SELECTED PORTIONS OF THE PRELIMINARY, UNAUDITED RESULTS OF DYNEX CAPITAL, INC.
Published on March 3, 2011
Exhibit 99.1
Selected Year-to-Date Financial Information
As of January 31, 2011, the most recent period through which Dynex Capital, Inc. (NYSE: DX) (the Company) has financial information available, the Company had a total investment portfolio of $1.75 billion, repurchase agreements outstanding of $1.32 billion, and shareholders equity of $298.8 million. Book value per common share was $9.77 and the Companys leverage ratio was 5.1 times.
Since December 31, 2010 and through March 2, 2011, the Company entered into $277 million in pay-fixed interest rate swaps of which $27 million will not be designated as a hedge for financial statement purposes under generally accepted accounting principles in the United States. As of March 2, 2011, the Company had $622 million in interest rate swaps with a current weighted average term of 42 months and a weighted average rate of 1.76%.
Since December 31, 2010 and through March 2, 2011, the Company has issued 409,237 shares of common stock through its continuous equity placement program and raised net proceeds of $4.3 million.
Selected Results for the Quarter and Year ended December 31, 2010
On February 10, 2011, the Company announced its preliminary, unaudited results for the quarter and year ended December 31, 2010. Below are selected portions of such preliminary results. All information as of or for the quarter or year ended December 31, 2010 is preliminary and unaudited. All information for the quarter ended December 31, 2009 is unaudited.
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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, or 4,221,539 shares, 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. |
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 Companys 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 Companys 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 for Agency MBS for the fourth quarter of 2010 was 2.78% which is the difference between the yield on assets of 3.42% the cost of funds of 0.64%. The net portfolio interest spread for non-Agency MBS for the fourth quarter of 2010 was 3.75% which is the difference between the yield on assets of 6.19% the cost of funds of 2.44%. The net portfolio interest spread for the entire investment portfolio 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, which was partially offset by a 30 basis point decline in our interest-earning investments during the quarter.
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 Companys 2010 activities and results pursuant to the performance bonus program for executive management.
Agency MBS Investments
The Companys Agency MBS portfolio, and specifically the Companys 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 Companys Agency MBS as of 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 Companys Agency MBS investments for the periods presented:
| (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 Companys non-Agency CMBS and RMBS was $252.0 million and $15.4 million, respectively. Below is certain information about the Companys 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 |
79.3 | % | 59.1 | % | 65.7 | % | ||||||
| Percentage below AA-rated |
20.7 | % | 40.9 | % | 34.3 | % | ||||||
Seriously delinquent loans (loans 60+ days past due) in the Companys 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 Companys 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 Companys exposure to changes in LIBOR for its repurchase agreement borrowings.
Shareholders Equity and Book Value per Common Share
Shareholders equity was $292.4 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 $9.64 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 $123.6 million primarily from the issuance of $116.6 million in common equity during the year and earnings in excess of dividends paid of $6.6 million. During 2010 the Companys return on average shareholders equity was approximately 14.5%.
The following table summarizes the allocation of the Companys 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 Companys 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) |
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| Agency RMBS |
$ | 989,743 | $ | (869,537 | ) | $ | 120,206 | 41.1 | % | $ | 5,743 | $ | 18,893 | |||||||||||
| Agency CMBS |
206,568 | (150,178 | ) | 56,390 | 19.3 | % | 1,517 | 2,372 | ||||||||||||||||
| Non-Agency CMBS |
251,955 | (200,328 | ) | 51,627 | 17.7 | % | 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 | 15.0 | % | 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 | ||||||||||||||||
| $ | 1,649,584 | $ | (1,357,227 | ) | $ | 292,357 | 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 Companys 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. |
DYNEX CAPITAL, INC.
Consolidated Balance Sheets
(Thousands except per share data)
| December 31, 2010 |
December 31, 2009 |
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| (unaudited) | ||||||||
| ASSETS |
||||||||
| Agency MBS |
$ | 1,196,311 | $ | 594,120 | ||||
| Non-Agency MBS |
267,363 | 109,110 | ||||||
| Securitized mortgage loans, net |
152,962 | 212,471 | ||||||
| Other investments |
1,229 | 2,280 | ||||||
| 1,617,865 | 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 | ||||||
| $ | 1,649,584 | $ | 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 |
10,057 | 10,061 | ||||||
| Accumulated deficit |
(256,307 | ) | (262,913 | ) | ||||
| 292,357 | 168,753 | |||||||
| $ | 1,649,584 | $ | 958,062 | |||||
| Book value per common share |
$ | 9.64 | $ | 9.08 | ||||
DYNEX CAPITAL, INC.
Consolidated Statements of Operations
(Thousands except share and per share data)
(unaudited)
| Three Months Ended December 31, |
Year Ended December 31, |
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| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| 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 | ||||||||