AGNC Investment Corp. — 2020 Form 10-K
Reporting period: Year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. AGNC is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements.
Key financial and operating metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Interest income | $1.519 billion | $2.842 billion |
| Interest expense | $674 million | $2.149 billion |
| Net interest income | $845 million | $693 million |
| Net income (loss) | ($266 million) | $688 million |
| Net income (loss) attributable to common stockholders | ($362 million) | $628 million |
| Diluted earnings (loss) per common share | ($0.66) | $1.16 |
| Net cash provided by operating activities | $1.747 billion | $1.180 billion |
| Common dividends declared per share | $1.56 | $2.00 |
| Tangible net book value per common share, year-end | $16.71 | $17.66 |
| Economic return on tangible common equity | 3.5% | 18.7% |
- Portfolio and balance sheet: Year-end investment portfolio, including TBAs, was $97.9 billion: $65.1 billion of Agency RMBS, $31.5 billion of net TBA securities, and $1.3 billion of CRT and non-Agency securities. Total assets were $81.8 billion and stockholders’ equity was $11.1 billion.
- Debt and leverage: Repurchase agreements and other debt totaled $52.5 billion; AGNC also had $31.2 billion of net TBA positions at cost. Year-end tangible net book value “at risk” leverage was 8.5x, down from 9.4x.
- Liquidity: Management reported $5.4 billion of cash and unencumbered Agency RMBS, excluding unencumbered credit assets and assets held at its broker-dealer subsidiary. Unencumbered assets were 60% of tangible net equity. AGNC said it met all margin requirements at year-end.
- Spread and funding: Management’s non-GAAP net interest spread, excluding catch-up premium amortization, was 1.78%, versus 1.18% in 2019. Average asset yield excluding catch-up amortization fell to 2.50% from 3.20%, while average aggregate cost of funds fell to 0.72% from 2.02%. Net spread and dollar roll income excluding catch-up amortization was $2.70 per diluted common share; this is a non-GAAP measure, not GAAP earnings.
- Cash flows: Investing activities provided $36.5 billion and financing activities used $37.2 billion. These large flows chiefly reflect the scale and turnover of the securities and financing portfolio; they should not be read as operating cash generation alone.
Changes versus 2019 and unusual items
- AGNC reported a GAAP net loss for 2020, compared with net income in 2019. Net interest income rose, but other gain (loss), net swung from a $78 million gain to a $1.018 billion loss.
- Derivative and other securities losses were $2.463 billion, including $2.698 billion of net losses on interest-rate swap termination fees and variation margin settlements. Investment securities generated $2.067 billion of total gains, including $1.126 billion of realized sale gains and $622 million of other comprehensive income gains.
- AGNC recorded $146 million of losses on extinguishing repo debt after terminating $3.7 billion of longer-dated agreements and replacing them with shorter-duration funding at lower rates.
- The year included a severe COVID-19 market disruption: AGNC reported a 20.2% economic loss in the first quarter, followed by positive economic returns in each of the next three quarters. Full-year economic return was 3.5%, including $1.56 of common dividends and a $0.95 decline in tangible net book value per common share.
- Year-end investment securities at fair value declined to $66.4 billion from $100.4 billion, while net TBA positions rose to $31.5 billion from $7.4 billion. Average actual CPR on Agency RMBS during 2020 was 19.9%, and year-end projected remaining-life CPR was 17.6%, versus 10.8% a year earlier.
- Common dividends declined to $1.56 per share from $2.00. AGNC issued $439 million of common stock through its at-the-market program and $557 million of preferred stock proceeds; it repurchased $378 million of common stock during the year.
Outlook, risks and contingencies
- Management expected near-zero short-term rates to persist at least through 2023 and did not expect Fed tapering of Agency RMBS purchases before 2022, while acknowledging that policy timing could differ. These are management expectations, not formal earnings guidance.
- Management anticipated moderate net-interest-spread compression as cash flows are reinvested at lower asset yields and TBA funding benefits normalize. It said elevated valuations could lead AGNC to operate at lower leverage at times; rising longer-term rates could, if sustained, ease prepayment pressure.
- Key risks include mortgage spread widening, interest-rate and prepayment/extension risk, leverage, short-term repo renewal and margin calls, TBA roll financing, counterparty exposure, and uncertainty around COVID-19 and government or Fed actions. Management notes that its hedges generally do not protect against spread risk.
- AGNC’s interest-rate sensitivity models estimate that a 50-basis-point spread widening would reduce tangible net book value per common share by 4.8%; a 100-basis-point rate increase would reduce it by 8.1%. These are modeled, static-portfolio estimates and actual results may differ materially.
- AGNC relies on REIT tax qualification and an exemption from the Investment Company Act. Failure to meet applicable tests could result in taxes, forced asset sales, or restrictions on leverage. The filing reports no material litigation and no unresolved SEC staff comments.
- AGNC’s financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Reconcile the GAAP loss and derivative-related losses with non-GAAP spread and dollar roll income; assess the effects of swap settlements and repo extinguishment costs.
- Review year-end tangible book value, leverage, available liquidity, repo maturity profile, and exposure to margin calls and TBA financing.
- Assess whether forecast prepayments, premium amortization, and asset yields reflect subsequent mortgage-rate and refinancing trends.
- Track common dividend coverage against estimated REIT taxable income, while noting that taxable income differs from GAAP income and can be revised.
- Monitor Federal Reserve purchase and reinvestment policy, mortgage spreads, funding costs, and LIBOR transition terms for preferred shares and other contracts.