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Summary

  • I am projecting AGNC will report a net gain (loss) on sale of derivative instruments and other securities of ($390) million for the second quarter of 2014.
  • I am projecting AGNC will report a management fees expense of $30 million for the second quarter of 2014.
  • My projection for AGNC’s net income (loss) and earnings per share amounts for the second quarter of 2014 are stated in the “Conclusions Drawn” section of the article.
  • Part 3 of the article will project the remaining accounts that make up AGNC's other comprehensive income (loss) and total comprehensive income (loss) amounts.

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) consolidated statement of comprehensive income for the second 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 Corp.'s Upcoming Q2 2014 Consolidated Statement of Comprehensive Income Projection - Part 1

This three-part article is a very detailed look at AGNC's consolidated statement of comprehensive income. I perform this detailed analysis for readers who anticipate/want such an analysis performed each quarter (to fully understand AGNC's ongoing business operations). 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 consolidated statement of comprehensive income for the second 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 (loss) and earnings per share ('EPS') amounts.

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

- Estimate of ($390) Million; Range ($740) - ($40) Million

- Confidence Within Range = Moderate to High

- See Boxed Blue Reference "4" in Tables 5 and 7 Below Next to the June 30, 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 regards 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) is 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 consolidated statement of comprehensive income for the second 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 regards 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:

American Capital Agency Corp.'s Mid-Q1 2014 Composition And Valuation Analysis: Part 2

American Capital Agency Corp.'s Mid-Q1 2014 Book Value Projection And Derivative Portfolio Valuation Analysis - Part 3

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 in the side note above). 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 3/31/2014):

- Estimate of $350 Million; Range $50 - $650 Million

- Confidence Within Range = Moderate

- See Black Highlighted, Blue Referenced Sub-Account "a)" in Table 5 Above Next to the June 30, 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 contracts. The second factor is the realized valuation gain (loss) upon the "settlement" of all TBA MBS and forward settling MBS contracts and the unrealized valuation gain (loss) on all contracts that are either "re-rolled" to a future settlement date or contracts that have yet to be settled during the quarter. A re-rolled TBA MBS and forward settling MBS position occurs when AGNC net settles the existing contract (known as a "pair-off") and immediately enters into a new contract with a new settlement date further out in the future.

For the first quarter of 2014, AGNC reported a TBA MBS and forward settling MBS net valuation gain (loss) of $60 million. When broken out, AGNC reported a net dollar-roll income (expense) of $48 million and a TBA MBS and forward settling MBS net valuation gain (loss) of $12 million. As of 12/31/2013, AGNC had a net long (short) TBA MBS and forward settling MBS position of $2.1 billion. AGNC had a net long (short) TBA MBS and forward settling MBS position of $13.9 billion as of 3/31/2014. When calculated, AGNC increased (decreased) the company's net long TBA MBS and forward settling MBS position by $11.8 billion during the first quarter of 2014.

Generally speaking, if mortgage interest rates/U.S. Treasury yields net decrease while AGNC has a net long TBA MBS and forward settling MBS position, AGNC would record a net valuation gain which would enhance the MBS portfolio's net valuation gain. Since mortgage interest rates/U.S. Treasury yields did in fact net decrease during the first quarter of 2014, AGNC reported a minor net valuation gain. AGNC continued to increase the company's net long TBA MBS and forward settling MBS position to setup an increased at-risk leverage position for the second quarter of 2014.

As will be discussed further in PART 3 of this article, mortgage interest rates/U.S. Treasury yields net decreased throughout the entire second 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 second quarter of 2014, then the company would have a material net valuation gain for this derivative sub-account (higher end of my projected range). If the assumption is made that AGNC eventually switched back to a minor to modest net (short) TBA MBS and forward settling MBS position during the second quarter of 2014, then the company would have a flat to minor net valuation gain for this derivative sub-account (lower end of my projected range because most gains during the beginning of the quarter would be offset by losses during the second-half of the quarter). If the assumption is made that AGNC maintained a similar net long TBA MBS and forward settling MBS position as of 3/31/2014, then the company would have a modest to material net valuation gain for this derivative sub-account.

