31, 2020 (dollars in millions):

March 31, 2021

Includes Net TBA Position Excludes Net TBA Position

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

As of 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.

As of March 31, 2021, lower balance specified pools had a weighted average original loan balance of $119,000 and $116,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 127% and 137% for 15-year and 30-year securities, respectively.

WAC represents the weighted average coupon of the underlying collateral.

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

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of March 31, 2021.

December 31, 2020

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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:

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

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

RMBS CMBS CRT 2

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

________________________________

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.

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.

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of March 31, 2021 and December 31, 2020, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-Q.

RESULTS OF OPERATIONS

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"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).

"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).

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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.

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.

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.

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

The tables below present our condensed consolidated balance sheets as of 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):

($ in Millions, Except Per Share Amounts)

Balance Sheet Data September 30,

December 31, 2019

The tables below present our condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 and condensed consolidated statements of comprehensive income and key statistics for the three months ended March 31, 2021 and 2020 (in millions, except per share amounts):

Balance Sheet Data 2021

Investment securities, at fair value $ 65,497 $ 66,414

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Three Months Ended

September 30,

Nine Months Ended

September 30,

Statement of Comprehensive Income Data (Unaudited)

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Net income (loss) $ 975 $ (2,421)

Other comprehensive income, net 70 246 737 1,025

Other comprehensive income (loss), net (237) 464

Comprehensive income (loss) 738 (1,957)

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Three Months Ended

September 30,

Nine Months Ended

September 30,

Other Data (Unaudited) * 2021 2020

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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

Economic return on tangible common equity - unannualized 7

8.2 % (20.2) %

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 %

Expenses % of average total assets - annualized 0.12 % 0.08 %

Expenses % of average assets, including average net TBA position - annualized 0.09 % 0.08 %

Expenses % of average stockholders' equity - annualized 0.85 % 0.86 %

________________________________

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Average stockholders' equity calculated as average month-ended stockholders' equity during the period.

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.

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.

"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.

Tangible net book value "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.

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Economic Interest Income and Asset Yields

The following table summarizes our economic interest income (a non-GAAP measure) for the three 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

The following table summarizes our economic interest income (a non-GAAP measure) for the three months ended March 31, 2021 and 2020, which includes the combination of interest income (a GAAP measure) on our holdings reported as investment securities on our consolidated balance sheets, adjusted to exclude estimated "catch-up" premium amortization adjustments for the cumulative effect from prior reporting periods of changes in our CPR forecast, and implied interest income on our TBA securities (dollars in millions):

Three Months Ended March 31,

Amount Yield Amount Yield

Interest income:

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$ 481 3.40 % $ 875 3.68 %

Net premium amortization

(209) (1.45) % (192) (0.96) % (816) (1.52) % (517) (0.86) %

Net premium amortization benefit (cost) 76 0.38 % (384) (1.67) %

Interest income (GAAP measure) 557 3.78 % 491 2.01 %

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

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

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three months ended March 31, 2021 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

Three Months Ended March 31, 2021 vs.

March 31, 2020

Due to Change in Average

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (322) $ (39) $ (283)

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.

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.

Our average investment portfolio, inclusive of TBAs (at cost), decreased 14% for the three months ended March 31, 2021, compared to the prior year period, largely due to lower operating leverage and a decline in our total stockholders' equity outstanding as a result of common stock repurchases.

The decrease in the average yield on our investment portfolio of 95 basis points, compared to the prior year period, was largely due to changes in asset composition and lower prevailing yields on new asset purchases.

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.

