Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value

v3.7.0.1
Available-for-Sale Securities, at Fair Value
 6 Months Ended
Jun. 30, 2017
Available-for-sale Securities [Abstract]  
Available-for-Sale Securities, at Fair Value
Available-for-Sale Securities, at Fair Value
The Company holds AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. AFS securities exclude the retained interests from the Company’s on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table presents the Company’s AFS investment securities by collateral type as of June 30, 2017 and December 31, 2016:
(in thousands)
June 30,
2017
 
December 31,
2016
Agency
 
 
 
Federal National Mortgage Association
$
10,177,588

 
$
8,274,507

Federal Home Loan Mortgage Corporation
3,508,298

 
2,742,630

Government National Mortgage Association
485,382

 
209,337

Non-Agency
2,256,442

 
1,902,383

Total available-for-sale securities
$
16,427,710

 
$
13,128,857



At June 30, 2017 and December 31, 2016, the Company pledged AFS securities with a carrying value of $16.4 billion and $13.1 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 15 - Repurchase Agreements and Note 17 - Federal Home Loan Bank of Des Moines Advances.
At June 30, 2017 and December 31, 2016, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, to be considered linked transactions and, therefore, classified as derivatives.
The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of June 30, 2017 and December 31, 2016:
 
June 30, 2017
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
16,212,860

 
$
3,077,412

 
$
19,290,272

Unamortized premium
827,000

 
—

 
827,000

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(433,736
)
 
(433,736
)
Net, unamortized
(2,813,604
)
 
(806,264
)
 
(3,619,868
)
Amortized Cost
14,226,256

 
1,837,412

 
16,063,668

Gross unrealized gains
84,781

 
422,884

 
507,665

Gross unrealized losses
(139,769
)
 
(3,854
)
 
(143,623
)
Carrying Value
$
14,171,268

 
$
2,256,442

 
$
16,427,710

 
December 31, 2016
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
13,571,417


$
2,732,139

 
$
16,303,556

Unamortized premium
571,749


—

 
571,749

Unamortized discount
 
 
 
 
 
Designated credit reserve
—


(367,437
)
 
(367,437
)
Net, unamortized
(2,758,445
)

(808,975
)
 
(3,567,420
)
Amortized Cost
11,384,721


1,555,727

 
12,940,448

Gross unrealized gains
79,040


353,358

 
432,398

Gross unrealized losses
(237,287
)

(6,702
)
 
(243,989
)
Carrying Value
$
11,226,474

 
$
1,902,383

 
$
13,128,857



The following tables present the carrying value of the Company’s AFS securities by rate type as of June 30, 2017 and December 31, 2016:
 
June 30, 2017
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
26,735

 
$
1,949,041

 
$
1,975,776

Fixed Rate
14,144,533

 
307,401

 
14,451,934

Total
$
14,171,268

 
$
2,256,442

 
$
16,427,710

 
December 31, 2016
(in thousands)
Agency
 
Non-Agency
 
Total
Adjustable Rate
$
30,463

 
$
1,574,850

 
$
1,605,313

Fixed Rate
11,196,011

 
327,533

 
11,523,544

Total
$
11,226,474

 
$
1,902,383

 
$
13,128,857



The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of June 30, 2017:
 
June 30, 2017
(in thousands)
 Agency
 
 Non-Agency
 
 Total
≤ 1 year
$
557

 
$
40,890

 
$
41,447

> 1 and ≤ 3 years
48,271

 
194,999

 
243,270

> 3 and ≤ 5 years
2,127,292

 
312,203

 
2,439,495

> 5 and ≤ 10 years
11,973,466

 
889,262

 
12,862,728

> 10 years
21,682

 
819,088

 
840,770

Total
$
14,171,268

 
$
2,256,442

 
$
16,427,710



When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because the Company does not expect to collect the entire discount due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as a credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.
The following table presents the changes for the three and six months ended June 30, 2017 and 2016 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 
Six Months Ended June 30,
 
2017
 
2016
(in thousands)
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
 
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
Beginning balance at January 1
$
(367,437
)
 
$
(808,975
)
 
$
(1,176,412
)
 
$
(409,077
)
 
$
(707,021
)
 
$
(1,116,098
)
Acquisitions
(100,558
)
 
(88,807
)
 
(189,365
)
 
(16,217
)
 
(74,039
)
 
(90,256
)
Accretion of net discount
—

 
44,301

 
44,301

 
—

 
32,287

 
32,287

Realized credit losses
8,424

 
—

 
8,424

 
(2,371
)
 
