AGNC Investment Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. AGNC is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), financed mainly through repurchase agreements. Results are unaudited.
Financial performance and position
- Income and earnings: Interest income was $475 million, down from $557 million a year earlier; interest expense was $27 million, producing net interest income of $448 million versus $528 million. The company reported a GAAP net loss of $651 million, or $1.29 per common share, compared with net income of $975 million, or $1.78 per share, in Q1 2021. The loss attributable to common stockholders was $676 million.
- Market marks and hedging: Other loss, net, was $1.078 billion. Investment-security losses totaled $3.365 billion, including $2.532 billion of unrealized losses through earnings, $342 million of realized sale losses, and $491 million of unrealized losses through OCI. These were partly offset by $1.796 billion of gains on derivatives and other securities, including $1.975 billion of interest-rate swap mark-to-market gains. These are predominantly valuation effects and should be considered alongside the company’s hedges.
- Operating and spread measures: Operating expenses were $21 million, versus $24 million. Management-reported net interest spread, excluding “catch-up” premium amortization, was 2.19%, compared with 2.00% in Q1 2021. Non-GAAP net spread and dollar roll income, excluding catch-up amortization, was $0.72 per diluted share, versus $0.76. Management said very strong TBA dollar-roll performance supported results.
- Dividends and returns: Common dividends declared were $0.36 per share, unchanged from Q1 2021. Economic return on tangible common equity was negative 14.4% for the quarter, including the decline in tangible book value and declared dividend.
- Balance sheet and book value: Total assets were $66.4 billion at March 31, down from $68.1 billion at December 31, 2021. Investment securities at fair value were $49.1 billion, versus $54.4 billion. Total liabilities were $57.5 billion; stockholders’ equity was $8.9 billion, down from $10.3 billion. Tangible net book value per common share was $13.12, down from $15.75; net book value was $14.12, down from $16.76.
- Debt and leverage: Repurchase agreements totaled $44.7 billion, down from $47.4 billion; consolidated VIE debt was $116 million. Tangible net book value “at risk” leverage was 7.5x at quarter-end, versus 7.7x at year-end. The weighted-average repo rate rose to 0.37% from 0.15%; weighted-average repo maturity remained 63 days.
- Liquidity and cash flow: Cash and cash equivalents were $1.0 billion, with restricted cash of $1.1 billion. Operating cash flow was $371 million; investing activities provided $3.1 billion and financing activities used $2.9 billion. Cash, cash equivalents and restricted cash increased $566 million to $2.1 billion. Management reported $3.5 billion of unencumbered cash and Agency RMBS/U.S. Treasury securities, excluding certain assets and subsidiary-held assets, and said all margin requirements had been met.
- Portfolio and hedging: Total investment portfolio fair value, including net TBAs, was $68.6 billion, compared with $82.0 billion at year-end. Interest-rate hedges equaled 121% of Agency repo, net TBA and other debt, versus 101% at year-end. Duration gap was 0.3 years, compared with 0.1 years.
Material changes versus comparable periods
Compared with Q1 2021, GAAP results shifted from substantial profit to loss, chiefly reflecting larger investment-security valuation losses; derivative gains partially offset those losses. Net interest income fell, while management’s adjusted net interest spread improved. Average portfolio size declined, and average actual portfolio prepayments slowed to 14.5% from 24.6%. Compared with December 31, 2021, portfolio fair value, equity, and tangible book value per share decreased, while hedging coverage increased.
Outlook, commentary, risks and unusual items
- Management described Q1 markets as unusually challenging amid geopolitical uncertainty, inflation concerns, expected monetary tightening, sharply higher rates, a flatter yield curve and wider mortgage spreads. It attributed the quarter’s 14.4% economic loss on tangible net asset value per common share primarily to Agency RMBS spread widening.
- Management believes repricing has made many Agency RMBS segments attractive on a risk-adjusted basis, but expects near-term volatility and acknowledges further valuation declines could reduce tangible book value. It views possible declines as potential buying opportunities and said higher rates and wider spreads may improve prospective portfolio returns.
- The Federal Reserve’s announced Agency RMBS runoff was expected to begin June 1, 2022, initially capped at $17.5 billion monthly for three months before increasing to $35 billion. Management said its swaps should provide considerable protection against expected increases in short-term funding rates; it also expects TBA dollar-roll performance to moderate toward historical levels.
- Key exposures include mortgage-spread widening, rising or volatile interest rates, prepayment and extension risk, financing availability and repo renewal, collateral haircuts and margin calls, liquidity, counterparty performance, and credit losses on CRT and non-Agency holdings. Management’s sensitivity analysis estimates that a 25-basis-point spread widening could reduce tangible book value per common share by 6.0%, assuming a static portfolio and no rate change; actual outcomes may differ.
- The company said it had sufficient liquidity and capital resources, met all margin requirements, and had no material changes to previously disclosed risk factors. No material litigation was reported. Disclosure controls were concluded effective. Estimated taxable loss attributable to common stockholders was $43 million, or $0.08 per diluted share; this estimate may be adjusted before tax returns are filed.
Important facts for investors to verify
- How subsequent Agency MBS spreads, interest rates and Fed balance-sheet runoff affected tangible book value and portfolio valuations.
- Whether reported adjusted spread income and TBA dollar-roll returns persisted as management expected TBA performance to moderate.
- Repo funding availability, renewal terms, haircuts, margin requirements and the adequacy of unencumbered liquidity under market stress.
- Whether hedge coverage and duration-gap measures continued to offset funding-cost and interest-rate risks, and how much residual spread risk remained.
- How estimated taxable income, dividend requirements and common dividends evolved; the filing reports a quarterly dividend declaration, not a forward dividend commitment.