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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 of this article was a continuation from PART 1 which was also discussed in a previous publication. Please see PART 1 of this article for a detailed projection of American Capital Agency Corp.'s (NASDAQ:AGNC) income statement for the fourth quarter of 2013 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 American Capital Agency Corp.'s income statement for the fourth quarter of 2013 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's and PART 2's analysis are provided below:

American Capital Agency's Upcoming Q4 2013 Income Statement Projection (Part 1)

American Capital Agency's Upcoming Q4 2013 Income Statement Projection (Part 2)

This three-part article is a very detailed look at AGNC's income statement. I perform this detailed analysis for readers who anticipate/want such an analysis performed each quarter. For readers who just want the summarized account projections, I would suggest to just scroll down to the "Conclusions Drawn" section at the bottom of the 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 American Capital Agency Corp.'s income statement for the fourth quarter of 2013 regarding the following accounts: 6) "unrealized gain (loss) on available-for-sale ('AFS') 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.

Side Note: Predicting a company's accounting figures within the mortgage real estate investment trust (mREIT) sector is usually more difficult when compared to other sectors due to the various hedging 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 could occur because management deviates from a company's prior business strategy and pursues a new strategy that was not previously disclosed. 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/(OCL) Estimate of ($255) Million; Range ($755) - $245 Million

- Confidence Within Range = Moderate

- See Red Reference "B" in Tables 7 and 11 Below Next to the December 31, 2013 Column

Having determined a net income (loss) projection of $91 million for the fourth quarter of 2013 (obtained during PART 1 and PART 2 of this article), let us now take a look at AGNC's quarterly income statements for the trailing twelve-months going back to the fourth quarter of 2012 (ACTUAL) and my projection for the fourth quarter of 2013 (ESTIMATE) regarding the company's OCI/(OCL) and comprehensive income (loss) amounts. This information is provided in Table 7 below. The income statement (ACTUAL) figures are derived from AGNC's quarterly SEC submissions via the company's 10-Q or 10-K where applicable.

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

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Table 7 above is the main source of summarized data regarding AGNC's OCI/(OCL) and comprehensive income (loss) amounts. As such, all material accounts within Table 7 will be separately analyzed and discussed in corresponding order to the boxed blue references next to the December 31, 2013 column. PART 3 of this article will include an analysis on the following income statement accounts: 6) unrealized gain (loss) on AFS securities, net; and 7) unrealized gain (loss) on interest rate swaps, net.

6) Unrealized Gain (Loss) on AFS Securities, Net:

- Estimate of ($300) Million; Range ($800) - $200 Million

- Confidence Within Range = Moderate to High

- See Boxed Blue Reference "6" in Table 7 Above and Table 11 Below Next to the December 31, 2013 Column

Projecting AGNC's unrealized gain (loss) on AFS 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 MBS portfolio (by far the largest asset class on the company's 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 the company's TBA MBS and forward settling MBS; see PART 2 of article) will be applied when analyzing this account.

Let us discuss the history of this account which will lead to a better explanation of my projected gain (loss) for the fourth quarter of 2013. During AGNC's second quarter of 2013, the Federal Reserve's ('FED') rhetoric began to caution markets that its third round of Quantitative Easing (QE3) stimulus COULD begin to slowly decrease in the near future. In other words, the FED may begin to reduce the monthly $85 billion worth of U.S. Treasury and MBS 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) the 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 a material MBS net valuation loss during the second quarter of 2013. Using Table 7 above as a reference, AGNC's gain (loss) on AFS securities, net account suffered an unrealized valuation gain (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 (loss) of $1.44 billion (see Table 1 of PART 1 of article). For a quarter's worth of valuation changes, this gain was also extremely large when compared to prior quarters (having an somewhat "mitigating" effect). Therefore, AGNC sustained a material MBS portfolio net valuation loss partially offset by a derivative portfolio net valuation gain.

During the third quarter of 2013, management had continued to "re-roll" AGNC's portfolio into higher coupons within the same maturities and continued to increase the proportion of the company's 15-year fixed-rate agency MBS holdings while decreasing the company's 30-year fixed-rate agency MBS holdings. When compared to 30-year fixed-rate agency MBS, 15-year fixed-rate agency MBS are generally less price sensitive to interest rate movements and help preserve BV if interest rates rise at a fairly rapid pace. Since overall market interest rates somewhat stabilized during the late summer/early fall of 2013 (hence a "flattening" of MBS prices), this account had a net valuation gain (loss) of $833 million for the third quarter of 2013. This rather large unrealized net valuation gain was after a ($733) million unrealized to realized reclassification occurred. When combining both of AGNC's gain (loss) on sale of agency securities, net and unrealized gain (loss) on AFS securities, net accounts together, AGNC reported a net valuation gain (loss) of $100 million for the third quarter of 2013.

