AGNC Investment Corp. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Dollar amounts are in millions except per-share data. AGNC is an internally managed REIT investing primarily in Agency residential mortgage-backed securities (RMBS), financed mainly through repurchase agreements and managed with interest-rate hedges.
Financial performance and position
| Metric | Q2 2023 | Comparable period / position |
|---|---|---|
| Interest income | $457 | $395 in Q2 2022 |
| Interest expense; net interest income (loss) | $526; $(69) | $80; $315 in Q2 2022 |
| Net income (loss) available to common stockholders; diluted EPS | $255; $0.43 | $(459); $(0.87) in Q2 2022 |
| Net spread and dollar roll income, excluding catch-up premium amortization (non-GAAP); per share | $404; $0.67 | $435; $0.83 in Q2 2022 |
| Net interest spread, excluding catch-up amortization (non-GAAP) | 3.26% | 2.74% in Q2 2022; 2.88% in Q1 2023 |
| Common dividend declared | $0.36 per share | Unchanged from Q2 2022 |
GAAP net income was $286 for the quarter, including $378 of net other gains, which included $996 of gains on derivatives and other investments, partly offset by investment-security losses. For the six months, net income was $135 and diluted EPS was $0.13, compared with a net loss of $1,085 and EPS of $(2.16) in the first half of 2022. Six-month net interest income was $(167), versus $763 a year earlier.
At June 30, total assets were $60.5 billion, total liabilities $52.6 billion, and stockholders’ equity $7.9 billion. Repurchase agreements were $42.0 billion, up from $36.3 billion at December 31, 2022. The investment portfolio, including net TBA positions, was $58.0 billion, compared with $59.5 billion at year-end. Tangible net book value was $9.39 per common share, down from $9.84 at year-end; reported net book value was $10.26 per share.
For the six months, operating cash flow was $(35), investing cash flow $(6,229), and financing cash flow $5,553. Cash, cash equivalents and restricted cash ended the period at $1,623, down $711 from the beginning of the year. Management reported $4.3 billion of unencumbered assets, equal to 59% of tangible equity, and stated it believed liquidity and capital resources were sufficient. Tangible net book value “at risk” leverage was 7.2x at quarter-end, within management’s stated usual range of 6x to 12x. Average repo funding cost increased to 5.23% from 4.31% at year-end.
Material changes and management commentary
- Management attributed market volatility in the quarter to regional-bank concerns, debt-ceiling uncertainty and the Federal Reserve’s hawkish stance. Mortgage spreads widened to late-May levels not seen since the Global Financial Crisis, then valuations improved modestly as uncertainty eased.
- AGNC reported a 3.6% quarterly economic return, comprising the $0.36 dividend and a $0.02 decline in tangible net book value per share. The company increased its exposure to higher-coupon Agency RMBS; the weighted-average coupon on fixed-rate Agency RMBS and TBAs rose to 4.42% from 4.24% at March 31.
- Net spread and dollar roll income excluding catch-up amortization declined to $0.67 per share from $0.70 in Q1, which management attributed primarily to a modestly smaller average portfolio. The spread measure nevertheless improved from 2.88% in Q1 to 3.26%, helped by legacy swaps with low fixed-pay rates.
- Management described the prospective Agency RMBS investment environment as favorable, citing elevated mortgage spreads and declining interest-rate volatility. It cautioned that the macroeconomic and rate outlook remains unsettled and that short-term setbacks are possible. No specific earnings, dividend or book-value guidance was provided.
Risks, contingencies and unusual items
- The business is highly leveraged and exposed to interest-rate, mortgage-spread, prepayment, extension, liquidity and counterparty risks. Repo borrowings are short-term and lenders are not obligated to renew them; falling collateral values or higher haircuts can trigger margin calls or asset sales. AGNC said it met all margin requirements at quarter-end.
- Management’s static-portfolio model estimated that a 50-basis-point increase in rates would reduce tangible book value per common share by 3.1%; a 50-basis-point widening in mortgage spreads would reduce it by 25.6%. These estimates depend on model assumptions, exclude portfolio changes and can differ materially from actual outcomes.
- Interest-rate sensitivity and hedging effectiveness depend on prepayment and duration assumptions. At quarter-end, projected portfolio CPR was 9.8%, compared with 7.4% at year-end; management noted faster or slower prepayments can affect yields, premium amortization and hedge performance.
- Investment securities are measured at fair value; realized and unrealized valuation changes can cause substantial GAAP earnings volatility. The company reported $595 of unrealized losses on available-for-sale securities in accumulated other comprehensive loss at June 30.
- No material change to previously disclosed risk factors was reported. The filing states there was no material litigation, no material change in internal controls, and that disclosure controls were effective. No off-balance-sheet arrangements with unconsolidated entities were reported.
Important facts for investors to verify
- Track tangible book value per share, portfolio spread exposure and the material modeled sensitivity to mortgage-spread widening.
- Monitor repo renewal access, collateral haircuts, margin requirements, unencumbered liquidity and the company’s high leverage.
- Assess whether non-GAAP net spread and dollar roll income supports the dividend over time; it is a supplemental measure and does not replace GAAP results or cash flows.
- Review interest-rate and prepayment developments, hedge coverage and the effect of higher funding costs on net interest income.
- Account for common-stock issuance: AGNC sold 27.8 million shares in the first half for $277 million net proceeds, increasing shares outstanding; verify the effect on per-share book value and earnings.