Dynex Capital, Inc. Reports First Quarter 2014 Results

Dynex Capital, Inc. (NYSE: DX) reported its first quarter results for 2014 today. GAAP net loss to common shareholders was $(3.0) million, or $(0.06) per common share, for the first quarter of 2014 versus net income of $19.3 million, or $0.35 per common share, for the fourth quarter of 2013 and net income of $18.4 million, or $0.34 per common share, for the first quarter of 2013. Core net operating income to common shareholders (a non-GAAP financial measure which the Company presents as a result of discontinuing GAAP cash flow hedge accounting in 2013) was $13.7 million for the first quarter of 2014, or $0.25 per common share, versus $15.5 million, or $0.29 per common share, for the fourth quarter of 2013, and $17.0 million, or $0.31 per common share, for the first quarter of 2013. See "Use of Non-GAAP Financial Measures" for more information on this and other non-GAAP measures discussed in this release. Book value per common share at March 31, 2014 was $8.87 versus $8.69 at December 31, 2013.

Management Remarks

Mr. Byron Boston, CEO, commented, "I am very pleased with our results for the quarter. Net interest spread increased as we benefited from repositioning our hedges and investment purchases, producing core earnings per share of $0.25. Book value increased 2.1% during the quarter reflecting tighter spreads on our assets and lower interest rates versus year end. We maintained our investment discipline during the first quarter, choosing to continue to reduce leverage while selectively making investments in the CMBS sector. The investment environment is evolving; it continues to be complex and requires vigilance on all fronts."

Book Value Per Common Share

Book value per common share was $8.87 at March 31, 2014, an increase of $0.18 per common share from December 31, 2013. The increase was principally the result of spread tightening on investments and increases in investment fair values which was partially offset by the decline in fair value of our derivative instruments as interest rates fell during the quarter. The following table reconciles the changes in the Company's book value per common share from December 31, 2013 to March 31, 2014:

Investments

The following table summarizes the changes in our MBS portfolio during the first quarter of 2014:

The following tables present certain information for the Company's MBS portfolio by category as of and for the periods indicated:

The following table presents the weighted average coupon by months-to-reset ("MTR") for the ARM and hybrid ARM portion of our Agency RMBS based on par value as of March 31, 2014 and December 31, 2013:

The following table presents the conditional prepayment rates ("CPRs") for the Company's Agency MBS for the periods presented:

Information related to the credit ratings for the Company's non-Agency MBS as of March 31, 2014 is as follows:

Investment Performance

The following table provides weighted average effective yield by type of investment, effective borrowing rate, and adjusted net interest spread (a non-GAAP measure) for the periods indicated:

Adjusted net interest spread as presented above is a non-GAAP measure which management considers a better measure of portfolio performance because it includes periodic interest costs on derivative instruments (which are included in "loss on derivative instruments, net" in the GAAP financial statements for the quarters subsequent to second quarter of 2013). Adjusted net interest spread increased 0.11% for the first quarter of 2014 compared to the fourth quarter of 2013 due to a decrease of 0.09% in our weighted average effective borrowing rate and a 0.02% increase in the weighted average effective yield on our investments. Our lower effective borrowing rate resulted from $0.8 million less in net periodic interest costs from derivative instruments due to terminations of certain interest rate swap agreements since November 2013. The weighted average effective yield on our investments increased as our portfolio mix shifted slightly during the quarter toward non-Agency MBS. The average balance of our non-Agency MBS portfolio has increased $39.2 million since the fourth quarter of 2013 while the average balance of our Agency MBS portfolio has decreased $156.6 million since the fourth quarter of 2013. As compared to the same period in 2013, adjusted net interest spread for the first quarter of 2014 was virtually unchanged as lower effective yields earned on our MBS portfolio were offset by lower effective borrowing costs.

Repurchase Agreement Borrowings

The following table presents our repurchase agreements as of March 31, 2014 by fair value and type of securities pledged as collateral to the repurchase agreements:

The combined weighted average original term to maturity for our repurchase agreements was 93 days as of March 31, 2014 and 114 days as of December 31, 2013.

Hedging Activities

We use pay-fixed interest rate swaps and Eurodollar contracts to mitigate our exposure to potential future changes in interest rates. During the first quarter of 2014 we entered into $75.0 million in interest rate swaps with a weighted average term of 6.9 years and terminated $15.0 million in interest rate swaps with a remaining weighted average term of 4.4 years. The following table summarizes the weighted average notional balance of our interest rate derivatives that will be effective for the periods indicated:

The following table details the components of our loss on derivative instruments, net recognized in our consolidated statement of comprehensive income for the first quarter of 2014:

Other Income and Expense Items

Loss on sale of investments for the first quarter of 2014 of $3.3 million includes the sale of $56.8 million in RMBS and $6.3 million in CMBS and CMBS IO during the quarter as a result of portfolio repositioning. General and administrative expenses were $4.1 million in the first quarter of 2014 versus $3.8 million in the first quarter of 2013. The majority of this increase is due to additional salary and benefits expenses related to additional employees, and increased professional fees.

Stock Activity

During the first quarter of 2014, we issued 428,363 shares of restricted stock for incentive compensation awards related to 2013 performance. In addition, 59,150 shares of restricted stock were forfeited by employees at vesting to cover payroll tax liabilities. No shares of common stock were repurchased during the quarter.

Capital Allocation

The following table summarizes the allocation of the Company's shareholders' equity capital as of March 31, 2014:

Conference Call

As previously announced, the Company's quarterly conference call to discuss the first quarter results is today at 11:00 a.m. Eastern Time. Interested investors may access the call by dialing 1-888-317-6016 or by accessing the live webcast, the link for which is provided under “Investor Relations/IR Highlights” on our website (www.dynexcapital.com). A slide presentation will accompany the webcast and will also be available at least one hour prior to the call at the same location on our website.

Company Description

Dynex Capital, Inc. is an internally managed real estate investment trust, or REIT, which invests in mortgage assets on a leveraged basis. The Company invests in Agency and non-Agency RMBS and CMBS. Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.

Forward Looking Statements

This release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “plan,” and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Forward-looking statements in this release may include, without limitation, statements regarding future interest rates, our views on expected characteristics of future investment environments, prepayment rates on our investment portfolio and risks posed by our investment portfolio, our future investment strategies, our future leverage levels and financing strategies including the use of specific financing and hedging instruments and the future impacts of these strategies, and the expected performance of our investments. The Company's actual results and timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements as a result of unforeseen external factors. These factors may include, but are not limited to, changes in general economic and market conditions, including volatility in the credit markets which impacts asset prices and the cost and availability of financing, defaults by borrowers, availability of suitable reinvestment opportunities, variability in investment portfolio cash flows, fluctuations in interest rates, fluctuations in property capitalization rates and values of commercial real estate, defaults by third-party servicers, prepayments of investment portfolio assets, other general competitive factors, uncertainty around government policy, the impact of regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the full impacts of which are unknown at this time, and another ownership change under Section 382 that further impacts the use of our tax net operating loss carryforward. For additional information on risk factors that could affect the Company's forward-looking statements, see the Company's Annual Report on Form 10-K for the year ended December 31, 2013, and other reports filed with and furnished to the Securities and Exchange Commission.

Use of Non-GAAP Financial Measures

In addition to the Company's operating results presented in accordance with GAAP, this release includes the following non-GAAP financial measures: core net operating income to common shareholders (including per common share), adjusted return on average common equity, effective borrowing costs and rates, adjusted net interest income, and adjusted net interest spread. Management uses these non-GAAP financial measures in its internal analysis of results and operating performance as a result of its discontinuance of GAAP hedge accounting in 2013 and believes these measures may be important to investors and present useful information about the Company's performance.

Core net operating income to common shareholders equals GAAP net income to common shareholders adjusted for amortization of accumulated other comprehensive loss on de-designated cash flow hedges included in GAAP interest expense, net change in fair value of derivative instruments which includes gains and losses on terminated derivative instruments (if applicable), gains and losses on sales of investments, and fair value adjustments on investments not classified as available for sale. Adjusted return on average common equity equals core net operating income to common shareholders divided by average common equity for the respective period. Effective borrowing costs equals GAAP interest expense excluding the amortization of accumulated other comprehensive loss on interest rate swaps de-designated as cash flow hedges on June 30, 2013 plus net periodic interest costs on derivative instruments (including accrued amounts) which are not already included in GAAP interest expense. Effective borrowing rate equals annualized cost of funds calculated on a GAAP basis, less the effect of amortization of de-designated cash flow hedges and plus the effect of net periodic interest costs of derivative instruments. Adjusted net interest spread equals average annualized yields on investments less effective borrowing rates. Schedules reconciling these non-GAAP financial measures to GAAP are provided as a supplement to this release.

The Company believes these non-GAAP financial measures are useful because they provide investors greater transparency to the information used by management in its financial and operational decision-making processes. The Company also believes the presentation of these measures, when analyzed in conjunction with the Company's GAAP operating results, allows investors to more effectively evaluate and compare the performance of the Company to that of its peers, particularly those competitors that continue to use hedge accounting in reporting their financial results, as well as to the Company's performance in periods prior to discontinuing hedge accounting. However, because these non-GAAP financial measures exclude certain items used to compute GAAP net income to common shareholders and GAAP interest expense, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, the Company's GAAP results as reported on its consolidated statements of comprehensive income. In addition, because not all companies use identical calculations, the Company's presentation of core net operating income, adjusted return on average common equity, effective borrowing costs and rates, adjusted net interest income, and adjusted net interest spread may not be comparable to other similarly-titled measures of other companies.