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10-Q
AGNC INVESTMENT CORP. filed this Form 10-Q on 08/05/2016
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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 June 30, 2016
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, 12th Floor
Bethesda, Maryland 20814
(Address of principal executive offices)
(301) 968-9315
(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 July 31, 2016 was 331,046,077.
 




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)

 
June 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Assets:
 
 
 
Agency securities, at fair value (including pledged securities of $48,344 and $48,380, respectively)
$
53,418

 
$
51,331

Agency securities transferred to consolidated variable interest entities, at fair value (pledged securities)
945

 
1,029

Non-agency securities, at fair value (pledged securities)
107

 
113

U.S. Treasury securities, at fair value (pledged securities)
62

 
25

REIT equity securities, at fair value
19

 
33

Cash and cash equivalents
1,131

 
1,110

Restricted cash and cash equivalents
1,399

 
1,281

Derivative assets, at fair value
111

 
81

Receivable under reverse repurchase agreements
2,982

 
1,713

Other assets
301

 
305

Total assets
$
60,475

 
$
57,021

Liabilities:
 
 
 
Repurchase agreements
$
41,947

 
$
41,754

Federal Home Loan Bank advances
3,037

 
3,753

Debt of consolidated variable interest entities, at fair value
528

 
595

Payable for securities purchased
2,581

 
182

Derivative liabilities, at fair value
1,519

 
935

Dividends payable
73

 
74

Obligation to return securities borrowed under reverse repurchase agreements, at
fair value
3,017

 
1,696

Accounts payable and other accrued liabilities
71

 
61

Total liabilities
52,773

 
49,050

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;
 
 
 
331.0 and 337.5 shares issued and outstanding, respectively
3

 
3

Additional paid-in capital
9,932

 
10,048

Retained deficit
(3,669
)
 
(2,350
)
Accumulated other comprehensive income (loss)
1,100

 
(66
)
Total stockholders' equity
7,702

 
7,971

Total liabilities and stockholders' equity
$
60,475

 
$
57,021

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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
Interest income
$
318

 
$
414

 
$
613

 
$
797

Interest expense
101

 
81

 
200

 
167

Net interest income
217

 
333

 
413

 
630

Other gain (loss), net:
 
 
 
 
 
 
 
Gain (loss) on sale of mortgage-backed securities, net
55

 
(22
)
 
53

 
14

Gain (loss) on derivative instruments and other securities, net
(367
)
 
237

 
(1,300
)
 
(312
)
Total other gain (loss), net
(312
)
 
215

 
(1,247
)
 
(298
)
Expenses:
 
 
 
 
 
 
 
Management fees
25

 
29

 
52

 
59

General, administrative and other expenses
15

 
7

 
21

 
13

Total expenses
40

 
36

 
73

 
72

Net income (loss)
(135
)
 
512

 
(907
)
 
260

Dividend on preferred stock
7

 
7

 
14

 
14

Net income (loss) available (attributable) to common stockholders
$
(142
)
 
$
505

 
$
(921
)
 
$
246

 
 
 
 
 
 
 
 
Net income (loss)
$
(135
)
 
$
512

 
$
(907
)
 
$
260

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities, net
370

 
(872
)
 
1,135

 
(481
)
Unrealized gain on derivative instruments, net
12

 
26

 
31

 
55

Other comprehensive income (loss)
382

 
(846
)
 
1,166

 
(426
)
Comprehensive income (loss)
247

 
(334
)
 
259

 
(166
)
Dividend on preferred stock
7

 
7

 
14

 
14

Comprehensive income (loss) available (attributable) to common stockholders
$
240

 
$
(341
)
 
$
245

 
$
(180
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic and diluted
331.0

 
352.1

 
332.7

 
352.5

Net income (loss) per common share - basic and diluted
$
(0.43
)
 
$
1.43

 
$
(2.77
)
 
$
0.70

Dividends declared per common share
$
0.60

 
$
0.62

 
$
1.20

 
$
1.28

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, 2014
6.9

 
$
336

 
352.8

 
$
4

 
$
10,332

 
$
(1,674
)
 
$
430

 
$
9,428

Net income

 

 

 

 

 
260

 

 
260

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

 

 

 

 

 

 
(481
)
 
(481
)
Unrealized gain on derivative instruments, net

 

 

 

 

 

 
55

 
55

Repurchase of common stock

 

 
(4.0
)
 

 
(79
)
 

 

 
(79
)
Preferred dividends declared

 

 

 

 

