10-Q 1 dx-20230630.htm 10-Q dx-20230630
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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, 2023
or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-09819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia52-1549373
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
4991 Lake Brook Drive, Suite 100
Glen Allen,Virginia23060-9245
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareDXNew York Stock Exchange
6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per shareDXPRCNew 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 26, 2023, the registrant had 54,204,319 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
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 (unaudited) and June 30, 2022 (unaudited)
Consolidated Statements of Shareholders' Equity for the three and six months ended
June 30, 2023 (unaudited) and June 30, 2022 (unaudited)
Consolidated Statements of Cash Flows for the six months ended
June 30, 2023 (unaudited) and June 30, 2022 (unaudited)
Notes to the Consolidated Financial Statements
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
SIGNATURES



i

DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
($s in thousands except per share data)

 June 30, 2023December 31, 2022
ASSETS(unaudited)
Cash and cash equivalents$300,108 $332,035 
Cash collateral posted to counterparties132,646 117,842 
Mortgage-backed securities (including pledged of $4,441,105 and $2,810,957, respectively), at fair value
5,059,308 3,112,705 
Due from counterparties1,364 10,348 
Derivative assets174 7,102 
Accrued interest receivable22,988 15,260 
Other assets, net9,367 9,942 
Total assets$5,525,955 $3,605,234 
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Liabilities:  
Repurchase agreements$4,201,901 $2,644,405 
Due to counterparties371,576 4,159 
Derivative liabilities23,621 22,595 
Cash collateral posted by counterparties— 435 
Accrued interest payable33,794 16,450 
Accrued dividends payable9,440 9,103 
Other liabilities4,661 6,759 
 Total liabilities4,644,993 2,703,906 
Shareholders’ equity:  
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; 4,460,000 and 4,460,000 shares issued and outstanding, respectively ($111,500 and $111,500 aggregate liquidation preference, respectively)
107,843 107,843 
Common stock, par value $0.01 per share, 180,000,000 shares authorized;
54,204,319 and 53,637,095 shares issued and outstanding, respectively
542 536 
Additional paid-in capital1,365,484 1,357,514 
Accumulated other comprehensive loss(175,996)(181,346)
Accumulated deficit(416,911)(383,219)
 Total shareholders’ equity880,962 901,328 
 Total liabilities and shareholders’ equity$5,525,955 $3,605,234 
See notes to the consolidated financial statements.

1

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
($s in thousands except per share data)

Three Months EndedSix Months Ended
June 30,June 30,
 2023202220232022
INTEREST INCOME (EXPENSE)
Interest income$42,212 $18,335 $73,058 $35,762 
Interest expense(45,142)(4,262)(76,450)(6,010)
Net interest (expense) income(2,930)14,073 (3,392)29,752 
OTHER GAINS (LOSSES)
Realized loss on sales of investments, net(51,601)(18,550)(74,916)(18,550)
Unrealized gain (loss) on investments, net488 (65,103)57,609 (176,354)
Gain on derivative instruments, net116,012 106,412 48,745 326,623 
Total other gains, net64,899 22,759 31,438 131,719 
EXPENSES
Compensation and benefits(3,617)(3,402)(7,367)(6,868)
Other general and administrative(3,580)(3,799)(7,202)(7,441)
Other operating expenses(435)(295)(861)(616)
Total operating expenses(7,632)(7,496)(15,430)(14,925)
Net income54,337 29,336 12,616 146,546 
Preferred stock dividends(1,923)(1,923)(3,847)(3,847)
Net income to common shareholders$52,414 $27,413 $8,769 $142,699 
Other comprehensive income:
Unrealized (loss) gain on available-for-sale investments, net$(9,443)$(60,910)$5,350 $(152,250)
Total other comprehensive (loss) gain(9,443)(60,910)5,350 (152,250)
Comprehensive income (loss) to common shareholders$42,971 $(33,497)$14,119 $(9,551)
Weighted average common shares-basic54,137,327 39,190,251 53,981,463 37,964,617 
Weighted average common shares-diluted54,585,082 39,558,462 54,327,385 38,332,828 
Net income per common share-basic$0.97 $0.70 $0.16 $3.76 
Net income per common share-diluted$0.96 $0.69 $0.16 $3.72 
Dividends declared per common share$0.39 $0.39 $0.78 $0.78 
See notes to the consolidated financial statements.
2

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
($s in thousands)

