American Capital Agency Corp. Reports $0.36 Comprehensive Income Per Common Share And $31.64 Net Book Value Per Common Share

BETHESDA, Md., Feb. 7, 2013 /PRNewswire/ -- American Capital Agency Corp. ("AGNC" or the "Company") (Nasdaq: AGNC) today reported comprehensive income for the fourth quarter of 2012 of $126 million, or $0.36 per common share, and net book value of $31.64 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 $0.40 per common share, or 5% on an annualized basis.  For the full year, AGNC reported a 32% economic return on common equity.

FOURTH QUARTER 2012 FINANCIAL HIGHLIGHTS

  • $0.36 comprehensive income per common share, comprised of:
    • $2.37 net income per common share
    • $(2.01) other comprehensive income (loss) ("OCI") per common share
      • Driven by net unrealized losses on investments marked-to-market through OCI
  • $0.89 net spread income per common share
    • Comprised of interest income, net of cost of funds (including interest rate swaps) and operating expenses
    • $0.78 per common share, excluding approximately $0.11 per common share of "catch-up" premium amortization benefit due to change in projected constant prepayment rate ("CPR") estimates
    • Excludes $0.29 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
  • $1.93 estimated taxable income per common share
  • $1.25 dividend per common share declared on December 14, 2012
  • $2.18 estimated undistributed taxable income per common share as of December 31, 2012
    • Represents an increase of $222 million from $518 million as of September 30, 2012 to $740 million as of December 31, 2012  
    • On a per share basis, increased $0.66 per common share from $1.52 as of September 30, 2012
  • $31.64 net book value per common share as of December 31, 2012
    • Decreased $0.85 per common share, or 2.6%, from $32.49 per common share as of September 30, 2012
  • 5% annualized economic return on common equity
    • Comprised of $1.25 dividend per common share and $0.85 decrease in net book value per common share

OTHER FOURTH QUARTER HIGHLIGHTS

  • $85 billion investment portfolio as of December 31, 2012
    • $98 billion including net TBA mortgage position as of December 31, 2012
  • 6.7x average leverage for the quarter
    • 7.8x including average net TBA mortgage position during the quarter
  • 7.0x leverage as of December 31, 2012
    • 8.2x including net TBA mortgage position as of December 31, 2012
  • 10% actual portfolio CPR for the quarter
    • 11% actual portfolio CPR for the month of January 2013
    • 11% average projected portfolio life CPR as of December 31, 2012
  • 1.63% annualized net interest rate spread for the quarter
    • 1.44% excluding "catch-up" premium amortization benefit due to change in projected CPR estimates
    • 1.65% when further adjusted for estimated TBA dollar roll income
  • 1.39% net interest rate spread as of December 31, 2012
    • 1.61% including net TBA mortgage position as of December 31, 2012
  • 2.7 million shares of common stock repurchased during the quarter at an average net repurchase price of $29.00 per common share

2012 FULL YEAR FINANCIAL HIGHLIGHTS

  • 32% economic return on common equity
    • Comprised of $5.00 dividend per common share and $3.93 increase in net book value per common share
  • $8.26 comprehensive income per common share, comprised of:
    • $4.17 net income per common share
    • $4.09 OCI per common share
  • $6.87 estimated taxable income per common share
    • Estimated undistributed taxable income increased from $0.80 per common share as of December 31, 2011 to $2.18 per common share as of December 31, 2012
  • $3.93 per common share, or 14%, increase in net book value from $27.71 per common share as of December 31, 2011 to $31.64 per common share as of December 31, 2012
  • Portfolio prepayments remained stable during 2012 at an average actual portfolio CPR of 10% for the year

"The year 2012 was very successful for AGNC as we delivered a 32% economic return to our common shareholders," commented John Erickson, Chief Financial Officer and Executive Vice President. "Despite the implementation of the Federal Reserve's third round of quantitative easing ("QE3"), our active management philosophy and focus on asset selection across the entire agency MBS spectrum enabled us to continue to extract significant value for our shareholders.  As we look to the future, we remain optimistic about our ability to create value for our shareholders in both today's environment and across a range of possible scenarios."

