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Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-09 · 169 added, 121 removed, 516 unchanged (36% of the section changed)

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

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended March 31, 2022.

Our MD&A is presented in the following sections:

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We are internally managed with the principal objective of providing our stockholders with favorable long-term returns on a risk-adjusted basis through attractive monthly dividends.

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.

our investments primarily through collateralized borrowings structured as repurchase agreements.

We generate income from the interest earned on our investments, net

of associated borrowing and hedging costs, and net realized gains and losses on our investment and hedging activities.

We fund our investments primarily through collateralized borrowings structured as repurchase agreements.

We operate in a manner to qualify to be taxed as a REIT under the Internal Revenue Code.

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Trends and Recent Market Impacts

The investment environment was very challenging in the first quarter as the market faced elevated geopolitical risk, growing inflation concerns, and the expectation of significantly tighter monetary policy.

Against this backdrop, interest rates repriced materially higher, the yield curve flattened, and fixed income spreads to benchmark interest rates widened.

These conditions led to a “risk-off” sentiment that pressured equity markets and caused unprecedented price declines across fixed income markets as evidenced by the Bloomberg Aggregate Bond Index, the broadest fixed income market measure, posting its worst quarterly performance in more than 40 years.

Major monetary policy transitions are difficult for fixed income markets broadly and the Agency MBS market specifically, given its unique role in monetary policy and the overall economy.

The Federal Reserve (the “Fed”) indicated at its March meeting that the portfolio runoff plan will include an Agency RMBS cap of $35 billion per month and provided greater clarity at its May meeting that the runoff will begin on June 1, 2022 with an initial cap of $17.5 billion per month for the first three months before increasing to the previously announced $35 billion per month level.

This guidance was largely in line with investor expectations.

Concerns associated with the Fed’s balance sheet normalization drove Agency RMBS spreads significantly wider during the first quarter relative to interest rate swap and U.S.

Financial markets have been under significant pressure since the start of the year as a result of the Federal Reserve’s intent to pursue a more aggressive path of monetary policy tightening.

Elevated inflation and the expectation of materially higher short-term rates increased the probability of a recession and drove significant interest rate volatility.

This challenging monetary policy and macro-economic environment led to broad-based financial market weakness.

As a result, the S&P 500 Index posted its worst first-half year performance in over 50 years, while the Bloomberg Aggregate Bond Index, representing more than $25 trillion in bonds, also experienced its deepest decline on record.

Agency RMBS performed largely in line with the broader fixed income market.

Concerns associated with the Federal Reserve’s balance sheet normalization drove Agency RMBS spreads significantly wider relative to interest rate swap and U.S.

Treasury hedges.

This mortgage spread widening was, in turn, the primary driver of AGNC’s 14.4% economic loss on tangible net asset value per common share for the quarter, which consisted of a 16.7% decline of our tangible net book value to $13.12 per common share as of March 31, 2022 and dividends declared during the quarter of $0.36 per common share.

As a result of the significant repricing of Agency RMBS over the past several quarters, we believe that risk-adjusted returns on many segments of the Agency RMBS market are now attractive on both an absolute and relative basis.

However, we expect markets to remain volatile over the near-term as a result of the uncertain and rapidly shifting economic backdrop.

Although Agency RMBS could experience additional valuation declines over the near-term, which may negatively impact our tangible net book value per share of common stock, we would likely view such declines as a favorable buying opportunity in light of the enhanced projected returns on new investments.

Our at-risk leverage remained below our historical operating levels during the first quarter as we continued to maintain a defensive position.

As of the end of the first quarter, our leverage was 7.5x tangible equity, slightly lower than 7.7x as of the end of the end of the fourth quarter.

Given the elevated interest rate volatility and ongoing uncertainty around quantitative tightening measures, we took additional actions to reduce our aggregate risk profile during the quarter by reducing our asset position, shifting our Agency RMBS portfolio toward higher coupon securities, and increasing our interest rate hedge position relative to our funding liabilities.

As of March 31, 2022, our interest rate hedges totaled 121% of the outstanding balance of our Agency repurchase agreements, net TBA position and other debt, compared to 101% as of December 31, 2021.

As of March 31, 2022, 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 0.3 years, up slightly from 0.1 years as of December 31, 2021.

