Edgar Filing: American Capital Agency Corp

Annualized Monthly Constant Prepayment Rates ¹

AGNC portfolio

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________

FORM 10-Q

__________________________________________________



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34057

__________________________________________________

AMERICAN CAPITAL AGENCY CORP.

(Exact name of registrant as specified in its charter)

__________________________________________________



Delaware		26-1701984
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2 Bethesda Metro Center, 14th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 968-9300

(Registrant’s telephone number, including area code)

__________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports 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 earlier 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 ý 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý		Accelerated filer	¨

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the issuer's common stock, $0.01 par value, outstanding as of April 30, 2016 was 330,999,538.

AMERICAN CAPITAL AGENCY CORP.

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	50

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	51

Signatures		53

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)



	March 31, 2016			December 31, 2015
	(Unaudited)
Assets:
Agency securities, at fair value (including pledged securities of $51,786 and $48,380, respectively)	$	54,950		$	51,331
Agency securities transferred to consolidated variable interest entities, at fair value (pledged securities)	993			1,029
Non-agency securities, at fair value (pledged securities)	112			113
U.S. Treasury securities, at fair value (pledged securities)	—			25
REIT equity securities, at fair value	38			33
Cash and cash equivalents	1,109			1,110
Restricted cash and cash equivalents	1,686			1,281
Derivative assets, at fair value	55			81
Receivable under reverse repurchase agreements	3,163			1,713
Other assets	290			305
Total assets	$	62,396		$	57,021
Liabilities:
Repurchase agreements	$	45,276		$	41,754
Federal Home Loan Bank advances	3,037			3,753
Debt of consolidated variable interest entities, at fair value	562			595
Payable for securities purchased	889			182
Derivative liabilities, at fair value	1,652			935
Dividends payable	73			74
Obligation to return securities borrowed under reverse repurchase agreements, at fair value	3,175			1,696
Accounts payable and other accrued liabilities	72			61
Total liabilities	54,736			49,050
Stockholders' equity:
Preferred stock - $0.01 par value; 10.0 shares authorized:
Redeemable Preferred Stock; $0.01 par value; 6.9 shares issued and outstanding (aggregate liquidation preference of $348)	336			336
Common stock - $0.01 par value; 600.0 shares authorized;
331.0 and 337.5 shares issued and outstanding, respectively	3			3
Additional paid-in capital	9,932			10,048
Retained deficit	(3,329		)	(2,350		)
Accumulated other comprehensive income (loss)	718			(66		)
Total stockholders' equity	7,660			7,971
Total liabilities and stockholders' equity	$	62,396		$	57,021

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in millions, except per share data)



	Three Months Ended March 31,
	2016			2015
Interest income:
Interest income	$	295		$	383
Interest expense	99			86
Net interest income	196			297
Other loss, net:
Gain (loss) on sale of mortgage-backed securities, net	(2		)	36
Loss on derivative instruments and other securities, net	(933		)	(549		)
Total other loss, net	(935		)	(513		)
Expenses:
Management fees	27			30
General and administrative expenses	6			6
Total expenses	33			36
Net loss	(772		)	(252		)
Dividend on preferred stock	7			7
Net loss attributable to common stockholders	$	(779	)	$	(259	)

Net loss	$	(772	)	$	(252	)
Other comprehensive income:
Unrealized gain on available-for-sale securities, net	765			391
Unrealized gain on derivative instruments, net	19			29
Other comprehensive income	784			420
Comprehensive income	12			168
Dividend on preferred stock	7			7
Comprehensive income available to common stockholders	$	5		$	161

Weighted average number of common shares outstanding - basic and diluted	334.4			352.8
Net loss per common share - basic and diluted	$	(2.33	)	$	(0.73	)
Dividends declared per common share	$	0.60		$	0.66

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

(in millions)



	Preferred Stock			Common Stock				Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount		Shares		Amount		Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2014	6.9	$	336	352.8		$	4	$	10,332		$	(1,674	)	$	430		$	9,428
Net loss	—	—		—		—		—			(252		)	—			(252		)
Other comprehensive income:
Unrealized gain on available-for-sale securities, net	—	—		—		—		—			—			391			391
Unrealized gain on derivative instruments, net	—	—		—		—		—			—			29			29
Preferred dividends declared	—	—		—		—		—			(7		)	—			(7		)
Common dividends declared	—	—		—		—		—			(233		)	—			(233		)
Balance, March 31, 2015	6.9	$	336	352.8		$	4	$	10,332		$	(2,166	)	$	850		$	9,356

Balance, December 31, 2015	6.9	$	336	337.5		$	3	$	10,048		$	(2,350	)	$	(66	)	$	7,971
Net loss	—	—		—		—		—			(772		)	—			(772		)
Other comprehensive income:
Unrealized gain on available-for-sale securities, net	—	—		—		—		—			—			765			765
Unrealized gain on derivative instruments, net	—	—		—		—		—			—			19			19
Repurchase of common stock	—	—		(6.5	)	—		(116		)	—			—			(116		)
Preferred dividends declared	—	—		—		—		—			(7		)	—			(7		)
Common dividends declared	—	—		—		—		—			(200		)	—			(200		)
Balance, March 31, 2016	6.9	$	336	331.0		$	3	$	9,932		$	(3,329	)	$	718		$	7,660

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in millions)



	Three Months Ended March 31,
	2016			2015
Operating activities:
Net loss	$	(772	)	$	(252	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of premiums and discounts on mortgage-backed securities, net	150			133
Amortization of accumulated other comprehensive loss on interest rate swaps de-designated as qualifying hedges	19			29
(Gain) loss on sale of mortgage-backed securities, net	2			(36		)
Loss on derivative instruments and other securities, net	933			549
(Increase) decrease in other assets	18			(4		)
Increase in accounts payable and other accrued liabilities	12			1
Net cash provided by operating activities	362			420
Investing activities:
Purchases of mortgage-backed securities	(7,370		)	(14,672		)
Proceeds from sale of mortgage-backed securities	3,513			7,099
Principal collections on mortgage-backed securities	1,604			1,811
Purchases of U.S. Treasury securities	(739		)	(21,929		)
Proceeds from sale of U.S. Treasury securities	2,164			17,999
Net proceeds from (payments on) reverse repurchase agreements	(1,450		)	2,043
Net proceeds from (payments on) other derivative instruments	(131		)	99
Purchases of REIT equity securities	—			(11		)
Proceeds from sale of REIT equity securities	—			11
Increase in restricted cash and cash equivalents	(424		)	(395		)
Other investing cash flows, net	—			(28		)
Net cash used in investing activities	(2,833		)	(7,973		)
Financing activities:
Proceeds from repurchase arrangements	62,155			120,104
Payments on repurchase agreements	(58,614		)	(112,288		)
Proceeds from Federal Home Loan Bank advances	2,098			—
Payments on Federal Home Loan Bank advances	(2,814		)	—
Payments on debt of consolidated variable interest entities	(31		)	(35		)
Payments for common stock repurchases	(116		)	—
Cash dividends paid	(208		)	(240		)
Net cash provided by financing activities	2,470			7,541
Net change in cash and cash equivalents	(1		)	(12		)
Cash and cash equivalents at beginning of period	1,110			1,720
Cash and cash equivalents at end of period	$	1,109		$	1,708

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL AGENCY CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Unaudited Interim Consolidated Financial Statements

The unaudited interim consolidated financial statements of American Capital Agency Corp. (referred throughout this report as the "Company", "we", "us" and "our") are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Our unaudited interim consolidated financial statements include the accounts of all of our wholly-owned subsidiaries and variable interest entities for which the Company is the primary beneficiary. Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.

Note 2. Organization

We were organized in Delaware on January 7, 2008, and commenced operations on May 20, 2008 following the completion of our initial public offering ("IPO"). Our common stock is traded on The NASDAQ Global Select Market under the symbol "AGNC."

We are externally managed by American Capital AGNC Management, LLC (our "Manager"), an affiliate of American Capital, Ltd. ("American Capital").

We operate so as to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). As a REIT, we are required to distribute annually 90% of our taxable net income. As long as we continue to qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

We earn income primarily from investing on a leveraged basis in agency mortgage-backed securities ("agency MBS"). These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") for which the principal and interest payments are guaranteed by a government-sponsored enterprise, such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. Government agency, such as the Government National Mortgage Association ("Ginnie Mae") (collectively referred to as "GSEs"). We may also invest in other assets reasonably related to agency securities and up to 10% of our assets in AAA non-agency and commercial mortgage-backed securities (collectively referred to as "AAA non-agency MBS").

Our principal objective is to generate attractive risk-adjusted returns for distribution to our stockholders through regular monthly dividends from the combination of our net interest income and net realized gains and losses on our investments and hedging activities while preserving our net asset value (also referred to as "net book value," "NAV" and "stockholders' equity"). We fund our investments primarily through short-term borrowings structured as repurchase agreements.

Note 3. Summary of Significant Accounting Policies

Investment Securities

ASC Topic 320, Investments—Debt and Equity Securities ("ASC 320"), requires that at the time of purchase, we designate a security as held-to-maturity, available-for-sale or trading, depending on our ability and intent to hold such security to maturity. Securities classified as trading and available-for-sale are reported at fair value, while securities classified as held-to-maturity are reported at amortized cost. We may sell any of our securities as part of our overall management of our investment portfolio. Accordingly, we typically designate our agency and non-agency securities (collectively referred to as "mortgage securities" or "investment securities") as available-for-sale. All securities classified as available-for-sale are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss) ("OCI"), a separate component of stockholders' equity.

Upon the sale of a security, we determine the cost of the security and the amount of unrealized gains or losses to reclassify out of accumulated OCI into earnings based on the specific identification method.

Non-agency securities in which we may invest consist of investment grade, AAA rated MBS backed by residential or commercial mortgages, for which the payment of principal and interest is not guaranteed by a GSE or government agency. Instead, a private institution such as a commercial bank will package residential or commercial mortgage loans and securitize them through the issuance of MBS. Investment grade, AAA rated non-agency MBS benefit from credit enhancements derived from structural elements, such as subordination, overcollateralization or insurance, but nonetheless carry a higher level of credit exposure than agency MBS.

Interest-only securities and inverse interest-only securities (collectively referred to as "interest-only securities") represent our right to receive a specified proportion of the contractual interest flows of specific agency CMO securities. Principal-only securities represent our right to receive the contractual principal flows of specific agency CMO securities. Interest and principal-only securities are measured at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Our investments in interest and principal-only securities are included in agency securities, at fair value on the accompanying consolidated balance sheets.

REIT equity securities represent investments in the common stock of other publicly traded mortgage REITs that invest predominantly in agency MBS. We designate our investments in REIT equity securities as trading securities and report them at fair value on the accompanying consolidated balance sheets.

We estimate the fair value of our mortgage securities based on a market approach using "Level 2" inputs from third-party pricing services and non-binding dealer quotes derived from common market pricing methods. Such methods incorporate, but are not limited to, reported trades and executable bid and asked prices for similar securities, benchmark interest rate curves, such as the spread to the U.S. Treasury rate and interest rate swap curves, convexity, duration and the underlying characteristics of the particular security, including coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security. We estimate the fair value of our REIT equity securities based on a market approach using "Level 1" inputs based on quoted market prices. Refer to Note 8 for further discussion of fair value measurements.

We evaluate our mortgage securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis. The determination of whether a security is other-than-temporarily impaired may involve judgments and assumptions based on subjective and objective factors. When a security is impaired, an OTTI is considered to have occurred if any one of the following three conditions exists as of the financial reporting date: (i) we intend to sell the security (that is, a decision has been made to sell the security), (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis or (iii) we do not expect to recover the security's amortized cost basis, even if we do not intend to sell the security and it is not more likely than not that we will be required to sell the security. A general allowance for unidentified impairments in a portfolio of securities is not permitted.

Interest Income

Interest income is accrued based on the outstanding principal amount of the investment securities and their contractual terms. Premiums or discounts associated with the purchase of investment securities are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments using the effective interest method in accordance with ASC Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs ("ASC 310-20").

We estimate long-term prepayment speeds of our mortgage securities using a third-party service and market data. The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates and mortgage rates of the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, interest rate volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the prepayment speeds estimated by the third-party service and, based on our Manager's judgment, we may make adjustments to its estimates. Actual and anticipated prepayment experience is reviewed quarterly and effective yields are recalculated when differences arise between (i) our previously estimated future prepayments and (ii) the actual prepayments to date plus our currently estimated future prepayments. If the actual and estimated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.

Derivative Instruments

We use a variety of derivative instruments to hedge a portion of our exposure to market risks, including interest rate, prepayment and extension risks. The objective of our risk management strategy is to reduce fluctuations in net book value over a range of

interest rate scenarios. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities increasing during a period of rising interest rates. The principal instruments that we use are interest rate swaps and options to enter into interest rate swaps ("swaptions"). We also utilize U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales, and forward contracts for the purchase or sale of agency MBS securities on a generic pool basis in the "to-be-announced" market ("TBA securities"). We may also purchase or write put or call options on TBA securities and invest in mortgage and other types of derivatives, such as interest and principal-only securities.

We also enter into TBA contracts as a means of investing in and financing agency securities (thereby increasing our "at risk" leverage) or as a means of disposing of or reducing our exposure to agency securities (thereby reducing our "at risk" leverage). Under TBA contracts, we agree to purchase or sell, for future delivery, agency securities with certain principal and interest terms and certain types of collateral, but the particular agency securities to be delivered are not identified until shortly before the TBA settlement date. We may also choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date. This transaction is commonly referred to as a "dollar roll." The agency securities purchased or sold for a forward settlement date are typically priced at a discount to agency securities for settlement in the current month. This difference (or discount) is referred to as the "price drop." The price drop is the economic equivalent of net interest carry income on the underlying agency securities over the roll period (interest income less implied financing cost) and is commonly referred to as "dollar roll income/loss." Consequently, forward purchases of agency securities and dollar roll transactions represent a form of off-balance sheet financing.

We account for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging ("ASC 815"). ASC 815 requires an entity to recognize all derivatives as either assets or liabilities in our accompanying consolidated balance sheets and to measure those instruments at fair value.

Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with the counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets. Derivative instruments in a gain position are reported as derivative assets at fair value and derivative instruments in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Changes in fair value of derivative instruments and periodic settlements related to our derivative instruments are recorded in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.

The use of derivative instruments creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We attempt to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

Discontinuation of hedge accounting for interest rate swap agreements

Prior to fiscal year 2011, we entered into interest rate swap agreements typically with the intention of qualifying for hedge accounting under ASC 815. However, during fiscal year 2011 we elected to discontinue hedge accounting for our interest rate swaps. Upon discontinuation of hedge accounting, the net deferred loss related to our de-designated interest rate swaps remained in accumulated OCI and is being reclassified from accumulated OCI into interest expense on a straight-line basis over the remaining term of each interest rate swap.

Interest rate swap agreements

We use interest rate swaps to hedge the variable cash flows associated with borrowings made under our repurchase agreement facilities. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one, three or six-month LIBOR ("payer swaps") with terms up to 20 years. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our swap agreements are privately negotiated in the over−the−counter ("OTC") market, with swap agreements entered into subsequent to May 2013 subject to central clearing through a registered commodities exchange ("centrally cleared swaps").

We estimate the fair value of our centrally cleared interest rate swaps using the daily settlement price determined by the respective exchange. Centrally cleared swaps are valued by the exchange using a pricing model that references the underlying rates including the overnight index swap rate and LIBOR forward rate to produce the daily settlement price.

We estimate the fair value of our "non-centrally cleared" swaps using a combination of inputs from counterparty and third-party pricing models to estimate the net present value of the future cash flows using the forward interest rate yield curve in effect

as of the end of the measurement period. We also incorporate both our own and our counterparties' nonperformance risk in estimating the fair value of our interest rate swaps. In considering the effect of nonperformance risk, we consider the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty risk is not significant to the overall valuation of these agreements.

Interest rate swaptions

We purchase interest rate swaptions generally to help mitigate the potential impact of larger, more rapid changes in interest rates on the performance of our investment portfolio. Interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. Our swaption agreements typically provide us the option to enter into a pay fixed rate interest rate swap, which we refer as "payer swaptions." We may also enter into swaption agreements that provide us the option to enter into a receive fixed interest rate swap, which we refer to as "receiver swaptions." The premium paid for interest rate swaptions is reported as an asset in our consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the swaption is reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid. If we sell or exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap received and the premium paid.

Our interest rate swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. We estimate the fair value of interest rate swaptions using a combination of inputs from counterparty and third-party pricing models based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option, adjusted for non-performance risk, if any.

TBA securities

A TBA security is a forward contract for the purchase ("long position") or sale ("short position") of agency MBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific agency MBS delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA contracts as a means of hedging against short-term changes in interest rates. We may also enter into TBA contracts as a means of acquiring or disposing of agency securities and utilize TBA dollar roll transactions to finance agency MBS purchases.

We account for TBA contracts as derivative instruments since either the TBA contracts do not settle in the shortest period of time possible or we cannot assert that it is probable at inception and throughout the term of the TBA contract that we will take physical delivery of the agency security upon settlement of the contract. We account for TBA dollar roll transactions as a series of derivative transactions. Gains, losses and dollar roll income associated with our TBA contracts and dollar roll transactions are recognized in our consolidated statements of comprehensive income in gain (loss) on derivative instruments and other securities, net.

We estimate the fair value of TBA securities based on similar methods used to value our agency MBS securities.

