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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-05 · 136 added, 135 removed, 550 unchanged (33% 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 June 30, 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

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.)

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.

In the third quarter, several positive developments benefited the Agency RMBS market.

First, the Federal Reserve (the “Fed”) communicated a potential timeline for the reduction of its asset purchases that was largely in line with market expectations and, as result, did not precipitate material mortgage spread widening or interest rate volatility.

The interest rate and prepayment landscape also improved, with intermediate and longer-term rates increasing late in the quarter.

Primary mortgage rates also ended the quarter well above their intra-year low, which should lead to a more benign prepayment environment.

Collectively, these favorable developments contributed to our stable tangible net book value and 2.3% economic return for the quarter, which consisted of a $0.02 increase in our tangible net book value per common share and $0.36 of dividends per common share for the quarter.

Notably, despite significant interest rate volatility and elevated prepayment speeds in the first half of the year, AGNC’s year-to-date economic return totaled 4.7% through the third quarter.

In November, the Fed announced that it will begin tapering Agency RMBS purchases at the pace of $5 billion per month over an estimated eight-month period but may adjust the pace consistent with changes in its economic outlook.

Importantly, when tapering is complete, it is expected that the Fed will continue to purchase significant amounts of Agency RMBS as it reinvests paydowns on its existing portfolio.

As a result, we do not expect significant Agency RMBS spread widening during the Fed taper cycle, though some spread volatility could occur.

Despite the Fed providing clarity regarding its tapering plan, broader macroeconomic uncertainty remains.

Inflation measures remain elevated, and supply chain shortages and disruptions have become more widespread.

Further, the employment outlook appears poised for strong growth and could put upward pressure on wages.

Collectively, uncertainty surrounding these inflationary pressures reduces the predictability as to when and how significantly the Fed will increase short-term interest rates, creating the potential for increased interest rate volatility.

As a result, we favor operating with a more conservative risk profile in the current environment.

As of September 30, 2021, our “at-risk” leverage ratio declined to 7.5x tangible equity, from 7.9x as of June 30, 2021.

Our interest rate hedge portfolio totaled $72.9 billion, or 98% of our mortgage borrowings, compared to $74 billion and 97%, respectively, as of June 30, 2021.

Our duration gap, which is a measure of the difference between the interest rate sensitivity of our assets and liabilities, inclusive of our interest rate hedges, was largely unchanged during the third quarter at 0.4 years as of September 30, 2021, compared to 0.3 years as of June 30, 2021.

Our investment portfolio totaled $84.1 billion as of September 30, 2021, a decline of $3.4 billion from $87.5 billion as of June 30, 2021, and consisted of $53.7 billion Agency RMBS, $28.3 billion TBA securities and $2.1 billion CRT and non-Agency securities, including forward setting non-Agency securities.

As of September 30, 2021, our portfolio remained positioned for a range of interest rate scenarios, with our Agency portfolio comprised roughly of 60% lower coupon generic securities and 40% higher coupon specified pools.

Our forecasted life CPRs decreased during the quarter to 10.7% as of September 30, 2021, from 11.6% as of June 30, 2021, due to the combination of moderate changes in portfolio composition and

higher interest rates.

Our actual prepayment rate for the third quarter also trended lower to 22.5% from 25.7% for the prior quarter.

Net spread and dollar roll income, excluding “catch-up” premium amortization as a result of changes in projected CPRs for securities acquired in prior quarters, a non-GAAP measure, was $0.75 per diluted common share for the third quarter, and was largely unchanged from the first two quarters of the year as favorable short-term funding, attractive TBA dollar roll opportunities and stable hedge costs continued to offset our smaller asset base.

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

As of September 30, 2021, our unencumbered cash and Agency MBS increased to $5.2 billion, or 51% of our tangible equity, which excludes unencumbered credit assets and assets held at our captive broker-dealer subsidiary, compared to $4.7 billion and 47%, respectively, as of June 30, 2021.

Looking ahead, we believe our current positioning and strong liquidity position offers us flexibility to increase leverage to take advantage of favorable investment opportunities as they arise.

Market Information

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Interest Rate/Security Price 1

June 30, 2020 Sept.

30, 2020 Dec.

31, 2020 Mar.

31, 2021 June 30, 2021 June 30, 2021

31, 2021 June 30, 2021 Sept.

30, 2021 Sept.

June 30, 2021

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15-Year Fixed Rate Agency Price:

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

1.5% $102.31 $102.89 $100.40 $101.23 $100.95 -$0.28 -$1.94

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$106.15 $106.28 $106.34 $106.19 $106.06 -$0.13 -$0.22

________________________________

Price information is for generic instruments only and is not reflective of our specific portfolio holdings.

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

Mortgage Rate/Credit Spread June 30, 2020 Sept.

Mortgage Rate/Credit Spread Sept.

30, 2020 Dec.

