AGNC Investment Corp. (American Capital Agency Corp.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in millions of dollars except per-share data, percentages, and leverage ratios. AGNC is a mortgage REIT investing primarily in leveraged agency mortgage-backed securities (MBS), funded mainly through repurchase agreements.
Financial performance and position
| Metric | Q2 2016 | Prior comparable period / other reference |
|---|---|---|
| Interest income | $318 | $414 in Q2 2015 |
| Net interest income | $217 | $333 in Q2 2015 |
| Net income (loss) | $(135); $(0.43) per common share | $512; $1.43 per share in Q2 2015 |
| Common dividend declared | $0.60 per share | $0.62 in Q2 2015 |
| Average asset yield / cost of funds / net interest spread | 2.46% / 1.46% / 1.00% | 2.95% / 1.43% / 1.52% in Q2 2015 |
| Investment portfolio | $54.5 billion MBS; $7.1 billion net long TBA position | $52.5 billion MBS and $7.4 billion net long TBA at Dec. 31, 2015 |
| Total assets / liabilities / equity | $60.5 billion / $52.8 billion / $7.7 billion | Equity was $8.0 billion at Dec. 31, 2015 |
| Borrowings and leverage | $41.9 billion repos; $3.0 billion FHLB advances; 7.2x at-risk leverage | At-risk leverage was 6.8x at Dec. 31, 2015 |
| Liquidity | $1.1 billion unrestricted cash and approximately $2.7 billion unpledged securities available | All margin requirements were met at quarter-end |
For the six months, interest income was $613 million, net interest income $413 million, net loss $907 million, and loss per common share $2.77. Operating cash flow was $688 million; investing activities provided $426 million and financing activities used $1.093 billion. Cash and cash equivalents increased by $21 million to $1.131 billion.
Quarter-end NAV was $22.22 per common share, compared with $22.59 at year-end 2015 and $22.09 at March 31, 2016. Management reported Q2 economic return of 3.3%, including the $0.60 dividend.
Changes and notable items
- Q2 net interest income fell year over year, reflecting lower average asset yield and a smaller average investment portfolio. Higher repo expense was largely offset by lower swap costs in the quarter.
- Q2 net loss included a $367 million loss on derivatives and other securities, including $430 million in interest-rate-swap termination fees. Six-month derivative and other securities loss was $1.300 billion. These mark-to-market and realized items were significant drivers of GAAP losses.
- Available-for-sale securities generated $1.135 billion of six-month other comprehensive income, largely reflecting unrealized MBS gains; accumulated OCI moved from a $66 million deficit at year-end to $1.100 billion of income at June 30.
- AGNC repurchased 6.5 million common shares for $116 million during the first half at an average $17.89 per share; no shares were repurchased in Q2. Remaining authorization was $0.6 billion.
- Portfolio CPR expectations rose to 11% from 8% at year-end. Management increased holdings of securities with favorable prepayment characteristics; 68% of fixed-rate securities excluding TBAs were in these categories, versus 63% at year-end.
Outlook, risks, and contingencies
- Internalization: On July 1, 2016, after the reporting date, AGNC completed its $562 million cash acquisition of American Capital Mortgage Management, LLC. It became internally managed and ended its affiliation with American Capital, Ltd. Management expects lower operating costs and management-fee income from MTGE; the purchase-price allocation was still in progress. The filing recognized $9 million of transaction costs in Q2.
- Funding and liquidity: FHLB membership termination requires repayment of outstanding advances by February 2017. AGNC said it expects alternative funding to be available, but acknowledged refinancing and repo renewal are not assured. Collateral declines or higher haircuts could trigger margin calls and asset sales.
- Market exposure: Management cited interest-rate, mortgage-spread, prepayment, extension, liquidity, credit, and counterparty risks. Its modeled June 30 sensitivity estimated NAV declines of 2.0% for a 50-basis-point rate increase and 7.7% for a 100-basis-point increase; a 25-basis-point spread widening was estimated to reduce NAV 9.3%. These are static-portfolio estimates, not forecasts.
- Operating outlook: Management expected operating expenses to decline in subsequent periods following internalization. No specific earnings or dividend guidance was provided. The board declared post-quarter monthly common dividends of $0.20 for August and $0.18 for September.
- AGNC reported no material litigation and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile the GAAP loss with derivative marks, swap termination fees, and the substantial unrealized MBS gains recorded in OCI; assess the distinction between GAAP and management’s supplemental non-GAAP spread and dollar-roll measures.
- Track whether internalization’s anticipated expense savings and MTGE management-fee income offset added employee and operating costs, and review the final acquisition accounting and goodwill allocation.
- Monitor repo renewal terms, collateral haircuts, margin requirements, and the repayment or refinancing of the $3.0 billion FHLB advances before February 2017.
- Evaluate whether rising prepayments, changing MBS spreads, or interest-rate movements affect asset yields, NAV, hedging effectiveness, and dividend coverage.
- Confirm future taxable income and required REIT distributions; the filing’s estimated taxable income is subject to adjustment, and GAAP earnings do not directly determine REIT distribution requirements.