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Author's Note: PART 3 of this article is a continuation from PART 2 which was discussed in a previous publication. PART 2 was a continuation from PART 1 which was discussed in a previous publication as well. Please see PART 1 of this article for a detailed projection of American Capital Agency Corp.'s (AGNC) third quarter of 2013 income statement regarding the following accounts: 1) interest income, 2) interest expense, and 3) gain (loss) on sale of agency securities, net. Please see PART 2 of this article for a detailed projection of AGNC's third quarter of 2013 income statement regarding the following accounts: 4) gain (loss) on derivative instruments and other securities, net (including four "sub-accounts"), and 5) management fees. PART 2 also discussed AGNC's projected net income and earnings per share ('EPS') amounts. PART 1 and PART 2 helps lead to a better understanding of the topics and analysis that will be discussed in PART 3. The links to PART 1 and PART 2 are provided below:

PART 1 - American Capital Agency's Upcoming Q3 2013 Income Statement Projection

PART 2 - American Capital Agency's Upcoming Q3 2013 Income Statement Projection

This three-part article is a very detailed look at AGNC's income statement. I perform this level of detail for readers who anticipate/want the detailed aspects of such an analysis. For readers who just want the summarized account projections, I would suggest to just look at the bold headers below and/or read the "Conclusions Drawn" section at the bottom of each part of the article.

Focus of PART 3 of Article:

The focus of PART 3 of this article is to provide a detailed projection of AGNC's third quarter of 2013 income statement regarding the following accounts: 6) "unrealized gain (loss) on available-for-sale securities, net," and 7) "unrealized gain (loss) on interest rate swaps, net." PART 3 will also discuss AGNC's projected other comprehensive income (loss) (OCI / (OCL) and comprehensive income (loss) amounts.

Predicting a company's accounting figures within the mortgage real estate investment trust (mREIT) sector are usually more difficult when compared to other sectors due to the various derivative and asset portfolio strategies that are implemented by management each quarter. As such, there are several assumptions used when performing such an analysis. AGNC's actual reported values may differ materially from my projected values within this article due to unforeseen circumstances. This includes a deviation from the typical business strategies by management in a specific quarter when compared to past quarters. Readers should be aware as such. All projections within this article are my personal estimates and should not solely be used for any investor's buying or selling decisions. All actual reported figures that are above my ranges within this article will be deemed a positive sign in my judgment. All actual reported figures that are below my ranges within this article will be deemed a negative sign in my judgment. Unless otherwise noted, all figures below are for the "three-months ended" (quarterly) timeframe.

B) Other Comprehensive Income (Loss) (OCI / (OCL):

- OCI Estimate of $371 Million; Range ($29) - $771 Million

- Confidence Within Range = Moderate to High

- See Red Reference "B" in Tables 7 and 11 Below Next to the September 30, 2013 Column

Having established a net income projection of $330 million for the third quarter of 2013 (via PART 1 and PART 2 of this article), let us look at AGNC's quarterly income statements (ACTUAL) for the trailing twelve-months going back to the third quarter of 2012 and my projection for the third quarter of 2013 (ESTIMATE) in regards to OCI / (OCL) and eventually comprehensive income (loss). This information is provided via Table 7 below. The income statement (ACTUAL) figures are derived from AGNC's quarterly SEC submissions via its 10-Q or 10-K where applicable.

Table 7 - AGNC Quarterly OCI / (OCL) and Comprehensive Income (Loss) Projection

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6) Unrealized Gain (Loss) on Available-For-Sale Securities, Net:

- Estimate of $325 Million; Range ($75) - $725 Million

- Confidence Within Range = Moderate to High

- See Boxed Blue Reference "6" in Table 7 Above and Table 11 Below Next to the September 30, 2013 Column

Projecting AGNC's unrealized gain (loss) on available-for-sale securities, net account is an analysis that involves several assumptions and variables that need to be taken into consideration. Since this account takes into consideration the quarterly valuation changes on AGNC's mortgage-backed securities ('MBS') portfolio (by far the largest asset class on its balance sheet), a wider range should be accompanied with this specific account. The same assumptions used within AGNC's gain (loss) on sale of agency securities, net account (see PART 1 of article) and gain (loss) on derivative instruments and other securities, net account (regarding its "to-be-announced" ('TBA') MBS and forward settling agency securities - see PART 2 of article) will be applied when analyzing this account.

