May 01, 2013 at 17:31 PM EDT
Dynex Capital, Inc. Reports First Quarter 2013 Diluted EPS of $0.34 and Book Value Per Common Share of $10.50

Dynex Capital, Inc. (NYSE: DX) reported net income available to common shareholders of $18.4 million, or $0.34 per diluted common share for the first quarter of 2013 versus $18.3 million, or $0.34 per diluted common share, for the fourth quarter of 2012 and $16.5 million, or $0.33 per diluted common share, for the first quarter of 2012.

Management Remarks

Mr. Thomas Akin, Chairman and Chief Executive Officer, commented, "Our first quarter results were excellent. Our book value per common share increased by $0.20 even as interest rates increased during the quarter. Net interest income increased to $22.5 million for this quarter from $21.1 million in the prior quarter. Return on average common equity remained the same as the fourth quarter of 2012 at 13.0%. Our performance was driven significantly by our focus over the past twelve months on CMBS investments, which now represent 61% of our invested capital. The Series B preferred stock we issued in April 2013 helps to diversify our capital base while lowering our average cost of equity capital. We now have fully invested the proceeds of this issuance at accretive returns to our shareholders. We believe that our portfolio is well positioned in this low-rate and uncertain environment."

Quarterly Highlights

($ in thousands, except per share amounts) 1Q2013 4Q2012 1Q2012
Net interest income $ 22,526 $ 21,145 $ 19,147
Gain on sale of investments, net $ 1,391 $ 2,044 $ 351
General and administrative expenses $ (3,808 ) $ (3,501 ) $ (3,121 )
Net income to common shareholders $ 18,381 $ 18,330 $ 16,476
Earnings per common share $ 0.34 $ 0.34 $ 0.33
Dividend per common share $ 0.29 $ 0.29 $ 0.28
Return on average common equity (annualized) 13.0 % 13.0 % 14.7 %
Interest earnings assets, end of period $ 4,531,342 $ 4,175,662 $ 3,276,170
Average interest earning assets $ 4,098,681 $ 4,117,527 $ 2,771,938
Average interest bearing liabilities $ (3,641,654 ) $ (3,655,229 ) $ (2,398,228 )
RMBS/single-family capital allocation, end of period $ 233,870 $ 219,766 $ 228,665
CMBS/commercial capital allocation, end of period $ 362,693 $ 361,264 $ 239,874
Book value per common share, end of period $ 10.50 $ 10.30 $ 9.62
Net interest spread 1.89 % 1.93 % 2.41 %
Portfolio CPR (excluding CMBS IO) 19.3 % 19.0 % 15.4 %
Debt to shareholders' equity ratio, end of period 6.3x 5.9x 5.4x

Conference Call

As previously announced, the Company's quarterly conference call to discuss the first quarter results is 11:00 a.m. ET on May 2, 2013. Interested investors may access the call by dialing 1-888-317-6016 or by accessing the webcast, the link for which is provided under “Investor Relations/IR Highlights” on our website (www.dynexcapital.com). A slide presentation will accompany the webcast and will also be available one hour prior to the call at the same location on our website.

Earnings Summary

Net interest income increased to $22.5 million for the first quarter of 2013 from $21.1 million for the fourth quarter of 2012 due to lower Agency RMBS premium amortization and higher prepayment penalty income received on CMBS IO investments.

Average interest earning investments decreased slightly to $4,098.7 million for the first quarter of 2013 versus $4,117.5 million for the fourth quarter of 2012. Net interest spread for the first quarter of 2013 was 1.89% and is the difference between the yield on the Company's interest-earning investment portfolio of 3.04% and the cost of funds of 1.15%. For the fourth quarter of 2012, net interest spread of 1.93% consisted of the yield on the Company's interest-earning investments of 3.04% less the cost of funds of 1.11%. For the first quarter of 2012, the net interest spread of 2.41% consisted of the yield on the Company's interest-earning investments of 3.58% less the cost of funds of 1.17%. The net interest spread declined in the first quarter of 2013 compared to the fourth quarter of 2012 primarily due to an increase in the cost of funds during the quarter related to $250 million in forward starting interest rate swaps that were entered into during 2012 and which became effective during the first quarter of 2013. The net interest spread declined for the first quarter of 2013 versus the first quarter of 2012 due primarily to the addition of lower yielding Hybrid ARMs and CMBS IO during the last twelve months and to a lesser extent from interest rate resets on ARMs.

