AGNC Investment Corp. annual report, FY2023

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AGNC Investment Corp. — 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; the supplied text does not provide a standalone fourth-quarter income statement or cash-flow summary.

Business context

AGNC is an internally managed mortgage REIT that invests primarily in Agency residential mortgage-backed securities (RMBS), generally financed with repurchase agreements and TBA dollar-roll transactions. Its returns depend on asset yields relative to funding and hedging costs, as well as changes in mortgage spreads and security values. AGNC intends to distribute its taxable income and maintain its REIT status.

Financial and operating highlights

  • Income and profitability: 2023 interest income was $2.041 billion, up from $1.590 billion in 2022. GAAP interest expense rose to $2.287 billion from $625 million, producing negative net interest income of $246 million, versus positive $965 million in 2022. Net income was $155 million, compared with a $1.190 billion net loss in 2022; net income available to common stockholders was $32 million, or $0.05 per diluted share, versus a $1.295 billion loss, or $2.41 per diluted share.
  • Comprehensive results and returns: Comprehensive income available to common stockholders was $187 million, or $0.30 per diluted share, versus a $2.268 billion loss in 2022. Management reported a 3.0% 2023 economic return on tangible common equity, including $1.44 in common dividends declared and a $1.14 decline in tangible book value per share; 2022 return was negative 28.4%.
  • Supplemental earnings measure: Non-GAAP net spread and dollar-roll income was $1.617 billion, or $2.61 per diluted share, compared with $1.676 billion, or $3.11 per diluted share, in 2022. The company reported a 3.06% average net interest spread using its non-GAAP methodology. These measures include TBA dollar-roll and swap periodic amounts and are not substitutes for GAAP results.
  • Portfolio: Investment securities and other mortgage credit investments totaled $54.9 billion at year-end; net TBA securities had $5.4 billion fair value. The broader portfolio, including TBAs, was reported at $60.2 billion. The weighted-average coupon on fixed-rate Agency RMBS and TBAs rose to 4.83% from 4.13%; the reported yield on investment securities excluding TBAs rose to 4.41% from 3.37%.
  • Capital, debt and liquidity: Total assets were $71.6 billion and total liabilities $63.3 billion, including $50.4 billion of repurchase agreements and other debt. Stockholders’ equity was $8.3 billion. Tangible book value per common share was $8.70, down from $9.84; year-end at-risk leverage was 7.0x, compared with 7.4x. Unencumbered assets were approximately $5.2 billion, or 67% of tangible equity, versus $4.4 billion, or 60%, a year earlier. AGNC said it had met all margin requirements at year-end.
  • Cash flow: Net cash used in operating activities was $118 million, compared with $1.013 billion provided in 2022. Investing activities used $14.672 billion, while financing activities provided $14.227 billion, primarily reflecting repo activity and $1.085 billion of common-stock issuance proceeds. Cash, cash equivalents and restricted cash ended the year at $1.771 billion; this total includes restricted cash and is not equivalent to unrestricted liquidity.
  • Dividends and equity issuance: Common dividends declared were $1.44 per share, unchanged from 2022. AGNC issued 118.8 million common shares through its at-the-market program for net proceeds of $1.085 billion. Common shares outstanding were 694.3 million at year-end, versus 574.6 million a year earlier.

Changes versus 2022

  • Results improved from 2022’s large GAAP loss, primarily as fair-value and other investment-related losses were substantially less severe; however, GAAP net interest income turned negative as funding costs increased sharply.
  • Management said higher asset yields and income from pay-fixed/receive-variable swaps largely offset higher repo costs, but non-GAAP net spread and dollar-roll income per diluted share declined to $2.61 from $3.11.
  • AGNC shifted from TBA and lower-coupon holdings toward higher-coupon, high-quality specified pools. The year-end net TBA position fell to $5.4 billion from $18.6 billion, while investment securities at fair value rose to $54.8 billion from $40.9 billion.
  • Average at-risk leverage declined to 7.4x from 7.8x. Tangible book value per share nevertheless fell, and the company issued substantial common equity through its ATM program.
  • Market conditions remained volatile: the Federal Reserve raised its target rate by 100 basis points during 2023 and continued balance-sheet reduction. Agency mortgage spreads widened materially at points during the year before narrowing to 139 basis points at year-end, near the prior year-end level.

Outlook, risks and unusual items

  • Management described its Agency RMBS outlook as positive, citing a more neutral Federal Reserve stance, possible 2024 rate cuts if inflation improves, reduced volatility drivers and a view that spread widening associated with Fed retrenchment may have run its course. This is management’s view, not quantified earnings or dividend guidance; the filing provides no numerical forecast.
  • Key risks include mortgage-spread widening, interest-rate and prepayment volatility, extension risk, repo refinancing and margin calls, counterparty and market-liquidity risks, and the possibility that hedges do not offset asset-value changes. AGNC’s hedges are generally not designed to protect against spread risk.
  • At year-end, investment securities had a net unamortized premium balance of $1.2 billion. Premium amortization and the effective yield depend on estimated mortgage prepayments; changes in those estimates can affect reported interest income. This was the auditor’s critical audit matter.
  • AGNC relies on its captive broker-dealer subsidiary’s continued FICC and FINRA compliance for access to important repo funding and clearing services. REIT qualification and the Investment Company Act exemption also depend on ongoing asset, income and distribution tests.
  • The company reported no material litigation and no unresolved SEC staff comments. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  • Reconcile GAAP interest income and expense with non-GAAP net spread and dollar-roll income, including the treatment of TBA transactions and interest-rate swaps.
  • Assess the sensitivity of tangible book value to spread changes: AGNC estimated a 4.6% decline per common share for a 10-basis-point spread widening at year-end, assuming a static portfolio and no rate change.
  • Review repo maturity concentration, collateral and margin requirements, FICC funding dependence, and the availability of unencumbered liquidity under stressed conditions.
  • Evaluate the impact of ATM share issuance and the common dividend relative to tangible book value, earnings, and taxable income; the board has not established a minimum dividend.
  • Monitor realized and unrealized investment results, premium-amortization assumptions, prepayment estimates, and whether management’s favorable market outlook is borne out.