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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, 2021
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-9819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)
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
7.625% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per shareN/ANone
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
1


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 30, 2021, the registrant had 30,879,569 shares outstanding of common stock, $0.01 par value, which is the registrant’s only class of common stock.
2


DYNEX CAPITAL, INC.
FORM 10-Q
INDEX


Page
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020
Consolidated Statements of Comprehensive Income (Loss) for the three months ended
March 31, 2021 (unaudited) and March 31, 2020 (unaudited)
Consolidated Statements of Shareholders' Equity for the three months ended
March 31, 2021 (unaudited) and March 31, 2020 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
March 31, 2021 (unaudited) and March 31, 2020 (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


PART I.    FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
 March 31, 2021December 31, 2020
ASSETS(unaudited)
Cash$328,936 $295,602 
Cash collateral posted to counterparties49,180 14,758 
Mortgage-backed securities (including pledged of $2,173,333 and $2,467,859, respectively), at fair value
2,380,373 2,596,255 
Mortgage loans held for investment, at fair value5,749 6,264 
Receivable for sales pending settlement5,067 150,432 
Derivative assets109,746 11,342 
Accrued interest receivable15,480 14,388 
Other assets, net6,577 6,394 
Total assets$2,901,108 $3,095,435 
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Liabilities:  
Repurchase agreements$2,032,089 $2,437,163 
Payable for purchases pending settlement24,455 5 
Derivative liabilities19,866 1,634 
Cash collateral posted by counterparties83,776 7,681 
Accrued interest payable418 1,410 
Accrued dividends payable5,639 5,814 
Other liabilities3,589 8,275 
 Total liabilities2,169,832 2,461,982 
Shareholders’ equity:  
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; 4,460,000 and 7,248,330 shares issued and outstanding, respectively ($111,500 and $181,208 aggregate liquidation preference, respectively)
$107,843 $174,564 
Common stock, par value $0.01 per share, 90,000,000 shares authorized;
30,879,569 and 23,697,970 shares issued and outstanding, respectively
309 237 
Additional paid-in capital997,326 869,495 
Accumulated other comprehensive income15,105 80,261 
Accumulated deficit(389,307)(491,104)
 Total shareholders’ equity731,276 633,453 
 Total liabilities and shareholders’ equity$2,901,108 $3,095,435 
See notes to the consolidated financial statements.

1


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 (amounts in thousands except per share data)
Three Months Ended
March 31,
 20212020
Interest income$13,892 $39,822 
Interest expense(1,633)(22,101)
  Net interest income12,259 17,721 
Gain on sale of investments, net4,697 84,783 
Loss on investments, net(980)(372)
Gain (loss) on derivative instruments, net107,801 (195,567)
Other operating expense, net(380)(423)
General and administrative expenses:
Compensation and benefits(3,096)(2,163)
Other general and administrative(2,372)(2,458)
Net income (loss)117,929 (98,479)
Preferred stock dividends(2,559)(3,841)
Preferred stock redemption charge(2,987)(3,914)
Net income (loss) to common shareholders$112,383 $(106,234)
Other comprehensive income:
Unrealized (loss) gain on available-for-sale investments, net$(60,459)$157,755 
Reclassification adjustment for realized gain on sale of available-for-sale investments, net(4,697)(84,783)
Total other comprehensive (loss) income(65,156)72,972 
Comprehensive income (loss) to common shareholders$47,227 $(33,262)
Net income (loss) per common share-basic and diluted$4.20 $(4.63)
Weighted average common shares-basic and diluted26,788,693 22,963,084 
See notes to the consolidated financial statements.
2