 
(14
)
 

 
(14
)
Common dividends declared

 

 

 

 

 
(451
)
 

 
(451
)
Balance, June 30, 2015
6.9

 
$
336

 
348.8

 
$
4

 
$
10,253

 
$
(1,879
)
 
$
4

 
$
8,718

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2015
6.9

 
$
336

 
337.5

 
$
3

 
$
10,048

 
$
(2,350
)
 
$
(66
)
 
$
7,971

Net loss

 

 

 

 

 
(907
)
 

 
(907
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net

 

 

 

 

 

 
1,135

 
1,135

Unrealized gain on derivative instruments, net

 

 

 

 

 

 
31

 
31

Repurchase of common stock

 

 
(6.5
)
 

 
(116
)
 

 

 
(116
)
Preferred dividends declared

 

 

 

 

 
(14
)
 

 
(14
)
Common dividends declared

 

 

 

 

 
(398
)
 

 
(398
)
Balance, June 30, 2016
6.9

 
$
336

 
331.0

 
$
3

 
$
9,932

 
$
(3,669
)
 
$
1,100

 
$
7,702


See accompanying notes to consolidated financial statements.


4



AMERICAN CAPITAL AGENCY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions) 

 
Six Months Ended June 30,
 
2016
 
2015
Operating activities:
 
 
 
Net income (loss)
$
(907
)
 
$
260

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of premiums and discounts on mortgage-backed securities, net
284

 
202

Amortization of accumulated other comprehensive loss on interest rate swaps de-designated as qualifying hedges
31

 
55

Stock based compensation
1

 

Gain on sale of mortgage-backed securities, net
(53
)
 
(14
)
Loss on derivative instruments and other securities, net
1,300

 
312

Decrease in other assets
23

 
56

Increase in accounts payable and other accrued liabilities
9

 

Net cash provided by operating activities
688

 
871

Investing activities:
 
 
 
Purchases of mortgage-backed securities
(13,453
)
 
(18,882
)
Proceeds from sale of mortgage-backed securities
11,076

 
18,006

Principal collections on mortgage-backed securities
3,690

 
4,106

Purchases of U.S. Treasury securities
(1,819
)
 
(36,811
)
Proceeds from sale of U.S. Treasury securities
2,947

 
30,854

Net proceeds from (payments on) reverse repurchase agreements
(1,269
)
 
2,477

Net payments on other derivative instruments
(609
)
 
(3
)
Purchases of REIT equity securities

 
(11
)
Proceeds from sale of REIT equity securities
4

 
11

Increase in restricted cash and cash equivalents
(141
)
 
(65
)
Other investing cash flows, net

 
(13
)
Net cash provided by (used in) investing activities
426

 
(331
)
Financing activities:
 
 
 
Proceeds from repurchase arrangements
134,605

 
232,533

Payments on repurchase agreements
(134,389
)
 
(232,651
)
Proceeds from Federal Home Loan Bank advances
2,098

 

Payments on Federal Home Loan Bank advances
(2,814
)
 

Payments on debt of consolidated variable interest entities
(64
)
 
(80
)
Payments for common stock repurchases
(116
)
 
(79
)
Cash dividends paid
(413
)
 
(473
)
Net cash used in financing activities
(1,093
)
 
(750
)
Net change in cash and cash equivalents
21

 
(210
)
Cash and cash equivalents at beginning of period
1,110

 
1,720

Cash and cash equivalents at end of period
$
1,131

 
$
1,510

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 all of our wholly-owned subsidiaries 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 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 our annual taxable net income to our stockholders on a timely basis. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.
We earn income primarily from investing in agency mortgage-backed securities ("agency MBS") on a leveraged basis. 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 MBS").
Our principal objective is to generate attractive risk-adjusted returns for distribution to our stockholders through regular monthly dividends from 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.
Prior to July 1, 2016, we were externally managed by American Capital AGNC Management, LLC (our "Manager"), an affiliate of American Capital, Ltd. ("ACAS"). On July 1, 2016, we completed the acquisition of all of the outstanding membership interests of American Capital Mortgage Management, LLC (“ACMM”), the parent company of our Manager, from American Capital Asset Management, LLC (“ACAM”), a wholly owned portfolio company of ACAS. ACMM is also the parent company of American Capital MTGE Management, LLC (“MTGE Manager”), the external manager of American Capital Mortgage Investment Corp. (“MTGE”). Following the closing of the acquisition of ACMM (the “Internalization”), we became internally managed and are no longer affiliated with ACAS. (See Note 10 for further details.)

