AGNC Investment Corp (AGNCN) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AGNC Shareholders' call.

At this time, all participants are in a listen only mode and later we will conduct a question and answer session, with instructions being given at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded.

And I would now like to turn the conference over to your host, Ms [Katie Wisecarver].

Please go ahead.

Thanks, Katie, and thank you for joining American Capital Agency's first quarter 2009 earnings conference call.

Before we begin, I would like to review the Safe Harbor Statement.

This conference call and corresponding slide presentation contains statements that to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are intended to be subject to the Safe Harbor protection provided by the Reform Act.

Actual outcomes and results could differ materially from those forecast due to the impact of many factors beyond the control of AGNC.

Certain factors that could cause actual results to differ materially are included in the risk factors section of AGNC's 10K dated February 17, 2009, and periodic reports filed with the Securities and Exchange Commission.

Copies are available on the SEC's website at www.sec.gov.

We disclaim any obligation to update our forward-looking statements.

An archive of this presentation will be available on our website and a telephone recording can be accessed through May 14th by dialing 800-475-6701.

And the replay pass code is 996569.

To view the Q1 slide presentation, turn to our website, www.agnc.com, and click on the Q1 2009 shareholder presentation link in the upper right corner, plus a conference call option to view the streaming slide presentation or the webcast option for the both slides and audio.

If you have any trouble with the webcast during the presentation, please hit F5 to refresh.

Participants on today's call are Malon Wilkus, Chairman, President, and Chief Executive Officer; John Erickson, Chief Financial Officer and Executive Vice President; Gary Kain, Chief Investment Officer; Justin Cressall, Vice President, Equity Capital Markets; and [Barney Dowell], Vice President, Accounting.

With that, I would like to turn the call over to Malon Wilkus.

Thank you, Katie.

Thank you, everyone, for joining us and I wanted to first -- before I turn it over to Gary to review the quarter, and we really did have a very fine quarter, so we look forward to that.

I wanted to mention an organizational change that we are implementing to more thoroughly align the interest of the management and employees with the shareholders of Agency.

And, this involves the American Capital Agency Management which is the wholly owned ACAPS affiliate that manages the fund.

Gary Kain will be promoted to President and Chief Investment Officer of that management company, he is at present the Senior Vice President of the management company and he also serves as Agency's Senior Vice President and Chief Investment Officer.

In addition Mr.

Kain and several other American Capital employees are expected to transfer to become full-time employees of the management company, providing the Company with dedicated investment team and support personnel and under the change structure the management company's employees will be able to receive incentive compensation based directly on Agency's performance, and to make personal investments in Agency.

This something they couldn't do while employed by American Capital as an investment company.

The new structure is intended to become effective by the end of the second quarter of 2009.

Now, we had a very good quarter for the year and I want to ask that we turn to slide six and I am going to turn it over go Gary to review it.

Good morning, everyone, and thanks, Malon.

As we mentioned on the last call, we felt that there were good opportunities in both premium fixed rate mortgages and in hybrid arms.

We put money to work and we feel good about having done that.

We increased our leverage and we made substantial progress in diversifying our portfolio beginning in early February as we had alluded to in the last call.

In light of these changes and in our desire to enhance the transparency, we have significantly expanded our disclosure relating to our portfolio.

And, I really look forward to reviewing much of this with you on this call.

We believe that the combination of all of these developments coupled with the organizational changes that Malon discussed really position AGNC well to generate substantial value for our shareholders.

With that as the background, let's just get to some specifics.

There are four key topics that I want to touch on today.

The Q1 highlights and the market environment; the changes in the size and composition of the portfolio; the business economics, which includes changes to the book value; and then our thoughts on prepayment risk versus extension risks and why we are comfortable with higher coupon mortgages.

So, if you turn to page six, we will start with the highlights for the quarter.

As you know, we declared a dividend of $0.85 which was below our GAAP net income but in line with our taxable income of $0.87 for the quarter.

As such, we still have $0.31 of net undistributed spill over income which we do expect to include in future dividends.

Our net income for the quarter was $1.01 per share, which translates to an annualized ROE of 22.4%.

Our results benefited from lower funding costs as repo rates plummeted earlier in the quarter, which is really a key driver behind the expansion of our net interest margin to 302 basis points.

And then, we recorded $0.22 per share in other income.

