NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization
AGNC Investment Corp. (referred throughout this report as the "Company," "we," "us" and "our") was 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 a leading provider of private capital to the U.S. housing market, enhancing liquidity in the residential real estate mortgage markets and, in turn, facilitating home ownership in the U.S. 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 other assets related to the housing, mortgage or real estate markets. We fund our investments primarily through collateralized borrowings structured as repurchase agreements.
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, and we will generally not be subject to U.S. federal or state corporate income tax 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 within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent tax year.
We are internally managed with the principal objective of providing our stockholders with favorable long-term returns on a risk-adjusted basis through attractive monthly dividends. 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.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
Our accompanying consolidated financial statements and related notes have been 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 accompanying consolidated financial statements and related notes are unaudited and 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. The accompanying consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements included in our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
The preparation of consolidated 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 consolidated 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 consolidated 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.
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 synthetically 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.
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, over-collateralization 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"), whereas 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). Upon the sale of a security designated as available-for-sale, we determine the cost of the security and the amount of unrealized gain or loss 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 by presenting the fair value changes for these assets in a manner consistent with the presentation and timing of the fair value changes for our derivative instruments.
We generally recognize gains or losses through net income on available-for-sale securities only if the security is sold; however, if the fair value of a security declines below its amortized cost and we determine that it is more likely than not that we will incur a realized loss on the security when we sell the asset, we will recognize the difference between the amortized cost and the fair value in net income as a component of other gain (loss). Since all of our available-for-sale designated securities consist of Agency RMBS, we do not have an allowance for credit losses. We have not recognized impairment losses on our available-for-sale securities through net income for the periods presented in our consolidated financial statements.
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, primary to secondary mortgage rate spreads, 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 for reasonableness with consideration given to both historical prepayment speeds and current market conditions. If based on our assessment, we believe that the third-party model does not fully reflect our expectations of the current prepayment landscape we may make adjustments to the models. 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 previous estimate of future prepayments and (ii) actual prepayments to date and our current estimate of future prepayments. We are required to record an adjustment in the current period to premium amortization / discount accretion for the cumulative effect of the difference in the effective yields as if the recalculated yield had been in place as of the security's acquisition date 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, collateral call provisions, 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 agreements with our lending counterparties. Repurchase arrangements involve the sale and a simultaneous agreement to repurchase the securities at a
future date. We maintain a beneficial interest in the specific securities pledged during the term of each repurchase arrangement and we receive the related principal and interest payments. Pursuant to ASC Topic 860, Transfers and Servicing, we account for repurchase agreements 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.
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. We may also enter into reverse repurchase agreements to earn a yield on excess cash balances. The securities received as collateral in connection with our reverse repurchase agreements mitigate our credit risk exposure to counterparties. Our reverse repurchase agreements typically have maturities of 30 days or less.
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.
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 swaps") based on a short-term benchmark rate, such as the Secured Overnight Financing Rate ("SOFR") and Overnight Index Swap Rate ("OIS"). Our interest rate swaps typically have terms from one to 10 years. Our interest rate swaps are centrally cleared through a registered commodities exchange. The clearing exchange requires that we post an "initial margin" amount determined by the exchange. The initial margin amount is intended to be set at a level sufficient to protect the exchange from the interest rate swap's maximum estimated single-day price movement and is subject to adjustment based on changes in market volatility and other factors. 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.
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 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.
U.S. Treasury securities and US Treasury futures contracts
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 enter into short-sales of U.S. Treasury securities by borrowing the securities under reverse repurchase agreements and selling them into the market. 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. Treasury futures contracts are standardized contracts that obligate us to sell or buy U.S. Treasury securities for future delivery. 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.
Fair Value Measurements
We determine the fair value of financial instruments based on our estimate of the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. We utilize a three-level valuation hierarchy for disclosure of fair value measurements based upon the transparency of inputs to the valuation of the instrument as of the measurement date. We categorize a financial instrument within the hierarchy based upon the lowest level of input that is significant to the fair value measurement.
The three levels of valuation hierarchy are defined as follows:
•Level 1 Inputs —Quoted prices (unadjusted) for identical unrestricted assets and liabilities in active markets that are accessible at the measurement date.
•Level 2 Inputs —Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 Inputs —Instruments with primarily unobservable market data that cannot be corroborated.
The majority of our financial instruments are classified as Level 2 inputs. The availability of observable inputs can be affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. We typically obtain price estimates from multiple third-party pricing sources, such as pricing services and dealers, or, if applicable, from the registered clearing exchange. We make inquiries of third-party pricing sources to understand the significant inputs and assumptions they used to determine their prices and that they are derived from orderly transactions, particularly during periods of elevated market turbulence and reduced market liquidity. We also review third-party price estimates and perform procedures to validate their reasonableness, including an analysis of the range of estimates for each position, comparison to recent trade activity for similar securities and for consistency with market conditions observed as of the measurement date. While we do not adjust prices we obtain from pricing sources, we will exclude prices for securities from our estimation of fair value if we determine based on our validation procedures and our market knowledge and expertise that the price is significantly different from what observable market data
would indicate and we cannot obtain an understanding from the third-party source as to the significant inputs used to determine the price.
The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis classified as Level 2 inputs. These instruments trade in active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of these markets and the similarity of our instruments to those actively traded enable our pricing sources and us to utilize the observed quoted prices as a basis for formulating fair value measurements.
Investment securities - are valued based on prices obtained from multiple third-party pricing sources. The pricing sources utilize various valuation approaches, including market and income approaches. For Agency RMBS, the pricing sources primarily utilize a matrix pricing technique that interpolates the estimated fair value 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, such as maximum loan balance, loan vintage, loan-to-value ratio, geography and other characteristics as may be appropriate. For other investment securities, the pricing sources primarily utilize discounted cash flow model-derived pricing techniques to estimate the fair value. 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, spread measurements to benchmark 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.
TBA securities - are valued using prices obtained from third-party pricing sources based on pricing models that reference recent trading activity.
Interest rate swaps - are valued 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.
Interest rate swaptions - are valued using prices obtained from the counterparty and other third-party pricing models. The pricing models are based on the 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 based on observable market inputs, adjusted for non-performance risk, if any.
U.S. Treasury securities and futures are valued based on quoted prices for identical instruments in active markets and are classified as Level 1 assets. None of our financial instruments are classified as Level 3 inputs.
Recent Accounting Pronouncements
We consider the applicability and impact of all ASUs issued by the FASB. There are no unadopted ASUs that are expected to have a significant impact on our consolidated financial statements when adopted or other recently adopted ASUs that had a significant impact on our consolidated financial statements upon adoption.
Note 3. Investment Securities
As of March 31, 2023 and December 31, 2022, our investment portfolio consisted of $46.4 billion and $40.9 billion investment securities, at fair value, respectively, and $10.4 billion and $18.6 billion net TBA securities, at fair value, respectively. Our TBA position is reported at its net carrying value totaling $10 million and $167 million as of March 31, 2023 and December 31, 2022, 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 security and the cost basis or the forward price to be paid or received for the underlying security.