U.S. Treasury securities

We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. We borrow securities to cover short sales of U.S. Treasury securities under reverse repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on our accompanying consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date. Gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

Note 4. Investment Securities

Our TBA position is reported at its net carrying value of $41 million and $14 million as of March 31, 2016 and December 31, 2015, respectively, in derivative assets/(liabilities) on our accompanying consolidated balance sheets. The net carrying value of our TBA position represents the difference between the fair value of the underlying agency security in the TBA contract and the cost basis or the forward price to be paid or received for the underlying agency security. (See Note 6 for further details of our net TBA position as of March 31, 2016 and December 31, 2015.)

As of March 31, 2016 and December 31, 2015, the net unamortized premium balance on our MBS was $2.4 billion and $2.3 billion, respectively, including interest and principal-only securities.

The following tables summarize our investments in MBS as of March 31, 2016 and December 31, 2015 (dollars in millions):



	March 31, 2016
Investments in Mortgage-Backed Securities	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Agency MBS:
Fixed rate	$	53,462	$	759	$	(66	)	$	54,155
Adjustable rate	458		13		—			471
CMO	937		29		—			966
Interest-only and principal-only strips	303		51		(3		)	351
Total agency MBS	55,160		852		(69		)	55,943
Non-agency MBS:
AAA non-agency	111		1		—			112
Total MBS	$	55,271	$	853	$	(69	)	$	56,055



	December 31, 2015
Investments in Mortgage-Backed Securities	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Agency MBS:
Fixed rate	$	50,576	$	339	$	(393	)	$	50,522
Adjustable rate	484		11		—			495
CMO	973		18		(1		)	990
Interest-only and principal-only strips	317		39		(3		)	353
Total agency MBS	52,350		407		(397		)	52,360
Non-agency MBS:
AAA non-agency	114		—		(1		)	113
Total MBS	$	52,464	$	407	$	(398	)	$	52,473



	March 31, 2016
Investments in Mortgage-Backed Securities	Fannie Mae			Freddie Mac			Ginnie Mae			Non-Agency			Total
Available-for-sale MBS:
MBS, par value	$	42,376		$	10,120		$	58		$	110		$	52,664
Unamortized discount	(31		)	(4		)	—			—			(35		)
Unamortized premium	1,845			492			1			1			2,339
Amortized cost	44,190			10,608			59			111			54,968
Gross unrealized gains	654			146			1			1			802
Gross unrealized losses	(40		)	(26		)	—			—			(66		)
Total available-for-sale MBS, at fair value	44,804			10,728			60			112			55,704
MBS remeasured at fair value through earnings:
Interest-only and principal-only strips, amortized cost ¹	285			18			—			—			303
Gross unrealized gains	47			4			—			—			51
Gross unrealized losses	(2		)	(1		)	—			—			(3		)
Total MBS remeasured at fair value through earnings	330			21			—			—			351
Total MBS, at fair value	$	45,134		$	10,749		$	60		$	112		$	56,055
Weighted average coupon as of March 31, 2016 ²	3.61		%	3.69		%	3.13		%	3.50		%	3.63		%
Weighted average yield as of March 31, 2016 ³	2.72		%	2.72		%	1.96		%	3.12		%	2.72		%

________________________


1.	The underlying unamortized principal balance ("UPB" or "par value") of our interest-only securities was $1.0 billion and the weighted average contractual interest we are entitled to receive was 5.26% of this amount as of March 31, 2016. The par value of our principal-only securities was $201 million as of March 31, 2016.


2.	The weighted average coupon includes the interest cash flows from our interest-only securities and is stated as a percentage of par value (excluding the UPB of our interest-only securities) as of March 31, 2016.


3.	Incorporates a weighted average future constant prepayment rate assumption of 10% based on forward rates as of March 31, 2016.



	December 31, 2015
Investments in Mortgage-Backed Securities	Fannie Mae			Freddie Mac			Ginnie Mae			Non-Agency			Total
Available-for-sale MBS:
MBS, par value	$	39,205		$	10,575		$	62		$	113		$	49,955
Unamortized discount	(32		)	(4		)	—			—			(36		)
Unamortized premium	1,707			519			1			1			2,228
Amortized cost	40,880			11,090			63			114			52,147
Gross unrealized gains	286			80			2			—			368
Gross unrealized losses	(283		)	(111		)	—			(1		)	(395		)
Total available-for-sale MBS, at fair value	40,883			11,059			65			113			52,120
MBS measured at fair value through earnings:
Interest-only and principal-only strips, amortized cost ¹	298			19			—			—			317
Gross unrealized gains	35			4			—			—			39
Gross unrealized losses	(2		)	(1		)	—			—			(3		)
Total MBS measured at fair value through earnings	331			22			—			—			353
Total MBS, at fair value	$	41,214		$	11,081		$	65		$	113		$	52,473
Weighted average coupon as of December 31, 2015 ²	3.62		%	3.69		%	3.18		%	3.50		%	3.63		%
Weighted average yield as of December 31, 2015 ³	2.79		%	2.77		%	1.97		%	3.33		%	2.78		%

________________________


1.	The underlying UPB of our interest-only securities was $1.0 billion and the weighted average contractual interest we are entitled to receive was 5.28% of this amount as of December 31, 2015. The par value of our principal-only securities was $207 million as of December 31, 2015.


2.	The weighted average coupon includes the interest cash flows from our interest-only securities and is stated as a percentage of par value (excluding the UPB of our interest-only securities) as of December 31, 2015.


3.	Incorporates a weighted average future constant prepayment rate assumption of 8% based on forward rates as of December 31, 2015.

The actual maturities of our investment securities are generally shorter than their stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic contractual principal payments and principal

prepayments. As of March 31, 2016 and December 31, 2015, our weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate investment portfolio was 10% and 8%, respectively. Our estimates differ materially for different types of securities and thus individual holdings have a wide range of projected CPRs.

The following table summarizes our investments classified as available-for-sale as of March 31, 2016 and December 31, 2015 according to their estimated weighted average life classification (dollars in millions):



	March 31, 2016						December 31, 2015
Estimated Weighted Average Life of Securities Classified as Available-for-Sale ¹	Fair Value		Amortized Cost		Weighted Average Coupon	Weighted Average Yield	Fair Value		Amortized Cost		Weighted Average Coupon	Weighted Average Yield
≥ 1 year and ≤ 3 years	$	462	$	457	3.99%	2.45%	$	167	$	163	4.02%	2.66%
> 3 years and ≤ 5 years	18,447		18,061		3.30%	2.43%	17,497		17,343		3.27%	2.40%
> 5 years and ≤10 years	36,757		36,414		3.65%	2.82%	34,206		34,391		3.67%	2.93%
> 10 years	38		36		4.22%	3.60%	250		250		3.56%	3.08%
Total	$	55,704	$	54,968	3.54%	2.69%	$	52,120	$	52,147	3.54%	2.75%

_______________________


1.	Excludes interest and principal-only strips.

The weighted average life of our interest-only securities was 5.4 and 6.1 years as of March 31, 2016 and December 31, 2015, respectively. The weighted average life of our principal-only securities was 6.8 and 8.0 years as of March 31, 2016 and December 31, 2015, respectively.

Securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated OCI, a separate component of stockholders' equity. Refer to Note 9 for a summary of changes in accumulated OCI for our available-for-sale securities for the three months ended March 31, 2016 and 2015.

The following table presents the gross unrealized loss and fair values of our available-for-sale securities by length of time that such securities have been in a continuous unrealized loss position as of March 31, 2016 and December 31, 2015 (in millions):



	Unrealized Loss Position For
	Less than 12 Months					12 Months or More					Total
Securities Classified as Available-for-Sale	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
March 31, 2016	$	1,578	$	(6	)	$	7,312	$	(60	)	$	8,890	$	(66	)
December 31, 2015	$	24,035	$	(200	)	$	6,793	$	(195	)	$	30,828	$	(395	)

We did not recognize any OTTI charges on our investment securities for the three months ended March 31, 2016 and 2015. As of the end of each respective reporting period, a decision had not been made to sell any of our securities in an unrealized loss position and we did not believe it was more likely than not that we would be required to sell such securities before recovery of their amortized cost basis. The unrealized losses on our securities were not due to credit losses given the GSE guarantees and credit enhancements on our AAA non-agency securities, but rather were due to changes in interest rates and prepayment expectations. However, as we continue to actively manage our portfolio, we may recognize additional realized losses on our investment securities upon selecting specific securities to sell.

Gains and Losses on Sale of Mortgage-Backed Securities

The following table is a summary of our net gain (loss) from the sale of securities classified as available-for-sale for the three months ended March 31, 2016 and 2015 (in millions):



	Three Months Ended March 31,
Securities Classified as Available-for-Sale	2016			2015
MBS sold, at cost	$	(3,515	)	$	(7,732	)
Proceeds from MBS sold ¹	3,513			7,768
Net gain (loss) on sale of MBS	$	(2	)	$	36

Gross gain on sale of MBS	$	5		$	57
Gross loss on sale of MBS	(7		)	(21		)
Net gain (loss) on sale of MBS	$	(2	)	$	36

________________________


1.	Proceeds include cash received during the period, plus receivable for MBS sold during the period as of period end.

For the three months ended March 31, 2016 and 2015, we recognized a net unrealized gain of $11 million and $11 million, respectively, for the change in value of investments in interest and principal-only securities in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Over the same periods, we did not recognize any realized gains or losses on our interest or principal-only securities.

Securitizations and Variable Interest Entities

As of March 31, 2016 and December 31, 2015, we held investments in CMO trusts, which are variable interest entities ("VIEs"). We have consolidated certain of these CMO trusts in our consolidated financial statements where we have determined we are the primary beneficiary of the trusts. All of our CMO securities are backed by fixed or adjustable-rate agency MBS. Fannie Mae or Freddie Mac guarantees the payment of interest and principal and acts as the trustee and administrator of their respective securitization trusts. Accordingly, we are not required to provide the beneficial interest holders of the CMO securities any financial or other support. Our maximum exposure to loss related to our involvement with CMO trusts is the fair value of the CMO securities and interest and principal-only securities held by us, less principal amounts guaranteed by Fannie Mae and Freddie Mac.

In connection with our consolidated CMO trusts, we recognized agency securities with a total fair value of $1.0 billion as of March 31, 2016 and December 31, 2015, and debt with a total fair value of $562 million and $595 million, respectively, in our accompanying consolidated balance sheets. As of March 31, 2016 and December 31, 2015, the agency securities had an aggregate unpaid principal balance of $0.9 billion and $1.0 billion, respectively, and the debt had an aggregate unpaid principal balance of $556 million and $587 million, respectively. We re-measure our consolidated debt at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. For the three months ended March 31, 2016, we recorded a loss of $5 million associated with our consolidated debt. For the three months ended March 31, 2015, we did not recognize a gain or loss associated with our consolidated debt. Our involvement with the consolidated trusts is limited to the agency securities transferred by us upon the formation of the trusts and the CMO securities subsequently held by us. There are no arrangements that could require us to provide financial support to the trusts.

As of March 31, 2016 and December 31, 2015, the fair value of our CMO securities and interest and principal-only securities was $1.3 billion, excluding the consolidated CMO trusts discussed above, or $1.7 billion and $1.8 billion, respectively, including the net asset value of our consolidated CMO trusts. Our maximum exposure to loss related to our CMO securities and interest and principal-only securities, including our consolidated CMO trusts, was $236 million and $238 million as of March 31, 2016 and December 31, 2015, respectively.

Note 5. Repurchase Agreements and Other Secured Borrowings

We pledge certain of our securities as collateral under our repurchase agreements with financial institutions and under our secured borrowing facility with the Federal Home Loan Bank ("FHLB") of Des Moines. Interest rates on our borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. If the fair value of our pledged securities declines, lenders will typically require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as "margin calls." Similarly, if the fair value of our pledged securities increases, lenders may release collateral back to us. As of March 31, 2016, we had met all margin call requirements. For additional information regarding our pledged assets, please refer to Note 7.

Repurchase Agreements

As of March 31, 2016 and December 31, 2015, we had $45.3 billion and $41.8 billion, respectively, of repurchase agreements outstanding. The terms and conditions of our repurchase agreements are typically negotiated on a transaction-by-transaction basis. Our repurchase agreements with original maturities greater than 90 days have floating interest rates based on an index plus or minus a fixed spread. As of March 31, 2016, all of our repurchase agreements and, as of December 31, 2015, $41.7 billion of our repurchase agreements, were used to fund purchases of agency securities ("agency repo"), with an average borrowing rate of 0.76% and 0.61%, respectively, and a weighted average remaining term to maturity of 184 and 173 days, respectively. The remainder, or $25 million, of our repurchase agreements as of December 31, 2015, were used to fund temporary holdings of U.S. Treasury securities ("U.S. Treasury repo").

The following table summarizes our borrowings under repurchase arrangements and weighted average interest rates classified by remaining maturities as of March 31, 2016 and December 31, 2015 (dollars in millions):



	March 31, 2016					December 31, 2015
Remaining Maturity	Repurchase Agreements		Weighted Average Interest Rate		Weighted Average Days to Maturity	Repurchase Agreements		Weighted Average Interest Rate		Weighted Average Days to Maturity
Agency repo:
≤ 1 month	$	24,531	0.68	%	12	$	17,579	0.54	%	14
> 1 to ≤ 3 months	8,941		0.70	%	49	14,283		0.64	%	58
> 3 to ≤ 6 months	2,158		0.83	%	122	3,154		0.61	%	121
> 6 to ≤ 9 months	920		0.83	%	222	589		0.65	%	199
> 9 to ≤ 12 months	2,497		0.92	%	315	1,201		0.65	%	307
> 12 to ≤ 24 months	2,154		0.95	%	537	1,473		0.73	%	600
> 24 to ≤ 36 months	1,150		1.04	%	902	650		0.81	%	901
> 36 to ≤ 48 months	2,300		1.07	%	1,326	1,300		0.86	%	1,231
> 48 to < 60 months	625		1.10	%	1,781	1,500		0.76	%	1,477
Total agency repo	45,276		0.76	%	184	41,729		0.61	%	173
U.S. Treasury repo:
1 day	—		—	%	—	25		—	%	1
Total	$	45,276	0.76	%	184	$	41,754	0.61	%	173

Federal Home Loan Bank Advances

On January 12, 2016, the Federal Housing Finance Agency ("FHFA") released its final rule on FHLB membership, which requires the termination of our wholly-owned captive insurance subsidiary's FHLB membership and repayment of all FHLB advances after a one year period ending in February 2017. As of March 31, 2016 and December 31, 2015, we had $3.0 billion and $3.8 billion, respectively, of outstanding secured FHLB advances, with a weighted average borrowing rate of 0.56% and 0.53%, respectively, and a weighted average remaining term to maturity of 306 and 141 days, respectively, through February 2017, consisting of 30 day and longer-term floating rate advances:



	March 31, 2016					December 31, 2015
Remaining Maturity	FHLB Advances		Weighted Average Interest Rate		Weighted Average Days to Maturity	FHLB Advances		Weighted Average Interest Rate		Weighted Average Days to Maturity
≤ 1 month	$	—	—	%	—	$	1,952	0.47	%	14
> 1 to ≤ 3 months	—		—	%	—	681		0.60	%	84
> 9 to ≤ 12 months	3,037		0.56	%	306	—		—	%	—
13 months	—		—	%	—	1,120		0.58	%	397
Total FHLB advances	$	3,037	0.56	%	306	$	3,753	0.53	%	141

Debt of Consolidated Variable Interest Entities

As of March 31, 2016 and December 31, 2015, debt of consolidated VIEs, at fair value, was $562 million and $595 million, respectively, and had a weighted average interest rate of LIBOR plus 38 and 34 basis points, respectively, and a principal balance of $556 million and $587 million, respectively. The actual maturities of our debt of consolidated VIEs are generally shorter than the stated contractual maturities. The actual maturities are affected by the contractual lives of the underlying agency MBS securitizing the debt of our consolidated VIEs and periodic principal prepayments of such underlying securities. The estimated weighted average life of the debt of our consolidated VIEs as of March 31, 2016 and December 31, 2015 was 4.5 and 4.9 years, respectively.

TBA Dollar Roll Financing Transactions

As of March 31, 2016 and December 31, 2015, we had outstanding forward commitments to purchase and sell agency securities through the TBA market at a cost of $6.0 billion and $7.4 billion, respectively (see Notes 3 and 6). These transactions, also referred to as "TBA dollar roll transactions," represent a form of "off-balance sheet" financing and serve to either increase, in the case of forward purchases, or decrease, in the case of forward sales, our total "at risk" leverage. We account for such transactions as one or more series of derivative transactions and report our outstanding TBA commitments at their net carrying value of $41 million and $14 million as of March 31, 2016 and December 31, 2015, respectively, in derivative assets/(liabilities) on our accompanying consolidated balance sheets.

Note 6. Derivative and Other Hedging Instruments

In connection with our risk management strategy, we hedge a portion of our interest rate risk by entering into derivative and other hedging instrument contracts. The principal instruments that we use are interest rate swaps and interest rate swaptions and U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also utilize TBA securities, purchase or write put or call options on TBA securities or invest in mortgage and other types of derivatives, such as interest and principal-only securities. We also enter into TBA contracts as a means of investing in and financing agency securities (thereby increasing our "at risk" leverage) or as a means of disposing of or reducing our exposure to agency securities (thereby reducing our "at risk" leverage). Our risk management strategy attempts to manage the overall risk of the portfolio, reduce fluctuations in our net book value and generate additional income distributable to stockholders. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivative and other hedging instruments in Note 3.

