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Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Exchange on Which Registered
iCommon Stock, par value $0.01 per share
iAGNC
iThe
Nasdaq Global Select Market
iDepositary shares of 7.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
iAGNCN
iThe
Nasdaq Global Select Market
iDepositary shares of 6.875% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
iAGNCM
iThe
Nasdaq Global Select Market
iDepositary shares of 6.50% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
iAGNCO
iThe
Nasdaq Global Select Market
iDepositary shares of 6.125% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
iAGNCP
iThe
Nasdaq Global Select Market
iDepositary shares of 7.75% Series G Fixed-Rate Reset Cumulative Redeemable Preferred Stock
iAGNCL
iThe
Nasdaq Global Select Market
Securities Registered Pursuant to Section 12(g) of the Act: None
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. iYesx No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). iYesx No ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller Reporting Company
i☐
Emerging growth company
i☐
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 i☐ No x
The number of shares of the issuer's common stock, $0.01 par value, outstanding as of July
31, 2023 was i606,077,370.
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
Amortization of premiums and discounts on mortgage-backed securities, net
i165
(i78)
Stock-based
compensation, net
i3
(i2)
Loss on sale of
investment securities, net
i336
i1,288
Unrealized
(gain) loss on investment securities measured at fair value through net income, net
(i231)
i3,519
Gain
on derivative instruments and other securities, net
(i452)
(i3,000)
(Increase)
decrease in other assets
(i36)
i21
Increase
in other liabilities
i45
i30
Net
cash (used in) provided by operating activities
(i35)
i693
Investing
activities:
Purchases of Agency mortgage-backed securities
(i11,138)
(i14,293)
Purchases
of credit risk transfer and non-Agency securities
(i135)
(i761)
Proceeds
from sale of Agency mortgage-backed securities
i3,313
i12,218
Proceeds
from sale of credit risk transfer and non-Agency securities
i534
i548
Principal
collections on Agency mortgage-backed securities
i1,933
i4,145
Principal
collections on credit risk transfer and non-Agency securities
i33
i159
Payments
on U.S. Treasury securities
(i18,861)
(i12,773)
Proceeds
from U.S. Treasury securities
i18,628
i11,151
Net
proceeds from (payments on) reverse repurchase agreements
(i1,156)
i2,055
Net
proceeds from derivative instruments
i620
i2,242
Net
cash (used in) provided by investing activities
(i6,229)
i4,691
Financing
activities:
Proceeds from repurchase arrangements
i1,599,134
i1,129,132
Payments
on repurchase agreements
(i1,593,367)
(i1,133,360)
Payments
on debt of consolidated variable interest entities
(i10)
(i14)
Net
proceeds from common stock issuances
i277
i50
Cash
dividends paid
(i481)
(i427)
Net cash provided by (used in) financing activities
i5,553
(i4,670)
Net
change in cash, cash equivalents and restricted cash
(i711)
i714
Cash,
cash equivalents and restricted cash at beginning of period
i2,334
i1,525
Cash,
cash equivalents and restricted cash at end of period
$
i1,623
$
i2,239
See
accompanying notes to consolidated financial statements.
5
AGNC INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. iOrganization
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 i90%
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 i100% 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. iSummary of Significant Accounting Policies
i
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.
i
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.
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, 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.
i
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.
i
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
7
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.
i
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.
i
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
8
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.
i
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
9
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.
i
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. iInvestment Securities
As of June 30, 2023 and December
31, 2022, our investment portfolio consisted of $i47.8 billion and $i40.9 billion investment securities,
at fair value, respectively, and $i10.2 billion and $i18.6 billion net TBA securities, at fair value, respectively. Our TBA position is reported at its net carrying value totaling $(i92)
million and $i167 million as of June 30, 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 June 30, 2023 and
December 31, 2022, our investment securities had a net unamortized premium balance of $i1.4 billion and $i1.5 billion, respectively.
10
i
The
following tables summarize our investment securities as of June 30, 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 June 30, 2023 and December 31, 2022, we had other mortgage credit investments of $i28 million and $i25
million, respectively, which we account for under the equity method of accounting.
1.Non-Agency
amounts exclude other mortgage credit investments of $i28 million and $i25 million as of June 30, 2023 and December
31, 2022, respectively.
2.Incorporates a weighted average future constant prepayment rate assumption of i9.8% and i7.4% based on forward rates as of June
30, 2023 and December 31, 2022, respectively.
i
As of June 30, 2023 and December 31, 2022, our investments in CRT and non-Agency securities had the following credit ratings (in millions):
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 $i28 million and $i25
million as of June 30, 2023 and December 31, 2022, respectively.
/
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 June 30, 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 i9.8% and i7.4%,
respectively. Our estimates can differ materially for different securities and thus our individual holdings have a wide range of projected CPRs. iThe following table summarizes our investments as of June 30, 2023 and December 31, 2022 according to their estimated weighted average life classification (dollars in millions):
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
$
i911
$
i938
i5.53%
i5.20%
$
i512
$
i537
i5.19%
i4.66%
>
3 years and ≤ 5 years
i4,823
i4,976
i5.39%
i4.61%
i2,643
i2,824
i4.57%
i3.79%
>
5 years and ≤10 years
i39,088
i42,378
i4.17%
i3.62%
i30,958
i33,985
i3.96%
i3.30%
>
10 years
i2,917
i3,114
i4.44%
i4.21%
i6,791
i7,534
i3.56%
i3.43%
Total
$
i47,739
$
i51,406
i4.33%
i3.78%
$
i40,904
$
i44,880
i3.94%
i3.37%
________________________________
1.Table
excludes other mortgage credit investments of $i28 million and $i25 million as of June 30, 2023 and December
31, 2022, respectively.
iThe 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 June 30, 2023 and December 31, 2022 (in millions):
The following table is a summary of our net gain (loss) from the sale of investment securities for the three and six months ended June 30, 2023 and 2022 by investment classification of accounting (in millions):
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.
13
Note 4. iRepurchase
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 June 30, 2023, we had met all margin
call requirements. For additional information regarding our pledged assets, please refer to Note 6.
As of June 30, 2023 and December 31, 2022, we had $i42.0 billion and $i36.3
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. iThe following table summarizes our borrowings under repurchase agreements by their remaining maturities as of June 30, 2023 and December
31, 2022 (dollars in millions):
As
of June 30, 2023 and December 31, 2022, $i12.6 billion and $i9.6 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 June 30, 2023, we had $i11.7 billion of forward commitments to enter into repurchase agreements with a weighted average forward start date of i3
days and a weighted average interest rate of i5.19%. As of December 31, 2022, we had $i6.4 billion of forward commitments to enter into repurchase agreements, with a weighted
average forward start date of i4 days and a weighted average interest rate of i4.38%. As of June 30, 2023 and December 31, 2022, i47%
and i49%, 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 i43%
and i48% of our repurchase agreement funding outstanding as of June 30, 2023 and December 31, 2022, respectively.
Reverse Repurchase Agreements
As of June 30, 2023 and December 31, 2022, we had $8.0 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 $8.0 billion and $6.5 billion, respectively. As of June 30, 2023 and December 31, 2022, $i2.7 billion and $i1.5
billion, respectively, of our reverse repurchase agreements were with the FICC sourced through BES.
Note 5. iDerivative 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.
14
Derivative and Other Hedging Instrument Assets (Liabilities), at Fair Value
i
The
table below summarizes fair value information about our derivative and other hedging instrument assets/(liabilities) as of June 30, 2023 and December 31, 2022 (in millions):
Obligation to return securities borrowed under reverse repurchase agreements, at fair value
(i7,970)
(i6,534)
Total
U.S. Treasury securities, net at fair value
$
(i6,447)
$
(i6,181)
________________________________
1.As
of June 30, 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 $i5.1 billion and $i4.5
billion, respectively. As of June 30, 2023 and December 31, 2022, the net fair value of our credit default swaps excluding the recognition of variation margin settlements was $(i11) million and $(i2)
million, respectively.
/i
The following tables summarize certain characteristics of our derivative and other hedging instruments outstanding as of June 30, 2023 and December 31, 2022 (dollars in millions):
1.As
of June 30, 2023 and December 31, 2022, short U.S. Treasury securities totaling $(8.0) billion and $(6.5) billion, at fair value, respectively, had a weighted average yield of i3.17% and i2.80%, respectively. As of June
30, 2023 and December 31, 2022, long U.S. Treasury securities totaling $i1.5 billion and $i0.4 billion, at fair value, respectively, had a weighted average yield of i3.72%
and i3.86%, respectively.
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.
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 June 30, 2023, we had a two-year swap equivalent SOFR futures contract long notional position of $i1,334
million, with a net carrying value of $(i19) million.
As of June 30, 2023 and December 31, 2022, we had $i710
million and $i215 million, respectively, notional value of centrally cleared credit default swaps ("CDS") outstanding that reference the Markit CDX Investment Grade or High Yield 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 June 30, 2023 and December 31, 2022, the CDS had a market value of $(i11)
million and $(i2) million, respectively, and a net carrying value of zero dollars, 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.
Gain (Loss) From Derivative Instruments and Other Securities, Net
i
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 and six months ended June 30, 2023 and 2022 (in millions):
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
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. iPledged 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.
18
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 June 30, 2023, our maximum amount at risk with any counterparty related to our repurchase agreements, excluding the Fixed Income Clearing Corporation, was less than i4%
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 June 30, 2023, less than i8% of our tangible stockholder's equity was at risk with the Fixed Income Clearing Corporation.
Assets Pledged to Counterparties
i
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 June 30, 2023 and December 31, 2022 (in millions):
1.Includes
repledged assets received as collateral from counterparties and securities sold but not yet settled.
2.Includes $i45 million and $i49
million of retained interests in our consolidated VIEs pledged as collateral under repurchase agreements as of June 30, 2023 and December 31, 2022, respectively.
3.Includes deposits under brokerage and clearing agreements.
/
19
i
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 June 30, 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.
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
$
i38,323
$
i41,383
$
i148
$
i27,525
$
i30,168
$
i94
>
30 and ≤ 60 days
i4,523
i4,793
i17
i7,922
i8,680
i27
>
60 and ≤ 90 days
i275
i286
i1
i240
i252
i—
>
90 days
i238
i270
i1
i1,739
i1,870
i6
Total
$
i43,359
$
i46,732
$
i167
$
i37,426
$
i40,970
$
i127
________________________________
1.Includes
$i45 million and $i49 million of
retained interests in our consolidated VIEs pledged as collateral under repurchase agreements as of June 30, 2023 and December 31, 2022, respectively.
2.Excludes $i2 million of repledged mortgage-backed securities received as collateral from counterparties as of June 30, 2023.
/
Assets
Pledged from Counterparties
i
As of June 30, 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).
1.As
of June 30, 2023 and December 31, 2022, amounts include $8.0 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. iiThe
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 June 30, 2023 and December 31, 2022 (in millions):/
20
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
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. iFair
Value Measurements
iThe following table provides a summary of our assets and liabilities that are measured at fair value on a recurring basis, as of June 30, 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.
Agency
securities transferred to consolidated VIEs
—
i131
—
—
i144
—
Credit
risk transfer securities
—
i711
—
—
i757
—
Non-Agency
securities
—
325
—
—
657
—
U.S. Treasury securities
i1,523
—
—
i353
—
—
Interest
rate swaps 1
—
i3
—
—
i2
—
Swaptions
—
i129
—
—
i293
—
TBA
securities
—
i5
—
—
i266
—
U.S.
Treasury futures
i97
—
—
i56
—
—
Total
$
i1,620
$
i47,876
$
—
$
i409
$
i41,465
$
—
Liabilities:
Debt
of consolidated VIEs
$
—
$
i87
$
—
$
—
$
i95
$
—
Obligation
to return U.S. Treasury securities borrowed under reverse repurchase agreements
i7,970
—
—
i6,534
—
—
Credit
default swaps 1
—
—
—
—
—
—
TBA securities
—
i97
—
—
i99
—
U.S.
Treasury futures
i1
—
—
i—
—
—
SOFR
Futures
i19
—
—
i—
—
—
Total
$
i7,990
$
i184
$
—
$
i6,534
$
i194
$
—
________________________________
1.As
of June 30, 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 $i5.1 billion and $i4.5
billion, respectively, based on "Level 2" inputs. As of June 30, 2023 and December 31, 2022, the net fair value of our credit default swaps excluding the recognition of variation margin settlements was $(i11) million and $(i2)
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 June 30, 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 June 30, 2023 and December 31, 2022, the carrying value of other mortgage credit investments reported under the equity method of accounting was $i28 million and $i25
million, respectively.
Note 8. iNet 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):
Weighted average number of common shares issued and outstanding
i597.1
i524.7
i587.4
i523.7
Weighted
average number of fully vested restricted stock units outstanding
i1.7
i1.5
i1.7
i1.6
Weighted
average number of common shares outstanding - basic
i598.8
i526.2
i589.1
i525.3
Weighted
average number of dilutive unvested restricted stock units outstanding
i0.9
i—
i1.0
i—
Weighted
average number of common shares outstanding - diluted
i599.7
i526.2
i590.1
i525.3
Net
income (loss) available (attributable) to common stockholders
$
i255
$
(i459)
$
i74
$
(i1,135)
Net
income (loss) per common share - basic
$
i0.43
$
(i0.87)
$
i0.13
$
(i2.16)
Net
income (loss) per common share - diluted
$
i0.43
$
(i0.87)
$
i0.13
$
(i2.16)
/
For
the three and six months ended June 30, 2022, i0.9 million and i1.1
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. iStockholders' Equity
Preferred Stock
We are authorized to designate
and issue up to i10.0 million shares of preferred stock in one or more classes or series. As of June 30, 2023 and December 31, 2022, i13,800,
i10,350, i16,100, i23,000
and i6,900 shares of preferred stock were designated as i7.00% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, i6.875%
Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, i6.50% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, i6.125% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and i7.75%
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 June 30, 2023 and December 31, 2022, i13,000, i9,400,
i16,100, i23,000 and i6,000
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 $i25.00 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 June 30, 2023 (dollars and shares in millions):
1.The
depositary shares underlying our preferred stock accrue dividends at an initial annual fixed rate of the $25.00 liquidation preference per depositary share from the issuance date up to, but not including, the fixed-to-floating rate or fixed-rate-reset conversion date; thereafter, dividends will accrue on a floating rate or fixed-rate-reset basis equal to the conversion rate plus a fixed spread.
2.The Series C per annum dividend rate represents the dividend rate in effect as of June 30, 2023.
3.The Series C dividend accrues at a rate equal to the 3-Month CME Term SOFR plus 0.26161%, plus a spread of i5.111%,
per annum, resetting quarterly in accordance with the certificate of designations for such series and the Adjustable Interest Rate (LIBOR) Act of 2021 (the “LIBOR Act”). At the conclusion of the fixed rate period (the conversion date) for each of the Series D, E, and F Preferred Stock, the dividend for such series
/
23
will accrue at a rate equal to the 3-Month CME Term SOFR plus 0.26161%, plus a spread of i4.332%,
i4.993% and i4.697%, respectively, per annum, resetting quarterly in accordance with the certificate of designations for such series and the LIBOR Act. At the conclusion of the fixed rate period for the Series
G Preferred Stock, the dividend will accrue at a floating rate equal to the 5-Year US Treasury rate, plus a spread of i4.39%, per annum and will reset in accordance with the certificate of designations for such series.
4.Shares may be redeemed prior to our optional redemption date under certain circumstances intended to preserve our qualification as a REIT for U.S federal income tax purposes.
At-the-Market Offering Program
We are authorized
by our Board of Directors to enter into agreements with sales agents to publicly offer and sell shares of our common stock in privately negotiated and/or at-the-market transactions from time-to-time up to a maximum aggregate offering price of our common stock. iDuring the three and six months ended June 30, 2023, we sold i10.7
million and i27.8 million shares, respectively, of our common stock under the sales agreements for proceeds of $i106 million and $i277
million, respectively, or $i9.86 and $i9.92 per common share, respectively, net of offering costs. As of June 30, 2023, shares of our common stock with an aggregate offering price of $i0.4
billion remained authorized for issuance under this program through June 11, 2024./
Common Stock Repurchase Program
We are authorized by our Board of Directors to repurchase shares of our common stock in open market or through privately negotiated transactions or pursuant to a trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As of June 30, 2023, shares of our common stock with an aggregate repurchase price of $i1
billion remained authorized for repurchase through December 31, 2024.
Accumulated Other Comprehensive Income (Loss)
iThe following table summarizes changes to accumulated OCI for the three and six months ended June 30, 2023 and 2022 (in millions):
Three
Months Ended
June 30,
Six Months Ended
June 30,
Accumulated Other Comprehensive Income (Loss)
2023
2022
2023
2022
Beginning Balance
$
(i530)
$
(i190)
$
(i672)
$
i301
OCI
before reclassifications
(i89)
(i269)
i29
(i760)
Net
loss amounts for available-for-sale securities reclassified from accumulated OCI to realized gain (loss) on sale of investment securities, net
i24
i24
i48
i24
Ending
Balance
$
(i595)
$
(i435)
$
(i595)
$
(i435)
24
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of AGNC Investment Corp.'s consolidated financial statements with a narrative from the perspective of management and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for quarterly period ended June 30, 2023. Our MD&A is presented in the following sections:
•Executive Overview
•Financial Condition
•Results of Operations
•Liquidity
and Capital Resources
•Off-Balance Sheet Arrangements
•Forward-Looking Statements
EXECUTIVE OVERVIEW
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") on a leveraged basis. These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise, such as
Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac," and together with Fannie Mae, the "GSEs"), or by a U.S. Government agency, such as Government National Mortgage Association ("Ginnie Mae"). We may also invest in other assets related to the housing, mortgage or real estate markets that are not guaranteed by a GSE or U.S. Government agency.
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. We fund our investments primarily through collateralized borrowings structured as repurchase agreements. We operate in a manner to qualify
to be taxed as a REIT under the Internal Revenue Code.
The size and composition of our investment portfolio depends on the investment strategies we implement, availability of attractively priced investments, suitable financing to appropriately leverage our investment portfolio and overall market conditions. Market conditions are influenced by a variety of factors, including interest rates, prepayment expectations, liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, regulations and relative returns on other assets.
Trends and Recent Market Impacts
Macroeconomic factors continued to have a significant impact on Agency RMBS performance during the second quarter of 2023. First, following the Federal Deposit Insurance Corporation’s
seizure of the assets of Silicon Valley Bank and Signature Bank late in the first quarter, fears of contagion throughout the regional banking sector and potential liquidations of bank portfolios created significant pressure on Agency RMBS prices as a result of the uncertain supply dynamic. Second, the U.S. debt ceiling standoff caused rampant speculation about the possibility of a government default and potential impacts on financial markets, especially fixed income markets. Third and finally, the Federal Reserve, reacting to persistently high inflation metrics, maintained a hawkish public stance and publicly expressed its intent to continue on a tightening cycle that the market had previously expected to conclude earlier in 2023 (and potentially reverse late in the year). Collectively, these factors caused mortgage spreads to benchmark rates to increase by late May 2023 to levels not seen since the Great Financial Crisis. Subsequent events – the debt ceiling resolution,
the return of stability to the banking sector, and the FDIC’s successful liquidation of assets from seized bank portfolios – ultimately reduced a significant amount of the volatility and uncertainty from the fixed income and Agency RMBS markets, improving valuations modestly by the end of the quarter from late May 2023 lows. Despite the challenging macroeconomic backdrop, AGNC generated an economic return of 3.6% for the quarter, comprised of $0.36 of dividends declared per common share and a slight decline in tangible net book value of $0.02 per common share, ending the quarter with a tangible net book value per common share of $9.39.
The price performance of Agency RMBS varied considerably across the coupon stack during the second quarter, with lower coupon RMBS significantly outperforming higher coupons due to strong money manager demand stemming from bond fund inflows. From a total return perspective, however, the performance
differences across the coupon stack were much more muted given the significantly higher yield associated with higher coupon RMBS. As a result, we continued to shift our portfolio
25
higher in coupon during the quarter. The weighted average coupon on our fixed rate Agency RMBS and TBA securities increased 18 basis points to 4.42% as of the end of the quarter, compared to 4.24% as of March 31, 2023. The average projected life CPR on our portfolio was largely unchanged at 9.8% as of June 30, 2023, compared to 10.0% for the first quarter. Actual CPRs increased modestly for the quarter due primarily to seasonal factors, averaging 6.6% for the second quarter compared to 5.2% for
the first quarter.
The short-term funding markets for Agency RMBS and U.S. Treasuries remained strong in the second quarter despite the debt ceiling concerns and significant U.S. Treasury issuance following the debt ceiling resolution. The Fed’s firmly established reverse repo and standing repo facilities together set clear upper and lower bounds for short term repo rates and provide significant liquidity and stability to the U.S. Government security funding markets. The significant Treasury issuance following the debt ceiling resolution was readily absorbed and largely offset by a decline in the Fed’s reverse repo facility balance, leaving the funding market for Agency MBS largely unaffected.
In light of continued elevated interest rate volatility, we maintained our disciplined risk management strategy throughout the second quarter. Our “at risk” leverage ratio remained
at the lower end of our longer-term historical average and was unchanged at 7.2x tangible stockholders’ equity as of June 30, 2023, compared to March 31, 2023, while our average leverage decreased from 7.7x for the first quarter to 7.2x for the second quarter. In addition, our interest rate hedge position remained in excess of our Agency RMBS funding liabilities and increased slightly to 119% as of June 30, 2023, from 114% as of March 31, 2023.
We continued to maintain significant liquidity throughout the second quarter. As of June 30, 2023, our unencumbered assets totaled $4.3 billion, or 59% of our tangible stockholders' equity, which consisted of $4.3 billion of cash and unencumbered
Agency RMBS and $81 million of unencumbered CRT and non-Agency securities.
Net spread and dollar roll income, excluding “catch-up” premium amortization, (a non-GAAP measure) declined $0.03 per common share to $0.67 per common share for the second quarter due to a modestly smaller average portfolio size during the quarter. Our net interest spread increased to 3.26% for the second quarter, compared to 2.88% for the prior quarter. The increase was largely due to a higher ratio of legacy, low fixed pay rate interest rate swap hedges to our funding liabilities for the quarter.
Looking ahead, we believe that one of the most favorable Agency RMBS investment environments in our fifteen-year history is now emerging. The dramatic repricing of the Agency RMBS and U.S. Treasury markets as the Fed transitioned from an ultra-accommodative monetary policy stance to its current restrictive
stance appears largely complete. In addition, the interest rate environment has correspondingly begun to show signs of improvement with interest rate volatility declining from the highs of last year as the Fed approaches its terminal rate level. Declining interest rate volatility is beneficial to Agency RMBS valuations and, over time, lowers the cost of interest rate related rebalancing. Furthermore, mortgage spreads to benchmark rates appear poised to remain well above their historical average as the Fed reduces its balance sheet holdings of Agency MBS and net supply of Agency RMBS is expected to remain consistent for the foreseeable future. At current spread levels, we believe our portfolio is positioned to generate attractive returns, either through strong earnings if mortgage spreads remain at these elevated levels or a combination of favorable earnings and net book value appreciation if mortgage spreads tighten over time. With the macroeconomic and interest rate
environment still unsettled, short term deviations from this promising path are possible, but we believe that AGNC is well-positioned for this favorable investment environment.
For information regarding non-GAAP financial measures, including reconciliations to the most comparable GAAP measure please refer to Results of Operations included in this MD&A below. For information regarding the sensitivity of our tangible net book value per common share to changes in interest rates and mortgage spreads, please refer to Item 3. Quantitative and Qualitative Disclosures about Market Risk in this form 10-Q.
26
Market Information
The following
table summarizes benchmark interest rates and prices of generic fixed rate Agency RMBS as of each date presented below:
1.Price
information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information is as of 3:00 p.m. (EST) on such date and can vary by source. Price information is sourced from Barclays. Interest rate information is sourced from Bloomberg.
27
The following table summarizes mortgage and credit spreads as of each date presented below:
30-Year
Agency Current Coupon Yield to 5-Year U.S. Treasury Spread
134
159
138
147
147
—
+9
30-Year Agency Current Coupon Yield to 10-Year U.S. Treasury Spread
136
185
151
158
179
+21
+28
30-Year
Agency Current Coupon Yield to 5/10-Year U.S. Treasury Spread
136
171
145
152
163
+11
+18
30-Year Agency Current Coupon Yield
4.38%
5.68%
5.39%
5.05%
5.63%
+58
bps
+24
bps
30-Year
Mortgage Rate
5.79%
6.72%
6.52%
6.40%
6.78%
+38
bps
+26
bps
Credit Spread (in bps): 2
CRT
M2
544
633
514
423
360
-63
-154
CMBS AAA
131
145
127
172
153
-19
+26
CDX
IG
101
108
82
76
66
-10
-16
________________________________
1.30-Year Current Coupon Yield represents yield on new production Agency RMBS. 30-Year Current Coupon Yields are sourced from Bloomberg and 30-Year Mortgage Rates are sourced from Clear Blue.
2.CRT
and CDX spreads sourced from JP Morgan. CMBS spreads are the average of spreads sourced from JP Morgan and Wells Fargo.
28
FINANCIAL CONDITION
As of June 30, 2023 and December 31, 2022, our investment portfolio totaled $58.0 billion and $59.5 billion, respectively, consisting of: $47.8 billion and $40.9 billion investment securities, at fair value, respectively; $10.2 billion and $18.6 billion net TBA securities, at fair value, respectively. The following table is a summary of our investment securities as of June
30, 2023 and December 31, 2022 (dollars in millions):
1.Table
excludes other mortgage credit investments of $28 million and $25 million as of June 30, 2023 and December 31, 2022, respectively, accounted for under the equity method of accounting.
2.TBA securities are presented net of long and short positions. For further details of our TBA securities refer to Note 5 of our Consolidated Financial Statements in this Form 10-Q
TBA securities are recorded as derivative instruments in our accompanying consolidated financial statements, and our TBA dollar roll transactions represent a form of off-balance sheet financing. As of June 30, 2023 and December 31, 2022, our TBA securities had a net carrying value of $(92) million and
$167 million, respectively, reported in derivative assets/(liabilities) on our accompanying consolidated balance sheets. The net carrying value represents the difference between the fair value of the underlying security in the TBA contract and the price to be paid or received for the underlying security.
As of June 30, 2023 and December 31, 2022, the weighted average yield on our investment securities (excluding TBA and forward settling securities) was 3.78% and 3.37%, respectively.
29
The following tables summarize certain characteristics
of our fixed rate Agency RMBS portfolio, inclusive of TBA securities, as of June 30, 2023 and December 31, 2022 (dollars in millions):
1.Specified
pools include pools backed by lower balance loans with original loan balances of up to $200K, HARP pools (defined as pools that were issued between May 2009 and December 2018 and backed by 100% refinance loans with original LTVs ≥ 80%), and pools backed by loans 100% originated in New York and Puerto Rico. As of June 30, 2023, lower balance specified pools had a weighted average original loan balance of $123,000 and $146,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 128% and 138% for 15-year and 30-year securities, respectively.
2.Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of June 30, 2023.
1.See Note 1 of preceding table for specified pool composition. As of December 31, 2022, lower balance specified pools had a weighted average original loan balance of $123,000 and $140,000 for 15-year and 30-year securities, respectively, and HARP pools had a weighted average original LTV of 128% and 138% for 15-year and 30-year securities, respectively.
2.Portfolio yield incorporates a projected life CPR based on forward rate assumptions as of December 31, 2022.
For additional details regarding our CRT and non-Agency securities, including credit ratings, as of June 30, 2023 and December
31, 2022, please refer to Note 3 of our Consolidated Financial Statements in this Form 10-Q.
RESULTS OF OPERATIONS
Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including "economic interest income,""economic interest expense,""net spread and dollar roll income" and "net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders," and the related per common share measures and certain financial metrics derived from such non-GAAP information.
"Economic interest income"
is measured as interest income (GAAP measure), adjusted to (i) exclude retrospective "catch-up" adjustments to premium amortization cost associated with changes in projected CPR estimates and (ii) include TBA dollar roll implied interest income. "Economic interest expense" is measured as interest expense (GAAP measure) adjusted to include TBA dollar roll implied interest expense/benefit and interest rate swap periodic cost/income. "Net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" is measured as comprehensive income (loss) available (attributable) to common stockholders (GAAP measure) adjusted to: (i) exclude gains/losses on investment securities recognized through net income and other comprehensive income and gains/losses on derivative instruments and other securities (GAAP measures) and (ii) include interest rate swap periodic income/cost, TBA dollar roll income and other miscellaneous
interest income/expense. As defined "Net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" includes (i) the components of "economic interest income" and "economic interest expense", plus (ii) other interest income/expense, and less (iii) total operating expenses and dividends on preferred stock (GAAP measures).
By providing such measures, in addition to the related GAAP measures, we believe we give greater transparency into the information used by our management in its financial and operational decision-making. We also believe it is important for users of our financial information to consider information related to our current financial performance without the effects of certain measures and one-time events that are not necessarily indicative of our current investment portfolio performance and operations.
Specifically,
in the case "net spread and dollar roll income, excluding 'catch-up' premium amortization, available to common stockholders" and components of such measure, "economic interest income" and "economic interest expense," we believe the inclusion of TBA dollar roll income is meaningful as TBAs, which are accounted for under GAAP as derivative instruments with gains and losses recognized in other gain (loss) in our consolidated statement of comprehensive income, are economically equivalent to holding and financing generic Agency RMBS using short-term repurchase agreements. Similarly, we believe that the inclusion of periodic interest rate swap settlements is meaningful as interest rate swaps are the primary instrument we use to economically hedge against fluctuations in our borrowing costs and it is more indicative of our total cost of funds than interest expense alone. Additionally, we believe the exclusion of "catch-up" premium amortization adjustments
is meaningful as it excludes the cumulative effect from prior reporting periods due to current changes in future prepayment expectations and, therefore, exclusion of such adjustments is more indicative of the current earnings potential of our investment portfolio.
However, because such measures are incomplete measures of our financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, results computed in accordance with GAAP. In addition, because not all companies use identical calculations, our presentation of such non-GAAP measures may not be comparable to other similarly titled measures of other companies.
31
Selected
Financial Data
The following selected financial data is derived from our interim consolidated financial statements and the notes thereto. The tables below present our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022 and condensed consolidated statements of comprehensive income and key statistics for the three and six months ended June 30, 2023 and 2022 (in millions, except per share amounts):
June
30,
December 31,
Balance Sheet Data
2023
2022
Investment securities, at fair value of $47,739 and $40,904, respectively, and other mortgage credit investments
$
47,767
$
40,929
Total
assets
$
60,518
$
51,748
Repurchase agreements and other debt
$
42,116
$
36,357
Total liabilities
$
52,640
$
43,878
Total
stockholders' equity
$
7,878
$
7,870
Net book value per common share 1
$
10.26
$
10.76
Tangible net book value per common share 2
$
9.39
$
9.84
Three
Months Ended
June 30,
Six Months Ended
June 30,
Statement of Comprehensive Income Data (Unaudited)
2023
2022
2023
2022
Interest income
$
457
$
395
$
808
$
870
Interest
expense
526
80
975
107
Net interest income
(69)
315
(167)
763
Other
gain (loss), net
378
(729)
347
(1,807)
Operating expenses
23
20
45
41
Net
income (loss)
286
(434)
135
(1,085)
Dividends on preferred stock
31
25
61
50
Net
income (loss) available (attributable) to common stockholders
$
255
$
(459)
$
74
$
(1,135)
Net
income (loss)
$
286
$
(434)
$
135
$
(1,085)
Other comprehensive income (loss), net
(65)
(245)
77
(736)
Comprehensive
income (loss)
221
(679)
212
(1,821)
Dividends on preferred stock
31
25
61
50
Comprehensive
income (loss) available (attributable) to common stockholders
$
190
$
(704)
$
151
$
(1,871)
Weighted
average number of common shares outstanding - basic
598.8
526.2
589.1
525.3
Weighted average number of common shares outstanding - diluted
599.7
526.2
590.1
525.3
Net
income (loss) per common share - basic
$
0.43
$
(0.87)
$
0.13
$
(2.16)
Net income (loss) per common share - diluted
$
0.43
$
(0.87)
$
0.13
$
(2.16)
Comprehensive
income (loss) per common share - basic
$
0.32
$
(1.34)
$
0.26
$
(3.56)
Comprehensive income (loss) per common share - diluted
$
0.32
$
(1.34)
$
0.26
$
(3.56)
Dividends
declared per common share
$
0.36
$
0.36
$
0.72
$
0.72
32
Three
Months Ended
June 30,
Six Months Ended
June 30,
Other Data (Unaudited) *
2023
2022
2023
2022
Average investment securities - at par
$
47,711
$
49,453
$
47,043
$
50,601
Average
investment securities - at cost
$
49,119
$
51,089
$
48,497
$
52,264
Average
net TBA dollar roll position - at cost
$
9,985
$
19,653
$
13,896
$
21,618
Average total assets - at fair value
$
62,469
$
65,274
$
60,391
$
66,197
Average
repurchase agreements and other debt outstanding 3
$
41,546
$
42,997
$
40,690
$
44,774
Average stockholders' equity 4
$
7,712
$
8,525
$
7,896
$
9,051
Average
tangible net book value "at risk" leverage 5
7.2:1
7.8:1
7.4:1
7.8:1
Tangible net book value "at risk" leverage (as of period end)6
7.2:1
7.4:1
7.2:1
7.4:1
Economic
return on tangible common equity - unannualized 7
3.6
%
(10.1)
%
2.7
%
(22.9)
%
Expenses % of average total assets - annualized
0.15
%
0.12
%
0.15
%
0.12
%
Expenses
% of average assets, including average net TBA position - annualized
0.13
%
0.09
%
0.12
%
0.09
%
Expenses % of average stockholders' equity - annualized
1.19
%
0.94
%
1.14
%
0.91
%
________________________________
*
Except as noted below, average numbers for each period are weighted based on days on our books and records.
1.Net book value per common share is calculated as total stockholders' equity, less preferred stock liquidation preference, divided by number of common shares outstanding as of period end.
2.Tangible net book value per common share excludes goodwill.
3.Amount excludes U.S. Treasury repurchase agreements and TBA contracts. Other debt includes debt of consolidated VIEs.
4.Average stockholders' equity calculated as average month-ended stockholders' equity during the period.
5.Average
tangible net book value "at risk" leverage is calculated by dividing the sum of daily weighted average repurchase agreements used to fund our investment securities, other debt, and TBA and forward settling securities (at cost) (collectively "mortgage borrowings") outstanding for the period by the sum of average stockholders' equity adjusted to exclude goodwill for the period. Leverage excludes U.S. Treasury repurchase agreements.
6.Tangible net book value "at risk" leverage as of period end is calculated by dividing the sum of mortgage borrowings outstanding and receivable/payable for unsettled investment securities as of period end by the sum of total stockholders' equity adjusted to exclude goodwill as of period end. Leverage excludes U.S. Treasury repurchase agreements.
7.Economic return on tangible common equity
represents the sum of the change in tangible net book value per common share and dividends declared per share of common stock during the period over beginning tangible net book value per common share.
Economic Interest Income and Asset Yields
The following table summarizes our economic interest income (a non-GAAP measure) for the three and six months ended June 30, 2023 and 2022, which includes the combination of interest income (a GAAP measure) on our holdings reported as investment securities on our consolidated balance sheets, adjusted to exclude estimated "catch-up" premium amortization adjustments for the cumulative effect from prior reporting periods
due to changes in our CPR forecast, and implied interest income on our TBA securities (dollars in millions):
Weighted
average actual portfolio CPR for investment securities held during the period
6.6
%
12.4
%
5.9
%
13.5
%
Weighted
average projected CPR for the remaining life of investment securities held as of period end
9.8
%
7.2
%
9.8
%
7.2
%
30-year
fixed rate mortgage rate as of period end 4
6.78
%
5.79
%
6.78
%
5.79
%
10-year
U.S. Treasury rate as of period end 4
3.84
%
3.02
%
3.84
%
3.02
%
33
________________________________
1.Reported
in gain (loss) on derivatives instruments and other securities, net in the accompanying consolidated statements of operations.
2.Implied interest income from TBA dollar roll transactions is computed as the sum of (i) TBA dollar roll income and (ii) estimated TBA implied funding cost (see Economic Interest Expense and Aggregate Cost of Funds below). TBA dollar roll income represents the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and is the economic equivalent to interest income on the underlying Agency securities, less an implied funding cost, over the forward settlement period. Amount is net of TBAs used for hedging purposes. Amount excludes TBA mark-to-market adjustments.
3.The combined
asset yield is calculated on a weighted average basis based on our average investment and TBA balances outstanding during the period and their respective yields.
4.30-year fixed rate mortgage rates are sourced from Clear Blue. 10-year U.S. Treasury rates are sourced from Bloomberg.
The principal elements impacting our economic interest income are the average size of our investment portfolio and the average yield on our securities. The following table includes a summary of the estimated impact of each of these elements on our economic interest income for the three and six months ended June 30, 2023 compared to the prior year period (in millions):
Impact
of Changes in the Principal Elements Impacting Economic Interest Income
Our average investment portfolio, inclusive of TBAs (at cost), decreased 16% for the three and six months ended June 30, 2023 compared to the respective prior year periods primarily due to a decline in stockholders' equity. The average yield on our investment portfolio, including TBA implied asset yields and excluding "catch-up" premium amortization, increased
101 and 133 basis points for the three and six months ended June 30, 2023, respectively, mostly due to changes in our asset composition as we shifted the portfolio higher in coupon.
Leverage
Our primary measure of leverage is our tangible net book value "at risk" leverage ratio, which is measured as the sum of our repurchase agreements and other debt used to fund our investment securities and net TBA and forward settling securities position (at cost) (together referred to as "mortgage borrowings") and our net receivable/payable for unsettled investment securities, divided by our total stockholders' equity adjusted to exclude goodwill.
We include our net TBA
position in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a TBA contract for the forward sale of Agency securities has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. (Refer to Liquidity and Capital Resources for further discussion of TBA securities and dollar roll transactions). Repurchase agreements used to fund short-term investments in U.S. Treasury securities ("U.S. Treasury repo") are excluded from our measure of leverage due to the temporary and highly liquid nature of these investments.
The following table presents a summary of our leverage ratios for the periods listed (dollars in millions):
1.Other
debt includes debt of consolidated VIEs. Amounts exclude U.S. Treasury repo agreements.
2.Daily average and ending net TBA position outstanding measured at cost. Includes forward settling non-Agency securities.
3.Average tangible net book value "at risk" leverage during the period represents the sum of our daily weighted average repurchase agreements and other debt used to fund acquisitions of investment securities and net TBA and forward settling securities position outstanding, divided by the sum of our average month-ended stockholders' equity, adjusted to exclude goodwill.
4.Tangible net book value "at risk" leverage as of period end represents the sum of our repurchase agreements and other debt used to fund acquisitions of investments securities, net
TBA and forward settling securities position (at cost), and net receivable/payable for unsettled investment securities outstanding as of period end, divided by total stockholders' equity, adjusted to exclude goodwill as of period end.
Economic Interest Expense and Aggregate Cost of Funds
The following table summarizes our economic interest expense and aggregate cost of funds (non-GAAP measures) for the three and six months ended June 30, 2023 and 2022 (dollars in millions), which includes the combination of interest expense on Agency repurchase agreements and other debt (GAAP measure), implied financing cost (benefit) of our TBA securities
and interest rate swap periodic cost (benefit):
Economic Interest Expense and Aggregate Cost of Funds 1
Amount
Cost of Funds
Amount
Cost
of Funds
Amount
Cost of Funds
Amount
Cost of Funds
Repurchase agreement and other debt - interest expense (GAAP measure)
$
526
5.01
%
$
80
0.74
%
$
975
4.77
%
$
107
0.48
%
TBA
dollar roll income - implied interest expense (benefit) 2,3
123
4.89
%
(2)
(0.04)
%
325
4.66
%
(31)
(0.29)
%
Economic
interest expense - before interest rate swap periodic cost (income), net 4
649
4.98
%
78
0.49
%
1,300
4.74
%
76
0.23
%
Interest
rate swap periodic cost (benefit), net 2,5,6
(567)
(4.35)
%
(56)
(0.35)
%
(1,071)
(3.90)
%
(38)
(0.11)
%
Total
economic interest expense (non-GAAP measure)
$
82
0.63
%
$
22
0.14
%
$
229
0.84
%
$
38
0.12
%
________________________________
1.Amounts
exclude interest rate swap termination fees and variation margin settlements paid or received, forward starting swaps and the impact of other supplemental hedges, such as swaptions and U.S. Treasury positions.
2.Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.
3.The implied funding cost (benefit) of TBA dollar roll transactions is determined using the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement and market based assumptions regarding the "cheapest-to-deliver" collateral that can be delivered to satisfy the TBA contract, such as the anticipated collateral’s
weighted average coupon, weighted average maturity and projected 1-month CPR. The average implied funding cost (benefit) for all TBA transactions is weighted based on our daily average TBA balance outstanding for the period.
4.The combined cost of funds for total mortgage borrowings outstanding, before interest rate swap costs, is calculated on a weighted average basis based on average repo, other debt and TBA balances outstanding during the period and their respective cost of funds.
5.Interest rate swap periodic cost (benefit) is measured as a percent of average mortgage borrowings outstanding for the period.
6.In 2023, we began reporting price alignment interest income (expense) ("PAI") on interest swap margin deposits posted by or (to) us in other interest
income (expense), net. PAI was previously reported in interest rate swap periodic cost (benefit). Both current and former categorizations are components of net spread and dollar roll income. Prior year amounts have been reclassified and our economic interest expense and cost of funds have been restated to conform to the current period's presentation.
The principal elements impacting our economic interest expense are (i) the size of our average mortgage borrowings and interest rate swap portfolio outstanding during the period, (ii) the average interest rate on our mortgage borrowings and (iii) the average net interest rate paid/received on our interest rate swaps. The following table includes a summary of the estimated impact of these elements on our economic interest expense for the three and six months ended June 30, 2023 compared to
the prior year period (in millions):
35
Impact of Changes in the Principal Elements of Economic Interest Expense
Repurchase agreements and other debt interest expense
$
446
$
(3)
$
449
TBA
dollar roll income - implied interest benefit/expense
125
1
124
Interest rate swap periodic income/cost
(511)
2
(513)
Total change in economic interest benefit/expense
$
60
$
—
$
60
Due
to Change in Average
Six months ended:
Total Increase / (Decrease)
Borrowing / Swap Balance
Borrowing / Swap Rate
Repurchase agreements and other debt interest expense
$
868
$
(10)
$
878
TBA
dollar roll income - implied interest benefit/expense
356
11
345
Interest rate swap periodic income/cost
(1,033)
2
(1,035)
Total change in economic interest benefit/expense
$
191
$
3
$
188
Our
average mortgage borrowings, inclusive of TBAs, decreased 18% for the three and six months ended June 30, 2023 due to a decline in our asset base. The average interest rate on our mortgage borrowings, excluding the impact interest rate swap period income/cost, increased 449 and 451 basis points for the three and six months ended June 30, 2023, respectively, due to higher short-term interest rates.
Interest rate swap periodic income increased for the three and six months ended June 30, 2023 primarily due to higher receive rates on our pay-fixed swaps. The following is a summary of our average interest rate swaps outstanding and the related average swap pay and receive rates for the three and six months ended June 30, 2023 (dollars
in millions). Amounts exclude forward starting swaps not yet in effect.
Three Months Ended
June 30,
Six
Months Ended
June 30,
Average Ratio of Interest Rate Swaps (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding
2023
2022
2023
2022
Average Agency repo and other debt outstanding
$
41,546
$
42,997
$
40,690
$
44,774
Average
net TBA dollar roll position outstanding - at cost
$
9,985
$
19,653
$
13,896
$
21,618
Average mortgage borrowings outstanding
$
51,531
$
62,650
$
54,586
$
66,392
Average
notional amount of interest rate swaps outstanding (excluding forward starting swaps), net
$
48,436
$
49,800
$
48,837
$
51,164
Ratio of average interest rate swaps to mortgage borrowings outstanding
94
%
79
%
89
%
77
%
Average
interest rate swap pay-fixed rate (excluding forward starting swaps)
0.44
%
0.27
%
0.45
%
0.25
%
Average interest rate swap receive-floating rate
(5.07)
%
(0.71)
%
(4.81)
%
(0.40)
%
Average
interest rate swap net pay/(receive) rate
(4.63)
%
(0.44)
%
(4.36)
%
(0.15)
%
For the three and six months ended June 30, 2023, we had an average forward starting net pay and (receive) fixed rate swap balance of $(12) million and $45 million, respectively, and for the three and six months ended June
30, 2022 of $34 million and $46 million, respectively. Forward starting interest rate swaps do not impact our economic interest expense and aggregate cost of funds until they commence accruing net interest settlements on their forward start dates.
Net Interest Spread
The following table presents a summary of our net interest spread (including the impact of TBA dollar roll income, interest rate swaps and excluding "catch-up" premium amortization) for the three and six months ended June 30, 2023 and 2022:
Three
Months Ended June 30,
Six Months Ended
June 30,
Investment and TBA Securities - Net Interest Spread
2023
2022
2023
2022
Average asset yield, excluding "catch-up" premium amortization
3.89
%
2.88
%
3.90
%
2.57
%
Average
aggregate cost of funds
(0.63)
%
(0.14)
%
(0.84)
%
(0.12)
%
Average net interest spread, excluding "catch-up" premium amortization
3.26
%
2.74
%
3.06
%
2.45
%
36
Net
Spread and Dollar Roll Income
The following table presents a reconciliation of net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure) from comprehensive income (loss) available (attributable) to common stockholders (the most comparable GAAP financial measure) for the three and six months ended June 30, 2023 and 2022 (dollars in millions):
Comprehensive income (loss) available (attributable) to common stockholders
$
190
$
(704)
$
151
$
(1,871)
Adjustments
to exclude realized and unrealized (gains) losses reported through net income:
Realized loss on sale of investment securities, net
255
946
336
1,288
Unrealized
(gain) loss on investment securities measured at fair value through net income, net
363
987
(231)
3,519
Gain on derivative instruments and other securities, net
(996)
(1,204)
(452)
(3,000)
Adjustment
to exclude unrealized (gain) loss reported through other comprehensive income:
Unrealized (gain) loss on available-for-sale securities measure at fair value through other comprehensive income, net
65
245
(77)
736
Other
adjustments:
TBA dollar roll income, net 1
6
182
24
334
Interest
rate swap periodic income (cost), net 1,4
567
56
1,071
38
Other interest income (expense), net 1,3,4
(35)
(7)
(68)
(7)
Net
spread and dollar roll income available to common stockholders (non-GAAP measure)
415
501
754
1,037
Estimated "catch-up" premium amortization cost (benefit) due to change in CPR forecast 2
(11)
(66)
58
(225)
Net
spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure)
$
404
$
435
$
812
$
812
Weighted
average number of common shares outstanding - basic
598.8
526.2
589.1
525.3
Weighted average number of common shares outstanding - diluted
599.7
527.1
590.1
526.4
Net
spread and dollar roll income per common share - basic
$
0.69
$
0.95
$
1.28
$
1.97
Net spread and dollar roll income per common share - diluted
$
0.69
$
0.95
$
1.28
$
1.97
Net
spread and dollar roll income, excluding "catch-up" premium amortization, per common share - basic
$
0.67
$
0.83
$
1.38
$
1.55
Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - diluted
$
0.67
$
0.83
$
1.38
$
1.54
________________________________
1.Reported
in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.
2.Reported in interest income in our consolidated statements of comprehensive income.
3.Other interest income (expense), net includes interest income on cash and cash equivalents; price alignment interest income (expense) ("PAI") on interest rate swap margin deposits posted by or (to) the Company; and other miscellaneous interest income (expense).
4.In 2023, we began reporting PAI in other interest income (expense), net. PAI was previously reported in interest rate swap periodic income (cost). Prior year amounts have been reclassified to conform to the current
period's presentation.
Gain (Loss) on Investment Securities, Net
The following table is a summary of our net gain (loss) on investment securities for the three and six months ended June 30, 2023 and 2022 (in millions):
Three
Months Ended June 30,
Six Months Ended
June 30,
Gain (Loss) on Investment Securities, Net 1
2023
2022
2023
2022
Loss on sale of investment securities, net
$
(255)
$
(946)
$
(336)
$
(1,288)
Unrealized
(loss) gain on investment securities measured at fair value through net income, net 2
(363)
(987)
231
(3,519)
Unrealized (loss) gain on investment securities measured at fair value through other comprehensive income, net
(65)
(245)
77
(736)
Total
loss on investment securities, net
$
(683)
$
(2,178)
$
(28)
$
(5,543)
________________________________
1.Amounts exclude gain (loss) on TBA securities, which are reported in gain (loss) on derivative instruments and other securities, net in our Consolidated Statements
of Comprehensive Income.
2.Investment securities acquired after fiscal year 2016 are measured at fair value through net income (see Note 2 of our Consolidated Financial Statements in this Form 10-Q).
37
Gain (Loss) on Derivative Instruments and Other Securities, Net
The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three and six months ended June 30, 2023 and 2022 (in millions):
Total gain (loss) on derivative instruments and other securities, net
$
996
$
1,204
$
452
$
3,000
________________________________
1.In
2023, we began reporting PAI in other interest income (expense), net. PAI was previously reported in interest rate swap periodic income (cost). Prior year amounts have been reclassified to conform to the current period's presentation.
For further details regarding our use of derivative instruments and related activity refer to Notes 2 and 5 of our Consolidated Financial Statements in this Form 10-Q.
38
LIQUIDITY AND CAPITAL RESOURCES
Our business is dependent on our ability to maintain adequate levels of liquidity and capital resources to fund day-to-day operations,
fulfill collateral requirements under our funding and derivative agreements, and to satisfy our dividend distribution requirement of at least 90% of our taxable income to maintain our qualification as a REIT. Our primary sources of liquidity are unencumbered cash and securities, borrowings available under repurchase agreements, TBA dollar roll financing and monthly receipts of principal and interest payments. We may also conduct asset sales, change our asset or funding mix, issue equity or undertake other capital enhancing actions to maintain adequate levels of liquidity and capital resources. There are various risks and uncertainties that can impact our liquidity, such as those described in Item 1A. Risk Factors of our most recent Annual Report on Form 10-K and Item 3. Quantitative and Qualitative Disclosures of Market Risks in this Form 10-Q. In assessing our liquidity,
we consider a number of factors, including our current leverage, collateral levels, access to capital markets, overall market conditions, and the sensitivity of our tangible net book value over a range of scenarios. We believe that we have sufficient liquidity and capital resources available to meet our obligations and execute our business strategy.
Leverage and Financing Sources
Our leverage will vary depending on market conditions and our assessment of relative risks and returns, but we generally expect our leverage to be between six and twelve times the amount of our tangible stockholders' equity, measured as the sum of our total mortgage borrowings and net payable / (receivable) for unsettled investment securities, divided by the sum of our total stockholders' equity adjusted to exclude goodwill. Our tangible net book value "at risk" leverage ratio was 7.2x and 7.4x as
of June 30, 2023 and December 31, 2022, respectively. The following table includes a summary of our mortgage borrowings outstanding as of June 30, 2023 and December 31, 2022 (dollars in millions). For additional details of our mortgage borrowings refer to Notes 2, 4 and 5 to our Consolidated Financial Statements in this Form 10-Q.
Debt
of consolidated variable interest entities, at fair value
87
—
%
95
—
%
Total debt
40,962
80
%
36,002
66
%
TBA
and forward settling non-Agency securities, at cost
10,320
20
%
18,407
34
%
Total mortgage borrowings
$
51,282
100
%
$
54,409
100
%
________________________________
1.Includes
Agency RMBS, CRT and non-Agency MBS repurchase agreements. Excludes U.S. Treasury repurchase agreements totaling $1,154 million and $355 million as of June 30, 2023 and December 31, 2022, respectively.
2.As of June 30, 2023 and December 31, 2022, 43% and 48%, respectively, of our repurchase agreements, including 44% and 48% or our Agency repurchase agreements, respectively, were funded through the Fixed Income Clearing Corporation's GCF Repo service.
Our primary financing sources are collateralized borrowings structured as repurchase agreements. We enter into repurchase agreements, or "repo," through bi-lateral
arrangements with financial institutions and independent dealers. We also enter into third-party repurchase agreements through our wholly-owned registered broker-dealer subsidiary, Bethesda Securities, LLC, such as tri-party repo offered through the FICC's GCF Repo service. We manage our repurchase agreement funding position through a variety of methods, including diversification of counterparties, maintaining a suitable maturity profile and utilization of interest rate hedging strategies. We also use TBA dollar roll transactions as a means of synthetically financing Agency RMBS.
The terms and conditions of our repurchase agreements are determined on a transaction-by-transaction basis when each such borrowing is initiated or renewed and, in the case of GCF Repo, by the variable margin requirements calculated by the FICC, which acts as the central counterparty. The amount borrowed is generally equal to the fair value of the
securities pledged, as determined by the lending counterparty, less an agreed-upon discount, referred to as a "haircut," which reflects the underlying risk of the specific collateral and protects the counterparty against a change in its value. Interest rates are generally fixed based on prevailing rates corresponding to the term of the borrowing. None of our repo counterparties are obligated to renew or otherwise enter into new borrowings at the conclusion of our existing borrowings.
The use of TBA dollar roll transactions increases our funding diversification, expands our available pool of assets, and increases our overall liquidity position, as TBA contracts typically have lower implied haircuts relative to Agency RMBS pools funded with repo financing. TBA dollar roll transactions may also have a lower implied cost of funds
than comparable repo funded transactions (referred to as "dollar roll specialness") offering incremental return potential. However, if it were to become uneconomical to roll our TBA contracts into future months it may be necessary to take physical delivery of the underlying securities and fund those assets with cash or other financing sources, which could reduce our liquidity position.
39
Collateral Requirements and Unencumbered Assets
Amounts available to be borrowed under our repurchase agreements are dependent upon prevailing interest rates, the lender’s "haircut" requirements and collateral value. Each of these elements
may fluctuate with changes in interest rates, credit quality and liquidity conditions within the financial markets. To help manage the adverse impact of interest rate changes on our borrowings, we utilize an interest rate risk management strategy involving the use of derivative financial instruments. In particular, we attempt to mitigate the risk of the cost of our short-term funding liabilities increasing at a faster rate than the earnings of our long-term fixed rate assets during a period of rising interest rates.
The collateral requirements, or haircut levels, under our repo agreements are typically determined on an individual transaction basis or by the prevailing requirements established by the FICC for GCF tri-party repo. Consequently, haircut levels and minimum margin requirements can change over time and may increase during periods of elevated market volatility. If the fair value of our collateral declines, our counterparties
will typically require that we post additional collateral to re-establish the agreed-upon collateral levels, referred to as "margin calls." Similarly, if the estimated fair value of our investment securities increases, we may request that counterparties release collateral back to us. Our counterparties typically have the sole discretion to determine the value of pledged collateral but are required to act in good faith in making determinations of value. Our agreements generally provide that in the event of a margin call, collateral must be posted on the same business day, subject to notice requirements. As of June 30, 2023, we had met all our margin requirements.
