Quarterly Report (10-q)

Date : 04/21/2017 @ 1:41PM
Source : Edgar (US Regulatory)
Stock : Cys Investments, Inc. (CYS)
Quote : 8.53  -0.19 (-2.18%) @ 3:59PM

Quarterly Report (10-q)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________
FORM 10-Q
 __________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission file number 001-33740
__________________________________
CYS2015LOGOA07.JPG
  CYS Investments, Inc.
(Exact name of registrant as specified in its charter)
__________________________________
Maryland
20-4072657
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
500 Totten Pond Road, 6 th  Floor, Waltham, Massachusetts
02451
(Address of principal executive offices)
(Zip Code)
(617) 639-0440
(Registrant’s telephone number, including area code)
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or a an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨   (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
April 21, 2017
Common Stock ($0.01 par value)
151,729,528
 




Table of Contents
 
 
 
Page
 
 
 
PART I.   FINANCIAL INFORMATION
 
 
 
 
 
(Derived from the audited consolidated financial statements at December 31, 2016)
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II.   OTHER INFORMATION
 
 
 
 
 
 
 






PART I. Financial Information
Item 1.         Financial Statements
CYS INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars and shares in thousands)
 
March 31, 2017
 
December 31, 2016*
 
(Unaudited)
 
 
Assets:
 
 
 
Cash and cash equivalents
$
584

 
$
1,260

Investments in securities, at fair value:
 
 
 
Agency mortgage-backed securities (including pledged assets of $9,482,227 and $10,233,165, respectively)
11,011,163

 
12,599,045

U.S. Treasury securities (including pledged assets of $26,334 and $44,469, respectively)
49,688

 
49,686

Receivable for securities sold and principal repayments
573

 
409,849

Receivable for cash pledged as collateral

 
600

Interest receivable
31,401

 
31,825

Derivative assets, at fair value
136,552

 
142,556

Other investments
8,028

 
8,028

Other assets
2,929

 
2,419

Total assets
$
11,240,918

 
$
13,245,268

Liabilities and stockholders' equity:
 
 
 
Liabilities:
 
 
 
Repurchase agreements
$
9,015,594

 
$
9,691,544

Payable for securities purchased
524,482

 
1,881,963

Payable for cash received as collateral
101,819

 
91,503

Accrued interest payable
25,457

 
27,908

Accrued expenses and other liabilities
3,559

 
6,170

Dividends payable
42,337

 
4,410

Derivative liabilities, at fair value

 
6,051

Total liabilities
$
9,713,248

 
$
11,709,549

Stockholders' equity:
 
 
 
Preferred Stock, $0.01 par value, 50,000 shares authorized:
 
 
 
7.75% Series A Cumulative Redeemable Preferred Stock, (3,000 shares issued and outstanding, respectively, $75,000 in aggregate liquidation preference)
$
72,369

 
$
72,369

7.50% Series B Cumulative Redeemable Preferred Stock, (8,000 shares issued and outstanding, respectively, $200,000 in aggregate liquidation preference)
193,531

 
193,531

Common Stock, $0.01 par value, 500,000 shares authorized (151,708 and 151,435 shares issued and outstanding, respectively)
1,517

 
1,514

Additional paid in capital
1,945,966

 
1,944,908

Retained earnings (accumulated deficit)
(685,713
)
 
(676,603
)
Total stockholders' equity
$
1,527,670

 
$
1,535,719

Total liabilities and stockholders' equity
$
11,240,918

 
$
13,245,268

* Derived from audited consolidated financial statements.
See Notes to consolidated financial statements (unaudited).

1


CYS INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)
 
Three Months Ended March 31,
 
2017
 
2016
Interest income:
 
 
 
Agency RMBS
$
73,227

 
$
81,323

Other
86

 
128

Total interest income
73,313

 
81,451

Interest expense:
 
 
 
Repurchase agreements
21,221

 
15,886

FHLBC Advances

 
2,059

Total interest expense
21,221

 
17,945

Net interest income
52,092

 
63,506

Other income (loss):
 
 
 
Net realized gain (loss) on investments
(66,044
)
 
1,202

Net unrealized gain (loss) on investments
63,478

 
162,286

Net unrealized gain (loss) on FHLBC Advances

 
(851
)
Other income
47

 
463

Net realized and unrealized gain (loss) on investments, FHLBC Advances and other income
(2,519
)
 
163,100

Swap and cap interest expense
(8,327
)
 
(18,398
)
Net realized and unrealized gain (loss) on derivative instruments
(1,012
)
 
(140,524
)
Net gain (loss) on derivative instruments
(9,339
)
 
(158,922
)
Total other income (loss)
(11,858
)
 
4,178

Expenses:
 
 
 
Compensation and benefits
3,776

 
3,865

General, administrative and other
2,438

 
2,488

Total expenses
6,214

 
6,353

Net income (loss)
$
34,020

 
$
61,331

Dividends on preferred stock
(5,203
)
 
(5,203
)
Net income (loss) available to common stockholders
$
28,817

 
$
56,128

Net income (loss) per common share basic & diluted
$
0.19

 
$
0.37

Dividends declared per common share
$
0.25

 
$
0.26


See Notes to consolidated financial statements (unaudited).

2


CYS INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(dollars in thousands)
 
 
Cumulative Redeemable Preferred Stock
 
 
 
 
 
 
 
 
 
 
Series A
 
Series B
 
Common Stock Par Value
 
Additional Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
Total
Balance, December 31, 2015
 
$
72,369

 
$
193,531

 
$
1,517

 
$
1,946,419

 
$
(519,222
)
 
$
1,694,614

Net income (loss)
 

 

 

 

 
61,331

 
61,331

Issuance of common stock
 

 

 
3

 
(3
)
 

 

Amortization of share based compensation
 

 

 

 
979

 

 
979

Repurchase and cancellation of common stock
 

 

 
(5
)
 
(4,218
)
 

 
(4,223
)
Preferred dividends
 

 

 

 

 
(5,203
)
 
(5,203
)
Common dividends
 

 

 

 

 
(39,399
)
 
(39,399
)
Balance, March 31, 2016
 
$
72,369

 
$
193,531

 
$
1,515

 
$
1,943,177

 
$
(502,493
)
 
$
1,708,099

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
 
$
72,369

 
$
193,531

 
$
1,514

 
$
1,944,908

 
$
(676,603
)
 
$
1,535,719

Net income (loss)
 

 

 

 

 
34,020

 
34,020

Issuance of common stock
 

 

 
3

 
(3
)
 

 

Amortization of share-based compensation
 

 

 

 
1,408

 

 
1,408

Repurchase and cancellation of common stock
 

 

 

 
(347
)
 

 
(347
)
Preferred dividends
 

 

 

 

 
(5,203
)
 
(5,203
)
Common dividends
 

 

 

 

 
(37,927
)
 
(37,927
)
Balance, March 31, 2017
 
$
72,369

 
$
193,531

 
$
1,517

 
$
1,945,966

 
$
(685,713
)
 
$
1,527,670


See Notes to consolidated financial statements (unaudited).