Prior to September 30, 2011, our interest rate swaps were typically designated as cash flow hedges under ASC 815; however, as of September 30, 2011, we elected to discontinue hedge accounting for our interest rate swaps in order to increase our funding flexibility. For the three months ended March 31, 2016 and 2015, we reclassified $19 million and $29 million, respectively, of net deferred losses from accumulated OCI into interest expense related to our de-designated interest rate swaps and recognized an equal, but offsetting, amount in other comprehensive income. Our total net periodic interest costs on our swap portfolio for those periods were $108 million and $113 million, respectively. The difference between our total net periodic interest costs on our swap portfolio and the amount recorded in interest expense related to our de-designated hedges is reported in gain (loss) on derivative instruments and other securities, net in our accompanying consolidated statements of comprehensive income (totaling $89 million and $84 million for the three months ended March 31, 2016 and 2015, respectively). As of March 31, 2016, the remaining net deferred loss in accumulated OCI related to de-designated interest rate swaps was $20 million and will be reclassified from OCI into interest expense over a remaining weighted average period of 0.4 years.

Derivative and Other Hedging Instrument Assets (Liabilities), at Fair Value

The table below summarizes fair value information about our derivative and other hedging instrument assets and liabilities as of March 31, 2016 and December 31, 2015 (in millions):



Derivative and Other Hedging Instruments	Balance Sheet Location	March 31, 2016			December 31, 2015
Interest rate swaps	Derivative assets, at fair value	$	2		$	31
Swaptions	Derivative assets, at fair value	10			17
TBA securities	Derivative assets, at fair value	42			29
U.S. Treasury futures - short	Derivative assets, at fair value	1			4
Total derivative assets, at fair value		$	55		$	81

Interest rate swaps	Derivative liabilities, at fair value	$	(1,651	)	$	(920	)
TBA securities	Derivative liabilities, at fair value	(1		)	(15		)
Total derivative liabilities, at fair value		$	(1,652	)	$	(935	)

U.S. Treasury securities - long	U.S. Treasury securities, at fair value	$	—		$	25
U.S. Treasury securities - short	Obligation to return securities borrowed under reverse repurchase agreements, at fair value	(3,175		)	(1,696		)
Total U.S. Treasury securities, net at fair value		$	(3,175	)	$	(1,671	)

The following tables summarize our interest rate swap agreements outstanding as of March 31, 2016 and December 31, 2015 (dollars in millions):



	March 31, 2016
Payer Interest Rate Swaps	Notional Amount ¹		Average Fixed Pay Rate 2	Average Receive Rate ³	Net Estimated Fair Value			Average Maturity (Years)
≤ 3 years	$	15,125	1.05%	0.62%	$	(89	)	1.5
> 3 to ≤ 5 years	7,750		1.94%	0.63%	(303		)	3.9
> 5 to ≤ 7 years	7,275		2.37%	0.62%	(443		)	6.0
> 7 to ≤ 10 years	6,850		2.63%	0.62%	(636		)	8.2
> 10 years	1,175		3.20%	0.63%	(178		)	14.5
Total payer interest rate swaps	$	38,175	1.83%	0.62%	$	(1,649	)	4.5

________________________


1.	Notional amount includes forward starting swaps of $2.7 billion with an average forward start date of 0.9 years and an average maturity of 7.3 years from March 31, 2016.


2.	Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.73% as of March 31, 2016.


3.	Average receive rate excludes forward starting swaps.



	December 31, 2015
Payer Interest Rate Swaps	Notional Amount ¹		Average Fixed Pay Rate ²	Average Receive Rate ³	Net Estimated Fair Value			Average Maturity (Years)
≤ 3 years	$	14,775	1.06%	0.40%	$	(23	)	1.6
> 3 to ≤ 5 years	9,950		2.03%	0.40%	(203		)	4.0
> 5 to ≤ 7 years	7,175		2.47%	0.44%	(230		)	6.1
> 7 to ≤ 10 years	7,450		2.57%	0.39%	(342		)	8.3
> 10 years	1,175		3.20%	0.39%	(91		)	14.7
Total payer interest rate swaps	$	40,525	1.89%	0.40%	$	(889	)	4.6

________________________


1.	Notional amount includes forward starting swaps of $4.5 billion with an average forward start date of 0.7 years and an average maturity of 5.5 years from December 31, 2015.


2.	Average fixed pay rate includes forward starting swaps. Excluding forward starting swaps, the average fixed pay rate was 1.75% as of December 31, 2015.


3.	Average receive rate excludes forward starting swaps.

The following table summarizes our interest rate payer swaption agreements outstanding as of March 31, 2016 and December 31, 2015 (dollars in millions):



Payer Swaptions	Option					Underlying Payer Swap
Years to Expiration	Cost		Fair Value		Average Months to Expiration	Notional Amount		Average Fixed Pay Rate	Average Receive Rate (LIBOR)	Average Term (Years)
March 31, 2016
Total ≤ 1 year	$	68	$	10	4	$	1,750	3.37%	3M	7.7

December 31, 2015
Total ≤ 1 year	$	74	$	17	4	$	2,150	3.51%	3M	7.0

The following table summarizes our U.S. Treasury securities as of March 31, 2016 and December 31, 2015 (in millions):



	March 31, 2016									December 31, 2015
Maturity	Face Amount Net Long / (Short)			Cost Basis			Market Value			Face Amount Net Long / (Short)			Cost Basis			Market Value
5 years	$	(500	)	$	(501	)	$	(507	)	$	(250	)	$	(249	)	$	(249	)
7 years	(1,730		)	(1,723		)	(1,735		)	(354		)	(353		)	(352		)
10 years	(905		)	(901		)	(933		)	(1,085		)	(1,078		)	(1,070		)
Total U.S. Treasury securities, net	$	(3,135	)	$	(3,125	)	$	(3,175	)	$	(1,689	)	$	(1,680	)	$	(1,671	)

The following table summarizes our U.S. Treasury futures as of March 31, 2016 and December 31, 2015 (in millions):



	March 31, 2016											December 31, 2015
Maturity	Notional Amount - Long (Short) ¹			Cost Basis ²			Market Value ³			Net Carrying Value ⁴		Notional Amount - Long (Short) ¹			Cost Basis ²			Market Value ³			Net Carrying Value ⁴
5 years	$	(730	)	$	(884	)	$	(884	)	$	—	$	(730	)	$	(866	)	$	(864	)	$	2
10 years	(1,130		)	(1,474		)	(1,473		)	1		(1,130		)	(1,424		)	(1,422		)	2
Total U.S. Treasury futures	$	(1,860	)	$	(2,358	)	$	(2,357	)	$	1	$	(1,860	)	$	(2,290	)	$	(2,286	)	$	4

_____________________


1.	Notional amount represents the par value (or principal balance) of the underlying U.S. Treasury security.


2.	Cost basis represents the forward price to be paid / (received) for the underlying U.S. Treasury security.


3.	Market value represents the current market value of U.S. Treasury futures as of period-end.


4.	Net carrying value represents the difference between the market value and the cost basis of U.S. Treasury futures as of period-end and is reported in derivative assets / (liabilities), at fair value in our consolidated balance sheets.

The following tables summarize our TBA securities as of March 31, 2016 and December 31, 2015 (in millions):



	March 31, 2016								December 31, 2015
TBA Securities by Coupon	Notional Amount - Long (Short) ¹		Cost Basis ²		Market Value ³		Net Carrying Value ⁴		Notional Amount - Long (Short) ¹			Cost Basis ²			Market Value ³			Net Carrying Value ⁴
15-Year TBA securities:
2.5%	$	18	$	19	$	19	$	—	$	(80	)	$	(81	)	$	(80	)	$	1
3.0%	62		64		64		—		225			233			232			(1		)
3.5%	33		35		35		—		136			143			142			(1		)
Total 15-Year TBAs	113		118		118		—		281			295			294			(1		)
30-Year TBA securities:
3.0%	3,914		3,990		4,015		25		3,914			3,911			3,916			5
3.5%	759		781		793		12		1,497			1,536			1,539			3
4.0%	1,000		1,064		1,068		4		1,575			1,658			1,665			7
4.5%	27		30		30		—		28			30			30			—
Total 30-Year TBAs	5,700		5,865		5,906		41		7,014			7,135			7,150			15
Total net TBA securities	$	5,813	$	5,983	$	6,024	$	41	$	7,295		$	7,430		$	7,444		$	14

	March 31, 2016								December 31, 2015
TBA Securities by Issuer	Notional Amount - Long (Short) ¹		Cost Basis ²		Market Value ³		Net Carrying Value ⁴		Notional Amount - Long (Short) ¹			Cost Basis ²			Market Value ³			Net Carrying Value ⁴
Fannie Mae	$	4,172	$	4,278	$	4,312	$	34	$	6,033		$	6,145		$	6,159		$	14
Freddie Mac	1,168		1,217		1,222		5		689			703			703			—
Ginnie Mae	473		488		490		2		573			582			582			—
TBA securities, net	$	5,813	$	5,983	$	6,024	$	41	$	7,295		$	7,430		$	7,444		$	14

_____________________


1.	Notional amount represents the par value (or principal balance) of the underlying agency security.


2.	Cost basis represents the forward price to be paid / (received) for the underlying agency security.


3.	Market value represents the current market value of the TBA contract (or of the underlying agency security) as of period-end.


4.	Net carrying value represents the difference between the market value and the cost basis of the TBA contract as of period-end and is reported in derivative assets / (liabilities), at fair value in our consolidated balance sheets.

Gain (Loss) From Derivative Instruments and Other Securities, Net

The tables below summarize changes in our derivative and other hedge portfolio and their effect on our consolidated statements of comprehensive income for the three months ended March 31, 2016 and 2015 (in millions):



	Three Months Ended March 31, 2016
Derivative and Other Hedging Instruments	Notional Amount Long/(Short) December 31, 2015			Additions		Settlement, Termination, Expiration or Exercise		Notional Amount Long/(Short) March 31, 2016			Amount of Gain/(Loss) Recognized in Income on Derivatives ¹
TBA securities, net	$	7,295		17,959		(19,441	)	$	5,813		$	216
Interest rate swaps	$	(40,525	)	(1,000	)	3,350		$	(38,175	)	(1,005		)
Payer swaptions	$	(2,150	)	—		400		$	(1,750	)	(7		)
U.S. Treasury securities - short position	$	(1,714	)	(1,980	)	559		$	(3,135	)	(83		)
U.S. Treasury securities - long position	$	25		180		(205	)	$	—		5
U.S. Treasury futures contracts - short position	$	(1,860	)	(1,860	)	1,860		$	(1,860	)	(77		)
											$	(951	)

________________________________


1.	Excludes a net loss of $5 million from debt of consolidated VIEs, a net gain of $11 million from interest and principal-only securities and other miscellaneous net gains of $12 million recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.



	Three Months Ended March 31, 2015
Derivative and Other Hedging Instruments	Notional Amount Long/(Short) December 31, 2014			Additions		Settlement, Termination, Expiration or Exercise		Notional Amount Long/(Short) March 31, 2015			Amount of Gain/(Loss) Recognized in Income on Derivatives ¹
TBA securities, net	$	14,412		45,500		(55,039	)	$	4,873		$	234
Interest rate swaps	$	(43,700	)	(3,500	)	2,275		$	(44,925	)	(746		)
Payer swaptions	$	(6,800	)	—		1,600		$	(5,200	)	(17		)
Receiver swaptions	$	4,250		—		(3,500	)	$	750		17
U.S. Treasury securities - short position	$	(5,392	)	(4,173	)	6,212		$	(3,353	)	(82		)
U.S. Treasury securities - long position	$	2,411		15,562		(13,712	)	$	4,261		52
U.S. Treasury futures contracts - short position	$	(730	)	(730	)	730		$	(730	)	(20		)
											$	(562	)

______________________


1.	Excludes a net gain of $2 million from investments in REIT equity securities and a net gain of $11 million from interest and principal-only securities recognized in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income.

Note 7. Pledged Assets

Our funding agreements require us to fully collateralize our obligations under the agreements based upon our counterparties' collateral requirements and their determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. Our derivative contracts similarly require us to fully collateralize our obligations under such agreements, which will vary over time based on similar factors as well as our counterparties' determination of the value of the derivative contract. We are typically required to post initial collateral upon execution of derivative transactions, such as interest rate swap agreements and TBA contracts. If we breach our collateral requirements, we will be required to fully settle our obligations under the agreements, which could include a forced liquidation of our pledged collateral.

Our counterparties also apply a "haircut" to our pledged collateral, which means our collateral is valued at slightly less than market value and limits the amount we can borrow against our securities. This haircut reflects the underlying risk of the specific collateral and protects our counterparty against a change in its value. Our agreements do not specify the haircut; rather haircuts are determined on an individual transaction basis. Additionally, the FHLB of Des Moines may adjust the haircut on our outstanding FHLB advances at any time prior to maturity. As a condition of our membership in the FHLB of Des Moines, we are also obligated to purchase membership and activity-based stock in the FHLB based upon the aggregate amount of advances obtained from the FHLB.

Consequently, our funding agreements and derivative contracts expose us to credit risk relating to potential losses that could be recognized in the event that our counterparties fail to perform their obligations under such agreements. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings or to registered clearinghouses and U.S. government agencies and we monitor our positions with individual counterparties. In the event of a default by a counterparty we may have difficulty obtaining our assets pledged as collateral to such counterparty and may not receive payments provided for under the terms of our derivative agreements. In the case of centrally cleared instruments, we could be exposed to credit risk if the central clearing agency or a clearing member defaults on its respective obligation to perform under the contract. However, we believe that the risk is minimal due to the clearing exchanges' initial and daily mark to market margin requirements and clearinghouse guarantee funds and other resources that are available in the event of a clearing member default.

Further, each of our International Swaps and Derivatives Association ("ISDA") Master Agreements also contains a cross default provision under which a default under certain of our other indebtedness in excess of certain thresholds causes an event of default under the ISDA Master Agreement. Threshold amounts vary by lender. Following an event of default, we could be required to settle our obligations under the agreements. Additionally, under certain of our ISDA Master Agreements, we could be required to settle our obligations under the agreements if we fail to maintain certain minimum stockholders' equity thresholds or our REIT status or if we fail to comply with limits on our leverage above certain specified levels. As of March 31, 2016, the fair value of additional collateral that could be required to be posted as a result of the credit-risk-related contingent features being triggered was not material to our financial statements.

As of March 31, 2016, our maximum amount at risk with any counterparty related to our repurchase agreements was 5% of our stockholders' equity and our maximum amount at risk with any counterparty related to our interest rate swap and swaption agreements, excluding centrally cleared swaps, was less than 1% of our stockholders' equity.

Assets Pledged to Counterparties

The following tables summarize our assets pledged as collateral under our funding, derivative and prime broker agreements by type, including securities pledged related to securities sold but not yet settled, as of March 31, 2016 and December 31, 2015 (in millions):



	March 31, 2016
Assets Pledged to Counterparties	Repurchase Agreements and FHLB Advances ¹		Debt of Consolidated VIEs		Derivative Agreements		Prime Broker Agreements		Total
Agency MBS - fair value	$	51,276	$	993	$	348	$	405	$	53,022
AAA non-agency MBS - fair value	112		—		—		—		112
Accrued interest on pledged securities	143		3		1		1		148
Restricted cash and cash equivalents	4		—		1,681		1		1,686
Total	$	51,535	$	996	$	2,030	$	407	$	54,968

______________________

1. Includes $243 million of retained interests in our consolidated VIEs pledged as collateral under repurchase agreements.



	December 31, 2015
Assets Pledged to Counterparties	Repurchase Agreements and FHLB Advances ¹		Debt of Consolidated VIEs		Derivative Agreements		Prime Broker Agreements		Total
Agency MBS - fair value	$	47,992	$	1,029	$	148	$	485	$	49,654
AAA non-agency MBS - fair value	113		—		—		—		113
U.S. Treasury securities - fair value	25		—		—		—		25
Accrued interest on pledged securities	135		3		—		2		140
Restricted cash and cash equivalents	23		—		1,226		32		1,281
Total	$	48,288	$	1,032	$	1,374	$	519	$	51,213

______________________

1. Includes $245 million of retained interests in our consolidated VIEs pledged as collateral under repurchase agreements.

As of March 31, 2016 and December 31, 2015, we held $126 million and $150 million, respectively, of membership and activity-based stock in the FHLB of Des Moines. FHLB stock is reported at cost, which equals par value, in other assets on our accompanying consolidated balance sheets. FHLB stock can only be redeemed or sold at its par value, and only to the FHLB of Des Moines.

The cash and cash equivalents and agency securities pledged as collateral under our derivative agreements are included in restricted cash and cash equivalents and agency securities, at fair value, respectively, on our consolidated balance sheets.

The following table summarizes our securities pledged as collateral under our repurchase agreements and FHLB advances by the remaining maturity of our borrowings, including securities pledged related to sold but not yet settled securities, as of March 31, 2016 and December 31, 2015 (in millions). For the corresponding borrowings associated with the following amounts and the interest rates thereon, refer to Note 5.



