AGNC Investment Corp. — 2017 Form 10-K
Reporting period: Year ended December 31, 2017; balance-sheet comparisons are to December 31, 2016. This is an annual filing, not a standalone fourth-quarter report. AGNC is a mortgage REIT that primarily earns interest from leveraged investments in agency residential mortgage-backed securities (RMBS), financed mainly through repurchase agreements.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Interest income | $1.293 billion | $1.321 billion |
| Interest expense | $524 million | $394 million |
| Net interest income | $769 million | $927 million |
| Other gain (loss), net | $72 million | $(199) million |
| Operating expenses | $70 million | $105 million |
| Net income | $771 million | $623 million |
| Net income available to common stockholders | $733 million | $595 million |
| GAAP diluted EPS | $2.04 | $1.79 |
| Common dividends declared per share | $2.16 | $2.30 |
| Total assets | $70.376 billion | $56.880 billion |
| Total liabilities | $61.622 billion | $49.524 billion |
| Total stockholders’ equity | $8.754 billion | $7.356 billion |
| Net book value per common share | $21.09 | $21.17 |
| Tangible net book value per common share | $19.69 | $19.50 |
- Portfolio: Investment securities were $57.1 billion at fair value; including TBA positions, the reported investment portfolio was $72.8 billion. Agency RMBS and TBAs represented 99% of the portfolio by fair value. CRT securities grew to $876 million from $164 million.
- Margins and leverage: Management’s non-GAAP net interest margin, including TBA dollar-roll income and swap costs and excluding CPR-related catch-up amortization, was 1.45%, versus 1.41%. Average at-risk leverage was 7.4x; year-end tangible book value at-risk leverage was 8.1x, versus 7.7x.
- Cash flow and liquidity: Operating activities provided $1.260 billion; investing activities used $11.328 billion; financing activities provided $9.906 billion. Cash and cash equivalents ended at $1.046 billion, down $162 million. AGNC also reported approximately $3.6 billion of unpledged securities available for liquidity and margin needs.
- Debt and funding: Repurchase agreements and other debt totaled $50.653 billion on the balance sheet; net TBA position at cost added $15.739 billion to management’s mortgage-borrowing measure. Agency repo outstanding was $50.3 billion, with a 1.57% weighted-average funding cost and 116 days’ weighted-average remaining maturity. The filing states leverage generally is expected to range from 6x to 12x tangible equity.
Material changes versus 2016
- Net income rose to $771 million from $623 million, while net interest income declined to $769 million from $927 million. Higher other gains and lower operating expenses more than offset the net-interest-income decline.
- Interest expense increased as short-term rates rose. Management cited three Federal Reserve rate increases totaling 75 basis points; the 10-year Treasury yield declined 2 basis points over the year.
- The average investment portfolio grew 8% at cost, mainly reflecting 63% growth in TBA assets and new equity issuance. Year-end investment securities at fair value increased to $57.1 billion from $46.5 billion.
- Net spread and dollar-roll income per diluted share, excluding catch-up amortization, increased to $2.56 from $2.36 (non-GAAP). Management attributed improvement to a larger asset base and lower expenses following internalization.
- Operating expenses fell to $70 million from $105 million. AGNC no longer incurred external management fees after its 2016 management internalization, while compensation and benefits rose to $42 million from $19 million.
- Common dividends declined to $2.16 per share from $2.30. The 2017 tax characterization included $1.346256 per share of non-dividend distributions, generally treated as return of capital.
- AGNC issued common stock for net proceeds of approximately $1.238 billion and Series C preferred stock for $315 million; it redeemed Series A preferred stock for $173 million. It did not repurchase common shares in 2017.
Outlook, risks and unusual items
- Management expected Agency RMBS spreads may widen further, interest rates may trend higher, and markets may be more volatile than in 2017. It said tangible book value could decline under those conditions, while leveraged Agency RMBS returns could remain attractive; it may increase leverage opportunistically.
- At year-end, hedges’ notional balance equaled 97% of Agency repo and TBA positions, versus 90% a year earlier; net duration gap was 0.1 years, versus 1.3 years. Model estimates indicated a 6.6% tangible-book-value decline for an immediate 100-basis-point rate increase, compared with an estimated 15.3% decline in 2016. A 25-basis-point spread widening was estimated to reduce tangible net asset value by 12.6%. These are model-based, static-portfolio estimates, not forecasts.
- Key risks include rising borrowing costs and a flattening yield curve, spread widening not generally hedged by AGNC, rate-driven changes in prepayments and asset duration, repo renewal and margin-call risk, derivative and counterparty exposure, and credit losses on CRT and non-Agency holdings. TBA dollar rolls also create off-balance-sheet financing and settlement liquidity risk.
- AGNC reported two groups of stockholder derivative lawsuits concerning its former management agreement and 2016 internalization. One motion to dismiss was denied and that case was in discovery; a dismissal motion in the other case was pending. AGNC disputed the claims, expected a vigorous defense, and recorded no loss contingency.
- Effective in 2017, AGNC elected fair-value accounting for securities acquired after 2016; older holdings remained available-for-sale. This changes where unrealized fair-value movements are reported. AGNC also noted the December 2017 Tax Cuts and Jobs Act and possible effects on housing, mortgage prepayments, and RMBS pricing.
- No formal earnings or dividend guidance was provided. AGNC said it intended to distribute 100% of taxable income, subject to REIT requirements and the board’s discretion. The board declared monthly common dividends of $0.18 per share for January and February 2018.
Important facts for investors to verify
- Reconcile GAAP net interest income and earnings with management’s non-GAAP spread-and-dollar-roll measures, including TBA income, swap costs, and catch-up amortization.
- Assess the sustainability of the $0.18 monthly common dividend against estimated taxable income, cash generation, preferred dividends, and REIT distribution requirements.
- Review repo maturity concentrations, collateral haircuts, margin-call liquidity, and the $15.7 billion net long TBA position; confirm the distinction between on-balance-sheet debt and at-risk leverage.
- Test interest-rate and mortgage-spread sensitivities against different prepayment assumptions, portfolio changes, and market conditions; management cautions actual outcomes may differ materially.
- Examine the credit quality and performance of the expanded CRT portfolio, including its concentration in lower-rated securities, and monitor the pending derivative litigation and post-2017 tax-law effects.