AGNC Investment Corp (AGNCN) 2010 Q1 法說會逐字稿

Good morning, my name is Debbie and I will be your conference operator today.

At this time I would like to welcome everyone to the Agency Q1 2010 earnings conference call.

All lines have placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions).

Thank you.

Miss Katie Wisecarver of Investor Relations, you may begin your conference.

Thanks, Debbie, and thank you for joining American Capital Agency's first-quarter 2010 earnings call.

Before we begin I'd like to review the Safe Harbor statement.

This conference call and corresponding slide presentation contain statements that, to the extent they are not recitations of historical facts, 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 10-K dated February 24, 2010 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 the telephone recording can be accessed through May 11 by dialing 800-642-1687 and the conference ID number is 685-39317.

To view the Q1 slide presentation turn to our website, AGNC.com, and click on the Q1 2010 earnings presentation link in the upper right corner.

Select the webcast option for both slides and audio or click on the link in the conference call section to view the streaming slide presentation during the call.

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

Participants on today's call include Malon Wilkus, Chairman, President and Chief Executive Officer; John Ericsson, Chief Financial Officer and Executive Vice President; Gary Kain, Chief Investment Officer; Bernie Bell, Vice President and Controller; and Jason Campbell, Head of Asset and Liability Management.

With that I'll turn the call over to Gary Kain.

Good morning, everyone, and thanks again for joining us.

As many of you know, we began positioning for the potential of a significant prepayment event driven by GSE buyouts back in September of 2009.

We remained very focused on this risk throughout the fourth quarter and into 2010 and we went to great lengths to minimize our exposure on this front.

We also fully disclosed these concerns and the strategies we were employing to protect our investment portfolio in both our third- and our fourth-quarter earnings releases.

But as the saying goes, talk is cheap, and you, as investors, care about our results.

On this front AGNC's active approach to portfolio management allowed us to turn this threat into an opportunity.

For the quarter GAAP and tax forwardings were very strong; we maintained a very attractive dividend; we increased our undistributed taxable income; we grew our book value; and we took advantage of attractive valuations following the GSE buyout announcements to grow and reposition our portfolio, which we believe will allow AGNC to continue to generate attractive ROEs going forward.

With this as the backdrop, let's quickly review the highlights on page 3.

For Q1 we again declared a dividend of $1.40 per share which was well below both our GAAP net income of $2.13 per weighted average share and our taxable income of $1.88 per weighted average share.

Since our taxable income continued to exceed our dividends undistributed taxable income increased by $9.6 million to $1.17 per ending share.

The net income number included $1.33 of other investment-related income which included realized gains, derivative mark to market and hedge ineffectiveness.

We also had $0.15 worth of amortization expense associated with our terminated swaps.

I want to remind you that this expense will no longer be a recurring item as it disappears in Q2.

Now earnings net of these two items were $0.80 per share.

There are two things that are really important to point out though.

First, because we project our prepayment speeds, our yields and our net interest income include the actual impacts of Freddie's buyouts, as well as the projected impacts from the Fannie Mae buyouts.

As such, in the second quarter we would not expect to see any material impact on NIM as a result of the actual Fannie buyouts as only the difference between the actual paydowns and our projections will impact results.

Second and more importantly, this quarter's $0.80 of portfolio interest income was reduced by pre-buyout sales of our highest yielding, highest coupon securities as the value from these sales was recognized as realized gains, which we believe enhanced our total return.

While we know the market prefers net interest income to realized gains, our goal is to maximize long-term total return and we will not hold on to at risk securities and risk losing money to improve the geography of our income.

Let me be clear, our priority is making money, not optimizing earnings geography.

Now to this point, after paying $1.40 in dividends our book value increased $0.43 to $22.91 as of March 31.

Thus the combination of our dividend and the improvement in book value translates to $1.83 per share which equates to an annualized economic or mark to market ROE for the quarter of approximately 33%.

As of March 31 our investment portfolio totaled $5.2 billion in assets and that was an increase of approximately $900 million from December 31.

