PRESS RELEASE
| FOR IMMEDIATE RELEASE | CONTACT: Alison Griffin |
| February 10, 2011 | (804) 217-5897 |
DYNEX CAPITAL, INC. REPORTS FOURTH QUARTER
AND FULL YEAR RESULTS
GLEN ALLEN, Va. -- Dynex Capital, Inc. (NYSE: DX) reported today net income of $9.6 million, or $0.40 diluted earnings per common share, for the fourth quarter of 2010 compared to net income of $4.1 million, or $0.23 diluted earnings per common share, for the fourth quarter of 2009. The Company also reported net income of $29.5 million, or $1.41 diluted earnings per common share, for the year ended December 31, 2010 versus net income of $17.6 million, or $1.02 diluted earnings per common share, for the year ended December 31, 2009.
The Company reported that its book value per common share as of December 31, 2010 was $9.71 versus $9.80 at September 30, 2010 and $9.08 as of December 31, 2009.
Fourth Quarter 2010 Highlights
| · | Raised and deployed a net $73.1 million in common equity capital during the quarter, increasing the investment portfolio to $1.6 billion at December 31, 2010 versus $1.1 billion as of September 30, 2010 and $0.9 billion as of December 31, 2009; |
| · | Generated net interest income of $10.9 million versus $8.4 million in the third quarter of 2010 and $7.0 million in the fourth quarter of 2009; |
| · | Earned a net interest spread of 3.07% for the fourth quarter of 2010 versus 2.98% for the third quarter of 2010 and 3.12% for the fourth quarter of 2009; |
| · | Converted the remaining Series D Preferred Stock outstanding into $41.7 million of common stock during the quarter; and |
| · | Increased overall leverage to approximately 4.6 times shareholders’ equity as of December 31, 2010 from 3.8 times as of September 30, 2010. |
The Company has scheduled a conference call for Friday, February 11, 2011 at 11:00 a.m. ET, to discuss fourth quarter and full year 2010 results. The call may be accessed by dialing 1-877-317-6789 and will also be available by webcast over the internet at www.dynexcapital.com through a link provided on the “Investor Relations” page under “IR Highlights.”
Management Comments
Thomas Akin, Chairman and Chief Executive Officer, commented, “Our strong results for the fourth quarter reflect successful execution of our hybrid investment strategy. Our short-duration Agency RMBS portfolio is performing exceptionally well in this benign prepayment environment and our non-Agency CMBS portfolio continues to generate solid earnings and cash flows. We were able to fully deploy the proceeds from our common equity offering in December by the end of the year primarily in Hybrid Agency ARMs. As of today, our current market capitalization exceeds $322 million, which is almost triple our market capitalization from a year ago. We continue to see a number of significant current market opportunities to leverage our capital and expertise. Our expectation for 2011 is contin ued growth and a favorable operating environment for the Company. We anticipate modestly increasing our leverage in 2011 and continuing to build on our core short duration strategy in the Agency and non-Agency MBS portfolios.”
Results of Operations
Net interest income increased to $10.9 million for the fourth quarter of 2010 from $7.0 million for the same period in 2009. The increase in net interest income is attributable to growth in average interest earning investments to $1.2 billion for the quarter versus $0.8 billion in the fourth quarter of 2009. Agency MBS and non-Agency MBS net interest income increased to $7.3 million and $2.8 million, respectively, for the fourth quarter of 2010 versus $5.5 million and $0.4 million, respectively, for the fourth quarter of 2009. Premium amortization on investments, which reduces net interest income, was $1.4 million for the fourth quarter of 2010, $0.7 million for the third quarter of 2010, and $0.7 million for the fourth quarter of 2009. Premium amortization on investments for the fourth quarter of 2010 increased versus both the third quarter of 2010 and fourth quarter of 2009 due to the greater amount of premium Agency MBS in the Company’s investment portfolio during the fourth quarter of 2010.
Net portfolio interest spread for the fourth quarter of 2010 was 3.07%, which is the difference between the yield of 4.32% on the Company’s interest-earning investment portfolio and its cost of funds of 1.25%. The net interest spread was 2.98% for the third quarter of 2010 and 3.12% for the fourth quarter of 2009. The net portfolio interest spread increased in the fourth quarter of 2010 from the third quarter of 2010 primarily due to a 39 basis point decline in our weighted average borrowing costs, which was mainly due to reductions in borrowing costs for repurchase agreements collateralized by non-Agency MBS.
Gain on sale of investments includes $2.2 million in gains from the liquidation of a $3.5 million delinquent securitized commercial mortgage loan during the quarter. General and administrative expense increased to $2.9 million for the fourth quarter of 2010 from $1.7 million for the fourth quarter of 2009,
primarily because of $1.1 million of bonus expenses accrued during the quarter related to the Company’s 2010 activities and results pursuant to the performance bonus program for executive management.