During the first quarter of 2013, the Company sold investments in CMBS IO with a notional balance of $377.0 million and CMBS with a par balance of $31.0 million for net gains of $0.4 million and $1.0 million, respectively. General and administrative expenses were $3.8 million in the first quarter of 2013, or 0.61% of average shareholders' equity, versus $3.5 million, or 0.56% of average shareholders' equity, in the fourth quarter of 2012. General and administrative expenses increased for the first quarter of 2013 as a percentage of average shareholders' equity primarily due to seasonal factors related to accounting and auditing fees and compensation and benefits expense.

Portfolio Summary

The Company's investment portfolio was $4,531.3 million at March 31, 2013 versus $4,175.7 million at December 31, 2012. The Company's Agency MBS investments were $3,848.4 million at March 31, 2013 versus $3,492.7 million at December 31, 2012. The Company's non-Agency MBS investments were $617.3 million at March 31, 2013 versus $611.3 million at December 31, 2012. Agency MBS as a percentage of the Company's investment portfolio was 85% at March 31, 2013 compared to 84% at December 31, 2012. During the first quarter of 2013 the Company purchased $636.0 million in MBS investments.

Agency MBS Investments

The Company's Agency RMBS investments consist of ARMs and Hybrid ARMs and have a weighted average months to coupon reset of 54 months. The Company's Agency CMBS and CMBS IO investments consist of fixed rate securities collateralized by multifamily loans and have a weighted average maturity of 93 months. Premium amortization on Agency RMBS was $8.1 million, or 0.32% of the average amortized cost of Agency RMBS for the first quarter of 2013 versus $9.5 million, or 0.36% of the average amortized cost for Agency RMBS for the fourth quarter of 2012. The following table presents the Company's Agency MBS portfolio by category and certain other information as of and for the three months ended March 31, 2013:

As of March 31, 2013 1Q2013
Principal
Balance
(notional for Net Premium Amortized WAVG WAVG Yield

($ in thousands)

CMBS IO) (Discount) Cost Fair Value Coupon

(2)

RMBS $ 2,732,173 $ 158,205 $ 2,890,378 $ 2,895,021 3.56 % 2.04 %
CMBS 306,677 23,108 329,785 352,024 5.18 % 3.60 %
CMBS IO 10,873,160 576,161 576,161 601,389 1.02 % 4.59 %
Total (1) $ 3,038,850 $ 757,474 $ 3,796,324 $ 3,848,434 2.60 %

(1) Total principal balance excludes notional amount of CMBS IO.
(2) Weighted average yield is based on weighted average amortized cost for the quarter.

The following table summarizes average yield and financing costs for the Company's Agency MBS investments for the periods presented:

($ in thousands) 1Q2013 4Q2012 1Q2012
Weighted average annualized yield for the period 2.60 % 2.62 % 2.98 %
Weighted average annualized cost of funds including interest rate swaps for the period (0.93 )% (0.92 )% (0.91 )%
Net interest spread for the period 1.67 % 1.70 % 2.07 %
Average balance of investments for the period $ 3,456,841 $ 3,492,814 $ 2,179,787
Average balance of financing for the period $ (3,128,324 ) $ (3,167,800 ) $ (1,911,423 )

The following table presents the weighted average of constant prepayment rates ("CPRs") for the Company's Agency MBS for the periods presented:

1Q2013 4Q2012 3Q2012 2Q2012
RMBS 24.8 % 24.3 % 23.4 % 20.8 %
CMBS 0.0 % 0.0 % 0.0 % 0.0 %
Total weighted average (1) 22.0 % 21.5 % 20.9 % 18.3 %

(1) CPRs for CMBS IO are not calculated and reported. If CPRs for CMBS IO were included, the total weighted averages above would be lower.

