Dynex Capital(DX) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the three months ended March 31, 2021, detailing the company's financial position, performance, and cash flows Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,901,108 | $3,095,435 | | Mortgage-backed securities, at fair value | $2,380,373 | $2,596,255 | | Repurchase agreements | $2,032,089 | $2,437,163 | | Total Liabilities | $2,169,832 | $2,461,982 | | Total Shareholders' Equity | $731,276 | $633,453 | Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands, except per share data) | Account | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net Interest Income | $12,259 | $17,721 | | Gain (loss) on derivative instruments, net | $107,801 | $(195,567) | | Net Income (Loss) | $117,929 | $(98,479) | | Net income (loss) to common shareholders | $112,383 | $(106,234) | | Comprehensive income (loss) to common shareholders | $47,227 | $(33,262) | | Net income (loss) per common share-basic and diluted | $4.20 | $(4.63) | Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $30,189 | $43,981 | | Net cash provided by investing activities | $398,335 | $287,880 | | Net cash used in financing activities | $(360,768) | $(352,291) | Notes to the Consolidated Financial Statements These notes detail the company's significant accounting policies, investment portfolio, financing, hedging activities, fair value measurements, and changes in shareholders' equity - The Company operates as an internally managed mortgage REIT, primarily investing in leveraged Agency and non-Agency mortgage-backed securities (MBS), including CMBS, RMBS, and CMBS IOs[23] - Effective January 1, 2021, the Company elected the fair value option for all new MBS, reporting fair value changes in net income to align with derivative accounting[44] MBS Portfolio by Fair Value (in thousands) | MBS Type | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Agency RMBS | $1,763,737 | $1,946,391 | | Agency CMBS | $249,617 | $258,550 | | CMBS IO | $365,876 | $390,039 | | Non-Agency Other | $1,143 | $1,275 | | Total | $2,380,373 | $2,596,255 | - During Q1 2021, the Company redeemed all remaining 2,788,330 shares of its 7.625% Series B Preferred Stock, incurring a $3.0 million redemption charge to net income available to common shareholders[108] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 performance, highlighting the positive impact of hedging in a rising interest rate environment, leading to comprehensive income and increased leverage due to TBA investments Executive Overview In Q1 2021, the company's hedging strategy protected book value in a rising interest rate environment, resulting in $47.2 million comprehensive income and increased leverage to 6.9x due to TBA investments - Comprehensive income to common shareholders for Q1 2021 was $47.2 million, or $1.76 per common share, primarily driven by hedging instrument gains that protected book value against rising interest rates[124] Non-GAAP Financial Highlights (in thousands, except per share data) | Metric | Q1 2021 | Q4 2020 | | :--- | :--- | :--- | | Core net operating income to common shareholders | $12,420 | $10,543 | | Core net operating income per common share | $0.46 | $0.45 | | Adjusted net interest income | $20,827 | $20,854 | - Leverage, including TBA long positions, increased to 6.9 times shareholders' equity as of March 31, 2021, up from 6.3 times at year-end 2020, primarily due to increased TBA investment[126] Financial Condition As of March 31, 2021, the company's investment portfolio primarily comprised Agency RMBS, CMBS, and CMBS IOs, with increased TBA allocation, financed by repurchase agreements and 72% hedged against interest rate risk Investment Portfolio Composition (including TBAs) | Investment Type | % of Portfolio (Mar 31, 2021) | % of Portfolio (Dec 31, 2020) | | :--- | :--- | :--- | | Agency RMBS | 82% | 81% | | Agency CMBS | 4% | 6% | | CMBS IO | 11% | 13% | | Non-Agency MBS | <1% | <1% | - The company increased investment in TBA securities due to lower implied financing rates for dollar roll transactions compared to repurchase agreement borrowings[139] - As of March 31, 2021, approximately 72% of the MBS portfolio (including TBA securities) was hedged using U.S. Treasury futures, options, and swaptions, up from 62% at year-end 2020[151] Results of Operations In Q1 2021, net interest income decreased, but adjusted net interest income remained stable, driven by a $107.8 million net gain on derivative instruments offsetting a $65.2 million fair value decline in AFS investments Net Interest Income Analysis (Q1 2021 vs Q4 2020, in