What changed in this filing

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Item 1. Business

2022-02-23 compared with 2021-02-26 · 60 added, 88 removed, 144 unchanged (51% of the section changed)

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We operate to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").

As a REIT, we are required to distribute annually 90% of our taxable income.

As a REIT, we will generally not be subject to U.S.

federal or state corporate taxes on our taxable income to the extent that we distribute all our annual taxable income to our stockholders on a timely basis.

As a REIT, we are required to distribute annually 90% of our taxable income, and we will generally not be subject to U.S.

federal or state corporate income tax to the extent that we distribute all our annual taxable income to our stockholders on a timely basis.

It is our intention to distribute 100% of our taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

We are an internally managed REIT 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 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.

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• manage an investment portfolio consisting primarily of Agency securities;

• invest a subset of the portfolio in credit-oriented and other assets related to the housing, mortgage or real estate markets that are not guaranteed by a GSE or U.S.

Government agency;

• invest a subset of the portfolio in credit-oriented securities that are not guaranteed by a GSE or U.S.

Government agency and other assets related to the housing, mortgage or real estate markets;

• capitalize on discrepancies in the relative valuations in the Agency and non-Agency securities market;

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Our primary investments consist of Agency pass-through certificates representing interests in "pools" of mortgage loans secured by residential real property.

Monthly payments of principal and interest made by the individual borrowers on the mortgage loans underlying the pools are in effect "passed through" to the security holders, after deducting GSE or U.S.

Government agency guarantee and servicer fees.

In general, mortgage pass-through certificates distribute cash flows from the underlying collateral on a pro rata basis among the security holders.

Security holders also receive guarantor advances of principal and interest for delinquent loans in the mortgage pools.

We also invest in Agency collateralized mortgage obligations ("CMOs"), which are structured instruments representing interests in Agency residential pass-through certificates, and interest-only, inverse interest-only and principal-only securities, which represent the right to receive a specified proportion of the contractual interest or principal flows of specific Agency CMO securities.

We may also invest in Agency collateralized mortgage obligations ("CMOs"), which are structured instruments backed by a pool of Agency mortgage-backed securities.

• To-Be-Announced Forward Contracts ("TBAs").

TBAs are forward contracts to purchase or sell Agency RMBS.

TBAs are forward contracts to purchase or sell Agency RMBS in the TBA market.

TBA contracts specify the coupon rate, issuer, term and face value of the bonds to be delivered, with the actual bonds to be delivered only identified shortly before the TBA settlement date.

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rather, "credit risk transfer" is achieved by writing down the outstanding principal balance of the CRT security if credit losses on the related pool of loans exceed certain thresholds.

The reduced amount that issuers are obligated to repay to the security holders offsets the issuer's credit losses on the related pool of loans.

• Non-Agency Residential Mortgage-Backed Securities ("Non-Agency RMBS").

Non-Agency RMBS are securities backed by pools of residential mortgages, for which payment of principal and interest is not guaranteed by a GSE or U.S.

Government agency.

Instead, a private institution such as a commercial bank will package residential mortgage loans and securitize them through the issuance of RMBS.

Non-Agency RMBS may benefit from credit enhancement derived from structural elements, such as subordination, overcollateralization or insurance.

Non-Agency RMBS are structured securities backed by pools of residential mortgages packaged and issued by private institutions, such as a commercial bank or non-bank lender.

Certain tranches of non-Agency RMBS may benefit from credit enhancement derived from structural elements, such as subordination, over-collateralization or insurance.

We may purchase investment grade instruments that benefit from credit enhancement and non-investment grade instruments that are structured to absorb more credit risk.

We focus primarily on non-Agency securities where the underlying mortgages are secured by residential properties within the United States.

Residential non-Agency securities are backed by residential mortgages that can be comprised of prime, non-prime, qualified and non-qualified mortgage loans.

We may also purchase Agency and non-Agency multifamily securities where the collateral backing the securitization consists of loans for multi-unit housing properties.

We focus primarily on non-Agency securities where the underlying mortgages are secured by residential properties within the United States, which may be comprised of prime, non-prime, qualified and non-qualified mortgage loans.

• Commercial Mortgage-Backed Securities ("CMBS").

CMBS are securities backed by pools of commercial mortgage loans.

CMBS can be structured as pass-through securities, where the cash flows generated by the collateral pool are passed on a pro rata basis to investors after netting servicer or other fees, or where cash flows are distributed to numerous classes of securities following a predetermined waterfall, which may give priority to selected classes while subordinating other classes.

We may invest across the capital structure of these securities, and we intend to focus on CMBS where the underlying collateral is secured by commercial properties located within the United States.

CMBS are securities backed by a pool of loans secured by one or more commercial properties.

CMBS may also consist of a single loan for a single asset or multiple loans for a group of cross-collateralized assets of a single-borrower.

CMBS are typically structured as multiple classes of securities where cash flows are distributed following a predetermined waterfall, which may give priority to selected classes while subordinating other classes.

We may invest across the capital structure of these securities.

We intend to focus on CMBS where the underlying collateral is secured by commercial properties located within the United States.

Active Portfolio Management Strategy

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As part of our investment strategy, we use leverage on our investment portfolio to increase potential returns to our stockholders.

We invest in securities based on our assessment of the relative risk-return profile of the securities and our ability to effectively hedge a portion of the securities' exposure to market risks.

The composition of our portfolio and strategies that we use will vary based on our view of prevailing market conditions and the availability of suitable investment, hedging and funding opportunities.

We may experience investment gains or losses when we sell securities that we believe no longer provide attractive risk-adjusted returns or when we believe more attractive alternatives exist elsewhere in the mortgage or mortgage-related securities market.

We may also experience gains or losses from our hedging strategies and losses on our non-Agency securities due to credit impairments.

We invest in securities based on our assessment of their relative risk-return profiles and our ability to effectively hedge a portion of the securities' exposure to market risks.

The composition of our portfolio and the strategies we use will vary based on our view of prevailing market conditions and the availability of suitable investment, hedging and funding opportunities.

Financing Strategy

The primary source of financing for our investments is repurchase agreement transactions.

A repurchase (or "repo") agreement transaction acts as a financing arrangement under which we effectively pledge our investment securities as collateral to secure a loan.

We finance our investment portfolio primarily through collateralized borrowings structured as repurchase agreements ("repo").

Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets at a future date.

Our borrowings through repurchase transactions are generally short-term and have maturities ranging from one day to one year but may have maturities up to five or more years.

Our financing rates are typically impacted by the U.S.

federal funds rate and other short-term benchmark rates and liquidity in the Agency repo and other short-term funding markets.

Our leverage depends on market conditions, our assessment of risk and returns and our ability to borrow sufficient funds to acquire mortgage securities.

We generally expect our leverage to be within six to twelve times the amount of our tangible stockholders' equity.

However, under certain market conditions, we may operate at leverage levels outside of this range for extended periods of time.

Our financing rates are primarily impacted by short-term benchmark rates and liquidity in the Agency repo and short-term funding markets.

The amount of leverage that we utilize depends on market conditions, our assessment of risk and returns and our ability to borrow sufficient funds to acquire mortgage securities.

We generally expect our leverage to be within six to twelve times the amount of our tangible stockholders' equity, but under certain conditions we may operate at leverage levels outside of this range.

We diversify our funding exposure by entering into repurchase agreements with multiple counterparties.

The terms of our master repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association ("SIFMA") as to repayment, margin requirements and the segregation of

all securities sold under the repurchase transaction.

In addition, each lender may require that we include supplemental terms and conditions to the standard master repurchase agreement to address such matters as additional margin maintenance requirements, cross default and other provisions.

The specific provisions may differ for each lender and certain terms may not be determined until we engage in individual repurchase transactions.

We finance a portion of our investments through our wholly-owned captive broker-dealer subsidiary, Bethesda Securities, LLC ("BES").

BES is a member of the Fixed Income Clearing Corporation ("FICC") and has direct access to bilateral and triparty repo funding as a Financial Industry Regulatory Authority ("FINRA") member broker-dealer.

As an eligible institution, BES also raises repo funding through the General Collateral Finance ("GCF") Repo service offered by the FICC, with the FICC acting as the central counterparty, which provides us greater depth and diversity of repurchase agreement funding while also lowering our funding cost, reducing our collateral requirements and limiting our counterparty exposure.

We also effectively finance the acquisition of Agency RMBS by entering into TBA dollar roll transactions through which we sell a TBA contract for current month settlement and simultaneously purchase a similar TBA contract for a forward settlement date.

As an eligible institution, BES also raises repo funding through the General Collateral Finance ("GCF") Repo service offered by the FICC, with the FICC acting as the central counterparty.

Thus, through BES, we have greater depth and diversity of funding than solely through traditional bilateral repo, while also lowering our funding cost, reducing our collateral requirements and limiting our counterparty exposure.

We also finance the acquisition of Agency RMBS by entering into TBA dollar roll transactions through which we sell a TBA contract for current month settlement and simultaneously purchase a similar TBA contract for a forward settlement date.

