NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited interim consolidated financial statements of AGNC Investment Corp. (referred throughout this report as the "Company," "we," "us" and "our") are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.
Our unaudited interim consolidated financial statements include the accounts of all of our wholly-owned subsidiaries and variable interest entities for which we are the primary beneficiary. Significant intercompany accounts and transactions have been eliminated.
Adoption of Accounting Standard Updates
As of January 1, 2018, we adopted Accounting Standards Update ("ASU") 2014-09,
Revenue from Contracts with Customers
(Topic 606),
and ASU 2016-18
, Statement of Cash Flows (Topic 230) - Restricted Cash.
The adoption of ASU 2014-09
resulted in reclassification of expense reimbursements from MTGE Investment Corp. ("MTGE") from an other operating expense offset to management fee income on the consolidated statements of comprehensive income. Net income was not impacted. The adoption of ASU 2016-18 resulted in the presentation of restricted cash with cash and cash equivalents on the consolidated statements of cash flows when reconciling the total beginning and ending amounts. Our prior period results have been revised to conform to the current presentation.
Note 2
. Organization
We were organized in Delaware 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 to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). As a REIT, we are required to distribute annually
90%
of our taxable income. So long as we continue to qualify as a REIT, we will generally not be subject to U.S. Federal or state corporate taxes on our taxable income to the extent that we distribute our annual taxable income to our stockholders on a timely basis. It is our intention to distribute
100%
of our taxable income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code, which may extend into the subsequent tax year.
We earn income primarily from investing in Agency residential mortgage-backed securities ("Agency RMBS") for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise or a U.S. Government agency. We may also invest in other types of mortgage and mortgage-related securities, such as credit risk transfer ("CRT") securities and non-Agency residential and commercial mortgage-backed securities ("non-Agency RMBS" and "CMBS," respectively), where repayment of principal and interest is not guaranteed by a U.S. Government-sponsored enterprise or U.S. Government agency. We fund our investments primarily through borrowings structured as repurchase agreements.
Our principal objective is to provide our stockholders with attractive risk-adjusted returns through a combination of monthly dividends and tangible net book value accretion. We generate income from the interest earned on our investments, net of associated borrowing and hedging costs, and net realized gains and losses on our investment and hedging activities.
Note 3
. Summary of Significant Accounting Policies
Investment Securities
Agency RMBS consist of residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") guaranteed by the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac," and together with Fannie Mae, the "GSEs") or the Government National Mortgage Association ("Ginnie Mae").
CRT securities are risk sharing instruments issued by the GSEs, and similarly structured transactions issued by third-party market participants, 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. Unlike Agency RMBS, full repayment of the original principal balance of CRT securities is not guaranteed by a GSE or U.S. Government agency; rather, "credit risk transfer" is achieved by writing down the outstanding principal balance of the CRT securities if credit losses on a related pool of loans exceed certain thresholds. By reducing the amount that they are obligated to repay to holders of CRT securities, the GSEs and/or other third parties offset credit losses on the related loans.
Non-Agency RMBS and CMBS (together, "Non-Agency MBS") are backed by residential and commercial mortgage loans, respectively, packaged and securitized by a private institution, such as a commercial bank. Non-Agency MBS typically benefit from credit enhancements derived from structural elements, such as subordination, overcollateralization or insurance, but nonetheless carry a higher level of credit exposure than Agency RMBS.
Mortgage-related securities may also include investments in the common stock of other publicly traded mortgage REITs, including MTGE, that primarily invest in Agency securities, non-Agency securities, other mortgage related instruments and/or real estate on a leveraged basis. As of
March 31, 2018
, our investments in REIT equity securities consisted solely of MTGE common stock.
Accounting Standards Codification ("ASC") Topic 320,
Investments—Debt and Equity Securities
, requires that at the time of purchase, we designate a security as held-to-maturity, available-for-sale or trading, depending on our ability and intent to hold such security to maturity. Alternatively, we may elect the fair value option of accounting for such securities pursuant to ASC Topic 825,
Financial Instruments
. All of our securities are reported at fair value as they have either been designated as available-for-sale or trading or we have elected the fair value option of accounting. Unrealized gains and losses on securities classified as available-for-sale are reported in accumulated other comprehensive income ("OCI"). Unrealized gains and losses on securities classified as trading or for which we elected the fair value option are reported in net income through other gain (loss) during the period in which they occur. Upon the sale of a security designated as available-for-sale, we determine the cost of the security and the amount of unrealized gains or losses to reclassify out of accumulated OCI into earnings based on the specific identification method.
Prior to fiscal year 2017, we primarily designated our investment securities as available-for-sale. On January 1, 2017, we began electing the fair value option of accounting for all investment securities acquired after fiscal year 2016. In our view, this election simplifies the accounting for investment securities and more appropriately reflects the results of our operations for a particular reporting period, as the fair value changes for these assets are presented in a manner consistent with the presentation and timing of the fair value changes of our hedging instruments. We are not permitted to change the designation of securities acquired prior to January 1, 2017; accordingly, such securities will continue to be classified as available-for-sale securities until we receive full repayment of principal or we dispose of the security.
We estimate the fair value of our investment securities based on prices provided by multiple third-party pricing services and non-binding dealer quotes (collectively "pricing sources"). These pricing sources use various valuation approaches, including market and income approaches, using "Level 2" inputs. The pricing sources primarily utilize a matrix pricing technique that interpolates the estimated fair value of our Agency RMBS based on observed quoted prices for forward contracts in the Agency RMBS "to-be-announced" market ("TBA securities") of the same coupon, maturity and issuer, adjusted to reflect the specific characteristics of the pool of mortgages underlying the Agency security, which may include maximum loan balance, loan vintage, loan-to-value ratio, geography and other characteristics as may be appropriate. The pricing sources may also utilize discounted cash flow model-derived pricing techniques to estimate the fair value of investment securities. Such models incorporate market-based discount rate assumptions based on observable inputs such as recent trading activity, credit data, volatility statistics, benchmark interest rate curves and other market data that are current as of the measurement date and may include certain unobservable inputs, such as assumptions of future levels of prepayment, defaults and loss severities. We review the pricing estimates obtained from the pricing sources and perform procedures to validate their reasonableness. Refer to Note 8 for further discussion of fair value measurements.
We evaluate our investments designated as available-for-sale for other-than-temporary impairment ("OTTI") on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired may involve judgments and assumptions based on subjective and objective factors. When a security is impaired, an OTTI is considered to have occurred if any one of the following three conditions exists as of the financial reporting date: (i) we intend to sell the security (that is, a decision has been made to sell the security), (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (iii) we do not expect to recover the security's amortized cost basis, even if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security. A general allowance for unidentified impairments in a portfolio of securities is not permitted.
Interest Income
Interest income is accrued based on the outstanding principal amount of the investment securities and their contractual terms. Premiums or discounts associated with the purchase of Agency RMBS and non-Agency MBS of high credit quality are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments using the effective interest method in accordance with ASC Subtopic 310-20,
Receivables—Nonrefundable Fees and Other Costs
.
We estimate long-term prepayment speeds of our mortgage securities using a third-party service and market data. The third-party service provider estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, mortgage rates of the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, interest rate volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the third-party estimates and, based on our judgment, we may adjust the estimates. We review our actual and anticipated prepayment experience on at least a quarterly basis and effective yields are recalculated when differences arise between (i) our previously estimated future prepayments and (ii) actual prepayments to date and our current estimated future prepayments. If the actual and estimated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.
At the time we purchase CRT securities and non-Agency MBS that are not of high credit quality, we determine an effective yield based on our estimate of the timing and amount of future cash flows and our cost basis. Our initial cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the impact of default and severity rates on the timing and amount of credit losses. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on inputs and analysis received from external sources, internal models, and our judgment regarding such inputs and other factors. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.
Repurchase Agreements
We finance the acquisition of securities for our investment portfolio primarily through repurchase transactions under master repurchase agreements. Pursuant to ASC Topic 860,
Transfers and Servicing
, we account for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts (cost), plus accrued interest. Our repurchase agreements typically have maturities of less than one year, but may extend up to five years or more. Interest rates on our repurchase agreements generally correspond to one or three-month LIBOR plus or minus a fixed spread. The fair value of our repurchase agreements is assumed to equal cost as the interest rates are considered to be at market.
Reverse Repurchase Agreements and Obligation to Return Securities Borrowed under Reverse Repurchase Agreements
We borrow securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our master repurchase agreements (see
Derivative Instruments
below). We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the balance sheet based on the value of the underlying borrowed securities as of the reporting date. Our reverse repurchase agreements typically have maturities of 30 days or less. The fair value of our reverse repurchase agreements is assumed to equal cost as the interest rates generally reset daily.
