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| AGNC > SEC Filings for AGNC > Form 10-Q on 9-Aug-2012 | All Recent SEC Filings |
9-Aug-2012
Quarterly Report
• 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. Our common stock is traded on The
NASDAQ Global Select Market under the symbol "AGNC". We are externally managed
by American Capital AGNC Management, LLC (our "Manager"), an affiliate of
American Capital, Ltd. ("American Capital").
We operate so as to qualify to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Internal
Revenue 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. It is our intention to distribute 100% of our taxable income,
after application of available tax attributes, within the limits prescribed by
the Internal Revenue Code, which may extend into the subsequent taxable year.
We earn income primarily from investing on a leveraged basis in agency
mortgage-backed securities. These investments consist of residential mortgage
pass-through securities and collateralized mortgage obligations ("CMOs") for
which the principal
and interest payments are guaranteed by government-sponsored entities, 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") (collectively
referred to as "GSEs"). We may also invest in agency debenture securities issued
by Freddie Mac, Fannie Mae or the Federal Home Loan Bank ("FHLB"). We refer to
agency mortgage-backed securities and agency debenture securities collectively
as "agency securities" and we refer to the specific investment securities in
which we invest as our "investment portfolio".
Our principal objective is to preserve our net book value (also referred to as
"net asset value", "NAV" and "stockholders' equity") 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 hedging activities. We fund our
investments primarily through borrowings structured as repurchase agreements.
Our Investment Strategy
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 book value;
• 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").
The size and composition of our investment portfolio depends on investment
strategies implemented by our Manager, the availability of investment capital
and overall market conditions, including the availability of attractively priced
investments and suitable financing to appropriately leverage our investment
portfolio. Market conditions are influenced by, among other things, current
levels of and expectations for future levels of, interest rates, mortgage
prepayments, market liquidity, housing prices, unemployment rates, general
economic conditions, government participation in the mortgage market, evolving
regulations or legal settlements that impact servicing practices or other
mortgage related activities.
Trends and Recent Market Impacts
Movements in interest rates impact the value of our securities and the amount of
income we can generate from our portfolio of investments. Accordingly, one of
the primary goals of our hedging activities is to protect our net asset value
against significant fluctuations due to market risks, including interest rate
and prepayment risk. We utilize a variety of strategies to aid us in this
objective, which are summarized in Notes 3 and 6 of the accompanying financial
statements.
The table below summarizes interest rates and prices of generic fixed-rate
agency MBS as of June 30, 2012, March 31, 2012 and December 31, 2011.
June 30, 2012 June 30, 2012
Interest Rate/Security December Versus Versus
Price (1) June 30, 2012 March 31, 2012 31, 2011 March 31, 2012 December 31, 2011
LIBOR:
1-Month 0.25% 0.24% 0.30% +0.01 -0.05
3-Month 0.46% 0.47% 0.58% -0.01 -0.12
U.S. Treasury Security
Rate:
2-Year U.S. Treasury 0.30% 0.33% 0.24% -0.03 +0.06
5-Year U.S. Treasury 0.72% 1.04% 0.83% -0.32 -0.11
10-Year U.S. Treasury 1.65% 2.21% 1.88% -0.56 -0.23
Interest Rate Swap Rate:
2-Year Swap 0.55% 0.58% 0.73% -0.03 -0.18
5-Year Swap 0.97% 1.27% 1.22% -0.30 -0.25
10-Year Swap 1.78% 2.29% 2.03% -0.51 -0.25
30-Year Fixed Rate MBS
Price
3.5% $105.11 $102.72 $102.88 +$2.39 +$2.23
4.0% $106.44 $104.86 $105.03 +$1.58 +$1.41
4.5% $107.28 $106.38 $106.42 +$0.90 +$0.86
5.0% $108.23 $108.03 $108.03 +$0.20 +$0.20
5.5% $109.08 $108.97 $108.89 +$0.11 +$0.19
6.0% $109.91 $110.20 $110.16 -$0.29 -$0.25
15-Year Fixed Rate MBS
Price
2.5% $103.09 $101.42 $101.34 +$1.67 +$1.75
3.0% $104.77 $103.56 $103.28 +$1.21 +$1.49
3.5% $105.66 $104.92 $104.58 +$0.74 +$1.08
4.0% $106.34 $106.00 $105.50 +$0.34 +$0.84
4.5% $107.17 $107.20 $106.59 -$0.03 +$0.58
________________________
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In the current environment of high market prices of agency securities and
historically low interest rates, the returns on agency securities are extremely
sensitive to prepayments. We believe maintaining a current investment portfolio
of agency securities with favorable prepayment characteristics is critical to
generating strong returns in a variety of potential market scenarios. Agency
securities backed by pools of (i) loans with lower loan balances, (ii) loans
already refinanced under the Home Affordable Refinance Program ("HARP") and
(iii) loans with lower coupons all exhibit favorable prepayment characteristics.