Prior to the forward settlement date, we may choose to roll the position to a later date by entering into an offsetting TBA position, net settling the paired off positions for cash, and simultaneously entering into a similar TBA contract for a forward settlement date.

The TBA contract purchased for the forward settlement date is priced at a discount to the TBA contract sold for settlement/pair off in the current month.

The difference (or discount) is referred to as the "price drop" and is the economic equivalent of net interest carry income (interest income less implied financing cost) on the underlying Agency RMBS over the roll period, which is commonly referred to as "dollar roll income." We recognize TBA contracts as derivative instruments on our consolidated financial statements at their net carrying value, which is their fair value less the purchase price to be paid or received under the TBA contract.

The difference (or discount) is referred to as the "price drop" and is the economic

equivalent of net interest carry income (interest income less implied financing cost) on the underlying Agency RMBS over the roll period, which is commonly referred to as "dollar roll income." We recognize TBA contracts as derivative instruments on our consolidated financial statements at their net carrying value, which is their fair value less the purchase price to be paid or received under the TBA contract.

Consequently, dollar roll transactions represent a form of off-balance sheet financing.

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Risk Management Strategy

We are exposed to a variety of market risks, including interest rate, prepayment, extension and credit risks.

We are exposed to a variety of market risks, including interest rate, prepayment, extension, spread and credit risks.

Our investment strategies are based on our assessment of these risks, our ability to hedge a portion of these risks and our intention to qualify as a REIT.

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In addition, although we attempt to protect our net book value against moves in interest rates, we may not fully hedge against interest rate, prepayment and extension risks if we believe that bearing such risks enhances our return profile, or if the hedging transaction would negatively impact our REIT status.

• Interest Rate Risk.

We hedge a portion of our interest rate risk with respect to both the fixed income nature of our long-term assets and the short-term, variable rate nature of our financing.

A majority of our funding is in the form of repurchase agreements, and, as a result, our financing costs fluctuate based on short-term benchmark rates, such as the U.S.

federal funds rate, Secured Overnight Financing Rate ("SOFR"), and three-month London Interbank Offered Rate ("LIBOR").

Our investments are assets that primarily have fixed rates of interest with maturities up to 30 years, and the interest we earn on those assets generally does not move in tandem with the interest that we pay on our repurchase agreements.

As such, we may experience reduced income or losses due to adverse interest rate movements.

To mitigate a portion of such risk, we utilize hedging techniques to attempt to lock in a portion of the net interest spread between the interest we earn on our assets and the interest we pay on our borrowings.

Fluctuations in the shape of the yield curve or changes in the market's expectation about future interest rate volatility can also adversely affect the value of our assets.

Furthermore, because prepayments on residential mortgages generally accelerate when interest rates decrease and slow when interest rates rise, mortgage securities may increase in value more slowly than similar duration bonds, or even fall in value, as interest rates decline.

Mortgage securities could also decrease in value more quickly than similar duration bonds as interest rates rise.

This is referred to as "negative convexity." We attempt to manage this risk through asset selection and the use of a variety of hedging techniques.

We monitor the "duration gap" of our portfolio, or differences in the interest rate sensitivity of our assets relative to our liabilities, inclusive of interest rate hedges, and how our convexity and duration gap could change if interest rates and prepayment expectations were to increase or decrease under a variety of scenarios.

• Prepayment Risk.

Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated.

Prepayment risk generally increases when interest rates decline, and our financial results could be adversely affected as we may have to reinvest principal repayments at lower yields.

• Extension Risk.

Because residential borrowers have the option to make only scheduled payments on their mortgage loans, we face the risk that a return of capital on our investment will occur slower than anticipated.

Extension risk generally increases when interest rates rise, and our financial results could be adversely affected as we may have to finance our investments at potentially higher costs without the ability to simultaneously reinvest principal repayments into higher yielding securities due to a lack of or slower than anticipated borrower prepayments.

• Spread Risk.

Because the market spread between the yield on our investments and the yield on benchmark interest rates, such as U.S.

Treasury rates and interest rate swap rates, may vary, we are exposed to spread risk.

When spreads widen, we will typically experience a loss in our tangible net book value, conversely, when spreads tighten, we will typically experience a gain in our tangible net book value.

Spread movements can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the U.S.

Federal Reserve (the "Fed"), liquidity, or changes in required rates of return on different assets.

Spread risk is an inherent risk we take as a levered investor in mortgage-backed securities and, as such, our strategies are generally not designed to protect our tangible net book value from adverse spread movements.