Let us first discuss a brief history of this account (regarding its prior quarter) which will lead to a better explanation of its projected value for the third quarter of 2013. During AGNC's second quarter of 2013, the Federal Reserve's rhetoric began to caution markets that its third round of Quantitative Easing (QE3) policy COULD begin to slowly decrease in the near future. In other words, the Fed may begin to reduce its monthly $85 billion worth of asset purchases when signs of an economic rebound became more apparent. The markets have dubbed this event as the Fed beginning to "taper" (and ultimately eliminate) its QE3 program. As such, markets began to speculate the ramifications of such an act regarding moves in overall U.S. interest rates from continued economic growth. Due to the market's speculation of future events to come, a quick yet material "spike" in mortgage interest rates/U.S. Treasury yields occurred during the latter half of the second quarter of 2013. As a direct result of this quick spike in rates/yields, rapid price declines were felt across the entire MBS market which caused substantial "market-to-market" / "fair market value" ('FMV') write-downs on assets held by AGNC during the second quarter of 2013.

As a result, AGNC sustained material MBS valuation write-downs during the second quarter of 2013. Using Table 7 above as a reference, AGNC's gain (loss) on available-for-sale securities, net account suffered an unrealized MBS portfolio valuation loss of ($2.81) billion for the second quarter of 2013. For a quarter's worth of valuation changes, this loss was massive. As was discussed in PART 2 of this article, AGNC's derivative portfolio helped offset some of the MBS portfolio valuation losses that occurred during the second quarter of 2013. When directly looking at AGNC's gain (loss) on derivative instruments and other securities, net account for the second quarter of 2013, AGNC reported a valuation gain of $1.44 billion (see PART 2, Table 1 for reference). For a quarter's worth of valuation changes, this gain was also extremely large when compared to prior quarters (having an overall "mitigating" effect). Therefore, AGNC sustained material MBS portfolio valuation losses partially offset by its derivative portfolio's valuation gain.

Having established what occurred to its MBS portfolio during the second quarter of 2013, let us now take a look at AGNC's unrealized gain (loss) on available-for-sale securities, net account for the third quarter of 2013. Before we begin to analyze the MBS price movements for the third quarter of 2013, it should be noted I'm making the assumption AGNC will continue its second quarter of 2013 strategy regarding MBS purchases and sales. As such, the company will sell some of its more matured, higher-coupon MBS while also selling a greater proportion of its lowest-coupon MBS. AGNC will continue to sell a modest proportion of its lowest-coupon MBS in the third quarter of 2013 to mitigate future unrealized losses in a rising interest rate environment. Therefore, I am assuming AGNC "re-rolled" most of its lower-coupon MBS into higher-coupon MBS investments during the third quarter of 2013.

These minor MBS portfolio "shifts" will be accounted for at the end of this specific account's analysis. As such, AGNC's MBS portfolio balance as of 6/30/2013 will be used as the starting point when analyzing the impact of MBS price movements for the third quarter of 2013. Using Table 8 below as a reference, let us first analyze the 15-year fixed-rate agency MBS price movements for the third quarter of 2013. This will then be followed by a similar analysis (via Table 9) of the 30-year fixed-rate agency MBS price movements for the third quarter of 2013.

Table 8 - Quarterly 15-Year Fixed-Rate Agency MBS Price Movements

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Table 8 above shows the weekly 15-year fixed-rate agency MBS price movements for the third quarter of 2013. It breaks out the 15-year fixed-rate agency MBS by government-sponsored entity ('GSE'). This includes both Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) holdings which are currently within AGNC's MBS portfolio. Table 8 further breaks out the 15-year fixed-rate agency MBS into various coupons ranging from 2.5% - 4.5% which were held within AGNC's MBS portfolio. AGNC held an immaterial balance of 15-year fixed-rate agency MBS over the 4.5% coupon and thus will not be discussed in this specific analysis (even though each MBS coupon is ultimately valued at the end of this account's analysis via Table 10 below).