Preferred StockCommon StockAdditional
Paid-in
Capital		Accumulated Other Comprehensive LossAccumulated
Deficit		Total Shareholders’ Equity
SharesAmountSharesAmount
Balance as of
December 31, 2022		4,460,000 $107,843 53,637,095 $536 $1,357,514 $(181,346)$(383,219)$901,328 
Stock issuance— — 199,274 2 2,769 — — 2,771 
Restricted stock granted, net of amortization— — 27,932 — 360 — — 360 
Other share-based compensation, net of amortization— — 33,213 1 649 — — 650 
Adjustments for tax withholding on share-based compensation— — (20,600)— (276)— — (276)
Stock issuance costs— — — — (16)— — (16)
Net loss— — — — — — (41,722)(41,722)
Dividends on preferred stock— — — — — — (1,923)(1,923)
Dividends on common stock— — — — — — (21,137)(21,137)
Other comprehensive income— — — — — 14,793 — 14,793 
Balance as of
March 31, 2023		4,460,000 $107,843 53,876,914 $539 $1,361,000 $(166,553)$(448,001)$854,828 
Stock issuance— — 296,600 3 3,540 — — 3,543 
Restricted stock granted, net of amortization— — 46,085 — 296 — — 296 
Other share-based compensation, net of amortization— — — — 833 — — 833 
Adjustments for tax withholding on share-based compensation— — (15,280)— (169)— — (169)
Stock issuance costs— — — — (16)— — (16)
Net loss— — — — — — 54,337 54,337 
Dividends on preferred stock— — — — — — (1,923)(1,923)
Dividends on common stock— — — — — — (21,324)(21,324)
Other comprehensive income— — — — — (9,443)— (9,443)
Balance as of
June 30, 2023		4,460,000 $107,843 54,204,319 $542 $1,365,484 $(175,996)$(416,911)$880,962 
3

Preferred StockCommon StockAdditional
Paid-in
Capital		Accumulated Other Comprehensive LossAccumulated
Deficit		Total Shareholders’ Equity
SharesAmountSharesAmount
Balance as of
December 31, 2021		4,460,000 $107,843 36,665,805 $367 $1,107,792 $6,729 $(451,452)$771,279 
Stock issuance— — 267,288 3 4,242 — — 4,245 
Restricted stock granted, net of amortization— — 40,196 — 451 — — 451 
Other share-based compensation, net of amortization— — — — 395 — — 395 
Adjustments for tax withholding on share-based compensation— — (15,407)— (236)— — (236)
Stock issuance costs— — — — (16)— — (16)
Net income— — — — — — 117,209 117,209 
Dividends on preferred stock— — — — — — (1,923)(1,923)
Dividends on common stock— — — — — — (14,431)(14,431)
Other comprehensive loss— — — — — (91,340)— (91,340)
Balance as of
March 31, 2022		4,460,000 $107,843 36,957,882 $370 $1,112,628 $(84,611)$(350,597)$785,633 
Stock issuance— — 6,539,485 65 105,134 — — 105,199 
Restricted stock granted, net of amortization— — 31,020 — 440 — — 440 
Other share-based compensation, net of amortization— — 19,093 — 601 — — 601 
Adjustments for tax withholding on share-based compensation— — (30,246)— (489)— — (489)
Stock issuance costs— — — — (16)— — (16)
Net income— — — — — — 29,336 29,336 
Dividends on preferred stock— — — — — — (1,923)(1,923)
Dividends on common stock— — — — — — (15,505)(15,505)
Other comprehensive loss— — — — — (60,910)— (60,910)
Balance as of
June 30, 2022		4,460,000 $107,843 43,517,234 $435 $1,218,298 $(145,521)$(338,689)$842,366 
See notes to the consolidated financial statements.
4

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
($s in thousands)
Six Months Ended
 June 30,
 20232022
Operating activities:  
Net income$12,616 $146,546 
Adjustments to reconcile net income to cash provided by operating activities: 
Realized loss on sale of investments, net74,916 18,550 
Unrealized (gain) loss on investments, net(57,609)176,354 
Gain on derivative instruments, net(48,745)(326,623)
Amortization of investment premiums, net38,924 51,988 
Other amortization and depreciation, net1,193 1,135 
Share-based compensation expense2,140 1,873 
(Increase) decrease in accrued interest receivable(7,728)1,087 
Increase in accrued interest payable17,344 446 
Change in other assets and liabilities, net2,176 (614)
Net cash provided by operating activities35,227 70,742 
Investing activities:  
Purchases of investments(2,109,585)(372,815)
Principal payments received on trading securities73,849 168,321 
Principal payments received on available-for-sale investments47,919 — 
Proceeds from sales of trading securities348,091 327,700 
Principal payments received on mortgage loans held for investment502 828 
Net receipts on derivatives, including terminations 64,290 334,910 
Decrease in cash collateral posted by counterparties5,190 57,400 
Net cash (used in) provided by investing activities(1,569,744)516,344 
Financing activities:  
Borrowings under repurchase agreements10,999,164 7,039,210 
Repayments of repurchase agreement borrowings(9,441,668)(7,686,478)
Proceeds from issuance of common stock6,314 109,444 
Payments related to tax withholding for share-based compensation(445)(725)
Dividends paid(45,971)(32,716)
Net cash provided by (used in) financing activities1,517,394 (571,265)
Net (decrease) increase in cash including cash posted to counterparties(17,123)15,821 
Cash including cash posted to counterparties at beginning of period449,877 421,307 
Cash including cash posted to counterparties at end of period$432,754 $437,128 
Supplemental Disclosure of Cash Activity:  
Cash paid for interest$59,105 $5,564 
See notes to the consolidated financial statements.
5