Derivative Instruments
We use a variety of derivative instruments to hedge a portion of our exposure to market risks, including interest rate, prepayment, extension and liquidity risks. The objective of our risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates. The primary instruments that we use are interest rate swaps, options to enter into interest rate swaps ("swaptions"), U.S. Treasury securities and U.S. Treasury futures contracts. We also use forward contracts in the Agency RMBS "to-be-announced" market, or TBA securities, to invest in and finance Agency securities as well as to periodically reduce our exposure to Agency RMBS.
We account for derivative instruments in accordance with ASC Topic 815,
Derivatives and Hedging
("ASC 815"). ASC 815 requires an entity to recognize all derivatives as either assets or liabilities in our accompanying consolidated balance sheets and to measure those instruments at fair value.
Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with the counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets. Derivative
instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Changes in fair value of derivative instruments and periodic settlements related to our derivative instruments are recorded in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.
The use of derivative instruments creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts. Our derivative agreements require that we post or receive collateral to mitigate such risk. We also attempt to minimize our risk of loss by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.
Interest rate swap agreements
We use interest rate swaps to hedge the variable cash flows associated with our borrowings made under repurchase agreements. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one or three-month LIBOR ("payer swaps") with terms up to 20 years. Our swap agreements are privately negotiated in the over-the-counter ("OTC") market.
The majority of our interest rate swaps are centrally cleared through a registered commodities exchange. We value centrally cleared interest rate swaps using the daily settlement price, or fair value, determined by the clearing exchange based on a pricing model that references observable market inputs, including LIBOR, swap rates and the forward yield curve. Our centrally cleared swaps require that we post an "initial margin" amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement. We also exchange daily settlements of "variation margin" based upon changes in fair value, as measured by the exchange. Pursuant to rules governing central clearing activities, we recognize variation margin settlements as a direct reduction of the carrying value of the interest rate swap asset or liability.
We value non-centrally cleared swaps using a combination of third-party valuations obtained from pricing services and the swap counterparty. The third-party valuations are model-driven using observable inputs, including LIBOR, swap rates and the forward yield curve. We also consider both our own and our counterparties' nonperformance risk in estimating the fair value of our interest rate swaps. In considering the effect of nonperformance risk, we assess the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty risk is not significant to the overall valuation of these agreements.
Interest rate swaptions
We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates on the performance of our investment portfolio. Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. Our swaption agreements typically provide us the option to enter into a pay-fixed rate interest rate swap ("payer swaptions"). We may also enter into swaption agreements that provide us the option to enter into a receive-fixed interest rate swap ("receiver swaptions").
Our interest rate swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. The premium paid for interest rate swaptions is reported as an asset in our consolidated balance sheets. We estimate the fair value of interest rate swaptions using a combination of inputs from counterparty and third-party pricing models based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option, adjusted for non-performance risk, if any. The difference between the premium paid and the fair value of the swaption is reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid. If we sell or exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap received and the premium paid.
TBA securities
A TBA security is a forward contract for the purchase or sale of Agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting TBA position, net settling the offsetting positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date (together referred to as a "dollar roll transaction"). The Agency securities
purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities settling in the current month. This difference, or "price drop," is the economic equivalent to interest income on the underlying Agency securities, less an implied funding cost, over the forward settlement period (referred to as "dollar roll income"). Consequently, forward purchases of Agency securities and dollar roll transactions represent a form of off-balance sheet financing.
We account for TBA contracts as derivative instruments since either the TBA contracts do not settle in the shortest period of time possible or we cannot assert that it is probable at inception and throughout the term of the TBA contract that we will physically settle the TBA contract on the settlement date. We account for TBA dollar roll transactions as a series of derivative transactions. Gains, losses and dollar roll income associated with our TBA contracts are recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. We estimate the fair value of TBA securities based on similar methods used to value our Agency RMBS securities.
U.S. Treasury securities
We purchase and sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. We borrow securities to cover short sales of U.S. Treasury securities under reverse repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on our accompanying consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date. Gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.
Loss Contingencies
We evaluate the existence of any pending or threatened litigation or other potential claims against the Company in accordance with ASC Topic 450,
Contingencies,
which requires that we assess the likelihood and range of potential outcomes of any such matters. We are the defendant in three stockholder derivative lawsuits alleging that certain of our current and former directors and officers breached fiduciary duties and wasted corporate assets relating to past renewals of the management agreement with our former external manager and the internalization of our management, which occurred on July 1, 2016. Although the outcomes of these cases cannot be predicted with certainty, we do not believe that these cases have merit or will result in a material liability, and, as of
March 31, 2018
, we did not accrue a loss contingency related to these matters.
Recent Accounting Pronouncements
We consider the applicability and impact of all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board. ASUs not listed below were determined to be either not applicable, are not expected to have a significant impact on our consolidated financial statements when adopted, or did not have a significant impact on our consolidated financial statements upon adoption.
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326):
ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Allowances for credit losses on available-for-sale debt securities will be recognized, rather than direct reductions in the amortized cost of the investments. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. ASU 2016-13 is not expected to have a significant impact on our consolidated financial statements.
Note 4
. Investment Securities
As of
March 31, 2018
and
December 31, 2017
, our investment portfolio consisted of
$55.7 billion
and
$57.1 billion
of investment securities, at fair value, respectively, and
$13.6 billion
and
$15.7 billion
of TBA securities, at fair value, respectively. Our TBA position is reported at its net carrying value of
$82 million
and
$3 million
as of
March 31, 2018
and
December 31, 2017
, respectively, in derivative assets / (liabilities) on our accompanying consolidated balance sheets. The net carrying value of our TBA position 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.
As of
March 31, 2018
and
December 31, 2017
, our investment securities had a net unamortized premium balance of
$2.6 billion
and
$2.7 billion
, respectively, including interest and principal-only securities.
The following tables summarize our investment securities as of
March 31, 2018
and
December 31, 2017
, excluding TBA securities, (dollars in millions). Details of our TBA securities as of each of the respective dates are included in
Note 6
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Investment Securities
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
Agency RMBS:
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
55,266
|
|
|
$
|
53,696
|
|
|
$
|
55,477
|
|
|
$
|
55,026
|
|
Adjustable rate
|
|
265
|
|
|
268
|
|
|
278
|
|
|
283
|
|
CMO
|
|
595
|
|
|
590
|
|
|
629
|
|
|
631
|
|
Interest-only and principal-only strips
|
|
202
|
|
|
208
|
|
|
213
|
|
|
228
|
|
Total Agency RMBS
|
|
56,328
|
|
|
54,762
|
|
|
56,597
|
|
|
56,168
|
|
Non-Agency RMBS
|
|
7
|
|
|
7
|
|
|
7
|
|
|
7
|
|
CMBS
|
|
28
|
|
|
29
|
|
|
28
|
|
|
29
|
|
CRT securities
|
|
848
|
|
|
884
|
|
|
834
|
|
|
876
|
|
Total investment securities
|
|
$
|
57,211
|
|
|
$
|
55,682
|
|
|
$
|
57,466
|
|
|
$
|
57,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Agency RMBS
|
|
Non-Agency
|
|
|
|
|
Investment Securities
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Ginnie
Mae
|
|
RMBS
|
|
CMBS
|
|
CRT
|
|
Total
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value
|
|
$
|
22,893
|
|
|
$
|
7,430
|
|
|
$
|
32
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,362
|
|
Unamortized discount
|
|
(24
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(27
|
)
|
Unamortized premium
|
|
1,083
|
|
|
414
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,497
|
|
Amortized cost
|
|
23,952
|
|
|
7,841
|
|
|
32
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
31,832
|
|
Gross unrealized gains
|
|
13
|
|
|
6
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Gross unrealized losses
|
|
(713
|
)
|
|
(273
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(986
|
)
|
Total available-for-sale securities, at fair value
|
|
23,252
|
|
|
7,574
|
|
|
33
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
30,866
|
|
Securities remeasured at fair value through earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value
|
|
13,472
|
|
|
9,948
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
814
|
|
|
24,263
|
|
Unamortized discount
|
|
(33
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(37
|
)
|
Unamortized premium
|
|
672
|
|
|
446
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
1,153
|
|
Amortized cost
|
|
14,111
|
|
|
10,392
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
848
|
|
|
25,379
|
|
Gross unrealized gains
|
|
11
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
37
|
|
|
54
|
|
Gross unrealized losses
|
|
(360
|
)
|
|
(256
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(617
|
)
|
Total securities remeasured at fair value through earnings
|
|
13,762
|
|
|
10,141
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
884
|
|
|
24,816
|
|
Total securities, at fair value
|
|
$
|
37,014
|
|
|
$
|
17,715
|
|
|
$
|
33
|
|
|
$
|
7
|
|
|
$
|
29
|
|
|
$
|
884
|
|
|
$
|
55,682
|
|
Weighted average coupon as of March 31, 2018
|
|
3.66
|
%
|
|
3.69
|
%
|
|
2.87
|
%
|
|
2.50
|
%
|
|
6.55
|
%
|
|
5.50
|
%
|
|
3.70
|
%
|
Weighted average yield as of March 31, 2018
1
|
|
2.88
|
%
|
|
2.93
|
%
|
|
2.02
|
%
|
|
3.03
|
%
|
|
7.36
|
%
|
|
5.51
|
%
|
|
2.93
|
%
|
________________________________
|
|
1.
