AGNC Investment Corp. Announces Second Quarter 2018 Financial Results

BETHESDA, Md., July 25, 2018 /PRNewswire/ -- AGNC Investment Corp. ("AGNC" or the "Company") (Nasdaq: AGNC) today announced financial results for the quarter ended June 30, 2018.

SECOND QUARTER 2018 FINANCIAL HIGHLIGHTS

• $0.34 comprehensive income per common share, comprised of:
• $0.70 net income per common share
• $(0.36) other comprehensive loss ("OCI") per common share on investments marked-to-market through OCI
• 0.63 net spread and dollar roll income per common share, excluding estimated "catch-up" premium amortization benefit ¹
• Includes $0.17 per common share of dollar roll income associated with the Company's $16.9 billion average net long position in forward purchases and sales of Agency mortgage-backed securities ("MBS") in the "to-be-announced" ("TBA") market
• Excludes $0.03 per common share of estimated "catch-up" premium amortization benefit due to change in projected constant prepayment rate ("CPR") estimates
• $18.41 tangible net book value per common share as of June 30, 2018
• Decreased $(0.22) per common share, or -1.2%, from $18.63 per common share as of March 31, 2018
• Excludes $550 million, or $1.27 per common share, of goodwill and other intangible assets as of June 30, 2018
• $0.54 dividends declared per common share during the quarter
• 1.7% economic return on tangible common equity for the quarter
• Comprised of $0.54 dividends per common share and $(0.22) decrease in tangible net book value per common share

OTHER SECOND QUARTER HIGHLIGHTS

• $77.1 billion investment portfolio as of June 30, 2018, comprised of:
• $56.1 billion Agency MBS
• $20.0 billion TBA mortgage position
• $1.0 billion credit risk transfer ("CRT") and non-Agency securities
• 8.3x tangible net book value "at risk" leverage as of June 30, 2018
• 8.0x average tangible net book value "at risk" leverage for the quarter
• 9.7% portfolio CPR for the quarter
• 7.1% average projected portfolio life CPR as of June 30, 2018
• 1.35% annualized net interest spread and TBA dollar roll income for the quarter, excluding estimated "catch-up" premium amortization benefit
• Excludes 7 bps of "catch up" premium amortization benefit due to change in projected CPR estimates
• Increased from 1.26% for the prior quarter, excluding 12 bps of "catch-up" premium amortization benefit
• $0.8 billion of common equity raised during the quarter, net of offering costs
• $633 million follow-on offering
• $155 million At-the-Market equity offerings

MANAGEMENT REMARKS

"Despite increasing global trade tensions, financial market volatility declined in the second quarter and equity markets recovered somewhat from the weakness experienced during the first quarter of 2018.  The U.S. economy continued to perform very well, but there were some signs that the global synchronous growth story was losing momentum.  Interest rates increased modestly, and the yield curve flattened further as the Federal Reserve continued to slowly increase short-term rates while longer-term rates remained relatively well supported," said Gary Kain, the Company's Chief Executive Officer and Chief Investment Officer.

"Against this backdrop, AGNC generated a 1.7% economic return on tangible common equity for the quarter, consisting of $0.54 in dividends and a $0.22 decline in tangible net book value per common share."

"In addition, the favorable funding dynamic between our repo funding rate and the LIBOR rate we receive on our pay-fixed swaps benefited our second quarter financial results," commented Peter Federico, the Company's President and Chief Operating Officer.  "AGNC also enhanced its scale, liquidity and operating efficiency by raising nearly $800 million in common equity during the second quarter through a follow-on offering and our At-the-Market equity offering program."

TANGIBLE NET BOOK VALUE PER COMMON SHARE

As of June 30, 2018, the Company's tangible net book value per common share was $18.41 per share, a decline of $(0.22) per common share, or -1.2%, compared to $18.63 per share as of March 31, 2018.  The Company's tangible net book value per common share excludes $550 million, or $1.27 per common share, of goodwill and other intangible assets as of June 30, 2018.

INVESTMENT PORTFOLIO

As of June 30, 2018, the Company's investment portfolio totaled $77.1 billion, comprised of:

• $76.1 billion of Agency MBS and TBA securities, including:
• $75.1 billion of fixed-rate securities, comprised of:
• $47.0 billion 30-year fixed-rate securities,
• $15.3 billion 30-year TBA securities,
• $7.3 billion 15-year securities,
• $4.7 billion 15-year TBA securities, and
• $0.8 billion 20-year fixed-rate securities;
• $0.7 billion of collateralized mortgage obligations ("CMOs"); and
• $0.2 billion of adjustable-rate securities;
• $1.0 billion of CRT and non-Agency securities; and
• $46 million of MTGE Investment Corp. common stock.