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Amount Ending

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, 2021 $ 54,602 $ 57,153 $ 55,221 $ 32,022 $ 25,355 8.0:1 7.7:1

December 31, 2020 $ 53,645 $ 55,249 $ 52,543 $ 33,753 $ 31,204 8.4:1 8.5:1

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

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Economic Interest Expense and Aggregate Cost of Funds

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three 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

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three months ended March 31, 2021 and 2020 (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 March 31,

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

Amount Cost of Funds Amount Cost of Funds

Repurchase agreement and other debt - interest expense (GAAP measure) $ 29 0.21 % $ 426 1.80 %

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

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

The following table includes a

summary of the estimated impact of these elements on our economic interest expense for the three months ended March 31, 2021 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements of Economic Interest Expense

Periods ended September 30, 2020 vs.

September 30, 2019

Three Months Ended March 31, 2021 vs.

March 31, 2020

Due to Change in Average

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Repurchase agreements and other debt interest expense $ (397) $ (177) $ (220)

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

TBA dollar roll income - implied interest benefit/expense (70) 103 (173)

Interest rate swap periodic interest expense/benefit 43 11 32

Total change in economic interest expense $ (424) $ (63) $ (361)

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):

Our average mortgage borrowings, inclusive of TBAs, decreased 14% for the three months ended March 31, 2021, compared to the prior year period, consistent with the decline in our average investment portfolio due to lower operating leverage and a decline in our total stockholders' equity outstanding as a result of common stock repurchases.

The decline in the average interest rate (actual and implied) on our mortgage borrowings for the three months ended March 31, 2021 was due to the combination of very low financing rates available in the Agency repo market and even lower implied financing rates available in the TBA dollar roll market, as repo and dollar roll funding levels benefited from favorable technical supply and demand factors.

The increase in our interest rate swap periodic cost for the three months ended March 31, 2021 was primarily due to a decline in the average floating rate received on our interest rate swaps, 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.

The following table presents a summary of the ratio of our average interest rates swaps outstanding, excluding forward starting swaps, to our average mortgage borrowings and the weighted average pay-fixed / receive-floating rates on our interest rate swaps for the three months ended March 31, 2021 and 2020 (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 2021 2020

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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) 0.16 % 1.22 %

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0.11 % (0.17) %

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.

For the three months ended March 31, 2021 and 2020, we had an average forward starting swap balance of $0.3 billion and $1.5 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 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.

Including forward starting swaps, our average ratio of interest rate swaps outstanding to our average mortgage borrowings for the three months ended March 31, 2021 and 2020 was 53% and 72%, 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 the three and nine months ended September 30, 2020 and 2019:

Three Months Ended September 30,

Nine Months Ended

September 30,

Three Months Ended

Investment and TBA Securities - Net Interest Spread 2021 2020

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Net Spread and Dollar Roll Income

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

The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three months ended March 31, 2021 and 2020 (dollars in millions):

Three Months Ended

Net interest income (GAAP measure) $ 528 $ 65

TBA dollar roll income, net 1

155 29 249 70

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

(13) 146 (41) 317

Interest rate swap periodic (cost) income, net 1

Other interest and dividend income 1

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Net spread and dollar roll income available to common stockholders (non-GAAP measure) 621 70

Estimated "catch-up" premium amortization cost due to change in CPR forecast 50 55 350 152

Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast (213) 243

Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) $ 408 $ 313

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Gain (Loss) on Investment Securities, Net

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

Three Months Ended September 30,

Nine Months Ended

September 30,

The following table is a summary of our net gain (loss) on investment securities for the three months ended March 31, 2021 and 2020 (in millions):

Three Months Ended

Gain (Loss) on Investment Securities, Net 1

2020 2019 2020 2019

Gain on sale of investment securities, net $ 346 $ 89 $ 993 $ 281

Gain (loss) on sale of investment securities, net $ (13) $ 494

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 (237) 464

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

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three 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

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three months ended March 31, 2021 and 2020 (in millions):

Three Months Ended

Interest rate swap periodic income (cost), net $ (12) $ 31

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)

Treasury securities - long position

Treasury securities - short position

(32) (203) (745) (820)

Treasury futures - short position

(2) (94) (97) (189)

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

1,090 (2,806)

Losses on debt extinguishment

Total realized gain (loss) on derivative instruments and other securities, net 1,010 (3,251)

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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)

Treasury securities - long position

(17) (1) (2) 4

Treasury securities - short position

17 49 (267) (264)

Treasury futures - short position

(3) 54 (20) 61

(3) (2) (7) 1

Total unrealized gain (loss) on derivative instruments and other securities, net 441 66

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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-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.

