Dynex Capital(DX) - 2020 Q4 - Annual Report

Part I Business Dynex Capital, Inc. is an internally managed mortgage REIT primarily investing in Agency MBS, leveraging repurchase agreements and hedging with derivatives - The company is an internally managed mortgage REIT primarily investing in Agency residential MBS (RMBS), commercial MBS (CMBS), and CMBS interest-only (IO) securities, which are guaranteed by U.S. government-sponsored entities (GSEs)[11] - Financing is principally achieved through borrowings under repurchase agreements, with leverage levels adjusted based on market conditions and risk assessments[11][23] - In 2020, the company shifted its hedging strategy from primarily using interest rate swaps to using U.S. Treasury futures and options due to significant market disruptions caused by the COVID-19 pandemic[27][29] - As of December 31, 2020, the company had 19 employees, with 53% being women or self-identified minorities, and maintained a 0% voluntary turnover rate for the preceding three years[59] Tax Characterization of Dividends Declared Per Share (2019-2020) | Dividend Type | Year | Ordinary | Capital Gain | Return of Capital | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Common | 2020 | $ — | $ 1.66000 | $ — | $ 1.66000 | | | 2019 | $ 0.36723 | $ — | $ 1.64277 | $ 2.01000 | | Preferred Series B | 2020 | $ — | $ 1.90625 | $ — | $ 1.90625 | | | 2019 | $ 1.90625 | $ — | $ — | $ 1.90625 | | Preferred Series C | 2020 | $ — | $ 1.12150 | $ — | $ 1.12150 | | | 2019 | $ — | $ — | $ — | $ — | Risk Factors The company faces significant investment, financing, regulatory, and operational risks, including market volatility, leverage, and REIT compliance - Investment risks include negative impacts on income and book value from fluctuations in market value, interest rates, and prepayment rates on MBS[72][76] - Financing and hedging risks stem from the use of leverage through uncommitted, short-term repurchase agreements, which can lead to margin calls and liquidity issues, and the potential for hedging strategies to be ineffective[81][83] - Regulatory risks involve the complex requirements to maintain REIT status, where failure could result in significant tax liabilities and debt defaults, alongside potential changes in tax legislation and regulation[88][90][99] - Other significant business risks include the continued adverse effects of the COVID-19 pandemic on market conditions, the replacement of LIBOR with an alternative reference rate, and potential cybersecurity incidents[100][102][104] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - There are no unresolved staff comments[106] Properties The company does not own or lease any physical properties that are material to its operations - The Company does not own or lease any material physical properties[107] Legal Proceedings The DCI Litigation was dismissed, while the Receiver Litigation, concerning a cost-sharing agreement, remains pending with no probable material loss - The DCI Litigation against the Company was affirmed for dismissal by the Fifth Circuit Court of Appeals, and the matter is now considered closed[108] - In the separate Receiver Litigation, the court found the Company breached a cost-sharing agreement but also granted the Company's motion for summary judgment for its own claims of offset and recoupment, with the matter pending and both parties having submitted damage claims[108] - Management believes the likelihood of loss in the Receiver Litigation is not probable and the amount cannot be reasonably estimated; therefore, no contingent liability has been recorded[110] Mine Safety Disclosures This section is not applicable to the company's business - None[111] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "DX", with a $40 million repurchase program authorized and $9.9 million raised via ATM in 2020 - The company's common stock is traded on the New York Stock Exchange under the symbol "DX"[114] - A stock repurchase program for up to $40 million of common stock is authorized through March 31, 2022, with no shares repurchased in the three months ended December 31, 2020[116] - During 2020, the company issued 553,364 shares of common stock through its ATM program, raising $9.9 million in net proceeds[116] Selected Financial Data This section has been omitted pursuant to amendments to Regulation S-K Item 301 - The requirement to disclose selected financial data has been eliminated and is therefore omitted[118] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, Dynex Capital achieved a 15.2% total economic return, increasing book value to $19.08 per share through active portfolio management and strategic shifts - Generated a total economic return of 15.2% for common shareholders in 2020, with book value per common share increasing by $1.07 to $19.08[124] - Actively managed the portfolio by strategically selling approximately 38% of its assets in early March 2020, realizing $84.8 million in gains, and later reinvesting to capture wider spreads[124] - The investment portfolio shifted from Agency CMBS to predominantly Agency RMBS and TBA securities to enhance liquidity and capture better risk-adjusted returns[132] - Leverage, including TBA positions, was 6.3x shareholders' equity as of December 31, 2020[170] GAAP to Non-GAAP Reconciliation Summary (in thousands) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Comprehensive income to common shareholders | $66,472 | $43,950 | | Core net operating income to common shareholders | $44,763 | $49,267 | | GAAP net interest income | $63,853 | $56,057 | | Adjusted net interest income | $80,499 | $78,198 | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate, spread, prepayment, credit, and liquidity risks through derivatives, investment strategies, and stress scenario monitoring - The primary market risks are interest rate, spread, prepayment, credit, liquidity, and reinvestment risks[191] Projected Change in Shareholders' Equity from Parallel Interest Rate Shifts (as of Dec 31, 2020) | Rate Shift (Basis Points) | Change in Equity | | :--- | :--- | | -100 | -5.1% | | -50 | +1.3% | | +50 | -1.7% | | +100 | -3.8% | Projected Change in Shareholders' Equity from Market Spread Shifts (as of Dec 31, 2020) | Spread Shift (Basis Points) | Change in Equity | | :--- | :--- | | +20/+50 | -9.5% | | +10 | -4.4% | | -10 | +4.4% | | -20/-50 | +9.5% | - Prepayment risk is managed by investing in lower coupon securities and specified pools where borrowers have disincentives to refinance; as of Dec 31, 2020, approximately 84% of capital in Agency RMBS was in 2.0% and 2.5% coupons[204] - Liquidity risk arises from reliance on recourse repurchase agreements and TBA positions, managed by monitoring liquidity under various stress scenarios[208] Financial Statements and Supplementary Data This section refers to the consolidated financial statements, related notes, and the Reports of the Independent Registered Public Accounting Firm, included from page F-1 - The company's audited consolidated financial statements and supplementary data are included at the end of the Form 10-K, beginning on page F-1[213] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[213] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2020, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of December 31, 2020[214] - There were no material changes in internal control over financial reporting during the fourth quarter of 2020[215] - Management's report asserts that internal control over financial reporting was effective as of year-end, based on the COSO (2013) framework[216] Other Information The company reports no other information for this item - None[217] Part III Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's 2021 definitive proxy statement - Information is incorporated by reference from the 2021 Proxy Statement[220] Executive Compensation The information required for this item, covering executive and director compensation, is incorporated by reference from the company's 2021 definitive proxy statement - Information is incorporated by reference from the 2021 Proxy Statement[221] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans, with other details on security ownership incorporated by reference from the 2021 proxy statement Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to Be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Shareholders | — | $ — | 2,266,371 | | Not Approved by Shareholders | — | — | — | | Total | — | $ — | 2,266,371 | - Additional information regarding security ownership is incorporated by reference from the 2021 Proxy Statement[223] Certain Relationships and Related Transactions, and Director Independence The information required for this item, concerning related person transactions and director independence, is incorporated by reference from the company's 2021 definitive proxy statement - Information is incorporated by reference from the 2021 Proxy Statement[224] Principal Accountant Fees and Services The information required for this item, detailing fees paid to the principal accountant and related services, is incorporated by reference from the company's 2021 definitive proxy statement - Information is incorporated by reference from the 2021 Proxy Statement[225] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K - This item provides an index of all financial statements, schedules, and exhibits included in or incorporated by reference into the Form 10-K filing[228][229] Form 10-K Summary The company indicates that there is no Form 10-K summary - None[235] Financial Statements and Notes Reports of Independent Registered Public Accounting Firm BDO USA, LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting, identifying MBS valuation as a critical audit matter - The independent auditor, BDO USA, LLP, provided an unqualified opinion, stating the financial statements are presented fairly in all material respects[246] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[258] - The valuation of investments in mortgage-backed securities (MBS) was identified as a critical audit matter[253] Consolidated Financial Statements Total assets decreased to $3.09 billion in 2020 from $5.37 billion in 2019, while net income to common shareholders significantly improved to $160.0 million Consolidated Balance Sheet Summary (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $3,087,754 | $5,370,604 | | Mortgage-backed securities, at fair value | $2,596,255 | $5,188,163 | | Total Liabilities | $2,454,301 | $4,787,616 | | Repurchase agreements | $2,437,163 | $4,752,348 | | Total Shareholders' Equity | $633,453 | $582,988 | Consolidated Comprehensive Income Summary (in thousands, except per share) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net interest income | $63,853 | $56,057 | | Gain (loss) on sale of investments, net | $308,084 | $(5,755) | | Loss on derivative instruments, net | $(172,290) | $(186,949) | | Net income (loss) to common shareholders | $160,017 | $(165,635) | | Comprehensive income (loss) to common shareholders | $66,472 | $43,950 | | Net income (loss) per common share | $6.93 | $(7.01) | Notes to the Consolidated Financial Statements The notes detail accounting policies, the $2.6 billion MBS portfolio, $2.4 billion in repurchase agreements, derivative hedging, and equity changes - As of Dec 31, 2020, the MBS portfolio had a fair value of $2.6 billion, down from $5.2 billion at year-end 2019, primarily composed of Agency RMBS and CMBS[325] - Repurchase agreements outstanding totaled $2.44 billion at year-end 2020, collateralized by $2.61 billion of MBS, a significant decrease from $4.75 billion at year-end 2019[333] - The company's derivative portfolio shifted in 2020, with interest rate swaps eliminated and replaced with U.S. Treasury futures, options, and interest rate swaptions for hedging purposes[340][344] - In Q1 2020, the company issued 4.46 million shares of Series C Preferred Stock for net proceeds of $107.8 million, using the funds to redeem all Series A and a portion of Series B Preferred Stock[368] - Subsequent to year-end, the company issued 3.16 million shares of common stock for net proceeds of $55.5 million and redeemed all remaining 2.79 million shares of its Series B Preferred Stock[379]