AGNC Investment Corp. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended March 31, 2021. Our MD&A is presented in six sections: • Executive Overview • Financial Condition • Results of Operations • Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Forward-Looking Statements EXECUTIVE OVERVIEW We are 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. These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise, such as Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac," and together with Fannie Mae, the "GSEs"), or by a U.S. Government agency, such as Government National Mortgage Association ("Ginnie Mae"). We 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 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. 23 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 24 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 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 Mar. 31, 2020 June 30, 2020 Sept. 30, 2020 Dec. 31, 2020 Mar. 31, 2021 Mar. 31, 2021 vs Dec. 31, 2020 Target Federal Funds Rate: Target Federal Funds Rate - Upper Band 0.25% 0.25% 0.25% 0.25% 0.25% — bps SOFR: SOFR Rate 0.01% 0.10% 0.08% 0.07% 0.01% -6 bps SOFR Interest Rate Swap Rate: 2-Year Swap 0.09% —% 0.03% 0.06% 0.12% +6 bps 5-Year Swap 0.24% 0.08% 0.13% 0.24% 0.82% +58 bps 10-Year Swap 0.45% 0.38% 0.47% 0.71% 1.52% +81 bps 30-Year Swap 0.61% 0.63% 0.86% 1.15% 1.92% +77 bps U.S. Treasury Security Rate: 2-Year U.S. Treasury 0.25% 0.15% 0.13% 0.12% 0.16% +4 bps 5-Year U.S. Treasury 0.38% 0.29% 0.28% 0.36% 0.94% +58 bps 10-Year U.S. Treasury 0.67% 0.66% 0.69% 0.92% 1.74% +82 bps 30-Year U.S. Treasury 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 2.5% $103.59 $104.26 $104.90 $105.41 $102.55 -$2.86 3.0% $104.83 $105.33 $104.75 $104.77 $104.13 -$0.64 3.5% $105.70 $105.18 $105.40 $105.66 $105.63 -$0.03 4.0% $106.67 $105.98 $106.64 $106.78 $107.31 +$0.53 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 2.5% $103.72 $104.70 $104.44 $104.30 $104.06 -$0.24 3.0% $104.61 $105.09 $104.94 $104.97 $105.59 +$0.62 3.5% $105.19 $105.06 $105.81 $106.03 $106.69 +$0.66 4.0% $105.56 $105.75 $106.15 $106.28 $106.34 +$0.06 ________________________________ 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. 25 FINANCIAL CONDITION 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 % Fixed rate Agency RMBS and TBA securities: ≤ 15-year: ≤ 15-year RMBS $ 15,402 $ 15,469 2.24 % 17 % $ 9,256 $ 9,482 2.48 % 10 % 15-year TBA securities, net 1 (2,352) (2,358) 2.38 % (3) % 6,916 6,980 1.74 % 7 % Total ≤ 15-year 13,050 13,111 2.22 % 15 % 16,172 16,462 2.16 % 17 % 20-year RMBS 2,626 2,627 2.49 % 3 % 2,409 2,470 2.58 % 3 % 30-year: 30-year RMBS 43,631 45,026 3.58 % 50 % 50,312 52,663 3.55 % 54 % 30-year TBA securities, net 1 27,707 27,137 2.35 % 30 % 24,288 24,499 2.05 % 25 % Total 30-year 71,338 72,163 3.10 % 80 % 74,600 77,162 3.06 % 79 % Total fixed rate Agency RMBS and TBA securities 87,014 87,901 2.95 % 97 % 93,181 96,094 2.89 % 98 % Adjustable rate Agency RMBS 61 62 2.30 % — % 69 70 2.35 % — % Multifamily — — — % — % 17 19 3.31 % — % CMO Agency RMBS: CMO 249 259 3.23 % — % 289 301 3.30 % 1 % Interest-only strips 42 55 5.59 % — % 45 59 5.57 % — % Principal-only strips 54 58 — % — % 60 67 — % — % Total CMO Agency RMBS 345 372 4.10 % 1 % 394 427 4.10 % 1 % Total Agency RMBS and TBA securities 87,420 88,335 2.95 % 98 % 93,661 96,610 2.90 % 99 % Non-Agency RMBS 487 495 3.16 % 1 % 178 188 4.28 % — % CMBS 356 373 4.06 % — % 333 358 4.13 % — % CRT 1,067 1,073 3.30 % 1 % 733 737 3.43 % 1 % Total investment portfolio $ 89,330 $ 90,276 2.96 % 100 % $ 94,905 $ 97,893 2.91 % 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-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 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 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. 