10-Q 1 dx-20240331.htm 10-Q dx-20240331
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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 March 31, 2024
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 filerAccelerated filer
Non-accelerated filerSmaller 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 April 22, 2024, the registrant had 64,160,931 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
Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023
Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2024 (unaudited) and March 31, 2023 (unaudited)
Consolidated Statements of Shareholders' Equity for the three months ended
March 31, 2024 (unaudited) and March 31, 2023 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
March 31, 2024 (unaudited) and March 31, 2023 (unaudited)
Notes to the Unaudited Condensed 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


PART I.    FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

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

 March 31, 2024December 31, 2023
ASSETS
(unaudited)
Cash and cash equivalents$295,715 $119,639 
Cash collateral posted to counterparties122,614 118,225 
Mortgage-backed securities (including pledged of $5,570,076 and $5,880,747, respectively), at fair value
5,840,559 6,038,948 
Derivative assets8,386 54,361 
Accrued interest receivable27,899 28,727 
Other assets, net9,324 9,850 
Total assets$6,304,497 $6,369,750 
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Liabilities:  
Repurchase agreements$5,284,708 $5,381,104 
Derivative liabilities1,314  
Cash collateral posted by counterparties8,507 46,001 
Accrued interest payable35,672 53,194 
Accrued dividends payable10,990 10,320 
Other liabilities4,774 8,396 
 Total liabilities5,345,965 5,499,015 
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;
64,160,931 and 57,038,247 shares issued and outstanding, respectively
641 570 
Additional paid-in capital1,494,893 1,404,431 
Accumulated other comprehensive loss(175,770)(158,502)
Accumulated deficit(469,075)(483,607)
 Total shareholders’ equity958,532 870,735 
 Total liabilities and shareholders’ equity$6,304,497 $6,369,750 
See accompanying notes to the unaudited condensed consolidated financial statements.

1


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

Three Months Ended
March 31,
 20242023
INTEREST INCOME (EXPENSE)
Interest income$71,525 $30,846 
Interest expense(74,717)(31,308)
Net interest expense
(3,192)(462)
OTHER GAINS (LOSSES)
Realized loss on sales of investments, net
 (23,315)
Unrealized (loss) gain on investments, net
(70,024)57,120 
Gain (loss) on derivative instruments, net
124,635 (67,267)
Total other gains (losses), net
54,611 (33,462)
EXPENSES
Compensation and benefits(7,177)(3,750)
Other general and administrative(3,703)(3,622)
Other operating expenses(421)(426)
Total operating expenses(11,301)(7,798)
Net income (loss)
40,118 (41,722)
Preferred stock dividends(1,923)(1,923)
Net income (loss) to common shareholders
$38,195 $(43,645)
Other comprehensive income:
Unrealized (loss) gain on available-for-sale investments, net
$(17,268)$14,793 
Reclassification of realized (loss) gain on available-for-sale investments, net
  
Total other comprehensive (loss) income
(17,268)14,793 
Comprehensive income (loss) to common shareholders
$20,927 $(28,852)
Weighted average common shares-basic59,008,316 53,823,866 
Weighted average common shares-diluted59,717,332 53,823,866 
Net income (loss) per common share-basic
$0.65 $(0.81)
Net income (loss) per common share-diluted
$0.64 $(0.81)
See accompanying notes to the unaudited condensed 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, 2023
4,460,000$107,843 57,038,247$570 $1,404,431 $(158,502)$(483,607)$870,735 
Stock issuance— 7,007,44870 86,736 — — 86,806 
Restricted stock granted, net of amortization— 46,544 510 — — 510 
Other share-based compensation, net of amortization— 111,2451 3,759 — — 3,760 
Adjustments for tax withholding on share-based compensation— (42,553) (527)— — (527)
Stock issuance costs— — (16)— — (16)
Net income
— — — — 40,118 40,118 
Dividends on preferred stock— — — — (1,923)(1,923)
Dividends on common stock— — — — (23,663)(23,663)
Other comprehensive loss
— — — (17,268)— (17,268)
Balance as of
March 31, 2024
4,460,000$107,843 64,160,931$641 $1,494,893 $(175,770)$(469,075)$958,532 

3


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 

See accompanying notes to the unaudited condensed consolidated financial statements.
4


