AGNC Investment Corp. (American Capital Agency Corp.) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context and reporting period
AGNC is an externally managed REIT that invests primarily in agency mortgage-backed securities (MBS), funded largely through repurchase agreements. Its stated priorities are preserving net asset value (NAV) and generating risk-adjusted returns and regular dividends. The filing reports a period of rising rates and widening mortgage spreads that pressured MBS valuations.
Financial results and position
| Metric | Q2 2013 | Comparable period / balance |
|---|---|---|
| Interest income | $545 million | $504 million in Q2 2012 |
| Net interest income | $414 million | $384 million in Q2 2012 |
| Net income attributable to common shareholders | $1.826 billion; $4.61 per share | Loss of $264 million; loss of $0.88 per share in Q2 2012 |
| Comprehensive income attributable to common shareholders | Loss of $939 million; loss of $2.37 per share | Income of $477 million; $1.58 per share in Q2 2012 |
| Common dividend declared | $1.05 per share | $1.25 per share in Q2 2012 |
| Net spread income per common share | $0.66 | $0.94 in Q2 2012 |
| Net spread and dollar-roll income per common share | $1.15 | $0.94 in Q2 2012 |
For the six months, net income was $2.060 billion, net income available to common shareholders was $2.053 billion ($5.45 per share), and comprehensive loss available to common shareholders was $1.500 billion. Common dividends declared totaled $2.30 per share.
The divergence between GAAP earnings and comprehensive results reflects large derivative gains recognized in earnings alongside unrealized MBS losses in other comprehensive income. Q2 net gains on derivatives and other securities were $1.444 billion, while the quarter’s other comprehensive loss was $2.765 billion, principally from available-for-sale securities.
At June 30, total assets were $98.663 billion, total liabilities $88.383 billion, and stockholders’ equity $10.280 billion. NAV per common share was $25.51, down from $31.64 at December 31, 2012. Agency MBS fair value was $77.207 billion, versus $85.245 billion at year-end. Repurchase agreements were $72.451 billion; debt of consolidated VIEs was $783 million. Total assets were funded with substantial leverage: reported period-end leverage was about 7.0 times equity excluding net TBA positions and 8.5 times including them.
For the six months, operating cash flow was $1.012 billion, investing cash flow was positive $766 million, and financing cash flow was negative $1.285 billion; cash and cash equivalents increased by $493 million to $2.923 billion. AGNC reported $2.9 billion of unrestricted cash and approximately $3.1 billion of unpledged securities available for margin calls and other purposes.
Material changes versus prior periods
- Average net interest rate spread declined to 1.49% in Q2 from 1.65% a year earlier; net spread income per share fell to $0.66 from $0.94. Management cited lower asset yields, higher funding costs, and a portion of assets held in TBA form.
- Average asset yield rose to 2.92% in Q2 from 2.73% a year earlier, partly reflecting lower projected prepayment speeds. Average cost of funds increased to 1.43% from 1.08%, including swap costs.
- Agency MBS fair value declined by about $8.0 billion from December 31. Accumulated other comprehensive income moved from positive $1.555 billion to a loss of $1.998 billion, largely due to unrealized MBS losses.
- AGNC issued 57.5 million common shares in March, receiving approximately $1.8 billion net; shares outstanding increased to 396.2 million from 338.9 million at year-end. The equity raise contributed to higher average assets and interest income.
- Repurchase-agreement debt decreased from $74.478 billion to $72.451 billion, while net TBA positions increased in scale and shifted from a positive $95 million carrying value at year-end to a negative $771 million.
Outlook, management commentary, and risks
Management expected continued agency MBS market volatility as investors reassessed Federal Reserve asset purchases and the timing of any QE3 taper. AGNC rebalanced toward lower-duration assets and increased hedges; management said this defensive posture should improve book-value protection in a rising-rate environment but is expected to reduce net spread income over the short to intermediate term.
Key risks include interest-rate and mortgage-spread movements, prepayment and extension risk, repo refinancing and margin calls, liquidity pressure from TBA settlement, and counterparty performance. Management noted its hedges generally do not protect against spread widening. Its sensitivity estimates, based on a static portfolio and stated assumptions, projected NAV declines of 5.9% for a 100-basis-point rate increase and 13% for a 25-basis-point widening in MBS spreads; actual results could differ materially.
AGNC said it had met all margin requirements and believed liquidity was sufficient, but cautioned that repo financing may not be renewable on favorable terms or at all. The filing reported no legal proceedings, no defaults upon senior securities, and no material changes to previously disclosed risk factors. No specific earnings or dividend guidance was provided. The company expected to distribute all 2013 taxable income within the permitted timeframe; estimated current-year undistributed taxable income, net of declared dividends, was $425 million as of June 30.
Important facts for investors to verify
- How much reported earnings depended on fair-value gains on derivatives, and how those gains compare with realized results and recurring net spread income.
- The drivers and sensitivity of the $6.13 per-share decline in NAV since year-end, including MBS spread widening and any subsequent recovery or further losses.
- Whether the 8.5-times leverage measure including net TBAs, and the $15.3 billion TBA forward purchase commitment, are fully reflected in the investor’s assessment of funding and liquidity risk.
- Whether cash, unpledged collateral, repo counterparties, and margin requirements remain adequate under further rate or spread shocks.
- Whether taxable income supports the dividend: estimated six-month taxable income available to common shareholders was $587 million, compared with $912 million of common dividends declared in the first half.