American Capital Agency Corporation (



Q3 2011 Earnings Call

October 26, 2011 11:00 AM ET


Katie Wisecarver – IR

Gary Kain – President and Chief Investment Officer

Christopher Kuehl – SVP, Mortgage Investments

Peter Federico – SVP and Chief Risk Officer


Bose George – KBW

Michael Taiano – Sandler O’Neill

Jason Weaver – Sterne Agee

Michael Widner – Stifel Nicolaus

Steven DeLaney – JMP Securities

Joel Houck – Wells Fargo

Dean Choksi – UBS



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Good morning. My name is Terence and I will be your conference operator today. At this time, I will like to welcome everyone to the AGNC Shareholders Q3 2011 Conference 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.

I would now like to turn the call over to Katie Wisecarver of Investor Relations. You may begin your conference.

Katie Wisecarver

Thanks, Terence. Thank you for joining American Capital Agency’s third 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 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 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 10-K dated February 25th, 2011, and 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 by law.

An archive of this presentation will be available on our website and the telephone recording can be accessed through November 9th by dialing 855-859-2056 the conference ID number is 16828279.

To view the Q3 slide presentation turn to our website and click on the Q3 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. If you have any trouble with the webcast during the presentation, please hit F5 to refresh.

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

Gary Kain

Thanks, Katie and thanks to all of you for joining us on the call and for your interest in AGNC. What an interesting quarter between the debt ceiling fiasco where our politicians did everything they could to create a crisis and to the U.S. debt downgrade the worsening of the European debt crisis, two surprises from the Fed and growing prepayment risk. Growing the SEC concept release and Monday’s HARP announcement and it is no wonder the risk factor has been a touch all over. But with all this we feel really good about AGNC’s performance and perhaps more importantly how it is positioned looking ahead.

Recall for a moment the prevailing view on interest rates at the end of the last quarter, the concern was that the growing U.S. debt burden and the potential for a rating downgrade would lead to a significant rise in interest rates many very well respected investor place large bets on that outcome instead we experienced the opposite a significant decline in interest rates.

AGNC on the other hand bet on neither outcome and was positioned to protect shareholder value under either scenario. The specific attributes of our portfolio that we highlighted last quarter proved to be critical in positioning the company to continue to generate very attractive risk adjusted returns despite the flatter yield curve, record low grades and even the recently announced changes to the HARP program which we will discuss in detail in a few minutes.

With that as introduction I want to quickly review the highlights of the quarter on slides 3 and 4 as we have a lot to cover today. As you will see we have also made a concerted effort to further enhance our disclosures related to our funding and counter party exposures and Peter will review them with you shortly.

First GAAP net income totaled $1.39 per share. Now if we exclude the $0.24 of other investment income that technically leaves $1.15 per share however that number includes approximately $0.08 of non-recurring catch up to amortization which relates to a one-time adjustment to our historical amortization due to the increase in our prepayment estimates.

As such the $1.23 per share is probably the best surrogate for what analyst like to call core income. The 13% CPR projection which drives our amortization an asset yields is approximately 50% faster than our actual Q3 CPR of 8. As such it’s like other players in the industry we did not make forward projections to our prepayments and just used our 8% actually CPR our decline in net interest income would have been considerably smaller. Alternatively you may want to think of this as us having taken the margin compression we would expect to see over the next few quarters upfront versus waiting for actual speed increases to show up. Now taxable net income increased significantly to $1.86 per average share as unrealized mark-to-market losses on derivatives don’t impact taxable earnings and taxable amortization was considerably lower than GAAP numbers. To this point taxable amortization was $34 million or $0.19 per share lower than GAAP amortization the cost prepayment projections do not impact taxable yields.

This is a key point to understand and you can see these numbers on slide 25. Given the strong taxable earnings our undistributed tax income essentially doubled this quarter to $156 million or $0.85 per share. Book value rose slightly to $26.90 per share from $26.76 our economic return which is the combination of dividends plus the increase in book value totaled 5.8% for the quarter or 22.9% on an annualized basis. As you can see on the next slide our mortgage portfolio totaled $42 billion leverage during the quarter was 7.9 times and was down slightly at quarter end to 7.7.

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