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American Capital Agency Corp. Message Board

  • mikeinfwtx mikeinfwtx Feb 8, 2012 2:28 PM Flag

    AGNC "other Comprehensive Income"

    Can someone explain the siurce of the "Other Comprehensive Income" = 268.1 Million. This is the sale of assets that have gone up in value? This number is rather large compared to previous earnings reports.. Thanks

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    • Al, that was $14 billion of securities, 1/3 of total assets. Not likely to have been just parked SPO money or a trading account.

      But, as you say, we can't be sure they were the family jewels either. A clue seems to be that their appreciation was 1.87% when sold in Q3 of 2011. Someone who knows more about MBS should be able to work backward from that number and figure out if indeed they were selling their highest yielding assets.

    • You're making the assumption that the securities sold were part of their mortgage inventory. That's possible, but not necessarily true. Those sold securities could easily have been other investments from their trading account. After each SPO, AGNC invests part of the proceeds in income-producing mortgage-backed securities and part of the proceeds in hedging and other investments (that management does not specify as to content). This latter type of investment secuities could be the ones sold.

      That would make sense in most portfolios, where part of the portfolio is designated for income and part is for (short-term) trading. When it comes time to sell, it's the short-term trading account that is used first.

      But, we'll never know for sure because management does not tell us exactly in what and how they invest SPO proceeds. I doubt that they'd even tell you if you called Investor Relations --- that's what separates AGNC from the rest of the mReit industry and makes them #1, and is a closelu guarded secret.

    • Thanks jpmist27, interesting. That was Q3, but we may see something similar in the Q4 10-Q, as the ER shows only net amounts. (If they sold similar amounts in Q4, it would be under the "Other Income" item, which shows a net loss because of greater losses in derivatives trading -- or hedging?)

      Disclaiming, again, any special expertise in such things, I see that those securities they sold in Q3 had appreciated just 1.87%. Does that make them the "family jewels"?

      Anyway, things are getting interesting. As long as BV is holding and actually increasing, and dividends remain stratospheric, is there any good reason for the share price to tank?

    • "that AGNC sold high-yielding assets in the quarter, sacrificing future profits for current performance. I said that I don't see evidence of any such sales in the ER, and I want to know where others have seen it."

      2011 3rd quarter 10-Q, page 15, "Proceeds from agency securities sold" is $14,308,404,000. Total assets that quarter on page 2, was $47,039,429,000

      In Q3 AGNC basically sold 1/3rd of their entire inventory for trading gains. They had to reinvest that cash buying into a more expensive market with lower coupons and thus lower future income.

      It puzzels me that AGNC does this because it seems to me to be a self-inflicted prepay. They work so hard culling out mortgages they deem to be at higher risk of refinancing then cash in 1/3rd of their bonds for a trading gain which they have to reinvest in currently more expensive inventory. Seems very short term oriented unless of couse it's a higher priority for them to hit their dividend number at any cost.

      IMHO there's nothing sinister about AGNC's trading, but investors should understand that, historically, an unpredictable percentage of AGNC earnings come from trading gains which aren't as steady as generating income off the yield spread.

    • But what KIND of securities were they? Everyone is implying that those securities were high income-producing mortgages. Could be, but not necessarily. Those securities could have been other appreciated investments made with SPO proceeds not used to buy mortgage-backed income-producing securities. We just don't know for sure.

    • • $112.1 million of net realized gains on sales of agency securities (Q4)

      The full year number being 472M.

      I take it you believe that to be high compared to previous periods. Compared to the full year 2010 amount of 92M, for example? The portfolio was valued at 13.5B at 12/31/10 and 54B at 12/31/11. About a 4 fold increase in portfolio size produced about a 5.1 fold increase in realized gains. Is that the basis of your argument?

    • I'm pretty sure I read "realized gains from sale" or something very like it either in the first press release or in the presentation slides. It was in the same sentence with "unrealized gains" from equity appreciation, though.

    • It isn't and there is NO way of knowing because management has not provided that answer (and likely will not provide it if you were to call Investor Relations).

      Those posters here who claim that high-yielding securities were sold for cash are GUESSING.