Having established what occurred to the company's MBS portfolio during the past two quarters, let us now take a look at AGNC's unrealized gain (loss) on AFS securities, net account for the fourth quarter of 2013. Before we begin to analyze the MBS price movements for the fourth quarter of 2013, it should be noted I am making the assumption AGNC will continue the company's recent strategy regarding MBS purchases and sales. As such, AGNC will continue to sell a material portion of the company's lower-coupon 30-year fixed-rate agency MBS (originally discussed in PART 1 of this article). This assumption is evident in AGNC's net (short) TBA MBS and forward settling MBS position as of 9/30/2013. AGNC will continue to pursue this strategy to mitigate further MBS valuation losses in a rising interest rate environment. Therefore, I am assuming AGNC continued to re-roll a material portion of the company's lower-coupon 30-year fixed-rate agency MBS into the following during the fourth quarter of 2013: 1) higher-coupon 30-year fixed-rate agency MBS; and 2) 15-year fixed-rate agency MBS with a similar coupon to the previously held 30-year fixed-rate agency MBS.

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

Table 8 - 15-Year Fixed-Rate Agency MBS Price Movements (During the Fourth Quarter of 2013)

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Table 8 above shows the 15-year fixed-rate agency MBS price movements during the fourth quarter of 2013. It breaks out the 15-year fixed-rate agency MBS holdings by government-sponsored entity ('GSE'). This includes both Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) MBS. As of 9/30/2013, AGNC's Ginnie Mae holdings only accounted for 0.29% of the company's MBS portfolio. As such, Ginnie Mae fixed-rate agency MBS price movements are immaterial for projection purposes and thus excluded from this table and article. Table 8 further breaks out the 15-year fixed-rate agency MBS price movements into the various coupons on AGNC's books ranging from 2.5% - 4.5%. AGNC holds an immaterial balance of 15-year fixed-rate agency MBS over the 4.5% coupon and thus these specific coupons are excluded from Table 8 above.

From the information portrayed in Table 8 above, a valuation gain (loss) can be calculated which is broken down by the various coupons. This valuation gain (loss) is performed in Table 10 later in the article. An exact valuation figure cannot be obtained because AGNC continually changes the company's portfolio holdings in a given quarter. As such, I must determine specific purchase and sale assumptions towards the end of my account projection analysis.

Using Table 8 as a reference, let us look at the 15-year fixed-rate agency MBS price movements for the current quarter regarding a few of the coupon rates where AGNC held a material MBS balance as of 9/30/2013. The cumulative quarterly net MBS price movements for each coupon rate are shown within Table 8 under the "Cumulative Quarterly Change" column. To illustrate, during the fourth quarter of 2013, the Fannie 15-year fixed-rate agency MBS with a 2.5% coupon had a cumulative quarterly price decline of (1.70) to settle its price at 98.92 (100 being par). The Fannie 15-year fixed-rate agency MBS with a 3.0% coupon had a cumulative quarterly MBS price decline of (1.56) to settle its price at 101.97 (100 being par). The Fannie 15-year fixed-rate agency MBS with a 3.5% coupon (AGNC's largest 15-year fixed-rate agency MBS position held as of 9/30/2013) had a cumulative quarterly MBS price decline of (1.08) to settle its price at 104.50 (100 being par).

Still using Table 8 above as a reference, when evaluating all coupons, it looks like AGNC's Fannie 15-year fixed-rate agency MBS had slight to modest cumulative quarterly MBS price changes during the fourth quarter of 2013. Modest 15-year fixed-rate agency MBS price decreases occurred on the 2.5%, 3.0%, and 3.5% coupons while slight MBS price increases occurred on the 4.5% and 5.0% coupons. The 15-year fixed-rate agency MBS price decrease on the 4.0% coupon was immaterial (basically flat).

