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SEC Filings

10-Q
AGNC INVESTMENT CORP. filed this Form 10-Q on 05/06/2015
Entire Document
 
AGNC 10Q 3/31/15
 
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 March 31, 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 April 30, 2015 was 352,788,707.
 




AMERICAN CAPITAL AGENCY CORP.
TABLE OF CONTENTS
 


1



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN CAPITAL AGENCY CORP.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
 
 
 
March 31, 2015
 
December 31, 2014
 
(Unaudited)
 
 
Assets:
 
 
 
Agency securities, at fair value (including pledged securities of $56,836 and $51,629, respectively)
$
60,131

 
$
55,482

Agency securities transferred to consolidated variable interest entities, at fair value (pledged securities)
1,221

 
1,266

U.S. Treasury securities, at fair value (including pledged securities of $4,328 and $2,375, respectively)
4,328

 
2,427

REIT equity securities, at fair value
68

 
68

Cash and cash equivalents
1,708

 
1,720

Restricted cash
1,108

 
713

Derivative assets, at fair value
229

 
408

Receivable for securities sold (including pledged securities of $721 and $79, respectively)
908

 
239

Receivable under reverse repurchase agreements
3,175

 
5,218

Other assets
229

 
225

Total assets
$
73,105

 
$
67,766

Liabilities:
 
 
 
Repurchase agreements
$
58,112

 
$
50,296

Debt of consolidated variable interest entities, at fair value
725

 
761

Payable for securities purchased
50

 
843

Derivative liabilities, at fair value
1,352

 
890

Dividends payable
85

 
85

Obligation to return securities borrowed under reverse repurchase agreements, at
fair value
3,363

 
5,363

Accounts payable and other accrued liabilities
62

 
100

Total liabilities
63,749

 
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;
 
 
 
352.8 shares issued and outstanding
4

 
4

Additional paid-in capital
10,332

 
10,332

Retained deficit
(2,166
)
 
(1,674
)
Accumulated other comprehensive income
850

 
430

Total stockholders' equity
9,356

 
9,428

Total liabilities and stockholders' equity
$
73,105

 
$
67,766

See accompanying notes to consolidated financial statements.

2



AMERICAN CAPITAL AGENCY CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions, except per share data)

 
 
Three months ended March 31,
 
2015
 
2014
Interest income:
 
 
 
Interest income
$
383

 
$
399

Interest expense
86

 
108

Net interest income
297

 
291

Other loss, net:
 
 
 
Gain (loss) on sale of agency securities, net
36

 
(19
)
Loss on derivative instruments and other securities, net
(549
)
 
(378
)
Total other loss, net
(513
)
 
(397
)
Expenses:
 
 
 
Management fees
30

 
29

General and administrative expenses
6

 
6

Total expenses
36

 
35

Net loss
(252
)
 
(141
)
Dividend on preferred stock
7

 
3

Net loss attributable to common stockholders
$
(259
)
 
$
(144
)
 
 
 
 
Net loss
$
(252
)
 
$
(141
)
Other comprehensive income:
 
 
 
Unrealized gain on available-for-sale securities, net
391

 
521

Unrealized gain on derivative instruments, net
29

 
43

Other comprehensive income
420

 
564

Comprehensive income
168

 
423

Dividend on preferred stock
7

 
3

Comprehensive income available to common stockholders
$
161

 
$
420

 
 
 
 
Weighted average number of common shares outstanding - basic and diluted
352.8

 
354.8

Net loss per common share - basic and diluted
$
(0.73
)
 
$
(0.41
)
Comprehensive income per common share - basic and diluted
$
0.46

 
$
1.18

Dividends declared per common share
$
0.66

 
$
0.65

See accompanying notes to consolidated financial statements.