"Against the backdrop of record low interest rates, AGNC has once again delivered extremely strong returns for our common shareholders in 2012.  In fact, this was our fourth year in a row where we were able to produce total economic or mark-to-market returns exceeding 30%," said Gary Kain, President and Chief Investment Officer.  "During the fourth quarter, we adjusted our investment strategies to take advantage of favorable financing opportunities in the TBA dollar roll market, which significantly enhanced the net carry on our agency mortgage positions.  While dollar roll income is recognized in 'other income' under GAAP, versus net interest income for on balance sheet assets, AGNC will continue to prioritize generating economic value over earnings geography.  Additionally, these opportunities are a direct result of the Federal Reserve's large scale mortgage purchases under QE3 and thus likely to remain in place for most of 2013 (and possibly beyond)." 

NET BOOK VALUE
As of December 31, 2012, the Company's net book value per common share was $31.64, or $0.85 lower than the September 30, 2012 net book value per common share of $32.49, reflective of lower pricing on the Company's MBS portfolio, net of hedge gains, as some of the initial gains on MBS recognized during the third quarter immediately following the Federal Reserve's announcement of QE3 declined in the fourth quarter. Since June 30, 2012, or "pre-QE3", the Company's net book value increased $2.23 per common share, or 7.6%.

INVESTMENT PORTFOLIO
As of December 31, 2012, the Company's investment portfolio totaled $85.2 billion of agency securities and $12.9 billion of net TBA mortgage positions, at fair value. 

Since commencing QE3, the Federal Reserve's purchases of agency MBS have had the effect of lowering net interest rate spreads on lower coupon agency MBS. However, the Federal Reserve's involvement in the mortgage market has also made it more attractive to purchase agency MBS on a forward-settlement basis through the TBA dollar roll market.

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 throughout the fourth quarter, the Company maintained an average net forward TBA position of $13.1 billion (cost basis) during the quarter.

The Company accounts for its 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 December 31, 2012, the Company's net TBA mortgage portfolio had a fair value of $12.9 billion and a cost basis of $12.8 billion, for a net fair value of $0.1 billion reported in derivative assets/liabilities on the Company's balance sheet. 

As of December 31, 2012, the Company's agency securities were comprised of $83.6 billion of fixed-rate securities, $0.9 billion of adjustable-rate securities and $0.7 billion of collateralized mortgage obligations ("CMOs") backed by fixed and adjustable-rate securities, including principal and interest-only strips.  As of December 31, 2012, the Company's fixed-rate investment portfolio was comprised of $30.0 billion ≤15-year fixed-rate securities, $1.6 billion 20-year fixed-rate securities and $52.0 billion 30-year fixed-rate securities, while the Company's net TBA mortgage portfolio was comprised of $8.7 billion 15-year net TBA securities and $4.2 billion 30-year net TBA securities, at fair value. 

As of December 31, 2012, 77% of the Company's fixed-rate securities, or 67% 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%. The remainder of the Company's portfolio was primarily comprised of low coupon, new issuance fixed-rate agency securities.

CONSTANT PREPAYMENT RATES
The actual CPR for the Company's investment portfolio during the fourth quarter was 10%, an increase from 9% for the third quarter.  The most recent CPR published in January 2013 for the Company's portfolio held as of December 31, 2012 was 11%.  The weighted average projected CPR for the remaining life of all of the Company's agency securities held as of December 31, 2012 was 11%, a decrease from 14% as of September 30, 2012 primarily due to the combination of an increase in long-term interest rates, higher concentration of lower loan balance and HARP security holdings and a decline in the weighted average coupon rate on the Company's portfolio during the quarter.  The Company's net TBA dollar roll position was concentrated in low coupon securities and 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 105.6% of par value as of December 31, 2012; 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. 