Our leverage was 7.9 times as of March 31.

However, average leverage for the quarter was materially lower.

And we can look at changes to the portfolio into more detail if we turn to slide six.

We began the quarter shrinking the portfolio, cutting leverage and reducing risk.

These sales generated substantial gains totaling approximately $24 million in January alone.

On net sales of over $500 million in securities.

These sales allowed AGNC to essentially lock in favorable prepayment outcomes that we now know would not have occurred.

After the significant market reaction to the buyout announcements we reversed course and we increased the portfolio.

Why not hunker down, wait for more clarity around the timing and the extent of buyouts?

Because our exposure was minimal and we expected that too many other investors would employ exactly that approach.

As such we viewed this as an opportunity and acted accordingly.

We purchased over $1 billion in hybrid ARMs and added a significant amount of 15-year mortgages.

But we did choose to reduce our holdings of 30-year mortgages as we wanted to minimize any exposure to near-term volatility associated with the Fed's withdrawal form the mortgage market.

Now as you can see in the pie charts to the right, our portfolio is again more than 50% hybrid ARMs and this percentage increases to 60% when you include the CMOs backed by ARM collateral.

Our holdings of shorter duration 15-year mortgages more than doubled during the quarter to 13%.

30-year mortgages now comprise only 22% of the portfolio versus 36% at year end.

Now mortgages have done very well following the initial shock of the buyout announcements and this performance has continued into April as well.

Hybrid ARMs have been the best performing sector with prices of some of these securities higher by around a full percentage point over the levels where we were able to purchase them immediately following buyouts.

Prices and spreads of 30-year mortgages have held up pretty well despite the Fed's exit, but during the first quarter we did prefer the risk return profile of shorter mortgages.

Going forward though we would be comfortable increasing our exposure to 30 years on any weakness or if other sectors continue to richen.

Now the next two pages give more detailed information on our fixed rate and our ARM holdings.

And given the increase of our holdings of 15-year mortgages we did add a comprehensive breakdown of the 15 years to the fixed rate slide, so look for that.

Now let's go to slide 10 and look at our hedging strategies and how they have evolved.

While we are generally more comfortable now on the prepayment front post buyouts, we are focusing even greater attention on interest rate risk management.

In addition to reducing the duration of our assets, which I discussed a few moments ago, we continue to supplement our interest rate swaps with other strategies that are designed to protect our book value over a wide range of different scenarios.

Our interest rate swap position continues to cover over 50% of our repo balance and has a weighted average maturity of close to three years.

And consistent with what we said in Q4, we continue to have a $300 million position in interest rate swaptions, which are options that we purchased to help protect the portfolio in the event of larger moves in rates.

Now lastly, we also use mortgage-related hedging strategies on a tactical basis to further protect our book value.

For example, as we have mentioned on calls in the past, on a limited basis we use short positions in TBA mortgages as temporary hedges to reduce interest rate risk and to protect book value from price declines associated with technical factors, prepayment fears or liquidity issues, as well as interest rates.

And then for similar reasons we also purchase $75 million in put options on TBA 30-year mortgage securities during the first quarter.

These put options work in a similar fashion to swaptions in that agency purchased the right to sell 30-year mortgages at a predetermined price.

This put option, like a short TBA position, provides incremental protection to our book value if mortgage prices were to drop significantly for any reason.

Now if we move to slide 11 we can look at the business economics.

Now I'm going to focus on the 3/31 as of numbers in the first two columns given the significant changes to the portfolio we just covered.

And as you can see, our asset yield dropped to 3.68% from 3.99% at year end.

As I mentioned earlier, this decline was largely a function of our sales of very high yielding high coupon assets where this value was realized in the other income line and most of which is still available as undistributed taxable income.

Additionally, the increase in the percentage of ARMs which carry lower yields also contributed to the decline.

Remember as well that these yields fully incorporate our projections from Fannie Mae buyouts and the actual impact of the Freddie buyouts that we saw in the first quarter.