Accordingly, we have positioned our current investment portfolio to be weighted
towards agency securities with favorable prepayment characteristics. A summary
of the composition of our investment portfolio as of June 30, 2012, including
our investments in agency securities backed by lower loan balances and HARP
loans, is included below under Financial Condition. The current composition of
our investment portfolio is also weighted towards agency securities with lower
coupons to further protect our portfolio against prepayment risk. For example,
our agency MBS portfolio had a weighted average coupon of 3.86% as of June 30,
2012 compared to 4.23% as of December 31, 2011. To illustrate the impact of
investing in securities that include favorable prepayment characteristics, the
table below compares the actual constant prepayment rates ("CPR") for our
portfolio and for the Fannie Mae 2011 30-year 4.0% fixed rate universe for the
six months ended June 30, 2012.
Annualized Monthly Constant May Prepayment Rates (1) January 2012 February 2012 March 2012 April 2012 2012 June 2012 AGNC portfolio 8% 8% 12% 12% 10% 8% Fannie Mae 2011 30-year 4.0% fixed rate universe (2) 13% 19% 21% 14% 15% 21% ________________________ |
2. Source: JP Morgan.
FINANCIAL CONDITION
As of June 30, 2012 and December 31, 2011, our investment portfolio consisted of
$77.9 billion and $54.7 billion, respectively, of agency mortgage-backed
securities ("agency MBS"). The following tables summarize certain
characteristics of our agency MBS investment portfolio as of June 30, 2012 and
December 31, 2011 (dollars in millions):
June 30, 2012
June 2012
Agency MBS Classified as Weighted Average Projected
Available-for-Sale Amortized Amortized Life CPR
("AFS") Par Value Cost Cost Basis Fair Value Coupon Yield (1) (2)
AFS Investments By
Issuer:
Fannie Mae $ 55,578 $ 58,231 104.8% $ 59,431 3.71% 2.79% 11%
Freddie Mac 16,511 17,267 104.6% 17,647 3.85% 2.80% 13%
Ginnie Mae 278 291 104.7% 294 3.78% 1.62% 20%
Total / Weighted Average
AFS Securities $ 72,367 $ 75,789 104.7% $ 77,372 3.74% 2.79% 12%
AFS Investments By
Security Type:
Fixed-Rate
? 15-Year
Lower Loan Balance (3) $ 15,552 $ 16,151 103.9% $ 16,707 3.71% 2.68% 13%
HARP (4) 1,193 1,239 103.9% 1,273 3.71% 2.65% 14%
Other (2009-2012 Vintage)
(5) 8,502 8,793 103.4% 8,843 2.91% 1.93% 14%
Other (Pre 2009 Vintage) 37 39 104.8% 40 4.55% 2.66% 17%
Total ? 15-Year 25,284 26,222 103.7% 26,863 3.44% 2.42% 14%
Total 20-Year: 2,894 3,015 104.1% 3,080 3.61% 2.74% 11%
30-Year:
Lower Loan Balance (3) 13,800 14,608 105.8% 14,902 3.98% 3.04% 9%
HARP (4) 18,928 20,028 105.8% 20,409 3.97% 3.02% 10%
Other (2009-2012 Vintage)
(5) 9,339 9,711 104.0% 9,867 3.70% 2.96% 11%
Other (Pre 2009 Vintage)
(5) 558 596 106.7% 611 5.59% 3.53% 21%
Total 30-Year 42,625 44,943 105.4% 45,789 3.94% 3.02% 10%
Total Fixed-Rate 70,803 74,180 104.8% 75,732 3.75% 2.80% 11%
Adjustable-Rate 1,010 1,046 103.7% 1,072 4.21% 2.44% 19%
CMO 554 563 102.9% 568 2.51% 2.01% 15%
Total / Weighted Average $ 72,367 $ 75,789 104.7% $ 77,372 3.74% 2.79% 12%
June 30, 2012
Underlying June 2012
Unamortized Weighted Average Projected
Agency MBS Remeasured at Principal Amortized Life CPR
Fair Value Through Earnings Balance Cost Fair Value Coupon Yield (1) (2)
Interest-Only Strips
Fannie Mae $ 354 $ 55 $ 44 5.50% 12.51% 22%
Freddie Mac 1,419 256 232 5.70% 6.93% 17%
Principal-Only Strips
Fannie Mae 316 252 274 -% 3.20% 10%
Total / Weighted Average $ 2,089 $ 563 $ 550 4.80% 5.81% 14%
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2. Weighted average projected life CPR based on forward rate assumptions as of June 30, 2012.
