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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34057
https://cdn.kscope.io/28189a7f0ccab1d50ae4ccc752225959-agnclogowhitespacinginv1.jpg
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 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  x    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x    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
 
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  x
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Trading Symbol(s)
 
Name of Exchange on Which Registered
Common Stock, par value $0.01 per share
 
AGNC
 
The Nasdaq Global Select Market
 
 
 
 
 
Depositary shares of 7.750% Series B Cumulative Redeemable Preferred Stock
 
AGNCB
 
The Nasdaq Global Select Market
 
 
 
 
 
Depositary shares of 7.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
 
AGNCN
 
The Nasdaq Global Select Market
 
 
 
 
 
Depositary shares of 6.875% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
 
AGNCM
 
The Nasdaq Global Select Market

The number of shares of the issuer's common stock, $0.01 par value, outstanding as of July 31, 2019 was 547,817,953.
 




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)

 
June 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets:
 
 
 
Agency securities, at fair value (including pledged securities of $87,582 and $78,619, respectively)
$
91,140

 
$
82,291

Agency securities transferred to consolidated variable interest entities, at fair value (pledged securities)
411

 
436

Credit risk transfer securities, at fair value (including pledged securities of $269 and $141, respectively)
1,117

 
1,012

Non-Agency securities, at fair value (including pledged securities of $0 and $45, respectively)
603

 
548

U.S. Treasury securities, at fair value (including pledged securities of $1,152 and $0, respectively)
1,152

 
46

Cash and cash equivalents
870

 
921

Restricted cash
789

 
599

Derivative assets, at fair value
116

 
273

Receivable for investment securities sold (including pledged securities of $673 and $489, respectively)
679

 
489

Receivable under reverse repurchase agreements
8,848

 
21,813

Goodwill
526

 
526

Other assets
325

 
287

Total assets
$
106,576

 
$
109,241

Liabilities:
 
 
 
Repurchase agreements
$
86,266

 
$
75,717

Debt of consolidated variable interest entities, at fair value
251

 
275

Payable for investment securities purchased
878

 
1,204

Derivative liabilities, at fair value
63

 
84

Dividends payable
101

 
106

Obligation to return securities borrowed under reverse repurchase agreements, at fair value
7,754

 
21,431

Accounts payable and other liabilities
917

 
518

Total liabilities
96,230

 
99,335

Stockholders' equity:
 
 
 
Preferred Stock - aggregate liquidation preference of $735 and $500, respectively
711

 
484

Common stock - $0.01 par value; 900 shares authorized; 547.8 and 536.3 shares issued and outstanding, respectively
5

 
5

Additional paid-in capital
13,988

 
13,793

Retained deficit
(4,194
)
 
(3,433
)
Accumulated other comprehensive loss
(164
)
 
(943
)
Total stockholders' equity
10,346

 
9,906

Total liabilities and stockholders' equity
$
106,576

 
$
109,241

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 June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
 
 
Interest income
$
693

 
$
414

 
$
1,398

 
$
845

Interest expense
570

 
237

 
1,111

 
443

Net interest income
123

 
177

 
287

 
402

Other gain (loss), net:
 
 
 
 
 
 
 
Gain (loss) on sale of investment securities, net
132

 
(74
)
 
192

 
(76
)
Unrealized gain (loss) on investment securities measured at fair value through net income, net
759

 
(94
)
 
1,819

 
(617
)
Gain (loss) on derivative instruments and other securities, net
(1,438
)
 
298

 
(2,438
)
 
1,036

Management fee income

 
4

 

 
8

Total other gain (loss), net:
(547
)
 
134

 
(427
)
 
351

Expenses:
 
 
 
 
 
 
 
Compensation and benefits
11

 
10

 
21

 
20

Other operating expense
9

 
8

 
18

 
16

Total operating expense
20

 
18

 
39

 
36

Net income (loss)
(444
)
 
293

 
(179
)
 
717

Dividend on preferred stock
13

 
9

 
23

 
18

Net income (loss) available (attributable) to common stockholders
$
(457
)
 
$
284

 
$
(202
)
 
$
699

 
 
 
 
 
 
 
 
Net income (loss)
$
(444
)
 
$
293

 
$
(179
)
 
$
717

Unrealized gain (loss) on investment securities measured at fair value through other comprehensive income (loss), net
379

 
(145
)
 
