American Capital Agency Corp. (AGNC)

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American Capital Agency Corp. (AGNC)

Q3 2012 Earnings Call

November 1, 2012 8:00 am ET


Katie Wisecarver – Investor Relations

Gary D. 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


Steven C. DeLaney – JMP Securities

Bill Carcache – Nomura Securities International, Inc.

Arren Cyganovich – Evercore Partners

Bose George – Keefe, Bruyette & Woods

Daniel Furtado – Jefferies & Co.

Mark C. DeVries – Barclays Capital

Edward Friedman – McLean & Partners

Kenneth Bruce – Bank of America/Merrill Lynch

Jasper Burch – Macquarie Research



Good morning and welcome to the American Capital Agency Third 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, Investor Relations. Please go ahead, Katie.

Katie Wisecarver

Thanks, Frank. Thank you for joining American Capital Agency’s Third 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 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 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 We disclaim any obligation to update our forward-looking statements unless required to by law.

An archive of this presentation will be available on our website and the telephone recording can be accessed through November 16 by dialing 877-344-7529 or 412-317-0088. And the conference ID number is 10019151.

To view the slide presentation, turn to our website and click on the Q3 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 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 of Mortgage Investments; Peter Federico, Senior Vice President and Chief Risk Officer; Ernie Bell, Vice President and Controller; and Jason Campbell, Senior Vice President and Head of Asset & Liability Management.

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

Gary D. Kain

Thanks, Katie, and thanks to all of you for joining us today. We recognize that there is a lot of uncertainty right now surrounding the Fed’s latest round of mortgage purchases and its impacts on the mortgage REIT space. Therefore, we do plan to dedicate a substantial amount of time on this call to QE3 and the implications for our business.

But let me say up front, that we continue to be very comfortable with how our portfolio is positioned and we believe that prepayments on our specific mortgage assets will remain muted, despite a more challenging prepayment landscape. And yes, while spreads have compressed, we believe risk is also lower in today’s environment. Therefore, nothing has changed our view that an actively managed portfolio can continue to generate attractive risk-adjusted returns.

So with that, let’s review the highlights for the third quarter on Slide 4. Our net comprehensive income, which incorporates both realized and unrealized gains and losses on assets and hedges, was $3.98 per share or $1.3 billion for the quarter. As a reminder, net comprehensive income is a complete mark-to-market earnings measure.

Net spread income, which is what many people refer to as core income, dropped to $0.86 per share when we exclude $0.07 per share for the one-time premium catch-up amortization attributed to the increase in our CPR projections. The decline in this figure from last quarter was largely a function of faster prepayment projections produced by our models, which increased from 12% to 14% CPR. This projection is now around 50% higher than the actual Q3 CPR of 9%. Lower average leverage versus Q2 partially as a result of our share offering in July was also a factor.

Now, taxable net income, which is not impacted by the changes in projected prepayment fees or by unrealized gains and losses on derivatives was a $1.36 per share. Our undistributed taxable income closed the quarter at a $1.52 per share and this despite the higher share count.

Book value grew by more than $3 per share, an increase of just over 10%, or $32.49 per share as our efforts to position the portfolio in lower coupons and prepayment protected mortgages payoff.

The combination of book value growth coupled with our dividend of $1.25 per share, led to total shareholder value creation or economic returns during Q3, a $4.33 per share, or 59% on an annualized basis.

I’m turning to slide 5, our mortgage portfolio increased to $90 billion by the end of the quarter. Leverage during the quarter averaged 7.1 times and ended the quarter at seven times. Our portfolio CPR actually dropped to 9% during the quarter from 10% last quarter. Additionally, our latest monthly CPR released in October was also 9%.

Our quarter end net interest spread was 150 basis points as of September 30. For comparative purposes, if we had used the CPR projection of 9%, which is equal to our Q3 actual speeds, our net interest margin would have been just over a 170 basis points. We also raised $1.2 billion of new accretive equity in July, the proceeds of which allowed us to enhance our portfolio, especially in light of Q3.

Lastly, given the recent stock, the weakness we have witnessed across the space, our Board approved up to $500 million in share repurchases. Similar to equity issuance, share repurchases can be an important way to enhance economic returns especially if our shares are trading at a meaningful discount to book. But it is important to realize that there are costs to both issuing and repurchasing shares and so buybacks are unlikely at relatively small discount to our real time estimates of book value. Management and our Board are committed to utilizing all tools at our disposal to enhance long term shareholder value.

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