|
Incorporates a weighted average future constant prepayment rate assumption of
7.6%
based on forward rates as of
March 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Agency RMBS
|
|
Non-Agency
|
|
|
|
|
Investment Securities
|
|
Fannie
Mae
|
|
Freddie Mac
|
|
Ginnie
Mae
|
|
RMBS
|
|
CMBS
|
|
CRT
|
|
Total
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value
|
|
$
|
24,200
|
|
|
$
|
8,219
|
|
|
$
|
34
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,460
|
|
Unamortized discount
|
|
(25
|
)
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(28
|
)
|
Unamortized premium
|
|
1,119
|
|
|
447
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,566
|
|
Amortized cost
|
|
25,294
|
|
|
8,663
|
|
|
34
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
33,998
|
|
Gross unrealized gains
|
|
98
|
|
|
22
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
121
|
|
Gross unrealized losses
|
|
(325
|
)
|
|
(141
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(466
|
)
|
Total available-for-sale securities, at fair value
|
|
25,067
|
|
|
8,544
|
|
|
35
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
33,653
|
|
Securities remeasured at fair value through earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par value
|
|
13,558
|
|
|
7,956
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
801
|
|
|
22,344
|
|
Unamortized discount
|
|
(34
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(35
|
)
|
Unamortized premium
|
|
711
|
|
|
415
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33
|
|
|
1,159
|
|
Amortized cost
|
|
14,235
|
|
|
8,371
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
834
|
|
|
23,468
|
|
Gross unrealized gains
|
|
26
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
42
|
|
|
71
|
|
Gross unrealized losses
|
|
(70
|
)
|
|
(42
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(112
|
)
|
Total securities remeasured at fair value through earnings
|
|
14,191
|
|
|
8,331
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
876
|
|
|
23,427
|
|
Total securities, at fair value
|
|
$
|
39,258
|
|
|
$
|
16,875
|
|
|
$
|
35
|
|
|
$
|
7
|
|
|
$
|
29
|
|
|
$
|
876
|
|
|
$
|
57,080
|
|
Weighted average coupon as of December 31, 2017
|
|
3.67
|
%
|
|
3.73
|
%
|
|
2.84
|
%
|
|
2.50
|
%
|
|
6.55
|
%
|
|
5.26
|
%
|
|
3.71
|
%
|
Weighted average yield as of December 31, 2017
1
|
|
2.84
|
%
|
|
2.87
|
%
|
|
2.02
|
%
|
|
3.08
|
%
|
|
7.30
|
%
|
|
5.19
|
%
|
|
2.89
|
%
|
________________________________
|
|
1.
|
Incorporates a weighted average future constant prepayment rate assumption of
8.4%
based on forward rates as of
December 31, 2017
.
|
As of
March 31, 2018
and
December 31, 2017
, our investments in CRT and non-Agency securities had the following credit ratings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
CRT and Non-Agency Security Credit Ratings
1
|
|
CRT
|
|
RMBS
|
|
CMBS
|
|
CRT
|
|
RMBS
|
|
CMBS
|
AAA
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
BBB
|
|
26
|
|
|
—
|
|
|
29
|
|
|
20
|
|
|
—
|
|
|
29
|
|
BB
|
|
139
|
|
|
—
|
|
|
—
|
|
|
136
|
|
|
—
|
|
|
—
|
|
B
|
|
698
|
|
|
—
|
|
|
—
|
|
|
691
|
|
|
—
|
|
|
—
|
|
Not Rated
|
|
21
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
884
|
|
|
$
|
7
|
|
|
$
|
29
|
|
|
$
|
876
|
|
|
$
|
7
|
|
|
$
|
29
|
|
________________________________
|
|
1.
|
Represents the lowest of Standard and Poor's ("S&P"), Moody's and Fitch credit ratings, stated in terms of the S&P equivalent rating as of each date.
|
Our CRT securities reference the performance of loans underlying Agency RMBS issued by Fannie Mae or Freddie Mac, which were subject to their underwriting standards. As of
March 31, 2018
, our CRT securities had floating and fixed rate coupons ranging from
3.7%
to
8.8%
, referenced to loans originated between
2012
and
2018
with weighted average coupons ranging from
3.6%
to
4.4%
. As of
December 31, 2017
, our CRT securities had floating rate coupons ranging from
3.9%
to
8.5%
, referenced to loans originated between
2012
and
2017
with weighted average coupons ranging from
3.6%
to
4.4%
.
The actual maturities of our investment securities are generally shorter than their stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic contractual principal payments and principal prepayments. As of
March 31, 2018
and
December 31, 2017
, the weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate investment portfolio was
7.6%
and
8.4%
, respectively. Our estimates can differ materially for different securities and thus our individual holdings have a wide range of projected CPRs. The following table summarizes our investments as of
March 31, 2018
and
December 31, 2017
according to their estimated weighted average life classification (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Estimated Weighted Average Life of Investment Securities
|
|
Fair Value
|
|
Amortized
Cost
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Yield
|
|
Fair Value
|
|
Amortized
Cost
|
|
Weighted
Average
Coupon
|
|
Weighted
Average
Yield
|
≥ 1 year and ≤ 3 years
|
|
$
|
2,671
|
|
|
$
|
2,683
|
|
|
3.91%
|
|
2.61%
|
|
$
|
2,712
|
|
|
$
|
2,693
|
|
|
3.90%
|
|
2.67%
|
> 3 years and ≤ 5 years
|
|
6,283
|
|
|
6,395
|
|
|
3.23%
|
|
2.36%
|
|
7,499
|
|
|
7,518
|
|
|
3.31%
|
|
2.39%
|
> 5 years and ≤10 years
|
|
42,171
|
|
|
43,513
|
|
|
3.75%
|
|
2.98%
|
|
45,977
|
|
|
46,398
|
|
|
3.75%
|
|
2.95%
|
> 10 years
|
|
4,557
|
|
|
4,620
|
|
|
3.79%
|
|
3.52%
|
|
892
|
|
|
857
|
|
|
4.87%
|
|
4.74%
|
Total
|
|
$
|
55,682
|
|
|
$
|
57,211
|
|
|
3.70%
|
|
2.93%
|
|
$
|
57,080
|
|
|
$
|
57,466
|
|
|
3.71%
|
|
2.89%
|
The following table presents the gross unrealized loss and fair values of securities classified as available-for-sale by length of time that such securities have been in a continuous unrealized loss position as of
March 31, 2018
and
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Position For
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
Securities Classified as Available-for-Sale
|
|
Fair
Value
|
|
Unrealized
Loss
|
|
Fair Value
|
|
Unrealized
Loss
|
|
Fair
Value
|
|
Unrealized
Loss
|
March 31, 2018
|
|
$
|
9,782
|
|
|
$
|
(133
|
)
|
|
$
|
18,946
|
|
|
$
|
(853
|
)
|
|
$
|
28,728
|
|
|
$
|
(986
|
)
|
December 31, 2017
|
|
$
|
3,582
|
|
|
$
|
(15
|
)
|
|
$
|
20,577
|
|
|
$
|
(451
|
)
|
|
$
|
24,159
|
|
|
$
|
(466
|
)
|
We did not recognize OTTI charges on our investment securities
for the three months ended
March 31, 2018
and
2017
. As of the end of each respective reporting period, a decision had not been made to sell any of our securities in an unrealized loss position and we did not believe it was more likely than not that we would be required to sell such securities before recovery of their amortized cost basis. The unrealized losses on our securities were not due to credit losses given the GSE or U.S. Government agency guarantees, but rather were due to changes in interest rates and prepayment expectations. However, as we continue to actively manage our portfolio, we may recognize additional realized losses on our investment securities upon selecting specific securities to sell.