As of June 30, 2018, inclusive of TBA securities, 30-year and 15-year Agency MBS fixed rate securities represented 81% and 16% of the Company's investment portfolio, respectively, compared to 78% and 18%, respectively, as of March 31, 2018.

As of June 30, 2018, the Company's fixed-rate Agency MBS, inclusive of TBA securities, had a weighted average coupon of 3.69%, compared to 3.57% as of March 31, 2018, comprised of the following weighted average coupons:

• 3.77% for 30-year fixed-rate securities;
• 3.27% for 15-year fixed rate securities; and
• 3.62% for 20-year fixed-rate securities.

The Company accounts for TBA securities (or "dollar roll funded assets") as derivative instruments and recognizes dollar roll income in other gain (loss), net on the Company's financial statements.  As of June 30, 2018, the Company's net TBA position had a total fair value of $20.0 billion and a GAAP net carrying value of $105 million reported in derivative assets/(liabilities) on the Company's balance sheet, compared to a total fair value of $13.6 billion and a GAAP net carrying value of $82 million as of March 31, 2018.

CONSTANT PREPAYMENT RATES

The Company's investment portfolio had a weighted average CPR of 9.7% for the second quarter, compared to 8.6% for the prior quarter.  The weighted average projected CPR for the remaining life of the Company's Agency securities held as of June 30, 2018 was 7.1%, compared to 7.6% as of March 31, 2018.

The weighted average cost basis of the Company's investment portfolio was 104.5% of par value as of June 30, 2018.  Net premium amortization cost on the Company's investment portfolio for the second quarter was $(74) million, or $(0.18) per common share, which includes a "catch-up" premium amortization benefit of $12 million, or $0.03 per common share, due to changes in the Company's projected CPR estimates for securities acquired prior to the second quarter.  This compares to net premium amortization cost for the prior quarter of $(69) million, or $(0.18) per common share, including a "catch-up" premium amortization benefit of $21 million, or $0.05 per common share.

ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD

The Company's average asset yield on its investment portfolio, excluding the net TBA position, was 2.99% for the second quarter, compared to 3.05% for the prior quarter.  Excluding "catch-up" premium amortization, the Company's average asset yield was 2.91% for the second quarter, compared to 2.90% for the prior quarter. The Company's average asset yield including TBA securities and excluding "catch-up" premium amortization for the second quarter was 3.02%, an increase from 2.94% for the prior quarter.

For the second quarter, the weighted average interest rate on the Company's Agency repurchase agreements was 1.99%, compared to 1.69% for the prior quarter.  The Company's average implied TBA funding cost was 1.75% for the second quarter, compared to 1.49% for the prior quarter.  Inclusive of interest rate swaps, the Company's combined average cost of funds for the second quarter was 1.67%, compared to 1.68% for the prior quarter.

The Company's annualized net interest spread, including TBA securities and interest rate swaps, was 1.42% for the second quarter, compared to 1.38% for the prior quarter.  Excluding "catch-up" premium amortization, the Company's combined annualized net interest spread for the second quarter was 1.35%, compared to 1.26% for the prior quarter.

NET SPREAD AND DOLLAR ROLL INCOME

The Company recognized $0.66 per common share of net spread and dollar roll income (a non-GAAP financial measure) for the second quarter, compared to $0.65 for the prior quarter.  Excluding "catch-up" premium amortization, the Company's net spread and dollar roll income was $0.63 per common share for the second quarter, an increase from $0.60 per common share for the prior quarter.  A reconciliation of the Company's net interest income to net spread and dollar roll income and additional information regarding the Company's use of non-GAAP measures are included later in this release.

LEVERAGE

As of June 30, 2018, $48.8 billion of Agency repo, $19.9 billion of TBA dollar roll positions (at cost) and $0.3 billion of other debt were used to fund the Company's investment portfolio.  Inclusive of its net TBA position and net payable/(receivable) for unsettled securities, the Company's tangible net book value "at risk" leverage ratio was 8.3x as of June 30, 2018, up slightly from 8.2x as of March 31, 2018, while its average "at risk" leverage for the second quarter was down slightly at 8.0x tangible net book value, compared to 8.2x for the prior quarter.