For the Freddie 15-year fixed-rate agency MBS, the same conclusions hold true. When compared to the Fannie 15-year fixed-rate agency MBS, the Freddie 15-year fixed-rate agency MBS usually have slight differences in weekly (hence cumulative quarterly) price valuations across the same coupons. However, the same general themes typically hold true. Now that we have an understanding of the 15-year fixed-rate MBS price movements during the fourth quarter of 2013, let us take a look at the 30-year fixed-rate agency MBS price movements.

Table 9 - 30-Year Fixed-Rate Agency MBS Price Movements (During the Fourth Quarter of 2013)

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Table 9 above shows the 30-year fixed-rate agency MBS price movements during the fourth 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 Fannie Mae and Freddie Mac holdings. As stated earlier, AGNC's Ginnie Mae fixed-rate agency MBS holdings are immaterial for projection purposes. As such, Ginnie Mae fixed-rate agency MBS price movements are excluded from this table. Table 9 further breaks out the 30-year fixed-rate agency MBS price movements into the various coupons on AGNC's books ranging from 3.0% - 5.0%. AGNC holds an immaterial balance of 30-year fixed-rate agency MBS over the 5.0% coupon and thus these specific coupons are excluded from Table 9 above.

From the information portrayed in Table 9 above, a valuation gain (loss) can be calculated which is broken down by the various coupons. This valuation gain (loss) is performed in Table 10 later in the article. An exact valuation figure cannot be obtained because AGNC continually changes the company's portfolio holdings in a given quarter. As such, I must determine specific purchase and sale assumptions towards the end of my account projection analysis.

Using Table 9 as a reference, let us look at the 30-year fixed-rate agency MBS price movements for the current quarter regarding a few of the coupon rates where AGNC held a material MBS balance as of 9/30/2013. The cumulative quarterly net MBS price movements for each coupon rate are shown within Table 9 under the "Cumulative Quarterly Change" column. To illustrate, during the fourth quarter of 2013, the Fannie 30-year fixed-rate agency MBS with a 3.0% coupon had a cumulative quarterly price decline of (2.76) to settle its price at 94.94 (100 being par). The Fannie 30-year fixed-rate agency MBS with a 3.5% coupon (AGNC's largest 30-year fixed-rate agency MBS position held as of 9/30/2013) had a cumulative quarterly MBS price decline of (2.48) to settle its price at 99.34 (100 being par). The Fannie 30-year fixed-rate agency MBS with a 4.0% coupon had a cumulative quarterly MBS price decline of (1.92) to settle its price at 102.94 (100 being par). The Fannie 30-year fixed-rate agency MBS with a 4.5% coupon had a cumulative quarterly MBS price decline of (0.83) to settle its price at 105.97 (100 being par).

Still using Table 9 above as a reference, when evaluating all coupons, it looks like AGNC's Fannie 30-year fixed-rate agency MBS had slight to material cumulative quarterly MBS price changes during the fourth quarter of 2013. Material 30-year fixed-rate agency MBS price decreases occurred on the 3.0%, 3.5%, 4.0%, and 4.5% coupons while a slight MBS price increase occurred on the 5.0% coupon.

For the Freddie 30-year fixed-rate agency MBS, the same conclusions hold true. When compared to the Fannie 30-year fixed-rate agency MBS, the Freddie 30-year fixed-rate agency MBS usually have slight differences in weekly (hence cumulative quarterly) price valuations across the same coupons. However, the same general themes typically hold true. Now that we have an understanding of the 15 and 30-year fixed-rate agency MBS price movements during the fourth quarter of 2013, let us take a look at how these price movements affected AGNC's MBS portfolio regarding the company's weekly and cumulative quarterly valuations (quantified in dollar amounts).

Table 10 - AGNC Summarized Weekly and Cumulative Quarterly Fixed-Rate MBS Portfolio Valuation Gain (Loss) (During the Fourth Quarter of 2013)

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Table 10 above first shows AGNC's weekly and cumulative quarterly projected valuation gain (loss) on the company's 15 and 30-year Fannie and Freddie fixed-rate agency MBS holdings across all coupons (including immaterial coupons omitted from Table 8 and Table 9 above). For this specific analysis, Table 10 quantifies the projected cumulative quarterly net valuation gain (loss) for the fourth quarter of 2013 in dollar amounts.

