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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-26 · 185 added, 254 removed, 529 unchanged (45% of the section changed)

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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 Annual Report on Form 10-K.

Our MD&A is presented in eight sections:

Our MD&A is presented in six sections:

• Executive Overview

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• Liquidity and Capital Resources

• Off-Balance Sheet Arrangements

• Aggregate Contractual Obligations

• Forward-Looking Statements

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Trends and Recent Market Impacts

In March 2020, the COVID-19 pandemic triggered one of the most severe and sudden financial market downturns in U.S.

As the U.S and the world grappled with the rapidly deteriorating public health situation late in the first quarter, financial markets experienced historically rapid and severe liquidity shortfalls and declined precipitously.

The Fed and the U.S.

Treasury, together with their global counterparts, took decisive actions to allay the global financial crisis in late March and early April, which stabilized the financial markets and ultimately drove a recovery throughout the remainder of the year.

In the U.S., the Fed's unprecedented monetary accommodation, which included substantial outright purchases of U.S.

Treasury and Agency RMBS securities and a near-zero interest rate policy, and a massive fiscal stimulus package drove a rebound across substantially all asset categories.

By year-end, U.S.

Treasury and Agency RMBS markets had fully stabilized, equity markets had rebounded to new highs, and credit spreads had tightened to pre-COVID levels as a result of the ongoing monetary and fiscal stimulus and optimism regarding vaccine efficacy, the combination of which boosted prospects for a broad-based economic recovery that is expected to gain significant momentum in the latter half of 2021.

In response to the Pandemic and resulting market disruptions and volatility, we took early action to strengthen our liquidity position and mitigate risk across our portfolio.

We repositioned the portfolio and increased more efficient funding sourced from our captive broker-dealer subsidiary, benefiting AGNC’s overall liquidity position and, in turn, avoiding the need to make significant portfolio sales at distressed levels to meet margin calls.

As a result, after experiencing a significant book

value decline in the first quarter of 2020, resulting in an economic loss for the quarter of -20.2%, AGNC posted three straight quarters of substantial economic returns:

12.2%, 8.8%, and 7.5%, respectively.

This strong performance drove a full year 2020 economic return of 3.5%, comprised of $1.56 in cash dividends per common share and a ($0.95) per share decline in tangible net book value per common share.

Considering the extraordinarily difficult market conditions in the first quarter, these results demonstrate the importance and value of AGNC's disciplined investment framework and risk management practices.

Moreover, the experience of 2020 clearly illustrates the unique value of a predominately Agency RMBS portfolio.

In times of significant market stress, the Fed has repeatedly shown a commitment to supporting and stabilizing the U.S.

housing finance system because of the significant impact this market has on the broader social and economic well-being of the country.

2020 was no exception, as the Fed purchased $1.5 trillion of Agency RMBS during the year and held approximately 30% of all outstanding Agency RMBS at year end.

Our portfolio management throughout the year, coupled with the Fed's continued support of the RMBS market, ultimately facilitated AGNC's recovery of substantially all of the tangible net book value decline experienced in the first quarter.

Importantly, the Fed has signaled that it intends to maintain its accommodative monetary policy stance until its objectives of maximum employment and long-term average inflation targets are achieved and that it expects to continue to increase its holdings of U.S.

Treasury securities and Agency RMBS until substantial further progress has been made toward achieving these goals.

The Fed's actions and strong demand for Agency RMBS drove primary mortgage rates to historic lows during the year and triggered the largest mortgage refinance wave in almost 20 years.

To manage the risk of increased prepayments on our portfolio, we shifted the composition of our portfolio to include a greater share to lower coupon 30 and 15-year TBA securities, while maintaining our higher coupon holdings concentrated in high quality, specified Agency RMBS pools.

In this elevated prepayment environment, our higher coupon specified pools performed considerably better than more generic RMBS, while our lower coupon holdings benefited from the extremely favorable funding conditions in the TBA dollar roll market, a result of significant new Agency RMBS issuance and the Fed's high level of participation.

As of December 31, 2020, our investment portfolio totaled $97.9 billion, consisting of $65.1 billion Agency RMBS, $31.5 billion TBA securities, and $1.3 billion of CRT and non-Agency securities.

Our "at risk" leverage, as of December 31, 2020, was 8.5x our tangible equity, and our liquidity position, consisting of unencumbered Agency RMBS and cash, was $5.4 billion, which excludes unencumbered credit assets and assets held at our broker-dealer subsidiary.

The average prepayment rate on our Agency RMBS holdings during the year peaked at an annualized rate of 27.6% for the fourth quarter, significantly below speeds for similar coupon generic securities.

As of December 31, 2020, our Agency RMBS had an average remaining life CPR forecast of 17.6%.

Our interest rate exposure remained limited throughout the year despite significant movements in interest rates as we actively managed the size and composition of our interest rate hedge position in response to changing market conditions.

In the fourth quarter, we increased our interest rate hedge ratio to 80% of our funding liabilities (compared to our intra-year low of 66% at the end of the second quarter) as the macroeconomic outlook became more favorable and the risk of higher longer term interest rates increased.

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 -0.5 years as of December 31, 2020, consistent with the reduction of our asset durations and our bias in the current environment to operate with incrementally more up-rate protection.

The funding environment for Agency RMBS remained favorable throughout the year.

The Agency MBS repo market remained highly liquid and functioned normally, even during the broad financial market turmoil experienced in March.

Our average funding cost moved steadily lower over the course of the year as the Fed acted quickly to reduce the Fed Funds rate to the zero bound range early in the crisis.

As of December 31, 2020, our average repo rate was 0.24%, down substantially from 2.17 % at the start of the year.

These favorable repo rates, even lower implied financing rates in the TBA dollar roll market, and reduced interest rate swap costs collectively drove a substantial improvement in our aggregate cost of funds, which declined to 0.05% in the fourth quarter from 1.67% in the first quarter.

This very favorable funding dynamic more than offset the decline in asset yields on our portfolio and drove a significant improvement in our net interest spread.