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

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Dynex Capital, Inc. (the “Company”) was incorporated in the Commonwealth of Virginia on December 18, 1987 and commenced operations in February 1988. The Company is an internally managed mortgage real estate investment trust, or mortgage REIT, which primarily earns income from investing on a leveraged basis in Agency mortgage-backed securities (“Agency MBS”) and in to-be-announced securities (“TBAs” or “TBA securities”). Agency MBS have a guaranty of principal and interest payments by a U.S. government-sponsored entity (“GSE”) such as Fannie Mae and Freddie Mac, which are in conservatorship and are currently supported by a senior preferred stock purchase agreement from the U.S. Treasury. As of June 30, 2023, the majority of the Company’s Agency MBS are secured by residential real property (“Agency RMBS”). The remainder of the Company’s investments are in Agency commercial MBS (“Agency CMBS”) and in both Agency and non-Agency CMBS interest-only (“CMBS IO”). Non-Agency MBS do not have a GSE guaranty of principal or interest payments.

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries (together, “Dynex” or, as appropriate, the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“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 months ended June 30, 2023 are not necessarily indicative of the results that may be expected for any other interim periods or for the entire year ending December 31, 2023. 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, 2022 (the “2022 Form 10-K”) filed with the SEC.  

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 and fair value measurements of its investments, including TBA securities accounted for as derivative instruments. These items are discussed further below within this note to the consolidated financial statements. The Company believes the estimates and assumptions underlying the consolidated financial statements included herein are reasonable and supportable based on the information available as of June 30, 2023.

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. Though the Company invests in Agency and non-Agency MBS
6

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

which are generally considered to be interests in VIEs, the Company does not consolidate these entities because it does not meet the criteria to be deemed a primary beneficiary.

Income Taxes

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 (the “Tax Code”) and the corresponding provisions of state law. To qualify as a REIT, the Company must meet certain asset, income, ownership, and distribution tests. To meet these requirements, the Company’s main source of income is interest earned from obligations secured by mortgages on real property, and the Company must distribute at least 90% of its annual REIT taxable income to shareholders. The Company’s income will generally not be subject to federal income tax to the extent it 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 and 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 (loss) per common share by dividing net income (loss) to common shareholders for the period by weighted-average shares of common stock outstanding for that period. Please see Note 2 for the calculation of the Company’s basic and diluted net income (loss) per common share for the periods indicated.

The Company currently has unvested restricted stock, service-based restricted stock units (“RSUs”) and performance-based stock units (“PSUs”) issued and outstanding. Restricted stock awards are considered participating securities and therefore are included in the computation of basic net income per common share using the two-class method because holders of unvested shares of restricted stock are eligible to receive non-forfeitable dividends. Holders of RSUs and PSUs accrue forfeitable dividend equivalent rights over the period outstanding, receiving dividend payments only upon the settlement date if the requisite service-based and performance-based conditions have been achieved, as applicable. As such, RSUs and PSUs are excluded from the computation of basic net income per common share, but are included in the computation of diluted net income per common share unless the effect is to reduce a net loss or increase the net income per common share (also known as “anti-dilutive”). Upon vesting (or settlement, in the case of units), restrictions on transfer expire on each share of restricted stock, RSU, and PSU, and each such share or unit becomes one unrestricted share of common stock and is included in the computation of basic net income per common share.

Because the Company’s 6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”) is redeemable at the Company’s option for cash only and convertible into shares of common stock only upon a change of control of the Company (and subject to other circumstances) as described in Article IIIC of the Company’s Restated Articles of Incorporation, the effect of those shares and their related dividends were excluded from the calculation of diluted net income per common share for the periods presented.

Cash and Cash Equivalents

Cash includes unrestricted demand deposits at highly rated financial institutions and highly liquid investments with original maturities of three months or less. The Company’s cash balances fluctuate throughout the year and may exceed Federal Deposit Insurance Corporation (“FDIC”) insured limits from time to time. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result due to the financial position and creditworthiness of the depository institutions in which those deposits are held.

Cash Collateral Posted To/By Counterparties

Cash collateral posted to/by counterparties represents amounts pledged/received to cover margin requirements related to the Company’s financing and derivative instruments. If the amount pledged to a counterparty exceeds the amount received from a counterparty, the net amount is recorded as an asset within “cash collateral posted to
7

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

counterparties”, and if the amount received from a counterparty exceeds the amount pledged to a counterparty, the net amount is recorded as a liability within “cash collateral posted by counterparties” on the Company’s consolidated balance sheets.

The following table provides a reconciliation of “cash” and “cash posted to counterparties” reported on the Company's consolidated balance sheet as of June 30, 2023, 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, 2023:
June 30, 2023
Cash and cash equivalents$300,108 
Cash collateral posted to counterparties132,646 
Total cash including cash posted to counterparties shown on consolidated statement of cash flows$432,754 

Mortgage-Backed Securities
 
The Company’s MBS are recorded at fair value on the Company’s consolidated balance sheet. Changes in fair value of MBS purchased prior to January 1, 2021 are designated as available-for-sale (“AFS”) with changes in fair value reported in other comprehensive income (“OCI”) as an unrealized gain (loss) until the security is sold or matures. Effective January 1, 2021, the Company elected the fair value option (“FVO”) for all MBS purchased on or after that date with changes in fair value reported in net income as “unrealized gain (loss) on investments, net” until the security is sold or matures. Upon the sale of an MBS, any unrealized gain or loss within OCI or net income is reclassified to “realized gain (loss) on sale of investments, net” within net income using the specific identification method.