I have personally made the assumption AGNC continued to maintain a similar net long TBA MBS and forward settling MBS position as of 3/31/2014 throughout most of the second quarter of 2014. Therefore, I believe the third scenario occurred during the second 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 net dollar-roll income (expense) of $100 million and a quarterly net valuation gain (loss) of $250 million, I am projecting AGNC's TBA MBS and forward settling MBS had a total net valuation gain (loss) of $350 million for the second quarter of 2014.

b) Interest Rate Swaps (Net (Short) Position as of 3/31/2014):

- Estimate of ($500) Million; Range ($750) - ($250) Million

- Confidence Within Range = Moderate to High

- See Purple Highlighted, Blue Referenced Secondary Sub-Accounts "b)" in Table 5 Above Next to the June 30, 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 second quarter of 2014. AGNC had a net long (short) interest rate swaps position of ($46.4) billion as of 3/31/2014. AGNC had ($5.9) billion of interest rate swap additions and $2.8 billion of interest rate swap expirations or terminations during the quarter. As such, AGNC slightly increased the company's net (short) interest rate swaps position during the first quarter of 2014. When calculated, the quarterly net notional balance change for this specific derivative sub-account was a net (short) (increase) decrease of ($3.1) billion or 7% of AGNC's interest rate swaps net long (short) position of ($43.3) billion as of 12/31/2013.

AGNC slightly increased the company's interest rate swaps net (short) position during the first quarter of 2014 for two main reasons. First, as discussed in PART 1 of this article, AGNC increased (decreased) the company's MBS portfolio by ($9.6) billion during the first quarter of 2014. However, as discussed in the derivative sub-account above, AGNC also increased (decreased) the company's net long TBA MBS and forward settling MBS position by $11.8 billion during the first quarter of 2014. When combined, this was a 3% increase (decrease) of AGNC's on-balance sheet MBS portfolio and off-balance sheet TBA MBS and forward settling MBS portfolio. To remain proportionately balanced, management believed a slight increase to AGNC's net (short) interest rate swaps position was appropriate. Second, management believed the risks associated with the fixed-rate agency MBS market remained relatively unchanged during the first quarter of 2014. As such, AGNC's duration gap only slightly decreased from 1.5 years as of 12/31/2013 to 1.2 years as of 3/31/2014.

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 regards to AGNC's interest rate swaps net (short) position as of 3/31/2014, the company had a weighted average fixed pay rate of 1.87% and a weighted average floating receive rate of 0.21%. A fixed pay rate is the rate AGNC pays to a counterparty in a 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) by 17 basis points ('bps') while the company's weighted average floating receive rate increased (decreased) by (1) bp during the first quarter of 2014. Since AGNC's weighted average fixed pay rate modestly 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.

I project AGNC will record a modest increase in the company's "net periodic interest costs of interest rate swaps" expense for the second quarter of 2014. This is due to the following three interest rate swap factors during the second quarter of 2014: 1) minor increase in AGNC's average notional balance as the company expanded its combined on-balance sheet MBS portfolio and off-balance sheet TBA MBS and forward settling 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.

Through a detailed analysis that will be omitted from this particular article (as mentioned in an earlier side note), I am projecting AGNC had a "net periodic interest costs of interest rate swaps" expense of $105 million for the second quarter of 2014. This calculates to an increased (decreased) expense of $22 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. 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 became basically flat in short-term tenors/maturities by the end of the second quarter of 2014. However, as of 6/30/2014, the fixed pay rate on interest rate swap contracts with long-term tenors/maturities (which typically match 15 and 30-year fixed-rate MBS with greater precision) continued to remain modestly to materially below rates as of 3/31/2014. The severity of the fixed-rate fluctuation was dependent on the tenor/maturity of the interest rate swap.

Side Note: 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.

AGNC's 2, 3 and 4-year interest rate swaps had an unchanged to minor net decrease in its fixed pay rate which would result in only a minor quarterly net valuation loss. However, the majority of AGNC's net (short) position was in 7 and 10-year interest rate swaps which had a modest to material net decrease in its fixed pay rate which would result in a material quarterly net valuation loss.