As of March 31, 2023 and December 31, 2022, our investment securities had a net unamortized premium balance of $1.5 billion and $1.5 billion, respectively.
The following tables summarize our investment securities as of March 31, 2023 and December 31, 2022, excluding TBA securities and other mortgage credit investments (dollars in millions). Details of our TBA securities are included in Note 5. As of March 31, 2023 and December 31, 2022, we had other mortgage credit investments of $25 million, which we account for under the equity method of accounting.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 | | December 31, 2022 |
| Investment Securities | | Amortized
Cost | | Fair Value | | Amortized
Cost | | Fair Value |
| Agency RMBS: | | | | | | | | |
| Fixed rate | | $ | 47,924 | | | $ | 44,754 | | | $ | 43,046 | | | $ | 39,169 | |
| Adjustable rate | | 122 | | | 119 | | | 126 | | | 122 | |
| CMO | | 129 | | | 123 | | | 136 | | | 129 | |
| Interest-only and principal-only strips | | 74 | | | 69 | | | 77 | | | 70 | |
| Total Agency RMBS | | 48,249 | | | 45,065 | | | 43,385 | | | 39,490 | |
Non-Agency RMBS 1 | | 67 | | | 53 | | | 111 | | | 90 | |
| CMBS | | 484 | | | 452 | | | 605 | | | 567 | |
| CRT securities | | 775 | | | 769 | | | 779 | | | 757 | |
| Total investment securities | | $ | 49,575 | | | $ | 46,339 | | | $ | 44,880 | | | $ | 40,904 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 |
| | Agency RMBS | | Non-Agency 1 | | | | |
| Investment Securities | | Fannie Mae | | Freddie Mac | | Ginnie
Mae | | RMBS | | CMBS | | CRT | | Total |
| Available-for-sale securities: | | | | | | | | | | | | | | |
Par value | | $ | 4,494 | | | $ | 1,367 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,862 | |
Unamortized discount | | (1) | | | — | | | — | | | — | | | — | | | — | | | (1) | |
Unamortized premium | | 246 | | | 79 | | | — | | | — | | | — | | | — | | | 325 | |
Amortized cost | | 4,739 | | | 1,446 | | | 1 | | | — | | | — | | | — | | | 6,186 | |
Gross unrealized gains | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Gross unrealized losses | | (400) | | | (130) | | | — | | | — | | | — | | | — | | | (530) | |
| Total available-for-sale securities, at fair value | | 4,339 | | | 1,316 | | | 1 | | | — | | | — | | | — | | | 5,656 | |
| Securities remeasured at fair value through earnings: | | | | | | | | | | | | | | |
Par value | | 26,543 | | | 14,387 | | | 2 | | | 69 | | | 490 | | | 770 | | | 42,261 | |
Unamortized discount | | (57) | | | (36) | | | — | | | (4) | | | (8) | | | (6) | | | (111) | |
Unamortized premium | | 841 | | | 383 | | | — | | | 2 | | | 2 | | | 11 | | | 1,239 | |
Amortized cost | | 27,327 | | | 14,734 | | | 2 | | | 67 | | | 484 | | | 775 | | | 43,389 | |
Gross unrealized gains | | 30 | | | 26 | | | — | | | — | | | 1 | | | 12 | | | 69 | |
Gross unrealized losses | | (1,924) | | | (786) | | | — | | | (14) | | | (33) | | | (18) | | | (2,775) | |
| Total securities remeasured at fair value through earnings | | 25,433 | | | 13,974 | | | 2 | | | 53 | | | 452 | | | 769 | | | 40,683 | |
| Total securities, at fair value | | $ | 29,772 | | | $ | 15,290 | | | $ | 3 | | | $ | 53 | | | $ | 452 | | | $ | 769 | | | $ | 46,339 | |
Weighted average coupon as of March 31, 2023 | | 3.96 | % | | 4.21 | % | | 4.65 | % | | 4.74 | % | | 6.44 | % | | 9.13 | % | | 4.15 | % |
Weighted average yield as of March 31, 2023 2 | | 3.33 | % | | 3.70 | % | | 2.63 | % | | 4.59 | % | | 5.84 | % | | 7.91 | % | | 3.55 | % |
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1.Amount excludes other mortgage credit investments of $25 million as of March 31, 2023.
2.Incorporates a weighted average future constant prepayment rate assumption of 10.0% based on forward rates as of March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | Agency RMBS | | Non-Agency 1 | | | | |
| Investment Securities | | Fannie
Mae | | Freddie Mac | | Ginnie
Mae | | RMBS | | CMBS | | CRT | | Total |
| Available-for-sale securities: | | | | | | | | | | | | | | |
Par value | | $ | 4,696 | | | $ | 1,535 | | | $ | 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,232 | |
Unamortized discount | | (1) | | | — | | | — | | | — | | | — | | | — | | | (1) | |
Unamortized premium | | 275 | | | 93 | | | — | | | — | | | — | | | — | | | 368 | |
| Amortized cost | | 4,970 | | | 1,628 | | | 1 | | | — | | | — | | | — | | | 6,599 | |
Gross unrealized gains | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Gross unrealized losses | | (500) | | | (172) | | | — | | | — | | | — | | | — | | | (672) | |
| Total available-for-sale securities, at fair value | | 4,470 | | | 1,456 | | | 1 | | | — | | | — | | | — | | | 5,927 | |
| Securities remeasured at fair value through earnings: | | | | | | | | | | | | | | |
| Par value | | 24,231 | | | 11,444 | | | 2 | | | 112 | | | 609 | | | 773 | | | 37,171 | |
| Unamortized discount | | (61) | | | (37) | | | — | | | (4) | | | (8) | | | (6) | | | (116) | |
| Unamortized premium | | 855 | | | 352 | | | — | | | 3 | | | 4 | | | 12 | | | 1,226 | |
| Amortized cost | | 25,025 | | | 11,759 | | | 2 | | | 111 | | | 605 | | | 779 | | | 38,281 | |
| Gross unrealized gains | | 13 | | | 8 | | | — | | | — | | | — | | | 8 | | | 29 | |
| Gross unrealized losses | | (2,307) | | | (937) | | | — | | | (21) | | | (38) | | | (30) | | | (3,333) | |
| Total securities remeasured at fair value through earnings | | 22,731 | | | 10,830 | | | 2 | | | 90 | | | 567 | | | 757 | | | 34,977 | |
| Total securities, at fair value | | $ | 27,201 | | | $ | 12,286 | | | $ | 3 | | | $ | 90 | | | $ | 567 | | | $ | 757 | | | $ | 40,904 | |
Weighted average coupon as of December 31, 2022 | | 3.79 | % | | 3.92 | % | | 4.66 | % | | 4.52 | % | | 6.06 | % | | 8.48 | % | | 3.94 | % |
Weighted average yield as of December 31, 2022 2 | | 3.17 | % | | 3.41 | % | | 2.58 | % | | 4.34 | % | | 6.02 | % | | 7.93 | % | | 3.37 | % |
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1.Amount excludes other mortgage credit investments of $25 million as of December 31, 2022.
