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10-K
AGNC INVESTMENT CORP. filed this Form 10-K on 02/27/2017
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34057
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11426937&doc=23
AGNC INVESTMENT CORP.
(Exact name of registrant as specified in its charter)
__________________________________________________
Delaware
 
26-1701984
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
2 Bethesda Metro Center, 12th Floor
Bethesda, Maryland 20814
(Address of principal executive offices)
(301) 968-9315
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Name of each exchange
on which registered
Common Stock, $0.01 par value per share
The NASDAQ Global Select Market
8.000% Series A Cumulative Redeemable Preferred Stock
The NASDAQ Global Select Market
7.750% Series B Cumulative Redeemable Preferred Stock
The NASDAQ Global Select Market
 
Securities registered pursuant to section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ý No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes   ¨   No   ý
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer     ý                    Accelerated filer    ¨
     Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller Reporting Company    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨  No ý 
As of June 30, 2016, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $5.5 billion based upon the closing price of the Registrant's common stock of $19.82 per share as reported on The NASDAQ Global Select Market on that date. (For this computation, the Registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the Registrant and certain other stockholders; such an exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the Registrant.)  
The number of shares of the issuer's common stock outstanding as of January 31, 2017 was 331,046,077.
DOCUMENTS INCORPORATED BY REFERENCE. The Registrant's definitive proxy statement for the 2017 Annual Meeting of Stockholders is incorporated by reference into certain sections of Part III herein.  
Certain exhibits previously filed with the Securities and Exchange Commission are incorporated by reference into Part IV of this report.
 





AGNC INVESTMENT CORP.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I.

Item 1. Business  
AGNC Investment Corp. ("AGNC," the "Company," "we," "us" and "our") was organized on January 7, 2008 and commenced operations on May 20, 2008 following the completion of our initial public offering. Our common stock is traded on The NASDAQ Global Select Market under the symbol "AGNC."  
We operate so as to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). As such, we are required to distribute annually 90% of our taxable net income. As long as we qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.
We earn income primarily from investing in Agency residential mortgage-backed securities on a leveraged basis. These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise, such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. Government agency, such as the Government National Mortgage Association ("Ginnie Mae") (collectively referred to as "GSEs"). We may also invest in other types of mortgage and mortgage-related residential and commercial mortgage-backed securities where repayment of principal and interest is not guaranteed by a GSE or U.S. Government agency.
Our principal objective is to provide our stockholders with attractive risk-adjusted returns through a combination of monthly dividend distributions and net asset value (also referred to as "net book value," "NAV" and "stockholders' equity") accretion. We fund our investments primarily through short-term borrowings structured as repurchase agreements.
Investment Strategy
Our investment strategy is designed to:
generate attractive risk-adjusted returns for our stockholders comprised of monthly dividend distributions and NAV accretion;
manage an investment portfolio consisting primarily of Agency securities;
invest a subset of the portfolio in mortgage credit risk oriented assets;
capitalize on discrepancies in the relative valuations in the Agency and non-Agency securities market;
manage financing, interest rate, prepayment, extension and credit risks;
continue to qualify as a REIT; and
remain exempt from the requirements of the Investment Company Act of 1940 (the "Investment Company Act").
 Targeted Investments
Agency Securities
Agency Residential Mortgage-Backed Securities ("Agency RMBS"). Our primary investments consist of Agency pass-through certificates representing interests in "pools" of mortgage loans secured by residential real property. Monthly payments of principal and interest made by the individual borrowers on the mortgage loans that underlie the securities, which are guaranteed by a GSE to holders of the securities, are in effect "passed through," net of fees paid to the issuer/guarantor and servicers of the securities, to the holders of the securities. In general, mortgage pass-through certificates distribute cash flows from the underlying collateral on a pro rata basis among the holders of the securities. Holders of the securities also receive guarantor advances of principal and interest for delinquent loans in the mortgage pools. We also invest in Agency collateralized mortgage obligations ("CMOs"), which are structured instruments representing interests in Agency residential pass-through certificates, and interest-only, inverse interest-only and principal-only securities, which represent the right to receive a specified proportion of the contractual interest or principal flows of specific Agency CMO securities.
To-Be-Announced Forward Contracts ("TBAs"). TBAs are forward contracts to purchase or sell Agency RMBS. TBA contracts specify the coupon rate, issuer, term and face value of the bonds to be delivered, with the actual bonds to be delivered only identified shortly before the TBA settlement date.

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Non-Agency Securities
Credit Risk Transfer Securities ("CRT"). CRT securities are risk sharing instruments that transfer a portion of the risk associated with credit losses within pools of conventional residential mortgage loans from the GSEs and/or third parties to private investors, such as us. Unlike Agency RMBS, full repayment of the original principal balance of CRT securities is not guaranteed by a GSE or other third party; rather, "credit risk transfer" is achieved by writing down the outstanding principal balance of the CRT securities if credit losses on the related pool of loans exceed certain thresholds. By reducing the amount that issuers are obligated to repay to holders of CRT securities, the issuers of CRT securities are able to offset credit losses on the related pool of loans.
Non-Agency Residential Mortgage-Backed Securities ("Non-Agency RMBS"). Non-Agency RMBS are securities backed by residential mortgages, for which payment of principal and interest is not guaranteed by a GSE or government agency. Instead, a private institution such as a commercial bank will package residential mortgage loans and securitize them through the issuance of RMBS. Non-Agency RMBS are often referred to as private label RMBS. Non-Agency RMBS may benefit from credit enhancement derived from structural elements, such as subordination, overcollateralization or insurance. We may purchase highly-rated instruments that benefit from credit enhancement or non-investment grade instruments that absorb credit risk. We focus primarily on non-Agency securities where the underlying mortgages are secured by residential properties within the United States. Residential non-Agency securities are backed by residential mortgages that can be comprised of prime mortgage or nonprime mortgage loans. We may also purchase Agency or non-Agency multifamily securities where the collateral backing the securitization consists in whole or in part of loans to properties housing multiple tenants.
Commercial Mortgage-Backed Securities ("CMBS"). CMBS are securities that are structured utilizing collateral pools comprised of commercial mortgage loans. CMBS can be structured as pass-through securities, where the cash flows generated by the collateral pool are passed on pro rata to investors after netting servicer or other fees, or where cash flows are distributed to numerous classes of securities following a predetermined waterfall, which may give priority to selected classes while subordinating other classes. We may invest across the capital structure of these securities, and we intend to focus on CMBS where the underlying collateral is secured by commercial properties located within the United States.
 Active Portfolio Management Strategy
We employ an active management strategy designed to achieve our principal objectives of generating attractive risk-adjusted returns and managing our net asset value within reasonable bands. We invest in securities based on our assessment of the relative risk-return profile of the securities and our ability to effectively hedge a portion of the securities' exposure to market risks. The composition of our portfolio and strategies that we use will vary based on our view of prevailing market conditions and the availability of suitable investment, hedging and funding opportunities. We may experience investment gains or losses when we sell securities that we believe no longer provide attractive risk-adjusted returns or when we believe more attractive alternatives are available elsewhere in the mortgage or mortgage-related securities market, or when we believe it is prudent to reduce aggregate exposure or a particular type of risk embedded in the portfolio. We may also experience gains or losses as a result of our hedging strategies or due to credit losses on our non-Agency securities.
 Financing Strategy
 As part of our investment strategy, we leverage our investment portfolio to increase potential returns to our stockholders. Our primary source of financing is through repurchase agreements. A repurchase agreement transaction acts as a financing arrangement under which we effectively pledge our investment securities as collateral to secure a loan. Our borrowings pursuant to these repurchase transactions generally have maturities ranging from 30 days to one year, but may have maturities less than 30 days or up to five or more years. Under our repurchase agreements, our financing rate typically tracks short term rates such as one, three or six month London Interbank Offered Rate ("LIBOR"), plus or minus a fixed spread.
Our leverage varies depending on market conditions, our assessment of risk and returns and our ability to continue to borrow funds sufficient to fund acquisitions of mortgage securities. We generally expect our leverage to be within six to eleven times the amount of our tangible stockholders' equity. However, under certain market conditions, we may operate at leverage levels outside of this range for extended periods of time.
We seek to diversify our funding exposure by entering into repurchase agreements with multiple counterparties. We had master repurchase agreements with 38 financial institutions as of December 31, 2016. The terms of our master repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association ("SIFMA") as to repayment, margin requirements and the segregation of all securities sold under the repurchase transaction. In addition, each lender may require that we include supplemental terms and conditions to the

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standard master repurchase agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions may differ for each lender and certain of these terms may not be determined until we engage in a specific repurchase transaction.
We may also obtain other sources of financing depending on market conditions. We may finance the acquisition of Agency RMBS by entering into TBA dollar roll transactions in which we would sell a TBA contract for current month settlement and simultaneously purchase a similar TBA contract for a forward settlement date. Prior to the forward settlement date, we may choose to roll the position out to a later date by entering into an offsetting TBA position, net settling the paired off positions for cash, and simultaneously entering into a similar TBA contract for a later settlement date. In such transactions, the TBA contract purchased for a forward settlement date is priced at a discount to the TBA contract sold for settlement/pair off in the current month. This difference (or discount) is referred to as the "price drop." The price drop is the economic equivalent of net interest carry income on the underlying Agency RMBS over the roll period (interest income less implied financing cost) and is commonly referred to as "dollar roll income." Consequently, dollar roll transactions represent a form of off-balance sheet financing. In evaluating our overall leverage at risk, we consider both our on-balance sheet and off-balance sheet financing.
During 2015, we formed a wholly-owned captive broker-dealer subsidiary, Bethesda Securities, LLC ("BES"). BES became operational and received final membership approval to the Fixed Income Clearing Corporation ("FICC") during the third quarter of 2016. BES has direct access to bilateral and triparty funding as a Financial Industry Regulatory Authority ("FINRA") member broker-dealer. As an eligible institution, BES also raises funds through the General Collateral Finance Repo service offered by the FICC, with the FICC acting as the central counterparty, and thus provides us greater depth and diversity of repurchase agreement funding while also lowering our funding cost and limiting our counterparty exposure.
Risk Management Strategy
We use a variety of strategies to reduce our exposure to market risks, including interest rate, prepayment, extension and credit risks. Our investment strategies take into account our assessment of these risks, the cost of the hedging transactions and our intention to qualify as a REIT. Our hedging strategies are generally not designed to protect our net asset value from "spread risk" (also referred to as "basis risk"), which is the risk that the yield differential between our investments and our hedges fluctuates. In addition, while we use interest rate swaps and other supplemental hedges to attempt to protect our net asset value against moves in interest rates, we may not hedge certain interest rate, prepayment or extension risks if we believe that bearing such risks enhances our return profile, or if the hedging transaction would negatively impact our REIT status.
Interest Rate Risk. We hedge a portion of our exposure to interest rate mismatches between the interest we earn on our longer term investments and the interest we pay on our shorter term borrowings. Because a majority of our funding is in the form of repurchase agreements, our financing costs fluctuate based on short-term interest rate indices, such as LIBOR. Because our investments are assets that primarily have fixed rates of interest and could mature in up to 40 years, the interest we earn on those assets generally does not move in tandem with the interest that we pay on our repurchase agreements; therefore, we may experience reduced income or losses due to adverse interest rate movements. In order to attempt to mitigate a portion of such risk, we utilize certain hedging techniques to attempt to lock in a portion of the net interest spread between the interest we earn on our assets and the interest we pay on our financing costs.
Additionally, because prepayments on residential mortgages generally accelerate when interest rates decrease and slow when interest rates increase, mortgage securities typically have "negative convexity." In other words, certain mortgage securities in which we invest may increase in price more slowly than similar duration bonds, or even fall in value, as interest rates decline. Conversely, certain mortgage securities in which we invest may decrease in value more quickly than similar duration bonds as interest rates increase. In order to manage this risk, we monitor, among other things, the "duration gap" between our mortgage assets and our hedge portfolio as well as our convexity exposure. Duration is the estimated percentage change in market value of our mortgage assets or our hedge portfolio that would be caused by a parallel change in short and long-term interest rates. Convexity exposure relates to the way the duration of our mortgage assets or our hedge portfolio changes when the interest rate or prepayment environment changes.
The value of our mortgage assets may also be adversely impacted by fluctuations in the shape of the yield curve or by changes in the market's expectation about the volatility of future interest rates. We analyze our exposure to non-parallel changes in interest rates and to changes in the market's expectation of future interest rate volatility and take actions to attempt to mitigate these risks.
Prepayment Risk. Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Prepayment risk generally increases when interest rates decline. In this scenario, our financial results may be adversely affected as we may have to invest that principal at potentially lower yields.

