2Q14 Form 10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
FORM 10-Q
  x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014
or
  o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-9819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia
52-1549373
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
4991 Lake Brook Drive, Suite 100, Glen Allen, Virginia
23060-9245
(Address of principal executive offices)
(Zip Code)
 
 
(804) 217-5800
(Registrant’s telephone number, including area code)
 
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           x           No           o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes           x           No           o

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

Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o

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

On August 5, 2014, the registrant had 54,731,849 shares outstanding of common stock, $0.01 par value, which is the registrant’s only class of common stock.



DYNEX CAPITAL, INC.
FORM 10-Q
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited)
 
 
 
 
 
 
Consolidated Statements of Shareholders' Equity for the six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited)
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2014 (unaudited) and June 30, 2013 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







i


PART I.
FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share data)
 
June 30, 2014
 
December 31, 2013
ASSETS
(unaudited)
 

Mortgage-backed securities (including pledged of $3,768,466 and
     $3,873,584, respectively)
$
3,949,965

 
$
4,018,161

Mortgage loans held for investment, net
52,564

 
55,423

Cash and cash equivalents
36,837

 
69,330

Restricted cash
30,747

 
13,385

Derivative assets
5,237

 
18,488

Principal receivable on investments
10,769

 
12,999

Accrued interest receivable
22,477

 
21,703

Other assets, net
7,322

 
7,648

Total assets
$
4,115,918

 
$
4,217,137

LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 

Liabilities:
 

 
 

Repurchase agreements
$
3,447,050

 
$
3,580,754

Payable for unsettled mortgage-backed securities
—

 
10,358

Non-recourse collateralized financing
12,073

 
12,914

Derivative liabilities
23,974

 
6,681

Accrued interest payable
1,770

 
2,548

Accrued dividends payable
15,620

 
16,601

Other liabilities
2,517

 
1,405

 Total liabilities
3,503,004

 
3,631,261


 
 
 
Shareholders’ equity:
 

 
 

Preferred stock, par value $.01 per share, 8.5% Series A Cumulative Redeemable; 8,000,000 shares authorized; 2,300,000 shares issued and outstanding ($57,500 aggregate liquidation preference)
55,407

 
55,407

Preferred stock, par value $.01 per share, 7.625% Series B Cumulative Redeemable; 7,000,000 shares authorized; 2,250,000 shares issued and outstanding($56,250 aggregate liquidation preference)
54,251

 
54,251

Common stock, par value $.01 per share, 200,000,000 shares
authorized; 54,729,087 and 54,310,484 shares issued and outstanding, respectively
547

 
543

Additional paid-in capital
762,502

 
761,550

Accumulated other comprehensive income (loss)
30,944

 
(33,816
)
Accumulated deficit
(290,737
)
 
(252,059
)
 Total shareholders' equity
612,914

 
585,876

Total liabilities and shareholders’ equity
$
4,115,918

 
$
4,217,137

See notes to unaudited consolidated financial statements.

1


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 (amounts in thousands except per share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
Mortgage-backed securities
$
26,995

 
$
32,968

 
$
53,897

 
$
65,007

Mortgage loans held for investment
723

 
922

 
1,462

 
1,865

 
27,718

 
33,890

 
55,359

 
66,872

Interest expense:
 
 
 
 
 
 
 
Repurchase agreements
6,548

 
11,165

 
14,159

 
21,383

Non-recourse collateralized financing
24

 
281

 
46

 
519

 
6,572

 
11,446

 
14,205

 
21,902

 

 
 
 
 
 
 
Net interest income
21,146

 
22,444

 
41,154

 
44,970

Provision for loan losses
—

 
—

 
—

 
(261
)
(Loss) gain on derivative instruments, net
(23,074
)
 
11,353

 
(36,496
)
 
11,336

(Loss) gain on sale of investments, net
(477
)
 
2,031

 
(3,784
)
 
3,422

Fair value adjustments, net
88

 
(600
)
 
119

 
(740
)
Other income, net
137

 
101

 
212

 
13

General and administrative expenses:
 
 
 
 
 
 
 
Compensation and benefits
(2,329
)
 
(2,308
)
 
(4,881
)
 
(4,666
)
Other general and administrative
(1,490
)
 
(1,487
)
 
(3,057
)
 
(2,938
)
Net (loss) income
(5,999
)
 
31,534

 
(6,733
)
 
51,136

Preferred stock dividends
(2,294
)
 
(2,092
)
 
(4,588
)
 
(3,313
)
Net (loss) income to common shareholders
$
(8,293
)
 
$
29,442

 
$
(11,321
)
 
$
47,823

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Change in fair value of available-for-sale investments
33,114

 
(115,263
)
 
57,080

 
(109,366
)
Reclassification adjustment for loss (gain) on sale of investments, net
477

 
(2,031
)
 
3,784

 
(3,422
)
Change in fair value of cash flow hedges
—

 
15,944

 
—

 
16,381

Reclassification adjustment for cash flow hedges (including de-designated hedges)
1,608

 
4,693

 
3,896

 
8,796

Total other comprehensive income (loss)
35,199

 
(96,657
)
 
64,760

 
(87,611
)
Comprehensive income (loss) to common shareholders
$
26,906

 
$
(67,215
)
 
$
53,439

 
$
(39,788
)
 
 
 
 
 
 
 
 
Weighted average common shares - basic and diluted
54,711

 
54,974

 
54,669

 
54,639

Net (loss) income per common share - basic and diluted
$
(0.15
)
 
$
0.54

 
$
(0.21
)
 
$
0.88

Dividends declared per common share
$
0.25

 
$
0.29

 
$
0.50

 
$
0.58

See notes to unaudited consolidated financial statements.

2


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(amounts in thousands)
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated Other
Comprehensive (Loss) Income
 
Accumulated
Deficit
 
Total
Balance as of
 December 31, 2013
$
109,658

 
$
543

 
$
761,550

 
$
(33,816
)
 
$
(252,059
)
 
$
585,876

Stock issuance
—

 
1

 
165

 
—

 
—

 
166

Granting and vesting of restricted stock
—

 
4

 
1,350

 
—

 
—

 
1,354

Amortization of stock issuance costs
—

 
—

 
(59
)
 
—

 
—

 
(59
)
Adjustments for tax withholding on share-based compensation
—

 
(1
)
 
(504
)
 
—

 
—

 
(505
)
Net loss
—

 
—

 
—

 
—

 
(6,733
)
 
(6,733
)
Dividends on preferred stock
—

 
—

 
—

 
—

 
(4,588
)
 
(4,588
)
Dividends on common stock
—

 
—

 
—

 
—

 
(27,357
)
 
(27,357
)
Other comprehensive income
—

 
—

 
—

 
64,760

 
—

 
64,760

Balance as of June 30, 2014
$
109,658

 
$
547

 
$
762,502

 
$
30,944

 
$
(290,737
)
 
$
612,914


 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Balance as of
 December 31, 2012
$
55,407

 
$
543

 
$
759,214

 
$
52,511

 
$
(250,965
)
 
$
616,710

Stock issuance
54,251

 
7

 
7,466

 
—

 
—

 
61,724

Granting and vesting of restricted stock
—

 
3

 
1,096

 
—

 
—

 
1,099

Amortization of stock issuance costs
—

 
—

 
(59
)
 
—

 
—

 
(59
)
Adjustments for tax withholding on share-based compensation
—

 
(1
)
 
(545
)
 
—

 
—

 
(546
)
Net income
—

 
—

 
—

 
—

 
51,136

 
51,136

Dividends on preferred stock
—

 
—

 
—

 
—

 
(3,313
)
 
(3,313
)
Dividends on common stock
—

 
—

 
—

 
—

 
(31,903
)
 
(31,903
)
Other comprehensive (loss)
—

 
—

 
—

 
(87,611
)
 
—

 
(87,611
)
Balance as of June 30, 2013
$
109,658

 
$
552

 
$
767,172

 
$
(35,100
)
 
$
(235,045
)
 
$
607,237

See notes to the unaudited consolidated financial statements.

