American Capital Agency Corp. Reports $(2.37) Comprehensive Loss Per Common Share And $25.51 Net Book Value Per Common Share
Bethesda, MD - July 29, 2013 - American Capital Agency Corp. (“AGNC” or the “Company”) (Nasdaq: AGNC) today reported comprehensive loss for the second quarter of 2013 of $(936) million, or $(2.37) per common share, and net book value of $25.51 per common share. Economic return for the period, defined as dividends on common shares plus the change in net book value per common share, was a loss of $(2.37) per common share, (8.2)% for the quarter, or (32.9)% on an annualized basis.
Second Quarter 2013 Financial Highlights
- $(2.37) comprehensive loss per common share, comprised of:
- $4.61 net income per common share
- $(6.98) other comprehensive loss ("OCI") per common share
- Includes net unrealized losses on investments marked-to-market through OCI
- $1.15 net spread and dollar roll income per common share, comprised of:
- Interest income, net of cost of funds (including interest rate swaps) and operating expenses
- $0.49 per common share of estimated net carry income (also known as "dollar roll income") associated with purchases of agency mortgage backed securities ("MBS") on a forward-settlement basis through the "to-be-announced" ("TBA") dollar roll market
- Includes $0.14 per common share of estimated "catch-up" premium amortization benefit due to change in projected constant prepayment rate ("CPR") estimates
- $1.04 estimated taxable income per common share
- $1.05 dividend per common share declared on June 18, 2013
- $1.07 estimated undistributed taxable income per common share as of June 30, 2013
- Decreased $(0.01) per common share from $1.08 per common share as of March 31, 2013, or $(5) million from $430 million as of March 31, 2013 to $425 million as of June 30, 2013
- $25.51 net book value per common share as of June 30, 2013
- Decreased $(3.42) per common share, or (11.8)%, from $28.93 per common share as of March 31, 2013
- Driven primarily by wider spreads in the broader mortgage backed securities market
- (8.2)% economic loss on common equity for the quarter, or (32.9)% annualized
- Comprised of $1.05 dividend per common share and $(3.42) decrease in net book value per common share
Other Second Quarter Highlights
- $91.7 billion investment portfolio as of June 30, 2013
- Includes $14.5 billion net TBA mortgage position as of June 30, 2013
- 8.4x average "at risk" leverage during the quarter
- 5.9x average leverage during the quarter excluding net TBA mortgage position
- 8.5x "at risk" leverage as of June 30, 2013
- 7.0x leverage excluding net TBA Mortgage position as of June 30, 2013
- Approximately 8.0x "at risk" leverage as of July 26, 2013
- 11% actual portfolio CPR for the quarter
- 11% actual portfolio CPR for the month of July 2013
- 7% average projected portfolio life CPR as of June 30, 2013
- Excludes TBA mortgage position
- 1.86% annualized net interest rate spread and TBA dollar roll income for the quarter
- Includes 37 bps of estimated TBA dollar roll income
- Includes 29 bps of "catch-up" premium amortization benefit due to change in projected CPR estimates
- 1.59% net interest rate spread and TBA dollar roll income as of June 30, 2013
- 1.24% excluding net TBA mortgage position as of June 30, 2013
- 0.3 million shares of common stock repurchased during the quarter
"The second quarter was characterized by extreme volatility in both interest rates and mortgage spreads," commented Gary Kain, President and Chief Investment Officer. "In response, we remained highly disciplined with respect to our risk management activities. We reduced the size of our asset portfolio, adjusted our asset composition to be more consistent with a higher rate environment, and materially increased the duration of our hedges. As a result of these actions and evolving market conditions, our exposure to higher rates is lower than it has been in years and our 'pay-up' risk is now minimal."
John Erickson, Chief Financial Officer and Executive Vice President, commented, "Despite what has been a very challenging year for both ourselves as managers and for our shareholders, when one steps back and evaluates our overall performance since QE3 we are reassured by the fact that we have been able to produce a positive economic return (dividends plus change in net book value per common share) of 3.1% over the last twelve months despite significant market volatility."
Net Book Value
As of June 30, 2013, the Company's net book value per common share was $25.51, or $(3.42) lower than the March 31, 2013 net book value per common share of $28.93, primarily due to wider interest rate spreads in the broader mortgage backed securities market relative to benchmark interest rates such as U.S. Treasury and swap rates.
Investment Portfolio
As of June 30, 2013, the Company's investment portfolio totaled $91.7 billion of agency securities, including $14.5 billion of net TBA mortgage positions, at fair value.
