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SEC Filings

10-Q
AGNC INVESTMENT CORP. filed this Form 10-Q on 11/03/2017
Entire Document
 
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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 September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34057
__________________________________________________
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11871426&doc=11
AGNC INVESTMENT 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
¨
 
 
 
 
 
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý  
The number of shares of the issuer's common stock, $0.01 par value, outstanding as of October 31, 2017 was 391,295,870.
 




AGNC INVESTMENT CORP.
TABLE OF CONTENTS
 


1



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
AGNC INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)

 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets:
 
 
 
Agency securities, at fair value (including pledged securities of $47,997 and $43,943, respectively)
$
51,638

 
$
45,393

Agency securities transferred to consolidated variable interest entities, at fair value (pledged securities)
700

 
818

Credit risk transfer securities, at fair value
717

 
164

Non-Agency securities, at fair value (including pledged securities of $0 and $90, respectively)
36

 
124

U.S. Treasury securities, at fair value (including pledged securities of $0 and $173, respectively)

 
182

REIT equity securities, at fair value
4

 

Cash and cash equivalents
1,098

 
1,208

Restricted cash and cash equivalents
294

 
74

Derivative assets, at fair value
183

 
355

Receivable for securities sold (including pledged securities of $149 and $21, respectively)
521

 
21

Receivable under reverse repurchase agreements
9,226

 
7,716

Goodwill and other intangible assets, net
552

 
554

Other assets
521

 
271

Total assets
$
65,490

 
$
56,880

Liabilities:
 
 
 
Repurchase agreements
$
45,505

 
$
37,858

Federal Home Loan Bank advances

 
3,037

Debt of consolidated variable interest entities, at fair value
380

 
460

Payable for securities purchased
1,373

 

Derivative liabilities, at fair value
62

 
256

Dividends payable
77

 
66

Obligation to return securities borrowed under reverse repurchase agreements, at fair value
9,119

 
7,636

Accounts payable and other liabilities
183

 
211

Total liabilities
56,699

 
49,524

Stockholders' equity:
 
 
 
8.000% Series A Cumulative Redeemable Preferred Stock (aggregate liquidation preference of $0 and $173, respectively)

 
167

7.750% Series B Cumulative Redeemable Preferred Stock (aggregate liquidation preference of $175)
169

 
169

7.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (aggregate liquidation preference of $325 and $0, respectively)
315

 

Common stock - $0.01 par value; 600 shares authorized; 391.3 and 331.0 shares issued and outstanding, respectively
4

 
3

Additional paid-in capital
11,172

 
9,932

Retained deficit
(2,729
)
 
(2,518
)
Accumulated other comprehensive loss
(140
)
 
(397
)
Total stockholders' equity
8,791

 
7,356

Total liabilities and stockholders' equity
$
65,490

 
$
56,880

See accompanying notes to consolidated financial statements.

2



AGNC INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in millions, except per share data)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
Interest income
$
318

 
$
315

 
$
907

 
$
928

Interest expense
140

 
96

 
350

 
296

Net interest income
178

 
219

 
557

 
632

Other gain (loss), net:
 
 
 
 
 
 
 
Gain (loss) on sale of investment securities, net
22

 
61

 
(47
)
 
114

Unrealized gain (loss) on investment securities measured at fair value through net income, net
(31
)
 
(6
)
 
(6
)
 
5

Gain (loss) on derivative instruments and other securities, net
131

 
248

 
(78
)
 
(1,063
)
Management fee income
3

 
4

 
10

 
4

Total other gain (loss), net:
125

 
307

 
(121
)
 
(940
)
Expenses:
 
 
 
 
 
 
 
Management fee expense

 

 

 
52

Compensation and benefits
10

 
9

 
30

 
9

Other operating expenses
7

 
6

 
20

 
27

Total operating expenses
17

 
15

 
50

 
88

Net income (loss)
286

 
511

 
386

 
(396
)
Dividend on preferred stock
9

 
7

 
23

 
21

Issuance costs of redeemed preferred stock
6

 

 
6

 

Net income (loss) available (attributable) to common stockholders
$
271

 
$
504

 
$
357

 
$
(417
)
 
 
 
 
 
 
 
 
Net income (loss)
$
286

 
$
511

 
$
386

 
$
(396
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities, net
90

 
(97
)
 
257

 
1,038

Unrealized gain on derivative instruments, net

 
7

 

 
38

Other comprehensive income (loss)
90

 
(90
)
 
257

 
1,076

Comprehensive income
376

 
421

 
643

 
680

Dividend on preferred stock
9

 
7

 
23

 
21

Issuance costs of redeemed preferred stock
6

 

 
6

 

Comprehensive income available to common stockholders
$
361

 
$
414

 
$
614

 
$
659

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic
364.7

 
331.0

 
347.5

 
332.1

Weighted average number of common shares outstanding - diluted
364.9

 
331.0

 
347.6

 
332.1

Net income (loss) per common share - basic and diluted
$
0.74

 
$
1.52

 
$
1.03

 
$
(1.26
)
Dividends declared per common share
$
0.54

 
$
0.56

 
$
1.62

 
$
1.76

See accompanying notes to consolidated financial statements.