31, 2020 Mar.

31, 2021 June 30, 2021 June 30, 2021

31, 2021 June 30, 2021 Sept.

30, 2021 Sept.

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

30 Year Mortgage Rate 3.08% 2.87% 3.27% 3.13% 3.18% +5 bps +31 bps

30 Year Agency Current Coupon 1.40% 1.34% 2.04% 1.83% 1.97% +14 bps +63 bps

30 Year Primary to Secondary Spread 1.68% 1.53% 1.23% 1.30% 1.21% -9 bps -32 bps

Credit Spread (in bps):

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________________________________

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.

30 Year Mortgage rates are sourced from Bloomberg;

30 Year Current Coupon rates represent current coupon rates for new production Agency RMBS sourced from Bloomberg;

and the 30 Year Primary to Secondary Spreads represent the 30 Year Mortgage Rate and 30 Year Agency Current Coupon rate spread differential as of each date.

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

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FINANCIAL CONDITION

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

As of September 30, 2021 and December 31, 2020, our investment portfolio totaled $84.1 billion and $97.9 billion, respectively, consisting of:

$55.4 billion and $66.4 billion investment securities, at fair value, respectively;

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and $0.5 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

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

September 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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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.

As of September 30, 2021 and December 31, 2020, our TBA position and forward settling securities had a net carrying value of $(171) 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

As of September 30, 2021 and December 31, 2020, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 2.48% and 2.33%, respectively.

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

September 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 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.

As of September 30, 2021, lower balance specified pools had a weighted average original loan balance of $119,000 and $115,000 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 June 30, 2021.

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of September 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 June 30, 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 September 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 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):

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

September 30,

Balance Sheet Data 2021

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Statement of Comprehensive Income Data (Unaudited)

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

Other Data (Unaudited) * 2021 2020 2021 2020

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Economic Interest Income and Asset Yields

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

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

Nine Months Ended September 30,

2021 2020 2021 2020

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Weighted average projected CPR for the remaining life of investment securities held as of period end 10.7 % 15.9 % 10.7 % 15.9 %

Average 30-year fixed rate mortgage rate as of period end 4

30-year fixed rate mortgage rate as of period end 4

3.18 % 3.08 % 3.18 % 3.08 %

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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.

Freddie Mac Primary Fixed Mortgage Rate Mortgage Market Survey

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

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three and six months ended June 30, 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 nine months ended September 30, 2021 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements Impacting Economic Interest Income

Periods ended June 30, 2021 vs.

June 30, 2020

Periods ended September 30, 2021 vs.

September 30, 2020

Due to Change in Average

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Due to Change in Average

Six months ended:

Nine months ended:

Total Increase /

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (514) $ (185) $ (329)

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 average investment portfolio, inclusive of TBAs (at cost), decreased 11% and 10% for the three and nine months ended September 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, of 14 basis points and 52 basis points for the three and nine months ended September 30, 2021, respectively, 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.

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Amount Ending

September 30, 2021 $ 45,847 $ 49,021 $ 45,723 $ 30,312 $ 28,912 7.5:1 7.5:1

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

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

Includes forward settling non-Agency securities.

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.

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Economic Interest Expense and Aggregate Cost of Funds

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

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

Three Months Ended September 30,

Nine Months Ended September 30,

2021 2020 2021 2020

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(33) (0.42) % (41) (0.58) % (94) (0.41) % (13) (0.10) %

Economic interest expense - before interest rate swap periodic cost (income), net 4

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

Interest rate swap periodic interest expense 2,5

Economic interest expense (benefit) - before interest rate swap periodic cost, net 4

(19) (0.10) % 21 0.09 % (34) (0.05) % 609 0.87 %

Total economic interest expense (non-GAAP measure)

Interest rate swap periodic cost 2,5

13 0.07 % 13 0.06 % 44 0.07 % 41 0.06 %

Total economic interest expense (benefit) (non-GAAP measure) $ (6) (0.03) % $ 34 0.15 % $ 10 0.02 % $ 650 0.93 %

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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 expense is measured as a percent of average mortgage borrowings outstanding for the period.

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

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

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three and six months ended June 30, 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 nine months ended September 30, 2021 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements of Economic Interest Expense

Periods ended June 30, 2021 vs.

June 30, 2020

Periods ended September 30, 2021 vs.

September 30, 2020

Due to Change in Average

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TBA dollar roll income - implied interest benefit/expense 8 (4) 12

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

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

Interest rate swap periodic cost — 3 (3)

Total change in economic interest benefit/expense $ (40) $ (16) $ (24)

Due to Change in Average

Six months ended:

Nine months ended:

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

Repurchase agreements and other debt interest expense $ (562) $ (198) $ (364)

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):

TBA dollar roll income - implied interest benefit/expense (81) (10) (71)

Interest rate swap periodic cost 3 (3) 6

Total change in economic interest benefit/expense $ (640) $ (211) $ (429)

Our average mortgage borrowings, inclusive of TBAs, decreased 14% and 12% for the three and nine months ended September 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 nine months ended September 30, 2021 of 19 basis points and 92 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 nine months ended September 30, 2021 was a function of our average swap balance outstanding and 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 our average interest rate swaps outstanding and the related average swap pay and receive rates for each of the periods presented (dollars in millions).

