If you just read the earnings headline, then you are missing the whole story. Here are a few noteworthy line in the AGNC press release:
· American Capital Agency Corp. (AGNC) reports $1.26 net income per share, excluding $1.24 of other income (mostly the sale of agency securities and derivatives paying off). AGNC’s earning power is less than their dividend payments.
· They paid a $1.40 dividend for 4Q2010. Their net income doesn’t cover the dividend. Dividend payout ratio was 111% excluding the irregular income items.
· Leverage increasing in the quarter. Leverage for the year equaled 7.8x; leverage for the quarter 8.4x. AGNC, like all banks, are borrowed short and lent long. They have a horrible balance sheet.
· “As of December 31st, 2010, the Company had repurchase agreements with 22 financial institutions.” They are 22 financial institutions away from a debt rollover problem. Their current liabilities (repurchase agreements) dwarf their current assets. That creates a weak balance sheet dependent on other institutions.
Delusional quote from the company’s chief investment officer, Gary Kain:
“As we look ahead,” continued Mr. Kain, “we believe that the economic and competitive landscape is very favorable for our industry. The changes we are witnessing at the GSE’s, coupled with the prepayment environment that is likely to be more benign, should provide for an attractive backdrop for mortgage investors. When you combine this with a very steep yield curve, and a Federal Reserve that is likely to keep short term funding rates low for an extended period of time, we continue to remain optimistic.”
The yield curve will not remain steep with short term rates low and longer term rates much higher. The front end (the short term) rates will rise and eventually it will invert. Inverted yield curves occur when short term rates are higher than long term rates. An inverted yield curve usually signals a recession is coming. In our case it will be the double-dip recession. Ben Bernanke said that QE2 would lower mid-term interest rates. The opposite is happening.
Conclusion: AGNC lacks earning power and a strong balance sheet. Mr. Kain is a delusional Keynesian. He will be speaking on February 10th, 2011. You can see so for yourself.
American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that Gary Kain, Chief Investment Officer, is scheduled to make a presentation at the Credit Suisse 12th Annual Financial Services Forum on Thursday, February 10, 2011 in Miami, FL. The AGNC presentation is scheduled to begin at 2:45pm ET. The presentation will be webcast live and archived for 90 days on the AGNC website at http://ir.agnc.com.
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Here is the press release from AGNC: http://bit.ly/AGNC_4Q2010_earnings
American Capital Agency Reports $2.50 Earnings Per Share and $24.24 Book Value Per Share
BETHESDA, Md., Feb. 8, 2011 /PRNewswire/ -- American Capital Agency Corp. ("AGNC" or the "Company") (Nasdaq: AGNC) today reported net income for the fourth quarter of 2010 of $138.1 million, or $2.50 per share, and book value of $24.24 per share.
FOURTH QUARTER 2010 FINANCIAL HIGHLIGHTS
· $2.50 per share of net income
o $1.26 per share, excluding $1.24 per share of other investment related income and excise tax
· $1.64 per share of taxable income(1)
· $1.40 per share fourth quarter dividend paid on January 27, 2011
· $0.60 per share of undistributed taxable income as of December 31, 2010
o Undistributed taxable income was $39 million as of December 31, 2010, essentially unchanged from September 30, 2010
· $24.24 book value per share as of December 31, 2010
o Increased from $23.43 per share as of September 30, 2010
o Increased from $23.78 per share, pro forma, as of September 30, 2010 when adjusted for the follow-on equity offering that closed on October 1, 2010
· 42% annualized return on average stockholders' equity ("ROE") for the quarter(2)
OTHER FOURTH QUARTER HIGHLIGHTS
· $13.5 billion portfolio value as of December 31, 2010
o 18%(3) constant prepayment rate ("CPR") for the fourth quarter of 2010
o 16% CPR in December 2010 (based on data released in January 2011)
· 7.8x(4) leverage as of December 31, 2010
o 8.4x average leverage for the quarter
· 2.58% annualized net interest rate spread for the quarter
· $354 million of net proceeds raised from follow-on equity offerings during the quarter(5)
o $227 million raised from a follow-on equity offering that settled on December 14
o $127 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement
o In January 2011 raised an additional $719 million from a subsequent follow-on equity offering
o All equity raised was accretive to book value
2010 FULL YEAR FINANCIAL HIGHLIGHTS
· $7.89 per share of net income
o $4.50 per share, excluding $3.39 per share of other investment related income, amortization expense associated with the termination of interest rate swaps during 2009 and excise tax
o 34% ROE
· $5.60 per share dividends declared
o $6.76 per share of taxable income(6)
o Undistributed taxable income increased from $22 million as of December 31, 2009 to $39 million as of December 31, 2010
· $1.76 per share or 7.8% increase in book value
o Increased from $22.48 as of December 31, 2009 to $24.24 per share as of December 31, 2010
· 33% economic return
o Represents the combination of dividends paid plus book value appreciation over the year
· 29% total return to shareholders
o Represents the combination of dividends paid or accrued plus share price appreciation over the year
“We are proud of the performance of AGNC in 2010, successfully navigating multiple challenges in our markets,” said Malon Wilkus, Chief Executive Officer of AGNC, “We delivered a 33% economic return to our shareholders in 2010, counting dividends paid plus book value appreciation and a 34% return on equity. We accomplished this due to the outstanding insights of Gary Kain our Chief Investment Officer and the AGNC team whose focus on relative value within the agency market proved highly successful. During the year, we also expanded the team, deepening and enhancing our overall capabilities. We are excited about the opportunity to perform for our shareholders in 2011 and beyond.”