3


AGNC INVESTMENT CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in millions)

 
8.000% Series A Cumulative Redeemable Preferred Stock
 
7.750% Series B Cumulative Redeemable Preferred Stock
 
7.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
 
 
 
Shares
 
Amount
 
Balance, December 31, 2015
$
167

 
$
169

 
$

 
337.5

 
$
3

 
$
10,048

 
$
(2,350
)
 
$
(66
)
 
$
7,971

Net loss

 

 

 

 

 

 
(396
)
 

 
(396
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Unrealized gain on available-for-sale securities, net

 

 

 

 

 

 

 
1,038

 
1,038

Unrealized gain on derivative instruments, net

 

 

 

 

 

 

 
38

 
38

Repurchase of common stock

 

 

 
(6.5
)
 

 
(116
)
 

 

 
(116
)
Preferred dividends declared

 

 

 

 

 

 
(21
)
 


 
(21
)
Common dividends declared

 

 

 

 

 

 
(583
)
 

 
(583
)
Balance, September 30, 2016
$
167

 
$
169

 
$

 
331.0

 
$
3

 
$
9,932

 
$
(3,350
)
 
$
1,010

 
$
7,931

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
$
167

 
$
169

 
$

 
331.0

 
$
3

 
$
9,932

 
$
(2,518
)
 
$
(397
)
 
$
7,356

Net income

 

 

 

 

 

 
386

 

 
386

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

 

 

 

 

 

 

 
257

 
257

Stock-based compensation

 

 

 

 

 
3

 

 

 
3

Issuance of preferred stock

 

 
315

 

 

 

 

 

 
315

Redemption of preferred stock
(167
)
 

 

 

 

 

 
(6
)
 

 
(173
)
Issuance of common stock

 

 

 
60.3

 
1

 
1,237

 

 

 
1,238

Preferred dividends declared

 

 

 

 

 

 
(23
)
 

 
(23
)
Common dividends declared

 

 

 

 

 

 
(568
)
 

 
(568
)
Balance, September 30, 2017
$

 
$
169

 
$
315

 
391.3

 
$
4

 
$
11,172

 
$
(2,729
)
 
$
(140
)
 
$
8,791

See accompanying notes to consolidated financial statements.



4



AGNC INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions) 
 
Nine Months Ended September 30,
 
2017
 
2016
Operating activities:
 
 
 
Net income (loss)
$
386

 
$
(396
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of premiums and discounts on mortgage-backed securities, net
282

 
394

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

 
38

Amortization of intangible assets
3

 
1

Stock-based compensation
3

 
1

(Gain) loss on sale of investment securities, net
47

 
(114
)
Unrealized gain (loss) on investment securities measured at fair value through net income, net
6

 
(5
)
Loss on derivative instruments and other securities, net
78

 
1,063

Decrease in other assets
99

 
37

Increase in accounts payable and other accrued liabilities
31

 
10

Net cash provided by operating activities
935

 
1,029

Investing activities:
 
 
 
Purchases of Agency mortgage-backed securities
(23,823
)
 
(17,275
)
Purchases of credit risk transfer and non-Agency securities
(881
)
 
(36
)
Proceeds from sale of Agency mortgage-backed securities
13,390

 
17,032

Proceeds from sale of credit risk transfer and non-Agency securities
437

 

Principal collections on Agency mortgage-backed securities
5,076

 
5,984

Principal collections on credit risk transfer and non-Agency securities
4

 
13

Payments on U.S. Treasury securities
(10,618
)
 
(2,178
)
Proceeds from U.S. Treasury securities
11,682

 
5,741

Net payments on reverse repurchase agreements
(1,456
)
 
(3,728
)
Net proceeds from (payments on) derivative instruments
38

 
(892
)
Purchases of REIT equity securities
(4
)
 

Proceeds from sale of REIT equity securities

 
39

Purchase of AGNC Mortgage Management, LLC, net of cash acquired

 
(555
)
(Increase) decrease in restricted cash pledged for derivative instruments
(239
)
 
577

Net cash provided by (used in) investing activities
(6,394
)
 
4,722

Financing activities:
 
 
 
Proceeds from repurchase arrangements
294,885

 
195,992

Payments on repurchase agreements
(287,238
)
 
(200,078
)
Proceeds from Federal Home Loan Bank advances

 
2,098

Payments on Federal Home Loan Bank advances
(3,037
)
 
(2,814
)
Payments on debt of consolidated variable interest entities
(80
)
 
(100
)
Net proceeds from preferred stock issuance
315

 

Payment for preferred stock redemption
(173
)
 

Net proceeds from common stock issuances
1,238

 

Payments for common stock repurchases

 
(116
)
Cash dividends paid
(580
)
 
(612
)
Decrease in restricted cash pledged for repurchase agreements
19

 
23

Net cash provided by (used in) financing activities
5,349

 
(5,607
)
Net change in cash and cash equivalents
(110
)
 
144

Cash and cash equivalents at beginning of period
1,208

 
1,110

Cash and cash equivalents at end of period
$
1,098

 
$
1,254

See accompanying notes to consolidated financial statements.

5



AGNC INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Unaudited Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements of AGNC Investment Corp. (referred throughout this report as the "Company," "we," "us" and "our") are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. 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 we are 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. 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 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 income to the extent that we distribute our annual taxable income to our stockholders on a timely basis. It is our intention to distribute 100% of our taxable income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code, which may extend into the subsequent tax year.
We earn income primarily from investing in residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise or a U.S. Government agency ("Agency RMBS") on a leveraged basis. We may also invest in other types of mortgage and mortgage-related securities, such as credit risk transfer ("CRT") securities and non-Agency residential and commercial mortgage-backed securities ("non-Agency RMBS" and "CMBS," respectively), where repayment of principal and interest is not guaranteed by a U.S. Government-sponsored enterprise or U.S. Government agency.
Our principal objective is to provide our stockholders with attractive risk-adjusted returns through a combination of monthly dividends and net book value accretion. We generate income from the interest earned on our investment assets, net of associated borrowing and hedging activities, and net realized gains and losses on our investments and hedging activities. We fund our investments primarily through borrowings structured as repurchase agreements.
Prior to July 1, 2016, we were externally managed by AGNC Management, LLC (our "Manager"). On July 1, 2016, we completed the acquisition of all of the outstanding membership interests of AGNC Mortgage Management, LLC ("AMM"), the parent company of our Manager, from American Capital Asset Management, LLC ("ACAM"), a wholly owned portfolio company of American Capital, Ltd. ("ACAS"). AMM is also the parent company of MTGE Management, LLC, the external manager of MTGE Investment Corp. ("MTGE") (NASDAQ: MTGE). Following the closing of the acquisition of AMM, we became internally managed and are no longer affiliated with ACAS.