3


DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(amounts in thousands)
 
Six Months Ended
 
June 30,
 
2014
 
2013
Operating activities:
 
 
 
Net (loss) income
$
(6,733
)
 
$
51,136

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

 
 

Increase in accrued interest receivable
(774
)
 
(1,231
)
Decrease in accrued interest payable
(778
)
 
(1,234
)
Provision for loan losses
—

 
261

Loss (gain) on derivative instruments, net
36,496

 
(11,336
)
Loss (gain) on sale of investments, net
3,784

 
(3,422
)
Fair value adjustments, net
(119
)
 
740

Amortization and depreciation
71,705

 
66,751

Stock-based compensation expense
1,355

 
1,106

Other operating activities
598

 
(782
)
Net cash and cash equivalents provided by operating activities
105,534

 
101,989

Investing activities:
 

 
 

Purchase of investments
(298,699
)
 
(1,310,794
)
Principal payments received on investments
253,263

 
481,072

Proceeds from sales of investments
95,932

 
164,916

Principal payments received on mortgage loans held for investment, net
2,889

 
8,495

Net payments on derivatives not designated as hedges
(5,951
)
 
(436
)
Other investing activities
(5
)
 
142

Net cash and cash equivalents provided by (used in) investing activities
47,429

 
(656,605
)
Financing activities:
 

 
 

(Repayments of) borrowings under repurchase agreements, net
(133,912
)
 
507,056

Principal payments on non-recourse collateralized financing
(858
)
 
(5,940
)
Increase in restricted cash
(17,362
)
 
—

Proceeds from issuance of preferred stock
—

 
54,251

Proceeds from issuance of common stock, net of issuance costs
107

 
7,412

Payments related to tax withholding for share-based compensation
(505
)
 
(545
)
Dividends paid
(32,926
)
 
(34,084
)
Net cash and cash equivalents (used in) provided by financing activities
(185,456
)
 
528,150

 
 
 
 
Net decrease in cash and cash equivalents
(32,493
)
 
(26,466
)
Cash and cash equivalents at beginning of period
69,330

 
55,809

Cash and cash equivalents at end of period
$
36,837

 
$
29,343

Supplemental Disclosure of Cash Activity:
 

 
 

Cash paid for interest
$
10,861

 
$
22,065

See notes to unaudited consolidated financial statements.

4


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

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Dynex Capital, Inc., ("Company”) was incorporated in the Commonwealth of Virginia on December 18, 1987 and commenced operations in February 1988. The Company primarily earns income from investing on a leveraged basis in mortgage-backed securities ("MBS") that are issued or guaranteed by the U.S. Government or U.S. Government sponsored agencies ("Agency MBS") and MBS issued by others ("non-Agency MBS").

Basis of Presentation

The accompanying consolidated financial statements of Dynex Capital, Inc. and its qualified real estate investment trust (“REIT”) subsidiaries and its taxable REIT subsidiary (together, “Dynex” or the “Company”) have been prepared in accordance 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 accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. The financial information included herein is unaudited; however, in the opinion of management, all significant adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the consolidated financial statements, have been included. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for any other interim periods or for the entire year ending December 31, 2014. 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, 2013 filed with the SEC.

Reclassifications

Certain items in the prior periods' consolidated financial statements have been reclassified to conform to the current year’s presentation. The Company's consolidated balance sheet as of December 31, 2013 now presents its "securitized mortgage loans, net" and "other investments, net" together as "mortgage loans held for investment, net". In addition, the Company has combined the presentation of its consolidated statements of income and its consolidated statements of other comprehensive income together as one financial statement which is now titled "consolidated statements of comprehensive income". The Company's "interest income - securitized mortgage loans" and "interest income-other investments" on its consolidated statement of income for the three and six months ended June 30, 2013 is now presented together as "interest income-mortgage loans held for investment" on its consolidated statement of comprehensive income for the three and six months ended June 30, 2013. In addition, changes in fair value and other activity related to the Company's derivative instruments have been reclassified from "fair value adjustments, net" to "gain (loss) on derivative instruments, net", and the respective amounts on the Company's consolidated statement of cash flows for the six months ended June 30, 2013 have been changed to reflect this reclassification. These presentation changes have no effect on reported total assets, total liabilities, results of operations, or cash flow activities.

Consolidation
 
The consolidated financial statements include the accounts of the Company, its qualified REIT subsidiaries and its taxable REIT subsidiary. The consolidated financial statements represent the Company’s accounts after the elimination of intercompany balances and transactions. The Company consolidates entities in which it owns more than 50% of the voting equity and control does not rest with others and variable interest entities in which it is determined to be the primary beneficiary in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 810-10. The Company follows the equity method of accounting for investments in which it owns greater than a 20% and less than 50% interest in partnerships and corporate joint ventures or when it is able to influence the financial and operating policies of the investee but owns less than 50% of the voting equity. The Company did not have any investments in which it owned less than a 50% interest in the voting equity as of June 30, 2014 or December 31, 2013.


5


In accordance with ASC Topic 810-10, the Company also consolidates certain trusts through which it has securitized mortgage loans held for investment. Additional information regarding the accounting policy for its securitized mortgage loans is provided below under "Mortgage Loans Held for Investment, Net".

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, fair value measurements of its investments, other-than-temporary impairments, contingencies, and amortization of premiums and discounts. These items are discussed further below within this note to the consolidated financial statements.

Income Taxes
 
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986 and the corresponding provisions of state law. To qualify as a REIT, the Company must meet certain tests including investing in primarily real estate-related assets and the required distribution of at least 90% of its annual REIT taxable income to stockholders after consideration of its net operating loss 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 gain that is distributed as dividends to shareholders.
The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities in accordance with ASC Topic 740. The Company records these liabilities, if any, to the extent they are deemed more likely than not to have been incurred.

Mortgage-Backed Securities
 
In accordance with ASC Topic 320, the Company has designated its investments in MBS as available-for-sale ("AFS"). All of the Company’s MBS are recorded at their fair value on its consolidated balance sheet. Changes in fair value for the Company's AFS securities are reported in other comprehensive income ("OCI") until the security is collected, disposed of, or determined to be other than temporarily impaired. Although the Company generally intends to hold its AFS securities until maturity, it may, from time to time, sell any of these securities as part of the overall management of its business. Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of accumulated other comprehensive income ("AOCI") into net income as a realized "gain (loss) on sale of investments, net" using the specific identification method.

The Company’s MBS pledged as collateral against repurchase agreements and derivative instruments are included in MBS on the consolidated balance sheets with the fair value of the MBS pledged disclosed parenthetically.

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 and discounts on Agency MBS as well as any non-Agency MBS rated 'AA' and higher at the time of purchase are amortized into interest income over the expected life of such securities using the effective yield method and adjustments to premium amortization are made for actual cash payments as well as changes in projected future cash payments in accordance with ASC Topic 310-20. The Company's projections of future cash payments are based on input and analysis received from external sources and internal models, and includes assumptions about the amount and timing of credit losses, loan prepayment rates, fluctuations in interest rates, and other factors. On at least a quarterly basis, the Company reviews and makes any necessary adjustments to its cash flow projections and updates the yield recognized on these assets.

The Company has non-Agency MBS that were rated less than 'AA' at the time of purchase by at least one national rating agency at discounts to their par value, and management does not believe these discounts to be substantial. The Company accretes the discount into income over the security's expected life, which reflects management's estimate of the security's projected cash flows in accordance with ASC Topic 325-40. Future changes in the timing of projected cash flows or differences arising between projected cash flows and actual cash flows received may result in a prospective change in the effective yield on those securities.