779

 
(766
)
Comprehensive income (loss)
(65
)
 
148

 
600

 
(49
)
Dividend on preferred stock
13

 
9

 
23

 
18

Comprehensive income (loss) available (attributable) to common stockholders
$
(78
)
 
$
139

 
$
577

 
$
(67
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic
537.8

 
404.9

 
537.2

 
398.2

Weighted average number of common shares outstanding - diluted
537.8

 
405.2

 
537.2

 
398.4

Net income (loss) per common share - basic
$
(0.85
)
 
$
0.70

 
$
(0.38
)
 
$
1.76

Net income (loss) per common share - diluted
$
(0.85
)
 
$
0.70

 
$
(0.38
)
 
$
1.75

Dividends declared per common share
$
0.50

 
$
0.54

 
$
1.04

 
$
1.08

See accompanying notes to consolidated financial statements.

3


AGNC INVESTMENT 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
 
Balance, March 31, 2018
$
484

 
391.3

 
$
4

 
$
11,174

 
$
(2,358
)
 
$
(966
)
 
$
8,338

Net income

 

 

 

 
293

 

 
293

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

 

 

 

 

 
(145
)
 
(145
)
Stock-based compensation

 

 

 
2

 

 

 
2

Issuance of common stock, net of offering cost

 
42.8

 

 
788

 

 

 
788

Preferred dividends declared

 

 

 

 
(9
)
 

 
(9
)
Common dividends declared

 

 

 

 
(225
)
 

 
(225
)
Balance, June 30, 2018
$
484

 
434.1

 
$
4

 
$
11,964

 
$
(2,299
)
 
$
(1,111
)
 
$
9,042

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
$
711

 
536.3

 
$
5

 
$
13,795

 
$
(3,467
)
 
$
(543
)
 
$
10,501

Net loss

 

 

 

 
(444
)
 

 
(444
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net

 

 

 

 

 
379

 
379

Stock-based compensation

 

 

 
3

 

 

 
3

Issuance of common stock, net of offering cost

 
11.4

 

 
190

 

 

 
190

Issuance of preferred stock, net of offering cost

 

 

 

 

 

 

Preferred dividends declared

 

 

 

 
(13
)
 

 
(13
)
Common dividends declared

 

 

 

 
(270
)
 

 
(270
)
Balance, June 30, 2019
$
711

 
547.8

 
$
5

 
$
13,988

 
$
(4,194
)
 
$
(164
)
 
$
10,346

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
484

 
391.3

 
$
4

 
$
11,173

 
$
(2,562
)
 
$
(345
)
 
$
8,754

Net income

 

 

 

 
717

 

 
717

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 


Unrealized loss on available-for-sale securities, net

 

 

 

 

 
(766
)
 
(766
)
Stock-based compensation

 

 

 
3

 

 

 
3

Issuance of common stock, net of offering cost

 
42.8

 

 
788

 

 

 
788

Preferred dividends declared

 

 

 

 
(18
)
 

 
(18
)
Common dividends declared

 

 

 

 
(436
)
 

 
(436
)
Balance, June 30, 2018
$
484

 
434.1

 
$
4

 
$
11,964

 
$
(2,299
)
 
$
(1,111
)
 
$
9,042

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
484

 
536.3

 
$
5

 
$
13,793

 
$
(3,433
)
 
$
(943
)
 
$
9,906

Net loss

 

 

 

 
(179
)
 

 
(179
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale securities, net

 

 

 

 

 
779

 
779

Stock-based compensation

 
0.1

 

 
5

 

 

 
5

Issuance of common stock, net of offering cost

 
11.4

 

 
190

 

 

 
190

Issuance of preferred stock, net of offering cost
227

 

 

 

 

 

 
227

Preferred dividends declared

 

 

 

 
(23
)
 

 
(23
)
Common dividends declared

 

 

 

 
(559
)
 

 
(559
)
Balance, June 30, 2019
$
711

 
547.8

 
$
5

 
$
13,988

 
$
(4,194
)
 
$
(164
)
 
$
10,346

Amounts may not total due to rounding.
See accompanying notes to consolidated financial statements.