2.Incorporates a weighted average future constant prepayment rate assumption of 7.4% based on forward rates as of December 31, 2022.
As of March 31, 2023 and December 31, 2022, our investments in CRT and non-Agency securities had the following credit ratings (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2023 | | December 31, 2022 |
CRT and Non-Agency Security Credit Ratings 1 | | CRT | | RMBS 2 | | CMBS | | CRT | | RMBS 2 | | CMBS |
| AAA | | $ | — | | | $ | — | | | $ | 140 | | | $ | — | | | $ | 9 | | | $ | 184 | |
| AA | | 1 | | | 3 | | | 71 | | | 2 | | | 3 | | | 117 | |
| A | | 16 | | | 3 | | | 33 | | | 16 | | | 13 | | | 38 | |
| BBB | | 85 | | | 22 | | | 71 | | | 91 | | | 40 | | | 65 | |
| BB | | 334 | | | 13 | | | 69 | | | 299 | | | 13 | | | 91 | |
| B | | 58 | | | 2 | | | 53 | | | 72 | | | 2 | | | 58 | |
| Not Rated | | 275 | | | 10 | | | 15 | | | 277 | | | 10 | | | 14 | |
| Total | | $ | 769 | | | $ | 53 | | | $ | 452 | | | $ | 757 | | | $ | 90 | | | $ | 567 | |
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1.Represents the lowest of Standard and Poor's ("S&P"), Moody's, Fitch, DBRS, Kroll Bond Rating Agency ("KBRA") and Morningstar credit ratings, stated in terms of the S&P equivalent rating as of each date.
2.RMBS excludes other mortgage credit investments of $25 million as of March 31, 2023 and December 31, 2022.
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.
The actual maturities of our investment securities are generally shorter than their stated contractual maturities. The actual maturities of our Agency and high credit quality non-Agency RMBS are primarily affected by principal prepayments and to a lesser degree the contractual lives of the underlying mortgages and periodic contractual principal repayments. The actual maturities of our credit-oriented investments are primarily impacted by their contractual lives and default and loss recovery rates. As of March 31, 2023 and December 31, 2022, the weighted average expected constant prepayment rate ("CPR") over the remaining life of our Agency and high credit quality non-Agency RMBS investment portfolio was 10.0% and 7.4%, respectively. Our estimates can differ materially for different securities and thus our individual holdings have a wide range of projected CPRs. The following table summarizes our investments as of March 31, 2023 and December 31, 2022 according to their estimated weighted average life classification (dollars in millions):
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| | | March 31, 2023 | | December 31, 2022 |
Estimated Weighted Average Life of Investment Securities 1 | | Fair Value | | Amortized
Cost | | Weighted
Average
Coupon | | Weighted
Average
Yield | | Fair Value | | Amortized
Cost | | Weighted
Average
Coupon | | Weighted
Average
Yield |
| ≤ 3 years | | $ | 996 | | | $ | 1,017 | | | 5.76% | | 4.85% | | $ | 512 | | | $ | 537 | | | 5.19% | | 4.66% |
| > 3 years and ≤ 5 years | | 4,612 | | | 4,736 | | | 5.26% | | 4.38% | | 2,643 | | | 2,824 | | | 4.57% | | 3.79% |
| > 5 years and ≤10 years | | 37,083 | | | 39,866 | | | 4.00% | | 3.40% | | 30,958 | | | 33,985 | | | 3.96% | | 3.30% |
| > 10 years | | 3,648 | | | 3,956 | | | 3.87% | | 3.69% | | 6,791 | | | 7,534 | | | 3.56% | | 3.43% |
Total | | $ | 46,339 | | | $ | 49,575 | | | 4.15% | | 3.55% | | $ | 40,904 | | | $ | 44,880 | | | 3.94% | | 3.37% |
________________________________
1.Table excludes other mortgage credit investments of $25 million as of March 31, 2023 and December 31, 2022.
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 March 31, 2023 and December 31, 2022 (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Unrealized Loss Position For |
| | | Less than 12 Months | | 12 Months or More | | Total |
| Securities Classified as Available-for-Sale | | Fair
Value | | Unrealized
Loss | |
Fair Value | | Unrealized
Loss | | Fair
Value | | Unrealized
Loss |
March 31, 2023 | | $ | 765 | | | $ | (43) | | | $ | 4,862 | | | $ | (487) | | | $ | 5,627 | | | $ | (530) | |
December 31, 2022 | | $ | 5,846 | | | $ | (665) | | | $ | 52 | | | $ | (7) | | | $ | 5,898 | | | $ | (672) | |
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 months ended March 31, 2023 and 2022 by investment classification of accounting (in millions):
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| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 | | |
| 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 | | $ | (202) | | | $ | (1,672) | | | $ | (1,874) | | | $ | (315) | | | $ | (7,312) | | | $ | (7,627) | | | | | | | |
Proceeds from investment securities sold 1 | | 178 | | | 1,615 | | | 1,793 | | | 315 | | | 6,970 | | | 7,285 | | | | | | | |
| Net gain (loss) on sale of investment securities | | $ | (24) | | | $ | (57) | | | $ | (81) | | | $ | — | | | $ | (342) | | | $ | (342) | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Gross gain on sale of investment securities | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 4 | | | $ | 6 | | | | | | | |
| Gross loss on sale of investment securities | | (24) | | | (58) | | | (82) | | | (2) | | | (346) | | | (348) | | | | | | | |
| Net gain (loss) on sale of investment securities | | $ | (24) | | | $ | (57) | | | $ | (81) | | | $ | — | | | $ | (342) | | | $ | (342) | | | | | | | |
________________________________
1.Proceeds include cash received during the period, plus receivable for investment securities sold during the period as of period end.
2.See Note 9 for a summary of changes in accumulated OCI.
Note 4. Repurchase Agreements and Reverse Repurchase Agreements
Repurchase Agreements
We pledge our securities as collateral under our borrowings structured as repurchase agreements with financial institutions. 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 March 31, 2023, we had met all margin call requirements. For additional information regarding our pledged assets, please refer to Note 6.