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
($s in thousands)
Three Months Ended
 March 31,
 20242023
Operating activities:  
Net income (loss)
$40,118 $(41,722)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
Realized loss on sales of investments, net
 23,315 
Unrealized loss (gain) on investments, net
70,024 (57,120)
(Gain) loss on derivative instruments, net
(124,635)67,267 
Amortization of investment premiums, net14,059 19,642 
Other amortization and depreciation, net501 585 
Share-based compensation expense4,270 1,010 
Decrease (increase) in accrued interest receivable
828 (1,974)
Decrease in accrued interest payable
(17,522)(3,644)
Change in other assets and liabilities, net(4,747)(3,622)
Net cash (used in) provided by operating activities
(17,104)3,737 
Investing activities: 
Purchases of investments (310,352)
Principal payments received on trading securities78,131 30,233 
Principal payments received on available-for-sale investments18,874 22,318 
Principal payments received on mortgage loans held for investment307 279 
Net receipts (payments) on derivatives, including terminations
172,784 (101,425)
(Decrease) increase in cash collateral posted by counterparties
(37,494)26,690 
Net cash provided by (used in) investing activities
232,602 (332,257)
Financing activities: 
Borrowings under repurchase agreements12,273,321 5,428,877 
Repayments of repurchase agreement borrowings(12,369,717)(5,136,158)
Proceeds from issuance of common stock86,806 2,771 
Payments related to tax withholding for share-based compensation(527)(276)
Dividends paid(24,916)(22,949)
Net cash (used in) provided by financing activities
(35,033)272,265 
Net increase (decrease) in cash, including cash posted to counterparties
180,465 (56,255)
Cash including cash posted to counterparties at beginning of period237,864 449,877 
Cash including cash posted to counterparties at end of period$418,329 $393,622 
Supplemental Disclosure of Cash Activity:  
Cash paid for interest$92,239 $34,952 
See accompanying notes to the unaudited condensed consolidated financial statements.
5


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

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 March 31, 2024, 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 statement of results for the interim period have been included. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for any other interim periods or for the entire year ending December 31, 2024. 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, 2023 (the “2023 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 March 31, 2024.


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-
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

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 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, 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 are excluded from the calculation of diluted net income per common share for the periods presented.

Cash and Cash Equivalents

Cash and cash equivalents include 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, the Company believes the risk of loss is mitigated by the financial position, creditworthiness, and strength of the depository institutions in which those deposits are held.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

Cash Collateral Posted To/By Counterparties

The Company regularly pledges and receives amounts 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 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 March 31, 2024, that sum to the total of the same such amounts shown on the Company’s consolidated statement of cash flows for the three months ended March 31, 2024:
($s in thousands)
March 31, 2024
Cash and cash equivalents$295,715 
Cash collateral posted to counterparties122,614 
Total cash including cash posted to counterparties shown on consolidated statement of cash flows$418,329 

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. Management elected the fair value option so that GAAP net income will reflect the changes in fair value for its future purchases of MBS in a manner consistent with the presentation and timing of the changes in fair value of its derivative instruments. 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 a pricing service. These prices are assessed for reasonableness using broker quotes and other third-party pricing services. 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
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

GSE, the Company is not likely to have an allowance for credit losses related to its MBS recorded on its consolidated balance sheet.

Interest accrued between payment dates on MBS is presented separately from the Company’s investment portfolio as “accrued interest receivable” on its consolidated balance sheet. The Company does not estimate an allowance for credit loss for its accrued interest receivable because the interest is generally received within 30 days and amounts not received when due are written off against interest income.

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. The repurchase facilities available to the Company are uncommitted with no guarantee of renewal.

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 or sell 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
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

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.

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 March 31, 2024, 96,571 common shares are available for issuance under the 2020 Plan.

The Company has issued restricted stock and RSUs, which are treated as equity awards and recorded at their fair value using the closing stock price on the grant date. Compensation expense is generally recognized over a service period specified within each award with a corresponding credit to shareholders’ equity using the straight-line method until the vesting date specified within each award or until the employee becomes eligible for retirement, if earlier than the vesting date. Compensation expense for subsequent equity awards to an employee who is retirement eligible is recognized immediately upon the grant date.