Gains and Losses on Sale of Investment Securities
The following table is a summary of our net gain (loss) from the sale of investment securities
for the three months ended
March 31, 2018
and
2017
by investment classification of accounting (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Investment Securities
|
|
Available-for-Sale
Securities
2
|
Fair Value Option Securities
|
Total
|
|
Available-for-Sale
Securities
2
|
Fair Value Option Securities
|
Total
|
Investment securities sold, at cost
|
|
$
|
(387
|
)
|
$
|
(1,003
|
)
|
$
|
(1,390
|
)
|
|
$
|
(5,149
|
)
|
$
|
(219
|
)
|
$
|
(5,368
|
)
|
Proceeds from investment securities sold
1
|
|
388
|
|
1,000
|
|
1,388
|
|
|
5,065
|
|
219
|
|
5,284
|
|
Net gain (loss) on sale of investment securities
|
|
$
|
1
|
|
$
|
(3
|
)
|
$
|
(2
|
)
|
|
$
|
(84
|
)
|
$
|
—
|
|
$
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
Gross gain on sale of investment securities
|
|
$
|
3
|
|
$
|
7
|
|
$
|
10
|
|
|
$
|
4
|
|
$
|
—
|
|
$
|
4
|
|
Gross loss on sale of investment securities
|
|
(2
|
)
|
(10
|
)
|
(12
|
)
|
|
(88
|
)
|
—
|
|
(88
|
)
|
Net gain (loss) on sale of investment securities
|
|
$
|
1
|
|
$
|
(3
|
)
|
$
|
(2
|
)
|
|
$
|
(84
|
)
|
$
|
—
|
|
$
|
(84
|
)
|
________________________________
|
|
1.
|
Proceeds include cash received during the period, plus receivable for investment securities sold during the period as of period end.
|
|
|
2.
|
See
Note 10
for a summary of changes in accumulated OCI.
|
Securitizations and Variable Interest Entities
As of
March 31, 2018
and
December 31, 2017
, we held investments in CMO trusts, which are VIEs. We have consolidated certain of these CMO trusts in our consolidated financial statements where we have determined we are the primary beneficiary of the trusts. All of our CMO securities are backed by fixed or adjustable-rate Agency RMBS. Fannie Mae or Freddie Mac guarantees the payment of interest and principal and acts as the trustee and administrator of their respective securitization trusts. Accordingly, we are not required to provide the beneficial interest holders of the CMO securities any financial or other support.
Our maximum exposure to loss related to our involvement with CMO trusts is the fair value of the CMO securities and interest and principal-only securities held by us, less principal amounts guaranteed by Fannie Mae and Freddie Mac.
In connection with our consolidated CMO trusts, we recognized Agency securities with a total fair value and approximate unpaid principal balance of
$0.6 billion
and
$0.7 billion
as of
March 31, 2018
and
December 31, 2017
, respectively, and debt with a total fair value and approximate unpaid principal balance of
$0.3 billion
and
$0.4 billion
, respectively, in our accompanying consolidated balance sheets. We re-measure our consolidated debt at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Our involvement with the consolidated trusts is limited to the Agency securities transferred by us upon the formation of the trusts and the CMO securities subsequently held by us. There are no arrangements that could require us to provide financial support to the trusts.
As of
March 31, 2018
and
December 31, 2017
, the fair value of our CMO securities and interest and principal-only securities was
$0.8 billion
and
$0.9 billion
, respectively, excluding the consolidated CMO trusts discussed above, or
$1.1 billion
and
$1.2 billion
, respectively, including the net asset value of our consolidated CMO trusts. Our maximum exposure to loss related to our CMO securities and interest and principal-only securities, including our consolidated CMO trusts, was
$91 million
and
$124 million
as of
March 31, 2018
and
December 31, 2017
, respectively.
Note 5
. Repurchase Agreements and Other Secured Borrowings
We pledge our securities as collateral under our borrowing agreements with financial institutions. Interest rates on our borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. If the fair value of our pledged securities declines, lenders will typically require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of our pledged securities increases, lenders may release collateral back to us. As of
March 31, 2018
, we had met all margin call requirements. For additional information regarding our pledged assets, please refer to
Note 7
.
Repurchase Agreements
As of
March 31, 2018
and
December 31, 2017
, we had
$49.0 billion
and
$50.3 billion
, respectively, of repurchase agreements outstanding. The terms and conditions of our repurchase agreements are typically negotiated on a transaction-by-transaction basis. Our repurchase agreements with original maturities greater than one year have floating interest rates based on an index plus or minus a fixed spread. The following table summarizes our borrowings under repurchase agreements by their remaining maturities as of
March 31, 2018
and
December 31, 2017
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Remaining Maturity
|
|
Repurchase Agreements
|
|
Weighted
Average
Interest
Rate
|
|
Weighted
Average Days
to Maturity
|
|
Repurchase Agreements
|
|
Weighted
Average
Interest
Rate
|
|
Weighted
Average Days
to Maturity
|
Agency repo:
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 1 month
|
|
$
|
24,939
|
|
|
1.79
|
%
|
|
14
|
|
|
$
|
19,771
|
|
|
1.59
|
%
|
|
11
|
|
> 1 to ≤ 3 months
|
|
12,881
|
|
|
1.70
|
%
|
|
57
|
|
|
16,150
|
|
|
1.50
|
%
|
|
50
|
|
> 3 to ≤ 6 months
|
|
3,381
|
|
|
1.76
|
%
|
|
134
|
|
|
7,287
|
|
|
1.50
|
%
|
|
130
|
|
> 6 to ≤ 9 months
|
|
485
|
|
|
2.07
|
%
|
|
214
|
|
|
2,361
|
|
|
1.66
|
%
|
|
225
|
|
> 9 to ≤ 12 months
|
|
3,678
|
|
|
1.96
|
%
|
|
297
|
|
|
202
|
|
|
1.64
|
%
|
|
297
|
|
> 12 to ≤ 24 months
|
|
2,267
|
|
|
2.29
|
%
|
|
596
|
|
|
1,700
|
|
|
1.84
|
%
|
|
468
|
|
> 24 to ≤ 36 months
|
|
1,325
|
|
|
2.26
|
%
|
|
937
|
|
|
2,200
|
|
|
1.80
|
%
|
|
803
|
|
> 36 to ≤ 48 months
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
625
|
|
|
1.90
|
%
|
|
1,141
|
|
Total Agency repo
|
|
$
|
48,956
|
|
|
1.82
|
%
|
|
109
|
|
|
$
|
50,296
|
|
|
1.57
|
%
|
|
116
|
|
As of
March 31, 2018
and
December 31, 2017
,
$3.7 billion
and
$5.3 billion
, respectively, of our Agency repurchase agreements matured overnight and none of our repurchase agreements were due on demand.
Note 6
. Derivative and Other Hedging Instruments
We hedge a portion of our interest rate risk by entering into interest rate swaps, interest rate swaptions and U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also utilize TBA securities, options and other types of derivative instruments to hedge a portion of our risk. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivative and other hedging instruments in
Note 3
.
Derivative and Other Hedging Instrument Assets (Liabilities), at Fair Value
The table below summarizes fair value information about our derivative and other hedging instrument assets/(liabilities) as of
March 31, 2018
and
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Derivative and Other Hedging Instruments
|
|
Balance Sheet Location
|
|
March 31, 2018
|
|
December 31, 2017
|
Interest rate swaps
|
|
Derivative assets, at fair value
|
|
$
|
174
|
|
|
$
|
81
|
|
Swaptions
|
|
Derivative assets, at fair value
|
|
153
|
|
|
75
|
|
TBA securities
|
|
Derivative assets, at fair value
|
|
83
|
|
|
30
|
|
U.S. Treasury futures - short
|
|
Derivative assets, at fair value
|
|
—
|
|
|
19
|
|
Total derivative assets, at fair value
|
|
|
|
$
|
410
|
|
|
$
|
205
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Derivative liabilities, at fair value
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
TBA securities
|
|
Derivative liabilities, at fair value
|
|
(1
|
)
|
|
(27
|
)
|
U.S. Treasury futures - short
|
|
Derivative liabilities, at fair value
|
|
(30
|
)
|
|
—
|
|
Total derivative liabilities, at fair value
|
|
|
|
$
|
(32
|
)
|
|
$
|
(28
|
)
|
|
|
|
|
|
|
|
U.S. Treasury securities - long
|
|
U.S. Treasury securities, at fair value
|
|
$
|
224
|
|
|
$
|
—
|
|
U.S. Treasury securities - short
|
|
Obligation to return securities borrowed under reverse repurchase agreements, at fair value
|
|
(10,352
|
)
|
|
(10,467
|
)
|
Total U.S. Treasury securities, net at fair value
|
|
|
|
$
|
(10,128
|
)
|
|
$
|
(10,467
|
)
|
The following tables summarize certain characteristics of our derivative and other hedging instruments outstanding as of
March 31, 2018
and
December 31, 2017
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Interest Rate Swaps
|
|
Notional
Amount
1
|
|
Average
Fixed Pay
Rate
2
|
|
Average
Receive
Rate
|
|
Average
Maturity
(Years)
|
|
Notional
Amount
1
|
|
Average
Fixed Pay
Rate
2
|
|
Average
Receive
Rate
|
|
Average
Maturity
(Years)
|
≤ 3 years
|
|
$
|
21,075
|
|
|
1.51%
|
|
1.90%
|
|
1.5
|
|
$
|
21,025
|
|
|
1.40%
|
|
1.46%
|
|
1.5
|
> 3 to ≤ 5 years
|
|
8,375
|
|
|
1.84%
|
|
1.87%
|
|
4.1
|
|
6,825
|
|
|
1.82%
|
|
1.43%
|
|
4.1
|
> 5 to ≤ 7 years
|
|
5,075
|
|
|
2.16%
|
|
1.96%
|
|
6.0
|
|
5,775
|
|
|
2.02%
|
|
1.44%
|
|
5.9
|
> 7 to ≤ 10 years
|
|
7,550
|
|
|
2.17%
|
|
1.88%
|
|
8.9
|
|
6,650
|
|
|
2.10%
|
|
1.42%
|
|
9.1
|
> 10 years
|
|
3,175
|
|
|
2.49%
|
|
1.91%
|
|
12.9
|
|
3,425
|
|
|
2.49%
|
|
1.45%
|
|
12.9
|
Total
|
|
$
|
45,250
|
|
|
1.82%
|
|
1.90%
|
|
4.5
|
|
$
|
43,700
|
|
|
1.74%
|
|
1.44%
|
|
4.5
|
________________________________
|
|
1.