The following table presents the weighted average coupon by weighted average months-to-reset ("MTR") for the variable-rate portion of our Agency RMBS based on par value as of March 31, 2013 and December 31, 2012:

March 31, 2013 December 31, 2012
WAVG WAVG

($ in thousands)

Par Value Coupon Par Value Coupon
0-12 MTR $ 488,356 3.53 % $ 523,711 3.94 %
13-24 MTR 224,005 3.98 % 105,372 4.41 %
25-36 MTR 286,418 3.70 % 194,814 3.82 %
37-60 MTR 512,505 3.96 % 471,159 4.02 %
61-84 MTR 549,347 3.24 % 620,099 3.28 %
Over 84 MTR 651,893 3.36 % 490,759 3.40 %
$ 2,712,524 3.57 % $ 2,405,914 3.69 %

Non-Agency MBS Investments

The following table presents the Company's non-Agency MBS portfolio by category and certain other information as of and for the three months ended March 31, 2013:

As of March 31, 2013 1Q2013
Principal
Balance
(notional for Net Premium Amortized WAVG WAVG Yield

($ in thousands)

CMBS IO) (Discount) Cost Fair Value Coupon

(2)

RMBS $ 10,053 $ (758 ) $ 9,295 $ 9,580 4.20 % 5.61%
CMBS 472,650 (16,685 ) 455,965 496,275 5.40 % 5.55%
CMBS IO 2,385,979 104,930 104,930 111,406 0.93 % 4.68%
Total (1) $ 482,703 $ 87,487 $ 570,190 $ 617,261 5.39%

(1) Total principal balance excludes notional amount of CMBS IO.
(2) Weighted average yield is based on weighted average amortized cost for the quarter.

The following table summarizes average yield and financing costs for the Company's non-Agency MBS investments for the periods presented:

($ in thousands) 1Q2013 4Q2012 1Q2012
Weighted average annualized yield for the period 5.39 % 5.47 % 6.49 %
Weighted average annualized cost of funds including interest rate swaps for the period (2.58 )% (2.52 )% (2.52 )%
Net interest spread for the period 2.81 % 2.95 % 3.97 %
Average balance of investments for the period $ 572,312 $ 548,153 $ 421,981
Average balance of financing for the period $ (473,177 ) $ (443,288 ) $ (366,590 )

Information related to the credit ratings for the Company's non-Agency MBS as of March 31, 2013 is as follows:

Fair Value

Weighted average
% of total

($ in thousands) RMBS CMBS CMBS IO
AAA $ 2,712 $ 153,348 $ 111,406 43.3 %
AA 343 60,429 9.9 %
A 167 239,413 38.8 %
Below A or not rated 6,358 43,085 8.0 %
$ 9,580 $ 496,275 $ 111,406 100.0 %

Securitized Mortgage Loans

Securitized mortgage loans had an amortized cost basis, net of reserves, of $64.8 million and a principal balance of $65.6 million with $26.9 million principal in commercial mortgage loans and $38.7 million principal in single-family mortgage loans at March 31, 2013. Seriously delinquent loans (loans 60+ days past due) totaled $4.2 million as of March 31, 2013 versus $3.4 million at December 31, 2012 and $15.2 million as of March 31, 2012. The allowance for loan losses for the Company's securitized mortgage loan portfolio has decreased to $0.3 million at March 31, 2013 from $0.4 million at December 31, 2012 due to charge-offs of $0.4 million offset by additional provisions of $0.3 million.

Hedging Activities

As of March 31, 2013, the Company had a notional total of $1.4 billion in pay-fixed interest rate swaps with a weighted average rate of 1.54% and a weighted average remaining maturity of 39 months. Of this amount, $25.0 million with a pay-fixed rate of 1.70% are forward-starting swaps. Additionally, $27.0 million of the Company's $1.4 billion of interest rate swaps are considered trading instruments and have a weighted average rate of 2.88% and weighted average remaining maturity of 47 months and are intended to offset market value changes of Agency CMBS with a par value at March 31, 2013 of $25.8 million which are also designated as trading instruments.

Equity Summary

Shareholders' equity was $633.3 million at March 31, 2013, versus $616.7 million at December 31, 2012. Book value per common share was $10.50 at March 31, 2013 compared to $10.30 at December 31, 2012. Net income of $19.6 million for the quarter ended March 31, 2013 exceeded the $17.1 million in preferred and common stock dividends declared as the Company utilized a portion of its tax net operating loss carryforwards to offset its distribution requirement.