As a result of our materially higher net interest spread, net spread and dollar roll income (a non-GAAP measure) totaled $2.70 per common share, excluding "catch-up" amortization cost, for the year.

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

Looking ahead, valuations of all financial assets have become elevated and, in many cases, are now above pre-COVID levels.

With Agency RMBS valuations similarly elevated, the expected return profile on new investments has correspondingly declined.

As a result, the net interest spread on our investment portfolio is likely to compress moderately as asset cash flows are reinvested at lower prevailing asset yields and the implied funding advantage of TBAs reverts to more historical norms.

Nevertheless, we believe Agency RMBS remain attractive on a relative basis for levered investors given the dual benefits of low funding costs and the likelihood of ongoing Fed purchases.

We believe that the near zero short-term interest rate environment is likely to remain in place through at least 2023, the Fed is unlikely to begin tapering its Agency RMBS purchases before 2022, and any such tapering will likely be gradual over a multi-month period.

Although any decisions by the Fed to taper

its investments in Agency RMBS could occur earlier or later than our current expectation, the Fed has indicated that it will seek to communicate its intentions well in advance of taking any such action so as to reduce market uncertainty.

Importantly, even after the Fed completes the taper process, it has indicated an intention to continue to reinvest portfolio paydowns for an extended period of time, likely until it begins to raise the Federal Funds target.

Nonetheless, we may experience periods of increased volatility as markets begin to price in an eventual shift in the Fed's monetary policy.

In the current environment with asset valuations elevated, we may choose to operate at comparatively lower leverage for periods of time to mitigate the potential downside risk to our tangible net book value associated with a reduced Fed presence, as well as to afford us the ability to increase leverage opportunistically when expected return levels are more favorable.

That said, the recent increase in longer term interest rates, if it continues, should ultimately lead to a more benign prepayment environment for mortgage assets.

Although Agency RMBS valuations have increased along with the vast majority of financial assets over the past several quarters, we believe significant ongoing Fed purchases, potentially slower prepayments, and attractive funding levels should continue to be positive factors for AGNC.

Net Interest Spread Information

The following table summarizes the components of our average net interest spread the four quarters ended December 31, 2020:

Quarter Ended Year Ended

2020 September 30,

2020 June 30,

2020 March 31,

2020 December 31,

Net interest spread, excluding "catch-up" amortization:

Average asset yield:

Investment securities - average asset yield 1.64 % 2.28 % 2.39 % 2.01 % 2.09 %

Estimated "catch-up" premium amortization cost due to change in CPR forecast

0.75 % 0.31 % 0.32 % 0.99 % 0.63 %

Investment securities average asset yield, excluding "catch-up" premium amortization 2.39 % 2.59 % 2.71 % 3.00 % 2.72 %

TBA securities - average implied asset yield 1

1.53 % 1.64 % 1.90 % 2.54 % 1.73 %

Average asset yield, excluding "catch-up" premium amortization 2

2.07 % 2.30 % 2.56 % 2.97 % 2.50 %

Average total cost of funds:

Repurchase agreements and other debt - average funding cost 0.38 % 0.40 % 0.76 % 1.80 % 0.96 %

TBA securities - average implied funding (benefit) cost 3

(0.54) % (0.58) % (0.09) % 1.67 % (0.27) %

Average cost of funds, before interest rate swap periodic cost (income), net 2

0.02 % 0.09 % 0.61 % 1.79 % 0.67 %

Interest rate swap periodic cost (income), net 4

0.03 % 0.06 % 0.27 % (0.12) % 0.05 %

Average total cost of funds 5

0.05 % 0.15 % 0.88 % 1.67 % 0.72 %

Average net interest spread, excluding "catch-up" premium amortization 2.02 % 2.15 % 1.68 % 1.30 % 1.78 %

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The average implied asset yield for TBA dollar roll transactions is extrapolated by adding the average TBA implied funding cost (benefit) (Note 3) to the net dollar roll yield.

The net dollar roll yield is calculated by dividing dollar roll income by the average net TBA balance (cost basis) outstanding for the period.

Dollar roll income represents the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement.

Amount includes dollar roll income (loss) on long and short TBA securities.

Amount excludes TBA mark-to-market adjustments.

Amount calculated on a weighted average basis based on average balances outstanding during the period and their respective asset yield/funding cost.

The implied funding cost/(benefit) of TBA dollar roll transactions is determined using the "price drop" and market based assumptions regarding the "cheapest-to-deliver" collateral that can be delivered to satisfy the TBA contract, such as the anticipated collateral’s weighted average coupon, weighted average maturity and projected 1-month CPR.

The average implied funding cost/benefit for all TBA transactions is weighted based on the daily average TBA balance outstanding for the period.

Represents interest rate swap periodic cost/(income) measured as a percent of total mortgage funding (Agency repurchase agreements, other debt and net TBA securities).

Amount excludes interest rate swap termination fees and mark-to-market adjustments.

Cost of funds excludes other supplemental hedges used to hedge a portion of the Company's interest rate risk (such as swaptions and U.S.

Treasury positions) and U.S.

Treasury repurchase agreements.

Since the onset of the COVID-19 financial crisis in March 2020, the Federal Reserve and the U.S.

Government have provided unprecedented amounts of monetary and fiscal stimulus in support of sustained economic growth.

In response, the U.S.

economy, as measured by gross domestic product, grew 5.7% in 2021, the fastest full-year pace in nearly 40 years.

equity markets also benefited, with the S&P 500 index reaching a series of record highs throughout 2021.

As part of its monetary policy response, the Fed doubled the size of its balance sheet from the start of the crisis to nearly $9 trillion as of December 31, 2021, through the acquisition of U.S.

Treasuries and Agency RMBS.

The Fed’s holdings of Agency RMBS totaled $2.6 trillion as of December 31, 2021, representing almost a third of all outstanding Agency RMBS, as compared to approximately 20% at the start of the crisis.