3



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 loss

 

 

 

 

 
(141
)
 

 
(141
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net

 

 

 

 

 

 
521

 
521

Unrealized gain on derivative instruments, net

 

 

 

 

 

 
43

 
43

Repurchase of common stock

 

 
(3.4
)
 

 
(74
)
 

 

 
(74
)
Preferred dividends declared

 

 

 

 

 
(3
)
 

 
(3
)
Common dividends declared

 

 

 

 

 
(229
)
 

 
(229
)
Balance, March 31, 2014
6.9

 
$
167

 
352.8

 
$
4

 
$
10,332

 
$
(870
)
 
$
(819
)
 
$
8,814

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
6.9

 
$
336

 
352.8

 
$
4

 
$
10,332

 
$
(1,674
)
 
$
430

 
$
9,428

Net loss

 

 

 

 

 
(252
)
 

 
(252
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net

 

 

 

 

 

 
391

 
391

Unrealized gain on derivative instruments, net

 

 

 

 

 

 
29

 
29

Preferred dividends declared

 

 

 

 

 
(7
)
 

 
(7
)
Common dividends declared

 

 

 

 

 
(233
)
 

 
(233
)
Balance, March 31, 2015
6.9

 
$
336

 
352.8

 
$
4

 
$
10,332

 
$
(2,166
)
 
$
850

 
$
9,356


See accompanying notes to consolidated financial statements.


4



AMERICAN CAPITAL AGENCY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions) 
 
Three months ended March 31,
 
2015
 
2014
Operating activities:
 
 
 
Net loss
$
(252
)
 
$
(141
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of agency securities premiums and discounts, net
133

 
142

Amortization of accumulated other comprehensive loss on interest rate swaps de-designated as qualifying hedges
29

 
43

(Gain) loss on sale of agency securities, net
(36
)
 
19

Loss on derivative instruments and other securities, net
549

 
378

(Increase) decrease in other assets
(4
)
 
60

Increase (decrease) in accounts payable and other accrued liabilities
1

 
(13
)
Net cash provided by operating activities
420

 
488

Investing activities:
 
 
 
Purchases of agency securities
(14,672
)
 
(1,403
)
Proceeds from sale of agency securities
7,099

 
9,545

Principal collections on agency securities
1,811

 
1,853

Purchases of U.S. Treasury securities
(21,929
)
 
(4,343
)
Proceeds from sale of U.S. Treasury securities
17,999

 
12,807

Net proceeds from (payments on) reverse repurchase agreements
2,043

 
(4,804
)
Net proceeds from other derivative instruments
99

 
58

Purchases of REIT equity securities
(11
)
 
(204
)
Proceeds from sale of REIT equity securities
11

 
86

Increase in restricted cash
(395
)
 
(168
)
Other investing cash flows, net
(28
)
 
(183
)
Net cash (used in) provided by investing activities
(7,973
)
 
13,244

Financing activities:
 
 
 
Proceeds from repurchase arrangements
120,104

 
79,314

Repayments on repurchase agreements
(112,288
)
 
(93,118
)
Repayments on debt of consolidated variable interest entities
(35
)
 
(36
)
Payments for common stock repurchases

 
(74
)
Cash dividends paid
(240
)
 
(235
)
Net cash provided by (used in) financing activities
7,541

 
(14,149
)
Net change in cash and cash equivalents
(12
)
 
(417
)
Cash and cash equivalents at beginning of period
1,720

 
2,143

Cash and cash equivalents at end of period
$
1,708

 
$
1,726

See accompanying notes to consolidated financial statements.

5



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 agency debenture securities issued by Freddie Mac, Fannie Mae or the Federal Home Loan Bank ("FHLB") and in other assets reasonably related to 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 agency securities as part of our overall management of our investment portfolio. Accordingly, we typically designate our 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

6



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 flows of specific agency CMO securities. Principal-only securities represent our right to receive the contractual principal 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 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 agency 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.
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 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 on a generic pool basis ("TBA securities") and we utilize U.S. Treasury securities and U.S. Treasury

7



futures contracts, primarily through short sales. We may also purchase or write put or call options on TBA securities and we may invest in other types of mortgage derivatives, 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 agreement facilities. 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 repurchase 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.

8



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 from time to time 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.