Using Table 10 above as a reference, I am projecting an "initial" total quarterly net valuation gain (loss) of ($1.25) billion on AGNC's 15 and 30-year fixed-rate agency MBS holdings (see blue reference "A" in Table 10 above). However, since AGNC currently has a material amount of the company's 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 fourth quarter of 2013. As such, I feel AGNC's specified pool 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 prior quarters) which will lead to a better explanation of my projected specified pools valuation gain (loss) for the fourth 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 calculated to 41% and 5% of AGNC's 15-year fixed-rate agency MBS holdings, respectively (when including the company's net long 15-year TBA MBS and forward settling MBS position). AGNC's 30-year fixed-rate agency MBS holdings were made up of $13.5 billion of LLB securities and $24.2 billion of HARP securities. This calculated to 26% and 48% of AGNC's 30-year fixed-rate agency MBS holdings, respectively (when including the company's net long 30-year TBA MBS and forward settling MBS 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 additional valuation losses to be incurred (when compared to generic TBA MBS pools). Therefore, AGNC's MBS portfolio sustained an additional specified pools net valuation loss between ($300) - ($500) million during 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 the company's 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 additional material MBS price declines on AGNC's specified pools for the second quarter of 2013, the remaining "at-risk" pay-ups for specified pools versus generic TBA MBS pools had vastly decreased. Regarding AGNC's 30-year LLB securities at 3/31/2013, the remaining at-risk specified pool pay-ups for the company's 3.0%, 3.5%, and 4.0% coupons were 0.13, 0.91, and 3.28 points, respectively. At 6/30/2013, the remaining at-risk specified pool pay-ups for AGNC's 3.0%, 3.5%, and 4.0% coupons decreased to 0.00, 0.22, and 0.91 points, respectively. At 9/30/2013, the remaining at-risk specified pool pay-ups for AGNC's 3.0%, 3.5%, and 4.0% coupons either remained relatively flat or decreased even further to 0.03, 0.22, and 0.70 points, respectively.

Regarding AGNC's 30-year HARP securities at 3/31/2013, the remaining at-risk specified pool pay-ups for the company's 3.0%, 3.5%, and 4.0% coupons were 0.07, 0.70, and 2.85 points, respectively. At 6/30/2013, the remaining at-risk specified pool pay-ups for AGNC's 3.0%, 3.5%, and 4.0% coupons decreased to 0.00, 0.16, and 0.59 points, respectively. At 9/30/2013, the remaining at-risk specified pool pay-ups for AGNC's 3.0%, 3.5%, and 4.0% coupons either remained relatively flat or decreased even further to 0.00, 0.16, and 0.21 points, respectively.

As the above data indicates, the remaining at-risk specified pool pay-ups continued to decrease and would become less of a factor if interest rates were to increase in the future. 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 the company's net long TBA MBS and forward settling MBS position). When calculated, the remaining maximum at-risk specified pool pay-ups valuation gain (loss) was approximately ($217) million. At 9/30/2013, the weighted average remaining at-risk specified pool pay-ups accounted for only 0.07% of AGNC's fixed-rate agency MBS portfolio (including the company's net (short) TBA MBS and forward settling MBS position). When calculated, the remaining maximum at-risk specified pool pay-ups valuation gain (loss) was approximately ($55) million. This remaining at-risk specified pool pay-ups balance is much lower when compared to the past several quarters. As such, when MBS prices amongst most coupons once again declined during the fourth quarter of 2013, a minor additional net valuation loss should occur within AGNC's specified pools. However, as indicated above, when compared to the second quarter of 2013, this additional net valuation loss will be much smaller.

Still using Table 10 above as a reference, through a detailed calculation that will be omitted from this particular article, I am projecting an additional net valuation gain (loss) of ($50) million for the fourth quarter of 2013 in regards to the following MBS holdings: 1) specified pools (HARP and LLB securities); 2) 20-year fixed-rate; 3) collateralized mortgage obligations ('CMO'); and 4) adjustable-rate mortgages ('ARM') (see blue reference "B" in Table 10 above).

Furthermore, as was discussed earlier in this article, I am assuming AGNC re-rolled a material portion of the company's lower-coupon 30-year fixed-rate agency MBS into the following during the fourth quarter of 2013: 1) higher-coupon 30-year fixed-rate agency MBS; and 2) 15-year fixed-rate agency MBS with a similar coupon to the previously held 30-year fixed-rate agency MBS. This assumption is evident in AGNC's net (short) TBA MBS and forward settling MBS position at the end of the third quarter of 2013. As of 9/30/2013, AGNC had a net (short) position of ($3.6) billion regarding the company's 30-year fixed-rate agency MBS with a 3.0% coupon. AGNC also had a net (short) position of ($5.4) billion regarding the company's 30-year fixed-rate agency MBS with a 3.5% coupon. As part of AGNC's continued pursuit into higher coupons, AGNC had a net long TBA MBS and forward settling MBS position of $3.4 billion regarding the company's "soon-to-be" 30-year fixed-rate agency MBS with a 4.5% coupon.