Interest Income, Premium Amortization, and Discount Accretion. Interest income on MBS is accrued based on the outstanding principal balance (or notional balance in the case of IO securities) and the contractual terms. Premiums or discounts associated with the purchase of Agency MBS as well as any non-Agency MBS are amortized or accreted into interest income over the projected life of such securities using the effective interest method, and adjustments to premium amortization and discount accretion are made for actual cash payments. The Company’s projections of future cash payments are based on input received from external sources and internal models and may 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.

Determination of MBS Fair Value. The Company estimates the fair value of the majority of its MBS based upon prices obtained from 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. Please refer to Note 6 for further discussion of MBS fair value measurements.

Allowance for Credit Losses. On at least a quarterly basis, the Company evaluates any MBS designated as AFS with a fair value less than its amortized cost for credit losses. If the difference between the present value of cash flows expected to be collected on the MBS is less than its amortized cost, the difference is recorded as an allowance for credit loss through net income up to and not exceeding the amount that the amortized cost exceeds current fair value. Subsequent changes in credit loss estimates are recognized in earnings in the period in which they occur. Because the majority of the Company’s investments are higher credit quality and most are guaranteed by a GSE, the Company is not likely to have an allowance for credit losses related to its MBS recorded on its consolidated balance sheet.

8

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


Repurchase Agreements
 
The Company’s repurchase agreements are used to finance its purchases of MBS and are accounted for as secured borrowings. The Company pledges its securities as collateral to secure a loan, which is equal to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral, which is disclosed parenthetically on the Company’s consolidated balance sheets. At the maturity of a repurchase agreement borrowing, 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. 

Derivative Instruments

Changes in the 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 statements of comprehensive income (loss). 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 short positions in U.S. Treasury futures contracts are valued based on exchange pricing with daily margin settlements. The margin requirement varies based on the market value of the open positions and the equity retained in the account. Any margin excess or deficit outstanding is recorded as a receivable or payable as of the date of the Company’s consolidated balance sheets. The Company realizes gains or losses on these contracts upon expiration at an amount equal to the difference between the current fair value of the underlying asset and the contractual price of the futures contract.

The Company’s options on U.S. Treasury futures provide the Company the right, but not an obligation, to buy U.S. Treasury futures at a predetermined notional amount and stated term in the future and are valued based on exchange pricing. The Company records the premium paid for the option contract as a derivative asset on its consolidated balance sheet and adjusts the balance for changes in fair value through “gain (loss) on derivative instruments” until the option is exercised or the contract expires. If the option contract expires unexercised, the realized loss is limited to the premium paid. If exercised, the realized gain or loss on the options is equal to the difference between the fair value of the underlying U.S. Treasury future and the premium paid for the option contract.

The Company may also purchase swaptions, which provide the Company the right, but not an obligation, to enter into an interest rate swap at a predetermined notional amount with a stated term and pay and receive rates in the future. The accounting for swaptions is similar to options on U.S. Treasury futures.

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 that the individual TBA transaction will settle in the shortest time period possible.

Please refer to Note 5 for additional information regarding the Company’s derivative instruments as well as Note 6 for information on how the fair value of these instruments is calculated.

9

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

Share-Based Compensation

The Company’s 2020 Stock and Incentive Plan (the “2020 Plan”) reserves for issuance up to 2,300,000 common shares for eligible employees, non-employee directors, consultants, and advisors to the Company to be granted in the form of stock options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, performance-based stock units (“PSUs”), and performance-based cash awards (collectively, “awards”). As of June 30, 2023, 1,097,453 common shares are available for issuance under the 2020 Plan.

Currently, the Company has shares of restricted stock and RSUs issued and outstanding which are treated as equity awards and recorded at their fair value using the closing stock price on the grant date. The compensation cost is recognized over the vesting period with a corresponding credit to shareholders’ equity using the straight-line method.

The Company also has PSUs issued and outstanding which contain Company performance-based and market performance-based conditions. PSUs subject to Company performance-based conditions are initially recognized as equity at their fair value which is measured using the closing stock price on the grant date multiplied by the number of units expected to vest based on an assessment of the probability of achievement of the Company performance-based conditions as of the grant date. The grant date fair value is recognized as expense on the Company’s consolidated statements of comprehensive income within “Compensation and benefits” on a straight-line basis over the vesting period and adjusted if necessary based on any change in probability of achievement which is re-assessed as of each reporting date and on at least a quarterly basis.

PSUs subject to market performance-based conditions are recognized as equity at their grant date fair value determined through a Monte-Carlo simulation of the Company’s common stock total shareholder return (“TSR”) relative to the common stock TSR of the group of peer companies specified in the award agreement. Awards subject to market performance-based conditions are not assessed for probability of achievement and are not remeasured subsequent to issuance. The grant date fair value is recognized as expense on the Company’s consolidated statements of comprehensive income within “Compensation and benefits” on a straight-line basis over the vesting period even if the market performance-based conditions are not achieved.