TBA dollar roll transactions are a form of off-balance sheet financing of agency MBS. The price differential between agency MBS purchased for a forward settlement date through a TBA dollar roll transaction and the price of agency MBS for settlement in the current month is referred to as the "price drop". The price drop is the economic equivalent of the net interest carry (interest income less implied financing cost), also referred to as "dollar roll income," on the agency MBS earned during the roll period. Given the attractive terms available in the dollar roll market, the Company maintained an average net forward TBA position of $28.9 billion (cost basis) during the quarter.
The Company accounts for TBA dollar roll positions as derivative instruments and recognizes dollar roll income in other income (loss), net on the Company's financial statements. As of June 30, 2013, the Company's net TBA mortgage portfolio had a fair value and cost basis of approximately $14.5 billion and $15.3 billion, respectively, and a net carrying value of $(771) million reported in derivative assets/(liabilities) on the Company's balance sheet.
As of June 30, 2013, the Company's investment portfolio was comprised of $90.4 billion of fixed-rate securities, inclusive of the net TBA position; $0.7 billion of adjustable-rate securities; and $0.6 billion of collateralized mortgage obligations ("CMOs"), including principal and interest-only strips. As of June 30, 2013, the Company's fixed-rate mortgage assets were comprised of $31.4 billion ? 15-year securities, $0.5 billion 20-year fixed-rate securities, $44.1 billion 30-year fixed-rate securities, $7.2 billion 15-year net TBA securities and $7.3 billion 30-year net TBA securities, at fair value.
As of June 30, 2013, the Company's fixed-rate mortgage assets, inclusive of the net TBA position, had a weighted average coupon of 3.42%, comprised of a weighted average coupon of 3.08% for ? 15-year fixed-rate securities, 3.89% for 20-year fixed-rate securities, 3.73% for 30-year fixed-rate securities, 3.08% for 15-year net TBA securities and 3.27% for 30-year net TBA securities.
As of June 30, 2013, 60% of the Company's fixed-rate mortgage assets, inclusive of net TBA mortgage positions, were comprised of securities backed by lower loan balance mortgages and loans originated under the U.S. Government sponsored Home Affordable Refinance Program ("HARP"), which have favorable prepayment attributes and, therefore, a lower risk of prepayment relative to generic agency securities. The Company defines lower loan balance securities as pools backed by original loan balances of up to $150,000 and HARP securities as pools backed by 100% refinance loans with original loan-to-values of ? 80%. As of June 30, 2013, the weighted average "pay-up" measured across the Company's fixed-rate mortgage asset portfolio was approximately 0.24% over the corresponding generic TBA price.
Constant Prepayment Rates
The actual CPR for the Company's investment portfolio during the second quarter was 11%, largely unchanged from the prior quarter of 10%. The most recent CPR published in July 2013 for the Company's portfolio held as of June 30, 2013 was 11%. The weighted average projected CPR for the remaining life of all of the Company's agency securities held as of June 30, 2013 was 7%, a decrease from 9% as of March 31, 2013, driven by higher interest rates and wider mortgage spreads. The Company's net TBA dollar roll position is not included in the CPR calculations above.
The Company amortizes or accretes premiums and discounts associated with purchases of agency securities into interest income using the effective yield method over the estimated life of such securities, incorporating both actual repayments to date and projected CPRs over the remaining life of the security. The weighted average cost basis of the Company's investment portfolio was 105.2% of par value as of June 30, 2013; therefore, faster actual or projected prepayments can have a meaningful negative impact, while slower actual or projected prepayments can have a meaningful positive impact, on the Company's asset yields.
Net premium amortization on the Company's investment portfolio for the second quarter was $(98) million, or $(0.25) per common share, compared to $(134) million, or $(0.38) per common share, for the first quarter. The change in the Company's weighted average projected CPR estimate resulted in recognition of approximately $55 million, or $0.14 per common share, of "catch-up" premium amortization benefit during the second quarter, compared to approximately $32 million, or $0.09 per common share, of "catch-up" premium amortization benefit during the first quarter. The unamortized net premium balance as of June 30, 2013 was $3.9 billion.
Asset Yields, Cost of Funds and Net Interest Rate Spread
The Company's average asset yield on its agency security portfolio for the second quarter was 2.92%, compared to 2.80% for the first quarter. Excluding the impact of "catch-up" premium amortization benefit recognized during the current and prior quarter due to changes in projected CPR estimates, the annualized weighted average yield on the Company's agency security portfolio was 2.63% for the current quarter, compared to 2.64% for the prior quarter. The Company's average asset yield reported as of June 30, 2013 was 2.71%, a 4 bps decrease from 2.75% as of March 31, 2013.