Through a detailed calculation that will be omitted from this particular article, I am projecting an additional net valuation benefit (detriment) of $210 million for the fourth quarter of 2013 in regards to the following MBS portfolio changes: 1) net (short) TBA MBS activity (reduction of lower-coupon 30-year fixed-rate agency MBS/increase of higher-coupon 30-year fixed-rate agency MBS); and 2) continued realignment into 15-year fixed-rate agency MBS versus 30-year fixed-rate agency MBS (see blue reference "C" in Table 10 above). A modest benefit should occur because, as stated above, the lower the coupon of a particular fixed-rate agency holding during the fourth quarter of 2013 the greater the MBS price decline. Furthermore, 15-year fixed-rate agency holdings had less MBS price declines when compared to 30-year fixed-rate agency holdings of the same coupons during the fourth quarter of 2013.

Therefore, when all three net valuation gains (losses) are combined, I am projecting a quarterly net valuation gain (loss) on AGNC's MBS portfolio of ($1.1) billion for the fourth quarter of 2013. This figure 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 AFS securities, net account is the quarterly reversal of the company's MBS sales shown in Table 11 below. Remember, all MBS sales have already been accounted for within AGNC's income statement under the gain (loss) on sale of agency securities, net account (see PART 1 of this article). Thus, all realized valuation gains (losses) must be "reversed-out" of AGNC's unrealized gain (loss) on AFS securities, net account.

Table 11- AGNC Quarterly Unrealized Gain (Loss) on AFS Securities and Unrealized Gain (Loss) on Interest Rate Swaps, Net Projection

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Table 11 above shows AGNC's projected unrealized net valuation gain (loss) of ($1.1) billion (see red reference "AB" in Table 11 above). The second account shown is AGNC's projected "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 December 31, 2013 column. As stated earlier, this is the exact amount accounted for within AGNC's gain (loss) on sale of agency securities, net account (see PART 1 of this article). Therefore, after the company's projected realized valuation gain (loss) of ($800) million is reversed-out, AGNC's total unrealized gain (loss) on AFS securities, net account is projected to be ($300) million for the fourth quarter of 2013 (see red reference "(AB + AC) = AD" in Table 11 above).

Side Note: 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 the unrealized gain (loss) on AFS securities, net account. As such, this particular account is directly tied to AGNC's "gain (loss) on sale of agency securities, net" account discussed in PART 1 of this article. Therefore, if AGNC's unrealized gain (loss) on AFS securities, net actual amount is above or below my projected figure/range, the variance is automatically offset in the company's gain (loss) on sale of agency securities, net account. Since both accounts would offset each other, let us say my projected unrealized gain (loss) on AFS securities, net amount is lower than the actual results. If this were the case, then my projected gain (loss) on sale of agency securities, net amount will automatically be higher by the exact same amount. If this situation occurs, my COMBINED projected figures would be accurately represented regardless. This happened regarding my projected unrealized gain (loss) on AFS securities, net and gain (loss) on sale of agency securities, net accounts for the third quarter of 2013. When combining both these accounts together, I projected a valuation gain (loss) of $330 million for the third quarter of 2013. My projected range for these two combined accounts was ($220) - $880 million. AGNC reported a combined realized and unrealized valuation gain (loss) of $100 million for the third quarter of 2013. As such, actual results for both accounts, when combined, were towards the lower end of my range but still within my stated range. If one solely looked at each account separately, there would be a material deviation between my projected and actual results. However, in my opinion, both these accounts should really be looked at as one combined account. The unrealized gain (loss) on AFS securities, net account has an immediate impact on BV while the gain (loss) on sale of agency securities, net account is merely a reclassification out of the unrealized account. As such, I feel both accounts should be monitored with the same level of importance.

I also see general similarities between AGNC and its sister company American Capital Mortgage Investment Company (NASDAQ:MTGE) regarding agency MBS portfolio strategies. There may be a few subtle differences between agency MBS portfolios, but each company's management team should implement similar strategies during the fourth quarter of 2013. As such, similar net valuation gains (losses) should occur between AGNC's unrealized gain (loss) on AFS securities, net account and MTGE's "unrealized gain (loss) on sale of agency securities, net" account.