6


The accrual of interest on MBS is discontinued when, in the opinion of management, it is probable that all amounts contractually due will not be collected, and in certain instances, as a result of an other-than-temporary impairment analysis (see discussion below). All interest accrued but not collected for investments that are placed on a non-accrual status or are charged-off is reversed against interest income. Interest on these investments is accounted for on the cash-basis or cost-recovery method until the affected investment or investments qualify for return to accrual status. Investments are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Determination of MBS Fair Value. In accordance with ASC Topic 820, the Company determines the fair value for the majority of its MBS based upon prices obtained from third-party pricing services and broker quotes. The remainder of the Company's MBS are valued by discounting the estimated future cash flows derived from cash flow models that utilize information such as the security's coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected losses, and credit enhancements as well as certain other relevant information. The Company's application of ASC Topic 820 guidance is discussed further in Note 7.

Other-than-Temporary Impairment. The Company evaluates all MBS in its investment portfolio for other-than-temporary impairments ("OTTI") by comparing the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. If there has been a significant adverse change in the cash flow expectations for a security resulting in its amortized cost becoming greater than the present value of its expected future cash flows, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and is not more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in other comprehensive income (loss). If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.

In periods after the recognition of an OTTI loss for MBS, the Company accounts for the other-than-temporarily impaired MBS as if the debt security had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For MBS for which OTTIs were recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted into interest income using the effective interest method. The Company continues to estimate the present value of cash flows expected to be collected over the life of the MBS. If upon subsequent evaluation, there is an increase in the cash flows expected to be collected or if actual cash flows are greater than cash flows previously expected, such changes will be accounted for as a prospective adjustment to the accretable yield in accordance with ASC Topic 310-30 even if the MBS would not otherwise be within the scope of that guidance. Please see Note 3 for additional information related to the Company's evaluation for OTTI.

Mortgage Loans Held for Investment, Net

Mortgage loans held for investment, net consist of mortgage loans originated or purchased by the Company from 1992-1998, and these mortgage loans are reported at amortized cost in accordance with ASC Topic 310-10. Substantially all of these loans have been pledged as collateral to support the repayment of securitization financing bonds issued by the Company. The associated securitization financing bonds are treated as debt of the Company and are presented as "non-recourse collateralized financing" on the consolidated balance sheet. Securitized mortgage loans can only be sold subject to the lien of the respective securitization financing indenture. An allowance has been established for currently existing and probable losses on all of the Company's mortgage loans held for investment.

Repurchase Agreements
 
Repurchase agreements are accounted for as secured borrowings under which the Company pledges its securities as collateral to secure a loan, which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew the agreement at the then prevailing financing rate. A repurchase agreement lender may require the Company to pledge additional collateral in the event of a decline in the fair value of the collateral pledged. Repurchase agreement financing is recourse to the Company and the assets pledged. Most of the Company’s repurchase agreements are based on the September 1996 version of the Bond Market Association Master Repurchase Agreement, which generally provides that the lender,

7


as buyer, is responsible for obtaining collateral valuations from a generally recognized source agreed to by both the Company and the lender, or, in an instance when such source is not available, the value determination is made by the lender.

Derivative Instruments

The Company accounts for its derivative instruments, which currently include interest rate swaps and Eurodollar futures, in accordance with ASC Topic 815, which requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. Gains and losses associated with derivative instruments are recorded in "(loss) gain on derivative instruments, net" in our consolidated statement of comprehensive income.

Effective June 30, 2013, the Company discontinued cash flow hedge accounting for derivative instruments which had previously been accounted for as cash flow hedges under ASC Topic 815. Activity up to and including June 30, 2013 for those agreements previously designated as cash flow hedges was recorded in accordance with cash flow hedge accounting as prescribed by ASC Topic 815, which states that the effective portion of the hedge relationship on an instrument designated as a cash flow hedge is reported in the current period's other comprehensive income while the ineffective portion is immediately reported as a component of the current period’s net income. The balance remaining in AOCI related to the de-designated cash flow hedges is amortized into the Company's net income as a portion of "interest expense" over the remaining life of the interest rate swap agreements. Subsequent to June 30, 2013, changes in the fair value of the Company's derivative instruments, plus periodic settlements, are recorded in the Company's net income as a portion of "(loss) gain on derivative instruments, net".

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We attempt to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

Although MBS have characteristics that meet the definition of a derivative instrument, ASC 815 specifically excludes these instruments from its scope because they are accounted for as debt securities under ASC 320.

Share-Based Compensation

Pursuant to the Company’s 2009 Stock and Incentive Plan ("SIP"), the Company may grant share-based compensation to eligible employees, directors or consultants or advisers to the Company, including stock awards, stock options, stock appreciation rights, dividend equivalent rights, performance shares, and restricted stock units. The Company's restricted stock currently issued and outstanding under this plan may be settled only in shares of its common stock, and therefore are treated as equity awards with their fair value measured at the grant date and recognized as compensation cost over a requisite service period with a corresponding credit to shareholders' equity as required by ASC Topic 718. The requisite service period is the period during which an employee is required to provide service in exchange for an award, which is equivalent to the vesting period specified in the terms of the share-based based award. None of the Company's restricted stock awards have performance based conditions. The Company does not currently have any share-based compensation issued or outstanding other than restricted stock.
 
Contingencies
 
In the normal course of business, there are 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 in accordance with ASC Topic 450, which states that a liability is recognized 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.

The Company and its subsidiaries are parties to various legal proceedings of which the ultimate outcome cannot be ascertained at this time. Although the results of those legal proceedings cannot be predicted with certainty, the Company believes,

8


based on current knowledge, that the resolution of any of these proceedings will not have a material effect on the Company’s consolidated financial condition or liquidity. However, the resolution of any of those proceedings could have a material impact on consolidated results of operations or cash flows in a given future reporting period as the proceedings are resolved.

The Company has not been named as a party to any additional legal proceedings during the three or six months ended June 30, 2014.

Recent Accounting Pronouncements

In June 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. All of the Company's repurchase agreement transactions are accounted for as secured borrowings, therefore the accounting changes required by ASU 2014-11 do not impact the Company's consolidated financial statements. ASU 2014-11 also requires two additional disclosures about repurchase agreements and other similar transactions. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The Company does not account for any of its repurchase agreement transactions as sales, therefore this new disclosure does not impact the Company's current disclosures. The second disclosure requires the following disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings: a disaggregation of the gross obligation by the class of collateral pledged; the remaining contractual tenor of the agreements; and a discussion of the potential risks associated with the agreements and the related collateral pledged, including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed. The Company already provides these disclosures in its "Notes to the Unaudited Consolidated Financial Statements" and within "Liquidity and Capital Resources" in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Quarterly Report on Form 10-Q. The amendments provided in ASU 2014-11 are effective for public business entities for the first interim or annual period beginning after December 15, 2014. ASU 2014-11 will not have a material impact on the Company's consolidated financial statements.

In addition, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company has not issued and is not anticipating to issue any share-based payments with terms that require a performance-based target, therefore this ASU will not have an impact on the Company's consolidated financial statements.


NOTE 2 – NET (LOSS) INCOME PER COMMON SHARE
 
Net (loss) income per common share is presented on both a basic and diluted basis.  Because the Company's Series A Cumulative Redeemable Preferred Stock and Series B Cumulative Redeemable Preferred Stock are redeemable at the Company's option for cash only, and may convert into shares of common stock only upon a change of control of the Company, the effect of those shares is excluded from the calculation of diluted net (loss) income per common share. Holders of unvested shares of our issued and outstanding restricted common stock are eligible to receive non-forfeitable dividends. As such, these unvested shares are considered participating securities as per ASC 260-10 and therefore are included in the computation of basic net (loss) income per share using the two-class method. Upon vesting, restrictions on transfer expire on each share of restricted stock, and each such share of restricted is converted to one equal share of common stock.

