Dynex Capital(DX) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited financial statements reveal increased assets and equity, with improved net income for the six months ended June 30, 2024 Consolidated Balance Sheets Total assets and shareholders' equity increased significantly by June 30, 2024, driven by MBS and stock issuances Consolidated Balance Sheet Highlights (unaudited) | ($s in thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $6,683,602 | $6,369,750 | | Mortgage-backed securities, at fair value | $6,193,139 | $6,038,948 | | Cash and cash equivalents | $286,132 | $119,639 | | Total Liabilities | $5,638,339 | $5,499,015 | | Repurchase agreements | $5,494,428 | $5,381,104 | | Total Shareholders' Equity | $1,045,263 | $870,735 | Consolidated Statements of Comprehensive Income (Loss) Q2 2024 reported a net loss to common shareholders, contrasting with improved H1 2024 net income from derivative gains Key Income Statement Data (unaudited) | ($s in thousands except per share data) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Net interest income (expense) | $1,287 | $(2,930) | $(1,904) | $(3,392) | | Total other (losses) gains, net | $(2,348) | $64,899 | $52,264 | $31,438 | | Net (loss) income | $(8,304) | $54,337 | $31,815 | $12,616 | | Net (loss) income to common shareholders | $(10,227) | $52,414 | $27,968 | $8,769 | | Net (loss) income per common share-diluted | $(0.15) | $0.96 | $0.44 | $0.16 | Consolidated Statements of Shareholders' Equity Shareholders' equity significantly increased by June 30, 2024, driven by stock issuances, despite dividends and comprehensive loss - Total shareholders' equity increased by $174.5 million in the first six months of 2024[13] - The company raised capital through stock issuances, adding $86.8 million in Q1 and $124.8 million in Q2 2024[13] - Dividends paid on common stock totaled $50.5 million and on preferred stock totaled $3.8 million for the six months ended June 30, 2024[13] Consolidated Statements of Cash Flows Net cash increased by $171.4 million for H1 2024, driven by financing activities, offsetting investing outflows Cash Flow Summary (unaudited) | ($s in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,505 | $35,227 | | Net cash used in investing activities | $(102,685) | $(1,569,744) | | Net cash provided by financing activities | $272,579 | $1,517,394 | | Net increase (decrease) in cash | $171,399 | $(17,123) | Notes to the Unaudited Consolidated Financial Statements Notes detail accounting policies, financial instruments, and the company's strategy as a mortgage REIT investing in leveraged Agency MBS and derivatives - The company is an internally managed mortgage REIT that primarily invests on a leveraged basis in Agency mortgage-backed securities (MBS) and to-be-announced (TBA) securities[17] - As of June 30, 2024, the MBS portfolio had a fair value of $6.19 billion, primarily composed of Agency RMBS ($5.96 billion)[54] - The company had $5.49 billion in repurchase agreements outstanding as of June 30, 2024, with a weighted average rate of 5.46%[61] - Derivative instruments include short positions in U.S. Treasury futures with a notional amount of $5.4 billion and long positions in TBA securities with an implied market value of $2.66 billion as of June 30, 2024[69][71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2024 market conditions, reporting an economic loss per share due to spread widening, despite capital raising and portfolio growth Executive Overview Q2 2024 saw shifting Fed rate expectations, wider mortgage spreads, and a total economic loss of $(0.31) per common share, despite capital raising - Expectations for Federal Funds rate cuts shifted to later in 2024 or 2025, causing the 10-year U.S. Treasury to close at 4.40% as of June 30, 2024[93] - Total economic loss was $(0.31) per common share for Q2 2024, comprised of a $(0.70) decline in book value per common share and $0.39 in dividends[99] - The company raised $124.7 million in capital during Q2 through a public offering and ATM issuances, partially deploying it into $551.1 million of higher coupon Agency RMBS[98] Financial Condition The investment portfolio, including TBAs, grew 19% to $9.09 billion by June 30, 2024, with a shift towards higher coupon Agency RMBS and increased hedging positions - The investment portfolio (including TBAs) increased by approximately 19% since December 31, 2023[104] Fixed-Rate Agency RMBS Portfolio (including TBAs) | ($s in thousands) | June 30, 2024 (Par/Notional) | December 31, 2023 (Par/Notional) | | :--- | :--- | :--- | | Total | $9,092,839 | $7,425,502 | | Weighted Average Market Yield | 5.45% | 4.98% | | Estimated Duration | 4.88 | 4.72 | Interest Rate Hedge Portfolio (Notional Amount) | ($s in thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | 10-year U.S. Treasury futures | $(4,570,000) | $(4,180,000) | | 30-year U.S. Treasury futures | $(825,000) | $(700,000) | Results of Operations Q2 2024 saw a comprehensive loss to common shareholders, despite positive net interest income, while H1 2024 net interest expense improved Quarterly Results Comparison | ($s in thousands) | Q2 2024 | Q1 2024 | | :--- | :--- | :--- | | Net interest income (expense) | $1,287 | $(3,192) | | Gain on derivative instruments, net | $41,135 | $124,635 | | Unrealized loss on investments, net | $(41,977) | $(70,024) | | Comprehensive (loss) income to common shareholders | $(12,013) | $20,927 | - The increase in the 10-year U.S. Treasury rate in Q2 2024 was mitigated by $64.1 million in gains on interest rate hedges, but net losses on investments were driven by spread widening on Agency RMBS[122] - For H1 2024, interest income increased by 102% YoY to $147.6 million, driven by additions of higher-yielding Agency RMBS, which helped narrow the net interest expense[127][128] Liquidity and Capital Resources Liquidity increased to $644.0 million by June 30, 2024, supported by a Q2 capital raise, with leverage at 7.9 times equity - Total liquidity was $644.0 million as of June 30, 2024, comprising $286.1 million in cash, $355.5 million in unencumbered Agency MBS, and $2.4 million in noncash collateral received[146] - In Q2 2024, the company issued 10.5 million shares of common stock, raising net proceeds of $124.5 million[145] - Leverage was 7.9 times shareholders' equity as of June 30, 2024, when including the cost basis of TBA long positions[149] - The company has $848.8 million in net deferred tax hedge gains as of June 30, 2024, which will be recognized as taxable income in future periods, with the majority recognized in 2026 and thereafter[158] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate, spread, prepayment, and credit risks, managing interest rate risk with derivatives, while spread risk remains unhedged Interest Rate Sensitivity Analysis on Common Equity (as of June 30, 2024) | Scenario | % Change in Common Equity | | :--- | :--- | | Parallel Rate Increase of 100 bps | (5.6)% | | Parallel Rate Increase of 50 bps | (2.1)% | | Parallel Rate Decrease of 50 bps | (0.1)% | | Parallel Rate Decrease of 100 bps | (3.5)% | Market Spread Sensitivity Analysis on Common Equity (as of June 30, 2024) | Basis Point Change in Spreads | % Change in Common Equity | | :--- | :--- | | +20/+50 | (10.6)% | | +10 | (5.3)% | | -10 | 5.3% | | -20/-50 | 10.6% | - The company does not hedge spread risk due to complexity and lack of liquid instruments[184] - Credit risk is considered low as the portfolio is primarily Agency MBS, which carry a guaranty of principal and interest from a U.S. government-sponsored entity[195] Item 4. Controls and Procedures Management concluded disclosure controls were effective as of June 30, 2024, with no material changes to internal control over financial reporting - Management concluded that as of June 30, 2024, the company's disclosure controls and procedures were effective[204] - No material changes were made to the internal control over financial reporting during the three months ended June 30, 2024[205] PART II. OTHER INFORMATION Item 1. Legal Proceedings No pending or threatened legal proceedings are expected to materially affect the company's financial condition or operations - There are no pending or threatened legal proceedings that could have a material adverse effect on the Company[206] Item 1A. Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's 2023 Annual Report on Form 10-K - No material changes have occurred from the risk factors discussed in the 2023 Form 10-K[207] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has an authorized share repurchase program, but no shares were repurchased during Q2 2024 - The company has an authorized share repurchase program for up to $100 million of common stock and $50 million of Series C Preferred Stock[208] - No shares were repurchased during the three months ended June 30, 2024[209] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - None[211] Item 4. Mine Safety Disclosures The company has no mine safety disclosures to report - None[212] Item 5. Other Information No directors or Section 16 officers adopted or terminated Rule 10b5-1 trading arrangements during Q2 2024 - No directors or Section 16 officers adopted or terminated any Rule 10b5-1 trading plans during the quarter[213] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including amended employment agreements and Sarbanes-Oxley certifications - The report includes exhibits such as amended employment agreements for executives and certifications pursuant to the Sarbanes-Oxley Act[215]