Company Quick10K Filing
Quick10K
Dynex Capital
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$5.96 74 $440
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-31 Earnings, Exhibits
8-K 2019-06-20 Shareholder Rights, Amend Bylaw, Exhibits
8-K 2019-06-11 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-05-31 Enter Agreement, Exhibits
8-K 2019-05-10 Enter Agreement, Shareholder Vote, Exhibits
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-02-07 Earnings, Exhibits
8-K 2019-01-28 Earnings, Other Events, Exhibits
8-K 2019-01-28 Enter Agreement, Other Events, Exhibits
8-K 2019-01-28 Earnings, Other Events, Exhibits
8-K 2019-01-01 Officers, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-12-11 Other Events, Exhibits
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-09-04 Enter Agreement, Exhibits
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-06-29 Enter Agreement, Leave Agreement, Exhibits
8-K 2018-05-15 Officers, Shareholder Vote, Exhibits
8-K 2018-05-02 Earnings, Exhibits
8-K 2018-03-12 Amend Bylaw, Exhibits
8-K 2018-02-21 Earnings, Exhibits
TDY Teledyne Technologies 8,980
GCP GCP Applied Technologies 2,010
UBA Urstadt Biddle Properties 914
PFIS Peoples Financial Services 319
CLCT Collectors Universe 183
ASM Avino Silver & Gold Mines 30
HLTH Nobilis Health 16
DLYT Dais Analytic 0
NSM Nationstar 0
KAAC Kayne Anderson Acquisition 0
DX 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Note 2 - Investments in Debt Securities
Note 3 - Repurchase Agreements
Note 4 - Derivatives
Note 5 - Fair Value of Financial Instruments
Note 6 - Shareholders' Equity and Share-Based Compensation
Note 7 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.23.5 exhibit10235mrawellsfa.htm
EX-31.1 a2q19form10-qexx311ceo.htm
EX-31.2 a2q19form10-qexx312cfo.htm
EX-32.1 a2q19form10-qexx321sox.htm

Dynex Capital Earnings 2019-06-30

DX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-9819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia
 
52-1549373
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
4991 Lake Brook Drive,
Suite 100
 
 
 

Glen Allen,
Virginia
 
23060-9245
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(804)
217-5800
 
(Registrant’s telephone number, including area code) 
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, $.01 par value
 
DX
 
New York Stock Exchange
8.50% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share
 
DXPRA
 
New York Stock Exchange
7.625% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per share
 
DXPRB
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes                   No           

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes                        No           

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes                      No            

On July 31, 2019, the registrant had 24,655,264 shares outstanding of common stock, $0.01 par value, which is the registrant’s only class of common stock.



DYNEX CAPITAL, INC.
FORM 10-Q
INDEX

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 (unaudited) and June 30, 2018 (unaudited)
 
 
 
 
 
 
Consolidated Statements of Shareholders' Equity for the three and six months ended June 30, 2019 and June 30, 2018 (unaudited)
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2019 (unaudited) and June 30, 2018 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




i


PART I.        FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
 
June 30, 2019
 
December 31, 2018
ASSETS
(unaudited)
 

Mortgage-backed securities (including pledged of $5,132,400 and $3,511,604 respectively)
$
5,713,788

 
$
3,749,464

Mortgage loans held for investment, net
10,306

 
11,527

Cash and cash equivalents
49,956

 
34,598

Restricted cash
61,394

 
54,106

Derivative assets
342

 
6,563

Receivable for securities sold
1,242

 

Accrued interest receivable
25,292

 
21,019

Other assets, net
6,565

 
8,812

Total assets
$
5,868,885

 
$
3,886,089

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY


 
 

Liabilities:
 

 
 

Repurchase agreements
$
4,815,452

 
$
3,267,984

Payable for unsettled securities
425,897

 
58,915

Non-recourse collateralized financing
3,078

 
3,458

Derivative liabilities
207

 
1,218

Accrued interest payable
15,907

 
10,308

Accrued dividends payable
7,164

 
13,810

Other liabilities
2,542

 
3,243

 Total liabilities
5,270,247

 
3,358,936

 


 
 
Shareholders’ equity:
 

 
 

