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Summary

  • I am projecting AGNC will report a net gain (loss) on sale of derivative instruments and other securities of ($400) million for the first quarter of 2014.
  • I am projecting AGNC will report a management fees expense of $30 million for the first quarter of 2014.
  • I am projecting AGNC will report a net income (loss) of ($412) million for the first quarter of 2014.
  • I am projecting AGNC will report earnings of ($1.17) per share for the first quarter of 2014.
  • Part 3 of the article will project AGNC's other comprehensive income (loss) amount and summarize the company's entire income statement.

Author's Note: PART 2 of this article is a continuation from PART 1, which was 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 first quarter of 2014 regarding the following accounts: 1) interest income; 2) interest expense; and 3) gain (loss) on sale of agency securities, net. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1's analysis is provided below:

American Capital Agency's Upcoming Q1 2014 Income Statement Projection (Part 1)

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 scroll down to the "Conclusions Drawn" section at the bottom of the each part of the article.

Focus of Article:

The focus of PART 2 of this article is to provide a detailed projection of AGNC's income statement for the first quarter of 2014 regarding the following accounts: 4) "gain (loss) on derivative instruments and other securities, net" (including four "sub-accounts"); and 5) "management fees". PART 2 will also discuss AGNC's projected net income and earnings per share ("EPS") 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) time frame.

4) Gain (Loss) on Derivative Instruments and Other Securities, Net:

- Estimate of ($400) Million; Range ($850) - $50 Million

- Confidence Within Range = Moderate-to-High

- See Boxed Blue Reference "4" in Table 1 in PART 1 and Table 5 Below Next to the March 31, 2014 Column

Projecting AGNC's gain (loss) on derivative instruments and other securities, net account is an analysis that involves several sub-accounts. This includes making assumptions within some of these derivative sub-accounts. One will never "fully" know management's derivative activities for any given quarter until results are provided to the public via the company's quarterly SEC submissions. However, one can understand management's overall derivative strategy and make a projection on these derivative sub-accounts using the balances that were represented at the end of the previous quarter. Such a detailed analysis was critical back in the second and fourth quarters of 2013 due to the events that unfolded in regard to MBS prices, the fixed pay rate on newly created interest rate swaps, and U.S. Treasury yields.

Side Note: Since AGNC's gain (loss) on derivative instruments and other securities, net account is usually more difficult for readers to understand, I believe two references/links to past articles I wrote (regarding this account) are warranted. As stated above, this particular account has several material derivative sub-accounts that will be discussed in detail below. However, due to the sheer amount of data I'm already presenting within this three-part article, I am omitting from PART 2 all supporting valuation tables on the four material derivative sub-accounts. The purpose of this three-part article is to provide a projection of AGNC's income statement for the first quarter of 2014, with a "line-by-line" mentality at each account's "main" level. As such, this particular article will not directly show HOW to value each material derivative sub-account. If I included such a lengthy discussion/breakdown within this article, it would make PART 2 entirely too long. Any reader unfamiliar with AGNC's derivative portfolio should read my past articles. Specifically, in regard to the company's derivative portfolio and how each material sub-account is valued, the following two links to my past AGNC articles provide a good detailed discussion and analysis on the topic:

Now, let us take a look at AGNC's gain (loss) on derivative instruments and other securities, net account. I show my projection for this figure in Table 5 below. All past (ACTUAL) sub-account figures within Table 5 are derived from AGNC's quarterly SEC submissions via the company's 10-Q or 10-K, where applicable. All projected (ESTIMATE) sub-account figures within Table 5 below are calculated and derived from multiple tables/charts that will not be shown within this particular article. As stated earlier, please see the two links above for some of the detailed spreadsheets used to generate such projections for AGNC's gain (loss) on derivative instruments and other securities, net sub-accounts.

