Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader ofAGNC 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 endedMarch 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 onMay 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 toU.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 aU.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 aU.S. Government agency, such asGovernment 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 orU.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 OnMarch 11, 2020 , theWorld Health Organization characterized COVID-19, a respiratory disease caused by a novel coronavirus, as a pandemic, and, onMarch 13, 2020 ,President Trump declared the COVID-19 outbreak (the "Pandemic") in theU.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 theU.S. were expected to substantially increase unemployment levels and sparked concerns that theU.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. TheU.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, theFederal 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 theU.S. Treasury and Agency MBS markets through unprecedented levels of asset purchases.The Fed also significantly increased its support for 24 -------------------------------------------------------------------------------- the repurchase agreement ("repo") funding markets forTreasury 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 theFixed Income Clearing Corporation ("FICC") through BES to 54% of our Agency repo funding, as ofMarch 31, 2020 , compared to 38% as ofDecember 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 fromDecember 31, 2019 . (See Liquidity and Capital Resources for additional discussion of unencumbered assets as ofMarch 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 shortU.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 ofMarch 31, 2020 , from 102% as ofDecember 31, 2019 , and the average pay-rate on our fixed to floating rate interest rate swaps declined 35 basis points to 0.94% as ofMarch 31, 2020 , fromDecember 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 theU.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 -------------------------------------------------------------------------------- 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 bpsU.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
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1. Price information is for generic instruments only and is not reflective of
our specific portfolio holdings. Price information is as of3:00 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 ofMarch 31, 2020 andDecember 31, 2019 , our TBA positions had a net carrying value of$574 million and$25 million , respectively, reported in derivative assets /(liabilities) on our accompanying consolidated balance sheets. The net carrying value represents the difference between the fair value of the underlying Agency security in the TBA contract and the contract price to be paid or received for the underlying Agency security. As ofMarch 31, 2020 andDecember 31, 2019 , the weighted average yield on our investment securities (excluding TBA securities) was 2.93% and 3.07%, respectively. 27 -------------------------------------------------------------------------------- The following tables summarize certain characteristics of our fixed rate Agency RMBS portfolio, inclusive of TBAs, as ofMarch 31, 2020 andDecember 31, 2019 (dollars in millions): March 31, 2020 Includes Net TBA Position Excludes Net TBA Position Fixed Rate Agency Weighted Average RMBS and TBA Amortized Specified Amortized Projected Securities Par Value Cost Fair Value Pool % 1 Cost Basis WAC 2 Yield 3 Age (Months) CPR 3 Fixed rate ? 15-year 2.5%$ 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 ofMarch 31, 2020 . 28
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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 RMBS
issued 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 10
Comprehensive 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
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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 %
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* 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 by
dividing 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 excludesU.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 endedMarch 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
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________________________________
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 endedMarch 31, 2020 compared to the prior year period (in millions): Impact of Changes in the Principal Elements of
Economic Interest Expense
Three Months EndedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 endedMarch 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 ofU.S. Treasury securities as ofMarch 31, 2020 andDecember 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 ofMarch 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 ofMarch 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 ofMarch 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 ofDecember 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 ofMarch 31, 2020 , from 38% as ofDecember 31, 2019 . These actions reduced our average "haircut" level and lowered our aggregate margin requirement compared to our traditional bi-lateral repo agreements. As ofMarch 31, 2020 , our unencumbered assets totaled 54% of our tangible net equity, unchanged fromDecember 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 ofMarch 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 ofMarch 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 ofMarch 31, 2020 , we had master repurchase agreements with 47 financial institutions located throughoutNorth America ,Europe andAsia , 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 ofMarch 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 ofMarch 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. 42 -------------------------------------------------------------------------------- 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 andU.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 ofMarch 31, 2020 andDecember 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 ofMarch 31, 2020 andDecember 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%
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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 43 -------------------------------------------------------------------------------- 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 ofMarch 31, 2020 andDecember 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%
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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 asU.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 theU.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 ofMarch 31, 2020 andDecember 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 ofMarch 31, 2020 andDecember 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. 44 --------------------------------------------------------------------------------
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%
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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 ofMarch 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 ofMarch 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. 45
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