10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________
FORM 10-Q
__________________________________________________
|
| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
OR
|
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-34057
__________________________________________________
AMERICAN CAPITAL AGENCY 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, 14th Floor
Bethesda, Maryland 20814
(Address of principal executive offices)
(301) 968-9300
(Registrant’s telephone number, including area code)
__________________________________________________
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 earlier 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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
The number of shares of the issuer's common stock, $0.01 par value, outstanding as of October 31, 2015 was 346,450,083.
AMERICAN CAPITAL AGENCY CORP.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN CAPITAL AGENCY CORP.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
|
| | | | | | | |
| September 30, 2015 | | December 31, 2014 |
| (Unaudited) | | |
Assets: | | | |
Agency securities, at fair value (including pledged securities of $47,319 and $51,629, respectively) | $ | 53,729 |
| | $ | 55,482 |
|
Agency securities transferred to consolidated variable interest entities, at fair value (pledged securities) | 1,088 |
| | 1,266 |
|
U.S. Treasury securities, at fair value (including pledged securities of $767 and $2,375, respectively) | 787 |
| | 2,427 |
|
REIT equity securities, at fair value | 34 |
| | 68 |
|
Cash and cash equivalents | 1,505 |
| | 1,720 |
|
Restricted cash | 1,413 |
| | 713 |
|
Derivative assets, at fair value | 143 |
| | 408 |
|
Receivable for securities sold (including pledged securities of $147 and $79, respectively) | 147 |
| | 239 |
|
Receivable under reverse repurchase agreements | 1,463 |
| | 5,218 |
|
Other assets | 300 |
| | 225 |
|
Total assets | $ | 60,609 |
| | $ | 67,766 |
|
Liabilities: | | | |
Repurchase agreements | $ | 41,014 |
| | $ | 50,296 |
|
Federal Home Loan Bank advances | 3,502 |
| | — |
|
Debt of consolidated variable interest entities, at fair value | 626 |
| | 761 |
|
Payable for securities purchased | 4,178 |
| | 843 |
|
Derivative liabilities, at fair value | 1,536 |
| | 890 |
|
Dividends payable | 76 |
| | 85 |
|
Obligation to return securities borrowed under reverse repurchase agreements, at fair value | 1,309 |
| | 5,363 |
|
Accounts payable and other accrued liabilities | 52 |
| | 100 |
|
Total liabilities | 52,293 |
| | 58,338 |
|
Stockholders' equity: | | | |
Preferred stock - $0.01 par value; 10.0 shares authorized: | | | |
Redeemable Preferred Stock; $0.01 par value; 6.9 shares issued and outstanding (aggregate liquidation preference of $348) | 336 |
| | 336 |
|
Common stock - $0.01 par value; 600.0 shares authorized; | | | |
346.5 and 352.8 shares issued and outstanding, respectively | 3 |
| | 4 |
|
Additional paid-in capital | 10,209 |
| | 10,332 |
|
Retained deficit | (2,727 | ) | | (1,674 | ) |
Accumulated other comprehensive income | 495 |
| | 430 |
|
Total stockholders' equity | 8,316 |
| | 9,428 |
|
Total liabilities and stockholders' equity | $ | 60,609 |
| | $ | 67,766 |
|
See accompanying notes to consolidated financial statements.
AMERICAN CAPITAL AGENCY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Interest income: | | | | | | | |
Interest income | $ | 295 |
| | $ | 357 |
| | $ | 1,092 |
| | $ | 1,141 |
|
Interest expense | 77 |
| | 88 |
| | 244 |
| | 291 |
|
Net interest income | 218 |
| | 269 |
| | 848 |
| | 850 |
|
Other gain (loss), net: | | | | | | | |
Gain (loss) on sale of agency securities, net | (39 | ) | | 14 |
| | (25 | ) | | 17 |
|
Loss on derivative instruments and other securities, net | (778 | ) | | (51 | ) | | (1,090 | ) | | (672 | ) |
Total other gain (loss), net | (817 | ) | | (37 | ) | | (1,115 | ) | | (655 | ) |
Expenses: | | | | | | | |
Management fees | 29 |
| | 30 |
| | 88 |
| | 89 |
|
General and administrative expenses | 5 |
| | 5 |
| | 18 |
| | 17 |
|
Total expenses | 34 |
| | 35 |
| | 106 |
| | 106 |
|
Net income (loss) | (633 | ) | | 197 |
| | (373 | ) | | 89 |
|
Dividend on preferred stock | 7 |
| | 7 |
| | 21 |
| | 16 |
|
Net income (loss) available (attributable) to common stockholders | $ | (640 | ) | | $ | 190 |
| | $ | (394 | ) | | $ | 73 |
|
| | | | | | | |
Net income (loss) | $ | (633 | ) | | $ | 197 |
| | $ | (373 | ) | | $ | 89 |
|
Other comprehensive income (loss): | | | | | | | |
Unrealized gain (loss) on available-for-sale securities, net | 467 |
| | (253 | ) | | (14 | ) | | 1,059 |
|
Unrealized gain on derivative instruments, net | 24 |
| | 38 |
| | 79 |
| | 121 |
|
Other comprehensive income (loss) | 491 |
| | (215 | ) | | 65 |
| | 1,180 |
|
Comprehensive income (loss) | (142 | ) | | (18 | ) | | (308 | ) | | 1,269 |
|
Dividend on preferred stock | 7 |
| | 7 |
| | 21 |
| | 16 |
|
Comprehensive income (loss) available (attributable) to common stockholders | $ | (149 | ) | | $ | (25 | ) | | $ | (329 | ) | | $ | 1,253 |
|
| | | | | | | |
Weighted average number of common shares outstanding - basic and diluted | 347.8 |
| | 352.8 |
| | 350.9 |
| | 353.5 |
|
Net income (loss) per common share - basic and diluted | $ | (1.84 | ) | | $ | 0.54 |
| | $ | (1.12 | ) | | $ | 0.21 |
|
Dividends declared per common share | $ | 0.60 |
| | $ | 0.65 |
| | $ | 1.88 |
| | $ | 1.95 |
|
See accompanying notes to consolidated financial statements.