It is nice when you can accomplish significant changes to your portfolio while you are adding to current coupon -- current period results.

Now, while our core earnings did benefit from the growth in our assets and in our leverage, the impact of this was muted by the fact that our purchases settled later in the quarter and there are still some purchases that are settling out in April.

So, to this point, we estimate that our average daily leverage during the quarter was only around 5.6 times, so the bulk of the benefits of the larger portfolio and the higher leverage will be seen in the future.

I also want to mention that there was no option activity and no option income during the quarter.

As of March 31st, our total assets stood at about $2.3 billion, which was around a 45% increase from December 31.

The bulk of this increase can be attributed to the addition of Hybrid ARMs.

However, there were significant changes in the composition of the fixed rate portfolio and I think that is very important.

And, I am going to go over this in detail in a few minutes.

Our effective leverage was approximately seven times at quarter end, when you factor in the impact of the unsettled purchases.

We feel really good about the $2 increase in book value to $19.26 per share.

It is important to remember that this size will increase in book value occurred despite our relatively low leverage earlier in the quarter.

And, as such, the assets, election strategies, the timing of our purchases and sales activity contributed significantly to this strong performance and really allowed us to fully benefit from the strengthening of mortgage valuations, which would necessarily have been implied by the lower earlier leverage.

Now, if you turn to slide seven, we are going to quickly review some of the key market developments during the quarter.

So, as we stressed in early February, we felt that there was still considerable value in the mortgage market and we weren't scared off by higher dollar prices, as we believed the interest rate environment, the improved liquidity, the lower cost of funds and clearly government support more than justified those price levels.

And, as you can see, on the left side of the table at the bottom of this page, Treasury rates increased during the quarter with longer term swap rates rising as well.

And, despite this as depicted on the bottom right, mortgage prices increased.

And, the largest price increases occurred in higher coupon mortgages with 30 year 6s and 6.5 coupons seeing the largest improvement in price at close to 1.5 points.

This relative performance is interesting against the back drop of the two major announcements that occurred during the quarter.

The US Treasury's housing plan, or HASP, and the Fed's announcement that they were significantly expanding their mortgage and debt purchase programs.

First the HASP, or Housing Affordability and Stability Plan, was the long-awaited announcement of the new GSE streamlined refinance and modification programs.

We expected this program will increase prepayment speeds by allowing a much broader cross-section of borrowers to qualify for new mortgages, largely due to the relaxation of LTV hurdles.

It is also likely that the number of modifications, which will increase and this will also serve to increase speeds on GSE mortgages.

But, I want to make it clear, this program removes a lot of the credit related barriers, but it doesn't remove them all and we are going to talk some on this later.

And, that is a very important factor.

The other big announcement came from the Fed.

And, they announced an increase to their mortgage purchase program of up to another $750 billion in fixed rate agency MBS, bringing the total program to $1.25 trillion.

Now, they also announced they would buy up to $300 billion in longer term treasuries and another $100 billion in GSE debt.

Longer term rates initially rallied by around 50 basis points following that announcement, but they have basically given back all of those gains and the ten year Treasury is actually trading higher today as we entered the call than it was before.

But on the mortgage side, the Fed purchases are expected to be almost entirely in lower coupons, 4% to 5%.

And, with the HASP program increase prepayment expectations, the very strong price performance of higher coupon mortgages could be viewed by many as being counterintuitive.

But, these factors were under valued early in Q1 or that was certainly our belief.

And, with the market pricing in excessive risk premiums associated with prepayments, so that is why we feel that the price performance ended up so positive in those coupons.

But, with this as the backdrop, let's turn to slide eight and look at the changes in our portfolio over the quarter.

And I want you to evaluate how we are doing at sourcing assets with favorable prepayment characteristics, because that is clearly important.

Before I touch on slide eight, our objective is to build a portfolio that balances income generation with book value preservation.

Now, for us to do this effectively we must select appropriate sectors of the market, like seasoned Hybrid ARMs, and then within that we have to proactively find individual securities that are going to perform better than generic securities.

And, we feel like we have made significant progress in this regard and I think we can show you that, but these efforts are not one time events.

We believe that active portfolio management is necessary as market conditions change and relative value and relative risks evolve.

So, in the quarter we increased our portfolio by 45% to $2.3 billion, as I mentioned earlier, by diversifying into other areas of the Agency's securities market.