"2010 was an extremely volatile year," said Gary Kain, Chief Investment Officer of AGNC, "where every quarter had significant and unique challenges in the mortgage market. Despite this difficult backdrop, we were able to produce strong returns for our shareholders each quarter, broaden our shareholder base, and meaningfully grow our company. We paid $5.60 per share in dividends for the year and grew our book value per share by $1.76 from $22.48 as of December 31, 2009 to $24.24 as of December 31, 2010. We view the combination of these two metrics as an essential part of shareholder value creation over the long term. We are proud of these accomplishments and believe that our emphasis on asset selection coupled with our active approach to portfolio management was instrumental to this success."
"As we look ahead," continued Mr. Kain, "we believe that the economic and competitive landscape is very favorable for our industry. The changes we are witnessing at the GSE's, coupled with a prepayment environment that is likely to be more benign, should provide for an attractive backdrop for mortgage investors. When you combine this with a very steep yield curve, and a Federal Reserve that is likely to keep short term funding rates low for an extended period of time, we continue to remain optimistic."
INVESTMENT PORTFOLIO
As of December 31, 2010, the Company's investment portfolio totaled $13.5 billion of agency securities, at fair value, comprised of $9.1 billion of fixed-rate agency securities, $3.9 billion of adjustable-rate agency securities ("ARMs") and $0.5 billion of collateralized mortgage obligations ("CMOs") backed by fixed and adjustable-rate agency securities(7). As of December 31, 2010, AGNC's investment portfolio was comprised of 40% </=15-year fixed-rate securities, 6% 20-year fixed-rate securities, 22% 30-year fixed-rate securities(8), 29% adjustable-rate securities and 3% CMOs backed by fixed and adjustable-rate agency securities.
ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD
During the quarter, the annualized weighted average yield on the Company's average earning assets was 3.48% and its annualized average cost of funds was 0.90%, which resulted in a net interest rate spread of 2.58%, versus the third quarter of 2010 net interest rate spread of 2.21%. As of December 31, 2010, the weighted average yield on the Company's earning assets was 3.31% and its weighted average cost of funds was 1.03%. This resulted in a net interest rate spread of 2.28% as of December 31, 2010, an increase of 12 bps from the weighted average net interest rate spread as of September 30, 2010 of 2.16%.
The weighted average cost basis of the investment portfolio was 104.9% (or 104.5% excluding interest-only strips) as of December 31, 2010. The amortization of premiums (net of any accretion of discounts) on the investment portfolio for the quarter was $33.2 million, or $0.60 per share. The unamortized net premium as of December 31, 2010 was $626.3 million.
The Company's asset yields benefited from a decline in the Company's projected CPR for the remaining life of its investments and from purchases of higher yielding securities toward the end of the quarter as the Company invested capital from its December capital raise after interest rates increased. Premiums and discounts associated with purchases of agency securities are amortized or accreted into interest income over the estimated life of such securities using the effective yield method. Given the relatively high cost basis of the Company's mortgage assets, slower prepayment projections can have a meaningful positive impact on asset yields. The Company's projected CPR for the remaining life of its investments as of December 31, 2010 was 12%. This reflects a decrease from 18% as of September 30, 2010. The decrease in the Company's projected CPR is largely due to increases in interest rates coupled with new purchases of lower coupon securities near the end of the quarter. The actual CPR for the Company's portfolio held in the fourth quarter of 2010 was 18%, an increase from 15% during the third quarter of 2010. The most recent prepayment speed for the Company's portfolio for the month of January 2011 was 12%.
The cost of funds at the end of the quarter reflects both a higher relative interest rate swap portfolio to borrowings at the end of the quarter compared to the average during the quarter, as well as a temporary increase in repurchase agreement financing rates extending over the end of the year.