As of March 31, 2023 and December 31, 2022, we had $48.4 billion and $36.3 billion, respectively, of repurchase agreements outstanding used to fund our investment portfolio and temporary holdings of U.S. Treasury securities. The terms and conditions of our repurchase agreements are typically negotiated on a transaction-by-transaction basis or subject to a tri-party repo agreement. Our repurchase agreements with original maturities greater than one year may have floating interest rates
based on an index plus or minus a fixed spread. The following table summarizes our borrowings under repurchase agreements by their remaining maturities as of March 31, 2023 and December 31, 2022 (dollars in millions):
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| | | March 31, 2023 | | December 31, 2022 |
| 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 | | $ | 34,391 | | | 4.87 | % | | 10 | | | $ | 26,712 | | | 4.42 | % | | 12 | |
| > 1 to ≤ 3 months | | 7,338 | | | 4.53 | % | | 45 | | | 7,762 | | | 4.48 | % | | 38 | |
| > 3 to ≤ 6 months | | — | | | — | % | | — | | | 1,433 | | | 1.42 | % | | 141 | |
| | | | | | | | | | | | |
| > 9 to ≤ 12 months | | 201 | | | 5.32 | % | | 325 | | | — | | | — | % | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total Agency repo | | 41,930 | | | 4.81 | % | | 18 | | | 35,907 | | | 4.31 | % | | 23 | |
| U.S. Treasury repo: | | | | | | | | | | | | |
| ≤ 1 month | | 6,454 | | | 4.87 | % | | 3 | | | 355 | | | 4.37 | % | | 3 | |
| Total | | $ | 48,384 | | | 4.82 | % | | 16 | | | $ | 36,262 | | | 4.31 | % | | 22 | |
As of March 31, 2023 and December 31, 2022, $12.1 billion and $9.6 billion, respectively, of our Agency repurchase agreements and all of our U.S. Treasury repurchase agreements had an overnight maturity of one business day and none of our repurchase agreements were due on demand. As of March 31, 2023, we had $7.5 billion of forward commitments to enter into repurchase agreements with a weighted average forward start date of 3 days and a weighted average interest rate of 4.94%. As of December 31, 2022, we had $6.4 billion of forward commitments to enter into repurchase agreements, with a weighted average forward start date of 4 days and a weighted average interest rate of 4.38%. As of March 31, 2023 and December 31, 2022, 42% and 49%, respectively, of our repurchase agreement funding was sourced through our wholly-owned captive broker-dealer subsidiary, Bethesda Securities, LLC ("BES"). Amounts sourced through BES include funding from the General Collateral Finance Repo service ("GCF Repo") offered by the Fixed Income Clearing Corporation ("FICC"), which totaled 38% and 48% of our repurchase agreement funding outstanding as of March 31, 2023 and December 31, 2022, respectively.
Reverse Repurchase Agreements
As of March 31, 2023 and December 31, 2022, we had $8.9 billion and $6.6 billion, respectively, of reverse repurchase agreements outstanding used primarily to borrow securities to cover short sales of U.S. Treasury securities, for which we had associated obligations to return borrowed securities at fair value of $8.9 billion and $6.5 billion, respectively. As of March 31, 2023 and December 31, 2022, $2.3 billion and $1.5 billion, respectively, of our reverse repurchase agreements were with the FICC sourced through BES.
Note 5. Derivative and Other Hedging Instruments
For the periods presented, our interest rate based hedges primarily consisted of interest rate swaps, interest rate swaptions, U.S. Treasury securities and U.S. Treasury futures contracts. We also utilized forward contracts, primarily consisting of TBA securities, for the purchase and sale of investment securities. 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 2.
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 March 31, 2023 and December 31, 2022 (in millions):
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| | | | |
| Derivative and Other Hedging Instruments | | Balance Sheet Location | | March 31, 2023 | | December 31, 2022 |
Interest rate swaps 1 | | Derivative assets, at fair value | | $ | — | | | $ | 2 | |
| Swaptions | | Derivative assets, at fair value | | 104 | | | 293 | |
| TBA and forward settling non-Agency securities | | Derivative assets, at fair value | | 125 | | | 266 | |
| U.S. Treasury futures - short | | Derivative assets, at fair value | | — | | | 56 | |
Total derivative assets, at fair value | | | | $ | 229 | | | $ | 617 | |
| | | | | | |
Interest rate swaps 1 | | Derivative liabilities, at fair value | | $ | — | | | $ | — | |
| TBA and forward settling non-Agency securities | | Derivative liabilities, at fair value | | (115) | | | (99) | |
| U.S. Treasury futures - short | | Derivative liabilities, at fair value | | (209) | | | — | |
| SOFR futures contracts - long | | Derivative liabilities, at fair value | | (2) | | | — | |
Credit default swaps 1 | | Derivative liabilities, at fair value | | — | | | — | |
Total derivative liabilities, at fair value | | | | $ | (326) | | | $ | (99) | |
| | | | | | |
| U.S. Treasury securities - long | | U.S. Treasury securities, at fair value | | $ | 6,642 | | | $ | 353 | |
| U.S. Treasury securities - short | | Obligation to return securities borrowed under reverse repurchase agreements, at fair value | | (8,869) | | | (6,534) | |
Total U.S. Treasury securities, net at fair value | | | | $ | (2,227) | | | $ | (6,181) | |
________________________________1.As of March 31, 2023 and December 31, 2022, the net fair value of our interest rate swaps excluding the recognition of variation margin settlements as a direct reduction of carrying value (see Note 2) was a net asset (liability) of $3.7 billion and $4.5 billion, respectively. As of March 31, 2023 and December 31, 2022, the net fair value of our credit default swaps excluding the recognition of variation margin settlements was $(5) million and $(2) million, respectively.
The following tables summarize certain characteristics of our derivative and other hedging instruments outstanding as of March 31, 2023 and December 31, 2022 (dollars in millions):
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| Pay Fixed / Receive Variable Interest Rate Swaps | | March 31, 2023 | | December 31, 2022 |
| Yeats to Maturity | | Notional
Amount | | Average
Fixed Pay
Rate | | Average
Receive
Rate | | Average
Maturity
(Years) | | Notional
Amount | | Average
Fixed Pay
Rate | | Average
Receive
Rate | | Average
Maturity
(Years) |
| ≤ 1 years | | $ | 10,500 | | | 0.14% | | 4.87% | | 0.7 | | $ | 5,250 | | | 0.03% | | 4.30% | | 0.7 |
| > 1 to ≤ 3 years | | 17,750 | | | 0.11% | | 4.86% | | 1.9 | | 22,250 | | | 0.14% | | 4.31% | | 1.9 |
| > 3 to ≤ 5 years | | 9,800 | | | 0.21% | | 4.86% | | 3.6 | | 10,550 | | | 0.22% | | 4.31% | | 3.8 |
| > 5 to ≤ 7 years | | 4,975 | | | 0.46% | | 4.86% | | 6.0 | | 5,625 | | | 0.85% | | 4.30% | | 6.1 |
| > 7 to ≤ 10 years | | 5,550 | | | 2.52% | | 4.87% | | 9.1 | | 3,650 | | | 1.60% | | 4.31% | | 8.4 |
| > 10 years | | 350 | | | 3.33% | | 4.87% | | 14.9 | | 500 | | | 3.54% | | 4.30% | | 10.0 |
| Total | | $ | 48,925 | | | 0.47% | | 4.86% | | 3.3 | | $ | 47,825 | | | 0.37% | | 4.31% | | 3.2 |
| | | | | | | | | | | | | | |
| | |
| Pay Fixed / Receive Variable Interest Rate Swaps by Receive Index (% of Notional Amount) | | March 31, 2023 | | December 31, 2022 |
| SOFR | | 82 | % | | 81 | % |
| OIS | | 18 | % | | 19 | % |
| Total | | 100 | % | | 100 | % |
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| Payer Swaptions | | Option | | Underlying Payer Swap |
| Current Option Expiration Date | | Cost Basis | | Fair Value | | Average
Months to Current Option
Expiration Date | | Notional
Amount | | Average Fixed Pay Rate 1 | | Average
Term
(Years) |
| March 31, 2023 | | | | | | | | | | | | |
| ≤ 1 year | | $ | 26 | | | $ | 67 | | | 10 | | $ | 1,100 | | | 2.57% | | 10.0 |
| > 1 year ≤ 2 years | | 10 | | | 37 | | | 17 | | 500 | | | 2.32% | | 10.0 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total | | $ | 36 | | | $ | 104 | | | 12 | | $ | 1,600 | | | 2.49% | | 10.0 |
| | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | |
| ≤ 1 year | | $ | 26 | | | $ | 145 | | | 6 | | $ | 1,300 | | | 2.04% | | 9.4 |
| > 1 year ≤ 2 years | | 39 | | | 148 | | | 18 | | 1,750 | | | 2.52% | | 10.0 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total | | $ | 65 | | | $ | 293 | | | 13 | | $ | 3,050 | | | 2.32% | | 9.8 |
________________________________
1.Receive index references SOFR.