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
($ in thousands)
Preferred StockCommon StockAdditional
Paid-in
Capital
AOCIAccumulated
Deficit
Total Shareholders’ Equity
SharesAmountSharesAmount
Balance as of
December 31, 2019
6,788,330 $162,807 22,945,993 $229 $858,347 $173,806 $(612,201)$582,988 
Cumulative effect of adopting accounting standard ASU 2019-05— — — — — — (548)(548)
Adjusted Balance, January 1, 20206,788,330 162,807 22,945,993 229 858,347 173,806 (612,749)582,440 
Stock issuance4,460,000 107,988 — — — — — 107,988 
Redemption of preferred stock(4,000,000)(96,086)— — — — (3,914)(100,000)
Restricted stock granted, net of amortization— — 67,511 1 306 — — 307 
Stock repurchase— — (18,782) (206)— — (206)
Adjustments for tax withholding on share-based compensation— — (12,744) (235)— — (235)
Stock issuance costs— — — — (9)— — (9)
Net loss— — — — — — (98,479)(98,479)
Dividends on preferred stock— — — — — — (3,841)(3,841)
Dividends on common stock— — — — — — (10,330)(10,330)
Other comprehensive income— — — — — 72,972 — 72,972 
Balance as of March 31, 20207,248,330 $174,709 22,981,978 $230 $858,203 $246,778 $(729,313)$550,607 
Preferred StockCommon StockAdditional
Paid-in
Capital
AOCIAccumulated
Deficit
Total Shareholders’ Equity
SharesAmountSharesAmount
Balance as of
December 31, 2020
7,248,330 $174,564 23,697,970 $237 $869,495 $80,261 $(491,104)$633,453 
Stock issuance— — 7,187,500 72 128,078 — — 128,150 
Redemption of preferred stock(2,788,330)(66,721)— — — — (2,987)(69,708)
Restricted stock granted, net of amortization— — 16,722  451 — — 451 
Adjustments for tax withholding on share-based compensation— — (22,623) (428)— — (428)
Stock issuance costs— — — — (270)— — (270)
Net income— — — — — — 117,929 117,929 
3


Preferred StockCommon StockAdditional
Paid-in
Capital
AOCIAccumulated
Deficit
Total Shareholders’ Equity
SharesAmountSharesAmount
Dividends on preferred stock— — — — — — (2,559)(2,559)
Dividends on common stock— — — — — — (10,586)(10,586)
Other comprehensive income— — — — — (65,156)— (65,156)
Balance as of March 31, 20214,460,000 $107,843 30,879,569 $309 $997,326 $15,105 $(389,307)$731,276 
See notes to the consolidated financial statements.
4


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
($ in thousands)
Three Months Ended
 March 31,
 20212020
Operating activities:  
Net income (loss)$117,929 $(98,479)
Adjustments to reconcile net income (loss) to cash provided by operating activities: 
(Gain) loss on derivative instruments, net(107,801)195,567 
Gain on sale of investments, net(4,697)(84,783)
Loss on investments, net980 372 
Amortization of investment premiums, net30,161 33,118 
Other amortization and depreciation, net599 499 
Stock-based compensation expense452 307 
(Increase) decrease in accrued interest receivable(1,092)3,105 
Decrease in accrued interest payable(992)(5,979)
Change in other assets and liabilities, net(5,350)254 
Net cash provided by operating activities30,189 43,981 
Investing activities:  
Purchase of investments(68,543)(155,594)
Principal payments received on investments118,022 140,032 
Proceeds from sales of investments220,194 487,464 
Principal payments received on mortgage loans held for investment488 615 
Net receipts (payments) on derivatives, including terminations 52,079 (187,822)
Increase in cash collateral posted by counterparties76,095 3,185 
Net cash provided by investing activities398,335 287,880 
Financing activities:  
Borrowings under repurchase agreements4,494,067 16,555,552 
Repayments of repurchase agreement borrowings(4,899,141)(16,899,794)
Principal payments on non-recourse collateralized financing(118)(569)
Proceeds from issuance of preferred stock 107,988 
Proceeds from issuance of common stock128,150  
Cash paid for redemption of preferred stock(69,708)(100,000)
Cash paid for stock issuance costs(270) 
Cash paid for common stock repurchases (206)
Payments related to tax withholding for stock-based compensation(428)(235)
Dividends paid(13,320)(15,027)
Net cash used in financing activities(360,768)(352,291)
Net increase (decrease) in cash and cash posted to counterparties67,756 (20,430)
Cash and cash posted to counterparties at beginning of period310,360 136,230 
Cash and cash posted to counterparties at end of period$378,116 $115,800 
Supplemental Disclosure of Cash Activity:  
Cash paid for interest$2,619 $28,074 
See notes to the consolidated financial statements.
5


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

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Dynex Capital, Inc. (“Company”) was incorporated in the Commonwealth of Virginia on December 18, 1987 and commenced operations in February 1988. The Company is an internally managed mortgage real estate investment trust, or mortgage REIT, which primarily earns income from investing on a leveraged basis in debt securities, the majority of which are specified pools of Agency mortgage-backed securities (“MBS”) consisting of commercial MBS (“CMBS”), residential MBS (“RMBS”), and CMBS interest-only (“IO”) securities and non-Agency MBS, which consist mainly of CMBS IO. Agency MBS have a guaranty of principal payment 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. Non-Agency MBS are issued by non-governmental enterprises and do not have a guaranty of principal payment. The Company also invests in other types of mortgage-related securities, such as to-be-announced securities (“TBAs” or “TBA securities”).