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

6



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 non-agency securities (collectively referred to as "mortgage securities" or "investment 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.
Non-agency securities in which we may invest consist of investment grade, AAA rated MBS backed by residential or commercial mortgages, for which the payment of principal and interest is not guaranteed by a GSE or government agency. Instead, a private institution such as a commercial bank will package residential or commercial mortgage loans and securitize them through the issuance of MBS. Investment grade, AAA rated non-agency MBS benefit from credit enhancements derived from structural elements, such as subordination, overcollateralization or insurance, but nonetheless carry a higher level of credit exposure than agency MBS.
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 mortgage securities based on a market approach using "Level 2" inputs from third-party pricing services and non-binding dealer quotes derived from common market pricing methods. 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 "Level 1" inputs based on quoted market prices. Refer to Note 8 for further discussion of fair value measurements.
We evaluate our mortgage 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 mortgage 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, interest rate volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the prepayment speeds estimated by the third-party service and, based on our judgment, we may make adjustments to its estimates. 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.

7



Derivative Instruments
We use a variety of derivative instruments to hedge a portion of our exposure to market risks, including interest rate, prepayment, extension and liquidity 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 U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales, and forward contracts for the purchase or sale of agency MBS securities on a generic pool basis in the "to-be-announced" market ("TBA securities"). We may also purchase or write put or call options on TBA securities and invest in mortgage and other types of derivatives, such as interest and principal-only securities.
We 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). Under 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 our accompanying consolidated balance sheets and to measure those instruments at fair value.
Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with the counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets. Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Changes in fair value of derivative instruments and periodic settlements related to our derivative instruments are recorded in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.
The use of derivative instruments creates exposure to credit risk relating to potential losses that could be recognized 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 fiscal year 2011, we entered into interest rate swap agreements typically with the intention of qualifying for hedge accounting under ASC 815. However, during fiscal year 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").

8



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" swaps using a combination of inputs from counterparty and third-party pricing models to estimate the net present value of the future cash flows using the forward interest rate yield curve in effect as of the end of the measurement period. We also incorporate both our own and our counterparties' nonperformance risk in estimating the fair value of our interest rate swaps. In considering the effect of nonperformance risk, we consider the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty risk is not significant to the overall valuation of these agreements.
Interest rate swaptions
We purchase interest rate swaptions 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 interest rate swaptions using a combination of inputs from counterparty and third-party pricing models based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option, adjusted for non-performance risk, if any.
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 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 our accompanying consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date. Gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.


9



Note 4. Investment Securities
As of June 30, 2016 and December 31, 2015, our investment portfolio consisted of $54.5 billion and $52.5 billion of MBS, at fair value, respectively, and a $7.1 billion and $7.4 billion net long TBA position, at fair value, respectively.
Our TBA position is reported at its net carrying value of $97 million and $14 million as of June 30, 2016 and December 31, 2015, 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 June 30, 2016 and December 31, 2015.)
As of June 30, 2016 and December 31, 2015, the net unamortized premium balance on our MBS was $2.4 billion and $2.3 billion, respectively, including interest and principal-only securities.
The following tables summarize our investments in MBS as of June 30, 2016 and December 31, 2015 (dollars in millions):
 
 
June 30, 2016
Investments in Mortgage-Backed Securities
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Agency MBS:
 
 
 
 
 
 
 
 
Fixed rate
 
$
51,590

 
$
1,068

 
$
(10
)
 
$
52,648

Adjustable rate
 
429

 
14

 

 
443

CMO
 
888

 
32

 

 
920

Interest-only and principal-only strips
 
305

 
50

 
(3
)
 
352

Total agency MBS
 
53,212

 
1,164

 
(13
)
 
54,363

Non-agency MBS:
 
 
 
 
 
 
 
 
AAA non-agency
 
105

 
2

 

 
107

Total MBS
 
$
53,317

 
$
1,166

 
$
(13
)
 
$
54,470


 
 
December 31, 2015
Investments in Mortgage-Backed Securities
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Agency MBS:
 
 
 
 
 
 
 
 
Fixed rate
 
$
50,576

 
$
339

 
$
(393
)
 
$
50,522

Adjustable rate
 
484

 
11

 

 
495

CMO
 
973

 
18

 
(1
)
 
990

Interest-only and principal-only strips
 
317

 
39

 
(3
)
 
353

Total agency MBS
 
52,350

 
407

 
(397
)
 