26 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 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% $ 3,462 $ 3,518 $ 3,474 —% 102.4% 2.31% 0.99% 4 10% 2.0% 5,593 5,794 5,747 1% 103.3% 2.55% 1.30% 3 9% 2.5% 771 812 807 58% 105.7% 3.06% 1.22% 17 11% 3.0% 1,082 1,099 1,153 94% 101.6% 3.55% 2.47% 47 14% 3.5% 1,147 1,171 1,240 100% 102.1% 4.03% 2.76% 43 16% ≥ 4.0% 637 656 690 91% 103.0% 4.61% 2.93% 42 17% Total ≤ 15-year 12,692 13,050 13,111 27% 103.0% 2.82% 1.53% 11 11% 20-year: ≤ 2.0% 1,454 1,500 1,473 —% 103.1% 2.87% 1.51% 5 6% 2.5% 560 583 579 —% 104.2% 3.28% 1.74% 9 9% 3.0% 45 46 48 98% 103.3% 3.78% 2.26% 20 12% 3.5% 209 213 225 81% 101.8% 4.05% 2.96% 92 13% ≥ 4.0% 273 284 302 96% 104.1% 4.74% 3.13% 52 15% Total 20-year: 2,541 2,626 2,627 20% 103.4% 3.27% 1.87% 18 9% 30-year: 2.0% 13,606 14,076 13,545 1% 101.2% 2.80% 1.85% 1 6% 2.5% 19,072 19,723 19,531 1% 105.4% 3.44% 1.76% 7 8% 3.0% 4,119 4,280 4,314 13% 103.5% 3.74% 2.38% 36 10% 3.5% 11,575 12,102 12,543 87% 104.5% 4.06% 2.64% 70 11% 4.0% 12,596 13,235 13,851 92% 105.1% 4.51% 2.93% 56 13% ≥ 4.5% 7,482 7,922 8,379 98% 105.9% 5.01% 3.21% 42 15% Total 30-year 68,450 71,338 72,163 45% 104.7% 4.19% 2.66% 46 12% Total fixed rate $ 83,683 $ 87,014 $ 87,901 42% 104.2% 3.81% 2.34% 36 11% ________________________________ 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 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. 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 March 31, 2021. 27 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. See Note 1 of preceding table for specified pool composition. 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. 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 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). 28 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. However, because such measures are incomplete measures of our financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, results computed in accordance with GAAP. In addition, because not all companies use identical calculations, our presentation of such non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing our income tax returns, which occurs after the end of our fiscal year. Selected Financial Data The following selected financial data is derived from our interim consolidated financial statements and the notes thereto. The tables below present our condensed consolidated balance sheets as of 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): March 31, December 31, Balance Sheet Data 2021 2020 (Unaudited) Investment securities, at fair value $ 65,497 $ 66,414 Total assets $ 85,545 $ 81,817 Repurchase agreements and other debt $ 55,221 $ 52,543 Total liabilities $ 74,181 $ 70,738 Total stockholders' equity $ 11,364 $ 11,079 Net book value per common share 1 $ 18.72 $ 17.68 Tangible net book value per common share 2 $ 17.72 $ 16.71 29 Three Months Ended March 31, Statement of Comprehensive Income Data (Unaudited) 2021 2020 Interest income $ 557 $ 491 Interest expense 29 426 Net interest income 528 65 Other gain (loss), net 471 (2,463) Operating expenses 24 23 Net income (loss) 975 (2,421) Dividends on preferred stock 25 21 Net income (loss) available (attributable) to common stockholders $ 950 $ (2,442) Net income (loss) $ 975 $ (2,421) Other comprehensive income (loss), net (237) 464 Comprehensive income (loss) 738 (1,957) Dividends on preferred stock 25 21 Comprehensive income (loss) available (attributable) to common stockholders $ 713 $ (1,978) Weighted average number of common shares outstanding - basic 533.7 548.0 Weighted average number of common shares outstanding - diluted 535.6 548.0 Net income (loss) per common share - basic $ 1.78 $ (4.46) Net income (loss) per common share - diluted $ 1.77 $ (4.46) Comprehensive income (loss) per common share - basic $ 1.34 $ (3.61) Comprehensive income (loss) per common share - diluted $ 1.33 $ (3.61) Dividends declared per common share $ 0.36 $ 0.48 Three Months Ended March 31, Other Data (Unaudited) * 2021 2020 Average investment securities - at par $ 56,641 $ 94,933 Average investment securities - at cost $ 58,948 $ 97,889 Average net TBA portfolio - at cost $ 32,022 $ 7,487 Average total assets - at fair value $ 79,415 $ 113,930 Average repurchase agreements and other debt outstanding 3 $ 54,602 $ 93,538 Average stockholders' equity 4 $ 11,312 $ 10,735 Average tangible net book value "at risk" leverage 5 8.0:1 9.9:1 Tangible net book value "at risk" leverage (as of period end) 6 7.7:1 9.4:1 Economic return on tangible common equity - unannualized 7 8.2 % (20.2) % 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 % ________________________________ * Except as noted below, average numbers for each period are weighted based on days on our books and records. 