Basis of Presentation

The accompanying unaudited consolidated financial statements of 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 March 31, 2021 are not necessarily indicative of the results that may be expected for any other interim periods or for the entire year ending December 31, 2021. 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, 2020 (the “2020 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. 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, 2021; however, the uncertainty over the impact that the COVID-19 pandemic may continue to have on the global economy and on the Company’s business makes any estimates and assumptions inherently less certain than they would be absent the current and potential impacts of COVID-19. The COVID-19 pandemic and resulting emergency measures have led (and may continue to lead) to significant disruptions in the global capital markets and supply chains as well as the economy of the U.S. and other countries impacted by COVID-19. In particular, as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by the U.S. Congress, which includes assistance to homeowners and renters, both Fannie Mae and Freddie Mac have implemented mortgage forbearance policies that allow borrowers to delay their mortgage payments for up to 18 months and placed a moratorium on foreclosures on single-family homes until June 30, 2021. The impact of high levels of forbearance on the Company’s MBS could range from immaterial to significant depending upon not only actual losses incurred on underlying loans but also future public policy choices and actions by the GSEs, their regulator the Federal Housing Finance Agency (“FHFA”), the U.S. Federal Reserve (“Federal Reserve”), and federal and state governments. The nature and timing of any such future public policy choices and actions are unpredictable, including the potential impact on MBS prices and prepayment speeds. Though these supportive actions have helped cushion the economic damage from the disruption of the
6


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

pandemic to date, the Company can give no assurance as to how, in the long term, these and other actions by the U.S. government and GSEs will affect the efficiency, liquidity and stability of the financial and mortgage markets.

Reclassifications

    Certain items on the Company’s consolidated balance sheet as of December 31, 2020 have been reclassified to conform to the current period’s presentation. In the Company’s 2020 Form 10-K, restricted cash on the consolidated balance sheet as of December 31, 2020 consisted of the cash collateral posted by the Company to its counterparties to cover initial and variation margin related to its financing and derivative instruments, net of any cash collateral received by the Company from its counterparties. Restricted cash has been renamed “cash collateral posted to counterparties” within total assets, and cash collateral of $7,681 posted by counterparties as of December 31, 2020 has been reclassified to “cash collateral posted by counterparties” within total liabilities.

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 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.

The Company consolidates a securitization trust, which has residential mortgage loans included in “mortgage loans held for investment” on its consolidated balance sheet, of which a portion is pledged as collateral for one remaining non-recourse collateralized bond classified within “other liabilities” on its consolidated balance sheet. The Company owns the subordinate class in the trust and has been deemed the 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 and the corresponding provisions of state law. To qualify as a REIT, the Company must meet certain tests including investing in primarily real estate-related assets and the required distribution of at least 90% of its annual REIT taxable income to shareholders after consideration of its net operating loss (“NOL”) carryforward and not including taxable income retained in its taxable subsidiaries. As a REIT, the Company generally will not be subject to federal income tax on the amount of its income or capital gains that is distributed as dividends to shareholders.

The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities 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 per common share by dividing net income to common shareholders for the period by weighted-average shares of common stock outstanding for that period. The Company did not have any potentially dilutive securities outstanding during the three months ended March 31, 2021 or March 31, 2020.

The Company currently has unvested service-based restricted stock issued and outstanding. Holders of unvested shares of restricted stock are eligible to receive non-forfeitable dividends. As such, unvested shares of restricted stock are considered participating securities and therefore are included in the computation of basic net income per common share using
7


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

the two-class method. Upon vesting, restrictions on transfer expire on each share of restricted stock, and each such share represents one unrestricted share of common stock.

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 Articles of Amendment to the Restated Articles of Incorporation (the “Restated Articles of Incorporation, as amended”), 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

Cash includes unrestricted demand deposits at highly rated financial institutions. The Company’s cash balances fluctuate throughout the year and may exceed Federal Deposit Insurance Company 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 initial and variation margin related to the Company’s financing and derivative instruments.