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 had a net valuation gain (loss) of ($395) million for the second quarter of 2014.

When both secondary sub-accounts are combined, I am projecting AGNC's interest rate swaps had a total net valuation gain (loss) of ($500) million for the second quarter of 2014.

c) Interest Rate Swaptions (Net (Short) Position as of 3/31/2014):

- Estimate of ($100) Million; Range ($250) - $50 Million

- Confidence Within Range = Moderate to High

- See Pink Highlighted, Blue Referenced Sub-Account "c)" in Table 5 Above Next to the June 30, 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 second quarter of 2014. AGNC had a net long (short) interest rate swaptions position of ($7.0) billion as of 3/31/2014 (based on the notional balance of the underlying interest rate swaps). AGNC had ($1.0) billion of interest rate payer swaption additions and $7.3 billion of interest rate payer swaption exercises, expirations, or terminations during the quarter. AGNC also added a $1.0 billion interest rate receiver swaption during the first quarter of 2014. As such, AGNC continued to aggressively decrease the company's net (short) interest rate swaptions position during the first quarter of 2014. When calculated, the quarterly net notional balance change for this specific derivative sub-account was a net (short) (increase) decrease of $7.3 billion or 51% of AGNC's interest rate swaptions net long (short) position of ($14.3) billion as of 12/31/2013. As of 3/31/2014, AGNC's interest rate payer swaptions had a weighted average of 12 months until expiration with an underlying interest rate swaps weighted average tenor/maturity of 5.7 years. AGNC's interest rate receiver swaption had a weighted average of 12 months until expiration with an underlying interest rate swap weighted average tenor/maturity of 10.0 years.

As was the case with the company's interest rate swaps, AGNC's net (short) interest rate payer swaptions position had a flat to minor net valuation loss in short-term tenors/maturities and a modest to material net valuation loss in long-term tenors/maturities. 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 payer swaptions) net deceased during the second quarter of 2014, AGNC's existing intermediate to long-term underlying interest rate swaps (hence interest rate payer swaptions) were previously valued at fixed-pay rates as of 3/31/2014 (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 had a net valuation gain (loss) of ($65) million for the second quarter of 2014. Since AGNC had ($4.7) billion of interest rate swaptions set to expire in 1 year or less, I am projecting the company acquired ($1.0) billion of interest rate swaptions with a net valuation gain (loss) of ($10) million. I am also projecting AGNC exercised, had expired, or terminated $2.0 billion of interest rate swaptions for a net valuation gain (loss) of ($25) million. Therefore, when these three figures are combined, I am projecting AGNC's interest rate swaptions had a total net valuation gain (loss) of ($100) million for the second quarter of 2014.

d) U.S. Treasury Securities (Net (Short) Position as of 3/31/2014):

- Estimate of ($165) Million; Range ($415) - $85 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 June 30, 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 second quarter of 2014. AGNC had the following three derivative secondary sub-account positions as of 3/31/2014: 1) long U.S. Treasury securities of $0.2 billion; 2) (short) U.S. Treasury securities of ($6.8) billion; and 3) U.S. Treasury security futures sold (short) of ($0.7) billion. This is based on each secondary sub-account's face amount ('par'). When combining all three secondary sub-accounts together, AGNC aggressively decreased the company's net long (short) U.S. Treasury securities position of $0.1 billion as of 12/31/2013 to ($7.3) billion as of 3/31/2014. As such, the quarterly net change for these three secondary sub-accounts (as a whole) was a net (short) (increase) decrease of ($7.4) billion during the first quarter of 2014.

For valuation purposes, I will be combining AGNC's long U.S. Treasury securities position of $0.2 billion and (short) position of ($6.8) billion. As such, AGNC had a net long (short) U.S. Treasury securities position of ($6.6) billion as of 3/31/2014. Unless management materially increased AGNC's net long position very early in the quarter, the company had a modest to material net valuation loss within this derivative sub-account for the second quarter of 2014. This is due to the fact U.S. Treasury yields once again net decreased during the second quarter of 2014 (regarding 5, 7, and 10-year maturities). For instance, the yield on a U.S. Treasury security with a 5, 7, and 10-year maturity increased (decreased) (11), (17), and (20) bps during the second quarter of 2014, respectively.