Estimated Taxable Income (Loss)

For the three months ended March 31, 2021 and 2020, we had estimated taxable income (loss) available (attributable) to common stockholders of $(164) million and $111 million, respectively, or $(0.31) and $0.20 per diluted common share, respectively.

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

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

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

Three Months Ended September 30,

Nine Months Ended

September 30,

2020 2019 2020 2019

The following is a reconciliation of our GAAP net income to our estimated taxable income for the three months ended March 31, 2021 and 2020 (dollars in millions, except per share amounts):

Three Months EndedMarch 31,

Net income/(loss) $ 975 $ (2,421)

Estimated book to tax differences:

Book to tax differences:

Premium amortization, net (269) 237

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Total book to tax differences (1,139) 2,553

(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

REIT taxable income (loss) (164) 132

REIT taxable income attributed to preferred stock — 21

REIT taxable income (loss), attributed to common stock $ (164) $ 111

Weighted average common shares outstanding - basic 533.7 548.0

Weighted average common shares outstanding - diluted 533.7 549.2

REIT taxable income (loss) per common share - basic $ (0.31) $ 0.20

REIT taxable income (loss) per common share - diluted $ (0.31) $ 0.20

Beginning net capital loss carryforward $ — $ 394

Increase (decrease) in net capital loss carryforward 89 32

Ending cumulative non-deductible net capital loss $ — $ 524 $ — $ 524

Ending cumulative non-deductible net capital loss per common share $ — $ 0.97 $ — $ 0.97

Ending net capital loss carryforward $ 89 $ 426

Ending net capital loss carryforward per common share $ 0.17 $ 0.75

LIQUIDITY AND CAPITAL RESOURCES

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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.

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).

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.

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 7.7x and 8.5x as of March 31, 2021 and December 31, 2020, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of March 31, 2021 and December 31, 2020 (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-Q.

September 30, 2020 December 31, 2019

March 31, 2021 December 31, 2020

Mortgage Borrowings Amount % Amount %

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________________________________

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.

As of March 31, 2021 and December 31, 2020, 44% and 46%, 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.

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 have lower implied haircuts relative to Agency RMBS pools held on balance sheet funded with repo financing.

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.

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.

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.

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 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.

As of March 31, 2021, 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 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.

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

As of March 31, 2021, 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 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 the three months ended March 31, 2021, haircuts remained stable, and, as of March 31, 2021, the weighted average haircut on our repurchase agreements was approximately 4.2% of the value of our collateral, compared to 4.6% as of December 31, 2020.

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 March 31, 2021, our unencumbered assets totaled 62% of our tangible net equity, compared to 60% as of December 31, December 31, 2020.

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 March 31, 2021, we had cash and unencumbered Agency RMBS and U.S.

Treasury securities totaling $5.2 billion, or 48% of our tangible equity, which excludes unencumbered CRT securities, non-Agency securities and assets held at Bethesda Securities, compared to $5.4 billion and 51%, respectively, as of December 31, 2020.

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.

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.

As of March 31, 2021, our maximum amount at risk (or the excess/shortfall of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables) 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 5% of our tangible stockholders' equity.

As of March 31, 2021, approximately 9% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of March 31, 2021, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.

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

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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.

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

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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.

Please refer to Note 9 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.

As of March 31, 2021, we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Additionally, as of March 31, 2021, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

FORWARD-LOOKING STATEMENTS

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• changes in U.S.

monetary policy or interest rates;

monetary policy or interest rates, including Fed purchases of Agency RMBS;

• fluctuations in the yield curve;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis