AGNC INVESTMENT CORP.
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 March 31, 2020 . Our MD&A is presented in six
sections:
• Executive Overview
• Financial Condition
• Results of Operations
• Liquidity and Capital Resources
• Off-Balance Sheet Arrangements
• Forward-Looking Statements
EXECUTIVE OVERVIEW
We are an internally managed Real Estate Investment Trust ("REIT"). We 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."
As a REIT, we are required to distribute annually 90% of our taxable income, and
we will generally not be subject to U.S. federal or state corporate income tax
to the extent that we distribute all our annual taxable income to our
stockholders on a timely basis. It is our intention to distribute 100% of our
taxable income within the time limits prescribed by the Internal Revenue Code,
which may extend into the subsequent taxable year.
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 also invest in other types of mortgage
and mortgage-related residential and commercial mortgage-backed securities where
repayment of principal and interest is not guaranteed by a GSE or U.S.
Government agency and in other investments in, or related to, the housing,
mortgage or real estate markets.
Our principal objective is to provide our stockholders with attractive
risk-adjusted returns through a combination of monthly dividends and tangible
net book value accretion. We generate income from the interest earned on our
investments, net of associated borrowing and hedging costs, and net realized
gains and losses on our investment and hedging activities. We fund our
investments primarily through borrowings structured as repurchase agreements.
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
On March 11, 2020 , the World Health Organization characterized COVID-19, a
respiratory disease caused by a novel coronavirus, as a pandemic, and, on March
13, 2020 , President Trump declared the COVID-19 outbreak (the "Pandemic") in the
U.S. a national emergency. The Pandemic resulted in stay-at-home orders, school
closures and widespread business shutdowns globally, significantly adversely
affecting worldwide economies. Extensive shutdowns and business reductions in
the U.S. were expected to substantially increase unemployment levels and sparked
concerns that the U.S. GDP could contract at Depression-era levels. Reactions to
the human and economic impacts of the Pandemic led to swift and severe financial
market dislocations that had a significant impact on our business and financial
results during the first quarter.
The U.S. government has taken actions to reduce the negative impact of the
Pandemic. For example, Congress passed multiple rounds of legislation increasing
and expanding unemployment benefits, providing direct cash payments to eligible
taxpayers, and allocating funds to assist businesses. In March, the Federal
Reserve (the "Fed") lowered the federal funds rate target by 150 basis points to
the zero-bound range. Importantly, the Fed also committed its unlimited support
of the U.S. Treasury and Agency MBS markets through unprecedented levels of
asset purchases. The Fed also significantly increased its support for
24
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the repurchase agreement ("repo") funding markets for Treasury and Agency
mortgage backed securities by offering to provide up to an additional $1
trillion of daily liquidity to the overnight repo market, in addition to its
ongoing open market repo operations. The Federal Housing Finance Administration
("FHFA") also announced large-scale mortgage forbearance programs, and some
states enacted bans on foreclosures to protect borrowers and avoid a steep
decline in the housing market.
The financial market dislocations during March resulted in a significant decline
in the valuations of Agency MBS and other fixed-income products, causing spreads
to widen to levels unseen since the depths of 2008 before the Fed's bold and
decisive actions began to take hold and stabilized the broader fixed income
markets. Despite the Fed's actions, the extreme intra-quarter volatility,
coupled with significantly weaker valuations on our holdings of specified pools,
drove a 22.9% decline in our tangible net book value per common share, resulting
in a negative economic return on tangible common equity of 20.2% for the
quarter.
In March, we transitioned to a fully remote work force, ensuring the safety and
well-being of our employees. Our prior investments in technology, business
continuity planning and cyber security protocols enabled a seamless transition
to this new paradigm. Benefit plans offered to all our employees have also
helped to ensure their well-being, including comprehensive health insurance
benefits, access to 24/7 Teladoc services, on-call family support and mental
health services, short and long-term disability benefits and others.
During the first quarter, we prioritized liquidity and risk management in
response to adverse market conditions, and, as such, took several actions to
mitigate the impact of the severe market volatility and disruptions on our
business. Specifically, we repositioned our assets, strategically managed our
liquidity and funding exposure, and adjusted our hedge positions. In aggregate,
we reduced our investment portfolio by $15 billion to $93 billion as of
quarter-end. The net decline in our asset base consisted of principal pay-downs
of $4 billion and sales of approximately $25 billion of lower coupon, relatively
generic Agency MBS, which were partially replaced with $14 billion of current
production coupon TBA securities. Importantly, our sales of these lower coupon
generic MBS enabled us to build liquidity while maintaining our higher quality
specified pools, as the premiums, or "pay-up" values, for these securities had
declined in mid-March to severely depressed levels. Pay-up values improved
somewhat prior to quarter-end but still contributed to about half of the decline
in our net book value per common share for the quarter.
To further strengthen our liquidity position, we maintained our entire TBA
position at our broker-dealer subsidiary, Bethesda Securities, LLC ("BES") and
shifted a larger portion of our Agency repo funding to the General Collateral
Finance Repo service offered by the Fixed Income Clearing Corporation ("FICC")
through BES to 54% of our Agency repo funding, as of March 31, 2020 , compared to
38% as of December 31, 2019 . The result was a significant reduction in "haircut"
levels, and in turn, margin requirements on our funding obligations compared to
traditional bi-lateral repo agreements.
Our leverage and liquidity position at the end of March was at normal operating
levels. Our "at risk" leverage ratio was 9.4x and our unencumbered assets
totaled 54% of our tangible equity, unchanged from December 31, 2019 . (See
Liquidity and Capital Resources for additional discussion of unencumbered assets
as of March 31, 2020 ).
With the Fed lowering short term rates to near zero, treasury bond yields fell
substantially, and interest rate swaps also repriced dramatically lower during
the quarter. The decline in interest rates reduced the duration of our assets,
which in turn reduced our near term hedging requirements. As such, we reduced
our shorter-dated interest rate swap position and our short U.S. Treasury
position but also added some longer-dated swaps at very low pay-rates. In
aggregate, our interest rate hedge position decreased to 70% of our funding
liabilities, inclusive of our net TBA position (at cost), as of March 31, 2020 ,
from 102% as of December 31, 2019 , and the average pay-rate on our fixed to
floating rate interest rate swaps declined 35 basis points to 0.94% as of March
31, 2020 , from December 31, 2019 .
Our duration gap, which is a measure of the mismatch between the interest rate
sensitivity of our assets and liabilities, inclusive of interest rate hedges,
ended the quarter near zero. With interest rates at historically low absolute
levels, there is significantly more extension risk in our portfolio and in the
mortgage market as a whole. Although negative interest rates are certainly
possible, we believe the Fed would likely utilize all its monetary policy tools,
including asset purchases, providing forward guidance and other measures, before
lowering the Fed funds target to a level materially below zero. Given this
asymmetric risk profile and the low cost of longer-dated hedges, we anticipate
operating with a flat or even negative duration gap in the current environment.
Additionally, as we look ahead, we believe liquidity concerns will give way to
fundamental performance metrics, with prepayments and funding being the key
determinants of AGNC's prospective returns. Although tremendous uncertainty
remains regarding the extent to which the federal government's actions will
mitigate the short and long-term negative impacts of the Pandemic on the U.S.
economy, we believe our portfolio composition is favorably positioned for the
current environment. We have minimal credit exposure, and the GSE guarantee
provides timely payment of principal and interest on our Agency holdings. On the
prepayment front, we believe social distancing, operational headwinds, and
negative credit conditions arising from the Pandemic are likely to persist over
the near term, causing meaningful disruptions to the mortgage origination and
refinance process. We expect that these disruptions will mitigate increases in
aggregate prepayment speeds resulting from today's very low interest
25
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rate environment over the next several quarters. These disruptions, coupled with
historically low funding costs, should benefit our net interest spread,
offsetting some of the negative impact of our smaller asset base. As conditions
ease, we anticipate prepayment activity increasing, assuming rates remain near
current levels, but we believe our portfolio will perform relatively well
despite faster aggregate prepayments given the concentration of our holdings in
low coupon TBA securities and high quality specified pool positions, which have
slower prepayment characteristics.
Longer-term risks remain, however. The Fed could prematurely reduce its support
of the mortgage and funding markets, and the eventual unwind of its asset
purchases could result in renewed strains on the mortgage and broader fixed
income markets. Despite the favorable prepayment profile of our portfolio
holdings, we could experience a higher than anticipated level of prepayment
activity. In addition, after extended forbearance periods, borrower
delinquencies could eventually lead to large scale GSE buyouts of delinquent
loans from mortgage pools. Increased market volatility could also negatively
impact mortgage spreads and reduce liquidity. Although any one of these events
could negatively impact our financial position, we believe Agency MBS continue
to provide the most attractive risk adjusted returns within the fixed income
markets. For additional information regarding our interest rate and spread
sensitivity please refer to Quantitative and Qualitative Disclosures about
Market Risk and regarding risks associated with the economic and financial
market turbulence resulting from the COVID-19 Pandemic to Risk Factors in this
Form 10-Q.
Market Information
The following table summarizes interest rates and prices of generic fixed rate
Agency RMBS as of each date presented below:
Mar. June Sept.
Dec. Mar.
31, 30, 30, 31, 31, vs
Interest Rate/Security Price 1 2019 2019 2019 2019 2020 Dec. 31, 2019
Target Federal Funds Rate:
Target Federal Funds Rate - Upper Band 2.50% 2.50% 2.00% 1.75% 0.25% -150 bps
LIBOR:
1-Month 2.49% 2.40% 2.02% 1.76% 0.99% -77 bps
3-Month 2.60% 2.32% 2.09% 1.91% 1.45% -46 bps
U.S. Treasury Security Rate:
2-Year U.S. Treasury 2.26% 1.75% 1.62% 1.57% 0.25% -132 bps
5-Year U.S. Treasury 2.23% 1.77% 1.54% 1.69% 0.38% -131 bps
10-Year U.S. Treasury 2.41% 2.01% 1.66% 1.92% 0.67% -125 bps
30-Year U.S. Treasury 2.81% 2.53% 2.11% 2.39% 1.32% -107 bps
Interest Rate Swap Rate:
2-Year Swap 2.38% 1.81% 1.63% 1.70% 0.49% -121 bps
5-Year Swap 2.28% 1.77% 1.50% 1.73% 0.52% -121 bps
10-Year Swap 2.41% 1.96% 1.56% 1.90% 0.72% -118 bps
30-Year Swap 2.58% 2.21% 1.71% 2.09% 0.88% -121 bps
30-Year Fixed Rate Agency Price:
2.5% $97.10 $99.36 $99.55 $98.89 $103.59 +$4.70
3.0% $99.55 $100.84 $101.51 $101.42 $104.83 +$3.41
3.5% $101.35 $102.24 $102.58 $102.86 $105.70 +$2.84
4.0% $102.86 $103.36 $103.77 $104.01 $106.67 +$2.66
4.5% $104.20 $104.49 $105.29 $105.29 $107.47 +$2.18
15-Year Fixed Rate Agency Price:
2.5% $99.39 $100.67 $100.85 $100.91 $103.72 +$2.81
3.0% $100.89 $101.95 $102.21 $102.50 $104.61 +$2.11
3.5% $102.28 $103.20 $103.42 $103.69 $105.19 +$1.50
4.0% $103.00 $103.84 $104.08 $104.28 $105.56 +$1.28 ________________________________
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. Prices and interest rates in
the table above were obtained from Barclays. LIBOR rates were obtained
from Bloomberg.
26-------------------------------------------------------------------------------- FINANCIAL CONDITION As ofMarch 31, 2020 andDecember 31, 2019 , our investment portfolio consisted of$71.8 billion and$100.4 billion of investment securities, at fair value, respectively, and$21.2 billion and$7.4 billion of TBA securities, at fair value, respectively. The following table is a summary of our investment portfolio as ofMarch 31, 2020 andDecember 31, 2019 (dollars in millions): March 31, 2020 December 31, 2019 Investment Portfolio Average Amortized Average (Includes TBAs) Amortized Cost Fair Value Coupon % Cost Fair Value Coupon % Fixed rate Agency RMBS and TBA securities: ? 15-year: ? 15-year RMBS $ 5,650$ 5,830 3.27 % 6 %$ 6,140 $ 6,239 3.29 % 6 % 15-year TBA securities, net 1 88 104 2.50 % - % 2,222 2,226 2.91 % 2 % Total ? 15-year 5,738 5,934 3.26 % 6 % 8,362 8,465 3.19 % 8 % 20-year RMBS 1,099 1,136 3.50 % 1 % 752 773 3.87 % 1 % 30-year: 30-year RMBS 60,535 62,935 3.86 % 68 % 89,483 91,062 3.67 % 84 % 30-year TBA securities, net 1 20,560 21,118 3.03 % 23 % 5,182 5,203 2.92 % 5 % Total 30-year 81,095 84,053 3.64 % 90 % 94,665 96,265 3.63 % 89 % Total fixed rate Agency RMBS and TBA securities 87,932 91,123 3.62 % 98 % 103,779 105,503 3.60 % 98 % Adjustable rate Agency RMBS 118 120 2.69 % - % 160 163 3.04 % - % Multifamily 37 42 3.37 % - % 37 39 3.37 % - % CMO Agency RMBS: CMO 406 422 3.43 % - % 441 447 3.44 % 1 % Interest-only strips 60 77 4.92 % - % 63 77 4.22 % - % Principal-only strips 78 88 - % - % 83 87 - % - % Total CMO Agency RMBS 544 587 3.81 % 1 % 587 611 3.48 % 1 % Total Agency RMBS and TBA securities 88,631 91,872 3.62 % 99 % 104,563 106,316 3.59 % 99 % Non-Agency RMBS 225 204 4.16 % - % 198 209 4.05 % 1 % CMBS 360 348 4.29 % 1 % 352 370 4.49 % - % CRT 775 574 4.27 % 1 % 961 976 5.07 % 1 % Total investment portfolio$ 89,991 $ 92,998 3.62 % 100 %$ 106,074 $ 107,871 3.61 % 100 %
________________________________
1. TBA securities are presented net of long and short positions. As of
of 3.03% and 3.00%, respectively, and 15-year TBA securities consisted of
entirely long TBA securities at an average coupon of 2.50%. As of December
31, 2019, 30-year TBA securities consisted of
billion short TBA securities at an average coupon of 3.17% and 4.00%,
respectively, and 15-year TBA securities consisted entirely of long TBA
securities at an average coupon of 2.91%. For further details of our TBA
securities held as of each date refer to Note 6 of the accompanying
consolidated financial statements.
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 March 31, 2020 and December 31,
2019 , our TBA positions had a net carrying value of $574 million and $25
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 Agency security in the TBA
contract and the contract price to be paid or received for the underlying Agency
security.
As of March 31, 2020 and December 31, 2019 , the weighted average yield on our
investment securities (excluding TBA securities) was 2.93% and 3.07%,
respectively.
27
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The following tables summarize certain characteristics of our fixed rate Agency
RMBS portfolio, inclusive of TBAs, as of March 31, 2020 and December 31, 2019
(dollars in millions):
March 31, 2020
Includes Net TBA Position Excludes Net TBA Position
Fixed Rate Agency Weighted Average
RMBS and TBA Amortized Specified Amortized Projected
Securities Par Value Cost Fair Value Pool % 1 Cost Basis WAC 2 Yield 3 Age (Months) CPR 3
Fixed rate
? 15-year
2.5% $ 961 $ 961 $ 997 67% 100.9% 2.98% 2.11% 89 13%
3.0% 1,950 1,982 2,048 92% 101.8% 3.53% 2.41% 51 12%
3.5% 1,671 1,709 1,770 93% 102.3% 4.03% 2.83% 29 13%
4.0% 942 970 1,002 91% 103.0% 4.60% 3.05% 29 14%
? 4.5% 112 116 117 97% 103.2% 4.89% 2.99% 115 15%
Total ? 15-year 5,636 5,738 5,934 88% 102.0% 3.81% 2.61% 48 13%
20-year
2.5% 148 155 153 -% 105.0% 3.51% 1.32% 4 22%
3.0% 264 278 279 21% 105.2% 3.81% 1.58% 4 21%
3.5% 271 276 292 81% 101.9% 4.05% 2.95% 79 13%
4.0% 189 194 206 92% 103.2% 4.45% 3.12% 37 15%
? 4.5% 187 196 206 100% 104.7% 5.00% 3.21% 41 16%
Total 20-year: 1,059 1,099 1,136 61% 103.9% 4.15% 2.45% 35 17%
30-year:
? 2.5% 6,787 6,896 7,010 -% 101.1% 3.51% 2.21% 0 17%
3.0% 13,344 13,527 13,997 6% 101.5% 3.74% 2.73% 27 16%
3.5% 20,704 21,502 22,182 74% 104.1% 4.05% 2.67% 56 12%
4.0% 25,654 26,735 27,863 84% 104.2% 4.51% 3.04% 42 15%
? 4.5% 11,836 12,435 13,001 98% 105.1% 5.00% 3.28% 28 17%
Total 30-year 78,325 81,095 84,053 64% 104.1% 4.40% 2.94% 41 14%
Total fixed rate $ 85,020 $ 87,932 $ 91,123 65% 103.9% 4.35% 2.91% 42 14%
________________________________
1. Specified pools include pools backed by lower balance loans with original
loan balances of up to
issued between
loans with original LTVs ? 80%), and pools backed by loans 100% originated
in
pools had a weighted average original loan balance of
had a weighted average original LTV of 119% and 136% for 15-year and
30-year securities, respectively.
2. WAC represents the weighted average coupon of the underlying collateral.
3. Portfolio yield incorporates a projected life CPR based on forward rate
assumptions as of March 31, 2020 .
28--------------------------------------------------------------------------------
Includes Net TBA Position Excludes Net TBA Position
Fixed Rate Agency Weighted Average
RMBS and TBA Amortized Specified Amortized Projected
Securities Par Value Cost Fair Value Pool % 1 Cost Basis WAC 2 Yield 3 Age (Months) CPR 3
Fixed rate
? 15-year
? 2.5% $ 1,720 $ 1,735 $ 1,738 40% 101.0% 2.98% 2.11% 86 11%
3.0% 2,985 3,041 3,067 59% 101.7% 3.52% 2.45% 58 10%
3.5% 2,299 2,354 2,401 71% 102.2% 4.04% 2.86% 25 13%
4.0% 1,075 1,109 1,135 84% 103.1% 4.60% 3.05% 26 14%
4.5% 117 122 123 98% 103.5% 4.87% 3.00% 111 13%
? 5.0% 1 1 1 100% 101.9% 6.55% 4.55% 146 15%
Total ? 15-year 8,197 8,362 8,465 63% 102.0% 3.82% 2.65% 47 12%
20-year
3.5% 284 289 297 81% 102.0% 4.05% 2.97% 77 12%
4.0% 196 202 209 92% 103.3% 4.45% 3.18% 34 13%
4.5% 194 204 210 100% 104.8% 5.00% 3.23% 37 15%
? 5.0% 1 1 1 -% 105.1% 5.95% 3.33% 141 18%
Total 20-year: 675 696 717 90% 103.2% 4.40% 3.05% 49 13%
30-year:
? 3.0% 27,864 28,218 28,252 3% 101.4% 3.85% 2.73% 8 9%
3.5% 23,760 24,525 24,902 60% 103.3% 4.05% 2.97% 49 10%
4.0% 26,934 28,062 28,795 84% 104.2% 4.51% 3.25% 37 11%
4.5% 12,730 13,381 13,831 93% 105.1% 4.98% 3.45% 23 13%
5.0% 380 410 416 94% 108.0% 5.50% 3.28% 39 14%
? 5.5% 63 69 69 49% 109.6% 6.18% 3.33% 158 13%
Total 30-year 91,731 94,665 96,265 55% 103.3% 4.29% 3.07% 31 11%
Total fixed rate $ 100,603 $ 103,723 $ 105,447 56% 103.3% 4.26% 3.04% 32 11%
________________________________
1. See Note 1 of preceding table for specified pool composition. As of
original loan balance of
securities, respectively, and HARP pools had a weighted average original
LTV of 119% and 136% for 15-year and 30-year securities, respectively.
