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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-07 · 198 added, 138 removed, 487 unchanged (41% of the section changed)

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended March 31, 2021.

Our MD&A is presented in six sections:

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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 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.

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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.

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.

The positive trends that drove the strong performance of Agency RMBS in the first quarter of 2021 largely reversed in the second quarter.

Agency RMBS spreads to swap and U.S.

Treasury interest rate hedges, particularly longer-term hedges, widened in the second quarter as interest rates declined and the yield curve flattened.

This spread widening coincided with stronger domestic economic data and higher inflation together with greater expectations that the Federal Reserve (the “Fed”) will communicate its plan to commence reducing its Agency RMBS asset purchases later this year.

In addition, despite the increase in mortgage rates during the first quarter, prepayment speeds did not slow as expected in the second quarter.

Faster prepayment speeds in the second quarter pressured higher coupon Agency RMBS valuations and largely reversed the significant outperformance of these coupons in the first quarter.

As a result, AGNC’s economic return for the second quarter was negative 5.5%.

On a year-to-date basis, lower coupon RMBS modestly outperformed interest rate hedges, while very attractive implied TBA financing levels further benefited the earnings profile of these assets.

Conversely, higher coupon RMBS modestly underperformed hedges due to elevated prepayment rates.

Taken together, AGNC’s economic return for the first two quarters was 2.4% despite the significant quarter-to-quarter volatility.

During the second quarter, we continued to gradually reduce the size of our investment portfolio and operate at lower average leverage levels in anticipation of wider spreads as the Fed’s eventual announcement about its plans to taper its Agency RMBS purchases approaches.

We reduced our investment portfolio by $2.8 billion during the second quarter, or by a total of $10.4 billion year-to-date.

As of June 30, 2021, our investment portfolio totaled $87.5 billion, consisting of $58.1 billion Agency RMBS, $27.4 billion TBA securities, and $2.0 billion CRT and non-Agency securities, including forward starting non-Agency securities.

Our average "at risk" leverage for the second quarter declined to 7.6x tangible net book value, compared to 8.0x for the first quarter.

We ended the second quarter moderately higher at 7.9x, due to the decline in our tangible net book value.

Additionally, during the second quarter, we shifted the composition of our investment portfolio.

Most notably, given the relative outperformance of our 15-year fix-rate Agency RMBS, we reduced our 15-year holdings by $6.8 billion and modestly increased our holdings of current coupon production 30-year Agency securities.

As of June 30, 2021, our 30-year and 15-year fixed-rate Agency securities represented 87% and 7%, respectively, of our investment portfolio, compared to 80% and 15%, respectively, as of March 31, 2021.

In addition, as of June 30, 2021, approximately 40% of our fixed-rate Agency securities were in higher coupon specified pools, with the balance primarily in lower coupon generic securities, largely unchanged from approximately 42% and 58%, respectively, as of the end of the first quarter.

We believe our investment portfolio, which is well balanced between lower coupon TBA securities and higher coupon specified pools, positions AGNC well over a wide range of market scenarios.

Residential credit continued to benefit from strong fundamentals, materially outperforming Agency RMBS during the second quarter.

Meanwhile, our credit holdings were largely unchanged during the quarter, as we found limited opportunities to make attractive investments given historically tight credit spreads to benchmark interest rates.

Our unencumbered cash and Agency RMBS during the second quarter, excluding both unencumbered credit assets and assets held at our broker-dealer subsidiary, remained very strong at $4.7 billion as of June 30, 2021, or 47% of our tangible equity, compared to $5.2 billion, or 48% of tangible equity, as of March 31, 2021.

Our investment portfolio had a weighted average CPR of 25.7% for the second quarter, compared to 24.6% for the prior quarter.

The weighted average projected CPR for the remaining life of our Agency securities held as of June 30, 2021 increased to 11.6% from 11.3% as of March 31, 2021, as lower rates and moderately faster prepayment assumptions were largely offset by changes in portfolio composition.

During the second quarter, we rebalanced a portion of our hedge portfolio in response to lower rates and our somewhat smaller investment portfolio by reducing our longer-term U.S.