3


CYS INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
34,020

 
$
61,331

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Amortization of share-based compensation
1,408

 
979

Amortization of premiums and discounts on investment securities
14,514

 
15,869

Amortization of premiums on interest rate cap contracts
4,375

 
4,375

Net realized (gain) loss on investments
66,044

 
(1,202
)
Net unrealized (gain) loss on investments
(63,478
)
 
(162,286
)
Net realized and unrealized (gain) loss on derivative instruments
(4,422
)
 
129,411

Net unrealized (gain) loss on FHLBC Advances

 
851

Change in assets and liabilities:
 
 
 
Interest receivable
424

 
530

Other assets
(510
)
 
(168
)
Accrued interest payable
(2,451
)
 
(12,568
)
Accrued expenses and other liabilities
(2,611
)
 
(970
)
Net cash provided by (used in) operating activities
47,313

 
36,152

Cash flows from investing activities:
 
 
 
Purchase of available-for-sale investment securities
(2,292,124
)
 
(1,468,196
)
Proceeds from sale of available-for-sale investment securities
3,532,448

 
1,382,390

Proceeds from sale of other investments

 
16,000

Proceeds from paydowns of available-for-sale investment securities
330,476

 
348,459

Change in assets and liabilities:
 
 
 
Receivable for securities sold and principal repayments
409,276

 
1,083,258

Receivable for cash pledged as collateral
600

 
(63,346
)
Payable for securities purchased
(1,357,481
)
 
(538,811
)
Payable for cash received as collateral
10,316

 
(9,393
)
Net cash provided by (used in) investing activities
633,511

 
750,361

Cash flows from financing activities:
 
 
 
Proceeds from repurchase agreements
37,052,807

 
23,794,322

Repayments of repurchase agreements
(37,728,757
)
 
(23,125,129
)
Proceeds from FHLBC Advances

 
2,175,000

Repayments of FHLBC Advances

 
(3,625,000
)
Net payments from repurchase of common stock
(347
)
 
(4,223
)
Dividends paid
(5,203
)
 
(5,203
)
Net cash provided by (used in) financing activities
(681,500
)
 
(790,233
)
Net increase (decrease) in cash and cash equivalents
(676
)
 
(3,720
)
Cash and cash equivalents - Beginning of period
1,260

 
9,982

Cash and cash equivalents - End of period
$
584

 
$
6,262

Supplemental disclosures of cash flow information:
 
 
 
Interest paid (excluding interest paid on interest rate swaps)
$
23,789

 
$
19,328

Net interest paid on interest rate swaps
$
3,835

 
$
25,207

Income taxes paid
$

 
$

Supplemental disclosures of non-cash flow information:
 
 
 
Dividends declared, not paid
$
42,337

 
$
43,809

See Notes to consolidated financial statements (unaudited).

4


CYS INVESTMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2017
These footnotes to our accompanying unaudited consolidated financial statements in this interim report should be read in conjunction with the footnotes to our Annual Report on Form 10-K, filed with the SEC on February 17, 2017 (the "2016 Annual Report").
1. ORGANIZATION
CYS Investments, Inc. (the "Company" "we", "us", and "our") was formed as a Maryland corporation on January 3, 2006, and commenced operations on February 10, 2006. The Company has elected to be taxed and intends to continue to qualify as a real estate investment trust ("REIT") and is required to comply with the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), with respect thereto. The Company has primarily purchased residential mortgage-backed securities that are issued and the principal and interest of which are guaranteed by a federally chartered corporation ("Agency RMBS"), such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or an agency of the U.S. government such as the Government National Mortgage Association ("Ginnie Mae"), and debt securities issued by the United States Department of Treasury ("U.S. Treasuries"). The Company may also purchase collateralized mortgage obligations issued by a government agency or government-sponsored entity that are collateralized by Agency RMBS ("CMOs"), or securities issued by a government sponsored entity that are not backed by collateral but, in the case of government agencies, are backed by the full faith and credit of the U.S. government, and, in the case of government sponsored entities, are backed by the integrity and creditworthiness of the issuer ("U.S. Agency Debentures").
The Company’s common stock, Series A Cumulative Redeemable Preferred Stock, $25.00 liquidation preference (the "Series A Preferred Stock"), and Series B Cumulative Redeemable Preferred Stock, $25.00 liquidation preference (the "Series B Preferred Stock"), trade on the New York Stock Exchange under the symbols "CYS," "CYS PrA" and "CYS PrB," respectively.
In March 2015, our wholly-owned captive insurance subsidiary, CYS Insurance Services, LLC ("CYS Insurance"), was granted membership in the Federal Home Loan Bank ("FHLB") system, specifically in the FHLB of Cincinnati ("FHLBC"). Membership in the FHLBC obligates CYS Insurance to purchase FHLBC membership stock and activity stock, the latter being a percentage of the advances it obtains from the FHLBC. CYS Insurance seeks both short and long-term advances (collectively, "FHLBC Advances") from the FHLBC. On January 12, 2016, the Federal Housing Finance Agency ("FHFA") issued a final rule (the "Final Rule") amending its regulations governing FHLB Membership criteria for captive insurance companies. The Final Rule defines "insurance company" to exclude "captive insurers". Under this Final Rule, which became effective on February 19, 2016, CYS Insurance's membership in the FHLBC was required to be terminated within one year of the effective date and it was not permitted to secure any new advances. As a result, all FHLBC Advances were required to be repaid no later than February 19, 2017. The Company repaid all outstanding FHLBC Advances prior to September 30, 2016, and CYS Insurance's membership in the FHLBC was terminated on February 19, 2017.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the instructions to the Securities and Exchange Commission ("SEC") Form 10-Q and Article 10, Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The unaudited consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2016, included in the 2016 Annual Report. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year.
The unaudited consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements of the Company have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make a number of estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and accompanying footnotes. Actual results could differ from these estimates and the differences may be material.

5


Reclassification
Prior to January 1, 2016, Short-term and Long-term FHLBC Advances were presented and disclosed separately on the consolidated balance sheet and interest expense on all FHLBC Advances was reported in the aggregate with interest expense on repurchase agreements.  Effective January 1, 2016, Short-term and Long-Term FHLBC Advances are presented on the balance sheet and disclosed in the aggregate, while interest expense on FHLBC Advances is reported separately from interest expense on repurchase agreements.  Prior periods have been reclassified to conform to the current period presentation.
Cash and Cash Equivalents
Cash and cash equivalents represent cash held in banks, cash on hand, and liquid investments with original maturities of three months or less. We may have bank balances in excess of federally insured amounts; however, we deposit our cash and cash equivalents with high credit-quality institutions to minimize credit risk exposure. We have not experienced, and do not expect, any losses on our cash or cash equivalents.
Investments in Securities
The Company's investment securities are accounted for in accordance with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") 320 -Investments-Debt and Equity Securities . These investments meet the requirements to be classified as available-for-sale under ASC 320. Therefore, our investment securities are recorded at fair market value on the consolidated balance sheets. The Company has chosen to make a fair value election pursuant to ASC 825 -Financial Instruments for its securities. Electing the fair value option requires the Company to record changes in the fair value of investments in the Consolidated Statement of Operations as a component of net unrealized gain (loss) on investments, which in management’s view more appropriately reflects the results of operations for a particular reporting period as all securities activities will be recorded in a similar manner.
The Company records its security purchase and sale transactions, including forward settling transactions, on a trade date basis. Realized gains and losses on securities transactions are recorded on an identified cost basis.
Agency RMBS
The Company's investments in Agency RMBS consist of pass-through certificates backed by fixed-rate, monthly-reset adjustable-rate loans ("ARMs") and Hybrid ARMs, the principal and interest of which are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Hybrid ARMs have interest rates that have an initial fixed period (typically three, five, seven or 10 years) and thereafter reset at regular intervals in a manner similar to ARMs.
Forward Settling Transactions
The Company engages in forward settling transactions to purchase or sell certain securities. Agency RMBS may include forward contracts for Agency RMBS purchases or sales of specified pools on a to-be-announced basis ("TBA Securities") that meet the regular-way scope exception in ASC 815 -Derivatives and Hedging ("ASC 815") , and are recorded on a trade date basis to the extent it is probable that we will take or make timely physical delivery of the related securities. The Company maintains security positions such that sufficiently liquid assets will be available to make payment on the settlement date for securities purchased. The Agency RMBS purchased at the forward settlement date are typically priced at a discount to securities for settlement in the current month. Securities purchased on a forward settling basis are carried at fair value and begin earning interest on the settlement date. Gains or losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Investment and Derivative Valuation
The Company has a pricing committee responsible for establishing valuation policies and procedures, and reviewing and approving valuations during monthly pricing meetings. The pricing committee is composed of individuals from the finance and investment teams and other members of senior management. See Note 7, Fair Value Measurements , for additional details related to the fair value of the Company's assets and liabilities.
Interest Income
We record interest income and expense on an accrual basis. We accrue interest income based on the outstanding principal amount of the settled securities in our portfolio and their contractual terms. We amortize premiums and discounts using the effective interest method as prepayments occur, and this net amortization is either a reduction of or accretive to interest income from Agency RMBS in the accompanying Consolidated Statements of Operations. The Company does not estimate prepayments when calculating the yield to maturity on Agency RMBS.