• Credit Risk.

We accept mortgage credit exposure related to our CRT and other non-Agency securities at levels we deem to be appropriate within the context of our overall investment strategy.

We attempt to manage this risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, and sale of assets where we identify negative credit trends.

We may also manage credit risk with credit default swaps or other financial derivatives that we believe are appropriate.

Additionally, we may attempt to adjust our credit exposure and/or to improve the return profile of our investment portfolio by varying the mix of our Agency and non-Agency mortgage investments and adjusting our duration gap when we believe credit performance is inversely correlated with changes in interest rates.

Our risk management actions may lower our earnings and dividends in the short-term to further our objective of preserving our net book value and maintaining attractive levels of earnings and dividends over the long-term.

In addition, some of our hedges are intended to provide protection against larger rate moves and as a result may be relatively ineffective for smaller interest rate changes.

Our projections of exposures to interest rate, prepayment, extension and other risks are also based on models that are dependent on a number of assumptions and inputs, and actual results could differ materially from our projections.

For additional explanation of our market risks please refer to Item 7A.

Quantitative and Qualitative Disclosures about Market Risk and Item 1A.

Risk Factors within this Form 10-K.

Regulatory Requirements

Exemption from Regulation under the Investment Company Act

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We typically treat "partial pool" and other mortgage securities where we hold less than all the certificates issued by the pool as real estate-related assets.

For additional information regarding our exemption under the Investment Company Act please refer to Item 1A.

Risk Factors within this Form 10-K.

Real Estate Investment Trust Requirements

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We believe that we have been organized and operate in such a manner as to qualify for taxation as a REIT.

Income Tests:

To continue to qualify as a REIT, we must satisfy two gross income requirements on an annual basis.

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Risk Factors" of this Form 10-K for further discussion of REIT qualification requirements and related items.

Regulatory Requirements of our Captive Broker-Dealer Subsidiary

BES as a member of the FICC and FINRA is subject to ongoing membership and regulatory requirements of the securities business that include but are not limited to trade practices, use and safekeeping of funds and securities, capital structure, recordkeeping and conduct of directors, officers and employees.

Additionally, as a self-clearing, registered broker-dealer, BES is subject to minimum net capital requirements.

Thus, our ability to access triparty repo funding through the FICC's GCF Repo service, which represents a significant portion of our total borrowing capacity, is reliant on BES' ability to continually meet FINRA and FICC regulatory and membership requirements.

Human Capital Management

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________________________________

Employee terminations include voluntary and involuntary terminations.

Terminations during 2018 and 2019 were primarily associated with the termination of MTGE Investment Corp.’s management services agreement with our subsidiary MTGE Management, LLC due to the sale of MTGE Investment Corp.

Employee t erminations include voluntary and involuntary terminations.

Terminations during 2019 were primarily associated with the termination of MTGE Investment Corp.’s management services agreement with our subsidiary MTGE Management, LLC due to the sale of MTGE Investment Corp.

to a third party in 2018.

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We recognize the importance of ongoing open communication and engagement with our employees, and we greatly value their input.

We regularly engage with our employees in a variety of ways through regular feedback with each member of our staff, anonymous employee surveys and frequent town hall meetings.

Our anonymous employee surveys are a key component of our employee engagement that provide a means of assessing job satisfaction and specific concerns of our employees.

To enhance the candor and comfort of our employees, we use an outside vendor that provides verbatim comments and analysis of engagement levels on an anonymous basis.

A recent anonymous employee survey indicated the Company had a satisfaction rating above 90% in many areas, including AGNC’s treatment of its employees, physical working conditions, commitment to integrity, and overall culture and environment.

Based on the results of our surveys, our Board and management have implemented various ideas and recommendations received from employees.

We regularly engage with our employees in a variety of ways through ongoing direct engagement with each member of our staff, anonymous employee surveys and regular town hall meetings.

Our anonymous employee surveys are an important component of our employee engagement that provide a means of assessing job satisfaction and specific concerns of our employees.

To enhance the candor and comfort of our employees, we use outside vendors that provide verbatim comments and analysis of engagement levels on an anonymous basis.

In 2021, AGNC received the Great Place to Work™ certification.

The prestigious certification was based entirely on feedback from employees through an extensive anonymous survey about their experiences working at AGNC, during which 98% of our employees said AGNC is a great place to work.

Our Board and management use the results of our surveys and ongoing feedback to implement various ideas and recommendations received from employees.

Workplace Culture and Ethics

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This includes reimbursement for any supervisor-approved courses for our employees.