	March 31, 2016						December 31, 2015
Securities Pledged by Remaining Maturity of Repurchase Agreements and FHLB Advances	Fair Value of Pledged Securities		Amortized Cost of Pledged Securities		Accrued Interest on Pledged Securities		Fair Value of Pledged Securities		Amortized Cost of Pledged Securities		Accrued Interest on Pledged Securities
MBS:¹
≤ 30 days	$	25,578	$	25,250	$	71	$	20,053	$	20,075	$	57
> 30 and ≤ 60 days	7,375		7,279		21		8,311		8,340		23
> 60 and ≤ 90 days	2,091		2,064		6		7,534		7,525		21
> 90 days	16,344		16,094		45		12,207		12,187		34
Total MBS	51,388		50,687		143		48,105		48,127		135
U.S. Treasury securities:
1 day	—		—		—		25		25		—
Total	$	51,388	$	50,687	$	143	$	48,130	$	48,152	$	135

______________________


1.	Includes $243 million and $245 million of retained interests in our consolidated VIEs pledged as collateral under repurchase agreements, as of March 31, 2016 and December 31, 2015, respectively.

As of March 31, 2016 and December 31, 2015, none of our borrowings backed by MBS were due on demand or mature overnight.

The table above excludes agency securities transferred to our consolidated VIEs. Securities transferred to our consolidated VIEs can only be used to settle the obligations of each respective VIE. However, we may pledge our retained interests in our consolidated VIEs as collateral under our repurchase agreements and derivative contracts. Please refer to Notes 4 and 5 for additional information regarding our consolidated VIEs.

Assets Pledged from Counterparties

As of March 31, 2016 and December 31, 2015, we had U.S. Treasury securities pledged to us from counterparties as collateral under our reverse repurchase agreements of $3.2 billion and $1.7 billion, respectively. U.S Treasury securities received as collateral under our reverse repurchase agreements that we use to cover short sales of U.S. Treasury securities are accounted for as securities borrowing transactions. We recognize a corresponding obligation to return the borrowed securities at fair value on the accompanying consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date.

Offsetting Assets and Liabilities

Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of setoff under master netting arrangements (or similar agreements), including in the event of default or in the event of bankruptcy of either party to the transactions. We present our assets and liabilities subject to such arrangements on a gross basis in our consolidated balance sheets.

The following tables present information about our assets and liabilities that are subject to such arrangements and can potentially be offset on our consolidated balance sheets as of March 31, 2016 and December 31, 2015 (in millions):



	Offsetting of Financial and Derivative Assets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets						Net Amount
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets				Financial Instruments			Collateral Received ²			Net Amount
March 31, 2016
Interest rate swap and swaption agreements, at fair value ¹	$	12	$	—	$	12	$	(12	)	$	—		$	—
Receivable under reverse repurchase agreements	3,163		—		3,163		(2,659		)	(504		)	—
Total	$	3,175	$	—	$	3,175	$	(2,671	)	$	(504	)	$	—

December 31, 2015
Interest rate swap and swaption agreements, at fair value¹	$	48	$	—	$	48	$	(31	)	$	—		$	17
Receivable under reverse repurchase agreements	1,713		—		1,713		(1,356		)	(357		)	—
Total	$	1,761	$	—	$	1,761	$	(1,387	)	$	(357	)	$	17



	Offsetting of Financial and Derivative Liabilities
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets						Net Amount
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets				Financial Instruments			Collateral Pledged ²			Net Amount
March 31, 2016
Interest rate swap agreements, at fair value ¹	$	1,651	$	—	$	1,651	$	(12	)	$	(1,628	)	$	11
Repurchase agreements and FHLB advances	48,313		—		48,313		(2,659		)	(45,654		)	—
Total	$	49,964	$	—	$	49,964	$	(2,671	)	$	(47,282	)	$	11

December 31, 2015
Interest rate swap agreements, at fair value¹	$	920	$	—	$	920	$	(31	)	$	(889	)	$	—
Repurchase agreements	45,507		—		45,507		(1,356		)	(44,151		)	—
Total	$	46,427	$	—	$	46,427	$	(1,387	)	$	(45,040	)	$	—

_______________________


1.	Reported under derivative assets / liabilities, at fair value in the accompanying consolidated balance sheets. Refer to Note 6 for a reconciliation of derivative assets / liabilities, at fair value to their sub-components.


2.	Includes cash and securities pledged / received as collateral, at fair value. Amounts presented are limited to collateral pledged sufficient to reduce the net amount to zero for individual counterparties, as applicable.

Note 8. Fair Value Measurements

We determine the fair value of our investment securities and debt of consolidated VIEs based upon fair value estimates obtained from multiple third party pricing services and dealers. In determining fair value, third party pricing sources use various valuation approaches, including market and income approaches. Factors used by third party sources in estimating the fair value of an instrument may include observable inputs such as coupons, primary and secondary mortgage rates, pricing information, credit data, volatility statistics, and other market data that are current as of the measurement date. The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. Third party pricing sources may also use certain unobservable inputs, such as assumptions of future levels of prepayment, defaults and foreclosures, especially when estimating fair values for securities with lower levels of recent trading activity. We make inquiries of third party pricing sources to understand the significant inputs and assumptions they used to determine their prices. For further information regarding valuation of our derivative instruments, please refer to the discussion of derivative and other hedging instruments in Note 3.

We review the various third party fair value estimates and perform procedures to validate their reasonableness, including an analysis of the range of third party estimates for each position, comparison to recent trade activity for similar securities, and management review for consistency with market conditions observed as of the measurement date. While we do not adjust prices we obtain from third party pricing sources, we will exclude third party prices for securities from our determination of fair value if we determine (based on our validation procedures and our market knowledge and expertise) that the price is significantly different from observable market data would indicate and we cannot obtain an understanding from the third party source as to the significant inputs used to determine the price.

The validation procedures described above also influence our determination of the appropriate fair value measurement classification. We utilize a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument's categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There were no transfers between hierarchy levels during the three months ended March 31, 2016. The three levels of hierarchy are defined as follows:


•	Level 1 Inputs —Quoted prices (unadjusted) for identical unrestricted assets and liabilities in active markets that are accessible at the measurement date.


•	Level 2 Inputs —Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


•	Level 3 Inputs —Instruments with primarily unobservable market data that cannot be corroborated.

The following table provides a summary of our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 (in millions):



	March 31, 2016						December 31, 2015
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Assets:
Agency securities	$	—	$	54,950	$	—	$	—	$	51,331	$	—
Agency securities transferred to consolidated VIEs	—		993		—		—		1,029		—
Non-agency securities	—		112		—		—		113		—
U.S. Treasury securities	—		—		—		25		—		—
Interest rate swaps	—		2		—		—		31		—
Swaptions	—		10		—		—		17		—
REIT equity securities	38		—		—		33		—		—
TBA securities	—		42		—		—		29		—
U.S. Treasury futures	1		—		—		4		—		—
Total	$	39	$	56,109	$	—	$	62	$	52,550	$	—
Liabilities:
Debt of consolidated VIEs	$	—	$	562	$	—	$	—	$	595	$	—
Obligation to return U.S. Treasury securities borrowed under reverse repurchase agreements	3,175		—		—		1,696		—		—
Interest rate swaps	—		1,651		—		—		920		—
TBA securities	—		1		—		—		15		—
Total	$	3,175	$	2,214	$	—	$	1,696	$	1,530	$	—

We elected the option to account for debt of consolidated VIEs at fair value with changes in fair value reflected in earnings during the period in which they occur, because we believe this election more appropriately reflects our financial position as both the consolidated agency securities and consolidated debt are presented in a consistent manner, at fair value, on our consolidated balance sheets. We estimate the fair value of the consolidated debt based on the fair value of the MBS transferred to consolidated VIEs, less the fair value of our retained interests, which are based on valuations obtained from third-party pricing services and non-binding dealer quotes derived from common market pricing methods using "Level 2" inputs.

Excluded from the table above are financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, receivables, payables and borrowings under repurchase agreements and FHLB advances, which are presented in our consolidated financial statements at cost. The cost basis of these instruments is determined to approximate fair value due to their short duration or, in the case of longer-term repo and FHLB advances, due to floating rates of interest based on an index plus or minus a fixed spread which is consistent with fixed spreads demanded in the market. We estimate the fair value of these instruments using "Level 2" inputs.

Note 9. Stockholders' Equity

Preferred Stock

Pursuant to our amended and restated certificate of incorporation, we are authorized to designate and issue up to 10.0 million shares of preferred stock in one or more classes or series. Our Board of Directors has designated 6.9 million shares as 8.000% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") and 8,050 shares as 7.750% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock"). As of March 31, 2016, we had 3.1 million shares of authorized but unissued shares of preferred stock. Our Board of Directors may designate additional series of authorized preferred stock ranking junior to or in parity with the Series A or Series B Preferred Stock or designate additional shares of the Series A or Series B Preferred Stock and authorize the issuance of such shares.

In April 2012, we completed a public offering in which 6.9 million shares of our Series A Preferred Stock were sold to the underwriters at a price of $24.2125 per share for proceeds, net of offering expenses, of $167 million. In May 2014, we completed a public offering in which 7.0 million depositary shares were sold to the underwriters at a price of $24.2125 per depositary share for proceeds, net of offering expenses, of $169 million. Each depositary share represents a 1/1,000th interest in a share of our Series B Preferred Stock.

Our Series A and Series B Preferred Stock have no stated maturity, are not subject to any sinking fund or mandatory redemption and rank on parity with each other. Under certain circumstances upon a change of control, our Series A and Series B Preferred Stock are convertible to shares of our common stock. Holders of our Series A Preferred Stock and depository shares underlying our Series B Preferred Stock have no voting rights, except under limited conditions, and are entitled to receive cumulative cash dividends at a rate of 8.000% and 7.750% per annum, respectively, of their $25.00 per share and $25.00 per depositary share liquidation preference, respectively, before holders of our common stock are entitled to receive any dividends. Shares of our Series A Preferred Stock and depository shares underlying our Series B Preferred Stock are each redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not declared) exclusively at our option commencing on April 5, 2017 and May 8, 2019, respectively, or earlier under certain circumstances intended to preserve our qualification as a REIT for federal income tax purposes. Dividends are payable quarterly in arrears on the 15th day of each January, April, July and October. As of March 31, 2016, we had declared all required quarterly dividends on our Series A and Series B Preferred Stock.

Common Stock Repurchase Program

Our Board of Directors adopted a program that authorizes repurchases of our common stock up to $2 billion. In October 2015, our Board of Directors extended its authorization through December 31, 2016. Shares of our common stock may be purchased in the open market, including through block purchases, or through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason. Among other factors, we intend to only consider repurchasing shares of our common stock when the purchase price is less than our estimate of our current net asset value per common share. Generally, when we repurchase our common stock at a discount to our net asset value, the net asset value of our remaining shares of common stock outstanding increases. In addition, we do not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

During the three months ended March 31, 2016, we repurchased 6.5 million shares of our common stock at an average repurchase price of $17.89 per share, including expenses, totaling $116 million. We did not repurchase any shares of our common stock during the three months ended March 31, 2015. As of March 31, 2016, the total remaining amount authorized for repurchases of our common stock was $0.6 billion.

Accumulated Other Comprehensive Income (Loss)

The following table summarizes changes to accumulated OCI for the three months ended March 31, 2016 and 2015 (in millions):



Accumulated Other Comprehensive Income (Loss)	Net Unrealized Gain (Loss) on Available-for-Sale MBS			Net Unrealized Gain (Loss) on Swaps			Total Accumulated OCI Balance
Three Months Ended March 31, 2016
Balance as of December 31, 2015	$	(27	)	$	(39	)	$	(66	)
OCI before reclassifications	763			—			763
Amounts reclassified from accumulated OCI	2			19			21
Balance as of March 31, 2016	$	738		$	(20	)	$	718

Three Months Ended March 31, 2015
Balance as of December 31, 2014	$	570		$	(140	)	$	430
OCI before reclassifications	427			—			427
Amounts reclassified from accumulated OCI	(36		)	29			(7		)
Balance as of March 31, 2015	$	961		$	(111	)	$	850

The following table summarizes reclassifications out of accumulated OCI for the three months ended March 31, 2016 and 2015 (in millions):



	Three Months Ended March 31,					Line Item in the Consolidated Statements of Comprehensive Income Where Net Income is Presented
Amounts Reclassified from Accumulated OCI	2016		2015
(Gain) loss amounts reclassified from accumulated OCI for available-for-sale MBS upon realization	$	2	$	(36	)	Gain (loss) on sale of mortgage-backed securities, net
Periodic interest costs of interest rate swaps previously designated as hedges under GAAP, net	19		29			Interest expense
Total reclassifications	$	21	$	(7	)

Note 10. Subsequent Events

On April 12, 2016, our Board of Directors declared a monthly dividend of $0.20 per common share, which will be paid on May 9, 2016, to common stockholders of record as of April 29, 2016.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of American Capital Agency Corp.'s consolidated financial statements with a narrative from the perspective of management, and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2016. Our MD&A is presented in six sections:


•	Executive Overview


•	Financial Condition


•	Results of Operations


•	Liquidity and Capital Resources


•	Off-Balance Sheet Arrangements


•	Forward-Looking Statements

EXECUTIVE OVERVIEW

American Capital Agency Corp. ("AGNC," the "Company," "we," "us" and "our") was organized on January 7, 2008 and commenced operations on May 20, 2008 following the completion of our initial public offering. Our common stock is traded on The NASDAQ Global Select Market under the symbol "AGNC." We are externally managed by American Capital AGNC Management, LLC (our "Manager"), an affiliate of American Capital, Ltd. ("American Capital").

We operate so as to qualify to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). As such, we are required to distribute annually 90% of our taxable net income. As long as we qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

Our principal objective is to generate attractive risk-adjusted returns for distribution to our stockholders through regular monthly dividends from the combination of our net interest income and net realized gains and losses on our investments and hedging activities while preserving our net book value (also referred to as "net asset value", "NAV" and "stockholders' equity"). We fund our investments primarily through borrowings structured as repurchase agreements ("repo").

Our Investment Strategy

Our investment strategy is designed to:


•	manage an investment portfolio consisting primarily of agency securities that seeks to generate attractive risk-adjusted returns;


•	capitalize on discrepancies in the relative valuations in the agency and AAA non-agency securities market;


•	manage financing, interest rate, prepayment and extension risks;


•	preserve our net book value;


•	provide regular monthly distributions to our stockholders;


•	continue to qualify as a REIT; and


•	remain exempt from the requirements of the Investment Company Act of 1940, as amended (the "Investment Company Act").

The size and composition of our investment portfolio depends on investment strategies implemented by our Manager, the availability of investment capital and overall market conditions, including the availability of attractively priced investments and suitable financing to appropriately leverage our investment portfolio. Market conditions are influenced by, among other things, current levels of and expectations for future levels of interest rates, mortgage prepayments, market liquidity, housing prices,

unemployment rates, general economic conditions, government participation in the mortgage market and evolving regulations or legal settlements that impact servicing practices or other mortgage related activities.

Our Risk Management Strategy

We use a variety of strategies to hedge a portion of our exposure to market risks, including interest rate, prepayment and extension risks, to the extent that our Manager believes is prudent, taking into account our investment strategy, the cost of the hedging transactions and our intention to qualify as a REIT. Consequently, while we use interest rate swaps and other hedges to attempt to protect our net book value against moves in interest rates, we may not hedge certain interest rate, prepayment or extension risks if our Manager believes that bearing such risks enhances our return relative to our risk/return profile, or the hedging transaction would negatively impact our REIT status.

The risk management actions we take may lower our earnings and dividends in the short term to further our objective of maintaining attractive levels of earnings and dividends over the long term. In addition, some of our hedges are intended to provide protection against larger rate moves and as a result may be relatively ineffective for smaller changes in interest rates. There can also be no certainty that our Manager's projections of our exposures to interest rates, prepayments, extension or other risks will be accurate or that our hedging activities will be effective and, therefore, actual results could differ materially. Furthermore, since our hedging strategies are generally not designed to protect our net book value from spread risk, wider spreads between the market yield on our investment securities and benchmark interests underlying our interest rate hedges will typically cause our net book value to decline and can occur independent of changes in benchmark interest rates. For further discussion of our market risks and risk management strategy, please refer to “Quantitative and Qualitative Disclosures about Market Risk” under Item 3 of this Quarterly Report on Form 10-Q.

Trends and Recent Market Impacts

Following the Federal Reserve's (the "Fed") first Federal Funds Rate increase in nearly ten years in December 2015, interest rates across much of the yield curve fell materially during the first quarter of 2016 as concerns regarding global economic weakness dampened the market’s expectations with respect to U.S. economic growth, inflation and the pace of monetary policy normalization. Consistent with this weaker outlook, at its March meeting, the Fed significantly reduced its expectations for short term interest rate increases and explicitly acknowledged the potential downside risk to the U.S. economy associated with the deteriorating global landscape. This weaker global growth also led to significant additional easing measures by the European Central Bank and the Bank of Japan, with the latter instituting negative interest rates for the first time.

Against this backdrop, the 10 year swap rate in the U.S. moved significantly during the first quarter, declining 70 basis points from 2.19% at the beginning of the quarter to a low of 1.49% in early February, ultimately closing the quarter at 1.64%, a 55 basis point decline for the quarter. The 10 year U.S. Treasury rate performed slightly better, closing the quarter down 49 basis points. The aggregate spread differential between the market yield on agency MBS and benchmark interest rates underlying our interest rate hedges widened modestly during the quarter and was the primary driver of the -2.2% decline in our net book value per common share to $22.09 per common share as of March 31, 2016, from $22.59 per common share as of December 31, 2015. Taking into account the $0.60 per common share of dividends declared during the first quarter, our economic return was 0.4% for the quarter, or 1.8% on an annualized basis.

