Dynex Capital Inc.

10/27/2025 | Press release | Distributed by Public on 10/27/2025 14:20

Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Dynex Capital operates at the intersection of capital markets and the U.S. housing finance system, using our expertise to earn income from investing primarily in Agency residential and commercial mortgage backed securities. We generate dividend income and long term returns though our investment, financing and hedging strategies.
Market Conditions and Outlook
In the third quarter of 2025, the Federal Open Market Committee ("FOMC") decided to lower the target rate for the U.S. Federal Funds rate by 25 basis points to 4.0% to 4.25% in September 2025 in support of its goals and in light of the shift in the balance of risks. The FOMC seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee is attentive to the risks to both sides of its dual mandate and noted that uncertainty about the economic outlook and downside risks to employment have risen. This is the first rate cut in 2025 with further cuts expected this year and in 2026; however, as observed over the last 2 years, actual rate cuts have lagged expected rate cuts.
We continue to monitor the activities of the FOMC as their actions to reduce the Federal Funds rate are expected to have a direct and positive impact on the cost of our repurchase borrowings. The swaps market and related positions continue to add to the interest spread that we are earning; however, if the yield curve steepens, new swap positions in the future could be at a net expense to our portfolio instead of a net positive today.
Dynex continues to monitor monetary policy, housing policy, supply and demand dynamics, and other changes to U.S. policies including those impacting the GSEs. Mortgage rates are beginning to trend down and refinance activity increased at the end of the third quarter. We are monitoring the evolution of the markets, assessing the impact of prepayment speeds, new supply of mortgage production and the impact these factors will have on spreads. We are also watching public and private credit markets, global macroeconomic conditions, and large investment flows into and out of market sectors as well as the potential impacts from the ongoing federal government shutdown.
Dynex continued to raise capital in the quarter and grew the portfolio. We expect to continue to raise and deploy capital primarily using our ATM program. Agency MBS remains an attractive asset class and continues to deliver returns that are accretive to our financial position. We are actively buying into this market to deliver value to our shareholders.
The charts below show the range of U.S. Treasury and SOFR-based swap rates for the third quarter of 2025 and information regarding market spreads as of and for the periods indicated:
Market Spreads as of:
Change in Spreads
YTD
Investment Type: (1)
September 30, 2025 June 30, 2025 March 31, 2025 December 31, 2024
Agency RMBS:
2.0% coupon 85 96 85 89 (4)
2.5% coupon 90 99 90 93 (3)
4.0% coupon 65 78 65 69 (4)
4.5% coupon 64 76 65 68 (4)
5.0% coupon 66 77 66 69 (3)
5.5% coupon 72 82 69 72 -
6.0% coupon 74 86 66 74 -
Agency CMBS(2)
96 102 94 96 -
(1)Option adjusted spreads ("OAS") are based on Company estimates using third-party models and market data. OAS shown for prior periods may differ from previous disclosures because the Company regularly updates the third-party model used.
(2)Data is sourced from J.P. Morgan and represents the spread to swap rate on newly issued Agency securities collateralized by multifamily properties.
Summary of Third Quarter 2025 Financial Performance
The increase in book value of $0.72 per common share for the third quarter of 2025 was driven by two main factors, the 10-year U.S. Treasury rate fell this quarter and mortgage spreads tightened relative to equivalent U.S. Treasury securities. In addition, net interest income and net interest spreads continued to improve and expenses in the third quarter were lower than the second quarter. We continued to raise capital through our ATM program, deploying the proceeds into additional investments. Our leverage trended down since the second quarter, primarily from asset appreciation.