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U.S. Treasury Securities 1 | | March 31, 2023 | | December 31, 2022 |
| Years to Maturity | | Face Amount Long/(Short) | | Cost Basis | | Fair Value | | Face Amount Long/(Short) | | Cost Basis | | Fair Value |
| ≤ 5 years | | $ | 5,477 | | | $ | 5,509 | | | $ | 5,553 | | | $ | 356 | | | $ | 354 | | | $ | 353 | |
| > 5 year ≤ 7 years | | (1,279) | | | (1,298) | | | (1,093) | | | (745) | | | (747) | | | (658) | |
| > 7 year ≤ 10 years | | (5,929) | | | (5,717) | | | (5,568) | | | (5,532) | | | (5,225) | | | (4,823) | |
| > 10 years | | (1,095) | | | (1,109) | | | (1,119) | | | (1,095) | | | (1,048) | | | (1,053) | |
| Total U.S. Treasury securities | | $ | (2,826) | | | $ | (2,615) | | | $ | (2,227) | | | $ | (7,016) | | | $ | (6,666) | | | $ | (6,181) | |
________________________________
1.As of March 31, 2023 and December 31, 2022, short U.S. Treasury securities totaling $(8.9) billion and $(6.5) billion, at fair value, respectively, had a weighted average yield of 2.95% and 2.80%, respectively. As of March 31, 2023 and December 31, 2022, long U.S. Treasury securities totaling $6.6 billion and $0.4 billion, at fair value, respectively, had a weighted average yield of 3.78% and 3.86%, respectively.
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| U.S. Treasury Futures | | March 31, 2023 | | December 31, 2022 |
| Years to Maturity | | Notional
Amount
Long (Short) | | Cost
Basis | | Fair
Value | | Net Carrying Value 1 | | Notional
Amount
Long (Short) | | Cost
Basis | | Fair
Value | | Net Carrying Value 1 |
| | | | | | | | | | | | | | | | |
| > 5 year ≤ 7 years | | $ | (4,554) | | | $ | (5,088) | | | $ | (5,234) | | | $ | (146) | | | $ | (7,498) | | | $ | (8,463) | | | $ | (8,420) | | | $ | 43 | |
| > 7 year ≤ 10 years | | (655) | | | (768) | | | (793) | | | (25) | | | (901) | | | (1,070) | | | (1,065) | | | 5 | |
| > 10 years | | (691) | | | (869) | | | (907) | | | (38) | | | (814) | | | (1,028) | | | (1,020) | | | 8 | |
| Total U.S. Treasury futures | | $ | (5,900) | | | $ | (6,725) | | | $ | (6,934) | | | $ | (209) | | | $ | (9,213) | | | $ | (10,561) | | | $ | (10,505) | | | $ | 56 | |
________________________________
1.Net carrying value represents the difference between the fair market value and the cost basis (or the forward price to be paid/(received) for the underlying U.S. Treasury security) of the U.S. Treasury futures contract as of period-end and is reported in derivative assets/(liabilities), at fair value in our consolidated balance sheets.
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| | | March 31, 2023 | | December 31, 2022 |
| TBA Securities by Coupon | | Notional
Amount
Long (Short) | | Cost
Basis | | Fair
Value | | Net Carrying Value 1 | | Notional
Amount
Long (Short) | | Cost
Basis | | Fair
Value | | Net Carrying Value 1 |
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| 30-Year TBA securities: | | | | | | | | | | | | | | | | |
| ≤ 2.5% | | (163) | | | (143) | | | (136) | | | 7 | | | 737 | | | 626 | | | 619 | | | (7) | |
| 3.0% - 4.0% | | 567 | | | 524 | | | 538 | | | 14 | | | 1,856 | | | 1,681 | | | 1,679 | | | (2) | |
≥ 4.5% | | 9,992 | | | 10,004 | | | 9,993 | | | (11) | | | 16,457 | | | 16,100 | | | 16,276 | | | 176 | |
| Total 30-Year TBA securities, net | | 10,396 | | | 10,385 | | | 10,395 | | | 10 | | | 19,050 | | | 18,407 | | | 18,574 | | | 167 | |
| Total TBA securities, net | | $ | 10,396 | | | $ | 10,385 | | | $ | 10,395 | | | $ | 10 | | | $ | 19,050 | | | $ | 18,407 | | | $ | 18,574 | | | $ | 167 | |
________________________________
1.Net carrying value represents the difference between the fair market value and the cost basis (or the forward price to be paid/(received) for the underlying Agency security) of the TBA contract as of period-end and is reported in derivative assets/(liabilities), at fair value in our consolidated balance sheets.
As of March 31, 2023 and December 31, 2022, we had $425 million and $215 million, respectively, notional value of centrally cleared credit default swaps ("CDS") outstanding that reference the Markit CDX Investment Grade Index, maturing in June 2028 and June 2027, respectively. Under the terms of our CDS, we pay fixed periodic payments equal to 1% per annum of the notional value and we are entitled to receive payments for qualified credit events. As of March 31, 2023 and December 31, 2022, the CDS had a market value of $(5) million and $(2) million, respectively, and a net carrying value of zero dollars, respectively, net of variation margin settlements. Pursuant to rules governing central clearing activities, we recognize variation margin settlements as a direct reduction of the carrying value of the CDS asset or liability.
As of March 31, 2023, we had $539 million notional value of 3-month SOFR futures contracts (long position) with maturities between September 2023 and March 2025, a market value of $515 million and net carrying value of $(2) million.