As you can see in the pie chart on the right, the portfolio is not comprised of 39% seasoned Hybrids.

Thirty year mortgages now comprise only half of the portfolio down from 90% at year end.

I want to stress that the bulk of this changes was attributable to the growth in the other sectors really rather than a significant reduction in our total holdings of 30 year mortgages.

However, we did sell around $800 million in fixed rate securities during the quarter, an amount equal to roughly half of the December 31st portfolio.

More specifically, we sold over $500 million in Ginnie Mae securities during the quarter, with another $250 million in other conventional Freddie and Fannie fixed rate securities, as we were uncomfortable with the prepayment expectations on these particular securities.

During 2008, Ginnie Mae securities were easier and they were cheaper to finance than conventionals, but those differences disappeared late in the year and into 2009 as a result of the liquidity provided by the federal government toward the end of 2008.

So the bulk of those sales were replaced by purchases of 30 year Fannie Mae securities, with loan attributes that we believe would have proved prepayment performance.

Also, dividing the portfolio amongst a variety of asset classes provides -- it does provide risk management benefits but it also provides us the ability to be more selective in each of these underlying classes, and to find better securities in them.

So, let's turn to page nine and look at some numbers.

This page summarizes our holdings of fixed rate mortgages by coupon and also gives our cost basis at our actual prepayments.

Notice that our portfolio is comprised of coupons 5.5 and higher, but it is largely concentrated in 6% coupons.

Now, focus on the actual one month prepayment speed for that coupon, 14%.

This is less than half of what was experienced by the universe of 2008 Freddie and Fannie 6s, which came in at 30.4, and compares even more favorable to 2008 Ginnie Mae 6s that paid at 43 CPR.

These faster Ginnie Mae speeds were a serious concern for us.

Notice that we were able to achieve favorable results in our holding of the other coupons as well and the difference in prepayments between Ginnie's and conventional's got larger on the 6% coupons and above.

Now, just the clarify, the actual one month prepayment speeds we are showing here are the latest available and they were released in early April and they include speeds on all of our holdings of fixed rate pass throughs as of March 31, and so, any trades after March 31 aren't included.

So, with that, before I go on and talk about the ARM portfolio, I want to point you to page ten, which provides some greater detail with respect to our 30 year and 40 year pass throughs.

While I am not going to go over this page in its entirety because we absolutely have a lot of material to cover today.

This page along with an even more detailed version, which is included on page 20, should give you a much greater transparency into what categories of assets we own, and don't own, and thus the drivers behind our prepayment experience.

Now, as you can see we divided our holdings into two categories which are listed separately in the two tables.

TBA Eligible securities are the most liquid securities in the mortgage market.

They can be liquidated easily, at little cost even in periods of substantial market volatility.

Here we concentrated our holding in securities backed by loans with lower than average loan balances, and with more seasoned mortgages.

And, we intentionally avoided the more readily available newest vintages.

The other category contains Freddie and Fannie securities that are not deliverable into to TBA trades.

They include IOs or 10/20s, 40 year prepayment penalty and other types of mortgage securities.

Now both of these categories produce considerably better than average speeds, however the prepayment from the Non-TBA Eligible securities perform the best.

Again, those consisted mostly of 10/20 and 40 year securities.

And, these typically trade at lower prices than generic mortgages.

So, as such, in aggregate this portfolio with favorable prepayment characteristics versus generic mortgages was put together at a price below that of generic TBA mortgages.

And, I think that is a key point.

I also want to stress that even within any one of these categories, we proactively and painstakingly focus on the other loan characteristics, such as geographic concentrations, servicers, LTV, FICO and other attributes to improve our odds even further of getting good prepayment results.

Again, while the HASP removed many of the credit and other barriers to refinancing there are still opportunities to source pools with repayment protection.

Two examples of these are loans with current LTVs above 105 are not eligible for the new programs, and on interest only loans borrowers have less incentive to refinance into amortizing mortgages because of higher monthly payments.

So, I hope this information helps give you a little more visibility into our portfolio and allows you to better understand your investment in us and to evaluate our performance going forward.

So why don't we turn to page 11 and let's look at the Hybrid ARM portfolio.

Again, we have included a fair amount of information here, but I want to highlight a few key points.

The vast majority of our Hybrid ARMs, or 88%, have an interest only feature, where the borrower does not make any principle payments for at least five years.