52,360

Non-agency MBS:
 
 
 
 
 
 
 
 
AAA non-agency
 
114

 

 
(1
)
 
113

Total MBS
 
$
52,464

 
$
407

 
$
(398
)
 
$
52,473



10



 
 
June 30, 2016
Investments in Mortgage-Backed Securities
 
Fannie Mae
 
Freddie Mac
 
Ginnie Mae
 
Non-Agency
 
Total
Available-for-sale MBS:
 
 
 
 
 
 
 
 
 
 
MBS, par value
 
$
40,245

 
$
10,356

 
$
53

 
$
104

 
$
50,758

Unamortized discount
 
(30
)
 
(3
)
 

 

 
(33
)
Unamortized premium
 
1,766

 
519

 
1

 
1

 
2,287

Amortized cost
 
41,981

 
10,872

 
54

 
105

 
53,012

Gross unrealized gains
 
897

 
215

 
2

 
2

 
1,116

Gross unrealized losses
 
(7
)
 
(3
)
 

 

 
(10
)
Total available-for-sale MBS, at fair value
 
42,871

 
11,084

 
56

 
107

 
54,118

MBS remeasured at fair value through earnings:
 
 
 
 
 
 
 
 
 

Interest-only and principal-only strips, amortized cost 1
 
288

 
17

 

 

 
305

Gross unrealized gains
 
47

 
3

 

 

 
50

Gross unrealized losses
 
(2
)
 
(1
)
 

 

 
(3
)
Total MBS remeasured at fair value through earnings
 
333

 
19

 

 

 
352

Total MBS, at fair value
 
$
43,204

 
$
11,103

 
$
56

 
$
107

 
$
54,470

Weighted average coupon as of June 30, 2016 2
 
3.61
%
 
3.70
%
 
3.08
%
 
3.50
%
 
3.63
%
Weighted average yield as of June 30, 2016 3
 
2.67
%
 
2.68
%
 
1.95
%
 
3.00
%
 
2.68
%
 ________________________
1.
The underlying unamortized principal balance ("UPB" or "par value") of our interest-only securities was $1.0 billion and the weighted average contractual interest we are entitled to receive was 5.29% of this amount as of June 30, 2016. The par value of our principal-only securities was $192 million as of June 30, 2016.
2.
The weighted average coupon includes the interest cash flows from our interest-only securities and is stated as a percentage of par value (excluding the UPB of our interest-only securities) as of June 30, 2016.
3.
Incorporates a weighted average future constant prepayment rate assumption of 11% based on forward rates as of June 30, 2016.

 
 
December 31, 2015
Investments in Mortgage-Backed Securities
 
Fannie Mae
 
Freddie Mac
 
Ginnie Mae
 
Non-Agency
 
Total
Available-for-sale MBS:
 
 
 
 
 
 
 
 
 
 
MBS, par value
 
$
39,205

 
$
10,575

 
$
62

 
$
113

 
$
49,955

Unamortized discount
 
(32
)
 
(4
)
 

 

 
(36
)
Unamortized premium
 
1,707

 
519

 
1

 
1

 
2,228

Amortized cost
 
40,880

 
11,090

 
63

 
114

 
52,147

Gross unrealized gains
 
286

 
80

 
2

 

 
368

Gross unrealized losses
 
(283
)
 
(111
)
 

 
(1
)
 
(395
)
Total available-for-sale MBS, at fair value
 
40,883

 
11,059

 
65

 
113

 
52,120

MBS measured at fair value through earnings:
 
 
 
 
 
 
 
 
 
 
Interest-only and principal-only strips, amortized cost 1
 
298

 
19

 

 

 
317

Gross unrealized gains
 
35

 
4

 

 

 
39

Gross unrealized losses
 
(2
)
 
(1
)
 

 

 
(3
)
Total MBS measured at fair value through earnings
 
331

 
22

 

 

 
353

Total MBS, at fair value
 
$
41,214

 
$
11,081

 
$
65

 
$
113

 
$
52,473

Weighted average coupon as of December 31, 2015 2
 
3.62
%
 
3.69
%
 
3.18
%
 
3.50
%
 
3.63
%
Weighted average yield as of December 31, 2015 3
 
2.79
%
 
2.77
%
 
1.97
%
 
3.33
%
 
2.78
%
 ________________________
1.
The underlying UPB of our interest-only securities was $1.0 billion and the weighted average contractual interest we are entitled to receive was 5.28% of this amount as of December 31, 2015. The par value of our principal-only securities was $207 million as of December 31, 2015.
2.
The weighted average coupon includes the interest cash flows from our interest-only securities and is stated as a percentage of par value (excluding the UPB of our interest-only securities) as of December 31, 2015.
3.
Incorporates a weighted average future constant prepayment rate assumption of 8% based on forward rates as of December 31, 2015.