1. Net book value per common share is calculated as total stockholders' equity, less preferred stock liquidation preference, divided by number of common shares outstanding as of period end. 2. Tangible net book value per common share excludes goodwill. 3. Amount excludes U.S. Treasury repurchase agreements and TBA contracts. Other debt includes debt of consolidated VIEs. 4. Average stockholders' equity calculated as average month-ended stockholders' equity during the period. 5. Average tangible net book value "at risk" leverage is calculated by dividing the sum of daily weighted average 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. 6. 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. Treasury repurchase agreements. 7. Economic return on tangible common equity represents the sum of the change in tangible net book value per common share and dividends declared per share of common stock during the period over beginning tangible net book value per common share. 30 Economic Interest Income and Asset Yields The following table summarizes our economic interest income (a non-GAAP measure) for the three months ended March 31, 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, 2021 2020 Amount Yield Amount Yield Interest income: Cash/coupon interest income $ 481 3.40 % $ 875 3.68 % Net premium amortization benefit (cost) 76 0.38 % (384) (1.67) % Interest income (GAAP measure) 557 3.78 % 491 2.01 % Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast (213) (1.45) % 243 0.99 % Interest income, excluding "catch-up" premium amortization 344 2.33 % 734 3.00 % TBA dollar roll income - implied interest income 1,2 116 1.44 % 48 2.54 % Economic interest income, excluding "catch-up" amortization (non-GAAP measure) 3 $ 460 2.02 % $ 782 2.97 % Weighted average actual portfolio CPR for investment securities held during the period 24.6 % 12.2 % Weighted average projected CPR for the remaining life of investment securities held as of period end 11.3 % 14.5 % Average 30-year fixed rate mortgage rate as of period end 4 3.17 % 3.50 % 10-year U.S. Treasury rate as of period end 1.74 % 0.67 % ________________________________ 1. Reported in gain (loss) on derivatives instruments and other securities, net in the accompanying consolidated statements of operations. 2. Implied interest income from TBA dollar roll transactions is computed as the sum of (i) TBA dollar roll income and (ii) estimated TBA implied funding cost (see Economic Interest Expense and Aggregate Cost of Funds below). TBA dollar roll income represents the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and is the economic equivalent to interest income on the underlying Agency securities, less an implied funding cost, over the forward settlement period. Amount is net of TBAs used for hedging purposes. Amount excludes TBA mark-to-market adjustments. 3. The combined asset yield is calculated on a weighted average basis based on our average investment and TBA balances outstanding during the period and their respective yields. 4. Source: Freddie Mac Primary Fixed Mortgage Rate Mortgage Market Survey The principal elements impacting our economic interest income are the size of our average investment portfolio and the yield (actual and implied) on our securities. The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three months ended March 31, 2021 compared to the prior year period (in millions): Impact of Changes in the Principal Elements Impacting Economic Interest Income Three Months Ended March 31, 2021 vs. March 31, 2020 Due to Change in Average Total Increase / (Decrease) Portfolio Size Asset Yield Three months ended: Interest Income (GAAP measure) $ 66 $ (195) $ 261 Estimated "catch-up" premium amortization due to change in CPR forecast (456) — (456) Interest income, excluding "catch-up" premium amortization (390) (195) (195) TBA dollar roll income - implied interest income 68 156 (88) Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (322) $ (39) $ (283) 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. 31 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. 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 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 March 31, 2020 $ 93,538 $ 104,773 $ 63,241 $ 7,487 $ 20,648 9.9:1 9.4:1 ________________________________ 1. Other debt includes debt of consolidated VIEs. Amounts exclude U.S. Treasury repo agreements. 