This reduces monthly payments and reduces incentive to refinance.

As importantly, borrowers who took out these loans also tended to have other loan attributes such as high LTVs, stated income, higher DTIs, lower FICOs and other factors that also reduce refinancing options as well in the future.

As in the case of fixed rate mortgages, the prepayments speak differences between IOs and amortizing loans are significant.

The universe of interest only 2005 to 2008 Fannie five ones prepaid more than 40% slower than those of regular amortizing ARMs.

Our Hybrid ARMs are also seasoned with the average age of the portfolio in over two years.

As in the case of fixed rate assets, we avoided the 2008 vintage as these borrowers are much more likely to qualify for new loans than those that took our loans in 2007 and prior.

Now, we are also comfortable purchasing higher coupon ARMs.

Why?

We believe, like in fixed rate, that these coupons provide the best risk adjusted returns and are priced for extremely fast speeds.

Our Hybrid ARM portfolio has an average coupon of 6%.

But, it prepaid at only 16% on average in the last prepayment report from March.

A meaningful percentage of the loans backing our higher coupon ARM securities have current LTVs above 105 (inaudible) IO, or have other characteristics that are going to continue to provide call protection as we move forward from here and the prepayment landscape changes.

Another benefit of the higher coupons, and this is important, is that they are going to perform considerably better than comparable lower coupon securities if rates increase.

So, said another way, these securities have significantly shorter durations and that is another important factor.

Number four, along these lines 100% of our ARMs as of March 31st are indexed to LIBOR, either six months or one year.

Why?

Our repo financing tracks LIBOR and unfortunately not Treasury rates, so purchasing an ARM index to Treasury rate somewhat defeats the purpose of having an adjustable security.

That being said, if the -- we would be willing to purchase Treasury ARMs if the priced discounts were significant enough but they have not been.

So, that is something that we expect to do very sparingly.

We also have listed the reset distribution on the ARM portfolio in the table at the bottom left, and, as you can see, 80% of our ARMs reset prior to five years.

Now, before we move on to cover the liabilities in the swap position, I really want to reiterate that the optimization of our holdings is a continuous process.

And, it must evolve with market conditions, new information around prepayments, new government programs, the availability and the pricing of different asset classes, and relative priority of the different risks.

As such, we are absolutely committed to diligently and proactively looking for opportunities to upgrade our assets, with an eye toward achieving that optimal balance between income and risk management.

And, along these lines our percentage of ARMs has increased since quarter end.

Now this that, let's turn to slide 12.

I think all of you are aware of the fact that repo funding costs and availability materially improved during the first quarter of 2009 versus the end of 2008.

And, as you can see, our weighted average repo rate dropped to 81 basis points in Q1, down approximately 150 basis points.

At quarter end, our average days to maturity was 19, and rates have improved so far in Q2 so we are optimistic about funding costs at this point.

Now, repo availability has also improved and we continue to feel comfortable with capacity.

Now, with respect to our interest rate swap positions, we increased the notional amount of our swap positions by $50 million, but more importantly we increased the duration of our swap position.

Now this was done by terminating $200 million in one year swaps and adding $100 million of three year swaps, and $150 million in five year swaps.

The net of these trades allowed us to add swap coverage essentially from year one through five years.

And, given the current economic weakness and the unprecedented action that we are seeing from the Fed, we feel relatively comfortable with short rates really over the next year, but we are much more concerned after 2009.

And therefore, we feel these transactions make sense and we have done more of these types of transactions in April.

These actions brought the average maturity of our swap position to 2.6 years as of March 31st, from 1.8 years as of December 31st, an increase of almost 50%.

It is important to keep in mind that our first tool in managing interest rate risk is not these swaps but our asset selection.

And, as I mentioned earlier, we greatly limit duration and extension risk in our portfolio by having increased the percentage of Hybrid ARMs and by owning higher coupons, again both in fixed rate and in ARMs.

And, the second point, sometimes just doesn't get enough attention with respect to keeping durations down.

I want to mention that the cost of unwinding the $200 million in swaps totaled $6.6 million but this is fully reflected in our total cost of funds number and in our book value.

Now, let's turn to page 13, and review the business economics.

Now, as we discussed in the highlights our margins improved materially from the fourth quarter.

The two big drivers were the improvement in funding costs and the disappearance of the impact of (inaudible).