6


Other Investments
CYS Insurance was a member of, and owns capital stock in, the FHLBC. As a condition of its membership in the FHLBC, CYS Insurance was required to maintain FHLBC stock, both for membership and for the level of advances from the FHLBC to CYS Insurance. The Company accounts for its investment in FHLBC stock as a cost method investment in "Other investments" in the accompanying consolidated balance sheets in accordance with ASC 325, Investments - Other . The Company periodically evaluates FHLBC stock for impairment in accordance with ASC 320 -Investments-Debt and Equity Securities . Also included in other investments is a net investment in real estate that is recorded at fair value, inclusive of $3.8 million of corresponding mortgage debt, with changes in estimated fair value recognized in the accompanying Consolidated Statements of Operations.
Repurchase Agreements and FHLBC Advances
Prior to the Final Rule effective date of February 19, 2016, which precluded the Company from securing new FHLBC Advances, we entered into FHLBC Advances that may have an initial maturity of more than one year that were collateralized by the Company's Agency RMBS and U.S. Treasuries (collectively, "Debt Securities"). The Company chose to make a fair value election pursuant to ASC 825 -Financial Instruments for FHLBC Advances with initial terms greater than one year and, therefore, this debt was recorded at fair market value in the accompanying consolidated balance sheets. The unpaid principal balance of FHLBC Advances with initial maturities less than one year generally approximated fair value due to the short-term nature of the instruments. We priced FHLBC Advances with an initial maturity greater than one year daily through a pricing service that uses a discounted cash flow model to value the debt, and we periodically validated the prices we received through this process. Changes in the fair market value were recorded in current period earnings in the accompanying Consolidated Statements of Operations as a component of net unrealized gain (loss) on FHLBC Advances. Electing the fair value option permitted the Company to record changes in the fair value of FHLBC Advances along with that of our investments in the Consolidated Statements of Operations which, in management’s view, more appropriately reflects the results of operations for a particular reporting period as all income producing assets and liabilities are recognized in a consistent manner.
Borrowings under repurchase agreements ("repo borrowings") are, and FHLBC Advances were, collateralized by the Company’s Debt Securities. The Company’s repo borrowing counterparties are institutional dealers in fixed income securities and large financial institutions, and CYS Insurance's counterparty for FHLBC Advances was the FHLBC. Collateral pledged on repo borrowings is valued daily, and collateral that was pledged on FHLBC Advances was valued periodically, and our counterparties (including the FHLBC) may require posting of additional collateral when the fair value of pledged collateral declines. Repo borrowing counterparties have, and the FHLBC had, the right to sell or repledge collateral pledged under repo borrowings and FHLBC Advances.
We account for our repo borrowings as short-term indebtedness under ASC 470 -Debt; accordingly, these short-term instruments are reflected in our financial statements at their amortized cost, which approximates fair value due to their short-term nature.
Derivative Instruments
Included in Derivative Instruments are interest rate swaps and interest rate caps and TBA Derivatives (defined below).
The Company uses interest rate swaps and caps (a "swap" or "cap", respectively) to economically hedge a portion of its exposure to market risks, including interest rate and extension risk. The objective of our risk management strategy is to reduce fluctuations in stockholders’ equity over a range of interest rate scenarios. In particular, we attempt to manage the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates.
During the term of a swap or cap, the Company makes and/or receives periodic payments and records unrealized gains or losses as a result of marking the swap or cap to fair value. When the Company terminates a swap or cap, we record a realized gain or loss equal to the difference between the proceeds from (or the cost of) closing the transaction and the Company's cost basis in the contract, if any. We report the periodic payments and amortization of premiums on cap contracts under swap and cap interest expense in the accompanying Consolidated Statements of Operations . Swaps involve a risk that interest rates will move contrary to the Company’s expectations, thereby increasing the Company’s payment obligation.
The Company's swaps and caps may be subject to a master netting arrangement ("MNA"). The Company is exposed to credit loss in the event of non-performance by the counterparty to the swap or cap, limited to the fair value of collateral posted in excess of the fair value of the contract in a net liability position and the shortage of the fair value of collateral posted for the contract in a net asset position. As of March 31, 2017 and December 31, 2016, the Company did not anticipate non-performance by any counterparty. Should interest rates move contrary to the Company's expectations, the Company may not achieve the anticipated benefits of the interest rate swap or cap and may realize a loss.

7



While the Company's derivative agreements generally permit netting or setting-off derivative assets and liabilities with the counterparty, the Company reports derivative assets and liabilities on a gross basis in the accompanying consolidated balance sheets. Derivatives are accounted for in accordance with ASC 815 which requires recognition of all derivatives as either assets or liabilities at fair value in the accompanying consolidated balance sheets with changes in fair value recognized in the accompanying Consolidated Statements of Operations in "Net realized and unrealized gain (loss) on derivative instruments". Cash receipts and payments related to derivative instruments are classified in the accompanying Consolidated Statements of Cash Flows in accordance with U.S. GAAP in both the operating and investing activities sections.
    
The Company enters into TBA dollar roll transactions whereby the Company is not contractually obligated to accept delivery on the settlement date ("TBA Derivatives"). TBA Derivatives are accounted for as a series of derivative transactions. The fair value of TBA Derivatives is based on similar methods used to value Agency RMBS with gains and losses recorded in Net realized and unrealized gains (losses) on derivative instruments in the accompanying Consolidated Statements of Operations . TBA Derivative transactions involve moving the settlement of a TBA contract out to a later date by entering into an offsetting short position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing a similar TBA contract for a later settlement date.  The Company records such pair offs on a gross basis such that there is a sale of the original TBA Derivative and a subsequent purchase of a new TBA Derivative.
    