Preferred stock, par value $.01 per share; 50,000,000 shares authorized; 6,514,130 and 5,954,594 shares issued and outstanding, respectively ($162,853 and $148,865 aggregate liquidation preference, respectively)
$
156,071

 
$
142,883

Common stock, par value $.01 per share, 90,000,000 shares authorized;
24,646,964 and 20,939,073 shares issued and outstanding, respectively
246

 
209

Additional paid-in capital
882,633

 
818,861

Accumulated other comprehensive income (loss)
161,815

 
(35,779
)
Accumulated deficit
(602,127
)
 
(399,021
)
 Total shareholders’ equity
598,638

 
527,153

 Total liabilities and shareholders’ equity
$
5,868,885

 
$
3,886,089

See notes to the unaudited consolidated financial statements.

1


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 (amounts in thousands except per share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Interest income
$
43,748

 
$
25,922

 
$
83,706

 
$
51,112

Interest expense
30,813

 
14,175

 
57,089

 
25,770

  Net interest income
12,935

 
11,747

 
26,617

 
25,342

 
 
 
 
 
 
 


(Loss) gain on derivative instruments, net
(117,535
)
 
20,667

 
(179,233
)
 
59,021

Loss on sale of investments, net
(10,360
)
 
(12,444
)
 
(10,360
)
 
(16,219
)
Fair value adjustments, net
(16
)
 
27

 
(29
)
 
56

Other operating income (expense), net
256

 
(339
)
 
25

 
(592
)
General and administrative expenses:
 
 
 
 
 
 
 
Compensation and benefits
(1,747
)
 
(1,751
)
 
(3,645
)
 
(3,713
)
Other general and administrative
(2,518
)
 
(2,255
)
 
(4,574
)
 
(3,936
)
Net (loss) income
(118,985
)
 
15,652

 
(171,199
)
 
59,959

Preferred stock dividends
(3,206
)
 
(2,942
)
 
(6,265
)
 
(5,882
)
Net (loss) income to common shareholders
$
(122,191
)
 
$
12,710

 
$
(177,464
)
 
$
54,077

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale investments, net
$
100,767

 
$
(22,156
)
 
$
187,399

 
$
(71,345
)
Reclassification adjustment for loss on sale of investments, net
10,360

 
12,444

 
10,360

 
16,219

Reclassification adjustment for de-designated cash flow hedges

 
(48
)
 
(165
)
 
(96
)
Total other comprehensive income (loss)
111,127

 
(9,760
)
 
197,594

 
(55,222
)
Comprehensive (loss) income to common shareholders
$
(11,064
)
 
$
2,950

 
$
20,130

 
$
(1,145
)
 
 
 
 
 
 
 
 
Net (loss) income per common share-basic and diluted
$
(4.98
)
 
$
0.68

 
$
(7.49
)
 
$
2.89

Weighted average common shares-basic and diluted
24,541

 
18,765

 
23,681

 
18,695

See notes to the unaudited consolidated financial statements.

2


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
($ in thousands)
 
For the Three and Six Months Ended June 30, 2019
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Accumulated
Deficit
 
Total Shareholders’ Equity
 
Shares
Amount
Shares
Amount
Balance as of
December 31, 2018
5,954,594

$
142,883

 
20,939,073

$
209

 
$
818,861

 
$
(35,779
)
 
$
(399,021
)
 
$
527,153

Stock issuance
213,468

5,015

 
3,109,047

31

 
53,841

 

 

 
58,887

Restricted stock granted, net of amortization


 
50,821

1

 
297

 

 

 
298

Adjustments for tax withholding on share-based compensation


 
(16,231
)

 
(296
)
 

 

 
(296
)
Stock issuance costs


 


 
(212
)
 

 

 
(212
)
Net loss


 


 

 

 
(52,214
)
 
(52,214
)
Dividends on preferred stock


 


 

 

 
(3,059
)
 
(3,059
)
Dividends on common stock


 


 

 

 
(12,350
)
 
(12,350
)
Other comprehensive income


 


 

 
86,467

 

 
86,467

Balance as of
March 31, 2019
6,168,062

$
147,898

 
24,082,710

$
241

 
$
872,491

 
$
50,688

 
$
(466,644
)
 