In the fourth quarter of 2021, however, with annual inflation measures running well above its 2% target and the labor market showing signs of full employment, the Fed communicated that it would soon end its incremental monthly asset purchases and begin tightening monetary policy conditions.

Accordingly, the Fed is expected to begin raising the Federal Funds rate in March 2022 and has signaled that these rate hikes could occur at an aggressive pace.

The Fed is also expected to reduce its holdings of U.S.

Treasury securities and Agency RMBS by a predetermined monthly amount soon after raising the Federal Funds rate.

This shift by the Fed led to a notable increase in short and intermediate-term rates, with the two and five-year Treasury rates increasing 61 and 90 basis points over the year, respectively, while the longer end of the yield curve, despite material intra-year volatility, experienced more modest increases, with the 10 and 30-year Treasury rates rising 59 and 25 basis points, respectively.

Against the backdrop of the anticipated reduction in the Fed’s balance sheet coupled with the expectation of greater mortgage supply in 2022, Agency RMBS spreads to benchmark interest rates widened over the course of 2021, particularly in the second and fourth quarters.

As a result, our economic return on tangible common equity for fiscal year 2021

was 2.9%, comprised of $1.44 in dividends declared per common share and a $0.96 decline in tangible net book value per common share.

We expect Agency RMBS spreads to continue to widen and for challenging market conditions to persist in 2022, as the Fed increases short term rates and reduces its holdings of Agency RMBS.

Given this outlook, we expect to continue to maintain a more defensive portfolio position characterized by lower leverage and significant interest rate hedge protection.

As of December 31, 2021, our "at risk" leverage was 7.7x our tangible equity, below our normal historical operating levels.

Our hedge ratio was 101%, indicating that the notional amount of our interest rate hedges exceeded our mortgage borrowings.

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 0.1 years.

Additionally, our unencumbered cash and Agency RMBS totaled $4.9 billion, or 50% of our tangible equity, as of December 31, 2021, which excludes unencumbered credit assets and assets held at our captive broker-dealer subsidiary, BES.

Wider spreads cause a decline in our tangible net book value, and we may experience increased volatility in our tangible net book value over the near term as the Agency RMBS market reprices to expectations regarding the normalization of Fed monetary policy.

Over the longer run, however, wider Agency RMBS spreads improve the expected return on new investments and are beneficial to our business.

We believe we are well positioned for the current environment and have the capacity and flexibility to take advantage of more attractive investment opportunities as they arise.

For fiscal year 2021, AGNC’s comprehensive income available to common stockholders totaled $231 million, or $0.44 per common share, compared to $260 million, or $0.47 per common share, for fiscal year 2020.

Our average "at risk" leverage, which includes our net TBA position, declined to 7.7x tangible equity for the year, compared to 8.5x for the prior year.

Despite the decline in our "at risk" leverage, our net spread and dollar roll income, excluding estimated catch-up premium amortization, a non-GAAP measure, increased to $3.02 per common share for the year, compared to $2.70 per common share for 2020, due primarily to favorable funding and stable hedge costs throughout the year.

Net spread and dollar roll income also benefited from attractive TBA dollar roll opportunities, with TBA dollar roll implied funding rates remaining well below comparable repo funding during the year.

As a result, we increased our average dollar roll position to approximately 35% of our investment portfolio for the year, compared to 23% for the prior year and well above typical levels prior to the start of the crisis.

As the Fed ends its monthly incremental asset purchases and begins to reduce the size of its balance sheet, we expect a corresponding decline in implied dollar roll financing to levels more consistent with historical averages.

Additionally, with the Fed set to begin raising the Federal Funds rate in March 2022, we anticipate similar increases in repo rates.

However, given our large hedge position, with interest rate swaps covering nearly 70% of our repo and TBA funding liabilities, we anticipate that these rate increases will have a more muted impact on our total cost of funds.

Lastly, during fiscal year 2021, our portfolio experienced elevated rates of prepayment as compared to pre-crisis levels driven by historically low mortgage rates.

For 2021, our Agency RMBS, which excludes our lower coupon holdings held in TBA form, repaid at 23.1% CPR, compared to 19.9% for 2020 and 11.4% for 2019.

Quantitative tightening measures by the Fed typically lead to higher mortgage rates and slower rates of prepayments, which should be beneficial to returns on our higher coupon RMBS holdings and new investments.

However, multiple factors can impact longer-term rates, as a consequence, this may not be case during the forthcoming quantitative tightening cycle.

For information regarding non-GAAP financial measures, including reconciliations to the most comparable GAAP measure, and information regarding our average implied TBA dollar roll financing for fiscal years 2021, 2020 and 2019, please refer to Results of Operations included in this MD&A below.

For further discussion regarding the sensitivity of our tangible net book value to changes in interest rates and mortgage spreads, please refer to Item 7A.

Quantitative and Qualitative Disclosures about Market Risk in this form 10-K.

Market Information

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0.25% 0.25% 0.25% 0.25% 0.25% — bps

1.76% 0.99% 0.16% 0.15% 0.14% -162 bps

1.91% 1.45% 0.30% 0.23% 0.24% -167 bps

Treasury Security Rate:

SOFR Rate 0.07% 0.01% 0.05% 0.05% 0.05% -2 bps

SOFR Interest Rate Swap Rate:

0.06% 0.12% 0.19% 0.24% 0.74% +68 bps

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1.15% 1.92% 1.50% 1.52% 1.46% +31 bps

Interest Rate Swap Rate:

Treasury Security Rate:

0.12% 0.16% 0.25% 0.28% 0.73% +61 bps

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30-Year Fixed Rate Agency Price:

1.5% N/A N/A N/A $100.66 $101.05 N/A

2.0% $103.88 $99.70 $101.09 $100.21 $99.79 -$4.09

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$106.78 $107.31 $106.53 $107.13 $106.44 -$0.34

4.5% $108.39 $108.91 $107.66 $108.13 $107.19 -$1.20

15-Year Fixed Rate Agency Price:

1.5% N/A N/A $101.83 $102.31 $102.89 N/A

1.5% $102.89 $100.40 $101.23 $100.95 $100.33 -$2.56

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$106.28 $106.34 $106.19 $106.06 $105.47 -$0.81

________________________________

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

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Prices in the table above were obtained from Barclays.