The value of Agency RMBS collateral is impacted by market factors and is reduced by monthly principal pay-downs on the underlying mortgage pools. Fannie Mae and Freddie Mac publish monthly security pay-down factors
for their mortgage pools on the fifth day after month-end, but do not remit payment to security holders until generally the 25th day after month-end. Bi-lateral repo counterparties assess margin to account for the reduction in value of Agency collateral when factors are released. The FICC assesses margin on the last day of each month, prior to the factor release date, based on its internally projected pay-down rates (referred to as the "blackout period exposure adjustment" or "blackout margin"). On the factor release date, the blackout margin is released and collateralization requirements are adjusted to actual factor data. Due to the timing difference between associated margin calls and our receipt of principal pay-downs, our liquidity is temporarily reduced each month for principal repayments. We attempt to manage the liquidity risk associated with principal pay-downs by monitoring conditions impacting prepayment rates and through asset selection. As
of June 30, 2023, approximately 18% our investment portfolio consisted of TBA securities, which are not subject to monthly principal pay-downs. The remainder of our portfolio, primarily consisted of Agency RMBS, which had an average one-year CPR forecast of 6%.
Collateral requirements under our derivative agreements are subject to our counterparties' assessment of their maximum risk of loss associated with the derivative instrument, referred to as the initial or minimum margin requirement, and may be adjusted based on changes in market volatility and other factors. We are also subject to daily variation margin requirements based on changes in the value of the derivative instrument and/or collateral pledged. Daily variation margin requirements also entitle us to receive collateral if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement.
The collateral requirements under our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC. Collateral levels for interest rate derivative agreements are typically governed by the central clearing exchange and the associated futures commission merchants ("FCMs"), which may establish margin levels in excess of the clearing exchange. Collateral levels for interest rate derivative agreements not subject to central clearing are established by the counterparty financial institution.
Haircut levels and minimum margin requirements imposed by our counterparties reduce the amount of our unencumbered assets and limit the amount we can borrow against our investment securities. During the six months ended June 30, 2023, haircuts on our repo funding
arrangements remained stable. As of June 30, 2023, the weighted average haircut on our repurchase agreements was approximately 3.6% of the value of our collateral, compared to 3.7% as of December 31, 2022.
To mitigate the risk of margins calls, we seek to maintain excess liquidity by holding unencumbered liquid assets that can be used to satisfy collateral requirements, collateralize additional borrowings or sold for cash. As of June 30, 2023, our unencumbered assets totaled approximately $4.3 billion, or 59% of tangible equity, consisting of $4.3 billion of unencumbered cash and Agency RMBS and $0.1 billion of unencumbered credit assets. This compares to $4.4 billion of unencumbered assets, or 60% of tangible equity, as of December
31, 2022, consisting of $4.3 billion of unencumbered cash and Agency RMBS and $0.1 billion of unencumbered credit assets.
Counterparty Risk
Collateral requirements imposed by counterparties subject us to the risk that the counterparty does not return pledged assets to us as and when required. We attempt to manage this risk by monitoring our collateral positions and limiting our counterparties to registered clearinghouses and major financial institutions with acceptable credit ratings. We also diversify our funding across multiple counterparties and by region.
40
As of June 30, 2023, our maximum amount at risk (or the excess/shortfall
of the value of collateral pledged/received over our repurchase agreement liabilities/reverse repurchase agreement receivables) with any of our repurchase agreement counterparties, excluding the FICC, was less than 4% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing approximately 8% of our tangible stockholders' equity. As of June 30, 2023, less than 8% of our tangible stockholder's equity was at risk with the FICC. Excluding central clearing exchanges, as of June 30, 2023, our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity.
Asset Sales
Agency RMBS securities are among the most liquid fixed income securities, and the TBA market is the second most liquid market
(after the U.S. Treasury market). Although market conditions fluctuate, the vitality of these markets enables us to sell assets under most conditions to generate liquidity through direct sales or delivery into TBA contracts, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA"). Under certain market conditions, however, we may be unable to realize the full carrying value of our securities. We attempt to manage this risk by maintaining at least a minimum level of securities that trade at or near TBA values that in our estimation enhances our portfolio liquidity across a wide range of market conditions. Please refer to Trends and Recent Market Impacts of this Management Discussion and Analysis for further information regarding Agency RMBS and TBA market
conditions.
Capital Markets
The equity capital markets serve as a source of capital to grow our business and to meet potential liquidity needs of our business. The availability of equity capital is dependent on market conditions and investor demand for our common and preferred stock. We will typically not issue common stock at times when we believe the capital raised will not be accretive to our tangible net book value or earnings, and we will typically not issue preferred equity when its cost exceeds acceptable hurdle rates of return on our equity. We may also be unable to raise additional equity capital at suitable times or on favorable terms. Furthermore, when the trading price of our common stock is less than our estimate of our current tangible net book value per common share, among other conditions, we may repurchase shares of our common stock. Please refer to Note 9 of our
Consolidated Financial Statements in this Form 10-Q for further details regarding our recent equity capital transactions, if any.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2023, we did not maintain relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Additionally, as of June 30, 2023, we had not guaranteed obligations of unconsolidated entities or entered into a commitment or intent to provide funding to such entities.
FORWARD-LOOKING
STATEMENTS
The statements contained in this Quarterly Report that are not historical facts, including estimates, projections, beliefs, expectations concerning conditions, events, or the outlook for our business, strategy, performance, operations or the markets or industries in which we operate, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are typically identified by words such as “believe,”“plan,”“expect,”“anticipate,”“see,”“intend,”“outlook,”“potential,”“forecast,”“estimate,”“will,”“could,”“should,”“likely” and other similar, correlative or comparable words and expressions.
Forward looking statements are based on management’s assumptions, projections and beliefs as of the date of this Quarterly
Report, but they involve a number of risks and uncertainties. Actual results may differ materially from those anticipated in forward-looking statements, as well as from historical performance. Factors that could cause actual results to vary from our forward-looking statements include, but are not limited to, the following:
•changes in U.S. monetary policy or interest rates, including actions taken by the Federal Reserve to normalize monetary policy and to reduce the size of its U.S. Treasury and Agency RMBS bond portfolio;
•fluctuations in the yield curve;
•fluctuations in mortgage prepayment rates on the loans underlying our Agency RMBS;
•the availability and terms of financing and our hedge positions;
•changes in the market value of our assets, including from changes in net interest spreads, market liquidity or depth, and changes in our "at risk" leverage or hedge positions;
•the effectiveness of our risk mitigation strategies;
•conditions in the market for Agency RMBS and other mortgage securities, including changes in the available supply of such securities or investor appetite therefor;
41
•actions by the federal, state, or local governments that affect the economy, the housing sector or financial markets;
•the
ongoing availability of personnel and systems to conduct our operations;
•changes to laws, regulations, rules or policies that affect U.S. housing finance activity, the GSE's or the markets for Agency RMBS; and
•legislative or regulatory changes that affect our status as a REIT, our exemption from the Investment Company Act of 1940 or the mortgage markets in which we participate.
Forward-looking statements speak only as of the date made, and we do not assume any duty and do not undertake to update forward-looking statements. A further discussion of risks and uncertainties that could cause actual results to differ from any of our forward-looking statements is included in our most recent Annual Report on Form 10-K and this document under Item 1A. Risk Factors. We
caution readers not to place undue reliance on our forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate, prepayment, spread, liquidity, extension and credit risks.
Interest Rate Risk
We are subject to interest rate risk in connection with the fixed income nature of our assets and the short-term, variable rate nature of our financing obligations. Our operating results depend in
large part on differences between the income earned on our assets and our cost of borrowing and hedging activities. The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yields earned on our existing portfolio of leveraged fixed-rate assets will largely remain static. This can result in a decline in our net interest spread. Changes in the level of interest rates can also affect the rate of mortgage prepayments and the value of our assets.
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. Subject to maintaining our qualification as a REIT, we engage in a variety of interest rate management techniques to mitigate the influence of interest
rate changes on our net interest income and fluctuations of our tangible net book value. The principal instruments that we use to hedge our interest rate risk are interest rate swaps, swaptions, U.S. Treasury securities and U.S. Treasury futures contracts. Our hedging techniques are highly complex and are partly based on assumed levels of prepayments of our assets. If prepayments are slower or faster than assumed, the maturity of our investments will also differ from our expectations, which could reduce the effectiveness of our hedging strategies and may cause losses on such transactions and adversely affect our cash flow.
The severity of potential declines in our tangible net book value due to fluctuations in interest rates would depend on our asset, liability, and hedge composition at the time, as well as the magnitude and duration
of the interest rate change. Primary measures of an instrument's price sensitivity to interest rate fluctuations are its duration and convexity. Duration measures the estimated percentage change in market value of an instrument that would be caused by a parallel change in short and long-term interest rates. The duration of our assets will vary with changes in interest rates and tends to increase when interest rates rise and decrease when interest rates fall. This "negative convexity" generally increases the interest rate exposure of our investment portfolio in excess of what is measured by duration alone.