Gain (Loss) From Derivative Instruments and Other Securities, Net
The following table summarizes changes in our derivative and other hedge portfolio and their effect on our consolidated statements of comprehensive income for the three months ended March 31, 2023 and 2022 (in millions):
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| Derivative and Other Hedging Instruments | | Beginning
Notional Amount | | Additions | | Settlement, Termination,
Expiration or
Exercise | | Ending
Notional Amount | | | Gain/(Loss) on Derivative Instruments and Other Securities, Net 1 |
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| Three months ended March 31, 2023: | | | | | | | | | | | |
| TBA securities, net | | $ | 19,050 | | | 60,147 | | | (68,801) | | | $ | 10,396 | | | | $ | 112 | |
| | | | | | | | | | | |
| Interest rate swaps - payer | | $ | 47,825 | | | 3,000 | | | (1,900) | | | $ | 48,925 | | | | (232) | |
| Credit default swaps - CDX IG - buy protection | | $ | (215) | | | (710) | | | 500 | | | $ | (425) | | | | (3) | |
| Payer swaptions | | $ | 3,050 | | | — | | | (1,450) | | | $ | 1,600 | | | | (66) | |
| | | | | | | | | | | |
| U.S. Treasury securities - short position | | $ | (7,373) | | | (2,949) | | | 936 | | | $ | (9,386) | | | | (157) | |
| U.S. Treasury securities - long position | | $ | 357 | | | 7,446 | | | (1,243) | | | $ | 6,560 | | | | 75 | |
| U.S. Treasury futures contracts - short position | | $ | (9,213) | | | (7,215) | | | 10,528 | | | $ | (5,900) | | | | (235) | |
| SOFR futures contracts - long position | | $ | — | | | 539 | | | — | | | $ | 539 | | | | (3) | |
| | | | | | | | | | | $ | (509) | |
| | | | | | | | | | | |
| Three months ended March 31, 2022: | | | | | | | | | | | |
| TBA securities, net | | $ | 26,673 | | | 78,634 | | | (85,700) | | | $ | 19,607 | | | | $ | (1,234) | |
| Forward settling non-Agency securities | | $ | 450 | | | — | | | (450) | | | $ | — | | | | — | |
| Interest rate swaps - payer | | $ | 51,225 | | | 2,400 | | | (2,500) | | | $ | 51,125 | | | | 1,957 | |
| Credit default swaps - CDX IG - buy protection | | $ | — | | | (5,470) | | | 2,860 | | | $ | (2,610) | | | | — | |
| Payer swaptions | | $ | 13,000 | | | 1,500 | | | (4,250) | | | $ | 10,250 | | | | 363 | |
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| U.S. Treasury securities - short position | | $ | (9,590) | | | (4,133) | | | 2,861 | | | $ | (10,862) | | | | 605 | |
| U.S. Treasury securities - long position | | $ | 472 | | | 2,251 | | | (2,020) | | | $ | 703 | | | | (54) | |
| U.S. Treasury futures contracts - short position | | $ | (1,500) | | | (6,870) | | | 2,985 | | | $ | (5,385) | | | | 196 | |
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________________________________
1.Amounts exclude other miscellaneous gains and losses and other interest income (expense) recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.
Note 6. Pledged Assets
Our funding agreements require us to fully collateralize our obligations under the agreements based upon our counterparties' collateral requirements and their determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. Our derivative contracts similarly require us to fully collateralize our obligations under such agreements, which will vary over time based on similar factors as well as our counterparties' determination of the value of the derivative contract. We are typically required to post initial margin upon execution of derivative transactions, such as under our interest rate swap agreements and TBA contracts, and subsequently post or receive variation margin based on daily fluctuations in fair value. Our brokerage and custody agreements and the clearing organizations utilized by our wholly-owned captive broker-dealer subsidiary, Bethesda Securities, LLC, also require that we post minimum daily clearing deposits. If we breach our collateral requirements, we will be required to fully settle our obligations under the agreements, which could include a forced liquidation of our pledged collateral.
Our counterparties also apply a "haircut" to our pledged collateral, which means our collateral is valued at slightly less than market value and limits the amount we can borrow against our securities. This haircut reflects the underlying risk of the specific collateral and protects our counterparty against a change in its value. Our agreements do not specify the haircut; rather, haircuts are determined on an individual transaction basis. Consequently, our funding agreements and derivative contracts expose us to credit risk relating to potential losses that could be recognized if our counterparties fail to perform their obligations under such agreements. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings or to registered clearinghouses and U.S. government agencies, and we monitor our positions with individual counterparties. In the event of a default by a counterparty, we may have difficulty obtaining our assets pledged as collateral to such counterparty and may not receive payments as and when due to us under the terms of our derivative agreements. In the case of centrally cleared instruments, we could be exposed to credit risk if the central clearing agency or a clearing member defaults on its respective obligation to perform under the contract. However, we believe that the risk is minimal due to the clearing exchanges' initial and daily mark-to-market margin requirements, clearinghouse guarantee funds and other resources that are available in the event of a clearing member default.
As of March 31, 2023, our maximum amount at risk with any counterparty related to our repurchase agreements, excluding the Fixed Income Clearing Corporation, was less than 4% of our tangible stockholders' equity (or the excess/shortfall of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables). As of March 31, 2023, less than 8% of our tangible stockholder's equity was at risk with the Fixed Income Clearing Corporation.
Assets Pledged to Counterparties
The following tables summarize our assets pledged as collateral under our funding, derivative and brokerage and clearing agreements by type, including securities pledged related to securities sold but not yet settled, as of March 31, 2023 and December 31, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
Assets Pledged to Counterparties 1 | | Repurchase Agreements 2 | | Debt of
Consolidated
VIEs | | Derivative Agreements and Other 3 | | Total |
| Agency RMBS - fair value | | $ | 42,187 | | | $ | 140 | | | $ | 51 | | | $ | 42,378 | |
CRT - fair value | | 747 | | | — | | | — | | | 747 | |
Non-Agency - fair value | | 468 | | | — | | | — | | | 468 | |
U.S. Treasury securities - fair value | | 6,481 | | | — | | | — | | | 6,481 | |
Accrued interest on pledged securities | | 172 | | | — | | | — | | | 172 | |
| Restricted cash | | 260 | | | — | | | 1,604 | | | 1,864 | |
| Total | | $ | 50,315 | | | $ | 140 | | | $ | 1,655 | | | $ | 52,110 | |
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| | December 31, 2022 |
Assets Pledged to Counterparties 1 | | Repurchase Agreements 2 | | Debt of
Consolidated
VIEs | | Derivative Agreements and Other 3 | | Total |
| Agency RMBS - fair value | | $ | 35,765 | | | $ | 144 | | | $ | 203 | | | $ | 36,112 | |
CRT - fair value | | 703 | | | — | | | — | | | 703 | |
Non-Agency - fair value | | 605 | | | — | | | — | | | 605 | |
U.S. Treasury securities - fair value | | 353 | | | — | | | — | | | 353 | |
Accrued interest on pledged securities | | 127 | | | 1 | | | — | | | 128 | |
| Restricted cash | | 211 | | | — | | | 1,105 | | 1,316 | |
| Total | | $ | 37,764 | | | $ | 145 | | | $ | 1,308 | | | $ | 39,217 | |
________________________________
1.Includes repledged assets received as collateral from counterparties and securities sold but not yet settled.