We continue to believe that rates in the U.S. will remain "lower for longer." This more benign interest rate environment, when coupled with increasingly attractive investment opportunities in agency MBS, should be supportive of improved economic returns for our stockholders. Given this view, we chose to increase our "at risk" leverage level again during the first quarter to 7.3x as of March 31, 2016, compared to 6.8x as of December 31, 2015 and a low of 6.1x as of June 30, 2015. We also repurchased 6.5 million shares, or 1.9%, of our common stock during the quarter.

Our weighted average net interest margin declined during the first quarter due to the combination of (i) lower asset yields, due to higher prepayment expectations following the decline in interest rates and the resultant "catch-up" premium amortization expense recognized during the quarter, and (ii) an increase in our average funding costs, largely due to higher repo costs following the Fed's December rate increase and timing differences between the rate reset on our repo positions and the rate reset on the receive-floating rate leg of our pay-fixed interest rate swaps.

The outstanding balance of our hedge portfolio declined to 83% from 87% of our repo, FHLB advances, other debt and net TBA position as of March 31, 2016 and December 31, 2015, respectively. In addition, the composition of our hedges shifted slightly toward a greater portion of U.S. Treasury hedges in our overall hedge mix, as we favored using a greater share of U.S. Treasury-based hedges in the current environment given the heightened risk associated with swap spreads. The significant drop in interest rates during the quarter also led to a reduction in our net duration gap from 0.8 years as of December 31, 2015 to a zero net duration gap as of the end of the first quarter. During periods of low interest rate levels where the risk is skewed towards higher interest rates, we will generally operate with a smaller, or even negative, net duration gap. For the estimated impact of

changes in interests rates and mortgage spreads on our net book value please refer to "Quantitative and Qualitative Disclosures about Market Risk" under Item 3 of this Quarterly Report on Form 10-Q.

Market Information

The following table summarizes interest rates and prices of generic fixed rate agency MBS as of each date presented below:



Interest Rate/Security Price ¹	Mar. 31, 2015	June 30, 2015	Sept. 30, 2015	Dec. 31, 2015	Mar. 31, 2016	Mar. 31, 2016 vs Dec. 31, 2015
LIBOR:
1-Month	0.18%	0.19%	0.19%	0.43%	0.44%	+0.01	bps
3-Month	0.27%	0.28%	0.33%	0.61%	0.63%	+0.02	bps
6-Month	0.40%	0.44%	0.53%	0.85%	0.90%	+0.05	bps
U.S. Treasury Security Rate:
2-Year U.S. Treasury	0.56%	0.64%	0.64%	1.06%	0.73%	-0.33	bps
3-Year U.S. Treasury	0.88%	0.99%	0.92%	1.32%	0.86%	-0.46	bps
5-Year U.S. Treasury	1.37%	1.63%	1.37%	1.77%	1.22%	-0.55	bps
10-Year U.S. Treasury	1.93%	2.33%	2.06%	2.27%	1.78%	-0.49	bps
30-Year U.S. Treasury	2.54%	3.10%	2.88%	3.01%	2.62%	-0.39	bps
Interest Rate Swap Rate:
2-Year Swap	0.81%	0.89%	0.76%	1.17%	0.85%	-0.32	bps
3-Year Swap	1.11%	1.24%	0.99%	1.41%	0.96%	-0.45	bps
5-Year Swap	1.53%	1.77%	1.40%	1.73%	1.18%	-0.55	bps
10-Year Swap	2.03%	2.44%	2.01%	2.19%	1.64%	-0.55	bps
30-Year Swap	2.39%	2.92%	2.53%	2.62%	2.13%	-0.49	bps
30-Year Fixed Rate MBS Price:
3.0%	$102.25	$99.58	$101.34	$100.01	$102.59	+$2.58
3.5%	$105.05	$103.02	$104.31	$103.18	$104.86	+$1.68
4.0%	$106.92	$105.91	$106.67	$105.83	$106.86	+$1.03
4.5%	$109.08	$108.09	$108.41	$108.00	$108.82	+$0.82
15-Year Fixed Rate MBS Price:
2.5%	$102.71	$101.17	$101.94	$100.80	$102.66	+$1.86
3.0%	$104.83	$103.57	$104.11	$103.02	$104.47	+$1.45
3.5%	$106.09	$105.44	$105.61	$104.72	$105.59	+$0.87
4.0%	$105.59	$105.06	$104.77	$104.41	$104.31	-$0.10

_______________________


1.	Price information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information is as of 3:00 p.m. (EST) on such date and can vary by source. Prices and interest rates in the table above were obtained from Barclays. LIBOR rates were obtained from Bloomberg.

The following table summarizes the weighted average actual one-month annualized constant prepayment rates on our investment portfolio for the three months ended March 31, 2016. The weighted average projected CPR for the remaining life of our investment securities held as of March 31, 2016 was 10.2%, an increase from 8.4% as of December 31, 2015.

________________________


1.	Weighted average actual one-month annualized CPR released at the beginning of the month based on securities held/outstanding as of the preceding month-end.

FINANCIAL CONDITION

As of March 31, 2016 and December 31, 2015, our investment portfolio consisted of $56.1 billion and $52.5 billion of MBS, respectively, and a $6.0 billion and $7.4 billion net long TBA position, at fair value, respectively. The following table is a summary of our investment portfolio as of March 31, 2016 and December 31, 2015 (dollars in millions):



	March 31, 2016								December 31, 2015
MBS and TBA Securities	Amortized Cost		Fair Value		Average Coupon		%		Amortized Cost		Fair Value		Average Coupon		%
Fixed rate agency securities:
≤ 15-year
≤ 15-year	$	16,124	$	16,447	3.25	%	26	%	$	16,725	$	16,865	3.25	%	28	%
15-year TBA securities	118		118		3.07	%	—	%	295		293		3.38	%	1	%
Total ≤ 15-year	16,242		16,565		3.24	%	26	%	17,020		17,158		3.25	%	29	%
20-year	1,026		1,066		3.48	%	2	%	1,061		1,088		3.48	%	2	%
30-year
30-year	36,312		36,642		3.69	%	59	%	32,790		32,570		3.70	%	54	%
30-year TBA securities	5,865		5,906		3.25	%	10	%	7,135		7,150		3.34	%	12	%
Total 30-year	42,177		42,548		3.62	%	69	%	39,925		39,720		3.63	%	66	%
Total fixed rate agency securities	59,445		60,179		3.52	%	97	%	58,006		57,966		3.52	%	97	%

Adjustable rate agency securities	458		471		3.03	%	1	%	484		495		3.05	%	1	%

AAA non-agency securities	111		112		3.50	%	—	%	114		113		3.50	%	—	%

CMO agency securities:
CMO	937		966		3.40	%	2	%	973		990		3.40	%	2	%
Interest-only strips	143		176		5.26	%	—	%	152		179		5.28	%	—	%
Principal-only strips	160		175		—	%	—	%	165		174		—	%	—	%
Total CMO agency securities	1,240		1,317		3.95	%	2	%	1,290		1,343		3.97	%	2	%

Total MBS and TBA securities	$	61,254	$	62,079	3.53	%	100	%	$	59,894	$	59,917	3.53	%	100	%

Our TBA positions are recorded as derivative instruments in our accompanying consolidated financial statements, with the TBA dollar roll transactions representing a form of off-balance sheet financing. As of March 31, 2016 and December 31, 2015, our TBA position had a net carrying value of $41 million and $14 million, respectively, reported in derivative assets/(liabilities) on our accompanying consolidated balance sheets. The net carrying value represents the difference between the fair value of the underlying agency security in the TBA contract and the cost basis or the forward price to be paid or received for the underlying agency security.

The following tables summarize certain characteristics of our agency MBS fixed rate portfolio, inclusive of our net TBA position as of March 31, 2016 and December 31, 2015 (dollars in millions):



	March 31, 2016
	Includes Net TBA Position							Excludes Net TBA Position
Fixed Rate Agency Securities	Par Value		Amortized Cost		Fair Value		% Lower Loan Balance & HARP ^1,2	Amortized Cost Basis	Weighted Average			Projected Life CPR ⁴
Fixed Rate Agency Securities	Par Value		Amortized Cost		Fair Value		% Lower Loan Balance & HARP ^1,2	Amortized Cost Basis	WAC ³	Yield ⁴	Age (Months)	Projected Life CPR ⁴
Fixed rate
≤ 15-year
≤ 2.5%	$	4,002	$	4,073	$	4,129	44%	101.8%	2.97%	2.04%	42	9%
3.0%	4,010		4,133		4,203		73%	103.0%	3.50%	2.19%	44	10%
3.5%	4,136		4,282		4,392		89%	103.5%	3.95%	2.50%	54	11%
4.0%	3,247		3,383		3,469		89%	104.2%	4.40%	2.69%	63	13%
4.5%	350		366		367		98%	104.6%	4.87%	3.02%	67	13%
≥ 5.0%	5		5		5		25%	103.6%	6.56%	4.57%	101	14%
Total ≤ 15-year	15,750		16,242		16,565		74%	103.1%	3.71%	2.36%	51	11%
20-year
≤ 3.0%	280		278		291		28%	99.3%	3.55%	3.12%	34	10%
3.5%	581		594		615		64%	102.1%	4.05%	3.03%	36	12%
4.0%	63		65		68		49%	104.2%	4.54%	2.93%	55	13%
4.5%	81		86		88		99%	106.5%	4.90%	2.99%	64	12%
≥ 5.0%	3		3		4		—%	105.8%	5.89%	3.34%	93	19%
Total 20-year:	1,008		1,026		1,066		56%	101.8%	4.02%	3.04%	40	11%
30-year:
≤ 3.0%	6,776		6,869		6,957		2%	100.6%	3.59%	2.91%	34	7%
3.5%	19,007		19,906		20,005		52%	104.8%	4.09%	2.74%	26	9%
4.0%	12,700		13,530		13,649		62%	106.5%	4.53%	2.85%	31	11%
4.5%	1,470		1,564		1,617		87%	106.3%	4.96%	3.31%	58	11%
5.0%	140		148		155		65%	106.2%	5.45%	3.69%	94	13%
≥ 5.5%	147		160		165		38%	109.2%	6.21%	3.37%	112	17%
Total 30-year	40,240		42,177		42,548		48%	105.1%	4.25%	2.82%	30	10%
Total fixed rate	$	56,998	$	59,445	$	60,179	55%	104.5%	4.08%	2.69%	37	10%

_______________________


1.	Lower loan balance securities represent pools backed by an original loan balance of ≤ $150,000. Our lower loan balance securities had a weighted average original loan balance of $97,000 for 15-year and 30-year securities, respectively, as of March 31, 2016.


2.	HARP securities are defined as pools backed by 100% refinance loans with LTV ≥ 80%. Our HARP securities had a weighted average LTV of 111% and 131% for 15-year and 30-year securities, respectively, as of March 31, 2016. Includes $0.9 billion and $5.2 billion of 15-year and 30-year securities, respectively, with >105 LTV pools which are not deliverable into TBA securities.


3.	WAC represents the weighted average coupon of the underlying collateral.


4.	Portfolio yield incorporates a projected life CPR assumption based on forward rate assumptions as of March 31, 2016.



	December 31, 2015
	Includes Net TBA Position							Excludes Net TBA Position
Agency Fixed Rate Securities	Par Value		Amortized Cost		Fair Value		% Lower Loan Balance & HARP ^1,2	Amortized Cost Basis	Weighted Average			Projected Life CPR ⁴
Agency Fixed Rate Securities	Par Value		Amortized Cost		Fair Value		% Lower Loan Balance & HARP ^1,2	Amortized Cost Basis	WAC ³	Yield ⁴	Age (Months)	Projected Life CPR ⁴
Fixed rate
≤ 15-year
≤ 2.5%	$	4,162	$	4,238	$	4,221	47%	101.8%	2.97%	2.04%	38	8%
3.0%	4,178		4,307		4,319		73%	103.1%	3.50%	2.22%	43	9%
3.5%	4,332		4,489		4,557		88%	103.6%	3.95%	2.53%	51	10%
4.0%	3,439		3,591		3,662		89%	104.4%	4.40%	2.71%	60	11%
4.5%	372		390		394		98%	104.9%	4.87%	3.04%	64	12%
≥ 5.0%	5		5		5		28%	103.8%	6.51%	4.54%	97	13%
Total ≤ 15-year	16,488		17,020		17,158		75%	103.2%	3.71%	2.38%	48	10%
20-year
≤ 3.0%	287		285		294		28%	99.3%	3.55%	3.11%	31	8%
3.5%	600		613		628		64%	102.2%	4.05%	3.04%	33	10%
4.0%	66		69		70		48%	104.5%	4.54%	2.97%	52	11%
4.5%	84		90		92		99%	106.7%	4.90%	3.03%	61	10%
≥ 5.0%	4		4		4		—%	106.1%	5.92%	3.35%	92	18%
Total 20-year:	1,041		1,061		1,088		56%	101.9%	4.03%	3.06%	37	9%
30-year:
≤ 3.0%	6,837		6,852		6,845		2%	100.6%	3.59%	2.92%	31	6%
3.5%	16,627		17,383		17,188		51%	104.7%	4.09%	2.84%	26	7%
4.0%	12,888		13,733		13,687		57%	106.7%	4.54%	2.99%	29	8%
4.5%	1,524		1,629		1,664		87%	106.8%	4.96%	3.39%	55	9%
5.0%	148		158		163		66%	106.4%	5.45%	3.74%	92	11%
≥ 5.5%	155		170		173		38%	109.5%	6.20%	3.40%	109	16%
Total 30-year	38,179		39,925		39,720		46%	105.2%	4.27%	2.93%	30	8%
Total fixed rate	$	55,708	$	58,006	$	57,966	55%	104.5%	4.08%	2.75%	36	8%

_______________


1.	Lower loan balance securities represent pools backed by an original loan balance of ≤ $150,000. Our lower loan balance securities had a weighted average original loan balance of $97,000 and $98,000 for 15-year and 30-year securities, respectively, as of December 31, 2015.


2.	HARP securities are defined as pools backed by 100% refinance loans with LTVs ≥ 80%. Our HARP securities had a weighted average LTV of 110% and 127% for 15-year and 30-year securities, respectively, as of December 31, 2015. Includes $0.9 billion and $4.0 billion of 15-year and 30-year securities, respectively, with >105 LTV pools which are not deliverable into TBA securities.


3.	WAC represents the weighted average coupon of the underlying collateral.


4.	Portfolio yield incorporates a projected life CPR assumption based on forward rate assumptions as of December 31, 2015.

As of March 31, 2016 and December 31, 2015, the combined weighted average yield of our MBS portfolio, inclusive of interest and principal-only securities and AAA non-agency securities, was 2.72% and 2.78%, respectively.

Our pass-through agency MBS collateralized by adjustable rate mortgage loans, or ARMs, have coupons linked to various indices. As of March 31, 2016 and December 31, 2015, our ARM securities had a weighted average next reset date of 44 months and 46 months, respectively.

RESULTS OF OPERATIONS

Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, our results of operations discussed below include certain non-GAAP financial information, including "adjusted net interest expense" (defined as interest expense plus the periodic interest rate costs of our interest rate swaps reported in gain (loss) on derivatives and other securities, net in our consolidated statements of comprehensive income), "net spread and dollar roll income" (defined as interest income, TBA dollar roll income and dividends from REIT equity securities, net of adjusted net interest expense and operating expenses) and "estimated taxable income" and certain financial metrics derived from non-GAAP information, such as "cost of funds" and "net interest rate spread." By providing users of our financial information with such measures in addition to the related GAAP measures, we believe it gives users greater

transparency into the information used by our management in its financial and operational decision-making and that it is meaningful information to consider related to: (i) the economic costs of financing our investment portfolio inclusive of interest rate swaps used to economically hedge against fluctuations in our borrowing costs, (ii) in the case of net spread and dollar roll income, our current financial performance without the effects of certain transactions that are not necessarily indicative of our current investment portfolio and operations, and (iii) in the case of estimated taxable income, information that is directly related to the amount of dividends we are required to distribute in order to maintain our REIT qualification status. However, because such measures are incomplete measures of our financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, our results computed in accordance with GAAP. In addition, because not all companies use identical calculations, our presentation of such non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing our income tax returns, which occurs after the end of our fiscal year.

