Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value

v3.8.0.1
Available-for-Sale Securities, at Fair Value
 9 Months Ended
Sep. 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 September 30, 2017 and December 31, 2016:
(in thousands)
September 30,
2017
 
December 31,
2016
Agency
 
 
 
Federal National Mortgage Association
$
13,057,102

 
$
8,274,507

Federal Home Loan Mortgage Corporation
3,972,963

 
2,742,630

Government National Mortgage Association
524,306

 
209,337

Non-Agency
2,644,723

 
1,902,383

Total available-for-sale securities
$
20,199,094

 
$
13,128,857



At September 30, 2017 and December 31, 2016, the Company pledged AFS securities with a carrying value of $20.0 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 September 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 September 30, 2017 and December 31, 2016:
 
September 30, 2017
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
19,303,065

 
$
3,538,252

 
$
22,841,317

Unamortized premium
1,038,789

 
—

 
1,038,789

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(525,687
)
 
(525,687
)
Net, unamortized
(2,789,785
)
 
(816,260
)
 
(3,606,045
)
Amortized Cost
17,552,069

 
2,196,305

 
19,748,374

Gross unrealized gains
120,236

 
451,182

 
571,418

Gross unrealized losses
(117,934
)
 
(2,764
)
 
(120,698
)
Carrying Value
$
17,554,371

 
$
2,644,723

 
$
20,199,094

 
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 September 30, 2017 and December 31, 2016:
 
September 30, 2017
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
24,960

 
$
2,300,247

 
$
2,325,207

Fixed Rate
17,529,411

 
344,476

 
17,873,887

Total
$
17,554,371

 
$
2,644,723

 
$
20,199,094

 
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 September 30, 2017:
 
September 30, 2017
(in thousands)
 Agency
 
 Non-Agency
 
 Total
≤ 1 year
$
15,632

 
$
165,060

 
$
180,692

> 1 and ≤ 3 years
38,357

 
249,220

 
287,577

> 3 and ≤ 5 years
1,192,719

 
435,531

 
1,628,250

> 5 and ≤ 10 years
16,285,575

 
1,043,103

 
17,328,678

> 10 years
22,088

 
751,809

 
773,897

Total
$
17,554,371

 
$
2,644,723

 
$
20,199,094



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 nine months ended September 30, 2017 and 2016 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 
Nine Months Ended September 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
(217,206
)
 
(111,938
)
 
(329,144
)
 
(45,398
)
 
(140,318
)
 
(185,716
)
Accretion of net discount
—

 
67,219

 
67,219

 
—

 
50,596

 
50,596

Realized credit losses
11,385

 
—

 
11,385

 
279

 
—

 
279

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

 
(429
)
 
(1,226
)
 
—

 
(1,226
)
Transfers from (to)
44,412

 
(44,412
)
 
—

 
70,371

 
(70,371
)
 
—

Sales, calls, other
3,588

 
81,846

 
85,434

 
32,562

 
77,689

 
110,251

Ending balance at September 30
$
(525,687
)
 
$
(816,260
)
 
$
(1,341,947
)
 
$
(352,489
)
 
$
(789,425
)
 
$
(1,141,914
)


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 September 30, 2017 and December 31, 2016. At September 30, 2017, the Company held 1,380 AFS securities, of which 152 were in an unrealized loss position for less than twelve consecutive months and 164 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 $4.1 billion and $6.4 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of September 30, 2017 and December 31, 2016, $3.9 billion, or 95.1%, 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
September 30, 2017
$
4,136,362

 
$
(22,669
)
 
$
2,341,707

 
$
(98,029
)
 
$
6,478,069

 
$
(120,698
)
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 the nine months ended September 30, 2017, the Company recorded $0.4 million in other-than-temporary credit impairments on one non-Agency security where the future expected cash flows for the security were less than its amortized cost. The Company did not record any other-than-temporary credit impairments during the three months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recorded $1.0 million and $1.8 million, respectively, in other-than-temporary credit impairments on a total of four non-Agency securities where the future expected cash flows for each security were less than its amortized cost. As of September 30, 2017, impaired securities with a carrying value of $117.6 million had actual weighted average cumulative losses of 5.3%, weighted average three-month prepayment speed of 7.3%, weighted average 60+ day delinquency of 21.8% of the pool balance, and weighted average FICO score of 659. At September 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 nine months ended September 30, 2017 and 2016:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Cumulative credit loss at beginning of period
$
(6,035
)
 
$
(6,710
)
 
$
(5,606
)
 
$
(6,499
)
Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
—

 
(1,015
)
 
(429
)
 
(1,307
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
—

 
—

 
—

 
(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
)
 
$
(7,725
)
 
$
(6,035
)
 
$
(7,725
)


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 nine months ended September 30, 2017, the Company sold AFS securities for $0.6 billion and $5.7 billion with an amortized cost of $0.6 billion and $5.7 billion for net realized losses of $3.9 million and $21.0 million, respectively. For the three and nine months ended September 30, 2016, the Company sold AFS securities for $2.8 billion and $6.6 billion with an amortized cost of $2.8 billion and $6.5 billion for net realized gains of $31.8 million and $63.3 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the three and nine months ended September 30, 2017 and 2016:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Gross realized gains
$
408

 
$
31,942

 
$
57,133

 
$
77,836

Gross realized losses
(4,342
)
 
(164
)
 
(78,125
)
 
(14,487
)
Total realized (losses) gains on sales, net
$
(3,934
)
 
$
31,778

 
$
(20,992
)
 
$
63,349