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SEC Filings

10-Q
AGNC INVESTMENT CORP. filed this Form 10-Q on 11/06/2014
Entire Document
 


on derivatives and other securities, net in our consolidated statements of comprehensive income. Our cost of funds does not include swap termination fees and costs associated with our other supplemental hedges, such as swaptions and short 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, relative to our repo funded assets, our cost of funds is higher than if we allocated 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 and nine months ended September 30, 2014 and 2013 (dollars in millions):

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Adjusted Net Interest Expense and Cost of Funds
 
Amount
 
% 1
 
Amount
 
% 1
 
Amount
 
% 1
 
Amount
 
% 1
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Repurchase agreement and other debt interest expense
 
$
50

 
0.41
%
 
$
98

 
0.49
%
 
$
170

 
0.44
%
 
$
272

 
0.51
%
Periodic interest costs of interest rate swaps previously designated as hedges under GAAP, net
 
38

 
0.33
%
 
47

 
0.24
%
 
121

 
0.31
%
 
144

 
0.27
%
Total interest expense
 
88

 
0.74
%
 
145

 
0.73
%
 
291

 
0.75
%
 
416

 
0.78
%
Other periodic interest costs of interest rate swaps, net
 
82

 
0.70
%
 
131

 
0.66
%
 
252

 
0.66
%
 
320

 
0.60
%
Total adjusted net interest expense and cost of funds
 
$
170

 
1.44
%
 
$
276

 
1.39
%
 
$
543

 
1.41
%
 
$
736

 
1.37
%
 _______________________
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 amount of repurchase agreements and interest rate swaps outstanding and 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 and nine months ended September 30, 2014 and 2013 (in millions):
Impact of Changes in the Principle Elements of Adjusted Net Interest Expense
Period Ended September 30, 2014 vs. September 30, 2013
 
 
 
Due to Change in Average 1
 
Decrease
 
Repo / Swap Balance
 
Repo / Swap Rate
Three months ended:
 
 
 
 
 
Repurchase agreements and other debt expense
$
(48
)
 
$
(40
)
 
$
(8
)
Periodic interest rate swap costs 2
(58
)
 
(64
)
 
6

Total change in adjusted net interest expense
$
(106
)
 
$
(104
)
 
$
(2
)
 
 
 
 
 
 
Nine months ended:
 
 
 
 
 
Repurchase agreements and other debt expense
$
(102
)
 
$
(77
)
 
$
(25
)
Periodic interest rate swap costs 2
(91
)
 
(123
)
 
32

Total change in adjusted net interest expense
$
(193
)
 
$
(200
)
 
$
7

_______________________
1.
Variances that are the combined effect of changes in our repurchase agreement/interest rate swap balance and changes in repurchase agreement/swap interest rates, but cannot be separately identified, are allocated to each variance based on their respective relative amounts.
2.
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 a smaller average repo and other debt balance outstanding in correlation with a smaller agency MBS portfolio balance. Despite a decline in our average repo rate of 8 bps and 7 bps for the three and nine months ended September 30, 2014, respectively, our average average cost of funds increased due to a higher ratio of interest rate swaps in effect to repo outstanding and an increase in our weighted average swap rate. The table below presents a summary of our average repo and interest rates swaps in effect outstanding for the three and nine months ended September 30, 2014 and 2013 (dollars in millions):

41


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