From the information provided via Table 8 above, a projected unrealized valuation gain (loss) can be broken down by the various coupons (as will be discussed later in the article). Using Table 8 as a reference, a mixed array of 15-year fixed-rate agency MBS price movements occurred across the 2.5% - 4.5% coupons for the third quarter of 2013. For the third quarter of 2013, it seems the 3.5% coupon had the most positive MBS price movement. The 2.5% coupon had the least positive MBS price movement. This is evidenced within the "Cumulative Quarterly Change" column in Table 8 above. To illustrate, the Fannie 15-year fixed-rate agency MBS with a 2.5% coupon had a positive quarterly price movement of 0.19 to settle its price at 100.59 (100 being par) at 9/30/2013. However, the Fannie 15-year fixed-rate agency MBS with a 3.5% coupon had a positive quarterly price movement of 1.47 to settle its price at 103.53 (100 being par) at 9/30/2013. When comparing the Freddie and Fannie 15-year fixed-rate agency MBS price movements, there are slight differences in quarterly price movements. However, the same general trends hold true.

At 6/30/2013, AGNC's proportion of 15 and 30-year fixed-rate agency MBS holdings were 41% and 58%, respectively. The remaining 1% of AGNC's MBS portfolio was in a combination of 20-year fixed-rate agency MBS holdings, collateralized mortgage obligations, and adjustable-rate mortgages. AGNC had the greatest proportion of its 15-year fixed-rate agency MBS holdings in the 2.5%, 4.0% and 3.5% coupons (in order of greatest proportion). When solely looking at its 15-year fixed-rate agency MBS portfolio, AGNC had 51% of its holdings in the 2.5% coupon, 21% of its holdings in the 4.0% coupon, and 19% of its holdings in the 3.5% coupon. When basing the 15-year fixed-rate agency percentages on its entire MBS portfolio, AGNC had 21% of its holdings in the 2.5% coupon, 9% of its holdings in the 4.0% coupon, and 8% of its holdings in the 3.5% coupon.

Having some sense of the 15-year fixed-rate agency MBS price movements for the third quarter of 2013, let us now look at the 30-year fixed-rate agency MBS price movements.

Table 9 - Quarterly 30-Year Fixed-Rate Agency MBS Price Movements

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Table 9 above shows the weekly 30-year fixed-rate agency MBS price movements for the third quarter of 2013. It breaks out the 30-year fixed agency MBS holdings by GSE. As was the case with the 15-year fixed-rate agency MBS, this includes both FNMA.OB and FMCC.OB holdings which are currently within AGNC's MBS portfolio. Table 9 further breaks out the 30-year fixed-rate agency MBS into various coupons ranging from 3.0% - 5.0% which were held within AGNC's MBS portfolio. AGNC held an immaterial balance of 30-year fixed-rate agency MBS over the 5.0% coupon and thus will not be discussed in this specific analysis (even though each MBS coupon is ultimately valued at the end of this account's analysis via Table 10 below).

From the information provided via Table 9 above, a projected unrealized valuation gain (loss) can be broken down by the various coupons (as will be discussed later in the article). Using Table 9 as a reference, a mixed array of 30-year fixed-rate agency MBS price movements occurred across the 3.0% - 5.0% coupons for the third quarter of 2013. For the third quarter of 2013, it seems the 4.5% coupon had the most positive MBS price movement. The 3.0% coupon had the least positive MBS price movement. This is evidenced within the "Cumulative Quarterly Change" column in Table 9 above. To illustrate, the Fannie 15-year fixed-rate agency MBS with a 3.0% coupon had a positive quarterly price movement of 0.09 to settle its price at 97.72 (100 being par) at 9/30/2013. However, the Fannie 15-year fixed-rate agency MBS with a 4.5% coupon had a positive quarterly price movement of 1.06 to settle its price at 106.81 (100 being par) at 9/30/2013. When comparing the Freddie and Fannie 30-year fixed-rate agency MBS price movements, there are slight differences in quarterly price movements. However, the same general trends hold true.