9



Note 4. Investment Securities
As of March 31, 2015 and December 31, 2014, our investment portfolio consisted of $61.4 billion and $56.7 billion of agency MBS, respectively, and a $4.9 billion and $14.8 billion net long TBA position, at fair value, respectively.
Our TBA positions are reported at their net carrying value of $79 million and $192 million as of March 31, 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 March 31, 2015 and December 31, 2014.)
As of March 31, 2015 and December 31, 2014, the net unamortized premium balance on our agency MBS was $2.6 billion and $2.5 billion, respectively, including interest and principal-only strips.
The following tables summarize our investments in agency MBS as of March 31, 2015 and December 31, 2014 (dollars in millions):
 
 
March 31, 2015
Agency MBS
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Fixed rate
 
$
58,235

 
$
977

 
$
(72
)
 
$
59,140

Adjustable rate
 
622

 
20

 

 
642

CMO
 
1,138

 
35

 

 
1,173

Interest-only and principal-only strips
 
354

 
46

 
(3
)
 
397

Total agency MBS
 
$
60,349

 
$
1,078

 
$
(75
)
 
$
61,352


 
 
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



10



 
 
March 31, 2015
Agency MBS
 
Fannie Mae
 
Freddie Mac
 
Ginnie Mae
 
Total
Available-for-sale agency MBS:
 
 
 
 
 
 
 
 
Agency MBS, par
 
$
44,954

 
$
12,231

 
$
289

 
$
57,474

Unamortized discount
 
(36
)
 
(5
)
 

 
(41
)
Unamortized premium
 
1,944

 
606

 
12

 
2,562

Amortized cost
 
46,862

 
12,832

 
301

 
59,995

Gross unrealized gains
 
823

 
205

 
4

 
1,032

Gross unrealized losses
 
(49
)
 
(23
)
 

 
(72
)
Total available-for-sale agency MBS, at fair value
 
47,636

 
13,014

 
305

 
60,955

Agency MBS remeasured at fair value through earnings:
 
 
 
 
 
 
 

Interest-only and principal-only strips, amortized cost 1
 
331

 
23

 

 
354

Gross unrealized gains
 
43

 
3

 

 
46

Gross unrealized losses
 
(2
)
 
(1
)
 

 
(3
)
Total agency MBS remeasured at fair value through earnings
 
372

 
25

 

 
397

Total agency MBS, at fair value
 
$
48,008

 
$
13,039

 
$
305

 
$
61,352

Weighted average coupon as of March 31, 2015 2
 
3.55
%
 
3.70
%
 
3.16
%
 
3.58
%
Weighted average yield as of March 31, 2015 3
 
2.63
%
 
2.71
%
 
1.61
%
 
2.64
%
Weighted average yield for the quarter ended March 31, 2015 3
 
2.56
%
 
2.58
%
 
1.63
%
 
2.57
%
 ________________________
1.
The underlying unamortized principal balance ("UPB" or "par value") of our interest-only agency MBS strips was $1.1 billion and the weighted average contractual interest we are entitled to receive was 5.45% of this amount as of March 31, 2015. The par value of our principal-only agency MBS strips was $235 million as of March 31, 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 March 31, 2015.
3.
Incorporates a weighted average future constant prepayment rate assumption of 10% based on forward rates as of March 31, 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 remeasured 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 remeasured 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
%
Weighted average yield for the year ended December 31, 2014 3
 
2.62
%
 
2.64
%
 
1.66
%
 
2.63
%
 ________________________
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.

11



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 March 31, 2015 and December 31, 2014, our weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate agency MBS portfolio was 10% and 9%, respectively. 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 March 31, 2015 and December 31, 2014 according to their estimated weighted average life classification (dollars in millions):

 
 
March 31, 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
 
1,049

 
1,032

 
3.36%
 
1.64%
 
289

 
280

 
4.08%
 
2.62%
> 3 years and ≤ 5 years
 
23,885

 
23,373

 
3.27%
 
2.37%
 
22,153

 
21,820

 
3.26%
 
2.40%
> 5 years and ≤10 years
 
35,898

 
35,471

 
3.64%
 
2.80%
 
33,271

 
33,055

 
3.73%
 
2.92%
> 10 years
 
123

 
119

 
3.75%
 
3.28%
 
633

 
621

 
3.28%
 
3.15%
Total
 
$
60,955

 
$
59,995

 
3.49%
 
2.61%
 
$
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 5.7 and 6.0 years as of March 31, 2015 and December 31, 2014, respectively. The weighted average life of our principal-only strips was 7.6 and 8.1 years as of March 31, 2015 and December 31, 2014, respectively.