2. WAC represents the weighted average coupon of the underlying collateral.
3. Portfolio yield incorporates a projected life CPR based on forward rate
assumptions as of
As of
March 31, 2020 December 31, 2019
CRT and Non-Agency
Security Credit Ratings 1 CRT 2 RMBS CMBS CRT 2 RMBS CMBS
AAA $ - $ - $ 34 $ - $ - $ 43
AA - 65 204 - 81 214
A - 29 30 13 25 34
BBB 97 72 55 67 71 69
BB 233 23 25 471 21 10
B 175 5 - 308 4 -
Not Rated 69 10 - 117 7 -
Total $ 574 $ 204 $ 348 $ 976 $ 209 $ 370 ________________________________
1. Represents the lowest of Standard and Poor's ("S&P"), Moody's, Fitch,
DBRS,
stated in terms of the S&P equivalent rating as of each date.
2. CRT securities reference the performance of loans underlying Agency RMBSissued by Fannie Mae or Freddie Mac, each of which were subject to Fannie
Mae and Freddie Mac's underwriting standards.
29-------------------------------------------------------------------------------- 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," "net spread and dollar roll income, excluding 'catch-up' premium amortization," "estimated taxable income" and the related per common share measures and certain financial metrics derived from such non-GAAP information, such as "cost of funds" and "net interest spread." "Economic interest income" is measured as interest income (GAAP measure), adjusted (i) to exclude "catch-up" premium amortization associated with changes in CPR estimates and (ii) to 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 and interest rate swap periodic income/(cost). "Net spread and dollar roll income, excluding "catch-up" premium amortization" includes (i) the components of economic interest income and economic interest expense and other interest and dividend income (referred to as "adjusted net interest and dollar roll income"), less (ii) total operating expenses (GAAP measure). 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 of "adjusted net interest and dollar roll income," 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 in "economic interest expense" 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. In the case of "economic interest income" and "net spread and dollar roll income, excluding 'catch-up' premium amortization," we believe the exclusion of "catch-up" adjustments to premium amortization cost or benefit 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 cost or benefit is more indicative of the current earnings potential of our investment portfolio. In the case of estimated taxable income, we believe it is meaningful information because it directly relates to the amount of dividends we are required to distribute to maintain our REIT qualification status. 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. Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing our income tax returns, which occurs after the end of our fiscal year. 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 ofMarch 31, 2020 andDecember 31, 2019 and our condensed consolidated statements of comprehensive income and key statistics for the three months endedMarch 31, 2020 and 2019 (in millions, except per share amounts): 30 -------------------------------------------------------------------------------- ($ in Millions, Except Per Share Amounts) Balance Sheet Data March 31, 2020 December
31, 2019
(Unaudited)
Investment securities, at fair value
$ 85,137 $
113,082
Repurchase agreements and other debt
89,410 Total liabilities$ 75,339 $ 102,041 Total stockholders' equity $ 9,798 $ 11,041 Net book value per common share 1 $ 14.55 $
18.63
Tangible net book value per common share 2 $ 13.62 $
17.66
Three Months Ended March 31,
Statement of Comprehensive Income Data 2020 2019
Interest income $ 491 $ 705
Interest expense 426 541
Net interest income 65 164
Other gain (loss), net (2,463 ) 120
Operating expenses 23 19
Net income (loss) (2,421 ) 265
Dividends on preferred stock 21 10
Net income (loss) available (attributable) to common
stockholders $ (2,442 ) $ 255
Net income (loss) $ (2,421 ) $ 265
Other comprehensive income, net 464 400
Comprehensive income (loss) (1,957 ) 665
Dividends on preferred stock 21 10Comprehensive income (loss) available (attributable) to common stockholders
$ (1,978
)
Weighted average number of common shares outstanding - basic
548.0 536.7
Weighted average number of common shares outstanding - diluted
548.0 537.2
Net income (loss) per common share - basic $ (4.46 ) $ 0.48
Net income (loss) per common share - diluted $ (4.46 ) $ 0.47
Comprehensive income (loss) per common share - basic $ (3.61 ) $ 1.22
Comprehensive income (loss) per common share - diluted $ (3.61 ) $ 1.22
Dividends declared per common share $ 0.48 $ 0.54
31--------------------------------------------------------------------------------
Three Months Ended March 31,
Other Data (Unaudited) * 2020 2019
Average investment securities - at par $ 94,933 $ 87,021
Average investment securities - at cost $ 97,889 $ 89,952
Average net TBA portfolio - at cost $ 7,487 $ 8,002
Average total assets - at fair value $ 113,930 $ 93,538 $ 82,070 Average stockholders' equity 4$ 10,735 $ 10,186 Average tangible net book value "at risk" leverage 5 9.9:1 9.3:1
Tangible net book value "at risk" leverage (as of period end) 6
9.4:1 9.4:1
Economic return on tangible common equity 7 (20.2 )% 7.3 %
Expenses % of average total assets 0.08 % 0.07 %
Expenses % of average assets, including average net TBA position
0.08 % 0.06 %
Expenses % of average stockholders' equity 0.86 % 0.75 %
________________________________
* 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
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 bydividing the sum of daily weighted average mortgage borrowings outstanding
(Agency and non-Agency MBS repurchase agreements, other debt and TBA
securities (at cost)) for the period by the sum of average stockholders'
equity adjusted to exclude goodwill for the period. Leverage excludes
6. "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 (at cost) 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 months ended March 31, 2020 and 2019, 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 of changes in our CPR forecast, and implied
interest income on our TBA securities (dollars in millions):
Three Months Ended March 31,
2020 2019
Amount Yield Amount Yield
Interest income:
Cash/coupon interest income $ 875 3.68 % $ 847 3.87 %
Net premium amortization (384 ) (1.67 )% (142 ) (0.73 )%
Interest income (GAAP measure) 491 2.01 % 705 3.14 %
Estimated "catch-up" premium amortization cost
(benefit) due to change in CPR forecast 243 0.99 % 39 0.17 %
Interest income, excluding "catch-up" premium
amortization 734 3.00 % 744 3.31 %
TBA dollar roll income - implied interest income
1,2 48 2.54 % 71 3.55 %
Economic interest income, excluding "catch-up"
amortization (non-GAAP measure) 3 $ 782 2.97 %
Weighted average actual portfolio CPR for
investment securities held during the period 12.2 % 6.3 %
Weighted average projected CPR for the remaining
life of investment securities held as of period
end 14.5 % 10.5 %
Average 30-year fixed rate mortgage rate as of
period end 4 3.50 % 4.06 %
10-year U.S. Treasury rate as of period end 0.67 % 2.41 %
32--------------------------------------------------------------------------------
________________________________
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. Source:
The principal elements impacting our economic interest income are the size of our average investment portfolio and the yield (actual and implied) 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 months endedMarch 31, 2020 compared to the prior year period (in millions): Impact of Changes in the Principal Elements Impacting Economic Interest Income Three Months Ended March 31, 2020 vs. March 31, 2019 Due to Change in Average Total Increase / Portfolio Asset (Decrease) Size Yield Three months ended: Interest Income (GAAP measure) $ (215 ) $ 62$ (277 ) Estimated "catch-up" premium amortization due to change in CPR forecast 204 - 204 Interest income, excluding "catch-up" premium amortization (11 ) 62 (73 ) TBA dollar roll income - implied interest income (24 ) (5 ) (19 ) Economic interest income, excluding "catch-up" amortization (non-GAAP measure) $ (35 ) $
57 $ (92 )
Our average investment portfolio, inclusive of TBAs, increased 8% (at cost) for the three months endedMarch 31, 2020 , compared to the prior year period, largely due to a larger capital base from equity capital raises. The decrease in our average asset yield was due to the combination of changes in asset composition and higher premium amortization cost resulting from faster prepayment expectations. 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 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 and other intangible assets. 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 inU.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): Average Tangible Tangible Repurchase Agreements Net TBA Position Net Book Net Book and Other Debt 1 Long/(Short) 2 Value Value "At "At Risk" Risk" Leverage Leverage Average during as of Daily Maximum Ending Average Daily Ending the Period Quarter Ended Amount Daily Amount Amount Amount Amount Period 3 End 4 March 31, 2020$ 93,538 $ 104,773 $ 63,241 $ 7,487$ 20,648 9.9:1 9.4:1 December 31, 2019$ 88,677 $ 92,672 $ 89,313 $ 7,038$ 7,404 9.5:1 9.4:1 March 31, 2019$ 82,070 $ 87,877 $ 86,590 $ 8,002$ 6,885 9.3:1 9.4:1