As mentioned earlier, at 6/30/2013 AGNC's proportion of 15 and 30-year fixed-rate agency MBS holdings were 41% and 58%, respectively. The remaining 1% of AGNC's MBS portfolio was in a mixed array of investments. AGNC had the greatest proportion of its 30-year fixed-rate agency MBS holdings in the 3.5% and 4.0% coupons (in order of greatest proportion). When solely looking at its 30-year fixed-rate agency MBS portfolio, AGNC had 45% of its holdings in the 3.5% coupon and 30% of its holdings in the 4.0% coupon. When basing the 30-year fixed-rate agency percentages on its entire MBS portfolio, AGNC had 26% of its holdings in the 3.5% coupon and 17% of its holdings in the 4.0% coupon.

Side Note: As was briefly discussed in PART 2 of this article, mortgage interest rates / U.S. Treasury yields generally continued to rise throughout most of the third quarter of 2013. As such, negative MBS price movements occurred throughout most of the coupons (especially the lower-tiered coupons). However, after the Fed announced it will not begin to "taper" its QE3 purchasing program in September 2013, mortgage interest rates / U.S. Treasury yields quickly dropped. Using Tables 8 and 9 above as a reference, material positive MBS price movements occurred throughout most of the coupons during the last two weeks of the quarter (especially the lower-tiered coupons). These positive price movements occurred for both 15 and 30-year fixed-rate agency MBS. As will be discussed shortly, AGNC's quarterly valuation loss sustained throughout most of the third quarter of 2013 (regarding its MBS portfolio) quickly reversed course to recognize a modest valuation gain during the last two weeks of the quarter. The main cause for the sharp reversal was the positive MBS price movements across all coupons.

Having some sense of the 15-year and 30-year fixed-rate MBS price movements for the third quarter of 2013, let us now begin to quantify the total quarterly valuation gain (loss) regarding AGNC's MBS portfolio. This information is provided via Table 10 below.

Table 10 - AGNC Cumulative Weekly and Ending Quarterly MBS Portfolio Valuation Gain (Loss) Projection

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Table 10 above shows AGNC's projected cumulative weekly and ending quarterly valuation gains (losses) on its 15 and 30-year fixed-rate agency MBS holdings (see red references "(A + C) = E" and "(B + D) =F" in Table 10 above). The cumulative weekly and ending quarterly valuation gains (losses) are based on MBS price movements shown via Tables 8 and 9 earlier in this account's analysis. These results are then combined to show a total quarterly valuation gain (loss) on AGNC's MBS portfolio (see red reference "(E + F)" in Table 10 above). As stated above, these particular types of MBS holdings account for over 99% of AGNC's MBS portfolio as of 6/30/2013.

Using Table 10 above as a reference, I am projecting an "initial" total quarterly valuation gain of $433 million on AGNC's 15 and 30-year fixed rate agency MBS holdings (see blue reference "1" in Table 10 above). However, since AGNC currently has a material amount of its fixed-rate agency MBS portfolio within "specified pools" (prepayment protected MBS, mainly through the Home Affordable Refinance Program (HARP) and low-loan balance (LLB) securities), additional quarterly valuation adjustments need to be projected for the third quarter of 2013. As such, I feel AGNC's specified pool of MBS holdings should be addressed.

Specified Pools (Prepay Protected MBS) Discussion:

HARP securities are defined as specified pools backed by 100% refinanced loans where the original loan-to-value (LTV) ratio is equal to or greater than 80% of the current market value of a particular home. LLB securities are defined as specified pools backed by original loan balances of up to $150,000. For the added prepayment protection of HARP and LLB securities, these MBS have what is called "pay-up" price premiums. Pay-ups represent the value of price premiums associated with specified pools over generic TBA MBS pools. In other words, specified pools have higher initial valuations/costs due to the prepayment protection associated with these types of investments. Typically, when mortgage interest rates rise, prepayment risk is reduced. Since prepayment risk is reduced under a rising interest rate environment, additional negative MBS price movements will occur on specified pools (when compared to generic TBA MBS pools). Let us first discuss a brief history of AGNC's specified pools (regarding its prior quarter) which will lead to a better explanation of its projected value for the third quarter of 2013.