Our agency securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated OCI. The following table summarizes changes in accumulated OCI, a separate component of stockholders' equity, for our available-for-sale securities for the three months ended March 31, 2015 and 2014 (in millions): 

Agency Securities Classified as
Available-for-Sale
 
Beginning Accumulated OCI
Balance
 
Unrealized
Gains and (Losses), Net
 
Reversal of 
Unrealized
(Gains) and Losses,
Net on Realization
 
Ending
Accumulated
OCI
Balance
Three months ended March 31, 2015
 
$
570

 
427

 
(36
)
 
$
961

Three months ended March 31, 2014
 
$
(1,087
)
 
502

 
19

 
$
(566
)

The following table presents the gross unrealized loss and fair values of our available-for-sale agency securities by length of time that such securities have been in a continuous unrealized loss position as of March 31, 2015 and December 31, 2014 (in millions):

 
 
Unrealized Loss Position For
 
 
Less than 12 Months
 
12 Months or More
 
Total
Agency Securities Classified as
Available-for-Sale
 
Estimated Fair
Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated Fair
Value
 
Unrealized
Loss
March 31, 2015
 
$
542

 
$
(3
)
 
$
7,942

 
$
(69
)
 
$
8,484

 
$
(72
)
December 31, 2014
 
$
778

 
$
(2
)
 
$
11,679

 
$
(186
)
 
$
12,457

 
$
(188
)

As of the end of each respective reporting period, a decision had not been made to sell any of these agency securities and we do not believe it is more likely than not we will be required to sell the agency securities before recovery of their amortized cost basis. The unrealized losses on these agency securities are not due to credit losses given the GSE guarantees, but are rather due to changes in interest rates and prepayment expectations. We did not recognize any OTTI charges on our investment securities

12



for the three months ended March 31, 2015 and 2014. 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 months ended March 31, 2015 and 2014 (in millions): 
 
 
Three Months Ended March 31,
Agency Securities Classified as
Available-for-Sale
 
2015
 
2014
Agency MBS sold, at cost
 
$
(7,732
)
 
$
(9,711
)
Proceeds from agency MBS sold 1
 
7,768

 
9,692

Net gain (loss) on sale of agency MBS
 
$
36

 
$
(19
)
 
 
 
 
 
Gross gain on sale of agency MBS
 
$
57

 
$
42

Gross loss on sale of agency MBS
 
(21
)
 
(61
)
Net gain (loss) on sale of agency MBS
 
$
36

 
$
(19
)
  ________________________
1.
Proceeds include cash received during the period, plus receivable for agency MBS sold during the period as of period end.

For the three months ended March 31, 2015 and 2014, we recognized a net unrealized gain of $11 million and $12 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 March 31, 2015 and December 31, 2014, 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 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 $1.2 billion and $1.3 billion as of March 31, 2015 and December 31, 2014, respectively, and debt, at fair value, of $725 million and $761 million, respectively, in our accompanying consolidated balance sheets. As of March 31, 2015 and December 31, 2014, the agency securities had an aggregate unpaid principal balance of $1.1 billion and $1.2 billion, respectively, and the debt had an aggregate unpaid principal balance of $707 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 months ended March 31, 2015, we recorded no gain or loss associated with our consolidated debt. For the three months ended March 31, 2014, we recognized a net loss of $(3) million 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 both March 31, 2015 and December 31, 2014, the fair value of our CMO securities and interest and principal-only securities was $1.6 billion, excluding the consolidated CMO trusts discussed above, or $2.1 billion 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 $289 million and $274 million as of March 31, 2015 and December 31, 2014, respectively.

Note 5. Repurchase Agreements and Other Debt
We pledge certain of our securities as collateral under repurchase arrangements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. For additional information regarding our pledged assets please refer to Note 7. Interest rates on these borrowings are generally based on LIBOR plus or minus a margin and amounts

13



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, 2015, we had met all margin call requirements.
The following table summarizes our borrowings under repurchase arrangements and weighted average interest rates classified by remaining maturities as of March 31, 2015 and December 31, 2014 (dollars in millions):
 
 
March 31, 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 MBS:
 
 
 
 
 
 
 
 
 
 
 