Treasury hedge positions.

As a result, our hedge portfolio totaled

$74 billion at June 30, 2021, down $5 billion from the first quarter, while our interest rate hedge ratio remained largely unchanged at 97% of our funding liabilities.

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, remained slightly positive at 0.3 years as of June 30, 2021, compared to 0.6 years as of March 31, 2021.

Net spread and dollar roll income (a non-GAAP measure) was $0.76 per diluted common share for the second quarter, unchanged from the first quarter, as favorable short-term funding, attractive TBA dollar roll opportunities, and stable hedging cost offset our smaller asset base.

Our net spread and dollar roll income excludes “catch-up” premium amortization (cost)/benefit of $(0.13) and $0.40 per diluted common share for the second and first quarters, respectively, due to changes in CPR projections for securities acquired in prior quarters.

(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.

At current valuation levels, we believe that the Agency investment risk-return backdrop is more balanced and that Agency RMBS remain attractive, particularly when compared on a relative value basis to other asset classes.

Looking ahead, as the Fed moves closer to asset tapering, we believe some further spread widening and volatility are possible.

In our view, this repricing is healthy for the Agency RMBS market over the longer-term.

Although AGNC’s book value may be pressured in the short run, our lower leverage and strong liquidity position should provide us capacity to add investments opportunistically when expected return levels are more favorable and further improve our longer-term earnings potential.

We thus expect that wider spreads will generally improve expected returns on new investments and enhance our value proposition over the long run.

Market Information

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31, 2020 Mar.

31, 2021 Mar.

31, 2021 June 30, 2021 June 30, 2021

June 30, 2021

Target Federal Funds Rate:

Target Federal Funds Rate - Upper Band

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

0.25% 0.25% 0.25% 0.25% 0.25% — bps — bps

SOFR Rate 0.10% 0.08% 0.07% 0.01% 0.05% +4 bps -2 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

0.00% 0.03% 0.06% 0.12% 0.19% +7 bps +13 bps

0.08% 0.13% 0.24% 0.82% 0.75% -7 bps +51 bps

0.38% 0.47% 0.71% 1.52% 1.19% -33 bps +48 bps

0.63% 0.86% 1.15% 1.92% 1.50% -42 bps +35 bps

Treasury Security Rate:

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

0.15% 0.13% 0.12% 0.16% 0.25% +9 bps +13 bps

0.29% 0.28% 0.36% 0.94% 0.89% -5 bps +53 bps

0.66% 0.69% 0.92% 1.74% 1.47% -27 bps +55 bps

1.41% 1.46% 1.65% 2.41% 2.09% -32 bps +44 bps

30-Year Fixed Rate Agency Price:

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

2.0% $102.33 $103.39 $103.88 $99.70 $101.09 +$1.39 -$2.79

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$105.98 $106.64 $106.78 $107.31 $106.53 -$0.78 -$0.25

4.5% $107.46 $108.16 $108.39 $108.91 $107.66 -$1.25 -$0.73

15-Year Fixed Rate Agency Price:

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

1.5% N/A $102.31 $102.89 $100.40 $101.23 +$0.83 -$1.66

2.0% $103.46 $103.95 $104.55 $102.61 $103.19 +$0.58 -$1.36

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Interest and LIBOR rates were obtained from Bloomberg.

The following table summarizes mortgage rates and credit spreads as of each date presented below:

Mortgage Rate/Credit Spread June 30, 2020 Sept.

30, 2020 Dec.

31, 2020 Mar.

31, 2021 June 30, 2021 June 30, 2021

June 30, 2021

Mortgage Rate:

30 Yr PMMS 3.13% 2.90% 2.67% 3.17% 3.02% -15 bps +35 bps

30 Yr CC 1.62% 1.42% 1.34% 1.97% 1.87% -10 bps +53 bps

30 Yr P/S Spread 1.51% 1.48% 1.33% 1.20% 1.15% -5 bps -18 bps

Credit Spread (in bps):

CRT M2 520 302 216 235 179 -56 -37

CMBS AAA 113 86 66 69 65 -4 -1

CDX IG 76 59 50 54 48 -6 -2

________________________________

30 Yr PMMS rates are sourced from Freddie Mac's weekly Primary Mortgage Market Survey of mortgage lenders;

30 Yr CC rates represent current coupon rates for new production Agency RMBS sourced from Bloomberg;

and the 30 Yr P/S spreads represent the 30 Yr PMMS and CC primary to secondary market spread differential as of each date.