At 6/30/2013, AGNC's 15-year fixed-rate agency MBS holdings were made up of $15.8 billion of LLB securities and $1.8 billion of HARP securities. This calculates to 41% and 5% of AGNC's 15-year fixed-rate agency MBS holdings, respectively (when including its 15-year TBA MBS and forward settling agency securities net long position). AGNC's 30-year fixed-rate agency MBS holdings are made up of $13.5 billion of LLB securities and $24.2 billion of HARP securities. This calculates to 26% and 48% of AGNC's 30-year fixed-rate agency MBS holdings, respectively (when including its 30-year TBA MBS and forward settling agency securities net long position).

Since mortgage interest rates sharply rose in the latter half of the second quarter of 2013, prepayment risk quickly decreased (inverse relationship). As such, less demand for specified pools caused even larger negative MBS price movements when compared to generic TBA MBS pools. Therefore, additional valuation losses were sustained by AGNC during the second quarter of 2013. An additional specified pool valuation loss between ($400 - $500) million occurred on AGNC's MBS portfolio for the second quarter of 2013.

Management, noting the potential valuation risks of specified pools in a rising interest rate environment, sold approximately $6 billion of its 30-year fixed-rate specified pools with a 4.0% coupon during the second quarter of 2013. At the time of sale, these specified pools had an average remaining pay-up of 2.00 points when compared to generic TBA MBS pools.

Due to the material additional MBS price declines on AGNC's specified pools for the second quarter of 2013, the remaining "at-risk" pay-ups of specified pools versus generic TBA MBS pools has vastly decreased. Regarding AGNC's 30-year LLB securities at 12/31/2012, the remaining at-risk specified pool pay-ups for its 3.0%, 3.5%, and 4.0% coupons were 0.69, 1.64, and 4.19 points, respectively. At 3/31/2013, the remaining at-risk specified pool pay-ups for its 3.0%, 3.5%, and 4.0% coupons decreased to 0.13, 0.91, and 3.28 points, respectively. At 6/30/2013, the remaining at-risk specified pool pay-ups for its 3.0%, 3.5%, and 4.0% coupons decreased even further to 0.00, 0.22, and 0.91 points, respectively. Regarding AGNC's 30-year HARP securities at 12/31/2012, the remaining at-risk specified pool pay-ups for its 3.0%, 3.5%, and 4.0% coupons were 0.19, 1.36, and 3.08 points, respectively. At 3/31/2013, the remaining at-risk specified pool pay-ups for its 3.0%, 3.5%, and 4.0% coupons decreased to 0.07, 0.70, and 2.85 points, respectively. At 6/30/2013, the remaining at-risk specified pool pay-ups for its 3.0%, 3.5%, and 4.0% coupons decreased even further to 0.00, 0.16, and 0.59 points, respectively.

As this data indicates, the remaining at-risk specified pool pay-ups have continued to decrease and will become less of a factor if interest rates were to increase. This bodes well for AGNC's specified pools. At 6/30/2013, the weighted average remaining at-risk specified pool pay-ups accounted for only 0.24% of AGNC's fixed-rate agency MBS portfolio (including its TBA MBS and forward settling agency security net long position). When calculated, a remaining total at-risk specified pool pay-ups balance of approximately $217 million is obtained. This remaining at-risk specified pool pay-ups balance is much lower when compared to the past several quarters.

Using Table 10 above as a reference, through a detailed analysis that will be omitted from this particular article, I'm projecting a third quarter of 2013 valuation loss of ($100) million in regards to the following AGNC accounts: 1) HARP + LLB (specified pools); and 2) all additional purchases + sales. This is a very cautious projection. Since mortgage interest rates first continued to increase but then sharply decreased during the last two weeks of the quarter, prepayment risk first continued to fall but then sharply increased by the end of the quarter. As such, additional slight to modest specified pool valuation gains most likely occurred. I'm basing the valuation loss of ($100) million on the assumption AGNC continued to sell its specified pool portfolio during the third quarter of 2013 in fear of rising interest rates. As such, I feel AGNC's specified pools may have missed the late quarter-rally regarding MBS prices. The valuation loss also takes into consideration a minor portion of AGNC's MBS portfolio being sold prior to the late-quarter rally regarding MBS prices. As such, a reduction in the unrealized gain (loss) on available-for-sale securities net account, is warranted.