 
≤ 1 month
 
$
24,680

 
0.36
%
 
16

 
$
14,157

 
0.37
%
 
15

> 1 to ≤ 3 months
 
15,100

 
0.38
%
 
52

 
20,223

 
0.38
%
 
61

> 3 to ≤ 6 months
 
5,455

 
0.43
%
 
132

 
6,654

 
0.42
%
 
120

> 6 to ≤ 9 months
 
2,668

 
0.56
%
 
222

 
1,575

 
0.50
%
 
225

> 9 to ≤ 12 months
 
1,826

 
0.47
%
 
330

 
2,678

 
0.54
%
 
313

> 12 to ≤ 24 months
 
700

 
0.61
%
 
491

 
600

 
0.57
%
 
551

> 24 to ≤ 36 months
 
852

 
0.61
%
 
937

 
952

 
0.60
%
 
999

> 36 to ≤ 48 months
 
1,150

 
0.68
%
 
1,268

 
650

 
0.64
%
 
1,266

> 48 to < 60 months
 
1,900

 
0.70
%
 
1,706

 
900

 
0.68
%
 
1,542

Total agency MBS
 
54,331

 
0.41
%
 
164

 
48,389

 
0.41
%
 
143

U.S. Treasury securities:
 
 
 
 
 
 
 
 
 
 
 
 
1 day
 
3,781

 
0.21
%
 
1

 
1,907

 
0.09
%
 
1

Total / Weighted Average
 
$
58,112

 
0.33
%
 
142

 
$
50,296

 
0.40
%
 
138

As of March 31, 2015 and December 31, 2014, debt of consolidated VIEs, at fair value ("other debt") was $725 million and $761 million, respectively. As of March 31, 2015 and December 31, 2014, our other debt had a weighted average interest rate of LIBOR plus 43 basis points and a principal balance of $707 million and $742 million, respectively. The actual maturities of our other debt are generally shorter than the stated contractual maturities. The actual maturities are affected by the contractual lives of the underlying agency MBS securitizing our other debt and periodic principal prepayments of such underlying securities. The estimated weighted average life of our other debt as of March 31, 2015 and December 31, 2014 was 5.6 and 5.8 years, respectively.
As of March 31, 2015 and December 31, 2014, we also had outstanding forward commitments to purchase and sell agency securities through the TBA market (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. However, pursuant to ASC 815, we account for such transactions as one or more series of derivative transactions and, consequently, they are not recognized as debt on our consolidated balance sheet and are excluded from commensurate measurements of our balance sheet debt to equity leverage ratios.

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 we may invest in other types of mortgage derivative securities, such as interest and principal-only securities. Our risk management strategy attempts to manage the overall risk of the portfolio, reduce fluctuations in 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 months ended March 31, 2015 and 2014, we reclassified $29 million and $43 million, respectively, of net deferred losses from accumulated OCI into interest expense related to our de-designated interest rate swaps and recognized

14



an equal, but offsetting, amount in other comprehensive income. Our total net periodic interest costs on our swap portfolio for these periods was $113 million and $126 million, respectively. The difference of $84 million and $83 million for these periods, respectively, is reported in our accompanying consolidated statements of comprehensive income in gain (loss) on derivative instruments and other securities, net. As of March 31, 2015, the remaining net deferred loss in accumulated OCI related to de-designated interest rate swaps was $111 million and will be reclassified from OCI into interest expense over a remaining weighted average period of 1.2 years. As of March 31, 2015, the net deferred loss expected to be reclassified from OCI into interest expense over the next twelve months was $91 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 March 31, 2015 and December 31, 2014 (in millions):

Derivative and Other Hedging Instruments
 
Balance Sheet Location
 
March 31, 2015
 
December 31, 2014
Interest rate swaps
 
Derivative assets, at fair value
 
$
70

 
$
136

Swaptions
 
Derivative assets, at fair value
 
50

 
75

TBA securities
 
Derivative assets, at fair value
 
109

 
197

Total
 
 
 
$
229

 
$
408

 
 
 
 
 
 
 
Interest rate swaps
 
Derivative liabilities, at fair value
 
$
(1,308
)
 
$
(880
)
TBA securities
 
Derivative liabilities, at fair value
 
(30
)
 
(5
)
U.S. Treasury futures - short
 
Derivative liabilities, at fair value
 
(14
)
 
(5
)
Total
 
 
 
$
(1,352
)
 
$
(890
)
 
 
 
 
 
 
 
