Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value

v3.10.0.1
Available-for-Sale Securities, at Fair Value
 6 Months Ended
Jun. 30, 2018
Debt Securities, Available-for-sale [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. The following table presents the Company’s AFS investment securities by collateral type as of June 30, 2018 and December 31, 2017:
(in thousands)
June 30,
2018
 
December 31,
2017
Agency
 
 
 
Federal National Mortgage Association
$
12,102,934

 
$
13,920,721

Federal Home Loan Mortgage Corporation
3,017,056

 
3,616,967

Government National Mortgage Association
669,001

 
701,037

Non-Agency
3,504,363

 
2,982,094

Total available-for-sale securities
$
19,293,354

 
$
21,220,819



At June 30, 2018 and December 31, 2017, the Company pledged AFS securities with a carrying value of $19.0 billion and $21.0 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 13 - Repurchase Agreements and Note 14 - Federal Home Loan Bank of Des Moines Advances.
At June 30, 2018 and December 31, 2017, 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 Company is not required to consolidate VIEs for which it has concluded it does not have both the power to direct the activities of the VIEs that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include all non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of June 30, 2018 and December 31, 2017, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $3.5 billion and $3.0 billion, respectively.
The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
(in thousands)
Principal/ Current Face
 
Un-amortized Premium
 
Accretable Purchase Discount
 
Credit Reserve Purchase Discount
 
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Carrying Value
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
$
15,178,924

 
$
960,177

 
$
(24,315
)
 
$
—

 
$
16,114,786

 
$
9,494

 
$
(532,602
)
 
$
15,591,678

Interest-only
3,377,698

 
229,293

 
—

 
—

 
229,293

 
15,728

 
(47,708
)
 
197,313

Total Agency
18,556,622

 
1,189,470

 
(24,315
)
 
—

 
16,344,079

 
25,222

 
(580,310
)
 
15,788,991

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
4,470,380

 
6,425

 
(664,948
)
 
(923,834
)
 
2,888,023

 
549,072

 
(7,707
)
 
3,429,388

Interest-only
5,349,634

 
73,708

 
—

 
—

 
73,708

 
3,843

 
(2,576
)
 
74,975

Total Non-Agency
9,820,014

 
80,133

 
(664,948
)
 
(923,834
)
 
2,961,731

 
552,915

 
(10,283
)
 
3,504,363

Total
$
28,376,636

 
$
1,269,603

 
$
(689,263
)
 
$
(923,834
)
 
$
19,305,810

 
$
578,137

 
$
(590,593
)
 
$
19,293,354


 
December 31, 2017
(in thousands)
Principal/ Current Face
 
Un-amortized Premium
 
Accretable Purchase Discount
 
Credit Reserve Purchase Discount
 
Amortized Cost
 
Unrealized Gain
 
Unrealized Loss
 
Carrying Value
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
$
17,081,849

 
$
1,079,246

 
$
(24,638
)
 
$
—

 
$
18,136,457

 
$
42,149

 
$
(134,969
)
 
$
18,043,637

Interest-only
2,941,772

 
223,289

 
—

 
—

 
223,289

 
10,955

 
(39,156
)
 
195,088

Total Agency
20,023,621

 
1,302,535

 
(24,638
)
 
—

 
18,359,746

 
53,104

 
(174,125
)
 
18,238,725

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
3,758,134

 
2,757

 
(676,033
)
 
(653,613
)
 
2,431,245

 
488,931

 
(3,166
)
 
2,917,010

Interest-only
5,614,925

 
65,667

 
—

 
—

 
65,667

 
2,163

 
(2,746
)
 
65,084

Total Non-Agency
9,373,059

 
68,424

 
(676,033
)
 
(653,613
)
 
2,496,912

 
491,094

 
(5,912
)
 
2,982,094

Total
$
29,396,680

 
$
1,370,959

 
$
(700,671
)
 
$
(653,613
)
 
$
20,856,658

 
$
544,198

 
$
(180,037
)
 
$
21,220,819



The following tables present the carrying value of the Company’s AFS securities by rate type as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
20,611

 
$
3,175,732

 
$
3,196,343

Fixed Rate
15,768,380

 
328,631

 
16,097,011

Total
$
15,788,991

 
$
3,504,363

 
$
19,293,354

 
December 31, 2017
(in thousands)
Agency
 
Non-Agency
 
Total
Adjustable Rate
$
23,220

 
$
2,622,710

 
$
2,645,930

Fixed Rate
18,215,505

 
359,384

 
18,574,889

Total
$
18,238,725

 
$
2,982,094

 
$
21,220,819



The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of June 30, 2018:
 
June 30, 2018
(in thousands)
 Agency
 
 Non-Agency
 
 Total
≤ 1 year
$
7,054

 
$
82,833

 
$
89,887

> 1 and ≤ 3 years
39,666

 
109,416

 
149,082

> 3 and ≤ 5 years
275,305

 
410,861

 
686,166

> 5 and ≤ 10 years
12,156,899

 
2,151,623

 
14,308,522

> 10 years
3,310,067

 
749,630

 
4,059,697

Total
$
15,788,991

 
$
3,504,363

 
$
19,293,354



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, 2018 and 2017 of the net unamortized discount/premium and designated credit reserves on non-Agency AFS securities.
 