Amounts exclude forward starting swaps not yet in effect.

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

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

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0.10 % 0.13 % 0.12 % 0.10 %

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.

For the three and nine months ended September 30, 2021, we had a forward starting swap average balance of $9 million and $0.1 billion, respectively, and, for the three and nine months ended September 30, 2020, an average balance of $0.7 billion and $1.0 billion, respectively.

Forward starting interest rate swaps do not impact our economic interest expense and aggregate cost of funds until they commence accruing net interest settlements on their forward start dates.

Including forward starting swaps, our average ratio of interest rate swaps outstanding to our average mortgage borrowings for the three and 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.

Including forward starting swaps, our average ratio of interest rate swaps outstanding to our average mortgage borrowings for the three and nine months ended September 30, 2021 was 65% and 59%, respectively, and 47% and 58% for the three and nine months ended September 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 and six months ended June 30, 2021 and 2020:

Three Months Ended June 30,

Six Months Ended

Three Months Ended September 30,

Nine Months Ended

September 30,

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 and six months ended June 30, 2021 and 2020 (dollars in millions):

Three Months Ended June 30,

Six 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 nine months ended September 30, 2021 and 2020 (dollars in millions):

Three Months Ended September 30,

Nine Months Ended

September 30,

2021 2020 2021 2020

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Gain (Loss) on Investment Securities, Net

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

Three Months Ended June 30,

Six Months Ended

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

Three Months Ended September 30,

Nine Months Ended

September 30,

Gain (Loss) on Investment Securities, Net 1

2021 2020 2021 2020

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

Gain (loss) on sale of investment securities, net $ (5) $ 346 $ 7 $ 993

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

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

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

Three Months Ended June 30,

Six Months Ended

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

Three Months Ended September 30,

Nine Months Ended

September 30,

2021 2020 2021 2020

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TBA securities, mark-to-market gain/(loss) (145) 128 (991) 947

Forward settling non-Agency, mark-to-market gain/(loss) 3 — 3 —

Interest rate swaps, periodic cost (13) (13) (44) (41)

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Estimated Taxable Income (Loss)

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.

For the three months ended September 30, 2021 and 2020, we had estimated taxable income attributed to common stockholders of $45 million and $508 million, respectively, or $0.09 and $0.92 per diluted common share, respectively.

For the nine months ended September 30, 2021 and 2020, we had estimated taxable income (loss) available (attributable) to common stockholders of $(277) million and $615 million, respectively, or $(0.52) and $1.11 per diluted common share, respectively.

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

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

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

Three Months Ended June 30,

Six Months EndedJune 30,

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

Three Months Ended September 30,

Nine Months Ended September 30,

2021 2020 2021 2020

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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 7.9x 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).

Our tangible net book value "at risk" leverage ratio was 7.5x and 8.5x as of September 30, 2021 and December 31, 2020, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of September 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.

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Mortgage Borrowings Amount % Amount %

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Total debt 45,723 61 % 52,543 63 %

Net TBA position, at cost 27,307 36 % 31,204 37 %

TBA and forward settling non-Agency securities, at cost 28,912 39 % 31,204 37 %

Total mortgage borrowings $ 74,635 100 % $ 83,747 100 %

________________________________

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.

As of September 30, 2021 and December 31, 2020, 42% 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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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.

TBA dollar roll transactions may also have a lower implied cost of funds than comparable repo funded transactions (referred to as "dollar roll specialness") offering incremental return potential.

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.

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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 June 30, 2021, we had met all our margin requirements.

As of September 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 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.

As of September 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 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.

During the nine months ended September 30, 2021, haircuts remained stable, and, as of September 30, 2021, the weighted average haircut on our repurchase agreements was approximately 4.0% 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 June 30, 2021, our unencumbered assets totaled 62% of our tangible net equity, compared to 60% as of December 31, 2020.

As of September 30, 2021, our unencumbered assets totaled 66% 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 June 30, 2021, we had cash and unencumbered Agency RMBS and U.S.

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

Treasury securities totaling $5.2 billion, or 51% 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 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.

As of September 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 September 30, 2021, approximately 7% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of September 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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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.

Please refer to Note 9 and 10 of our Consolidated Financial Statements in this Form 10-Q for further details regarding our recent equity capital transactions and stock repurchase plan.

OFF-BALANCE SHEET ARRANGEMENTS

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.

As of September 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 September 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