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 $99 thousand and $103 thousand for 15-year and 30-year securities, respectively,
as of June 30, 2012.
4. HARP securities are defined as pools backed by100% refinance loans with
loan-to-values ("LTV") ? 80%. Our HARP securities had a weighted average
LTV of 95% and 97% for 15-year and 30-year securities, respectively, as of
June 30, 2012.
5. Other 15-year and 30-year securities include a total of $689 million and $960 million of securities backed by loans with original loan balances ? $175 thousand.
December 31, 2011
December
Weighted Average 2011
Projected
Agency MBS Classified as Amortized Amortized Life CPR
AFS Par Value Cost Cost Basis Fair Value Coupon Yield (1) (2)
AFS Investments By
Issuer:
Fannie Mae $ 37,232 $ 38,891 104.5% $ 39,567 4.07% 3.02% 14%
Freddie Mac 13,736 14,342 104.4% 14,664 4.21% 3.16% 14%
Ginnie Mae 258 270 104.7% 273 3.74% 1.71% 25%
Total / Weighted AFS
Securities $ 51,226 $ 53,503 104.4% $ 54,504 4.11% 3.05% 14%
AFS Investments By
Security Type:
Fixed-Rate
? 15-Year:
Lower Loan Balance (3) $ 16,033 $ 16,626 103.7% $ 17,027 3.81% 2.84% 12%
HARP (4) 1,160 1,208 104.2% 1,235 3.93% 2.87% 12%
Other (5) 1,814 1,873 103.2% 1,898 3.54% 2.58% 15%
Total ? 15-Year 19,007 19,707 103.7% 20,160 3.79% 2.82% 13%
Total 20-Year: 5,462 5,659 103.6% 5,710 3.71% 2.72% 16%
30-Year:
Lower Loan Balance (3) 4,577 4,847 105.9% 4,927 4.48% 3.40% 11%
HARP (4) 11,676 12,318 105.5% 12,591 4.48% 3.50% 11%
Other (2009-2011 Vintage) 6,987 7,307 104.6% 7,380 4.24% 3.17% 15%
Other (Pre 2009 Vintage) 655 697 106.3% 715 5.59% 3.37% 25%
Total 30-Year 23,895 25,169 105.3% 25,613 4.44% 3.38% 12%
Total Fixed-Rate 48,364 50,535 104.5% 51,483 4.10% 3.09% 13%
Adjustable-Rate 2,627 2,725 103.7% 2,774 4.29% 2.58% 32%
CMO 235 243 103.1% 247 3.74% 1.69% 29%
Total / Weighted Average $ 51,226 $ 53,503 104.4% $ 54,504 4.11% 3.05% 14%
December 31, 2011
December
Underlying Weighted Average 2011
Unamortized Projected
Agency MBS Remeasured at Principal Amortized Life CPR
Fair Value Through Earnings Balance Cost Fair Value Coupon Yield (1) (2)
Interest-Only Strips
Fannie Mae $ 687 $ 90 $ 86 5.55% 6.62% 31%
Freddie Mac 453 66 56 5.48% 10.35% 25%
Principal-Only Strips
Fannie Mae 40 35 37 -% 5.40% 31%
Total / Weighted Average $ 1,180 $ 191 $ 179 5.33% 7.70% 29%
______________________
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2. Weighted average projected life CPR based on forward rate assumptions as of December 31, 2011.
3. Lower loan balance securities represent pools backed by a maximum original loan balance of ? $150 thousand. Our lower loan balance securities had a weighted average original loan balance of $102 thousand and $108 thousand for 15-year and 30-year securities, respectively, as of December 31, 2011.
4. HARP securities are defined as pools backed by100% refinance loans with LTVs ? 80% and ? 125%. Our HARP securities had a weighted average LTV of 98% and 97% for 15-year and 30-year securities, respectively, as of December 31, 2011.
5. Other 15-year securities include $687 million of securities backed by loans with original loan balances ? $175 thousand.
Interest-only agency MBS strips 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 agency CMO securities.