Selected Financial Data

The following selected financial data is derived from our interim consolidated financial statements and the notes thereto. The tables below present our condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015 and our condensed consolidated statements of comprehensive income and key statistics for the three months ended March 31, 2016 and 2015 (in millions, except per share amounts):



($ in millions, except per share amounts)
Balance Sheet Data	March 31, 2016		December 31, 2015
	(unaudited)
Investment portfolio, at fair value	$	56,055	$	52,473
Total assets	$	62,396	$	57,021
Repurchase agreements, Federal Home Loan Bank advances and other debt	$	48,875	$	46,102
Total liabilities	$	54,736	$	49,050
Total stockholders' equity	$	7,660	$	7,971
Net asset value per common share as of period end ¹	$	22.09	$	22.59



	Three Months Ended March 31,
Statement of Comprehensive Income Data (unaudited)	2016			2015
Interest income	$	295		$	383
Interest expense ²	99			86
Net interest income	196			297
Other loss, net ²	(935		)	(513		)
Expenses	33			36
Net loss	(772		)	(252		)
Dividend on preferred stock	7			7
Net loss attributable to common stockholders	$	(779	)	$	(259	)

Net loss	$	(772	)	$	(252	)
Other comprehensive income ²	784			420
Comprehensive income	12			168
Dividend on preferred stock	7			7
Comprehensive income available to common stockholders	$	5		$	161

Weighted average number of common shares outstanding - basic and diluted	334.4			352.8
Net loss per common share - basic and diluted	$	(2.33	)	$	(0.73	)
Comprehensive loss per common share - basic and diluted	$	0.01		$	0.46
Dividends declared per common share	$	0.60		$	0.66

	Three Months Ended March 31,
Other Data (unaudited)	2016			2015
Average investment securities - at par	$48,687			$56,874
Average investment securities - at cost	$50,897			$59,479
Average net TBA portfolio - at cost	$8,144			$6,957
Average total assets - at fair value	$56,763			$72,688
Average mortgage borrowings outstanding ³	$45,926			$53,963
Average stockholders' equity ⁴	$7,776			$9,401
Average coupon ⁵	3.63		%	3.63		%
Average asset yield ⁶	2.32		%	2.57		%
Average cost of funds ⁷	(1.64		)%	(1.28		)%
Average net interest rate spread	0.68		%	1.29		%
Average net interest rate spread, including estimated TBA dollar roll income ⁸	0.94		%	1.53		%
Average coupon (as of period end)	3.63		%	3.58		%
Average asset yield (as of period end)	2.72		%	2.64		%
Average cost of funds (as of period end) ⁹	(1.49		)%	(1.34		)%
Average net interest rate spread (as of period end)	1.23		%	1.30		%
Net comprehensive income return on average common equity - annualized ¹⁰	0.3		%	7.2		%
Economic return on common equity ¹¹	1.8		%	7.1		%
Average leverage ¹²	5.9:1			5.8:1
Average "at risk" leverage, inclusive of the net TBA position ¹³	7.0:1			6.5:1
Leverage (as of period end) ¹⁴	6.5:1			5.8:1
"At risk" leverage, inclusive of net TBA position (as of period end) ¹⁵	7.3:1			6.4:1
Expenses % of average total assets	0.23		%	0.20		%
Expenses % of average assets, including average net TBA position	0.20		%	0.18		%
Expenses % of average stockholders' equity	1.70		%	1.55		%

_______________________

* Except as noted below, average numbers for each period are weighted based on days on our books and records. All percentages are annualized.


1.	Net asset value per common share is calculated as our total stockholders' equity, less our Series A and Series B Preferred Stock aggregate liquidation preference, divided by our number of common shares outstanding as of period end.

We voluntarily discontinued hedge accounting for our interest rate swaps as of September 30, 2011. Please refer to our Interest Expense and Cost of Funds discussion in Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 3 and 6 of our Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information regarding our discontinuance of hedge accounting.


3.	Average mortgage borrowings include agency repo, FHLB advances and debt of consolidated VIEs. Amount excludes U.S. Treasury repo agreements and TBA contracts.


4.	Average stockholders' equity calculated as our average month-end stockholders' equity during the period.


5.	Average coupon for the period was calculated by dividing our total coupon (or cash) interest income on investment securities by our average investment securities held at par.


6.	Average asset yield for the period was calculated by dividing our total cash interest income on investment securities, adjusted for amortization of premiums and discounts, by our average amortized cost of investment securities held.

Average cost of funds includes mortgage borrowings and interest rate swap periodic costs. Amount excludes interest rate swap termination fees, forward starting swaps and costs associated with other supplemental hedges, such as interest rate swaptions and U.S. Treasury positions. Average cost of funds for the period was calculated by dividing our total cost of funds by our average mortgage borrowings outstanding for the period.


8.	TBA dollar roll income / (loss) is net of short TBAs used for hedging purposes. Dollar roll income excludes the impact of other supplemental hedges, and is recognized in gain (loss) on derivative instruments and other securities, net.


9.	Average cost of funds as of period end includes mortgage borrowings outstanding, plus the impact of interest rate swaps. Amount excludes costs associated with other supplemental hedges such as swaptions, U.S. Treasuries and TBA positions.


10.	Net comprehensive income (loss) return on average common equity for the period was calculated by dividing our comprehensive income/(loss) available /(attributable) to common stockholders by our average stockholders' equity, net of the Series A and Series B Preferred Stock aggregate liquidation preference.


11.	Economic return (loss) on common equity represents the sum of the change in our net asset value per common share and our dividends declared on common stock during the period over our beginning net asset value per common share.


12.	Average leverage during the period was calculated by dividing our daily weighted average mortgage borrowings outstanding for the period by the sum of our average stockholders' equity less our average investment in REIT equity securities for the period. Leverage excludes U.S. Treasury repurchase agreements.


13.	Average "at risk" leverage, inclusive of net TBA portfolio, during the period includes the components of "average leverage" plus our daily weighted average net TBA dollar position (at cost) during the period.


14.	Leverage at period end is calculated by dividing the sum of our mortgage borrowings outstanding and our receivable / payable for unsettled investment securities by the sum of our total stockholders' equity less the fair value of investments in REIT equity securities at period end. Leverage excludes U.S. Treasury repurchase agreements.


15.	"At risk" leverage at period end, inclusive of net TBA position, includes the components of "leverage (as of period end)" plus our net TBA dollar roll position outstanding as of period end, at cost.

Interest Income and Asset Yield

The following table summarizes our interest income for the three months ended March 31, 2016 and 2015 (dollars in millions):



	Three Months Ended March 31,
	2016					2015
	Amount			Yield		Amount			Yield
Cash/coupon interest income	$	445		3.63	%	$	516		3.63	%
Net premium amortization	(150		)	(1.31	)%	(133		)	(1.06	)%
Interest income	$	295		2.32	%	$	383		2.57	%
Weighted average actual portfolio CPR for securities held during the period	9		%			8		%
Weighted average projected CPR for the remaining life of securities held as of period end	10		%			10		%
Average 30-year fixed rate mortgage rate as of period end ¹	3.71		%			3.70		%
10-year U.S. Treasury rate as of period end	1.78		%			1.93		%

_______________________


1.	Source: Freddie Mac Primary Fixed Mortgage Rate Mortgage Market Survey

The principal elements impacting our interest income are the size of our average investment portfolio and the yield on our investments. The following is a summary of the estimated impact of each of these elements on the decline in interest income for the three months ended March 31, 2016, compared to the prior year period (in millions):



Impact of Changes in the Principal Elements Impacting Interest Income
Three Months Ended March 31, 2016 vs. March 31, 2015
				Due to Change in Average
	Total Increase / (Decrease)			Portfolio Size			Asset Yield
Interest Income	$	(88	)	$	(55	)	$	(33	)

The size of our average investment portfolio decreased in par value by 14% for the three months ended March 31, 2016, compared to the prior year period, largely as a function of the decline in our stockholders' equity due to share repurchase activity as our average leverage during the period was largely unchanged at 5.9x our stockholders' equity for the three months ended March 31, 2016, compared to 5.8x for the prior year period (see "Leverage" below).

Our average asset yield decreased for the three months ended March 31, 2016, compared to the prior year period, due to fluctuations in "catch-up" premium amortization cost recognized due to changes in our projected CPR estimates. We recognized "catch-up" premium amortization cost of $55 million for the three months ended March 31, 2016, compared to $19 million for the prior year period. Excluding "catch-up" premium amortization adjustments, our average asset yield was 2.75% for the three months ended March 31, 2016, up slightly from 2.70% for the prior year period.

Leverage

Our leverage was 6.5x and 5.8x our stockholders' equity as of March 31, 2016 and December 31, 2015, respectively, measured as the sum of our agency repurchase agreements ("agency repo"), FHLB advances and debt of consolidated VIEs (collectively referred to as "mortgage borrowings") and our net receivable / payable for unsettled agency securities divided by the sum of our total stockholders' equity less the fair value of our investments in REIT equity securities as of period end. Since the individual agency mortgage REITs in which we invest employ similar leverage as within our agency portfolio, we acquire these securities on an unlevered basis and, therefore, exclude from our leverage measurements the portion of our stockholders' equity allocated to investments in other mortgage REITs. In addition, our measurement of leverage excludes repurchase agreements used to fund short-term investments in U.S. Treasury securities ("U.S. Treasury repo") due to the temporary and highly liquid nature of these investments.

Inclusive of our net TBA position, our total "at risk" leverage was 7.3x and 6.8x our stockholders' equity as of March 31, 2016 and December 31, 2015, respectively. Since we recognize our TBA commitments as derivatives under GAAP, they are not included in our repurchase agreement and other debt leverage calculations as measured from our consolidated balance sheets; however, a long TBA position carries similar risks as if we had purchased the underlying MBS assets and funded such purchases with on-balance sheet funding liabilities. Similarly, a short TBA position has substantially the same effect as selling the underlying MBS assets and reducing our on-balance sheet funding commitments. (Refer to Liquidity and Capital Resources for further discussion of TBA dollar roll positions). Therefore, we refer to our leverage adjusted for TBA positions as our "at risk" leverage.

The table below presents our average and quarter-end mortgage borrowings, net TBA position and leverage ratios for each of the three month periods listed below (dollars in millions):



	Mortgage Borrowings ¹						Net TBA Position Long / (Short) ²				Average Leverage during the Period ^1,3	Average Total "At Risk" Leverage during the Period ^1,4	Leverage as of Period End ^1,5	"At Risk" Leverage as of Period End ^1,6
Quarter Ended	Average Daily Amount		Maximum Daily Amount		Ending Amount		Average Daily Amount		Ending Amount		Average Leverage during the Period ^1,3	Average Total "At Risk" Leverage during the Period ^1,4	Leverage as of Period End ^1,5	"At Risk" Leverage as of Period End ^1,6
March 31, 2016	$	45,926	$	49,767	$	48,875	$	8,144	$	5,983	5.9:1	7.0:1	6.5:1	7.3:1
December 31, 2015	$	47,018	$	50,078	$	46,077	$	7,796	$	7,430	5.8:1	6.8:1	5.8:1	6.8:1
March 31, 2015	$	53,963	$	58,217	$	55,056	$	6,957	$	4,815	5.8:1	6.5:1	5.8:1	6.4:1

_______________________


1.	Mortgage borrowings includes agency repo, FHLB advances and debt of consolidated VIEs. Amounts exclude U.S. Treasury repo agreements.


2.	Daily average and ending net TBA position outstanding measured at cost.


3.	Average leverage during the period was calculated by dividing the sum of our daily weighted average mortgage borrowings outstanding by the sum of our average month-end stockholders' equity less our average investment in REIT equity securities for the period.


4.	Average "at risk" leverage during the period includes the components of "average leverage during the period," plus our daily weighted average net TBA position (at cost) during the period.


5.	Leverage as of period end was calculated by dividing the sum of the amount of mortgage borrowings outstanding and net payables and receivables for unsettled agency securities by the sum of our total stockholders' equity less the fair value of our investment in REIT equity securities at period end.


6.	"At risk" leverage as of period end includes the components of "leverage as of period end," plus the cost basis (or contract price) of our net TBA position.

Interest Expense and Cost of Funds

Our interest expense is comprised of interest expense on our mortgage borrowings and the reclassification of accumulated OCI into interest expense related to previously de-designated interest rate swaps. Our mortgage borrowings primarily consist of agency repurchase agreements. Upon our election to discontinue hedge accounting under GAAP as of September 30, 2011, the net deferred loss related to our de-designated interest rate swaps remained in accumulated OCI and is being reclassified from accumulated OCI into interest expense on a straight-line basis over the remaining term of each interest rate swap.

Our "adjusted net interest expense," also referred to as our "cost of funds" when stated as a percentage of our mortgage borrowings outstanding, includes periodic interest costs on our interest rate swaps reported in gain/loss on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Our cost of funds does not include swap termination fees, forward starting swaps and costs associated with our other supplemental hedges, such as swaptions and U.S. Treasury positions. Our cost of funds also does not include the implied financing cost/benefit of our net TBA dollar roll position, but does, however, include interest rate swap hedge costs related to our TBA dollar roll funded assets. Consequently, our cost of funds measured as a percentage of our outstanding mortgage borrowings is higher than if we allocated a portion of our swap hedge costs to our TBA dollar roll funded assets.

The table below presents a reconciliation of our interest expense (the most comparable GAAP financial measure) to our adjusted net interest expense and cost of funds (non-GAAP financial measures) for the three months ended March 31, 2016 and 2015 (dollars in millions):



	Three Months Ended March 31,
	2016				2015
Adjusted Net Interest Expense and Cost of Funds	Amount		% ¹		Amount		% ¹
Interest expense:
Interest expense on mortgage borrowings	$	80	0.70	%	$	57	0.43	%
Periodic interest costs of interest rate swaps previously designated as hedges under GAAP, net	19		0.17	%	29		0.22	%
Total interest expense	99		0.87	%	86		0.65	%
Other periodic interest costs of interest rate swaps, net	89		0.77	%	84		0.63	%
Total adjusted net interest expense and cost of funds	$	188	1.64	%	$	170	1.28	%

_______________________


1.	Percent of our average mortgage borrowings outstanding for the period annualized.

The principal elements impacting our adjusted net interest expense are the size of our average mortgage borrowings outstanding during the period, the size of our average interest rate swap balance outstanding (excluding forward starting swaps), the average interest rate on our borrowings and the average net pay rate on our pay-fixed receive-floating interest rate swaps. The size of our average borrowings declined 15% for the three months ended March 31, 2016, compared to the prior year period, while our average cost of funds increased 36 basis points due to the net effect of (i) higher average interest rates on our mortgage borrowings, (ii) a higher ratio of interest rate swaps outstanding to our average mortgage borrowings (excluding forward starting swaps) and (iii) an increase in the floating rate received on our interest rate swaps more than offsetting an increase in the average fixed rate paid.

The following is a summary of the estimated impact of the principal elements impacting the increase in our adjusted net interest expense for the three months ended March 31, 2016, compared to the prior year period (in millions):



Impact of Changes in the Principal Elements of Adjusted Net Interest Expense
Three Months Ended March 31, 2016 and March 31, 2015
				Due to Change in Average
	Total Increase / (Decrease)			Borrowing / Swap Balance			Borrowing / Swap Rate
Interest expense on mortgage borrowings	$	23		$	(8	)	$	31
Periodic interest rate swap costs ¹	(5		)	10			(15		)
Total change in adjusted net interest expense	$	18		$	2		$	16

_______________________


1.	Includes amounts recognized in interest expense and in gain (loss) on derivatives and other securities, net in our consolidated statements of comprehensive income. The change due to interest rate reflects the net impact of the change in the weighted average fixed pay and variable receive rates.

The table below presents a summary of our average mortgage borrowings outstanding and our average interest rates swaps outstanding, excluding forward starting swaps, for the three months ended March 31, 2016 and 2015 (dollars in millions):



	Three Months Ended March 31,
Average Ratio of Interest Rate Swaps Outstanding (Excluding Forward Starting Swaps) to Mortgage Borrowings Outstanding	2016			2015
Average mortgage borrowings	$	45,926		$	53,963
Average notional amount of interest rate swaps (excluding forward starting swaps)	$	35,811		$	32,924
Average ratio of interest rate swaps to mortgage borrowings	78		%	61		%

Weighted average pay rate on interest rate swaps	1.75		%	1.62		%
Weighted average receive rate on interest rate swaps	(0.54		)%	(0.23		)%
Weighted average net pay rate on interest rate swaps	1.21		%	1.39		%

For the three months ended March 31, 2016 and 2015, we had an average of $4.0 billion and $13.0 billion, respectively, of forward starting interest rate swaps outstanding. Forward starting interest rate swaps do not impact our adjusted net interest expense and cost of funds until they commence accruing net interest settlements on their forward start dates. We enter into forward starting interest rate swaps based on a variety of factors, including our view of the forward yield curve and the timing of potential changes in short-term interest rates, time to deploy new capital, amount and timing of expirations of our existing interest rate swap portfolio, current and anticipated swap spreads and our desire to mitigate our exposure to specific sectors of the yield curve.

Including forward starting swaps and our net TBA position, our average ratio of interest rate swaps outstanding to our average mortgage borrowings and net TBA position (at cost) was 74% for the three months ended March 31, 2016, compared to 75% for the three months ended March 31, 2015.



	Three Months Ended March 31,
Average Ratio of Interest Rate Swaps Outstanding (Including Forward Starting Swaps) to Mortgage Borrowings and Net TBA Position	2016			2015
Average mortgage borrowings	$	45,926		$	53,963
Average net TBA position - at cost	8,144			6,957
Total average mortgage borrowings and net TBA position	$	54,070		$	60,920
Average notional amount of interest rate swaps (including of forward starting swaps)	$	39,767		$	45,880
Average ratio of interest rate swaps to mortgage borrowings and net TBA position	74		%	75		%

Net Spread and Dollar Roll Income

The table below presents a reconciliation of our net interest income (the most comparable GAAP financial measure) to our net spread and dollar roll income and to our net spread and dollar roll income, excluding estimated "catch-up" premium amortization cost, (non-GAAP financial measures) for the three months ended March 31, 2016 and 2015 (dollars in millions):



	Three Months Ended March 31,
	2016			2015
Net interest income	$	196		$	297
Other periodic interest costs of interest rate swaps, net ¹	(89		)	(84		)
Dividend from REIT equity securities ¹	1			2
TBA dollar roll income ¹	50			57
Adjusted net interest income	158			272
Operating expenses	33			36
Net spread and dollar roll income	125			236
Dividend on preferred stock	7			7
Net spread and dollar roll income available to common stockholders	118			229
Estimated "catch-up" premium amortization cost due to change in CPR forecast	55			19
Net spread and dollar roll income, excluding "catch-up" premium amortization, available to common stockholders	$	173		$	248

Weighted average number of common shares outstanding - basic and diluted	334.4			352.8
Net spread and dollar roll income per common share - basic and diluted	$	0.36		$	0.65
Net spread and dollar roll income, excluding "catch-up" premium amortization, per common share - basic and diluted	$	0.52		$	0.70

_______________________


1.	Reported in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income

Net spread and dollar roll income, excluding "catch-up" premium amortization adjustments, for the three months ended March 31, 2016 decreased to $0.52 per common share from $0.70 per common share for the prior year period, reflective of the increase in our average cost of funds, which was partially offset by the increase in our average "at risk" leverage.