CRT and CMBS spreads are averages of JP Morgan, Bank of America and Wells Fargo.

CRT spreads are discount margins.

CMBS spreads are spreads to the swap curve.

CDX spreads are sourced from JP Morgan.

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

As of June 30, 2021 and December 31, 2020, our investment portfolio totaled $87.5 billion and $97.9 billion, respectively, consisting of:

$59.8 billion and $66.4 billion investment securities, at fair value, respectively;

$27.4 billion and $31.5 billion net TBA securities, at fair value, respectively;

and $0.3 billion and zero forward settling non-Agency securities, at fair value, respectively.

The following table is a summary of our investment portfolio as of June 30, 2021 and December 31, 2020 (dollars in millions):

June 30, 2021 December 31, 2020

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

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Non-Agency RMBS 2

490 503 3.18 % 1 % 178 188 4.28 % — %

CMBS 336 353 3.69 % — % 333 358 4.13 % — %

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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.

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 $0.3 billion of forward settling non-Agency securities.

TBA and forward settling 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 June 30, 2021 and December 31, 2020, our TBA position and forward settling securities had a net carrying value of $79 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 security in the TBA contract or forward purchase agreement and the price to be paid or received for the underlying security.

As of June 30, 2021 and December 31, 2020, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 2.42% and 2.33%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBA securities, as of June 30, 2021 and December 31, 2020 (dollars in millions):

June 30, 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 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.

As of June 30, 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 138% for 15-year and 30-year securities, respectively.

WAC represents the weighted average coupon of the underlying collateral.

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

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of June 30, 2021.

December 31, 2020

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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.

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of June 30, 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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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):

The tables below present our condensed consolidated balance sheets as of June 30, 2021 and December 31, 2020 and condensed consolidated statements of comprehensive income and key statistics for the three and six months ended June 30, 2021 and 2020 (in millions, except per share amounts):

Balance Sheet Data 2021

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Three Months Ended

Six Months Ended

Statement of Comprehensive Income Data (Unaudited)

2021 2020 2021 2020

Interest income $ 249 $ 429 $ 806 $ 920

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Three Months Ended

Six Months Ended

Other Data (Unaudited) * 2021 2020 2021 2020

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Average tangible net book value "at risk" leverage 5

7.6:1 8.8:1 7.8:1 9.2:1

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

7.9:1 9.2:1 7.9:1 9.2:1

Economic return on tangible common equity - unannualized 7

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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 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.

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 and forward settling 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.

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Economic Interest Income and Asset Yields

The following table summarizes our economic interest income (a non-GAAP measure) for the three months ended March 31, 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

The following table summarizes our economic interest income (a non-GAAP measure) for the three and six months ended June 30, 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 June 30,

Six Months Ended June 30,

2021 2020 2021 2020

Amount Yield Amount Yield Amount Yield Amount Yield

Interest income:

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

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three months ended March 31, 2021 compared to the prior year period (in millions):

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three and six months ended June 30, 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

Periods ended June 30, 2021 vs.

June 30, 2020

Due to Change in Average

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (101) $ (27) $ (74)

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.

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.

Due to Change in Average

Six months ended:

Total Increase /

(Decrease) Portfolio

Interest Income (GAAP measure) $ (114) $ (290) $ 176

Estimated "catch-up" premium amortization due to change in CPR forecast (442) — (442)

Interest income, excluding "catch-up" premium amortization (556) (290) (266)

TBA dollar roll income - implied interest income 133 194 (61)

Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (423) $ (96) $ (327)

Our average investment portfolio, inclusive of TBAs (at cost), decreased 2% and 9% for the three and six months ended June 30, 2021, respectively, compared to the prior year period, primarily due to lower operating leverage and a decline in our average stockholders' equity.