Table 5 - AGNC Quarterly Gain (Loss) on Derivative Instruments and Other Securities, Net Projection (All Sub-Accounts)

(click to enlarge)

(Source: Table created entirely by myself, partially using AGNC data obtained from the SEC's EDGAR Database)

Within AGNC's gain (loss) on derivative instruments and other securities, net account is the following four material sub-accounts that will be discussed below:

a) TBA MBS and Forward Settling MBS

b) Interest Rate Swaps

c) Interest Rate Swaptions

d) U.S. Treasury Securities

Each of the four material derivative sub-accounts listed above will be separately analyzed and discussed in corresponding order of the blue references under the "Ref." column in Table 5 above.

a) TBA MBS and Forward Settling MBS (Net Long Position as of 12/31/2013):

- Estimate of $55 Million; Range ($245) - $355 Million

- Confidence Within Range = Moderate

- See Black Highlighted, Blue Referenced Sub-Account "a)" in Table 5 Above Next to the March 31, 2014 Column

Let us first briefly get accustomed with this type of derivative instrument. Typically, AGNC uses a combination of both long and (short) TBA MBS and forward settling MBS contracts during any given quarter. AGNC enters into TBA contracts with a long position, where it agrees to buy, for future delivery, MBS with certain predetermined prices, face amounts, issuers, coupons, and stated maturities. AGNC enters into TBA contracts with a long position as an "off-balance sheet" means of investing in and financing MBS. Since TBA contracts with a long position are an extension of the balance sheet, this increases AGNC's "at-risk" leverage. AGNC enters into TBA contracts with a (short) position, where it agrees to sell, for future delivery, MBS with certain predetermined prices, face amounts, issuers, coupons, and stated maturities. Since TBA contracts with a (short) position are ultimately a reduction of the balance sheet, this decreases AGNC's "at-risk" leverage.

There are two main factors that affect this derivative sub-account's valuation in a given quarter. The first factor is the dollar-roll income (expense) generated on the net long (short) TBA MBS and forward settling MBS position. The second factor is the realized valuation gain (loss) upon the "settlement" of the individual TBA MBS and forward settling MBS contracts, and the unrealized valuation gain (loss) on all contracts that are "re-rolled" to a future settlement date. This transpires when AGNC settles the existing TBA MBS and forward settling MBS contract, and immediately enters into a new contract with a new settlement date further out in the future.

For the fourth quarter of 2013, AGNC reported a TBA MBS and forward settling MBS net valuation gain (loss) of $30 million. When broken out, AGNC reported a dollar-roll income (expense) of ($5) million, and a TBA MBS and forward settling MBS net valuation gain (loss) of $35 million. AGNC changed the company's TBA MBS and forward settling MBS strategy from a net long (short) position of ($7.4) billion as of 9/30/2013, to a net long (short) position of $2.1 billion as of 12/31/2013. Generally speaking, if mortgage interest rates/U.S. Treasury yields increased while AGNC had a net (short) TBA MBS and forward settling MBS position, AGNC would record a net valuation gain, which would help offset the MBS portfolio's net valuation loss. Since mortgage interest rates/U.S. Treasury yields did, in fact, increase throughout most of the fourth quarter of 2013, AGNC reported a minor net valuation gain. This net valuation gain was mitigated (to an extent) due to the fact that AGNC reversed the company's TBA MBS and forward settling MBS net (short) position to a minor net long position by the end of the quarter. AGNC reversed the company's TBA MBS and forward settling MBS position to set up an increased leverage position for the first quarter of 2014.

As will be discussed further in PART 3 of this article, mortgage interest rates/U.S. Treasury yields first materially decreased, but then reversed course and slightly net increased throughout the remaining part of the first quarter of 2014. As such, three possible scenarios likely occurred within this derivative sub-account. If the assumption is made that AGNC continued to increase its net long TBA MBS and forward settling MBS position throughout the first quarter of 2014, then the company would have a modest net valuation gain for this derivative sub-account (higher end of my projected range). If the assumption is made that AGNC quickly switched back to a modest net (short) TBA MBS and forward settling MBS position during the first quarter of 2014, then the company would have a modest net valuation loss for this derivative sub-account (lower end of my projected range). If the assumption is made that AGNC alternated between a minor net long (short) TBA MBS and forward settling MBS position throughout the quarter, then the company would have a minor net valuation gain (loss) for this derivative sub-account. The amount of this net valuation gain (loss) would be dependent on the timing of the net long (short) position, as rates fluctuated throughout the quarter.