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 using the straight-line method until the earlier of the vesting date specified within each award or the date the employee becomes eligible for retirement. Adjustments are made, 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 using the straight-line method until the earlier of the vesting date specified within each award or the date the employee becomes eligible for retirement, 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, which are paid in cash only upon settlement, any accrued dividend equivalent rights (“DERs”) on forfeited units are reversed with a corresponding credit to “Compensation and benefits” expense.

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 March 31, 2024 or December 31, 2023.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

Recently Issued Accounting Pronouncements

The Company evaluates Accounting Standards Updates (“ASU”) 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.

ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" amended existing guidance to improve disclosures about a public entity’s reportable segments and provide more detailed information about a reportable segment’s expenses. ASU 2023-07 clarifies that an entity which has a single reportable segment is to provide all the disclosures required by Topic 280 and ASU 2023-07. The amendment is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The adoption of ASU 2023-07 is not expected to have a significant impact on the Company's consolidated financial statements.

There were no other accounting pronouncements issued during the three months ended March 31, 2024, that are applicable to the Company and 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 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 Ended
March 31,
($s in thousands)
20242023
Weighted average number of common shares outstanding - basic59,008,31653,823,866
Incremental common shares-unvested RSUs379,880
Incremental common shares-unvested PSUs329,136
Weighted average number of common shares outstanding - diluted59,717,33253,823,866
Net income (loss) to common shareholders$38,195 $(43,645)
Net income (loss) per common share-basic$0.65 $(0.81)
Net income (loss) per common share-diluted$0.64 $(0.81)

The calculation of diluted net loss per common share for the three months ended March 31, 2023 excludes unvested RSUs and PSUs of 270,106, which would have been anti-dilutive for the period.

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

NOTE 3 – MORTGAGE-BACKED SECURITIES
 
The following tables provide details on the Company’s MBS by investment type as of the dates indicated:
March 31, 2024December 31, 2023
($s in thousands)
Par ValueAmortized CostFair ValuePar ValueAmortized CostFair Value
Agency RMBS$5,928,956 $5,900,650 $5,583,208 $6,022,502 $5,993,922 $5,763,532 
Agency CMBS117,984 118,473 111,762 121,293 121,799 115,595 
CMBS IO (1)
n/a153,001 145,589 n/a167,314 159,718 
Non-Agency other   150 150 103 
Total$6,046,940 $6,172,124 $5,840,559 $6,143,945 $6,283,185 $6,038,948 
(1) The notional balance for Agency CMBS IO and non-Agency CMBS IO was $7,594,510 and $3,529,181, respectively, as of March 31, 2024, and $7,723,379 and $3,860,007, respectively, as of December 31, 2023.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

March 31, 2024
($s in thousands)
Amortized CostGross Unrealized GainGross Unrealized LossFair Value
MBS measured at fair value through OCI:
Agency RMBS$882,334 $ $(165,983)$716,351 
Agency CMBS103,209  (5,448)97,761 
CMBS IO113,599 1,505 (5,844)109,260 
Non-Agency other    
Total$1,099,142 $1,505 $(177,275)$923,372 
MBS measured at fair value through net income:
Agency RMBS$5,018,316 $22,675 $(174,134)$4,866,857 
Agency CMBS15,264  (1,263)14,001 
CMBS IO39,402  (3,073)36,329 
Total$5,072,982 $22,675 $(178,470)$4,917,187 
December 31, 2023
($s in thousands)
Amortized CostGross Unrealized GainGross Unrealized LossFair Value
MBS measured at fair value through OCI:
Agency RMBS$898,420 $ $(148,606)$749,814 
Agency CMBS106,527 28 (5,159)101,396 
CMBS IO126,672 1,296 (6,014)121,954 
Non-Agency other150  (47)103 
Total$1,131,769 $1,324 $(159,826)$973,267 
MBS measured at fair value through net income:
Agency RMBS$5,095,502 $48,459 $(130,243)$5,013,718 
Agency CMBS15,272  (1,073)14,199 
CMBS IO40,642 2 (2,880)37,764 
Total$5,151,416 $48,461 $(134,196)$5,065,681 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

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 Ended
March 31,
($s in thousands)
20242023
Agency RMBS$(69,676)$55,779 
Agency CMBS(190)237 
CMBS IO(194)1,092 
Other assets36 12 
Total unrealized gain (loss) on investments, net
$(70,024)$57,120 