Excluding catch-up premium amortization cost, our average net interest rate spread and dollar roll income (i.e., the difference between the average yield on our assets and our average cost of funds inclusive of TBAs) was 1.31% for the three months ended March 31, 2016, compared to 1.64% for the prior year period. Including catch-up premium amortization adjustments, our net interest rate spread and dollar roll income was 0.94% for the three months ended March 31, 2016, compared to 1.53% for the prior year period.

Gain (Loss) on Sale of Mortgage-Backed Securities, Net

The following table is a summary of our net gain (loss) on sale of MBS for the three months ended March 31, 2016 and 2015 (in millions):



	Three Months Ended March 31,
	2016			2015
MBS sold, at cost	$	(3,515	)	$	(7,732	)
Proceeds from MBS sold ¹	3,513			7,768
Net gain (loss) on sale of MBS	$	(2	)	$	36

Gross gain on sale of MBS	$	5		$	57
Gross loss on sale of MBS	(7		)	(21		)
Net gain (loss) on sale of MBS	$	(2	)	$	36

_______________________


1.	Proceeds include cash received during the period, plus receivable for MBS sold during the period as of period end.

Asset sales primarily resulted from leverage adjustments and portfolio repositioning.

Gain (Loss) on Derivative Instruments and Other Securities, Net

The following table is a summary of our gain (loss) on derivative instruments and other securities, net for the three months ended March 31, 2016 and 2015 (in millions):



	Three Months Ended March 31,
	2016			2015
Periodic interest costs of interest rate swaps, net	$	(89	)	$	(84	)
Realized gain (loss) on derivative instruments and other securities, net:
TBA securities - dollar roll income, net	50			57
TBA securities - mark-to-market net gain	138			289
Payer swaptions	(7		)	(15		)
Receiver swaptions	—			13
U.S. Treasury securities - long position	5			36
U.S. Treasury securities - short position	(24		)	(47		)
U.S. Treasury futures - short position	(74		)	(11		)
Interest rate swap termination fees	(136		)	(162		)
REIT equity securities	—			2
Other	7			—
Total realized gain (loss) on derivative instruments and other securities, net	(41		)	162
Unrealized gain (loss) on derivative instruments and other securities, net:
TBA securities - mark-to-market net gain (loss)	28			(112		)
Interest rate swaps	(780		)	(500		)
Payer swaptions	—			(2		)
Receiver swaptions	—			4
Interest and principal-only strips	11			11
U.S. Treasury securities - long position	—			16
U.S. Treasury securities - short position	(59		)	(35		)
U.S. Treasury futures - short position	(3		)	(9		)
Debt of consolidated VIEs	(5		)	—
REIT equity securities	5			—
Total unrealized gain (loss) on derivative instruments and other securities, net	(803		)	(627		)
Total gain (loss) on derivative instruments and other securities, net	$	(933	)	$	(549	)

For further details regarding our use of derivative instruments and related activity refer to Notes 3 and 6 of our Consolidated Financial Statements in this Form 10-Q.

Management Fees and General and Administrative Expenses

We pay our Manager a management fee payable monthly in arrears in an amount equal to one-twelfth of 1.25% of our month-end stockholders' equity, adjusted to exclude the effect of any unrealized gains or losses included in either retained earnings or accumulated OCI, each as computed in accordance with GAAP. There is no incentive compensation payable to our Manager pursuant to the management agreement. We incurred management fees of $27 million and $30 million for the three months ended March 31, 2016 and 2015, respectively.

General and administrative expenses were $6 million for the three months ended March 31, 2016 and 2015. Our general and administrative expenses primarily consisted of prime broker fees, information technology costs, accounting fees, legal fees, Board of Director fees, insurance expense and general overhead expense. For the three months ended March 31, 2016, our general and administrative expenses also included compensation costs of our wholly-owned captive broker-dealer subsidiary, Bethesda Securities, LLC.

Our total annualized operating expense as a percentage of our average stockholders' equity was 1.70% and 1.55% for the three months ended March 31, 2016 and 2015, respectively.

Dividends and Income Taxes

For the three months ended March 31, 2016 and 2015, we had estimated taxable income available to common stockholders of $74 million and $166 million (or $0.22 and $0.47 per common share), respectively.

As a REIT, we are required to distribute annually 90% of our ordinary taxable income to maintain our status as a REIT and all of our taxable income to avoid federal and state corporate income taxes. We can treat dividends declared by September 15 and paid by December 31 as having been a distribution of our taxable income for our prior tax year ("spill-back provision"). Income as determined under GAAP differs from income as determined under tax rules because of both temporary and permanent differences in income and expense recognition. The primary differences are (i) unrealized gains and losses associated with interest rate swaps and other derivatives and securities marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) timing differences, both temporary and potentially permanent, in the recognition of certain realized gains and losses and (iii) temporary differences related to the amortization of premiums and discounts on investments. Furthermore, our estimated taxable income is subject to potential adjustments up to the time of filing our appropriate tax returns, which occurs after the end of our fiscal year.

The following is a reconciliation of our GAAP net income to our estimated taxable income for the three months ended March 31, 2016 and 2015 (dollars in millions):



	Three Months Ended March 31,
	2016			2015
Net loss	$	(772	)	$	(252	)
Estimated book to tax differences:
Premium amortization, net	55			26
Realized gain/loss, net	93			(113		)
Net capital loss/(utilization of net capital loss carryforward)	(99		)	(115		)
Unrealized gain/loss, net	804			627
Other	—			—
Total book to tax differences	853			425
Estimated REIT taxable income	81			173
Dividend on preferred stock	7			7
Estimated REIT taxable income available to common stockholders	$	74		$	166
Weighted average number of common shares outstanding - basic and diluted	334.4			352.8
Estimated REIT taxable income per common share - basic and diluted	$	0.22		$	0.47

Beginning cumulative non-deductible net capital loss	$	684		$	761
Utilization of net capital loss carryforward	(99		)	(115		)
Ending cumulative non-deductible net capital loss	$	585		$	646
Ending cumulative non-deductible net capital loss per ending common share	$	1.77		$	1.83

As of March 31, 2016, we had $0.6 billion (or $1.77 per common share) of net capital loss carryforwards, which can be carried forward and applied against future net capital gains through fiscal year 2018.

The following table summarizes dividends declared on our Series A Preferred Stock, depositary shares underlying our Series B Preferred Stock and common stock during the three months ended March 31, 2016 and 2015:



	Dividends Declared per Share
Quarter Ended	Series A Preferred Stock		Series B Preferred Stock (Per Depositary Share)		Common Stock
March 31, 2016	$	0.50000	$	0.484375	$	0.60
March 31, 2015	$	0.50000	$	0.484375	$	0.66

The final tax characterization of our fiscal year 2016 dividends will be determined and reported to stockholders on their annual Form 1099-DIV statement after the end of the year.

Other Comprehensive Income

The following table summarizes the components of our other comprehensive income for the three months ended March 31, 2016 and 2015 (in millions):



	Three Months Ended March 31,
	2016		2015
Unrealized gain (loss) on available-for-sale securities, net:
Unrealized gain, net	$	763	$	427
Reversal of prior period unrealized (gain) loss, net, upon realization	2		(36		)
Unrealized gain on available-for-sale securities, net:	765		391
Unrealized gain on interest rate swaps designated as cash flow hedges:
Reversal of prior period unrealized loss on interest rate swaps, net, upon reclassification to interest expense	19		29
Total other comprehensive income	$	784	$	420

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of funds are borrowings under master repurchase agreements, asset sales, receipts of monthly principal and interest payments on our investment portfolio and equity offerings. Because the level of our borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our balance sheet is significantly less important than the potential liquidity available under our borrowing arrangements. Our leverage may vary periodically depending on market conditions and our Manager's assessment of risks and returns. We generally would expect our leverage to be within six to eleven times the amount of our stockholders' equity. However, under certain market conditions, we may operate at leverage levels outside of this range for extended periods of time.

We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, maintenance of any margin requirements and the payment of cash dividends as required for our continued qualification as a REIT. To qualify as a REIT, we must distribute annually at least 90% of our taxable income. To the extent that we annually distribute all of our taxable income in a timely manner, we will generally not be subject to federal and state income taxes. We currently expect to distribute all of our taxable income in a timely manner so that we are not subject to federal and state income taxes. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital from operations.

Debt Capital

Repurchase Agreements

As part of our investment strategy, we borrow against our investment portfolio pursuant to master repurchase agreements. We expect that the majority of our borrowings under such master repurchase agreements will have maturities ranging up to one year, but we may have longer-term borrowings ranging up to five years or longer. Borrowings under our master repurchase agreements with maturities greater than 90 days will typically have floating rates of interest based on LIBOR plus or minus a fixed spread.

As of March 31, 2016, we had $45.3 billion of repurchase agreements outstanding used to fund acquisitions of agency securities. Our "at risk" leverage ratio was 7.3x as of March 31, 2016, compared to 6.8x as of December 31, 2015, measured as the sum of our mortgage borrowings (primarily consisting of our agency repurchase agreements), our net TBA position (at cost) and our net receivable / payable for unsettled mortgage securities divided by the sum of our total stockholders' equity less the fair value of our investment in REIT equity securities as of period end. Excluding our net TBA position, our leverage ratio was 6.5x our stockholders' equity as of March 31, 2016, compared to 5.8x as of December 31, 2015.

As of March 31, 2016, our agency repurchase agreements had a weighted average cost of funds of 0.76% and a weighted average remaining days-to-maturity of 184 days, compared 0.61% and 173 days, respectively, as of December 31, 2015.

To limit our exposure to counterparty credit risk, we diversify our funding across multiple counterparties and by counterparty region. As of March 31, 2016, we had master repurchase agreements with 36 financial institutions located throughout North America, Europe and Asia. As of March 31, 2016, a maximum of 5% of our stockholders' equity was at risk with any one repo counterparty, with the top five repo counterparties representing less than 15% of our stockholders' equity. The table below includes a summary of our repurchase agreement funding by number of repo counterparties and counterparty region as of March 31, 2016. For further details regarding our borrowings under repurchase agreements and concentration of credit risk as of March 31, 2016, please refer to Notes 5 and 7 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q.



	March 31, 2016
Counter-Party Region	Number of Counter-Parties	Percent of Repurchase Agreement Funding
North America	18	64%
Europe	13	24%
Asia	5	12%
	36	100%

Amounts available to be borrowed under our repurchase agreements are dependent upon lender collateral requirements and the lender's determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. In addition, our

counterparties apply a "haircut" to our pledged collateral, which means our collateral is valued at slightly less than market value. This haircut reflects the underlying risk of the specific collateral and protects our counterparty against a change in its value, but conversely subjects us to counterparty risk and limits the amount we can borrow against our investment securities. Our master repurchase agreements do not specify the haircut; rather haircuts are determined on an individual repurchase transaction basis. Throughout the three months ended March 31, 2016, haircuts on our pledged collateral remained stable and as of March 31, 2016, our weighted average haircut was approximately 5% of the value of our collateral.

Under our repurchase agreements, we may be required to pledge additional assets to the repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such counterparties demand additional collateral (a "margin call"), which may take the form of additional securities or cash. Specifically, margin calls would result from a decline in the value of our securities securing our repurchase agreements and prepayments on the mortgages securing such securities. Similarly, if the estimated fair value of our investment securities increases due to changes in interest rates or other factors, counterparties may release collateral back to us. Our repurchase agreements generally provide that the valuations of securities securing our repurchase agreements are to be obtained from a generally recognized source agreed to by the parties. However, in certain circumstances under certain of our repurchase agreements our lenders have the sole discretion to determine their value. In such instances, our lenders are required to act in good faith in making determinations of value. Our repurchase agreements generally provide that in the event of a margin call, we must provide additional securities or cash on the same business day that a margin call is made if the lender provides us notice prior to the margin notice deadline on such day.

As of March 31, 2016, we had met all of our margin requirements and we had unrestricted cash and cash equivalents of $1.1 billion and unpledged securities of approximately $2.5 billion, including securities pledged to us and unpledged interests in our consolidated VIEs, available to meet margin calls on our repurchase agreements and other funding liabilities, derivative instruments and for other corporate purposes.

Although we believe we will have adequate sources of liquidity available to us through repurchase agreement financing to execute our business strategy, there can be no assurances that repurchase agreement financing will be available to us upon the maturity of our current repurchase agreements to allow us to renew or replace our repurchase agreement financing on favorable terms or at all. If our repurchase agreement lenders default on their obligations to resell the underlying collateral back to us at the end of the term, we could incur a loss equal to the difference between the value of the collateral and the cash we originally received.

Our wholly-owned captive broker-dealer subsidiary, Bethesda Securities, LLC ("BES"), was formed in 2015 and is currently in the regulatory application process. BES expects to become operational during 2016 and intends to become a member of the Fixed Income Clearing Corporation ("FICC"), thereby providing us with additional repurchase agreement funding and TBA trade clearing capabilities. There can be no assurances that BES will be successful in receiving the regulatory approvals required to become operational or that BES will be successful in becoming a member of the FICC.

To help manage the adverse impact of interest rate changes on the value of our investment portfolio as well as our cash flows, we utilize an interest rate risk management strategy under which we use derivative financial instruments. In particular, we attempt to mitigate the risk of the cost of our variable rate liabilities increasing at a faster rate than the earnings of our long-term fixed rate assets during a period of rising interest rates. The principal derivative instruments that we use are interest rate swaps, supplemented with the use of interest rate swaptions, U.S. Treasury securities, U.S. Treasury futures contracts, TBA securities and other instruments. Please refer to Notes 3 and 6 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q for further details regarding our use of derivative instruments.

Our derivative agreements typically require that we pledge/receive collateral on such agreements to/from our counterparties in a similar manner as we are required to under our repurchase agreements. Our counterparties, or the clearing agency in the case of centrally cleared interest rate swaps, typically have the sole discretion to determine the value of the derivative instruments and the value of the collateral securing such instruments. In the event of a margin call, we must generally provide additional collateral on the same business day.

Similar to repurchase agreements, our use of derivatives exposes us to counterparty credit risk relating to potential losses that could be recognized in the event that our counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and by monitoring positions with individual counterparties.

Excluding centrally cleared interest rate swaps, as of March 31, 2016, our amount at risk with any counterparty related to our interest rate swap and swaption agreements was less than 1% of our stockholders' equity.

In the case of centrally cleared interest rate swap contracts, we could be exposed to credit risk if the central clearing agency or a clearing member defaults on its respective obligation to perform under the contract. However, we believe that the risk is

minimal due to the exchange's initial and daily mark to market margin requirements and a clearinghouse guarantee fund and other resources that are available in the event of a clearing member default.

TBA Dollar Roll Transactions

TBA dollar roll transactions represent a form of off-balance sheet financing accounted for as derivative instruments and we may use them as a means of leveraging (or deleveraging) our investment portfolio through the use of long (or short) TBA contracts. (See Notes 3 and 6 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q).

Under certain market conditions, it may be uneconomical for us to roll our TBA contracts into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take physical delivery to settle a long TBA contract, we would have to fund our total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted. As of March 31, 2016, we had a net long TBA position with a market value and total contract price of $6.0 billion and a net carrying value of $41 million recognized in derivative assets/(liabilities), at fair value, on our Consolidated Balance Sheets in this Quarterly Report on Form 10-Q.

Our TBA dollar roll contracts are also subject to margin requirements governed by the Mortgage-Backed Securities Division ("MBSD") of the FICC and by our prime brokerage agreements, which may establish margin levels in excess of the MBSD. Such provisions require that we establish an initial margin based on the notional value of the TBA contract, which is subject to increase if the estimated fair value of our TBA contract or the estimated fair value of our pledged collateral declines. The MBSD has the sole discretion to determine the value of our TBA contracts and of the pledged collateral securing such contracts. In the event of a margin call, we must generally provide additional collateral on the same business day.

Settlement of our TBA obligations by taking delivery of the underlying securities as well as satisfying margin requirements could negatively impact our liquidity position. However, since we do not use TBA dollar roll transactions as our primary source of financing, we believe that we will have adequate sources of liquidity to meet such obligations.

Federal Home Loan Bank Membership

In April 2015, our wholly-owned captive insurance subsidiary, Old Georgetown Insurance Co., LLC ("OGI"), was approved as a member of the FHLB of Des Moines. The FHLBs provide a variety of products and services to their members, including short and long-term secured loans, called "advances." In January 2016, the FHFA released its final rule on changes to regulations concerning FHLB membership criteria. The final rule terminates OGI's FHLB membership and requires repayment of all advances at the earlier of their contractual maturity dates or one year after the effective date of the final rule (February 2017). As of March 31, 2016, we had $3.0 billion of FHLB advances outstanding with a weighted average interest rate of 0.56% and a weighted average remaining days to maturity of 306 days up to February 2017. Termination of our FHLB membership could negatively impact our liquidity position; however, since FHLB advances do not represent our primary source of funding, we believe that we will have adequate alternative sources of funding upon such termination.