I have personally made the assumption AGNC continued to have a minor to modest net long TBA MBS and forward settling MBS position throughout the quarter. Therefore, I believe the third scenario occurred during the first quarter of 2014. Through a detailed analysis that will be omitted from this particular article (as mentioned in an earlier side note), when combining the company's quarterly dollar-roll income (expense) of $20 million and a quarterly net valuation gain (loss) of $35 million, I am projecting AGNC's TBA MBS and forward settling MBS to have a total net valuation gain (loss) of $55 million for the first quarter of 2014.

b) Interest Rate Swaps (Net (Short) Position as of 12/31/2013):

- Estimate of ($260) Million; Range ($510) - ($10) Million

- Confidence Within Range = Moderate-to-High

- See Purple Highlighted, Blue Referenced Secondary Sub-Accounts "b)" in Table 5 Above Next to the March 31, 2014 Column

Let us first discuss the recent history of this derivative sub-account, which will lead to a better explanation of my projected gain (loss) for the first quarter of 2014. AGNC had a net long (short) interest rate swaps position of ($43.3) billion as of 12/31/2013. AGNC had ($4.1) billion of interest rate swap additions and $11.0 billion of interest rate swap expirations or terminations during the quarter. AGNC continued to decrease the company's net (short) interest rate swaps position during the fourth quarter of 2013. The quarterly net notional balance change for this specific derivative sub-account was a net (short) reduction of $7.0 billion, or 14% of AGNC's interest rate swaps net long (short) position of ($50.2) billion as of 9/30/2013.

AGNC continued to decrease the company's interest rate swaps net (short) position during the fourth quarter of 2013 for two main reasons. First, as discussed in PART 1 of this article, AGNC reduced the company's MBS portfolio by ($19.1) billion during the fourth quarter of 2013. When calculated, this was an increase (decrease) of the company's MBS portfolio by (22%). Due to the smaller MBS portfolio, management felt a smaller net (short) interest rate swaps position was appropriate. Second, management felt the risks associated with the fixed-rate agency MBS market began to dissipate during the fourth quarter of 2013. AGNC felt the extension risk in the company's MBS portfolio materially decreased due to the rebalancing efforts during the third and fourth quarters of 2013. As such, AGNC's duration gap increased from 0.9 years as of 9/30/2013, to 1.5 years as of 12/31/2013. Therefore, management felt the continued extremely high ratio of interest rate swaps versus MBS holdings/repurchase loans was unwarranted.

Using Table 5 above as a reference, there are two secondary sub-accounts to discuss when projecting a net valuation gain (loss) for AGNC's interest rate swaps. The first secondary sub-account to discuss is AGNC's "net periodic interest costs of interest rate swaps" expense. If one recalls, this figure was first discussed in AGNC's interest expense account during PART 1 of this article. In regard to AGNC's interest rate swaps net (short) position as of 12/31/2013, the company had a weighted average fixed pay rate of 1.70% and a weighted average floating receive rate of 0.22%. A fixed pay rate is the rate AGNC pays to a counterparty in a payer swap. Adding to AGNC's net (short) interest rate swaps position in a rising interest rate environment comes at an added cost regarding a slightly higher average fixed pay rate on all newly created interest rate swap contracts (when comparing similar tenors/maturities; disregards the notion of interest rate swaptions for simplicity). It should be noted this increase is only on newly created interest rate swap contracts. In exchange, AGNC receives interest, which is known as the floating receive rate. Currently, AGNC's average receive rate is based on the three-month LIBOR.

AGNC's weighted average fixed pay rate increased (decreased) 5 basis points ('bps'), while the company's weighted average floating receive rate increased (decreased) (2) bps during the fourth quarter of 2013. Since AGNC's weighted average fixed pay rate slightly increased, while the company's weighted average floating receive rate slightly decreased, if management held the same interest rate swaps throughout the quarter, the net periodic interest costs of interest rate swaps expense would increase. However, due to the fact the net notional balance change for this specific derivative sub-account was a net (short) reduction of $7.0 billion (stated earlier), AGNC's net periodic interest costs of interest rate swaps expense was only $104 million for the fourth quarter of 2013. This calculated to an increased (decreased) expense of ($27) million when compared to the prior quarter.

After an initial modest to material decrease in the fixed pay rate on all newly created interest rate swap contracts, this rate reversed course and modestly increased as mortgage interest rates/U.S. Treasury yields continued to net rise during the remainder of the first quarter of 2014. The severity of the fixed pay rate fluctuation was dependent on the tenor/maturity of the interest rate swap. In regard to the floating receive rate on both newly created and existing interest rate swap contracts, the three-month LIBOR remained relatively flat during the first quarter of 2014.