Now with respect to the net interest spread, a good percentage of the change in asset yield was offset by a decline in our funding costs.

Also since the remaining $2.6 million of our terminated swaps will be amortized during the second quarter and will no longer be a recurring item, we added a column which displays the economics without this line item so investors can see the impact on our gross and our net ROEs.

And as that first column illustrates, our gross ROE before expenses and without the inclusion of any other income is still almost 24%, which is very close to the average gross ROE before expenses for the full year of 2009.

Again, this ROE gives no credit to realized gains and other types of income which were clearly a major contributor to returns over the past year.

Now if we go to page 12, there's one more thing I want to cover related to buyouts before I open the lines up to questions.

While I mentioned that our asset yield fully incorporates our projections of faster speeds as a result of the Fannie Mae buyouts, this slide is designed to address a different question, which I know many of you are thinking about.

How many of our higher-yielding assets will be called away and then will we be forced to reinvest in the future at lower yields?

As the table shows that the book yields on the categories of Fannie Mae securities that we believe are likely to have the largest paydowns.

Interestingly, since many of the securities in these categories were purchased relatively recently that average yield on these is 3.62% which is in line with Agency's average portfolio yield and not very different from current reinvestment alternatives.

Furthermore, the projected amount of paydowns as a result of a buyout of these securities using Fannie Mae's tables comes to less than $100 million which is less than 2% of the portfolio.

For these reasons we are very confident that buyout-related reinvestment risk is not a material issue for AGNC.

So with that, let me open up the call to the most important part, your questions.

(Operator Instructions).

Steve DeLaney, JMP Securities.

So, once again you didn't disappoint us by sitting around on your hands with a passive portfolio.

Nice job.

Thank you for clarifying at the outset because I had -- the wording in the press release certainly suggested that you had already provided for the additional premium amortization coming from the Fannie Mae buyouts that would -- in April through June, but I think you clarified that very clearly.

So I think what you're saying to us is look at your -- don't look at your spread for the first quarter, but look at your spot spread at March 31 of 2.36%.

And if we want to look forward to the third quarter maybe we need to look at it without the terminated swap expense that expires in 2Q and we'll be looking at something north of 2.50%.

So, I mean for modeling purposes is -- am I reading you right as to how we should look at what the real spread is on the book now that we're post the buyout impact?

No, I think everything you said makes sense.

Basically again, we project prepayments going forward.

And at this point, given the information that is out there, clearly there are ways to project the Fannie Mae buyouts pretty directly.

So, at this point we are projecting them and they are incorporated in our yields.

Of course if the actual buyouts are materially different then you would see that flow through.

But other than that it's incorporated.

So that's one issue that should be thought about.

And the other is just the changing composition of the portfolio and the fact that we did sell a lot of mortgages early in the quarter and they were our highest yielding mortgages.

So the Q1 yield, a lot of that value was achieved within the other income line item.

And so to your point, I think you do get a lot of information from looking at the go-forward run rates.

Okay.

And, Gary, it looks for the first time -- you've had CMOs, but this quarter, in first quarter you added some I/O strips.

And I was wondering if you could tell us how much notional value does that $38 million of fair value, how much does that reference in terms of your interest stream on your I/O.

And was that -- did you do that because you liked the yield on those securities or were you thinking about the I/O serving as something of a hedge in case you get some duration extension on your fixed rate book and using the I/O's to protect book value?

Yes and yes.

But going back to the notional, what I don't want to -- you have to be careful on nationals because the way these securities work sometimes the notional is on a 25 basis point strip or 0.25 and other times it's the full coupon, which is why you use the market value.

So, I'm going to -- I'll get you more information on the notional, but again, it's somewhat of a misleading number because it's a mix of different notional amounts.

Got it.

So it's not like just a fixed -- it's not like just a fixed 5% coupon on a certain amount of notional value?

Well, yes, some of it is.

The fixed rate I/O is fixed at a particular coupon and the notional there is in the area of $125 million.

Some other I/Os are off -- have very small coupons of like 25 basis points and higher notional, so it's a little misleading.

