American Capital Agency Corp. Reports $1.58 Comprehensive Income Per Common Share; Net Loss Of $(0.88) Per Common Share And $29.41 Net Book Value Per Common Share

BETHESDA, Md., Aug. 2, 2012 /PRNewswire/ -- American Capital Agency Corp. ("AGNC" or the "Company") (Nasdaq: AGNC) today reported comprehensive income and net loss for the second quarter of 2012 of $480 million and $(261) million, respectively, or $1.58 and $(0.88) per common share, respectively, and net book value of $29.41 per common share.  Economic return, defined as dividends on common shares, plus the change in net book value per common share, for the period was $1.60 per common share, or 22% on an annualized basis.

SECOND QUARTER 2012 FINANCIAL HIGHLIGHTS

  • $1.58 comprehensive income per common share, comprised of:
    • $(0.88) net loss per common share
    • $2.46 other comprehensive income per common share
  • $0.94 net spread income per common share
    • Comprised of interest income, net of cost of funds (including interest rate swaps) and operating expenses
    • $1.05 per common share, excluding approximately $(0.11) per common share of "catch-up" premium amortization cost due to change in projected constant prepayment rate ("CPR") estimates
  • $1.62 estimated taxable income per common share
  • $1.25 dividend declared per common share
  • $1.61 estimated undistributed taxable income per common share as of June 30, 2012
    • Increased $0.33 per common share from March 31, 2012
    • Represents an increase of $108 million from March 31, 2012 to $492 million as of June 30, 2012
  • $29.41 net book value per common share as of June 30, 2012
    • Increased $0.35 per common share from $29.06 per common share as of March 31, 2012
  • 22% annualized economic return on common equity
    • Comprised of $1.25 dividend per common share and $0.35 increase in net book value per common share

OTHER SECOND QUARTER HIGHLIGHTS

  • $78 billion investment portfolio as of June 30, 2012
  • 7.6x leverage as of June 30, 2012, including net receivable for unsettled securities
    • 7.5x average leverage for the quarter
  • 10% actual portfolio CPR for the quarter
    • 8% actual portfolio CPR for the month of July 2012
    • 12% average projected portfolio life CPR as of June 30, 2012
  • 1.65% annualized net interest rate spread for the quarter
    • 1.83% annualized net interest rate spread for the quarter, excluding "catch-up" premium amortization cost due to change in projected CPR estimates
    • 1.62% net interest rate spread as of June 30, 2012
  • $322 million of net equity proceeds raised during the second quarter
    • $155 million of net proceeds raised from an at-the-market common stock offering
    • $167 million of net proceeds raised from a preferred stock offering
  • $1.2 billion of net equity proceeds raised from a follow-on common stock offering during July 2012

"We are pleased with the performance of our portfolio this quarter," commented Gary Kain, President and Chief Investment Officer.  "With the second quarter now complete, AGNC has grown book value in 13 of the past 14 quarters,  thus producing industry leading performance while hedging a significant component of the interest rate risk inherent in a mortgage portfolio.  Looking ahead, despite record low interest rates, we believe our portfolio is likely to continue to exhibit relatively benign prepayments and continue to produce attractive returns over a wide range of scenarios.  Lastly, strong book value performance and the substantial amount of undistributed taxable income give us significant flexibility with respect to our dividend despite a lower spread environment."

"We are very proud of the performance of our management team," said Malon Wilkus, Chair and Chief Executive Officer.  "Their diligent focus on asset selection enabled AGNC to pay an attractive dividend of $1.25 per common share this quarter while growing book value from $29.06 to $29.41, resulting in total value creation of $1.60 per common share.  Gary and his team have consistently created shareholder value throughout a very volatile interest rate environment."

INVESTMENT PORTFOLIO
As of June 30, 2012, the Company's investment portfolio totaled $77.9 billion of agency securities, at fair value, comprised of $75.7 billion of fixed-rate securities, $1.1 billion of adjustable-rate securities and $1.1 billion of collateralized mortgage obligations ("CMOs") backed by fixed and adjustable-rate securities, including principal and interest-only strips.  As of June 30, 2012, the Company's fixed-rate investment portfolio was comprised of $26.9 billion </= 15-year fixed-rate securities, $3.0 billion 20-year fixed-rate securities and $45.8 billion 30-year fixed-rate securities. 

CONSTANT PREPAYMENT RATES
The actual CPR for the Company's portfolio during the second quarter was 10%, unchanged from the first quarter. The most recent CPR published in July 2012 for the Company's portfolio held as of June 30, 2012 was 8%.  The weighted average projected CPR for the remaining life of all of the Company's investments held as of June 30, 2012 was 12%, an increase from 9% as of March 31, 2012, due to the decrease in long-term interest rates during the quarter.  The Company repositioned the portfolio during the quarter into lower coupon MBS and lower loan balance and HARP securities, which are less susceptible to prepayment risk, reducing the impact of the decline in long-term interest rates on the Company's prepayment forecast.