Interest and LIBOR rates were obtained from Bloomberg.

Interest rates were obtained from Bloomberg.

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

Mortgage Rate/Credit Spread Dec.

31, 2020 Mar.

31, 2021 June 30, 2021 Sept.

30, 2021 Dec.

31, 2021 Dec.

Mortgage Rate:

30-Year Mortgage Rate 2.87% 3.27% 3.13% 3.18% 3.27% +40 bps

30-Year Agency Current Coupon 1.34% 2.04% 1.83% 1.97% 2.07% +73 bps

30-Year Primary to Secondary Spread 1.53% 1.23% 1.30% 1.21% 1.20% -33 bps

Credit Spread (in bps):

CRT M2 216 235 179 171 182 -34

CMBS AAA 66 69 65 66 68 +2

CDX IG 50 54 48 53 49 -1

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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.

CRT spreads are discount margins.

CMBS spreads are spreads to the swap curve.

CDX spreads are sourced from JP Morgan.

FINANCIAL CONDITION

As of December 31, 2020 and 2019, our investment portfolio consisted of $66.4 billion and $100.4 billion of investment securities, at fair value, respectively, and $31.5 billion and $7.4 billion of TBA securities, at fair value, respectively.

As of December 31, 2021 and 2020, our investment portfolio totaled $82.0 billion and $97.9 billion, respectively, consisting of:

$54.4 billion and $66.4 billion investment securities, at fair value, respectively;

$27.1 billion and $31.5 billion net TBA securities, at fair value, respectively;

and $0.4 billion and zero forward settling non-Agency securities, at fair value, respectively.

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

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Non-Agency RMBS 2

763 767 2.85 % 1 % 178 188 4.28 % — %

CMBS 505 514 3.60 % 1 % 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-K.

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 December 31, 2020 and 2019, our TBA positions had a net carrying value of $275 million and $25 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 December 31, 2020 and 2019, the weighted average yield on our investment securities (excluding TBA securities) was 2.33% and 3.07%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBAs, as of December 31, 2020 and 2019 (dollars in millions):

Includes $0.4 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 December 31, 2021 and 2020, our TBA position and forward settling securities had a net carrying value of $(44) 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 December 31, 2021 and 2020, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 2.43% and 2.33%, respectively.

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

December 31, 2021

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3.5% 226 230 246 81% 101.6% 4.05% 2.93% 89 18%

≥ 4.0% 296 307 327 96% 103.6% 4.73% 3.05% 48 20%

Total 20-year:

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

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of December 31, 2020 and 2019, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-K.

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of December 31, 2021 and 2020, please refer to Note 3 of our Consolidated Financial Statements included under Item 8 of this Form 10-K.

SUMMARY OF CRITICAL ACCOUNTING ESTIMATES

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Under different conditions, we could report materially different amounts based on such estimates.

For additional information regarding our significant accounting policies please refer to Note 2 to our Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.

For additional information regarding our significant accounting policies please refer to Note 2 of our Consolidated Financial Statements included under Item 8 of this Form 10-K.

Interest Income

The effective yield on our Agency RMBS and non-Agency securities of high credit quality is highly impacted by our estimate of future prepayments.

We accrue interest income based on the outstanding principal amount and contractual terms of these securities, and we amortize or accrete premiums and discounts associated with our purchase of these securities into interest income over their projected lives, taking into account scheduled contractual payments and estimated prepayments, using the interest method.

The weighted average cost basis of our securities as of December 31, 2021 was 103.4% of par value;

therefore, faster actual or projected prepayments than our estimates could significantly reduce the yield on our assets.

therefore, changes in our actual or projected prepayments can significantly alter the effective yield on our assets.

Future prepayment rates are difficult to predict, and we rely on a third-party service provider and our experience and analysis of historical and current market data to arrive at what we believe to be reasonable estimates.

Our third-party service provider estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, mortgage

rates on the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, interest rate volatility and other factors.

We review the prepayment speeds estimated and compare the results to market consensus prepayment speeds, if available.

We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the third-party estimates and, based on our judgment, we may adjust the estimates.

We review our actual and anticipated prepayment experience on at least a quarterly basis, and effective yields are recalculated when differences arise between (i) our previous estimate of future prepayments and (ii) actual prepayments to date and current estimates of future prepayments.

If the actual and estimated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.

Our third-party service

provider estimates prepayment rates over the remaining life of our securities using models that incorporate the forward yield curve, current mortgage rates, mortgage rates on the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, interest rate volatility and other factors.

We review the estimated prepayment rates for reasonableness, giving consideration to historical prepayment rates, current market conditions and other factors we believe are likely to impact the rate of prepayments on our portfolio, and based on our judgment we may adjust the third-party estimates.

We review our actual and anticipated prepayment experience on at least a quarterly basis, and effective yields are recalculated when differences arise between (i) our previous prepayment estimates and (ii) actual prepayments to date and current estimates of future prepayments.

We commonly refer to this adjustment as "catch-up" premium amortization or expense.

The most significant factor impacting prepayment rates on our securities is changes to long-term interest rates.

Prepayment rates generally increase when interest rates fall and decrease when interest rates rise.

However, there are a variety of other factors that may impact the rate of prepayments on our securities.

Consequently, under different conditions, we could report materially different amounts.

Quantitative and Qualitative Disclosures About Market Risk in this Form 10-K includes the estimated change in the weighted average projected CPR of our investments and in the corresponding weighted average yield on our investments should interest rates instantaneously go up or down by 50, 75 and 100 basis points.

At the time we purchase non-Agency securities that are not of high credit quality, we determine an effective interest rate based on our estimate of the timing and amount of cash flows and our cost basis.

On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, timing and amount of estimated credit losses, and other factors.

However, there are a variety of other factors that may impact the rate of prepayments on our securities.