2. Daily average and ending net TBA position outstanding measured at cost. 3. Average tangible net book value "at risk" leverage during the period represents the sum of our daily weighted average repurchase agreements and other debt used to fund acquisitions of investment securities and net TBA position outstanding divided by the sum of our average month-ended stockholders' equity, adjusted to exclude goodwill. 4. Tangible net book value "at risk" leverage as of period end represents the sum of our repurchase agreements and other debt used to fund acquisitions of investments securities, net TBA position (at cost) and net receivable/payable for unsettled investment securities outstanding as of period end divided by total stockholders' equity, adjusted to exclude goodwill as of period end. Economic Interest Expense and Aggregate Cost of Funds The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three 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, 2021 2020 Economic Interest Expense and Aggregate Cost of Funds 1 Amount Cost of Funds Amount Cost of Funds Repurchase agreement and other debt - interest expense (GAAP measure) $ 29 0.21 % $ 426 1.80 % TBA dollar roll income - implied interest expense (benefit) 2,3 (38) (0.48) % 32 1.67 % Economic interest expense - before interest rate swap periodic cost (income), net 4 (9) (0.04) % 458 1.79 % Interest rate swap periodic interest cost (income), net 2,5 12 0.06 % (31) (0.12) % Total economic interest expense (non-GAAP measure) $ 3 0.02 % $ 427 1.67 % ________________________________ 1. Amounts exclude interest rate swap termination fees and variation margin settlements paid or received, forward starting swaps and the impact of other supplemental hedges, such as swaptions and U.S. Treasury positions. 2. Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. 3. The implied funding cost (benefit) of TBA dollar roll transactions is determined using the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and market based assumptions regarding the "cheapest-to-deliver" collateral that can be delivered to satisfy the TBA contract, such as the anticipated collateral’s weighted average coupon, weighted average maturity and projected 1-month CPR. The average implied funding cost (benefit) for all TBA transactions is weighted based on our daily average TBA balance outstanding for the period. 4. The combined cost of funds for total mortgage borrowings outstanding, before interest rate swap costs, is calculated on a weighted average basis based on average repo, other debt and TBA balances outstanding during the period and their respective cost of funds. 5. Interest rate swap periodic interest (income) cost is measured as a percent of average mortgage borrowings outstanding for the period. The principal elements impacting our economic interest expense are (i) the size of our average mortgage borrowings and interest rate swap portfolio outstanding during the period, (ii) the average interest rate (actual and implied) on our mortgage borrowings and (iii) the average net interest rate paid/received on our interest rate swaps. The following table includes a 32 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 Three Months Ended March 31, 2021 vs. March 31, 2020 Due to Change in Average Total Increase / (Decrease) Borrowing / Swap Balance Borrowing / Swap Rate Three months ended: Repurchase agreements and other debt interest expense $ (397) $ (177) $ (220) 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 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 March 31, Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2021 2020 Average Agency repo and other debt outstanding $ 54,602 $ 93,538 Average net TBA portfolio outstanding - at cost $ 32,022 $ 7,487 Average mortgage borrowings outstanding $ 86,624 $ 101,025 Average notional amount of interest rate swaps outstanding (excluding forward starting swaps) $ 45,211 $ 71,659 Ratio of average interest rate swaps to mortgage borrowings outstanding 52 % 71 % Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.16 % 1.22 % Average interest rate swap receive-floating rate (0.05) % (1.39) % Average interest rate swap net pay/(receive) rate 0.11 % (0.17) % 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 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 months ended March 31, 2021 and 2020: 33 Three