American Capital Agency Corp. (AGNC) reported mixed results in fourth quarter 2012. The company's net spread income per share of 89 cents in the reported quarter fell short of the Zacks Consensus Estimate of $1.01. However, it exceeded the prior quarter figure of 79 cents per share.

Net interest income was $423 million in the reported quarter, which was above the Zacks Consensus Estimate of $350 million and ahead of $381 million recorded in the prior quarter.

Behind the Headline Numbers

American Capital Agency recorded an annualized economic return on common equity of 5% for the reported quarter. As of Dec 31, 2012, the company's investment portfolio comprised $85.2 billion worth of agency securities and $12.9 billion of net TBA (to-be-announced) mortgage positions, at fair value. Agency securities included $83.6 billion of fixed-rate securities, $0.9 billion of adjustable-rate securities and $0.7 billion of collateralized mortgage obligations (CMOs).
 
American Capital Agency's fixed-rate investment portfolio consisted of $30.0 billion less than or equal to 15-year fixed-rate securities, $1.6 billion 20-year fixed-rate securities and $52.0 billion 30-year fixed-rate securities. Net TBA mortgage portfolio included $8.7 billion 15-year net TBA securities and $4.2 billion 30-year net TBA securities, at fair value.

The investment portfolio of American Capital Agency was financed with $75.4 billion of repurchase agreements and other debt, resulting in a leverage ratio of 7.0x, including the net payable for agency securities not yet settled, or 8.2x inclusive of off-balance sheet TBA financing.

During the reported quarter, the annualized weighted average yield on the company's agency security portfolio was 2.82% (up 27 basis points sequentially) and its annualized average cost of funds was 1.19% (up 6 bps sequentially), resulting in a net interest rate spread of 1.63% (an increase of 21 bps sequentially).

During the reported quarter, American Capital Agency declared fourth quarter dividend of $1.25 per share. This equates to a total of $2.8 billion in dividends or $23.86 per share since its initial public offering in May 2008.

As of Dec 31, 2012, the company's net book value per share was $31.64, down from $32.49 as of Sep 30, 2012. This was due to lower pricing on the company's mortgage-backed securities (MBS) portfolio. However, it was up from $27.71 reported at prior-year end 2011.

At year-end 2012, American Capital Agency had cash and cash equivalents of $2.4 billion compared to $1.4 billion at prior year-end.

Board Expansion

In a separate press release, American Capital Agency announced an expansion of the board of directors. In the 2 new positions, the company elected Prue B. Larocca and John R. Erickson.

Mr. Erickson served as the company's Executive Vice President and Chief Financial Officer since its formation in 2008. Ms. Larocca, until her retirement in 2011, served as a Managing Director in the Mortgage Backed and Asset Backed Finance Group at Royal Bank of Scotland Group Plc. (RBS).

In Conclusion

Though American Capital Agency reported a mixed bag in the fourth quarter, we note that the company's exclusive focus on fixed-rate agency securities guaranteed by the U.S. government limits its credit risks.

However, increased volatility and deterioration in the broader residential mortgage and RMBS markets may limit the upside potential of the company going forward. The company is externally managed and advised by American Capital AGNC Management, LLC, an affiliate of American Capital, Ltd. (ACAS).

American Capital Agency currently has a Zacks Rank #3 (Hold). However, the other stock in the same industry that is performing better and worth a look is Invesco Mortgage Capital Inc. (IVR) carrying a Zacks Rank #2 (Buy).


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Tickers in this Article: AGNC, IVR, ACAS, RBS

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