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 Ended
March 31,
($s in thousands)
20242023
Realized losses on sales of MBS - FVO (23,315)
Total realized loss on sales of investments, net
$ $(23,315)

The following table presents certain information for MBS designated as AFS that were in an unrealized loss position as of the dates indicated:
 March 31, 2024December 31, 2023
($s in thousands)
Fair ValueGross Unrealized Losses# of SecuritiesFair ValueGross Unrealized Losses# of Securities
Continuous unrealized loss position for less than 12 months:    
Agency MBS$4,314 $(183)4$3,926 $(149)4
Non-Agency MBS636 (12)31,736 (37)8
Continuous unrealized loss position for 12 months or longer:
Agency MBS$887,563 $(176,389)71$932,682 $(158,651)78
Non-Agency MBS15,640 (691)2921,704 (989)41

The unrealized losses on the Company’s MBS designated as AFS were the result of rising interest rates and declines in market prices and were not credit related; therefore, the Company did not have any allowance for credit losses as of March 31, 2024 or December 31, 2023. 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
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

ratings, the credit characteristics of the mortgage loans collateralizing these securities, and the estimated future cash flows including projected collateral losses.

NOTE 4 – REPURCHASE AGREEMENTS

The Company’s repurchase agreements outstanding as of March 31, 2024 and December 31, 2023 are summarized in the following tables:
 March 31, 2024December 31, 2023
Collateral TypeBalanceWeighted
Average Rate
Fair Value of
Collateral Pledged
BalanceWeighted
Average Rate
Fair Value of
Collateral Pledged
($s in thousands)
Agency RMBS$5,048,942 5.46 %$5,319,619 $5,130,438 5.59 %$5,613,212 
Agency CMBS104,557 5.46 %109,935 104,495 5.60 %113,753 
Agency CMBS IO112,156 5.74 %120,037 120,979 5.83 %127,823 
Non-Agency CMBS IO19,053 6.16 %20,485 25,192 6.25 %25,959 
Total repurchase agreements$5,284,708 5.46 %$5,570,076 $5,381,104 5.59 %$5,880,747 
The Company had borrowings outstanding under 28 different repurchase agreements as of March 31, 2024, and its equity at risk did not exceed 10% with any counterparty as of that date. The Company received noncash collateral with a fair value of $11.5 million pledged by its counterparties to compensate the Company for the increase in fair value of collateral previously pledged in excess of required margin related to its repurchase agreement borrowings outstanding as of March 31, 2024. In accordance with Accounting Standards Codification (“ASC”) Topic 860, the fair value of this noncash collateral is not recorded on the Company’s consolidated balance sheet unless the Company re-pledges the collateral or sells the collateral in the event of default by the counterparty. The Company had not re-pledged any of the noncash collateral pledged by its counterparties as of March 31, 2024.

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:
March 31, 2024December 31, 2023
Remaining Term to MaturityBalanceWeighted
Average Rate
WAVG Original Term to MaturityBalanceWeighted
Average Rate
WAVG Original Term to Maturity
($s in thousands)
Less than 30 days$2,440,188 5.48 %58 $2,855,917 5.61 %92 
30 to 90 days2,305,208 5.46 %71 2,525,187 5.58 %86 
91 to 180 days539,312 5.42 %182   % 
Total$5,284,708 5.46 %76 $5,381,104 5.59 %89 

The Company’s accrued interest payable related to its repurchase agreement borrowings decreased to $35.7 million as of March 31, 2024 from $53.2 million as of December 31, 2023.

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
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

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 March 31, 2024.

The Company's repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of setoff 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 March 31, 2024 and December 31, 2023:
($s in thousands)
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
March 31, 2024:
Repurchase agreements$5,284,708 $ $5,284,708 $(5,284,708)$ $ 
December 31, 2023:
Repurchase agreements$5,381,104 $ $5,381,104 $(5,381,104)$ $ 
(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 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 as “cash collateral posted to/by counterparties.”

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 put 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 or 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
16


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

period possible.