The Company amortizes or accretes premiums and discounts associated with purchases of agency securities into interest income over the estimated life of such securities based on actual and projected CPRs, using the effective yield method.  The weighted average cost basis of the Company's investment portfolio was 105.0% as of June 30, 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 quarter was $(196) million, or $(0.65) per common share, compared to $(100) million, or $(0.42) per common share, for the prior quarter.  The change in the Company's weighted average projected CPR estimate resulted in recognition of approximately $(33) million, or $(0.11) per common share, of "catch-up" premium amortization cost during the quarter, compared to approximately $28 million, or $0.12 per common share, of "catch-up" premium amortization benefit during the prior quarter. The unamortized net premium balance as of June 30, 2012 was $3.7 billion

"Prepayment speeds on our HARP and lower loan balance positions remain well contained despite record low interest rates.  Looking ahead, I expect that we will see an even greater divergence in the prepayment performance of these strategies relative to more generic MBS," said Chris Kuehl, Senior Vice President, Agency Portfolio Investments.

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-value ratios of  >/= 80%. 

ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD
The Company's average asset yield for the second quarter decreased 59 bps to 2.73%, from 3.32% for the first quarter.  Excluding the impact of "catch-up" premium amortization cost/benefit recognized during the current and prior quarter due to changes in projected CPR estimates, the annualized weighted average yield on the Company's investment portfolio was 2.91% for the current quarter, compared to 3.14% for the prior quarter.  The Company's average asset yield reported as of June 30, 2012 was 2.81%, a decrease of 25 bps from 3.06% as of March 31, 2012.  The decline in the Company's average asset yield was due to a combination of the increase in forecasted prepayment speeds and a decline in the average coupon on the Company's portfolio due to changes in asset composition.  

The Company's average cost of funds (comprised of repurchase agreements ("repos"), other debt and interest rate swaps) increased 7 bps to 1.08% for the second quarter, from 1.01% for the first quarter.  The Company's average cost of funds as of June 30, 2012 increased 20 bps to 1.19%, from 0.99% as of March 31, 2012. The increase in the Company's average cost of funds was primarily due to a higher ratio of interest rate swaps to repurchase agreements and other debt outstanding of 69% as of June 30, 2012, compared to 55% as of March 31, 2012, and higher repo costs. The Company's weighted average repo cost was 0.42% as of June 30, 2012, compared to 0.37% as of March 31, 2012.

The Company's average net interest rate spread for the second quarter was 1.65%, a decrease of 66 bps from the first quarter of 2.31%. Excluding the impact of "catch-up" premium amortization cost/benefit during the current and prior quarter due to changes in projected CPR estimates, the Company's average net interest rate spread was 1.83% for the current quarter, a 30 bps decrease from the first quarter of 2.13%.  As of June 30, 2012, the Company's average net interest rate spread was 1.62%, a decrease of 45 bps from the net interest rate spread as of March 31, 2012 of 2.07%.

LEVERAGE AND HEDGING ACTIVITIES
As of June 30, 2012, the Company had total repurchase agreements and other debt outstanding of $70.5 billion, resulting in a leverage ratio of 7.7x.  When adjusted for the net receivable for agency securities not yet settled, the leverage ratio was 7.6x as of June 30, 2012.  Average leverage for the quarter was 7.5x, which the Company calculates as its daily weighted average repurchase agreements and other debt balance outstanding divided by its average month-ended stockholders' equity for the quarter.

The $69.5 billion borrowed under repurchase agreements as of June 30, 2012 had original maturities consisting of:

  • $8.9 billion of one month or less;
  • $19.8 billion from one to three months;
  • $21.6 billion from three to six months;
  • $12.7 billion from six to nine months;
  • $2.9 billion from nine to twelve months;
  • $3.1 billion from twelve to twenty-four months; and
  • $0.5 billion from twenty-four to thirty-six months.

The Company increased the weighted average original maturity of its repurchase agreements to 121 days as of June 30, 2012, from 104 days as of March 31, 2012.  As of June 30, 2012, the Company's repurchase agreements had a weighted average remaining days to maturity of 74 days.

As of June 30, 2012, the Company had repurchase agreements with 31 financial institutions.  Less than 4% of the Company's equity was at risk with any one repo counterparty as of June 30, 2012, with the top five repo counterparties representing less than 16% of the Company's equity at risk.