Months Ended March 31, Investment and TBA Securities - Net Interest Spread 2021 2020 Average asset yield, excluding "catch-up" premium amortization 2.02 % 2.97 % Average aggregate cost of funds (0.02) % (1.67) % Average net interest spread, excluding "catch-up" premium amortization 2.00 % 1.30 % Net Spread and Dollar Roll Income The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three months ended March 31, 2021 and 2020 (dollars in millions): Three Months Ended March 31, 2021 2020 Net interest income (GAAP measure) $ 528 $ 65 TBA dollar roll income, net 1 154 16 Interest rate swap periodic (cost) income, net 1 (12) 31 Other interest and dividend income 1 — 2 Adjusted net interest and dollar roll income 670 114 Operating expense (24) (23) Net spread and dollar roll income 646 91 Dividend on preferred stock 25 21 Net spread and dollar roll income available to common stockholders (non-GAAP measure) 621 70 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 Weighted average number of common shares outstanding - basic 533.7 548.0 Weighted average number of common shares outstanding - diluted 535.6 549.2 Net spread and dollar roll income per common share - basic $ 1.16 $ 0.13 Net spread and dollar roll income per common share - diluted $ 1.16 $ 0.13 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - basic $ 0.76 $ 0.57 Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - diluted $ 0.76 $ 0.57 ________________________________ 1. Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income Gain (Loss) on Investment Securities, Net The following table is a summary of our net gain (loss) on investment securities for the three months ended March 31, 2021 and 2020 (in millions): Three Months Ended March 31, Gain (Loss) on Investment Securities, Net 1 2021 2020 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 (955) 197 Unrealized gain (loss) on investment securities measured at fair value through other comprehensive income, net (237) 464 Total gain (loss) on investment securities, net $ (1,205) $ 1,155 ________________________________ 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 2 of our Consolidated Financial Statements in this Form 10-Q). 34 Gain (Loss) on Derivative Instruments and Other Securities, Net The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three months ended March 31, 2021 and 2020 (in millions): Three Months Ended March 31, 2021 2020 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 154 16 TBA securities - mark-to-market net gain (loss) (228) 129 Payer swaptions (24) (22) U.S. Treasury securities - long position (10) 60 U.S. Treasury securities - short position 1 (634) U.S. Treasury futures - short position 27 (21) Interest rate swaps - termination fees and variation margin settlements, net 1,090 (2,806) Other — 27 Total realized gain (loss) on derivative instruments and other securities, net 1,010 (3,251) Unrealized gain (loss) on derivative instruments and other securities, net: TBA securities - mark-to-market net gain (loss) (852) 548 Interest rate swaps 46 (20) Payer swaptions 411 (112) U.S. Treasury securities - long position — 37 U.S. Treasury securities - short position 806 (303) U.S. Treasury futures - short position 34 (83) Other (4) (1) Total unrealized gain (loss) on derivative instruments and other securities, net 441 66 Total gain (loss) on derivative instruments and other securities, net $ 1,439 $ (3,154) 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 (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. federal income tax rules because of both temporary and permanent differences in income and expense recognition. The primary differences are (i) unrealized gains and losses on investment securities and derivative instruments marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized, settled or amortized over the instrument's original term, (ii) timing differences, both temporary and potentially permanent, in the recognition of certain realized gains and losses and (iii) temporary differences related to the amortization of premiums and discounts on investments. Furthermore, our estimated taxable income is subject to potential adjustments up to the time of filing our appropriate tax returns, which occurs after the end of our fiscal year. The following is a reconciliation of our GAAP net income to our estimated taxable