The actual maturities of our investment securities are generally shorter than their stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic contractual principal payments and principal

11



prepayments. As of June 30, 2016 and December 31, 2015, our weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate investment portfolio was 11% and 8%, 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 investments classified as available-for-sale as of June 30, 2016 and December 31, 2015 according to their estimated weighted average life classification (dollars in millions):

 
 
June 30, 2016
 
December 31, 2015
Estimated Weighted Average Life of Securities 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
 
$
1,155

 
$
1,134

 
3.89%
 
2.45%
 
$
167

 
$
163

 
4.02%
 
2.66%
> 3 years and ≤ 5 years
 
19,190

 
18,698

 
3.36%
 
2.45%
 
17,497

 
17,343

 
3.27%
 
2.40%
> 5 years and ≤10 years
 
31,934

 
31,349

 
3.65%
 
2.77%
 
34,206

 
34,391

 
3.67%
 
2.93%
> 10 years
 
1,839

 
1,831

 
3.02%
 
2.64%
 
250

 
250

 
3.56%
 
3.08%
Total
 
$
54,118

 
$
53,012

 
3.53%
 
2.64%
 
$
52,120

 
$
52,147

 
3.54%
 
2.75%
 _______________________
1.
Excludes interest and principal-only strips.

The weighted average life of our interest-only securities was 5.1 and 6.1 years as of June 30, 2016 and December 31, 2015, respectively. The weighted average life of our principal-only securities was 6.0 and 8.0 years as of June 30, 2016 and December 31, 2015, 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 six months ended June 30, 2016 and 2015

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 June 30, 2016 and December 31, 2015 (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
June 30, 2016
 
$
730

 
$
(1
)
 
$
2,072

 
$
(9
)
 
$
2,802

 
$
(10
)
December 31, 2015
 
$
24,035

 
$
(200
)
 
$
6,793

 
$
(195
)
 
$
30,828

 
$
(395
)

We did not recognize any OTTI charges on our investment securities for the six months ended June 30, 2016 and 2015. As of the end of each respective reporting period, a decision had not been made to sell any of our securities in an unrealized loss position and we did not believe it was more likely than not that we would be required to sell such securities before recovery of their amortized cost basis. The unrealized losses on our securities were not due to credit losses given the GSE guarantees and credit enhancements on our AAA non-agency securities, but rather were due to changes in interest rates and prepayment expectations. However, as we continue to actively manage our portfolio, we may recognize additional realized losses on our investment securities upon selecting specific securities to sell.

12



Gains and Losses on Sale of Mortgage-Backed Securities
The following table is a summary of our net gain (loss) from the sale of securities classified as available-for-sale for the three and six months ended June 30, 2016 and 2015 (in millions): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Securities Classified as Available-for-Sale
 
2016
 
2015
 
2016
 
2015
MBS sold, at cost
 
$
(7,508
)
 
$
(10,241
)
 
$
(11,023
)
 
$
(17,974
)
Proceeds from MBS sold 1
 
7,563

 
10,219

 
11,076

 
17,988

Net gain (loss) on sale of MBS
 
$
55

 
$
(22
)
 
$
53

 
$
14

 
 
 
 
 
 
 
 
 
Gross gain on sale of MBS
 
$
55

 
$
22

 
$
60

 
$
79

Gross loss on sale of MBS
 

 
(44
)
 
(7
)
 
(65
)
Net gain (loss) on sale of MBS
 
$
55

 
$
(22
)
 