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Extension Risk. Because residential borrowers have the option to make only scheduled payments on their mortgage loans, rather than prepay their mortgage loans, we face the risk that a return of capital on our investment will occur slower than anticipated. Extension risk generally increases when interest rates rise. In this scenario, our financial results may be adversely affected as we may have to finance our investments at potentially higher costs without the ability to reinvest principal into higher yielding securities because the rate at which borrowers refinance their mortgages, sell the property collateralizing the mortgage, or otherwise pay incremental principal payments occurs at a slower pace than was originally expected.
Spread Risk. Because the market spread between the yield on our investments and the yield on benchmark interest rates, such as U.S. Treasury rates and interest rate swap rates, may vary, we are exposed to spread risk. The inherent spread risk associated with our investment securities and the resulting fluctuations in fair value of these securities can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Federal Reserve (the "Fed"), liquidity, or changes in required rates of return on different assets. Our strategies are generally not designed to protect our net asset value from spread risk.

Credit Risk. We accept mortgage credit exposure related to our non-Agency securities at levels we deem to be prudent within the context of our overall investment strategy. Therefore, we may retain all or a portion of the credit risk on the loans underlying our non-Agency securities. We seek to manage this risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, and sale of assets where we identify negative credit trends. We may also manage credit risk with credit default swaps or other financial derivatives that we believe are appropriate. Additionally, we may vary the percentage mix of our Agency and non-Agency mortgage investments or our duration gap, when we believe credit performance is inversely correlated with changes in interest rates, in an effort to actively adjust our credit exposure and/or to improve the return profile of our investment portfolio.
The principal instruments that we use to hedge a portion of our exposure to interest rate, prepayment and extension risks are interest rate swaps and options to enter into interest rate swaps ("interest rate swaptions"). We also utilize forward contracts for the purchase or sale of Agency RMBS securities in the TBA market on a generic pool basis and U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also purchase or write put or call options on TBA securities and invest in mortgage and other types of derivative instruments, such as interest and principal-only securities.
The risk management actions we take may lower our earnings and dividends in the short term to further our objective of maintaining attractive levels of earnings and dividends over the long term. In addition, some of our hedges are intended to provide protection against larger rate moves and as a result may be relatively ineffective for smaller changes in interest rates. There can be no certainty that our projections of our exposures to interest rates, prepayments, extension or other risks will be accurate or that our hedging activities will be effective and, therefore, actual results could differ materially.
Income from hedging transactions that we enter into to manage risk may not constitute qualifying gross income under one or both of the gross income tests applicable to REITs (see "Real Estate Investment Trust Requirements"). Therefore, we may have to limit our use of certain hedging techniques, which could expose us to greater risks than we would otherwise want to bear, or implement those hedging techniques through a taxable REIT subsidiary ("TRS"). Implementing our hedges through a TRS could increase the cost of our hedging activities because a TRS would be subject to tax on income and gains.

Management Internalization
Prior to July 1, 2016, we were externally managed by AGNC Management, LLC (our "Manager," formerly known as American Capital AGNC Management, LLC). On July 1, 2016, we completed the acquisition of AGNC Mortgage Management, LLC ("AMM," formerly known as American Capital Mortgage Management, LLC), the parent company of our Manager, from American Capital Asset Management, LLC ("ACAM"), a wholly owned portfolio company of American Capital, Ltd. ("ACAS"), for a purchase price of $562 million in cash. AMM is also the parent company of MTGE Management, LLC ("MTGE Manager," formerly known as American Capital MTGE Management, LLC), the external manager of MTGE Investment Corp. ("MTGE," formerly known as American Capital Mortgage Investment Corp.).
Prior to our management internalization, we paid our Manager a management fee payable monthly in arrears in an amount equal to one-twelfth of 1.25% of our month-end stockholders' equity, adjusted to exclude the effect of any unrealized gains or losses included in either retained earnings or accumulated OCI, each as computed in accordance with GAAP, and were obligated to reimburse our Manager for its expenses incurred directly related to our operations, excluding employment-related expenses of our Manager's officers and employees and any American Capital employees who provided services to us pursuant to the management agreement. There was no incentive compensation payable to our Manager pursuant to the management agreement. Following the internalization of our manager, we no longer incur a management fee, but we incur expenses associated with being an internally managed organization, including compensation expense previously borne by our Manager. If we had elected to cancel the

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management contract without cause, we would have been obligated to pay management fees through our existing renewal term (plus an additional one year period if we had not provided notice of non-renewal at least 180-days prior to the completion of the then current renewal term) and a termination fee equal to three times our average annual management during the preceding 24-month period. We would have also been precluded from hiring any of the employees for a two year period following termination who had worked for ACAS or any of its affiliates, including our Manager, at any point over the prior two year period.
Employees
As of December 31, 2016, we had 54 full-time employees.
Exemption from Regulation under the Investment Company Act
We conduct our business so as not to become regulated as an investment company under the Investment Company Act, in reliance on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act. As long as we qualify for this exemption, we will not be subject to leverage and other restrictions imposed on regulated investment companies, which would significantly reduce our ability to use leverage. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets in "mortgages and other liens on and interest in real estate" or "qualifying real estate interests" and at least 80% of our assets in qualifying real estate interests and "real estate-related assets." In satisfying this 55% requirement, based on pronouncements of the SEC staff and in certain instances our own judgment, we treat Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool ("whole pool" securities) as qualifying real estate interests. We typically treat "partial pool" and other mortgage securities where we hold less than all of the certificates issued by the pool as real estate-related assets.
Real Estate Investment Trust Requirements
We have elected to be taxed as a REIT under the Internal Revenue Code. As long as we qualify as a REIT, we generally will not be subject to U.S. federal or state corporate income tax on our taxable net income to the extent that we annually distribute all of our taxable net income to stockholders within the time limits prescribed by the Internal Revenue Code. Qualification and taxation as a REIT depends on our ability to meet on a continuing basis various qualification requirements imposed upon REITs by the Internal Revenue Code, including satisfying certain organizational requirements, an annual distribution requirement and quarterly asset and annual income tests. The REIT asset and income tests are of particular significance as they restrict the extent to which we can invest in certain types of securities and conduct certain hedging activities within the REIT. Consequently, we may be required to limit these activities or conduct them through a TRS. We believe that we have been organized and operate in such a manner as to qualify for taxation as a REIT.
Income Tests
In order to continue to qualify as a REIT, we must satisfy two gross income requirements on an annual basis.
1.
At least 75% of our gross income for each taxable year generally must be derived from investments in real property or mortgages on real property.
2.
At least 95% of our gross income in each taxable year generally must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gains from the sale or disposition of stock or securities, which need not have any relation to real property.
Interest income constitutes qualifying mortgage interest for purposes of the 75% gross income test described above to the extent that the obligation upon which such interest is paid is secured by a mortgage on real property. We expect that substantially all of our income from our Agency and non-Agency MBS will continue to be qualifying income for purposes of the 75% gross income test. Income from CRT securities is treated as non-qualifying income for the 75% gross income test, which potentially limits our ability to invest in CRT securities. There is no direct authority with respect to the qualification of income or gains from TBAs as gains from the sale of real estate assets or other qualifying income for purposes of the 75% gross income test. We treat gains from TBAs as qualifying income for purposes of the 75% gross income test and we treat TBAs as qualifying assets for purposes of the 75% asset test described below based on an opinion of legal counsel. Income and gains that we derive from instruments that we use to hedge the interest rate risk associated with our borrowings incurred to acquire real estate assets will generally be excluded from both the numerator and the denominator for purposes of the 75% and 95% gross income test, provided that specified requirements are met.
Asset Tests
At the close of each calendar quarter, we must satisfy four tests relating to the nature of our assets.

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1.
At least 75% of the value of our total assets must be represented by some combination of "real estate assets," cash, cash items, U.S. Government securities, and, under some circumstances, temporary investments in stock or debt instruments purchased with new capital. For this purpose, mortgage-backed securities and mortgage loans are generally treated as "real estate assets." Assets that do not qualify for purposes of the 75% asset test are subject to the additional asset tests described below.
2.
The value of any one issuer's securities that we own may not exceed 5% of the value of our total assets.
3.
We may not own more than 10% of any one issuer's outstanding securities, as measured by either voting power or value. The 5% and 10% asset tests do not apply to securities of TRSs and qualified REIT subsidiaries and the 10% asset test does not apply to "straight debt" having specified characteristics and to certain other securities.
4.
The aggregate value of all securities of all TRSs that we hold may not exceed 25% of the value of our total assets. (For tax years beginning after December 31, 2017, the limit is reduced to 20% of the value of total assets.)
If we should fail to satisfy the income or asset tests, such a failure would not cause us to lose our REIT qualification if we were able to eliminate the discrepancy within a 30 day cure period, in the case of the asset test, or satisfy certain relief provisions and pay any applicable penalty taxes and other fines. Please also refer to the "Risks Related to Our Taxation as a REIT" in "Item 1A. Risk Factors" of this Form 10-K for further discussion of REIT qualification requirements and related items.
Corporate Information
Our executive offices are located at Two Bethesda Metro Center, 12th Floor, Bethesda, MD 20814 and our telephone number is (301) 968-9315.
We make available all of our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports as well as our Code of Ethics and Conduct free of charge on our internet website at www.AGNC.com as soon as reasonably practical after such material is electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). These reports are also available on the SEC internet website at www.sec.gov.
Competition
Our success depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. In acquiring mortgage assets, we compete with mortgage REITs, mortgage finance and specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders, governmental bodies and other entities. These entities and others that may be organized in the future may have similar asset acquisition objectives and increase competition for the available supply of mortgage assets suitable for purchase. Additionally, our investment strategy is dependent on the amount of financing available to us in the repurchase agreement market, which may also be impacted by competing borrowers. Our investment strategy will be adversely impacted if we are not able to secure financing on favorable terms, if at all.

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Item 1A. Risk Factors
 You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K, including our annual consolidated financial statements and the related notes thereto before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance.
If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.
Risks Related to Our Investing, Portfolio Management and Financing Activities
An increase in our borrowing costs would adversely affect our financial condition and results of operations.
Our borrowing costs may increase for a number of reasons, including increases in short-term interest rates, the "haircut" applied to our assets under repurchase agreements, interest rate volatility, decreases in the value of our assets or availability of financing generally. An increase in our borrowing costs will reduce the difference, or spread, that we may earn between the yields on the investments we make and the borrowings we use to finance such investments. Moreover, due to the short-term or adjustable rate nature of the majority of our repurchase agreements used to finance our investments, our borrowing costs are particularly sensitive to increases in short-term interest rates as well as other factors. It is possible that due to higher borrowing costs, the spread on investments could be reduced to a point at which the profitability from investments would be significantly reduced or eliminated. This would adversely affect the returns on our assets, financial condition and results of operations and could require us to liquidate certain or all of our assets.
Changes to the pace of reinvestment of paydowns or sales of Agency mortgage-backed securities by the Federal Reserve may adversely affect the price and return associated with Agency securities.
In October 2014, the Federal Reserve ended its large scale asset purchases under quantitative easing programs designed to support the mortgage markets and stimulate the economy. The Federal Reserve currently reinvests all principal payments from its U.S. Treasury, Agency debt and Agency RMBS portfolios acquired as a function of its quantitative easing programs, thereby holding the nominal size of the securities it holds in each of these portfolios largely unchanged. In previous statements, members of the Federal Open Market Committee (FOMC) of the Federal Reserve have indicated that full reinvestment of the securities portfolio would continue until "normalization of the level of the federal funds rate is well under way"; therefore, it is difficult to predict when and at what pace the Federal Reserve will end reinvestments of principal payments. We also cannot predict the impact that this or other actions could have on the prices and liquidity of Agency RMBS or on mortgage spreads relative to interest rate hedges tied to benchmark interest rates. During periods in which the Federal Reserve reduces or ceases reinvestment of principal or undertakes outright sales of its securities portfolio, the price of Agency RMBS and U.S. Treasury securities will likely decline, mortgage spreads will likely widen, refinancing volumes will likely be lower and market volatility will likely be considerably higher than would have been the case absent such actions and our net book value could be adversely affected.
Our Board of Directors may change our investment guidelines without notice or stockholder consent, which may result in riskier investments, and does not approve each investment we make.
Our Board of Directors has approved the following investment guidelines:  
our investment portfolio shall consist primarily of Agency securities, but may include other types of mortgage and mortgage-related residential and commercial mortgage-backed securities where repayment of principal and interest is not guaranteed by a GSE;
no investment shall be made that would cause us to fail to qualify as a REIT for federal income tax purposes; and
no investment shall be made that would cause us to be regulated as an investment company under the Investment Company Act.
Our Board of Directors periodically reviews our investment guidelines, investment portfolio, and potential investment strategies. However, our Board of Directors does not pre-approve individual investments leaving management with day to day discretion over the portfolio composition within the investment guidelines. Within those guidelines, management has discretion to significantly change the composition of the portfolio. In addition, in conducting periodic reviews, our Board of Directors may rely primarily on information provided to them by our management. Our Board of Directors has the authority to change our investment guidelines at any time without notice to or consent from our stockholders. In 2015, our Board of Directors amended our investment guidelines permitting us to invest in high credit quality non-Agency MBS. In 2016, our Board of Directors, expanded such authorization to include CRT securities and other mortgage or mortgage-related investments with no restriction on the credit rating of those securities. To the extent that our investment guidelines change in the future, we may make investments

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that are different from, and possibly riskier than, the investments described in this Annual Report on Form 10-K. A change in our investment guidelines may increase our exposure to interest rate and real estate market fluctuations.
We may experience significant gains or losses and, consequently, greater earnings volatility as a result of our active portfolio management strategy.
We employ an active management strategy to achieve our principal objective of preserving our net asset value while generating attractive risk-adjusted returns. The composition of our investment portfolio will vary as we believe changes to market conditions, risks and valuations warrant. Consequently, we may experience significant investment gains or losses when we sell investments that we no longer believe provide attractive risk-adjusted returns or when we believe more attractive alternatives are available. We may be incorrect in our assessment of our investment portfolio and select an investment portfolio that could generate lower returns than a more static management strategy. Also, investors may be less able to assess the changes in our valuation and performance by observing changes in the mortgage market since we may have changed our strategy and portfolio from the last publicly available data. We may also experience fluctuations in leverage as we pursue our active management strategy.
Our strategy involves significant leverage, which increases the risk that we may incur substantial losses.
We expect our leverage to vary with market conditions and our assessment of risk/return on investments. We incur this leverage by borrowing against a substantial portion of the market value of our assets. By incurring this leverage, we could enhance our returns. Nevertheless, this leverage, which is fundamental to our investment strategy, also creates significant risks. For example, because of our significant leverage, we may incur substantial losses or lose our ability to maintain the outstanding balance of our borrowings if our borrowing costs increase substantially or if the value of our investments declines substantially.
Failure to procure adequate repurchase agreement and other financing or to renew or replace existing repurchase agreement and other financing as it matures (to which risk we are specifically exposed due to the short-term nature of our financing arrangements we employ) would adversely affect our financial condition and results of operations.
We use debt financing as a strategy to increase our return on equity. However, we may not be able to achieve our desired leverage ratio for a number of reasons, including if:
our lenders do not make repurchase or other financing agreements available to us at acceptable terms;
lenders with whom we enter into repurchase or other financing agreements subsequently exit the market;
our lenders require additional collateral to cover our borrowings, which we may be unable to do; or
we determine that the leverage would expose us to excessive risk.
Furthermore, because we rely primarily on short-term borrowings, our ability to achieve our investment objectives depends not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. Additionally, our wholly-owned captive broker-dealer subsidiary's (or BES's) ability to access bilateral and triparty repo funding and to raise funds through the General Collateral Finance Repo service offered by the FICC, requires that it meet on a continuous basis the regulatory and membership requirements of FINRA and the FICC, which may change over time. If BES fails to meet these requirements and is unable to access such funding, we would be required to find alternative funding, which we may be unable to do, and our funding costs, "haircuts" and/or counterparty exposure could increase. Additionally, on January 12, 2016, the Federal Housing Finance Agency ("FHFA") released its final rule on changes to regulations concerning Federal Home Loan Bank ("FHLB") membership criteria. The final rule terminated our captive insurance subsidiary's FHLB membership and required repayment of all advances at the earlier of their contractual maturity dates or one year after the effective date of the final rule in February 2017.
If we are not able to renew or replace maturing borrowings, we may have to sell some or all of our assets, possibly under adverse market conditions. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk, particularly with respect to assignee liability. Consequently, financing may not be available to us in the future on terms that are acceptable to us. In the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the value of our common and preferred stock and our ability to make distributions on our common and preferred stock.
Differences in the stated maturity of our fixed rate assets, or in timing of interest rate adjustments on our adjustable-rate assets, and our borrowings may adversely affect our profitability.
We rely primarily on short-term and/or variable rate borrowings to acquire fixed-rate securities with long-term maturities. In addition, we may have adjustable rate assets with interest rates that vary over time based upon changes in an objective index,

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such as LIBOR or the U.S. Treasury rate. These indices generally reflect short-term interest rates but these assets may not reset in a manner that matches our borrowings.
The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a "flattening" of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our investments generally bear interest at longer-term rates than we pay on our borrowings, a flattening of the yield curve would tend to decrease our net interest income and the market value of our investment portfolio. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve "inversion"), in which event, our borrowing costs may exceed our interest income and we could incur operating losses and our ability to make distributions to our stockholders could be adversely affected.
Declines in value of the assets in which we invest will adversely affect our financial condition and results of operations, and make it more costly to finance these assets.
We use our investments as collateral for our financings. A decline in their value, or perceived market uncertainty about their value, could make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Any fixed-rate securities we invest in generally will be more negatively affected by increases in interest rates than adjustable-rate securities. Most of our investments in mortgage-related securities are recorded at fair value with changes in fair value reported in net income or other comprehensive income (a component of equity). As a result, a decline in the fair value of our mortgage-related securities could reduce both our comprehensive income and stockholders' equity. If market conditions result in a decline in the fair value of our assets it will decrease the amounts we may borrow to purchase additional mortgage-related investments, which may restrict our ability to increase our net income, and our financial condition and results of operations could be adversely affected.
Our hedging strategies may not be successful in mitigating the risks associated with changes in interest rates.
Subject to complying with REIT tax requirements, we employ techniques that are intended to limit, or "hedge," the adverse effects of changes in interest rates on our repurchase agreements and our net asset value. In general, our hedging strategy depends on our management's view of our entire investment portfolio, consisting of assets, liabilities and derivative instruments, in light of prevailing market conditions. Our hedging activities are generally designed to limit certain exposures and not to eliminate them. In addition, these strategies may be unsuccessful and we could misjudge the condition of our investment portfolio or the market. Our hedging activity will vary in scope based on the level and volatility of interest rates and principal repayments, credit market conditions, the type of assets held and other changing market conditions. Our hedging decisions will be determined in light of the facts and circumstances existing at the time and may differ from our current hedging strategy. Our hedging strategies may include entering into interest rate swap agreements, interest rate swaptions, TBAs, short sales, caps, collars, floors, forward contracts, options, futures or other types of hedging transactions. We may conduct certain hedging transactions through a TRS, which may subject those transactions to federal, state and, if applicable, local income tax.
There are no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Additionally, our business model calls for accepting certain amounts of interest rate, mortgage spread, prepayment, extension, liquidity and credit risks and other exposures and thus some risks will generally not be hedged. We could also fail to properly assess a risk to our investment portfolio or fail to recognize a risk entirely, leaving us exposed to losses without the benefit of any offsetting hedging activities. The derivative financial instruments we select may not have the effect of reducing our risk. The nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed hedging strategies or improperly executed transactions could actually increase our risk and losses. In addition, hedging activities could result in losses if the event against which we hedge does not occur. For example, interest rate hedging could fail to protect us or adversely affect us because, among other things:
interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
the duration of the hedge may not match the duration of the related asset or liability;
the amount of income that a REIT may earn from hedging transactions, other than hedging transactions that satisfy certain requirements of the Internal Revenue Code or that are done through a TRS, is limited by federal tax provisions governing REITs;
the party owing money in the hedging transaction may default on its obligation to pay;

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the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
the value of our interest rate hedges declines due to interest rate fluctuations, lapse of time or other factors, reducing our stockholders' equity.
Furthermore, our hedging activities involve costs that we incur regardless of the effectiveness of the hedging activity. These costs may be higher in periods of market volatility, both because the counterparties to our derivative agreements may demand a higher payment for taking risks, and because repeated adjustments of our hedges during periods of interest rate changes also may increase costs. Consequently, we could incur significant hedging-related costs without any corresponding economic benefits.
Our hedging strategies are generally not designed to mitigate spread risk.
When the market spread between the yield on our mortgage assets and benchmark interest rates widens, our net asset value could decline if the value of our mortgage assets falls by more than the offsetting fair value increases on our hedging instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk associated with our mortgage assets and the resulting fluctuations in fair value of these securities is an inherent risk to our business and can occur independent of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Federal Reserve, market liquidity, or changes in required rates of return on different assets. Consequently, while we use interest rate swaps and other supplemental hedges to attempt to protect against moves in interest rates, such instruments typically will not protect our net asset value against spread risk, which could adversely affect our financial condition and results of operations.
Changes in prepayment rates may adversely affect our profitability and are difficult to predict.
Our investment portfolio includes securities backed by pools of mortgage loans. For securities backed by pools of mortgage loans, we receive payments, generally, from the payments that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans at rates that are faster or slower than expected, it results in prepayments that are faster or slower than expected on our assets. These faster or slower than expected payments may adversely affect our profitability.
We may purchase securities that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the security. In accordance with GAAP, we amortize this premium over the expected term of the security based on our prepayment assumptions. If a security is prepaid in whole or in part at a faster than expected rate, however, we must expense all or a part of the remaining unamortized portion of the premium that was paid at the time of the purchase, which would adversely affect our profitability.
We also may purchase securities that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may receive a discount to par value to acquire the security. We accrete this discount over the expected term of the security based on our prepayment assumptions. If a security is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate, which would result in a lower than expected yield on securities purchased at a discount to par.
Moreover, if prepayment rates decrease due to a rising interest rate environment, the average life or duration of our fixed-rate assets or the fixed-rate portion of our hybrid ARMs and other assets will generally extend. This could have a negative impact on our results from operations, as our interest rate swap maturities are fixed and will, therefore, cover a smaller percentage of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments. This situation may also cause the market value of our assets to decline by more than otherwise would be the case while most of our hedging instruments would not receive any incremental offsetting gains.  In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.
Although prepayment rates generally increase when interest rates fall and decrease when interest rates rise, changes in prepayment rates are difficult to predict. Prepayments can also occur when borrowers sell the property and use the sale proceeds to prepay the mortgage or when borrowers default on their mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property. Fannie Mae and Freddie Mac will generally, among other conditions, purchase mortgages that are 120 days or more delinquent from mortgage-backed securities trusts when the cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in their portfolios. Consequently, prepayment rates also may be affected by conditions in the housing and financial markets, which may result in increased delinquencies on mortgage loans, the government-sponsored entities cost of capital, general economic conditions and the relative interest rates on fixed and adjustable rate loans, which could lead to an acceleration of the payment of the related principal. Additionally, changes in the government-sponsored entities' decisions as to when to repurchase delinquent loans can materially impact prepayment rates.

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In addition, the introduction of new government programs could increase the availability of mortgage credit to a large number of homeowners in the United States, which could impact the prepayment rates for the entire mortgage securities market, and in particular for Fannie Mae and Freddie Mac Agency securities. These new programs or changes to existing programs could cause substantial uncertainty around the magnitude of changes in prepayment speeds. To the extent that actual prepayment speeds differ from our expectations, it could adversely affect our operating results.
Market conditions may disrupt the historical relationship between interest rate changes and prepayment trends, which may make it more difficult to analyze our investment portfolio.
Our success depends, in part, on our ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans that underlie securities we may own. Changes in interest rates and prepayments affect the market price of the assets that we purchase and any assets that we may hold at a given time. As part of our overall portfolio risk management, we analyze interest rate changes and prepayment trends separately and collectively to assess their effects on our investment portfolio. In conducting our analysis, we depend on certain assumptions based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. Dislocations in the residential mortgage market and other developments may disrupt the relationship between the way that prepayment trends have historically responded to interest rate changes and, consequently, may negatively impact our ability to (i) assess the market value of our investment portfolio, (ii) implement our hedging strategies and (iii) implement techniques to reduce our prepayment rate volatility, which could materially adversely affect our financial condition and results of operations.
Investments in non-Agency securities potentially subject us to delinquency, foreclosure and related losses on the underlying mortgage loans.
Investments in mortgage and mortgage-related securities, such as CRT securities, non-Agency RMBS and CMBS, where repayment of principal and interest is not guaranteed by a GSE subject us to the potential risk of loss of principal and/or interest due to delinquency, foreclosure and related losses on the underlying mortgage loans.
CRT securities are risk sharing instruments issued by Fannie Mae (CAS) and Freddie Mac (STACR), and similarly structured transactions arranged by third party market participants. The securities issued in the CRT sector are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors. Currently, CAS and STACR transactions are structured as unsecured and unguaranteed bonds issued by Fannie Mae or Freddie Mac, respectively, whose principal payments are determined by the delinquency and prepayment experience of a reference pool of mortgages guaranteed by Fannie Mae or Freddie Mac in a particular quarter. Transactions arranged by third party market participants in the CRT sector are similarly structured to reference a specific pool of loans that have been securitized by Fannie Mae or Freddie Mac and synthetically transfer mortgage credit risk related to those loans to the purchaser of the securities. The holder of CRT securities bears the risk that the borrowers may default on their obligations to make full and timely payments of principal and interest. The return of the principal invested in CRT securities is dependent on the level of borrower defaults on the underlying pool of mortgages. An investor in CRT securities bears the risk that the borrowers in the reference pool of loans may default on their obligations to make full and timely payments of principal and interest.
Residential mortgage loans underlying non-Agency RMBS are secured by residential property and are subject to risks of delinquency, foreclosure and loss. The ability of a borrower to repay a loan secured by residential property is dependent upon the income or assets of the borrower. A number of factors may impair a borrower's ability to repay its loan, including: loss of employment; divorce; illness; acts of God; acts of war or terrorism; adverse changes in national and local economic and market conditions; changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of complying with such laws and regulations, fiscal policies and ordinances; costs of remediation and liabilities associated with environmental conditions such as mold; and the potential for uninsured or under-insured property losses.
Commercial mortgage loans underlying CMBS are generally secured by multifamily or other commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans made on the security of residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. Net operating income of an income producing property can be affected by, among other things: tenant mix; success of tenant businesses; property management decisions; property location and condition; competition from comparable types of properties; changes in laws that increase operating expense or limit rents that may be charged; any need to address environmental contamination at the property; the occurrence of any uninsured casualty at the property; changes in national, regional or local economic conditions or specific industry segments; declines in regional or local real estate values; declines in regional or local rental or occupancy rates; increases in interest rates; real estate tax rates and other operating expenses; changes in governmental

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rules, regulations and fiscal policies, including environmental legislation; acts of God, acts of war or terrorism, social unrest and civil disturbances.
Investments in non-Agency securities could cause us to incur losses of income from, and/or losses in market value relating to, these assets if there are defaults of principal and/or interest on the underlying or referenced pool of mortgages in the transaction.
Actions of the U.S. Government, including the U.S. Congress, U.S. Federal Reserve, U.S. Treasury, Federal Housing Finance Administration, and other governmental and regulatory bodies may adversely affect our business.
U.S. Government actions may have an adverse impact on the financial and housing markets. To the extent the markets do not respond favorably to any such actions or such actions do not function as intended, they could have broad adverse market implications and could negatively impact our financial condition and results of operations. New regulatory requirements could adversely affect the availability or terms of financing from our lender counterparties, could impose more stringent capital rules on large financial institutions, could restrict the origination of residential mortgage loans and the formation of new issuances of mortgage-backed securities and could limit the trading activities of certain banking entities and other systemically significant organizations that are important to our business. Together or individually these new regulatory requirements could materially affect our financial condition or the results of our operations in an adverse way.
Pursuant to the terms of borrowings under master repurchase agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.
We enter into master repurchase agreements with a number of financial institutions. We borrow under these master repurchase agreements to finance the assets for our investment portfolio. Pursuant to the terms of borrowings under our master repurchase agreements, a decline in the value of the collateral may result in our lenders initiating margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements and is not determined until we engage in a repurchase transaction under these agreements. Our fixed-rate collateral generally may be more susceptible to margin calls as increases in interest rates tend to affect more negatively the market value of fixed-rate securities. In addition, some collateral may be more illiquid than other instruments in which we invest, which could cause them to be more susceptible to margin calls in a volatile market environment. Moreover, collateral that prepays more quickly increases the frequency and magnitude of potential margin calls as there is a significant time lag between when the prepayment is reported (which reduces the market value of the security) and when the principal payment is actually received. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. The threat of or occurrence of a margin call could force us to sell, either directly or through a foreclosure, our collateral under adverse market conditions. Because of the leverage we expect to have, we may incur substantial losses upon the threat or occurrence of a margin call.
Our derivative agreements expose us to margin calls that could result in defaults or force us to sell assets under adverse market conditions.
Our derivative agreements typically require that we pledge collateral on such agreements to our counterparties in a similar manner as we are required to under our repurchase agreements. Our counterparties, or the central clearing agency, typically have the sole discretion to determine the value of the derivative instruments and the value of the collateral securing such instruments. In the event of a margin call, we must generally provide additional collateral on the same business day. Our derivative agreements may also contain cross default provisions under which a default under certain of our other indebtedness in excess of a certain threshold amount causes an event of default under the agreement. Following an event of default, we could be required to settle our obligations under the agreements at their termination values. The threat of or occurrence of margin calls or the forced settlement of our obligations under our derivative agreements at their termination values could force us to sell, either directly or through a foreclosure, our investments under adverse market conditions. Because of the leverage we have, we may incur substantial losses upon the threat or occurrence of either of these events.
Regulations adopted by the U.S. Commodity Futures Trading Commission and regulators of other countries could impose increased margin requirements and require additional operational and compliance costs, which could negatively affect our financial condition and results of operations.
The U.S. Commodity Futures Trading Commission (the "CFTC") subjects certain swaps to clearing and exchange trading requirements, margin requirements, reporting, record keeping and business conduct rules. The rules and regulations promulgated by the CFTC and regulators of other countries may adversely affect our ability to engage in derivative transactions or may increase the cost of our hedging activity. We are required to follow some of these local regulations or help the non-U.S. counterparties comply with these local regulations. It is possible that such regulatory requirements will result in increased costs for OTC derivative counterparties and also lead to an increase in the costs of collateral, which may have an adverse impact on our business and results of operations.

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It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts, which could negatively affect our financial condition and results of operations.
We may utilize TBA dollar roll transactions as a means of investing in and financing Agency mortgage-backed securities. TBA contracts enable us to purchase or sell, for future delivery, Agency securities with certain principal and interest terms and certain types of collateral, but the particular Agency securities to be delivered are not identified until shortly before the TBA settlement date. Prior to settlement of the TBA contract we may choose to move the settlement of the securities out to a later date by entering into an offsetting position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing a similar TBA contract for a later settlement date, collectively referred to as a "dollar roll." The Agency securities purchased for a forward settlement date under the TBA contract are typically priced at a discount to Agency securities for settlement in the current month. This difference (or discount) is referred to as the "price drop." The price drop is the economic equivalent of net interest carry income on the underlying Agency securities over the roll period (interest income less implied financing cost) and is commonly referred to as "dollar roll income." Consequently, dollar roll transactions and such forward purchases of Agency securities represent a form of off-balance sheet financing and increase our "at risk" leverage.
Under certain market conditions, TBA dollar roll transactions may result in negative carry income whereby the Agency securities purchased for a forward settlement date under the TBA contract are priced at a premium to Agency securities for settlement in the current month. Additionally, sales of some or all of the Fed's holdings of Agency RMBS or declines in purchases of Agency RMBS by the Fed could adversely impact the dollar roll market. Under such conditions, it may be uneconomical to roll our TBA positions prior to the settlement date and we could have to take physical delivery of the underlying securities and settle our obligations for cash. We may not have sufficient funds or alternative financing sources available to settle such obligations. In addition, pursuant to the margin provisions established by the Mortgage-Backed Securities Division ("MBSD") of the FICC we are subject to margin calls on our TBA contracts. Further, our prime brokerage agreements may require us to post additional margin above the levels established by the MBSD. Negative carry income on TBA dollar roll transactions or failure to procure adequate financing to settle our obligations or meet margin calls under our TBA contracts could result in defaults or force us to sell assets under adverse market conditions or through foreclosure and adversely affect our financial condition and results of operations.
Defaults by lenders to our repurchase transactions on their obligations to resell the underlying collateral back to us at the end of the transaction term, declines in the value of our collateral by the end of the term or defaults by us on our obligations under the transaction will cause us to lose money on repurchase transactions.
When we engage in a repurchase transaction, we initially transfer securities or loans to the financial institution under one of our master repurchase agreements in exchange for cash, and our counterparty is obligated to resell such assets to us at the end of the term of the transaction, which is typically from 30 days to one year, but which may have terms from one day to up to five years or more. The cash we receive when we initially sell the collateral is less than the value of that collateral, which is referred to as the "haircut." As a result, we are able to borrow against a smaller portion of the collateral that we initially sell in these transactions. Increased haircuts require us to post additional collateral. The haircut rates under our master repurchase agreements are not set until we engage in a specific repurchase transaction under these agreements. If our counterparty defaults on its obligation to resell collateral to us, we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). Any losses we incur on our repurchase transactions could adversely affect our earnings, and, thus, our cash available for distribution to our stockholders.
If we default on one of our obligations under a repurchase transaction, the counterparty can terminate the transaction and cease entering into any other repurchase transactions with us. In that case, we would likely need to establish a replacement repurchase facility with another financial institution in order to continue to leverage our investment portfolio and carry out our investment strategy. We may not be able to secure a suitable replacement facility on acceptable terms or at all.
Further, financial institutions providing the repurchase agreements may require us to maintain a certain amount of cash or to set aside non-leveraged assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. If we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly. Additionally, our counterparties can unilaterally choose to cease entering into any further repurchase transactions with us.
Our rights under our repurchase agreements are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements.
In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the collateral agreement without delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted,

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under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our assets under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.
Our use of derivative agreements may expose us to counterparty risk.
Certain hedging instruments are not traded on regulated exchanges or guaranteed by an exchange or its clearinghouse and involves risks and costs that could result in material losses. Consequently, there may not be requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the domicile of the counterparty, applicable international requirements. Consequently, if a counterparty fails to perform under a derivative agreement we could incur a significant loss.
For example, if a swap counterparty under an interest rate swap agreement that we enter into as part of our hedging strategy cannot perform under the terms of the interest rate swap agreement, we may not receive payments due under that agreement, and, thus, we may lose any potential benefit associated with the interest rate swap. Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under these swap agreements if the counterparty becomes insolvent or files for bankruptcy. Similarly, if an interest rate swaption counterparty fails to perform under the terms of the interest rate swaption agreement, in addition to not being able to exercise or otherwise cash settle the agreement, we could also incur a loss for the premium paid for that swaption.
Our investments are recorded at fair value and quoted prices or observable inputs may not be readily available to determine such value, resulting in the use of unobservable inputs to determine value, and the fair value of our investments may be materially different from the value that we ultimately realize upon their disposal.
The values of our investments may not be readily determinable or ultimately realizable. We measure the fair value of our investments quarterly, in accordance with guidance set forth in Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions that are beyond our control. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since market prices of investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset is valued. Accordingly, the value of our common stock could be adversely affected by our determinations regarding the fair value of our investments, whether in the applicable period or in the future. Additionally, such valuations may fluctuate over short periods of time.
Our determination of the fair value of our investments includes inputs provided by third-party dealers and pricing services. Valuations of certain investments in which we invest may be difficult to obtain or unreliable. In general, dealers and pricing services heavily disclaim their valuations. Dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental, or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of a security, valuations of the same security can vary substantially from one dealer or pricing service to another. Therefore, our results of operations for a given period could be adversely affected if our determinations regarding the fair market value of these investments are materially different from the values that we ultimately realize upon their disposal.
Investments in the common stock of other publicly traded mortgage REITs expose us to incremental risks and costs and may adversely affect our financial condition and results of operations.
We may invest in other mortgage REITs that primarily invest in Agency securities, non-Agency securities and other mortgage related instruments on a leveraged basis, utilizing short-term borrowings as their primary source of funding. Such mortgage REITs are, therefore, exposed to similar risk factors as those described herein and other risks inherent to investment strategies that they may pursue that diverge from our own.  In addition, our investments in other mortgage REITs may expose us to incremental risks and costs due to our lack of control, lack of transparency into their underlying investment portfolios and business operations, stock market volatility and management fees, each of which could adversely affect our financial condition and results of operations.

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The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. Government, may adversely affect our business.
The payments of principal and interest we receive on the Agency securities in which we invest are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The guarantees on Agency securities created by Fannie Mae and Freddie Mac are not backed by the full faith and credit of the United States, whereas the guarantee on securities created by Ginnie Mae are backed by the full faith and credit of the United States.
In response to general market instability and, more specifically, the financial conditions of Fannie Mae and Freddie Mac, in July 2008, the Housing and Economic Recovery Act of 2008, or "HERA", established FHFA as the new regulator for Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury, the FHFA and the U.S. Federal Reserve announced a comprehensive action plan to help stabilize the financial markets, support the availability of mortgage financing and protect taxpayers. Under this plan, among other things, the FHFA was appointed as conservator of both Fannie Mae and Freddie Mac. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantee obligations could be considerably limited relative to historical measurements. Any such changes to the nature of their guarantee obligations could re-define what constitutes an Agency security and could have broad adverse implications for the market and our business, operations and financial condition.
Future changes to Fannie Mae or Freddie Mac may create market uncertainty and may reduce the actual or perceived credit quality of securities issued or guaranteed by these agencies. Moreover, if the guarantee obligations of Fannie Mae or Freddie Mac were repudiated by FHFA, payments of principal and/or interest to holders of Agency securities issued by Fannie Mae or Freddie Mac would be reduced in the event of any borrower's late payments or failure to pay or a servicer's failure to remit borrower payments to the trust. In that case, trust administration and servicing fees could be paid from mortgage payments prior to distributions to holders of Agency securities. Any actual direct compensatory damages owed due to the repudiation of Fannie Mae or Freddie Mac's guarantee obligations may not be sufficient to offset any shortfalls experienced by holders of Agency securities. As a result, such laws or changes could increase the risk of loss on our investments in Agency mortgage investments guaranteed by Fannie Mae and/or Freddie Mac or adversely impact the market for such securities and spreads at which they trade and could materially and adversely affect our financial condition and results of operations.
There are conflicts of interest with other funds that we manage. 
Through our wholly-owned subsidiary, MTGE Management, LLC, we manage MTGE Investment Corp., which is also a mortgage REIT that invests in securities and instruments of the type invested by us. Although we have policies in place to seek to mitigate the effects of conflicts of interest, these policies will not eliminate the conflicts of interest that our officers and employees, who provide services to both us and MTGE, will face in making investment decisions on behalf of us or MTGE. Further, we do not have any agreement or understanding with MTGE that would give us any priority over it in opportunities to invest in overlapping investments. Accordingly, we may compete for access to investments with MTGE.
Our executive officers and other key personnel are critical to our success and the loss of any executive officer or key employee may materially adversely affect our business.
We operate in a highly specialized industry and our success is dependent upon the efforts, experience, diligence, skill and network of business contacts of our executive officers and key personnel. The departure of any of our executive officers and/or key personnel could have a material adverse effect on our operations and performance.
Risks Related to Our Taxation as a REIT
Our failure to qualify as a REIT would have adverse tax consequences.
We believe that we operate in a manner that allows us to qualify as a REIT for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, and Treasury Regulations promulgated thereunder (or the Code).  We plan to continue to meet the requirements for taxation as a REIT.  The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control and our compliance with the annual REIT income and quarterly asset requirements depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. For example, to qualify as a REIT, at least 75% of our gross income must come from real estate sources and 95% of our gross income must come from real estate sources and certain other sources that are itemized in the REIT tax laws.  Additionally, our ability to satisfy the REIT asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Furthermore, the proper classification of an instrument as debt or equity for federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements. We are also required to distribute to stockholders at least 90% of our REIT taxable income (determined without regard to the deduction for dividends paid and by excluding any net capital gain).

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If we fail to qualify as a REIT in any tax year, we would be subject to U.S. federal and state corporate income tax on our taxable net income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income.  Also, unless the IRS granted us relief under certain statutory provisions, we would remain disqualified as a REIT for four years following the year we first fail to qualify.  If we fail to qualify as a REIT, we would have to pay significant income taxes and would, therefore, have less money available for investments or for distributions to our stockholders.  This would likely have a significant adverse effect on the value of our equity.  In addition, the tax law would no longer require us to make distributions to our stockholders.
If we should fail to satisfy one or more requirements for REIT qualification, we may still qualify as a REIT if there is reasonable cause for the failure and not due to willful neglect and other applicable requirements are met, including completion of applicable IRS filings. It is not possible to state whether we would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances, we will not qualify as a REIT. Furthermore, if we satisfy the relief provisions and maintain our qualification as a REIT, we may be still subject to a penalty tax. The amount of the penalty tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the assets in question multiplied by the highest U.S. federal corporate tax rate (currently 35%) if that amount exceeds $50,000 per failure, and, in case of income test failures, will be a 100% tax on an amount based on the magnitude of the failure, as adjusted to reflect the profit margin associated with our gross income.
Distributions payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from "qualified dividends" payable to domestic stockholders that are individuals, trusts and estates is currently 20%. Distributions of ordinary income payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or distributions payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to remain qualified as a REIT or it could reduce the favorable tax attributes of REITs to stockholders.
The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in us. The federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Furthermore, changes in corporate and individual tax rates may reduce or eliminate the favorable tax attributes of REITs to stockholders relative to alternative investment vehicles. Revisions in federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal and state corporate income tax not to apply to earnings that we distribute. Distributions of our taxable income must generally occur in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the year and if paid with or before the first regular dividend payment after such declaration. We may also elect to retain, rather than distribute, our net long-term capital gains and pay tax on such gains if required. In this case, we could elect for our stockholders to include their proportionate shares of such undistributed long-term capital gains in income, and to receive a corresponding credit for their share of the tax that we paid. Our stockholders would then increase their adjusted basis of their stock by the difference between (a) the amounts of capital gain dividends that we designated and that they include in their taxable income, minus (b) the tax that we paid on their behalf with respect to that income. We intend to make distributions to our stockholders to comply with the REIT qualification requirements of the Internal Revenue Code.
To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal and state corporate income tax on our undistributed taxable income. Furthermore, if we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed, (y) the amounts of income we retained and on which we have paid corporate income tax and (z) any excess distributions from prior periods.
From time-to-time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may

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occur. For example, if we purchase mortgage securities at a discount, we are generally required to accrete the discount into taxable income prior to receiving the cash proceeds of the accreted discount at maturity. Additionally, if we incur capital losses in excess of capital gains, such net capital losses are not allowed to reduce our taxable income for purposes of determining our distribution requirement. They may be carried forward for a period of up to five years and applied against future capital gains subject to the limitation of our ability to generate sufficient capital gains, which cannot be assured. If we do not have other funds available in these situations we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to maintain our qualification as a REIT, or avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our stockholders' equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.
We may in the future choose to pay dividends in our own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive.
We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may nonetheless be subject to certain federal, state and local taxes on our income and assets, including, but not limited to, the following items. Any of these or other taxes we may incur would decrease cash available for distribution to our stockholders.
Regular U.S. federal and state corporate income taxes on any undistributed taxable income, including undistributed net capital gains.
A non-deductible 4% excise tax if the actual amount distributed to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws.
Corporate income taxes on the earnings of subsidiaries, to the extent that such subsidiaries are subchapter C corporations and are not qualified REIT subsidiaries or other disregarded entity for federal income tax purposes.
A 100% tax on transactions between us and our TRSs, that do not reflect arm's-length terms.  
If we acquire appreciated assets from a corporation that is not a REIT (i.e., a corporation taxable under subchapter C of the Internal Revenue Code) in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of the subchapter C corporation, we may be subject to tax on such appreciation at the highest corporate income tax rate then applicable if we subsequently recognize a gain on a disposition of any such assets during the ten-year period following their acquisition from the subchapter C corporation.  
A 100% tax on net income and gains from "prohibited transactions"
Penalty taxes and other fines for failure to satisfy one or more requirements for REIT qualification.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
To remain qualified as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make and, in certain cases, to maintain ownership of, certain attractive investments.

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Complying with REIT requirements may force us to liquidate otherwise attractive investments.
To remain qualified as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and, for tax years beginning on or before December 31, 2017, no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. For tax years beginning after December 31, 2017, no more than 20% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our investment portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to remain qualified as a REIT.
We enter into certain financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto. We believe that we would be treated for REIT asset and income test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we could fail to remain qualified as a REIT.
Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.
To remain qualified as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Internal Revenue Code could substantially limit our ability to hedge our liabilities. Any income from a properly designated hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute "gross income" for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may have to limit our use of advantageous hedging techniques or implement those hedges through our TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.
Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
We purchase and sell Agency mortgage-backed securities through TBAs and recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise, and may continue to do so in the future. While there is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat our TBAs as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency securities, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of the underlying Agency securities. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, it must be emphasized that the opinion of Skadden, Arps, Slate, Meagher & Flom LLP is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations

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and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income. If the IRS were to successfully challenge the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.
Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to remain qualified as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for federal income tax purposes.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of structuring CMOs, which would be treated as prohibited transactions for federal income tax purposes.
Net income that we derive from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (including Agency securities, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of a trade or business by us or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to us. We could be subject to this tax if we were to dispose of or structure CMOs in a manner that was treated as a prohibited transaction for federal income tax purposes.
We intend to conduct our operations at the REIT level so that no asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain transactions at the REIT level, and may limit the structures we utilize for our CMO transactions, even though the sales or structures might otherwise be beneficial to us. In addition, whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends on the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Internal Revenue Code that would prevent such treatment. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to avoid prohibited transaction characterization.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of common stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as unrelated business taxable income if shares of our common stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income;
part of the income and gain recognized by a tax-exempt investor with respect to our common stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the common stock;
part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under the Internal Revenue Code may be treated as unrelated business taxable income; and
to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a "taxable mortgage pool," or if we hold residual interests in a REMIC, a portion of the distributions paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.
Risks Related to Our Business Structure
Loss of our exemption from regulation pursuant to the Investment Company Act would adversely affect us.
We conduct our business so as not to become regulated as an investment company under the Investment Company Act in reliance on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires that: (i) at least 55% of our investment portfolio consist of "mortgages and other liens on and interest

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in real estate," or "qualifying real estate interests," and (ii) at least 80% of our investment portfolio consist of qualifying real estate interests plus "real estate-related assets."
The specific real estate related assets that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated thereunder. In satisfying the 55% requirement we treat Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool ("whole pool" securities) as qualifying real estate interests based on pronouncements of the SEC staff. We treat partial pool securities, CRT and other mortgage related securities as real estate-related assets. If the SEC determines that any of these securities are not qualifying interests in real estate or real estate-related assets, adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exceptions or changes its interpretation of the above exceptions, we could be required to restructure our activities or sell certain of our assets. Our compliance with these requirements may at times lead us to adopt less efficient methods of financing certain of our investments, and we may be precluded from acquiring higher yielding securities. Furthermore, if we fail to qualify for this exemption, our ability to use leverage would be substantially reduced and we would be unable to conduct our business as we currently conduct it, which could materially and adversely affect our business.
Risks Related to Our Common Stock
The market price and trading volume of our common stock may be volatile.
The market price of our common stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Price variations may be unrelated to our operating performance. If the market price of our common stock declines significantly, you may be unable to resell your shares at a gain. Further, fluctuations in the trading price of our common stock may adversely affect the liquidity of the trading market for our common stock and, in the event that we seek to raise capital through future equity financings, our ability to raise such equity capital.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
actual or anticipated variations in our quarterly operating results or distributions;
changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;
increases in market interest rates that lead purchasers of our shares of common stock to demand a higher yield;
changes in market valuations of similar companies;
adverse market reaction to any increased indebtedness we incur in the future;
issuance of additional equity securities;
our repurchases of shares of our common stock;
actions by institutional stockholders;
additions or departures of key management personnel;
speculation in the press or investment community;
price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies;
changes in regulatory policies, tax laws and financial accounting and reporting standards, particularly with respect to REITs, or applicable exemptions from the Investment Company Act of 1940, as amended;
actual or anticipated changes in our dividend policy and earnings or variations in operating results;
any shortfall in revenue or net income or any increase in losses from levels expected by securities analysts;
decreases in our net asset value per share;
loss of major repurchase agreement providers; and
general market and economic conditions.

In addition, the price of our common stock may be below our reported net asset value per common share. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future.

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Future offerings of debt securities, which would rank senior to our preferred and common stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
In the future, we may raise capital through the issuance of debt or equity securities. Upon liquidation, holders of our debt securities, if any, preferred stock and lenders with respect to other borrowings will be entitled to our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock has a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay dividends to the holders of our common stock. Sales of substantial amounts of our common stock, or the perception that these sales could occur, could have a material adverse effect on the price of our common stock. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us.
Future sales of shares of our common stock may depress the price of our shares.
We cannot predict the effect, if any, of future sales of our common stock or the availability of shares for future sales on the market price of our common stock. Any sales of a substantial number of our shares in the public market, or the perception that sales might occur, may cause the market price of our shares to decline.     
We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future.
We intend to pay monthly dividends to our common stockholders and to distribute all or substantially all of our taxable income within the limits prescribed by the Internal Revenue Code. However, we have not established a minimum dividend payment level and the amount of our dividend will fluctuate. Our ability to pay dividends may be adversely affected by the risk factors described herein. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, the requirements for REIT qualification and such other factors as our Board of Directors may deem relevant from time to time. We may not be able to make distributions in the future or our Board of Directors may change our dividend policy in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to pay dividends in excess of our current and accumulated tax earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes. A return of capital reduces the basis of a stockholder's investment in our common stock to the extent of such basis and is treated as capital gain thereafter.
An increase in market interest rates may cause a material decrease in the market price of our common stock.
One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions are likely to affect adversely the market price of our common stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a higher distribution rate on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby reducing cash flow and our ability to service our indebtedness and pay distributions.
The stock ownership limit imposed by the Internal Revenue Code for REITs and our amended and restated certificate of incorporation may restrict our business combination opportunities.
To qualify as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year in which we qualify as a REIT. Our amended and restated certificate of incorporation, with certain exceptions, authorizes our Board of Directors to take the actions that are necessary and desirable to qualify as a REIT. Pursuant to our amended and restated certificate of incorporation, no person may beneficially or constructively own more than 9.8% in value or in number of shares, whichever is more restrictive, of our common or capital stock.
Our Board of Directors may grant an exemption from this 9.8% stock ownership limitation, in its sole discretion, subject to such conditions, representations and undertakings as it may determine are reasonably necessary. Pursuant to our amended and restated certificate of incorporation, our Board of Directors has the power to increase or decrease the percentage of common or capital stock that a person may beneficially or constructively own. However, any decreased stock ownership limit will not apply

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to any person whose percentage ownership of our common or capital stock, as the case may be, is in excess of such decreased stock ownership limit until that person's percentage ownership of our common or capital stock, as the case may be, equals or falls below the decreased stock ownership limit. Until such a person's percentage ownership of our common or capital stock, as the case may be, falls below such decreased stock ownership limit, any further acquisition of our common or capital stock will be in violation of the decreased stock ownership limit.
The ownership limits imposed by the tax law are based upon direct or indirect ownership by "individuals," but only during the last half of a tax year. The ownership limits contained in our amended and restated certificate of incorporation apply to the ownership at any time by any "person," which term includes entities. Any attempt to own or transfer shares of our common stock or capital stock in violations of these restrictions may result in the shares being transferred to a charitable trust or may be void. These ownership limitations are intended to assist us in complying with the tax law requirements, and to minimize administrative burdens. However, these ownership limits might also delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

The stock ownership limitation contained in our amended and restated certificate of incorporation generally does not permit ownership in excess of 9.8% of our common or capital stock, and attempts to acquire our common or capital stock in excess of these limits will be ineffective unless an exemption is granted by our Board of Directors.

As described above, our amended and restated certificate of incorporation generally prohibits beneficial or constructive ownership by any person of more than 9.8% (by value or by number of shares, whichever is more restrictive) of our common or capital stock, unless exempted by our Board of Directors. Our amended and restated certificate of incorporation's constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than these percentages of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of these percentages of the outstanding stock and thus be subject to our amended and restated certificate of incorporation's ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without the consent of the Board of Directors will result in the shares being automatically transferred to a charitable trust or, if the transfer to a charitable trust would not be effective, such transfer being treated as invalid from the outset.

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could also adversely affect the market price of our common stock.

Provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult and expensive for a third party to acquire control of us, even if a change of control would be beneficial to our stockholders. We could issue a series of preferred stock to impede the completion of a merger, tender offer or other takeover attempt. The anti-takeover provisions in our amended and restated certificate of incorporation and bylaws may impede takeover attempts, or other transactions, that may be in the best interests of our stockholders and, in particular, our common stockholders. In addition, the market price of our common stock could be adversely affected to the extent that provisions of our amended and restated certificate of incorporation and bylaws discourage potential takeover attempts, or other transactions, that our stockholders may favor.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
 
We do not own any property. Our executive offices are located in Bethesda, Maryland.
Item 3. Legal Proceedings  
Neither we, nor any of our consolidated subsidiaries, are currently subject to any material litigation nor, to our knowledge, is any litigation threatened against us or any consolidated subsidiary, in each case, that is expected to have a material adverse effect on our business, financial condition or operations. See also "Loss Contingencies" in Note 2 to the Consolidated Financial Statements included under Item 8 of this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.

23



PART II. FINANCIAL INFORMATION

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Quarterly Stock Prices and Dividend Declarations
 
Our common stock is listed on the NASDAQ Global Select Market under the symbol "AGNC." As of January 31, 2017, we had 1,084 stockholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of stockholders.
 
The following table sets forth the range of high and low sales prices of our common stock as reported on the NASDAQ Global Select Market and dividends declared on our common stock for fiscal years 2016 and 2015:
 
 
Common Stock
 
Sales Prices
 
Dividends Declared 1
 
High 
Low
 
Fiscal Year 2016
 
 
 
 
Fourth Quarter
$
20.43

$
17.30

 
$
0.54

Third Quarter
$
20.10

$
18.88

 
$
0.56

Second Quarter
$
19.85

$
18.00

 
$
0.60

First Quarter
$
18.80

$
15.69

 
$
0.60

Fiscal Year 2015
 

 

 
 

Fourth Quarter
$
19.54

$
16.89

 
$
0.60

Third Quarter
$
20.08

$
18.21

 
$
0.60

Second Quarter
$
21.83

$
18.31

 
$
0.62

First Quarter
$
22.36

$
20.74

 
$
0.66

_______________________
1.Represents the sum of monthly dividends declared during each period presented.

We intend to pay monthly dividends to our common stockholders and to distribute all of our annual taxable income in a timely manner. This will enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected for the reasons described under the caption "Risk Factors."

In addition, holders of our 8.000% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") and our 7.750% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") (each underlying depositary share representing a 1/1000th interest in a share of our Series B Preferred Stock) are entitled to receive cumulative cash dividends at a rate of 8.000% and 7.750% per annum, respectively, of their aggregate liquidation preference of $173 million and $175 million, respectively, before holders of our common stock are entitled to receive any dividends. Under certain circumstances upon a change of control, the Series A and Series B Preferred Stock are convertible to shares of our common stock. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Directors may deem relevant from time to time.
 
The following table summarizes the tax characterization of dividends declared on our common stock for fiscal years 2016 and 2015:
 
 
 
 
Tax Characterization
 
 
Dividends Declared Per Share of Common Stock
 
Ordinary Income Per Share
 
Qualified Dividends
 
Long-Term Capital Gains Per Share
Non-Dividend Distributions 2
Fiscal Year 2016 1
 
$
2.12

 
$
1.689674

 
$

 
$

$
0.430326

Fiscal Year 2015
 
$
2.48

 
$
2.480000

 
$

 
$

$

_________________________________________________________
1.
Includes dividends declared through November 30, 2016. The dividend of $0.18 per common share declared on December 14, 2016, which was payable on January 9, 2017, will be reported to stockholders as a fiscal year 2017 distribution for federal income tax purposes.
2.
Also referred to as a "return of capital." Represents dividends paid in excess of our current and accumulated earnings and profit, or "E&P," which is a tax-based measure calculated by making adjustments to taxable income for items that are treated differently for E&P purposes, such as net capital

24



losses and utilization of net capital loss carryforwards. A return of capital reduces the basis of a stockholder's investment in our common stock to the extent of such basis and is treated as capital gain thereafter.

Our stock transfer agent and registrar is Computershare Investor Services. Requests for information from Computershare can be sent to Computershare Investor Services, P.O. Box 43078, Providence, RI 02940-3078 and their telephone number is 1-800-733-5001.
 Equity Compensation Plan Information
 
The following table summarizes information, as of December 31, 2016, concerning shares of our common stock authorized for issuance under our equity compensation plans, pursuant to which grants of equity-based awards, including stock options, restricted stock units and unrestricted stock awards may be granted from time to time. See "Item 8. Financial Statements" for a description of our equity compensation plans.
Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column of this table)
Equity compensation plans approved by security holders 1
 
122,841
 
$

 
9,898,593
Equity compensation plans not approved by security holders
 
 

 
Total
 
122,841
 
$

 
9,898,593
_________________________________________________________
1.
Represents unvested restricted stock units and accrued dividend equivalent units.

Performance Graph
 
The following graph and table compare a stockholder's cumulative total return, assuming $100 invested at December 31, 2011, with the reinvestment of all dividends, as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the Standard & Poor's 500 Stock Index ("S&P 500"); (iii) the stocks included in the FTSE NAREIT Mortgage REIT Index; (iv) an index of selected issuers in our peer group, composed of Annaly Capital Management, Inc., Anworth Mortgage Asset Corporation, Capstead Mortgage Corporation, CYS Investments, Inc. and Armour Residential REIT, Inc. (collectively, the "Agency REIT Peer Group").

25



http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11426937&doc=22
_______________________
*$100 invested on 12/31/11 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright © 2017 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

 
 
 
December 31,
 
 
2016
 
2015
 
2014
 
2013
 
2012
AGNC Investment Corp.
 
$
126.34

 
$
106.90

 
$
118.63

 
$
93.30

 
$
120.10

S&P 500
 
$
198.18

 
$
177.01

 
$
174.60

 
$
153.58

 
$
116.00

FTSE NAREIT Mortgage REITs
 
$
155.11

 
$
126.26

 
$
138.56

 
$
117.54

 
$
119.89

Agency REIT Peer Group 1
 
$
112.01

 
$
93.07

 
$
98.05

 
$
81.35

 
$
100.95

_______________________
1.Agency REIT Peer Group annual return is calculated on a weighted basis by market cap at the end of the previous year.

 
The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness can be guaranteed. The historical information set forth above is not necessarily indicative of future performance. Accordingly, we do not make or endorse any predictions as to future share performance.  
Item 6. Selected Financial Data

The following selected financial data is derived from our audited financial statements for the five fiscal years ended December 31, 2016. The selected financial data should be read in conjunction with the more detailed information contained in the Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.


26



($ in millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
Balance Sheet Data
 
2016
 
2015
 
2014
 
2013
 
2012
Investment securities, at fair value
 
$
46,499

 
$
52,473

 
$
56,748

 
$
65,941

 
$
85,245

Total assets
 
$
56,880

 
$
57,021

 
$
67,766

 
$
76,255

 
$
100,453

Repurchase agreements, Federal Home Loan Bank advances and other debt
 
$
41,355

 
$
46,102

 
$
51,057

 
$
64,443

 
$
75,415

Total liabilities
 
$
49,524

 
$
49,050

 
$
58,338

 
$
67,558

 
$
89,557

Total stockholders' equity
 
$
7,356

 
$
7,971

 
$
9,428

 
$
8,697

 
$
10,896

Net asset value per common share as of period end 1
 
$
21.17

 
$
22.59

 
$
25.74

 
$
23.93

 
$
31.64

Tangible net asset value per common share as of period end 2
 
$
19.50

 
N/A

 
N/A

 
N/A

 
N/A

 
 
Fiscal Year
Statement of Comprehensive Income Data
 
2016
 
2015
 
2014
 
2013
 
2012
Interest income
 
$
1,321

 
$
1,466

 
$
1,472

 
$
2,193

 
$
2,109

Interest expense 3
 
394

 
330

 
372

 
536

 
512

Net interest income
 
927

 
1,136

 
1,100

 
1,657

 
1,597

Other gain (loss), net 3
 
(199
)
 
(782
)
 
(1,192
)
 
(217
)
 
(157
)
Operating Expenses
 
105

 
139

 
141

 
168

 
144

Income (loss) before income tax
 
623

 
215

 
(233
)
 
1,272

 
1,296

Provision for income tax, net
 

 

 

 
13

 
19

Net income (loss)
 
623

 
215

 
(233
)
 
1,259

 
1,277

Dividend on preferred stock
 
28

 
28

 
23

 
14

 
10

Net income (loss) available (attributable) to common stockholders
 
$
595

 
$
187

 
$
(256
)
 
$
1,245

 
$
1,267

 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
623

 
$
215

 
$
(233
)
 
$
1,259

 
$
1,277

Other comprehensive income (loss) 3
 
(331
)
 
(496
)
 
1,813

 
(2,938
)
 
1,244

Comprehensive income (loss) available (attributable) to common stockholders
 
292

 
(281
)
 
1,580

 
(1,679
)
 
2,521

Dividend on preferred stock
 
28

 
28

 
23

 
14

 
10

Comprehensive income (loss) available (attributable) to common stockholders
 
$
264

 
$
(309
)
 
$
1,557

 
$
(1,693
)
 
$
2,511

 
 
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic and diluted
 
331.9

 
348.6

 
353.3

 
379.1

 
303.9

Net income (loss) per common share - basic and diluted
 
$
1.79

 
$
0.54

 
$
(0.72
)
 
$
3.28

 
$
4.17

Comprehensive income (loss) per common share - basic and diluted
 
$
0.80

 
$
(0.89
)
 
$
4.41

 
$
(4.47
)
 
$
8.26

Dividends declared per common share
 
$
2.30

 
$
2.48

 
$
2.61

 
$
3.75

 
$
5.00

 
 
Fiscal Year
Other Data (unaudited)
 
2016
 
2015
 
2014
 
2013
 
2012
Average investment securities - at par
 
$47,101
 
$51,759
 
$53,578
 
$75,263
 
$71,002
Average investment securities - at cost
 
$49,268
 
$54,019
 
$56,051
 
$79,056
 
$74,588
Average total assets - at fair value
 
$56,931
 
$63,674
 
$67,007
 
$96,956
 
$86,172
Net TBA dollar roll position - at par (as of period end)
 
$10,916
 
$7,295
 
$14,412
 
$2,119
 
$12,477
Net TBA dollar roll position - at cost (as of period end)
 
$11,312
 
$7,430
 
$14,576
 
$2,276
 
$12,775
Net TBA dollar roll position - at market value (as of period end)
 
$11,165
 
$7,444
 
$14,768
 
$2,271
 
$12,870
Net TBA dollar roll position - at carrying value (as of period end) 4
 
$(147)
 
$14
 
$192
 
$(5)
 
$95
Average net TBA portfolio - at cost
 
$10,329
 
$7,547
 
$13,212
 
$11,383
 
$3,294
Average mortgage borrowings outstanding 5
 
$44,566
 
$48,641
 
$50,015
 
$71,753
 
$68,810
Average stockholders' equity 6
 
$7,718
 
$8,817
 
$9,295
 
$10,394
 
$9,473
Average coupon 7
 
3.64
 %
 
3.62
 %
 
3.63
 %
 
3.59
 %
 
3.90
 %
Average asset yield 8
 
2.68
 %
 
2.71
 %
 
2.63
 %
 
2.77
 %
 
2.82
 %
Average cost of funds 9
 
(1.45
)%
 
(1.49
)%
 
(1.40
)%
 
(1.34
)%
 
(1.11
)%
Average net interest rate spread
 
1.23
 %
 
1.22
 %
 
1.23
 %
 
1.43
 %
 
1.71
 %

27



Average net interest rate spread, including TBA dollar roll income 10
 
1.39
 %
 
1.48
 %
 
1.75
 %
 
1.63
 %
 
1.77
 %
Average coupon (as of period end)
 
3.61
 %
 
3.63
 %
 
3.65
 %
 
3.58
 %
 
3.69
 %
Average asset yield (as of period end)
 
2.77
 %
 
2.78
 %
 
2.74
 %
 
2.70
 %
 
2.61
 %
Average cost of funds (as of period end) 11
 
(1.44
)%
 
(1.65
)%
 
(1.40
)%
 
(1.31
)%
 
(1.22
)%
Average net interest rate spread (as of period end)
 
1.33
 %
 
1.13
 %
 
1.34
 %
 
1.39
 %
 
1.39
 %
Net comprehensive income return on average common equity 12
 
3.6
 %
 
(3.6
)%
 
17.3
 %
 
(16.6
)%
 
26.9
 %
Economic return on common equity 13
 
3.9
 %
 
(2.6
)%
 
18.5
 %
 
(12.5
)%
 
32.2
 %
Average "at risk" leverage 14
 
7.1:1

 
6.4:1

 
7.0:1

 
8.0:1

 
7.6:1

Average tangible net book value "at risk" leverage 16
 
7.5:1

 
N/A

 
N/A

 
N/A

 
N/A

"At risk" leverage (as of period end) 15
 
7.1:1

 
6.8:1

 
6.9:1

 
7.5:1

 
8.2:1

Tangible net book value "at risk" leverage (as of period end) 16
 
7.7:1

 
N/A

 
N/A

 
N/A

 
N/A

Expenses % of average total assets
 
0.18
 %
 
0.22
 %
 
0.21
 %
 
0.17
 %
 
0.17
 %
Expenses % of average assets, including average net TBA position
 
0.16
 %
 
0.20
 %
 
0.18
 %
 
0.15
 %
 
0.16
 %
Expenses % of average stockholders' equity
 
1.36
 %
 
1.58
 %
 
1.52
 %
 
1.61
 %
 
1.52
 %
_______________________
* Except as noted below, average numbers for each period are weighted based on days on our books and records.
N/A - Not applicable

1.
Net asset value per common share is calculated as our total stockholders' equity, less our Series A and Series B Preferred Stock aggregate liquidation preference, divided by our number of common shares outstanding as of period end.
2.
Tangible net asset value per common share excludes goodwill and other intangible assets, net.
3.
We voluntarily discontinued hedge accounting for our interest rate swaps as of September 30, 2011. Please refer to our Interest Expense and Cost of Funds discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 2 and 5 of our Consolidated Financial Statements in this Form 10-K for additional information regarding our discontinuance of hedge accounting.
4.
The carrying value of our net TBA position represents the difference between the market value and the cost basis of the TBA contract as of period-end and is reported in derivative assets/(liabilities), at fair value on our accompanying consolidated balance sheets.
5.
Average mortgage borrowings include repurchase agreements used to fund Agency securities ("Agency repo"), FHLB advances and debt of consolidated VIEs. Amount excludes U.S. Treasury repo agreements and TBA contracts.
6.
Average stockholders' equity calculated as our average month-end stockholders' equity during the period.
7.
Average coupon for the period was calculated by dividing our total coupon (or cash) interest income on investment securities by our average investment securities held at par.
8.
Average asset yield for the period was calculated by dividing our total cash interest income on investment securities, adjusted for amortization of premiums and discounts, by our average amortized cost of investment securities held.
9.
Average cost of funds includes mortgage borrowings and interest rate swap periodic costs. Amount excludes interest rate swap termination fees, forward starting swaps and costs associated with other supplemental hedges, such as interest rate swaptions and U.S. Treasury positions. Average cost of funds for the period was calculated by dividing our total cost of funds by our average mortgage borrowings outstanding for the period.
10.
TBA dollar roll income/(loss) is net of short TBAs used for hedging purposes and is recognized in gain (loss) on derivative instruments and other securities, net.
11.
Average cost of funds as of period end includes mortgage borrowings outstanding and interest rate swap hedges. Amount excludes costs associated with other supplemental hedges such as swaptions, U.S. Treasuries and TBA positions.
12.
Net comprehensive income (loss) return on average common equity for the period was calculated by dividing our comprehensive income/(loss) available /(attributable) to common stockholders by our average stockholders' equity, net of the Series A and Series B Preferred Stock aggregate liquidation preference.
13.
Economic return on common equity represents the sum of the change in our net asset value per common share and our dividends declared on common stock during the period over our beginning net asset value per common share.
14.
Average "at risk" leverage is calculated by dividing the sum of our daily weighted average mortgage borrowings outstanding and our weighted average net TBA dollar position (at cost) for the period by the sum of our average stockholders' equity less our average investment in REIT equity securities for the period. Leverage excludes U.S. Treasury repurchase agreements.
15.
"At risk" leverage as of period end is calculated by dividing the sum of our mortgage borrowings outstanding, our receivable/payable for unsettled investment securities and our net TBA dollar roll position outstanding as of period end (at cost) by the sum of our total stockholders' equity less the fair value of investments in REIT equity securities at period end. Leverage excludes U.S. Treasury repurchase agreements.
16.
Tangible net book value "at risk" leverage includes the components of "at risk" leverage, with stockholders' equity adjusted to exclude goodwill and other intangible assets, net.
Item 7. 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. Our MD&A is presented in eight sections:
Executive Overview
Financial Condition
Summary of Critical Accounting Estimates
Results of Operations

28



Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Aggregate Contractual Obligations
Forward-Looking Statements
EXECUTIVE OVERVIEW
The size and composition of our investment portfolio depends on the investment strategies we implement, the availability of investment capital and overall market conditions, including the availability of attractively priced investments and suitable financing to appropriately leverage our investment portfolio. Market conditions are influenced by, among other things, current levels of and expectations for future levels of interest rates, mortgage prepayments, market liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, evolving regulations or legal settlements that impact servicing practices or other mortgage related activities.

Trends and Recent Market Impacts
2016 proved to be a challenging year for many fixed income investments as U.S. interest rates fluctuated significantly during the year in response to changing views on economic growth both domestically and abroad. The yield on the 10 year U.S. Treasury security, for example, hit a low of 1.36% in July following the Brexit vote in the United Kingdom and a high of 2.60% in December following the U.S. Presidential election. Our view at the beginning of the year was that U.S. interest rates would remain "lower for longer," based upon the belief that global economic weakness, secular labor trends and accelerating technological advances would lead to moderate employment growth and persistently low inflation both in the U.S. and globally, thus making it difficult for the the Fed to move away from its ultra-accommodative stance on monetary policy. This view proved to be the emerging scenario for most of the year, and as a result, the Fed refrained from raising rates for most of the year. Following the unanticipated outcome of the U.S. Presidential election in November, however, the direction and level of U.S. interest rates became less certain as expectations for economic growth in the U.S. improved markedly and as the Fed raised the Federal Funds rate by 0.25% in December.
The changing interest rate landscape in the U.S. over the course of the year caused Agency RMBS to underperform swap and U.S. Treasury rates. This spread widening negatively impacted AGNC’s net asset value, but also improved the return profile on new investments. In response to more favorable investment opportunities, we increased our tangible net book value "at risk" leverage to 7.7x as of December 31, 2016, from 6.8x as of December 31, 2015. Our tangible net book value excludes $554 million of goodwill as of December 31, 2016, which we recorded in connection with our acquisition of AMM. This increase in leverage improves the earnings profile of our portfolio but also increases the sensitivity of our net asset value to fluctuations in the spread between Agency RMBS and other benchmark rates.
We also adjusted the composition of our asset portfolio during the year. Our mix of fixed rate 15 year and 30 year securities (including TBAs) remained relatively stable throughout the year, at 27% and 73%, respectively, as of December 31, 2016, but the weighted average loan age, or "seasoning," of our portfolio increased significantly over the year. As of December 31, 2016, the weighted average loan age of our 15 year and 30 year Agency RMBS positions were approximately 5.0 years and 3.4 years, respectively. In aggregate, 75% of our on-balance sheet Agency RMBS position had a weighted average loan age of at least 3.0 years as of December 31, 2016, compared to 62% as of December 31, 2015 and less than 5% was during the "taper tantrum" in 2013. The increase in the weighted average loan age of our Agency RMBS should reduce prepayment speed variability of our portfolio and, therefore, require less interest rate hedging, all other things equal.
In response to higher interest rates and the extension of the duration of our Agency RMBS, particularly in the fourth quarter, we increased the size of our hedge portfolio. As a result, our hedge ratio increased to 91% of our funding liabilities (Agency repo, TBA and other debt) as of December 31, 2016, from an intra-year low of 75% as of September 30, 2016 and from 87% as of December 31, 2015. Ongoing portfolio rebalancing actions during the year, as well as the cumulative increase in our hedge position, enabled us to keep our net asset duration gap relatively stable throughout the year. Our net asset duration gap, which is a measure of our portfolio’s interest rate sensitivity, net of hedges, was 1.1 years as of December 31, 2016, compared to 0.8 years as of December 31, 2015.
The funding landscape for Agency RMBS improved in 2016 as a result of the implementation of money market reform requirements, which took effect in October of 2016 and caused a sizable reallocation of assets from prime funds to U.S. Government bond money market funds. This shift of capital to U.S. Government money market funds was supportive of repo backed by Agency RMBS, ultimately reducing our funding costs relative to LIBOR. As we receive a floating LIBOR rate on our pay fixed/receive floating interest rate swaps, the resultant decline in the spread between our repo borrowing costs and LIBOR had the effect of lowering our all-in cost of funds on the portion of our debt that we have hedged with pay fixed swaps.

29



In addition, our wholly-owned captive broker-dealer subsidiary, BES, became fully operational in the third quarter of 2016 as a member of the FICC, providing us with access to additional repo funding with favorable rates and haircuts relative to traditional bilateral repo arrangements. As of December 31, 2016, we had placed approximately $4.7 billion of repo financing at BES, providing further diversification of our funding sources and reducing our net interest expense. We anticipate transitioning a greater share of our repo funding to BES during 2017.
In the third quarter of 2016, our Board of Directors expanded our investment guidelines to include credit-sensitive assets, including CRT securities issued by the GSEs and other third parties. We believe CRT securities provide a compelling opportunity to invest in conforming credit, which has previously been the exclusive purview of the GSEs, and could provide incremental returns to our existing Agency RMBS investments over the longer term.
Our net asset value declined to $21.17 per common share as of December 31, 2016, from $22.59 per common share as of December 31, 2015. Our tangible net book value per common share was $19.50 per common share as of December 31, 2016. The loss in our net asset value was predominately a result of wider spreads on agency MBS relative to benchmark interest rates and the large increase in interest rates experienced during the fourth quarter.
Our economic return on common equity was 3.9% for 2016, comprised of dividends declared per common share of $2.30 and a loss in net asset value of $1.42 per common share. Our total return on our common stock, which includes stock price appreciation and dividend reinvestments, was 18.2% for the year.
The widening of Agency RMBS spreads and favorable funding dynamics that occurred over the course of 2016 have improved the risk-adjusted returns on Agency RMBS investments. In addition, with AGNC’s recent expansion into credit-sensitive investments, we believe that opportunistic investments in CRT securities can provide incremental returns that are less correlated with the interest rate exposure inherent in our Agency RMBS portfolio. Portfolio returns could be further supported by either higher leverage or a reduction in aggregate hedge or funding cost.
Finally, on July 1, 2016, we completed the acquisition of our external Manager, AMM, thereby internalizing our management, which lowers our operating costs and generates management fee income from managing MTGE.