Our unencumbered cash and Agency RMBS position, which excludes both unencumbered credit assets and assets held at our captive broker-dealer subsidiary, was $3.5 billion as of March 31, 2022, compared to $4.9 billion as of December 31, 2021.

Consistent with higher interest rates, the average projected life CPR on our portfolio decreased to 7.9% as of March 31, 2022, from 10.9% as of the end of the prior quarter.

Actual CPRs on our portfolio also continued to trend lower, averaging 14.5% for the first quarter.

Our net interest spread for the quarter increased to 219 basis points, from 215 basis points for the fourth quarter, as the improvement in asset yields due to declining prepayment speeds, portfolio repositioning, and very strong TBA dollar roll performance more than offset a modest increase in our cost of funds.

Thus, despite a smaller asset base, our net spread and dollar roll income, excluding “catch-up” premium amortization due to changes in CPR projections, remained relatively stable at $0.72 per share of common stock (a non-GAAP measure), compared to $0.75 for the prior quarter.

While we anticipate that TBA dollar roll performance will moderate over time to levels more consistent with historical averages, our interest rate swap position should provide considerable protection for our cost of funds against the significant increase in short-term rates that is expected to occur over the remainder of the year.

Although the underperformance of Agency RMBS has negatively impacted our tangible net book value in the short-run, higher rates and wider spreads have significantly improved our investment outlook on both our existing portfolio and new Agency RMBS investments.

We believe we are well-positioned to take advantage of favorable investment opportunities as market conditions stabilize, which should improve the long-term earnings profile of our investment portfolio.

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, please refer to Results of Operations included in this MD&A below.

This mortgage spread widening was the primary driver of AGNC’s economic loss on tangible net book value per common share of -10.1% for the second quarter and -22.9% for the first half of the year, which consists of dividends declared per common share and the decline in our tangible net book value.

As a result of these challenging market conditions, we maintained a defensive position during the first half of the year.

AGNC’s at-risk leverage has remained below our historical operating levels, ending the second quarter at 7.4x tangible stockholders’ equity, down from 7.7x as of December 31, 2021.

We also operated with very low interest rate exposure, as evidenced by our significant hedge ratio, which totaled 126% of the outstanding balance of our Agency repurchase agreements, net TBA position and other debt as of June 30, 2022, an increase from 101% as of December 31, 2021.

Thus, as of June 30, 2022, 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 0.4 years, compared to 0.1 years as of December 31, 2021, despite materially higher benchmark interest rates.

As of June 30, 2022, our unencumbered assets totaled $4.4 billion, or 58% of tangible equity, consisting of $3.9 billion of unencumbered cash and Agency RMBS and $0.5 billion of unencumbered credit assets.

This compares to unencumbered assets of $6.5 billion, or 67% of tangible equity, as of December 31, 2021, consisting of $5.8 billion of unencumbered cash and Agency RMBS and $0.7 billion of unencumbered credit assets.

The decline in our unencumbered assets both on an absolute basis and as a percentage of our tangible equity reflects the additional initial margin cost of maintaining our elevated interest rate hedge position and the material repricing of Agency RMBS assets.

Despite our defensive positioning, our annualized net interest spread and TBA dollar roll income, excluding "catch-up" premium amortization, increased to 2.70% for the second quarter, from 2.19% for the first quarter, averaging 2.43% for the first half of the year.

Thus, although we operated with a smaller asset base, net spread and dollar roll income per diluted common share, excluding "catch-up" premium amortization, increased to $0.83 for the second quarter, from $0.72 for the first quarter.

This improvement was largely due to exceptionally strong TBA dollar roll performance, higher asset yields as we shifted the portfolio up in coupon and stable funding costs, net of our interest rate hedges.

Although dollar roll performance has moderated following the end of the second quarter, our net spread and dollar roll income should continue to be well protected against the effects of higher short-term interest rates as a result of our significant hedge portfolio.

Looking ahead, the longer-term outlook for Agency RMBS has improved substantially.

Although spreads could widen further and volatility may persist over the near-term, positive developments in the supply and demand outlook for Agency RMBS suggest that this period of weakness in the Agency RMBS market may be nearing its end.