Let me get to the guts of your question, because first off, what's important is the market value or the investment amount at the and of March 31 was $38 million.

And so it is a very small percentage of our portfolio.

Now why are we -- why did we choose to buy fixed rate I/Os?

And the reason is following buyouts and it goes to a major theme which is that we were again more comfortable with repayments in certain areas of the market.

And by buying interest only strips, which appreciate in value if interest rates go up because repayments tend to slow down.

We felt that it did serve a hedging purpose for the portfolio and would be another vehicle for protecting both returns and book value in a rising rate environment.

We also felt, again, that there was good relative value in the securities we were selecting and we felt that because of the fact that the buyouts had occurred and because that risk was lifted and was being, if anything, over priced by the market in the securities we looked at.

So it was a combination of both of those -- the reasons that you laid out.

Again, it's something that we really wanted to disclose.

We don't necessarily believe we're alone in buying these, but we really wanted to put it on our -- in our disclosure and highlight it so people recognize that it was there.

Thanks a lot, Gary.

I appreciate it.

Bose George.

Good morning, nice quarter.

Actually my first question is kind of a follow-up to Steve's.

Just given how proactive you've been in changing your portfolio for different market environments, could we see you potentially do more in terms of protecting yourselves against rising rates and what kind of things could you do?

The short answer is, yes, I think we're very focused on the rate picture.

We laid out the different tools we used and given Steve's question, I mean I/O strips were another thing that you could add to that toolbox.

But we're very focused on both our assets and our liabilities and we recognize that at this juncture there is uncertainty around the rate picture and I would say in both directions, especially given the issues in Europe.

And so, what you can look to for us is a recognition of that, continuing to really do what we've done, which is increase the optionality of our hedges and look to different ways to protect our book value in an effort to ensure decent performance irrespective of what happens to rates.

Great.

And the other thing I was curious about is clearly your company is somewhat difficult to model just with the recurring gains.

I was just wondering about when you think about your approach of running the Company can we think about it as a base ROE and then you realize gains opportunistically or have you purchased securities where you look at the gain side of it more or can you just talk a little bit more strategically about that?

Strategically our active management is designed from the perspective of trying to continuously improve our portfolio at all times.

And so, we feel that it's imperative to look at everything we own as well as what we plan on purchasing to just add those securities to the portfolio.

So if we're looking at the market on any day, we come in and we're as interested in a very expensive security as we are in a very cheap security.

Why?

Because the cheap security we can buy and the expensive security we could potentially sell.

And both of those traits add value to our investors and to our portfolio.

So what you can think of in terms of our business model is that, which is every day we're coming in and we can make money on either side of the market and that's our objective and that's the challenge we put on ourselves.

Overlay on that is that there are times when there are big picture calls and we've had a number of those times of late and those big picture calls were we (inaudible) in coupon early in 2009, we got very concerned about upping coupon and buyouts late in 2009 and into 2010.

Now we're more balanced on our views.

So those will overlay the day-to-day transactional mindset but both impact our portfolio performance and our ability to generate transactions.

Okay, great, thanks for that.

And actually one last thing.

What was the premium that you guys paid for that $1 million of ARMs you purchased?

We don't have the exact price, but my assumption is that it was 105 or higher.

Okay, great.

Thanks a lot and good quarter.

Thanks.

Mike Widner, Stifel Nicolaus.

Good morning, guys, and congrats on another solid quarter.

Thank you.

Let me just ask you another follow-up question just to make sure I understand how to model the amortization and the yields going forward.

What I'm gathering from what you're talking about and using the effective yield method is that you've built in the expectation of the prepays on the higher coupon stuff and the I/Os for 2Q, and then you're expecting them to ramp down in 3Q.

So essentially the 368 yielded that you've got on the portfolio now we should expect that to be roughly stable all else equal, assuming prepayments come in with that expectation, high prepaids in Q2 and then slowing down in 3Q, is that right?

That is accurate.

Okay.