4



AGNC INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions) 
 
Six Months Ended June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net income (loss)
$
(179
)
 
$
717

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of premiums and discounts on mortgage-backed securities, net
325

 
143

Amortization of intangible assets

 
1

Stock-based compensation
5

 
3

(Gain) loss on sale of investment securities, net
(192
)
 
76

Unrealized (gain) loss on investment securities measured at fair value through net income, net
(1,819
)
 
617

(Gain) loss on derivative instruments and other securities, net
2,438

 
(1,036
)
Increase in other assets
(36
)
 
(139
)
Increase in accounts payable and other accrued liabilities
22

 
28

Net cash provided by operating activities
564

 
410

Investing activities:
 
 
 
Purchases of Agency mortgage-backed securities
(23,963
)
 
(7,946
)
Purchases of credit risk transfer and non-Agency securities
(904
)
 
(437
)
Proceeds from sale of Agency mortgage-backed securities
12,186

 
4,326

Proceeds from sale of credit risk transfer and non-Agency securities
852

 
380

Principal collections on Agency mortgage-backed securities
4,772

 
3,421

Principal collections on credit risk transfer and non-Agency securities
14

 
4

Payments on U.S. Treasury securities
(22,535
)
 
(4,734
)
Proceeds from U.S. Treasury securities
7,122

 
7,318

Net proceeds from (payments on) reverse repurchase agreements
13,219

 
(2,251
)
Net proceeds from (payments on) derivative instruments
(1,539
)
 
630

Net payments on other investing activity

 
(16
)
Net cash (used in) provided by investing activities
(10,776
)
 
695

Financing activities:
 
 
 
Proceeds from repurchase arrangements
1,904,071

 
702,295

Payments on repurchase agreements
(1,893,522
)
 
(703,752
)
Payments on debt of consolidated variable interest entities
(28
)
 
(42
)
Net proceeds from preferred stock issuance
227

 

Net proceeds from common stock issuance
190

 
788

Cash dividends paid
(587
)
 
(447
)
Net cash provided by (used in) financing activities
10,351

 
(1,158
)
Net change in cash, cash equivalents and restricted cash
139

 
(53
)
Cash, cash equivalents and restricted cash at beginning of period
1,520

 
1,363

Cash, cash equivalents and restricted cash at end of period
$
1,659

 
$
1,310

See accompanying notes to consolidated financial statements.

5



AGNC INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The unaudited interim consolidated financial statements of AGNC Investment Corp. (referred throughout this report as the "Company," "we," "us" and "our") are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.
Our unaudited interim consolidated financial statements include the accounts of all our wholly-owned subsidiaries and variable interest entities for which we are the primary beneficiary. Significant intercompany accounts and transactions have been eliminated.

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 are internally-managed, and our principal objective is to provide our stockholders with attractive risk-adjusted returns through a combination of monthly dividends and tangible net book value accretion. We generate income from the interest earned on our investments, net of associated borrowing and hedging costs, and net realized gains and losses on our investment and hedging activities.
We operate to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). As a REIT, we are required to distribute annually 90% of our taxable income. 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 invest primarily in Agency residential mortgage-backed securities ("Agency RMBS") for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise ("GSE") or a U.S. Government agency. We 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 GSE or U.S. Government agency and in other investments in, or related to, the housing, mortgage or real estate markets. We fund our investments primarily through borrowings structured as repurchase agreements.

Note 3. Summary of Significant Accounting Policies
Investment Securities
Agency RMBS consist of residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") guaranteed by the Federal National Mortgage Association ("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac," and together with Fannie Mae, the "GSEs") or the Government National Mortgage Association ("Ginnie Mae").
CRT securities are risk sharing instruments issued by the GSEs, and similarly structured transactions issued by third-party market participants, that transfer a portion of the risk associated with credit losses within pools of conventional residential mortgage loans from the GSEs and/or third parties to private investors. Unlike Agency RMBS, full repayment of the original principal balance of CRT securities is not guaranteed by a GSE or U.S. Government agency; rather, "credit risk transfer" is achieved by writing down the outstanding principal balance of the CRT securities if credit losses on a related pool of loans exceed certain thresholds. By reducing the amount that they are obligated to repay to holders of CRT securities, the GSEs and/or other third parties offset credit losses on the related loans.