$
604,674

Stock issuance
346,068

8,173

 
547,071

5

 
9,874

 

 

 
18,052

Restricted stock granted, net of amortization


 
17,183


 
296

 

 

 
296

Stock issuance costs


 


 
(28
)
 

 

 
(28
)
Net loss


 


 

 

 
(118,985
)
 
(118,985
)
Dividends on preferred stock


 


 

 

 
(3,206
)
 
(3,206
)
Dividends on common stock


 


 

 

 
(13,292
)
 
(13,292
)
Other comprehensive income


 


 

 
111,127

 

 
111,127

Balance as of
June 30, 2019
6,514,130

$
156,071

 
24,646,964

$
246

 
$
882,633

 
$
161,815

 
$
(602,127
)
 
$
598,638

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three and Six Months Ended June 30, 2018
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total Shareholders’ Equity
 
Shares
Amount
Shares
Amount
Balance as of
December 31, 2017
5,888,680

$
141,294

 
18,610,516

$
186

 
$
776,245

 
$
(8,697
)
 
$
(351,970
)
 
$
557,058

Stock issuance
20,319

494

 
15,133


 
294

 

 

 
788

Restricted stock granted, net of amortization


 
58,745

1

 
334

 

 

 
335

Adjustments for tax withholding on share-based compensation


 
(19,045
)

 
(364
)
 

 

 
(364
)
Stock issuance costs


 


 
(19
)
 

 

 
(19
)
Net income


 


 

 

 
44,307

 
44,307

Dividends on preferred stock


 


 

 

 
(2,940
)
 
(2,940
)
Dividends on common stock


 


 

 

 
(10,079
)
 
(10,079
)
Other comprehensive loss


 


 

 
(45,462
)
 

 
(45,462
)

3


Balance as of
March 31, 2018
5,908,999

$
141,788

 
18,665,349

$
187

 
$
776,490

 
$
(54,159
)
 
$
(320,682
)
 
$
543,624

Stock issuance


 
291,076

3

 
5,617

 

 

 
5,620

Restricted stock granted, net of amortization


 
12,308


 
294

 

 

 
294

Stock issuance costs


 


 
(11
)
 

 

 
(11
)
Net income


 


 

 

 
15,652

 
15,652

Dividends on preferred stock


 


 

 

 
(2,942
)
 
(2,942
)
Dividends on common stock


 


 

 

 
(10,243
)
 
(10,243
)
Other comprehensive loss


 


 

 
(9,760
)
 

 
(9,760
)
Balance as of
June 30, 2018
5,908,999

$
141,788

 
18,968,733

$
190

 
$
782,390

 
$
(63,919
)
 
$
(318,215
)
 
$
542,234

See notes to the unaudited consolidated financial statements.

4


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
($ in thousands)
 
Six Months Ended
 
June 30,
 
2019
 
2018
Operating activities:
 
 
 
Net (loss) income
$
(171,199
)
 
$
59,959

Adjustments to reconcile net (loss) income to cash provided by operating activities:
 

 
 

(Increase) decrease in accrued interest receivable
(4,273
)
 
493

Increase in accrued interest payable
5,599

 
1,735

Loss (gain) on derivative instruments, net
179,233

 
(59,021
)
Loss on sale of investments, net
10,360

 
16,219

Fair value adjustments, net
29

 
(56
)
Amortization of investment premiums, net
63,239

 
74,136

Other amortization and depreciation, net
707

 
625

Stock-based compensation expense
593

 
629

Change in other assets and liabilities, net
642

 
(1,744
)
Net cash and cash equivalents provided by operating activities
84,930

 
92,975

Investing activities:
 

 
 

Purchase of investments
(2,100,712
)
 
(567,704
)
Principal payments received on investments
195,061

 
95,452

Proceeds from sales of investments
432,552

 
525,973

Principal payments received on mortgage loans held for investment, net
1,199

 
2,101

Net (payments) receipts on derivatives, including terminations
(174,023
)
 
54,050

Other investing activities
(1,348
)
 
(68
)
Net cash and cash equivalents (used in) provided by investing activities
(1,647,271
)
 
109,804

Financing activities:
 