None of the Company's derivatives have been designated as hedging instruments for accounting purposes. Effective January 1, 2016, the Company recognized all TBAs that do not qualify for the regular-way scope exception under ASC 815 as derivatives.
Income Taxes
The Company has elected to be treated as a REIT under the Code.  The Company will generally not be subject to federal income tax to the extent that it distributes 90% of its taxable income, after application of available tax attributes, within the time limits prescribed by the Code and as long as it satisfies the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.
Leases
The Company occupies leased office space. The Company’s lease is accounted for in accordance with ASC 840 -Leases , and is classified as an operating lease. Rent expense is amortized on a straight-line basis over the lease term and is included in "General, administrative and other expense" in the accompanying Consolidated Statements of Operations.
Stock-based compensation
The Company applies the provisions of ASC 718- Compensation-Stock Compensation , with regard to its equity incentive plans.  ASC 718 covers a wide range of share-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee stock purchase plans.  ASC 718 requires that compensation costs relating to stock-based payment transactions be recognized in the consolidated financial statements.  Compensation costs related to restricted common shares issued are measured at their estimated fair value at the grant date, and are amortized and expensed over the vesting period on a straight-line basis.

Earnings Per Share ("EPS")

The Company computes basic EPS using the two-class method by dividing net income (loss), after adjusting for the impact of unvested stock awards deemed to be participating securities, by the weighted-average number of common shares outstanding, calculated excluding unvested stock awards. The Company computes diluted EPS by dividing net income (loss), after adjusting for the impact of unvested stock awards deemed to be participating securities, by the weighted-average number of common shares outstanding, calculated excluding unvested stock awards, giving effect to common stock options and warrants, if they are not anti-dilutive. See Note 9, Earnings Per Share for EPS computations.
 
Recent Accounting Pronouncements
The following table provides a brief description of recent accounting pronouncements that could potentially impact the Company's unaudited consolidated financial statements:

8


Accounting Standard
 
Description
 
Required Date of Adoption
 
Anticipated Effect on the Financial Statements
ASU 2017-05 Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
 
On February 22, 2017, the FASB issued ASU 2017-05, which clarifies the scope of the Board’s recently established guidance on nonfinancial asset derecognition (ASC 610-20) as well as the accounting for partial sales of nonfinancial assets. The ASU conforms the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard (ASC 606, as amended).

The FASB issued the ASU in response to stakeholder feedback indicating that (1) the meaning of the term “in-substance nonfinancial asset” is unclear because the Board’s new revenue standard does not define it and (2) the scope of the guidance on nonfinancial assets is confusing and complex and does not specify how a partial sales transaction should be accounted for or which model entities should apply.
 
January 1, 2018. The effective date of the new guidance aligns with the requirements in the new revenue standard. If the entity decides to early adopt the ASU’s guidance, it must also early adopt ASC 606-Revenue from Contracts with Customers (and vice versa).
 
Not expected to have a significant impact on the consolidated financial statements.
ASU 2017-01 Business Combinations (Topic 805) Clarifying the Definition of a Business
 
On January 5, 2017, the FASB issued ASU 2017-01 to clarify the definition of a business in ASC 805. The FASB issued the ASU in response to stakeholder feedback that the definition of a business in ASC 805 is being applied too broadly. In addition, stakeholders said that analyzing transactions under the current definition is difficult and costly. Concerns about the definition of a business were among the primary issues raised in connection with the Financial Accounting Foundation’s post-implementation review report on FASB Statement No. 141(R), Business Combinations (codified in ASC 805). The amendments in the ASU are intended to make application of the guidance more consistent and cost-efficient. Real estate is less likely to be a "business" which will lead to more capitalization of transaction costs-vs-expensing.
 
January 1, 2018 (early adoption permitted).
 
Not expected to have a significant impact on the consolidated financial statements.

9


Accounting Standard
 
Description
 
Required Date of Adoption
 
Anticipated Effect on the Financial Statements
ASU 2016-15 Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15")   (a consensus of the Emerging Issues Task Force)
 
On August 26, 2016, the FASB issued ASU 2016-15, which amends ASC 230, Statement of Cash Flows ("ASC 230), to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Consequently, the FASB issued ASU 2016-15 with the intent of reducing diversity in practice with respect to certain types of cash flows.
 
January 1, 2018 (early adoption is permitted). Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively if retrospective application would be impracticable.
 
Not expected to have a significant impact on the consolidated financial statements.
ASU 2016-02  Leases (Topic 842)
 
The amendments require lessees to recognize a right-of-use asset and a liability to make lease payments in the balance sheets for most leases.  The accounting for lessors is largely unchanged.
 
January 1, 2019 (early adoption permitted).
 
Not expected to have a significant impact on the consolidated financial statements.
ASU 2016-01 Financial Instruments - Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities
 
The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.
 
January 1, 2018 (early adoption permitted for a provision related to presentation of instrument-specific credit risk of liabilities accounted for under the fair value option).
 
Not expected to have a significant impact on the consolidated financial statements.



10


3. INVESTMENTS IN SECURITIES
The available-for-sale portfolio consisted of the following as of March 31, 2017 and December 31, 2016 (in thousands):    
March 31, 2017
 

 
 
 
 
 

Asset Type
 
Amortized Cost
 
Gross Unrealized Loss
 
Gross Unrealized Gain
 
Fair Value
Fannie Mae Certificates
 
 
 
 
 
 
 
 
Fixed Rate
 
$
8,365,820

 
$
(42,425
)
 
$
33,841

 
$
8,357,236

ARMs
 
225,827

 
(1,041
)
 
1,441

 
226,227

Total Fannie Mae
 
8,591,647

 
(43,466
)
 
35,282

 
8,583,463

Freddie Mac Certificates
 
 
 
 
 
 
 
 
Fixed Rate
 
2,392,522

 
(30,559
)
 
7,726

 
2,369,689

ARMs
 
23,100

 
(80
)
 
572

 
23,592

Total Freddie Mac
 
2,415,622

 
(30,639
)
 
8,298

 
2,393,281

Ginnie Mae Certificates
 
 
 
 
 
 
 
 
Fixed Rate
 
1,843

 
(57
)
 

 
1,786

ARMs
 
32,304

 

 
329

 
32,633

Ginnie Mae Certificates - ARMs
 
34,147

 
(57
)
 
329

 
34,419

Total Agency RMBS
 
11,041,416

 
(74,162
)
 
43,909

 
11,011,163

U.S. Treasuries
 
49,960

 
(272
)
 

 
49,688

Total
 
$
11,091,376

 
$
(74,434
)
 
$
43,909

 
$
11,060,851

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Asset Type
 
Amortized Cost
 
Gross Unrealized Loss
 
Gross Unrealized Gain
 
Fair Value
Fannie Mae Certificates
 
 
 
 
 
 
 
 
Fixed Rate
 
$
9,505,262

 
$
(81,783
)
 
$
36,622

 
$
9,460,101

ARMs
 
301,029

 
(2,668
)
 
1,571

 
299,932

Total Fannie Mae
 
9,806,291

 
(84,451
)
 
38,193

 
9,760,033

Freddie Mac Certificates
 


 
 
 
 
 


Fixed Rate
 
2,799,604

 
(55,624
)
 
7,659

 
2,751,639

ARMs
 
50,641

 
(514
)
 
606

 
50,733

Total Freddie Mac
 
2,850,245

 
(56,138
)
 
8,265

 
2,802,372

Ginnie Mae Certificates
 
 
 
 
 
 
 
 
Fixed Rate
 
1,856

 
(54
)
 

 
1,802

ARMs
 
34,390

 

 
448

 
34,838

Total Ginnie Mae
 
36,246

 
(54
)
 
448

 
36,640

Total Agency RMBS
 
12,692,782

 
(140,643
)
 
46,906

 
12,599,045

U.S. Treasuries
 
49,952

 
(266
)
 