Consequently, our actual experience and future estimates of prepayments could differ materially from our estimates.

At the time we purchase CRT and non-Agency securities that are not of high credit quality, we determine an effective interest rate based on our estimate of the timing and amount of cash flows and our cost basis.

On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments based on input and analysis received from external sources, internal models, our judgment about interest rates, prepayment rates, including collateral call provisions, timing and amount of estimated credit losses, and other factors.

Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.

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Similarly, we believe that the inclusion of periodic interest rate swap settlements in "economic interest expense" is meaningful as interest rate swaps are the primary instrument we use to economically hedge against fluctuations in our borrowing costs and it is more indicative of our total cost of funds than interest expense alone.

In the case of "economic interest income" and "net spread and dollar roll income, excluding 'catch-up' premium amortization," we believe the exclusion of "catch-up" adjustments to premium amortization cost or benefit is meaningful as it excludes the cumulative effect from prior reporting periods due to current changes in future prepayment expectations and, therefore, exclusion of such cost or benefit is more indicative of the current earnings potential of our investment portfolio.

prepayment expectations and, therefore, exclusion of such cost or benefit is more indicative of the current earnings potential of our investment portfolio.

In the case of estimated taxable income, we believe it is meaningful information because it directly relates to the amount of dividends that we are required to distribute to maintain our REIT qualification status.

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Other comprehensive income (loss), net (418) 622 1,040

Comprehensive income (loss) 356 1,728 (469)

Comprehensive income 331 356 1,728

Dividends on preferred stock 100 96 54

Issuance cost of redeemed preferred stock — — 6

Comprehensive income (loss) available (attributable) to common stockholders $ 260 $ 1,668 $ (505)

Comprehensive income available to common stockholders $ 231 $ 260 $ 1,668

Weighted average number of common shares outstanding - basic 528.1 551.6 540.6

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Average investment securities - at cost $ 54,869 $ 72,543 $ 92,207

Net TBA dollar roll position - at par (as of period end) $ 30,364 $ 7,322 $ 7,152

Net TBA dollar roll position - at cost (as of period end) $ 31,204 $ 7,404 $ 7,252

Net TBA dollar roll position - at market value (as of period end) $ 31,479 $ 7,429 $ 7,322

Net TBA dollar roll position - at carrying value (as of period end) 3

Net TBA portfolio - at par (as of period end) 9

$ 27,123 $ 30,364 $ 7,322

Average net TBA portfolio - at cost $ 21,224 $ 9,262 $ 14,697

Net TBA portfolio - at cost (as of period end) 9

$ 27,622 $ 31,204 $ 7,404

Net TBA portfolio - at market value (as of period end) 9

$ 27,578 $ 31,479 $ 7,429

Net TBA portfolio - at carrying value (as of period end) 3,9

$ (44) $ 275 $ 25

Average net TBA dollar roll position - at cost $ 29,851 $ 21,224 $ 9,262

Average total assets - at fair value $ 72,908 $ 88,403 $ 110,112

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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) (collectively "mortgage borrowings") outstanding for the period by the sum of average stockholders' equity adjusted to exclude goodwill for the period.

Leverage excludes U.S.

Treasury repurchase agreements.

"At risk" leverage as of period end is calculated by dividing the sum of mortgage borrowings outstanding and receivable/payable for unsettled investment securities as of period end (at cost) by the sum of total stockholders' equity adjusted to exclude goodwill as of period end.

Tangible net book value "at risk" leverage as of period end is calculated by dividing the sum of mortgage borrowings outstanding and receivable/payable for unsettled investment securities as of period end by the sum of total stockholders' equity adjusted to exclude goodwill as of period end.

Leverage excludes U.S.

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Economic return on tangible common equity represents the sum of the change in tangible net book value per common share and dividends declared per share of common stock during the period over beginning tangible net book value per common share.

Expenses for fiscal year 2018 have been adjusted to exclude $27 million of non-recurring expenses associated with the sale of MTGE Investment Corp., an entity we previously managed, and corresponding termination of MTGE's management agreement.

Excluded amounts include the write-off of our intangible asset associated with our acquisition of the MTGE management agreement and other miscellaneous expenses.

Includes net TBA dollar roll position and, if applicable, forward settling securities.

Economic Interest Income and Asset Yields

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$ 1,730 3.26 % $ 2,601 3.71 % $ 3,443 3.84 %

Net premium amortization

(1,082) (1.62) % (601) (0.76) % (331) (0.68) %

Net premium amortization benefit (cost) (369) (0.78) % (1,082) (1.62) % (601) (0.76) %

Interest income (GAAP measure) 1,361 2.48 % 1,519 2.09 % 2,842 3.08 %

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Weighted average projected CPR for the remaining life of investment securities held as of period end 10.9 % 17.6 % 10.8 %

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

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

3.27 % 2.87 % 3.86 %

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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 principal elements impacting our economic interest income are the size of our average investment portfolio and the yield on our securities.

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for fiscal years 2021 and 2020 compared to the prior year period (in millions):

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (911) $ (211) $ (700)

Our average investment portfolio, inclusive of TBAs (at cost), decreased 8% for fiscal year 2020 and increased 30% for fiscal year 2019, compared to the prior year periods, largely due to shifts in our targeted operating leverage and changes to our

total stockholders equity outstanding as a result of new equity issuances, a preferred stock redemption and common stock repurchases.

(See Note 9 of our Consolidated Financial Statements in this Form 10-K for additional information regarding our equity capital markets transactions).

The decrease in our average investment portfolio for fiscal year 2020 was in particular impacted by the decline in our tangible net stockholders' equity in the first quarter due to the COVID-19 financial crisis and our decision to operate with somewhat lower leverage for the balance of the year as compared to 2019.

The decrease in our average asset yield for fiscal year 2020 was due to changes in asset composition and faster actual and projected CPRs resulting from historically low mortgage rates resulting from the Fed's unprecedented monetary stimulus measures.