We also benefited some from the increased leverage and the changes in our prepayment profile, but again, this impact really was limited by the timing of settlements.

So, active yields came in at 5.13% for the quarter versus 4.24% in the previous period.

This, coupled with a drop in funding costs down to 2.03 increased the Q1 margin to 302 basis points, which is net of the swap termination expense.

Of note, as I mentioned on the previous slide, we realized an expense of $6.6 million for terminating swaps in the first quarter, and this will be amortized quarterly through the second quarter of 2010.

Hedge accounting requires that this expense be included in our interest expense of which $300,000, or 8 basis points, was recognized in the first quarter of 2009 and $1.3 million will be recognized per quarter going forward over roughly the next year.

Now if we look at the end of Q1 numbers, you can see the average asset yield for the portfolio is lower and that is due to the higher concentration of Hybrid ARMs as a result and as a result of the sale of securities with higher book yields.

Thus, our repositioning activities help to capture that value in the quarter generating gains of $0.32 per share.

And, remember, the impact of selling these securities is already captured in our March 31st yields.

So, looking ahead, we expect to benefit from improving repo rates and are now rolling repo in the 50 to 70 basis point range.

At this point, as we continue to actively manage the portfolio, we do expect additional realized gains in the second quarter.

Now, I do want to point out a few caveats -- our yields and funding costs are impacted by a host of factors including prepayment projections, interest rates, repo rates, and both our prepayment estimates and the future coupons on our adjustable rate mortgage securities factor in both current rates and the implied forward curve.

So, changes in the shape and level of interest rates can have material impacts.

So, with that, let's turn to page 14 and look at book value.

Despite our lower leverage early in the quarter, we saw substantial book value appreciation.

Book value at the end of Q1 was $19.26 per share, which was a 12% increase from the $17.20 at year end.

Again, a key driver of this was our willingness in February and early March to add assets, coupled with the particulars around our assets selection.

Now, timely sales and the replacement of those sales also contributed to our book value realization.

All of these factors allowed us to fully benefit from the price appreciation that occurred late in the quarter.

And, Agency MBS have also performed very well out of the gate this quarter, and this should give us a decent tailwind for the second quarter, but we all know that market conditions can change.

So, now let's turn to slide 15, as I would -- our presentation hasn't gone that long -- as I would like to close by being really transparent about we currently intend to balance income generation with risk management issues, given the current market conditions.

The bottom line is that we cannot avoid risk entirely.

And, in addition to the liquidity and spread risk that we talked about on the last call, we have to manage both prepayment risk and our exposure to higher interest rates or extension risk.

In evaluating the trade-offs between these two exposures, we are actually more comfortable with prepayment risk than extension risk.

Why?

Because we can quantify it and because we are confident that we can pick individual assets that are going to behave better than the market as a whole.

On the other side of the equation, the new lower coupon mortgages are both fully valued because of the tremendous bid from the Fed and Treasury.

And, they have tremendous price risk if the combination of stimulus and quantitative easing or other factors lead to high rates.

These new 4% mortgages are going to drop materially in price and will be difficult, if not impossible, to hedge reliably.

Now while, in concept we feel more comfortable with new issue ARMs or 15 year mortgages, we still clearly prefer the more seasoned ARMs because the limited supply of the new issue paper has kept the sector to relatively rich.

Furthermore, even with ARMs it is important to recognize the fact that these mortgages have considerably longer duration and much greater price risk than seasoned hybrids, but, at this point, offer at best comparable yields.

Now, on the prepayment front, if you look at the table on the bottom of page 15, you can see estimates of how changes in prepayment assumptions could impact the yields on our current portfolio.

We stressed our prepayment estimates up and down by 20% and 40%.

I want to remind everyone that the speeds listed here are lifetime prepayment estimates, and that our base case prepayment speeds are much higher for the next 12 months, and then, they slow down due to higher forward rates, burnout and the phasing out of government programs.

So, our base scenario calls for lifetime speeds on our current portfolio of around 31 CPR.

But, this provides for average speeds over the next year in the low 40s.

And now, that is almost three times the average actual CPR on our securities that we saw of 15% in the last prepayment release.

Now by comparison, when you think of higher speed quotes from other people, our expectation for one year speeds for very generic premium mortgages are more like the mid-50s with lifetime speeds in the low 40s.

