Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AGNC > SEC Filings for AGNC > Form 10-Q on 7-Nov-2011All Recent SEC Filings

Show all filings for AMERICAN CAPITAL AGENCY CORP

Form 10-Q for AMERICAN CAPITAL AGENCY CORP


7-Nov-2011

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide a reader of American Capital Agency Corp.'s consolidated financial statements with a narrative from the perspective of management. Our MD&A is presented in five sections:
Executive Overview

Financial Condition

Results of Operations

Liquidity and Capital Resources

Forward-Looking Statements

EXECUTIVE OVERVIEW
American Capital Agency Corp. ("AGNC", the "Company", "we", "us" and "our") was organized on January 7, 2008 and commenced operations on May 20, 2008 following the completion of our initial public offering ("IPO"). Our common stock is traded on The NASDAQ Global Select Market under the symbol "AGNC". We earn income primarily from investing in residential mortgage pass-through securities and collateralized mortgage obligations ("CMOs") on a leveraged basis. These investments consist of securities for which the principal and interest payments are guaranteed by U.S. Government-sponsored entities ("GSEs"), such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. Government agency, such as the Government National Mortgage Association, ("Ginnie Mae"). We refer to these types of securities as agency securities and the specific agency securities in which we invest as our investment portfolio.
Our principal objective is to preserve our net asset value (also referred to as "stockholders' equity") within reasonable bands while generating attractive risk-adjusted returns for distribution to our stockholders through regular quarterly dividends from the combination of our net interest income and net realized gains and losses on our investments and other hedging activities. Our net interest income consists of the spread between the interest income earned on our agency securities and the interest costs of our borrowings and derivatives accounted for as hedges for accounting purposes (please refer to Notes 3 and 6 to our consolidated financial statements in this Quarterly Report on Form 10-Q regarding discontinuation of hedge accounting as of September 30, 2011). We fund our investments primarily through short-term borrowings structured as repurchase agreements.
We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as


amended (the "Code"). As such, we are required to distribute annually 90% of our taxable net income. As long as we qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. We are externally managed by American Capital AGNC Management, LLC ("our Manager"), an affiliate of American Capital, Ltd. ("American Capital"). Our Investment Strategy
Our investment strategy is to manage an investment portfolio consisting exclusively of agency securities (other than for hedging purposes) that seeks to generate attractive, risk-adjusted returns. Specifically, our investment strategy is designed to:
manage an investment portfolio consisting of agency securities that seeks to generate attractive risk-adjusted returns;

capitalize on discrepancies in the relative valuations in the agency securities market;

manage financing, interest and prepayment rate risks;

preserve our net asset value within reasonable bands;

provide regular quarterly distributions to our stockholders;

qualify as a REIT; and

remain exempt from the requirements of the Investment Company Act of 1940, as amended (the "Investment Company Act").

Trends and Recent Market Impacts
Thus far, the year 2011 has been marked by extreme volatility in the U.S. markets fueled by an array of significant global economic and political events, including slow U.S. economic growth, the worsening European debt crisis, the congressional debt ceiling debate and S&P's downgrade of its U.S. sovereign debt ratings. In addition, following the conclusion of "QE2" in June 2011, the Federal Reserve continued their efforts to try to help stimulate the U.S. economy with their September 2011 announcement of "Operation Twist" and their plan to reinvest principal and interest received from their holdings of agency securities into new purchases of agency securities, each designed to reduce mortgage and interest rates. These events led to a decline in the 10 year U.S. Treasury rate from 3.30% at the beginning of 2011 to as low as 1.72% during September 2011, ending the month of September at 1.92%. Fixed-rate mortgage rates also experienced significant declines, reaching their historical lowest levels during the third quarter. Low mortgage rates, coupled with changes to the GSE's underwriting practices and the anticipated announcement by the Federal Housing Finance Authority ("FHFA") regarding changes to the government sponsored Home Affordable Refinance Program ("HARP") intended to extend HARP's reach to a larger number of underwater borrowers, drove escalating prepayment fears during the third quarter.
Despite the extreme volatility, we declared a cash dividend of $1.40 per share for each of the three quarters ended September 30, 2011, while increasing our net book value per share and undistributed taxable income per share sequentially over the past three quarters, from $24.24 net book value per share as of December 31, 2010 to $26.90 per share as of September 30, 2011 and from $0.60 undistributed taxable income per share as of December 31, 2010 to $0.85 per share as of September 30, 2011.
In addition, during the third quarter, we executed a number of significant actions intended to reduce risk and increase the durability of our returns. These actions included increasing our use of longer term repurchase agreements, proactively managing our counterparty exposure, significantly increasing our ratio of interest rate swaps to our repurchase agreement financings and continuing to enhance our portfolio to our highest percentage of assets backed by loans that our Manager views as having favorable prepayment characteristics, with 93% of our 15-year securities and 86% of our 30-year securities backed by either lower loan balance loans or higher loan-to-value loans refinanced through HARP. We believe that less than 5% of our holdings are likely to be affected by the changes to the HARP program announced on October 24, 2011 as a result of our Manager's active portfolio management.