The following table presents the calculation of the numerator and denominator for both basic and diluted net (loss) income per common share for the periods indicated:

9


 
For the Three Months Ended
 
June 30, 2014
 
June 30, 2013
 
Net 
Income
 
Weighted-Average Common Shares
 
Net 
Income
 
Weighted-
Average
Common
Shares
Net (loss) income
$
(5,999
)
 
 
 
$
31,534

 
 
Preferred stock dividends
(2,294
)
 
 
 
(2,092
)
 
 
Net (loss) income to common shareholders
(8,293
)
 
54,711,108

 
29,442

 
54,973,561

Effect of dilutive instruments (1)
—

 
—

 
—

 
—

Diluted net (loss) income to common shareholders
$
(8,293
)
 
54,711,108

 
$
29,442

 
54,973,561

Net (loss) income per common share:
 
 
 
 
 
 
 
Basic and diluted
 

 
$
(0.15
)
 
 

 
$
0.54

 
For the Six Months Ended
 
June 30, 2014
 
June 30, 2013
 
Net 
Income
 
Weighted-Average Common Shares
 
Net 
Income
 
Weighted-
Average
Common
Shares
Net (loss) income
$
(6,733
)
 
 
 
$
51,136

 
 
Preferred stock dividends
(4,588
)
 
 
 
(3,313
)
 
 
Net (loss) income to common shareholders
(11,321
)
 
54,668,591

 
47,823

 
54,638,651

Effect of dilutive instruments (1)
—

 
—

 
—

 
—

Diluted net (loss) income to common shareholders
$
(11,321
)
 
54,668,591

 
$
47,823

 
54,638,651

Net (loss) income per common share:
 
 
 
 
 
 
 
Basic and diluted
 

 
$
(0.21
)
 
 

 
$
0.88

(1) The Company did not have any anti-dilutive securities outstanding during the three and six months ended June 30, 2014 or June 30, 2013.


NOTE 3 – MORTGAGE-BACKED SECURITIES
 
The following tables presents the components and weighted average coupon ("WAC") for the portion of the Company’s MBS designated as AFS as of June 30, 2014 and December 31, 2013:

10


 
June 30, 2014
 
Par
 
Net Premium (Discount)
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
WAC
Agency:
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
$
2,360,799

 
$
132,342

 
$
2,493,141

 
$
7,657

 
$
(33,257
)
 
$
2,467,541

 
3.16
%
CMBS
309,235

 
20,178

 
329,413

 
15,892

 
(109
)
 
345,196

 
5.23
%
CMBS IO (1)
—

 
432,588

 
432,588

 
15,055

 
(143
)
 
447,500

 
0.88
%
Total Agency AFS:
2,670,034

 
585,108

 
3,255,142

 
38,604

 
(33,509
)
 
3,260,237

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency:
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
13,482

 
(6
)
 
13,476

 
198

 
(81
)
 
13,593

 
4.48
%
CMBS
391,332

 
(17,190
)
 
374,142

 
27,166

 
—

 
401,308

 
4.96
%
CMBS IO (1)
—

 
268,972

 
268,972

 
6,361

 
(506
)
 
274,827

 
0.70
%
Total non-Agency AFS:
404,814

 
251,776

 
656,590

 
33,725

 
(587
)
 
689,728

 


 
 
 
 
 
 
 
 
 
 
 
 
 


Total AFS securities
$
3,074,848

 
$
836,884

 
$
3,911,732

 
$
72,329

 
$
(34,096
)
 
$
3,949,965

 
 
(1)
The notional balance for Agency CMBS IO and non-Agency CMBS IO was $9,703,887 and $6,958,238, respectively, as of June 30, 2014.

 
December 31, 2013
 
Par
 
Net Premium (Discount)
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
 
WAC
Agency:
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
$
2,591,568

 
$
154,220

 
$
2,745,788

 
$
6,104

 
$
(59,742
)
 
$
2,692,150

 
3.22
%
CMBS
273,830

 
19,061

 
292,891

 
10,793

 
(900
)
 
302,784

 
5.07
%
CMBS IO (1)
—

 
453,766

 
453,766

 
9,895

 
(3,334
)
 
460,327

 
0.83
%
Total Agency AFS:
2,865,398

 
627,047

 
3,492,445

 
26,792

 
(63,976
)
 
3,455,261

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency:
 
 
 
 
 
 
 
 
 
 
 
 
 
RMBS
13,845

 
(338
)
 
13,507

 
338

 
(80
)
 
13,765

 
4.61
%
CMBS
375,703

 
(18,277
)
 
357,426

 
15,366

 
(3,511
)
 
369,281

 
5.10
%
CMBS IO (1)
—

 
150,518

 
150,518

 
2,618

 
(1,999
)
 
151,137

 
0.66
%
Total non-Agency AFS:
389,548

 
131,903

 
521,451

 
18,322

 
(5,590
)
 
534,183

 


 
 
 
 
 
 
 
 
 
 
 
 
 


Total AFS securities
$
3,254,946

 
$
758,950

 
$
4,013,896

 
$
45,114

 
$
(69,566
)
 
$
3,989,444

 
 
(1)
As of December 31, 2013, the Company had Agency CMBS with an amortized cost of $26,920 and fair value of $28,717 which were designated as trading securities and are not included in this table. The Company changed the designation of these Agency CMBS to AFS during the three months ended June 30, 2014. Changes in the fair value of these MBS while they were designated as trading are recognized in net income within "fair value adjustments, net". Future changes in the fair value of these MBS which are now designated as AFS will be recognized in "other comprehensive income". As of June 30, 2014, the Company does not have any MBS designated as trading.
(2)
The notional balance for the Agency CMBS IO and non-Agency CMBS IO was $10,160,502 and $4,274,957, respectively, as of December 31, 2013.

The following table presents certain information for those Agency MBS in an unrealized loss position as of June 30, 2014 and December 31, 2013:

11


 
June 30, 2014
 
December 31, 2013
 
Fair Value
 
Gross Unrealized Losses
 
# of Securities
 
Fair Value
 
Gross Unrealized Losses
 
# of Securities
Continuous unrealized loss position for less than 12 months:
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
95,177

 
$
(741
)
 
18
 
$
1,912,937

 
$
(43,543
)
 
150
Non-Agency MBS
11,711

 
(73
)
 
2
 
162,558

 
(5,435
)
 
39
 
 
 
 
 
 
 
 
 
 
 
 
Continuous unrealized loss position for 12 months or longer:
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
$
1,905,306

 
$
(32,768
)
 
151
 
$
670,402

 
$
(20,433
)
 
67
Non-Agency MBS
27,008

 
(514
)
 
8
 
6,310

 
(155
)
 
6

Because the principal and interest related to Agency MBS are guaranteed by the government-sponsored entities Fannie Mae and Freddie Mac who have the implicit guarantee of the U.S. government, the Company does not consider any of the unrealized losses on its Agency MBS to be credit related. Although the unrealized losses are not credit related, the Company assesses its ability and intent to hold any Agency 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 current leverage and anticipated liquidity.  Based on this analysis, the Company has determined that the unrealized losses on its Agency MBS as of June 30, 2014 and December 31, 2013 were temporary.

The Company also reviews any non-Agency MBS in an unrealized loss position to evaluate whether any decline in fair value represents an OTTI. The evaluation includes a review of the credit ratings of these non-Agency MBS and the seasoning of the mortgage loans collateralizing these securities as well as the estimated future cash flows which include projected losses. The Company performed this evaluation for the non-Agency MBS in an unrealized loss position and has determined that there have not been any adverse changes in the timing or amount of estimated future cash flows that necessitate a recognition of OTTI amounts as of June 30, 2014 or December 31, 2013.

