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American Capital Agency 4Q 2012 results

American Capital (AGNC) reported interest income of $570 million, an increase of 9.6% from 3Q 2012 as the asset yield increase of 27 basis points was helped by an increase in assets.  The net interest spread grew to 1.63% from 1.42% as expenses increased by 6 basis points to 1.19%.  In addition to the $323 million of net interest earned, AGNC earned $353 million in sales of securities and $89 million from a gain on derivatives. 
 
Overall, the bottom line increased by $724 million to $810 million. The company earned $0.89 vs $0.79 per share of net spread income, $1.93 of reportable taxable income, 2.37 of GAAP income, and $2.18 of undistributed taxable income vs the $1.25 common dividend. 
 
While the company's mortgages are split between 15 year (39%) and 30 year (57%) tranches, AGNC hedged 63% of its portfolio through swaps leaving an average duration of 4.4 years.  The company's CPR (constant prepayment rate) was 10% in 4Q vs 9% in 3Q.  However, the average projected CPR for the life of the remaining securities fell from 14% at the end of the 3Q to 11% at the end of the 4Q of 2012 due to higher interest rates, a decline in the average coupon of the company's portfolio, and a higher concentration of lower loan balances including HARP loans.  These lower loan balance and HARP loans are less susceptible to prepayment as they have higher LTV's (Loan to Values) than the normal mortgage.   
 
The company effectively raised its leverage in the quarter to 8.2x or 7.0x without the TBA (To Be Announced Mortgage Backed Securities).  TBA's are MBS pools of securities that are issued with basic information (Maturity, coupon, issuer date, maturity date, etc...) with the full issuance to occur 3 months later that list other data including credit scores, debt/income, loan/value, etc...  The company was able to benefit by $0.30 per share this quarter through the trading of these TBA's which effectively lower the company's capital cost vs using the Repo (repurchase agreement) market.  These TBA's also increased the company's mortgage investments  by $13 billion to $98 billion on $11 billion in common equity capital.    
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