AGNC

American Capital Agency Corp. (AGNC)

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Industry: Consumer Services
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American Capital Agency Corp. (AGNC)

Q4 2012 Earnings Call

February 8, 2013 9:00 am ET

Executives

Katie Wisecarver – Investor Relations

Gary Kain – President and Chief Investment Officer

Christopher J. Kuehl – Senior Vice President-Agency Portfolio Investments

Peter J. Federico – Senior Vice President and Chief Risk Officer

Malon Wilkus – Chairman and Chief Executive Officer

John R. Erickson – Executive Vice President, Chief Financial Officer and Treasurer

Analysts

Joel J. Houck – Wells Fargo Securities, LLC

Bill Carcache – Nomura Securities International, Inc.

Douglas Harter – Credit Suisse

Steven C. DeLaney – JMP Securities

Mark DeVries – Barclays Capital

Bose George – Keefe, Bruyette & Woods, Inc.

Daniel Furtado – Jefferies & Co.

Arren Cyganovich – Evercore Partners

Kenneth Bruce – Bank of America Merrill Lynch

Stephen A. Laws – Deutsche Bank Securities, Inc.

Christopher R. Donat – Sandler O'Neill & Partners LP

Presentation

Operator

Good morning and welcome to the American Capital Agency Fourth Quarter 2012 Shareholder Call. All participants will be in listen-only mode. (Operator Instructions) after today’s presentation there will be an opportunity to ask questions (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Katie Wisecarver in Investor Relations. Please go ahead.

Katie Wisecarver

Thank you, Denise. Thank you for joining American Capital Agency's fourth quarter 2012 earnings call. Before we begin, I'd like to review the Safe Harbor statement. This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act. Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC. All forward-looking statements included in this presentation are made only as of the date of this presentation and are subject to change without notice.

Certain factors that could cause actual results to differ materially from those contained in the forward-looking statements are included in the risk factors section of AGNC's periodic reports filed with the Securities and Exchange Commission. Copies are available on the SEC's website at www.sec.gov. We disclaim any obligation to update our forward-looking statements unless required by law. An archive of this presentation will be available on our website and the telephone recording can be accessed through February 22 by dialing 877-344-7529 or 412-317-0088 and the conference ID is 10024358.

To view the slide presentation, turn to our website agnc.com and click on the Q4 2012 Earnings Presentation link in the upper right corner. Select the webcast option for both slides and audio or click on the link in the Conference Call section to view the streaming slide presentation during the call.

Participants on the today’s call include Malon Wilkus, Chairman and Chief Executive Officer; Sam Flax, Director, Executive Vice President and Secretary; John Erickson, Director, Chief Financial Officer and Executive Vice President; Gary Kain, President and Chief Investment Officer; Chris Kuehl, Senior Vice President of Mortgage Investments; Peter Federico, Senior Vice President and Chief Risk Officer; and Bernie Bell, Vice President and Controller.

With that, I’ll turn the call over to Gary Kain.

Gary Kain

Thank you, Katie. Good morning everyone and thanks again for your interest in AGNC. I just wanted to discuss on this call, our portfolio continues to perform well despite the challenges post by QE3. We also believe our near-term earnings outlook is actually stronger now than it was at the end of the third quarter.

During the fourth quarter, mortgages did cheapen and favorable financing opportunities presented themselves in the TBA market. Moreover, since these financing dynamics are a function of QE3, they likely to remain very attractive for most of 2013 and possibly beyond as the stock effect of the Fed’s purchases dominates the market.

With introduction, let's turn to page 4 and quickly review AGNC’s 2012 full year performance. Most importantly, we generated economic or mark to market returns of 32% for the year. This was comprised of the combination of $5 per share in dividends and $3.93 of book value growth. A 32% return is a worthy accomplishment in any environment, we are especially pleased with AGNC's performance against the backdrop of Q3 and even more so because this is the fourth year in a row where AGNC has been able to produce economic returns in excess of 30%.

Against the backdrop of strong multi-year economic returns, a very sizable amount of undistributed taxable income and our confidence in our investment strategies, we continue to believe AGNC’s current dividend remains appropriate at this point. However, investors should remember that future dividends are by definition uncertain and will be a function of market conditions in our actual performance.

Now turning to slides five and six, I want to highlight the most important takeaways from AGNC’s Q4 performance. I also want to apologize upfront as I’ll be bouncing back and forth between these two sides. So first and foremost, when thinking about our true earnings power and/or risk, it is now important to focus on both our on balance sheet leverage and our net forward purchases of TBA mortgages.

As you can see on the top of page 6, our average on balance sheet leverage for the quarter was only 6.8 times. However, that number was 7.8 times when you include our net TBA position. At the end of the quarter, our on balance sheet leverage was seven times what we call at risk or true effective leverage was 8.2 times inclusive of our $13 billion in forward TBAs.

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