We estimate the duration and convexity of our assets using a third-party risk management system and market data. We review the estimates for reasonableness, giving consideration to any unique characteristics of our securities, market conditions and other factors likely to impact these estimates, and based on our judgement
we may make adjustments to the third-party estimates. Our estimated duration gap, which is a measure of the difference between the interest rate sensitivity of our assets and our liabilities, inclusive of interest rate hedges, was 0.4 years as of June 30, 2023, compared to 0.4 years as of December 31, 2022.
The table below quantifies the estimated changes in the fair value of our investment portfolio (including derivatives and other securities used for hedging purposes) and in our tangible net book value per common share as of June 30, 2023 and December 31, 2022 should interest rates go up or down by 25, 50 and 75 basis points, assuming instantaneous parallel shifts in the yield curve and including the impact of both duration
and convexity. All values in the table below are measured as percentage changes from the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment projections as of June 30, 2023 and December 31, 2022.
To the extent that these estimates or other assumptions do not hold true, which may be more likely during periods of elevated market volatility, actual results could differ materially from our projections. Moreover, if different models were
42
employed in the analysis, materially different projections could result. Lastly, while the table below reflects the estimated impact of interest rate
changes on a static portfolio, we actively manage our portfolio, and we continuously adjust the size and composition of our asset and hedge portfolio.
Estimated Change in Tangible Net Book Value Per Common Share
Estimated Change in Portfolio Market Value
Estimated Change in Tangible Net Book Value Per Common Share
-75
Basis Points
0.0%
+0.3%
+0.1%
+1.4%
-50 Basis Points
+0.1%
+0.9%
+0.1%
+1.5%
-25 Basis Points
0.1%
+0.7%
0.1%
1.0%
+25
Basis Points
-0.1%
-1.3%
-0.1%
-1.4%
+50 Basis Points
-0.3%
-3.1%
-0.3%
-3.3%
+75 Basis Points
-0.5%
-5.4%
-0.5%
-5.4%
________________________________
1.Derived
from models that are dependent on inputs and assumptions, assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates.
2.Includes the effect of derivatives and other securities used for hedging purposes. Interest rates are assumed to be floored at 0% in down rate scenarios.
Prepayment Risk and Extension Risk
Prepayment risk is the risk that our assets will be repaid at a faster rate than anticipated. Interest rates and numerous other factors affect the rate of prepayments, such as housing prices, general economic conditions, loan age, size and loan-to-value ratios, and GSE buyouts of delinquent loans underlying our securities. Generally, declining mortgage rates increase the rate of prepayments, while rising rates have the opposite
effect.
If our assets prepay at a faster rate than anticipated, we may be unable to reinvest the repayments at acceptable yields. If the proceeds are reinvested at lower yields than our existing assets, our net interest income would be negatively impacted. We also amortize or accrete premiums and discounts we pay or receive at purchase relative to the stated principal of our assets into interest income over their projected lives using the effective interest method. If the actual and estimated future prepayment experience differs from our prior estimates, we are required to record an adjustment to interest income for the impact of the cumulative difference in the effective yield.
Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise. In a rising or higher interest rate environment, we may be required
to finance our investments at potentially higher costs without the ability to reinvest principal into higher yielding securities as a result of borrowers prepaying their mortgages at a slower pace than originally anticipated, adversely impacting our net interest spread, and thus our net interest income.
As of June 30, 2023 and December 31, 2022, our investment securities (excluding TBAs) had a weighted average projected CPR of 9.8% and 7.4%, respectively, and a weighted average yield of 3.78% and 3.37%, respectively. The table below presents estimated weighted average projected CPRs and yields for our investment securities should interest rates go up or down instantaneously by 25, 50 and 75 basis points. Estimated yields exclude the impact of retroactive "catch-up" premium amortization adjustments for prior periods due
to changes in the projected CPR assumption.
1.Derived from models that are dependent on inputs and assumptions and assumes a static portfolio. Actual results could differ materially from these estimates. Table excludes TBA securities.
2.Asset
yield based on historical cost basis and does not include the impact of retroactive "catch-up" premium amortization adjustments due to changes in projected CPR.
Spread Risk
Spread risk is the risk that the market spread between the yield on our assets and the yield on benchmark interest rates linked to our interest rate hedges, such as U.S. Treasury rates and interest rate swap rates, may vary. As a levered investor in mortgage-backed securities, spread risk is an inherent component of our investment strategy. Therefore, although we use hedging instruments to attempt to protect against moves in interest rates, our hedges are generally not designed to protect against spread risk, and our tangible net book value could decline if spreads widen.
Fluctuations in mortgage spreads can occur due to a variety of factors, including changes
in interest rates, prepayment expectations, actual or anticipated monetary policy actions by the U.S. and foreign central banks, liquidity conditions, required rates of returns on different assets and other market supply and demand factors. The table below quantifies the estimated changes in the fair value of our assets, net of hedges, and our tangible net book value per common share as of June 30, 2023 and December 31, 2022 should spreads widen or tighten by 10, 25 and 50 basis points. The estimated impact of changes in spreads is in addition to our interest rate shock sensitivity included in the interest rate shock table above. The table below assumes a spread duration of 5.0 and 5.8 years as of June 30, 2023 and December 31, 2022, respectively, based on interest rates
and prices as of such dates; however, our portfolio's sensitivity to mortgage spread changes will vary with changes in interest rates and in the size and composition of our portfolio. Therefore, actual results could differ materially from our estimates.
Estimated Change in Tangible Net Book Value Per Common Share
Estimated Change in Portfolio Market Value
Estimated Change in Tangible Net Book Value Per Common Share
-50 Basis Points
+2.5%
+25.6%
+2.9%
+30.6%
-25
Basis Points
+1.3%
+12.8%
+1.5%
+15.3%
-10 Basis Points
+0.5%
+5.1%
+0.6%
+6.1%
+10 Basis Points
-0.5%
-5.1%
-0.6%
-6.1%
+25
Basis Points
-1.3%
-12.8%
-1.5%
-15.3%
+50 Basis Points
-2.5%
-25.6%
-2.9%
-30.6%
________________________________
1.Spread sensitivity is derived
from models that are dependent on inputs and assumptions, assumes there are no changes in interest rates and assumes a static portfolio. Actual results could differ materially from these estimates.
2.Includes the effect of derivatives and other securities used for hedging purposes.
Liquidity Risk
Our liquidity risk principally arises from financing long-term fixed rate assets with shorter-term variable rate borrowings. Future borrowings are dependent upon the willingness of lenders to finance our investments, lender collateral
44
requirements and the lenders’ determination of the fair value of the securities pledged
as collateral, which fluctuates with changes in interest rates and liquidity conditions within the commercial banking and mortgage finance industries.
As of June 30, 2023, we believe that we have sufficient liquidity and capital resources available to execute our business strategy (see Liquidity and Capital Resources in this Form 10-Q for additional details). However, should the value of our collateral or the value of our derivative instruments suddenly decrease, or margin requirements increase, we may be required to post additional collateral for these arrangements, causing an adverse change in our liquidity position. Furthermore, there is no assurance that we will always be able to renew (or roll) our short-term funding liabilities. In addition, our counterparties have the option to increase our haircuts (margin requirements)
on the assets we pledge against our funding liabilities, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll our funding liabilities. Significantly higher haircuts can reduce our ability to leverage our portfolio or may even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.
Credit Risk
Our credit sensitive investments, such as CRT and non-Agency securities, expose us to the risk of nonpayment of principal, interest or other remuneration we are contractually entitled to. We are also exposed to credit risk in the event our repurchase agreement counterparties default on their obligations to resell the underlying collateral back to us at the end of the repo term or in the event our derivative counterparties do not perform under the terms of our derivative agreements.
We
accept credit exposure related to our credit sensitive assets at levels we deem prudent within the context of our overall investment strategy. We attempt to manage this risk through careful asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, and the sale of assets where we identify negative credit trends. We may also manage credit risk with credit default swaps or other financial derivatives that we believe are appropriate. Additionally, we may vary the mix of our interest rate and credit sensitive assets or our duration gap to adjust our credit exposure and/or improve the return profile of our assets, such as when we believe credit performance is inversely correlated with changes in interest rates. Our credit risk related to derivative and repurchase agreement transactions is largely mitigated by limiting our counterparties to major financial institutions with acceptable credit ratings or to registered central clearinghouses and
monitoring concentration levels with any one counterparty. We also continuously monitor and adjust the amount of collateral pledged based on changes in market value. However, our efforts to manage credit risk may be unsuccessful and we could suffer losses as a result. Excluding central clearing exchanges, as of June 30, 2023, our maximum amount at risk with any counterparty related to our repurchase agreements and derivative agreements was less than 4% and 1%, respectively, of tangible stockholders' equity.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We, including our Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2023. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
45
PART
II. OTHER INFORMATION
Item 1. Legal Proceedings
Neither we, nor any of our consolidated subsidiaries, are currently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us or any consolidated subsidiary, other than routine litigation and administrative proceedings arising in the ordinary course of business. Such proceedings are not expected to have a material adverse effect on the business, financial conditions, or results of our operations.
Item
1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
During the three months ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) informed us of the iadoption or itermination
of a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as those terms are defined in Regulation S-K, Item 408.
Item 6. Exhibits and Financial Statement Schedules
** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing,
in accordance with Item 601 of Regulation S-K
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AGNC INVESTMENT CORP.
By:
/s/ PETER
J. FEDERICO
Peter J. Federico President and Chief Executive Officer (Principal Executive Officer)
