THE EARNINGS Extract

Peter Federico | President, Chief Executive Officer, and Chief Investment Officer

In the third quarter, the Federal Reserve’s pivot to a less restrictive monetary policy stance and the easing of fiscal policy concerns drove robust financial market performance and a significant improvement in investor sentiment. Agency MBS were one of the best-performing fixed income asset classes during the quarter and have now outperformed U.S. Treasuries for five consecutive months, a sequence of outperformance that has not happened since 2013. In this favorable investment environment, AGNC generated a very strong economic return of 10.6%, comprised of our attractive monthly dividend and book value appreciation.

At its September meeting, the Fed lowered the federal funds rate as expected and signaled further monetary policy accommodation with the possibility of rate cuts at the October and December meetings. On the fiscal policy side, the passage of the tax bill early in the quarter and several positive tariff developments eased some of the concerns that dampened the investment outlook in the second quarter. These investor-friendly developments led to a material decline in interest rate volatility and contributed to the outperformance of Agency MBS.

As we have discussed, a number of emerging factors support our constructive outlook for Agency MBS. The first relates to the improved spread environment for Agency MBS. Over the last four years, the spread range between Agency securities and benchmark rates has become increasingly well-defined, with incremental investor demand consistently emerging when spreads trade near the upper end of the range. In addition, the Administration has begun to focus on mortgage spreads as a means of improving housing affordability. In an interview in late September, the Treasury Secretary reinforced this view when he said, “The really important thing is that we either maintain mortgage spreads, or narrow them further, to help the American people.” This focus on spreads by the Administration is good for Agency MBS and good for our business.

Second, the supply and demand dynamic for Agency MBS continues to be well balanced. With the primary mortgage rate persistently above 6%, the net new supply of Agency MBS this year will be about $200 billion, the lower end of initial expectations. At the same time, the demand outlook has improved. Bank demand for Agency MBS has been relatively muted this year but should increase as regulatory reforms get implemented. The money manager community is another important source of demand for Agency MBS. Demand from this sector increased meaningfully in the third quarter, as the favorable shift in monetary policy led to $180 billion of bond fund inflows, which are now running slightly ahead of last year’s pace.

Third, the financing market for Agency MBS remains strong. With bank reserves just under $3 trillion, the Fed will likely end balance sheet runoff within the next few months. Importantly, the Fed is also considering joining the Fixed Income Clearing Corp. (FICC) for purposes of the Standing Repo Facility and using a repo-based measure as its primary target rate. If adopted, these changes would be highly beneficial to the repo market for U.S. Treasuries and Agency MBS, particularly during times of stress.

Fourth and finally, the potential path of GSE reform continues to move in a favorable direction. The Treasury Department has taken a leadership role in the reform process, holding a series of roundtable discussions with a wide range of housing and mortgage market participants to gain insight into potential reform actions. This careful approach demonstrates the Treasury’s commitment to maintaining mortgage market stability. To that end, the Treasury has emphasized three important guiding principles for GSE reform: maximize taxpayer value, lower the mortgage rate through stable or tighter mortgage spreads, and do no harm to the housing finance system. The mortgage market has responded well to this approach.

Collectively, these four factors are currently pointing in a favorable direction for Agency MBS. Moreover, given the Treasury’s thoughtful approach, it is possible the Agency MBS market emerges from this reform process with a stronger and more durable structure. In this evolving investment environment, we believe AGNC, as the largest pure-play levered Agency MBS investment vehicle, is well positioned to generate attractive risk-adjusted returns for our shareholders.

Bernie Bell | EVP and Chief Financial Officer

For the third quarter, AGNC reported comprehensive income of $0.78 per common share. Our economic return on tangible common equity was 10.6%, consisting of $0.36 of dividends declared per common share and a $0.47 increase in tangible net book value per common share, driven by a significant decline in interest rate volatility and tighter mortgage spreads to benchmark rates. As of late last week, our tangible net book value per common share was unchanged to slightly up for October.

We ended the third quarter with leverage of 7.6x tangible equity and average leverage of 7.5x, both unchanged from the prior quarter. Our liquidity position remained very strong, with $7.2 billion in cash and unencumbered Agency MBS at the end of the quarter, representing 66% of tangible equity.

Net spread and dollar roll income declined $0.03 to $0.35 per common share for the quarter, driven by lower swap income due to the maturity of $4 billion of legacy swaps and a timing mismatch between the issuance and deployment of new preferred and common equity capital. Another important driver of our net spread and dollar roll income is the amount of unhedged short-term debt in our funding mix, as measured by our hedge ratio. As of the end of the third quarter, our hedge ratio, excluding option-based hedges, was 77%, representing the amount of swap- and Treasury-based hedges relative to our total funding liabilities. This hedge portfolio positioning reflects our expectations for an accommodative monetary policy environment and positions our net spread and dollar roll income to benefit from rate cuts as they occur. Looking ahead, we expect that lower funding costs from the September rate cut and widely anticipated future rate cuts, along with the full deployment of recently raised capital and a shift in our hedge mix toward a greater share of swap-based hedges, will collectively provide a moderate tailwind to net spread and dollar roll income.

The average projected life CPR of our portfolio increased 80 basis points to 8.6% at quarter-end from 7.8% in the prior quarter on lower mortgage rates. Actual CPRs averaged 8.3% for the quarter, compared to 8.7% in the prior quarter.

Lastly, during the third quarter, we issued $345 million of fixed-rate preferred equity — the largest mortgage REIT preferred stock offering since 2021 — and $309 million of common equity through our at-the-market offering program at a significant premium to our tangible net book value per share. Notably, the preferred issuance carries a cost significantly below the levered returns available on deployed capital, which is expected to further enhance future earnings available to common shareholders.

Peter Federico | President, Chief Executive Officer, and Chief Investment Officer

Agency spreads to both Treasury and swap rates tightened meaningfully across the coupon stack in the third quarter as interest rate volatility declined sharply. Intermediate coupons performed the best, driven by strong index-based buying from money managers. Higher coupons also generated positive excess returns, but to a lesser extent, as the sizable intra-quarter rally in long-term interest rates increased prepayment concerns associated with these coupons. Hedge composition was also a driver of performance in the third quarter, as swap spreads widened two to five basis points across the curve.

Our asset portfolio totaled $90.8 billion at quarter-end, up meaningfully from the prior quarter, as we fully deployed the capital that we raised in the second and third quarters. As is often the case when we deploy new capital, the mortgages that we added were largely newly-originated production coupon MBS. Over time, however, we optimize our asset composition by rotating into pools with favorable prepayment characteristics as opportunities arise. Consistent with the growth in our asset portfolio, our TBA position increased to $14 billion at quarter-end. As a result, the percentage of our assets with favorable prepayment attributes declined to 76% in the third quarter. The weighted average coupon of our portfolio increased slightly to 5.14%.

The notional balance of our swap- and Treasury-based hedges remained relatively stable during the quarter, but the composition of our portfolio shifted to a greater share of longer-dated swap-based hedges. In duration dollar terms, our swap-based hedges increased to 59% of our overall portfolio. Lastly, given the convexity profile of our assets and the large decline in interest rate volatility, we opportunistically added $7 billion of receiver swaptions during the quarter as an additional source of down-rate protection.