I project AGNC will record a minor increase in the company's net periodic interest costs of interest rate swaps expense for the first quarter of 2014. This is due to the following three interest rate swap factors during the first quarter of 2014. 1) minor increase in AGNC's average notional balance as the company once again expanded its MBS portfolio; 2) continued minor increase in the weighted average fixed pay rate on all newly created contracts when compared to terminated/settled contracts; and 3) continued relatively flat average floating receive rate on all contracts.

Still using Table 5 as a reference, I am projecting AGNC will record a net periodic interest costs of interest rate swaps expense of $110 million for the first quarter of 2014. This calculates to an increased (decreased) expense of $6 million when compared to the prior quarter.

The second secondary sub-account to discuss relates to the net valuation gain (loss) on AGNC's interest rate swaps. As stated above, after an initial modest to material decrease in the fixed pay rate on all newly created interest rate swap contracts, this rate reversed course and modestly increased as mortgage interest rates/U.S. Treasury yields continued to net rise during the remainder of the first quarter of 2014. As such, AGNC's net (short) interest rate swaps position first had a modest to material net valuation loss. However, this loss was less severe by the end of the first quarter of 2014.

In fact, the 2, 3, 4, and 5-year interest rate swaps had a minor-to-modest net increase in its fixed pay rate, which would result in a quarterly net valuation gain. However, the 7 and 10-year interest rate swaps had a modest-to-material net decrease in its fixed pay rate, which would result in a quarterly net valuation loss. Each mREIT's net valuation gain (loss) for this derivative sub-account will vary according to which specific interest rate swaps were held during the quarter. For AGNC, the company held a blend of short-term, intermediate-term, and long-term interest rate swaps. Through a detailed analysis that will be omitted from this particular article (as mentioned in an earlier side note), I am projecting AGNC's second secondary sub-account to have a net valuation gain (loss) of ($150) million for the first quarter of 2014.

When both secondary sub-accounts are combined, I am projecting AGNC's interest rate swaps to have a total net valuation gain (loss) of ($260) million for the first quarter of 2014.

c) Interest Rate Swaptions (Net (Short) Position as of 12/31/2013):

- Estimate of ($95) Million; Range ($345) - $155 Million

- Confidence Within Range = Moderate-to-High

- See Pink Highlighted, Blue Referenced Sub-Account "c)" in Table 5 Above Next to the March 31, 2014 Column

Let us first briefly get accustomed with this type of derivative instrument. Interest rate swaptions are basically options to enter into underlying interest rate swap contracts. Whereas interest rate swap contracts have no initial "up-front" costs (gains and losses are incurred as interest rates fluctuate over the life of the swaps), interest rate swaptions have implicit up-front costs (similar to an option contract; generally speaking).

Let us discuss the recent history of this derivative sub-account, which will lead to a better explanation of my projected gain (loss) for the first quarter of 2014. AGNC had a net long (short) interest rate swaptions position of ($14.3) billion as of 12/31/2013 (based on the notional balance of the underlying interest rate swaps). AGNC had no interest rate swaption additions and $6.0 billion of interest rate swaption exercises, expirations, or terminations during the quarter. AGNC continued to decrease the company's net (short) interest rate swaptions position during the fourth quarter of 2013. The quarterly net notional balance change for this specific derivative sub-account was a net (short) reduction of $6.0 billion, or 29% of AGNC's interest rate swaptions net long (short) position of ($20.2) billion as of 9/30/2013. As of 12/31/2013, AGNC's interest rate swaptions had a weighted average of 10 months until expiration, with an underlying interest rate swaps weighted average tenor/maturity of 7.0 years.

As was the case with the company's interest rate swaps, AGNC's net (short) interest rate swaptions position first had a modest-to-material net valuation loss. However, this loss was less severe by the end of the first quarter of 2014. A net valuation loss would occur, because while the fixed pay rate on newly created intermediate to long-term underlying interest rate swaps (hence interest rate swaptions) net deceased during the first quarter of 2014, AGNC's existing intermediate to long-term underlying interest rate swaps (hence interest rate swaptions) were previously valued at fixed-pay rates as of 12/31/2013 (disregards discussing the net change to the variable receiver rate for simplicity/due to immateriality).