Therefore, when combining my projected valuation gain of $433 million on AGNC's 15 and 30-year fixed rate agency MBS portfolio and valuation loss of ($100) million on AGNC's specified pools and current quarter MBS purchases and sales, I'm projecting a quarterly valuation gain of $333 million ($330 million when rounded) on AGNC's MBS portfolio. The rounded valuation gain of $330 million is prior to all sold MBS being reversed out in the current quarter. As such, the final calculation within AGNC's unrealized gain (loss) on available-for-sale securities, net account is the quarterly reversal of its MBS sales shown via Table 11 below. All MBS sales have been already been accounted for on AGNC's income statement under the "gain (loss) on sale of agency securities, net" account (see PART 1 of this article). Thus, this amount must be "reversed-out" of this account.

Table 11- AGNC Quarterly Unrealized Gain (Loss) on Available-For-Sale Securities and Unrealized Gain (Loss) on Derivative Instruments, Net Projection

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Table 11 above shows AGNC's total "unrealized gain (loss), net" projection of $330 million (see red reference "AB" in Table 11 above). The second account is AGNC's "reversal of prior period unrealized ('gain') loss, net, (upon realization)" figure (see red reference "AC" in Table 11 above). This amount is highlighted in pink and also has a boxed blue reference "3" next to the September 30, 2013, column.

Therefore, after its MBS sales valuation gain of $5 million is reversed-out, AGNC's total unrealized gain on available-for-sale securities, net account, is projected to be $325 million for the third quarter of 2013 (see red reference "(AB + AC = AD)" in Table 11 above).

Side Note: Some people may question the specific methodology I employ to predict my unrealized gain (loss) on available-for-sale securities, net account. I will note there will never be a projection technique that can precisely account for (with 100% accurately) how a company will operate in a specified quarter in regards to asset purchases and sales. When I research and prepare my analysis regarding AGNC's income statement, I take into consideration the wide array of possibilities that can occur within this account. As such, AGNC's unrealized gain (loss) on available-for-sale securities, net account, is directly tied to AGNC's gain (loss) on sale of agency securities, net account, discussed in PART 1 of this analysis. Therefore, if AGNC's unrealized gain (loss) on available-for-sale securities, net reported amount is above or below my projected figure, the variance is automatically offset in its gain (loss) on sale of agency securities, net account. Since both accounts would offset each other, if my projected unrealized gain (loss) on available-for-sale securities, net amount, is lower than the actual results, my projected gain (loss) on sale of agency securities, net amount, will automatically be higher by the same exact amount. If this situation occurs, my combined projected figures would be accurately represented regardless.

This was exactly what happened in the second quarter of 2013 regarding my projected unrealized gain (loss) on available-for-sale securities, net amount, and gain (loss) on sale of agency securities, net amount. When combined, my two account projections only had a ($90) million variance on a combined ($2.8) billion balance. This equates to a 97% accuracy rate when both accounts are combined and compared to AGNC's reported amounts. As such, I feel the specific methodology used within this account is appropriate for projection purposes due to the accurate results obtained regarding prior quarters.

7) Unrealized Gain (Loss) on Interest Rate Swaps, Net:

- Estimate of $46 Million; Range $44 - $48 Million

- Confidence Within Range = High

- See Boxed Blue Reference "7" in Table 11 Above Next to the September 30, 2013 Column

Now let us take a look at AGNC's unrealized gain (loss) on interest rate swaps, net account. I show my projection for this figure via Table 11 above. All past (ACTUAL) figures within Table 11 are derived from AGNC's quarterly SEC submissions via its 10-Q or 10-K where applicable. However, I have used specific information derived from multiple tables/charts (some provided by AGNC, some via my own researched data) for my projection of the gain (loss) on interest rate swaps, net account.