NOTE 4 – REPURCHASE AGREEMENTS
    
The following tables present the components of the Company’s repurchase agreements as of June 30, 2014 and December 31, 2013 by the fair value and type of securities pledged as collateral:
 
 
June 30, 2014
Collateral Type
 
Balance
 
Weighted
Average Rate
 
Fair Value of
Collateral Pledged
Agency RMBS
 
$
2,242,441

 
0.33
%
 
2,332,716

Agency CMBS
 
262,822

 
0.35
%
 
316,139

Agency CMBS IOs
 
377,554

 
0.97
%
 
447,501

Non-Agency RMBS
 
10,279

 
1.65
%
 
12,735

Non-Agency CMBS
 
321,769

 
1.18
%
 
391,437

Non-Agency CMBS IO
 
216,644

 
1.10
%
 
265,278

Securitization financing bonds
 
15,576

 
1.50
%
 
17,775

Deferred costs
 
(35
)
 
n/a

 
n/a

 
 
$
3,447,050

 
0.54
%
 
$
3,783,581



12


 
 
December 31, 2013
Collateral Type
 
Balance
 
Weighted
Average Rate
 
Fair Value of Collateral Pledged
Agency RMBS
 
$
2,522,503

 
0.42
%
 
2,598,158

Agency CMBS
 
246,849

 
0.39
%
 
306,318

Agency CMBS IOs
 
369,948

 
1.16
%
 
449,072

Non-Agency RMBS
 
10,569

 
1.80
%
 
12,746

Non-Agency CMBS
 
303,674

 
1.27
%
 
367,859

Non-Agency CMBS IOs
 
106,803

 
1.27
%
 
136,227

Securitization financing bonds
 
20,651

 
1.59
%
 
19,686

Deferred costs
 
(243
)
 
n/a

 
n/a

 
 
$
3,580,754

 
0.61
%
 
$
3,890,066


The combined weighted average original term to maturity for the Company’s repurchase agreements decreased to 70 days as of June 30, 2014 from 114 days as of December 31, 2013. The following table provides a summary of the original maturities as of June 30, 2014 and December 31, 2013:

Original Maturity
 
June 30,
2014
 
December 31,
2013
30 days or less
 
$
362,588

 
$
206,112

31 to 60 days
 
797,617

 
492,145

61 to 90 days
 
1,208,340

 
665,020

91 to 120 days
 
921,603

 
783,371

121 to 190 days
 
156,937

 
1,434,349

Deferred costs
 
(35
)
 
(243
)
 
 
$
3,447,050

 
$
3,580,754


As of June 30, 2014, shareholders' equity at risk did not exceed 10% for any of the Company's counterparties. The Company had $27,888 of its repurchase agreement balance as of June 30, 2014 outstanding under a two-year repurchase facility with Wells Fargo Bank National Association. This facility provides an aggregate maximum borrowing capacity of $250,000 and matures on August 6, 2015, subject to early termination provisions contained in the master repurchase agreement. The facility is collateralized primarily by CMBS IO, and its weighted average borrowing rate as of June 30, 2014 was 1.46%.

As of June 30, 2014, the Company had repurchase agreement amounts outstanding with 23 of its 32 available counterparties. The Company's counterparties, as set forth in the master repurchase agreement with the counterparty, require the Company to comply with various customary operating and financial covenants, including, but not limited to, minimum net worth, maximum declines in net worth in a given period, and maximum leverage requirements as well as maintaining the Company's REIT status.  In addition, some of the agreements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that the Company fails to comply with the covenants contained in these financing agreements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the master repurchase agreement. The Company was in compliance with all covenants as of June 30, 2014.


13


NOTE 5 – DERIVATIVES

     The Company utilizes derivative instruments to economically hedge a portion of its exposure to market risks, primarily interest rate risk. The principal instruments used to hedge these risks are interest rate swaps and Eurodollar futures. The objective of the Company's risk management strategy is to mitigate declines in book value resulting from fluctuations in the fair value of the Company's assets from changing interest rates and to protect the Company's earnings from rising interest rates. The Company seeks to limit its exposure to changes in interest rates but does not seek to eliminate this risk. Please refer to Note 1 for information related to the Company's accounting policy for its derivative instruments.
    
The table below summarizes information about the Company’s derivative instruments on its consolidated balance sheet as of the dates indicated:  
 
 
 
 
 
 
June 30, 2014
 
December 31, 2013
Type of Derivative Instrument
 
Accounting Designation
 
Balance Sheet Location:
 
Fair Value
 
Aggregate Notional Amount
 
Fair Value
 
Aggregate Notional Amount
Interest rate swaps
 
Non-hedging
 
Derivative assets
 
$
5,237

 
$
290,000

 
$
18,488

 
$
575,000

 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
Non-hedging
 
 
 
$
(2,835
)
 
$
410,000

 
$
(1,336
)
 
$
215,000

Eurodollar futures (1)
 
Non-hedging
 
 
 
(21,139
)
 
11,400,000

 
(5,345
)
 
9,000,000

 
 
 
 
Derivative liabilities
 
$
(23,974
)
 
$
11,810,000

 
$
(6,681
)
 
$
9,215,000

(1)
The Eurodollar futures aggregate notional amount represents the total notional of the 3-month contracts with expiration dates from 2016 to 2020. The maximum notional outstanding for any future 3-month period did not exceed $1,275,000 as of June 30, 2014 and $1,175,000 as of December 31, 2013.

During the six months ended June 30, 2014, the Company added Eurodollar futures with a total notional of $2,400,000 and interest rate swaps with a total notional of $75,000. The Company also terminated a total notional of $165,000 in interest rate swaps. There were no interest rate swaps or Eurodollar futures that expired during the six months ended June 30, 2014. The following table summarizes the contractual maturities remaining for the Company’s outstanding interest rate swap agreements as of June 30, 2014:
Remaining
Maturity
 
Notional Amount
 
Weighted-Average
Fixed Rate Swapped
37-48 months
 
185,000

 
0.92
%
49-60 months
 
235,000

 
1.45
%
61-72 months
 
25,000

 
1.61
%
73-84 months
 
75,000

 
2.24
%
85-108 months
 
30,000

 
1.93
%
109-127 months
 
150,000

 
2.17
%
 
 
$
700,000

 
1.57
%

The table below provides detail of the Company's "(loss) gain on derivative instruments, net" by type of interest rate derivative for the periods indicated:

14


 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Type of Derivative Instrument
 
2014
 
2013
 
2014
 
2013
Interest rate swaps
 
$
(11,694
)
 
$
11,353

 
$
(20,702
)
 
$
11,336

Eurodollar futures
 
(11,380
)
 
—

 
(15,794
)
 
—

(Loss) gain on derivative instruments, net
 
$
(23,074
)
 
$
11,353

 
$
(36,496
)
 
$
11,336


Effective June 30, 2013, the Company de-designated certain interest rate swap agreements as cash flow hedges under ASC Topic 815. There is a net unrealized loss of $5,468 remaining in AOCI on the Company's consolidated balance sheet as of June 30, 2014 which represents the activity related to these interest rate swap agreements while they were previously designated as cash flow hedges, and this amount will be recognized in the Company's net income as a portion of "interest expense" over the remaining contractual life of the agreements. All forecasted transactions associated with interest rate swap agreements previously designated as cash flow hedges are expected to occur. No amounts have been reclassified to net income in any period in connection with forecasted transactions that are no longer considered probable of occurring. The Company estimates the portion of existing net unrealized loss on discontinued cash flow hedges expected to be reclassified to net income within the next 12 months is $4,756. The Company reclassified $1,608 and $3,896 from AOCI to net loss for the three and six months ended June 30, 2014 related to amortization of the net unrealized loss remaining in AOCI at the time the Company discontinued its cash flow hedge accounting. For the three and six months June 30, 2013, the Company reclassified $4,693 and $8,796 from AOCI to net income related to recognition of interest expense from cash flow hedging transactions.
  
Many of the Company's interest rate swaps were entered into under bilateral agreements which contain various covenants related to the Company’s credit risk. Specifically, if the Company defaults on any of its indebtedness, including those circumstances whereby repayment of the indebtedness has not yet been accelerated by the lender, or is declared in default of any of its covenants with any counterparty, then the Company could also be declared in default under the bilateral agreement. Additionally, these agreements allow those counterparties to require settlement of its outstanding derivative transactions if the Company fails to earn GAAP net income excluding derivative gains and losses greater than one dollar as measured on a rolling two quarter basis. These interest rate agreements also contain provisions whereby, if the Company fails to maintain a minimum net amount of shareholders’ equity, then the Company may be declared in default on its derivative obligations. The Company was in compliance with all covenants under bilateral agreements on June 30, 2014.