As of June 30, 2018, the Company's Agency repurchase agreements had a weighted average interest rate of 2.18%, an increase from 1.82% as of March 31, 2018, and a weighted average remaining days to maturity of 101 days, compared to 109 days as of March 31, 2018.  As of June 30, 2018, $21.2 billion, or 43%, of the Company's Agency repurchase agreements were funded through the Company's captive broker-dealer subsidiary, Bethesda Securities, LLC, compared to $18.8 billion, or 38%, as of March 31, 2018.

As of June 30, 2018, the Company's Agency repurchase agreements had remaining maturities of:

• $36.0 billion of three months or less;
• $0.7 billion from three to six months;
• $8.9 billion from six to twelve months; and
• $3.2 billion from one to three years.

HEDGING ACTIVITIES

As of June 30, 2018, 99% of the Company's outstanding balance of Agency repurchase agreements, other debt and net TBA position was hedged with interest rate swaps, swaptions and U.S. Treasury positions, compared to 103% as of March 31, 2018.

As of June 30, 2018, the Company's interest rate swap position totaled $47.9 billion in notional amount, compared to $45.3 billion as of March 31, 2018.  The Company's interest rate swap position as of June 30, 2018 included $4.4 billion of forward starting swaps, with an average forward start date of 0.4 years, compared to $2.5 billion and 0.4 years, respectively, as of March 31, 2018.   Including forward starting swaps, the Company's interest rate swap portfolio had an average fixed pay rate of 1.93%, an average receive rate of 2.34% and an average maturity of 4.6 years as of June 30, 2018, compared to 1.82%, 1.90% and 4.5 years, respectively, as of March 31, 2018.  Excluding forward starting swaps, the Company's interest rate swap portfolio had an average fixed pay rate of 1.83% as of June 30, 2018, compared to 1.77% as of March 31, 2018.

As of June 30, 2018, the Company had payer swaptions outstanding totaling $5.6 billion, compared to $6.8 billion as of March 31, 2018.  During the second quarter, the Company exercised $1.2 billion of swaptions with an average fixed pay rate of 2.44%, swap term of 9.9 years and a total cost basis of $30 million, compared to $0.5 billion exercised during the prior quarter with an average pay rate of  2.34%, swap term of 9.7 years and cost basis of $11 million.  As of June 30, 2018, the Company had short U.S. Treasury positions outstanding totaling $14.9 billion, compared to $13.0 billion as of March 31, 2018.

OTHER GAIN (LOSS), NET

For the second quarter, the Company recorded a net gain of $134 million in other gain (loss), net, or $0.33 per common share, compared to a net gain of $217 million, or $0.55 per common share, for the prior quarter.  Other gain (loss), net for the second quarter was comprised of:

• $(74) million of net realized losses on sales of investment securities;
• $(94) million of net unrealized losses on investment securities measured at fair value through net income;
• $41 million of interest rate swap periodic income;
• $175 million of net gains on interest rate swaps;
• $34 million of net gains on interest rate swaptions;
• $56 million of net gains on U.S. Treasury positions;
• $70 million of TBA dollar roll income;
• $(84) million of net mark-to-market losses on TBA mortgage positions;
• $4 million of management fee income; and
• $6 million of other miscellaneous gains.

OTHER COMPREHENSIVE LOSS

During the second quarter, the Company recorded an other comprehensive loss of $(145) million, or $(0.36) per common share, consisting of net unrealized losses on the Company's Agency securities recognized through OCI, compared to a $(621) million, or $(1.59) per common share, other comprehensive loss for the prior quarter.

SECOND QUARTER 2018 DIVIDEND DECLARATIONS

During the second quarter, the Company's Board of Directors declared dividends of $0.18 per share to common stockholders of record as of April 30, May 31 and June 29, 2018, respectively, totaling $0.54 per share for the quarter, which were paid on May 9, June 8 and July 9, 2018, respectively.  Since its May 2008 initial public offering through the second quarter of 2018, the Company has declared a total of $8.0 billion in common stock dividends, or $38.24 per common share.

On June 13, 2018, the Company's Board of Directors declared a second quarter dividend on its 7.750% Series B Cumulative Redeemable Preferred Stock of $0.484375 per depositary share and on its Series C Preferred Stock of $0.43750 per depositary share. The dividends were paid on July 16, 2018 to preferred stockholders of record as of July 1, 2018.

FINANCIAL STATEMENTS, OPERATING PERFORMANCE AND PORTFOLIO STATISTICS

The following measures of operating performance include net spread and dollar roll income; net spread and dollar roll income, excluding "catch-up" premium amortization; economic interest income; economic interest expense; estimated taxable income; and the related per common share measures and financial metrics derived from such information, 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.

 

*Except as noted below, average numbers for each period are weighted based on days on the Company's books and records. All percentages are annualized, unless otherwise noted.