|
As of
March 31, 2018
and
December 31, 2017
, notional amount includes forward starting swaps of
$2.5 billion
and
$4.6 billion
, respectively, with an average forward start date of
0.4
and
0.3
years, respectively.
|
|
|
2.
|
Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was
1.77%
and
1.68%
as of
March 31, 2018
and
December 31, 2017
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaptions
|
|
Option
|
|
Underlying Payer Swap
|
Current Option Expiration Date
|
|
Cost Basis
|
|
Fair Value
|
|
Average
Months to Current Option
Expiration Date
1
|
|
Notional
Amount
|
|
Average Fixed Pay
Rate
|
|
Average
Receive
Rate
(LIBOR)
|
|
Average
Term
(Years)
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 1 year
|
|
$
|
110
|
|
|
$
|
104
|
|
|
7
|
|
$
|
5,050
|
|
|
2.74%
|
|
3M
|
|
8.0
|
> 1 year ≤ 2 years
|
|
24
|
|
|
29
|
|
|
16
|
|
1,200
|
|
|
2.83%
|
|
3M
|
|
8.1
|
> 2 year ≤ 3 years
|
|
18
|
|
|
20
|
|
|
27
|
|
500
|
|
|
2.78%
|
|
3M
|
|
10.0
|
Total
|
|
$
|
152
|
|
|
$
|
153
|
|
|
10
|
|
$
|
6,750
|
|
|
2.76%
|
|
3M
|
|
8.2
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 1 year
|
|
$
|
118
|
|
|
$
|
46
|
|
|
7
|
|
$
|
5,100
|
|
|
2.71%
|
|
3M
|
|
8.8
|
> 1 year ≤ 2 years
|
|
23
|
|
|
16
|
|
|
18
|
|
1,050
|
|
|
2.71%
|
|
3M
|
|
8.7
|
> 2 year ≤ 3 years
|
|
18
|
|
|
13
|
|
|
30
|
|
500
|
|
|
2.78%
|
|
3M
|
|
10.0
|
Total
|
|
$
|
159
|
|
|
$
|
75
|
|
|
10
|
|
$
|
6,650
|
|
|
2.72%
|
|
3M
|
|
8.9
|
________________________________
|
|
1.
|
As of
March 31, 2018
and
December 31, 2017
, ≤ 1 year notional amount includes
$700 million
of Bermudan swaptions where the options may be exercised on predetermined dates up to their final exercise date, which is six months prior to the underlying swaps' maturity date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities
|
|
March 31, 2018
|
|
December 31, 2017
|
Maturity
|
|
Face Amount Net Long / (Short)
|
|
Cost Basis
|
|
Fair Value
|
|
Face Amount Net Long / (Short)
|
|
Cost Basis
|
|
Fair Value
|
5 years
|
|
$
|
50
|
|
|
$
|
50
|
|
|
$
|
54
|
|
|
$
|
(288
|
)
|
|
$
|
(286
|
)
|
|
$
|
(283
|
)
|
7 years
|
|
(6,451
|
)
|
|
(6,419
|
)
|
|
(6,235
|
)
|
|
(6,131
|
)
|
|
(6,106
|
)
|
|
(6,029
|
)
|
10 years
|
|
(4,172
|
)
|
|
(4,122
|
)
|
|
(3,947
|
)
|
|
(4,280
|
)
|
|
(4,230
|
)
|
|
(4,155
|
)
|
Total U.S. Treasury securities, net
|
|
$
|
(10,573
|
)
|
|
$
|
(10,491
|
)
|
|
$
|
(10,128
|
)
|
|
$
|
(10,699
|
)
|
|
$
|
(10,622
|
)
|
|
$
|
(10,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Futures
|
|
March 31, 2018
|
|
December 31, 2017
|
Maturity
|
|
Notional
Amount - Long (Short)
|
|
Cost
Basis
|
|
Fair
Value
|
|
Net Carrying Value
1
|
|
Notional
Amount - Long (Short)
|
|
Cost
Basis
|
|
Fair
Value
|
|
Net Carrying Value
1
|
5 years
|
|
$
|
(730
|
)
|
|
$
|
(831
|
)
|
|
$
|
(836
|
)
|
|
$
|
(5
|
)
|
|
$
|
(730
|
)
|
|
$
|
(852
|
)
|
|
$
|
(848
|
)
|
|
$
|
4
|
|
10 years
|
|
(1,650
|
)
|
|
(1,974
|
)
|
|
(1,999
|
)
|
|
(25
|
)
|
|
(2,180
|
)
|
|
(2,718
|
)
|
|
(2,703
|
)
|
|
15
|
|
Total U.S. Treasury futures
|
|
$
|
(2,380
|
)
|
|
$
|
(2,805
|
)
|
|
$
|
(2,835
|
)
|
|
$
|
(30
|
)
|
|
$
|
(2,910
|
)
|
|
$
|
(3,570
|
)
|
|
$
|
(3,551
|
)
|
|
$
|
19
|
|
________________________________
|
|
1.
|
Net carrying value represents the difference between the fair market value and the cost basis (or the forward price to be paid/(received) for the underlying U.S. Treasury security) of the U.S. Treasury futures contract as of period-end and is reported in derivative assets/(liabilities), at fair value in our consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
TBA Securities by Coupon
|
|
Notional
Amount - Long (Short)
|
|
Cost
Basis
|
|
Fair
Value
|
|
Net Carrying Value
1
|
|
Notional
Amount - Long (Short)
|
|
Cost
Basis
|
|
Fair
Value
|
|
Net Carrying Value
1
|
15-Year TBA securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5%
|
|
$
|
403
|
|
|
$
|
390
|
|
|
$
|
394
|
|
|
$
|
4
|
|
|
$
|
1,373
|
|
|
$
|
1,372
|
|
|
$
|
1,370
|
|
|
$
|
(2
|
)
|
3.0%
|
|
2,774
|
|
|
2,756
|
|
|
2,768
|
|
|
12
|
|
|
3,161
|
|
|
3,225
|
|
|
3,217
|
|
|
(8
|
)
|
3.5%
|
|
750
|
|
|
761
|
|
|
764
|
|
|
3
|
|
|
414
|
|
|
428
|
|
|
428
|
|
|
—
|
|
Total 15-Year TBA securities
|
|
3,927
|
|
|
3,907
|
|
|
3,926
|
|
|
19
|
|
|
4,948
|
|
|
5,025
|
|
|
5,015
|
|
|
(10
|
)
|
30-Year TBA securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0%
|
|
3,822
|
|
|
3,690
|
|
|
3,726
|
|
|
36
|
|
|
4,317
|
|
|
4,303
|
|
|
4,312
|
|
|
9
|
|
3.5%
|
|
3,272
|
|
|
3,259
|
|
|
3,276
|
|
|
17
|
|
|
3,932
|
|
|
4,027
|
|
|
4,034
|
|
|
7
|
|
4.0%
|
|
2,650
|
|
|
2,709
|
|
|
2,719
|
|
|
10
|
|
|
2,338
|
|
|
2,449
|
|
|
2,446
|
|
|
(3
|
)
|
4.5%
|
|
(35
|
)
|
|
(36
|
)
|
|
(36
|
)
|
|
—
|
|
|
(61
|
)
|
|
(65
|
)
|
|
(65
|
)
|
|
—
|
|
Total 30-Year TBA securities, net
|
|
9,709
|
|
|
9,622
|
|
|
9,685
|
|
|
63
|
|
|
10,526
|
|
|
10,714
|
|
|
10,727
|
|
|
13
|
|
Total TBA securities, net
|
|
$
|
13,636
|
|
|
$
|
13,529
|
|
|
$
|
13,611
|
|
|
$
|
82
|
|
|
$
|
15,474
|
|
|
$
|
15,739
|
|
|
$
|
15,742
|
|
|
$
|
3
|
|
________________________________
|
|
1.