The Company's interest rate swap positions as of June 30, 2012 totaled $48.6 billion in notional amount at an average fixed pay rate of 1.48%, a weighted average receive rate of 0.37% and a weighted average maturity of 4.3 years.  During the quarter, the Company increased its swap position, including forward starting swaps ranging up to four months as of June 30, 2012, by $12.0 billion, while $1.6 billion of the Company's swaps were either terminated or matured during the quarter.  The new swap agreements entered into during the quarter have an average contractual term of approximately 6.7 years and a weighted average fixed pay rate of 1.37%.  The Company enters into swaps with longer maturities with the intention of protecting its net book value and longer term earnings potential.

The Company also utilizes interest rate swaptions to mitigate exposure to larger changes in interest rates.  During the quarter, the Company added $2.2 billion of payer swaptions at a cost of $(33) million, while $3.9 billion of payer swaptions from previous quarters expired for a total loss of $(21) million.  As of June 30, 2012, the Company had $8.8 billion in payer swaptions outstanding at a market value of $37 million with an average option term of 12 months and an average underlying interest rate swap term of 7.4 years.

As of June 30, 2012, 69% of the Company's repurchase agreement balance and other debt was hedged through interest rate swap agreements, an increase from 55% as of March 31, 2012. Including swaps underlying the payer swaptions noted above, this percentage increases to 81% as of June 30, 2012, an increase from 70% as of March 31, 2012.

"Given the decline in interest rates, we opportunistically increased the size of our hedge portfolio relative to our liabilities by adding longer term pay fixed swaps.  In total, our hedge portfolio provides substantial book value protection in a rising rate scenario," commented Peter Federico, Senior Vice President and Chief Risk Officer.

OTHER INCOME (LOSS), NET
During the quarter, the Company recorded a loss of $(612) million in other income (loss), net, or $(2.03) per common share.  Other income (loss), net is comprised of:

  • $417 million of net realized gains on sales of agency securities;
  • $(62) million of other interest rate swap periodic interest costs (recognized in addition to $(52) million of interest rate swap costs recorded in interest expense);
  • $(472) million of net unrealized losses on interest rate swaps;
  • $(312) million of net realized losses on other derivative instruments and securities; and
  • $(183) million of net unrealized 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, short or long positions in "to-be-announced" mortgage securities ("TBA's"), treasury securities and treasury futures contracts) to supplement the Company's interest rate risk management strategies.

OTHER COMPREHENSIVE INCOME
During the quarter, the Company recorded other comprehensive income of $741 million, or $2.46 per common share, comprised of $689 million of net unrealized gains on agency securities and $52 million of net unrealized gains on interest rate swaps.  The net unrealized gains on interest rate swaps consists of amortization of the deferred loss that is reclassified into interest expense for interest rate swaps that were de-designated as hedges in the third quarter of 2011. 

NET BOOK VALUE
As of June 30, 2012, the Company's net book value per common share was $29.41, or $0.35 higher than the March 31, 2012 net book value per common share of $29.06, reflective of price appreciation on the Company's investment portfolio in excess of losses on the Company's hedge portfolio during the quarter.

ESTIMATED TAXABLE INCOME
Estimated taxable income for the second quarter was $1.62 per common share, or $2.50 higher 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 2012 DIVIDEND DECLARATIONS
On June 11, 2012, the Board of Directors of the Company declared a second quarter dividend on its common stock of $1.25 per share paid on July 27, 2012 to common stockholders of record as of June 21, 2012. Since its May 2008 initial public offering, the Company has paid a total of $1.9 billion in common dividends, or $21.36 per common share. 

On June 20, 2012, the Board of Directors of the Company declared its inaugural dividend on its 8.000% Series A Cumulative Redeemable Preferred Stock of $0.556 per share. The dividend was paid on July 16, 2012 to preferred stockholders of record as of July 1, 2012.

The Company had approximately $492 million of estimated undistributed taxable income as of June 30, 2012, or $1.61 per common share, after adjusting for the second quarter common and preferred dividends declared, but without adjustment for future quarterly dividends not yet declared on the Company's 8.000% Series A Cumulative Redeemable 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.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share data)






















June 30, 


March 31,


December 31,


September 30,


June 30,

2012

2012

2011

2011

2011


(unaudited)


(unaudited)




(unaudited)


(unaudited)

Assets:










  Agency securities, at fair value (including pledged securities of $73,353,

  $72,598, $50,725, $38,860 and $35,118, respectively)

$

77,922



$

80,570



$

54,683



$

41,970



$

39,926


  U.S. Treasury securities, at fair value





101



301




  Cash and cash equivalents

2,099



1,762



1,367



984



626


  Restricted cash

302



315



336



375



189


  Derivative assets, at fair value

64



184



82



55



86


  Receivable for securities sold (including pledged securities of $2,674,  

  $1,442, $319, $2,694 and $573, respectively)