$
53

 
$
14

  ________________________
1.
Proceeds include cash received during the period, plus receivable for MBS sold during the period as of period end.
For the three and six months ended June 30, 2016, we recognized a net unrealized gain of zero and $11 million, respectively, and for the three and six months ended June 30, 2015 we recognized a net unrealized loss of $7 million and an unrealized gain of $4 million, respectively, for the change in value of investments in interest and principal-only securities 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 June 30, 2016 and December 31, 2015, 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 $0.9 billion and 1.0 billion as of June 30, 2016 and December 31, 2015, respectively, and debt with a total fair value of $528 million and $595 million, respectively, in our accompanying consolidated balance sheets. As of June 30, 2016 and December 31, 2015, the agency securities had an aggregate unpaid principal balance of $0.9 billion and $1.0 billion, respectively, and the debt had an aggregate unpaid principal balance of $523 million and $587 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 six months ended June 30, 2016, we recorded a gain of $1 million and a loss of $6 million, respectively, associated with our consolidated debt. For the three and six months ended June 30, 2015, we recorded a gain of $9 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 June 30, 2016 and December 31, 2015, the fair value of our CMO securities and interest and principal-only securities was $1.3 billion, excluding the consolidated CMO trusts discussed above, or $1.7 billion and $1.8 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 $241 million and $238 million as of June 30, 2016 and December 31, 2015, respectively.

Note 5. Repurchase Agreements and Other Secured Borrowings
We pledge certain of our securities as collateral under our repurchase agreements with financial institutions and under our 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

13



June 30, 2016, we had met all margin call requirements. For additional information regarding our pledged assets, please refer to Note 7.
Repurchase Agreements
As of June 30, 2016 and December 31, 2015, we had $41.9 billion and $41.8 billion, respectively, of repurchase agreements outstanding. The terms and conditions of our repurchase agreements are typically negotiated on a transaction-by-transaction basis. Our repurchase agreements with original maturities greater than 90 days have floating interest rates based on an index plus or minus a fixed spread. Substantially all of our repurchase agreements were used to fund purchases of agency securities ("agency repo"). The remainder of our repurchase agreements were used to fund temporary holdings of U.S. Treasury securities ("U.S. Treasury repo").
The following table summarizes our borrowings under repurchase agreements by their remaining maturities as of June 30, 2016 and December 31, 2015 (dollars in millions):
 
 
June 30, 2016
 
December 31, 2015
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
 
$
18,710

 
0.69
%
 
12

 
$
17,579

 
0.54
%
 
14

> 1 to ≤ 3 months
 
10,043

 
0.71
%
 
56

 
14,283

 
0.64
%
 
58

> 3 to ≤ 6 months
 
2,479

 
0.82
%
 
117

 
3,154

 
0.61
%
 
121

> 6 to ≤ 9 months
 
3,185

 
0.92
%
 
224

 
589

 
0.65
%
 
199

> 9 to ≤ 12 months
 
1,269

 
0.90
%
 
328

 
1,201

 
0.65
%
 
307

> 12 to ≤ 24 months
 
2,176

 
0.99
%
 
521

 
1,473

 
0.73
%
 
600

> 24 to ≤ 36 months
 
1,150

 
1.08
%
 
955

 
650

 
0.81
%
 
901

> 36 to ≤ 48 months
 
2,300

 
1.07
%
 
1,292

 
1,300

 
0.86
%
 
1,231

> 48 to < 60 months
 
625

 
1.10
%
 
1,690

 
1,500

 
0.76
%
 
1,477

Total agency repo
 
41,937

 
0.78
%
 
202

 
41,729

 
0.61
%
 
173

U.S. Treasury repo:
 
 
 
 
 
 
 
 
 
 
 
 
1 day
 
10

 
0.60
%
 
1

 
25

 
%
 
1

Total
 
$
41,947

 
0.78
%
 
202

 
$
41,754

 
0.61
%
 
173

Federal Home Loan Bank Advances

On January 12, 2016, the Federal Housing Finance Agency ("FHFA") released its final rule on FHLB membership, which requires the termination of our wholly-owned captive insurance subsidiary's FHLB membership and repayment of all FHLB advances after a one year period ending in February 2017. As of June 30, 2016 and December 31, 2015, we had $3.0 billion and $3.8 billion, respectively, of outstanding secured FHLB advances, with a weighted average borrowing rate of 0.61% and 0.53%, respectively, and a weighted average remaining term to maturity of 215 and 141 days, respectively, consisting of 30 day and longer-term floating rate advances:
 
 
June 30, 2016
 
December 31, 2015
Remaining Maturity
 
FHLB Advances
 
Weighted
Average
Interest
Rate
 
Weighted
Average Days
to Maturity
 
FHLB Advances
 
Weighted
Average
Interest
Rate
 
Weighted
Average Days
to Maturity
≤ 1 month
 
$

 
%
 

 
$
1,952

 
0.47
%
 
14

> 1 to ≤ 3 months
 

 
%
 

 
681

 
0.60
%
 
84

> 7 to ≤ 9 months
 
3,037

 
0.61
%
 
215

 

 
%
 

13 months
 

 
%
 

 
1,120

 
0.58
%
 
397

Total FHLB advances
 
$
3,037

 
0.61
%
 
215

 
$
3,753

 
0.53
%
 
141


14



Debt of Consolidated Variable Interest Entities
As of June 30, 2016 and December 31, 2015, debt of consolidated VIEs, at fair value, was $528 million and $595 million, respectively, and had a weighted average interest rate of LIBOR plus 36 and 34 basis points, respectively, and a principal balance of $523 million and $587 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 June 30, 2016 and December 31, 2015 was 4.8 and 4.9 years, respectively.