The only material difference between each company's MBS portfolio was the fact MTGE also had a minor non-agency MBS portfolio as of 9/30/2013. As such, MTGE also has an "unrealized gain (loss) on sale of non-agency securities, net" account within the company's income statement. MTGE had a total non-agency MBS portfolio of $928 million as of 9/30/2013. When compared to the company's agency MBS portfolio of $6.8 billion, MTGE's non-agency MBS portfolio was 12% of the company's total MBS portfolio as of 9/30/2013. Due to the continued slight to modest real estate price appreciation and decreasing mortgage delinquencies and foreclosures during the fourth quarter of 2013, most non-agency MBS should continue to outperform agency MBS regarding quarterly valuation adjustments.

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

- Estimate of $45 Million; Range $43 - $47 Million

- Confidence Within Range = High

- See Boxed Blue Reference "7" in Table 11 Above Next to December 31, 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 in Table 11 above. All past (ACTUAL) figures within Table 11 are derived from AGNC's quarterly SEC submissions via the company's 10-Q or 10-K where applicable. All projected (ESTIMATE) figures within Table 11 above are calculated and derived from multiple tables/charts that will not be shown within this particular article.

AGNC's unrealized gain (loss) on interest rate swaps, net account consists of two "sub-accounts". The first is AGNC's "unrealized gain (loss) on interest rate swaps designated as cash flow hedges" sub-account (see red reference "AE" in Table 11 above). Since AGNC has discontinued accounting for the company's interest rate swaps as cash flow hedges, this balance will remain $0 for the fourth quarter of 2013. The second is AGNC's "reversal of prior period unrealized loss on interest rate swaps, net (upon reclassification to interest expense)" sub-account (see red reference "AF" in Table 11 above). AGNC has elected to discontinue accounting for the company's interest rate swaps as cash flow hedges under Generally Accepted Accounting Principles ('GAAP') as of September 30, 2011. Each quarter, a portion of this remaining net deferred loss is taken out of the OCI/(OCL) account and is reclassified into interest expense as it relates to AGNC's "de-designated" interest rate swaps.

As of 9/30/2013, AGNC had a remaining net deferred gain (loss) of ($341) million in the company's accumulated OCI/(OCL) account relating to these de-designated interest rate swaps. The remaining net deferred loss will be reclassified from OCI/(OCL) into interest expense over the next nine quarters. The net deferred gain (loss) that is expected to be reclassified from OCI/(OCL) into interest expense over the next twelve months is ($167) million. Therefore, a reclassification of $45 million has been projected for the fourth quarter of 2013.

After combining the company's unrealized gain (loss) on AFS securities, net and unrealized gain (loss) on interest rate swaps, net accounts together, I am projecting AGNC will report an OCI/(OCL) of ($255) million for the fourth quarter of 2013 (see red reference "B" in Tables 7 and 11 above).

C) Comprehensive Income (Loss):

- Comprehensive Income (Loss) Estimate of ($164) Million; Range ($664) - $336 Million

- Comprehensive Income (Loss) of ($0.45) Per Share; Range ($1.80) - $0.90 Per Share

- Confidence Within Range = Moderate to High

- See Red Reference "C" in Table 7 Above Next to the December 31, 2013 Column

Finally, let us look at AGNC's comprehensive income (loss) for the fourth quarter of 2013. This is the summation of the following AGNC income statement amounts: A) net income (loss) of $91 million (see PART 1 and PART 2 of article) and B) an OCI/(OCL) of ($255) million (see analysis above). Therefore, I am projecting AGNC will report a comprehensive income (loss) of ($164) million for the fourth quarter of 2013.

Conclusions Drawn (PART 3):

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

6) Quarterly Unrealized Gain (Loss) on AFS Securities, Net of ($300) Million

7) Quarterly Unrealized Gain (Loss) on Interest Rate Swaps, Net of $45 Million

After a brief decrease, mortgage interest rates/U.S. Treasury yields generally continued to rise throughout the remainder of the fourth quarter of 2013. As such, cumulative quarterly MBS price declines occurred throughout most of the 15 and 30-year fixed-rate agency coupons for the fourth quarter of 2013. Through the detailed analysis performed above, AGNC's total unrealized gain (loss) on AFS securities, net account is projected to be ($300) million for the fourth quarter of 2013. This projected valuation loss is materially worse when compared to the prior quarter's total net valuation gain (loss) of $833 million.