2.Includes $48 million and $49 million of retained interests in our consolidated VIEs pledged as collateral under repurchase agreements as of March 31, 2023 and December 31, 2022, respectively.
3.Includes deposits under brokerage and clearing agreements.
The following table summarizes our securities pledged as collateral under our repurchase agreements by the remaining maturity of our borrowings, including securities pledged related to sold but not yet settled securities, as of March 31, 2023 and December 31, 2022 (in millions). For the corresponding borrowings associated with the following amounts and the interest rates thereon, refer to Note 4.
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| | | March 31, 2023 | | December 31, 2022 |
Securities Pledged by Remaining Maturity of Repurchase Agreements 1,2 | | Fair Value of Pledged Securities | | Amortized
Cost of
Pledged Securities | | Accrued
Interest on
Pledged
Securities | | Fair Value of Pledged Securities | | Amortized
Cost of
Pledged Securities | | Accrued
Interest on
Pledged
Securities |
| ≤ 30 days | | $ | 41,669 | | | $ | 44,064 | | | $ | 143 | | | $ | 27,525 | | | $ | 30,168 | | | $ | 94 | |
| > 30 and ≤ 60 days | | 6,490 | | | 6,943 | | | 22 | | | 7,922 | | | 8,680 | | | 27 | |
| > 60 and ≤ 90 days | | 1,504 | | | 1,559 | | | 5 | | | 240 | | | 252 | | | — | |
| > 90 days | | 209 | | | 235 | | | 1 | | | 1,739 | | | 1,870 | | | 6 | |
| Total | | $ | 49,872 | | | $ | 52,801 | | | $ | 171 | | | $ | 37,426 | | | $ | 40,970 | | | $ | 127 | |
________________________________
1.Includes $48 million and $49 million of retained interests in our consolidated VIEs pledged as collateral under repurchase agreements as of March 31, 2023 and December 31, 2022, respectively.
2.Excludes $11 million of repledged mortgage-backed securities received as collateral from counterparties as of March 31, 2023.
Assets Pledged from Counterparties
As of March 31, 2023 and December 31, 2022, we had assets pledged to us from counterparties as collateral under our reverse repurchase and derivative agreements summarized in the tables below (in millions).
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| | March 31, 2023 | | December 31, 2022 |
| Assets Pledged to AGNC | | Reverse Repurchase Agreements | | Derivative Agreements | | Repurchase Agreements | | Total | | Reverse Repurchase Agreements | | Derivative Agreements | | Repurchase Agreements | | Total |
U.S. Treasury securities - fair value 1 | | $ | 8,923 | | | $ | — | | | $ | 34 | | | $ | 8,957 | | | $ | 6,572 | | | $ | — | | | $ | 28 | | | $ | 6,600 | |
Cash | | — | | | 109 | | | 33 | | | 142 | | | 46 | | | 296 | | | 6 | | | 348 | |
| Total | | $ | 8,923 | | | $ | 109 | | | $ | 67 | | | $ | 9,099 | | | $ | 6,618 | | | $ | 296 | | | $ | 34 | | | $ | 6,948 | |
________________________________
1.As of March 31, 2023 and December 31, 2022, amounts include $8.9 billion and $6.5 billion, respectively, of U.S. Treasury securities received from counterparties that were used to cover short sales of U.S. Treasury securities.
Offsetting Assets and Liabilities
Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of setoff under master netting arrangements (or similar agreements), including in the event of default or in the event of bankruptcy of either party to the transactions. We present our assets and liabilities subject to such arrangements on a gross basis in our consolidated balance sheets. The following tables present information about our assets and liabilities that are subject to master netting arrangements and can potentially be offset on our consolidated balance sheets as of March 31, 2023 and December 31, 2022 (in millions):
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| | Offsetting of Financial and Derivative Assets |
| | | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets Presented in the Consolidated Balance Sheets | | Gross Amounts Not Offset
in the
Consolidated Balance Sheets | | Net Amount |
| | | | | Financial Instruments | | Collateral Received 2 | |
| March 31, 2023 | | | | | | | | | | | | |
Interest rate swap and swaption agreements, at fair value 1 | | $ | 104 | | | $ | — | | | $ | 104 | | | $ | — | | | $ | (104) | | | $ | — | |
TBA and forward settling non-Agency securities, at fair value 1 | | 125 | | | — | | | 125 | | | (115) | | | — | | | 10 | |
| Receivable under reverse repurchase agreements | | 8,929 | | | — | | | 8,929 | | | (8,760) | | | (169) | | | — | |
| Total | | $ | 9,158 | | | $ | — | | | $ | 9,158 | | | $ | (8,875) | | | $ | (273) | | | $ | 10 | |
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| December 31, 2022 | | | | | | | | | | | | |
Interest rate swap and swaption agreements, at fair value 1 | | $ | 295 | | | $ | — | | | $ | 295 | | | $ | — | | | $ | (293) | | | $ | 2 | |
TBA securities, at fair value 1 | | 266 | | | — | | | 266 | | | (99) | | | (167) | | | — | |
| Receivable under reverse repurchase agreements | | 6,622 | | | — | | | 6,622 | | | (4,007) | | | (2,610) | | | 5 | |
| Total | | $ | 7,183 | | | $ | — | | | $ | 7,183 | | | $ | (4,106) | | | $ | (3,070) | | | $ | 7 | |
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| | Offsetting of Financial and Derivative Liabilities |
| | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheets | | Gross Amounts Not Offset
in the
Consolidated Balance Sheets | | Net Amount |
| | | | | Financial Instruments | | Collateral Pledged 2 | |
| March 31, 2023 | | | | | | | | | | | | |
| | | | | | | | | | | | |
TBA securities, at fair value 1 | | $ | 115 | | | $ | — | | | $ | 115 | | | $ | (115) | | | $ | — | | | $ | — | |
| Repurchase agreements | | 48,384 | | | — | | | 48,384 | | | (8,760) | | | (39,624) | | | — | |
| Total | | $ | 48,499 | | | $ | — | | | $ | 48,499 | | | $ | (8,875) | | | $ | (39,624) | | | $ | — | |
| | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | |
| | | | | | | | | | | | |
TBA securities, at fair value 1 | | $ | 99 | | | $ | — | | | $ | 99 | | | $ | (99) | | | $ | — | | | $ | — | |
| Repurchase agreements | | 36,262 | | | — | | | 36,262 | | | (4,007) | | | (32,255) | | | — | |
| Total | | $ | 36,361 | | | $ | — | | | $ | 36,361 | | | $ | (4,106) | | | $ | (32,255) | | | $ | — | |
________________________________
1.Reported under derivative assets / liabilities, at fair value in the accompanying consolidated balance sheets. Refer to Note 5 for a reconciliation of derivative assets / liabilities, at fair value to their sub-components.