Although the Federal Reserve has begun to reduce its portfolio organically, this runoff is expected to occur at a slower pace than previously anticipated as a result of higher mortgage rates and reduced prepayments.

Lower net supply expectations combined with the stock effect of the Federal Reserve holding a significant portion of the outstanding Agency RMBS market should provide a supportive backdrop for Agency RMBS.

At current valuation levels, Agency RMBS appear extremely attractive on an absolute and relative basis.

As volatility stabilizes, we believe AGNC is well-positioned to increase leverage to take advantage of this stronger risk-adjusted return environment.

For information regarding non-GAAP financial measures, including reconciliations to the most comparable GAAP measure 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 3.

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Market Information

The following table summarizes interest rates and prices of generic fixed rate Agency RMBS as of each date presented below:

The following table summarizes benchmark interest rates and prices of generic fixed rate Agency RMBS as of each date presented below:

Interest Rate/Security Price 1

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31, 2021 Mar.

31, 2022 Mar.

31, 2022 June 30, 2022 June 30, 2022

June 30, 2022

Target Federal Funds Rate:

Target Federal Funds Rate - Upper Band

0.25% 0.25% 0.25% 0.25% 0.50% +25 bps

SOFR Rate 0.01% 0.05% 0.05% 0.05% 0.29% +24 bps

0.25% 0.25% 0.25% 0.50% 1.75% +125 bps +150 bps

SOFR Rate 0.05% 0.05% 0.05% 0.29% 1.50% +121 bps +145 bps

SOFR Interest Rate Swap Rate:

0.12% 0.19% 0.24% 0.74% 2.28% +154 bps

0.82% 0.75% 0.83% 1.12% 2.25% +113 bps

1.52% 1.19% 1.26% 1.32% 2.13% +81 bps

1.92% 1.50% 1.52% 1.46% 1.97% +51 bps

0.19% 0.24% 0.74% 2.28% 2.99% +71 bps +225 bps

0.75% 0.83% 1.12% 2.25% 2.79% +54 bps +167 bps

1.19% 1.26% 1.32% 2.13% 2.81% +68 bps +149 bps

1.50% 1.52% 1.46% 1.97% 2.66% +69 bps +120 bps

Treasury Security Rate:

0.16% 0.25% 0.28% 0.73% 2.34% +161 bps

0.94% 0.89% 0.97% 1.26% 2.46% +120 bps

1.74% 1.47% 1.49% 1.51% 2.34% +83 bps

2.41% 2.09% 2.05% 1.90% 2.45% +55 bps

0.25% 0.28% 0.73% 2.34% 2.96% +62 bps +223 bps

0.89% 0.97% 1.26% 2.46% 3.04% +58 bps +178 bps

1.47% 1.49% 1.51% 2.34% 3.02% +68 bps +151 bps

2.09% 2.05% 1.90% 2.45% 3.19% +74 bps +129 bps

30-Year Fixed Rate Agency Price:

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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 Mar.

31, 2021 June 30, 2021 Sept.

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

Mortgage Rate/Credit Spread June 30, 2021 Sept.

30, 2021 Dec.

31, 2021 Mar.

31, 2022 Mar.

31, 2022 June 30, 2022 June 30, 2022

June 30, 2022

Mortgage Rate:

30-Year Mortgage Rate 3.27% 3.13% 3.18% 3.27% 4.90% +163 bps

30-Year Agency Current Coupon 2.04% 1.83% 1.97% 2.07% 3.49% +142 bps

30-Year Primary to Secondary Spread 1.23% 1.30% 1.21% 1.20% 1.41% +21 bps

30-Year Agency Current Coupon Yield to 5-Year U.S.

Treasury Spread 94 100 81 103 134 +31 +53

30-Year Agency Current Coupon Yield 1.83% 1.97% 2.07% 3.49% 4.38% +89 bps +231 bps

30-Year Mortgage Rate 3.13% 3.18% 3.27% 4.90% 5.83% +93 bps +256 bps

Credit Spread (in bps):

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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.

30-Year Current Coupon Yield represents yield on new production Agency RMBS.

30-Year Current Coupon Yield and 30-Year Mortgage Rate are sourced from Bloomberg.