AMERICAN CAPITAL AGENCY CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Shares | | Amount | | Shares | | Amount | |
Balance, December 31, 2013 | 6.9 |
| | $ | 167 |
| | 356.2 |
| | $ | 4 |
| | $ | 10,406 |
| | $ | (497 | ) | | $ | (1,383 | ) | | $ | 8,697 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 89 |
| | — |
| | 89 |
|
Other comprehensive income: | | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale securities, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,059 |
| | 1,059 |
|
Unrealized gain on derivative instruments, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 121 |
| | 121 |
|
Issuance of preferred stock | — |
| | 169 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 169 |
|
Repurchase of common stock | — |
| | — |
| | (3.4 | ) | | — |
| | (74 | ) | | — |
| | — |
| | (74 | ) |
Preferred dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (16 | ) | | — |
| | (16 | ) |
Common dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (688 | ) | | — |
| | (688 | ) |
Balance, September 30, 2014 | 6.9 |
| | $ | 336 |
| | 352.8 |
| | $ | 4 |
| | $ | 10,332 |
| | $ | (1,112 | ) | | $ | (203 | ) | | $ | 9,357 |
|
| | | | | | | | | | | | | | | |
Balance, December 31, 2014 | 6.9 |
| | $ | 336 |
| | 352.8 |
| | $ | 4 |
| | $ | 10,332 |
| | $ | (1,674 | ) | | $ | 430 |
| | $ | 9,428 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (373 | ) | | — |
| | (373 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | | | | |
Unrealized loss on available-for-sale securities, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14 | ) | | (14 | ) |
Unrealized gain on derivative instruments, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 79 |
| | 79 |
|
Repurchase of common stock | — |
| | — |
| | (6.3 | ) | | (1 | ) | | (123 | ) | | — |
| | — |
| | (124 | ) |
Preferred dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (21 | ) | | — |
| | (21 | ) |
Common dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (659 | ) | | — |
| | (659 | ) |
Balance, September 30, 2015 | 6.9 |
| | $ | 336 |
| | 346.5 |
| | $ | 3 |
| | $ | 10,209 |
| | $ | (2,727 | ) | | $ | 495 |
| | $ | 8,316 |
|
See accompanying notes to consolidated financial statements.
AMERICAN CAPITAL AGENCY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2015 | | 2014 |
Operating activities: | | | |
Net income (loss) | $ | (373 | ) | | $ | 89 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Amortization of agency securities premiums and discounts, net | 330 |
| | 351 |
|
Amortization of accumulated other comprehensive loss on interest rate swaps de-designated as qualifying hedges | 79 |
| | 121 |
|
(Gain) loss on sale of agency securities, net | 25 |
| | (17 | ) |
Loss on derivative instruments and other securities, net | 1,090 |
| | 672 |
|
(Increase) decrease in other assets | (73 | ) | | 71 |
|
Increase (decrease) in accounts payable and other accrued liabilities | (8 | ) | | 7 |
|
Net cash provided by operating activities | 1,070 |
| | 1,294 |
|
Investing activities: | | | |
Purchases of agency securities | (23,792 | ) | | (15,342 | ) |
Proceeds from sale of agency securities | 22,615 |
| | 25,404 |
|
Principal collections on agency securities | 6,177 |
| | 5,678 |
|
Purchases of U.S. Treasury securities | (46,774 | ) | | (28,889 | ) |
Proceeds from sale of U.S. Treasury securities | 44,237 |
| | 34,203 |
|
Net proceeds from (payments on) reverse repurchase agreements | 3,755 |
| | (3,377 | ) |
Net proceeds from (payments on) other derivative instruments | (85 | ) | | 282 |
|
Purchases of REIT equity securities | (11 | ) | | (204 | ) |
Proceeds from sale of REIT equity securities | 35 |
| | 386 |
|
Increase in restricted cash | (700 | ) | | (693 | ) |
Other investing cash flows, net | (28 | ) | | (244 | ) |
Net cash provided by investing activities | 5,429 |
| | 17,204 |
|
Financing activities: | | | |
Proceeds from repurchase arrangements | 317,718 |
| | 216,945 |
|
Repayments on repurchase agreements | (327,000 | ) | | (235,151 | ) |
Proceeds from Federal Home Loan Bank advances | 5,437 |
| | — |
|
Repayments on Federal Home Loan Bank advances | (1,935 | ) | | — |
|
Repayments on debt of consolidated variable interest entities | (121 | ) | | (119 | ) |
Net proceeds from preferred stock issuance | — |
| | 169 |
|
Payments for common stock repurchases | (124 | ) | | (74 | ) |
Cash dividends paid | (689 | ) | | (703 | ) |
Net cash used in financing activities | (6,714 | ) | | (18,933 | ) |
Net change in cash and cash equivalents | (215 | ) | | (435 | ) |
Cash and cash equivalents at beginning of period | 1,720 |
| | 2,143 |
|
Cash and cash equivalents at end of period | $ | 1,505 |
| | $ | 1,708 |
|
See accompanying notes to consolidated financial statements.
AMERICAN CAPITAL AGENCY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Unaudited Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements of American Capital Agency 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. Actual results could differ from those estimates.
Our unaudited interim consolidated financial statements include the accounts of our wholly-owned subsidiaries, American Capital Agency TRS, LLC and Old Georgetown Insurance Co., LLC, and variable interest entities for which the Company is the primary beneficiary. Significant intercompany accounts and transactions have been eliminated. 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.
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 ("IPO"). Our common stock is traded on The NASDAQ Global Select Market under the symbol "AGNC."
We are externally managed by American Capital AGNC Management, LLC (our "Manager"), an affiliate of American Capital, Ltd. ("American Capital").
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 a REIT, we are required to distribute annually 90% of our taxable net income. As 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 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 on a leveraged basis in agency mortgage-backed securities ("agency MBS"). These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") for which the principal and interest payments are guaranteed by a 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 assets reasonably related to agency securities and up to 10% of our assets in AAA non-agency and commercial mortgage-backed securities (collectively referred to as "AAA non-agency securities").
Our principal objective is to generate attractive risk-adjusted returns for distribution to our stockholders through regular monthly dividends from the combination of our net interest income and net realized gains and losses on our investments and hedging activities while preserving our net asset value (also referred to as "net book value," "NAV" and "stockholders' equity"). We fund our investments primarily through short-term borrowings structured as repurchase agreements.
Note 3. Summary of Significant Accounting Policies
Investment Securities
ASC Topic 320, Investments—Debt and Equity Securities ("ASC 320"), 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. Securities classified as trading and available-for-sale are reported at fair value, while securities classified as held-to-maturity are reported at amortized cost. We may sell any of our securities as part of our overall management of our investment portfolio. Accordingly, we typically designate our agency and AAA non-agency securities as available-for-sale. All securities classified as available-for-sale are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss) ("OCI"), a separate component of stockholders' equity. Upon the sale of a security, 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.
Interest-only securities and inverse interest-only securities (collectively referred to as "interest-only securities") represent our right to receive a specified proportion of the contractual interest cash flows of specific agency CMO securities. Principal-only securities represent our right to receive the contractual principal cash flows of specific agency CMO securities. Interest and principal-only securities are measured at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Our investments in interest and principal-only securities are included in agency securities, at fair value on the accompanying consolidated balance sheets.