2.Includes cash and securities pledged / received as collateral, at fair value. Amounts include repledged collateral. Amounts presented are limited to collateral pledged sufficient to reduce the net amount to zero for individual counterparties, as applicable.
Note 7. Fair Value Measurements
The following table provides a summary of our assets and liabilities that are measured at fair value on a recurring basis, as of March 31, 2023 and December 31, 2022, based on their categorization within the valuation hierarchy (in millions). There were no transfers between valuation hierarchy levels during the periods presented in our accompanying consolidated statements of comprehensive income.
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| | March 31, 2023 | | December 31, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | |
Agency securities | | $ | — | | | $ | 44,925 | | | $ | — | | | $ | — | | | $ | 39,346 | | | $ | — | |
Agency securities transferred to consolidated VIEs | | — | | | 140 | | | — | | | — | | | 144 | | | — | |
Credit risk transfer securities | | — | | | 769 | | | — | | | — | | | 757 | | | — | |
Non-Agency securities | | — | | | 505 | | | — | | | — | | | 657 | | | — | |
U.S. Treasury securities | | 6,642 | | | — | | | — | | | 353 | | | — | | | — | |
Interest rate swaps 1 | | — | | | — | | | — | | | — | | | 2 | | | — | |
Swaptions | | — | | | 104 | | | — | | | — | | | 293 | | | — | |
| TBA securities | | — | | | 125 | | | — | | | — | | | 266 | | | — | |
| | | | | | | | | | | | |
U.S. Treasury futures | | — | | | — | | | — | | | 56 | | | — | | | — | |
| Total | | $ | 6,642 | | | $ | 46,568 | | | $ | — | | | $ | 409 | | | $ | 41,465 | | | $ | — | |
| Liabilities: | | | | | | | | | | | | |
| Debt of consolidated VIEs | | $ | — | | | $ | 92 | | | $ | — | | | $ | — | | | $ | 95 | | | $ | — | |
| Obligation to return U.S. Treasury securities borrowed under reverse repurchase agreements | | 8,869 | | | — | | | — | | | 6,534 | | | — | | | — | |
| | | | | | | | | | | | |
Credit default swaps 1 | | — | | | — | | | — | | | — | | | — | | | — | |
| TBA securities | | — | | | 115 | | | — | | | — | | | 99 | | | — | |
| U.S. Treasury futures | | 209 | | | — | | | — | | | — | | | — | | | — | |
| SOFR Futures | | 2 | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 9,080 | | | $ | 207 | | | $ | — | | | $ | 6,534 | | | $ | 194 | | | $ | — | |
________________________________1.As of March 31, 2023 and December 31, 2022, the net fair value of our interest rate swaps excluding the recognition of variation margin settlements as a direct reduction of carrying value was a net asset (liability) of $3.7 billion and $4.5 billion, respectively, based on "Level 2" inputs. As of March 31, 2023 and December 31, 2022, the net fair value of our credit default swaps excluding the recognition of variation margin settlements was $(5) million and $(2) million, respectively, based on "Level 2" inputs. See Notes 2 and 5 for additional details.
Excluded from the table above are financial instruments reported at cost and other mortgage credit investments reported under the equity method of accounting in our consolidated financial statements. As of March 31, 2023 and December 31, 2022, the fair value of our repurchase agreements approximated cost, as the rates on our outstanding repurchase agreements largely corresponded to prevailing rates observed in the repo market. The fair value of cash and cash equivalents, restricted cash, receivables and other payables were determined to approximate cost as of such dates due to their short duration. We estimate the fair value of these instruments carried at cost using "Level 1" or "Level 2" inputs. As of March 31, 2023 and December 31, 2022, the carrying value of other mortgage credit investments reported under the equity method of accounting was $25 million.
Note 8. Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing (i) net income (loss) available (attributable) to common stockholders by (ii) the sum of our weighted-average number of common shares outstanding and the weighted-average number of vested but not yet issued time and performance-based restricted stock units ("RSUs") outstanding for the period granted under our long-term incentive program to employees and non-employee Board of Directors. Diluted net income (loss) per common share assumes the issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per common share. Our potential common stock equivalents consist of unvested time and performance-based RSUs. The following table presents the computations of basic and diluted net income (loss) per common share for the periods indicated (shares and dollars in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 | | |
| Weighted average number of common shares issued and outstanding | | | | | | 577.6 | | | 522.6 | | | |
| Weighted average number of fully vested restricted stock units outstanding | | | | | | 1.7 | | | 1.7 | | | |
| Weighted average number of common shares outstanding - basic | | | | | | 579.3 | | | 524.3 | | | |
| Weighted average number of dilutive unvested restricted stock units outstanding | | | | | | — | | | — | | | |
| Weighted average number of common shares outstanding - diluted | | | | | | 579.3 | | | 524.3 | | |
| Net income (loss) available (attributable) to common stockholders | | | | | | $ | (181) | | | $ | (676) | | | |
| Net income (loss) per common share - basic | | | | | | $ | (0.31) | | | $ | (1.29) | | | |
| Net income (loss) per common share - diluted | | | | | | $ | (0.31) | | | $ | (1.29) | | | |
For the three months ended March 31, 2023 and 2022, 1.2 million and 1.4 million, respectively, of potentially dilutive unvested time and performance based RSUs outstanding were excluded from the computation of diluted net income (loss) per common share because to do so would have been anti-dilutive for the period.
Note 9. Stockholders' Equity
Preferred Stock
We are authorized to designate and issue up to 10.0 million shares of preferred stock in one or more classes or series. As of March 31, 2023 and December 31, 2022, 13,800, 10,350, 16,100, 23,000 and 6,900 shares of preferred stock were designated as 7.00% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 6.875% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 6.50% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 6.125% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 7.75% Series G Fixed-Rate Reset Cumulative Redeemable Preferred Stock, respectively, (referred to as "Series C, D, E, F and G Preferred Stock", respectively). As of March 31, 2023 and December 31, 2022, 13,000, 9,400, 16,100, 23,000 and 6,000 shares of Series C, D, E, F and G Preferred Stock, respectively, were issued and outstanding. Each share of preferred stock is represented by 1,000 depositary shares. Each share of preferred stock has a liquidation preference of $25,000 per share ($25 per depositary share).
Our preferred stock ranks senior to our common stock with respect to the payment of dividends and the distribution of assets upon a voluntary or involuntary liquidation, dissolution or winding up of the Company. Our preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and each series of preferred stock ranks on parity with one another. Under certain circumstances upon a change of control, our preferred stock is convertible to shares of our common stock. Holders of our preferred stock and depositary shares underlying our preferred stock have no voting rights, except under limited conditions. Beginning on each series' optional redemption date, we may redeem shares at $25.00 per depositary share, plus accumulated and unpaid dividends (whether or not declared), exclusively at our option.
The following table includes a summary of preferred stock depositary shares issued and outstanding as of March 31, 2023 (dollars and shares in millions):
