AGNC Investment Corp. quarterly report, Q2 FY2020

AGNC Investment Corp. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Unless noted otherwise, amounts are in U.S. dollars. AGNC is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements.

Key financial results and position

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Interest income	$429 million	$693 million	$920 million	$1.398 billion
Net interest income	$295 million	$123 million	$360 million	$287 million
Net income (loss)	$718 million	$(444) million	$(1.703) billion	$(179) million
Net income (loss) per common share	$1.24	$(0.85)	$(3.16)	$(0.38)
Common dividends declared per share	$0.36	$0.50	$0.84	$1.04

Q2 2020 net income included $447 million of net other gains, while the six-month net loss reflected $3.539 billion of losses on derivative instruments and other securities, net. These results include substantial fair-value and hedging effects and should be read alongside AGNC’s non-GAAP spread and dollar-roll measures.

For Q2, net spread and dollar-roll income excluding catch-up premium amortization was $0.58 per diluted common share, versus $0.49 a year earlier. The reported average net interest spread on that basis was 1.68%, versus 1.00%. These are company-defined non-GAAP measures, not substitutes for GAAP results.

Balance sheet at June 30: total assets $89.853 billion; investment securities at fair value $77.143 billion; total liabilities $79.503 billion; stockholders’ equity $10.350 billion.
Funding and leverage: repurchase agreements were $69.685 billion, compared with $89.182 billion at December 31, 2019. Period-end tangible net book value “at risk” leverage was 9.2x tangible equity; average Q2 leverage was 8.8x.
Book value: tangible net book value was $14.92 per common share at June 30, versus $13.62 at March 31 and $17.66 at December 31, 2019. Q2 economic return on tangible common equity, including dividends, was 12.2%; the six-month return was negative 10.8%.
Liquidity: cash and cash equivalents were $859 million and restricted cash was $1.306 billion. Management reported $4.5 billion of cash and unencumbered Agency RMBS, excluding certain other assets and assets held at its broker-dealer subsidiary. AGNC said it met all margin requirements at quarter-end.
Cash flow: for the six months, operating activities provided $776 million, investing activities provided $19.309 billion, and financing activities used $19.202 billion. Ending cash, cash equivalents and restricted cash totaled $2.165 billion.

Material changes versus comparable periods

Compared with Q2 2019, GAAP net income moved from a $444 million loss to $718 million of income, while net interest income rose from $123 million to $295 million. Interest income declined, but interest expense fell more sharply.
The six-month net loss widened to $1.703 billion from $179 million, principally in a period of large derivative and other securities losses. Six-month comprehensive loss was $1.036 billion.
The portfolio of investment securities declined to $77.1 billion from $100.4 billion at year-end 2019, while the net TBA position rose to $20.5 billion from $7.4 billion. Total liabilities and repo funding also declined from year-end.
Q2 weighted average repo rate fell to 0.766% from 1.80% in Q1; aggregate cost of funds, including TBAs and swaps, declined to 0.88% from 1.67%. The net interest spread improved, but asset yields were pressured by lower rates and faster prepayments.
Projected remaining-life CPR rose to 16.6% at June 30 from 10.8% at December 31, 2019. The actual weighted average portfolio CPR was 19.9% in Q2, versus 10.0% in Q2 2019.
During the first half, AGNC issued $557 million net proceeds of Series F preferred stock and $439 million net proceeds from common stock issuance; it also repurchased $147 million of common shares in Q2.

Outlook, management commentary and risks

Management said market liquidity and asset prices rebounded during Q2 after severe first-quarter disruption, supported by Federal Reserve and fiscal stimulus. It characterized the Agency RMBS earnings environment as favorable for the foreseeable future, citing funding rates near zero and muted interest-rate volatility, while noting ongoing COVID-19 uncertainty and longer-term risks. No specific earnings or dividend guidance was provided.

Management noted that faster prepayments may weigh on earnings and book value; low mortgage rates and refinancing activity drove higher CPR and premium amortization. AGNC shifted portfolio mix toward lower-coupon, newer-production Agency RMBS and increased its TBA position. It also terminated $3.7 billion of longer-duration repo agreements and replaced them with shorter, lower-rate funding, recording $146 million of debt-extinguishment losses.

Key exposures include interest-rate, mortgage-spread, prepayment, extension, liquidity, credit and counterparty risks. Repo lenders may demand additional collateral, increase haircuts, or decline to renew funding; adverse markets could force asset sales.
COVID-19 may increase market volatility and impair the reliability of models used to value securities, estimate prepayments and manage hedges. Remote work also raises operational and cybersecurity risks.
AGNC’s modeled sensitivity at June 30 estimated that a 100-basis-point parallel rate increase would reduce tangible net book value per share by 9.5%; a 50-basis-point widening in MBS spreads would reduce it by 5.2%. These are static-model estimates, not forecasts, and actual results may differ materially.
The company reported no material litigation expected to adversely affect its business and no material change in internal controls. Its disclosure controls were assessed as effective.

Important facts for investors to verify

How much of reported earnings and book-value movement reflects realized operating income versus fair-value changes, hedging results and one-time repo termination costs.
Whether higher prepayment rates and premium amortization continue to pressure asset yields, and how these developments affect the non-GAAP spread and dollar-roll income measure.
Funding access, repo renewal terms, collateral haircuts and margin requirements, including the concentration of funding through FICC and the broker-dealer subsidiary.
The assumptions underlying management’s prepayment, interest-rate and spread-sensitivity models, especially given the filing’s warning that pandemic conditions may make historical models less predictive.
The sustainability of the common dividend relative to taxable income and cash generation; AGNC declared a July 2020 monthly dividend of $0.12 per share, payable August 11, 2020.