2,877



1,706



443



2,698



1,252


  Receivable under reverse repurchase agreements

1,274



3,613



763



474



1,388


  Other assets

244



267



197



182



170


Total assets

$

84,782



$

88,417



$

57,972



$

47,039



$

43,637












Liabilities:










  Repurchase agreements

$

69,540



$

69,816



$

47,681



$

38,842



$

33,505


  Other debt (1)

954



50



54



57



62


  Payable for securities purchased

2,198



4,852



1,919



1,660



3,337


  Derivative liabilities, at fair value

1,250



827



853



793



290


  Dividends payable

384



286



314



257



180


  Obligation to return securities borrowed under reverse 

1,269



3,816



899



473



1,459


  repurchase agreements, at fair value

  Accounts payable and other accrued liabilities

51



52



40



17



27


Total liabilities

75,646



79,699



51,760



42,099



38,860












Stockholders' equity:










  8.000% Series A Cumulative Redeemable Preferred Stock; $0.01

  par value;10.0 shares authorized; 6.9, 0.0, 0.0, 0.0 and 0.0 shares issued and

  outstanding, respectively; liquidation preference of $25 per share ($173)

167










  Common stock, $0.01 par value; 600.0, 300.0, 300.0, 300.0, and 300.0

  shares   authorized; 304.8, 300.0, 224.1, 183.6 and 178.5 shares issued

  and outstanding, respectively

3



3



2



2



2


  Additional paid-in capital

8,296



8,141



5,937



4,829



4,682


  Retained (deficit) earnings

(328)



317



(38)



67



74


  Accumulated other comprehensive income

998



257



311



42



19


Total stockholders' equity

9,136



8,718



6,212



4,940



4,777


Total liabilities and stockholders' equity

$

84,782



$

88,417



$

57,972



$

47,039



$

43,637












Net book value per common share

$

29.41



$

29.06



$

27.71



$

26.90



$

26.76






















  





















AMERICAN CAPITAL AGENCY CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(unaudited)












Three Months Ended


June 30,


March 31,


December 31,


September 30,


June 30,

2012

2012

2011

2011

2011

Interest income:










   Interest income

$

504



$

514



$

353



$

327



$

265


   Interest expense (2)

120



106



90



95



64


        Net interest income

384



408



263



232



201












Other (loss) income, net:










   Gain on sale of agency securities, net

417



216



112



263



94


   (Loss) gain on derivative instruments and other securities, net (2)

(1,029)



47



(137)



(222)



(100)


        Total other (loss) income, net

(612)



263



(25)



41



(6)


Expenses:










   Management fees

28



22



18



16



12


   General and administrative expenses

8



6



6



6



5


        Total expenses

36



28



24



22



17


(Loss) income before income tax (benefit) provision

(264)



643



214



251



178


   Income tax (benefit) provision

(3)



2



5



1




Net (loss) income

(261)



641



209



250



178


   Dividend on preferred stock

3










Net (loss) income (attributable) available to common shareholders

$

(264)



$

641



$

209



$

250



$

178












Net (loss) income

$

(261)



$

641



$

209



$

250



$

178


Other comprehensive income (loss):










   Unrealized gain (loss) on available-for-sale securities, net

689



(106)



214



536



319


   Unrealized gain (loss) on derivative instruments, net (2)

52



52



54



(512)



(253)


 Other comprehensive income (loss)

741



(54)



268



24



66


Comprehensive income

480



587



477



274



244


   Dividend on preferred stock

3










Comprehensive income available to common shareholders

$

477



$

587



$

477



$

274



$

244












Weighted average number of common shares outstanding -

301.0



240.6



210.3



180.7



130.5


      basic and diluted

Net (loss) income per common share - basic and diluted

$

(0.88)



$

2.66



$

0.99



$

1.39



$

1.36


Comprehensive income per common share - basic and diluted

$

1.58



$

2.44



$

2.27



$

1.51



$

1.87


Estimated REIT taxable income per common share - basic and diluted (3)

$

1.62



$

2.03



$

1.61



$

1.86



$

1.56


Dividends declared per common share

$

1.25



$

1.25



$

1.40



$

1.40



$

1.40






















 

AMERICAN CAPITAL AGENCY CORP. 
RECONCILIATION OF GAAP NET INTEREST INCOME TO ADJUSTED NET INTEREST INCOME AND NET SPREAD INCOME (3)        
(in millions, except per share data)  

(unaudited) 












Three Months Ended


June 30, 


March 31,


December 31,


September 30,


June 30,

2012

2012

2011

2011

2011











Interest income

$

504



$

514



$

353



$

327



$

265


Interest expense:










   Repurchase agreements and other debt

68



54



36



24



18


   Interest rate swap periodic costs(2)

52



52



54



71



46


Total interest expense

120



106



90



95



64


Net interest income

384



408



263



232



201


   Other interest rate swap periodic costs (4)

62



39



33