 
 

Borrowings under repurchase agreements
60,627,601

 
54,577,482

Repayments of repurchase agreement borrowings
(59,080,133
)
 
(54,628,400
)
Principal payments on non-recourse collateralized financing
(386
)
 
(1,144
)
Proceeds from issuance of preferred stock
13,188

 
494

Proceeds from issuance of common stock
63,751

 
5,914

Cash paid for stock issuance costs
(185
)
 

Payments related to tax withholding for stock-based compensation
(296
)
 
(364
)
Dividends paid
(38,553
)
 
(26,003
)
Net cash and cash equivalents provided by (used in) financing activities
1,584,987

 
(72,021
)
 
 
 
 
Net increase in cash, cash equivalents, and restricted cash
22,646

 
130,758

Cash, cash equivalents, and restricted cash at beginning of period
88,704

 
87,200

Cash, cash equivalents, and restricted cash at end of period
$
111,350

 
$
217,958

Supplemental Disclosure of Cash Activity:
 

 
 

Cash paid for interest
$
51,650

 
$
24,114

See notes to the unaudited consolidated financial statements.

5


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Dynex Capital, Inc. (“Company”) was incorporated in the Commonwealth of Virginia on December 18, 1987 and commenced operations in February 1988. The Company primarily earns income from investing on a leveraged basis in debt securities, the majority of which are specified pools of Agency and non-Agency mortgage-backed securities (“MBS”) consisting of residential MBS (“RMBS”), commercial MBS (“CMBS”) and CMBS interest-only (“IO”) securities that are issued or guaranteed by U.S. Government sponsored agencies (“Agency MBS”) and MBS issued by others (“non-Agency MBS”). The Company also invests in other types of mortgage-related securities, such as to-be-announced securities (“TBAs” or “TBA securities”).

Basis of Presentation

The accompanying unaudited consolidated financial statements of Dynex Capital, Inc. and its subsidiaries (together, “Dynex” or, as appropriate, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and Article 10, Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all significant adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the consolidated financial statements have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for any other interim periods or for the entire year ending December 31, 2019. The unaudited consolidated financial statements included herein should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”) filed with the SEC.

All references to common shares, per common share amounts, and restricted stock have been adjusted to reflect the effect of the Company’s 1-for-3 reverse stock split effected on June 20, 2019 for all periods presented. Please refer to Note 6 for additional information.

Consolidation and Variable Interest Entities
 
The consolidated financial statements include the accounts of the Company and the accounts of its majority owned subsidiaries and variable interest entities (“VIE”) for which it is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

The Company consolidates a VIE if the Company is determined to be the VIE’s primary beneficiary, which is defined as the party that has both: (i) the power to control the activities that most significantly impact the VIE’s financial performance and (ii) the right to receive benefits or absorb losses that could potentially be significant to the VIE. The Company reconsiders its evaluation of whether to consolidate a VIE on an ongoing basis, based on changes in the facts and circumstances pertaining to the VIE.

The Company consolidates a securitization trust, which has residential mortgage loans included in “mortgage loans held for investment, net” on its consolidated balance sheet, of which a portion is pledged as collateral for one remaining bond recorded as “non-recourse collateralized financing” on its consolidated balance sheet. The Company owns the subordinate class in the trust and has been deemed the primary beneficiary.

Though the Company invests in Agency and non-Agency MBS which are generally considered to be interests in VIEs, the Company does not consolidate these entities because it does not meet the criteria necessary to be deemed a primary beneficiary. Please refer to Note 2 for financial information regarding the Company’s investments in these debt securities.


6


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)


Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. The most significant estimates used by management include, but are not limited to, amortization of premiums and discounts, fair value measurements of its investments, and other-than-temporary impairments. These items are discussed further below within this note to the consolidated financial statements.

Income Taxes

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 and the corresponding provisions of state law. To qualify as a REIT, the Company must meet certain tests including investing in primarily real estate-related assets and the required distribution of at least 90% of its annual REIT taxable income to stockholders after consideration of its net operating loss (“NOL”) carryforward and not including taxable income retained in its taxable subsidiaries. As a REIT, the Company generally will not be subject to federal income tax on the amount of its income or capital gains that is distributed as dividends to shareholders.