The table below provides detail of the Company’s “gain (loss) on derivative instruments, net” by type of derivative instrument for the periods indicated:
Three Months Ended
March 31,
Type of Derivative Instrument20242023
($s in thousands)
U.S. Treasury futures$139,810 $(106,373)
Put options on U.S. Treasury futures
 (4,258)
TBA securities-long positions(15,175)43,364 
Gain (loss) on derivative instruments, net$124,635 $(67,267)

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 LocationPurposeMarch 31, 2024December 31, 2023
($s in thousands)
TBA securitiesDerivative assetsInvesting$8,386 $54,361 
Total derivatives assets$8,386 $54,361 
TBA securitiesDerivative liabilitiesInvesting$1,314 $ 
Total derivatives liabilities$1,314 $ 

The Company’s U.S. Treasury futures contracts were in a liability position of $(54.4) million as of March 31, 2024 and $(219.9) million as of December 31, 2023, but because these instruments are considered legally settled on a daily basis, the carrying value on the Company’s consolidated balance sheet nets to $0. The amount of cash posted by the Company to cover required initial margin for its U.S. Treasury futures was $122.4 million as of March 31, 2024 and $118.2 million as of December 31, 2023, which was recorded within “cash collateral posted to counterparties.”

The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:
($s in thousands)
March 31, 2024December 31, 2023
Implied market value (1)
$2,408,100 $1,381,702 
Implied cost basis (2)
2,401,028 1,327,341 
Net carrying value (3)
$7,072 $54,361 
(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.

17


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

Volume of Activity

The table below summarizes changes in the Company’s derivative instruments for the three months ended March 31, 2024:
Type of Derivative InstrumentBeginning
Notional Amount-Long (Short)
AdditionsSettlements,
Terminations,
or Pair-Offs
Ending
Notional Amount-Long (Short)
($s in thousands)
U.S. Treasury futures$(4,880,000)$(5,325,000)$5,030,000 $(5,175,000)
TBA securities1,403,000 5,811,000 (4,761,000)2,453,000 

Offsetting

The Company's derivatives are subject to underlying agreements with master netting or similar arrangements, which provide for the right of setoff 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 March 31, 2024 and December 31, 2023:
Offsetting of Assets
($s in thousands)
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
March 31, 2024
TBA securities$8,386 $ $8,386 $(1,144)$(6,774)$468 
Derivative assets$8,386 $ $8,386 $(1,144)$(6,774)$468 
December 31, 2023
TBA securities$54,361 $ $54,361 $ $(44,153)$10,208 
Derivative assets$54,361 $ $54,361 $ $(44,153)$10,208 

Offsetting of Liabilities
($s in thousands)
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
March 31, 2024
TBA securities$1,314 $ $1,314 $(1,144)$(170)$ 
Derivative liabilities$1,314 $ $1,314 $(1,144)$(170)$ 
December 31, 2023
TBA securities$ $ $ $ $ $ 
Derivative liabilities$ $ $ $ $ $ 
18


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

(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 as “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:
($s in thousands)
March 31, 2024December 31, 2023
Level 1Level 2Level 3Level 1Level 2Level 3
Assets:
   
MBS$ $5,840,559 $ $ $6,038,845 $103 
TBA securities (1)
 8,386   54,361  
Mortgage loans  1,531   1,793 
Total assets
$ $5,848,945 $1,531 $ $6,093,206 $1,896 
Liabilities:
TBA securities (1)
$ $1,314 $ $ $ $ 
Total liabilities
$ $1,314 $ $ $ $ 
(1)TBA securities are reflected on consolidated balance sheets at their implied fair value, net of implied cost basis. Please refer to Note 5 for additional information.

The fair value measurements for the Company’s TBA securities and the majority of its 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 a pricing service. In valuing a security, the pricing service primarily uses a market approach, which uses observable prices and other relevant information that is generated by market transactions of identical or similar securities, but may use an income approach, which uses valuation techniques such as discounted cash flow modeling. The Company reviews the prices it receives from the pricing service as well as the assumptions and inputs, if any, utilized by the pricing service for reasonableness.
19


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

Examples of the observable inputs and assumptions include market interest rates, credit spreads, and projected prepayment speeds, among other things. In addition, the prices received from the pricing service are assessed for reasonableness using broker quotes as well as other third-party pricing services.