This modest to material net valuation loss would also be impacted 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 second quarter of 2014. If the assumption is made that AGNC continued to increase its net (short) U.S. Treasury securities position during the second 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 switched back to a net long U.S. Treasury securities position fairly early in the second quarter of 2014, then the company would have a minor net valuation gain for this derivative sub-account (higher end of my projected range). If the assumption is made that AGNC maintained a modest net (short) U.S. Treasury securities position throughout the quarter, then the company would have a modest to material net valuation 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 continued to keep the company's modest net (short) U.S. Treasury securities position during a modest portion of the quarter. However, as AGNC began to see overall market interest rates materially decrease during the second quarter of 2014 (due to weaker than expected economic indicators and geopolitical tensions), I believe management modestly decreased the company's net (short) U.S. Treasury securities position. Therefore, I am projecting as the net (short) U.S. Treasury securities position was decreased, some valuation losses were mitigated.

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 had a total net valuation gain (loss) of ($165) million for the second 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 had a total net valuation gain (loss) of ($390) million for the second quarter of 2014.

Brief Discussion of MTGE's and NLY's Derivative Portfolio:

I 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 second quarter of 2014. One minor difference between AGNC's and MTGE's derivative portfolio was the composition of each company's TBA MBS and forward settling MBS position. AGNC held a net long (short) TBA MBS and forward settling MBS position of $13.9 billion as of 3/31/2014. This was equal to 25% of AGNC's MBS portfolio. Meanwhile, MTGE held a net long (short) TBA MBS and forward settling MBS position of $0.7 billion as of 3/31/2014. This was equal to 14% of MTGE's agency MBS portfolio and 11% of the company's combined agency and non-agency MBS portfolio. 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 3/31/2014. 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 second quarter of 2014 (proportionally speaking).

When it comes to AGNC's closest sector peer Annaly Capital Management Inc. (NYSE:NLY), I see several modest differences that would affect the derivative sub-accounts described above. I will note a few of these differences. AGNC and NLY had a material difference in each company's TBA MBS and forward settling MBS position as of 3/31/2014. As discussed earlier, AGNC had a net long (short) TBA MBS and forward settling MBS position of $13.9 billion as of 3/31/2014. When calculated, AGNC increased (decreased) the company's net long TBA MBS and forward settling MBS position by $11.8 billion during the first quarter of 2014. In sharp contrast, NLY had a net long (short) TBA MBS and forward settling MBS position of ($1.3) billion as of 12/31/2013. NLY had a net long (short) TBA MBS and forward settling MBS position of ($0.6) billion as of 3/31/2014. When calculated, NLY (increased) decreased the company's net (short) TBA MBS and forward settling MBS position by $0.7 billion during the first quarter of 2014. Since NLY still had a minor net (short) TBA MBS and forward settling MBS position as of 3/31/2014, the probability of the company generating a material amount of net dollar-roll income or a material net valuation gain during the second quarter of 2014 was inherently lower when compared to AGNC.

Offsetting this first difference, NLY did not have an U.S. Treasury securities position as of 3/31/2014. As stated earlier, AGNC had a total net long (short) U.S. Treasury securities position of ($7.3) billion as of 3/31/2014. Unlike AGNC, NLY would inherently benefit from not having a total net (short) U.S. Treasury securities position when yields net decreased during the second quarter of 2014. This partially offsets NLY having a net long (short) TBA MBS and forward settling MBS position of ($0.6) billion as of 3/31/2014 while AGNC had a net long (short) position of $13.9 billion. AGNC and NLY had a fairly similar proportion of interest rate swaps and swaptions as of 3/31/2014 (some slight variances in the detailed compositional makeup of these specific derivative sub-accounts).

5) Management Fees:

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

- Confidence Within Range = High

- See Boxed Blue Reference "5" in Tables 6 and 7 Below Next to the June 30, 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 second quarter of 2014 when compared to the first quarter of 2014 ($30 million versus $29 million). Further analysis and discussion of this account is unwarranted.