The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities in accordance with Accounting Standards Codification (“ASC”) Topic 740. The Company records these liabilities, if any, to the extent they are deemed more likely than not to have been incurred.

Net Income (Loss) Per Common Share

The Company calculates basic net income per common share by dividing net income to common shareholders for the period by weighted-average shares of common stock outstanding for that period. The Company did not have any potentially dilutive securities outstanding during the three and six months ended June 30, 2019 or June 30, 2018.

Holders of unvested shares of the Company’s issued and outstanding restricted common stock are eligible to receive non-forfeitable dividends. As such, these unvested shares are considered participating securities as per ASC Topic 260-10 and therefore are included in the computation of basic net income per common share using the two-class method. Upon vesting, restrictions on transfer expire on each share of restricted stock, and each such share of restricted stock represents one unrestricted share of common stock.

Because the Company’s 8.50% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”) and 7.625% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”) are redeemable at the Company’s option for cash only and may convert into shares of common stock only upon a change of control of the Company, the effect of those shares and their related dividends is excluded from the calculation of diluted net income per common share.

On June 20, 2019, the Company effected a 1-for-3 reverse stock split of its common stock whereby every three common shares issued and outstanding as of the close of market on that date were converted into one common share. The Company’s weighted average common shares outstanding and net income (loss) per common share amounts presented on its consolidated statements of comprehensive income (loss) have been restated to reflect the effect of the reverse stock split for all periods presented. Please refer to Note 6 for additional information about the Company’s reverse stock split.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less.

Restricted Cash

Restricted cash consists of cash the Company has pledged to cover initial and variation margin with its financing and derivative counterparties.

7


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)



The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Company's consolidated balance sheet as of June 30, 2019 that sum to the total of the same such amounts shown on the Company’s consolidated statement of cash flows for the six months ended June 30, 2019:
 
 
June 30, 2019
Cash and cash equivalents
 
$
49,956

Restricted cash
 
61,394

Total cash, cash equivalents, and restricted cash shown on consolidated statement of cash flows
 
$
111,350


Investments in Debt Securities
 
The Company’s investments in debt securities are designated as available-for-sale (“AFS”) and are recorded at fair value on the Company’s consolidated balance sheet. Changes in unrealized gain (loss) on the Company’s debt securities are reported in other comprehensive income (“OCI”) until the investment is sold, matures, or is determined to be other than temporarily impaired. Although the Company generally intends to hold its AFS securities until maturity, it may sell any of these securities as part of the overall management of its business. Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of accumulated other comprehensive income (“AOCI”) into net income as a realized “gain (loss) on sale of investments, net” using the specific identification method.

The fair value of the Company’s debt securities pledged as collateral against repurchase agreements is disclosed parenthetically on the Company’s consolidated balance sheets.

Interest Income, Premium Amortization, and Discount Accretion. Interest income on debt securities is accrued based on the outstanding principal balance (or notional balance in the case of interest-only, or “IO”, securities) and their contractual terms. Premiums or discounts associated with the purchase of Agency MBS as well as any non-Agency MBS rated ‘AA’ and higher are amortized or accreted into interest income over the projected life of such securities using the effective yield method, and adjustments to premium amortization and discount accretion are made for actual cash payments. The Company may also adjust premium amortization and discount accretion for changes in projected future cash payments. The Company’s projections of future cash payments are based on input and analysis received from external sources and internal models and include assumptions about the amount and timing of loan prepayment rates, fluctuations in interest rates, credit losses, and other factors. On at least a quarterly basis, the Company reviews and makes any necessary adjustments to its cash flow projections and updates the yield recognized on these assets. The Company does not estimate future prepayments on its fixed-rate Agency RMBS.

The Company holds certain non-Agency MBS that had credit ratings of less than ‘AA’ at the time of purchase or were not rated by any of the nationally recognized credit rating agencies. A portion of these non-Agency MBS were purchased at discounts to their par value, which management does not believe to be substantial. The discount is accreted into income over the security’s expected life based on management’s estimate of the security’s projected cash flows. Future changes in the timing of projected cash flows or differences arising between projected cash flows and actual cash flows received may result in a prospective change in the effective yield on those securities.