|
Net carrying value represents the difference between the fair market value and the cost basis (or the forward price to be paid/(received) for the underlying Agency security) of the TBA contract as of period-end and is reported in derivative assets/(liabilities), at fair value in our consolidated balance sheets.
|
Gain (Loss) From Derivative Instruments and Other Securities, Net
The following table summarizes changes in our derivative and other hedge portfolio and their effect on our consolidated statements of comprehensive income
for the three months ended
March 31, 2018
and
2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative and Other Hedging Instruments
|
|
Beginning
Notional Amount
|
|
Additions
|
|
Settlement, Termination,
Expiration or
Exercise
|
|
Ending
Notional Amount
|
|
|
Gain/(Loss)
on Derivative Instruments and Other Securities, Net
1
|
Three months ended March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
TBA securities, net
|
|
$
|
15,474
|
|
|
43,669
|
|
|
(45,507
|
)
|
|
$
|
13,636
|
|
|
|
$
|
(292
|
)
|
Interest rate swaps
|
|
$
|
43,700
|
|
|
3,150
|
|
|
(1,600
|
)
|
|
$
|
45,250
|
|
|
|
663
|
|
Payer swaptions
|
|
$
|
6,650
|
|
|
1,100
|
|
|
(1,000
|
)
|
|
$
|
6,750
|
|
|
|
91
|
|
U.S. Treasury securities - short position
|
|
$
|
(10,699
|
)
|
|
(662
|
)
|
|
563
|
|
|
$
|
(10,798
|
)
|
|
|
212
|
|
U.S. Treasury securities - long position
|
|
$
|
—
|
|
|
959
|
|
|
(734
|
)
|
|
$
|
225
|
|
|
|
—
|
|
U.S. Treasury futures contracts - short position
|
|
$
|
(2,910
|
)
|
|
(2,909
|
)
|
|
3,439
|
|
|
$
|
(2,380
|
)
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
736
|
|
Three months ended March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
TBA securities, net
|
|
$
|
10,916
|
|
|
36,096
|
|
|
(32,842
|
)
|
|
$
|
14,170
|
|
|
|
$
|
39
|
|
Interest rate swaps
|
|
$
|
37,175
|
|
|
1,300
|
|
|
(2,700
|
)
|
|
$
|
35,775
|
|
|
|
22
|
|
Payer swaptions
|
|
$
|
1,200
|
|
|
1,000
|
|
|
—
|
|
|
$
|
2,200
|
|
|
|
(11
|
)
|
U.S. Treasury securities - short position
|
|
$
|
(8,061
|
)
|
|
(2,558
|
)
|
|
1,450
|
|
|
$
|
(9,169
|
)
|
|
|
(78
|
)
|
U.S. Treasury securities - long position
|
|
$
|
189
|
|
|
303
|
|
|
(492
|
)
|
|
$
|
—
|
|
|
|
1
|
|
U.S. Treasury futures contracts - short position
|
|
$
|
(1,810
|
)
|
|
(1,810
|
)
|
|
1,810
|
|
|
$
|
(1,810
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(39
|
)
|
________________________________
|
|
1.
|
Amounts above exclude other miscellaneous gains and losses recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.
|
Note 7
. Pledged Assets
Our funding agreements require us to fully collateralize our obligations under the agreements based upon our counterparties' collateral requirements and their determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. Our derivative contracts similarly require us to fully collateralize our obligations under such agreements, which will vary over time based on similar factors as well as our counterparties' determination of the value of the derivative contract. We are
typically required to post initial margin upon execution of derivative transactions, such as under our interest rate swap agreements and TBA contracts, and subsequently post or receive variation margin based on daily fluctuations in fair value. Our prime brokerage agreements, pursuant to which we receive custody and settlement services, and the clearing organizations utilized by our wholly-owned captive broker-dealer subsidiary, Bethesda Securities, LLC, also require that we post minimum daily clearing deposits. If we breach our collateral requirements, we will be required to fully settle our obligations under the agreements, which could include a forced liquidation of our pledged collateral.
Our counterparties also apply a "haircut" to our pledged collateral, which means our collateral is valued at slightly less than market value and limits the amount we can borrow against our securities. This haircut reflects the underlying risk of the specific collateral and protects our counterparty against a change in its value. Our agreements do not specify the haircut; rather haircuts are determined on an individual transaction basis. Consequently, our funding agreements and derivative contracts expose us to credit risk relating to potential losses that could be recognized if our counterparties fail to perform their obligations under such agreements. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings or to registered clearinghouses and U.S. government agencies, and we monitor our positions with individual counterparties. In the event of a default by a counterparty, we may have difficulty obtaining our assets pledged as collateral to such counterparty and may not receive payments provided for under the terms of our derivative agreements. In the case of centrally cleared instruments, we could be exposed to credit risk if the central clearing agency or a clearing member defaults on its respective obligation to perform under the contract. However, we believe that the risk is minimal due to the clearing exchanges' initial and daily mark to market margin requirements, clearinghouse guarantee funds and other resources that are available in the event of a clearing member default.
Our International Swaps and Derivatives Association ("ISDA") Master Agreements contain a cross default provision under which a default under the terms of certain of our other indebtedness in excess of certain thresholds causes an event of default under the ISDA Master Agreement. Threshold amounts vary by lender. Following an event of default, we could be required to settle our obligations under the agreements. Additionally, under certain of our ISDA Master Agreements, we could be required to settle our obligations under the agreements if we fail to maintain certain minimum stockholders' equity thresholds or our REIT status or if we fail to comply with limits on our leverage up to certain specified levels. As of
March 31, 2018
, the fair value of additional collateral that could be required to be posted as a result of the credit-risk-related contingent features being triggered was not material to our financial statements.
As of
March 31, 2018
, our amount at risk with any counterparty related to our repurchase agreements was less than
5%
of our tangible stockholders' equity and our maximum amount at risk with any counterparty related to our interest rate swap and swaption agreements, excluding centrally cleared swaps, was less than
1%
of our stockholders' equity.
Assets Pledged to Counterparties
The following tables summarize our assets pledged as collateral under our funding, derivative and prime broker agreements by type, including securities pledged related to securities sold but not yet settled, as of
March 31, 2018
and
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
Assets Pledged to Counterparties
|
|
Repurchase Agreements
1
|
|
Debt of Consolidated VIEs
|
|
Derivative Agreements
|
|
Prime Broker Agreements
2
|
|
Total
|
Agency RMBS - fair value
|
|
$
|
50,996
|
|
|
$
|
621
|
|
|
$
|
202
|
|
|
$
|
410
|
|
|
$
|
52,229
|
|
U.S. Treasury securities - fair value
3
|
|
115
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
164
|
|
Accrued interest on pledged securities
|
|
151
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
155
|
|
Restricted cash and cash equivalents
|
|
49
|
|
|
—
|
|
|
331
|
|
|
6
|
|
|
386
|
|
Total
|
|
$
|
51,311
|
|
|
$
|
623
|
|
|
$
|
583
|
|
|
$
|
417
|
|
|
$
|
52,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Assets Pledged to Counterparties
|
|
Repurchase Agreements
1
|
|
Debt of Consolidated VIEs
|
|
Derivative Agreements
|
|
Prime Broker Agreements
2
|
|
Total
|
Agency RMBS - fair value
|
|
$
|
52,497
|
|
|
$
|
662
|
|
|
$
|
221
|
|
|
$
|
519
|
|
|
$
|
53,899
|
|
U.S. Treasury securities - fair value
3
|
|
113
|
|
|
—
|
|
|
72
|
|
|
—
|
|
|
185
|
|
Accrued interest on pledged securities
|
|
153
|
|
|
2
|
|
|
1
|
|
|
2
|
|
|
158
|
|
Restricted cash and cash equivalents
|
|
35
|
|
|
—
|
|
|
281
|
|
1
|
|
|
317
|
|
Total
|
|
$
|
52,798
|
|
|
$
|
664
|
|
|
$
|
575
|
|
|
$
|
522
|
|
|
$
|
54,559
|
|
________________________________
|
|
1.
|
Includes
$174 million
and
$182 million
of retained interests in our consolidated VIEs pledged as collateral under repurchase agreements as of
March 31, 2018
and
December 31, 2017
, respectively.
|
|
|
2.
|
Includes margin for TBAs cleared through prime brokers and other clearing deposits.