FINANCIAL CONDITION
As of September 30, 2011 and December 31, 2010, our investment portfolio consisted of $42.0 billion and $13.5 billion, respectively, of agency securities. The following tables summarize certain characteristics of our investment portfolio as of September 30, 2011 (dollars in thousands):


                                                               As of September 30, 2011
                                             Amortized       Amortized                        Weighted Average
                            Par Value           Cost        Cost Basis      Fair Value      Coupon      Yield(1)    CPR (2)
Agency Securities
Classified as
Available-For-Sale:
Fannie Mae                $ 22,477,679     $ 23,465,391         104.4 %   $ 23,920,324       4.18 %        3.15 %    13.11 %
Freddie Mac                 16,695,524       17,403,540         104.2 %     17,733,081       4.14 %        3.17 %    12.28 %
Ginnie Mae                     102,938          106,681         103.6 %        108,788       4.15 %        2.17 %    32.04 %
Total / Weighted Average
Available-For-Sale Agency
Securities                $ 39,276,141     $ 40,975,612         104.3 %   $ 41,762,193       4.16 %        3.15 %    12.80 %

Fixed-Rate
 ? 15 Year
Lower Loan Balance (3)    $ 18,242,870     $ 18,916,760         103.7 %   $ 19,320,604       3.83 %        2.94 %    10.39 %
HARP (4)                       998,692        1,039,375         104.1 %      1,056,742       3.96 %        2.91 %    12.84 %
Other (5)                    1,553,673        1,597,119         102.8 %      1,629,567       3.67 %        2.84 %    13.43 %
Total ? 15 Year             20,795,235       21,553,254         103.6 %     22,006,913       3.82 %        2.93 %    10.73 %
30 Year:(6)
Lower Loan Balance (3)       4,725,992        5,011,051         106.0 %      5,065,501       4.52 %        3.49 %     9.86 %
HARP (4)                     8,304,864        8,749,268         105.4 %      8,906,753       4.60 %        3.57 %    11.78 %
Other (2009-2011 Vintage)    1,456,452        1,505,812         103.4 %      1,546,335       4.41 %        3.64 %    15.06 %
Other (Pre 2009 Vintage)       691,229          735,426         106.4 %        752,755       5.62 %        3.50 %    22.99 %
Total 30 Year               15,178,537       16,001,557         105.4 %     16,271,344       4.61 %        3.55 %    12.00 %
Total Fixed-Rate            35,973,772       37,554,811         104.4 %     38,278,257       4.15 %        3.20 %    11.27 %

Adjustable-Rate              3,067,123        3,179,456         103.7 %      3,237,779       4.28 %        2.76 %    29.47 %
CMO                            235,246          241,345         102.6 %        246,157       3.75 %        1.67 %    29.92 %
Total / Weighted Average
Available- For-Sale
Securities                $ 39,276,141     $ 40,975,612         104.3 %   $ 41,762,193       4.16 %        3.15 %    12.80 %



                                                      As of September 30, 2011
                         Underlying
                        Unamortized                                          Weighted Average
                         Principal        Amortized
                          Balance           Cost          Fair Value       Coupon        Yield(1)    CPR (2)
Agency Securities
Remeasured at Fair
Value Through
Earnings:
Interest-Only Strips
Fannie Mae             $    833,893     $   119,049     $    107,454         5.54 %         6.57 %    25.71 %
Freddie Mac                 488,884          71,286           60,759         5.62 %        10.87 %    22.46 %
Principal-Only Strips
Fannie Mae                   43,273          37,961           40,013            - %         5.13 %    29.00 %
Total / Weighted
Average Agency
Securities Remeasured
at Fair Value Through
Earnings               $  1,366,050     $   228,296     $    208,226         5.39 %         7.67 %    22.46 %


_______________________


(1) Incorporates an average future constant prepayment rate assumption of 13% based on forward rates as of September 30, 2011 and an average reset rate for adjustable rate securities of 2.76%, which is equal to the average underlying index rate of 0.96% based on the current spot rate in effect as of the date we acquired the securities and an average margin of 1.80%.