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. The principal instruments that we use are interest rate swaps and interest rate swaptions and U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also utilize TBA securities, purchase or write put or call options on TBA securities or invest in mortgage and other types of derivatives, such as interest and principal-only securities. We 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). 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 six months ended June 30, 2016, we reclassified $12 million and $31 million, respectively, and for the three and six months ended June 30, 2015 $26 million and $55 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 were $81 million and $189 million for the three and six months ended June 30, 2016, respectively, and $125 million and $238 million for the three and six months ended June 30, 2015, 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 gain (loss) on derivative instruments and other securities, net in our accompanying consolidated statements of comprehensive income (totaling $69 million and $158 million for the three and six months ended June 30, 2016, respectively, and $99 million and $183 million for the three and six months ended June 30, 2015, respectively). As of June 30, 2016, the remaining net deferred loss in accumulated OCI related to de-designated interest rate swaps was $8 million.


15



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 June 30, 2016 and December 31, 2015 (in millions):

Derivative and Other Hedging Instruments
 
Balance Sheet Location
 
June 30, 2016
 
December 31, 2015
Interest rate swaps
 
Derivative assets, at fair value
 
$
1

 
$
31

Swaptions
 
Derivative assets, at fair value
 
7

 
17

TBA securities
 
Derivative assets, at fair value
 
103

 
29

U.S. Treasury futures - short
 
Derivative assets, at fair value
 

 
4

Total derivative assets, at fair value
 
 
 
$
111

 
$
81

 
 
 
 
 
 
 
Interest rate swaps
 
Derivative liabilities, at fair value
 
$
(1,455
)
 
$
(920
)
TBA securities
 
Derivative liabilities, at fair value
 
(6
)
 
(15
)
U.S. Treasury futures - short
 
Derivative liabilities, at fair value
 
(58
)
 

Total derivative liabilities, at fair value
 
 
 
$
(1,519
)
 
$
(935
)
 
 
 
 
 
 
 
U.S. Treasury securities - long
 
U.S. Treasury securities, at fair value
 
$
62

 
$
25

U.S. Treasury securities - short
 
Obligation to return securities borrowed under reverse repurchase agreements, at fair value
 
(3,017
)
 
(1,696
)
Total U.S. Treasury securities, net at fair value
 
 
 
$
(2,955
)
 
$
(1,671
)

The following tables summarize our interest rate swap agreements outstanding as of June 30, 2016 and December 31, 2015 (dollars in millions):
 
 
June 30, 2016
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
 
$
17,225

 
1.04%
 
0.64%
 
$
(113
)
 
1.4
> 3 to ≤ 5 years
 
5,200

 
1.58%
 
0.64%
 
(148
)
 
3.6
> 5 to ≤ 7 years
 
6,975

 
2.22%
 
0.64%
 
(448
)
 
5.9
> 7 to ≤ 10 years
 
4,550

 
2.67%
 
0.64%
 
(526
)
 
8.2
> 10 years
 
1,175

 
3.20%
 
0.66%
 
(219
)
 
14.2
Total payer interest rate swaps
 
$
35,125

 
1.64%
 
0.64%
 
$
(1,454
)
 
4.0
   ________________________
1.
Notional amount includes forward starting swaps of $2.7 billion with an average forward start date of 0.7 years and an average maturity of 7.1 years from June 30, 2016.
2.
Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.51% as of June 30, 2016.
3.
Average receive rate excludes forward starting swaps.


