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SEC Filings

10-Q
AGNC INVESTMENT CORP. filed this Form 10-Q on 05/06/2015
Entire Document
 



Interest Expense and Cost of Funds 

Our interest expense is primarily comprised of interest expense on our repurchase agreements and the reclassification of accumulated OCI into interest expense related to previously de-designated interest rate swaps. Upon our election to discontinue hedge accounting under GAAP as of September 30, 2011, the net deferred loss related to our de-designated interest rate swaps remained in accumulated OCI and is being reclassified from accumulated OCI into interest expense on a straight-line basis over the remaining term of each interest rate swap.
Our "adjusted net interest expense," also referred to as our "cost of funds" when stated as a percentage of our outstanding repurchase agreements and other debt balance, includes periodic interest costs on our interest rate swaps reported in gain (loss) on derivatives and other securities, net in our consolidated statements of comprehensive income. Our cost of funds does not include swap termination fees, forward starting swaps and costs associated with our other supplemental hedges, such as swaptions and U.S. Treasury positions. Our cost of funds also does not include the implied financing cost/benefit of our net TBA dollar roll position, but does however include interest rate swap hedge costs related to our TBA dollar roll funded assets. Consequently, our cost of funds measured as a percentage of our outstanding repurchase agreement and other debt is higher than if we allocated a portion of our swap hedge costs to our TBA dollar roll funded assets.
The table below presents a reconciliation of our interest expense (the most comparable GAAP financial measure) to our adjusted net interest expense and cost of funds (non-GAAP financial measures) for the three months ended March 31, 2015 and 2014 (dollars in millions):

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Adjusted Net Interest Expense and Cost of Funds
 
Amount
 
% 1
 
Amount
 
% 1
Interest expense:
 
 
 
 
 
 
 
 
Repurchase agreement and other debt interest expense
 
$
57

 
0.43
%
 
$
65

 
0.46
%
Periodic interest costs of interest rate swaps previously designated as hedges under GAAP, net
 
29

 
0.22
%
 
43

 
0.30
%
Total interest expense
 
86

 
0.65
%
 
108

 
0.76
%
Other periodic interest costs of interest rate swaps, net
 
84

 
0.63
%
 
83

 
0.59
%
Total adjusted net interest expense and cost of funds
 
$
170

 
1.28
%
 
$
191

 
1.35
%
 _______________________
1.
Percent of our average repurchase agreements and other debt outstanding for the period annualized.

The principal elements impacting our adjusted net interest expense are the average repurchase agreements and interest rate swaps in effect, or "current pay" interest rate swaps, outstanding during the period as well as our cost of funds. The following is a summary of the estimated impact of these elements on changes in our adjusted net interest expense for the three months ended March 31, 2015 and 2014 (in millions):

Impact of Changes in the Principal Elements of Adjusted Net Interest Expense
Three Months Ended March 31, 2015 vs. March 31, 2014
 
 
 
Due to Change in Average
 
Decrease
 
Repo / Swap Balance
 
Repo / Swap Rate
Repurchase agreements and other debt expense
$
(8
)
 
$
(4
)
 
$
(4
)
Periodic interest rate swap costs 1
(13
)
 
(14
)
 
1

Total change in adjusted net interest expense
$
(21
)
 
$
(18
)
 
$
(3
)
_______________________
1.
Includes amounts recognized in interest expense and in gain (loss) on derivatives and other securities, net in our consolidated statements of comprehensive income. The change due to interest rate reflects the net impact of the change in the weighted average fixed pay and variable receive rates.

The decline in our adjusted net interest expense was primarily a function of maintaining a smaller portfolio of current pay interest rate swaps (i.e., excluding forward starting swaps) during the three months ended March 31, 2015, in both absolute terms and relative to our average repurchase agreements and other debt outstanding during the period, compared to the prior year period. The table below presents a summary of our average repurchase agreement and other debt outstanding and our average current pay interest rates swaps in effect for the three months ended March 31, 2015 and 2014 (dollars in millions):

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