AGNC Investment Corp. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. AGNC invests primarily in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements, and operates as a REIT. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 / September 30, 2022 | Comparable period / date |
|---|---|---|
| Interest income | $373; net interest income $177 | Q3 2021: $293; net interest income $279 |
| Net income (loss) available to common stockholders | $(692); basic and diluted EPS $(1.31) | Q3 2021: $187; basic EPS $0.36 |
| Comprehensive loss available to common stockholders | $(1,064) | Q3 2021: income of $193 |
| Net spread and dollar roll income, excluding catch-up amortization (non-GAAP) | $444; $0.84 per common share | Q3 2021: $396; $0.75 per share |
| Nine-month net loss available to common stockholders | $(1,827); EPS $(3.47) | Nine months 2021: income of $701; EPS $1.33 |
| Common dividend declared | $0.36 per share for Q3; $1.08 year to date | Same per-share amounts in 2021 |
| Assets / investment portfolio fair value | Total assets $58.5 billion; portfolio including TBAs $61.5 billion | December 31, 2021: $68.1 billion; portfolio $82.0 billion |
| Stockholders’ equity / tangible book value per common share | $7.2 billion; $9.08 | December 31, 2021: $10.3 billion; $15.75 |
| Repurchase agreements / leverage | $40.3 billion of repo liabilities; period-end tangible “at-risk” leverage 8.7x | December 31, 2021: $47.4 billion; 7.7x |
| Cash and liquidity | Cash and equivalents $976; restricted cash $2.186 billion; unencumbered assets $3.7 billion | Unencumbered assets were $6.5 billion at December 31, 2021 |
Cash flow, nine months: Operating activities provided $919 million, investing activities provided $8.020 billion, and financing activities used $7.302 billion. Cash, cash equivalents and restricted cash increased $1.637 billion to $3.162 billion. These cash flows reflect substantial securities, repo and derivative activity.
Margins and hedging: Management-reported non-GAAP net interest spread, excluding catch-up premium amortization, was 2.81% for Q3, versus 2.19% in Q3 2021. The average portfolio yield including TBA income, on the same adjusted basis, was 3.31%; aggregate cost of funds was 0.50%. The hedge portfolio equaled 118% of Agency repo, net TBA and other debt at quarter end; average “at-risk” leverage was 8.1x for Q3.
Material changes versus prior periods
- Rapidly rising interest rates and widening Agency RMBS spreads sharply reduced asset values. Q3 investment-security losses were $2.670 billion, including realized and unrealized losses; derivative and other securities gains of $1.474 billion partly offset these losses.
- For the first nine months, GAAP net interest income fell to $940 million from $1.039 billion, while total other losses increased to $2.631 billion from $195 million. Net loss was $1.751 billion, compared with net income of $776 million in 2021.
- Portfolio fair value including TBAs declined to $61.5 billion from $82.0 billion at year-end 2021. Tangible book value per common share fell to $9.08 from $15.75; reported economic return on tangible common equity was negative 17.4% for Q3 and negative 35.5% year to date.
- Funding costs rose: weighted-average repo interest rate was 2.84% at quarter end versus 0.15% at year-end 2021. AGNC issued 28.6 million common shares for net proceeds of $289 million during Q3 and issued $150 million of Series G preferred stock.
Outlook, commentary and risks
Management described Q3 as a period of broad fixed-income market weakness and significant repricing. It said the Agency RMBS market could weaken further, but that the scale of spread widening and improving supply-and-demand conditions suggested the weakness might be nearing its end. Management considered Agency RMBS attractive at prevailing valuations and said AGNC was positioned to benefit if volatility and uncertainty recede. The filing provides no formal earnings or dividend guidance.
Key exposures include interest-rate, mortgage-spread, prepayment and extension, liquidity, financing and counterparty risks. Management said it had met all margin requirements at September 30 and believed liquidity and capital were sufficient. However, repo lenders may not renew funding, collateral haircuts or margin requirements can rise, and falling asset values may trigger margin calls or forced sales. Management’s modeled sensitivities estimate that a 50-basis-point rate increase would reduce tangible book value per common share by 7.8%; a 25-basis-point spread widening would reduce it by 18.8%. These are static-portfolio estimates, depend on assumptions, and do not predict actual results.
After quarter end, AGNC replaced its prior repurchase authorization with a plan permitting up to $1 billion of common-stock repurchases through December 31, 2024; it stated repurchases would be made only when the price was below management’s estimate of tangible book value per share. Management cautioned that the program may be limited or terminated. No material litigation or material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Reconcile GAAP losses and the decline in tangible book value with management’s non-GAAP spread and dollar roll income; these measures exclude significant market-value changes.
- Review the assumptions behind interest-rate, spread and prepayment sensitivities, particularly the modeled impact of spread widening and the stated exclusion of spread changes from rate scenarios.
- Track repo funding costs, short-term maturities, collateral haircuts, margin requirements and unencumbered liquidity as market conditions change.
- Assess dilution from common-stock issuance, the cost and seniority of preferred equity, the common dividend relative to estimated taxable income, and any repurchases under the new authorization.