LEVERAGE AND HEDGING ACTIVITIES
As of December 31, 2010, the Company's $13.5 billion investment portfolio was financed with $11.7 billion of repurchase agreements, $0.1 billion of other debt(9) and $1.6 billion of equity capital, resulting in a leverage ratio of 7.5x. When adjusted for the net payable for agency securities not yet settled, the leverage ratio was 7.8x as of December 31, 2010. Due in part to the equity raise the Company completed towards the end of the fourth quarter, the Company's leverage at the end of the quarter was lower than the average leverage for the quarter of 8.4x.
Of the $11.7 billion borrowed under repurchase agreements as of December 31, 2010, $3.3 billion had original maturities of 30 days or less, $5.7 billion had original maturities greater than 30 days and less than or equal to 60 days, $1.5 billion had original maturities greater than 60 days and less than or equal to 90 days and the remaining $1.2 billion had original maturities of 91 days or more. As of December 31, 2010, the Company had repurchase agreements with 22 financial institutions.
The Company's interest rate swap positions as of December 31, 2010 totaled $6.5 billion in notional amount at an average fixed pay rate of 1.61%, a weighted average receive rate of 0.26% and a weighted average maturity of 3.1 years. During the quarter, the Company increased its swap position by $2.5 billion in conjunction with an increase in the portfolio size. The new swap agreements entered into during the quarter have an average term of approximately 3.8 years and a weighted average fixed pay rate of 1.35%.
The Company also utilizes swaptions to help mitigate the Company's exposure to larger changes in interest rates. During the quarter, the Company added $850 million of payer swaptions at a cost of $4.6 million. The Company also had $200 million of payer swaptions from a previous quarter expire during the fourth quarter. As of December 31, 2010, the Company still had $850 million in payer swaptions outstanding at a market value of $16.8 million.
As of December 31, 2010, 55% of the Company's repurchase agreement balance and other debt were hedged through interest rate swap agreements. If net unsettled purchases and sales of securities are incorporated, this percentage declines to 53%. These percentages do not reflect the swaps underlying the swaptions noted above.
OTHER INCOME, NET
During the quarter, the Company produced $68.5 million in other income, net, or $1.24 per share. Other income is comprised of $10.4 million of net realized gains on sales of agency securities, $20.6 million of net realized gains on derivative and trading securities and $37.5 million of net unrealized gains, including reversals of prior period unrealized gains and losses realized during the current quarter, on derivative and trading securities that are marked-to-market in current income.
Sales of agency securities during the quarter were largely driven by actions taken by the Company in the ordinary course in response to changing relative values perceived by the Company.
The net gains (realized and unrealized) on derivative and trading securities generally represent instruments that are used to supplement the Company's interest rate swaps (such as swaptions, short or long positions in "to-be-announced" mortgage securities (TBA's) and short or long positions in treasury securities); however, these are not in hedge relationships for accounting purposes and consequently are accounted for through current income as opposed to shareholders' equity. The Company uses these supplemental hedges to reduce its exposure to interest rates, which, given the increase in interest rates experienced in December, resulted in the significant net derivative gains discussed above and helped to protect the Company's book value.
TAXABLE INCOME
For the quarter ended December 31, 2010, GAAP income exceeded taxable net income by $0.86 per share. This was comprised of $0.18 per share of net temporary differences between GAAP and taxable income related to premium amortization and net realized gains, as well as $0.68 per share of net unrealized gains, net of prior period reversals, associated with derivatives marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled.
NET ASSET VALUE
As of December 31, 2010, the Company's net asset value per share was $24.24, or $0.81 higher than the September 30, 2010 net asset value per share of $23.43, or $0.46 higher than pro forma net asset value per share of $23.78, when adjusted for the follow on equity offering that settled on October 1, 2010.
FOURTH QUARTER 2010 DIVIDEND DECLARATION
On December 17, 2010, the Board of Directors of the Company declared a fourth quarter 2010 dividend of $1.40 per share payable to stockholders of record as of December 31, 2010, which was paid on January 27, 2011. Since its May 2008 initial public offering, the Company has paid or declared a total of $364.0 million in dividends, or $13.26 per share. After adjusting for the fourth quarter 2010 accrued dividend, the Company had approximately $39 million of undistributed taxable income as of December 31, 2010, essentially unchanged from September 30, 2010. Undistributed taxable income per share as of December 31, 2010 was $0.60 per share.
The Company has also announced the tax characteristics of its 2010 distributions. The Company's 2010 distributions of $5.60 per share consisted of $4.93 per share of ordinary income and $0.67 per share of long-term capital gains for federal income tax purposes. AGNC stockholders should receive an IRS Form 1099-DIV containing this information from their brokers, transfer agents or other institutions. For additional detail please visit the Company's Investor Relations website at www.AGNC.com.
(1) Based on the weighted average shares outstanding for the quarter. Please refer to the section on the use of Non-GAAP financial information
(2) Annualized ROE based on net income and average monthly stockholders' equity for the q
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