FHLB members may use a variety of real estate related assets, including agency MBS and AAA non-agency securities, as collateral for advances. The ability to borrow from the FHLB during the duration of our FHLB membership is subject to our subsidiary's continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with the FHLB. Each advance requires approval by the FHLB and is secured by collateral in accordance with the FHLB’s credit and collateral guidelines, as may be revised from time to time by the FHLB. In addition, membership in the FHLB obligates OGI to purchase membership and activity-based stock in the FHLB, the latter dependent upon the aggregate amount of advances obtained from the FHLB.

FHLB advances typically require higher effective "haircuts" than those required under our current repurchase agreements due to the combination of slightly higher haircuts implemented by the FHLB of Des Moines and the requirement to acquire activity-based stock in the FHLB concurrent with such borrowings. The FHLBs also determine the fair value of the securities pledged as collateral and retain the right to adjust collateral haircuts over the term of the secured borrowings.

Asset Sales and TBA Eligible Securities

We maintain a portfolio of highly liquid mortgage-backed securities. We may sell our agency securities through the TBA market by delivering them into TBA contracts, subject to "good delivery" provisions promulgated by Securities Industry and Financial Markets Association ("SIFMA"). We may alternatively sell agency securities that have more unique attributes on a specified basis when such securities trade at a premium over generic TBA securities or if the securities are not otherwise eligible for TBA delivery. Since the TBA market is the second most liquid market (second to the U.S. Treasury market), maintaining a significant level of agency securities eligible for TBA delivery enhances our liquidity profile and provides price support for our TBA eligible securities at or above generic TBA prices. As of March 31, 2016, approximately 89% of our fixed rate agency MBS portfolio was eligible for TBA delivery.

Equity Capital

To the extent we raise additional equity capital through follow-on equity offerings or under our dividend reinvestment and direct stock purchase plan, we may use cash proceeds from such transactions to purchase additional investment securities, to make scheduled payments of principal and interest on our funding liabilities and for other general corporate purposes. There can be no assurance, however, that we will be able to raise additional equity capital at any particular time or on any particular terms. Furthermore, when the trading price of our common stock is significantly less than our estimate of our current net asset value per common share, among other conditions, we may repurchase shares of our common stock.

Common Stock Repurchase Program

During the three months ended March 31, 2016, we repurchased 6.5 million shares of our common stock at an average repurchase price of $17.89 per share, including expenses, totaling $116 million. As of March 31, 2016, the total remaining amount authorized for repurchases of our common stock was $0.6 billion.

OFF-BALANCE SHEET ARRANGEMENTS

As of March 31, 2016, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of March 31, 2016, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

FORWARD-LOOKING STATEMENTS

This document contains "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that inherently involve risks and uncertainties. Our actual results and liquidity can differ materially from those anticipated in these forward-looking statements because of changes in the level and composition of our investments and other factors. These factors may include, but are not limited to, changes in general economic conditions, the availability of suitable investments from both an investment return and regulatory perspective, the availability of new investment capital, fluctuations in interest rates and levels of mortgage prepayments, deterioration in credit quality and ratings, the effectiveness of risk management strategies, the impact of leverage, liquidity of secondary markets and credit markets, increases in costs and other general competitive factors.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk, prepayment risk, spread risk, liquidity risk, extension risk, credit risk and inflation risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates can also affect the rate of prepayments of our securities and the value of the mortgage securities that constitute our investment portfolio, which affects our net income and ability to realize gains from the sale of these assets and impacts our ability and the amount that we can borrow against these securities.

We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our operations. The principal instruments that we use are interest rate swaps and swaptions. We also utilize U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales, as well as TBA contracts. We may also purchase or write put or call options on TBA securities and invest in mortgage and other types of derivative instruments, such as interest and principal-only securities. Derivative instruments may expose us to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments.

Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be adversely affected during any period as a result of changing interest rates including changes in the forward yield curve.

Primary measures of an instrument's price sensitivity to interest rate fluctuations are its duration and convexity. Duration measures the estimated percentage change in market value of our mortgage assets or our hedge portfolio that would be caused by a parallel change in short and long-term interest rates. The duration of our investment portfolio changes with interest rates and tends to increase when interest rates rise and decrease when interest rates fall. This "negative convexity" generally increases the interest rate exposure of our investment portfolio in excess of what is measured by duration alone.

We estimate the duration and convexity of our portfolio using both a third-party risk management system and market data. We review the duration estimates from the third-party model and may make adjustments based on our Manager's judgment. These adjustments are intended to, in our Manager's opinion, better reflect the unique characteristics and market trading conventions associated with certain types of securities.

The table below quantifies the estimated changes in (i) net interest income (including periodic interest costs on our interest rate swaps); (ii) the fair value of our investment portfolio (including derivatives and other securities used for hedging purposes); and (iii) our net asset value as of March 31, 2016 and December 31, 2015 should interest rates go up or down by 50 and 100 basis points, assuming instantaneous parallel shifts in the yield curve and including the impact of both duration and convexity.

All changes in income and value in the table below are measured as percentage changes from the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment projections as of March 31, 2016 and December 31, 2015. We apply a floor of 0% for the down rate scenarios on our interest bearing liabilities and the variable leg of our interest rate swaps, such that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level.

Actual results could differ materially from estimates, especially in the current market environment. To the extent that these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from projections. Moreover, if different models were employed in the analysis, materially different projections could result. Lastly, while the table below reflects the estimated impact of interest rate changes on a static portfolio, we actively manage our portfolio and we continuously make adjustments to the size and composition of our asset and hedge portfolio.



Interest Rate Sensitivity ¹
	Percentage Change in Projected
Change in Interest Rate	Net Interest Income ²	Portfolio Market Value ^3,4	Net Asset Value ^3,5
As of March 31, 2016
-100 Basis Points	-24.1%	-1.1%	-9.2%
-50 Basis Points	-7.1%	-0.3%	-2.1%
+50 Basis Points	+3.4%	-0.2%	-2.0%
+100 Basis Points	+4.1%	-0.9%	-7.5%

As of December 31, 2015
-100 Basis Points	-17.3%	-0.4%	-2.8%
-50 Basis Points	-4.2%	+0.1%	+0.6%
+50 Basis Points	+2.0%	-0.5%	-3.7%
+100 Basis Points	+2.5%	-1.2%	-9.4%

________________


1.	Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates.

Represents the estimated dollar change in net interest income expressed as a percent of net interest income based on asset yields and cost of funds as of such date. It includes the effect of periodic interest costs on our interest rate swaps, but excludes costs associated with our forward starting swaps and other supplemental hedges, such as swaptions and U.S. Treasury securities. Amounts also exclude costs associated with our TBA position and TBA dollar roll income/loss, which are accounted for as derivative instruments in accordance with GAAP. Base case scenario assumes interest rates and forecasted CPR of 10% and 8% as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, rate shock scenarios assume a forecasted CPR of 17%, 13%, 9% and 8% for the -100, -50, +50 and +100 basis points scenarios, respectively. As of December 31, 2015, rate shock scenarios assume a forecasted CPR of 12%, 10%, 8% and 7% for such scenarios, respectively. Estimated dollar change in net interest income does not include the impact of retroactive "catch-up" premium amortization adjustments due to changes in our forecasted CPR. Down rate scenarios assume a floor of 0% for anticipated interest rates.


3.	Includes the effect of derivatives and other securities used for hedging purposes.


4.	Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date.


5.	Estimated dollar change in portfolio value expressed as a percent of stockholders' equity, net of the Series A and Series B Preferred Stock liquidation preference, as of such date.

Prepayment Risk

Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates, general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic conditions. Additionally, changes to GSE underwriting practices or other governmental programs could also significantly impact prepayment rates or expectations. Also, the pace at which the loans underlying our securities become seriously delinquent or are modified and the timing of GSE repurchases of such loans from our securities can materially impact the rate of prepayments. Generally, prepayments on residential mortgage-backed securities increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may not always be the case.

We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets. We also amortize or accrete premiums and discounts associated with the purchase of mortgage securities into interest income over the projected lives of the securities, including contractual payments and estimated prepayments using the effective interest method. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate published prepayment data for similar securities, market consensus and current market conditions. If the actual prepayment experienced differs from our estimate of prepayments, we will be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.

Spread Risk

When the market spread between the yield on our investment securities and benchmark interest rates widens, our net book value could decline if the value of our investment securities fall by more than the offsetting fair value increases on our hedging instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk associated with our mortgage assets and the resulting fluctuations in fair value of these securities can occur independent of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or

anticipated monetary policy actions by the Federal Reserve, market liquidity, or changes in required rates of return on different assets. Consequently, while we use interest rate swaps and other supplemental hedges to attempt to protect against moves in interest rates, such instruments typically will not protect our net book value against spread risk.

The table below quantifies the estimated changes in the fair value of our investment portfolio (including derivatives and other securities used for hedging purposes) and in our net asset value as of March 31, 2016 and December 31, 2015 should spreads widen or tighten by 10 and 25 basis points. The estimated impact of changes in spreads is in addition to our interest rate shock sensitivity included in the interest rate shock table above. The table below assumes a spread duration of 4.8 years and 5.2 years as of March 31, 2016 and December 31, 2015, respectively, based on interest rates and MBS prices as of such dates. However, our portfolio's sensitivity of mortgage spread changes will vary with changes in interest rates and in the size and composition of our investment portfolio. Therefore, actual results could differ materially from our estimates.



Spread Sensitivity of Agency MBS Portfolio ¹
	Percentage Change in Projected
Change in MBS Spread	Portfolio Market Value ^2,3	Net Asset Value ^2,4
As of March 31, 2016
-25 Basis Points	+1.2%	+10.1%
-10 Basis Points	+0.5%	+4.0%
+10 Basis Points	-0.5%	-4.0%
+25 Basis Points	-1.2%	-10.1%

As of December 31, 2015
-25 Basis Points	+1.3%	+10.2%
-10 Basis Points	+0.5%	+4.1%
+10 Basis Points	-0.5%	-4.1%
+25 Basis Points	-1.3%	-10.2%

________________


1.	Spread sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, assumes there are no changes in interest rates and assumes a static portfolio. Actual results could differ materially from these estimates.


2.	Includes the effect of derivatives and other securities used for hedging purposes.


3.	Estimated dollar change in investment portfolio value expressed as a percent of the total fair value of our investment portfolio as of such date.


4.	Estimated dollar change in portfolio value expressed as a percent of stockholders' equity, net of the Series A and Series B Preferred Stock liquidation preference, as of such date.

Liquidity Risk

The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase agreements, FHLB advances and other short-term funding agreements. As of March 31, 2016, we had unrestricted cash and cash equivalents of $1.1 billion and unpledged securities of approximately $2.5 billion, including securities pledged to us and unpledged interests in our consolidated VIEs, available to meet margin calls on our funding liabilities and derivative contracts and for other corporate purposes. However, should the value of our collateral or the value of our derivative instruments suddenly decrease, margin calls relating to our funding liabilities and derivative agreements could increase, causing an adverse change in our liquidity position. Furthermore, there is no assurance that we will always be able to renew (or roll) our short-term funding liabilities. In addition, our counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against our funding liabilities, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll such funding liabilities. Significantly higher haircuts can reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.

In addition, we may utilize TBA dollar roll transactions as a means of investing in and financing agency mortgage-backed securities. Under certain economic conditions it may be uneconomical to roll our TBA dollar roll transactions prior to the settlement date and we could have to take physical delivery of the underlying securities and settle our obligations for cash, which could negatively impact our liquidity position, result in defaults or force us to sell assets under adverse conditions.

Extension Risk

The projected weighted-average life and estimated duration, or interest rate sensitivity, of our investments is based on our Manager's assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans. In general, we use

interest rate swaps and swaptions to help manage our funding cost on our investments in the event that interest rates rise. These swaps (or swaptions) allow us to reduce our funding exposure on the notional amount of the swap for a specified period of time by establishing a fixed rate to pay in exchange for receiving a floating rate that generally tracks our financing costs under our funding liabilities.

However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed rate assets generally extends. This could have a negative impact on our results from operations, as our interest rate swap maturities are fixed and will, therefore, cover a smaller percentage of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments. This situation may also cause the market value of our fixed rate securities to decline by more than otherwise would be the case while most of our hedging instruments would not receive any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.

Credit Risk

We are exposed to credit risk relating to potential losses that could be recognized on our non-agency securities due to delinquency, foreclosure and related losses on the underlying mortgage loans, and to counterparty credit risk relating to potential losses on our repurchase agreements, other debt and derivative contracts in the event that the counterparties fail to perform their obligations under such agreements. The amount of assets we pledge as collateral in accordance with our agreements varies over time based on the market value and notional amount of such assets as well as the value of our derivative contracts. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our agreements and may have difficulty obtaining our assets pledged as collateral under such agreements. Our credit risk related to certain derivative transactions is largely mitigated through daily adjustments to collateral pledged based on changes in market value and we limit our counterparties to major financial institutions with acceptable credit ratings. We seek to manage credit risk related to investments in non-agency securities through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, sale of assets where we have identified negative credit trends and the use of various types of credit enhancements. Our overall management of credit exposure may also include the use of credit default swaps or other financial derivatives that we believe are appropriate. Additionally, we intend to limit our non-agency mortgage investments to investment grade, AAA rated securities and to up to 10% of our portfolio. However, there is no guarantee our efforts to manage credit risk will be successful and we could suffer significant losses if unsuccessful.

Inflation Risk

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Further, our consolidated financial statements are prepared in accordance with GAAP and our distributions are determined by our Board of Directors based in part on our net income as calculated for income tax purposes. In each case, our activities and consolidated balance sheets are measured with reference to historical cost and/or fair market value without considering inflation.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2016. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.

Item 1. Legal Proceedings

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. Neither we, nor any of our consolidated subsidiaries, are currently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us or any consolidated subsidiary.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchase Program

The following table presents information with respect to purchases of our common stock made during the three months ended March 31, 2016 by us or any "affiliated purchaser" of us, as defined in Rule 10b-18(a)(3) under the Exchange Act (in millions, except per share amounts):



Settlement Date	Total Number of Shares Purchased	Average Net Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs¹	Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Plans or Programs
February 8, 2016 - February 29, 2016	5.4	$17.85	5.4	N/A
March 1, 2016 - March 21, 2016	1.1	$18.08	1.1	N/A
Total	6.5	$17.89	6.5	N/A

___________________________


1.	All shares were purchased by us pursuant to the stock repurchase program described in Note 9 of our accompanying Consolidated Financial Statements in this Form 10-Q.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits and Financial Statement Schedules

(a) Exhibit Index



Exhibit No.		Description

3.1		American Capital Agency Corp. Amended and Restated Certificate of Incorporation, as amended April 20, 2016, filed herewith.

*3.2		American Capital Agency Corp. Second Amended and Restated Bylaws, as amended, incorporated herein by reference to Exhibit 3.2 of Form 10-K for the year ended December 31, 2011 (File No. 001-34057), filed February 23, 2012.

*3.3		Certificate of Designations of 8.000% Series A Cumulative Redeemable Preferred Stock, incorporated herein by reference to Exhibit 3.1 of Form 8-K (File No 001-34057), filed April 3, 2012.

*3.4		Certificate of Designations of 7.750% Series B Cumulative Redeemable Preferred Stock, incorporated herein by reference to Exhibit 3.3 of Form 8-A (File No. 001-34057), filed May 7, 2014.

*4.1		Instruments defining the rights of holders of securities: See Article IV of our Amended and Restated Certificate of Incorporation, as amended, incorporated herein by reference to Exhibit 3.1 of Form 10-Q for the quarter ended March 31, 2012 (File No. 001-34057), filed May 9, 2012.

*4.2		Instruments defining the rights of holders of securities: See Article VI of our Second Amended and Restated Bylaws, as amended, incorporated herein by reference to Exhibit 3.2 of Form 10-K for the year ended December 31, 2011 (File No. 001-34057), filed February 23, 2012.

*4.3		Form of Certificate for Common Stock, incorporated herein by reference to Exhibit 4.1 to Amendment No. 4 to the Registration Statement on Form S-11 (Registration No. 333-149167), filed May 9, 2008.

*4.4		Specimen 8.000% Series A Cumulative Redeemable Preferred Stock Certificate, incorporated herein by reference to Exhibit 4.1 of Form 8-K (File No. 001-34057), filed April 3, 2012.

*4.5		Specimen 7.750% Series B Cumulative Redeemable Preferred Stock Certificate, incorporated herein by reference to Exhibit 4.1 of Form 8-A (File No. 001-34057), filed May 7, 2014.

*4.6		Deposit Agreement, dated May 8, 2014, among American Capital Agency Corp., Computershare Inc. and Computershare Trust Company, N.A., jointly as depositary, incorporated herein by reference to Exhibit 4.2 of Form 8-K (File No. 001-34067), filed May 8, 2014.

*4.7		Form of Depositary Receipt, incorporated herein by reference to Exhibit 4.3 of Form 8-K (File No. 001-34067), filed May 8, 2014.

*10.1		Form of American Capital Agency Corp. Amended and Restated Equity Incentive Plan for Independent Directors, incorporated herein by reference to Appendix 1 of the Definitive Proxy Statement for the 2016 Annual Meeting (File No. 001-34057), filed March 11, 2016.

31.1		Certification of CEO Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32		Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

______________________

* Previously filed


**	This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K


(b)	Exhibits


	See the exhibits filed herewith.


(c)	Additional financial statement schedules


	None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		AMERICAN CAPITAL AGENCY CORP.

		By:	/s/ GARY KAIN
			Gary Kain Chief Executive Officer, President and Chief Investment Officer
Date:	May 5, 2016