We also maintain a regular "Lunch and Learn" series and recently launched a formal mentoring program for employees to provide direct one-on-one career guidance and cross-functional experience across various operations.

We also maintain a "Lunch and Learn" series and a formal mentoring program for employees to receive direct one-on-one career guidance and cross-functional experience across various operations.

These initiatives have advanced unique and professional skill sets throughout the organization.

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We strive to have a diverse workforce and an inclusive and welcoming work environment that is free from wrongful discrimination.

We have long maintained policies against discrimination and harassment in our workplace.

We have long maintained policies against discrimination and harassment in our workplace, and we periodically conduct workplace trainings and workshops attended by all employees related to these topics.

Although we have a relatively small workforce and low turnover rate, our recruitment and hiring practices attempt to ensure the diversity of applicant pools for posted job openings.

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Our Board also strives to maintain diversity and inclusion among its directors.

As of December 31, 2020, three of seven directors were women and one director was ethnically diverse.

As of December 31, 2021, three of our nine directors were women and two directors were ethnically diverse.

Compensation and Benefits

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Our pay-for-performance compensation philosophy is based on rewarding each employee’s individual contributions through a combination of fixed and variable pay elements.

Each employee receives a total compensation package that includes base salary, short-term incentives in the form of an annual cash bonus and long-term equity incentives.

Each employee receives a total compensation package that includes base salary, short-term incentives in the form of an annual cash bonus and long-term equity incentives in the form of time-vesting and/or performance-vesting restricted stock units.

The proportion of each employee’s variable incentive versus fixed-based elements of their compensation is directly correlated to the individual’s level of responsibility and role in the organization.

Generally, higher level employees have higher proportions of variable incentive-based compensation in their target mix.

Similarly, within the incentive-based elements, the proportion of long-term incentive-based elements generally increases with the individual’s level of responsibility in the organization.

Similarly, within the incentive-based elements, the proportion of long-term incentive-based elements generally corresponds to the individual’s role and level of responsibility in the organization.

As the success of our business is fundamentally connected to the well-being of our people, we offer benefits that support their physical, financial and emotional well-being.

We provide our employees with access to flexible, comprehensive and convenient medical coverage intended to meet their needs and the needs of their families.

In addition to standard medical coverage, we offer employees dental and vision coverage, health savings and flexible spending accounts, paid time off, employee assistance programs, voluntary short-term and long-term disability insurance, term life insurance and other benefits.

In addition to standard medical coverage, we offer employees dental and vision coverage, health savings and flexible spending accounts, paid time off,

employee assistance programs, voluntary short-term and long-term disability insurance, term life insurance and other benefits.

We also believe in the long-term financial wellness of our employees, and to foster maximum savings rates by our employees we offer a 401(k) Savings Plan and Company matching contributions of 100% up to 6% of each employee’s eligible compensation, subject to IRS limits.

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We used their feedback to inform decisions regarding matters such as implementing flexible work schedules, providing additional resources and equipment to improve our employees work from home experience, and demonstrating flexibility with respect to the timing and manner of eventual office re-openings.

Finally, we hosted town hall meetings on a frequent basis – including weekly during the early phases of the COVID-19 pandemic in March and April and on a monthly basis thereafter – to ensure sufficient company-wide communication with our workforce during this time.

Finally, we hosted regular town hall meetings to ensure sufficient company-wide communication with our workforce during this time.

Employee survey results indicated that 100% of our employees believe we responded to the COVID-19 outbreak very well or extremely well.

These approaches continued in 2021.

Mid-year, we commenced a gradual return to in-office work, with employees having the choice to work in the office subject to safety protocols or to continue working remotely.

Going forward, when conditions permit, we expect to implement a hybrid model through which employees will be able to split hours between the office and remote work.

Our success depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs.

In acquiring mortgage assets, we compete with mortgage REITs, mortgage finance and specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders, governmental bodies and other entities.

These entities and others that may be organized in the future may have similar asset acquisition objectives and increase competition for the available supply of mortgage assets suitable for purchase.

Additionally, our investment strategy is dependent on the amount of financing available to us through repurchase agreements and would be adversely impacted if we are not able to secure financing on favorable terms, if at all.

In acquiring mortgage assets, we compete with a variety of other investors, including other mortgage REITs, government entities, banks, specialty finance companies, public and private funds, insurance companies and other financial institutions, who may have competitive advantages over us as to the price they are willing to pay due to factors such as a lower cost of funds, access to funding sources not available to us or a lack of REIT and Investment Company Act regulatory constraints.

Corporate Information

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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-K

Item 1. Business