The following table summarizes the changes in the Company's financial position during the third quarter of 2025:
($s in thousands except per share data)
Net Change in Fair Value
Components of Comprehensive Income
Common Book Value Rollforward
Per Common Share
Balance as of June 30, 2025 (1)
$ 1,498,493 $ 11.95
Net interest income
$ 30,611
Periodic interest from interest rate swaps
14,265
G & A and other operating expenses (11,998)
Preferred stock dividends (2,827)
Changes in fair value:
MBS and other
$ 157,435
TBAs 27,571
U.S. Treasury futures (20,423)
Options on U.S. Treasury futures
(508)
Interest rate swaps
(30,320)
Interest rate swaptions
(1,279)
Total net change in fair value 132,476
Comprehensive income to common shareholders
162,527
Capital transactions:
Net proceeds from stock issuance (2)
256,347
Common dividends declared (71,319)
Balance as of September 30, 2025 (1)
$ 1,846,048 $ 12.67
(1)Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's preferred stock of $111.5 million, in thousands and on a per common share basis.
(2)Net proceeds from common stock issuance include approximately $254 million from ATM issuances and approximately $2 million from amortization of share-based compensation, net of grants, during the three months ended September 30, 2025.
FINANCIAL CONDITION
Investment Portfolio
Our investment portfolio (including TBAs) as of September 30, 2025, has increased approximately 60% compared to December 31, 2024. The following charts compare the composition of our MBS portfolio (including TBAs) as of the dates indicated:
We have added approximately $5.2 billion of Agency RMBS and $882 million of Agency CMBS during the nine months ended September 30, 2025, of which $263 million were pending settlement as of September 30, 2025. The Agency CMBS purchases have a different convexity profile compared to our Agency RMBS, which we believe adds diversification to our investment portfolio.
The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:
September 30, 2025
Agency RMBS by Coupon
Par/Notional
Amortized Cost/
Implied Cost
Basis(2)(4)
Fair
Value (3)(4)
Weighted Average
Loan Age
(in months)(5)
3 Month
CPR (5)(6)
Estimated Duration(7)
Market Yield (8)
($s in thousands)
2.0% $ 616,555 $ 626,357 $ 505,258 60 5.2 % 7.45 4.70 %
2.5% 526,783 546,065 451,782 61 7.6 % 7.06 4.71 %
4.0% 299,690 300,076 286,028 54 9.6 % 5.96 4.75 %
4.5% (1)
1,805,670 1,749,387 1,764,268 32 8.0 % 5.50 4.87 %
5.0% 3,466,247 3,402,253 3,464,184 21 6.9 % 4.79 5.01 %
5.5% 5,144,293 5,153,380 5,220,402 13 6.6 % 3.70 5.24 %
6.0% 497,167 505,328 511,272 14 7.4 % 2.50 5.34 %
TBA 4.0% 1,257,000 1,183,947 1,184,816 n/a n/a 6.33 4.86 %
TBA 4.5% (2)
840,000 833,230 834,619 n/a n/a 3.56 4.57 %
TBA 5.0% 254,000 252,163 251,912 n/a n/a 4.91 5.12 %
TBA 5.5% 250,000 251,709 251,953 n/a n/a 3.48 5.36 %
Total $ 14,957,405 $ 14,803,895 $ 14,726,494 23 7.0 % 4.63 5.03 %
December 31, 2024
Agency RMBS by Coupon
Par/Notional
Amortized Cost/
Implied Cost
Basis (2)(4)
Fair
Value (3)(4)
Weighted Average
Loan Age
(in months)(5)
3 Month
CPR (5)(6)
Estimated Duration(7)
Market Yield (8)
($s in thousands)
2.0% $ 655,356 $ 666,107 $ 516,541 51 5.0 % 6.49 5.42 %
2.5% 561,625 582,776 463,402 52 4.3 % 6.37 5.33 %
4.0% 324,615 325,091 299,774 45 6.4 % 5.92 5.25 %
4.5% 1,323,371 1,291,410 1,252,219 27 7.4 % 5.79 5.33 %
5.0% 2,356,262 2,315,518 2,284,613 18 5.7 % 5.19 5.47 %
5.5% 2,193,064 2,207,296 2,178,180 13 5.3 % 4.53 5.61 %
6.0% 303,470 307,211 307,509 13 13.2 % 3.60 5.74 %
TBA 4.0% 462,000 424,917 421,796 n/a n/a 6.62 5.20 %
TBA 4.5% 383,000 361,610 359,837 n/a n/a 5.95 5.35 %
TBA 5.0% 710,000 693,938 684,706 n/a n/a 5.20 5.51 %
TBA 5.5% 864,000 860,609 852,053 n/a n/a 4.21 5.73 %
Total $ 10,136,763 $ 10,036,483 $ 9,620,630 23 6.1 % 5.22 5.49 %
(1)Includes $9 million of 4.5% 15-year Agency RMBS.