The Company's mortgage loans held for investment are single-family mortgage loans, which were originated or purchased by the Company prior to 2000, and for which the Company has elected the fair value option. The fair value measurements for these mortgage loans and certain non-Agency MBS are considered Level 3 assets because there has been no recent trading activity of similar instruments upon which their fair value can be measured. The fair value for these Level 3 assets is measured by discounting the estimated future cash flows derived from cash flow models using certain inputs such as the security’s credit rating, coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, and expected credit losses as well as certain other relevant information. The Company used a constant prepayment rate assumption of 10%, default rate of 2%, loss severity of 20%, and a discount rate of 10.2% in measuring the fair value of its Level 3 assets as of March 31, 2024.

The Company’s short positions in U.S. Treasury futures contracts are valued based on exchange pricing and are classified accordingly as Level 1 measurements. The carrying value of the U.S. Treasury futures contracts on the Company’s consolidated balance sheets is $0 because the instruments require daily margin exchanges, which are considered by the settlement agent to represent legal settlement of the contracts on a daily basis.


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 March 31, 2024. 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 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 April 15, 2024 to shareholders of record as of April 1, 2024.

Common Stock. During the three months ended March 31, 2024, the Company issued 7,007,448 shares of its common stock through its at-the-market (“ATM”) program at an aggregate value of $86.8 million, 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.

20


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

Share-Based Compensation. The following table presents a rollforward of share-based awards for the periods indicated:
Three Months Ended
March 31,
 20242023
Type of AwardSharesWeighted Average
Grant Date Fair Value
Per Share
SharesWeighted Average
Grant Date Fair Value
Per Share
Restricted stock:
Awards outstanding, beginning of period104,282 $12.61 133,951 $15.22 
Granted46,544 12.50 27,932 11.97 
Vested(76,865)12.76 (36,573)16.75 
Awards outstanding, end of period73,961 $12.39 125,310 $14.05 
Target RSUs: (1)
Awards outstanding, beginning of period394,497 $13.06 86,666 $16.57 
Granted214,755 12.50 106,850 11.97 
Vested(68,896)14.42 (33,213)13.50 
Awards outstanding, end of period540,356 $12.66 160,303 $14.14 
Target PSUs: (2)
Awards outstanding, beginning of period276,866 $13.17 201,284 $16.60 
Granted322,132 12.50 160,277 11.97 
Vested—    
Awards outstanding, end of period598,998 $12.81 361,561 $16.60 
(1)The number of RSUs shown represent the target number of awards. Actual number of shares that will potentially settle may range from 0% if the recipient’s service-based vesting condition is not met to 100% if the service-based vesting condition is met.
(2)The number of PSUs shown represent the target number of awards. Actual number of shares that will potentially settle may range from 0% to 200% based on the achievement of the performance goals defined in each grant award.

As of March 31, 2024, the Company expects 95% of the remaining target PSUs will be settled on their vesting dates. The three-year performance period for 84,695 of target PSUs ended on December 31, 2023, of which 42,348 units were converted to shares of common stock during the three months ended March 31, 2024.

The Company has DERs accrued for RSUs and PSUs of $0.4 million and $0.6 million, respectively, as of March 31, 2024 compared to $0.4 million and $0.8 million, respectively, as of December 31, 2023, which is included on the Company’s consolidated balance sheet within “accrued dividends payable.” During the three months ended March 31, 2024, the Company paid $0.4 million in cash to settle DERs related to RSUs and PSUs awards granted in 2021.

Total share-based compensation expense recognized by the Company for the three months ended March 31, 2024 was $4.3 million compared to $1.0 million for the three months ended March 31, 2023. The increase in share-based compensation for the quarter ended March 31, 2024 is due to accelerated recognition of expense for certain stock incentive awards granted in March 2024 to retirement eligible employees. The following table discloses the
21


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

Company’s remaining compensation expense related to stock awards it has granted as of March 31, 2024, which will be amortized over the period disclosed:
March 31, 2024
($s in thousands)
Remaining Compensation CostWAVG Period of Recognition
Restricted stock$685 2.2 years
RSUs4,360 2.5 years
PSUs2,810 2.5 years
Total$7,855 2.5 years


22


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

NOTE 8     – SUBSEQUENT EVENT

On April 18, 2024, the Board of Directors of the Company authorized a new share repurchase program (the “Program”), which replaces the Company’s prior repurchase program that expired on March 31, 2024. The Program authorizes the repurchase up to $100 million of its common stock and up to $50 million of its preferred stock through open market transactions, privately negotiated transactions, trading plans adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), block transactions or otherwise. The Program permits the Company to repurchase shares of common stock or preferred stock at any time or from time-to-time at management’s discretion. The Program is authorized through April 30, 2026, although it may be modified or terminated by the Board at any time.