Agency MBS Investments
The Company’s Agency MBS portfolio, and specifically the Company’s investments in Hybrid Agency ARMs and fixed rate Agency CMBS, increased substantially during the fourth quarter of 2010 as the Company deployed the net proceeds of its common equity capital raising activities. As of December 31, 2010, the Company had $763.1 million in Hybrid Agency ARMs with a weighted average months-to-reset of 34 months, $226.6 million in Agency ARMs with a weighted average months-to-reset of 6 months, and $206.6 million in fixed rate Agency CMBS. The Company’s Agency MBS at December 31, 2010 consisted of $901.9 million in Fannie Mae Agency MBS and $294.4 million in Freddie Mac Agency MBS. The following table summarizes certain information about the Company’s Agency MBS investments for the periods present ed:
| (amounts in thousands) | | Quarter ended Dec 31, 2010 | | | Quarter ended Sept 30, 2010 | | | Quarter ended Dec 31, 2009 | |
| Weighted average annualized yield for the period | | | 3.42 | % | | | 3.44 | % | | | 4.03 | % |
| Weighted average annualized cost of funds including interest rate swaps for the period | | | 0.64 | % | | | 0.68 | % | | | 0.45 | % |
| Net interest spread for the period | | | 2.78 | % | | | 2.76 | % | | | 3.58 | % |
| Average balance for the period | | $ | 839,374 | | | $ | 574,395 | | | $ | 577,380 | |
| CPR for the period | | | 23.4 | % | | | 26.3 | % | | | 17.8 | % |
| Weighted average coupon | | | 4.49 | % | | | 4.40 | % | | | 4.79 | % |
| Weighted average months-to-reset on ARMs, period end | | | 27 | | | | 23 | | | | 20 | |
| Amortized cost (as a % of par), period end | | | 105.5 | % | | | 104.5 | % | | | 102.3 | % |
| Weighted average repurchase agreement original term to maturity (days), period end | | | 50 | | | | 52 | | | | 59 | |
Non-Agency Investments
As of December 31, 2010, the fair value of the Company’s non-Agency CMBS and RMBS was $254.3 million and $15.4 million, respectively. Below is certain information about the Company’s non-Agency MBS and securitized mortgage loan portfolio as of and for the quarter ended December 31, 2010:
| (amounts in thousands) | | CMBS | | | RMBS | | | Securitized loans | |
| Principal balance | | $ | 247,501 | | | $ | 16,101 | | | $ | 153,614 | |
| Amortized cost basis, net of reserves | | $ | 241,557 | | | $ | 15,124 | | | $ | 152,962 | |
| Average balance for the quarter, amortized cost | | $ | 228,409 | | | $ | 15,664 | | | $ | 159,711 | |
| Weighted average annualized yield for the period | | | 6.25 | % | | | 5.25 | % | | | 6.18 | % |
| Weighted average annualized cost of funds | | | 2.51 | % | | | 1.36 | % | | | 3.09 | % |
| Net interest spread for the period | | | 3.74 | % | | | 3.89 | % | | | 3.09 | % |
| Amortized cost (excluding reserves) as a % of par | | | 97.6 | % | | | 93.9 | % | | | 100.3 | % |
| Percentage ‘AAA’ and ‘AA’-rated | | | 80.2 | % | | | 59.1 | % | | | 65.7 | % |
| Percentage below ‘AA’-rated | | | 19.8 | % | | | 40.9 | % | | | 34.3 | % |
Seriously delinquent loans (loans 60+ days past due) in the Company’s securitized mortgage loan portfolio totaled $17.7 million as of December 31, 2010 versus $18.3 million as of September 30, 2010. Approximately $1.8 million of the delinquent loans have some form of insurance or other credit support which substantially reduces or eliminates the Company’s exposure to losses on these loans. The Company has recorded an allowance for loan losses of $4.5 million for its securitized mortgage loan portfolio.
Hedging Activities
During the fourth quarter of 2010 the Company entered into $130 million of pay-fixed interest rate swaps with a weighted average initial term of 5 years. As of December 31, 2010, the Company had a total of $345 million in pay-fixed interest rate swaps with a weighted average rate of 1.67% and a weighted average remaining maturity of 38 months. The interest rate swaps are being used to hedge the Company’s exposure to changes in LIBOR for its repurchase agreement borrowings.
Shareholders’ Equity and Book Value per Common Share
Shareholders’ equity was $294.7 million as of December 31, 2010 versus $225.5 million as of September 30, 2010 and $168.8 million as of December 31, 2009. Book value per common share was $9.71 as of December 31, 2010 versus $9.80 as of September 30, 2010 and $9.08 as of December 31, 2009. During the fourth quarter of 2010, the Company issued 7.4 million shares in common stock for net proceeds of $73.1 million through a common stock offering and through its equity placement program. Shareholders’ equity increased during 2010 by $126.0 million primarily from the issuance of $116.6 million in common equity during the year, earnings in excess of dividends paid of $6.6 million, and an increase of $2.3 million in accumulated other comprehensive inco me.
The following table summarizes the allocation of the Company’s shareholders’ equity as of December 31, 2010 and the net earnings contribution for the fourth quarter and 2010 fiscal year on each component of the Company’s balance sheet:
| (amounts in thousands) | | Asset Carrying Basis | | | Associated Financing(1)/Liability Carrying Basis | | | Allocated Shareholders’ Equity | | | % of Shareholders’ Equity | | | 4Q10 Net Interest Income Contribution(2) | | | 2010 Net Interest Income Contribution(2) | |
| Agency RMBS | | $ | 989,743 | | | $ | (869,537 | ) | | $ | 120,206 | | | | 40.8 | % | | $ | 5,743 | | | $ | 18,893 | |
| Agency CMBS | | | 206,568 | | | | (150,178 | ) | | | 56,390 | | | | 19.1 | % | | | 1,517 | | | | 2,372 | |
| Non-Agency CMBS | | | 254,301 | | | | (200,328 | ) | | | 53,973 | | | | 18.3 | % | | | 2,624 | | | | 9,093 | |
| Non-Agency RMBS | | | 15,408 | | | | (12,126 | ) | | | 3,282 | | | | 1.1 | % | | | 161 | | | | 550 | |
| Securitized mortgage loans | | | 152,962 | | | | (109,119 | ) | | | 43,843 | | | | 14.9 | % | | | 984 | | | | 4,641 | |
| Other investments | | | 1,229 | | | | – | | | | 1,229 | | | | 0.4 | % | | | 30 | | | | (60 | ) |
| Hedging instruments | | | 692 | | | | (3,532 | ) | | | (2,840 | ) | | | (1.0 | )% | | | (781 | ) | | | (2,479 | ) |
| Cash and cash equivalents | | | 18,836 | | | | – | | | | 18,836 | | | | 6.4 | % | | | 3 | | | | 11 | |
| Other assets/other liabilities | | | 12,191 | | | | (12,407 | ) | | | (216 | ) | | | – | | | | 5 | | | | 25 | |
| | | $ | 1,651,930 | | | $ | (1,357,227 | ) | | $ | 294,703 | | | | 100.0 | % | | $ | 10,286 | | | $ | 33,046 | |
| (1) | Associated financing for investments includes repurchase agreements, securitization financing issued to third parties and TALF financing (the latter two of which are presented on the Company’s balance sheet as “non-recourse collateralized financing”). Associated financing for hedging instruments represents the fair value of the interest rate swap agreements in a liability position. |
| (2) | Amount equals net interest income after provision for loan losses. |
Company Description
Dynex Capital, Inc. is a 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. The Company also has investments in securitized single-family residential and commercial mortgage loans originated by the Company from 1992 to 1998. Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.
Note: 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 include, without limitation, statements regarding future interest rates, characteristics of future investment environments, our future investment strategies, our future leverage levels and financing strategies, and the expected performance of certain 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 the ongoing volatility in the cred it 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 Emergency Economic Stabilization Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the full impacts of which are unknown at this time, and the impact of Section 404 of the Sarbanes-Oxley Act of 2002. For additional information, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, and other reports filed with and furnished to the Securities and Exchange Commission.
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DYNEX CAPITAL, INC.
Consolidated Balance Sheets
(Thousands except per share data)
| | | December 31, | | | December 31, | |
| | | 2010 | | | 2009 | |
| | | (unaudited) | | | | |
| ASSETS | | | | | | |
| Agency MBS | | $ | 1,196,311 | | | $ | 594,120 | |
| Non-Agency MBS | | | 269,709 | | | | 109,110 | |
| Securitized mortgage loans, net | | | 152,962 | | | | 212,471 | |
| Other investments | | | 1,229 | | | | 2,280 | |
| | | | 1,620,211 | | | | 917,981 | |
| | | | | | | | | |
| Cash and cash equivalents | | | 18,836 | | | | 30,173 | |
| Derivative assets | | | 692 | | | | 1,008 | |
| Accrued interest receivable | | | 6,105 | | | | 4,583 | |
| Other assets | | | 6,086 | | | | 4,317 | |
| | | $ | 1,651,930 | | | $ | 958,062 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
| LIABILITIES: | | | | | | | | |
| Repurchase agreements | | $ | 1,234,183 | | | $ | 638,329 | |
| Non-recourse collateralized financing | | | 107,105 | | | | 143,081 | |
| Derivative liabilities | | | 3,532 | | | | – | |
| Accrued interest payable | | | 1,079 | | | | 1,208 | |
| Accrued dividends payable | | | 8,192 | | | | 4,207 | |
| Other liabilities | | | 3,136 | | | | 2,484 | |
| | | | 1,357,227 | | | | 789,309 | |
| | | | | | | | | |
| SHAREHOLDERS' EQUITY: | | | | | | | | |
| Preferred stock | | | – | | | | 41,749 | |
| Common stock | | | 303 | | | | 139 | |
| Additional paid-in capital | | | 538,304 | | | | 379,717 | |
| Accumulated other comprehensive income | | | 12,403 | | | | 10,061 | |
| Accumulated deficit | | | (256,307 | ) | | | (262,913 | ) |
| | | | 294,703 | | | | 168,753 | |
| | | $ | 1,651,930 | | | $ | 958,062 | |
| | | | | | | | | |
| Book value per common share | | $ | 9.71 | | | $ | 9.08 | |
DYNEX CAPITAL, INC.
Consolidated Statements of Operations
(Thousands except share and per share data)
(unaudited)
| | | Three Months Ended | | | Year Ended | |
| | | | | | | |
| | | | | | | | | | | | | |
| Interest income: | | | | | | | | | | | | |
| Agency MBS | | $ | 7,835 | | | $ | 6,018 | | | $ | 22,920 | | | $ | 20,962 | |
| Non-Agency MBS | | | 3,904 | | | | 393 | | | | 13,491 | | | | 863 | |
| Securitized mortgage loans | | | 2,508 | | | | 4,032 | | | | 12,234 | | | | 17,169 | |
| Other investments | | | 31 | | | | 42 | | | | 125 | | | | 226 | |
| Cash and cash equivalents | | | 3 | | | | 3 | | | | 11 | | | | 16 | |
| | | | 14,281 | | | | 10,488 | | | | 48,781 | | | | 39,236 | |
| | | | | | | | | | | | | | | | | |
| Interest expense | | | 3,385 | | | | 3,445 | | | | 14,356 | | | | 14,671 | |
| | | | | | | | | | | | | | | | | |
| Net interest income | | | 10,896 | | | | 7,043 | | | | 34,425 | | | | 24,565 | |
| Provision for loan losses | | | (610 | ) | | | (216 | ) | | | (1,379 | ) | | | (782 | ) |
| | | | | | | | | | | | | | | | | |
| Net interest income after provision for loan losses | | | 10,286 | | | | 6,827 | | | | 33,046 | | | | 23,783 | |
| | | | | | | | | | | | | | | | | |
| Gain (loss) on sale of investments, net | | | 2,098 | | | | (50 | ) | | | 2,891 | | | | 171 | |
| Fair value adjustments, net | | | 64 | | | | 524 | | | | 294 | | | | 205 | |
| Other income (expense), net | | | 109 | | | | (1,531 | ) | | | 2,058 | | | | 138 | |
| General and administrative expenses: | | | | | | | | | | | | | | | | |
| Compensation and benefits | | | (1,898 | ) | | | (850 | ) | | | (4,930 | ) | | | (3,626 | ) |
| Other general and administrative expenses | | | (1,013 | ) | | | (845 | ) | | | (3,887 | ) | | | (3,090 | ) |
| | | | | | | | | | | | | | | | | |
| Net income | | | 9,646 | | | | 4,075 | | | | 29,472 | | | | 17,581 | |
| Preferred stock dividends | | | – | | | | (1,003 | ) | | | (3,061 | ) | | | (4,010 | ) |
| | | | | | | | | | | | | | | | | |
| Net income to common shareholders | | $ | 9,646 | | | $ | 3,072 | | | $ | 26,411 | | | $ | 13,571 | |
| | | | | | | | | | | | | | | | | |
| Weighted average common shares: | | | | | | | | | | | | | | | | |
Basic | | | 23,717 | | | | 13,622 | | | | 17,595 | | | | 13,088 | |
Diluted | | | 24,368 | | | | 13,625 | | | | 20,919 | | | | 17,311 | |
| | | | | | | | | | | | | | | | | |
| Net income per common share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.41 | | | $ | 0.23 | | | $ | 1.50 | | | $ | 1.04 | |
Diluted | | $ | 0.40 | | | $ | 0.23 | | | $ | 1.41 | | | $ | 1.02 | |