—

 
(2,371
)
Reclassification adjustment for other-than-temporary impairments
(429
)
 
—

 
(429
)
 
(211
)
 
—

 
(211
)
Transfers from (to)
22,676

 
(22,676
)
 
—

 
59,453

 
(59,453
)
 
—

Sales, calls, other
3,588

 
69,893

 
73,481

 
32,562

 
67,121

 
99,683

Ending balance at June 30
$
(433,736
)
 
$
(806,264
)
 
$
(1,240,000
)
 
$
(335,861
)
 
$
(741,105
)
 
$
(1,076,966
)


The following table presents the components comprising the carrying value of AFS securities not deemed to be other than temporarily impaired by length of time that the securities had an unrealized loss position as of June 30, 2017 and December 31, 2016. At June 30, 2017, the Company held 1,306 AFS securities, of which 233 were in an unrealized loss position for less than twelve consecutive months and 131 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2016, the Company held 1,239 AFS securities, of which 252 were in an unrealized loss position for less than twelve consecutive months and 125 were in an unrealized loss position for more than twelve consecutive months. Of the $5.9 billion and $6.4 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of June 30, 2017 and December 31, 2016, $5.7 billion, or 97.2%, and $6.1 billion, or 95.8%, respectively, were Agency AFS securities, whose principal and interest are guaranteed by the GSEs.
 
Unrealized Loss Position for
 
Less than 12 Months
 
12 Months or More
 
Total
(in thousands)
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
June 30, 2017
$
5,911,117

 
$
(80,353
)
 
$
1,046,174

 
$
(63,270
)
 
$
6,957,291

 
$
(143,623
)
December 31, 2016
$
6,416,820

 
$
(204,034
)
 
$
504,978

 
$
(39,955
)
 
$
6,921,798

 
$
(243,989
)


Evaluating AFS Securities for Other-Than-Temporary Impairments
In evaluating AFS securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in either other comprehensive income, net of tax, or gain (loss) on investment securities, depending on the accounting treatment. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.
During both the three and six months ended June 30, 2017, the Company recorded $0.4 million in other-than-temporary credit impairments on one non-Agency RMBS where the future expected cash flows for the security were less than its amortized cost. During the three and six months ended June 30, 2016, the Company recorded $0.1 million and $0.8 million, respectively, in other-than-temporary credit impairments on three non-Agency RMBS where the future expected cash flows for each security were less than its amortized cost. As of June 30, 2017, impaired securities with a carrying value of $117.6 million had actual weighted average cumulative losses of 5.2%, weighted average three-month prepayment speed of 5.2%, weighted average 60+ day delinquency of 21.4% of the pool balance, and weighted average FICO score of 659. At June 30, 2017, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities; therefore, only the projected credit loss was recognized in earnings.
The following table presents the changes in OTTI included in earnings for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Cumulative credit loss at beginning of period
$
(5,606
)
 
$
(6,620
)
 
$
(5,606
)
 
$
(6,499
)
Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
(429
)
 
—

 
(429
)
 
(292
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
—

 
(90
)
 
—

 
(515
)
Reductions:
 
 
 
 
 
 
 
Decreases related to other-than-temporary impairments on securities paid down
—

 
—

 
—

 
—

Decreases related to other-than-temporary impairments on securities sold
—

 
—

 
—

 
596

Cumulative credit loss at end of period
$
(6,035
)
 
$
(6,710
)
 
$
(6,035
)
 
$
(6,710
)


Cumulative credit losses related to OTTI may be reduced for securities sold as well as for securities that mature, are paid down, or are prepaid such that the outstanding principal balance is reduced to zero. Additionally, increases in cash flows expected to be collected over the remaining life of the security cause a reduction in the cumulative credit loss.
Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within gain (loss) on investment securities in the Company’s condensed consolidated statements of comprehensive income. For the three and six months ended June 30, 2017, the Company sold AFS securities for $2.7 billion and $5.1 billion with an amortized cost of $2.6 billion and $5.1 billion for net realized gains of $33.3 million and losses of $17.1 million, respectively. For the three and six months ended June 30, 2016, the Company sold AFS securities for $1.5 billion and $3.8 billion with an amortized cost of $1.5 billion and $3.7 billion for net realized gains of $9.9 million and $31.6 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Gross realized gains
$
47,994

 
$
10,700

 
$
56,725

 
$
45,894

Gross realized losses
(14,649
)
 
(830
)
 
(73,783
)
 
(14,323
)
Total realized gains (losses) on sales, net
$
33,345

 
$
9,870

 
$
(17,058
)
 
$
31,571