This account consists of two sub-accounts. The first sub-account is AGNC's "unrealized gain (loss) on interest rate swaps designated as cash flow hedges." Since AGNC has discontinued accounting for its interest rate swaps as cash flow hedges, this balance will remain $0 in the third quarter of 2013.

The second account is AGNC's "reversal of prior period unrealized loss on interest rate swaps, net, upon reclassification to interest expense." AGNC has elected to discontinue accounting for its interest rate swaps as cash flow hedges under GAAP as of September 30, 2011. Therefore, this account's balance is the remaining net deferred portion of losses on interest rate swaps from accumulated OCI / (OCL). Every quarter, a portion of this net deferred loss is taken out of OCI / (OCL) and classified into interest expense as it relates to AGNC's "de-designated" interest rate swaps.

At 6/30/2013, AGNC had a remaining net deferred loss relating to these de-designated interest rate swaps of ($389) million in its accumulated OCI / (OCL) account. This remaining amount will be reclassified from OCI / (OCL) into interest expense over a remaining weighted average time frame of 2.5 years. The net deferred loss expected to be reclassified from OCI / (OCL) into interest expense over the next twelve months is ($176) million. Therefore, a calculated reclassification of $46 million has been projected for the third quarter of 2013.

After adding up its unrealized gain on available-for-sale securities, net of $325 million and its unrealized gain on interest rate swaps, net of $46 million, I project AGNC will report OCI / (OCL) of $371 million for the third quarter of 2013 (see red reference "B" in Tables 7 and 11 above).

C) Comprehensive Income (Loss):

- Comprehensive Income Estimate of $701 Million; Range $201 Million - $1.2 Billion

- Comprehensive Income of $1.79 Per Share; Range $0.51 - $3.07 Per Share

- Confidence Within Range = Moderate to High

- See Red Reference "C" in Table 7 Above Next to the September 30, 2013 Column

Finally, let us look at AGNC's comprehensive income (loss) for the third quarter of 2013. This is basically the summation of the following AGNC income statement amounts: A) net income of $330 million (see PART 1 and PART 2 of article) and B) OCI of $371 million (see analysis above). Therefore, my projection for AGNC's comprehensive income is $701 million for the third quarter of 2013.

Conclusions Drawn (PART 3):

To sum up all the information in PART 3 of this article, I am projecting AGNC will report the following income statement figures for the third quarter of 2013 (refer to Tables 7 and 11 above):

6) Quarterly Unrealized Gain on Available-For-Sale Securities, Net of $325 Million

7) Quarterly Unrealized Gain on Interest Rate Swaps, Net of $46 Million

Mortgage interest rates / U.S. Treasury yields generally continued to rise throughout most of the third quarter of 2013. As such, negative MBS price movements occurred throughout most of the coupons (especially the lower-tiered coupons) during most of the quarter. However, after the Fed announced it will not begin to "taper" its QE3 purchasing program in September 2013, mortgage interest rates / U.S. Treasury yields quickly dropped by 9/30/2013. As such, positive MBS price movements occurred throughout most of the coupons during the last two weeks of the quarter (especially the lower-tiered coupons). These positive price movements occurred for both 15 and 30-year fixed-rate agency MBS. Through the detailed analysis performed above, I am projecting AGNC's total unrealized gain on available-for-sale securities, net account, will be $325 million for the third quarter of 2013. This projection is a much better result when compared to the prior quarter's ($2.81) billion loss within the same account.

I am also projecting AGNC will report an immaterial change to its unrealized gain (loss) on interest rate swaps, net account when compared to the prior quarter. When compared to the prior quarter, I am projecting a ($2) million reduction in this account to a gain of $46 million for the third quarter of 2013. This slight decrease is due to the lower remaining net deferred loss on AGNC's de-designated interest rate swaps at 6/30/2013 when compared to 3/31/2013.