Through a detailed analysis that will be omitted from this particular article (as mentioned in an earlier side note), I am projecting AGNC's interest rate swaptions that were held throughout the quarter to have a net valuation gain (loss) of ($65) million for the first quarter of 2014. Since AGNC had ($9.4) billion of interest rate swaptions set to expire in 1 year or less, I am projecting the company acquired ($1.5) billion of interest rate swaptions, with a net valuation gain (loss) of ($10) million. I am also projecting the company exercised, had expired, or terminated $2.5 billion of interest rate swaptions for a net valuation gain (loss) of ($20) million. Therefore, when these three figures are combined, I am projecting AGNC's interest rate swaptions to have a total net valuation gain (loss) of ($95) million for the first quarter of 2014.

d) U.S. Treasury Securities (Net Long Position as of 12/31/2013):

- Estimate of ($125) Million; Range ($375) - $125 Million

- Confidence Within Range = Moderate

- See Dark Blue, Brown, and Teal Highlighted, Blue Referenced Secondary Sub-Accounts "d)" in Table 5 Above Next to the March 31, 2014 Column

Let us first briefly get accustomed with this type of derivative instrument. AGNC purchases (or sells short) U.S. Treasury securities and U.S. Treasury security futures to help mitigate the potential impact of changes in mortgage interest rates (hence the valuation of the company's MBS portfolio). AGNC borrows securities to cover U.S. Treasury (short sales) under reverse repurchase agreements. AGNC accounts for these derivative instruments as "security borrowing transactions", and recognizes an obligation to return the borrowed securities at FMV based on the current value of the underlying borrowed securities.

Let us discuss the recent history of this derivative sub-account, which will lead to a better explanation of my projected gain (loss) for the first quarter of 2014. AGNC had the following three derivative secondary sub-account positions as of 12/31/2013: 1) long U.S. Treasury securities of $3.9 billion; 2) (short) U.S. Treasury securities of ($2.0) billion; and 3) U.S. Treasury security futures sold (short) of ($1.9) billion. This is based on each secondary sub-account's face amount ("par"). When combining all three secondary sub-accounts together, AGNC slightly decreased the company's net long (short) U.S. Treasury securities position of $1.2 billion as of 9/30/2013, to $0.1 million as of 12/31/2013. As such, the quarterly net change for these three secondary sub-accounts (as a whole) was a net long increase (decrease) of ($1.1) billion during the fourth quarter of 2013.

For valuation purposes, I will be combining AGNC's net long U.S. Treasury securities position of $3.9 billion and net (short) position of ($2.0) billion together. As such, AGNC had a net long (short) U.S. Treasury securities position of $1.9 billion as of 12/31/2013. Unless management materially increased AGNC's net long position very early in the quarter, the company will only have a minor net valuation gain within this derivative sub-account for the first quarter of 2014. This is due to the fact that after an initial material drop during January 2014, U.S. Treasury yields once again net increased during the rest of the first quarter of 2014 (especially with the 5- and 7-year maturities). For instance, the yield on a U.S. Treasury security with a 5-year maturity increased (decreased) (26) bps during the month of January 2014. However, by the end of the first quarter of 2014, the 5-year U.S. Treasury security only increased (decreased) (2) bps. When calculated, during February and March 2014, a U.S. Treasury security with a 5-year maturity increased (decreased) 24 bps. The yield on a U.S. Treasury security with a 7-year maturity increased (decreased) (32) bps during the month of January 2014. However, by the end of the first quarter of 2014, the 7-year U.S. Treasury security only increased (decreased) (15) bps. When calculated, during February and March 2014, a U.S. Treasury security with a 7-year maturity increased (decreased) 17 bps.

This minor to modest net valuation gain would be materially offset by the U.S. Treasury security futures sold (short) position that was most likely held throughout the quarter (with daily settlements). Furthermore, AGNC must calculate interest income (expense) on all long (short) U.S. Treasury securities (based on each security's stated yield).