The decrease in the average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization on our investment securities, of 41 basis points and 64 basis points for the three and six months ended June 30, 2021, respectively, compared to the prior year period, was largely due to changes in asset composition and lower prevailing yields on new asset purchases.

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 and forward settling securities 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.

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Amount Ending

June 30, 2021 $ 52,374 $ 60,186 $ 48,488 $ 28,082 $ 27,611 7.6:1 7.9:1

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, 2020 $ 61,008 $ 69,628 $ 54,558 $ 27,785 $ 29,460 8.9:1 8.8:1

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

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

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Daily average and ending net TBA position outstanding measured at cost.

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.

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.

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 and forward settling securities position outstanding, divided by the sum of our average month-ended stockholders' equity, adjusted to exclude goodwill.

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 and forward settling securities 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,

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three and six months ended June 30, 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 June 30,

Six Months Ended June 30,

2021 2020 2021 2020

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) $ 17 0.13 % $ 134 0.76 % $ 46 0.17 % $ 560 1.36 %

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(6) (0.03) % 130 0.61 % (15) (0.04) % 588 1.25 %

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

Interest rate swap periodic interest expense 2,5

19 0.09 % 59 0.27 % 31 0.07 % 28 0.06 %

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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.

Interest rate swap periodic interest (income) cost is measured as a percent of average mortgage borrowings outstanding for the period.

Interest rate swap periodic interest expense is measured as a percent of average mortgage borrowings outstanding for the period.

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

The following table includes a

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

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three and six months ended June 30, 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

Periods ended June 30, 2021 vs.

June 30, 2020

Due to Change in Average

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TBA dollar roll income - implied interest benefit/expense (19) (3) (16)

Interest rate swap periodic interest expense/benefit 43 11 32

Interest rate swap periodic interest expense (40) 7 (47)

Total change in economic interest expense $ (176) $ (29) $ (147)

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):

Due to Change in Average

Six months ended:

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

Repurchase agreements and other debt interest expense $ (514) $ (193) $ (321)

TBA dollar roll income - implied interest expense (89) 44 (133)

Interest rate swap periodic interest expense 3 (5) 8

Total change in economic interest expense $ (600) $ (154) $ (446)

Our average mortgage borrowings, inclusive of TBAs, decreased 6% and 10% for the three and six months ended June 30, 2021, respectively, compared to the prior year period, consistent with the decline in our average investment portfolio.

The decline in the average interest rate (actual and implied) on our mortgage borrowings for the three and six months ended June 30,

2021 of 82 basis points and 128 basis points, respectively, was due to the combination of lower short-term interest rates and favorable technical supply and demand factors in the repo and TBA dollar roll markets.

The change in our interest rate swap periodic cost for the three and six months ended June 30, 2021 was due to the combination of the change in our average swap balance outstanding and the change in the average fixed rate paid and floating rate received on our interest rate swaps as compared to the prior year periods.

The following is a summary of each of these factors for the three and six months ended June 30, 2021 as compared to the prior year periods (dollars in millions):

Three Months Ended

Six Months Ended

Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2021 2020 2021 2020

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Ratio of average interest rate swaps to mortgage borrowings outstanding

62 % 52 % 57 % 62 %

Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.18 % 0.65 % 0.17 % 1.00 %

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0.15 % 0.54 % 0.13 % 0.10 %

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.

For the three and six months ended June 30, 2021, we had a forward starting swap average balance of zero and $0.1 billion, respectively, and, for the three and six months ended June 30, 2020, an average balance of $0.9 billion and $1.2 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.