The following table summarizes the allocation of the Company's shareholders' equity as of March 31, 2013 and the net interest income contribution for the quarters indicated to each component of the Company's balance sheet:

Associated

Financing(1)/

1Q2013 Net 4Q2012 Net
Asset Liability Allocated % of Interest Interest
Carrying Carrying Shareholders' Shareholders' Income Income

($ in thousands)

Basis Basis Equity Equity Contribution Contribution
Agency MBS $ 3,848,434 $ 3,397,273 $ 451,161 71.2 % $ 16,863 $ 15,570
Non-Agency MBS 617,261 499,642 117,619 18.6 % 4,861 4,656
Securitized mortgage loans (2) 64,825 37,864 26,961 4.3 % 522 877
Other investments (2) 822 822 0.1 % 19 20
Derivative instruments(3) 37,687 (37,687 ) (6.0 )%
Cash and cash equivalents 44,129 44,129 7.0 %
Other assets/other liabilities 52,642 22,349 30,293 4.8 %
$ 4,628,113 $ 3,994,815 $ 633,298 100.0 % $ 22,265 $ 21,123

(1) Associated financing for investments includes repurchase agreements and securitization financing issued to third parties (which is 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) Net interest income contribution amount is after provision for loan losses.
(3) Net interest expense from derivative instruments designated as hedges of repurchase agreement financing is included within net interest income contribution amounts for each respective investment category.

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 is actively investing 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, our views on expected characteristics of future investment environments and risks posed by our investment portfolio, our future investment strategies, our future leverage levels and financing strategies, and the expected performance of our investment portfolio and 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 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 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 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, 2012, and other reports filed with and furnished to the Securities and Exchange Commission.

DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS

(amounts in thousands except share and per share data)

March 31, 2013December 31, 2012
ASSETS(unaudited)
Mortgage-backed securities, at fair value (including pledged of $4,127,459) $ 4,465,695 $ 4,103,981
Securitized mortgage loans, net 64,825 70,823
Other investments, net 822 858
4,531,342 4,175,662
Cash and cash equivalents 44,129 55,809
Principal receivable on investments 18,615 17,008
Accrued interest receivable 24,920 23,073
Other assets, net 9,107 8,677
Total assets $ 4,628,113 $ 4,280,229
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Repurchase agreements $ 3,708,255 $ 3,564,128
Payable for securities pending settlement 198,051
Non-recourse collateralized financing 28,473 30,504
Derivative liabilities 37,687 42,537
Accrued interest payable 2,873 2,895
Accrued dividends payable 16,934 16,770
Other liabilities 2,542 6,685
Total liabilities 3,994,815 3,663,519
Shareholders’ equity:
Preferred stock, par value $.01 per share, 8.5% Series A Cumulative Redeemable; 8,000,000 shares authorized; 2,300,000 shares issued and outstanding, respectively 55,407 55,407

Common stock, par value $.01 per share, 100,000,000 shares authorized; 54,835,420 and 54,268,915 shares issued and outstanding, respectively

548 543
Additional paid-in capital 764,272 759,214
Accumulated other comprehensive income (loss) 61,557 52,511
Accumulated deficit (248,486 ) (250,965 )
Total shareholders' equity 633,298 616,710
Total liabilities and shareholders’ equity $ 4,628,113 $ 4,280,229
Book value per common share $ 10.50 $ 10.30
DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF INCOME

(amounts in thousands except per share data)

Three Months Ended
March 31,
20132012
Interest income: (unaudited)(unaudited)
Mortgage-backed securities, at fair value $ 32,039 $ 24,463
Securitized mortgage loans 924 1,504
Other investments 19 305
32,982 26,272
Interest expense:
Repurchase agreements 10,218 6,644
Non-recourse collateralized financing 238 481
10,456 7,125
Net interest income 22,526 19,147
Provision for loan losses (261 ) (60 )
Net interest income after provision for loan losses 22,265 19,087
Gain on sale of investments, net 1,391 351
Fair value adjustments, net (157 ) (210 )
Other income, net (88 ) 369
General and administrative expenses:
Compensation and benefits (2,358 ) (1,798 )
Other general and administrative (1,450 ) (1,323 )
Net income 19,603 16,476
Preferred stock dividends (1,222 )
Net income to common shareholders $ 18,381 $ 16,476
Weighted average common shares:
Basic 54,300 49,480
Diluted 54,301 49,481
Net income per common share:
Basic $ 0.34 $ 0.33
Diluted $ 0.34 $ 0.33
Dividends declared per common share $ 0.29 $ 0.28

Contacts:

Dynex Capital, Inc.
Alison Griffin, 804-217-5897
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