(2) Average projected life CPR as of September 30, 2011.

(3) Lower loan balance securities represent pools backed by a maximum original loan balance of up to $150 thousand. Our lower loan balance securities had a weighted average original loan balance of $104 thousand and $100 thousand for 15 year and 30 year securities, respectively, as of September 30, 2011.

(4) HARP securities are defined as pools backed by100% refinance loans with loan-to-values (LTV) between 80% and 125%. Our HARP securities had a weighted average LTV of 95% and 100% for 15 year and 30 year securities, respectively, as of September 30, 2011.

(5) 15 year securities include $643 million of securities backed by loans with original loan balances ? $175 thousand.

(6) 30 year securities include $841 million and $87 million of 20 and 40 year securities, respectively.

Interest-only securities represent the right to receive a specified portion of the contractual interest flows of the underlying unamortized principal balance ("UPB" or "par value") of specific CMO securities. Principal-only securities represent the right to receive contractual principal flows of the UPB of specific CMO securities. The interest cash flows


from our interest-only securities taken together with interest cash flows from our fixed-rate, adjustable-rate and CMO securities, total 4.35% of the combined par value our agency securities (excluding the UPB of our interest-only securities) as of September 30, 2011. The combined weighted average yield of our agency portfolio was 3.18% as of September 30, 2011.
The following table summarizes certain characteristics of our investment portfolio as of December 31, 2010 (dollars in thousands):

                                                               As of December 31, 2010
                                            Amortized       Amortized                        Weighted Average
                           Par Value           Cost        Cost Basis      Fair Value       Coupon      Yield(1)    CPR (2)
Agency Securities
Classified as
Available-For-Sale:
Fannie Mae               $  8,207,464     $  8,557,281         104.3 %   $  8,559,569        4.51 %        3.31 %    11.32 %
Freddie Mac                 4,599,712        4,819,133         104.8 %      4,788,706        4.45 %        3.11 %    11.72 %
Ginnie Mae                    100,408          105,078         104.7 %        105,266        4.37 %        2.14 %    23.61 %
Total / Weighted Average
Available-For-Sale
Agency Securities        $ 12,907,584     $ 13,481,492         104.4 %   $ 13,453,541        4.49 %        3.23 %    11.56 %

Fixed-Rate
 ? 15 Year               $  5,226,452     $  5,412,261         103.6 %   $  5,373,165        4.28 %        3.09 %     7.07 %
30 Year (3)                 3,553,239        3,732,091         105.0 %      3,728,314        4.97 %        3.99 %    10.04 %
Total Fixed-Rate            8,779,691        9,144,352         104.2 %      9,101,479        4.29 %        3.45 %     8.28 %

Adjustable-Rate             3,745,363        3,942,937         105.3 %      3,950,164        4.96 %        2.69 %    18.34 %
CMO                           382,530          394,203         103.1 %        401,898        4.27 %        3.52 %    19.71 %
Total / Weighted Average
Available- For-Sale
Agency Securities        $ 12,907,584     $ 13,481,492         104.4 %   $ 13,453,541        4.49 %        3.23 %    11.56 %



                                                         As of December 31, 2010
                            Underlying
                            Unamortized                                          Weighted Average
                             Principal        Amortized
                              Balance           Cost          Fair Value       Coupon       Yield(1)    CPR (2)
Agency Securities
Remeasured at Fair Value
Through Earnings:
Interest-Only Securities
Fannie Mae                $     229,980     $    18,957     $     20,425         4.18 %       15.48 %    13.49 %
Freddie Mac                     314,705          33,447           36,314         5.52 %       27.23 %    11.75 %
Total / Weighted Average
Agency Securities
Remeasured at Fair Value
Through Earnings          $     544,685     $    52,404     $     56,739         4.95 %       22.98 %    12.38 %


 _______________________


(1) Incorporates an average future constant prepayment rate assumption of 12% based on forward rates as of December 31, 2010 and an average reset rate for adjustable rate securities of 2.76%, which is equal to the average underlying index rate of 0.94% based on the current spot rate in effect as of the date we acquired the securities and an average margin of 1.82%

(2)Average projected life CPR as of December 31, 2010.
(3) 30 year securities include $802 million and $81 million of 20 and 40 year securities, respectively.