The moderate increase in our asset yield during 2019 was due to changes in asset composition and somewhat slower CPR projections.

Our primary measure of leverage is our tangible net book value "at risk" leverage ratio, which is measured as the sum of our repurchase agreements and other debt used to fund our investment securities and net TBA position (at cost) (together referred to as "mortgage borrowings") and our net receivable/payable for unsettled investment securities, divided by our total stockholders' equity adjusted to exclude goodwill and other intangible assets.

Our average investment portfolio, inclusive of TBAs (at cost), decreased 10% and 8% for fiscal years 2021 and 2020, respectively, primarily due to reductions in our targeted operating leverage.

The decrease in the average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization, of 38 and 70 basis points for fiscal years 2021 and 2020, respectively, was largely the result of 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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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.

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.

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 fiscal years 2020, 2019 and 2018 (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):

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for fiscal years 2021, 2020 and 2019 (dollars in millions), which includes the combination of interest expense on Agency repurchase agreements and other debt (GAAP measure), implied financing cost (benefit) of our TBA securities and interest rate swap periodic cost:

Fiscal Year 2021 Fiscal Year 2020 Fiscal Year 2019

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(128) (0.42) % (60) (0.27) % 212 2.26 %

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

614 0.67 % 2,361 2.44 % 1,446 2.06 %

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

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

(53) (0.06) % 614 0.67 % 2,361 2.44 %

Total economic interest expense (non-GAAP measure)

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

60 0.07 % 48 0.05 % (402) (0.42) %

Total economic interest expense (benefit) (non-GAAP measure) $ 7 0.01 % $ 662 0.72 % $ 1,959 2.02 %

________________________________

Amounts exclude interest rate swap termination fees and variation margin settlements paid or received, repurchase agreement termination fees, forward starting swaps and the impact of other supplemental hedges, such as swaptions and U.S.

Amounts exclude interest rate swap termination fees and variation margin settlements paid or received, forward starting swaps and the impact of other supplemental hedges, such as swaptions and U.S.

Treasury positions.

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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.

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.

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 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 fiscal years 2021 and 2020 compared to the prior year period (in millions):

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Repurchase agreements and other debt interest expense $ (599) $ (189) $ (410)

TBA dollar roll income - implied interest expense (272) 274 (546)

Interest rate swap periodic interest income/cost 450 87 363

Total change in economic interest expense $ (1,297) $ (54) $ (1,243)

TBA dollar roll income - implied interest benefit/expense (68) (24) (44)

Interest rate swap periodic cost 12 (1) 13

Total change in economic interest benefit/expense $ (655) $ (214) $ (441)

Due to Change in Average

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Repurchase agreements and other debt interest expense $ (1,475) $ (415) $ (1,060)

TBA dollar roll income - implied interest expense (61) (101) 40

Interest rate swap periodic interest income/cost (251) (73) (178)

Total change in economic interest expense $ 664 $ 467 $ 197

Our average mortgage borrowings, inclusive of TBAs, decreased 5% and increased 36% for fiscal years 2020 and 2019, respectively, largely due to shifts in our targeted operating leverage and changes to our total stockholders equity outstanding due to equity capital markets transactions.

The decline in our average interest rate (actual and implied) on our mortgage borrowings during fiscal year 2020 was largely due to a decline in the Fed Funds target rate to the zero bound range early in the COVID-19 financial crisis, compared to moderate increases in the Fed Funds rate in the prior two year periods.

TBA implied funding rates particularly benefited from a significant volume of new Agency RMBS issuance and the Fed's purchases of Agency RMBS through the TBA market.

Additionally, during fiscal year 2020, we terminated $3.7 billion of longer-dated repurchase agreements and replaced them with shorter duration repurchase agreements at lower prevailing market rates.

We recognized losses on debt extinguishment totaling $146 million in other gain (loss) during the period associated with the terminated agreements, which is excluded from economic interest expense in the tables above.

We did not terminate any repurchase agreements during fiscal years 2019 or 2018.

The increase in our interest rate swap periodic cost for fiscal year 2020 was largely due to a decline in the average floating rate received, 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 and a decline in our average swap balance outstanding.

The decrease in our interest rate swap cost during fiscal year 2019, was largely due to the combination of an increase in the average floating rate received and a decrease in the average fixed-rate paid on our interest rate swaps.

During fiscal years 2020 and 2019, we also adjusted the duration and

composition of our interest rates swaps, taking advantage of favorable repricing events in the interest rate swap markets, benefiting our interest rate swap cost.

For additional details regarding our interest rate swaps as of December 31, 2020 and 2019, please refer to Note 5 of our Consolidated Financial Statements in this Form 10-K.

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 fiscal years 2020, 2019 and 2018 (dollars in millions):

TBA dollar roll income - implied interest benefit/expense (272) 274 (546)

Interest rate swap periodic cost 450 87 363

Total change in economic interest benefit/expense $ (1,297) $ (54) $ (1,243)

Our average mortgage borrowings, inclusive of TBAs, decreased 12% and 5% for fiscal years 2021 and 2020, respectively, due to reductions in our targeted operating leverage.

The decline in the average interest rate on our mortgage borrowings for fiscal years 2021 and 2020 of 73 and 177 basis points, respectively, was due to the combination of lower short-term interest rates and favorable funding opportunities in the TBA dollar roll market.

The change in our interest rate swap periodic cost for fiscal years 2021 and 2020 was a function of our average swap balance outstanding and the average fixed rate paid / floating rate received on our interest rate swaps.

The following is a summary of our average interest rate swaps outstanding and the related average swap pay and receive rates for fiscal years 2021, 2020 and 2019 (dollars in millions).

Amounts exclude forward starting swaps not yet in effect.

Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2021 2020 2019

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$ 49,923 $ 69,370 $ 86,231

Average net TBA portfolio outstanding - at cost

$ 21,224 $ 9,262 $ 14,697

Average net TBA dollar roll position outstanding - at cost $ 29,851 $ 21,224 $ 9,262

Average mortgage borrowings outstanding

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Interest rate swap periodic cost (income), net 1

(60) (48) 402

Other interest and dividend income 1

Adjusted net interest and dollar roll income 1,882 1,225 1,203

Other operating income (expense)

Operating expense (88) (93) (83)

Less non-recurring write-off of intangible asset and other expenses associated with termination of management agreement — — 27

Management fee income — — 54

Less non-recurring management agreement termination fee income — — (42)

Adjusted other operating income (expense), net (93) (83) (61)

Net spread and dollar roll income 1,794 1,132 1,120

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2021 2020 2019

Interest rate swap periodic income (cost), net $ (48) $ 402 $ 151

Realized gain (loss) on derivative instruments and other securities, net:

TBA securities - dollar roll income, net

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

822 362 (592)

TBA securities, dollar roll income $ 656 $ 425 $ 94

TBA securities, mark-to-market gain/(loss) (1,208) 1,072 317

Forward settling non-Agency securities, mark-to-market gain/(loss) 5 — —

Interest rate swaps, periodic cost/(income) (60) (48) 402

Interest rate swaps, mark-to-market gain/(loss) 1,177 (2,718) (2,047)

Payer swaptions 23 (156) (26)

Treasury securities - long position

Treasury securities - short position 444 (905) (967)

(760) (885) 125

Treasury futures - short position

(90) (166) 112

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

(2,698) (1,932) (44)

Losses on debt extinguishment

Total realized gain (loss) on derivative instruments and other securities, net (2,402) (2,550) (97)

Unrealized gain (loss) on derivative instruments and other securities, net:

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

Interest rate swaps

(20) (115) 33

Payer swaptions

Treasury securities - long position (25) 102 11

Treasury securities - short position

(145) (82) (286)

Treasury futures - short position

Total unrealized gain (loss) on derivative instruments and other securities, net (13) (176) (221)

Treasury futures contracts - short position 42 (106) (109)

Other 56 (129) 1

Total gain (loss) on derivative instruments and other securities, net $ 1,110 $ (2,463) $ (2,324)

For further details regarding our use of derivative instruments and related activity refer to Notes 2 and 5 of our Consolidated Financial Statements in this Form 10-K.

Estimated Taxable Income

For the fiscal years 2020, 2019 and 2018, we had estimated taxable income available to common stockholders of $745 million, $620 million and $490 million, or $1.35, $1.15 and $1.11 per diluted common share, respectively.

Estimated Taxable Income (Loss)

For the fiscal years 2021, 2020 and 2019, we had estimated taxable income (loss) available (attributable) to common stockholders of $(488) million, $745 million and $620 million, respectively, or $(0.92), $1.35 and $1.15 per diluted common share, respectively.

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

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Net income/(loss) $ 749 $ (266) $ 688

Estimated book to tax differences:

Book to tax differences:

Premium amortization, net (300) 292 91

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Total book to tax differences (1,237) 1,107 (14)

1,107 (14) 397

Estimated REIT taxable income 841 674 526

Dividends on preferred stock 96 54 36

Estimated REIT taxable income available to common stockholders $ 745 $ 620 $ 490

Weighted average number of common shares outstanding - basic 551.6 540.6 441.1

Weighted average number of common shares outstanding - diluted 552.7 541.4 441.4

Estimated REIT taxable income per common share - basic $ 1.35 $ 1.15 $ 1.11

Estimated REIT taxable income per common share - diluted $ 1.35 $ 1.15 $ 1.11

Beginning cumulative non-deductible net capital loss $ 394 $ 182 $ 357

REIT taxable income (loss) (488) 841 674

REIT taxable income attributed to preferred stock — 96 54

REIT taxable income (loss), attributed to common stock $ (488) $ 745 $ 620

Weighted average common shares outstanding - basic 528.1 551.6 540.6

Weighted average common shares outstanding - diluted 528.1 552.7 541.4

REIT taxable income (loss) per common share - basic $ (0.92) $ 1.35 $ 1.15

REIT taxable income (loss) per common share - diluted $ (0.92) $ 1.35 $ 1.15

Beginning net capital loss carryforward $ — $ 394 $ 182

Increase (decrease) in net capital loss carryforward — (394) 212

Ending cumulative non-deductible net capital loss $ — $ 394 $ 182

Ending cumulative non-deductible net capital loss per common share $ — $ 0.73 $ 0.34

As of December 31, 2020, 2019 and 2018, we had distributed all our estimated taxable income for fiscal years 2020, 2019 and 2018, respectively.

Accordingly, we do not expect to incur an income tax or excise tax liability on our 2020 taxable income, nor did we incur such liabilities on our 2019 and 2018 taxable income.

Ending net capital loss carryforward $ — $ — $ 394

Ending net capital loss carryforward per common share $ — $ — $ 0.73

Given our taxable loss for fiscal year 2021, we do not expect to incur a tax liability for this period.

We also did not incur income or excise tax liabilities for fiscal years 2020 or 2019 as we distributed all of our taxable income for these periods within the time limits prescribed by the Internal Revenue Code.

Please refer to Note 9 to our Consolidated Financial Statements included in this Form 10-K for a summary of dividends declared on our common and preferred stock during fiscal years 2021, 2020 and 2019.

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We may also conduct asset sales, change our asset or funding mix, issue equity or undertake other capital enhancing actions to maintain adequate levels of liquidity and capital resources.

We believe that we have sufficient liquidity and capital resources available to meet our obligations and execute our business strategy.

There are various risks and uncertainties that can impact our liquidity, such as those described in Item 1A.

Risk Factors and Item 7A.

Quantitative and Qualitative Disclosures of Market Risks sections of this Form 10-K.

In assessing our liquidity, we consider a number of factors, including our current leverage, collateral levels, access to capital markets, overall market conditions, and the sensitivity of our tangible net book value over a range of scenarios.

However, these and other factors impacting our liquidity are subject to numerous risks and uncertainties, including as described in the Quantitative and Qualitative Disclosures of Market Risks and Risk Factors sections of this Form 10-K.