The Company does not estimate forfeitures for any of its share-based compensation awards, but adjusts for actual forfeitures in the periods in which they occur. Because RSUs and PSUs have forfeitable dividend equivalent rights that are paid only upon settlement, any accrued dividend equivalent rights (“DERs”) on forfeited units are reversed with a corresponding credit to “Compensation and benefits.”

Please see Note 7 for additional information about the Company’s share-based compensation awards.

Contingencies

The Company did not have any pending lawsuits, claims, or other contingencies as of June 30, 2023 or December 31, 2022.
Recently Issued Accounting Pronouncements

The Company evaluates Accounting Standards Updates issued by the Financial Accounting Standards Board on at least a quarterly basis to evaluate applicability and significance of any impact on its financial condition and results of operations. There were no accounting pronouncements issued during the six months ended June 30, 2023, that are expected to have a material impact on the Company’s financial condition or results of operations.


NOTE 2 – NET INCOME (LOSS) PER COMMON SHARE

Please refer to Note 1 for information regarding the Company’s treatment of its preferred stock and stock awards in the calculation of its basic and diluted net income or loss per common share and to Note 7 for information
10

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

regarding the Company’s stock award activity for the periods presented. The following table presents the computations of basic and diluted net income or loss per common share for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Weighted average number of common shares outstanding - basic54,137,32739,190,25153,981,46337,964,617
Incremental common shares-unvested RSUs160,303110,629119,570110,629
Incremental common shares-unvested PSUs287,452257,582226,352257,582
Weighted average number of common shares outstanding - diluted54,585,08239,558,46254,327,38538,332,828
Net income to common shareholders$52,414 $27,413 $8,769 $142,699 
Net income per common share-basic$0.97 $0.70 $0.16 $3.76 
Net income per common share-diluted$0.96 $0.69 $0.16 $3.72 



NOTE 3 – MORTGAGE-BACKED SECURITIES
 
The following tables provide details on the Company’s MBS by investment type as of the dates indicated:
June 30, 2023December 31, 2022
Par ValueAmortized CostFair ValuePar ValueAmortized CostFair Value
Agency RMBS$5,060,491 $5,080,710 $4,753,037 $3,104,498 $3,150,873 $2,762,878 
Agency CMBS121,931 122,514 115,136 131,578 132,333 124,690 
CMBS IO (1)
n/a202,489 191,017 n/a238,841 224,985 
Non-Agency other173 173 118 209 209 152 
Total$5,182,595 $5,405,886 $5,059,308 $3,236,285 $3,522,256 $3,112,705 
(1) The notional balance for Agency CMBS IO and non-Agency CMBS IO was $8,342,158 and $4,332,365, respectively, as of June 30, 2023, and $9,711,981 and $6,280,761, respectively, as of December 31, 2022.
June 30, 2023
Amortized CostGross Unrealized GainGross Unrealized LossFair Value
MBS measured at fair value through OCI:
Agency RMBS$937,727 $— $(161,660)$776,067 
Agency CMBS107,227 — (6,172)101,055 
CMBS IO159,318 902 (9,011)151,209 
Non-Agency other173 — (55)118 
Total$1,204,445 $902 $(176,898)$1,028,449 
MBS measured at fair value through net income:
Agency RMBS$4,142,983 $1,030 $(167,043)$3,976,970 
11

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

Agency CMBS15,287 — (1,206)14,081 
CMBS IO43,170 — (3,362)39,808 
Total$4,201,440 $1,030 $(171,611)$4,030,859 
December 31, 2022
Amortized CostGross Unrealized GainGross Unrealized LossFair Value
MBS measured at fair value through OCI:
Agency RMBS$977,624 $— $(164,949)$812,675 
Agency CMBS117,031 — (6,474)110,557 
CMBS IO193,405 507 (10,373)183,539 
Non-Agency other209 — (57)152 
Total$1,288,269 $507 $(181,853)$1,106,923 
MBS measured at fair value through net income:
Agency RMBS$2,173,249 $— $(223,046)$1,950,203 
Agency CMBS15,302 — (1,169)14,133 
CMBS IO45,436 — (3,990)41,446 
Total$2,233,987 $— $(228,205)$2,005,782 

The majority of the Company’s MBS are pledged as collateral for the Company’s repurchase agreements, which are disclosed in Note 4. 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 presents information regarding unrealized gains and losses on investments reported within net income (loss) on the Company’s consolidated statements of comprehensive income (loss) for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Agency RMBS$1,254 $(64,398)$57,033 $(174,599)
Agency CMBS(275)— (37)— 
CMBS IO(466)(711)626 (1,841)
Other assets(25)6 (13)86 
Total unrealized gain (loss) on investments, net$488 $(65,103)$57,609 $(176,354)


12

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

The following table presents information regarding realized gains and losses on sales of MBS reported in the Company’s consolidated statements of comprehensive income (loss) for the periods indicated:

Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
Realized gains on sales of MBS - AFS$— $— $— $— 
Realized losses on sales of MBS - AFS— — — — 
Realized gains on sales of MBS - FVO— — — — 
Realized losses on sales of MBS - FVO(51,601)(18,550)(74,916)(18,550)
Total realized loss on sales of investments, net$(51,601)$(18,550)$(74,916)$(18,550)

The following table presents certain information for MBS designated as AFS that were in an unrealized loss position as of the dates indicated:
 June 30, 2023December 31, 2022
Fair ValueGross Unrealized Losses# of SecuritiesFair ValueGross Unrealized Losses# of Securities
Continuous unrealized loss position for less than 12 months:    
Agency MBS$63,933 $3,117 24$346,064 $22,808 79
Non-Agency MBS6,172 208 1542,162 1,787 56
Continuous unrealized loss position for 12 months or longer:
Agency MBS$918,195 $171,896 65$697,514 $156,411 17
Non-Agency MBS31,780 1,677 5512,195 847 22

The unrealized losses on the Company’s MBS designated as AFS were the result of rising interests rates and declines in market prices and were not credit related; therefore, the Company did not have any allowance for credit losses as of June 30, 2023 or December 31, 2022. Although the unrealized losses are not credit related, the Company assesses its ability and intent to hold any MBS with an unrealized loss until the recovery in its value. This assessment is based on the amount of the unrealized loss and significance of the related investment as well as the Company’s leverage and liquidity position. In addition, for its non-Agency MBS, the Company reviews the credit ratings, the credit characteristics of the mortgage loans collateralizing these securities, and the estimated future cash flows including projected collateral losses.

13

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

NOTE 4 – REPURCHASE AGREEMENTS

The Company’s repurchase agreements outstanding as of June 30, 2023 and December 31, 2022 are summarized in the following tables:
 June 30, 2023December 31, 2022
Collateral TypeBalanceWeighted
Average Rate		Fair Value of
Collateral Pledged		BalanceWeighted
Average Rate		Fair Value of
Collateral Pledged
Agency RMBS$3,924,082 5.25 %$4,146,397 $2,349,181 4.15 %$2,496,781 
Agency CMBS109,129 5.16 %113,281 108,580 3.76 %108,146 
Agency CMBS IO132,611 5.57 %141,541 137,569 4.62 %150,517 
Non-Agency CMBS IO36,079 6.00 %39,885 49,075 5.26 %55,513 
Total repurchase agreements$4,201,901 5.26 %$4,441,104 $2,644,405 4.18 %$2,810,957 
The Company had borrowings outstanding under 25 different repurchase agreements as of June 30, 2023, and its equity at risk did not exceed 5% with any counterparty as of that date. The Company also had $371,576 and $4,159 payable to counterparties for transactions pending settlement as of June 30, 2023 and December 31, 2022, respectively.

The following table provides information on the remaining term to maturity and original term to maturity for the Company’s repurchase agreements as of the dates indicated:
June 30, 2023December 31, 2022
Remaining Term to MaturityBalanceWeighted
Average Rate		WAVG Original Term to MaturityBalanceWeighted
Average Rate		WAVG Original Term to Maturity
Less than 30 days$1,069,565 5.27 %50 $858,161 4.44 %42 
30 to 90 days2,039,943 5.24 %130 1,786,244 4.06 %104 
91 to 180 days1,092,393 5.30 %175 — — %— 
Total$4,201,901 5.26 %122 $2,644,405 4.18 %84 

The increase in the Company’s weighted average rate for its borrowings as of June 30, 2023 compared to December 31, 2022 resulted from the increase in the U.S. Federal Funds Target rate (“Fed Funds rate”) set by the Federal Reserve. The Company’s accrued interest payable related to its repurchase agreement borrowings was $33,794 as of June 30, 2023 compared to $16,450 as of December 31, 2022.

The repurchase facilities available to the Company are uncommitted with no guarantee of renewal or terms of renewal. The Company had a committed repurchase facility with Wells Fargo Bank, N.A. which matured on June 8, 2023, which the Company decided to not extend.

The Company’s counterparties, as set forth in the master repurchase agreement with the counterparty, require the Company to comply with various customary operating and financial covenants, including, but not limited to, minimum net worth, maximum declines in net worth in a given period, and maximum leverage requirements as well as maintaining the Company’s REIT status. In addition, some of the agreements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that the Company fails to comply with the covenants contained in these financing agreements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the master repurchase agreement. The Company believes it was in full compliance with all covenants in master repurchase agreements under which there were amounts outstanding as of June 30, 2023.

The Company's repurchase agreements are subject to underlying agreements with master netting or similar
14

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

arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its repurchase agreements to these arrangements on a gross basis. The following table presents information regarding the Company's repurchase agreements as if the Company had presented them on a net basis as of June 30, 2023 and December 31, 2022:
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as Collateral
June 30, 2023:
Repurchase agreements$4,201,901 $— $4,201,901 $(4,201,901)$— $— 
December 31, 2022:
Repurchase agreements$2,644,405 $— $2,644,405 $(2,644,405)$— $— 
(1) Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the repurchase agreement liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented.