So, there is a distinction for the performance that we have seen from our portfolio and the specific attributes of the mortgages that we're purchasing.

So, as the table shows, even in the scenario where we increase our portfolio -- our current estimates by 40%, which would allow for one year speeds on our total portfolio of near 60% CPR and lifetime speeds in the low 40s, again versus our current 15%, our asset yield drops by around 60 basis points.

This would be clearly a significant decline but it should still afford reasonable margins especially since financing costs should remain low in this environment and we don't expect speeds of this magnitude are likely as we are talking again about holdings with specific loan characteristics and we expect them to continue to outperform generic securities.

And, it is also possible that prepayment speeds will come in below our expectations, which would enhance yields and margins.

Hopefully, the key here is this table should give you greater transparency into the sensitivity of our portfolio changes and prepayment speeds and that, coupled with some of the other slides we have added, we really -- we intend to continue to move in this direction so you can better understand us.

Obviously, many factors can affect our prepayment speeds going forward in our projections, including changes in the level and shape of interest rates, the housing market, the fault in modification activity, government and GSE actions and other factors, and our ARM yields will be affected by changing composition or our -- or changes to implied board rates as well.

With that, that concludes our prepared remarks and -- but, we are very interested in your questions and I would like to ask the operator to open up the lines.

Thank you.

(Operator Instructions)

And we will go to the line of Mike Widner of Stifel Nicolaus.

Please go ahead.

Hi, good morning, guys, and thanks for additional disclosures and thanks for taking the call.

I just had one -- on the disclosures, I think, definitely to see additional disclosures, but a couple of things that aren't on there that might be helpful and I was wondering if you could give us the numbers real quick would be -- principle balance on the portfolio at the end of the quarter as well as the WAC.

And if I missed them in there, I apologize.

I don't think -- I think you are right that the WACs are not in there and you could back into the principle balance via the market value and -- actually not with the WAC market value and the cost basis.

But, let me see, I think we probably have those.

The PAR value is $2.2 million and WACs we probably don't have right offhand.

Okay.

I would assume that's $2.2 billion?

Yes, I'm sorry.

That's all right.

All right, we let me -- again, definitely appreciate the disclosures going forward for modeling purposes.

I think those number would certainly help a lot of us if you get around to including them in the future.

I am a little confused by some of the data on the -- some of the things you said and some of the things that are in the note on the swap termination.

And I guess specifically I see that in the income statement you got a $1.5 million charge for derivatives.

I had assumed that that was related to the terminated swaps, but it sounded from your conversation like it -- that it wasn't and that there was only $300,000 in the quarter and that was being reflected in the interest expense line.

I just wonder if you can talk me through that a little more.

Sure, now that is a very good question.

So the $1.5 million actually relates to hedging effectiveness on the swap portfolio.

So, as the asset portfolio moved around and the funding base moved around, you have the potential for hedging effectiveness.

And, so the $1.5 million related to hedging effectiveness and then you additionally had the $300,000 that related to the percentage of the terminated swaps that was taken in Q1.

Okay, so that was imbedded in the interest expense line?

Yes, the $300,000 is imbedded in the interest expense line and the $1.5 million is imbedded in other income.

Got you.

And so, as we amortized the rest of that $6.6 million, so I guess it would be $6.3 million, you indicated that it would be about $1.3 million per quarter, is that -- is it just going to be a straight line amortization or is there going to be any ramp or should we just run.

No.

It's straight line amortization.

Okay, great.

I will let other people ask some questions and jump back in the queue if I have others, thanks.

Thank you.

Thank you.

And next we will go to the line of Matthew Howlett of Fox-Pitt Kelton.

Please go ahead.

Thanks for taking my question and congratulations on some pretty good results.

I just want to drill down more the purchase yields you are seeing going forward.

From some of the dealer reports I have seen and the street pricing, there are looking at -- sort of if you look at a premium fixed rate of 5.5 or 6 at a 103.5, 104 dollar price, it looks like the street yields around 2% on that and that assumes really three months CPR on 55 and even longer term CPR as low as 60, and that is clearly just for generic.

Are you seeing something where you feel like you can find securities out there that could yield -- that could prepay at a meaningful slower rate and therefore would have an implied higher yield?

The short answer is yes.

But, there's two things you have to keep in mind.