NOTE 6 – OFFSETTING ASSETS AND LIABILITIES

The Company's derivatives and 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 assets and liabilities subject to these arrangements on a gross basis. The following tables present information regarding those assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of June 30, 2014 and December 31, 2013:
 
Offsetting of Assets
 
Gross Amount of Recognized Assets
 
Gross Amount Offset in the Balance Sheet
 
Net Amount of Assets Presented in the Balance Sheet
 
Gross Amount Not Offset in the Balance Sheet
 
Net Amount
Financial Instruments Received as Collateral
 
Cash Received as Collateral
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
5,237

 
$
—

 
$
5,237

 
$
(1,039
)
 
$
(3,170
)
 
$
1,028

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
 


 
 
 
 
 


Derivative assets
$
18,488

 
$
—

 
$
18,488

 
$
(193
)
 
$
(12,141
)
 
$
6,154



15


 
Offsetting of Liabilities
 
Gross Amount of Recognized Liabilities
 
Gross Amount Offset in the Balance Sheet
 
Net Amount of Liabilities Presented in the Balance Sheet
 
Gross Amount Not Offset in the Balance Sheet
 
Net Amount
Financial Instruments Posted as Collateral
 
Cash Posted as Collateral
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
23,974

 
$
—

 
$
23,974

 
$
(1,495
)
 
$
(22,479
)
 
$
—

Repurchase agreements
3,447,050

 
—

 
3,447,050

 
(3,447,050
)
 
—

 
—

 
$
3,471,024

 
$
—

 
$
3,471,024

 
$
(3,448,545
)
 
$
(22,479
)
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
6,681

 
$
—

 
$
6,681

 
$
(1,299
)
 
$
(5,382
)
 
$
—

Repurchase agreements
3,580,754

 
—

 
3,580,754

 
(3,580,754
)
 
—

 
—

 
$
3,587,435

 
$
—

 
$
3,587,435

 
$
(3,582,053
)
 
$
(5,382
)
 
$
—

(1)
Amount 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 asset or liability presented in the balance sheet. The fair value of the actual collateral received by or posted to the same counterparty may exceed the amounts presented.

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
ASC Topic 820 defines fair value 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. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and also requires an entity to consider 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 fair value of the Company’s assets and liabilities presented on its consolidated balance sheets, segregated by the hierarchy level of the fair value estimate, that are measured at fair value on a recurring basis as of the dates indicated:

16


 
June 30, 2014
 
Fair Value
 
Level 1 - Unadjusted Quoted Prices in Active Markets
 
Level 2 - Observable Inputs
 
Level 3 - Unobservable Inputs
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
3,949,965

 
$
—

 
$
3,884,723

 
$
65,242

Derivative assets
5,237

 
—

 
5,237

 
—

Total assets carried at fair value
$
3,955,202

 
$
—

 
$
3,889,960

 
$
65,242

Liabilities:
 

 
 

 
 

 
 

Derivative liabilities
$
23,974

 
$
21,139

 
$
2,835

 
$
—

Total liabilities carried at fair value
$
23,974

 
$
21,139

 
$
2,835

 
$
—


 
December 31, 2013
 
Fair Value
 
Level 1 - Unadjusted Quoted Prices in Active Markets
 
Level 2 - Observable Inputs
 
Level 3 - Unobservable Inputs
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
4,018,161

 
$
—

 
$
3,944,681

 
$
73,480

Derivative assets
18,488

 
—

 
18,488

 
—

Total assets carried at fair value
$
4,036,649

 
$
—

 
$
3,963,169

 
$
73,480

Liabilities:
 

 
 

 
 

 
 

Derivative liabilities
$
6,681

 
$
5,345

 
$
1,336

 
$
—

Total liabilities carried at fair value
$
6,681

 
$
5,345

 
$
1,336

 
$
—


The Company did not have assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2014 or December 31, 2013.

The Company's derivative assets and liabilities include interest rate swaps and Eurodollar futures. Interest rate swaps are valued using the income approach with the primary input being the forward interest rate swap curve, which is considered an observable input and thus their fair values are considered Level 2 measurements. Eurodollar futures are valued based on closing exchange prices on these contracts. Accordingly, these financial futures are classified as Level 1.

Agency MBS, as well a majority of non-Agency MBS, are substantially similar to securities that either are currently actively traded or have been recently traded in their respective market. Their fair values are derived from an average of multiple dealer quotes and thus are considered Level 2 fair value measurements. The Company’s remaining non-Agency MBS are comprised of securities for which there are not substantially similar securities that trade frequently, and their fair values are therefore considered Level 3 measurements. The Company determines the fair value of its Level 3 securities by discounting the estimated future cash flows derived from cash flow models using assumptions that are confirmed to the extent possible by third party dealers or other pricing indicators. Significant inputs into those pricing models are Level 3 in nature due to the lack of readily available market quotes. Information utilized in those pricing models include the security’s credit rating, coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected credit losses, and credit enhancement as well as certain other relevant information. Significant changes in any of these inputs in isolation would result in a significantly different fair value measurement. Generally Level 3 assets are most sensitive to the default rate and severity assumptions.

17



The table below presents information about the significant unobservable inputs used in the fair value measurement for the Company's Level 3 non-Agency CMBS and RMBS as of June 30, 2014:
 
Quantitative Information about Level 3 Fair Value Measurements (1)
 
Prepayment Speed
 
Default Rate
 
Severity
 
Discount Rate
Non-Agency CMBS
20 CPY
 
2.5
%
 
35.0
%
 
8.9
%
Non-Agency RMBS
10 CPR
 
1.0
%
 
20.0
%
 
6.8
%
(1)
Data presented are weighted averages.

The following table presents the activity of the instruments fair valued at Level 3 during the three and six months ended June 30, 2014:
 
Level 3 Fair Values
 
Three Months Ended
 
Six Months Ended
 
June 30, 2014
 
June 30, 2014
 
Non-Agency CMBS
 
Non-Agency RMBS
 
Total assets
 
Non-Agency CMBS
 
Non-Agency RMBS
 
Total assets
Balance as of beginning of period
$
63,832

 
$
2,555

 
$
66,387

 
$
70,733

 
$
2,747

 
$
73,480

Unrealized gain (loss) included in OCI
173

 
3

 
176

 
200

 
(123
)
 
77

Principal payments
(1,315
)
 
(60
)
 
(1,375
)
 
(8,308
)
 
(456
)
 
(8,764
)
Accretion
54

 
—

 
54

 
119

 
330

 
449

Balance as of end of period
$
62,744

 
$
2,498

 
$
65,242

 
$
62,744

 
$
2,498

 
$
65,242


The following table presents a summary of the recorded basis and estimated fair values of the Company’s financial instruments as of the dates indicated:
 
June 30, 2014
 
December 31, 2013
 
Recorded Basis
 
Fair Value
 
Recorded Basis
 
Fair Value
Assets:
 
 
 
 
 
 
 
Mortgage-backed securities
$
3,949,965

 
$
3,949,965

 
$
4,018,161

 
$
4,018,161

Mortgage loans held for investment, net (1)
52,564

 
44,252

 
55,423

 
46,383

Derivative assets
5,237

 
5,237

 
18,488

 
18,488

Liabilities:
 

 
 

 
 

 
 

Repurchase agreements (2)
$
3,447,050

 
$
3,447,085

 
$
3,580,754

 
$
3,580,997

Non-recourse collateralized financing (1)
12,073

 
11,603

 
12,914

 
12,414

Derivative liabilities
23,974

 
23,974

 
6,681

 
6,681

(1) The Company determines the fair value of its mortgage loans held for investment, net and its non-recourse collateralized financing using internally developed cash flow models with inputs similar to those used to estimate fair value of the Company's Level 3 non-Agency MBS.
(2) The difference between the recorded basis of repurchase agreements and their fair value is the deferred cost of the 2-year repurchase facility.