Six Months Ended June 30,
 
2018
 
2017
(in thousands)
Designated Credit Reserve
 
Net Unamortized Discount/Premium
 
Total
 
Designated Credit Reserve
 
Net Unamortized Discount/Premium
 
Total
Beginning balance at January 1
$
(653,613
)
 
$
(607,609
)
 
$
(1,261,222
)
 
$
(367,437
)
 
$
(623,440
)
 
$
(990,877
)
Acquisitions
(310,985
)
 
(14,025
)
 
(325,010
)
 
(100,558
)
 
(78,796
)
 
(179,354
)
Accretion of net discount
—

 
44,611

 
44,611

 
—

 
44,301

 
44,301

Realized credit losses
14,810

 
—

 
14,810

 
8,424

 
—

 
8,424

Reclassification adjustment for other-than-temporary impairments
(268
)
 
—

 
(268
)
 
(429
)
 
—

 
(429
)
Transfers from (to)
26,222

 
(26,222
)
 
—

 
22,676

 
(22,676
)
 
—

Sales, calls, other
—

 
18,430

 
18,430

 
3,588

 
52,063

 
55,651

Ending balance at June 30
$
(923,834
)
 
$
(584,815
)
 
$
(1,508,649
)
 
$
(433,736
)
 
$
(628,548
)
 
$
(1,062,284
)


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, 2018 and December 31, 2017. At June 30, 2018, the Company held 1,464 AFS securities, of which 525 were in an unrealized loss position for less than twelve consecutive months and 228 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2017, the Company held 1,435 AFS securities, of which 253 were in an unrealized loss position for less than twelve consecutive months and 234 were in an unrealized loss position for more than twelve consecutive months. Of the $13.5 billion and $12.2 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of June 30, 2018 and December 31, 2017, $13.1 billion, or 97.0%, and $12.0 billion, or 98.5%, 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, 2018
$
13,496,177

 
$
(404,135
)
 
$
2,291,284

 
$
(186,458
)
 
$
15,787,461

 
$
(590,593
)
December 31, 2017
$
12,198,870

 
$
(65,313
)
 
$
2,464,544

 
$
(114,724
)
 
$
14,663,414

 
$
(180,037
)


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 (loss) income, net of tax, or (loss) gain 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 the three and six months ended June 30, 2018, the Company recorded $0.2 million and $0.3 million in other-than-temporary credit impairments on a total of two non-Agency securities where the future expected cash flows for each security were less than its amortized cost. 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 security where its future expected cash flows were less than its amortized cost. As of June 30, 2018, impaired securities with a carrying value of $127.6 million had actual weighted average cumulative losses of 6.7%, weighted average three-month prepayment speed of 8.3%, weighted average 60+ day delinquency of 20.3% of the pool balance, and weighted average FICO score of 662. At June 30, 2018, 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, 2018 and 2017:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Cumulative credit loss at beginning of period
$
(6,489
)
 
$
(5,606
)
 
$
(6,395
)
 
$
(5,606
)
Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
(85
)
 
(429
)
 
(85
)
 
(429
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
(89
)
 
—

 
(183
)
 
—

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

 
—

 
—

 
—

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

 
—

 
—

 
—

Cumulative credit loss at end of period
$
(6,663
)
 
$
(6,035
)
 
$
(6,663
)
 
$
(6,035
)


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 (loss) gain on investment securities in the Company’s condensed consolidated statements of comprehensive income. For the three and six months ended June 30, 2018, the Company sold AFS securities for $1.7 billion and $3.7 billion with an amortized cost of $1.7 billion and $3.8 billion for net realized losses of $39.0 million and $58.6 million, respectively. 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.
The following table presents the gross realized gains and losses on sales of AFS securities for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Gross realized gains
$
1,559

 
$
47,994

 
$
9,754

 
$
56,725

Gross realized losses
(40,559
)
 
(14,649
)
 
(68,317
)
 
(73,783
)
Total realized (losses) gains on sales, net
$
(39,000
)
 
$
33,345

 
$
(58,563
)
 
$
(17,058
)