I am also projecting AGNC will report an immaterial change to the company's 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 valuation gain (loss) of $45 million for the fourth quarter of 2013. This slight decrease is due to the lower remaining net deferred loss on AGNC's de-designated interest rate swaps as of 9/30/2013 when compared to 6/30/2013.

Conclusions Drawn From PART 1, PART 2, and PART 3:

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

A) Quarterly Net Income (Loss) of $91 Million ($0.24 Per Share)

B) Quarterly OCI/(OCL) of ($255) Million

C) Quarterly Comprehensive Income (Loss) (A + B Combined) of ($164) Million (($0.45) Per Share)

AGNC's projected net income (loss) of $91 million for the fourth quarter of 2013 is much better than the reported net income (loss) of ($701) million for the third quarter of 2013. This is mainly due to AGNC's projected net valuation gain (loss) of $520 million on the company's derivative instruments and other securities, net account for the fourth quarter of 2013. For the same account in the prior quarter, AGNC recognized a net valuation gain (loss) of ($339) million.

However, I am also projecting AGNC will report an OCI/(OCL) of ($255) million for the fourth quarter of 2013. This projected amount is much worse when compared to an OCI/(OCL) of $880 million for the third quarter of 2013. When compared to the prior quarter, this is a positive (negative) change of ($1.14) billion. For one quarter's worth of change, this is a material negative swing for AGNC. As stated above, the main culprit for this material change in AGNC's OCI/(OCL) amount was caused by the continued rise in mortgage interest rates/U.S. Treasury yields throughout most of the fourth quarter of 2013 which led to cumulative quarterly MBS price declines throughout most of the 15 and 30-year fixed-rate agency coupons. AGNC's total unrealized gain (loss) on AFS securities, net account is projected to be ($300) million for the fourth quarter of 2013. This projected valuation loss is materially worse when compared to the prior quarter's total net valuation gain (loss) of $833 million.

As a result of the company's projected net income (loss) of $91 million and an OCI/(OCL) of ($255) million, I am projecting AGNC will report a comprehensive income (loss) of ($164) million for the fourth quarter of 2013. When compared to a comprehensive income (loss) of $176 million for the third quarter of 2013, this is a positive (negative) change of ($340) million. For one quarter's worth of change, this is a modest negative swing for AGNC. Two accounts are the main culprit for the modest quarterly negative change in the comprehensive income (loss) amount. First, a quarterly positive (negative) change of ($1.14) billion is projected to occur in AGNC's unrealized gain (loss) on AFS securities, net account. Second, a quarterly positive (negative) change of $859 million is projected to occur in AGNC's gain (loss) on derivative instruments and other securities, net account. When combined, these two accounts cause a quarterly positive (negative) change of ($281) million.

When taking a step back and looking at the bigger picture, AGNC's projected comprehensive income (loss) of ($164) million could be seen as either positive or negative (depending on one's perspective). On one hand, MBS prices once again declined in the fourth quarter of 2013 causing some net realized and unrealized valuation losses on AGNC's MBS portfolio. On the other hand, overall net valuation losses were mitigated (to an extent) as AGNC continued to hedge the company's MBS portfolio via the derivatives portfolio. AGNC has continued to maintain a very high hedging coverage ratio mainly with the company's net (short) interest rate swaps and swaptions position. Having such a high hedging coverage ratio may negatively impact future earnings (to an extent). However, a high hedging coverage ratio should also mitigate future MBS valuation losses in a rising interest rate environment. This would ultimately be a positive to AGNC's BV.

Finally, due to the recent mixed economic data (strong December 2013 ADP Jobs Report but weak Employment Situation Report), I feel the FED will only gradually decrease (taper) the level of its QE3 program. As such, a rise in mortgage interest rates / U.S. Treasury yields should be "subdued" over the next 3-6 months (if not relatively flat). Remember, mortgage interest rates/U.S. Treasury yields spiked over the summer as the market was pricing in an eventual end to the QE3 stimulus program. Any delays to this process may cause rates to level-off or even decline for short periods of time (as we are currently seeing in today's market). This generally would bode well for fixed-rate agency MBS prices and help stabilize AGNC's BV.

Final Note on Upcoming 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 earnings press release for the fourth quarter of 2013 (early February).

Source: American Capital Agency's Upcoming Q4 2013 Income Statement Projection (Part 3)