The amortization of premiums, net of any accretion of discounts, on the investment portfolio for the fourth quarter was $(153) million, or $(0.45) per common share, compared to $(219) million, or $(0.66) per common share, for the third quarter.  The change in the Company's weighted average projected CPR estimate resulted in recognition of approximately $37 million, or $0.11 per common share, of "catch-up" premium amortization benefit during the quarter, compared to approximately $(23) million, or $(0.07) per common share, of "catch-up" premium amortization cost during the third quarter. The unamortized net premium balance as of December 31, 2012 was $4.4 billion.

ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD
The Company's average asset yield on its agency security portfolio for the fourth quarter increased 27 bps to 2.82%, from 2.55% for the third quarter.  Excluding the impact of "catch-up" premium amortization benefit/cost 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 2.66% for the prior quarter.  The Company's average asset yield reported as of December 31, 2012 was 2.61%, unchanged from September 30, 2012. 

The Company's average cost of funds (derived from the cost of repurchase agreements ("repos"), other debt and interest rate swaps) increased 6 bps to 1.19% for the fourth quarter, from 1.13% for the third quarter.  The Company's average cost of funds as of December 31, 2012, increased 11 bps to 1.22% from 1.11% as of September 30, 2012.  The increase in the Company's average cost of funds was due to an increase of 5 bps in repo costs from 0.46% as of September 30, 2012 to 0.51% as of December 31, 2012, due to higher year-end repo rates and higher average swap costs.  The ratio of interest rate swaps to repurchase agreements and other debt outstanding was 62% as of December 31, 2012, largely unchanged from 61% as of September 30, 2012.

The Company's average net interest rate spread for the fourth quarter was 1.63%, an increase of 21 bps from the third quarter of 1.42%.  Excluding the impact of "catch-up" premium amortization benefit/cost during the current and prior quarter due to changes in projected CPR estimates, the Company's average net interest rate spread was 1.44% for the current quarter, or 1.65% inclusive of estimated TBA dollar roll income, compared to 1.53% for the third quarter.  As of December 31, 2012, the Company's average net interest rate spread was 1.39%, or 1.61% inclusive of net TBA dollar roll positions compared to 1.50% as of September 30, 2012. 

LEVERAGE AND HEDGING ACTIVITIES
As of December 31, 2012, the Company had total repurchase agreements and other debt outstanding of $75.4 billion, resulting in a leverage ratio of 7.0x including the net payable for agency securities not yet settled, or 8.2x inclusive of off-balance sheet TBA financing.  Average leverage for the quarter was 6.7x.  Inclusive of off-balance sheet TBA financing, the Company's average leverage for the quarter was 7.8x.

The $74.5 billion borrowed under repurchase agreements as of December 31, 2012 had original maturities consisting of:

  • $4.0 billion of one month or less;
  • $28.3 billion from one to three months;
  • $24.3 billion from three to six months;
  • $5.3 billion from six to nine months;
  • $7.8 billion from nine to twelve months;
  • $1.9 billion from twelve to twenty-four months;
  • $2.8 billion from twenty-four to thirty-six months; and
  • $0.1 billion of greater than thirty-six months.

The Company increased the weighted average original maturity of its repurchase agreements to 181 days as of December 31, 2012, from 141 days as of September 30, 2012.  As of December 31, 2012, the Company's repurchase agreements had a weighted average remaining days to maturity of 118 days, compared to 89 days as of September 30, 2012.

The Company's interest rate swap positions as of December 31, 2012 totaled $46.9 billion in notional amount and had an average fixed pay rate of 1.46%, a weighted average receive rate of 0.29% and a weighted average maturity of 4.4 years.  During the quarter, the Company increased its swap position, including forward starting swaps ranging up to April 2013, by $1.7 billion, while $3.7 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 8.7 years from December 31, 2012 and a weighted average fixed pay rate of 1.53%.  The Company enters into swaps with longer maturities with the intention of protecting its net book value and longer term earnings potential.