Including forward starting swaps, our average ratio of interest rate swaps outstanding to our average mortgage borrowings for the three and six months ended June 30, 2021 was 62% and 57%, respectively, and 53% and 63% for the three and six months ended June 30, 2020, 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:

Three Months Ended

Three Months Ended June 30,

Six Months Ended

Investment and TBA Securities - Net Interest Spread 2021 2020 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 months ended March 31, 2021 and 2020 (dollars in millions):

Three Months Ended

The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three and six months ended June 30, 2021 and 2020 (dollars in millions):

Three Months Ended June 30,

Six Months Ended

2021 2020 2021 2020

Net interest income (GAAP measure) $ 232 $ 295 $ 760 $ 360

TBA dollar roll income, net 1

Interest rate swap periodic (cost) income, net 1

162 78 316 94

Interest rate swap periodic cost, net 1

(19) (59) (31) (28)

Other interest and dividend income 1

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Gain (Loss) on Investment Securities, Net

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

Three Months Ended

The following table is a summary of our net gain (loss) on investment securities for the three and six months ended June 30, 2021 and 2020 (in millions):

Three Months Ended June 30,

Six Months Ended

Gain (Loss) on Investment Securities, Net 1

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

2021 2020 2021 2020

Gain on sale of investment securities, net $ 25 $ 153 $ 12 $ 647

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

(28) 679 (983) 876

Unrealized gain (loss) on investment securities measured at fair value through other comprehensive income, net (77) 203 (314) 667

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

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

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

Payer swaptions

Treasury securities - long position

Treasury securities - short position

Treasury futures - short position

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

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three and six months ended June 30, 2021 and 2020 (in millions):

Three Months Ended June 30,

Six Months Ended

2021 2020 2021 2020

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)

Interest rate swaps

TBA securities, dollar roll income $ 162 $ 78 $ 316 $ 94

TBA securities, mark-to-market gain/(loss) 234 142 (846) 819

Interest rate swaps, periodic cost (19) (59) (31) (28)

Interest rate swaps, mark-to-market gain/(loss) (381) (320) 755 (3,146)

Payer swaptions (313) (14) 74 (148)

Treasury securities - long position

Treasury securities - short position (333) (60) 474 (997)

Treasury futures - short position

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

Treasury securities - long position (1) 4 (11) 101

Treasury futures contracts - short position (29) (8) 32 (112)

Other 62 (148) 58 (122)

Total gain (loss) on derivative instruments and other securities, net $ (618) $ (385) $ 821 $ (3,539)

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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.

For the three months ended June 30, 2021 and 2020, we had estimated taxable loss attributable to common stockholders of $(158) million and $(4) million, respectively, or $(0.30) and $(0.01) per diluted common share, respectively.

For the six months ended June 30, 2021 and 2020, we had estimated taxable income (loss) available (attributable) to common stockholders of $(322) million and $107 million, respectively, or $(0.61) and $0.19 per diluted common share, respectively.

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

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

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

Three Months EndedMarch 31,

The following is a reconciliation of our GAAP net income to our estimated taxable income for the three and six months ended June 30, 2021 and 2020 (dollars in millions, except per share amounts):

Three Months Ended June 30,

Six Months EndedJune 30,

2021 2020 2021 2020

Net income/(loss) $ (411) $ 718 $ 564 $ (1,703)

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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).

Our tangible net book value "at risk" leverage ratio was 7.9x and 8.5x as of June 30, 2021 and December 31, 2020, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of June 30, 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

June 30, 2021 December 31, 2020

Mortgage Borrowings Amount % Amount %

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________________________________

As of March 31, 2021 and December 31, 2020, 44% and 46%, respectively, of our repurchase agreement funding was through the GCF Repo service.

As of June 30, 2021 and December 31, 2020, 43% and 46%, respectively, of our repurchase agreements were funded through the Fixed Income Clearing Corporation's GCF Repo service.

Our primary financing sources are collateralized borrowings structured as repurchase agreements.

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

As of March 31, 2021, we had met all our margin requirements.

As of June 30, 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.

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

As of March 31, 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.

As of June 30, 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.

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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.

During the six months ended June 30, 2021, haircuts remained stable, and, as of June 30, 2021, the weighted average haircut on our repurchase agreements was approximately 4.1% 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.

As of June 30, 2021, our unencumbered assets totaled 62% of our tangible net equity, compared to 60% as of 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.

As of June 30, 2021, we had cash and unencumbered Agency RMBS and U.S.

Treasury securities totaling $4.7 billion, or 47% 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.

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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.

As of June 30, 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 June 30, 2021, approximately 8% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of June 30, 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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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.

As of June 30, 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 June 30, 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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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