We believe that we have sufficient liquidity and capital resources available to meet our obligations and execute our business strategy.

Leverage and Financing Sources

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Total debt 47,037 63 % 52,543 63 %

Net TBA position, at cost 31,204 37 % 7,404 8 %

TBA and forward settling non-Agency securities, at cost 27,622 37 % 31,204 37 %

Total mortgage borrowings $ 74,659 100 % $ 83,747 100 %

________________________________

Amount excludes $97 million of repurchase agreements used to fund purchases of U.S.

Treasury securities as of December 31, 2019.

As of December 31, 2020 and 2019, 46% and 38%, respectively, of our repurchase agreement funding was through the GCF Repo service.

As of December 31, 2021 and 2020, 42% and 46%, respectively, of our repurchase agreements were funded through the Fixed Income Clearing Corporation's GCF Repo service.

Amounts exclude U.S.

Treasury repurchase agreements.

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

As of December 31, 2020, 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 December 31, 2021, our portfolio largely consisted of lower coupon 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 fiscal year 2020, haircuts on Agency RMBS collateral remained stable.

Haircuts and funding levels for our less liquid, credit-oriented securities were adversely impacted by the dislocation in the financial markets in the first quarter, but subsequently rebounded to levels consistent with historical norms.

As of December 31, 2020, the weighted average haircut on our repurchase agreements was approximately 4.6% of the value of our collateral, largely unchanged from December 31, 2019.

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.

During fiscal year 2021, haircuts remained stable.

As of December 31, 2021, the weighted average haircut on our repurchase agreements was approximately 3.8% of the value of our collateral, compared to 4.6% as of December 31, 2020.

To mitigate the risk of 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 December 31, 2021, our unencumbered assets totaled 67% 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 December 31, 2020, we had cash and unencumbered Agency RMBS totaling $5.4 billion, which excludes unencumbered CRT securities, non-Agency securities and assets held at Bethesda Securities.

As of December 31, 2021, we had cash and unencumbered Agency RMBS and U.S.

Treasury securities totaling $4.9 billion, or 50% of our tangible equity, which excludes unencumbered CRT and non-Agency securities and assets held at Bethesda Securities, compared to $5.4 billion and 51%, respectively, as of December 31, 2020.

Counterparty Risk

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We also diversify our funding across multiple counterparties and by region.

As of December 31, 2020, our maximum amount at risk (or the excess value of collateral pledged over our repurchase liabilities) with any of our repurchase agreement counterparties, excluding the FICC, was less than 2% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing less than 6% of our tangible stockholders' equity.

As of December 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 approximately 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 December 31, 2021, approximately 7% of our tangible stockholder's equity was at risk with the FICC.

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The vitality of these markets enables us to sell assets under most market conditions to generate liquidity through direct sales or delivery into TBA contracts, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA").

Under certain market conditions, however, we may be unable to realize the full "pay-up" value of our specified pool securities, or premium relative to generic Agency RMBS.

We attempt to manage this risk by maintaining a minimum level of securities that trade at or near TBA values that in our estimation enhances our portfolio liquidity across a wide range of market conditions.

Under certain market conditions, however, we may be unable to realize the full "pay-up" value of our specified pool securities, or the incremental value in excess of equivalent coupon generic Agency RMBS.

We attempt to manage this risk by maintaining at least a minimum level of securities that trade at or near TBA values that in our estimation enhances our portfolio liquidity across a wide range of market conditions.

Capital Markets

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Furthermore, when the trading price of our common stock is less than our estimate of our current tangible net book value per common share, among other conditions, we may repurchase shares of our common stock.

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

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2020, we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Additionally, as of December 31, 2020, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

AGGREGATE CONTRACTUAL OBLIGATIONS

The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase agreements and related interest expense (in millions):

2021 2022 2023 2024 2025 Total

Repurchase agreements $ 52,366 $ — $ — $ — $ — $ 52,366

Interest expense 1

19 — — — — 19

Total $ 52,385 $ — $ — $ — $ — $ 52,385

________________________________

Interest expense is calculated based on the weighted average interest rates on our repurchase agreements as of December 31, 2020.

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

FORWARD-LOOKING STATEMENTS

The statements contained in this Annual Report that are not historical facts, including estimates, projections, beliefs, expectations concerning conditions, events, or the outlook for our business, strategy, performance, operations or the markets or industries in which we operate, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,”

“intend,” “outlook,” “potential,” “forecast,” “estimate,” “will,” “could,” “should,” “likely” and other similar, correlative or comparable words and expressions.

Forward-looking statements are typically identified by words such as “believe,” “plan,” “expect,” “anticipate,” “see,” “intend,” “outlook,” “potential,” “forecast,” “estimate,” “will,” “could,” “should,” “likely” and other similar, correlative or comparable words and expressions.

Forward looking statements are based on management’s assumptions, projections and beliefs as of the date of this Annual Report, but they involve a number of risks and uncertainties.

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Factors that could cause actual results to vary from our forward-looking statements include, but are not limited to, the following:

• the impact of the COVID-19 pandemic and of measures taken in response to the COVID-19 pandemic by various governmental authorities, businesses and other third parties;

• actions by the federal, state, or local governments to stabilize the economy, the housing sector or financial markets;

• changes in U.S.

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

monetary policy or interest rates, including actions taken by the Fed to normalize monetary policy, to reduce its purchases of Agency RMBS and to address the size of its U.S.

Treasury and Agency RMBS bond portfolio;

• fluctuations in the yield curve;

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• conditions in the market for Agency RMBS and other mortgage securities;

• the impact of the COVID-19 pandemic and of measures taken in response to the COVID-19 pandemic by various governmental authorities, businesses and other third parties;

• actions by the federal, state, or local governments to stabilize the economy, the housing sector or financial markets;

• legislative or regulatory changes that affect our status as a REIT, our exemption from the Investment Company Act of 1940 or the mortgage markets in which we participate;

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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 7. Management’s Discussion and Analysis