The Company utilizes interest rate swaptions to mitigate exposure to larger changes in interest rates.  During the quarter, the Company added $6.1 billion of payer swaptions at a cost of $124 million, while $0.2 billion of payer swaptions from previous quarters expired for a total loss of $3 million.  As of December 31, 2012, the Company had $14.5 billion in payer swaptions outstanding at a market value of $171 million with an average option term of 21 months and an average underlying interest rate swap term of 7.8 years. 

The Company also utilizes short positions in U.S. Treasury Securities to mitigate exposure to increases in interest rates.  As of December 31, 2012, the Company had $11.8 billion in short Treasury positions. As of December 31, 2012, 97% of the Company's outstanding balance of repurchase agreements and other debt was hedged through interest rate swaps, swaptions and short Treasury positions, an increase from 81% as of September 30, 2012.  Inclusive of off-balance sheet TBA financing, the Company's aggregate hedge ratio was 80% as of December 31, 2012, an increase from 76% as of September 30, 2012.

OTHER INCOME (LOSS), NET
During the quarter, the Company recorded a gain of $442 million in other income (loss), net, or $1.30 per common share.  Other income (loss), net is comprised of:

  • $353 million of net realized gains on sales of agency securities;
  • $(77) million of other interest rate swap periodic interest costs (excludes $(50) million of interest rate swap costs recorded in interest expense);
  • $145 million of net unrealized gains on interest rate swaps;
  • $(32) million of interest rate swap termination fees;
  • $98 million of TBA dollar roll income;
  • $(8) million of net losses on TBA mortgage positions and forward settling securities; and
  • $(37) million of net losses on other derivative instruments and securities.

Other derivative instruments and securities generally represent instruments that are used in addition to interest rate swaps (such as swaptions, treasury securities and treasury futures contracts) to supplement the Company's interest rate risk management strategies.

OTHER COMPREHENSIVE INCOME (LOSS)
During the quarter, the Company recorded other comprehensive loss of $(684) million, or $(2.01) per common share, comprised of $(734) million of net unrealized losses on agency securities and $50 million of net unrealized gains on interest rate swaps.  The net unrealized gains on interest rate swaps consists of amounts reclassified out of accumulated OCI into interest expense for the amortization of deferred losses associated with interest rate swaps that were de-designated as hedges in the third quarter of 2011.

ESTIMATED TAXABLE INCOME
Estimated taxable income for the fourth quarter was $1.93 per common share, or $0.44 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.

FOURTH QUARTER 2012 DIVIDEND DECLARATIONS
On December 14, 2012, the Board of Directors of the Company declared a fourth quarter dividend on its common stock of $1.25 per share, which was paid on January 28, 2013 to common stockholders of record as of December 27, 2012. Since its May 2008 initial public offering, the Company has paid a total of $2.8 billion in common dividends, or $23.86 per common share. 

On December 17, 2012, the Board of Directors of the Company declared a fourth 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 January 15, 2013 to preferred stockholders of record as of January 1, 2013.

The Company had approximately $740 million of estimated undistributed taxable income as of December 31, 2012, or $2.18 per common share, after adjusting for the fourth quarter common and preferred dividends declared, but without adjustment for future quarterly dividends not yet declared on the Company's Series A Preferred Stock.

The Company also announced the tax characteristics of its 2012 dividends. The Company's 2012 common stock dividend of $5.00 per common share consisted of $4.5092 per common share of ordinary income and $0.4908 per common share of long-term capital gains for federal income tax purposes.  The Company's 2012 Series A Preferred Stock dividend of $1.056 per preferred share consisted of $0.9523 per preferred share of ordinary income and $0.1037 per preferred share of long-term capital gains for federal income tax purposes. The Company's 2012 Series A Preferred Stock dividend excludes for federal income tax purposes the dividend of $0.50 per preferred share declared during the fourth quarter since the record date was subsequent to December 31, 2012.  Stockholders should receive an IRS Form 1099-DIV containing this information from their brokers, transfer agents or other institutions. For additional detail please visit the Company's website at www.AGNC.com.