6



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.
All of our securities are reported at fair value on our consolidated balance sheet. 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 securities pursuant to ASC Topic 825, Financial Instruments. 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 newly acquired after such date. Unrealized gains and losses on securities classified as available-for-sale are reported in accumulated other comprehensive income ("OCI"). Unrealized gains and losses on securities for which we elected the fair value option or are classified as trading 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. In our view, the election of the fair value option simplifies the accounting for investment securities and more appropriately reflects the results of our operations for a 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 derivative instruments.
We estimate the fair value of our investment securities based on prices provided by multiple third-party pricing services and non-binding dealer quotes (collectively "pricing sources"). These pricing sources use various valuation approaches, including market and income approaches, using "Level 2" inputs. The pricing sources primarily utilize a matrix pricing technique that interpolates the estimated fair value of our Agency RMBS based on observed quoted prices for forward contracts in the Agency RMBS "to-be-announced" market ("TBA securities") of the same coupon, maturity and issuer, adjusted to reflect the specific characteristics of the pool of mortgages underlying the Agency security, which may include maximum loan balance, loan vintage, loan-to-value ratio, geography and other characteristics as may be appropriate. The pricing sources may also utilize discounted cash flow model-derived pricing techniques to estimate the fair value of investment securities. Such models incorporate market-based discount rate assumptions based on observable inputs such as recent trading activity, credit data, volatility statistics, benchmark interest rate curves and other market data that are current as of the measurement date and may include certain unobservable inputs, such as assumptions of future levels of prepayment, defaults and loss severities. We review the pricing estimates obtained from the pricing sources and perform procedures to validate their reasonableness. Refer to Note 8 for further discussion of fair value measurements.
We evaluate our investments designated as available-for-sale for other-than-temporary impairment ("OTTI") on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired may involve judgments and assumptions based on subjective and objective factors. When a security is impaired, an OTTI is considered to have occurred if any one of the following three conditions exists as of the financial reporting date: (i) we intend to sell the security (that is, a decision has been made to sell the security), (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (iii) we do not expect to recover the security's amortized cost basis, even if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security. A general allowance for unidentified impairments in a portfolio of securities is not permitted.
Interest Income
Interest income is accrued based on the outstanding principal amount of the investment securities and their contractual terms. Premiums or discounts associated with the purchase of Agency RMBS and non-Agency MBS of high credit quality are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments, using the effective interest method in accordance with ASC Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs.
We estimate long-term prepayment speeds of our mortgage securities using a third-party service and market data. The third-party service provider estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, mortgage rates of the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, interest rate volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the third-party estimates. We review our actual and anticipated prepayment experience on at least a quarterly basis and effective yields are recalculated when differences arise between (i) our previously estimated future prepayments and (ii) actual prepayments to date and our current estimated future prepayments. If the actual and estimated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.

7



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 adjusted for credit impairments, if any.
Repurchase Agreements 
We finance the acquisition of securities for our investment portfolio primarily through repurchase transactions under master repurchase agreements. Pursuant to ASC Topic 860, Transfers and Servicing, we account for repurchase transactions as collateralized financing transactions, which are carried at their contractual amounts (cost), plus accrued interest. Our repurchase agreements typically have maturities of less than one year but may extend up to five years or more. Interest rates on our repurchase agreements generally correspond to short-term benchmark rates 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 considered to be at market.
Derivative Instruments
We use a variety of derivative instruments to hedge a portion of our exposure to market risks, including interest rate, prepayment, extension and liquidity risks. The objective of our risk management strategy is to reduce fluctuations in net book value over a range of interest rate scenarios. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates. The primary instruments that we use are interest rate swaps, options to enter into interest rate swaps ("swaptions"), U.S. Treasury securities and U.S. Treasury futures contracts. We also use forward contracts in the Agency RMBS "to-be-announced" market, or TBA securities, to invest in and finance Agency securities and 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. None of our derivative instruments have been designated as hedging instruments for accounting purposes under the provisions of ASC 815, consequently changes in the fair value of our derivative instruments are reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.
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 registered central clearing exchanges and major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.
Interest rate swap agreements
We use interest rate swaps to economically 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 ("payer

