Business context and reporting period
AGNC Investment Corp. filed this unaudited Form 10-Q for the quarter ended September 30, 2021. The internally managed mortgage REIT invests primarily in leveraged Agency residential mortgage-backed securities (RMBS), with smaller credit-risk-transfer and non-Agency holdings. It finances investments mainly through repurchase agreements and uses derivatives to hedge market risks.
Financial performance and position
| Metric | Q3 2021 / September 30, 2021 | Comparable period / prior date |
|---|---|---|
| Interest income; net interest income | $293 million; $279 million | Q3 2020: $364 million; $302 million |
| Net income; diluted EPS | $212 million; $0.35 ($187 million available to common) | Q3 2020: $662 million; $1.15 ($637 million available to common) |
| Net spread and dollar roll income, excluding catch-up amortization (non-GAAP) | $0.75 per diluted common share | Q3 2020: $0.81 |
| Economic net interest spread, excluding catch-up amortization (non-GAAP) | 2.19% | Q3 2020: 2.15% |
| Common dividend declared | $0.36 per share | Q3 2020: $0.36 |
| Total investment portfolio, including TBAs | $84.1 billion | $87.5 billion at June 30, 2021; $97.9 billion at December 31, 2020 |
| Total assets; stockholders’ equity | $68.8 billion; $10.7 billion | $81.8 billion; $11.1 billion at December 31, 2020 |
| Repurchase agreements; tangible net book value per common share | $46.5 billion; $16.41 | $52.4 billion; $16.71 at December 31, 2020 |
For the first nine months of 2021, net income was $776 million, or $1.32 per diluted common share, versus a $1.041 billion net loss, or $2.01 loss per share, in 2020. Net interest income was $1.039 billion versus $662 million. Other gains and losses were materially different year over year: a $195 million net loss in 2021 versus a $1.635 billion net loss in 2020.
Cash flows for the first nine months: $1.164 billion provided by operating activities, $4.715 billion provided by investing activities, and $6.758 billion used in financing activities. Cash, cash equivalents and restricted cash ended at $1.445 billion, down $879 million from year-end 2020. These figures include substantial portfolio and financing activity and should not be read as a simple measure of recurring earnings.
Material changes versus comparable periods
- Q3 2021 common earnings and diluted EPS were lower than Q3 2020, despite slightly higher net interest spread. Net interest income declined, while other gains shifted from a $381 million gain in Q3 2020 to a $45 million loss in Q3 2021.
- Portfolio size contracted: investment securities at fair value were $55.4 billion versus $66.4 billion at December 31, 2020; the broader portfolio including net TBAs was $84.1 billion versus $97.9 billion.
- At-risk leverage declined to 7.5x tangible equity from 7.9x at June 30, 2021 and 8.5x at December 31, 2020. Interest-rate hedges were $72.9 billion, or 98% of mortgage borrowings, and duration gap was 0.4 years.
- Management reported quarterly economic return of 2.3% and year-to-date economic return of 4.7%, including dividends and the change in tangible net book value per common share. Tangible book value rose $0.02 per share in Q3, while the declared dividend was $0.36 per share.
- Estimated life prepayment speed fell to 10.7% from 11.6% at June 30 and 17.6% at year-end 2020; actual Q3 prepayment rate was 22.5%, down from 25.7% in Q2.
Outlook, management commentary and risks
Management said favorable funding conditions, TBA dollar-roll opportunities and stable hedge costs helped sustain spread income despite a smaller asset base. It described the portfolio as positioned for a range of interest-rate scenarios and said strong liquidity gave it flexibility to increase leverage if attractive opportunities arise. Management generally expects leverage in a range of 6x to 12x tangible equity; this is a stated operating range, not earnings guidance. The filing provides no specific financial forecast.
Management viewed the Federal Reserve’s expected tapering of Agency RMBS purchases as unlikely to cause significant spread widening, while acknowledging possible volatility. It noted continuing uncertainty from elevated inflation, supply-chain disruptions and the employment outlook, and favored a more conservative risk profile. The filing discusses sensitivity to interest rates, mortgage spreads, prepayments and extensions, liquidity and financing availability, collateral calls, counterparty performance, and credit losses. Modeled spread-widening sensitivity was significant: a 25-basis-point widening was estimated to reduce tangible net book value per common share by 13.6%, assuming a static portfolio and other stated assumptions.
Liquidity indicators included $5.2 billion of unencumbered cash and Agency MBS, equal to 51% of tangible equity, and unencumbered assets equal to 66% of tangible equity. The weighted-average repo haircut was approximately 4.0%; AGNC reported meeting all margin requirements at quarter-end. These measures do not eliminate the risk of increased margin calls, higher haircuts or lenders declining to renew short-term funding.
After quarter-end, the board replaced the existing share repurchase plan with authorization to repurchase up to $1 billion through December 31, 2022. AGNC said it intended to repurchase only when the price was below its then-current estimate of tangible net book value per share. It repurchased 15.0 million shares for $239 million during Q1 2021 and none in Q2 or Q3. No material litigation or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile GAAP earnings with management’s non-GAAP spread and dollar-roll measures; the latter exclude specified items and are not directly interchangeable with GAAP results.
- Track tangible net book value per share, mortgage-spread sensitivity and the assumptions behind modeled interest-rate and prepayment scenarios.
- Monitor leverage, repo maturities and renewal availability, collateral haircuts, margin calls, unencumbered liquidity and reliance on TBA financing.
- Assess whether Fed policy, interest-rate volatility and mortgage prepayment trends affect asset yields, hedging effectiveness and book value.
- Review subsequent dividend declarations and share repurchases, including the company’s estimated tangible book value used to guide repurchases.