23


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the accompanying notes included in Part II, Item 8, “Financial Statements and Supplementary Data” in our 2023 Form 10-K. References herein to “Dynex,” the “Company,” “we,” “us,” and “our” include Dynex Capital, Inc. and its consolidated subsidiaries, unless the context otherwise requires. In addition to current and historical information, the following discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future business, financial condition, or results of operations. For a description of certain factors that may have a significant impact on our future business, financial condition, or results of operations, see “Forward-Looking Statements” at the end of this discussion and analysis.

    For more information about our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Part I, Item 1, “Business” of our 2023 Form 10-K.

EXECUTIVE OVERVIEW

At the end of 2023, the 10-year U.S. Treasury rate was at 3.88% and was down from a peak of almost 5% in October 2023. Many forecasts were predicting multiple U.S. Federal Funds rate cuts would be coming in 2024 and 2025. The economic data released in the first quarter of 2024 showed that the U.S. economy ended 2023 on a strong footing and started 2024 with solid momentum. GDP, which rose over 3% on an annualized basis in the fourth quarter of 2023, was tracking near 3% for the first quarter of 2024. The labor market remained strong, driving continued gains in consumer spending, especially in the services sectors.

With strong economic and employment news, the U.S. Federal Funds rate cuts anticipated at the beginning of 2024 have shifted to later in 2024, with some forecasters not predicting any Federal Funds rate cuts until 2025. This change in sentiment resulted in the back end of the yield curve increasing during the first quarter of 2024, with the 10-year U.S. Treasury closing at 4.20% as of March 31, 2024. The U.S. 10-year Treasury rate has continued increasing into the second quarter of 2024, from the lows seen at the end of 2023. The mortgage spreads to Treasuries were flat to slightly tighter as of March 31, 2024 compared to December 31, 2023, although spreads widened in February 2024 as the 10-year U.S. Treasury rate trended up. Dynex used this opportunity to add Agency RMBS TBAs to its investment portfolio.
24


Market Data
The charts below show the range of U.S. Treasury rates for the past three months and information regarding market spreads as of and for the periods indicated:

3506
Market Spreads as of:
Change in Spreads
YTD
Investment Type:March 31, 2024December 31, 2023
Agency RMBS: (1)
2.0% coupon84768
2.5% coupon84786
3.0% coupon84795
3.5% coupon78753
4.0% coupon7474
4.5% coupon7173(2)
5.0% coupon6869(1)
5.5% coupon6566(1)
6.0% coupon62602
Agency DUS (Agency CMBS)(2)
6576(11)
Freddie K AAA IO (Agency CMBS IO)(2)
165180(15)
AAA CMBS IO (Non-Agency CMBS IO)(2)
168225(57)
(1)Option adjusted spreads (“OAS”) are based on Company estimates using third-party models and market data. OAS shown for prior periods may differ from previous disclosures because the Company regularly updates the third-party model used.
(2)Data represents the spread to swap rate on newly issued securities and is sourced from J.P. Morgan.

25


Summary of Results

Our total economic return of $0.28 per common share for the first quarter of 2024 consisted of a decline in book value of $(0.11) per common share and dividends declared of $0.39 per common share. Operating expenses for the first quarter of 2024 included an increase of $0.05 per common share in share-based compensation expense due to accelerated vesting conditions for certain March 2024 grants.
Net gains on our hedging portfolio exceeded net losses on our investment portfolio by $37.3 million. Though the 10-year U.S. Treasury rate increased over 30 basis points during the first quarter, which negatively impacted the fair value of our investment portfolio, losses were offset by modest spread tightening on some of our investments and gains on U.S. Treasury futures used as interest rate hedging instruments.
Book value was also impacted by approximately $(0.07) per common share from equity issued during the first quarter. We did not issue any common shares from March 31, 2024 through the filing date of this Quarterly Report on Form 10-Q.