________________________________
1. Other debt includes debt of consolidated VIEs. Amounts exclude
2. Daily average and ending net TBA position outstanding measured at cost.
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
position outstanding divided by the sum of our average month-ended
stockholders' equity, adjusted to exclude goodwill.
33--------------------------------------------------------------------------------
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 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 months endedMarch 31, 2020 and 2019 (dollars in millions), which includes the combination of interest expense on Agency repurchase agreements and other debt (GAAP measure), implied interest expense on our TBA securities and interest rate swap periodic interest (income) cost: Three Months Ended March 31, 2020 2019 Economic Interest Expense and Aggregate Cost of Funds 1 Amount Cost of Funds Amount Cost of Funds Repurchase agreement and other debt - interest expense (GAAP measure)$ 426 1.80 %$ 541 2.64 % TBA dollar roll income - implied interest expense 2,3 32 1.67 % 52 2.60 % Economic interest expense - before interest rate swap periodic (income) costs, net 4 458 1.79 % 593 2.64 % Interest rate swap periodic interest (income) cost, net 2,5 (31 ) (0.12 )% (83 ) (0.37 )% Total economic interest expense (non-GAAP measure)$ 427 1.67 %$ 510 2.27 %
________________________________
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
2. Reported in gain (loss) on derivative instruments and other securities,
net in our consolidated statements of comprehensive income.
3. The implied funding cost 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 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 interest (income) cost is measured as a
percent of average mortgage borrowings outstanding for the period.
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 (actual and implied) 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 months
ended March 31, 2020 compared to the prior year period (in millions):
Impact of Changes in the Principal Elements of Economic Interest Expense
Three Months Ended March 31, 2020 vs. March 31, 2019
Due to Change in Average
Total Increase / Borrowing / Swap Borrowing / Swap
(Decrease) Balance Rate
Repurchase agreements and other debt interest
expense $ (114 ) $ 73 $ (187 )
TBA dollar roll income - implied interest
expense (20 ) (3 ) (17 )
Interest rate swap periodic interest
income/cost 52 (48 ) 100
Total change in economic interest expense $ (82 ) $
22 $ (104 )
Our average mortgage borrowings, inclusive of TBAs, increased by 12% for the
three months ended March 31, 2020 compared to the prior year period largely as a
function of our higher asset base. The decrease in the average interest rate
(actual and implied) on our mortgage borrowings was largely due to decreases in
the Federal Funds rate. The decrease in our interest rate swap periodic interest
income was due a decline in the average rate received on our interest rate swaps
as the receive leg of our pay-fixed interest rate swaps reset to lower
prevailing rates, which was partially offset by a decline in our average
pay-rate. The increase in our average interest rate swap position outstanding
was due to hedge recomposition. The following table presents a summary of the
ratio of our average interest rates swaps outstanding, excluding forward
starting swaps, to our average mortgage borrowings and the weighted average
pay-fixed / receive-floating rates on our interest rate swaps for the three
months ended March 31, 2020 and 2019 (dollars in millions):
34
--------------------------------------------------------------------------------
Three Months
Ended
2020 2019
Average Agency repo and other debt outstanding$ 93,538 $ 82,070 Average net TBA portfolio outstanding - at cost$ 7,487 $ 8,002 Average mortgage borrowings outstanding$ 101,025 $ 90,072 Average notional amount of interest rate swaps outstanding (excluding forward starting swaps)$ 71,659 $ 45,158 Ratio of average interest rate swaps to mortgage borrowings outstanding 71 % 50 %
Average interest rate swap pay-fixed rate (excluding forward starting swaps)
1.22 % 1.97 %
Average interest rate swap receive-floating rate (1.39 )% (2.72 )%
Average interest rate swap net pay/(receive) rate (0.17 )% (0.75 )%
For the three months ended March 31, 2020 and 2019, we had an average forward
starting swap balance of $1.5 billion and $5.9 billion , 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. Including forward starting swaps, our average ratio
of interest rate swaps outstanding to our average mortgage borrowings for the
three months ended March 31, 2020 and 2019 was 72% and 57%, respectively.
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 months ended March 31, 2020 and 2019:
Three Months Ended March 31,
Investment and TBA Securities - Net Interest Spread 2020 2019
Average asset yield, excluding "catch-up" premium amortization 2.97
% 3.33 %
Average aggregate cost of funds (1.67 )% (2.27 )%
Average net interest spread, excluding "catch-up" premium
amortization 1.30 % 1.06 %
35-------------------------------------------------------------------------------- Net Spread and Dollar Roll Income The following table presents a summary of our net spread and dollar roll income, excluding estimated "catch-up" premium amortization, per diluted common share (a non-GAAP financial measure) and a reconciliation to our net interest income (the most comparable GAAP financial measure) for the three months endedMarch 31, 2020 and 2019 (dollars in millions): Three Months
Ended
2020 2019
Net interest income (GAAP measure) $ 65 $ 164 TBA dollar roll income, net 1 16 19
Interest rate swap periodic interest income (cost), net 1
31 83
Other interest and dividend income 1 2 3
Adjusted net interest and dollar roll income 114 269
Operating expense (23 ) (19 )
Net spread and dollar roll income 91 250
Dividend on preferred stock 21 10
Net spread and dollar roll income available to common stockholders (non-GAAP measure)
70 240
Estimated "catch-up" premium amortization cost due to change in CPR forecast
243 39
Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders (non-GAAP measure)
$ 313 $ 279
Weighted average number of common shares outstanding - basic
548.0 536.7
Weighted average number of common shares outstanding - diluted
549.2 537.2
Net spread and dollar roll income per common share - basic
$ 0.13
$ 0.13
$ 0.57
________________________________
1. Reported in gain (loss) on derivative instruments and other securities,
net in our consolidated statements of comprehensive income
Gain (Loss) onInvestment Securities , Net The following table is a summary of our net gain (loss) on investment securities for the three months endedMarch 31, 2020 and 2019 (in millions): Three Months Ended March 31, Gain (Loss) on Investment Securities, Net 1 2020 2019 Gain on sale of investment securities, net $
494
197 1,060 Unrealized gain (loss) on investment securities measured at fair value through other comprehensive income, net
464 400
Total gain (loss) on investment securities, net $
1,155
________________________________
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 3 of our Consolidated Financial
Statements in this Form 10-Q).