 
49,686

Total
 
$
12,742,734

 
$
(140,909
)
 
$
46,906

 
$
12,648,731

The following table presents the gross unrealized loss and fair values of our available-for-sale investments by length of time that such securities have been in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016 (in thousands):

11


 
 
Unrealized loss positions for
 
 
Less than 12 Months
 
Greater than 12 months
 
Total
As of
 
Fair value
 
Unrealized loss
 
Fair value
 
Unrealized loss
 
Fair value
 
Unrealized loss
March 31, 2017
 
$
7,048,303

 
$
(74,434
)
 
$

 
$

 
$
7,048,303

 
$
(74,434
)
December 31, 2016
 
9,264,265

 
(140,909
)
 

 

 
9,264,265

 
(140,909
)
The following table summarizes the Company’s available-for-sale investments as of March 31, 2017  and December 31, 2016 , according to their weighted-average loan age classifications:
 
 
March 31, 2017
 
December 31, 2016
 
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
Less than one year
 
$
6,118,231

 
$
6,162,987

 
$
5,421,799

 
$
5,524,456

Greater than one year through five years
 
4,106,344

 
4,113,412

 
6,415,988

 
6,431,065

Greater than five years through ten years
 
836,276

 
814,977

 
810,944

 
787,213

Greater than ten years
 

 

 

 

Total
 
$
11,060,851

 
$
11,091,376

 
$
12,648,731

 
$
12,742,734


The following table summarizes the Company’s available-for-sale investments as of March 31, 2017  and December 31, 2016 , according to their estimated remaining weighted-average maturity classifications:
 
 
March 31, 2017
 
December 31, 2016
 
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
Less than one year
 
$

 
$

 
$

 
$

Greater than one year through five years
 
3,231,229

 
3,208,100

 
3,765,037

 
3,744,614

Greater than five years through ten years
 
7,810,395

 
7,863,794

 
8,864,309

 
8,978,537

Greater than ten years
 
19,227

 
19,482

 
19,385

 
19,583

Total
 
$
11,060,851

 
$
11,091,376

 
$
12,648,731

 
$
12,742,734

The following table summarizes our net realized gain (loss) from the sale of available-for-sale investments for the three months ended March 31, 2017 and 2016 (in thousands):
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Available-for-sale investments, at cost
 
$
3,598,492

 
$
1,397,188

Proceeds from sale of available-for-sale investments
 
3,532,448

 
1,398,390

Net realized gain (loss) on sale of available-for-sale investments
 
$
(66,044
)
 
$
1,202

 
 
 
 
 
Gross gain on sale of available-for-sale investments
 
$
8,603

 
$
5,383

Gross (loss) on sale of available-for-sale investments
 
(74,647
)
 
(4,181
)
Net realized gain (loss) on sale of available-for-sale investments
 
$
(66,044
)
 
$
1,202

The components of the carrying value of available-for-sale securities at March 31, 2017 and December 31, 2016 are presented below. A premium purchase price is generally due to the average coupon interest rates on these investments being higher than prevailing market rates; similarly, a discount purchase price is generally due to the average coupon interest rate on these investments being lower than prevailing market rates.

12


(in thousands)
 
March 31, 2017
 
December 31, 2016
Principal balance
 
$
10,729,666

 
$
12,285,204

Unamortized premium
 
361,829

 
458,709

Unamortized discount
 
(119
)
 
(1,179
)
Gross unrealized gains
 
43,909

 
46,906

Gross unrealized losses
 
(74,434
)
 
(140,909
)
Fair value
 
$
11,060,851

 
$
12,648,731

As of  March 31, 2017 , the weighted-average coupon interest rate on the Company's Agency RMBS and U.S. Treasuries was  3.43%  and  0.63% , respectively. As of  December 31, 2016 , the weighted-average coupon interest rate on the Company's Agency RMBS and U.S. Treasuries was  3.37%  and  0.63% , respectively. Actual maturities of Agency RMBS are generally shorter than their stated contractual maturities (which range up to 30 years), because they are affected by the contractual lives of the underlying mortgages, periodic payments and principal prepayments.
Credit Risk
The Company believes it has minimal exposure to credit losses on its investment securities at March 31, 2017 and December 31, 2016 because it principally owns Debt Securities. Principal and interest payments on Agency RMBS are guaranteed by Freddie Mac and Fannie Mae, while principal and interest payments on Ginnie Mae RMBS and U.S. Treasuries are backed by the full faith and credit of the U.S. government. In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the U.S. government. On August 5, 2011, Standard & Poor's ("S&P") downgraded the U.S. government's credit rating for the first time to AA+. Fitch Ratings Inc. ("Fitch") announced on October 15, 2013 that it had placed the U.S. government's credit rating on "negative watch". Fitch changed this negative watch to "stable" on March 21, 2014 and has maintained a stable outlook since that time.

As of March 31, 2017, S&P has maintained its AA+ rating for the U.S. government, while Fitch and Moody's rated the U.S. government AAA and Aaa, respectively. Since Fannie Mae and Freddie Mac are in U.S. government conservatorship, the implied credit ratings of Agency RMBS are similarly rated. While the conservatorship, ratings downgrade and ratings watch appear not to have had a significant impact on the fair value of the Agency RMBS or U.S. Treasuries in the Company’s portfolio, these developments create a modest level of uncertainty regarding the credit risk of Debt Securities.
4. DERIVATIVE INSTRUMENTS
The Company enters into swaps and caps with the intent of managing our interest rate exposure. The Company did not enter into any new, nor did it open or terminate any existing swaps or caps for the three months ended March 31, 2017 . The Company had the following activity in interest rate swap and cap transactions during the three months ended March 31, 2017 and 2016 (in thousands):
March 31, 2017
 
March 31, 2016
Trade Date
 
Transaction
 
Notional
 
Trade Date
 
Transaction
 
Notional
N/A
 
N/A
 
$

 
January 2016
 
Terminated
 
$(500,000)
As of March 31, 2017 and December 31, 2016 , the Company had pledged Debt Securities with a fair value of $51.2 million and $72.5 million , respectively, as collateral on swaps and caps. As of March 31, 2017 and December 31, 2016 , the Company had no cash pledged as collateral on swaps and caps. As of March 31, 2017 , the Company had Agency RMBS and U.S. Treasuries of $21.2 million and cash of $99.7 million pledged to it as collateral for its derivative instruments. As of December 31, 2016, the Company had Agency RMBS and U.S. Treasuries of $33.0 million and cash of $90.8 million pledged to it as collateral for its derivative instruments. The table below summarizes information about our derivative and other hedging instrument assets and liabilities as of March 31, 2017 and December 31, 2016 (in thousands):

13


 
 
March 31, 2017
 
December 31, 2016
Derivative and Other Hedging Instruments - Assets
 
Consolidated Balance Sheets
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Interest Rate Swaps
 
Derivative assets, at fair value
 
$
6,450,000

 
$
87,647

 
$
6,450,000

 
$
80,608

Interest Rate Caps
 
Derivative assets, at fair value
 
2,500,000

 
38,326

 
2,500,000

 
42,532

TBA Derivatives
 
Derivative assets, at fair value
 
1,548,200

 
10,579

 
2,417,000

 
19,416

Total derivative assets at fair value
 
 
 
$
10,498,200

 
$
136,552

 
$
11,367,000

 
$
142,556

 
 
 
 
 
 
 
 
 
 
 
Derivative and Other Hedging Instruments - Liabilities
 
Consolidated Balance Sheets
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Interest Rate Swaps
 