Note 3. Summary of Significant Accounting Policies
Investment Securities
The Agency RMBS in which we invest consist of residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") guaranteed by the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") or the Government National Mortgage Association ("Ginnie Mae") (collectively referred to as "GSEs").
CRT securities are risk sharing instruments issued by the GSEs, and similarly structured transactions issued by third party market participants, that transfer a portion of the risk associated with credit losses within pools of conventional residential mortgage

6



loans from the GSEs and/or third parties to private investors. Unlike Agency RMBS, full repayment of the original principal balance of CRT securities is not guaranteed by a GSE or other government agency; rather, "credit risk transfer" is achieved by writing down the outstanding principal balance of the CRT securities if credit losses on a related pool of loans exceed certain thresholds. By reducing the amount that they are obligated to repay to holders of CRT securities, the GSEs and/or other third parties are able to offset credit losses on the related loans.
Non-Agency RMBS and CMBS (together, "Non-Agency MBS") are backed by residential and commercial mortgage loans, respectively, packaged and securitized by a private institution, such as a commercial bank. Non-Agency MBS typically benefit from credit enhancements derived from structural elements, such as subordination, overcollateralization or insurance, but nonetheless carry a higher level of credit exposure than Agency RMBS.
Mortgage-related securities may also include investments in the common stock of other publicly traded mortgage REITs, including MTGE, which invest in Agency and non-Agency securities and/or other real estate related assets. As of September 30, 2017, our investments in REIT equity securities consisted solely of MTGE common stock.
Accounting Standards Codification ("ASC") Topic 320, Investments—Debt and Equity Securities, requires that at the time of purchase, we designate a security as held-to-maturity, available-for-sale or trading, depending on our ability and intent to hold such security to maturity. Alternatively, we may elect the fair value option of accounting for such securities pursuant to ASC Topic 825, Financial Instruments. All of our securities are reported at fair value as they have either been designated as available-for-sale or trading or we have elected the fair value option of accounting. Unrealized gains and losses on securities classified as available-for-sale are reported in accumulated other comprehensive income (loss) ("OCI"). Unrealized gains and losses on securities classified as trading or for which we elected the fair value option are reported in net income through other gain (loss) during the period in which they occur. Upon the sale of a security designated as available-for-sale, we determine the cost of the security and the amount of unrealized gains or losses to reclassify out of accumulated OCI into earnings based on the specific identification method.
Prior to fiscal year 2017, we primarily designated our investment securities as available-for-sale. On January 1, 2017, we began electing the fair value option of accounting for all investment securities acquired after fiscal year 2016. In our view, this election simplifies the accounting for investment securities and more appropriately reflects the results of our operations for a particular reporting period, as the fair value changes for these assets are presented in a manner consistent with the presentation and timing of the fair value changes of our hedging instruments. We are not permitted to change the designation of securities acquired prior to January 1, 2017; accordingly, such securities will continue to be classified as available-for-sale securities until such time as we receive full repayment of principal or we dispose of the security.
We estimate the fair value of our investment 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. Refer to Note 8 for further discussion of fair value measurements.
We evaluate our investments designated as available-for-sale for other-than-temporary impairment ("OTTI") on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired may involve judgments and assumptions based on subjective and objective factors. When a security is impaired, an OTTI is considered to have occurred if any one of the following three conditions exists as of the financial reporting date: (i) we intend to sell the security (that is, a decision has been made to sell the security), (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (iii) we do not expect to recover the security's amortized cost basis, even if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security. A general allowance for unidentified impairments in a portfolio of securities is not permitted.
Interest Income
Interest income is accrued based on the outstanding principal amount of the investment securities and their contractual terms. Premiums or discounts associated with the purchase of Agency RMBS and non-Agency MBS of high credit quality are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments using the effective interest method in accordance with ASC Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs.
We estimate long-term prepayment speeds of our mortgage securities using a third-party service and market data. Actual and anticipated prepayment experience is reviewed quarterly and effective yields are recalculated when differences arise between (i) our previous estimate of future prepayments and (ii) the actual prepayments to date plus our current estimate of future

7



prepayments. If the actual and estimated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.