30



Market Information
The following table summarizes interest rates and prices of generic fixed rate Agency RMBS as of each date presented below:
Interest Rate/Security Price 1
 
Dec. 31, 2015
 
Mar. 31, 2016
 
June 30, 2016
 
Sept. 30, 2016
 
Dec. 31, 2016
 
Dec. 31, 2016
vs
Dec. 31, 2015
LIBOR:
 
 
 
 
 
 
 
 
 
 
 
 
 
1-Month
 
0.43%
 
0.44%
 
0.47%
 
0.53%
 
0.77%
 
+0.34

bps
3-Month
 
0.61%
 
0.63%
 
0.65%
 
0.85%
 
1.00%
 
+0.39

bps
6-Month
 
0.85%
 
0.90%
 
0.92%
 
1.24%
 
1.31%
 
+0.46

bps
U.S. Treasury Security Rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
2-Year U.S. Treasury
 
1.06%
 
0.73%
 
0.59%
 
0.76%
 
1.20%
 
+0.14

bps
3-Year U.S. Treasury
 
1.32%
 
0.86%
 
0.70%
 
0.87%
 
1.46%
 
+0.14

bps
5-Year U.S. Treasury
 
1.77%
 
1.22%
 
1.01%
 
1.15%
 
1.92%
 
+0.15

bps
10-Year U.S. Treasury
 
2.27%
 
1.78%
 
1.49%
 
1.61%
 
2.43%
 
+0.16

bps
30-Year U.S. Treasury
 
3.01%
 
2.62%
 
2.31%
 
2.33%
 
3.05%
 
+0.04

bps
Interest Rate Swap Rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
2-Year Swap
 
1.17%
 
0.85%
 
0.74%
 
1.01%
 
1.46%
 
+0.29

bps
3-Year Swap
 
1.41%
 
0.96%
 
0.81%
 
1.07%
 
1.68%
 
+0.27

bps
5-Year Swap
 
1.73%
 
1.18%
 
0.99%
 
1.18%
 
1.96%
 
+0.23

bps
10-Year Swap
 
2.19%
 
1.64%
 
1.38%
 
1.46%
 
2.32%
 
+0.13

bps
30-Year Swap
 
2.62%
 
2.13%
 
1.84%
 
1.78%
 
2.57%
 
-0.05

bps
30-Year Fixed Rate Agency Price:
 
 
 
 
 
 
 
 
 
 
 
 
 
3.0%
 
$100.01
 
$102.59
 
$103.75
 
$103.95
 
$99.38
 
-$0.63
3.5%
 
$103.18
 
$104.86
 
$105.50
 
$105.53
 
$102.50
 
-$0.68
4.0%
 
$105.83
 
$106.86
 
$107.23
 
$107.41
 
$105.13
 
-$0.70
4.5%
 
$108.00
 
$108.82
 
$109.17
 
$109.52
 
$107.51
 
-$0.49
15-Year Fixed Rate Agency Price:
 
 
 
 
 
 
 
 
 
 
 
 
 
2.5%
 
$100.80
 
$102.66
 
$103.48
 
$103.56
 
$100.20
 
-$0.60
3.0%
 
$103.02
 
$104.47
 
$104.84
 
$104.99
 
$102.62
 
-$0.40
3.5%
 
$104.72
 
$105.59
 
$105.97
 
$105.41
 
$104.17
 
-$0.55
4.0%
 
$104.41
 
$104.31
 
$103.81
 
$103.73
 
$102.69
 
-$1.72
_______________________
1.
Price information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information is as of 3:00 p.m. (EST) on such date and can vary by source. Prices and interest rates in the table above were obtained from Barclays. LIBOR rates were obtained from Bloomberg.
The following table summarizes the monthly weighted average actual one-month annualized constant prepayment rates on our investment portfolio during fiscal year 2016.
Annualized Monthly Constant Prepayment Rates 1
 
Jan. 2016
 
Feb. 2016
 
Mar. 2016
 
Apr. 2016
 
May 2016
 
June 2016
 
July 2016
 
Aug. 2016
 
Sep. 2016
 
Oct. 2016
 
Nov. 2016
 
Dec. 2016
AGNC portfolio
 
10%
 
8%
 
9%
 
12%
 
11%
 
13%
 
14%
 
13%
 
16%
 
15%
 
14%
 
14%
 ________________________
1.
Weighted average actual one-month annualized CPR released at the beginning of the month based on securities held/outstanding as of the preceding month-end.


31



FINANCIAL CONDITION
As of December 31, 2016 and 2015, our investment portfolio consisted of $46.5 billion and $52.5 billion of investment securities, at fair value, respectively, and an $11.2 billion and $7.4 billion net long TBA position, at fair value, respectively. The following table is a summary of our investment portfolio as of December 31, 2016 and 2015 (dollars in millions):
 
 
December 31, 2016
 
December 31, 2015
Investment Portfolio (Includes TBAs)
 
Amortized Cost
 
Fair Value
 
Average Coupon
 
%
 
Amortized Cost
 
Fair Value
 
Average Coupon
 
%
Fixed rate Agency RMBS and TBA securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ≤ 15-year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ≤ 15-year RMBS
 
$
12,794

 
$
12,867

 
3.26
%
 
22
%
 
$
16,725

 
$
16,865

 
3.25
%
 
28
%
15-year TBA securities
 
2,188

 
2,172

 
2.57
%
 
4
%
 
295

 
293

 
3.38
%
 
1
%
Total ≤ 15-year
 
14,982

 
15,039

 
3.16
%
 
26
%
 
17,020

 
17,158

 
3.25
%
 
29
%
20-year RMBS
 
801

 
817

 
3.49
%
 
1
%
 
1,061

 
1,088

 
3.48
%
 
2
%
30-year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
30-year RMBS
 
31,553

 
31,052

 
3.63
%
 
54
%
 
32,790

 
32,570

 
3.70
%
 
54
%
30-year TBA securities
 
9,124

 
8,993

 
3.58
%
 
16
%
 
7,135

 
7,150

 
3.34
%
 
12
%
Total 30-year
 
40,677

 
40,045

 
3.62
%
 
70
%
 
39,925

 
39,720

 
3.63
%
 
66
%
Total fixed rate Agency RMBS and TBA securities
 
56,460

 
55,901

 
3.49
%
 
97
%
 
58,006

 
57,966

 
3.52
%
 
97
%
Adjustable rate Agency RMBS
 
371

 
379

 
2.96
%
 
1
%
 
484

 
495

 
3.05
%
 
1
%
CMO Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMO
 
796

 
801

 
3.41
%
 
2
%
 
973

 
990

 
3.40
%
 
2
%
Interest-only strips
 
132

 
151

 
5.03
%
 
%
 
152

 
179

 
5.28
%
 
%
Principal-only strips
 
136

 
144

 
%
 
%
 
165

 
174

 
%
 
%
Total CMO Agency RMBS
 
1,064

 
1,096

 
3.89
%
 
2
%
 
1,290

 
1,343

 
3.97
%
 
2
%
Total Agency RMBS and TBA securities
 
57,895

 
57,376

 
3.50
%
 
100
%
 
59,780

 
59,804

 
3.53
%
 
100
%
Non-Agency RMBS
 
102

 
101

 
3.42
%
 
%
 
114

 
113

 
3.50
%
 
%
CMBS
 
23

 
23

 
6.55
%
 
%
 

 

 
%
 
%
CRT
 
161

 
164

 
5.25
%
 
%
 

 

 
%
 
%
Total investment portfolio
 
$
58,181

 
$
57,664

 
3.51
%
 
100
%
 
$
59,894

 
$
59,917

 
3.53
%
 
100
%
Our TBA position is recorded as derivative instruments in our accompanying consolidated financial statements, with the TBA dollar roll transactions representing a form of off-balance sheet financing. As of December 31, 2016 and 2015, our TBA position had a net carrying value of $(147) million and $14 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 cost basis or the forward price to be paid or received for the underlying Agency security.

32



The following tables summarize certain characteristics of our Agency RMBS fixed rate portfolio, inclusive of our net TBA position, as of December 31, 2016 and 2015 (dollars in millions):
 
 
December 31, 2016
 
 
Includes Net TBA Position
 
Excludes Net TBA Position
Fixed Rate Agency RMBS and TBA Securities
 
Par Value
 
Amortized
Cost
 
Fair Value
 
% Lower Loan Balance & HARP 1,2
 
Amortized
Cost Basis
 
Weighted Average
 
Projected Life
CPR 4
 
WAC 3
 
Yield 4
 
Age (Months)
Fixed rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ≤ 15-year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.5%
 
$
4,877

 
$
4,945

 
$
4,912

 
26%
 
101.7%
 
2.96%
 
2.05%
 
50
 
9%
3.0%
 
3,460

 
3,561

 
3,561

 
73%
 
102.9%
 
3.50%
 
2.20%
 
55
 
9%
3.5%
 
3,294

 
3,408

 
3,450

 
90%
 
103.4%
 
3.95%
 
2.50%
 
63
 
10%
4.0%
 
2,655

 
2,766

 
2,810

 
89%
 
104.2%
 
4.40%
 
2.69%
 
72
 
11%
4.5%
 
285

 
298

 
302

 
98%
 
104.6%
 
4.87%
 
3.03%
 
76
 
11%
≥ 5.0%
 
4

 
4

 
4

 
22%
 
103.3%
 
6.63%
 
4.65%
 
112
 
13%
Total ≤ 15-year
 
14,575

 
14,982

 
15,039

 
65%
 
103.1%
 
3.72%
 
2.37%
 
60
 
10%
20-year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ≤ 3.0%
 
225

 
223

 
228

 
31%
 
99.4%
 
3.55%
 
3.10%
 
43
 
8%
3.5%
 
436

 
445

 
454

 
75%
 
102.2%
 
4.06%
 
3.01%
 
46
 
10%
4.0%
 
54

 
57

 
58

 
50%
 
104.4%
 
4.54%
 
2.97%
 
64
 
10%
4.5%
 
68

 
73

 
74

 
99%
 
106.7%
 
4.90%
 
2.99%
 
73
 
11%
≥ 5.0%
 
3

 
3

 
3

 
—%
 
106.3%
 
5.94%
 
3.33%
 
104
 
17%
Total 20-year:
 
786

 
801

 
817

 
63%
 
101.9%
 
4.03%
 
3.03%
 
49
 
10%
30-year:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.0%
 
7,390

 
7,482

 
7,357

 
20%
 
100.1%
 
3.57%
 
2.97%
 
26
 
6%
3.5%
 
16,365

 
17,227

 
16,849

 
72%
 
105.4%
 
4.07%
 
2.75%
 
38
 
7%
4.0%
 
13,464

 
14,368

 
14,224

 
61%
 
107.4%
 
4.51%
 
2.92%
 
45
 
7%
4.5%
 
1,246

 
1,341

 
1,352

 
87%
 
107.6%
 
4.97%
 
3.30%
 
67
 
8%
5.0%
 
119

 
127

 
130

 
65%
 
106.8%
 
5.45%
 
3.73%
 
104
 
10%
≥ 5.5%
 
120

 
132

 
133

 
38%
 
110.0%
 
6.20%
 
3.40%
 
122
 
14%
Total 30-year
 
38,704

 
40,677

 
40,045

 
56%
 
105.4%
 
4.19%
 
2.86%
 
40
 
7%
Total fixed rate
 
$
54,065

 
$
56,460

 
$
55,901

 
58%
 
104.6%
 
4.05%
 
2.73%
 
46
 
8%
_______________________
1.
Lower loan balance securities represent pools backed by an original loan balance of ≤ $150,000. Our lower loan balance securities had a weighted average original loan balance of $97,000 and $100,000 for 15-year and 30-year securities, respectively, as of December 31, 2016.
2.
HARP securities are defined as pools backed by 100% refinance loans with LTV ≥ 80%. Our HARP securities had a weighted average LTV of 113% and 135% for 15-year and 30-year securities, respectively, as of December 31, 2016. Includes $0.8 billion and $5.1 billion of 15-year and 30-year securities, respectively, with >105 LTV pools, which are not deliverable into TBA securities.
3.
WAC represents the weighted average coupon of the underlying collateral.
4.
Portfolio yield incorporates a projected life CPR assumption based on forward rate assumptions as of December 31, 2016.



33



 
 
December 31, 2015
 
 
Includes Net TBA Position
 
Excludes Net TBA Position
Fixed Rate Agency RMBS and TBA Securities
 
Par Value
 
Amortized
Cost
 
Fair Value
 
% Lower Loan Balance & HARP 1,2
 
Amortized
Cost Basis
 
Weighted Average
 
Projected Life
CPR 4
 
WAC 3
 
Yield 4
 
Age (Months)
Fixed rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ≤ 15-year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ≤ 2.5%
 
$
4,162

 
$
4,238

 
$
4,221

 
47%
 
101.8%
 
2.97%
 
2.04%
 
38
 
8%
3.0%
 
4,178

 
4,307

 
4,319

 
73%
 
103.1%
 
3.50%
 
2.22%
 
43
 
9%
3.5%
 
4,332

 
4,489

 
4,557

 
88%
 
103.6%
 
3.95%
 
2.53%
 
51
 
10%
4.0%
 
3,439

 
3,591

 
3,662

 
89%
 
104.4%
 
4.40%
 
2.71%
 
60
 
11%
4.5%
 
372

 
390

 
394

 
98%
 
104.9%
 
4.87%
 
3.04%
 
64
 
12%
≥ 5.0%
 
5

 
5

 
5

 
28%
 
103.8%
 
6.51%
 
4.54%
 
97
 
13%
Total ≤ 15-year
 
16,488

 
17,020

 
17,158

 
75%
 
103.2%
 
3.71%
 
2.38%
 
48
 
10%
20-year
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 ≤ 3.0%
 
287

 
285

 
294

 
28%
 
99.3%
 
3.55%
 
3.11%
 
31
 
8%
3.5%
 
600

 
613