AGNC Investment Corp. (American Capital Agency Corp.) — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Amounts are in U.S. dollars unless stated otherwise. AGNC is an externally managed mortgage REIT investing primarily in leveraged agency mortgage-backed securities (MBS).
Key financial results
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $547 million | $514 million in Q1 2012 |
| Net interest income | $407 million | $408 million in Q1 2012 |
| Net income | $231 million; $228 million available to common shareholders | $641 million in Q1 2012 |
| Basic and diluted common EPS | $0.64 | $2.66 in Q1 2012 |
| Comprehensive income (loss) available to common | $(560) million | $587 million in Q1 2012 |
| Common dividend declared | $1.25 per share | $1.25 in Q1 2012 |
| Stockholders’ equity | $11.642 billion | $10.896 billion at December 31, 2012 |
| NAV per common share | $28.93 | $31.64 at December 31, 2012 |
| Agency MBS at fair value | $76.295 billion | $85.245 billion at December 31, 2012 |
Net interest income was nearly unchanged year over year, but adjusted net interest expense rose to $224 million from $145 million. Net spread income was $281 million, or $0.78 per common share, versus $341 million, or $1.42 per share, in Q1 2012. Average asset yield fell to 2.80% from 3.32%; average cost of funds increased to 1.28% from 1.01%; and the average net interest spread narrowed to 1.52% from 2.31%. Including estimated TBA dollar-roll income, the average spread was 1.87%.
Operating cash flow was $518 million, investing activities provided $6.785 billion, and financing activities used $6.907 billion. Cash and cash equivalents rose by $396 million to $2.826 billion. These cash flows reflect substantial securities and financing transactions.
Debt, leverage and liquidity
- Repurchase-agreement borrowings were $66.260 billion; consolidated VIE debt was $862 million. Total repurchase agreements and other debt were $67.122 billion.
- Period-end leverage was 5.7:1 including unsettled securities, and 8.1:1 including the net TBA position. Net TBA forward purchase commitments were $27.3 billion at cost and are an off-balance-sheet form of financing.
- Repo funding cost was 0.47% at quarter-end; remaining weighted-average repo maturity was 118 days. Funding was spread across 32 counterparties; no single counterparty represented more than 3% of equity at risk.
- Management reported $2.8 billion of unrestricted cash and $4.3 billion of unpledged agency securities available for settlements, margin calls and other needs. The company said it had met all margin calls.
Material changes and management commentary
- Comprehensive results were pressured by an $837 million net unrealized loss on available-for-sale securities, contributing to a $788 million other comprehensive loss. NAV per common share fell 8.6% from year-end, despite higher total equity.
- AGNC completed a March common-stock offering of 57.5 million shares at $31.34 per share, receiving approximately $1.8 billion net. Common shares outstanding increased to 396.5 million from 338.9 million at year-end.
- The portfolio was repositioned: agency MBS fair value declined, while net TBA positions increased from $12.9 billion at year-end to $27.3 billion. Management cited favorable TBA dollar-roll financing and reported $142 million of Q1 TBA dollar-roll income, partly offset by price losses.
- Management said agency MBS prices and specified-pool premiums declined in Q1 as spreads widened and expectations about Federal Reserve purchases shifted. AGNC expected significant market volatility and anticipated that the Federal Reserve would continue substantial agency MBS purchases through the remainder of fiscal 2013; this was management’s expectation, not company earnings guidance.
- AGNC reported estimated Q1 taxable income available to common shareholders of $177 million, or $0.50 per share, below the $1.25 common dividend declared. It also estimated $430 million of undistributed taxable income, including approximately $250 million related to 2012, net of the March dividend payable. Taxable-income estimates may be adjusted.
Risks, contingencies and unusual items
- Core risks include interest-rate, prepayment, extension, spread/basis, liquidity and counterparty risks. Hedging may reduce exposure to rate movements but generally does not protect NAV from widening MBS spreads.
- Management’s modeled parallel-rate shocks estimated NAV changes of -10.8% for a 100-basis-point increase and -8.2% for a 100-basis-point decrease; estimated net interest income changes were -9.5% and -6.3%, respectively. The filing cautions that these static-portfolio estimates depend on assumptions and may differ materially from actual outcomes.
- Repo lenders may demand additional collateral or decline to renew financing. TBA positions also create margin requirements and potential cash demands if contracts cannot be rolled and securities must be taken into delivery.
- Q1 included $24 million of interest-rate-swap termination fees and a $10 million income-tax provision, primarily attributable to the taxable REIT subsidiary. The company reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether MBS spread movements, hedging results and further unrealized valuation changes continue to affect NAV and book value.
- The economics and financing exposure of the $27.3 billion net TBA position, including dollar-roll income, settlement obligations and margin needs.
- Repo renewal terms, collateral haircuts, counterparty concentration and liquidity under adverse market conditions.
- How narrowing asset yields and higher funding costs affect recurring spread income and the capacity to maintain dividends.
- Taxable-income calculations, the timing of distributions, and the relationship between estimated taxable income and declared dividends.