At the time we purchase CRT securities and non-Agency MBS that are not of high credit quality, we determine an effective yield based on our estimate of the timing and amount of future cash flows and our cost basis. Our initial cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the impact of default and severity rates on the timing and amount of credit losses. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on inputs and analysis received from external sources, internal models, and our judgment regarding such inputs and other factors. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.
Repurchase Agreements 
We finance the acquisition of securities for our investment portfolio primarily through repurchase transactions under master repurchase agreements. Pursuant to ASC Topic 860, Transfers and Servicing ("ASC 860"), we account for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts (cost), plus accrued interest. Our repurchase agreements typically have maturities of less than one year, but may extend up to five years or more. Interest rates on our repurchase agreements generally correspond to one, three or six month LIBOR plus or minus a fixed spread. The fair value of our repurchase agreements is assumed to equal cost as the interest rates are considered to be at market.
Reverse Repurchase Agreements and Obligation to Return Securities Borrowed under Reverse Repurchase Agreements
We borrow securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our master repurchase agreements (see Derivative Instruments below). We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the balance sheet based on the value of the underlying borrowed securities as of the reporting date. Our reverse repurchase agreements typically have maturities of 30 days or less. The fair value of our reverse repurchase agreements is assumed to equal cost as the interest rates are generally reset daily.
Derivative Instruments
We use a variety of derivative instruments to hedge a portion of our exposure to market risks, including interest rate, prepayment, extension and liquidity risks. The objective of our risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates. The primary instruments that we use are interest rate swaps, options to enter into interest rate swaps ("swaptions"), U.S. Treasury securities and U.S. Treasury futures contracts. We also use forward contracts in the Agency RMBS "to-be-announced" market ("TBA") to invest in and finance Agency securities as well as to periodically reduce our exposure to Agency RMBS.
We account for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). ASC 815 requires an entity to recognize all derivatives as either assets or liabilities in our accompanying consolidated balance sheets and to measure those instruments at fair value.
Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with the counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets. Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Changes in fair value of derivative instruments and periodic settlements related to our derivative instruments are recorded in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.
The use of derivative instruments creates exposure to credit risk relating to potential losses that could be recognized if the counterparties to these instruments fail to perform their obligations under the contracts. Our derivative agreements require that we post or receive collateral to mitigate such risk. We also attempt to minimize our risk of loss by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

8



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 was reclassified from accumulated OCI into interest expense on a straight-line basis over the remaining term of each interest rate swap through December 2016.
Interest rate swap agreements
We use interest rate swaps to hedge the variable cash flows associated with our borrowings made under repurchase agreements. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one, three or six-month LIBOR ("payer swaps") with terms up to 20 years. Our swap agreements are privately negotiated in the over−the−counter ("OTC") market.
Swap agreements entered into after May 2013 are centrally cleared through a registered commodities exchange. We value centrally cleared interest rate swaps using the daily settlement price, or fair value, determined by the clearing exchange based on a pricing model that references observable market inputs, including LIBOR, swap rates and the forward yield curve. Our centrally cleared swaps require that we post an "initial margin" amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement. We also exchange "variation margin" based upon daily changes in fair value, as measured by the exchange. As a result of amendments to rules governing certain central clearing activities, which took effect January 3, 2017, the exchange of variation margin is a settlement of the interest rate swap, as opposed to pledged collateral. Accordingly, beginning in the first quarter of 2017 and in subsequent periods, we account for the receipt or payment of variation margin as a direct reduction to the carrying value of the interest rate swap asset or liability. Variation margin pledged / (received) was previously reported in restricted cash and cash equivalents / (other liabilities) in our consolidated balance sheet.
We value non-centrally cleared swaps using a combination of third-party valuations obtained from pricing services and the swap counterparty. The third-party valuations are model-driven using observable inputs, including LIBOR, swap rates and the forward yield curve. We also consider both our own and our counterparties' nonperformance risk in estimating the fair value of our interest rate swaps. In considering the effect of nonperformance risk, we assess the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty risk is not significant to the overall valuation of these agreements.
Interest rate swaptions
We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates on the performance of our investment portfolio. Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. Our swaption agreements typically provide us the option to enter into a pay-fixed rate interest rate swap ("payer swaptions"). We may also enter into swaption agreements that provide us the option to enter into a receive-fixed interest rate swap ("receiver swaptions").
Our interest rate swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. The premium paid for interest rate swaptions is reported as an asset in our consolidated balance sheets. We estimate the fair value of interest rate swaptions using a combination of inputs from counterparty and third-party pricing models based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option, adjusted for non-performance risk, if any. The difference between the premium paid and the fair value of the swaption is reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid. If we sell or exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap received and the premium paid.
TBA securities
A TBA security is a forward contract for the purchase or sale of Agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency RMBS to be delivered into the contract are not known until shortly before the settlement date. We may choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting TBA position, net settling the offsetting positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date (together referred to as a "dollar roll transaction"). The Agency securities purchased or sold for a forward settlement date are typically priced at a discount to equivalent securities settling in the current month. This difference, or "price drop," is the economic equivalent to interest income on the underlying Agency securities, less

9



an implied funding cost, over the forward settlement period (referred to as "dollar roll income"). Consequently, forward purchases of Agency securities and dollar roll transactions represent a form of off-balance sheet financing.
We account for TBA contracts as derivative instruments since either the TBA contracts do not settle in the shortest period of time possible or we cannot assert that it is probable at inception and throughout the term of the TBA contract that we will physically settle the TBA contract on the settlement date. We account for TBA dollar roll transactions as a series of derivative transactions. Gains, losses and dollar roll income associated with our TBA contracts are recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. We estimate the fair value of TBA securities based on similar methods used to value our Agency RMBS securities.
U.S. Treasury securities
We purchase and sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. We borrow securities to cover short sales of U.S. Treasury securities under reverse repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on our accompanying consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date. Gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.
Loss Contingencies
We evaluate the existence of any pending or threatened litigation or other potential claims against the Company in accordance with ASC Topic 450, Contingencies, which requires that we assess the likelihood and range of potential outcomes of any such matters. We are the defendant in two stockholder derivative lawsuits alleging that certain of our current and former directors and officers breached fiduciary duties and wasted corporate assets in connection with past renewals of the management agreement with our former external Manager and the internalization of our management, which occurred on July 1, 2016. Although the outcomes of these cases cannot be predicted with certainty, we do not believe that these cases have merit or will result in a material liability, and, as of September 30, 2017, we did not accrue a loss contingency related to these matters.
Recent Accounting Pronouncements
We consider the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board. ASUs not listed below were determined to be either not applicable, are not expected to have a significant impact on our consolidated financial statements when adopted, or did not have a significant impact on our consolidated financial statements upon adoption.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606): ASU 2014-09 is a comprehensive revenue recognition standard that supersedes virtually all existing revenue guidance under U.S. GAAP. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. Revenue recognition with respect to financial instruments is not within the scope of ASU 2014-09 and our review of each of our revenue streams indicates that it will not have a significant impact on our consolidated financial statements. ASU 2014-09 is effective on January 1, 2018.
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Allowances for credit losses on available-for-sale debt securities will be recognized, rather than direct reductions in the amortized cost of the investments. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. ASU 2016-13 is not expected to have a significant impact on our consolidated financial statements.
ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash: ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective on January 1, 2018 and is not expected to have a significant impact on our consolidated financial statements.