Numbers in financial tables may not total due to rounding.

1. Tangible net book value per common share excludes preferred stock liquidation preference and goodwill and other intangible assets, net.
2. During Q1 2018, the Company adopted new accounting guidance on revenue recognition, which resulted in reclassification of  expense reimbursements from MTGE Investment Corp. from an operating expense offset to management fee income.  Net income was not impacted. Prior periods have been revised accordingly, as applicable.
3. Table includes non-GAAP financial measures and/or amounts derived from non-GAAP measures.  Refer to "Use of Non-GAAP Financial Information" for additional discussion of non-GAAP financial measures.
4. Amount reported in gain (loss) on derivatives instruments and other securities, net in the accompanying consolidated statements of operations.
5. Dollar roll income represents the price differential, or "price drop," between the TBA price for current month settlement versus the TBA price for forward month settlement.  Amount is net of TBAs used for hedging purposes. Amount excludes TBA mark-to-market adjustments.
6. The implied funding cost of TBA dollar roll transactions is determined using the "price drop" (Note 5) and market based assumptions regarding the "cheapest-to-deliver" collateral that can be delivered to satisfy the TBA contract, such as the anticipated collateral's weighted average coupon, weighted average maturity and projected 1-month CPR.  The average implied funding cost for all TBA transactions is weighted based on the Company's daily average TBA balance outstanding for the period.
7. The average implied asset yield for TBA dollar roll transactions is extrapolated by adding the average TBA implied funding cost (Note 6) to the net dollar roll yield.  The net dollar roll yield is calculated by dividing dollar roll income (Note 5) by the average TBA cost basis outstanding for the period.
8. Amount calculated on a weighted average basis based on average balances outstanding during the period and their respective asset yield/funding cost.
9. Represents periodic interest rate swap settlements.  Amount excludes interest rate swap termination fees and mark-to-market adjustments.
10. Represents interest rate swap periodic income/cost measured as a percent of total mortgage funding (Agency repurchase agreements, other debt and TBA securities).
11. "Catch-up" premium amortization cost/benefit is reported in interest income on the accompanying consolidated statements of operations
12. Investment securities include Agency MBS, CRT and non-Agency securities.  Amounts exclude TBA securities.
13. Average repurchase agreements and other debt includes Agency repo and debt of consolidated VIE's.  Amount excludes U.S. Treasury repurchase agreements.
14. Average stockholders' equity calculated as the average month-ended stockholders' equity during the quarter.
15. Average tangible net book value "at risk" leverage during the period was calculated by dividing the sum of the daily weighted average Agency repurchase agreements, other debt and net TBA position (at cost) outstanding for the period by the sum of average stockholders' equity adjusted to exclude investments in REIT equity securities and goodwill and other intangible assets.  Leverage excludes U.S. Treasury repurchase agreements.
16. Tangible net book value "at risk" leverage as of period end was calculated by dividing the sum of the amount outstanding under Agency repurchase agreements, other debt, net TBA position (at cost) and net receivable / payable for unsettled investment securities outstanding by the sum of total stockholders' equity adjusted to exclude investments in REIT equity securities and goodwill and other intangible assets at period end.  Leverage excludes U.S. Treasury repurchase agreements.
17. Includes forward starting swaps not yet in effect as of reported period-end.
18. Economic return (loss) on tangible common equity represents the sum of the change in tangible net book value per common share and dividends declared on common stock during the period over the beginning tangible net book value per common share. 

STOCKHOLDER CALL

AGNC invites stockholders, prospective stockholders and analysts to attend the AGNC stockholder call on July 26, 2018 at 8:30 am ET.  Interested persons who do not plan on asking a question and have internet access are encouraged to utilize the free live webcast at www.AGNC.com.  Those who plan on participating in the Q&A or do not have internet available may access the call by dialing (877) 300-5922 (U.S. domestic) or (412) 902-6621 (international). Please advise the operator you are dialing in for the AGNC Investment Corp. stockholder call.

A slide presentation will accompany the call and will be available at www.AGNC.com.  Select the Q2 2018 Earnings Presentation link to download and print the presentation in advance of the stockholder call.

An archived audio of the stockholder call combined with the slide presentation will be available on the AGNC website after the call on July 26, 2018.  In addition, there will be a phone recording available one hour after the live call on July 26, 2018 through August 9, 2018. Those who are interested in hearing the recording of the presentation, can access it by dialing (877) 344-7529 (U.S. domestic) or (412) 317-0088 (international), passcode 10122211.

For further information, please contact Investor Relations at (301) 968-9300 or [email protected].

