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Dynex Capital Inc. Reports Operating Results (10-Q)

November 09, 2010 | About:

Dynex Capital Inc. (NYSE:DX) filed Quarterly Report for the period ended 2010-09-30.

Dynex Capital Inc. has a market cap of $194.2 million; its shares were traded at around $10.69 with a P/E ratio of 8.6 and P/S ratio of 5.3. The dividend yield of Dynex Capital Inc. stocks is 9.4%.DX is in the portfolios of Jim Simons of Renaissance Technologies LLC.

Highlight of Business Operations:

The volatility experienced in the credit markets beginning in 2007 resulted in extraordinary and often coordinated measures by global central banks and governments to increase the liquidity in and provide stability to the credit markets. In response to these conditions and their negative effect on economic output, the Federal Reserve lowered the targeted Federal Funds rate (the rate at which U.S. banks may borrow from each other) from 4.25% at the beginning of 2008 to its current targeted rate of 0.25% and began purchasing Agency MBS and U.S.

In the first quarter of 2010, both Fannie Mae and Freddie Mac announced delinquent loan buyout programs pursuant to which loans delinquent more than 120 days would be purchased out of existing RMBS pools. Up to that point, Fannie Mae and Freddie Mac had not been actively purchasing delinquent loans from its RMBS pools. Freddie Mac completed its buy-outs in March 2010, and Fannie Mae began its buy-out activity in April and concluded it in July 2010. Delinquent loan buy-outs by Fannie Mae and Freddie Mac resulted in significant increases in prepayments on our Agency RMBS during the second and third quarters of 2010. Subsequent to the buy-out activity, prepayments on our Agency RMBS have declined considerably not only due to reduced buy-out activity, but also due in part to the inability of borrowers to refinance their mortgages. Our average constant prepayment rate, or CPR, for our Agency MBS during the third quarter of 2010 was 26.3% versus 33.9% during the second quarter of 2010. As of September 30, 2010, our monthly CPRs for September and October 2010 were 18.5% and 18.4%, respectively. These recent actual CPRs as well as our expectations of reduced future prepayment activity in our Agency RMBS (which is discussed below) reduced the rate at which we amortized our premiums for the third quarter of 2010 compared to the second quarter of 2010.

As of September 30, 2010, the weighted average coupon on the mortgage loans underlying our Agency RMBS was 4.79%. The 30-year fixed mortgage rate and the 5-year hybrid ARM mortgage rate were 4.32% and 3.52%, respectively, as published by Freddie Mac. Generally, this type of interest rate environment encourages the average borrower to refinance their mortgage loans at lower rates. However, in many cases, obstacles exist to refinancing, including but not limited to, the lack of borrower s equity in the underlying real estate and the lack of an acceptable level of income. These obstacles are currently contributing to the limited refinancing of loans in our Agency RMBS portfolio and are keeping prepayment speeds relatively low (except for the delinquent loan buyouts by Fannie Mae and Freddie Mac). If mortgage rates remain low and the obstacles to refinancing are removed either through changes in government or Agency policies, through house appreciation or other reasons, we may experience increased prepayments. As discussed above, increased prepayments may impact our net interest income by increasing the amortization expense on any investments which we own at premiums to their par balance.

Our net interest spread on our entire investment portfolio was 2.98% and 3.03% for the three and nine months ended September 30, 2010, respectively. Resets in hybrid ARM mortgage loans within our existing Agency MBS portfolio and lower effective yields on our newer Agency RMBS investments were offset by higher yields on our Agency and non-Agency CMBS compared to the three and nine months ended September 30, 2009. In addition, our overall net interest spread for the three months ended September 30, 2010 benefitted by approximately 10 basis points from reductions in premium amortization resulting from slower prepayments on Agency MBS. In general, new investment opportunities in the current interest rate environment have a lower effective yield than our existing investments.

As of September 30, 2010, approximately 99.2% and 77.9% of our Agency CMBS and Agency RMBS portfolios, respectively, are comprised of Fannie Mae securities, with the remainder being Freddie Mac securities. The following table presents our Agency MBS portfolio by type of interest rate as of September 30, 2010 and December 31, 2009:

The fair value as a percentage of par value of our Agency MBS increased to 106.2% as of September 30, 2010 from 104.2% as of December 31, 2009. As of September 30, 2010, our portfolio of Agency MBS included net unamortized premiums of $28.6 million, or 4.5% of the par value of the securities, compared to net unamortized premiums of $12.9 million, or 2.3% of the par value of the securities, as of December 31, 2009. The average quarterly prepayment rate realized on our Agency MBS portfolio was 26.3% for the third quarter of 2010 compared to 22.1% for the comparable period of 2009. Although the average quarterly prepayment rate increased during the

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Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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