18


NOTE 8 – SHAREHOLDERS' EQUITY

Preferred Stock

The Company has 2,300,000 shares of its 8.50% Series A Cumulative Redeemable Preferred Stock and 2,250,000 shares of its 7.625% Series B Cumulative Redeemable Preferred Stock issued and outstanding as of June 30, 2014 (collectively, the "Preferred Stock"). The Preferred Stock has no maturity and will remain outstanding indefinitely unless redeemed or otherwise repurchased or converted into common stock pursuant to the terms of the Preferred Stock. Except under certain limited circumstances intended to preserve the Company's REIT status, upon the occurrence of a change in control as defined in Article IIIA, Section 7(d) of the Company’s Articles of Incorporation, or to avoid the direct or indirect imposition of a penalty tax in respect of, or to protect the tax status of, any of the Company’s real estate mortgage investment conduits (“REMIC”) interests or a REMIC in which the Company may acquire an interest (as permitted by the Company’s Articles of Incorporation), the Company may not redeem the Series A Preferred Stock prior to July 31, 2017 or the Series B Preferred Stock prior to April 30, 2018. On or after these dates, at any time and from time to time, the Preferred Stock may be redeemed in whole, or in part, at the Company's option at a cash redemption price of $25.00 per share plus any accumulated and unpaid dividends. The Series A Preferred Stock pays a cumulative cash dividend equivalent to 8.50% of the $25.00 liquidation preference per share each year and the Series B Preferred Stock pays a cumulative cash dividend equivalent to 7.625% of the $25.00 liquidation preference per share each year. Because the Preferred Stock is redeemable only at the option of the issuer, it is classified as equity on the Company's consolidated balance sheet.
    
Common Stock

The following table presents a summary of the changes in the number of common shares outstanding for the periods presented:
 
Six Months Ended
 
June 30,
 
2014
 
2013
Balance as of beginning of period
54,310,484

 
54,268,915

Common stock issued under DRIP
6,543

 
505,718

Common stock issued under ATM program
—

 
180,986

Common stock issued or redeemed under stock and incentive plans
471,210

 
270,158

Common stock forfeited for tax withholding on share-based compensation
(59,150
)
 
(52,385
)
Balance as of end of period
54,729,087

 
55,173,392


The Company's Dividend Reinvestment and Share Purchase Plan ("DRIP") allows registered shareholders to automatically reinvest some or all of their quarterly common stock dividends in shares of the Company’s common stock and provides an opportunity for investors to purchase shares of the Company’s common stock, potentially at a discount to the prevailing market price. Of the 3,000,000 shares reserved for issuance under the Company's DRIP, there were 2,460,355 shares remaining for issuance as of June 30, 2014. The Company declared a second quarter common stock dividend of $0.25 per share payable on July 31, 2014 to shareholders of record as of July 3, 2014. There was no discount for shares purchased through the DRIP during the second quarter of 2014.
 
The Company had approximately 7,416,520 shares of common stock that remain available to offer and sell through its sales agent, JMP Securities LLC, under its "at the market", or "ATM" program, as of June 30, 2014.

Of the $50,000 authorized by the Company's Board of Directors for the repurchase of its common stock through December 31, 2014, approximately $42,145 remains available for repurchase at the Company's option as of June 30, 2014.

2009 Stock and Incentive Plan. Of the 2,500,000 shares of common stock authorized for issuance under its 2009 Stock and Incentive Plan, the Company had 1,078,908 available for issuance as of June 30, 2014. Total stock-based compensation expense

19


recognized by the Company for the three and six months ended June 30, 2014 was $683 and $1,355 compared to $625 and $1,115 for the three and six months ended June 30, 2013.
  
The following table presents a rollforward of the restricted stock activity for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Restricted stock outstanding as of beginning of period
760,712

 
434,163

 
520,969

 
448,283

Restricted stock granted
29,175

 
115,558

 
457,538

 
255,158

Restricted stock vested
(43,057
)
 
(22,918
)
 
(231,677
)
 
(176,638
)
Restricted stock outstanding as of end of period
746,830

 
526,803

 
746,830

 
526,803


The combined grant date fair value of the restricted stock issued by the Company for the three and six months ended June 30, 2014 was $250 and $3,703, respectively, compared to $1,217 and $2,708 for the three and six months ended June 30, 2013, respectively. As of June 30, 2014, the balance of the Company’s outstanding restricted stock remaining to be amortized into compensation expense is $5,659 of which $1,364 is expected to be amortized in the remainder of 2014, $2,265 in 2015, $1,453 in 2016, $541 in 2017, and $36 in 2018. The Company did not have any other type of stock-based compensation issued or outstanding as of June 30, 2014 or December 31, 2013 other than its restricted stock.


NOTE 9 – SUBSEQUENT EVENTS

Management has evaluated events and circumstances occurring as of and through the date this Quarterly Report on Form 10-Q was filed with the SEC and has determined that there have been no significant events or circumstances that qualify as a "recognized" or "nonrecognized" subsequent event as defined by ASC Topic 855.

20


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 financial statements and the accompanying notes included in Item 1. “Financial Statements” in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2013. 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.
    

EXECUTIVE OVERVIEW

Company Overview

We are an internally managed mortgage real estate investment trust, or mortgage REIT, which invests in mortgage assets on a leveraged basis. Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "DX". We also have two series of preferred stock outstanding, our 8.50% Series A Cumulative Redeemable Preferred Stock (the "Series A Preferred Stock") which is traded on the NYSE under the symbol "DXPRA", and our 7.625% Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock") which is traded on the NYSE under the symbol "DXPRB". Our objective is to provide attractive risk-adjusted returns to our shareholders over the long term that are reflective of a leveraged, high quality fixed income portfolio with a focus on capital preservation. We seek to provide returns to our shareholders primarily through regular quarterly dividends and also through capital appreciation.

We were formed in 1987 and commenced operations in 1988. Beginning with our inception through 2000, our operations largely consisted of originating and securitizing various types of loans, principally single-family and commercial mortgage loans and manufactured housing loans. Since 2000, we have been investing in Agency and non-Agency mortgage-backed securities (“MBS”), and we are no longer originating or securitizing mortgage loans. MBS consist of residential MBS (“RMBS”) and commercial MBS (“CMBS”), including CMBS interest-only ("IO") securities. Agency MBS have a guaranty of principal payment by an agency of the U.S. government or a U.S. government-sponsored entity ("GSE") such as Fannie Mae and Freddie Mac. Non-Agency MBS have no such guaranty of payment.

Our primary source of income is net interest income, which is the excess of the interest income earned on our investments over the cost of financing these investments. We invest our capital pursuant to our Operating Policies as approved by our Board of Directors which include an Investment Policy and Investment Risk Policy as discussed in Part I, Item 1, "Business" under "Company Overview-Operating Policies and Restrictions" in our annual Report on Form 10-K for the year ended December 31, 2013. Our investment policy permits investments in any type of Agency MBS and investment grade non-Agency MBS, legacy securitized mortgage loans, and legacy whole loans.

RMBS. Our Agency RMBS investments include MBS collateralized by adjustable-rate mortgage loans ("ARMS"), which have interest rates that generally will adjust at least annually to an increment over a specified interest rate index, and hybrid adjustable-rate mortgage loans ("hybrid ARMs"), which are loans that have a fixed rate of interest for a specified period (typically three to ten years) and then adjust their interest rate at least annually to an increment over a specified interest rate index as further discussed below. Agency ARMs also include hybrid Agency ARMs that are past their fixed-rate periods or within twelve months of their initial reset period. We may also invest in fixed-rate Agency RMBS from time to time. Additionally, we invest in non-Agency RMBS which generally resemble similar types of Agency ARMs, but lack a guaranty of principal payment by an agency of the U.S. government or a U.S. government-sponsored entity.