Derivative liabilities, at fair value
 
$

 
$

 
$

 
$

Interest Rate Caps
 
Derivative liabilities, at fair value
 

 

 

 

TBA Derivatives
 
Derivative liabilities, at fair value
 

 

 
1,870,000

 
(6,051
)
Total derivative liabilities at fair value
 
 
 
$

 
$

 
$
1,870,000

 
$
(6,051
)
The average notional value of the Company's TBA Derivatives during the three months ended March 31, 2017 and 2016 was $1.5 billion and $1.1 billion , respectively. The average notional value of the Company's swaps and caps during the three months ended March 31, 2017 and 2016 was $9.0 billion and $10.1 billion , respectively.
The following table presents information about the net realized and unrealized gain (loss) on swap, cap and TBA Derivatives for the three months ended March 31, 2017 and 2016 (in thousands):
 
 
 
 
Three Months Ended March 31,
Derivative Instrument Type
 
Location of Gain (Loss) on Derivative Instruments
 
2017
 
2016
Interest rate swaps and caps
 
Swap and cap interest expense
 
$
(8,327
)
 
$
(18,398
)
Interest rate swaps, caps and TBA Derivatives
 
Net realized and unrealized gain (loss) on derivative instruments
 
(1,012
)
 
(140,524
)
Interest rate swaps, caps and TBA Derivatives
 
Net gain (loss) on derivative instruments
 
$
(9,339
)
 
$
(158,922
)
    
The swap and cap notional was $9.0 billion at March 31, 2017 compared to $9.0 billion at December 31, 2016 , and respectively 99.3% and 92.3% of our repo borrowings at March 31, 2017 and December 31, 2016 .
5. REPURCHASE AGREEMENTS AND FHLBC ADVANCES
The Company leverages its Debt Securities portfolio primarily through repo borrowings. Each of the Company's repo borrowings bears interest at a rate based on a spread above or below the London Interbank Offered Rate ("LIBOR"). While repo borrowings are the Company's principal source of borrowings, the Company may issue long-term debt ( i.e. , debt with an initial term greater than one year) to diversify credit sources and to manage interest rate and duration risk.
Certain information with respect to the Company’s repo borrowings outstanding at the balance sheet dates is summarized in the table below.
(in thousands)
March 31, 2017

 
December 31, 2016

Outstanding repurchase agreements
$
9,015,594

 
$
9,691,544

Interest accrued thereon
$
13,602

 
$
16,170

Weighted-average borrowing rate
0.98
%
 
0.89
%
Weighted-average remaining maturity (in days)
65.8

 
53.3

Fair value of pledged collateral (1)
$
9,453,877

 
$
10,198,641

 __________________


14


(1)
Collateral for repo borrowings consists of Agency RMBS and U.S. Treasuries.
The following table presents the remaining contractual maturity of repo borrowings by collateral type as of March 31, 2017 and December 31, 2016 (in thousands):
 
Remaining contractual maturity
March 31, 2017
 
Up to 30 days
 
30-90 days
 
Greater than 90 days
 
Total
Agency RMBS
 
$
3,334,315

 
$
4,118,444

 
$
1,562,835

 
$
9,015,594

Total
 
$
3,334,315

 
$
4,118,444

 
$
1,562,835

 
$
9,015,594

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Agency RMBS
 
$
4,113,286

 
$
3,694,937

 
$
1,883,321

 
$
9,691,544

Total
 
$
4,113,286

 
$
3,694,937

 
$
1,883,321

 
$
9,691,544

At March 31, 2017 and December 31, 2016 , our amount at risk with any individual counterparty related to our repo borrowings was less than 2.6% of stockholders' equity. The amount at risk is defined as the excess of the fair value of the securities, including accrued interest, and cash, pledged to secure the repurchase agreement, over the amount of the repurchase agreement liability adjusted for accrued interest.
Prior to the issuance of the Final Rule on January 12, 2016, pursuant to the FHLBC terms and conditions of membership and applicable credit policies, CYS Insurance was able to obtain long-term advances, secured by eligible collateral, including, but not limited to, residential mortgage-backed securities. As a direct result of the Final Rule, all FHLBC Advances were required to be repaid on or before February 19, 2017. The Company repaid all of its remaining FHLBC Advances prior to September 30, 2016.    
6. PLEDGED ASSETS
Assets Pledged to Counterparties
The following tables summarize our assets pledged as collateral under repo borrowings, and derivative instruments by type, including securities pledged related to securities purchased or sold but not yet settled, as of March 31, 2017 and December 31, 2016 (in thousands):
March 31, 2017
 
 
Asset Type
 
Repurchase Agreements
 
Derivative Instruments
 
Forward Settling Trades (TBAs)
 
Total
Agency RMBS - fair value
 
$
9,462,607

 
$
24,921

 
$
596

 
$
9,488,124

U.S. Treasuries - fair value
 
837

 
27,085

 

 
27,922

Accrued interest on pledged securities
 
26,235

 
110

 
3

 
26,348

Cash
 

 

 

 

Total
 
$
9,489,679

 
$
52,116

 
$
599

 
$
9,542,394

December 31, 2016
 
 
Asset Type
 
Repurchase Agreements
 
Derivative Instruments
 
Forward Settling Trades (TBAs)
 
Total
Agency RMBS - fair value
 
$
10,197,244

 
$
33,311

 
$
2,610

 
$
10,233,165

U.S. Treasuries - fair value
 
1,398

 
45,730

 

 
47,128

Accrued interest on pledged securities
 
27,730

 
87

 
7

 
27,824

Cash
 

 
600

 

 
600

Total
 
$
10,226,372

 
$
79,728

 
$
2,617

 
$
10,308,717




15


Assets Pledged from Counterparties
If the estimated fair value of our investment securities pledged as collateral increases due to changes in interest rates or other factors, we may require counterparties to return collateral to us, which may be in the form of identical or similar securities, or cash. As of March 31, 2017 and December 31, 2016 , we had assets pledged to us as collateral under our repurchase agreements, derivative agreements and TBAs as summarized in the tables below (in thousands):
March 31, 2017
 
 
Asset Type
 
Repurchase Agreements
 
Derivative Instruments
 
Forward Settling Trades (TBAs)
 
Total
Agency RMBS - fair value
 
$
5,457

 
$
2,605

 
$

 
$
8,062

U.S. Treasuries - fair value
 
4,110

 
18,617

 

 
22,727

Accrued interest on pledged securities
 
32

 
583

 

 
615

Cash
 

 
99,699

 
2,121

 
101,820

Total
 
$
9,599

 
$
121,504

 
$
2,121

 
$
133,224

December 31, 2016
 
 
Asset Type
 
Repurchase Agreements
 
Derivative Instruments
 
Forward Settling Trades (TBAs)
 
Total
Agency RMBS - fair value
 
$

 
$
3,016

 
$
1,293

 
$
4,309

U.S. Treasuries - fair value
 

 
29,937

 

 
29,937

Accrued interest on pledged securities
 

 
1,788

 
4

 
1,792

Cash
 

 
90,779

 
724

 
91,503

Total
 
$

 
$
125,520

 
$
2,021

 
$
127,541


Cash collateral received is not restricted as to use and is recognized in "Cash and cash equivalents" with a corresponding amount recognized in "Payable for cash received as collateral" in the accompanying consolidated balance sheets. The Company's collateral received in the form of securities from counterparties is disclosed in Note 4, Derivative Instruments .
The Company’s Master Repurchase Agreements ("MRAs"), Master Securities Forward Transaction Agreements ("MSFTA") and ISDA Master Agreements ("ISDAs", and together with MRAs, the “Master Agreements”) generally provide (unless specified otherwise) that the Company may sell, pledge, rehypothecate, assign, invest, use, commingle, dispose of, or otherwise use in its business any posted collateral it holds, free from any claim or right of any nature whatsoever of the counterparty.  MSFTAs govern the considerations and factors surrounding the settlement of certain forward settling transactions, TBAs and secured borrowing transactions by and between the Company and our counterparties. As of March 31, 2017 , $24.9 million of assets were pledged to the Company under the Master Agreements, of which $1.6 million were pledged by the Company to other counterparties at March 31, 2017 . As of December 31, 2016, $34.2 million of assets were pledged to the Company under the Master Agreements, of which $2.7 million were pledged by the Company to other counterparties at December 31, 2016. Since title to these assets remain with the counterparty under the Master Agreements, these assets are not reflected in the accompanying consolidated balance sheets.