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

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FINANCIAL CONDITION

As of March 31, 2022 and December 31, 2021, our investment portfolio totaled $68.6 billion and $82.0 billion, respectively, consisting of:

As of June 30, 2022 and December 31, 2021, our investment portfolio totaled $61.3 billion and $82.0 billion, respectively, consisting of:

$45.4 billion and $54.4 billion investment securities, at fair value, respectively;

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and, as of December 31, 2021, $0.4 billion forward settling non-Agency securities, at fair value.

The following table is a summary of our investment portfolio as of March 31, 2022 and December 31, 2021 (dollars in millions):

March 31, 2022 December 31, 2021

The following table is a summary of our investment portfolio as of June 30, 2022 and December 31, 2021 (dollars in millions):

June 30, 2022 December 31, 2021

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

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TBA and forward settling securities are recorded as derivative instruments in our accompanying consolidated financial statements, and our TBA dollar roll transactions represent a form of off-balance sheet financing.

As of March 31, 2022 and December 31, 2021, our TBA position and forward settling securities had a net carrying value of $(609) million and $(44) million, respectively, reported in derivative assets/(liabilities) on our accompanying consolidated balance sheets.

As of June 30, 2022 and December 31, 2021, our TBA position and forward settling securities had a net carrying value of $(108) million and $(44) 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 March 31, 2022 and December 31, 2021, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 2.56% and 2.43%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBA securities, as of March 31, 2022 and December 31, 2021 (dollars in millions):

March 31, 2022

As of June 30, 2022 and December 31, 2021, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 2.85% and 2.43%, respectively.

The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBA securities, as of June 30, 2022 and December 31, 2021 (dollars in millions):

June 30, 2022

Includes Net TBA Position Excludes Net TBA Position

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Specified pools include pools backed by lower balance loans with original loan balances of up to $200K, HARP pools (defined as pools that were issued between May 2009 and December 2018 and backed by 100% refinance loans with original LTVs ≥ 80%), and pools backed by loans 100% originated in New York and Puerto Rico.

As of March 31, 2022, lower balance specified pools had a weighted average original loan balance of $122,000 and $122,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 128% and 138% for 15-year and 30-year securities, respectively.

As of June 30, 2022, lower balance specified pools had a weighted average original loan balance of $123,000 and $129,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 128% and 138% for 15-year and 30-year securities, respectively.

WAC represents the weighted average coupon of the underlying collateral.

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of March 31, 2022.

Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of June 30, 2022.

December 31, 2021

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

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of March 31, 2022 and December 31, 2021, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-Q.

For additional details regarding our CRT and non-Agency securities, including credit ratings, as of June 30, 2022 and December 31, 2021, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-Q.

RESULTS OF OPERATIONS

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The following selected financial data is derived from our interim consolidated financial statements and the notes thereto.

The tables below present our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 and condensed consolidated statements of comprehensive income and key statistics for the three months ended March 31, 2022 and 2021 (in millions, except per share amounts):

The tables below present our condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021 and condensed consolidated statements of comprehensive income and key statistics for the three and six months ended June 30, 2022 and 2021 (in millions, except per share amounts):

Balance Sheet Data 2022

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Three Months Ended

Six Months Ended

Statement of Comprehensive Income Data (Unaudited)

2022 2021 2022 2021

Interest income $ 395 $ 249 $ 870 $ 806

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Three Months Ended

Six Months Ended

Other Data (Unaudited) * 2022 2021 2022 2021

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Average tangible net book value "at risk" leverage 5

7.8:1 7.6:1 7.8:1 7.8:1

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

7.4:1 7.9:1 7.4:1 7.9:1

Economic return on tangible common equity - unannualized 7

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Economic Interest Income and Asset Yields

The following table summarizes our economic interest income (a non-GAAP measure) for the three months ended March 31, 2022 and 2021, which includes the combination of interest income (a GAAP measure) on our holdings reported as investment securities on our consolidated balance sheets, adjusted to exclude estimated "catch-up" premium amortization adjustments for the cumulative effect from prior reporting periods due to changes in our CPR forecast, and implied interest income on our TBA securities (dollars in millions):

Three Months Ended March 31,

Amount Yield Amount Yield

The following table summarizes our economic interest income (a non-GAAP measure) for the three and six months ended June 30, 2022 and 2021, which includes the combination of interest income (a GAAP measure) on our holdings reported as investment securities on our consolidated balance sheets, adjusted to exclude estimated "catch-up" premium amortization adjustments for the cumulative effect from prior reporting periods due to changes in our CPR forecast, and implied interest income on our TBA securities (dollars in millions):

Three Months Ended June 30,

Six Months Ended June 30,

2022 2021 2022 2021

Amount Yield Amount Yield Amount Yield Amount Yield

Interest income:

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3.02 % 1.47 % 3.02 % 1.47 %

________________________________

Reported in gain (loss) on derivatives instruments and other securities, net in the accompanying consolidated statements of operations.