Determination of MBS Fair Value. The Company estimates the fair value of the majority of its MBS based upon prices obtained from third-party pricing services and broker quotes. The remainder of the Company’s MBS are valued by discounting the estimated future cash flows derived from cash flow models that utilize information such as the security’s coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected losses, and credit enhancements as well as certain other relevant information. Refer to Note 5 for further discussion of MBS fair value measurements.

Other-than-Temporary Impairment. An MBS is considered impaired when its fair value is less than its amortized cost. The Company evaluates all of its impaired MBS for other-than-temporary impairments (“OTTI”) on at least a quarterly basis. An impairment is considered other-than-temporary if: (1) the Company intends to sell the MBS; (2) it is more likely than not that the Company will be required to sell the MBS before its fair value recovers; or (3) the Company does not expect to recover the full amortized cost basis of the MBS. If either of the first two conditions is met, the entire amount of the impairment is

8


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)


recognized in earnings. If the impairment is solely due to the inability to fully recover the amortized cost basis, the security is further analyzed to quantify any credit loss, which is the difference between the present value of cash flows expected to be collected on the MBS and its amortized cost. The credit loss, if any, is then recognized in earnings, while the balance of impairment related to other factors is recognized in other comprehensive income.

Following the recognition of an OTTI through earnings, a new cost basis is established for the security. Any subsequent recoveries in fair value may be accreted back into the amortized cost basis of the MBS on a prospective basis through interest income. Please see Note 2 for additional information related to the Company’s evaluation for OTTI.

Repurchase Agreements
 
The Company’s repurchase agreements, which are used to finance its purchases of debt securities, are accounted for as secured borrowings under which the Company pledges its securities as collateral to secure a loan, which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew the agreement at the then prevailing financing rate. A repurchase agreement lender may require the Company to pledge additional collateral in the event of a decline in the fair value of the collateral pledged. Repurchase agreement financing is recourse to the Company and the assets pledged. Most of the Company’s repurchase agreements are based on the September 1996 version of the Bond Market Association Master Repurchase Agreement, which generally provides that the lender, as buyer, is responsible for obtaining collateral valuations from a generally recognized source agreed to by both the Company and the lender, or, in an instance when such source is not available, the value determination is made by the lender.

Derivative Instruments

The Company’s derivative instruments generally include interest rate swaps, futures, and forward contracts for the purchase or sale of non-specified Agency RMBS, commonly referred to as “TBA securities” or “TBA contracts”. Derivative instruments are accounted for at the fair value of their unit of account. Derivative instruments in a gain position are reported as derivative assets and derivative instruments in a loss position are reported as derivative liabilities on the Company’s consolidated balance sheet. All periodic interest benefits/costs and changes in fair value of derivative instruments, including gains and losses realized upon termination, maturity, or settlement are recorded in “gain (loss) on derivative instruments, net” on the Company’s consolidated statement of comprehensive income. Cash receipts and payments related to derivative instruments are classified in the investing activities section of the consolidated statements of cash flows in accordance with the underlying nature or purpose of the derivative transactions.

The Company’s interest rate swap agreements are privately negotiated in the over-the-counter (“OTC”) market. As of June 30, 2019, all of these agreements are centrally cleared through the Chicago Mercantile Exchange (“CME”). The Company’s CME cleared swaps require that the Company post initial margin as determined by the CME, and in addition, variation margin is exchanged, typically in cash, for changes in the fair value of the CME cleared swaps. The exchange of variation margin for CME cleared swaps is legally considered to be the settlement of the derivative itself as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily exchange of variation margin associated with its CME cleared interest rate swaps as a direct increase or decrease to the carrying value of the related derivative asset or liability. The carrying value of derivative instruments on the Company’s consolidated balance sheet as of December 31, 2018 is the unsettled fair value of the instruments subject to bilateral agreements and not centrally cleared through the CME as of that date.

A TBA security is a forward contract (“TBA contract”) for the purchase (“long position”) or sale (“short position”) of a non-specified Agency MBS at a predetermined price with certain principal and interest terms and certain types of collateral, but the particular Agency securities to be delivered are not identified until shortly before the settlement date. The Company accounts for long and short positions in TBAs as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in physical delivery of the underlying Agency RMBS, or the individual TBA transaction will not settle in the shortest time period possible.

