AGNC Investment Corp. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. AGNC is a REIT that primarily invests in Agency residential mortgage-backed securities (RMBS), financed mainly with repurchase agreements and managed with interest-rate hedges. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior date |
|---|---|---|
| Interest income; net interest income | $249; $232 | Q2 2020: $429; $295 |
| Net income (loss); common EPS | $(411); $(0.83) | Q2 2020: $718; $1.24 |
| Net spread and dollar roll income per diluted share, excluding CPR “catch-up” amortization (non-GAAP) | $0.76 | Q2 2020: $0.58 |
| Economic net interest spread, excluding “catch-up” amortization (non-GAAP) | 2.09% | Q2 2020: 1.68% |
| Common dividend declared per share | $0.36 | Q2 2020: $0.36 |
| Investment portfolio, including net TBAs | $87.5 billion | December 31, 2020: $97.9 billion |
| Repurchase agreements; total mortgage borrowings including net TBAs | $48.7 billion; $75.8 billion | December 31, 2020: $52.4 billion; $83.7 billion |
| Total stockholders’ equity; tangible book value per common share | $10.7 billion; $16.39 | December 31, 2020: $11.1 billion; $16.71 |
| At-risk leverage, quarter-end | 7.9x tangible net book value | December 31, 2020: 8.5x |
There is no conventional product-sales revenue measure for this investment business; interest income is the closest reported operating-income measure. Q2’s GAAP net loss reflected, in particular, a $618 million loss on derivatives and other securities, alongside an $80 million net loss on investment securities. Operating expenses were $22 million. Comprehensive loss was $488 million.
For the six months ended June 30, 2021, AGNC reported net income of $564 million and common EPS of $0.97, versus a net loss of $1.703 billion and common EPS of $(3.16) in the first half of 2020. Net cash provided by operating activities was $771 million (versus $776 million); investing activities provided $2.801 billion and financing activities used $4.326 billion. Cash, cash equivalents and restricted cash fell by $754 million to $1.570 billion.
At June 30, cash and cash equivalents were $947 million and restricted cash was $623 million. Management separately reported $4.7 billion of cash and unencumbered Agency RMBS and U.S. Treasury securities, equal to 47% of tangible equity, excluding specified credit assets and assets at its broker-dealer subsidiary. The company reported that it had met all margin requirements.
Material changes and management commentary
- Management said Agency RMBS spreads widened in Q2 as rates declined and the yield curve flattened; faster-than-expected prepayments also pressured higher-coupon securities. AGNC’s economic return on tangible common equity was negative 5.5% for Q2, but positive 2.4% for the first half.
- The portfolio declined by $2.8 billion in Q2 and $10.4 billion year to date. AGNC reduced 15-year fixed-rate Agency holdings by $6.8 billion and modestly increased current-coupon 30-year holdings. At quarter-end, 30-year and 15-year securities represented 87% and 7% of the portfolio, respectively.
- Average at-risk leverage decreased to 7.6x for Q2 from 8.0x in Q1; quarter-end leverage was 7.9x. The hedge portfolio was $74 billion, and the interest-rate hedge ratio was 97% of funding liabilities. The duration gap was slightly positive at 0.3 years.
- Net spread and dollar roll income, excluding “catch-up” premium amortization, was $0.76 per diluted share, unchanged from Q1. Q2 included a $0.13-per-share “catch-up” amortization cost, compared with a $0.40-per-share benefit in Q1. These are non-GAAP measures and should be considered alongside GAAP results.
Outlook, risks and contingencies
Management expected possible further spread widening and volatility as the Federal Reserve moved closer to reducing Agency RMBS purchases. It said short-term book value could be pressured, while lower leverage and strong liquidity could allow AGNC to add investments opportunistically if expected returns improve. The filing does not provide numerical earnings or book-value guidance.
Key risks include interest-rate and yield-curve changes, mortgage-spread widening, prepayment and extension risk, reduced repo availability or higher collateral haircuts, margin calls, counterparty performance, and the effectiveness of hedges. Management cautioned that its modeled sensitivities assume a static portfolio and no spread changes in the rate scenarios; actual results could differ materially. A 25-basis-point spread widening was modeled to reduce tangible book value per common share by 5.5%, all else equal. The filing reported no material litigation, no material changes to previously disclosed risk factors, and no material off-balance-sheet funding relationships or guarantees of unconsolidated entities. Disclosure controls were judged effective.
Important facts for investors to verify
- Reconcile GAAP losses and book-value movements with derivative marks, security valuations, OCI and non-GAAP spread-and-dollar-roll income.
- Assess portfolio prepayment assumptions: actual Q2 CPR was 25.7%, while projected remaining-life CPR at quarter-end was 11.6%; changes affect premium amortization and asset yields.
- Review repo rollover, collateral and liquidity exposure: $48.7 billion of repo funding, 7.9x quarter-end at-risk leverage and substantial collateral requirements.
- Evaluate spread and rate sensitivities, recognizing that modeled results rely on assumptions and do not capture all market conditions or active portfolio changes.
- Compare the $0.36 common dividend with future taxable income and REIT distribution requirements; first-half estimated taxable loss attributable to common stockholders was $322 million and may be adjusted.