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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 the three months ended March 31, 2022 compared to the prior year period (in millions):

The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three and six months ended June 30, 2022 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements Impacting Economic Interest Income

Three Months Ended March 31, 2022 vs.

March 31, 2021

Periods ended June 30, 2022 vs.

June 30, 2021

Due to Change in Average

Three months ended:

Total Increase /

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Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 50 $ (69) $ 119

Our average investment portfolio, inclusive of TBAs (at cost), decreased 15% for the three months ended March 31, 2022, compared to the prior year period, primarily due to a decline in stockholders' equity.

The average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization, increased 26 basis points largely due to changes in asset composition and slower CPR projections.

Due to Change in Average

Six months ended:

Total Increase /

(Decrease) Portfolio

Interest Income (GAAP measure) $ 64 $ (81) $ 145

Estimated "catch-up" premium amortization due to change in CPR forecast (83) — (83)

Interest income, excluding "catch-up" premium amortization (19) (81) 62

TBA dollar roll income - implied interest income 48 (71) 119

Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ 29 $ (152) $ 181

Our average investment portfolio, inclusive of TBAs (at cost), decreased 17% and 16% for the three and six months ended June 30, 2022, respectively, compared to the prior year period, due to a decline in stockholders' equity.

The average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization, increased 73 and 49 basis points, respectively, due to changes in asset composition and 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 and forward settling securities position (at cost) (together referred to as "mortgage borrowings") and our net receivable/payable for unsettled investment securities, divided by our total stockholders' equity adjusted to exclude goodwill.

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Amount Ending

June 30, 2022 $ 42,997 $ 44,243 $ 41,406 $ 19,653 $ 16,001 7.8:1 7.4:1

March 31, 2022 $ 46,570 $ 47,940 $ 44,150 $ 23,605 $ 20,152 7.8:1 7.5:1

December 31, 2021 $ 46,999 $ 48,524 $ 47,037 $ 29,014 $ 27,622 7.6:1 7.7:1

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

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

March 31, 2021 $ 54,602 $ 57,153 $ 55,221 $ 32,022 $ 25,355 8.0:1 7.7:1

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Economic Interest Expense and Aggregate Cost of Funds

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three months ended March 31, 2022 and 2021 (dollars in millions), which includes the combination of interest expense on Agency repurchase agreements and other debt (GAAP measure), implied financing cost (benefit) of our TBA securities and interest rate swap periodic cost:

Three Months Ended March 31,

The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three and six months ended June 30, 2022 and 2021 (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 (benefit):

Three Months Ended June 30,

Six Months Ended June 30,

2022 2021 2022 2021

Economic Interest Expense and Aggregate Cost of Funds 1

Amount Cost of Funds Amount Cost of Funds

Amount Cost of Funds Amount Cost of Funds Amount Cost of Funds Amount Cost of Funds

Repurchase agreement and other debt - interest expense (GAAP measure) $ 80 0.74 % $ 17 0.13 % $ 107 0.48 % $ 46 0.17 %

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(2) (0.04) % (23) (0.33) % (31) (0.29) % (61) (0.41) %

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

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

78 0.49 % (6) (0.03) % 76 0.23 % (15) (0.04) %

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(49) (0.31) % 19 0.09 % (31) (0.09) % 31 0.07 %

Total economic interest expense (benefit) (non-GAAP measure) $ 16 0.09 % $ 3 0.02 %

Total economic interest expense (non-GAAP measure) $ 29 0.18 % $ 13 0.06 % $ 45 0.14 % $ 16 0.03 %

________________________________

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

Interest rate swap periodic 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 on our mortgage borrowings and (iii) the average net interest rate paid/received on our interest rate swaps.