8



swaps") based on three-month LIBOR or the overnight index swap rate ("OIS"). Our interest rate swaps typically have terms from one to 10 years but may extend up to 20 years or more. The majority of our interest rate swaps are centrally cleared through a registered commodities exchange. We value centrally cleared interest rate swaps using the daily settlement price, or fair value, determined by the clearing exchange based on a pricing model that references observable market inputs, including current benchmark rates and the forward yield curve. Our centrally cleared swaps require that we post an "initial margin" amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement. We also exchange daily settlements of "variation margin" based upon changes in fair value, as measured by the exchange. Pursuant to rules governing central clearing activities, we recognize variation margin settlements as a direct reduction of the carrying value of the interest rate swap asset or liability.
We value non-centrally cleared swaps using a combination of third-party valuations obtained from pricing services and the swap counterparty. The third-party valuations are model-driven using observable inputs, including LIBOR, swap rates and the forward yield curve. We also consider both our own and our counterparties' nonperformance risk in estimating the fair value of our interest rate swaps. In considering the effect of nonperformance risk, we assess the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty risk is not significant to the overall valuation of these agreements.
Interest rate swaptions
We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates on the performance of our investment portfolio. Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. Our interest rate swaption agreements 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 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 of interest income on the underlying Agency securities, less an implied funding cost, over the forward settlement period (referred to as "dollar roll income"). Consequently, forward purchases of Agency securities and dollar roll transactions represent a form of off-balance sheet financing.
We account for TBA contracts as derivative instruments since either the TBA contracts do not settle in the shortest period of time possible or we cannot assert that it is probable at inception and throughout the term of the TBA contract that we will physically settle the contract on the settlement date. We account for TBA dollar roll transactions as a series of derivative transactions. We estimate the fair value of TBA securities based on similar methods used to value our Agency RMBS securities.
U.S. Treasury securities
We use U.S. Treasury securities and U.S. Treasury futures contracts to mitigate the potential impact of changes in interest rates on the performance of our portfolio. We borrow U.S. Treasury securities under reverse repurchase agreements to cover short sales of U.S. Treasury securities. 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 U.S. Treasury security as of the reporting date. Gains and losses associated with 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.

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Recent Accounting Pronouncements
We consider the applicability and impact of all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board. ASUs not listed below were determined to be either not applicable, are not expected to have a significant impact on our consolidated financial statements when adopted or did not have a significant impact on our consolidated financial statements upon adoption.
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. Rather than a direct reduction of the amortized cost of available-for-sale investments for an other-than-temporary-impairment, an allowance for the portion attributed to expected credit loss is recorded; the remaining loss unrelated to credit, such as due to changes in interest rates, continues to be recorded through OCI. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. ASU 2016-13 is not expected to have a significant impact on our consolidated financial statements.

Note 4. Investment Securities
As of June 30, 2019 and December 31, 2018, our investment portfolio consisted of $93.3 billion and $84.3 billion of investment securities, at fair value, respectively, and $11.2 billion and $7.3 billion of TBA securities, at fair value, respectively. Our TBA position is reported at its net carrying value of $84 million and $70 million as of June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, our investment securities had a net unamortized premium balance of $3.0 billion and $2.9 billion, respectively.
The following tables summarize our investment securities as of June 30, 2019 and December 31, 2018, excluding TBA securities, (dollars in millions). Details of our TBA securities as of each of the respective dates are included in Note 6.
 
 
June 30, 2019
 
December 31, 2018
Investment Securities
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Agency RMBS:
 
 
 
 
 
 
 
 
Fixed rate
 
$
89,384

 
$
90,627

 
$
83,047

 
$
81,753

Adjustable rate
 
186

 
188

 
212

 
213

CMO
 
517

 
524

 
588

 
583

Interest-only and principal-only strips
 
159

 
179

 
172

 
178

Multifamily
 
30

 
33

 

 

Total Agency RMBS
 
90,276

 
91,551

 
84,019

 
82,727

Non-Agency RMBS
 
250

 
262

 
264

 
266

CMBS
 
321

 
341

 
280

 
282

CRT securities
 
1,106

 
1,117

 
1,006

 
1,012

Total investment securities
 
$
91,953

 
$
93,271

 
$
85,569

 
$
84,287



10



 
 
June 30, 2019
 
 
Agency RMBS
 
Non-Agency
 
 
 
 
Investment Securities
 
Fannie Mae
 
Freddie Mac
 
Ginnie
Mae
 
RMBS
 
CMBS
 
CRT
 
Total
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Par value
 
$
15,743

 
$
5,221

 
$
22

 
$

 
$

 
$

 
$
20,986

Unamortized discount
 
(11
)
 
(2
)
 

 

 

 

 
(13
)
Unamortized premium
 
782

 
304

 

 

 

 

 
1,086

Amortized cost
 
16,514

 
5,523

 
22

 

 

 

 
22,059

Gross unrealized gains
 
74

 
14

 
1