U.S. Treasury securities - long
 
U.S. Treasury securities, at fair value
 
$
4,328

 
$
2,427

U.S. Treasury securities - short
 
Obligation to return securities borrowed under reverse repurchase agreements, at fair value 1
 
(3,363
)
 
(5,363
)
Total - (short)/long, net
 
 
 
$
965

 
$
(2,936
)
 ________________________
1.
Our obligation to return securities borrowed under reverse repurchase agreements as of March 31, 2015 and December 31, 2014 relates to securities borrowed to cover short sales of U.S. Treasury securities from which we received total sale proceeds of $3.3 billion and $5.4 billion, respectively. The change in fair value of the borrowed securities is recorded in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

The following tables summarize our interest rate swap agreements outstanding as of March 31, 2015 and December 31, 2014 (dollars in millions):
 
 
March 31, 2015
Payer Interest Rate Swaps
 
Notional
Amount 1
 
Average
Fixed
Pay Rate 2
 
Average
Receive
Rate 3
 
Net
Estimated
Fair Value
 
Average
Maturity
(Years) 4
≤ 3 years
 
$
14,850

 
1.21%
 
0.24%
 
$
(110
)
 
1.9
> 3 to ≤ 5 years
 
10,475

 
1.74%
 
0.26%
 
(149
)
 
4.3
> 5 to ≤ 7 years
 
7,050

 
2.61%
 
0.26%
 
(309
)
 
6.2
> 7 to ≤ 10 years
 
9,825

 
2.45%
 
0.26%
 
(405
)
 
8.2
> 10 years
 
2,725

 
3.15%
 
0.26%
 
(265
)
 
12.5
Total Payer Interest Rate Swaps
 
$
44,925

 
1.94%
 
0.25%
 
$
(1,238
)
 
5.2
   ________________________
1.
Notional amount includes forward starting swaps of $10.1 billion with an average forward start date of 0.9 years and an average maturity of 7.3 years from March 31, 2015.
2.
Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.64% as of March 31, 2015.
3.
Average receive rate excludes forward starting swaps.
4.
Average maturity measured from March 31, 2015 through stated maturity date.


15



 
 
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)
4
≤ 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.
4.
Average maturity measured from December 31, 2014 through stated maturity date.
The following table summarizes our interest rate payer swaption agreements outstanding as of March 31, 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)
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
≤ 1 year
 
$
117

 
$
28

 
7
 
$
4,650

 
3.33%
 
3M
 
7.1
> 1 to ≤ 2 years
 
13

 
1

 
16
 
550

 
4.01%
 
3M
 
5.7
Total Payer Swaptions
 
$
130

 
$
29

 
8
 
$
5,200

 
3.40%
 
3M
 
7.0
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 March 31, 2015 and December 31, 2014 (dollars in millions):
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)
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
≤ 1 year
 
$
6

 
$
21

 
2
 
$
750

 
1.96%
 
3M
 
6.7
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
≤ 1 year
 
$
18

 
$
29

 
5
 
$
4,250

 
1.78%
 
3M
 
6.4

16



The following table summarizes our U.S. Treasury securities as of March 31, 2015 and December 31, 2014 (in millions):
 
 
March 31, 2015
 
December 31, 2014
Maturity
 
Face Amount Net Long / (Short)
 
Cost Basis
 
Market Value
 
Face Amount Net Long / (Short)
 
Cost Basis
 
Market Value
3 years
 
$
(900
)
 
$
(899
)
 
$
(902
)
 
$

 
$

 
$

5 years
 
(2,111
)
 
(2,096
)
 
(2,116
)
 
(4,674
)
 
(4,650
)
 
(4,645
)
7 years
 
(339
)
 
(334
)
 
(341
)
 
(717
)
 
(717
)
 
(718
)
10 years
 
4,258

 
4,303

 
4,324

 
2,410

 
2,422

 
2,427

Total U.S. Treasury securities, net
 
$
908

 
$
974

 
$
965

 
$
(2,981
)
 
$
(2,945
)
 
$
(2,936
)
The following tables summarize our TBA securities as of March 31, 2015 and December 31, 2014 (in millions):
  
 
 
March 31, 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%
 
$
1,632

 
$
1,670

 
$
1,673

 
$
3

 
$
962

 
$
968

 
$
980

 
$
12

3.0%
 
(2,733
)
 