income for the three months ended March 31, 2021 and 2020 (dollars in millions, except per share amounts): 35 Three Months EndedMarch 31, 2021 2020 Net income/(loss) $ 975 $ (2,421) Book to tax differences: Premium amortization, net (269) 237 Realized gain/loss, net (1,494) 2,555 Net capital loss/(utilization of net capital loss carryforward) 89 32 Unrealized (gain)/loss, net 545 (263) Other (10) (8) Total book to tax differences (1,139) 2,553 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 net capital loss carryforward $ 89 $ 426 Ending net capital loss carryforward per common share $ 0.17 $ 0.75 36 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-Q. 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. March 31, 2021 December 31, 2020 Mortgage Borrowings Amount % Amount % Repurchase agreements 1 $ 55,056 68 % $ 52,366 63 % Debt of consolidated variable interest entities, at fair value 165 — % 177 — % Total debt 55,221 69 % 52,543 63 % Net TBA position, at cost 25,355 31 % 31,204 37 % Total mortgage borrowings $ 80,576 100 % $ 83,747 100 % ________________________________ 1. 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. 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. 37 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 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 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 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 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. 38 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 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. 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-Q for further details regarding our recent equity capital transactions and our stock repurchase plan. OFF-BALANCE SHEET ARRANGEMENTS 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 The statements contained in this Quarterly Report that are not historical facts, including estimates, projections, beliefs, expectations concerning conditions, events, or the outlook for our business, strategy, performance, operations or the markets or industries in which we operate, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “intend,” “outlook,” “potential,” “forecast,” “estimate,” “will,” “could,” “should,” “likely” and other similar, correlative or comparable words and expressions. Forward looking statements are based on management’s assumptions, projections and beliefs as of the date of this Quarterly Report, but they involve a number of risks and uncertainties. Actual results may differ materially from those anticipated in forward-looking statements, as well as from historical performance. Factors that could cause actual results to vary from our forward-looking statements include, but are not limited to, the following: • the impact of the COVID-19 pandemic and of measures taken in response to the COVID-19 pandemic by various governmental authorities, businesses and other third parties; • actions by the federal, state, or local governments to stabilize the economy, the housing sector or financial markets; • changes in U.S. monetary policy or interest rates, including Fed purchases of Agency RMBS; • fluctuations in the yield curve; 39 • fluctuations in mortgage prepayment rates on the loans underlying our Agency RMBS; • the availability and terms of financing; • changes in the market value of our assets, including from changes in net interest spreads, and changes in market liquidity or depth; • the effectiveness of our risk mitigation strategies; • conditions in the market for Agency RMBS and other mortgage securities; • legislative or regulatory changes that affect our status as a REIT, our exemption from the Investment Company Act of 1940 or the mortgage markets in which we participate; and • other risks discussed under the heading “Risk Factors” herein and in our Annual Report on Form 10-K. Forward-looking statements speak only as of the date made, and we do not assume any duty and do not undertake to update forward-looking statements. A further discussion of risks and uncertainties that could cause actual results to differ from any of our forward-looking statements is included in our most recent Annual Report on Form 10-K and this document under Item 1A. Risk Factors . We caution readers not to place undue reliance on our forward-looking statements.