REIT equity securities represent investments in the common stock of other publicly traded mortgage REITs that invest predominantly in agency MBS. We designate our investments in REIT equity securities as trading securities and report them at fair value on the accompanying consolidated balance sheets.
We estimate the fair value of our agency and AAA non-agency securities based on valuations obtained from third-party pricing services and non-binding dealer quotes derived from common market pricing methods using observable (or "Level 2") inputs. Such methods incorporate, but are not limited to, reported trades and executable bid and asked prices for similar securities, benchmark interest rate curves, such as the spread to the U.S. Treasury rate and interest rate swap curves, convexity, duration and the underlying characteristics of the particular security, including coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security. We estimate the fair value of our REIT equity securities based on a market approach using quoted market prices (or "Level 1" inputs). Refer to Note 8 for further discussion of fair value measurements.
We evaluate our investment securities 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.
The liquidity of the agency and AAA non-agency securities market allows us to obtain competitive bids and execute on a sale transaction typically within one to two days of making the decision to sell a security and, therefore, we generally do not make decisions to sell specific securities until shortly prior to initiating a sell order. In some instances, we may sell specific agency securities by delivering such securities into existing short to-be-announced ("TBA") contracts. TBA market conventions require the identification of the specific agency securities to be delivered no later than 48 hours prior to settlement. If we settle a short TBA contract through the delivery of securities, we will generally identify the specific securities to be delivered within one to two days of the 48-hour deadline.
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 investment securities 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 ("ASC 310-20").
We estimate long-term prepayment speeds of our agency and AAA non-agency securities using a third-party service and market data. The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates and mortgage rates of the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, 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 prepayment speeds estimated by the third-party service. As market conditions may change rapidly, we may make adjustments for different securities based on our Manager's judgment. Various market participants could use materially different assumptions.
Actual and anticipated prepayment experience is reviewed quarterly and effective yields are recalculated when differences arise between (i) our previously estimated future prepayments and (ii) the actual prepayments to date plus our currently 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.
Derivative Instruments
We use a variety of derivative instruments to hedge a portion of our exposure to market risks, including interest rate risk, prepayment risk and extension risk. 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 principal instruments that we use are interest rate swaps and options to enter into interest rate swaps ("swaptions"). We also utilize forward contracts for the purchase or sale of agency MBS securities in the "to-be-announced" market ("TBA securities"), U.S. Treasury securities and U.S. Treasury futures contracts. 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.
We may also enter into TBA contracts as a means of investing in and financing agency securities (thereby increasing our "at risk" leverage) or as a means of disposing of or reducing our exposure to agency securities (thereby reducing our "at risk" leverage). Pursuant to TBA contracts, we agree 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. We may also choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date. This transaction is commonly referred to as a "dollar roll." The agency securities purchased or sold for a forward settlement date 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/loss." Consequently, forward purchases of agency securities and dollar roll transactions represent a form of "off-balance sheet" financing.
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 the balance sheet 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 in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We attempt to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.
Discontinuation of hedge accounting for interest rate swap agreements
Prior to September 30, 2011, we entered into interest rate swap agreements typically with the intention of qualifying for hedge accounting under ASC 815. However, as of September 30, 2011, we elected to discontinue hedge accounting for our interest rate swaps. Upon discontinuation of hedge accounting, the net deferred loss related to our de-designated interest rate swaps remained in accumulated OCI and is being reclassified from accumulated OCI into interest expense on a straight-line basis over the remaining term of each interest rate swap.
Interest rate swap agreements
We use interest rate swaps to hedge the variable cash flows associated with borrowings made under our repurchase agreements and Federal Home Loan Bank advance facility. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one, three or six-month LIBOR ("payer swaps") with terms up to 20 years. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our funding agreements and cash flows on such liabilities. Our swap agreements are privately negotiated in the over−the−counter ("OTC") market, with swap agreements entered into subsequent to May 2013 subject to central clearing through a registered commodities exchange ("centrally cleared swaps").
We estimate the fair value of our centrally cleared interest rate swaps using the daily settlement price determined by the respective exchange. Centrally cleared swaps are valued by the exchange using a pricing model that references the underlying rates including the overnight index swap rate and LIBOR forward rate to produce the daily settlement price.
We estimate the fair value of our "non-centrally cleared" interest rate swaps based on valuations obtained from third-party pricing services and the swap counterparty (collectively, “third-party valuations”). The third-party valuations are model-driven using observable inputs consisting of LIBOR and the forward yield curve. We also consider the creditworthiness of both us and our counterparties and the impact of netting and credit enhancement provisions contained in each derivative agreement, such as collateral postings. All of our "non-centrally cleared" interest rate swaps are subject to bilateral collateral arrangements. Consequently, no credit valuation adjustment was made in determining the fair value of such instruments.
Interest rate swaptions
We purchase interest rate swaptions generally 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, which we refer as "payer swaptions." We may also enter into swaption agreements that provide us the option to enter into a receive fixed interest rate swap, which we refer to as "receiver swaptions." The premium paid for interest rate swaptions is reported as an asset in our consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium 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.
Our interest rate swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. We estimate the fair value of our interest rate swaption agreements based on model-driven valuations obtained from third-party pricing services and the swaption counterparty using observable inputs, taking into account 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.
TBA securities
A TBA security is a forward contract for the purchase ("long position") or sale ("short position") of agency MBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific agency MBS delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA contracts as a means of hedging against short-term changes in interest rates. We may also enter into TBA contracts as a means of acquiring or disposing of agency securities and we may utilize TBA dollar roll transactions to finance agency MBS purchases.
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 take physical delivery of the agency security upon settlement of the contract. We account for TBA dollar roll transactions as a series of derivative transactions. Gains, losses and dollar roll income associated with our TBA contracts and dollar roll transactions are recognized in our consolidated statements of comprehensive income in gain (loss) on derivative instruments and other securities, net.
We estimate the fair value of TBA securities based on similar methods used to value our agency MBS securities.
U.S. Treasury securities
We purchase or 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 the balance sheet 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.
Note 4. Investment Securities
As of September 30, 2015 and December 31, 2014, our investment portfolio consisted of $54.8 billion and $56.7 billion of agency MBS, respectively, and a $7.4 billion and $14.8 billion net long TBA position, at fair value, respectively.
Our TBA position is reported at its net carrying value of $120 million and $192 million as of September 30, 2015 and December 31, 2014, 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. (See Note 6 for further details of our net TBA position as of September 30, 2015 and December 31, 2014.)