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three months ended March 31, 2022 compared to the prior year period (in millions):

The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three and six months ended June 30, 2022 compared to the prior year period (in millions):

Impact of Changes in the Principal Elements of Economic Interest Expense

Three Months Ended March 31, 2022 vs.

March 31, 2021

Periods ended June 30, 2022 vs.

June 30, 2021

Due to Change in Average

Three months ended:

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

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TBA dollar roll income - implied interest benefit/expense 21 7 14

Interest rate swap periodic cost 6 2 4

Interest rate swap periodic income/cost (68) — (68)

Total change in economic interest benefit/expense $ 16 $ 4 $ 12

Our average mortgage borrowings, inclusive of TBAs, decreased 19% for the three months ended March 31, 2022, compared to the prior year period, due to a decline in stockholders' equity and smaller asset base.

The average interest rate on our mortgage borrowings for the three months ended March 31, 2022 was largely unchanged from the prior year period, increasing 3 basis points.

The increase in our interest rate swap periodic cost for the three months ended March 31, 2022 was a function of our average swap balance outstanding and the average fixed rate paid / floating rate received.

The following is a summary of our average interest rate swaps outstanding and the related average swap pay and receive rates for the three months ended March 31, 2022 and 2021 (dollars in millions).

Due to Change in Average

Six months ended:

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

Repurchase agreements and other debt interest expense $ 61 $ (7) $ 68

TBA dollar roll income - implied interest benefit/expense 30 17 13

Interest rate swap periodic income/cost (62) 2 (64)

Total change in economic interest benefit/expense $ 29 $ 12 $ 17

Our average mortgage borrowings, inclusive of TBAs, decreased 22% and 21% for the three and six months ended June 30, 2022, respectively, compared to the prior year period, due to a decline in stockholders' equity and smaller asset base.

The average interest rate on our mortgage borrowings for the three and six months ended June 30, 2022 increased 52 and 27 basis points, respectively, due to higher short-term rates.

The decrease in our interest rate swap periodic cost for the three and six months ended June 30, 2022 was primarily a function of higher receive rates.

The following is a summary of our average interest rate swaps outstanding and the related average swap pay and receive rates for the three and six months ended June 30, 2022 and 2021 (dollars in millions).

Amounts exclude forward starting swaps not yet in effect.

Three Months Ended

Six Months Ended

Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding 2022 2021 2022 2021

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Ratio of average interest rate swaps to mortgage borrowings outstanding

79 % 62 % 77 % 57 %

Average interest rate swap pay-fixed rate (excluding forward starting swaps) 0.27 % 0.18 % 0.25 % 0.17 %

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(0.39) % 0.15 % (0.12) % 0.13 %

For the three months ended March 31, 2022 and 2021, we had an average forward starting swap balance of $0.1 billion and $0.3 billion, respectively.

For the three and six months ended June 30, 2022, we had an average forward starting swap balance of $34 million and $46 million, respectively, and for the three and six months ended June 30, 2021, an average forward starting swap balance of zero and $141 million, respectively.

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

Including forward starting swaps, our average ratio of interest rate swaps outstanding to our average mortgage borrowings for the three months ended March 31, 2022 and 2021 was 75% and 53%, respectively.

Net Interest Spread

The following table presents a summary of our net interest spread (including the impact of TBA dollar roll income, interest rate swaps and excluding "catch-up" premium amortization) for the three months ended March 31, 2022 and 2021:

Three Months Ended

Three Months Ended June 30,

Six Months Ended

Investment and TBA Securities - Net Interest Spread 2022 2021 2022 2021

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Net Spread and Dollar Roll Income

The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three months ended March 31, 2022 and 2021 (dollars in millions):

Three Months Ended

The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three and six months ended June 30, 2022 and 2021 (dollars in millions):

Three Months Ended June 30,

Six Months Ended

2022 2021 2022 2021

Net interest income (GAAP measure) $ 315 $ 232 $ 763 $ 760

TBA dollar roll income, net 1

182 162 334 316

Interest rate swap periodic cost (income), net 1

49 (19) 31 (31)

Adjusted net interest and dollar roll income 546 375 1,128 1,045

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Gain (Loss) on Investment Securities, Net