thousands) | Metric | Q1 2021 | Q4 2020 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income (GAAP) | $12,259 | $14,416 | $(2,157) | | TBA Drop Income | $8,568 | $6,445 | $2,123 | | Adjusted Net Interest Income (Non-GAAP) | $20,827 | $20,854 | $(27) | Gain (Loss) on Derivative Instruments, Net (Q1 2021, in thousands) | Derivative Type | Gain / (Loss) | | :--- | :--- | | Interest rate swaptions | $57,763 | | U.S. Treasury futures | $95,647 | | Options on U.S. Treasury futures | $12,617 | | TBA dollar roll positions, net | $(58,226) | | Total | $107,801 | - The fair value of investments declined, resulting in a $65.2 million unrealized loss in OCI for AFS securities and a $1.0 million loss in net income for fair value option securities[171] Liquidity and Capital Resources The company's liquidity strengthened with liquid assets increasing to $528.6 million, while leverage rose to 6.9x due to increased TBA investments, maintaining full compliance with all financial covenants - Liquid assets, including unrestricted cash and unencumbered Agency securities, increased to $528.6 million as of March 31, 2021, from $415.3 million as of December 31, 2020[178] - Leverage, including TBA long positions, was 6.9x shareholders' equity as of March 31, 2021, up from 6.3x at year-end 2020[178] - The company was in full compliance with all debt covenants as of March 31, 2021, with no material restrictions on financing flexibility[180] Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate, spread, prepayment, credit, and liquidity risks, and its strategies for managing them through investment selection and hedging Projected Sensitivity of Shareholders' Equity to Interest Rate Shifts (as of March 31, 2021) | Rate Shift (Basis Points) | % Change in Common Equity | | :--- | :--- | | -100 | -9.6% | | -50 | -1.4% | | +50 | -3.4% | | +100 | -9.1% | Projected Sensitivity of Shareholders' Equity to Market Spread Shifts (as of March 31, 2021) | Spread Shift (Basis Points) | % Change in Common Equity | | :--- | :--- | | -20/-50 | +10.5% | | -10 | +5.0% | | +10 | -5.0% | | +20/+50 | -10.5% | - Prepayment risk is managed by investing substantially in lower coupon RMBS (83% of capital in securities with a coupon of 2.5% or lower) and in CMBS with prepayment protections[211] - Credit risk is mitigated by primarily investing in Agency MBS with government or GSE guarantees, and in senior, AAA-rated tranches of CMBS IO securities[213] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting during the quarter - The principal executive and financial officers concluded that the Company's disclosure controls and procedures were effective as of March 31, 2021[220] - No material changes occurred in internal control over financial reporting during Q1 2021[221] PART II. OTHER INFORMATION Legal Proceedings No material developments occurred in the 'Receiver Litigation' during the quarter, with management deeming a loss not probable and no other material legal proceedings pending - No material developments occurred in the previously disclosed 'Receiver Litigation' during the three months ended March 31, 2021[223] - Management believes the likelihood of loss is not probable and cannot be reasonably estimated, thus no contingent liability has been recorded[223] Risk Factors No material changes occurred to the risk factors previously disclosed in the Company's 2020 Annual Report on Form 10-K - No material changes from the risk factors discussed in the Company's 2020 Form 10-K[224] Unregistered Sales of Equity Securities and Use of Proceeds The Board authorized a $40 million common stock and $40 million Series C Preferred Stock repurchase program, though no shares were repurchased in Q1 2021, except for 22,623 shares withheld for employee tax obligations - The Board of Directors authorized the repurchase of up to $40 million of common stock and $40 million of Series C Preferred Stock[225] - No shares were purchased under the publicly announced repurchase plan during the three months ended March 31, 2021[227][228] Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None[229] Mine Safety Disclosures No mine safety disclosures were reported - None[230] Other Information No other material information was reported - None[231] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents, underwriting agreements, and Sarbanes-Oxley Act certifications - The report includes certifications from the principal executive and financial officers pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[233] - Underwriting agreements related to equity offerings in January and March 2021 are included by reference[233]