Please refer to Note 4 for additional information regarding the Company’s derivative instruments as well as Note 5 for information on how the fair value of these instruments are calculated.

9


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)



Share-Based Compensation

Pursuant to the Company’s 2018 Stock and Incentive Plan (“2018 Plan”), the Company may grant share-based compensation to eligible employees, non-employee directors or consultants or advisors to the Company, including restricted stock awards, stock options, stock appreciation rights, performance units, restricted stock units, and performance cash awards. The Company’s restricted stock currently issued and outstanding may be settled only in shares of its common stock, and therefore are treated as equity awards with their fair value measured at the grant date and recognized as compensation cost over the requisite service period with a corresponding credit to shareholders’ equity. The requisite service period is the period during which a participant is required to provide service in exchange for an award, which is equivalent to the vesting period specified in the terms of the time-based restricted stock award. None of the Company’s restricted stock awards have performance-based conditions. The Company does not currently have any share-based compensation issued or outstanding other than restricted stock issued to its employees, officers, and directors.

Contingencies

In the normal course of business, there may be various lawsuits, claims, and other contingencies pending against the Company. On a quarterly basis, the Company evaluates whether to establish provisions for estimated losses from those matters. The Company recognizes a liability for a contingent loss when: (a) the underlying causal event has occurred prior to the balance sheet date; (b) it is probable that a loss has been incurred; and (c) there is a reasonable basis for estimating that loss. A liability is not recognized for a contingent loss when it is only possible or remotely possible that a loss has been incurred, however, possible contingent losses shall be disclosed. If the contingent loss (or an additional loss in excess of any accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible material loss, or range of loss, then that fact is disclosed.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments - Credit Losses, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For assets measured at amortized cost, the amendments in this ASU eliminate the probable initial recognition threshold in current GAAP and broaden the information that an entity must consider in developing its expected credit loss estimate to include the use of forecasted information. For assets classified as available-for-sale with changes in fair value recorded in other comprehensive income, measurement of credit losses will be similar to current GAAP. However, the amendments in this ASU require that credit losses be presented as an allowance rather than as a write-down, which is referred to in current GAAP as an other-than-temporary impairment. An entity will be able to record reversals of credit losses, if credit loss estimates decline, in net income for the current period. The amendments in this ASU will not permit an entity to use the length of time a debt security has been in an unrealized loss position to avoid recording a credit loss and removes the requirements to consider historical and implied volatility of the fair value of a security as well as recoveries or declines in fair value after the balance sheet date. The amendments in this ASU will affect an entity by varying degrees depending on a number of factors, including but not limited to, the credit quality of the assets held by the entity, their duration, and how the entity applies current GAAP. These amendments will become effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Though the Company has not fully completed evaluating the impact this ASU will have on its financial condition and results of operations, the Company does not expect it will have a material impact given that the majority of its investments are Agency MBS.

In May 2019, FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326) Targeted Transition Relief, which provides entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses— Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments except for held-to-maturity debt securities, upon adoption of Topic 326. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-10. For entities that have not yet adopted the amendments in

10


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)


ASU NO. 2016-13, the effective date and transition methodology for the amendments in ASU No. 2019-05 are the same as in ASU 2016-13. For entities that have adopted the amendments in ASU No. 2016-13, the amendments in ASU No. 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period as long as an entity has adopted the amendments in ASU No. 2016-13. The amendments in ASU No. 2019-05 should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity adopts the amendments in ASU No. 2016-13. The Company has mortgage loans held for investment which are measured at amortized cost which are eligible for the option to irrevocably elect the fair value option. Though the Company is evaluating its options, it does not expect adoption of ASU No. 2019-05 to have a material impact on its consolidated financial statements.


