AGNC

American Capital Agency Corp. (AGNC)

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American Capital Agency Corp. (AGNC)

Q4 2011 Earnings Call

February 7, 2012 11:00 am ET

Executives

Katie Wisecarver - IR

Malon Wilkus - Chairman & CEO

Sam Flax - Director, EVP & Secretary

John Erickson - CFO & EVP

Gary Kain - President & CIO

Chris Kuehl - SVP, Mortgage Investments

Peter Federico - SVP & CRO

Ernie Bell - VP and Head of Accounting & Reporting

Jason Campbell - SVP and Head of Asset & Liability Management.

Analysts

Arren Cyganovich - Evercore Partners

Jason Weaver - Sterne Ag

Bill Carcache - Nomura Securities

Douglas Harter - Credit Suisse

Bose George - KBW

Joel Houck - Wells Fargo

Mark DeVries - Barclays Capital

Steven Delaney - JMP Securities

Matthew Howlett - Macquarie

Jim Young - West Family Investments

Mike Widner - Stifel Nicolaus

Presentation

Operator

Good morning. My name is Debbie and I will be your conference operator today. At this time, I will like to welcome everyone to the American Capital Agency Shareholders Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Katie Wisecarver, Investor Relations, please go ahead.

Katie Wisecarver

Thanks, Debbie. Thank you for joining American Capital Agency’s Fourth Quarter 2011 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 facts, 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 forecasts 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 21st by dialing 855-859-2056 and the conference ID number is 42070592.

To view the Q4 slide presentation turn to our website agnc.com and click on the Q4 2011 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 Calls section to view the streaming slide presentation during the call.

Participants on today's call include Malon Wilkus, Chairman and Chief Executive Officer; Sam Flax, Director, Executive Vice President and Secretary; John Erickson, Chief Financial Officer and Executive Vice President; Gary Kain, President and Chief Investment Officer; Chris Kuehl, Senior Vice President, Mortgage Investments; Peter Federico, Senior Vice President and Chief Risk Officer; Ernie Bell, Vice President and Head of Accounting & Reporting; and Jason Campbell, Senior Vice President and Head of Asset & Liability Management.

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

Gary Kain

Thanks, Katie, and thanks to all of you for your interest in AGNC. The fourth quarter was characterized by a fair amount of uncertainty related to the European debt crisis and prepayment speeds.

As we will discuss on today's AGNC's portfolio continues to perform extremely well and we remain confident that the prepayments speeds in our assets should stay muted despite record low mortgage rates. We also continue to have very little exposure to HARP 2.0 which is likely to begin to impact speeds over the next several months.

Now, for the quarter, slow prepayments and improved valuations on lower loan balance and HARP securities helped to drive our very strong economic returns for both the quarter and for 2011 as a whole. We remain steadfastly focused on actively adjusting our asset selection strategies as the market landscape and as mortgage valuations continue to evolve.

Before discussing our results in greater detail I want to directly acknowledge the adjustment we announced yesterday to the first quarter dividend. We took this proactive action because we believed it is consistent with evolving market conditions and we are serious about transparency. I will address the dividend in my prepared remark as well as in the Q&A. But I want to be clear that we remain extremely optimistic about our ability to produce very attractive returns for our shareholders.

Now, with that, let’s turn to our slides 3 & 4 where I can review a few of the highlights. On page three, we begin by presenting net comprehensive income. We do this because GAAP net income per share has become less constructive given our decision at the end of last quarter to discontinue hedge accounting for our swaps. As such all of our hedges are now mark-to-market to GAAP income while price changes on our assets flow through the other comprehensive income line in shareholders’ equity.

Net comprehensive income is essentially a complete mark-to-market earnings number well GAAP income includes unrealized gains and losses on derivatives but not on our assets. So, our net comprehensive income was $2.27 per share. This number is comprised of $0.99 of GAAP net income and unrealized gains on our assets which are recorded in other comprehensive income of $1.28 per share.

Now, net spread income, which many of you refer to as core income, was only $0.98 during the quarter or $1.1 when we back out approximately $0.03 per share of catch up premium amortization. This result was negatively impacted by a number of factors including our mid-quarter equity risk, temporary increases in repo funding going into year-end, and high intra-quarter swap hedge ratios. It is, therefore, not necessarily indicative of a future run rate.

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