16


Offsetting Assets and Liabilities
Certain of our repo borrowings and derivative transactions are governed by underlying agreements that generally provide for a right of offset under MNAs (or similar agreements), including in the event of default or in the event of bankruptcy of either party to the transactions. Under U.S. GAAP, if the Company has a contractual right of offset, the Company may offset the related asset and liability and report the net amount in the accompanying consolidated balance sheets. However, the Company reports amounts subject to its MRAs and ISDAs in the consolidated balance sheets on a gross basis without regard to such rights of offset.
At March 31, 2017 and December 31, 2016 , the Company's derivative assets and liabilities (by type) are as follows (in thousands):
March 31, 2017
 
Assets
 
Liabilities
Interest rate swap contracts
 
$
87,647

 
$

Interest rate cap contracts
 
38,326

 

TBA derivatives
 
10,579

 

Total derivative assets and liabilities
 
136,552

 

Derivatives not subject to a Master Netting Agreement
 
83,323

 

Total assets and liabilities subject to a Master Netting Agreement
 
$
53,229

 
$

 
 
 
 
 
December 31, 2016
 
Assets
 
Liabilities
Interest rate swap contracts
 
$
80,608

 
$

Interest rate cap contracts
 
42,532

 

TBA derivatives
 
19,416

 
6,051

Total derivative assets and liabilities
 
142,556

 
6,051

Derivatives not subject to a Master Netting Agreement
 
75,033

 

Total assets and liabilities subject to a Master Netting Agreement
 
$
67,523

 
$
6,051

Below are summaries of the Company's assets and liabilities subject to offsetting provisions (in thousands):
Assets
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
As of
 
Description
 
Amount of Assets Presented in the Consolidated Balance Sheets
 
Instruments Available for Offset
 
Collateral Received (1)
 
Net Amount (2)
March 31, 2017
 
Derivative assets
 
$
53,229

 
$

 
$
21,473

 
$
31,756

December 31, 2016
 
Derivative assets
 
67,523

 
3,145

 
49,801

 
14,577

Liabilities
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
As of
 
Description
 
Amount of Liabilities Presented in the Consolidated Balance Sheets
 
Instruments Available for Offset
 
Collateral Pledged (1)
 
Net Amount (2)
March 31, 2017
 
Derivative liabilities
 
$

 
$

 
$

 
$

March 31, 2017
 
Repurchase agreements and FHLBC Advances
 
9,015,594

 

 
9,015,594

 

December 31, 2016
 
Derivative liabilities
 
6,051

 
3,145

 
2,906

 

December 31, 2016
 
Repurchase agreements and FHLBC Advances
 
9,691,544

 

 
9,691,544

 

______________
(1)
Collateral consists of Agency RMBS, U.S. Treasuries and Cash and cash equivalents. Excess collateral pledged is not shown for financial reporting purposes.

17


(2)
Net amount represents the net amount receivable (in the case of assets) and payable (in the case of liabilities) to the counterparty in the event of default.
7. FAIR VALUE MEASUREMENTS

The Company’s valuation techniques are based on observable and unobservable inputs. ASC 820 establishes a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument, and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination, as follows:
 
 
 
 
Level 1: Generally includes only unadjusted quoted prices that are available in active markets for identical financial instruments as of the reporting date.
 
 
 
 
Level 2: Pricing inputs include quoted prices in active markets for similar instruments, quoted prices in less active or inactive markets for identical or similar instruments where multiple price quotes can be obtained, and other observable inputs, such as interest rates and yield curves.
 
 
 
 
Level 3: Pricing inputs are unobservable for the financial instruments and include situations where there is little, if any, market activity for the financial instrument. These inputs require significant judgment or estimation by management when determining fair value and generally represent anything that does not meet the criteria of Levels 1 and 2.

The estimated value of each asset reported at fair value using Level 3 inputs is approved by an internal committee composed of members of senior management, including our Chief Executive Officer, Chief Financial Officer, and other senior officers.
Excluded from the tables below are short-term financial instruments carried in our unaudited consolidated financial statements at cost basis, which is deemed to approximate fair value, primarily due to the short duration of these instruments, including cash and cash equivalents, receivables, payables, and repo borrowings with initial terms of one year or less.
Agency RMBS and U.S. Treasuries are generally valued based on prices provided by third-party pricing services, as derived from such services' pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker quotations, prices or yields of securities with similar characteristics, prepayment rates, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may also use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security.
All valuations we receive from third-party pricing services or broker quotes are non-binding. The pricing committee reviews all prices. To date, the Company has not adjusted any of the prices received from third-party pricing services or brokers. Our pricing review includes comparisons of similar market transactions, alternative third-party pricing services and broker quotes, or comparisons to a pricing model. To ensure proper classification within the fair value hierarchy in ASC 820, the Company reviews the third-party pricing services' methodologies periodically to understand whether observable or unobservable inputs are being used.
We generally value swaps and caps using prices provided by broker quotations. Such broker quotations are based on the present value of fixed and projected floating rate cash flows over the term of the swap contract. Future cash flows are discounted to present value using swap rates provided by electronic data services or by brokers.
"Other investments" is comprised of our investment in FHLBC stock and our net investment in a real estate asset at fair value, inclusive of the corresponding $3.8 million of mortgage debt at March 31, 2017 and December 31, 2016 . Investment in real estate is considered to be a Level 3 asset to which we periodically apply valuation techniques and/or impairment analysis.
The following tables provide a summary of the Company’s assets and liabilities that are measured at fair value on a recurring basis, as of March 31, 2017 and December 31, 2016 (in thousands):

18


March 31, 2017
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Agency RMBS
$

 
$
11,011,163

 
$

 
$
11,011,163

U.S. Treasuries
49,688

 

 

 
49,688

Derivative assets

 
136,552

 

 
136,552

Other investments

 

 
8,028

 
8,028

Total
$
49,688

 
$
11,147,715

 
$
8,028

 
$
11,205,431

Liabilities
 
 
 
 
 
 
 
Derivative liabilities

 

 

 

Total
$

 
$

 
$

 
$

December 31, 2016
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Agency RMBS
$

 
$
12,599,045

 
$

 
$
12,599,045

U.S. Treasuries
49,686

 

 

 
49,686

Derivative assets

 
142,556

 

 
142,556

Other investments

 

 
8,028

 
8,028

Total
$
49,686

 
$
12,741,601

 
$
8,028

 
$
12,799,315

Liabilities
 
 
 
 
 
 
 
FHLBC Advances

 

 

 