(2)Includes a notional amount of $690 million of 4.5% 15-year TBA securities.
(3)Implied cost basis of TBAs represents the forward price to be paid for the underlying Agency MBS.
(4)Fair value of TBAs is the implied market value of the underlying Agency security as of the end of the period.
(5)TBAs are included on the consolidated balance sheet within "derivative assets/liabilities" at their net carrying value which is the difference between their implied market value and implied cost basis. Please refer to Note 5of the Notes to the Consolidated Financial Statements for additional information.
(6)TBAs are excluded from this calculation as they do not have a defined weighted-average loan balance or age until mortgages have been assigned to the pool.
(7)Constant prepayment rate ("CPR") represents the 3-month CPR of Agency RMBS held as of date indicated.
(8)Duration measures the sensitivity of a security's price to the change in interest rates and represents the percent change in price of a security for a 100-basis point increase in interest rates. We calculate duration using third-party financial models and empirical data. Different models and methodologies can produce different estimates of duration for the same securities.
(9)Represents the weighted average market yield projected using cash flows generated from the forward curve based on market prices as of the date indicated and assuming zero volatility.
Our Agency CMBS consist of loans collateralized by multifamily properties. Though we expect our exposure to Agency CMBS to remain modest as a percentage of the total portfolio, we added selectively in the second and third quarters of 2025 where the risk-adjusted return profile aligned with our broader strategy. In addition to offering strong relative value, Agency CMBS help diversify and stabilize the portfolio's cash flow and total return profile, given their unique prepayment characteristics and underlying asset base.
Agency CMBS IO are backed by loans collateralized by multifamily properties. Our Agency CMBS IO are from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation. According to Freddie Mac, 99.6% of the loans in K-deals are current as of June 30, 2025. Our non-Agency CMBS IO were all originated prior to 2018 and are backed by loans collateralized by a number of different property types, such as multifamily, office, retail, hotels, industrial, storage, and others. Our non-Agency CMBS IO investments are nearing maturity and have very little amortized cost remaining; any changes in actual payments may result in large swings in yield as shown below.
The following table provides certain information regarding our CMBS and CMBS IO as of the dates indicated:
September 30, 2025
($s in thousands)
Par/Notional Value
Amortized Cost Fair Value
WAVG Life Remaining (1)
WAVG Market Yield (2)
Agency CMBS $ 927,964 $ 929,273 $ 933,839 5.5 4.27 %
CMBS IO
6,142,308 94,227 93,112 4.6 11.23 %
Total $ 1,023,500 $ 1,026,951
December 31, 2024
($s in thousands)
Par/Notional Value
Amortized Cost Fair Value
WAVG Life Remaining (1)
WAVG Market Yield (2)
Agency CMBS $ 99,636 $ 99,848 $ 95,463 2.6 4.76 %
CMBS IO
8,647,176 117,591 114,386 4.5 12.65 %
Total $ 217,439 $ 209,849
(1) Represents the weighted average life remaining in years based on contractual cash flows as of the dates indicated.
(2) Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the dates indicated and assuming zero volatility.
Repurchase Agreements
Our repurchase agreement borrowings increased to $12 billion as of September 30, 2025 from $7 billion as of December 31, 2024. These borrowings were used to partially finance our purchases of Agency MBS during the nine months ended September 30, 2025. We have not experienced any difficulty in securing financing with any of our counterparties, and our repurchase agreement counterparties have not indicated any concerns regarding leverage or credit. Please refer to Note 4of the Notes to the Consolidated Financial Statements contained within this Quarterly Report on Form 10-Q as well as "Results of Operations" and "Liquidity and Capital Resources" contained within this Item 2 for additional information relating to our repurchase agreement borrowings.