|
|
|
3.
|
Includes repledged securities received as collateral from counterparties.
|
The following table summarizes our securities pledged as collateral under our repurchase agreements by the remaining maturity of our borrowings, including securities pledged related to sold but not yet settled securities, as of
March 31, 2018
and
December 31, 2017
(in millions). For the corresponding borrowings associated with the following amounts and the interest rates thereon, refer to
Note 5
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Securities Pledged by Remaining Maturity of Repurchase Agreements
|
|
Fair Value of Pledged Securities
|
|
Amortized
Cost of Pledged Securities
|
|
Accrued
Interest on
Pledged
Securities
|
|
Fair Value of Pledged Securities
|
|
Amortized
Cost of Pledged Securities
|
|
Accrued
Interest on
Pledged
Securities
|
RMBS:
1,2
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 30 days
|
|
$
|
25,229
|
|
|
$
|
25,939
|
|
|
$
|
75
|
|
|
$
|
20,162
|
|
|
$
|
20,313
|
|
|
$
|
59
|
|
> 30 and ≤ 60 days
|
|
8,001
|
|
|
8,249
|
|
|
24
|
|
|
12,950
|
|
|
13,061
|
|
|
38
|
|
> 60 and ≤ 90 days
|
|
5,561
|
|
|
5,724
|
|
|
17
|
|
|
4,000
|
|
|
4,013
|
|
|
11
|
|
> 90 days
|
|
12,205
|
|
|
12,570
|
|
|
36
|
|
|
15,385
|
|
|
15,512
|
|
|
45
|
|
Total RMBS
|
|
$
|
50,996
|
|
|
$
|
52,482
|
|
|
$
|
152
|
|
|
$
|
52,497
|
|
|
$
|
52,899
|
|
|
$
|
153
|
|
________________________________
|
|
1.
|
Includes
$174 million
and
$182 million
of retained interests in our consolidated VIEs pledged as collateral under repurchase agreements as of
March 31, 2018
and
December 31, 2017
, respectively.
|
|
|
2.
|
March 31, 2018
amounts exclude
$115 million
of repledged U.S. Treasury securities received as collateral from counterparties.
|
The table above excludes Agency securities transferred to our consolidated VIEs. Securities transferred to our consolidated VIEs can only be used to settle the obligations of each respective VIE. However, we may pledge our retained interests in our consolidated VIEs as collateral under our repurchase agreements and derivative contracts. Please refer to Note
4
for additional information regarding our consolidated VIEs.
Assets Pledged from Counterparties
As of
March 31, 2018
and
December 31, 2017
, we had assets pledged to us from counterparties as collateral under our reverse repurchase and derivative agreements summarized in the tables below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Assets Pledged to AGNC
|
|
Reverse Repurchase Agreements
1
|
|
Derivative Agreements
|
|
Total
|
|
Reverse Repurchase Agreements
|
|
Derivative Agreements
|
|
Total
|
U.S. Treasury securities - fair value
|
|
$
|
10,712
|
|
|
$
|
—
|
|
|
$
|
10,712
|
|
|
$
|
10,853
|
|
|
$
|
—
|
|
|
$
|
10,853
|
|
Cash
|
|
—
|
|
|
247
|
|
|
247
|
|
|
—
|
|
|
82
|
|
|
82
|
|
Total
|
|
$
|
10,712
|
|
|
$
|
247
|
|
|
$
|
10,959
|
|
|
$
|
10,853
|
|
|
$
|
82
|
|
|
$
|
10,935
|
|
U.S Treasury securities received as collateral under our reverse repurchase agreements that we use to cover short sales of U.S. Treasury securities are accounted for as securities borrowing transactions. We recognize a corresponding obligation to return the borrowed securities at fair value on the accompanying consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date.
Cash collateral received is recognized in cash and cash equivalents with a corresponding amount recognized in accounts payable and other accrued liabilities on the accompanying consolidated balance sheets.
Offsetting Assets and Liabilities
Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of setoff under master netting arrangements (or similar agreements), including in the event of default or in the event of bankruptcy of either party to the transactions. We present our assets and liabilities subject to such arrangements on a gross basis in our consolidated balance sheets. The following tables present information about our assets and liabilities that are subject to master netting arrangements and can potentially be offset on our consolidated balance sheets as of
March 31, 2018
and
December 31, 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Financial and Derivative Assets
|
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Assets Presented in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset
in the
Consolidated Balance Sheets
|
|
Net Amount
|
|
|
|
|
|
Financial Instruments
|
|
Collateral Received
2
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap and swaption agreements, at fair value
1
|
|
$
|
327
|
|
|
$
|
—
|
|
|
$
|
327
|
|
|
$
|
(1
|
)
|
|
$
|
(243
|
)
|
|
$
|
83
|
|
TBA securities, at fair value
|
|
83
|
|
|
—
|
|
|
83
|
|
|
(1
|
)
|
|
—
|
|
|
82
|
|
Receivable under reverse repurchase agreements
|
|
10,770
|
|
|
—
|
|
|
10,770
|
|
|
(7,606
|
)
|
|
(3,164
|
)
|
|
—
|
|
Total
|
|
$
|
11,180
|
|
|
$
|
—
|
|
|
$
|
11,180
|
|
|
$
|
(7,608
|
)
|
|
$
|
(3,407
|
)
|
|
$
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap and swaption agreements, at fair value
1
|
|
$
|
156
|
|
|
$
|
—
|
|
|
$
|
156
|
|
|
$
|
(1
|
)
|
|
$
|
(82
|
)
|
|
$
|
73
|
|
TBA securities, at fair value
|
|
30
|
|
|
—
|
|
|
30
|
|
|
(22
|
)
|
|
—
|
|
|
8
|
|
Receivable under reverse repurchase agreements
|
|
10,961
|
|
|
—
|
|
|
10,961
|
|
|
(9,682
|
)
|
|
(1,279
|
)
|
|
—
|
|
Total
|
|
$
|
11,147
|
|
|
$
|
—
|
|
|
$
|
11,147
|
|
|
$
|
(9,705
|
)
|
|
$
|
(1,361
|
)
|
|
$
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Financial and Derivative Liabilities
|
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset
in the
Consolidated Balance Sheets
|
|
Net Amount
|
|
|
|
|
|
Financial Instruments
|
|
Collateral Pledged
2
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements, at fair value
1
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
TBA securities, at fair value
|
|
1
|
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Repurchase agreements
|
|
48,956
|
|
|
—
|
|
|
48,956
|
|
|
(7,606
|
)
|
|
(41,350
|
)
|
|
—
|
|
Total
|
|
$
|
48,958
|
|
|
$
|
—
|
|
|
$
|
48,958
|
|
|
$
|
(7,608
|
)
|
|
$
|
(41,350
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements, at fair value
1
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
TBA securities, at fair value
|
|
27
|
|
|
—
|
|
|
27
|
|
|
(22
|
)
|
|
(5
|
)
|
|
—
|
|
Repurchase agreements and FHLB advances
|
|
50,296
|
|
|
—
|
|
|
50,296
|
|
|
(9,682
|
)
|
|
(40,614
|
)
|
|
—
|
|
Total
|
|
$
|
50,324
|
|
|
$
|
—
|
|
|
$
|
50,324
|
|
|
$
|
(9,705
|
)
|
|
$
|
(40,619
|
)
|
|
$
|
—
|
|
________________________________
|
|
1.
|
Reported under derivative assets / liabilities, at fair value in the accompanying consolidated balance sheets. Refer to
Note 6
for a reconciliation of derivative assets / liabilities, at fair value to their sub-components.
|
|
|
2.
|
Includes cash and securities pledged / received as collateral, at fair value. Amounts presented are limited to collateral pledged sufficient to reduce the net amount to zero for individual counterparties, as applicable.
|
Note 8
. Fair Value Measurements
We determine the fair value of our financial instruments based on our estimate of the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. We typically obtain price estimates from multiple third-party pricing services and dealers or, if applicable, the clearing exchange (see
Note 3
for further details.) We utilize a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument's categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The three levels of valuation hierarchy are defined as follows:
|
|
•
|
Level 1 Inputs —Quoted prices (unadjusted) for identical unrestricted assets and liabilities in active markets that are accessible at the measurement date.
|
|
|
•
|
Level 2 Inputs —Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
|
|
|
•
|
Level 3 Inputs —Instruments with primarily unobservable market data that cannot be corroborated.
|
The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. Third-party pricing sources may also use certain unobservable inputs, such as assumptions of future levels of prepayment, defaults and loss severities, especially when estimating fair values for securities with lower levels of recent trading activity.