Derivative liabilities

 
6,051

 

 
6,051

Total
$

 
$
6,051

 
$

 
$
6,051

The table below presents a reconciliation of changes in Other investments classified as Level 3 and measured at fair value on a recurring basis in the accompanying consolidated balance sheets for the three months ended March 31, 2017 and 2016 .
Level 3 Fair Value Reconciliation
 
 
 
(In thousands)
Three Months Ended March 31,
Other investments
2017
 
2016
Beginning balance Level 3 assets
$
8,028

 
$
8,028

Change in net unrealized gain (loss)

 

Gross purchases

 

Gross sales

 

Net gain (loss) on sales

 

Transfers into (out of) Level 3

 

Ending balance Level 3 assets
$
8,028

 
$
8,028

    
The fair value of our net investment in a real estate asset is primarily derived internally, and is based on inputs observed from sales transactions of similar assets. We also rely on available industry information about capitalization rates and expected trends in rents and occupancy in determining estimates of the fair value of real estate.  The significant unobservable input used in the fair value measurement of our net investment in real estate is the capitalization rate, which the Company estimated to be between 4.0% and 4.9% at March 31, 2017 and December 31, 2016 , respectively.


19


8. STOCKHOLDERS' EQUITY
The Company has authorized 500,000,000 shares of common stock having par value of $0.01 per share. As of March 31, 2017 and December 31, 2016 , the Company had issued and outstanding 151,707,792 and 151,434,917 shares of common stock, respectively.
The Company has authorized 50,000,000 shares of preferred stock having a par value of $0.01 per share. As of March 31, 2017 and December 31, 2016 , 3,000,000 shares of 7.75% Series A Cumulative Redeemable Preferred Stock ( $25.00 liquidation preference) were issued and outstanding. As of March 31, 2017 and December 31, 2016 , 8,000,000 shares of 7.50% Series B Cumulative Redeemable Preferred Stock ( $25.00 liquidation preference) were issued and outstanding. The Series A Preferred Stock and Series B Preferred Stock are not redeemable before August 3, 2017 and April 30, 2018, respectively, except under circumstances where it is necessary to preserve the Company's qualification as a REIT, for federal income tax purposes, or the occurrence of a change of control. On or after August 3, 2017 and April 30, 2018, the Company may, at its option, redeem any or all of the shares of the Series A Preferred Stock and Series B Preferred Stock, respectively, at $25.00 per share plus any accumulated and unpaid dividends to, but not including, the respective redemption date. The Series A Preferred Stock and Series B Preferred Stock have no stated maturity, and are not subject to a sinking fund requirement or mandatory redemption.
Equity Offerings
On May 23, 2014, the Company filed an automatically effective shelf registration statement on Form S-3 with the SEC (the "Registration Statement"). The Company may offer and sell, from time to time, shares of common stock, preferred stock and debt securities in one or more offerings pursuant to the prospectus that is a part of the registration statement. As of March 31, 2017 , the Company had not issued any shares of common stock, preferred stock or debt securities under the Registration Statement.
Dividend Reinvestment and Direct Stock Purchase Plan ("DSPP")
The Company sponsors a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of common stock by reinvesting some or all cash dividends received on shares of common stock. Stockholders may also make optional cash purchases of shares of common stock subject to certain limitations detailed in the respective plan prospectus. For the three months ended March 31, 2017 and 2016 the Company did not issue any shares under the DSPP. As of March 31, 2017 and December 31, 2016 , there were approximately 4.1 million shares available for issuance under the DSPP.
Share Repurchase Program
On November 15, 2012, the Company announced that its Board of Directors authorized the repurchase of shares of the Company’s common stock having an aggregate value of up to $250 million . Pursuant to this program, through July 20, 2014, the Company repurchased approximately $115.7 million in aggregate value of its shares of common stock on the open market. On July 21, 2014, the Company announced that its Board of Directors authorized the repurchase of shares of the Company's common stock having an aggregate value of up to $250 million , which included approximately $134.3 million available for repurchase under the November 2012 authorization. Subsequently, during 2014 we repurchased 172,549 shares at a weighted-average purchase price of  $8.88 per share, for an aggregate purchase price of approximately $1.5 million . For the year ended December 31, 2015, the Company repurchased  10,559,493  shares at a weighted-average purchase price of  $8.28 per share for an aggregate purchase price of approximately  $87.7 million . For the year ended December 31, 2016 , the Company repurchased  673,166  shares at a weighted-average purchase price of  $7.85 per share for an aggregate purchase price of approximately  $5.3 million . Accordingly, the Company was authorized to repurchase shares of its common stock of approximately $155.5 million as of December 31, 2016 .
For the three months ended March 31, 2017 , we did not repurchase any shares of the Company's common stock. For the three months ended March 31, 2016 , we repurchased  510,618  shares of the Company's common stock at a weighted-average purchase price of $7.82 , for an aggregate purchase price of approximately  $4.0 million . Accordingly, the Company was authorized to repurchase shares of its common stock of approximately $155.5 million and $156.8 million as of March 31, 2017 and March 31, 2016 , respectively.
Restricted Stock Awards
For the three months ended March 31, 2017 and 2016 , the Company granted 317,396 and 336,101 shares of restricted stock, respectively, to certain of its directors, officers and employees.

20


9. EARNINGS PER SHARE
Components of the computation of basic and diluted earnings per share ("EPS") are as follows (in thousands except per share amounts):  
 
Three Months Ended March 31,
 
2017
 
2016
Net income (loss)
$
34,020

 
$
61,331

Less dividend on preferred shares
(5,203
)
 
(5,203
)
Net income (loss) available to common stockholders
28,817

 
56,128

Less dividends paid:
 
 
 
Common shares
(37,695
)
 
(39,126
)
Unvested shares
(232
)
 
(273
)
Undistributed earnings (loss)
(9,110
)
 
16,729

Basic weighted-average shares outstanding:
 
 
 
Common shares
150,582

 
150,776

Basic earnings (loss) per common share:
 
 
 
Distributed earnings
$
0.25

 
$
0.26

Undistributed earnings (loss)
(0.06
)
 
0.11

Basic earnings (loss) per common share
$
0.19

 
$
0.37

Diluted weighted-average shares outstanding:
 
 
 
Common shares
150,582

 
150,776

Net effect of dilutive stock options (1)

 

 
150,582

 
150,776

Diluted earnings (loss) per common share:
 
 
 
Distributed earnings
$
0.25

 
$
0.26

Undistributed earnings
(0.06
)
 
0.11

Diluted earnings (loss) per common share
$
0.19

 
$
0.37

__________________
(1)
For the three months ended March 31, 2017 and 2016 , the Company had no stock options outstanding.

10. COMMITMENTS AND CONTINGENCIES
The Company enters into certain agreements that contain a variety of indemnifications, principally with broker-dealers. As of March 31, 2017 and December 31, 2016 , no claims have been asserted against the Company under these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2017 and December 31, 2016 .
The Company occupied leased office space for which the term expired on June 30, 2016. In September 2015, the Company entered into a new lease agreement with a commencement date of January 1, 2016, and an estimated rent commencement date of July 1, 2016 (the "New Lease"). The New Lease has an initial term of 84 months from the rent commencement date. All leases have been classified as operating leases. The Company’s aggregate future minimum lease payments total approximately $2.4 million .  The following table details the lease payments (in thousands):

21


Years Ending December 31,
 
Lease Commitments
2017 (remaining)
 
$
266

2018
 
363

2019
 
373

2020
 
383