Three possible scenarios likely occurred within this derivative sub-account during the first quarter of 2014. If the assumption is made that AGNC materially increased its net long U.S. Treasury securities position very early in the first quarter of 2014 (mentioned above), then the company would have a modest net valuation gain for this derivative sub-account (higher end of my projected range). If the assumption is made that AGNC switched to a net (short) U.S. Treasury securities position very early in January 2014 and then switched back to a net long position during the first quarter of 2014, then the company would have a material net valuation loss for this derivative sub-account (lower end of my projected range). If the assumption is made that AGNC alternated between a minor net long (short) U.S. Treasury securities position throughout the quarter, then the company would have a minor to modest net valuation gain or (loss) for this derivative sub-account. The amount of this net valuation gain (loss) would be dependent on the timing of the net long (short) position, as yields fluctuated throughout the quarter.

I have personally made the assumption AGNC first continued to keep the company's minor net long U.S. Treasury securities position. However, as AGNC began to see overall market interest rates materially decrease in January 2014 (due to weaker than expected economic indicators and geopolitical tensions), I believe management increased the company's net long U.S. Treasury securities position. As such, when this increased net long U.S. Treasury securities position was implemented, a modest net valuation loss occurred as U.S. Treasury yields rose during the second half of the first quarter of 2014 (especially on the shorter-termed maturities). Therefore, I believe the third scenario occurred during the first quarter of 2014.

Through a detailed analysis that will be omitted from this particular article (as mentioned in an earlier side note), I am projecting AGNC's U.S. Treasury securities to have a total net valuation gain (loss) of ($125) million for the first quarter of 2014. This is a fairly cautious projection due to the assumptions I have used within this derivative sub-account.

As stated earlier, all remaining derivative sub-accounts within Table 5 above are deemed immaterial for discussion purposes. As such, these immaterial derivative sub-accounts will be omitted from any analysis, even though a projected net valuation gain (loss) has been included in Table 5. This includes valuation changes on the following derivative sub-accounts: 1) interest-only and principle-only strips; 2) debt on consolidated variable-interest-entities ("VIE"); 3) REIT equity securities; and 4) put options (when applicable). When combining all the derivative sub-accounts together (both material and immaterial), I am projecting AGNC's derivative instruments and other securities, net account to have a total net valuation gain (loss) of ($400) million for the first quarter of 2014.

Brief Discussion of MTGE's Derivative Portfolio:

I also see general similarities between AGNC and its sister company, American Capital Mortgage Investment Company (NASDAQ:MTGE), regarding derivative portfolio strategies. There may be a few subtle differences between derivative portfolios, but each company's management team should implement similar strategies during the first quarter of 2014. One modest difference between AGNC's and MTGE's derivative portfolio was the composition of each company's TBA MBS and forward settling MBS position as of 12/31/2013. AGNC held a net long (short) TBA MBS and forward settling MBS position of $2.1 billion as of 12/31/2013. Meanwhile, MTGE held a net long (short) TBA MBS and forward settling MBS position of ($0.8) billion as of 12/31/2013.

Other than the minor difference in each company's TBA MBS and forward settling MBS position, AGNC and MTGE had a fairly similar proportion of interest rate swaps, swaptions, and U.S. Treasury securities (also known as each company's hedging portfolio) as of 12/31/2013. Therefore, I am projecting a similar total net valuation gain (loss) between AGNC's and MTGE's derivative instruments and other securities, net account for the first quarter of 2014 (proportionally speaking).

5) Management Fees:

- Estimate of $30 Million; Range $25 - $35 Million

- Confidence Within Range = High

- See Boxed Blue Reference "5" in Table 1 in PART 1 and Table 6 Below Next to the March 31, 2014 Column

AGNC has a base management fee, paid in arrears, equal to an amount that is 1/12th of 1.25% of the company's equity balance for the quarter. Equity is defined as AGNC's month-ended stockholders' equity, adjusted to exclude the effect of any unrealized gains or losses included in either retained earnings or accumulated OCI/(OCL).

I show my projection for this figure in Table 6 below. All past (ACTUAL) figures within Table 6 are derived from AGNC's quarterly SEC submissions via the company's 10-Q or 10-K, where applicable. This excludes all recalculated and ratio figures. As such, there will not be an identical sheet AGNC provides that matches the data I have prepared in Table 6 below. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC's management fees expense account.

