AGNC Investment Corp. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The filing names the registrant American Capital Agency Corp. (AGNC). It is an externally managed REIT investing primarily in agency mortgage-backed securities (MBS), financed mainly with repurchase agreements. Unless noted, financial amounts below are in U.S. dollars.
Financial results and position
- Income and earnings: Interest income was $295 million, down from $383 million in Q1 2015; interest expense rose to $99 million from $86 million, reducing net interest income to $196 million from $297 million. Net loss was $772 million versus $252 million; net loss attributable to common stockholders was $779 million, or $2.33 per diluted share, versus $259 million, or $0.73 per share.
- Other comprehensive income: OCI was $784 million, mainly reflecting $765 million of unrealized MBS gains. Comprehensive income was $12 million, with $5 million available to common stockholders. These fair-value movements materially offset the GAAP net loss in comprehensive results.
- Spread and margins: Net interest margin was not presented as a conventional operating-company margin. Average asset yield fell to 2.32% from 2.57%, while average cost of funds increased to 1.64% from 1.28%; average net interest-rate spread narrowed to 0.68% from 1.29%. Net spread and dollar-roll income, a non-GAAP measure, was $125 million, or $0.36 per common share, versus $236 million, or $0.65. Excluding estimated catch-up premium amortization, it was $173 million, or $0.52 per share, versus $248 million, or $0.70.
- Cash flow: Operating activities provided $362 million, investing activities used $2.833 billion, and financing activities provided $2.470 billion. Cash and cash equivalents ended at $1.109 billion, essentially unchanged from year-end. Restricted cash was $1.686 billion.
- Balance sheet and leverage: Total assets were $62.396 billion and total liabilities $54.736 billion; stockholders’ equity was $7.660 billion. MBS at fair value totaled $56.055 billion, with a further $6.0 billion net long TBA position at fair value. Repurchase agreements were $45.276 billion, FHLB advances $3.037 billion, and consolidated-VIE debt $562 million. Period-end leverage was 6.5x equity, or 7.3x including net TBA positions, compared with 5.8x and 6.8x, respectively, at December 31, 2015.
- Per-share returns and distributions: NAV per common share declined to $22.09 from $22.59. With $0.60 per share of dividends declared, economic return was 1.8% for the quarter. The common dividend declared was $0.60 per share, down from $0.66 in Q1 2015. The board declared a subsequent $0.20 monthly dividend, payable May 9, 2016.
Changes versus comparable periods
- Against Q1 2015, net interest income fell by $101 million and net loss worsened by $520 million. Management attributed lower interest income to a smaller average portfolio and lower asset yield, including greater catch-up premium amortization as projected prepayments increased.
- Average cost of funds rose 36 basis points year over year. Management cited higher borrowing costs, a larger ratio of swaps to borrowings, and timing differences in floating-rate resets.
- Interest rates declined substantially during Q1 2016; the 10-year swap rate fell 55 basis points from year-end. MBS spread widening was the principal driver of the reported 2.2% decline in NAV per common share.
- At-risk leverage increased to 7.3x from 6.8x at year-end. AGNC repurchased 6.5 million shares for $116 million, at an average $17.89 per share. The net long TBA position decreased to $6.0 billion from $7.4 billion.
- Unrealized losses on available-for-sale securities declined to $66 million from $398 million; the filing says no other-than-temporary impairment charges were recognized in either Q1 2016 or Q1 2015.
Outlook, risks and unusual items
- Management said it continued to expect a “lower for longer” U.S. rate environment and believed that, together with more attractive agency MBS opportunities, it could support improved economic returns. This is management’s view, not formal earnings guidance; the filing provides no quantified forecast.
- Management reported a zero net duration gap at quarter-end and a hedge portfolio equal to 83% of repo, FHLB advances, other debt and net TBA position, versus 87% at year-end. Hedging may not protect against MBS spread widening, and the filing cautions that hedge effectiveness and model estimates are uncertain.
- Illustrative rate sensitivities as of March 31 estimate NAV declines of 2.0% for a 50-basis-point rise and 7.5% for a 100-basis-point rise; a 50-basis-point decline estimates a 2.1% NAV decline. These model scenarios assume parallel rate shifts and no spread changes. A 10-basis-point widening in MBS spreads estimates a 4.0% NAV decline; a 25-basis-point widening estimates a 10.1% decline.
- Key exposures include short-term repo funding against longer-term assets, margin calls and collateral haircuts, refinancing and counterparty risk, prepayment and extension risk, and spread risk. AGNC reported $1.1 billion of unrestricted cash and approximately $2.5 billion of unpledged securities available for liquidity needs, and said it had met all margin requirements at quarter-end.
- A January 2016 FHFA final rule requires termination of the captive insurer’s FHLB membership and repayment of all advances by February 2017. AGNC had $3.0 billion of advances outstanding at quarter-end; management expected alternative funding to be available but acknowledged potential liquidity effects.
- Estimated Q1 taxable income available to common stockholders was $74 million, or $0.22 per share, versus $166 million, or $0.47, in Q1 2015. The estimate is subject to adjustment; REIT status requires annual distribution of at least 90% of taxable income. The filing reports no material litigation and no material change to previously disclosed risk factors. Management concluded disclosure controls were effective.
Investor verification points
- Reconcile the large GAAP net loss with positive comprehensive income and assess the distinction between realized results and unrealized OCI movements.
- Review sustainability of net interest spread and dollar-roll income, including the effect of rising funding costs and prepayment-driven premium amortization.
- Assess the increased 7.3x at-risk leverage, TBA exposure, collateral availability, and sensitivity to MBS spread widening and rate changes.
- Monitor the February 2017 FHLB advance repayment requirement and AGNC’s replacement funding and liquidity plans.
- Verify subsequent common-dividend declarations against taxable income, available tax attributes, and the company’s distribution requirements.