NOTE 2 – INVESTMENTS IN DEBT SECURITIES
 
The majority of the Company’s debt securities are pledged as collateral for the Company’s repurchase agreements. The following tables present the Company’s debt securities by investment type (including securities pending settlement) as of the dates indicated:
 
June 30, 2019
 
Par
 
Net Premium (Discount)
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
WAC (1)
RMBS:
 
 
 
 


 
 
 
 
 
 
 
 
Agency
$
3,095,408

 
$
82,035

 
$
3,177,443

 
$
58,044

 
$
(2,184
)
 
$
3,233,303

 
3.97
%
Non-Agency
744

 

 
744

 
32

 
(19
)
 
757

 
6.75
%
 
3,096,152

 
82,035

 
3,178,187

 
58,076

 
(2,203
)
 
3,234,060

 
 
CMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
1,875,117

 
15,793

 
1,890,910

 
91,994

 
(269
)
 
1,982,635

 
2.84
%
Non-Agency
1,422

 
(977
)
 
445

 
692

 

 
1,137

 
5.50
%
 
1,876,539

 
14,816

 
1,891,355

 
92,686

 
(269
)
 
1,983,772

 
 
CMBS IO (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency

 
267,703

 
267,703

 
8,332

 
(108
)
 
275,927

 
0.66
%
Non-Agency

 
214,728

 
214,728

 
5,472

 
(171
)
 
220,029

 
0.63
%
 

 
482,431

 
482,431

 
13,804

 
(279
)
 
495,956

 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
Total AFS securities:
$
4,972,691

 
$
579,282

 
$
5,551,973

 
$
164,566

 
$
(2,751
)
 
$
5,713,788

 
 
(1)
The weighted average coupon (“WAC”) is the gross interest rate of the security weighted by the outstanding principal balance (or by notional balance in the case of an IO security).
(2)
The notional balance for Agency CMBS IO and non-Agency CMBS IO was $12,861,382 and $10,014,205 respectively, as of June 30, 2019.

11


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)


 
December 31, 2018
 
Par
 
Net Premium (Discount)
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
WAC (1)
RMBS:
 
 
 
 


 
 
 


 
 
 
 
Agency
$
2,118,639

 
$
56,744

 
$
2,175,383

 
$
8,902

 
$
(26,264
)
 
$
2,158,021

 
3.95
%
Non-Agency
856

 

 
856

 
24

 
(22
)
 
858

 
6.75
%
 
2,119,495

 
56,744

 
2,176,239

 
8,926

 
(26,286
)
 
2,158,879

 
 
CMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
1,071,906

 
8,518

 
1,080,424

 
6,141

 
(29,550
)
 
1,057,015

 
3.22
%
Non-Agency
3,040

 
(2,037
)
 
1,003

 
413

 

 
1,416

 
6.47
%
 
1,074,946

 
6,481

 
1,081,427

 
6,554

 
(29,550
)
 
1,058,431

 
 
CMBS IO (2):
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency

 
287,062

 
287,062

 
4,281

 
(239
)
 
291,104

 
0.55
%
Non-Agency

 
240,681

 
240,681

 
1,675

 
(1,306
)
 
241,050

 
0.57
%
 

 
527,743

 
527,743

 
5,956

 
(1,545
)
 
532,154

 
 



 
 
 


 


 
 
 


 
 
Total AFS securities:
$
3,194,441

 
$
590,968

 
$
3,785,409

 
$
21,436

 
$
(57,381
)
 
$
3,749,464

 



(1)
The WAC is the gross interest rate of the security weighted by the outstanding principal balance (or by notional balance in the case of an IO security).
(2)
The notional balance for the Agency CMBS IO and non-Agency CMBS IO was $13,048,666 and $10,275,494, respectively, as of December 31, 2018.

Actual maturities of MBS are affected by the contractual lives of the underlying mortgage collateral, periodic payments of principal, prepayments of principal, and the payment priority structure of the security; therefore, actual maturities are generally shorter than the securities' stated contractual maturities. The following table categorizes the Company’s debt securities according to their stated maturity as of the dates indicated:
 
June 30, 2019
 
December 31, 2018
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Less than 1 year
$
152,858

 
$
157,963

 
$
39,868

 
$
39,808

>1 and <5 years
285,275

 
289,174

 
151,041

 
152,917

>5 and <10 years
879,723

 
914,413

 
828,543

 
806,015

> 10 years
4,234,117

 
4,352,238