Derivative Assets and Liabilities
Please refer to Note 5of the Notes to the Consolidated Financial Statements for details on our interest rate hedging instruments as well as "Liquidity and Capital Resources" within Item 2 and "Quantitative and Qualitative Disclosures about Market Risk" in Item 3 of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2025 Compared to the Three Months Ended June 30, 2025
The following table summarizes the results of operations for the periods discussed in this section:
Three Months Ended
$s in thousands September 30, 2025 June 30, 2025
Net interest income
$ 30,611 $ 23,128
Unrealized gain on investments, net
142,469 33,652
Loss on derivative instruments, net
(10,694) (58,093)
Operating expenses, net
(11,998) (12,293)
Preferred stock dividends (2,827) (2,680)
Net income (loss) to common shareholders
147,561 (16,286)
Other comprehensive income
14,966 4,064
Comprehensive income (loss) to common shareholders
$ 162,527 $ (12,222)
Net Interest Income
Net interest income and net interest spread improved for the three months ended September 30, 2025, compared to the three months ended June 30, 2025 due to a larger portfolio of Agency RMBS with higher yields. Financing costs held steady at 4.45% for each of the three months ended September 30, 2025 and June 30, 2025.
The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:
Three Months Ended
September 30, 2025 June 30, 2025
($s in thousands) Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Financing Cost (3)(4)
Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Financing Cost (3)(4)
Agency RMBS $ 136,921 $ 11,137,193 4.92 % $ 102,738 $ 8,663,590 4.74 %
Agency CMBS 5,380 488,441 4.32 % 1,945 189,815 4.05 %
CMBS IO (5)
1,740 97,693 7.02 % 2,612 105,162 9.62 %
Other investments
16 841 3.84 % 12 940 4.40 %
Subtotal
144,057 $ 11,724,168 4.91 % 107,307 8,959,507 4.79 %
Cash equivalents 5,622 4,439
Total interest income $ 149,679 $ 111,746
Repurchase agreement financing (119,068) 10,468,568 (4.45) % (88,618) 7,871,627 (4.45) %
Net interest income/spread
$ 30,611 0.46 % $ 23,128 0.33 %
Net periodic interest (6)
14,265 0.54 % 12,349 0.63 %
Economic net interest income/spread (6)
$ 44,876 1.00 % $ 35,477 0.96 %
*Table Note: Data may not foot due to rounding.
(1)Average balance for assets is calculated as a simple average of the daily amortized cost and excludes securities pending settlement if applicable.
(2)Average balance for liabilities is calculated as a simple average of the daily borrowings outstanding during the period.
(3)Effective yield is calculated by dividing annualized interest income by the average balance of asset type outstanding during the reporting period. Unscheduled adjustments to premium/discount amortization/accretion, such as for prepayment compensation, are not annualized in this calculation.
(4)Financing cost is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year.
(5)Includes Agency and non-Agency issued securities.
(6)Net periodic interest is the difference between the fixed interest rate we pay and the variable interest rate we receive on our interest rate swaps. It is a component of economic net interest income (expense), a non-GAAP measure. Please refer to the section below "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP measure.
The following table presents information regarding the performance of our TBA dollar roll transactions for the periods indicated:
Three Months Ended
September 30, 2025 June 30, 2025
($s in thousands)
Implied Net Interest Income (1)
Average Balance
Implied Net Spread
Implied Net Interest Income (1)
Average Balance Implied Net Spread
TBAs
$ 3,548 $ 2,660,867 0.52 % $ 4,758 $ 2,425,857 0.78 %
(1)Implied net interest income (expense) is also referred to as "drop income (loss)" and represents a portion of the total realized gain (loss) from our TBA dollar roll transactions recorded within "gain (loss) on derivative instruments, net."