(2,852
)
 
(2,866
)
 
(14
)
 
2,779

 
2,889

 
2,888

 
(1
)
3.5%
 
(192
)
 
(201
)
 
(203
)
 
(2
)
 
(468
)
 
(495
)
 
(494
)
 
1

4.0%
 

 

 

 

 
(13
)
 
(14
)
 
(14
)
 

Total 15-Year TBAs
 
(1,293
)
 
(1,383
)
 
(1,396
)
 
(13
)
 
3,260

 
3,348

 
3,360

 
12

30-Year TBA securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.0%
 
5,432

 
5,500

 
5,566

 
66

 
5,254

 
5,259

 
5,313

 
54

3.5%
 
3,423

 
3,560

 
3,598

 
38

 
7,902

 
8,151

 
8,232

 
81

4.0%
 
(2,689
)
 
(2,862
)
 
(2,874
)
 
(12
)
 
(1,853
)
 
(2,019
)
 
(1,974
)
 
45

4.5%
 

 

 

 

 
(151
)
 
(163
)
 
(163
)
 

Total 30-Year TBAs
 
6,166

 
6,198

 
6,290

 
92

 
11,152

 
11,228

 
11,408

 
180

Total net TBA securities
 
$
4,873

 
$
4,815

 
$
4,894

 
$
79

 
$
14,412

 
$
14,576

 
$
14,768

 
$
192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 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
 
$
2,230

 
$
2,125

 
$
2,178

 
$
53

 
$
15,127

 
$
15,316

 
$
15,509

 
$
193

Freddie Mac
 
(957
)
 
(1,021
)
 
(1,025
)
 
(4
)
 
(715
)
 
(740
)
 
(741
)
 
(1
)
Ginnie Mae
 
3,600

 
3,711

 
3,741

 
30

 

 

 

 

TBA securities, net
 
$
4,873

 
$
4,815

 
$
4,894

 
$
79

 
$
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 months ended March 31, 2015 and 2014 (in millions):


17



 
 
Three Months Ended March 31, 2015
Derivative and Other Hedging Instruments
 
Notional Amount
Long/(Short)
December 31, 2014
 
Additions
 
Settlement, Termination,
Expiration or
Exercise
 
Notional Amount
Long/(Short) March 31, 2015
 
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivatives 1
TBA securities, net
 
$
14,412

 
45,500

 
(55,039
)
 
$
4,873

 
 
$
234

Interest rate swaps
 
$
(43,700
)
 
(3,500
)
 
2,275

 
$
(44,925
)
 
 
(746
)
Payer swaptions
 
$
(6,800
)
 

 
1,600

 
$
(5,200
)
 
 
(17
)
Receiver swaptions
 
$
4,250

 

 
(3,500
)
 
$
750

 
 
17

U.S. Treasury securities - short position
 
$
(5,392
)
 
(4,173
)
 
6,212

 
$
(3,353
)
 
 
(82
)
U.S. Treasury securities - long position
 
$
2,411

 
15,562

 
(13,712
)
 
$
4,261

 
 
52

U.S. Treasury futures contracts - short position
 
$
(730
)
 
(730
)
 
730

 
$
(730
)
 
 
(20
)
 
 
 
 
 
 
 
 
 
 
 
$
(562
)
  ________________________________
1.
Excludes a net gain of $2 million from investments in REIT equity securities and a net gain of $11 million from interest and principal-only securities recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

 
 
Three Months Ended March 31, 2014
Derivative and Other Hedging Instruments
 
Notional Amount
Long/(Short)
December 31, 2013
 
Additions
 
Settlement, Termination,
Expiration or
Exercise
 
Notional Amount
 Long/(Short) March 31, 2014
 
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivatives 1
TBA securities, net
 
$
2,119

 
24,376

 
(12,586
)
 
$
13,909

 
 
$
60

Interest rate swaps
 
$
(43,250
)
 
(5,900
)
 
2,750

 
$
(46,400
)
 
 
(380
)
Payer swaptions
 
$
(14,250
)
 
(1,000
)
 
7,250

 
$
(8,000
)
 
 
(105
)
Receiver swaptions
 
$

 
1,000