ABOUT AGNC INVESTMENT CORP.

AGNC Investment Corp. is an internally-managed real estate investment trust ("REIT") that invests primarily in residential mortgage-backed securities for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise or a U.S. Government agency.  For further information, please refer to www.AGNC.com.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements.  Forward-looking statements are based on estimates, projections, beliefs and assumptions of management of the Company at the time of such statements and are not guarantees of future performance.  Forward-looking statements involve risks and uncertainties in predicting future results and conditions.  Actual results could differ materially from those projected in these forward-looking statements due to a variety of important factors, including, without limitation, changes in interest rates, changes in the yield curve, changes in prepayment rates, the availability and terms of financing, changes in the market value of the Company's assets, general economic conditions, market conditions, conditions in the market for Agency securities, and legislative and regulatory changes that could adversely affect the business of the Company.  Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements, are included in the Company's periodic reports filed with the Securities and Exchange Commission ("SEC").  Copies are available on the SEC's website, www.sec.gov.  The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

USE OF NON-GAAP FINANCIAL INFORMATION

In addition to the results presented in accordance with GAAP, the Company's results of operations discussed in this release include certain non-GAAP financial information, including "net spread and dollar roll income," "net spread and dollar roll income, excluding 'catch-up' premium amortization," "economic interest income"  and "economic interest expense" (both components of "net spread and dollar roll income"), "estimated taxable income" and the related per common share measures and certain financial metrics derived from such non-GAAP information, such as "cost of funds" and "net interest spread."

"Net spread and dollar roll income" is measured as (i) net interest income (GAAP measure) adjusted to include TBA dollar roll income, interest rate swap periodic income/cost and dividend income from REIT equity securities (referred to as "adjusted net interest and dollar roll income"), plus (ii) management fee income (GAAP measure) and less (iii) total operating expense (GAAP measure). "Net spread and dollar roll income, excluding 'catch-up' premium amortization," further excludes retrospective "catch-up" adjustments to premium amortization cost or benefit due to changes in projected CPR estimates.  Related amounts available to common stockholders exclude non-recurring issuance costs of redeemed preferred stock.

By providing users of the Company's financial information with such measures in addition to the related GAAP measures, the Company believes users will have greater transparency into the information used by the Company's management in its financial and operational decision-making.  The Company also believes that it is important for users of its financial information to consider information related to the Company's current financial performance without the effects of certain transactions that are not necessarily indicative of its current investment portfolio performance and operations.

Specifically, in the case of "adjusted net interest and dollar roll income," the Company believes the inclusion of TBA dollar roll income is meaningful as TBAs, which are accounted for under GAAP as derivative instruments with gains and losses recognized in other gain (loss) in the Company's statement of operations, are economically equivalent to holding and financing generic Agency MBS using short-term repurchase agreements.  Similarly, the Company believes that the inclusion of periodic interest rate swap settlements in such measure, which are recognized under GAAP in other gain (loss), is meaningful as interest rate swaps are the primary instrument the Company uses to economically hedge against fluctuations in the Company's borrowing costs and inclusion of periodic interest rate swap settlements is more indicative of the Company's total cost of funds than interest expense alone.  In the case of "net spread and dollar roll income, excluding 'catch-up' premium amortization," the Company believes the exclusion of "catch-up" adjustments to premium amortization cost is meaningful as it excludes the cumulative effect from prior reporting periods due to current changes in future prepayment expectations and, therefore, exclusion of such 'catch-up' cost or benefit is more indicative of the current earnings potential of the Company's investment portfolio.  The Company also believes the exclusion of issuance costs of redeemed preferred stock reported as a reduction to net income available to common stockholders under GAAP is meaningful as they represent non-recurring costs associated capital transactions and are not representative of ongoing costs.  In the case of estimated taxable income, the Company believes it is meaningful information as it is directly related to the amount of dividends the Company is required to distribute in order to maintain its REIT qualification status.

However, because such measures are incomplete measures of the Company's financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, results computed in accordance with GAAP.  In addition, because not all companies use identical calculations, the Company's presentation of such non-GAAP measures may not be comparable to other similarly-titled measures of other companies.  Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing the Company's income tax returns, which occurs after the end of its fiscal year.

A reconciliation of GAAP net interest income to non-GAAP "net spread and dollar roll income, excluding 'catch-up' premium amortization" and a reconciliation of GAAP net income to non-GAAP "estimated taxable income" is included in this release.

CONTACT:
Investors - (301) 968-9300
Media - (301) 968-9303

SOURCE AGNC Investment Corp.