The Company's average cost of funds (derived from the cost of repurchase agreements, other debt and interest rate swaps) increased 15 bps to 1.43% for the second quarter, from 1.28% for the first quarter, due to higher average swap costs associated with entering into longer dated swaps during the quarter. The Company's average cost of funds as of June 30, 2013 increased 15 bps to 1.47% from 1.32% as of March 31, 2013.
The Company's average net interest rate spread for the second quarter was 1.49%, a decrease of 3 bps from the first quarter of 1.52%. Including estimated TBA dollar roll income, the Company's average net interest rate spread for the second quarter was 1.86%, largely unchanged from 1.87% during the first quarter. The Company's average net spread income for the second quarter includes 29 bps of "catch-up" premium amortization benefit due to changes in projected CPR estimates, compared to 16 bps of "catch-up" premium amortization benefit during the first quarter. As of June 30, 2013, the Company's average net interest rate spread was 1.24%, or 1.59% inclusive of net TBA dollar roll positions, compared to 1.43%, or 1.71% inclusive of net TBA dollar roll positions, as of March 31, 2013.
Leverage
As of June 30, 2013, $70.3 billion of the Company's repurchase agreements were used to fund acquisitions of agency securities ("agency repo"), while the remainder, or $2.1 billion, was used to fund purchases of U.S. Treasury securities and are not included in the Company's leverage measurements. The Company's leverage ratio as of June 30, 2013 was 7.0x. Inclusive of off-balance sheet TBA financing, the Company's "at risk" leverage ratio as of June 30, 2013 was 8.5x. The Company's average leverage for the quarter was 5.9x, or 8.4x inclusive of off-balance sheet TBA financing.
As of June 30, 2013, the Company's agency repo agreements had a weighted average interest rate of 0.45%, compared to 0.47% as of March 31, 2013. As of June 30, 2013, the Company's agency repo agreements had original maturities consisting of:
- $6.1 billion of one month or less;
- $28.2 billion from one to three months;
- $16.2 billion from three to six months;
- $5.7 billion from six to nine months;
- $8.4 billion from nine to twelve months;
- $2.5 billion from twelve to twenty-four months;
- $2.6 billion from twenty-four to thirty-six months; and
- $0.6 billion of greater than thirty-six months.
The Company's agency repo agreements had a weighted average original maturity of 188 days as of June 30, 2013, compared to 183 days as of March 31, 2013. As of June 30, 2013, the Company's agency repo agreements had a weighted average remaining days to maturity of 119 days, compared to 118 days as of March 31, 2013.
"Despite the sharp rise in interest rates and the underperformance of mortgage backed securities during the quarter our access to attractive funding remained uninterrupted," commented Peter Federico, Senior Vice President and Chief Risk Officer. "The average 'haircut' on our repo borrowings remained unchanged and our average repo rate even declined by a couple of basis points during the quarter."
Hedging Activities
The Company's interest rate swap positions as of June 30, 2013 totaled $55.7 billion in notional amount and had an average fixed pay rate of 1.61%, a weighted average receive rate of 0.26% and a weighted average maturity of 5.2 years. During the quarter, the Company increased its swap position by $10.1 billion, while $5.7 billion of the Company's shorter duration swaps were terminated during the quarter. The new swap agreements entered into during the quarter have an average maturity of approximately 9.3 years from June 30, 2013 and a weighted average fixed pay rate of 2.08%. The Company enters into swaps with longer maturities with the intention of protecting its net book value and longer term earnings potential against the impact of rising interest rates.
The Company utilizes interest rate swaptions to mitigate exposure to larger, more rapid increases in interest rates. During the quarter, the Company added $3.2 billion in notional amount of payer swaptions at a cost of $(76) million, while $2.4 billion of payer swaptions from previous quarters expired or were terminated resulting in net realized losses of $(11) million. As of June 30, 2013, the Company had $23.8 billion of notional value in payer swaptions outstanding at a market value of $842 million and a cost basis of $483 million, with an average option term of 1.3 years and an average underlying interest rate swap term of 8.4 years.
The Company also utilizes short positions in U.S. Treasury securities and futures to mitigate exposure to increases in interest rates. As of June 30, 2013, the Company had a net short position of $6.3 billion market value in U.S. Treasury securities and short position of $3.1 billion market value in U.S. Treasury futures. As of June 30, 2013, 101% of the Company's outstanding balance of repurchase agreements, other debt and net TBA dollar roll position was hedged through interest rate swaps, swaptions and net short Treasury positions, an increase from 94% as of March 31, 2013.