Principal-only agency MBS strips represent the right to receive contractual
principal flows of the UPB of specific agency CMO securities. As of June 30,
2012 and December 31, 2011, the combined weighted average yield of our agency
MBS portfolio was 2.81% and 3.07%, respectively.
The stated contractual final maturity of the mortgage loans underlying our
agency MBS portfolio ranges up to 40 years. As of June 30, 2012 and December 31,
2011, the weighted average final contractual maturity of our agency MBS
portfolio was 24 and 23 years, respectively.
The actual maturities of agency MBS are generally shorter than their stated
contractual maturities primarily as a result of prepayments of principal of the
underlying mortgages. The weighted average expected maturity of our agency MBS
portfolio was 6.3 and 5.1 years as of June 30, 2012 and December 31, 2011,
respectively. In determining the estimated weighted average years to maturity of
our agency MBS and the yield on our agency MBS, we have assumed a weighted
average CPR over the remaining projected life of our agency MBS portfolio of 12%
as of June 30, 2012 and 14% as of December 31, 2011. We amortize or accrete
premiums and discounts associated with purchases of our agency MBS into interest
income over the estimated life of our securities based on actual and projected
CPRs, using the effective yield method. Since the weighted average cost basis of
our agency MBS portfolio was 105.0% of par value as of June 30, 2012, slower
actual and projected prepayments can have a meaningful positive impact on our
asset yields, while faster actual or projected prepayments can have a meaningful
negative impact on our asset yields.
The following table summarizes our agency MBS classified as available-for-sale,
at fair value, according to their estimated weighted average life
classifications as of June 30, 2012 and December 31, 2011 (dollars in
millions):
June 30, 2012 December 31, 2011
Estimated Weighted Average Weighted Weighted
Life of Agency MBS Amortized Average Amortized Average
Classified as AFS Fair Value Cost Coupon Fair Value Cost Coupon
Less than or equal to 1 year $ - $ - -% $ 214 $ 210 4.61%
Greater than 1 year and less
than or equal to 3 years 2,266 2,245 4.06% 3,392 3,338 4.38%
Greater than 3 years and
less than or equal to 5
years 23,989 23,294 3.69% 26,168 25,616 3.99%
Greater than 5 years and
less than/equal to 10 years 50,092 49,231 3.75% 24,710 24,320 4.19%
Greater than 10 years 1,025 1,019 4.00% 20 19 5.02%
Total $ 77,372 $ 75,789 3.74% $ 54,504 $ 53,503 4.11%
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The weighted average life of our interest-only agency MBS strips was 5.5 and 3.0
years as of June 30, 2012 and December 31, 2011, respectively, and the weighted
average life of our principal-only agency MBS strips was 6.6 and 2.6 years as of
June 30, 2012 and December 31, 2011, respectively.
As of June 30, 2012 and December 31, 2011, we held pass-through agency MBS
collateralized by adjustable rate mortgage loans ("ARMs") and hybrid ARMs with
coupons linked to various indices. Hybrid ARMs are mortgage loans that have
interest rates that are fixed for an initial period and, thereafter, reset at
regular intervals subject to interest rate caps. The following tables detail the
characteristics of our ARM and hybrid ARM agency MBS portfolio by index as of
June 30, 2012 and December 31, 2011 (dollars in millions):
June 30, 2012 December 31, 2011
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) 27 63 45 23 33 75 45 26
Weighted average
margin 1.59 % 1.78 % 1.56 % 1.83 % 1.59 % 1.79 % 1.72 % 1.83 %
Weighted average
annual period cap 1.10 % 2.00 % 1.09 % 1.00 % 1.08 % 2.00 % 1.31 % 1.00 %
Weighted average
lifetime cap 10.59 % 9.27 % 8.93 % 10.06 % 10.59 % 9.25 % 9.25 % 10.07 %
Principal amount $ 76 $ 464 $ 303 $ 167 $ 95 $ 1,967 $ 366 $ 199
Percentage of
investment portfolio
at par value 0.11 % 0.64 % 0.42 % 0.23 % 0.19 % 3.84 % 0.71 % 0.38 %
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The following table details the number of months to the next reset for our pass-through agency MBS collateralized by ARMs and hybrid ARMs as of June 30, 2012 and December 31, 2011 (dollars in millions):
June 30, 2012 December 31, 2011
Average Average
Fair Value % Total Reset Fair Value % Total Reset
Less than 1 year $ 80 8 % 6 $ 29 1 % 6
Greater than or equal to 1
year and less than 2 years 237 22 % 21 156 6 % 17
. . .
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