As of December 31, 2010, the interest cash flows from our interest-only securities taken together with interest cash flows from our fixed-rate, adjustable-rate and CMO securities, total 4.70% of the combined par value our agency securities (excluding the UPB of our interest-only securities). The combined weighted average yield of our agency portfolio was 3.31% as of December 31, 2010.
As of September 30, 2011 and December 31, 2010, we held fixed-rate pass-through agency securities, pass-through agency securities collateralized by ARMs and hybrid ARMs, with coupons linked to various indices. The following tables detail the characteristics of our ARM and hybrid ARM portfolio by index as of September 30, 2011 and December 31, 2010 (dollars in thousands):


                                       As of September 30, 2011                                       As of December 31, 2010
                                                                   Twelve-Month                                                  Twelve-Month
                       Six-Month      One-Year       One-Year        Treasury        Six-Month      One-Year       One-Year        Treasury
                         Libor          Libor        Treasury         Average          Libor          Libor        Treasury         Average
Weighted average term
to next reset
(months)                     37              81            42                29            39              75            48                35
Weighted average
margin                     1.59 %          1.79 %        1.91 %            1.84 %        1.53 %          1.75 %        2.14 %            1.83 %
Weighted average
annual period cap          1.09 %          2.00 %        1.57 %            1.00 %        1.23 %          2.00 %        1.86 %            1.00 %
Weighted average
lifetime cap              10.59 %          9.17 %        9.90 %           10.08 %       10.86 %          9.88 %       10.28 %           10.13 %
Principal amount      $  99,470     $ 2,520,583     $ 227,669     $     219,401     $ 141,318     $ 2,683,203     $ 659,825     $     261,017
Percentage of
investment portfolio
at par value               0.25 %          6.33 %        0.58 %            0.56 %        1.00 %         21.00 %        5.00 %            2.00 %

The following table details the number of months to the next reset for our pass-through securities collateralized by ARMs and hybrid ARMs as of September 30, 2011 and December 31, 2010 (dollars in thousands):

                                         As of September 30, 2011                        As of December 31, 2010
                                                                    Average                                        Average
                                     Fair Value         % Total      Reset          Fair Value         % Total      Reset
Less than one year             $        24,679               1 %         6     $        25,803              1 %         7
Greater than or equal to one
year and less than two years           137,090               4 %        19             218,928              5 %        18
Greater than or equal to two
years and less than three
years                                  387,362              12 %        29             737,130             19 %        33
Greater than or equal to three
years and less than five years         385,898              12 %        44           1,010,349             26 %        47
Greater than or equal to five
years                                2,302,750              71 %        89           1,957,954             49 %        94
Total / Weighted Average       $     3,237,779             100 %        73     $     3,950,164            100 %        66

Actual maturities of agency securities are generally shorter than stated contractual maturities primarily as a result of prepayments of principal of the underlying mortgages. The stated contractual final maturity of the mortgage loans underlying our portfolio of agency securities ranges up to 40 years, but the expected maturity is subject to change based on the actual and expected future prepayments of the underlying loans. As of September 30, 2011 and December 31, 2010, the average final contractual maturity of the agency securities in our investment portfolio was 21 and 22 years, respectively. The estimated weighted average months to maturity of the agency securities in the table below are based upon our prepayment expectations, which are estimated based on assumptions for different securities using a combination of third-party services, market data and internal models. The third-party services estimate prepayment speeds using models that incorporate the forward yield curve, mortgage rates, current mortgage rates of the outstanding loans, loan age, volatility and other factors. As market conditions are changing rapidly, we use judgment in making adjustments to our models for some products. Various market participants could use materially different assumptions. The following table summarizes our agency securities classified as available-for-sale, at fair value, according to their estimated weighted average life classifications as of September 30, 2011 and December 31, 2010 (in thousands):