36-------------------------------------------------------------------------------- Gain (Loss) onDerivative 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 months endedMarch 31, 2020 and 2019 (in millions): Three Months Ended March 31, 2020 2019 Interest rate swap periodic interest income (cost), net $ 31 $ 83 Realized gain (loss) on derivative instruments and other securities, net: TBA securities - dollar roll income, net 16 19 TBA securities - mark-to-market net gain (loss) 129 65 Payer swaptions (22 ) (10 ) U.S. Treasury securities - long position 60 - U.S. Treasury securities - short position (634 ) (66 ) U.S. Treasury futures - short position (21 ) (45 )
Interest rate swaps - termination fees and variation margin settlements, net
(2,806 ) (699 )
Other 27 (6 )
Total realized gain (loss) on derivative instruments and other securities, net
(3,251 ) (742 )
Unrealized gain (loss) on derivative instruments and other securities, net: TBA securities - mark-to-market net gain (loss)
548 (1 ) Interest rate swaps (20 ) 20 Payer swaptions (112 ) (17 ) U.S. Treasury securities - long position 37 - U.S. Treasury securities - short position (303 ) (359 ) U.S. Treasury futures - short position (83 ) 14 Other (1 ) 2
Total unrealized gain (loss) on derivative instruments and other securities, net
66 (341 )
Total gain (loss) on derivative instruments and other securities, net
$
(3,154 )
For further details regarding our use of derivative instruments and related activity refer to Notes 3 and 6 of our Consolidated Financial Statements in this Form 10-Q. Estimated Taxable Income For the three months endedMarch 31, 2020 and 2019, we had estimated taxable income available to common stockholders of$111 million and$196 million (or$0.20 and$0.36 per diluted common share), respectively. Income determined under GAAP differs from income determined underU.S. federal income tax rules because of both temporary and permanent differences in income and expense recognition. The primary differences are (i) unrealized gains and losses on investment securities and derivative instruments marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized, settled or amortized over the instrument's original term, (ii) timing differences, both temporary and potentially permanent, in the recognition of certain realized gains and losses and (iii) temporary differences related to the amortization of premiums and discounts on investments. Furthermore, our estimated taxable income is subject to potential adjustments up to the time of filing our appropriate tax returns, which occurs after the end of our fiscal year. The following is a reconciliation of our GAAP net income to our estimated taxable income for the three months endedMarch 31, 2020 and 2019 (dollars in millions, except per share amounts): 37 --------------------------------------------------------------------------------
Three Months Ended March 31,
2020 2019
Net income (loss) $ (2,421 ) $ 265
Estimated book to tax differences:
Premium amortization, net 237 54
Realized gain/loss, net 2,555 627
Net capital loss/(utilization of net capital loss
carryforward) 32 (12 )
Unrealized (gain)/loss, net (263 ) (719 )
Other (8 ) (9 )
Total book to tax differences 2,553 (59 )
Estimated REIT taxable income 132 206
Dividends on preferred stock 21 10
Estimated REIT taxable income available to common
stockholders $ 111 $ 196
Weighted average number of common shares outstanding - basic 548.0 536.7
Weighted average number of common shares outstanding - diluted
549.2 537.2
Estimated REIT taxable income per common share - basic $ 0.20
Beginning cumulative non-deductible net capital loss $ 394$ 182 Increase (decrease) in net capital loss carryforward 32 (12 ) Ending cumulative non-deductible net capital loss $ 426$ 170 Ending cumulative non-deductible net capital loss per common share $ 0.75$ 0.32 38
-------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Our business is dependent on our ability to maintain adequate levels of liquidity 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, monthly receipts of principal and interest payments, asset sales and equity offerings. We may also utilize TBA dollar roll transactions to finance Agency RMBS investments. We believe that we have sufficient liquidity and capital resources available to meet our obligations and execute our business strategy. In assessing our liquidity, we consider a number of factors, including our current leverage, haircut and minimum collateral levels, access to capital markets, overall market conditions, and the sensitivity of our tangible net book value over a range of scenarios. However, these and other factors impacting our liquidity are subject to numerous risks and uncertainties, including as described in the Quantitative and Qualitative Disclosures of Market Risks and Risk Factors sections of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , as amended (our "2019 Form 10-K") and this Form 10-Q. Leverage Our leverage will vary depending on market conditions and our assessment of relative risks and returns, but we generally would 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. As ofMarch 31, 2020 , our tangible net book value "at risk" leverage ratio was 9.4x and, despite the decline in our tangible net book value during the first quarter, was unchanged fromDecember 31, 2019 . The following table includes a summary of our mortgage borrowings outstanding, as ofMarch 31, 2020 andDecember 31, 2019 (dollars in millions). For additional details of our mortgage borrowings refer to Notes 3, 5 and 6 to our Consolidated Financial Statements in this Form 10-Q. March 31, 2020 December 31, 2019 Mortgage Borrowings Amount % Amount % Repurchase agreements 1$ 63,027 75 %$ 89,085 92 % Debt of consolidated variable interest entities, at fair value 214 - % 228 - % Total debt 63,241 75 % 89,313 92 % Net TBA position, at cost 20,648 25 % 7,404 8 % Total mortgage borrowings$ 83,889 100 %$ 96,717 100 %
________________________________
1. Amount excludes
used to fund purchases of U.S. Treasury securities as of March 31, 2020
and December 31, 2019 , respectively.
Repurchase arrangements involve the sale and a simultaneous agreement to
repurchase the transferred assets at a future date and are accounted for as
collateralized financing transactions. 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.
The terms and conditions of secured borrowings are negotiated on a
transaction-by-transaction basis when each such borrowing is initiated or
renewed. 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." This haircut reflects the
underlying risk of the specific collateral and protects our counterparty against
a change in its value, but conversely subjects us to counterparty credit risk
and limits the amount we can borrow against our investment securities. Interest
rates are generally fixed based on prevailing rates corresponding to the terms
of the borrowings. Interest may be paid monthly or at the termination of a
borrowing at which time we may enter into a new borrowing at prevailing haircuts
and rates with the same lending counterparty or repay that counterparty and
negotiate financing with a different lending counterparty. 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 have lower implied haircuts relative to Agency MBS
pools held on balance sheet and funded with repo financing. However, if it were
to become uneconomical to roll our TBA contracts into future months we could be
required to take physical delivery of the underlying securities and fund those
assets with cash or other financing sources, which could reduce our liquidity
position, as the liquidity benefit of TBA contracts would be eliminated. The
collateral requirements under our TBA contracts are governed by the
Mortgage-Backed Securities Division ("MBSD") of the FICC and by our brokerage
agreements, which may establish margin levels in excess of the MBSD.