Please see Note 5 for information related to the Company’s derivatives, which are also subject to underlying agreements with master netting or similar arrangements.

NOTE 5 – DERIVATIVES

Types and Uses of Derivatives Instruments

Interest Rate Derivatives. During the periods presented herein, the Company used short positions in U.S. Treasury futures, interest rate swaptions, and call options on U.S. Treasury futures to mitigate the impact of changing interest rates on its repurchase agreement financing costs and the fair value of its investments.

TBA Transactions. The Company purchases TBA securities as a means of investing in non-specified fixed-rate Agency RMBS and may also periodically sell TBA securities as a means of economically hedging its exposure to Agency RMBS. The Company holds long and short positions in TBA securities by executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase (or sale) of a non-specified Agency RMBS by entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long (or short) position with a later settlement date. TBA securities purchased (or sold) for a forward settlement date are generally priced at a discount relative to TBA securities settling in the current month. This discount, often referred to as “drop income” represents the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. The Company accounts for all TBAs (whether net long or net short positions, or collectively “TBA dollar roll positions”) as derivative instruments because it 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 that the individual TBA transaction will settle in the shortest period possible.

The table below provides detail of the Company’s “gain (loss) on derivative instruments, net” by type of
15

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

derivative instrument for the periods indicated:
Three Months EndedSix Months Ended
June 30,June 30,
Type of Derivative Instrument2023202220232022
U.S. Treasury futures$171,219 $150,475 $64,846 $439,408 
Interest rate swaptions— 26,502 — 51,940 
Options on U.S. Treasury futures(1,211)— (5,468)— 
TBA securities-long positions(53,996)(70,565)(10,633)(164,725)
Gain on derivative instruments, net$116,012 $106,412 $48,745 $326,623 

The table below provides the carrying amount by type of derivative instrument comprising the Company’s derivative assets and liabilities on its consolidated balance sheets as of the dates indicated:
Type of Derivative InstrumentBalance Sheet LocationPurposeJune 30, 2023December 31, 2022
Options on U.S. Treasury futuresDerivative assetsEconomic hedging$— $5,859 
TBA securitiesDerivative assetsInvesting174 1,243 
Total derivatives assets$174 $7,102 
TBA securitiesDerivative liabilitiesInvesting$23,621 $22,595 
Total derivatives liabilities$23,621 $22,595 

The Company’s short positions in U.S. Treasury futures are considered legally settled on a daily basis, therefore the carrying value on the Company’s consolidated balance sheet nets to $0. As of June 30, 2023, the amount of cash posted by the Company to cover required initial margin for its U.S. Treasury futures was $96,600, which is recorded within “cash collateral posted to counterparties.” The Company had excess margin receivable of $5,625 as of June 30, 2023, which is recorded within “due to counterparties.”

The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:
June 30, 2023December 31, 2022
Implied market value (1)
$2,115,641 $2,751,568 
Implied cost basis (2)
2,139,089 2,772,920 
Net carrying value (3)
$(23,448)$(21,352)
(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the dates indicated.
(2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as of the dates indicated.
(3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets” and “derivative liabilities” and represents the difference between the implied market value and the implied cost basis of the TBA securities as of the dates indicated.
16

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


Volume of Activity

The table below summarizes changes in the Company’s derivative instruments for the six months ended June 30, 2023:
Type of Derivative InstrumentBeginning
Notional Amount-Long (Short)		AdditionsSettlements,
Terminations,
or Pair-Offs		Ending
Notional Amount-Long (Short)
U.S. Treasury futures$(4,920,000)$(10,440,000)$10,460,000 $(4,900,000)
Options on U.S. Treasury futures250,000 250,000 (500,000)— 
TBA securities2,869,000 19,045,000 (19,738,000)2,176,000 

Offsetting

The Company's derivatives are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its derivative assets and liabilities subject to these arrangements on a gross basis. Please see Note 4 for information related to the Company’s repurchase agreements, which are also subject to underlying agreements with master netting or similar arrangements. The following tables present information regarding those derivative assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of June 30, 2023 and December 31, 2022:
Offsetting of Assets
Gross Amount of Recognized AssetsGross Amount Offset in the Balance SheetNet Amount of Assets Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Received as CollateralCash Received as Collateral
June 30, 2023
TBA securities$174 $— $174 $(174)$— $— 
Derivative assets$174 $— $174 $(174)$— $— 
December 31, 2022
Options on U.S. Treasury futures$5,859 $— $5,859 $— $— $5,859 
TBA securities1,243 — 1,243 (1,243)— — 
Derivative assets$7,102 $— $7,102 $(1,243)$— $5,859 
17

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

Offsetting of Liabilities
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as Collateral
June 30, 2023
TBA securities$23,621 $— $23,621 $(174)$(23,407)$40 
Derivative liabilities$23,621 $— $23,621 $(174)$(23,407)$40 
December 31, 2022
TBA securities$22,595 $— $22,595 $(1,243)$(16,639)$4,713 
Derivative liabilities$22,595 $— $22,595 $(1,243)$(16,639)$4,713 
(1) Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the derivative asset or liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented. Please refer to the consolidated balance sheets for the total fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically, and the total cash pledged or received as collateral which is disclosed in “cash collateral posted to/by counterparties.”