As of September 30, 2015 and December 31, 2014, the net unamortized premium balance on our agency MBS was $2.3 billion and $2.5 billion, respectively, including interest and principal-only strips.
The following tables summarize our investments in agency MBS as of September 30, 2015 and December 31, 2014 (dollars in millions):
|
| | | | | | | | | | | | | | | | |
| | September 30, 2015 |
Agency MBS | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
Fixed rate | | $ | 52,354 |
| | $ | 653 |
| | $ | (145 | ) | | $ | 52,862 |
|
Adjustable rate | | 535 |
| | 16 |
| | — |
| | 551 |
|
CMO | | 1,010 |
| | 31 |
| | — |
| | 1,041 |
|
Interest-only and principal-only strips | | 317 |
| | 48 |
| | (2 | ) | | 363 |
|
Total agency MBS | | $ | 54,216 |
| | $ | 748 |
| | $ | (147 | ) | | $ | 54,817 |
|
|
| | | | | | | | | | | | | | | | |
| | December 31, 2014 |
Agency MBS | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
Fixed rate | | $ | 53,945 |
| | $ | 715 |
| | $ | (187 | ) | | $ | 54,473 |
|
Adjustable rate | | 659 |
| | 19 |
| | — |
| | 678 |
|
CMO | | 1,172 |
| | 24 |
| | (1 | ) | | 1,195 |
|
Interest-only and principal-only strips | | 372 |
| | 33 |
| | (3 | ) | | 402 |
|
Total agency MBS | | $ | 56,148 |
| | $ | 791 |
| | $ | (191 | ) | | $ | 56,748 |
|
|
| | | | | | | | | | | | | | | | |
| | September 30, 2015 |
Agency MBS | | Fannie Mae | | Freddie Mac | | Ginnie Mae | | Total |
Available-for-sale agency MBS: | | | | | | | | |
Agency MBS, par | | $ | 39,898 |
| | $ | 11,230 |
| | $ | 559 |
| | $ | 51,687 |
|
Unamortized discount | | (33 | ) | | (4 | ) | | — |
| | (37 | ) |
Unamortized premium | | 1,718 |
| | 523 |
| | 8 |
| | 2,249 |
|
Amortized cost | | 41,583 |
| | 11,749 |
| | 567 |
| | 53,899 |
|
Gross unrealized gains | | 555 |
| | 139 |
| | 6 |
| | 700 |
|
Gross unrealized losses | | (99 | ) | | (46 | ) | | — |
| | (145 | ) |
Total available-for-sale agency MBS, at fair value | | 42,039 |
| | 11,842 |
| | 573 |
| | 54,454 |
|
Agency MBS remeasured at fair value through earnings: | | | | | | | |
|
Interest-only and principal-only strips, amortized cost 1 | | 297 |
| | 20 |
| | — |
| | 317 |
|
Gross unrealized gains | | 43 |
| | 5 |
| | — |
| | 48 |
|
Gross unrealized losses | | (1 | ) | | (1 | ) | | — |
| | (2 | ) |
Total agency MBS remeasured at fair value through earnings | | 339 |
| | 24 |
| | — |
| | 363 |
|
Total agency MBS, at fair value | | $ | 42,378 |
| | $ | 11,866 |
| | $ | 573 |
| | $ | 54,817 |
|
Weighted average coupon as of September 30, 2015 2 | | 3.60 | % | | 3.67 | % | | 3.05 | % | | 3.61 | % |
Weighted average yield as of September 30, 2015 3 | | 2.76 | % | | 2.77 | % | | 2.66 | % | | 2.76 | % |
________________________
| |
1. | The underlying unamortized principal balance ("UPB" or "par value") of our interest-only agency MBS strips was $1.0 billion and the weighted average contractual interest we are entitled to receive was 5.42% of this amount as of September 30, 2015. The par value of our principal-only agency MBS strips was $216 million as of September 30, 2015. |
| |
2. | The weighted average coupon includes the interest cash flows from our interest-only agency MBS strips taken together with the interest cash flows from our fixed rate, adjustable-rate and CMO agency MBS as a percentage of the par value of our agency MBS (excluding the UPB of our interest-only securities) as of September 30, 2015. |
| |
3. | Incorporates a weighted average future constant prepayment rate assumption of 9% based on forward rates as of September 30, 2015. |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2014 |
Agency MBS | | Fannie Mae | | Freddie Mac | | Ginnie Mae | | Total |
Available-for-sale agency MBS: | | | | | | | | |
Agency MBS, par | | $ | 42,749 |
| | $ | 10,566 |
| | $ | 107 |
| | $ | 53,422 |
|
Unamortized discount | | (37 | ) | | (5 | ) | | — |
| | (42 | ) |
Unamortized premium | | 1,880 |
| | 514 |
| | 2 |
| | 2,396 |
|
Amortized cost | | 44,592 |
| | 11,075 |
| | 109 |
| | 55,776 |
|
Gross unrealized gains | | 610 |
| | 145 |
| | 3 |
| | 758 |
|
Gross unrealized losses | | (127 | ) | | (61 | ) | | — |
| | (188 | ) |
Total available-for-sale agency MBS, at fair value | | 45,075 |
| | 11,159 |
| | 112 |
| | 56,346 |
|
Agency MBS measured at fair value through earnings: | | | | | | | | |
Interest-only and principal-only strips, amortized cost 1 | | 348 |
| | 24 |
| | — |
| | 372 |
|
Gross unrealized gains | | 30 |
| | 3 |
| | — |
| | 33 |
|
Gross unrealized losses | | (2 | ) | | (1 | ) | | — |
| | (3 | ) |
Total agency MBS measured at fair value through earnings | | 376 |
| | 26 |
| | — |
| | 402 |
|
Total agency MBS, at fair value | | $ | 45,451 |
| | $ | 11,185 |
| | $ | 112 |
| | $ | 56,748 |
|
Weighted average coupon as of December 31, 2014 2 | | 3.63 | % | | 3.70 | % | | 3.52 | % | | 3.65 | % |
Weighted average yield as of December 31, 2014 3 | | 2.75 | % | | 2.73 | % | | 1.87 | % | | 2.74 | % |
________________________
| |
1. | The underlying UPB of our interest-only agency MBS strips was $1.2 billion and the weighted average contractual interest we are entitled to receive was 5.46% of this amount as of December 31, 2014. The par value of our principal-only agency MBS strips was $242 million as of December 31, 2014. |
| |
2. | The weighted average coupon includes the interest cash flows from our interest-only agency MBS strips taken together with the interest cash flows from our fixed rate, adjustable-rate and CMO agency MBS as a percentage of the par value of our agency MBS (excluding the UPB of our interest-only securities) as of December 31, 2014. |
| |
3. | Incorporates a weighted average future constant prepayment rate assumption of 9% based on forward rates as of December 31, 2014. |
The actual maturities of our agency MBS are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic contractual principal payments and principal prepayments. As of September 30, 2015 and December 31, 2014, our weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate agency MBS portfolio was 9%. Our estimates differ materially for different types of securities and thus individual holdings have a wide range of projected CPRs.