39
--------------------------------------------------------------------------------
To help manage the adverse impact of interest rate changes on the value of our
investment portfolio as well as our cash flows, we utilize an interest rate risk
management strategy under which we use derivative financial instruments. In
particular, we attempt to mitigate the risk of the cost of our variable rate
liabilities increasing at a faster rate than the earnings of our long-term fixed
rate assets during a period of rising interest rates. 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.
Collateral Requirements and Unencumbered Assets
Amounts available to be borrowed under our repurchase agreements are dependent
upon lender collateral requirements and the lender's 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. In response to declines in
the fair value of pledged securities due to changes in market conditions or the
publishing of monthly security pay-down factors, lending counterparties
typically require that we post additional securities as collateral, pay-down
borrowings or fund cash margin accounts with the counterparties in order to
re-establish the agreed-upon collateral requirements, referred to as "margin
calls." Similarly, if the estimated fair value of our investment securities
increases due to changes in interest rates or other factors, counterparties may
release collateral back to us. Our derivative agreements also require that we
maintain a minimum collateral balance regardless of the value of the derivative
instrument based on our counterparties' assessment of risk specific to the
derivative instrument and clearing exchange rules.
Collateral requirements under our repurchase and derivative agreements are
dependent on our counterparties' determination of the fair value of securities
pledged and the "haircut" levels they apply against the value of our securities.
Haircuts under repo agreements are typically determined on an individual
transaction basis and reflect our counterparties' assessment of the underlying
risk associated with the specific collateral. Our derivative agreements also
require that we maintain a minimum collateral balance regardless of the value of
the derivative instrument based on our counterparties' assessment of risk
specific to the derivative instrument and clearing exchange rules. Haircut
levels and minimum margin requirements can change overtime and could be expected
to increase during periods of elevated market volatility. We are also subject to
daily variation margin requirements based on changes in the value of our
collateral and, in the case of derivative agreements, changes in the value of
the derivative instrument. Daily variation margin requirements under our
interest rate derivative agreements also entitle us to receive collateral if the
value of amounts owed to us under the derivative instrument exceeds a minimum
margin requirement. Our agreements may provide that the valuations of securities
securing our obligations under the agreement are to be obtained from a generally
recognized source agreed to by both parties to the agreement. Other agreements
provide that our counterparty has the sole discretion to determine the value of
pledged collateral, but is 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 March 31, 2020 , we had met all our margin
requirements.
The value of Agency RMBS is reduced by principal pay-downs on the mortgage pools
underlying them. Fannie Mae and Freddie Mac publish monthly security pay-down
factors for their mortgage pools on the fifth day after month-end and remit
payment based on these factors generally on the 25th day after month-end.
Counterparties to our bi-lateral repurchase agreements typically assess margin
to account for these principal pay-downs when pool level principal payment data
becomes available and prior to our receipt of the principal repayment. The FICC
assesses margin based on its internally projected pay-down rates on the last day
of each month (referred to as the "blackout period exposure adjustment" or
"blackout margin"). On the fifth day of the month, the blackout margin is
released and collateralization requirements are adjusted to the actual published
factor data. Consequently, our liquidity is temporarily reduced each month until
we receive payment of the pay-down amounts. We attempt to manage the liquidity
risk associated with principal pay-downs by monitoring conditions impacting
prepayment rates and through asset selection. As of March 31, 2020 , given the
current market conditions and elevated prepayment risk associated with
historically low interest rates, our portfolio largely consisted of higher
coupon specified pool securities, which have a lower risk of prepayment compared
to generic Agency RMBS, and TBA securities, which do not expose us to margin
calls due to prepayments.
Haircut levels and minimum margin requirements imposed by counterparties reduce
the amount of our unencumbered assets and limit the amount we can borrow against
our investment securities. As of March 31, 2020 , the weighted average haircut on
our repurchase agreements was approximately 4.0% of the value of our collateral,
inclusive of collateral funded through BES, compared to 4.4% as of December 31,
2019 . During the first quarter, haircuts on our Agency RMBS collateral remained
stable. Financing for less liquid, credit-oriented securities was significantly
impacted by the dislocation in the financial markets in the first quarter; such
assets were either not financeable through certain lenders, or haircuts and
pricing for such assets increased substantially.
To enhance our liquidity position during the first quarter, we sold lower coupon
Agency RMBS securities funded by repurchase agreements and partially replaced
them with TBA securities. We maintained our entire TBA position at our
broker-dealer subsidiary,
40
--------------------------------------------------------------------------------
BES, and we shifted a larger portion of our Agency repo funding to the FICC
through BES, increasing it to 54% of our Agency repo funding, as of March 31,
2020 , from 38% as of December 31, 2019 . These actions reduced our average
"haircut" level and lowered our aggregate margin requirement compared to our
traditional bi-lateral repo agreements. As of March 31, 2020 , our unencumbered
assets totaled 54% of our tangible net equity, unchanged from December 31, 2019 ,
or $5.0 billion in the aggregate. The majority of our liquidity is held at AGNC,
which included $3.5 billion of unencumbered cash and Agency RMBS and $0.3
billion of unencumbered CRT and non-agency securities as of March 31, 2020 . We
also maintain capital and excess liquidity at BES for regulatory standards, risk
management purposes, and to meet expectations of counterparties, its clearing
bank and clearing organizations. As of March 31, 2020 , our unencumbered assets
held at BES totaled approximately $1.2 billion , after being temporarily reduced
for "blackout margin" charges posted by BES at the end of the month.
Collateral haircuts and minimum margin requirements imposed by counterparties
subject us to counterparty credit risk. 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. As of March 31, 2020 , we had master repurchase agreements with 47
financial institutions located throughout North America , Europe and Asia ,
including repo counterparties accessed through BES. BES' direct access to the
General Collateral Finance Repo service offered by the FICC and other triparty
and bi-lateral repo funding provides us greater depth and diversity of funding
at favorable terms relative to traditional bilateral repurchase agreement
funding. As of March 31, 2020 , $35.4 billion of our repurchase agreement funding
was sourced through BES.
The table below includes a summary of our Agency RMBS repurchase agreement
funding by number of repo counterparties and counterparty region as of March 31,
2020 .
March 31, 2020
Percent of
Number of Repurchase
Counter-Party Region Counter-Parties Agreement Funding 1
North America:
FICC 1 53%
Other 27 36%
Total North America 28 89%
Europe 14 9%
Asia 5 2%
Total 47 100%
________________________________
1. Percent of repurchase agreement funding includes
agreements.