NOTE 6 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on the assumptions market participants would use when pricing an asset or liability and also considers all aspects of nonperformance risk, including the entity’s own credit standing, when measuring fair value of a liability. ASC Topic 820 established a valuation hierarchy of three levels as follows:

•Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date.
•Level 2 – Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs either directly observable or indirectly observable through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
•Level 3 – Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best estimate of how market participants would price the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following table presents the Company’s financial instruments that are measured at fair value on the Company’s consolidated balance sheet by their valuation hierarchy levels as of the dates indicated:
18

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

June 30, 2023December 31, 2022
 Fair ValueLevel 1Level 2Level 3Fair ValueLevel 1Level 2Level 3
Assets carried at fair value:    
MBS$5,059,308 $— $5,059,190 $118 $3,112,705 $— $3,112,553 $152 
Derivative assets:
Options on U.S. Treasury futures— — — — 5,859 5,859 — — 
TBA securities-long position174 — 174 — 1,243 — 1,243 — 
Total assets carried at fair value$5,059,482 $— $5,059,364 $118 $3,119,807 $5,859 $3,113,796 $152 
Liabilities carried at fair value:
TBA securities-long position$23,621 $— $23,621 $— $22,595 $— $22,595 $— 
Total liabilities carried at fair value$23,621 $— $23,621 $— $22,595 $— $22,595 $— 

The fair value measurements for most of the Company's MBS are considered Level 2 because there are substantially similar securities actively trading or for which there has been recent trading activity in their respective markets and are based on prices received from pricing services and quotes from brokers. In valuing a security, the pricing service uses either a market approach, which uses observable prices and other relevant information that is generated by market transactions of identical or similar securities, or an income approach, which uses valuation techniques such as discounted cash flow modeling. The Company reviews the prices it receives from its pricing sources as well as the assumptions and inputs utilized by its pricing sources for reasonableness. Examples of the observable inputs and assumptions include market interest rates, credit spreads, and projected prepayment speeds, among other things.

Options on U.S. Treasury futures are valued based on closing exchange prices on these contracts and are classified accordingly as Level 1 measurements. The fair value of TBA securities is estimated using methods similar to those used to fair value the Company’s Level 2 MBS.


NOTE 7 – SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Preferred Stock. The Company’s Board of Directors has designated 6,600,000 shares of the Company’s preferred stock for issuance as Series C Preferred Stock, of which the Company has 4,460,000 of such shares outstanding as of June 30, 2023. The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and will remain outstanding indefinitely unless redeemed, repurchased or converted into common stock pursuant to the terms of the Series C Preferred Stock. Except under certain limited circumstances described in Article IIIC of the Company’s Restated Articles of Incorporation, the Company may not redeem the Series C Preferred Stock prior to April 15, 2025. On or after that date, the Series C Preferred Stock may be redeemed at any time and from time to time at the Company's option at a cash redemption price of $25.00 per share plus any accumulated and unpaid dividends. Because the Series C Preferred Stock is redeemable only at the option of the issuer, it is classified as equity on the Company’s consolidated balance sheet.

The Series C Preferred Stock pays a cumulative cash dividend equivalent to 6.900% of the $25.00 liquidation preference per share each year until April 15, 2025. The terms of the Series C Preferred Stock state that upon April 15, 2025 and thereafter, the Company will pay cumulative cash dividends at a percentage of the $25.00 liquidation value per share equal to an annual floating rate of 3-month LIBOR plus a spread of 5.461%. When 3-month LIBOR ceases
19

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

to be a published, the fallback provision provided in the terms of the Series C Preferred Stock will allow for the Company to appoint a third-party independent financial institution of national standing to select an industry accepted alternative base rate. The Company paid its regular quarterly dividend of $0.43125 per share of Series C Preferred Stock on July 17, 2023 to shareholders of record as of July 1, 2023.

Common Stock. During the six months ended June 30, 2023, the Company issued 495,874 shares of its common stock through its at-the-market (“ATM”) program at an aggregate value of $6,313, net of broker commissions and fees. The Company currently pays a monthly dividend on its common stock. The Company’s timing, frequency, and amount of dividends declared on its common stock are determined by its Board of Directors. When declaring dividends, the Board of Directors considers the Company’s taxable income, the REIT distribution requirements of the Tax Code, and maintaining compliance with dividend requirements of the Series C Preferred Stock, along with other factors that the Board of Directors may deem relevant from time to time.

Share-Based Compensation. Total share-based compensation expense recognized by the Company was $1,129 and $2,140 for the three and six months ended June 30, 2023 compared to $1,026 and $1,873 for the three and six months ended June 30, 2022.

The following tables present a rollforward of share-based awards for the periods indicated:
Six Months Ended
June 30,
 20232022
Type of AwardSharesWeighted Average
Grant Date Fair Value
Per Share		SharesWeighted Average
Grant Date Fair Value
Per Share
Restricted stock:
Awards outstanding, beginning of period133,951 $15.22 197,804 $