We make inquiries of third-party pricing sources to understand the significant inputs and assumptions they used to determine their prices. We also review third-party price estimates and perform procedures to validate their reasonableness, including an analysis of the range of estimates for each position, comparison to recent trade activity for similar securities, and for consistency with market conditions observed as of the measurement date. While we do not adjust prices we obtain from pricing sources, we will exclude prices for securities from our estimation of fair value if we determine (based on our validation procedures and our market knowledge and expertise) that the price is significantly different from what observable market data would indicate and we cannot obtain an understanding from the third-party source as to the significant inputs used to determine the price.
The validation procedures described above also influence our determination of the appropriate fair value measurement categorization. The following table provides a summary of our assets and liabilities that are measured at fair value on a recurring
basis as of
March 31, 2018
and
December 31, 2017
based on their categorization within the valuation hierarchy (in millions). There were no transfers between valuation hierarchy levels during the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency securities
|
|
$
|
—
|
|
|
$
|
54,141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,506
|
|
|
$
|
—
|
|
Agency securities transferred to consolidated VIEs
|
|
—
|
|
|
621
|
|
|
—
|
|
|
—
|
|
|
662
|
|
|
—
|
|
Credit risk transfer securities
|
|
—
|
|
|
884
|
|
|
—
|
|
|
—
|
|
|
876
|
|
|
—
|
|
Non-Agency securities
|
|
—
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
36
|
|
|
—
|
|
U.S. Treasury securities
|
|
224
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
REIT equity securities
|
|
42
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
—
|
|
|
174
|
|
|
—
|
|
|
—
|
|
|
81
|
|
|
—
|
|
Swaptions
|
|
—
|
|
|
153
|
|
|
—
|
|
|
—
|
|
|
75
|
|
|
—
|
|
TBA securities
|
|
—
|
|
|
83
|
|
|
—
|
|
|
—
|
|
|
30
|
|
|
—
|
|
U.S. Treasury futures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
266
|
|
|
$
|
56,092
|
|
|
$
|
—
|
|
|
$
|
48
|
|
|
$
|
57,266
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt of consolidated VIEs
|
|
$
|
—
|
|
|
$
|
336
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
357
|
|
|
$
|
—
|
|
Obligation to return U.S. Treasury securities borrowed under reverse repurchase agreements
|
|
10,352
|
|
|
—
|
|
|
—
|
|
|
10,467
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
TBA securities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
—
|
|
U.S. Treasury futures
|
|
30
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
10,352
|
|
|
$
|
338
|
|
|
$
|
—
|
|
|
$
|
10,467
|
|
|
$
|
385
|
|
|
$
|
—
|
|
Excluded from the table above are financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, receivables, payables and borrowings under repurchase agreements, which are presented in our consolidated financial statements at cost. The cost basis of these instruments is determined to approximate fair value due to their short duration or, in the case of longer-term repo, due to floating rates of interest based on an index plus or minus a fixed spread which is consistent with fixed spreads demanded in the market. We estimate the fair value of these instruments using "Level 1" or "Level 2" inputs.
Note 9
. Net Income Per Common Share
Basic net income per common share includes no dilution and is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding for the respective period. Diluted earnings per common share includes the impact of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares outstanding include unvested restricted stock units and performance share units granted under our long-term incentive program to employees and non-employee Board of Directors. The following table presents the computations of basic and diluted net income per common share for the periods indicated (shares and dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
Weighted average number of common shares outstanding - basic
|
|
391.3
|
|
|
331.0
|
|
Unvested restricted stock units and performance share units
|
|
0.2
|
|
|
0.1
|
|
Weighted average number of common shares outstanding - diluted
|
|
391.5
|
|
|
331.1
|
Net income available to common stockholders
|
|
$
|
415
|
|
|
$
|
69
|
|
Net income per common share - basic and diluted
|
|
$
|
1.06
|
|
|
$
|
0.21
|
|
Note 10
. Stockholders' Equity
Preferred Stock
Pursuant to our amended and restated certificate of incorporation, we are authorized to designate and issue up to
10.0 million
shares of preferred stock in one or more classes or series. As of December 31, 2017 and March 31, 2018,
8,050
shares were designated as
7.750%
Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") and
13,800
shares were designated as
7.00%
Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Series C Preferred Stock"). Shares of Series B and Series C Preferred Stock are represented by depositary shares equal to 1/1000 interest in each share of Series B and Series C Preferred Stock, respectively. As of December 31, 2017 and
March 31, 2018
, we had
7,000
shares of Series B Preferred Stock and
13,000
shares of Series C Preferred Stock outstanding (represented by
7.0 million
Series B depositary shares and
13.0 million
Series C depositary shares outstanding, respectively) and
9,980,000
of authorized but unissued shares of preferred stock.
Holders of depository shares underlying our Series B Preferred Stock are entitled to receive cumulative cash dividends at a rate of
7.750%
per annum of their
$25.00
per depositary share liquidation preference. Holders of depositary shares underlying our Series C Preferred Stock are entitled to receive cumulative cash dividends at a rate of
7.00%
per annum up to, and including, October 14, 2022 and thereafter at a floating rate equal to three-month LIBOR plus a spread of
5.111%
per annum of their
$25.00
per depositary share liquidation preference. Dividends are payable quarterly in arrears on the 15th day of each January, April, July and October. As of
March 31, 2018
, we had declared all required quarterly dividends on our preferred stock.
Our preferred stock ranks senior to our common stock with respect to the payment of dividends and the distribution of assets upon a voluntary or involuntary liquidation, dissolution or winding up of the Company. Our preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and ranks on parity with each other. Under certain circumstances upon a change of control, our preferred stock is convertible to shares of our common stock. Holders of our preferred stock and depository shares underlying our preferred stock have no voting rights, except under limited conditions. Beginning on
May 8, 2019
and October 15, 2022, depository shares underlying our Series B and Series C Preferred Stock, respectively, will be redeemable at
$25.00
per depositary share, plus accumulated and unpaid dividends (whether or not declared) exclusively at our option. We may redeem shares of our preferred stock prior to our optional redemption date under certain circumstances intended to preserve our qualification as a REIT for Federal income tax purposes.
Preferred Stock Offering and Redemption
In August 2017, we issued
13,000
shares of Series C Preferred Stock in a public offering of
13.0 million
Series C depositary shares at a price of
$25
per depositary share for net proceeds of
$315 million
, after deducting underwriting discounts and estimated offering expenses. In September 2017, we redeemed all of our issued and outstanding shares of
8.000%
Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") for
$173 million
(or
$25
per share liquidation preference), plus accrued and unpaid dividends, and, in October of 2017, we filed a Certificate of Elimination of our Series A Preferred Stock with the Secretary of State of the State of Delaware, which eliminated the designation of Series A Preferred Stock from our amended and restated certificate of incorporation.
Common Stock Offerings
In May 2017, we completed a public offering in which
24.5 million
shares of our common stock were sold to the underwriters for proceeds of
$503 million
, or
$20.51
per common share, net of offering costs. In September 2017, we completed a public offering in which
28.2 million
shares of our common stock were sold to the underwriters for proceeds of
$577 million
, or
$20.47
per common share, net of estimated offering costs.
At-the-Market Offering Program
In February 2017, we entered into agreements with sales agents to publicly offer and sell shares of our common stock in privately negotiated and/or at-the-market transactions from time-to-time up to an aggregate amount of
$750 million
of shares of our common stock. During fiscal year 2017, we sold
7.6 million
shares of our common stock under the sales agreements for proceeds of
$159 million
, or
$20.96
per common share, net of estimated offering costs. As of
March 31, 2018
,
$589 million
of shares of our common stock remain available for issuance under this program.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes changes to accumulated OCI
for the three months ended
March 31, 2018
and
2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Accumulated Other Comprehensive Income (Loss)
|
|
2018
|
|
2017
|
Beginning Balance
|
|
$
|
(345
|
)
|
|
$
|
(397
|
)
|
OCI before reclassifications
|
|
(620
|
)
|
|
(38
|
)
|
(Gain) loss amounts for available-for-sale securities
reclassified from accumulated OCI to realized gain (loss) on sale of investment securities
|
|
(1
|
)
|
|
84
|
|
Ending Balance
|
|
$
|
(966
|
)
|
|
$
|
(351
|
)
|
Note 11
. Subsequent Events
On
April 12, 2018
, our Board of Directors declared a monthly dividend of
$0.18
per common share, payable on
May 9, 2018
to common stockholders of record as of
April 30, 2018
, respectively.
On May 2, 2018, we entered into an amendment to our management agreement with MTGE in connection with the proposed acquisition of MTGE by Annaly Capital Management, Inc. The transaction is expected to close in the third quarter of 2018, subject to customary closing conditions. Pursuant to the amendment, we will continue to manage MTGE through the closing of the merger and for a short transitional period following the merger. In addition to regular monthly management fees payable for ongoing service through the transition period, under the amendment we will be paid a termination fee of
$41.7
million.