As ofMarch 31, 2020 , our maximum amount at risk (or the excess value of collateral pledged over our repurchase liabilities) with any of our repurchase agreement counterparties, excluding the FICC, was less than 6% of our tangible stockholders' equity, with our top five repo counterparties, excluding the FICC, representing less than 12% of our tangible stockholders' equity. As ofMarch 31, 2020 , approximately 10% of our tangible stockholder's equity was at risk with the FICC. Excluding central clearing exchanges, as ofMarch 31, 2020 , our amount at risk with any counterparty to our derivative agreements was less than 1% of our stockholders' equity. Asset Sales and TBA Eligible Securities Agency RMBS securities are among the most liquid fixed income securities, and the TBA market is the second most liquid market (after theU.S. Treasury market). The vitality of these markets enables us to sell assets under most market conditions to generate liquidity through direct sales or delivery into TBA contracts, subject to "good delivery" provisions promulgated bySecurities Industry and Financial Markets Association ("SIFMA"). As ofMarch 31, 2020 , approximately 93% of our fixed rate Agency RMBS portfolio was eligible for TBA delivery, although we will typically conduct outright sales of specified securities when they trade at a premium to generic securities due to their unique attributes. Equity Capital The equity capital markets serve as a source of capital to grow our business and to generate liquidity to meet our business objectives. The availability of equity capital is dependent on conditions in the equity capital markets and investor demand for our common and preferred stock. We will typically not issue common stock when the price of our common stock trades below our tangible net book value or issue preferred equity when its cost of capital exceeds acceptable hurdle rates of return on our equity. There can be no assurance, however, that we will be able to raise additional equity capital at any particular time or on any particular 41 -------------------------------------------------------------------------------- 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 Notes 10 and 11 to our Consolidated Financial Statements in this Form 10-Q for further details regarding our recent equity capital transactions. OFF-BALANCE SHEET ARRANGEMENTS As ofMarch 31, 2020 , 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 ofMarch 31, 2020 , 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: • the impact of the Pandemic and of measures taken in response to the Pandemic by various governmental authorities, businesses and other third parties; • actions by the federal, state, or local governments to stabilize the economy, the housing sector or financial markets;
• changes in
• fluctuations in the yield curve;
• fluctuations in mortgage prepayment rates on the loans underlying our
Agency RMBS;
• the availability and terms of financing;
• changes in the market value of our assets, including from changes in net
interest spreads, and changes in market liquidity or depth;
• the effectiveness of our risk mitigation strategies;
• conditions in the market for Agency RMBS and other mortgage securities;
• 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; and
• other risks discussed under the heading "Risk Factors" herein and in our
Annual Report on Form 10-K.
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 risk.
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.
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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 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 both a third-party
risk management system and market data. We review the duration estimates from
the third-party model and may make adjustments based on our judgment to better
reflect any unique characteristics and market trading conventions associated
with certain types of securities.
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
March 31, 2020 and December 31, 2019 should interest rates go up or down by 50,
75 and 100 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 March 31, 2020 and December 31, 2019 .
To the extent that these estimates or other assumptions do not hold true, which
is likely in a period of high volatility, actual results could differ materially
from our projections. Moreover, if different models were 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.
Interest Rate Sensitivity 1,2
March 31, 2020 December 31, 2019
Estimated Estimated
Change in Change in
Estimated Tangible Net Estimated Tangible Net
Change in Book Value Change in Book Value
Portfolio Per Common Portfolio Per Common
Change in Interest Rate Market Value Share Market Value Share
-100 Basis Points -% +0.1% -0.5% -6.0%
-75 Basis Points +0.2% +2.9% -0.3% -3.0%
-50 Basis Points +0.3% +3.3% -0.1% -0.9%
+50 Basis Points -0.2% -2.6% -0.4% -4.7%
+75 Basis Points -0.5% -5.9% -0.8% -9.1%
+100 Basis Points -0.9% -10.3% -1.3% -14.8%
________________________________
1. Derived from models that are dependent on inputs and assumptions provided
by third parties, 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 floored at 0% in down rate scenarios.
Prepayment 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 among. Generally, prepayments increase during periods of falling
mortgage interest rates and decrease during periods of rising mortgage interest
rates. However, this may not always be the case.
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
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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
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 which case, we
may have to finance our investments at potentially higher costs without the
ability to reinvest principal into higher yielding securities because borrowers
prepay their mortgages at a slower pace than originally expected, adversely
impacting our net interest spread, and thus our net interest income.
As of March 31, 2020 and December 31, 2019 , our investment securities (excluding
TBAs) had a weighted average projected CPR of 14.5% and 10.8%, respectively, and
a weighted average yield of 2.93% and 3.07%, 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 50, 75 and 100
basis points. Estimated yields exclude the impact of retroactive "catch-up"
premium amortization adjustments from prior periods due to changes in the
projected CPR assumption.
Interest Rate Sensitivity 1
March 31, 2020 December 31, 2019
Weighted Weighted Weighted Weighted
Average Average Average Average
Projected Asset Yield Projected Asset Yield
Change in Interest Rate CPR 2 CPR 2
-100 Basis Points 19.5% 2.67% 20.3% 2.73%
-75 Basis Points 18.6% 2.70% 17.7% 2.82%
-50 Basis Points 17.4% 2.76% 15.0% 2.90%
Actual as of Period End 14.5% 2.93% 10.8% 3.07%
+50 Basis Points 11.4% 3.03% 8.1% 3.12%
+75 Basis Points 10.3% 3.08% 7.5% 3.15%
+100 Basis Points 9.4% 3.12% 6.8% 3.16%
________________________________
1. Derived from models that are dependent on inputs and assumptions provided
by third parties 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. Consequently, 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 March 31, 2020 and December 31, 2019 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 4.5 and 5.0 years as of March 31, 2020 and December 31, 2019 ,
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.
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Spread Sensitivity 1,2
March 31, 2020 December 31, 2019
Estimated Estimated
Change in Change in
Estimated Tangible Net Estimated Tangible Net
Change in Book Value Change in Book Value
Portfolio Per Common Portfolio Per Common
Change in MBS Spread Market Value Share Market Value Share
-50 Basis Points +2.3% +27.1% +2.5% +28.0%
-25 Basis Points +1.1% +13.6% +1.2% +14.0%
-10 Basis Points +0.5% +5.4% +0.5% +5.6%
+10 Basis Points -0.5% -5.4% -0.5% -5.6%
+25 Basis Points -1.1% -13.6% -1.2% -14.0%
+50 Basis Points -2.3% -27.1% -2.5% -28.0%
________________________________
1. Spread sensitivity is derived from models that are dependent on inputs and
assumptions provided by third parties, 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
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 March 31, 2020 , 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,
margin calls relating to our funding liabilities and derivative agreements could
increase, 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 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 to be 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.
There is no guarantee that our efforts to manage credit risk will be successful
and we could suffer losses if credit performance is worse than our expectations
or our counterparties default on their obligations. Excluding central clearing
exchanges, as of March 31, 2020 , our maximum amount at risk with any
counterparty related to our repurchase agreements was less than 6% of our
tangible stockholders' equity and less than 1% of tangible stockholders' equity
related to our interest rate swap and swaption agreements.
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