The following table summarizes our agency MBS classified as available-for-sale as of September 30, 2015 and December 31, 2014 according to their estimated weighted average life classification (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 |
Estimated Weighted Average Life of Agency MBS Classified as Available-for-Sale 1 | | 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 | | $ | 322 |
| | $ | 316 |
| | 3.67% | | 2.12% | | $ | 289 |
| | $ | 280 |
| | 4.08% | | 2.62% |
> 3 years and ≤ 5 years | | 19,210 |
| | 18,870 |
| | 3.28% | | 2.40% | | 22,153 |
| | 21,820 |
| | 3.26% | | 2.40% |
> 5 years and ≤10 years | | 34,856 |
| | 34,648 |
| | 3.65% | | 2.91% | | 33,271 |
| | 33,055 |
| | 3.73% | | 2.92% |
> 10 years | | 66 |
| | 65 |
| | 3.78% | | 3.37% | | 633 |
| | 621 |
| | 3.28% | | 3.15% |
Total | | $ | 54,454 |
| | $ | 53,899 |
| | 3.52% | | 2.72% | | $ | 56,346 |
| | $ | 55,776 |
| | 3.54% | | 2.72% |
_______________________
| |
1. | Excludes interest and principal-only strips. |
The weighted average life of our interest-only strips was 5.9 and 6.0 years as of September 30, 2015 and December 31, 2014, respectively. The weighted average life of our principal-only strips was 7.8 and 8.1 years as of September 30, 2015 and December 31, 2014, respectively.
Securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated OCI, a separate component of stockholders' equity. Refer to Note 9 for a summary of changes in accumulated OCI for our available-for-sale securities for the three and nine months ended September 30, 2015 and 2014.
The following table presents the gross unrealized loss and fair values of our available-for-sale securities by length of time that such securities have been in a continuous unrealized loss position as of September 30, 2015 and December 31, 2014 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Unrealized Loss Position For |
| | Less than 12 Months | | 12 Months or More | | Total |
Securities Classified as Available-for-Sale | | Estimated Fair Value | | Unrealized Loss | | Estimated Fair Value | | Unrealized Loss | | Estimated Fair Value | | Unrealized Loss |
September 30, 2015 | | $ | 6,059 |
| | $ | (30 | ) | | $ | 7,298 |
| | $ | (115 | ) | | $ | 13,357 |
| | $ | (145 | ) |
December 31, 2014 | | $ | 778 |
| | $ | (2 | ) | | $ | 11,679 |
| | $ | (186 | ) | | $ | 12,457 |
| | $ | (188 | ) |
We did not recognize any OTTI charges on our investment securities for the nine months ended September 30, 2015 and 2014. 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 agency securities were not due to credit losses given the GSE 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 agency securities upon selecting specific securities to sell.
Gains and Losses
The following table is a summary of our net gain (loss) from the sale of agency securities classified as available-for-sale for the three and nine months ended September 30, 2015 and 2014 (in millions):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
Agency Securities Classified as Available-for-Sale | | 2015 | | 2014 | | 2015 | | 2014 |
Agency MBS sold, at cost | | $ | (4,575 | ) | | $ | (8,763 | ) | | $ | (22,548 | ) | | $ | (25,640 | ) |
Proceeds from agency MBS sold 1 | | 4,536 |
| | 8,777 |
| | 22,523 |
| | 25,657 |
|
Net gain (loss) on sale of agency MBS | | $ | (39 | ) | | $ | 14 |
| | $ | (25 | ) | | $ | 17 |
|
| | | | | | | | |
Gross gain on sale of agency MBS | | $ | 2 |
| | $ | 41 |
| | $ | 81 |
| | $ | 132 |
|
Gross loss on sale of agency MBS | | (41 | ) | | (27 | ) | | (106 | ) | | (115 | ) |
Net gain (loss) on sale of agency MBS | | $ | (39 | ) | | $ | 14 |
| | $ | (25 | ) | | $ | 17 |
|
________________________
| |
1. | Proceeds include cash received during the period, plus receivable for agency MBS sold during the period as of period end. |
For the three and nine months ended September 30, 2015, we recognized a net unrealized gain of $10 million and $14 million, respectively, and for the three and nine months ended September 30, 2014 we recognized a net unrealized gain of $4 million and $31 million, respectively, for the change in value of investments in interest and principal-only strips in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Over the same periods, we did not recognize any realized gains or losses on our interest or principal-only securities.
Securitizations and Variable Interest Entities
As of September 30, 2015 and December 31, 2014, we held investments in CMO trusts, which are variable interest entities ("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 MBS. 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 of $1.1 billion and $1.3 billion as of September 30, 2015 and December 31, 2014, respectively, and debt, at fair value, of $626 million and $761 million, respectively, in our accompanying consolidated balance sheets. As of September 30, 2015 and December 31, 2014, the agency securities had an aggregate unpaid principal balance of $1.0 billion and $1.2 billion, respectively, and the debt had an aggregate unpaid principal balance of $621 million and $742 million, respectively. 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. For the three and nine months ended September 30, 2015, we recorded a gain of $7 million and $16 million, respectively, associated with our consolidated debt. For the three and nine months ended September 30, 2014, we recognized a net gain of $6 million and a net loss of $6 million, respectively, associated with our consolidated debt. 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 September 30, 2015 and December 31, 2014, the fair value of our CMO securities and interest and principal-only securities was $1.4 billion and $1.6 billion, respectively, excluding the consolidated CMO trusts discussed above, or $1.9 billion and $2.1 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 $267 million and $274 million as of September 30, 2015 and December 31, 2014, respectively.
Note 5. Repurchase Agreements and Other Debt
We pledge certain of our securities as collateral under our repurchase and other agreements with financial institutions and secured borrowing facility with the Federal Home Loan Bank ("FHLB") of Des Moines. 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 September 30, 2015, we had met all margin call requirements. For additional information regarding our pledged assets, please refer to Note 7.
Repurchase Agreements
As of September 30, 2015 and December 31, 2014, we had $41.0 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 > 90 days have floating interest rates based on an index plus or minus a fixed spread. As of September 30, 2015 and December 31, 2014, $40.6 billion and $48.4 billion, respectively, of our repurchase agreements were used to fund purchases of agency securities ("agency repo"), with an average borrowing rate of 0.52% and 0.41%, respectively, and a weighted average remaining term to maturity of 201 and 143 days, respectively. The remainder, or $460 million and $1.9 billion, of our repurchase agreements as of September 30, 2015 and December 31, 2014, respectively, were used to fund temporary holdings of U.S. Treasury securities ("U.S. Treasury repo").
The following table summarizes our borrowings under repurchase arrangements and weighted average interest rates classified by remaining maturities as of September 30, 2015 and December 31, 2014 (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 |
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 | | $ | 17,335 |
| | 0.45 | % | | 14 |
| | $ | 14,157 |
| | 0.37 | % | | 15 |
|
> 1 to ≤ 3 months | | 10,209 |
| | 0.52 | % | | 59 |
| | 20,223 |
| | 0.38 | % | | 61 |
|
> 3 to ≤ 6 months | | 5,167 |
| | 0.54 | % | | 135 |
| | 6,654 |
| | 0.42 | % | | 120 |
|
> 6 to ≤ 9 months | | 1,963 |
| | 0.59 | % | | 208 |
| | 1,575 |
| | 0.50 | % | | 225 |
|
> 9 to ≤ 12 months | | 500 |
| | 0.64 | % | | 292 |
| | 2,678 |
| | 0.54 | % | | 313 |
|
> 12 to ≤ 24 months | | 1,078 |
| | 0.61 | % | | 634 |
| | 600 |
| | 0.57 | % | | 551 |
|
> 24 to ≤ 36 months | | 1,252 |
| | 0.66 | % | | 812 |
| | 952 |
| | 0.60 | % | | 999 |
|
> 36 to ≤ 48 months | | 1,350 |
| | 0.75 | % | | 1,254 |
| | 650 |
| | 0.64 | % | | 1,266 |
|
> 48 to < 60 months | | 1,700 |
| | 0.73 | % | | 1,560 |
| | 900 |
| | 0.68 | % | | 1,542 |
|
Total agency repo | | 40,554 |
| | 0.52 | % | | 201 |
| | 48,389 |
| | 0.41 | % | | 143 |
|
U.S. Treasury repo: | | | | | | | | | | | | |
1 day | | 208 |
| | 0.38 | % | | 1 |
| | 1,907 |
| | 0.09 | % | | 1 |
|
> 1 day to ≤ 1 month | | 252 |
| | 0.30 | % | | 9 |
| | — |
| | — | % | | — |
|
Total U.S. Treasury repo | | 460 | | 0.34 | % | | 5 |
| | 1,907 | | 0.09 | % | | 1 |
|
Total | | $ | 41,014 |
| | 0.52 | % | | 199 |
| | $ | 50,296 |
| | 0.40 | % | | 138 |
|
Federal Home Loan Bank Advances
In April 2015, our wholly-owned subsidiary, Old Georgetown Insurance Co., LLC ("OGI"), was accepted for membership in the Federal Home Loan Bank of Des Moines. As a member of the FHLB, OGI has access to a variety of products and services offered by the FHLB, including secured advances. The ability to borrow from the FHLB is subject to OGI's continued creditworthiness, pledging of sufficient eligible collateral to secure advances and compliance with certain agreements with the FHLB. Each advance requires approval by the FHLB and is secured by collateral in accordance with the FHLB’s credit and collateral guidelines, which may be revised from time to time by the FHLB.
As of September 30, 2015, OGI had $3.5 billion of outstanding secured FHLB advances, with a weighted average borrowing rate of 0.27% and a weighted average remaining term to maturity of 3.5 years, consisting of 30 day advances and longer-term floating rate advances with a one month cancellation feature:
|
| | | | | | | | | | |
| | September 30, 2015 |
Remaining Maturity | | FHLB Advances | | Weighted Average Interest Rate | | Weighted Average Days to Maturity |
≤ 1 month | | $ | 753 |
| | 0.27 | % | | 6 |
|
> 9 to ≤ 12 months | | 245 |
| | 0.35 | % | | 322 |
|
> 36 to ≤ 48 months | | 411 |
| | 0.26 | % | | 1,419 |
|
> 48 to < 60 months | | 2,093 |
| | 0.26 | % | | 1,813 |
|
Total FHLB advances | | $ | 3,502 |
| | 0.27 | % | | 1,274 |
|
Debt of Consolidated Variable Interest Entities
As of September 30, 2015 and December 31, 2014, debt of consolidated VIEs, at fair value, was $626 million and $761 million, respectively, and had a weighted average interest rate of LIBOR plus 40 and 43 basis points, respectively, and a principal balance of $621 million and $742 million, respectively. The actual maturities of our debt of consolidated VIEs are generally shorter than the stated contractual maturities. The actual maturities are affected by the contractual lives of the underlying agency MBS securitizing the debt of our consolidated VIEs and periodic principal prepayments of such underlying securities. The estimated weighted average life of the debt of our consolidated VIEs as of September 30, 2015 and December 31, 2014 was 4.6 and 5.8 years, respectively.
TBA Dollar Roll Financing Transactions
As of September 30, 2015 and December 31, 2014, we had outstanding forward commitments to purchase and sell agency securities through the TBA market at a cost of $7.3 billion and $14.6 billion, respectively (see Notes 3 and 6). These transactions, also referred to as "TBA dollar roll transactions," represent a form of "off-balance sheet" financing and serve to either increase, in the case of forward purchases, or decrease, in the case of forward sales, our total "at risk" leverage. We account for such transactions as one or more series of derivative transactions and report our outstanding TBA commitments at their net carrying value of $120 million and $192 million as of September 30, 2015 and December 31, 2014, respectively, in derivative assets/(liabilities) on our accompanying consolidated balance sheets.
Note 6. Derivative and Other Hedging Instruments
In connection with our risk management strategy, we hedge a portion of our interest rate risk by entering into derivative and other hedging instrument contracts. We typically enter into agreements for interest rate swaps and interest rate swaptions and purchase or short TBA and U.S. Treasury securities. We may also purchase or write put or call options on TBA securities or invest in mortgage and other types of derivative instruments, such as interest and principal-only securities. Our risk management strategy attempts to manage the overall risk of the portfolio, reduce fluctuations in our net book value and generate additional income distributable to stockholders. 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.