The following table is a summary of our net gain (loss) on investment securities for the three months ended March 31, 2022 and 2021 (in millions):

Three Months Ended

The following table is a summary of our net gain (loss) on investment securities for the three and six months ended June 30, 2022 and 2021 (in millions):

Three Months Ended June 30,

Six Months Ended

Gain (Loss) on Investment Securities, Net 1

Loss on sale of investment securities, net $ (342) $ (13)

2022 2021 2022 2021

Gain (loss) on sale of investment securities, net $ (946) $ 25 $ (1,288) $ 12

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

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

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three months ended March 31, 2022 and 2021 (in millions):

Three Months Ended

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three and six months ended June 30, 2022 and 2021 (in millions):

Three Months Ended June 30,

Six Months Ended

2022 2021 2022 2021

TBA securities, dollar roll income $ 182 $ 162 $ 334 $ 316

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Interest rate swaps, mark-to-market gain 765 (381) 2,740 755

Credit default swaps - CDX IG - buy protection 21 — 21 —

Payer swaptions 309 (313) 672 74

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Estimated Taxable Income (Loss)

For the three months ended March 31, 2022 and 2021, we had estimated taxable loss attributable to common stockholders of $(43) million and $(164) million, respectively, or $(0.08) and $(0.31) per diluted common share, respectively.

For the three months ended June 30, 2022 and 2021, we had estimated taxable income (loss) attributed to common stockholders of $22 million and $(158) million, respectively, or $0.04 and $(0.30) per diluted common share, respectively.

For the six months ended June 30, 2022 and 2021, we had estimated taxable loss attributable to common stockholders of $(21) million and $(322) million, respectively, or $(0.04) and $(0.61) per diluted common share, respectively.

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

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The following is a

reconciliation of our GAAP net income to our estimated taxable income (loss) for the three months ended March 31, 2022 and 2021 (dollars in millions, except per share amounts):

Three Months Ended March 31,

reconciliation of our GAAP net income to our estimated taxable income (loss) for the three and six months ended June 30, 2022 and 2021 (dollars in millions, except per share amounts):

Three Months Ended June 30,

Six Months Ended

2022 2021 2022 2021

Net income (loss) $ (434) $ (411) $ (1,085) $ 564

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Net capital loss/(utilization of net capital loss carryforward) 1,666 52 2,534 141

Unrealized (gain)/loss, net 2,294 545

Unrealized loss, net 78 152 2,372 697

Other — 5 (13) (5)

Total book to tax differences 456 253 1,064 (886)

REIT taxable loss (43) (164)

REIT taxable income (loss) 22 (158) (21) (322)

REIT taxable income attributed to preferred stock — — — —

REIT taxable loss attributed to common stock $ (43) $ (164)

REIT taxable income (loss) attributed to common stock $ 22 $ (158) $ (21) $ (322)

Weighted average common shares outstanding - basic 526.2 526.6 525.3 530.1

Weighted average common shares outstanding - diluted 527.1 526.6 525.3 530.1

REIT taxable loss per common share - basic $ (0.08) $ (0.31)

REIT taxable loss per common share - diluted $ (0.08) $ (0.31)

REIT taxable income (loss) per common share - basic $ 0.04 $ (0.30) $ (0.04) $ (0.61)

REIT taxable income (loss) per common share - diluted $ 0.04 $ (0.30) $ (0.04) $ (0.61)

Beginning net capital loss carryforward $ 868 $ 89 $ — $ —

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Our leverage will vary depending on market conditions and our assessment of relative risks and returns, but we generally expect our leverage to be between six and twelve times the amount of our tangible stockholders' equity, measured as the sum of our total mortgage borrowings and net payable / (receivable) for unsettled investment securities, divided by the sum of our total stockholders' equity adjusted to exclude goodwill.

Our tangible net book value "at risk" leverage ratio was 7.5x and 7.7x as of March 31, 2022 and December 31, 2021, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of March 31, 2022 and December 31, 2021 (dollars in millions).

Our tangible net book value "at risk" leverage ratio was 7.4x and 7.7x as of June 30, 2022 and December 31, 2021, respectively.

The following table includes a summary of our mortgage borrowings outstanding as of June 30, 2022 and December 31, 2021 (dollars in millions).