The following table provides a reconciliation of cash and cash posted to counterparties reported on the Company's consolidated balance sheet as of the period indicated 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, 2021:
March 31, 2021
Cash$328,936 
Cash collateral posted to counterparties49,180 
Total cash and cash posted to counterparties shown on consolidated statement of cash flows$378,116 

Mortgage-Backed Securities
 
The Company’s MBS are recorded at fair value on the Company’s consolidated balance sheet. 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 investment is sold or matures. Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of accumulated other comprehensive income (“AOCI”) into net income as a realized “gain (loss) on sale of investments, net” using the specific identification method. Effective January 1, 2021, the Company elected the fair value option for all MBS purchased on or after that date with changes in fair value reported in net income as “gain (loss) on investments, net”. Management is electing 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. Electing the fair value option is increasing as an industry trend for mortgage REITs who have not elected cash flow hedge accounting. “Gain (loss) on investments, net”, which was titled “fair value adjustments, net” in prior reporting periods, also includes changes in fair value for mortgage loans held for investment for which the Company elected the fair value option effective January 1, 2020.

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 interest-only, or “IO” securities) and their contractual terms. Premiums or discounts associated with the purchase of Agency MBS as well as any non-Agency MBS are amortized or accreted into interest income over the projected life of such securities using the effective yield method, and adjustments to premium amortization and discount accretion are made for actual cash payments. The Company’s projections of future cash payments are based on input and analysis received from external sources and internal models and include assumptions about the amount and timing of loan prepayment rates, fluctuations in interest rates, credit losses, and other factors. On at least a
8


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

quarterly basis, the Company reviews and makes any necessary adjustments to its cash flow projections and updates the yield recognized on these assets.

The Company does not currently hold any non-Agency MBS that were purchased at a discount with credit ratings of less than ‘AA’ or not rated by any of the nationally recognized credit rating agencies at the time of purchase.

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 5 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.

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

Derivative Instruments

As of March 31, 2021, the Company’s derivative instruments include U.S. Treasury futures, options on U.S. Treasury futures, options on interest rate swaps (“swaptions”) and TBA securities, which are forward contracts for the purchase or sale of Agency RMBS on a non-specified pool basis. Derivative instruments are reported at their fair value on the Company’s consolidated balance sheet as derivative assets if in a gain position or as derivative liabilities if in a loss position, at the end of the period reported. All periodic interest benefits/costs and changes in fair value of derivative instruments, including gains and losses realized upon termination, maturity, or settlement are recorded in “gain (loss) on derivative instruments, net” on the Company’s consolidated statement of comprehensive income (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 currently has short positions in U.S. Treasury futures contracts, which are valued based on exchange pricing with daily margin settlements. 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. Daily margin exchanges for the Company’s U.S. Treasury futures are not considered legal settlement of the instrument.

9


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

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. Options on U.S. Treasury futures are valued based on exchange pricing without daily exchanges of margin amounts. 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. The Company may also purchase swaptions and defer the premium payment until the effective date. The premium payable and underlying swaption are accounted for as a single unit of account.

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 not settle in the shortest time period possible.

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

Share-Based Compensation

Pursuant to the Company’s 2020 Stock and Incentive Plan (the “2020 Plan”), the Company may grant share-based compensation to eligible employees, non-employee directors or consultants or advisors to the Company, including restricted stock awards, stock options, stock appreciation rights, performance-based and service-based restricted stock units, and performance cash awards. Currently, the Company has shares of restricted stock issued and outstanding which are treated as equity awards and recorded at their fair value which is measured using the closing stock price on the date of the grant. The compensation cost is recognized over the vesting period with a corresponding credit to shareholders’ equity using the straight-line method. The Company does not estimate forfeiture rates, but adjusts for actual forfeitures in the periods in which they occur. The Company does not currently have any share-based compensation issued or outstanding other than restricted stock issued to its employees, officers, and directors.

Contingencies

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

As previously disclosed in the 2020 Form 10-K, the receiver (the “Receiver”) for one of the plaintiffs awarded damages in a judgment (the "DCI Judgment") against Dynex Commercial, Inc. ("DCI"), a subsidiary of a former affiliate of the Company, filed a separate claim in May 2018 against the Company seeking payment of the damages awarded in connection with the DCI Judgment, alleging that the Company breached a litigation cost sharing agreement, as amended (the "Agreement"), that was initially entered into by the Company and DCI in December 2000. On November 21, 2019, the U.S. District Court, Northern District of Texas ("Northern District Court") granted in part and denied in part summary judgment on the Receiver’s claim and the Company’s claim for offset and recoupment. The Northern District Court found that the Company breached the Agreement and therefore must pay damages to the Receiver. The Northern District Court simultaneously granted the Company’s motion for summary judgment finding that DCI also breached the Agreement and that the Company can recover amounts due to it from DCI under the Agreement. The Receiver subsequently filed a claim for damages with the Northern District Court of approximately $12,600, while the Company filed claims for damages ranging
10


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

from $13,300 to $30,600, including interest. The Receiver filed objections (the "Objections") with the Northern District Court to, among other things, the Company recovering amounts incurred prior to entry into the Agreement and amounts incurred under the Agreement after January 31, 2006, including interest, which is the date that DCI’s corporate existence ceased under Virginia law. The Company has disputed the Receiver’s Objections, arguing, among other things, that the Receiver's Objections are not supportable under Virginia law and has further refined its damages claim to range from $15,961 based on simple interest to $22,752 based on a combination of simple and compound interest, which the Company believes is supportable under Virginia law. There have been no material developments in this matter during the three months ended March 31, 2021. After consultation with litigation counsel, the Company believes, based upon information currently available and its evaluation of Virginia law, that the likelihood of loss is not probable, and given the range of potential claims for damages by the Company to offset the Receiver's claims, the amount of possible loss cannot be reasonably estimated, and therefore, no contingent liability has been recorded.

Recently Issued Accounting Pronouncements

The Company evaluates Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) 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 three months ended March 31, 2021 that are expected to have a material impact on the Company’s financial condition or results of operations.



NOTE 2 – MORTGAGE-BACKED SECURITIES
 
The following tables present the Company’s MBS by investment type as of the dates indicated:

March 31, 2021
Agency RMBSAgency CMBS
CMBS IO (1)
Non-Agency OtherTotal
MBS designated as AFS:
Par value$1,651,864 $234,091 $ $1,354 $1,887,309 
Unamortized premium (discount)55,118 2,975 352,655 (370)410,378 
Amortized cost1,706,982 237,066 352,655 984 2,297,687 
Gross unrealized gain13,646 12,551 14,200 202 40,599 
Gross unrealized loss(24,473) (979)(43)(25,495)
Fair value1,696,155 249,617 365,876 1,143 2,312,791 
MBS measured at fair value through net income:
Par value$67,692 $— $— $— $67,692 
Unamortized premium (discount)850 — — — 850 
Amortized cost68,542 — — — 68,542 
Gross unrealized gain — — —  
Gross unrealized loss(960)— — — (960)
Fair value67,582 — — — 67,582 
Total as of March 31, 2021
$1,763,737 $249,617 $365,876 $1,143 $2,380,373 
(1) The notional balance for Agency CMBS IO and non-Agency CMBS IO was $11,097,619 and $9,209,025 respectively, as of March 31, 2021.
11


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

December 31, 2020
Agency RMBSAgency CMBS
CMBS IO (1)
Non-Agency OtherTotal
MBS designated as AFS:
Par value$1,839,046 $235,801 $ $1,499 $2,076,346 
Unamortized premium (discount)57,997 3,152 378,940 (440)439,649 
Amortized cost1,897,043 238,953 378,940 1,059 2,515,995 
Gross unrealized gain49,348 19,597 12,081 267 81,293 
Gross unrealized loss  (982)(51)(1,033)
Fair value1,946,391 258,550 390,039 1,275 2,596,255 
MBS measured at fair value through net income:
Par value$— $— $— $— $— 
Unamortized premium (discount)— — — — — 
Amortized cost— — — — — 
Gross unrealized gain— — — — — 
Gross unrealized loss— — — — — 
Fair value— — — — — 
Total as of December 31, 2020$1,946,391 $258,550 $390,039 $1,275 $2,596,255 
(1) The notional balance for the Agency CMBS IO and non-Agency CMBS IO was $11,277,908 and $9,319,520, respectively, as of December 31, 2020.

