Dynex Capital, Inc. Reports Fourth Quarter and Full Year 2014 Results

Dynex Capital, Inc. (NYSE:DX) reported its fourth quarter and full year results for 2014 today.

2014 Highlights

• Total annual economic return to common shareholders for 2014 of 15.3%, consisting of $1.00 in common dividends plus a $0.33 increase in book value per common share divided by book value per common share of $8.69 at December 31, 2013
• Book value per common share of $9.02 at December 31, 2014 versus $8.69 at December 31, 2013
• Core net operating income to common shareholders of $54.2 million, or $0.99 per common share
• Net income to common shareholders of $18.6 million, or $0.34 per common share for the year and other comprehensive income of $55.1 million, or $1.01 per common share, for total comprehensive income to common shareholders of $73.8 million, or $1.35 per common share

Fourth Quarter Highlights

• Core net operating income of $12.5 million, or $0.23 per common share
• Net income to common shareholders of $1.4 million, or $0.03 per common share, and other comprehensive income of $4.8 million, or $0.08 per common share, for total comprehensive income to common shareholders of $6.2 million, or $0.11 per common share

Management Remarks

Byron Boston, CEO, President and Co-CIO commented, "2014 was a very good year for Dynex. We identified the environment as being complex and positioned ourselves accordingly, generating a total annual economic return of 15.3%, including dividends of $1.00 per common share. Importantly, we were able to generate this return in a year that presented numerous surprises to the market by keeping our risk relatively low. 2015 is likely to be similarly surprising given the potential for Federal Reserve action, the low level of absolute rates, the flatter yield curve, and the tight spread environment. The Company enters 2015 with a solid balance sheet, liquidity, and capital position. We continue to believe that our intense focus on disciplined capital deployment and risk management will create long term value for our shareholders."

Book Value Per Common Share

Book value per common share was $9.02 at December 31, 2014, a decrease of $(0.12) per common share from September 30, 2014. Overall, book value per common share decreased from the excess of the cost of our hedges over the increase in fair value of our investments.

Investments

The following table summarizes the changes in the Company's MBS portfolio during the fourth quarter of 2014:

The following tables present certain information for the Company's MBS portfolio by category as of December 31, 2014:

Premium amortization expense for our Agency RMBS portfolio declined $1.8 million during the fourth quarter of 2014 compared to the third quarter of 2014. The table below presents the constant prepayment rate ("CPR"), which is a measure of prepayment speed, by collateral type for our Agency MBS portfolio for the periods presented:

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

Investment Performance

The following table provides details for our adjusted net interest spread for the periods indicated:

Adjusted net interest spread increased for the fourth quarter of 2014 compared to the third quarter of 2014 because of a decline in our periodic interest costs on derivative instruments partially offset by lower weighted average effective yield earned on investments. Adjusted net interest spread is a non-GAAP measure that includes the periodic interest costs on our derivative instruments as an additional cost of financing. Periodic interest costs declined during the fourth quarter of 2014 due to the addition of receive-fixed interest rate swaps late in the third quarter of 2014. As compared to the same period in 2013, adjusted net interest spread for the fourth quarter of 2014 was 20 basis points higher due to lower borrowing costs and lower periodic interest costs from derivative instruments, partially offset by lower weighted average effective yield earned on investments.

During the fourth quarter we sold $100.4 million of investments, continuing our efforts from the third quarter to reduce spread risk. Overall, we generated a net gain of $11.0 million from these sales.

Repurchase Agreement Borrowings

The following table presents repurchase agreements by the type of security pledged as collateral as of the dates indicated:

The combined weighted average original term to maturity for our repurchase agreements was 144 days as of December 31, 2014 and 114 days as of December 31, 2013.

Hedging Activities

The Company continues to maintain the bulk of its hedging instruments beginning in early 2016. During the fourth quarter of 2014, the Company terminated $25 million in pay-fixed interest rate swaps. The following table summarizes the weighted average notional balance of 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 fourth quarter of 2014:

(1) Periodic interest costs represent interest receipts and payments (including accrued amounts) related to interest rate derivatives during the quarter.

Conference Call

As previously announced, the Company's quarterly conference call to discuss the fourth quarter results is today at 11:00 a.m. Eastern Time. Interested investors may access the call by dialing 1-888-339-0823 or by accessing the live webcast, the link for which is provided under “Investor Center/News & Market Information/Event Calendar” 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, future actions by the Federal Reserve, 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 financial and operating performance and believes that it provides better transparency to our investors. Management 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. In addition, management uses these non-GAAP financial measures to compare the Company's financial results generated prior to discontinuing GAAP hedge accounting in 2013 with the Company's financial results for 2014 periods. 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.

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.