AGNC Investment AGNC Business Risk Report

I. Market Risks

A. Interest Rate Fluctuations

1. Impact on borrowing costs and profitability

AGNC Investment Corp., as a real estate investment trust (REIT) primarily investing in mortgage-backed securities, is significantly exposed to interest rate fluctuations. Increases in interest rates can raise borrowing costs and compress the spread between the income from their asset holdings and their funding costs, thereby reducing profitability.

2. Mitigation: Hedging strategies and diversification of funding sources

AGNC employs various hedging strategies to manage interest rate risks, including the use of interest rate swaps and options. Additionally, they seek to diversify their funding sources across various platforms to avoid over-reliance on any single funding channel, reducing the impact of shocks in specific markets.

II. Credit Risks

A. Default Risk in Mortgage-Backed Securities

1. Potential losses from mortgage defaults

AGNC’s investments in mortgage-backed securities inherently carry the risk of losses from homeowner defaults. Especially during economic downturns, the likelihood of increased default rates can affect the value of their security holdings and overall financial health.

2. Mitigation: Rigorous credit analysis and risk assessment processes

To mitigate default risks, AGNC employs a rigorous credit analysis and risk assessment process for their investment selections. They analyze historical and projected default rates among other factors to make informed investment decisions.

III. Regulatory Risks

A. Compliance and Regulatory Changes

1. Impact of changing regulations on operations and profitability

As a financial entity, AGNC is subject to extensive federal regulation, and any changes in such regulations might impact their operational capability and profitability. New regulatory requirements can impose additional compliance costs or limit certain profitable operations.

2. Mitigation: Regular monitoring of regulatory changes and proactive compliance measures

AGNC actively monitors legislative and regulatory environments to stay ahead of changes. It has in place strict compliance protocols and often engages in lobbying efforts to influence policy decisions beneficial to their business model.

IV. Liquidity Risks

A. Funding and Liquidity Squeeze

1. Challenges in accessing funding sources and maintaining liquidity

Funding and liquidity are pivotal for AGNC, especially during market volatilities. Challenges might arise in accessing capital markets or other funding sources, which could hinder their ability to finance operations and invest in new assets.

2. Mitigation: Maintaining sufficient liquidity reserves and diversifying funding options

AGNC maintains solid liquidity reserves and has a strategic approach to managing its maturities portfolio to ensure it can meet its short-term obligations. Furthermore, it diversifies its funding sources among bank borrowings, equity issuances, and other financing options to spread its risk.

V. Operational Risks

A. Technology and Cybersecurity Risks

1. Exposure to cyber threats and operational disruptions

In the digital age, AGNC faces substantial risks related to technological failures and cybersecurity breaches. Such events could compromise their operational capabilities and sensitive data related to investments and clients.

2. Mitigation: Robust cybersecurity measures and regular testing of systems

AGNC invests in robust technological infrastructure and cybersecurity measures. Frequent audits and updates of their IT systems help safeguard against cyber threats. Regular employee training further ensures adherence to best practices in cybersecurity.

VI. Market Competition

A. Competitive Pressure in the Mortgage Industry

1. Impact on market share and profitability

The mortgage REIT sector is highly competitive, and AGNC faces competition from other REITs and financial institutions. Increased competition can erode market share and push down profit margins.

2. Mitigation: Differentiation strategies and continuous monitoring of the competitive landscape

To navigate competitive pressures, AGNC focuses on differentiation through its investment strategies, operational efficiencies, and the quality of its asset portfolio. By continuously analyzing the competitive landscape, it adjusts its business strategies to sustain its market position and profitability.