The majority of the Company’s MBS are pledged as collateral for the Company’s repurchase agreements which are disclosed in Note 3. 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 the "gain on sale of investments, net" on the Company’s consolidated statements of comprehensive income (loss) for the periods indicated:
Three Months Ended
March 31,
20212020
Proceeds ReceivedRealized GainProceeds ReceivedRealized Gain
Agency RMBS-designated as AFS$74,829 $4,697 $1,817,350 $64,094 
Agency CMBS-designated as AFS  173,684 20,689 
$74,829 $4,697 $1,991,034 $84,783 

The following table presents certain information for the AFS securities in an unrealized loss position as of the dates indicated:
12


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

 March 31, 2021December 31, 2020
Fair ValueGross Unrealized Losses# of SecuritiesFair ValueGross Unrealized Losses# of Securities
Continuous unrealized loss position for less than 12 months:    
Agency MBS$1,446,354 $(25,019)32$19,266 $(399)19
Non-Agency MBS5,221 (111)533,417 (408)23
Continuous unrealized loss position for 12 months or longer:
Agency MBS$846 $(224)5$749 $(133)2
Non-Agency MBS5,029 (140)82,156 (93)5

The unrealized losses on the Company’s MBS were the result of declines in market prices and were not credit related; therefore the Company’s allowance for credit losses on its MBS designated as AFS was $0 as of March 31, 2021. The principal related to Agency MBS is guaranteed by the GSEs Fannie Mae and Freddie Mac. 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 in accordance with GAAP. 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.

NOTE 3 – REPURCHASE AGREEMENTS

The Company’s repurchase agreements outstanding as of March 31, 2021 and December 31, 2020 are summarized in the following tables:
 March 31, 2021December 31, 2020
Collateral TypeBalanceWeighted
Average Rate
Fair Value of
Collateral Pledged
BalanceWeighted
Average Rate
Fair Value of
Collateral Pledged
Agency RMBS$1,499,034 0.16 %$1,568,623 $1,874,176 0.23 %$1,973,608 
Agency CMBS234,228 0.16 %246,936 237,649 0.23 %255,741 
Agency CMBS IO191,882 0.78 %228,854 209,393 0.90 %243,042 
Non-Agency CMBS IO106,945 1.01 %128,920 115,945 1.28 %136,684 
Total repurchase agreements$2,032,089 0.26 %$2,173,333 $2,437,163 0.34 %$2,609,075 

The amounts for fair value of collateral pledged in the table above as of December 31, 2020 include securities with an amortized cost of $141,215 which were sold but not settled as of that date, and for which the proceeds of $150,432 are recorded within “receivable for sales pending settlement” on the consolidated balance sheet. These securities collateralized $140,612 of the Company’s repurchase agreement borrowings outstanding as of December 31, 2020. The Company also had $24,455 and $5 payable to counterparties as of March 31, 2021 and December 31, 2020, respectively, for purchases pending settlement as of those respective dates. The Company had repurchase agreement borrowings outstanding with 20 different counterparties as of March 31, 2021, and its equity at risk did not exceed 5% with any counterparty as of that date.

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:
13


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

March 31, 2021December 31, 2020
Remaining Term to MaturityBalanceWeighted
Average Rate
WAVG Original Term to MaturityBalanceWeighted
Average Rate
WAVG Original Term to Maturity
Less than 30 days$1,119,808 0.27 %24 $1,416,608 0.37 %53 
30 to 90 days753,223 0.28 %42 845,394 0.31 %35 
91 to 180 days159,058 0.17 %14 175,161 0.22 %13 
Total$2,032,089 0.26 %30 $2,437,163 0.34 %44 

The Company has one committed repurchase facility with Wells Fargo that has an aggregate maximum borrowing capacity of $250,000, of which it had $114,251 outstanding at a weighted average borrowing rate of 0.97% as of March 31, 2021. The maturity date for the facility is June 11, 2021. The Company is expecting to renew the facility as it has in prior periods and with similar terms. The remaining repurchase facilities available to the Company are uncommitted with no guarantee of renewal or terms of renewal.

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 and earnings, 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 March 31, 2021.

