Business context and reporting period
The filing is for the quarter ended September 30, 2013, with year-to-date comparisons through September 30. The registrant is named American Capital Agency Corp. in the filing (ticker AGNC). It is an externally managed REIT investing primarily in leveraged agency mortgage-backed securities (MBS), financed mainly with repurchase agreements.
Financial performance and position
Amounts below are in millions unless stated otherwise.
| Metric | Q3 2013 | Q3 2012 | Change / context |
|---|---|---|---|
| Interest income | $558 | $520 | Higher |
| Net interest income | $413 | $381 | Higher |
| Net loss attributable to common shareholders | $(704) | $83 | Net loss per common share $(1.80), versus income of $0.25 |
| Net spread income, non-GAAP | $240 | $267 | Per common share $0.61 versus $0.79 |
| Common dividend declared per share | $0.80 | $1.25 | Lower |
The Q3 loss included a $733 million realized loss on agency MBS sales and a $339 million net loss on derivatives and other securities. Other comprehensive income was $880 million, resulting in comprehensive income of $179 million for the quarter.
For the first nine months, net income was $1.359 billion versus $466 million in 2012, but comprehensive loss was $1.314 billion versus comprehensive income of $2.394 billion. The 2013 comprehensive loss primarily reflects a $2.817 billion unrealized loss on available-for-sale securities. Year-to-date common dividends declared were $3.10 per share versus $3.75.
- Margins and funding: Q3 average asset yield was 2.59%, average cost of funds 1.39%, and average net interest-rate spread 1.20%, compared with 2.55%, 1.13%, and 1.42%, respectively, in Q3 2012. Higher swap costs were a key factor in lower spread income.
- Balance sheet at September 30: Total assets were $97.271 billion, total liabilities $87.386 billion, and stockholders’ equity $9.885 billion. Agency MBS fair value was $85.009 billion.
- Book value and leverage: NAV per common share was $25.27, down from $31.64 at December 31, 2012. Period-end leverage was 7.9x equity excluding net TBA positions and 7.2x including them.
- Debt and liquidity: Repurchase agreements totaled $82.473 billion; their weighted-average interest rate was 0.42% and weighted-average days to maturity 106. Cash and cash equivalents were $2.129 billion, with approximately $1.9 billion of unpledged securities also available for liquidity. Management reported meeting all margin requirements.
- Cash flow, nine months: Operating cash flow was $1.484 billion, investing cash flow was $(9.787) billion, and financing cash flow was $8.002 billion. Cash decreased $301 million to $2.129 billion.
Material changes and management commentary
Market volatility and rising rates during 2013 led AGNC to rebalance toward lower-duration assets, including 15-year fixed-rate MBS, and prioritize NAV protection over near-term returns. The company reported a 91% hedge ratio against repurchase agreements, other debt, and net TBA exposure at quarter-end, down from 101% at June 30. It also reported that 65% of fixed-rate mortgage assets (71% including its net short TBA position) were in prepayment-protected securities.
Management expected this portfolio repositioning and sizable hedging to weigh on net spread income in the short to intermediate term. It anticipated continued agency MBS volatility amid uncertainty about Federal Reserve asset purchases and policy timing; the Fed did not begin tapering at its September 2013 meeting. The company had $1.4 billion of unrealized losses on $43.9 billion of agency MBS and noted it could realize further losses as it actively manages the portfolio.
No numerical earnings or dividend guidance was provided. Management expected to distribute all 2013 taxable income within the permitted timeframe to maintain REIT treatment. Estimated year-to-date taxable income available to common shareholders was $700 million, and estimated undistributed taxable income, net of dividends declared, was $219 million; these estimates may be adjusted.
Risks, contingencies and unusual items
- AGNC’s business is highly leveraged and exposed to interest-rate, mortgage-spread, prepayment, extension, liquidity, and counterparty risks. Repo lenders can demand same-day collateral, raise haircuts, or decline to renew financing.
- Management’s modeled sensitivities estimated that a parallel 100-basis-point rate increase would reduce NAV by 8.6%; a 25-basis-point widening in MBS spreads would reduce NAV by 10.0%. These are model-based estimates for a static portfolio, not forecasts; actual results may differ materially.
- About 96% of fixed-rate agency MBS were TBA-deliverable, but settlement or margin requirements on TBA positions could still pressure liquidity. The period-end net short TBA position had a $7.3 billion market value.
- The company reported no legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. It stated there were no off-balance-sheet arrangements involving unconsolidated entities of the type described in the filing.
- Unusual capital actions included a March common-stock offering that raised approximately $1.8 billion net and $270 million of share repurchases year to date. The board expanded the repurchase authorization to $1 billion through December 31, 2014; $653 million remained authorized at quarter-end.
Important facts for investors to verify
- Whether the sharp decline in NAV per share and the Q3 realized MBS losses reflect continuing valuation pressure or a completed portfolio adjustment.
- How net interest spread, swap costs, funding rates, and dividend coverage evolve after the reported decline in Q3 spread income per share.
- Whether the reported 7.2x at-risk leverage, hedge coverage, and liquidity remain adequate under higher rates, wider MBS spreads, or repo haircuts and margin calls.
- How actual taxable income compares with management’s estimates and supports future distributions, given that taxable income and GAAP earnings differ.
- The sensitivity assumptions behind modeled rate and spread scenarios, particularly because management cautioned that actual outcomes may vary materially.