You -- obviously mortgages have done well, fixed rates are more expensive than they were in February when we talked last, but the key again is to your point finding securities that can prepay slower and one of the things is, by looking across the mortgage market, ARMs, fixed rate, 15 year and potentially even CMOs going forward, and given our size, we actually do feel like we can find pockets where we can feel pretty good about the prepayment assumptions.

The other thing is, even the generic yields that you quoted, the one year speeds or six months speeds are likely on generic mortgages to be in that 50s area, maybe 60 depending on the security you are looking at.

But, the lifetime speeds are not expected to be that fast, and we have seen that in the past and most models capture that.

So, even the yields of the generic securities are in the low 2s under normal, kind of -- when you factor that in they are higher than that.

But, to the key gist of you question, given our size and given our ability and desire to look through the entire mortgage market, we do feel like we can find securities that will produce higher yields than that and given the benefits of low funding right now, we still think there are pockets of value although it is clearly tougher now than it was a few months ago.

Fair enough.

And, certainly performance in your book has been a lot smaller than we have been seeing so certainly a good job so far.

Are you factoring in -- there has been a lot of talk about that there has been a delay in buyouts, I mean it was going to come with the modification plans and that could really increase speeds for sort of an involuntary prepayment, is that factored in with your portfolio?

Absolutely.

Again, we recognize, and I want to be clear, there is a lot of uncertainty around the prepayment landscape.

It is changing continuously.

But, our portfolio prepaid at 15.

Look, we know it is going higher, all right?

We recognize the -- we know that there is the refi program, we know that there is going to be more modifications.

Both of those are going to increase speeds.

And we are not hoping for 15s, well, we may hope for that, but we are not expecting them.

We are expecting prepayments to pick up pretty materially.

And if you look at what we are saying for our portfolio as a whole, we are running them for the next year in the low 40s for speeds.

So we have plenty of room.

Now, going back to your specific question about modifications and buyouts and credit, the thing to keep in mind is that in the GSE space, even in the weaker credits within the GSE space, what kind of default rates or modification rates would you need to get really high CPRs?

They would have to be astronomical in a sense.

Even if you assumed a 25% default rate, which again is so far above the delinquency rates -- the average delinquency rates, and even probably the delinquency rates for weaker cohorts in the GSE space, if you assume that happened over two years, you would add 10% to 15% CPR to the speeds.

We are not worried about 10% and 15% increments.

We are worried about the really fast numbers, which we feel are more likely to come from refinancing behavior rather than the modification or credit or default behavior.

So, you are absolutely right.

It is going to pick up.

We feel like we have plenty of room for that, and we are going to be watching it.

Great.

And then, just one last thing, what was the underlying cost basis for the fixed rate side?

I didn't see it in there, I might have missed it.

We did not break out -- actually you could get it --

Okay, I didn't know you --I can get back into it.

Thank you.

Okay.

Thank you

Thank you.

Next we will go to the line of Ben Mackovak of Rivanna Capital.

Please go ahead.

Hi guys, thanks.

Nice quarter.

Thank you.

Why the higher leverage?

The higher leverage was brought about because, and I think we talked a little about this on the call last time, we felt there was considerable value in the mortgage market.

We knew prices had gone up, but we felt that given the drop in funding costs, given what was priced into mortgages in terms of risk premiums, we were very comfortable with the product and we were very comfortable with our ability to finance it.

So, for those two reasons, we proactively and pretty quickly got our -- raised our leverage to the levels where it is now.

Could we see it go even higher?

That is an interesting question.

It is obviously an important question.

We are going to evaluate our leverage in light of all of those factors going forward.

So, we want to keep track of the financing environment, again we feel very good about that.

Mortgage prices are higher at this point, that is a factor that would tend to keep us from growing leverage that much.

But again, there are some pockets where we might get more value, and the uncertainty in the market, particularly around prepayments, is something that does impact financing, the ability to finance a much higher leverage portfolio.

So, that is something else we are going to watch.

But, at this point we feel very comfortable with our leverages where we are.

We would evaluate under the right circumstances taking the leverage higher from here.

And, one thing I want to reiterate is, we purposely maintain that PBA eligible fixed rate population so that if there were a reason to lower leverage relatively quickly, we feel like we could do that at very little cost, or if we saw a good opportunity in some other sector of the market we could swap out of that into something else.

So there are a lot of benefits to having that position as well with respect to moving leverage around.

On prepayment speeds, is there a catalyst that is going to get those to pick up or is it just they are going to happen when they happen?

How do you guys think about that?

Well, there definitely is a catalyst.

We are projecting again much faster speeds, multiples of where we currently are.

And, it is the lower rates that -- mortgages rates that we have seen recently.

Again, -- and these new GSE programs are the catalyst.

However, we have designed our portfolio to perform as well as it can with given those programs.

So, just to reiterate, we expect our speeds to pick up but we expect them to continue to outperform generic securities.

(inaudible) Is the summer more -- is there a seasonal factor, are people waiting for tax refunds?

Obviously the lower rates are going to cause prepayments, but is there something else that -- I am just surprised that they haven't picked up already, because there have been low rates for a few months.

Yes, and I think realistically, if you went back to our call last quarter we were confident that speeds were going to -- if you went to that point, we were confident that speed expectations were very conservative and that is why we are comfortable in a higher coupons.

The large acceleration, you know speeds accelerated, but the large acceleration especially on our holdings didn't occur.

There are reasons to believe the catalyst -- again, the seasonal factors matter.

They are not going to be the biggest driver.

The bigger drivers are the changes in the programs which are going into effect, or have just recently gone into effect.

So, speeds will pick up.

I am highly confident of that.

But again, we are cautiously optimistic that they are going to remain contained.

Great.

Thanks a lot.

Gary, to an earlier question, the cost basis for a fixed rate portfolio is $1.4 billion relative to par value of $1.3 billion.

Okay.

Did you get that?

What was that?

The cost basis for a fixed portfolio was $1.4 billion versus a UPV of $1.3 billion.

And, in dollar price terms that was just over 102, I believe?

102.1.

02.1 -- it was an earlier question, I am sorry.

We will next go to the line of Jim Delisle of Cambridge Place.

Please go ahead.

Hi, guys, I apologize for the speaker phone.

I don't know how to run this darn thing.

I think the transparency is really good.

I enjoyed reading it.

And, I look forward to the Q.

I was hoping that I could get an update on the status of your -- of the two blocks of $2.5 million of locked up securities right now as to when the securities locked period ends for either of them or both of them.

And, if there are any plans to do anything with them.

Well, we are in a position of getting liquidity in our -- in half the total of American Capital Investment Agency.

The other half is still subject to underwriters lockups.

And, beyond that we really don't intend to comment much.

We do view this as an investment and we will take our opportunities to get liquidity in it from time to time, I suspect, but we will -- because of our position, we will have to be filing 8Ks when we do so.

I hope you can give me a phone call before you file the 8K because I would like to big time buyer of those .

I am looking forward to the opportunity to participate more as a shareholder going forward, so please keep me in

Sure.

Thanks for the question, though, but we obviously -- we are just going to have to operate as we are required to with respect to our holdings in terms of filing and keeping the public informed.

I understand.

I love the changes you have made, the transparency.

Gary going on the road upon immediately taking charge, like I that, and it makes for a situation where I would be proud to participate going forward if I was given the proper opportunity.

Thanks again.

Thank you.

And we will go to the line of Tim Wengerd, Deutsche Bank.

Please go ahead.

Hi, good morning.

Thank you for all of the clarity in the presentation.

It is very helpful.

The comments at the beginning of the call, are there changes in incentive comp?

I know there is shifting structure going on, but I was wondering if you could clarify that.

Yes.

We could just barely hear you, but I believe the question was there a change in incentive comp.

And, the reason we did not announce that this has been implemented already is that we are still working on some of those details.

We do expect to get it done by the end of the second quarter.

But, the compensation will be driven by the income to the management company under the management agreement and we will be working with them in the confines of that agreement.

Okay, got it.

Thank you.

And, just one other thing to reiterate, is that the changes allow for the people in the management company to invest on their own in AGNC stock whereas that wasn't possible under the old arrangement.

Okay.

Anything further, sir?

Nothing further.

Thank you.

Thank you.

(Operator Instructions)

And there are no further questions in queue at this time.

Please continue.

Well, folks, thank you so much for joining us.

This has been a very good call.

We felt we had a good quarter and we are optimistic that we can perform well in the quarters ahead.

We will be back in another three months and talk to you some more and review the information.

In the meantime, always feel free to give us a call if you have any questions.

So, Katie, thank you so much for hosting the meeting here with us.