Table 6 - AGNC Quarterly Management Fees Projection

(click to enlarge)

(Source: Table created entirely by myself, partially using AGNC data obtained from the SEC's EDGAR Database [link provided below Table 5])

Using Table 6 above as a reference, I am projecting AGNC's management fees expense to increase (decrease) by ($1) million for the first quarter of 2014 when compared to the fourth quarter of 2013 ($30 million versus $31 million). The ($1) million increase (decrease) is projected mainly due to the 3.4 million outstanding shares of common stock bought back by AGNC during the first quarter of 2014 (total repurchase price of $74 million). Further analysis and discussion of this account is unwarranted.

Side Note: Two remaining accounts on AGNC's income statement that affect net income are the following: 1) general/administrative expenses and 2) income tax provision (benefit). These two accounts are immaterial for discussion purposes, and will be excluded from any analysis within this article.

Conclusions Drawn (PART 2):

To sum up all the information above, I am projecting AGNC will report the following income statement figures for the first quarter of 2014 (refer back to Table 1 in PART 1 of the article or Tables 5 and 6 above):

4) Quarterly Gain (Loss) on Derivative Instruments and Other Securities, Net of ($400) Million

5) Quarterly Management Fees of $30 Million

After an initial material drop, but then subsequent increase in mortgage interest rates, the fixed pay rate on newly created interest rate swaps, and U.S. Treasury yields during the first quarter of 2014, AGNC's long TBA MBS and forward settling MBS and long U.S. Treasury securities most likely saw minor-to-modest valuation gains. However, these minor-to-modest valuation gains will be more than offset by AGNC's (short) TBA MBS and forward settling MBS, (short) interest rate swaps, (short) interest rate swaptions, and (short) U.S. Treasury securities, which most likely saw minor-to-material valuation losses. When combining all the derivative sub-accounts together (both material and immaterial), I am projecting AGNC's derivative instruments and other securities, net account to have a total net valuation gain (loss) of ($400) million for the first quarter of 2014.

I am also projecting AGNC will report a slightly reduced management fees expense when compared to the prior quarter. I am projecting AGNC's management fees expense to increase (decrease) by ($1) million for the first quarter of 2014 when compared to the fourth quarter of 2013 ($30 million versus $31 million).

Net Income and EPS Projections:

I am projecting AGNC will report the following net income and EPS amounts for the first quarter of 2014 (refer back to Table 1 in PART 1 of the article):

A) Quarterly Net Income (Loss) of ($412) Million and Earnings of ($1.17) Per Share

AGNC's projected net income (loss) of ($412) million for the first quarter of 2014 is materially worse than the reported net income (loss) of ($101) million for the fourth quarter of 2013. This is mainly due to AGNC's projected net valuation gain (loss) of ($400) million on the company's derivative instruments and other securities, net account for the first quarter of 2014. For the same account in the prior quarter, AGNC recognized a net valuation gain (loss) of $184 million.

Even though this is a projected material decrease of AGNC's net income (loss) and EPS amounts when compared to the prior quarter, investors should also realize that AGNC will most likely report a strong OCI/(OCL) amount for the first quarter of 2014 (as will be discussed in PART 3 of this article). As stated in PART 1 of this article, AGNC's OCI/(OCL) amount is part of the income statement, but EXCLUDED from the company's net income (loss) and EPS amounts. The OCI/(OCL) account goes directly to AGNC's balance sheet, and remains separate from the company's "retained earnings/(accumulated deficit)" account.

I would suggest holding off on a "final verdict" regarding AGNC's results for the first quarter of 2014 until PART 3 of this article is released. I personally believe AGNC's "comprehensive income (loss)" amount is more important than the company's net income and EPS amounts.

Final Note: PART 2 of this article is only a PARTIAL analysis of AGNC's income statement for the first quarter of 2014. As such, a "full" conclusion regarding AGNC's income statement will not be provided yet. PART 3 of this article will just pick up where PART 2's analysis ends. PART 3 of this article will discuss AGNC's projected OCI/(OCL) and comprehensive income (loss) amounts. PART 3 will also summarize the major points throughout PARTS 1, 2, and 3 of the article. This will be followed by a detailed projection of AGNC's BV as of 3/31/2014, which will be available to readers prior to the company's earnings press release for the first quarter of 2014 on 4/28/2014.

Source: American Capital Agency's Upcoming Q1 2014 Income Statement Projection - Part 2