The following table summarizes the changes in the Company's financial position during the first quarter of 2024:
($s in thousands except per share data)
Net Change in Fair Value
Components of Comprehensive Income
Common Book Value Rollforward
Per Common Share
Balance as of December 31, 2023 (1)
$759,235 $13.31 
Net interest expense
$(3,192)
G & A and other operating expenses(11,301)
Preferred stock dividends(1,923)
Changes in fair value:
MBS and loans$(87,292)
TBAs(15,175)
U.S. Treasury futures139,810 
Total net change in fair value37,343 
Comprehensive income to common shareholders
20,927 0.35 
Capital transactions:
Net proceeds from stock issuance (2)
90,533 (0.07)
Common dividends declared(23,663)(0.39)
Balance as of March 31, 2024 (1)
$847,032 $13.20 
(1)Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's preferred stock of $111.5 million, in thousands and on a per common share basis.
(2)Net proceeds from stock issuance include $86.8 million from the common stock ATM program and $3.7 million from share-based compensation grants, net of amortization. The amount shown for “per common share” includes the impact of the increase in the number of common shares outstanding.

26


Current Outlook

While periods of volatility will always arise, we expect higher volatility to be less persistent than it was in the past two years, improving the ability to earn the leveraged yield spread on our mortgage portfolio relative to our Treasury futures hedging portfolio. Moreover, costs related to adjusting hedges should decline over time with more certainty around path of the Federal Reserve’s monetary policy. In the medium- and long-term, we expect the portfolio to generate compelling returns for our shareholders. A thorough analysis of the global macroeconomic environment remains at the core of our disciplined investment process. Geopolitical risk and the U.S. election remain high on our considerations for evaluating investment opportunities. Over the medium – and long-run, we continue to expect tighter equilibrium spreads for Agency MBS and, in the absence of severe disruptions, would regard any short-term widening as opportunities for new investment.

FINANCIAL CONDITION

Investment Portfolio
Our investment portfolio (including TBAs) as of March 31, 2024 increased 11% compared to December 31, 2023. The following charts compare the composition of our MBS portfolio including TBA securities as of the dates indicated:
579580
27


The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:
March 31, 2024
Par/Notional
Amortized Cost/
Implied Cost
Basis (1)(3)
Fair
Value (2)(3)
Weighted Average
Coupon
Loan Age
(in months)(4)
3 Month
CPR (4)(5)
Estimated Duration (6)
Market Yield (7)
30-year fixed-rate:($s in thousands)
2.0%$696,233 $707,989 $559,217 424.3 %6.715.08 %
2.5%598,717 621,886 502,714 434.0 %6.565.02 %
4.0%347,937 348,500 326,119 375.1 %5.835.00 %
4.5%1,363,175 1,331,442 1,307,279 184.2 %5.425.13 %
5.0%2,037,775 2,003,091 2,000,866 124.9 %4.625.29 %
5.5%885,118 887,741 887,012 114.3 %3.945.46 %
TBA 4.0%262,000 241,204 242,974 n/an/a6.205.01 %
TBA 4.5%223,000 212,672 212,529 n/an/a5.305.17 %
TBA 5.0%518,000 507,111 505,940 n/an/a4.375.35 %
TBA 5.5%1,250,000 1,239,104 1,244,695 n/an/a3.375.57 %
TBA 6.0%
200,000 200,938 201,961 n/an/a2.365.65 %
Total$8,381,955 $8,301,678 $7,991,306 204.5 %4.79 5.28 %
December 31, 2023
Par/Notional
Amortized Cost/
Implied Cost
Basis (1)(3)
Fair
Value (2)(3)
Weighted Average
Coupon
Loan Age
(in months)(4)
3 Month
CPR (4)(5)
Estimated Duration (6)
Market Yield (7)
30-year fixed-rate:($s in thousands)
2.0%$708,528 $720,611 $586,361 394.4 %6.814.60 %
2.5%608,580 632,343 525,018 404.5 %6.624.59 %
4.0%354,382 354,965 339,212 345.5 %5.654.67 %
4.5%1,383,019 1,350,697 1,348,108 155.0 %5.084.88 %
5.0%2,070,473 2,035,088 2,057,309 94.7 %4.245.10 %
5.5%897,520 900,218 907,524 85.0 %3.585.29 %
TBA 4.0%262,000