For additional details of our mortgage borrowings refer to Notes 2, 4 and 5 to our Consolidated Financial Statements in this Form 10-Q.

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Mortgage Borrowings Amount % Amount %

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________________________________

As of March 31, 2022 and December 31, 2021, 41% and 42%, respectively, of our repurchase agreements were funded through the Fixed Income Clearing Corporation's GCF Repo service.

As of June 30, 2022 and December 31, 2021, 41% and 42%, respectively, of our repurchase agreements were funded through the Fixed Income Clearing Corporation's GCF Repo service.

Amounts exclude U.S.

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

As of March 31, 2022, we had met all our margin requirements.

As of June 30, 2022, we had met all our margin requirements.

The value of Agency RMBS collateral is impacted by market factors and is reduced by monthly principal pay-downs on the underlying mortgage pools.

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

As of March 31, 2022, 31% our portfolio consisted of TBA securities, which are not subject to monthly principal pay-downs.

As of June 30, 2022, 28% our portfolio consisted of TBA securities, which are not subject to monthly principal pay-downs.

The remainder of our portfolio, primarily consisted of Agency RMBS, which had an average one-year CPR forecast of 5%.

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Haircut levels and minimum margin requirements imposed by our counterparties reduce the amount of our unencumbered assets and limit the amount we can borrow against our investment securities.

During the three months ended March 31, 2022, haircuts remained stable.

As of March 31, 2022, the weighted average haircut on our repurchase agreements was approximately 4.0% of the value of our collateral, compared to 3.8% as of December 31, December 31, 2021.

During the six months ended June 30, 2022, haircuts remained stable.

As of June 30, 2022, the weighted average haircut on our repurchase agreements was approximately 4.0% of the value of our collateral, compared to 3.8% as of December 31, 2021.

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 March 31, 2022, our unencumbered assets totaled 59% of our tangible equity, compared to 67% as of December 31, 2021.

The majority of our liquidity is held at AGNC, but we also maintain capital and excess liquidity at Bethesda Securities to meet regulatory standards, satisfy counterparty and clearing organization expectations, and for risk management purposes.

As of March 31, 2022, we had cash and unencumbered Agency RMBS and U.S.

Treasury securities totaling $3.5 billion, or 42% of our tangible equity, which excludes unencumbered CRT and non-Agency securities and assets held at Bethesda Securities, compared to $4.9 billion and 50%, respectively, as of December 31, 2021.

This compares to $6.5 billion of unencumbered assets, or 67% of tangible equity, as of December 31, 2021, consisting of $5.8 billion of unencumbered cash and Agency RMBS and $0.7 billion of unencumbered credit assets.

Counterparty Risk

Collateral requirements imposed by counterparties subject us to the risk that the counterparty does not return pledged assets to us as and when required.

We attempt to manage this risk by monitoring our collateral positions and limiting our counterparties to registered clearinghouses and major financial institutions with acceptable credit ratings.

We attempt to manage this risk by monitoring our collateral positions and limiting our

counterparties to registered clearinghouses and major financial institutions with acceptable credit ratings.

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

As of March 31, 2022, our maximum amount at risk (or the excess/shortfall of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables) with any of our repurchase agreement counterparties, excluding the FICC, was less than 2% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 5% of our tangible stockholders' equity.

As of March 31, 2022, approximately 8% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of March 31, 2022, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.

As of June 30, 2022, our maximum amount at risk (or the excess/shortfall of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables) with any of our repurchase agreement counterparties, excluding the FICC, was less than 3% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 6% of our tangible stockholders' equity.

As of June 30, 2022, approximately 10% of our tangible stockholder's equity was at risk with the FICC.

Excluding central clearing exchanges, as of June 30, 2022, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.

Agency RMBS securities are among the most liquid fixed income securities, and the TBA market is the second most liquid market (after the U.S.

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OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2022, we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Additionally, as of March 31, 2022, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

As of June 30, 2022, we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Additionally, as of June 30, 2022, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.

FORWARD-LOOKING STATEMENTS

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• changes in U.S.

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

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

Treasury and Agency RMBS bond portfolio;

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

• changes to laws, regulations, rules or policies that affect U.S.

housing finance activity, the GSE's or the markets for Agency RMBS

• 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;

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis