AGNC Investment Corp. (formerly American Capital Agency Corp.) — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report; it also provides fourth-quarter results and year-end balances.
Business context
AGNC is an externally managed mortgage REIT that earns income primarily by investing with leverage in agency mortgage-backed securities, funded mainly through repurchase agreements. Its objective is to generate risk-adjusted returns and monthly dividends while preserving net asset value. In October 2015, it expanded its investment guidelines to permit up to 10% of assets in AAA-rated non-agency and commercial MBS.
Key financial metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Interest income | $1.466 billion | $1.472 billion |
| Net interest income | $1.136 billion | $1.100 billion |
| Net income (loss) | $215 million | $(233) million |
| Net income (loss) available to common stockholders | $187 million | $(256) million |
| Net income (loss) per common share | $0.54 | $(0.72) |
| Comprehensive income (loss) | $(281) million | $1.580 billion |
| Common dividends declared per share | $2.48 | $2.61 |
- Other earnings and margins: Net losses on securities sales and derivatives totaled $782 million, versus $1.192 billion in 2014. Average asset yield was 2.71%; average cost of funds was 1.49%; reported average net interest spread was 1.22%, or 1.48% including estimated TBA dollar-roll income. Net spread and dollar-roll income, a non-GAAP measure, was $2.35 per common share, down from $3.20; excluding estimated catch-up premium amortization, it was $2.35 versus $3.35.
- Cash flow: Operating activities provided $1.428 billion; investing activities provided $4.093 billion; financing activities used $6.131 billion. Cash and cash equivalents decreased by $610 million to $1.110 billion. These cash-flow figures reflect substantial portfolio trading and financing activity.
- Year-end balance sheet: Investment portfolio fair value was $52.473 billion; total assets were $57.021 billion; total liabilities were $49.050 billion; and stockholders’ equity was $7.971 billion. Repurchase agreements, FHLB advances and other debt totaled $46.102 billion. NAV per common share was $22.59, down from $25.74.
- Leverage and liquidity: Year-end leverage was 5.8x equity excluding TBAs and 6.8x on an “at risk” basis including net TBA positions. AGNC reported $1.1 billion of unrestricted cash and approximately $3.0 billion of unpledged securities available for liquidity needs. Agency repo funding was spread across 36 counterparties; year-end agency repo cost was 0.61%.
- Portfolio and risk measures: The portfolio included $7.4 billion of net long TBA positions at year-end, versus $14.8 billion a year earlier. A modeled 100-basis-point rise in rates implied a 9.4% decline in NAV; a 25-basis-point widening in MBS spreads implied a 10.2% decline. These are model-based estimates, not forecasts.
Material changes versus 2014
- Net income returned to positive, but comprehensive income turned to a $281 million loss from $1.580 billion of income in 2014, reflecting a $496 million decline in other comprehensive income, chiefly unrealized MBS losses.
- NAV per common share fell 12% to $22.59; management reported a 2.6% negative economic return after dividends, compared with an 18.5% positive return in 2014.
- Net interest income increased modestly, but spread and dollar-roll income per share declined as leverage and TBA dollar-roll income fell and funding costs rose. Average cost of funds rose to 1.49% from 1.40%.
- Total assets declined to $57.0 billion from $67.8 billion, while total stockholders’ equity fell to $8.0 billion from $9.4 billion. Common dividends declined to $2.48 per share from $2.61.
- AGNC repurchased 15.3 million common shares for $285 million at an average $18.58 per share. The year-end common share count was 337.5 million, compared with 352.8 million.
Outlook, risks and unusual items
- Management described 2015 as challenging, citing global economic uncertainty, interest-rate volatility and widening MBS spreads. It prioritized risk management and relatively low leverage. For 2016, management was cautiously optimistic that slower global growth and low commodity prices could constrain rate increases and that wider MBS spreads could support earnings; further spread widening could still pressure NAV.
- In January 2016, the FHFA issued a rule terminating AGNC’s captive insurer’s FHLB membership and requiring repayment of advances by February 2017 at the latest. AGNC said it did not expect a material adverse effect, citing alternative funding sources. Year-end FHLB advances were $3.753 billion.
- AGNC formed Bethesda Securities, LLC, which was pursuing regulatory approval and planned to seek FICC membership to expand repo funding and TBA clearing access; approval and successful operation were not assured.
- On January 7, 2016, AGNC’s manager’s parent, American Capital, announced it was soliciting offers to acquire the company or business lines. The filing said the outcome and any effect on AGNC or its manager were uncertain.
- Principal risks include leverage and short-term funding rollover, repo and derivative margin calls, rising borrowing costs, MBS spread risk not generally hedged, prepayment and extension risk, valuation uncertainty, counterparty exposure, and maintaining REIT and Investment Company Act exemptions. No material litigation was reported. Auditors issued unqualified opinions on the financial statements and internal controls.
- The board declared common dividends of $0.20 per share for February and March 2016. The filing does not provide a longer-term earnings or dividend forecast.
Important facts for investors to verify
- Whether subsequent results confirm management’s 2016 assumptions about interest rates, MBS spreads, funding costs and portfolio earnings.
- Current NAV per share, leverage including TBA exposure, and the sensitivity of equity to rate and spread moves.
- Repo maturity, collateral and margin-call exposures, available liquidity, and the funding plan for repayment of FHLB advances.
- Dividend coverage from taxable income and recurring spread income; the filing reports $2.48 of 2015 common dividends against estimated taxable income of $1.24 per common share.
- Progress on Bethesda Securities and FICC membership, and any developments in American Capital’s sale solicitation that could affect AGNC’s external management.