And then I just wanted to also on at your table on page 12 which shows some of the higher coupon stuff, I just wanted to make sure I know how to reconcile that with the statement you made that you bought a lot more hybrids kind of in the wake of the Fanny and Freddie announcements.

That table only has $1 billion of total and principal amount of loans in there.

So reasonably low.

Should we take it that when you say you bought a whole bunch of additional hybrids post the announcement, that it was mostly the lower coupon and the non-I/O stuff, is that the right interpretation?

I think what you can take from this is that they didn't -- if they had fallen into these categories, these are the highest risk categories.

Unlike the table that we put out on September -- I mean, on February 17, this is not a complete portfolio picture.

We took the highlighted categories to try to give some numbers around this reinvestment point.

But, no, this isn't our total portfolio paydown for Fannie Mae securities.

I think what you can take away from that is a good chunk of those securities were probably Freddie's.

And another thing you can take away is that a good chunk of them did not fall into these categories that are highlighted on this page.

Got you.

And so for the Freddies that aren't in there, I mean how should we think about your mix between Fannies and Freddies?

Should we assume I guess that if we did this same chart for Freddies it would be roughly also $1 billion or is that not a safe assumption?

Well, the Freddie buyouts are already in the end of March numbers.

So the point here was how many of our securities are going to disappear because of the buyouts?

And so the extraordinary prepayments due to the buyouts aren't a factor on the Freddie side at this point, and so that's why we didn't include them.

Yeah, no, that part I got.

I was thinking about it from the standpoint of understanding the exact composition of the portfolio and the mix.

I guess I can wait for the Q to see because you guys have a fair amount of detail.

And also go back, it doesn't give you the Freddie and Fannie, but if you go back a couple pages to the ARM breakdown you can actually see the composition of the ARM portfolio.

And that may answer a number of your questions.

Got you.

Yes, I can back into it that way as well.

And then just one final question.

You guys talk about taking leverage up.

Just wondering what you feel comfortable with at this point in the cycle and how your views on Fed tightening and how far away and how aggressive the Fed might be plays into your views on how and when to take leverage up?

That's an excellent question and I appreciate it.

One of the things is our leverage over the past year has generally ranged between 7.3 and 7.8 times.

And over the last couple quarters it was lower because of buyouts which was a major issue we were talking about and the risk associated with that which we felt was difficult to hedge, so to speak.

So, where we are now is, yes, that's a pretty tight range, 7.3 to 7.8; we were absolutely on the higher-end of that range at the end of March 31.

We were comfortable with that position given the composition of our portfolio.

Right now we feel that their -- my personal view is that the Fed is on hold for longer than people are pricing in.

I think that when they do start tightening the tightening will be a methodical balanced approach where they'll be worried about the implications for the economy.

And so we are comfortable with the interest rate environment.

On the other side, we are more -- we have less comfort around the longer end of the curve.

And the reasons there are -- we have two factors.

One is the economy is improving; two, we have a treasury issuance; and three, going in the other direction we have a lot of uncertainty in Greece that could actually bring down long rates.

For that reason we've done things like add options and add other types of vehicles to really help hedge the portfolio.

So we feel with the composition of the portfolio that we have we can perform reasonably well in either direction.

And we don't view leverage as the only lever that we have to control risk.

We feel that it's very blunt and sometimes doesn't do the job very well.

A perfect example would be the buyout risk.

The better approach was not to have very low leverage; it was just to avoid the securities that were at risk.

Got you.

And one final question.

Do you have any views of the capital's odds of making it through the first round of the playoffs here?

I hope it's high.

Thanks, guys.

Appreciate the comments and congrats on a solid quarter.

Thank you, appreciate it.

Daniel Furtado, Jefferies.

Good morning, Gary, thanks for taking my call and good quarter, well played on the buyouts there.

Just a couple real quick questions.

The first is these put options on the TBA, is this the first put options you've engaged in since you've been at the helm here?

Yes, it is the first put option that we've done since I've been at Agency.

The one thing is what distinguishes this from what I believe occurred in the past is that this is a purchased option, it provides protection, it is something we pay for and it's not designed to generate income, it's designed to help protect book value in extreme scenarios.

Right, no, I've got you.

I didn't think you were playing it the other way.

And then on the I/O side of the coin, assuming a constant capital base, what level would feel comfortable taking that I/O exposure up to?

One of the reasons that we have it on the -- that we chose to disclose it specifically and put it on the pie chart was because we recognize that it's an interest only instrument.

And so we did want to highlight it.

It's not something that's ever going to make up a significant component of the portfolio.

Are we comfortable with it being higher than where it is?

Absolutely.

But it's something that you have to use -- that you'd have to use at certain times and you have to be cognizant of the amounts that you use and that is specifically again the reason why we broke it out in disclosure to be transparent about it.

And that's very much appreciated.

And then the final strategy side is, can you help us understand how you're thinking about incremental investment near-term considering where pricing is right now in this space?

Sure.

It's interesting, in the second half of the first quarter we obviously like ARMs and 15-year and that's what we added pretty aggressively.

The ARM market in particular has tightened dramatically.

And so we're less enamored with ARMs versus other instruments.

We're still reasonably comfortable with 15 -- we're still comfortable with 15-year and we're still comfortable with some components of 30-year, less so the lower coupons.

And there are maybe infrequent opportunities on the ARM side, but one of the things that's clearly happened in the market is as the pay downs have come in and there's been more clarity on when they will come in, there has absolutely been a recent rush to the ARM market and there aren't enough securities to go around.

So we're glad we're not in a position right now where we have to add a lot of ARMs.

Got you.

Thanks again for your time.

Thank you.

Henry Coffey, Sterne, Agee.

Good morning, everyone.

You've certainly a simplified the task for us, which we appreciate.

But basically, based on a level yield method you've told us what to expect the portfolio to generate, the swaps go away mid-quarter, end of quarter, what is that expense at?

At $2.6 million, I mean it's actually not the and of the quarter because you can see it's a lower run rate (multiple speakers).

But that number you're giving us is what it's going to cost for the quarter?

For the whole quarter, yes.

Then it's zero in subsequent quarters?

Exactly.

If we do a back of the envelope we'll probably see you with operating earnings higher than you delivered this quarter, but not up to the $1.40.

So how do start to structure a game plan around the dividend?

Well, two things you've got to keep in mind again, we're very comfortable with our operating -- our pure portfolio interest income and our capabilities on that front.

Clearly we're going to maintain an active management kind of framework which I described (multiple speakers).

Right, no --.

-- on an earlier question.

And we do feel we can add incremental value via that approach.

And then lastly, you've got to keep in mind that we have $1.17 in undistributed taxable income which we do have to pay out and which we will pay out.

And so you can do your own calculations with respect to the combination of those tools and make your own projections (multiple speakers).

One of the things we learned from that strategy as it was applied in the past is eventually you get to a turning point.

If course you won't have a liquidity crisis, but you'd get to a point where those back end distributions end up coming out either not at all or in the form of stock.

So do you see your ability to add leverage to eventually get your operating earnings up to that level?

Or do think it will always be a mix of operating income and gains in the $1.40?

I think there are a number of options, we absolutely could raise leverage at some point.

But look, our mindset on leverage is not -- there's not a particular number that we're going to try to hit.

We'll add leverage when we feel it's warranted because the returns are attractive and we won't add leverage if we don't feel it's warranted.

Again, we have a number of different tools to generate income.

And I think we've demonstrated over the past that we can do that and manage risk at the same time.

Great, thank you.

Mike Taiano, Sandler O'Neill.

Good morning.

Most of my questions have been answered.

Just had a couple though.

Just to hit on your point in terms of what's gone on with the hybrid ARM market and it seems like there's just not enough of securities to go around.

I mean, is that a little bit of a scarcity value play here where you think that production in the hybrid ARM market is going to continue to lag significantly relative to where it's been historically?

And looking at natural buyers being banks and obviously they have capital concerns and can kind of a play that carry trade here, do you think that's likely to continue?

Actually there is absolutely scarcity value to ARMs and there's negative net supply as the buyouts have hit the ARM universe extremely hard.

And production, while it's picking up as a percent of total originations, is not that high.

But our focus has not actually been on the newest origination ARMs and, yes, they've done very well.

I think there will be a turning point over the next three to six months where new production ARMs -- where production may overtake demand, but in the short run with buyout reinvestment and other factors, I think ARMs are going to remain in very high demand.

And I think that's true both of new origination ARMs and the remaining higher-quality seasonal ARMs actually have even better technical support because there's absolutely no production of them and 20% to 25% of that universe just disappeared.

Great.

And then just secondly, you were able to raise $62 million through the DRIP this quarter.

Is that just for modeling purposes?

I mean, do you think that's something that is sustainable going forward and something that you think will continue into the remainder of the year?

It's really hard to predict.

It's a function of a number of different factors.

All of the details on the plan are up on our website.

But like any other capital activities, it's completely dependent on market conditions and other factors.

It's not something we're going to give guidance on.

Okay, but is that the highest amount you've raised in any particular quarter so far?

It's the only quarter that the program has been up and running and activated.

Got it.

Thanks.

Jason Arnold, RBC Capital Markets.

Good morning, Gary.

Nice job this quarter.

I don't know if you've quantified this or not, but would you say that the average portfolio yield was impacted by the buyouts to the tune of maybe 10 basis points to 20 basis points or so in 1Q 2009 -- or 1Q 2010, I'm sorry?

We didn't give a quantification because there are so many ways that the yield is impacted.

If you sell an instrument before the buyouts it's not -- I mean, you're not impacted by the buyouts, but if that was a high-yielding instrument and you sold it, then you lose yield.

We actually don't see the buyout component or the faster speeds on what we held as being one of the larger issues.

The bigger issues being that we cut leverage and sold our highest yielding instruments.

That was clearly buyout related, but indirectly.

And again, what's really important there is we didn't lose that income, we just -- we actually locked it in and locked in favorable prepayment outcomes by selling them.

But it just shows up in a different line item.

Okay, perfect.

And then I guess you talked a little bit about taking duration down on the fixed rate side of things.

It seems like most of that came from focusing on the 15-year side of things.

But were you also maybe focused a bit on any season 30-years or what was the thought process there?

We are focused on seasoned 30-years and we like them and we had actually bought a fair amount of those and they were in our disclosure -- they're in our disclosure now.

You can see our 5% coupon 30-years are pretty seasoned.

Actually a lot of those were purchased though in the fourth quarter and we mentioned I think on the fourth-quarter call that that was a way to maintain less interest rate risk while also avoiding buyouts.

So it is something we're interested in and we like seasoned 30-year versus new 30-year in general.

However, in the first quarter it wasn't a large component of what we purchased, but it is something that we will absolutely look at in the 30-year sector to the extent that we move -- add more assets there.

Great, terrific.

Thank you very much.

Thank you.

Robert Roell, RiverSource Investments.

Good morning.

A couple questions, please.

Just a clarification on what your current weighted average duration on the liabilities is and also on the assets.

Well, on our liabilities if you look at page 11 -- or 10, I'm sorry, the numbering around.

So if you look on page 10, our swap position was $2.35 billion at the end of the quarter and the weighted average maturity was 2.7 years, the duration is actually slightly shorter than 2.7, but that's the weighted average of maturity.

We don't quantify the duration of the options or the mortgage hedging positions.

On the asset side we do not disclose durations for the assets and the reason we don't do that, we give you as much as detail as we can about what the assets are and in what categories they reside.

However, every model produces a different duration for all these types of assets.

And so while we certainly have opinions as to the duration and we've certainly, as we've talked about, made every effort to reduce our interest rate sensitivity.

I can't just throw out a number on the duration of the assets because it's so different depending on which model you would use.

That's actually what I'm most curious in is what is your opinion of what the weighted average duration of your assets is?

And then can you give us any sensitivity on what the convexity looks like in your view?

If you have a 50 or a 100 basis point move one way or the other.

Well, I mean as you can tell if you look at our asset portfolio, we only have 22% of the portfolio in 30-year mortgages, again, a number of those are seasoned.

Then you add the 15-year mortgages, which tend to be lower coupons.

When you go to the ARMs you have mostly seasoned higher coupon arms.

If you think about the convexity issues and, for that matter, duration, those are relatively low duration and convexity within each of the categories.

So, couple that with our hedges, which are swap -- which are swaps and swaptions, we feel very comfortable that we can handle larger moves in either direction.

If you'd look at our Q and our 10-K we show what our models produce for the sensitivity of our book value or net asset value to changes in interest rates.

And that's probably where I would point you to get some specific numbers.

Okay, I'll look there.

Thank you.

(Operator Instructions).

[John Carmichael], private investor.

Great quarter.

Thank you.

I did have a couple questions.

One was just with respect to the increase in the undistributed taxable income.

I noticed that you had $1.88 of taxable income, which is $0.48 higher than the dividend, but yet the increase in the undistributed taxable income was $0.27.

I realize that some of that might have been a result of the $62 million that was added but my map didn't seem -- I wasn't quite sure if that totally explained the --?

It's the share count, that the $1.88 is weighted average shares and the dividend and the distributed taxable income are ending shares.

And so if you do it in dollars you should be able to add it up.

I got yet, okay.

The other question was just if I can get your guy's thoughts, on mortgage rates and where you think those are going irrespective of short-term funding rates and the low end of the -- where the Fed is going with its decision.

In other words, you see spreads getting any better as a result -- as time goes on here with respect to the end of the Fed buyout and maybe there being some need for people to ramp up their portfolios, but -- and that's keeping rates down right now or do you already see those as being a pretty constant spread?

No, we see the technicals again for most of the shorter mortgage products remaining extremely strong for the next we'll say three months.

On the -- with longer mortgage product new issued 30-year we think there's probably a negative bias there toward spreads or toward wider spreads.

We absolutely think the mortgage market will hold in, remain reasonably stable.

But over time we do expect spreads to expand and we think in the long run we feel very comfortable with the value that's likely to be had in the Agency market because both the Fed and the GSE involvement over the long run is likely to be minimal and there's a big gap that needs to be made up over time by private investors.

And we think the Agency REIT business model fits in very well there.

So it short run, spreads hold in reasonably well, some widening over some transition period, which should lead to long run good opportunities for the peer group.

That dovetails with what I was thinking too.

Thank you very much.

Ken Bruce, Merrill Lynch.

Thanks, good morning.

I understand you don't want to change your investment strategy just to appease the Street as it relates to the objects around your earnings.

But I guess based on the somewhat defensive position that you're -- or the defensive discussion around those earnings it would appear that you believe the Street is not giving you credit for the otherwise good performance.

So, how long are you willing to pursue your investment strategy if the Street is not giving you credit for it?

Well, that's a good question, Ken.

And in the end our job is we have two main objectives and those two objectives are to generate attractive returns for our shareholders and to manage risk and to protect our investment portfolio and our book value.

Those are our main objectives.

And our strategy, given the unique markets that we're in where the risks change on a continuous basis, requires in our minds an active portfolio management strategy.

And we will continue to maintain it.

We understand the way that the Street, so to speak, looks at things.

And we'll continue to do whatever we can on the disclosure part.

But as I said on the call, our objective is to make money for our shareholders over the long-term and not to focus on geography as being the driver of our actions.

Okay, thank you for the disclosure and good job on showing the nimbleness in the market.

It really is a volatile market and you've shown better than most to be able to navigate around it.

Thanks a lot, Ken.

I appreciate it.

At this time there are no additional questions.

Well, thank you, guys.

Really appreciate everyone's time and I think that does it.

Thanks, Debbie, if you could just read the closing remarks.

Okay.

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