Other Income (Loss), Net
During the second quarter, the Company recorded a net gain of $1.5 billion in other income (loss), net, or $3.69 per common share, compared to a net loss of $(124) million, or $(0.35) per common share for the prior quarter. Other income (loss), net for the second quarter was comprised of:
- $1,240 million of net unrealized gains on interest rate swaps and termination fee income (excludes $48 million of unrealized gains recognized in OCI);
- $(105) million of other interest rate swap periodic interest costs;
- $454 million of net gains on interest rate swaptions;
- $427 million of net gains from U.S. Treasury short positions;
- $195 million of TBA dollar roll income;
- $(767) million of net losses on TBA mortgage positions and forward settling securities; and
- $17 million of net realized gains on sales of agency securities.
The increase in other income (loss), net was largely a function of the large upward move in benchmark interest rates during the second quarter, and resulting hedge gains, compared to a modest rise in rates during the prior quarter.
Other Comprehensive Income (Loss)
During the second quarter, the Company recorded an other comprehensive loss of $(2.8) billion, or $(6.98) per common share, primarily comprised of net unrealized losses on agency securities due to the combination of higher interest rates and wider spreads in the broader mortgage backed securities market.
Estimated Taxable Income
Estimated taxable income for the second quarter was $1.04 per common share, or $3.57 lower than GAAP net income per common share. The primary differences between tax and GAAP net income are (i) unrealized gains and losses associated with interest rate swaps and other derivatives and securities marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to the amortization of premiums paid on investments and (iii) timing differences in the recognition of certain realized gains and losses.
Second Quarter 2013 Dividend Declarations
On June 18, 2013, the Board of Directors of the Company declared a second quarter dividend on its common stock of $1.05 per share, compared to $1.25 per share declared in the prior quarter, which was paid on July 26, 2013 to common stockholders of record as of June 28, 2013. Since its May 2008 initial public offering, the Company has paid a total of $3.7 billion in common dividends, or $26.16 per common share.
On June 19, 2013, the Board of Directors of the Company declared a second quarter dividend on its 8.000% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") of $0.50 per share. The dividend was paid on July 15, 2013 to preferred stockholders of record as of July 1, 2013.
The Company had approximately $425 million of estimated undistributed taxable income as of June 30, 2013, or $1.07 per common share, net of dividends declared, but without adjustment for future quarterly dividends not yet declared on the Company's Series A Preferred Stock.
Financial Statements, Operating Performance and Portfolio Statistics
The following measures of operating performance include net spread income and estimated taxable income, which are Non-GAAP financial measures. Please refer to "Use of Non-GAAP Financial Information" later in this release for further discussion of non-GAAP measures.
AMERICAN CAPITAL AGENCY CORP.
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CONSOLIDATED BALANCE SHEETS
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(in millions, except per share data)
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June 30,
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March 31,
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|
December 31,
|
|
September 30,
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|
June 30,
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2013
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|
2013
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|
2012
|
|
2012
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|
2012
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(unaudited)
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(unaudited)
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(unaudited)
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(unaudited)
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Assets:
|
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Agency securities, at fair value (including pledged securities of $71,261,
$70,094, $79,966, $83,600, and $71,809, respectively)
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$
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75,926
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|
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$
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74,874
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|
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$
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83,710
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|
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$
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88,020
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|
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$
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76,378
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Agency securities transferred to consolidated variable interest entities, at
fair value (pledged securities)
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1,281
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|
|
1,421
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|
|
1,535
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|
|
1,620
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|
|
1,544
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|
U.S. Treasury securities (including pledged securities of $2,569)
|
3,671
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|
|
—
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|
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—
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|
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—
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|
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—
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Cash and cash equivalents
|
2,923
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|
|
2,826
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|
|
2,430
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|
|
2,569
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|
|
2,099
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Restricted cash
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1,216
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|
|
499
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|
|
399
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|
|
369
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|
|
302
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Derivative assets, at fair value
|
1,876
|
|
|
480
|
|
|
301
|
|
|
292
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|
|
64
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|
Receivable for securities sold (including pledged securities of $1,338,
$484, $0, $1,466, and $2,674, respectively)
|
2,070
|
|
|
734
|
|
|
—
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|
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2,326
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|
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2,877
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Receivable under reverse repurchase agreements
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9,430
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|
|
12,291
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|
|
11,818
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|
|
6,712
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|
|
1,274
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|
Other assets
|
270
|
|
|
244
|
|
|
260
|
|
|
269
|
|
|
244
|
|
Total assets
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$
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98,663
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|
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$
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93,369
|
|
|
$
|
100,453
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|
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$
|
102,177
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|
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$
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84,782
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|
|
|
|
|
|
|
|
|
|
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Liabilities:
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|
|
|
|
|
|
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Repurchase agreements
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$
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72,451
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$
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(0)
(0)