Side Note: Two remaining accounts on AGNC's consolidated statement of comprehensive income 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.

A) Net Income (Loss):

- Net Income (Loss) Estimate of ($22) Million; Range ($422) - $378 Million

- Net Income (Loss) Available to Common Shareholders of ($0.08) Per Share (Excluding OCI/(OCL)); Range ($1.21) - $1.05 Per Share

- Confidence Within Range = Moderate to High

- See Red Reference "A" in Table 7 Below Next to the June 30, 2014 Column

Finally, let us look at my projection for AGNC's quarterly net income (loss) for the second quarter of 2014. This information is provided in Table 7 below.

Table 7 - AGNC Quarterly Net Income (Loss) Projection

(click to enlarge)

(Source: Table created entirely by myself, partially using data obtained from AGNC's quarterly investor presentation slides)

Table 7 is a summation of the following consolidated statement of comprehensive income accounts regarding the second quarter of 2014: 1) interest income of $360 million; 2) interest expense of $105 million; 3) gain (loss) on sale of agency securities, net of $150 million; 4) gain (loss) on derivative instruments and other securities, net of ($390) million; 5) management fees of $30 million; 6) general and administrative expenses of $7 million; and 7) excise tax of $0. Therefore, when these seven accounts are combined, I am projecting AGNC had a net income (loss) of ($22) million for the second quarter of 2014. After accounting for AGNC's quarterly preferred stock dividend, this would be earnings available to common shareholders of ($0.08) per share.

Conclusions Drawn (PART 2):

To sum up all the information above, I am projecting AGNC will report the following consolidated statement of comprehensive income figures for the second quarter of 2014 (refer back to Table 7 above):

4) Quarterly Gain (Loss) on Derivative Instruments and Other Securities, Net of ($390) Million

5) Quarterly Management Fees of $30 Million

Partially in correlation to a net decrease in mortgage interest rates/U.S. Treasury yields, AGNC's long TBA MBS and forward settling MBS, interest rate receiver swaption, and long U.S. Treasury securities most likely had valuation gains during the second quarter of 2014. However, these valuation gains will be more than offset by AGNC's (short) TBA MBS and forward settling MBS, fixed-rate interest rate swaps, interest rate payer swaptions, and (short) U.S. Treasury securities which most likely had valuation losses during the second quarter of 2014. When combining all the derivative sub-accounts together (both material and immaterial), I am projecting AGNC's derivative instruments and other securities, net account had a total net valuation gain (loss) of ($390) million for the second quarter of 2014.

I am also projecting AGNC had a slight increase to the company's 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 second quarter of 2014 when compared to the first quarter of 2014 ($30 million versus $29 million).

Net Income and EPS Projections:

I am projecting AGNC will report the following net income and EPS amounts for the second quarter of 2014 (refer back to Table 7):

A) Quarterly Net Income (Loss) of ($22) Million and Earnings Available to Common Shareholders of ($0.08) Per Share

AGNC's projected net income (loss) of ($22) million for the second quarter of 2014 is modestly better than the reported net income (loss) of ($141) million for the first quarter of 2014. This is mainly due to AGNC's projected net valuation gain (loss) of $150 million on the company's realized MBS sales for the second quarter of 2014. For the same account in the prior quarter, AGNC recognized a net valuation gain (loss) of ($19) million.

Even though I am projecting a minor net loss for the second quarter of 2014, readers should also realize that AGNC will most likely report a strong OCI/(OCL) amount (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 company's consolidated statement of comprehensive income 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.

As such, I would suggest holding off on a "final verdict" regarding AGNC's results for the second 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 consolidated statement of comprehensive income for the second quarter of 2014. As such, a "full" conclusion regarding AGNC's consolidated statement of comprehensive income 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 AGNC's entire statement of comprehensive income (loss) and the main points throughout PARTS 1, 2, and 3 of the article. This will be followed by a detailed projection of AGNC's BV as of 6/30/2014 which will be available to readers prior to the company's earnings press release for the second quarter of 2014 (late July).

Disclosure: The author is long AGNC, MTGE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in NLY.