The Company's repurchase agreements 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 repurchase agreements to these arrangements on a gross basis. The following tables present information regarding the Company's repurchase agreements as if the Company had presented them on a net basis as of March 31, 2021 and December 31, 2020:
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, 2021
Repurchase agreements$2,032,089 $ $2,032,089 $(2,032,089)$ $ 
December 31, 2020
Repurchase agreements$2,437,163 $ $2,437,163 $(2,437,163)$ $ 
(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 4 for information related to the Company’s derivatives, which are also subject to underlying agreements with master netting or similar arrangements.


14


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

NOTE 4 – DERIVATIVES

Types and Uses of Derivatives Instruments

Interest Rate Derivatives. The Company is currently using short positions in U.S. Treasury futures, put options on U.S. Treasury futures, and interest rate swaptions to mitigate the impact of changing interest rates on its book value.

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 book value 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 not settle in the shortest period possible.

Gain (Loss) on Derivative Instruments, Net

The table below provides detail of the Company’s “gain (loss) on derivative instruments, net” by type of derivative for the periods indicated:
Three Months Ended
March 31,
Type of Derivative Instrument20212020
Interest rate swaps$ $(182,181)
Interest rate swaptions57,763 (573)
U.S. Treasury futures95,647 (8,447)
Options on U.S. Treasury futures12,617 (10,727)
TBA securities - long positions(58,226)18,432 
TBA securities - short positions (12,071)
Gain (loss) on derivative instruments, net$107,801 $(195,567)

The table below summarizes information about the carrying value by type of derivative instrument on the Company’s consolidated balance sheets as of the dates indicated:
15


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

Type of Derivative InstrumentBalance Sheet LocationPurposeMarch 31, 2021December 31, 2020
U.S. Treasury futuresDerivative assetsEconomic hedging$72,723 $— 
Options on U.S. Treasury futuresDerivative assetsEconomic hedging9,180 1,094 
Interest rate swaptionsDerivative assetsEconomic hedging27,843 1,360 
TBA securitiesDerivative assetsInvesting— 8,888 
Total derivatives assets$109,746 $11,342 
Interest rate swaptionsDerivative liabilitiesEconomic hedging$— $(107)
U.S. Treasury futuresDerivative liabilitiesEconomic hedging (1,527)
TBA securitiesDerivative liabilitiesInvesting(19,866)— 
Total derivatives liabilities$(19,866)$(1,634)

The following table provides details on the Company’s interest rate swaptions held as of the dates indicated:
OptionUnderlying Payer Swap
Average Months to ExpirationCostFair ValueNotional AmountAverage Fixed Pay RateAverage Term in Years
As of March 31, 2021:
6 months or less$2,963 $14,208 $250,000 1.12%10
6-9 months3,725 13,635 250,000 1.19%10
$6,688 $27,843 $500,000 1.16%
As of December 31, 2020:
6 months or less$6,312 $1,161 $750,000 1.02%10
6-9 months6,688 92 500,000 1.16%10
$13,000 $1,253 $1,250,000 1.07%

The following table provides details on the Company’s U.S. Treasury futures and options on U.S. Treasury futures held as of the dates indicated:
March 31, 2021December 31, 2020:
Notional Amount Long (Short)Fair ValueAverage Term to ExpirationNotional Amount Long (Short)Fair ValueAverage Term to Expiration
Options on U.S. Treasury futures$250,000 $9,180 2 months$500,000 $1,094 1 month
U.S. Treasury futures(2,980,000)72,723 3 months(825,000)(1,527)2 months


The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:
March 31, 2021December 31, 2020
Implied market value (1)
$2,825,937 $1,572,949 
Implied cost basis (2)
2,845,803 1,564,061 
Net carrying value (3)
$(19,866)$8,888 
(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the date indicated.
(2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as of the date indicated.
16


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

(3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets (liabilities)” and represents the difference between the implied market value and the implied cost basis of the TBA security as of the date indicated.

Volume of Activity

The tables below summarize changes in the Company’s derivative instruments for the three months ended March 31, 2021:
Type of Derivative InstrumentBeginning
Notional Amount-Long (Short)
AdditionsSettlements,
Terminations,
or Pair-Offs
Ending
Notional Amount-Long (Short)
Interest rate swaptions1,250,000  (750,000)500,000 
U.S. Treasury futures(825,000)(4,010,000)1,855,000 (2,980,000)
Options on U.S. Treasury futures500,000 1,500,000 (1,750,000)250,000 
TBA securities1,515,000 8,065,000 (6,780,000)2,800,000 

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