Prior to September 30, 2011, our interest rate swaps were typically designated as cash flow hedges under ASC 815; however, as of September 30, 2011, we elected to discontinue hedge accounting for our interest rate swaps in order to increase our funding flexibility. For the three and nine months ended September 30, 2015, we reclassified $24 million and $79 million, respectively, and for the three and nine months ended September 30, 2014, we reclassified, $38 million and $121 million, respectively, of net deferred losses from accumulated OCI into interest expense related to our de-designated interest rate swaps and recognized an equal, but offsetting, amount in other comprehensive income. Our total net periodic interest costs on our swap portfolio was $131 million and $369 million for the three and nine months ended September 30, 2015, respectively, and $120 million and $373 million for the three and nine months ended September 30, 2014, respectively. The difference between our total net periodic interest costs on our swap portfolio and the amount recorded in interest expense related to our de-designated hedges is reported in our accompanying consolidated statements of comprehensive income in gain (loss) on derivative instruments and other securities, net (totaling $107 million and $290 million for the three and nine months ended September 30, 2015, respectively, and $82 million and $252 million for the three and nine months ended September 30, 2014, respectively). As of September 30, 2015, the remaining net deferred loss in accumulated OCI related to de-designated interest rate swaps was $61 million and will be reclassified from OCI into interest expense over a remaining weighted average period of 0.8 years. As of September 30, 2015, the net deferred loss expected to be reclassified from OCI into interest expense over the next twelve months was $58 million.
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 and liabilities as of September 30, 2015 and December 31, 2014 (in millions):
|
| | | | | | | | | | |
Derivative and Other Hedging Instruments | | Balance Sheet Location | | September 30, 2015 | | December 31, 2014 |
Interest rate swaps | | Derivative assets, at fair value | | $ | — |
| | $ | 136 |
|
Swaptions | | Derivative assets, at fair value | | 21 |
| | 75 |
|
TBA securities | | Derivative assets, at fair value | | 122 |
| | 197 |
|
Total derivative assets, at fair value | | | | $ | 143 |
| | $ | 408 |
|
| | | | | | |
Interest rate swaps | | Derivative liabilities, at fair value | | $ | (1,523 | ) | | $ | (880 | ) |
TBA securities | | Derivative liabilities, at fair value | | (2 | ) | | (5 | ) |
U.S. Treasury futures - short | | Derivative liabilities, at fair value | | (9 | ) | | (5 | ) |
Other | | Derivative liabilities, at fair value | | (2 | ) | | — |
|
Total derivative liabilities, at fair value | | | | $ | (1,536 | ) | | $ | (890 | ) |
| | | | | | |
U.S. Treasury securities - long | | U.S. Treasury securities, at fair value | | $ | 787 |
| | $ | 2,427 |
|
U.S. Treasury securities - short | | Obligation to return securities borrowed under reverse repurchase agreements, at fair value | | (1,309 | ) | | (5,363 | ) |
Total - U.S. Treasury securities, net at fair value | | | | $ | (522 | ) | | $ | (2,936 | ) |
The following tables summarize our interest rate swap agreements outstanding as of September 30, 2015 and December 31, 2014 (dollars in millions):
|
| | | | | | | | | | | | | | |
| | September 30, 2015 |
Payer Interest Rate Swaps | | Notional Amount 1 | | Average Fixed Pay Rate 2 | | Average Receive Rate 3 | | Net Estimated Fair Value | | Average Maturity (Years) |
≤ 3 years | | $ | 16,725 |
| | 1.21% | | 0.29% | | $ | (133 | ) | | 1.6 |
> 3 to ≤ 5 years | | 9,450 |
| | 1.93% | | 0.32% | | (277 | ) | | 4.1 |
> 5 to ≤ 7 years | | 8,425 |
| | 2.43% | | 0.32% | | (373 | ) | | 6.2 |
> 7 to ≤ 10 years | | 9,050 |
| | 2.67% | | 0.31% | | (588 | ) | | 8.2 |
> 10 years | | 1,525 |
| | 3.21% | | 0.32% | | (152 | ) | | 13.9 |
Total Payer Interest Rate Swaps | | $ | 45,175 |
| | 1.95% | | 0.30% | | $ | (1,523 | ) | | 4.7 |
________________________
| |
1. | Notional amount includes forward starting swaps of $7.8 billion with an average forward start date of 0.6 years and an average maturity of 6.3 years from September 30, 2015. |
| |
2. | Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.72% as of September 30, 2015. |
| |
3. | Average receive rate excludes forward starting swaps. |
|
| | | | | | | | | | | | | | |
| | December 31, 2014 |
Payer Interest Rate Swaps | | Notional Amount 1 | | Average Fixed Pay Rate 2 | | Average Receive Rate 3 | | Net Estimated Fair Value | | Average Maturity (Years) |
≤ 3 years | | $ | 12,300 |
| | 1.33% | | 0.21% | | $ | (87 | ) | | 2.0 |
> 3 to ≤ 5 years | | 8,975 |
| | 1.63% | | 0.24% | | (4 | ) | | 4.2 |
> 5 to ≤ 7 years | | 7,250 |
| | 2.47% | | 0.23% | | (139 | ) | | 6.1 |
> 7 to ≤ 10 years | | 10,775 |
| | 2.48% | | 0.24% | | (223 | ) | | 8.3 |
> 10 years | | 4,400 |
| | 3.19% | | 0.23% | | (291 | ) | | 12.6 |
Total Payer Interest Rate Swaps | | $ | 43,700 |
| | 2.05% | | 0.23% | | $ | (744 | ) | | 5.8 |
________________________
| |
1. | Notional amount includes forward starting swaps of $12.4 billion with an average forward start date of 1.1 years and an average maturity of 7.9 years from December 31, 2014. |
| |
2. | Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.68% as of December 31, 2014. |
| |
3. | Average receive rate excludes forward starting swaps. |
The following table summarizes our interest rate payer swaption agreements outstanding as of September 30, 2015 and December 31, 2014 (dollars in millions):
|
| | | | | | | | | | | | | | | | | | | | |
Payer Swaptions | | Option | | Underlying Payer Swap |
Years to Expiration | | Cost | | Fair Value | | Average Months to Expiration | | Notional Amount | | Average Fixed Pay Rate | | Average Receive Rate (LIBOR) | | Average Term (Years) |
September 30, 2015 | | | | | | | | | | | | | | |
≤ 1 year | | $ | 95 |
| | $ | 21 |
| | 5 | | $ | 3,650 |
| | 3.35% | | 3M | | 8.2 |
| | | | | | | | | | | | | | |
December 31, 2014 | | | | | | | | | | | | | | |
≤ 1 year | | $ | 113 |
| | $ | 36 |
| | 6 | | $ | 5,600 |
| | 3.15% | | 3M | | 6.4 |
> 1 to ≤ 2 years | | 32 |
| | 10 |
| | 16 | | 1,200 |
| | 3.87% | | 3M | | 5.1 |
Total Payer Swaptions | | $ | 145 |
| | $ | 46 |
| | 8 | | $ | 6,800 |
| | 3.28% | | 3M | | 6.2 |
The following table summarizes our interest rate receiver swaption agreements outstanding as of December 31, 2014 (dollars in millions). We had no interest rate receiver swaptions outstanding as of September 30, 2015.
|
| | | | | | | | | | | | | | | | | | | | |
Receiver Swaptions | | Option | | Underlying Receiver Swap |
Years to Expiration | | Cost | | Fair Value | | Average Months to Expiration | | Notional Amount | | Average Fixed Receive Rate | | Average Pay Rate (LIBOR) | | Average Term (Years) |
December 31, 2014 | | | | | | | | | | | | | | |
≤ 1 year | | $ | 18 |
| | $ | 29 |
| | 5 | | $ | 4,250 |
| | 1.78% | | 3M | | 6.4 |
The following table summarizes our U.S. Treasury securities as of September 30, 2015 and December 31, 2014 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 |
Maturity | | Face Amount Net Long / (Short) | | Cost Basis | | Market Value | | Face Amount Net Long / (Short) | | Cost Basis | | Market Value |
5 years | | $ | 597 |
| | $ | 604 |
| | $ | 605 |
| | $ | (4,674 | ) | | $ | (4,650 | ) | | $ | (4,645 | ) |
7 years | | (90 | ) | | (89 | ) | | (88 | ) | | (717 | ) | | (717 | ) | | (718 | ) |
10 years | | (1,033 | ) | | (1,028 | ) | | (1,039 | ) | | 2,410 |
| | 2,422 |
| | 2,427 |
|
Total U.S. Treasury securities, net | | $ | (526 | ) | | $ | (513 | ) | | $ | (522 | ) | | $ | (2,981 | ) | | $ | (2,945 | ) | | $ | (2,936 | ) |
The following tables summarize our TBA securities as of September 30, 2015 and December 31, 2014 (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 |
TBA Securities by Coupon | | Notional Amount - Long (Short) 1 | | Cost Basis 2 | | Market Value 3 | | Net Carrying Value 4 | | Notional Amount - Long (Short) 1 | | Cost Basis 2 | | Market Value 3 | | Net Carrying Value 4 |
15-Year TBA securities: | | | | | | | | | | | | | | | | |
2.5% | | $ | (409 | ) | | $ | (414 | ) | | $ | (417 | ) | | $ | (3 | ) | | $ | 962 |
| | $ | 968 |
| | $ | 980 |
| | $ | 12 |
|
3.0% | | 143 |
| | 148 |
| | 149 |
| | 1 |
| | 2,779 |
| | 2,889 |
| | 2,888 |
| | (1 | ) |
3.5% | | 4 |
| | 4 |
| | 4 |
| | — |
| | (468 | ) | | (495 | ) | | (494 | ) | | 1 |
|
4.0% | | — |
| | — |
| | — |
| | — |
| | (13 | ) | | (14 | ) | | (14 | ) | | — |
|
Total 15-Year TBAs | | (262 | ) | | (262 | ) | | (264 | ) | | (2 | ) | | 3,260 |
| | 3,348 |
| | 3,360 |
| | 12 |
|
30-Year TBA securities: | | | | | | | | | | | | | | | | |
3.0% | | 3,441 |
| | 3,424 |
| | 3,480 |
| | 56 |
| | 5,254 |
| | 5,259 |
| | 5,313 |
| | 54 |
|
3.5% | | 1,873 |
| | 1,900 |
| | 1,954 |
| | 54 |
| | 7,902 |
| | 8,151 |
| | 8,232 |
| | 81 |
|
4.0% | | 2,076 |
| | 2,203 |
| | 2,215 |
| | 12 |
| | (1,853 | ) | | (2,019 | ) | | (1,974 | ) | | 45 |
|
4.5% | | — |
| | — |
| | — |
| | — |
| | (151 | ) | | (163 | ) | | (163 | ) | | — |
|
Total 30-Year TBAs | | 7,390 |
| | 7,527 |
| | 7,649 |
| | 122 |
| | 11,152 |
| | 11,228 |
| | 11,408 |
| | 180 |
|
Total net TBA securities | | $ | 7,128 |
| | $ | 7,265 |
| | $ | 7,385 |
| | $ | 120 |
| | $ | 14,412 |
| | $ | 14,576 |
| | $ | 14,768 |
| | $ | 192 |
|
| | | | | | | | | | | | | | | | |
| | September 30, 2015 | | December 31, 2014 |
TBA Securities by Issuer | | Notional Amount - Long (Short) 1 | | Cost Basis 2 | | Market Value 3 | | Net Carrying Value 4 | | Notional Amount - Long (Short) 1 | | Cost Basis 2 | | Market Value 3 | | Net Carrying Value 4 |
Fannie Mae | | $ | 6,572 |
| | $ | 6,698 |
| | $ | 6,807 |
| | $ | 109 |
| | $ | 15,127 |
| | $ | 15,316 |
| | $ | 15,509 |
| | $ | 193 |
|
Freddie Mac | | 256 |
| | 255 |
| | 264 |
| | 9 |
| | (715 | ) | | (740 | ) | | (741 | ) | | (1 | ) |
Ginnie Mae | | 300 |
| | 312 |
| | 314 |
| | 2 |
| | — |
| | — |
| | — |
| | — |
|
TBA securities, net | | $ | 7,128 |
| | $ | 7,265 |
| | $ | 7,385 |
| | $ | 120 |
| | $ | 14,412 |
| | $ | 14,576 |
| | $ | 14,768 |
| | $ | 192 |
|
_____________________
| |
1. | Notional amount represents the par value (or principal balance) of the underlying agency security. |
| |
2. | Cost basis represents the forward price to be paid / (received) for the underlying agency security. |
| |
3. | Market value represents the current market value of the TBA contract (or of the underlying agency security) as of period-end. |
| |
4. | Net carrying value 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 in our consolidated balance sheets. |
Gain (Loss) From Derivative Instruments and Other Securities, Net
The tables below summarize changes in our derivative and other hedge portfolio and their effect on our consolidated statements of comprehensive income for the three and nine months ended September 30, 2015 and 2014 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2015 |
Derivative and Other Hedging Instruments | | Notional Amount Long/(Short) June 30, 2015 | | Additions | | Settlement, Termination, Expiration or Exercise | | Notional Amount Long/(Short) September 30, 2015 | | | Amount of Gain/(Loss) Recognized in Income on Derivatives 1 |
TBA securities, net | | |