    • From the earnings announcement:

      "OTHER COMPREHENSIVE INCOME
      During the quarter, the Company recorded other comprehensive income of $268.1 million, or $1.28 per share, comprised of $214.5 million of net unrealized gains on agency securities and $53.6 million of net unrealized gains on interest rate swaps..."

      GAAP Net Income + Other Comprehensive Income = Comprehensive Income

      .99 + 1.28 = 2.27

      Basically, "Other Comprehensive Income" allows AGNC to mark up certain balance sheet assets to market value without running the unrealized gains through GAAP net income. "Other Comprehensive Income" itself bears no relationship to assets sold during the quarter. Those gains are realized and run through net income.

      "other Comprehensive Income" is determined by comparing the value of your assets at the end of the current Q to their value at the end of the previous Q. If an asset is worth $3 at the end of Q3 and $4 at the end of Q4, than $1 is recorded as "Other Comprehensive Income".

      The importance of understanding how its calculated comes into play when evaluating the theory the company is selling off its "crown jewels" to cover the dividend.

      The high coupon HARP related MBS securities experienced the greatest increase in value during the quarter. That increase was booked through "Other Comprehensive Income", indicating those assets were stil on the books at 12/31/11. In other words, they were obviously not sold during the quarter.

      Its possible they sold some higher coupon securities during the quarter, but I didn't see evidence of that in the numbers. Of course, I haven't reviewed the 10-K yet (its not out yet to my knowledge).

      • 3 Replies to jdg4000
      • Thanks for the info.

      • Just checked again. It's on the filing in two places.

        There's the paragraph you quote, though you left out the explanatory sentence about "de-designated" gobbledygook. I could get through half a cup of tea parsing that one.

        And there are a few lines down in the income table with the heading, "Other comprehensive income (loss)," and the two entries, "Unrealized gain (loss) on available-for-sale securities, net," and, "Unrealized gain (loss) on derivative instruments, net."

        I think it's the "available-for-sale securities" part that gets it confused with realized gains, which are accounted for several lines higher in the table.

        And to understand what exactly the "other comprehensive income is," you really do need to parse this wonderful trip through the Matterhorn:

        "The net unrealized gains on interest rate swaps consists of the amortization of the deferred loss that is reclassified into interest expense for interest rate swaps that were de-designated as hedges in the third quarter of 2011."

        They changed an accounting practice in Q3. This caused some hedges to change meaning. Because it isn't paid yet, they consider it an asset (like proceeds of a loan). Because of that accounting change, this asset item somehow got more net-present valuable. Because their total assets went up they had to count that increase as income, and to list the particular source of that income even though it's a virtual income and not a real one. It really isn't a real income, because if they went back to the former accounting system it would disappear again.

        This might go some way to explaining how they could rack up a big net income but still justify dropping the dividend. The big up isn't really a change in their real-world financial position, just an artifact of how they report it.

      • So jdg, your conclusions are identical to mine (I don't know if you read my comments above).

        Yet it seems the idea that AGNC sold prized assets in Q4 persists in the comments -- at least from what I have been able to read).

    • Rates continued to drop.

      They were holding some paper with good rates on it, and the asking price of that paper went up because those high rates became a prize.

      So they evaluated their chances of doing better and decided to sell them off.

      That made BV go up, not down. But it made future cashflow go down, but to the benefit of present cashflow.

      And it probably saved the div from getting cut to less than a dollar.

      I still would like to know why they shifted to longer-term borrowings and squeezed their own spread. It's not making sense.

      • 2 Replies to yourbestfriendintheworld
      • Also, when the ER discusses the increase in Book Value, it does not mention any sales. Instead, it says:

        "... the Company's net book value per share primarily benefited from incremental price appreciation on securities backed by loans issued through the U.S. Government sponsored Home Affordable Refinance Program (or "HARP"), which significantly outperformed generic securities, as well as incremental price appreciation on lower loan balance pools, which also performed well relative to generic securities."

      • Several people have written this explanation, but I still do not see how "other Comprehensive Income" shows that they sold anything, since it seems to be made up 100% of unrealized gains. From the ER:

        "During the quarter, the Company recorded other comprehensive income of $268.1 million, or $1.28 per share, comprised of $214.5 million of net unrealized gains on agency securities and $53.6 million of net unrealized gains on interest rate swaps."

        I haven't been reading all comments, but I asked this question earlier and haven't seen an answer.

 
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