Interest rates on loans collateralizing Agency and non-Agency ARMs are based on specific index rates, such as the London Interbank Offered Rate, or LIBOR, the one-year constant maturity treasury rate, or CMT, the Federal Reserve U.S. 12-month cumulative average one-year CMT, or MTA, or the 11th District Cost of Funds Index, or COFI. These loans will typically have

21


interim and lifetime caps on interest rate adjustments, or interest rate caps, limiting the amount that the rates on these loans may reset in any given period.

CMBS. Our Agency and non-Agency CMBS are collateralized by first mortgage loans and are substantially comprised of fixed-rate securities. The majority of the loans collateralizing our CMBS are secured by multifamily properties. Typically these loans have some form of prepayment protection provisions (such as prepayment lock-out) or prepayment compensation provisions (such as yield maintenance or prepayment penalty). Yield maintenance and prepayment penalty requirements are intended to create an economic disincentive for the loans to prepay.

CMBS IO. A portion of our Agency and non-Agency CMBS also include IO securities which represent the right to receive excess interest payments (but not principal cash flows) based on the underlying unpaid principal balance of the underlying pool of mortgage loans. As these securities have no principal associated with them, the interest payments received are based on the unpaid principal balance (often referred to as the notional amount) of the underlying pool of mortgage loans. CMBS IO securities generally have some level of prepayment protection in the form of lock-outs, prepayment penalties, or yield maintenance associated with the underlying loans similar to CMBS described above.


Factors that Affect Our Results of Operations and Financial Condition

The performance of our investment portfolio, including the amount of net interest income we earn and fluctuations in investment values, will depend on multiple factors, many of which are beyond our control. These factors include, but are not limited to, the absolute level of interest rates, trends of interest rates, the relative steepness of interest rate curves, prepayment rates on our investments, competition for investments, economic conditions and their impact on the credit performance of our investments (including multifamily, residential and commercial mortgage markets), and market required yields as reflected by market credit spreads. In addition, the performance of our investment portfolio, the cost and availability of financing and the availability of investments at acceptable return levels could be influenced by actions and policy measures of the U.S. government including the Federal Housing Finance Administration, the U. S. Department of the Treasury (the "Treasury"), and the Board of Governors of the Federal Reserve System (the "Federal Reserve") and could also be influenced by other central banks around the world.

Our business model may also be impacted by other factors such as the availability and cost of financing and the state of the overall credit markets. Reductions in the availability of financing for our investments could significantly impact our business and force us to sell assets that we otherwise would not sell, potentially at losses or at amounts below their true fair value. Other factors also impacting our business include changes in regulatory requirements, including requirements to qualify for registration under the Investment Company Act of 1940, and REIT requirements.

Investing in mortgage-related securities while using leverage to increase our return on shareholders' capital subjects us to a number of risks including interest rate risk, prepayment and reinvestment risk, credit risk, market value risk and liquidity risk, which are discussed in "Liquidity and Capital Resources" within this Item 2 and Part I, Item 3 of this Quarterly Report on Form 10-Q as well as in Item 1A, "Risk Factors" of Part I, and in Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" of Part II of our Annual Report on Form 10-K for the year ended December 31, 2013. Please see these Items for a detailed discussion of these risks and the potential impact on our results of operations and financial condition.

Non-GAAP Financial Measures

In addition to our operating results presented in accordance with GAAP, this Quarterly Report on Form 10-Q contains certain non-GAAP financial measures. The following descriptions are for the non-GAAP measures contained herein which management has included because we believe these measures may be important to investors and present useful information about the Company's performance:

•Core net operating income to common shareholders equals GAAP net income to common shareholders adjusted for amortization of accumulated other comprehensive loss on de-designated cash flow hedges included in GAAP interest expense, net change in fair value of derivative instruments which includes gains and losses on terminated derivative

22


instruments (if applicable), gains and losses on sales of investments, and fair value adjustments on investments not classified as available for sale.
•Effective borrowing costs equals GAAP interest expense excluding the amortization of accumulated other comprehensive loss on interest rate swaps de-designated as cash flow hedges on June 30, 2013 plus net periodic interest costs on derivative instruments (including accrued amounts) which are not already included in GAAP interest expense.
•Adjusted net interest income equals GAAP net interest income less effective borrowing costs.
•Adjusted net interest spread equals average annualized yields on investments less effective borrowing costs.

Schedules reconciling these non-GAAP financial measures to GAAP financial measures are provided in "Results of Operations" within Part 1, Item 2 of this Quarterly Report on Form 10-Q. Management believes these non-GAAP financial measures are useful because they provide investors greater transparency to the information we use in our financial and operational decision-making processes. Management also believes the presentation of these measures, when analyzed in conjunction with the our GAAP operating results, allows investors to more effectively evaluate and compare our performance to that of our peers, particularly those competitors that continue to use cash flow hedge accounting in reporting their financial results, as well as to our performance in periods prior to discontinuing cash flow hedge accounting. However, because these non-GAAP financial measures exclude certain items used to compute GAAP net (loss) income to common shareholders and GAAP interest expense, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, our GAAP results as reported in our consolidated statements of comprehensive income. In addition, because not all companies use identical calculations, our presentation of core net operating income, effective borrowing costs, adjusted net interest income, and adjusted net interest spread may not be comparable to other similarly-titled measures of other companies.


Highlights of the Second Quarter of 2014
    
Credit spreads continued to tighten in the second quarter amidst the low volatility environment, resulting in increases in the fair value of our investments. As a result of the increase in the fair value of our investments, our book value per common share increased 2.8% to $9.12 as of June 30, 2014 from $8.87 as of March 31, 2014. The increase in our book value as well as a shift in our investments toward CMBS versus Agency RMBS resulted in a modest decline in our leverage ratio to 5.7 as of June 30, 2014 from 5.9 as of March 31, 2014 and 6.2 as of December 31, 2013. We redeployed principal payments received on our investments and proceeds from our sales of certain lower yielding Agency ARMS and near-reset hybrid ARMS into purchases of higher yielding CMBS. Given our outlook on the interest rate environment for the next several quarters, we maintained our positive duration gap (a measure of our interest rate risk) which is virtually unchanged from the first quarter. We continue to maintain a higher than normal amount of liquidity given the very tight credit spread environment as a sudden reversal of the trend could result in negative fluctuations in our investment values which could lead to demands on our liquidity, and could also be a good buying opportunity. In the longer term, we see opportunities in Agency RMBS as the Federal Reserve winds down its large scale asset purchase program as discussed further below.

Our GAAP net interest spread and our adjusted net interest spread continued their recent trends. We discuss the particular reasons in "Results of Operations", but in general the adjusted net interest spread has increased from the shift in our portfolio toward CMBS and CMBS IO investments versus RMBS. The following table summarizes the average annualized effective yield by type of MBS investment for the second quarter of 2014 and for each of the preceding four quarters:

23


 
Three Months Ended
 
June 30, 2014
 
March 31, 2014
 
December 31, 2013
 
September 30, 2013
 
June 30, 2013
Average annualized effective yield:
 
 
 
 
 
 
 
 
 
RMBS
1.85%
 
1.87%
 
1.85%
 
1.99%
 
1.91%
CMBS
4.66%
 
4.61%
 
4.65%
 
4.78%
 
4.75%
CMBS IO
4.21%
 
4.21%
 
4.47%
 
4.41%
 
4.53%
All other investments
5.17%
 
5.17%
 
5.26%
 
5.36%
 
5.44%
Total average annualized effective yield
2.79%
 
2.74%
 
2.72%
 
2.82%
 
2.86%
Costs of financing
(0.75)%
 
(0.87)%
 
(0.90)%
 
(0.88)%
 
(1.11)%
GAAP net interest spread
2.04%
 
1.87%
 
1.82%
 
1.94%
 
1.75%
 
 
 
 
 
 
 
 
 
 
Effective borrowing cost (1)
(0.87)%
 
(0.86)%
 
(0.95)%
 
(1.17)%
 
(1.14)%
Adjusted net interest spread (1)
1.92%