 
 
December 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)
≤ 3 years
 
$
14,775

 
1.06%
 
0.40%
 
$
(23
)
 
1.6
> 3 to ≤ 5 years
 
9,950

 
2.03%
 
0.40%
 
(203
)
 
4.0
> 5 to ≤ 7 years
 
7,175

 
2.47%
 
0.44%
 
(230
)
 
6.1
> 7 to ≤ 10 years
 
7,450

 
2.57%
 
0.39%
 
(342
)
 
8.3
> 10 years
 
1,175

 
3.20%
 
0.39%
 
(91
)
 
14.7
Total payer interest rate swaps
 
$
40,525

 
1.89%
 
0.40%
 
$
(889
)
 
4.6

16



   ________________________
1.
Notional amount includes forward starting swaps of $4.5 billion with an average forward start date of 0.7 years and an average maturity of 5.5 years from December 31, 2015.
2.
Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.75% as of December 31, 2015.
3.
Average receive rate excludes forward starting swaps.
The following table summarizes our interest rate payer swaption agreements outstanding as of June 30, 2016 and December 31, 2015 (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)
June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ≤ 1 year
 
$
55

 
$
7

 
2
 
$
1,050

 
3.38%
 
3M
 
6.7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ≤ 1 year
 
$
74

 
$
17

 
4
 
$
2,150

 
3.51%
 
3M
 
7.0
The following table summarizes our U.S. Treasury securities as of June 30, 2016 and December 31, 2015 (in millions):
 
 
June 30, 2016
 
December 31, 2015
Maturity
 
Face Amount Net Long / (Short)
 
Cost Basis
 
Market Value
 
Face Amount Net Long / (Short)
 
Cost Basis
 
Market Value
5 years
 
$
(500
)
 
$
(501
)
 
$
(512
)
 
$
(250
)
 
$
(249
)
 
$
(249
)
7 years
 
(1,668
)
 
(1,662
)
 
(1,703
)
 
(354
)
 
(353
)
 
(352
)
10 years
 
(700
)
 
(697
)
 
(740
)
 
(1,085
)
 
(1,078
)
 
(1,070
)
Total U.S. Treasury securities, net
 
$
(2,868
)
 
$
(2,860
)
 
$
(2,955
)
 
$
(1,689
)
 
$
(1,680
)
 
$
(1,671
)
The following table summarizes our U.S. Treasury futures as of June 30, 2016 and December 31, 2015 (in millions):
 
 
June 30, 2016
 
December 31, 2015
Maturity
 
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
5 years
 
$
(730
)
 
$
(876
)
 
$
(892
)
 
$
(16
)
 
$
(730
)
 
$
(866
)
 
$
(864
)
 
$
2

10 years
 
(1,230
)
 
(1,592
)
 
(1,634
)
 
(42
)
 
(1,130
)
 
(1,424
)
 
(1,422
)
 
2

Total U.S. Treasury futures
 
$
(1,960
)
 
$
(2,468
)
 
$
(2,526
)
 
$
(58
)
 
$
(1,860
)
 
$
(2,290
)
 
$
(2,286
)
 
$
4

_____________________
1.
Notional amount represents the par value (or principal balance) of the underlying U.S. Treasury security.
2.
Cost basis represents the forward price to be paid / (received) for the underlying U.S. Treasury security.
3.
Market value represents the current market value of U.S. Treasury futures as of period-end.
4.
Net carrying value represents the difference between the market value and the cost basis of U.S. Treasury futures as of period-end and is reported in derivative assets / (liabilities), at fair value in our consolidated balance sheets.

17



The following tables summarize our TBA securities as of June 30, 2016 and December 31, 2015 (in millions):
 
 
June 30, 2016
 
December 31, 2015
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%
 
$
793

 
$
817

 
$
820

 
$
3

 
$
(80
)
 
$
(81
)
 
$
(80
)
 
$
1

3.0%
 
292

 
305

 
307

 
2

 
225

 
233

 
232

 
(1
)
3.5%
 
189

 
199

 
200

 
1

 
136

 
143

 
142

 
(1
)
Total 15-Year TBAs
 
1,274

 
1,321

 
1,327

 
6

 
281

 
295

 
294

 
(1
)
30-Year TBA securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.0%
 
3,361

 
3,438

 
3,492

 
54

 
3,914

 
3,911

 
3,916

 
5

3.5%
 
1,063

 
1,089

 
1,119

 
30

 
1,497

 
1,536

 
1,539

 
3

4.0%
 
1,030

 
1,097

 
1,104

 
7

 
1,575

 
1,658

 
1,665

 
7

4.5%
 
28

 
30

 
30

 

 
28

 
30

 
30

 

Total 30-Year TBAs
 
5,482

 
5,654

 
5,745

 
91

 
7,014

 
7,135

 
7,150

 
15

Total net TBA securities
 
$
6,756

 
$
6,975

 
$
7,072

 
$
97

 
$
7,295