                                    As of September 30, 2011                       As of December 31, 2010
Estimated Weighted
Average Life of Agency
Securities Classified                                        Weighted                                       Weighted
as                                           Amortized       Average                        Amortized       Average
Available-for-Sale          Fair Value          Cost          Coupon       Fair Value          Cost          Coupon
Less than or equal to
one year                  $      3,097     $      3,112         5.50 %   $          -     $          -            - %
Greater than one year
and less than or equal
to three years               7,769,007        7,613,464         4.32 %        133,123          132,520         5.05 %
Greater than three
years and less than or
equal to five years         30,555,145       29,971,368         4.09 %      3,841,282        3,821,992         4.92 %
Greater than five years      3,434,944        3,387,668         4.43 %      9,479,136        9,526,980         4.31 %
Total                     $ 41,762,193     $ 40,975,612         4.16 %   $ 13,453,541     $ 13,481,492         4.49 %

The weighted average life of our interest-only and principal-only securities was 2.7 and 6.2 years as of September 30, 2011 and December 31, 2010, respectively. The constant prepayment rate ("CPR") reflects the percentage of principal that is prepaid over a period of time on


an annualized basis. In general, while there are various factors that impact the rate of prepayments, as interest rates rise, the rate of refinancings typically declines, which may result in lower rates of prepayment and, as a result, a lower portfolio CPR. Conversely, as interest rates fall, the rate of refinancings typically increases, which may result in higher rates of prepayment and, as a result, a higher portfolio CPR. As of September 30, 2011, our portfolio was purchased at a net premium.
In determining the estimated weighted average months to maturity of our agency securities and the yield on our agency securities, we have assumed that the CPR over the remaining projected life of our aggregate investment portfolio is 13% as of September 30, 2011. We make different prepayment assumptions for the individual securities that comprise the investment portfolio and these individual assumptions can differ materially from the average. There is also considerable uncertainty around prepayment speeds in this environment and actual speeds could differ materially from our estimates. Changes to the GSE's underwriting standards, further modifications to existing U.S. government sponsored programs such as HARP or the implementation of new programs could materially impact prepayment speeds. Furthermore, GSE buyouts of loans in imminent risk of default, loans that have been modified, or loans that have defaulted will generally be reflected as prepayments on agency securities and also increase the uncertainty around these estimates. In addition, securities were purchased with different amounts of premiums and therefore the yield on some securities is more sensitive to changes in prepayment speeds.

RESULTS OF OPERATIONS
The following analysis of our financial condition and results of operations
should be read in conjunction with our interim consolidated financial statements
and the notes thereto. The tables below present our condensed consolidated
balance sheets as of September 30, 2011 and December 31, 2010 and our
consolidated statements of operations and key statistics for the three and nine
months ended September 30, 2011 and 2010 (in thousands, except per share
amounts):

                                                                            As of
Balance Sheet Data:                                       September 30, 2011       December 31, 2010
Investment portfolio, at fair value                     $         41,970,419     $        13,510,280
Total assets                                            $         47,039,429     $        14,475,829
Repurchase agreements and other debt                    $         38,898,483     $        11,753,019
Total liabilities                                       $         42,099,173     $        12,903,765
Total stockholders' equity                              $          4,940,256     $         1,572,064
Net asset value per common share as of period end(1)    $              26.90     $             24.24


                                      For the three months             For the nine months
                                      ended September 30,              ended September 30,
Consolidated Statement of
Operations Data:                      2011            2010            2011            2010
Interest income                  $    326,754     $    62,600     $   755,975     $   151,986
Interest expense                       95,036          18,531         194,500          51,389
Net interest income                   231,718          44,069         561,475         100,597
Gain on sale of agency
securities, net                       262,768          24,565         360,880          81,558
Realized loss on periodic
interest settlements of interest
rate swaps, net                        (1,773 )             -          (1,773 )             -
Other realized loss on
derivative instruments and other
securities, net                      (173,190 )          (736 )      (222,594 )        (4,214 )
Unrealized loss on derivative
instruments and other
securities, net                       (46,543 )        (2,997 )       (85,623 )       (15,466 )
Total other income, net                41,262          20,832          50,890          61,878
Management fees                        15,634           2,697          36,511           6,795
General and administrative
expenses                                5,845           1,926          12,988           5,394
Total expenses                         21,479           4,623          49,499          12,189
Income before tax                     251,501          60,278         562,866         150,286
Excise tax                              1,100             250           1,100             250
Net income                       $    250,401     $    60,028     $   561,766     $   150,036
. . .
  Add AGNC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AGNC - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.