10



Note 4. Investment Securities
As of September 30, 2017 and December 31, 2016, our investment portfolio consisted of $53.1 billion and $46.5 billion of investment securities, at fair value, respectively, and $19.4 billion and $11.2 billion of TBA securities, at fair value, respectively. Our TBA position is reported at its net carrying value of $(24) million and $(147) million as of September 30, 2017 and December 31, 2016, respectively, in derivative assets / (liabilities) on our accompanying consolidated balance sheets. The net carrying value of our TBA position represents the difference between the fair value of the underlying Agency security in the TBA contract and the cost basis or the forward price to be paid or received for the underlying Agency security.
As of September 30, 2017 and December 31, 2016, our investment securities had a net unamortized premium balance of $2.4 billion and $2.1 billion, respectively, including interest and principal-only securities.
The following tables summarize our investment securities as of September 30, 2017 and December 31, 2016, excluding TBA securities, (dollars in millions). Note 6 contains details of our TBA securities as of each of these respective dates.
 
 
September 30, 2017
 
December 31, 2016
Investment Securities
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Agency RMBS:
 
 
 
 
 
 
 
 
Fixed rate
 
$
51,275

 
$
51,104

 
$
45,145

 
$
44,736

Adjustable rate
 
304

 
311

 
371

 
379

CMO
 
669

 
677

 
796

 
801

Interest-only and principal-only strips
 
225

 
246

 
268

 
295

Total Agency RMBS
 
52,473

 
52,338

 
46,580

 
46,211

Non-Agency RMBS
 
8

 
7

 
102

 
101

CMBS
 
28

 
29

 
23

 
23

CRT securities
 
697

 
717

 
161

 
164

Total investment securities
 
$
53,206

 
$
53,091

 
$
46,866

 
$
46,499

 
 
September 30, 2017
 
 
Agency RMBS
 
Non-Agency
 
 
 
 
Investment Securities
 
Fannie Mae
 
Freddie Mac
 
Ginnie
Mae
 
RMBS
 
CMBS
 
CRT
 
Total
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par value
 
$
25,724

 
$
8,244

 
$
36

 
$
7

 
$

 
$

 
$
34,011

Unamortized discount
 
(26
)
 
(3
)
 

 

 

 

 
(29
)
Unamortized premium
 
1,183

 
447

 

 

 

 

 
1,630

Amortized cost
 
26,881

 
8,688

 
36

 
7

 

 

 
35,612

Gross unrealized gains
 
174

 
41

 
1

 

 

 

 
216

Gross unrealized losses
 
(244
)
 
(112
)
 

 

 

 

 
(356
)
Total available-for-sale securities, at fair value
 
26,811

 
8,617

 
37

 
7

 

 

 
35,472

Securities remeasured at fair value through earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par value
 
11,260

 
4,826

 

 

 
29

 
669

 
16,784

Unamortized discount
 
(36
)
 

 

 

 
(1
)
 

 
(37
)
Unamortized premium
 
580

 
239

 

 

 

 
28

 
847

Amortized cost
 
11,804

 
5,065

 

 

 
28

 
697

 
17,594

Gross unrealized gains
 
37

 
7

 

 

 
1

 
21

 
66

Gross unrealized losses
 
(26
)
 
(14
)
 

 

 

 
(1
)
 
(41
)
Total securities remeasured at fair value through earnings
 
11,815

 
5,058

 

 

 
29

 
717

 
17,619

Total securities, at fair value
 
$
38,626

 
$
13,675

 
$
37

 
$
7

 
$
29

 
$
717

 
$
53,091

Weighted average coupon as of September 30, 2017
 
3.65
%
 
3.68
%
 
2.78
%
 
2.50
%
 
6.55
%
 
5.10
%
 
3.67
%
Weighted average yield as of September 30, 2017 1
 
2.82
%
 
2.81
%
 
2.01
%
 
3.03
%
 
7.31
%
 
4.61
%
 
2.85
%
 ________________________
1.
Incorporates a weighted average future constant prepayment rate assumption of 9% based on forward rates as of September 30, 2017.


11



 
 
December 31, 2016
 
 
Agency RMBS
 
Non-Agency
 
 
 
 
Investment Securities
 
Fannie 
Mae
 
Freddie Mac
 
Ginnie 
Mae
 
RMBS
 
CMBS
 
CRT
 
Total
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par value
 
$
34,244

 
$
10,008

 
$
44

 
$
101

 
$

 
$

 
$
44,397

Unamortized discount
 
(43
)
 
(3
)
 

 

 

 

 
(46
)
Unamortized premium
 
1,518

 
544

 

 
1

 

 

 
2,063

Amortized cost
 
35,719

 
10,549

 
44

 
102

 

 

 
46,414

Gross unrealized gains
 
176

 
48

 
1

 

 

 

 
225

Gross unrealized losses
 
(442
)
 
(179
)
 

 
(1
)
 

 

 
(622
)
Total available-for-sale securities, at fair value
 
35,453

 
10,418

 
45

 
101

 

 

 
46,017

Securities remeasured at fair value through earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par value
 
171

 

 

 

 
24

 
157

 
352

Unamortized discount
 
(35
)
 

 

 

 
(1
)
 

 
(36
)
Unamortized premium
 
118

 
14

 

 

 

 
4

 
136

Amortized cost
 
254

 
14

 

 

 
23

 
161

 
452

Gross unrealized gains
 
28

 
3

 

 

 

 
3

 
34

Gross unrealized losses
 
(3
)
 
(1
)
 

 

 

 

 
(4
)
Total securities remeasured at fair value through earnings
 
279

 
16

 

 

 
23

 
164

 
482

Total securities, at fair value
 
$
35,732

 
$
10,434

 
$
45

 
$
101

 
$
23

 
$
164

 
$
46,499

Weighted average coupon as of December 31, 2016
 
3.59
%
 
3.67
%
 
2.75
%
 
3.42
%
 
6.55
%
 
5.25
%
 
3.61
%
Weighted average yield as of December 31, 2016 1
 
2.77
%
 
2.72
%
 
2.00
%
 
3.27
%
 
7.54
%
 
6.28
%
 
2.77
%
 ________________________
1.
Incorporates a weighted average future constant prepayment rate assumption of 8% based on forward rates as of December 31, 2016.

As of September 30, 2017 and December 31, 2016, our investments in CRT and non-Agency securities had the following credit ratings:
 
 
September 30, 2017
 
December 31, 2016
CRT and Non-Agency Security Credit Ratings 1
 
CRT
 
RMBS
 
CMBS
 
CRT
 
RMBS
 
CMBS
AAA
 
$

 
$
7

 
$

 
$

 
$
99

 
$

BBB
 

 

 
29

 

 

 
23

BB
 
65

 

 

 

 

 

B
 
633

 

 

 
164

 
2

 

Not Rated
 
19

 

 

 

 

 

Total
 
$
717

 
$
7

 
$
29

 
$
164

 
$
101

 
$
23

 ________________________
1.
Represents the lowest of Standard and Poor's ("S&P"), Moody's and Fitch credit ratings, stated in terms of the S&P equivalent rating as of each date.

Our CRT securities reference the performance of loans underlying Agency RMBS issued by Fannie Mae or Freddie Mac, which were subject to their underwriting standards. As of September 30, 2017, our CRT securities had floating rate coupons ranging from 3.7% to 7.6%, referenced to loans originated between 2012 and 2017 with weighted average coupons ranging from 3.6% to 4.3%. As of December 31, 2016, our CRT securities had floating rate coupons ranging from 4.6% to 7.1%, referenced to loans originated between 2015 and 2016 with weighted average coupons ranging from 4.0% to 4.2%.

The actual maturities of our investment securities are generally shorter than their stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic contractual principal payments and principal prepayments. As of September 30, 2017 and December 31, 2016, the weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate investment portfolio was 9% 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 as of September 30, 2017 and December 31, 2016 according to their estimated weighted average life classification (dollars in millions):

12




 
 
September 30, 2017
 
December 31, 2016
Estimated Weighted Average Life of Investment Securities
 
Fair Value
 
Amortized
Cost
 
Weighted
Average
Coupon
 
Weighted
Average
Yield
 
Fair Value
 
Amortized
Cost
 
Weighted
Average
Coupon
 
Weighted
Average
Yield
≥ 1 year and ≤ 3 years
 
$
2,518

 
$
2,481

 
3.89%
 
2.66%
 
$
419

 
$
416

 
4.33%
 
2.27%
> 3 years and ≤ 5 years
 
8,763

 
8,704

 
3.35%
 
2.44%
 
13,601

 
13,509

 
3.38%
 
2.44%
> 5 years and ≤10 years
 
40,234

 
40,453

 
3.75%
 
2.94%
 
30,513

 
30,979

 
3.74%
 
2.89%
> 10 years
 
1,576

 
1,568

 
3.36%
 
3.07%
 
1,966

 
1,962

 
3.17%
 
3.27%
Total
 
$
53,091

 
$
53,206

 
3.68%
 
2.85%
 
$
46,499

 
$
46,866

 
3.61%
 
2.77%

The following table presents the gross unrealized loss and fair values of securities classified as available-for-sale by length of time that such securities have been in a continuous unrealized loss position as of September 30, 2017 and December 31, 2016 (in millions):

 
 
Unrealized Loss Position For
 
 
Less than 12 Months
 
12 Months or More
 
Total
Securities Classified as Available-for-Sale
 
Estimated Fair
Value
 
Unrealized
Loss
 
Estimated
Fair Value
 
Unrealized
Loss
 
Estimated Fair
Value
 
Unrealized
Loss
September 30, 2017
 
$
19,663

 
$
(291
)
 
$
1,972

 
$
(65
)
 
$
21,635

 
$
(356
)
December 31, 2016
 
$
28,397

 
$
(554
)
 
$
1,719

 
$
(68
)
 
$
30,116

 
$
(622
)

We did not recognize any OTTI charges on our investment securities for the nine months ended September 30, 2017 and 2016. 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, 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.

13



Gains and Losses on Sale of Investment Securities
The following table is a summary of our net gain (loss) from the sale of investment securities for the three and nine months ended September 30, 2017 and 2016 by investment classification of accounting (in millions).
 
 
Three Months Ended September 30,
 
 
2017
 
2016
Investment Securities
 
Available-for-Sale
Securities 2
Fair Value Option Securities
Total
 
Available-for-Sale
Securities 2
Fair Value Option Securities
Total
Investment securities sold, at cost
 
$
(3
)
$
(6,016
)
$
(6,019
)
 
$
(6,123
)
$

$
(6,123
)
Proceeds from investment securities sold 1
 
2

6,039

6,041

 
6,184


6,184

Net gain (loss) on sale of investment securities
 
$
(1
)
$
23

$
22

 
$
61

$

$
61

 
 
 
 
 
 
 
 
 
Gross gain on sale of investment securities
 
$

$
28

$
28

 
$
62

$

$
62

Gross loss on sale of investment securities
 
(1
)
(5
)
(6
)
 
(1
)

(1
)
Net gain (loss) on sale of investment securities
 
$
(1
)
$
23

$
22

 
$
61

$

$
61

 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Investment Securities
 
Available-for-Sale
Securities 2
Fair Value Option Securities
Total
 
Available-for-Sale
Securities 2
Fair Value Option Securities
Total
Investment securities sold, at cost
 
$
(5,738
)
$
(8,636
)
$
(14,374
)
 
$
(17,146
)
$

$
(17,146
)
Proceeds from investment securities sold 1
 
5,649

8,678

14,327

 
17,260


17,260

Net gain (loss) on sale of investment securities
 
$
(89
)
$
42

$
(47
)
 
$
114

$

$
114

 
 
 
 
 
 
 
 
 
Gross gain on sale of investment securities
 
$
6

$
48

$
54

 
$
122

$

$
122

Gross loss on sale of investment securities
 
(95
)
(6
)
(101
)
 
(8
)

(8
)
Net gain (loss) on sale of investment securities
 
$
(89
)
$
42

$
(47
)
 
$
114

$

$
114

  ________________________
1.
Proceeds include cash received during the period, plus receivable for investment securities sold during the period as of period end.
2.
See Note 10 for a summary of changes in accumulated OCI.  
Securitizations and Variable Interest Entities
As of September 30, 2017 and December 31, 2016, 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 RMBS. Fannie Mae or Freddie Mac guarantees the payment of interest and principal and acts as the trustee and administrator of their respective securitization trusts. Accordingly, we are not required to provide the beneficial interest holders of the CMO securities any financial or other support. Our maximum exposure to loss related to our involvement with CMO trusts is the fair value of the CMO securities and interest and principal-only securities held by us, less principal amounts guaranteed by Fannie Mae and Freddie Mac.
In connection with our consolidated CMO trusts, we recognized Agency securities with a total fair value and approximate unpaid principal balance of $0.7 billion as of September 30, 2017 and $0.8 billion as of December 31, 2016 and debt with a total fair value and approximate unpaid principal balance of $0.4 billion as of September 30, 2017 and $0.5 billion as of December 31, 2016 in our accompanying consolidated balance sheets. We re-measure our consolidated debt at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Our involvement with the consolidated trusts is limited to the Agency securities transferred by us upon the formation of the trusts and the CMO securities subsequently held by us. There are no arrangements that could require us to provide financial support to the trusts.
As of September 30, 2017 and December 31, 2016, the fair value of our CMO securities and interest and principal-only securities was $0.9 billion and $1.1 billion, respectively, excluding the consolidated CMO trusts discussed above, or $1.2 billion and $1.5 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 $149 million and $182 million as of September 30, 2017 and December 31, 2016, respectively.


14



Note 5. Repurchase Agreements and Other Secured Borrowings
We pledge certain of our securities as collateral under our borrowing agreements with financial institutions. Interest rates on our borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. If the fair value of our pledged securities declines, lenders will typically require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of our pledged securities increases, lenders may release collateral back to us. As of September 30, 2017, we had met all margin call requirements. For additional information regarding our pledged assets, please refer to Note 7.
Repurchase Agreements
As of September 30, 2017 and December 31, 2016, we had $45.5 billion and $37.9 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 September 30, 2017 and December 31, 2016 (dollars in millions):
 
 
September 30, 2017
 
December 31, 2016
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
 
$
21,943

 
1.31
%
 
13

 
$
17,481

 
0.90
 %
 
11

> 1 to ≤ 3 months
 
12,443

 
1.27
%
 
59

 
10,011

 
0.93
 %
 
55

> 3 to ≤ 6 months
 
4,640

 
1.34
%
 
137

 
2,030

 
1.02
 %
 
136

> 6 to ≤ 9 months
 
791

 
1.60
%
 
211

 
1,270

 
0.98
 %
 
214

> 9 to ≤ 12 months
 
1,111

 
1.53
%
 
319

 
1,566

 
1.08
 %
 
299

> 12 to ≤ 24 months
 
1,552

 
1.69
%
 
522

 
1,203

 
1.28
 %
 
538

> 24 to ≤ 36 months
 
2,100

 
1.75
%
 
851

 
1,300

 
1.36
 %
 
865

> 36 to ≤ 48 months
 
925

 
1.77
%
 
1,194

 
2,200

 
1.32
 %
 
1,168

> 48 to < 60 months
 

 

 

 
625

 
1.38
 %
 
1,506

Total Agency repo
 
45,505

 
1.36
%
 
129

 
37,686

 
0.98
 %
 
187

U.S. Treasury repo:
 
 
 
 
 
 
 
 
 
 
 
 
> 1 day to ≤ 1 month
 

 

 

 
172

 
(0.30
)%
 
17

Total
 
$
45,505

 
1.36
%
 
129

 
$
37,858

 
0.98
 %
 
186

As of September 30, 2017 and December 31, 2016, $1.6 billion and $150 million, respectively, of our Agency repurchase agreements matured overnight and none of our repurchase agreements were due on demand.
Federal Home Loan Bank Advances
As of December 31, 2016, we had $3.0 billion of outstanding secured Federal Home Loan Bank ("FHLB") advances, with a weighted average borrowing rate of 0.73%. Our FHLB advances matured in February 2017, coinciding with the termination of our wholly-owned captive insurance subsidiary's FHLB membership in February 2017 pursuant to the Federal Housing Finance Agency's ("FHFA") final rule on FHLB membership released in January 2016. As a result, we had no outstanding secured FHLB advances as of September 30, 2017.

15



Debt of Consolidated Variable Interest Entities
As of September 30, 2017 and December 31, 2016, debt of consolidated VIEs, at fair value, was $380 million and $460 million, respectively, and had a weighted average interest rate of LIBOR plus 41 and 36 basis points, respectively, and a principal balance of $372 million and $452 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 RMBS securitizing the debt of our consolidated VIEs and periodic principal prepayments of such underlying securities. The estimated weighted average life of the debt of our consolidated VIEs as of September 30, 2017 and December 31, 2016 was 5.5 years and 5.8 years, respectively.

Note 6. Derivative and Other Hedging Instruments
We hedge a portion of our interest rate risk by entering into interest rate swaps, interest rate swaptions and U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also utilize TBA securities, options and other types of derivative instruments to hedge a portion of our risk. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivative and other hedging instruments in Note 3.
Derivative and Other Hedging Instrument Assets (Liabilities), at Fair Value
The table below summarizes fair value information about our derivative and other hedging instrument assets/(liabilities) as of September 30, 2017 and December 31, 2016 (in millions):
Derivative and Other Hedging Instruments
 
Balance Sheet Location
 
September 30, 2017
 
December 31, 2016
Interest rate swaps
 
Derivative assets, at fair value
 
$
67

 
$
321

Swaptions
 
Derivative assets, at fair value
 
64

 
22

TBA securities
 
Derivative assets, at fair value
 
23

 
4

U.S. Treasury futures - short
 
Derivative assets, at fair value
 
29

 
8

Total derivative assets, at fair value
 
 
 
$
183

 
$
355

 
 
 
 
 
 
 
Interest rate swaps
 
Derivative liabilities, at fair value
 
$
(15
)
 
$
(105
)
TBA securities
 
Derivative liabilities, at fair value
 
(47
)
 
(151
)
Total derivative liabilities, at fair value
 
 
 
$
(62
)
 
$
(256
)
 
 
 
 
 
 
 
U.S. Treasury securities - long
 
U.S. Treasury securities, at fair value
 
$

 
$
182

U.S. Treasury securities - short
 
Obligation to return securities borrowed under reverse repurchase agreements, at fair value
 
(9,119
)
 
(7,636
)
Total U.S. Treasury securities, net at fair value
 
 
 
$
(9,119
)
 
$
(7,454
)

The following tables summarize certain characteristics of our derivative and other hedging instruments outstanding as of September 30, 2017 and December 31, 2016 (dollars in millions):
 
 
September 30, 2017
 
December 31, 2016
Payer Interest Rate Swaps
 
Notional
Amount
1
 
Average
Fixed Pay 
Rate 2
 
Average
Receive
Rate
 
Average
Maturity
(Years)
 
Notional
Amount
1
 
Average
Fixed Pay 
Rate 2
 
Average
Receive
Rate
 
Average
Maturity
(Years)
≤ 3 years
 
$
19,975

 
1.27%
 
1.31%
 
1.4
 
$
19,775

 
1.16%
 
0.92%
 
1.5
> 3 to ≤ 5 years
 
7,975

 
1.78%
 
1.31%
 
4.1
 
7,450

 
1.62%
 
0.91%
 
4.0
> 5 to ≤ 7 years
 
3,500

 
1.92%
 
1.31%
 
5.7
 
4,725

 
1.89%
 
0.91%
 
5.9
> 7 to ≤ 10 years
 
7,225

 
2.08%
 
1.31%
 
8.8
 
3,325

 
1.90%
 
0.91%
 
9.2
> 10 years
 
3,475

 
2.47%
 
1.31%
 
13.1
 
1,900

 
2.64%
 
0.91%
 
13.8
Total
 
$
42,150

 
1.66%
 
1.31%
 
4.5
 
$
37,175

 
1.48%
 
0.92%
 
3.9
   ________________________
1.
As of September 30, 2017 and December 31, 2016, notional amount includes forward starting swaps of $3.4 billion and $0.6 billion, respectively, with an average forward start date of 0.4 and 1.2 years, respectively, and an average maturity of 7.1 and 10.7 years, respectively.
2.
Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.61% and 1.46% as of September 30, 2017 and December 31, 2016, respectively.

16



Payer Swaptions
 
Option
 
Underlying Payer Swap
Years to Expiration
 
Cost
 
Fair
Value
 
Average
Months to
Expiration
 
Notional
Amount
 
Average Fixed Pay
Rate
 
Average
Receive
Rate
(LIBOR)
 
Average
Term
(Years)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
≤ 1 year
 
$
105

 
$
34

 
5
 
$
3,850

 
2.80%
 
3M
 
9.3
> 1 year ≤ 2 years
 
13

 
10

 
21
 
450

 
2.72%
 
3M
 
10.0
> 2 year ≤ 3 years
 
23

 
20

 
32
 
650

 
2.80%
 
3M
 
10.0
Total
 
$
141

 
$
64

 
10
 
$
4,950

 
2.79%
 
3M
 
9.4
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total ≤ 1 year