Conclusions Drawn (PART 1, PART 2, and PART 3):

To sum up all the information from all three parts of the article, I am projecting AGNC will report the following amounts for the third quarter of 2013:

A) Quarterly Net Income of $330 Million ($0.84 Per Share)

B) Quarterly Other Comprehensive Income of $371 Million

C) Quarterly Comprehensive Income (A + B Combined) of $701 Million ($1.79 Per Share)

Therefore, in regard to quarterly net income, it looks as though AGNC will either be inline or slightly beat most analysts' forecasts in regards to EPS estimates. As of the date when this article was finalized, the third quarter of 2013 consensus estimate for AGNC is earnings of $0.77 per share.

Projected net income of $330 million for the third quarter of 2013 is much less than the reported $1.83 billion for the second quarter of 2013. This is mainly due to AGNC's huge valuation gain of $1.44 billion on its derivative instruments and other securities, net account, for the second quarter of 2013. For the third quarter of 2013, I am projecting a valuation loss of ($30) million in regards to this account. Even though AGNC's projected net income of $330 million is a material reduction when compared to the prior quarter, AGNC will most likely report a positive OCI figure for the third quarter of 2013.

I am projecting AGNC will report a total OCI of $371 million for the third quarter of 2013. This amount is a much more favorable projection when compared to a total OCL of ($2.77) billion on the same account for the second quarter of 2013. When compared to the second quarter of 2013, this is a positive net change of $3.14 billion. For one quarter's worth of change, this is a huge positive swing for AGNC. As stated above, the main culprit for the huge change in AGNC's total OCI / (OCL) account is the quick rapid rise in MBS prices when the Fed announced it will not begin to taper its QE3 purchasing program in September 2013. As such, I am projecting AGNC's total unrealized gain on available-for-sale securities, net account, will be $325 million for the third quarter of 2013.

As a result of its projected net income of $330 million and OCI of $371 million, I am projecting AGNC will report comprehensive income of $701 million for the third quarter of 2013. This amount is a much more favorable projection when compared to the comprehensive loss of ($936) million on the same account for the second quarter of 2013. When compared to the second quarter of 2013, this is a quarterly positive change of $1.64 billion. For one quarter's worth of change, this is a huge positive swing for AGNC. Two accounts are the main culprit for the huge quarterly positive net change in other comprehensive income. First, a $3.14 billion quarterly positive change in AGNC's unrealized gain (loss) on available-for-sale securities, net account is projected to occur. Second, a ($1.47) billion quarterly negative change in AGNC's gain (loss) on derivative instruments and other securities, net account is projected to occur. These two accounts combined account for a quarterly positive change of $1.67 billion.

When taking a step back and looking at the bigger picture, AGNC's projected comprehensive income of $701 million should be seen as an encouraging sign. MBS valuations have stabilized in the third quarter of 2013 which should help settle fears of continued MBS valuation losses and book value ('BV') erosion. If MBS prices were to decline once again in future quarters, AGNC's management team has properly hedged its MBS portfolio. AGNC has continued to maintain a very high level of interest rate swaps, swaptions and U.S. Treasury securities. This will negatively impact potential future earnings (to an extent). However, this mitigates future MBS valuation losses in case interest rates increase once again.

I personally feel AGNC's comprehensive income (loss) account is more important than its net income / EPS account. As such, when AGNC reports its third quarter of 2013 results, the markets should react positively to the figures reported.

Finally, due to the negative economic impacts of the recent government shutdown and debt ceiling "scare," I feel the Fed will continue its current level of asset purchases into 2014. As such, a rise in mortgage interest rates / U.S. Treasury yields should be minimal over the next 3-6 months. The market has already begun to price in the potential for a weaker-than-expected U.S. economy over the next few quarters. This has directly caused positive MBS price movements. Furthermore, another potential government shutdown and debt ceiling debacle is only a few months away. I personally cannot see the Fed beginning its QE3 tapering program when these two events are "looming" over the country.

Final Note on Upcoming Book Value BV Article: The projected amounts from this three-part article will have a direct impact on my upcoming AGNC BV article. My upcoming AGNC BV article will be available to readers prior to the company's third quarter of 2013 press release after the market's close on 10/28/2013.

Source: American Capital Agency's Upcoming Q3 2013 Income Statement Projection (Part 3)