Gains (Losses) on Investments and Derivative Instruments
During the three months ended September 30, 2025, the fair value of our investment portfolio increased $185 million primarily due to a decline in the 10-year U.S. Treasury rate and tighter mortgage spreads to U.S. Treasuries. These gains were offset by net losses on our hedging portfolio of $(38) million, which is net of periodic interest of $14 million we earned from our interest rate swaps. Losses in our hedging portfolio occur when SOFR-based swap rates and U.S. Treasury rates decline relative to the rates in effect at the time we enter into a hedge.
During the three months ended June 30, 2025, the fair value of our investment portfolio increased $45 million primarily due to purchases of new investments during the second quarter. These gains were offset by net losses on our hedging portfolio of $(66) million, which is net of periodic interest of $12 million we earned from our interest rate swaps. Our hedge losses were primarily the result of the decline in SOFR-based swap rates and U.S. Treasury rates as of June 30, 2025 as compared to March 31, 2025.
The following tables provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:
Three Months Ended
September 30, 2025
($s in thousands) Realized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in OCI Total Change in Fair Value
Investment portfolio:
Agency RMBS $ - $ 139,842 $ 14,768 $ 154,610
Agency CMBS - 2,410 613 3,023
CMBS IO - 223 (415) (192)
Other investments
- (6) - (6)
Subtotal - 142,469 14,966 157,435
TBA securities (1)
56,112 (28,541) - 27,571
Net gain on investments
$ 56,112 $ 113,928 $ 14,966 $ 185,006
Interest rate hedging portfolio:
U.S. Treasury futures $ (61,597) $ 41,174 $ - $ (20,423)
Interest rate swaps (2)
14,265 (30,320) - (16,055)
Interest rate swaptions
- (1,279) - (1,279)
Options on U.S. Treasury futures
- (508) - (508)
Net loss on interest rate hedges
$ (47,332) $ 9,067 $ - $ (38,265)
Total net gain
$ 8,780 $ 122,995 $ 14,966 $ 146,741
Three Months Ended
June 30, 2025
($s in thousands) Realized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in OCI Total Change in Fair Value
Investment portfolio:
Agency RMBS $ - $ 29,102 $ 3,629 $ 32,731
Agency CMBS - 4,266 426 4,692
CMBS IO - 315 9 324
Other investments
- (31) - (31)
Subtotal - 33,652 4,064 37,716
TBA securities (1)
(21,014) 28,622 - 7,608
Net (loss) gain on investments
$ (21,014) $ 62,274 $ 4,064 $ 45,324
Interest rate hedging portfolio:
U.S. Treasury futures $ 58,270 $ (51,950) $ - $ 6,320
Interest rate swaps (2)
12,349 (84,552) - (72,203)
Interest rate swaptions
- 182 - 182
Net gain (loss) on interest rate hedges
$ 70,619 $ (136,320) $ - $ (65,701)
Total net gain (loss)
$ 49,605 $ (74,046) $ 4,064 $ (20,377)
(1)Realized and unrealized gains (losses) on TBA securities are recorded within "gain (loss) on derivative instruments, net" on the Company's consolidated statements of comprehensive income.
(2)Realized gain (loss) for interest rate swaps consists of net periodic interest benefit of $14.3 million for the three months ended September 30, 2025 and $12.3 million for the three months ended June 30, 2025.
Operating Expenses
Operating expenses for the three months ended September 30, 2025, declined slightly compared to the three months ended June 30, 2025 primarily due to lower share-based compensation expenses.
Nine Months Ended September 30, 2025 Compared to the Nine Months Ended September 30, 2024
Net Interest Income
Net interest income and net interest spread improved for the nine months ended September 30, 2025, compared to the nine months ended September 30, 2024 due to the purchases of higher yielding Agency RMBS over the past year. Though interest expense has increased due to an increase in repurchase agreement borrowings used to finance these purchases, financing costs as a percentage of the average balance of borrowings have declined due to the FOMC's lowering of the Federal Funds rate by 75 basis points since September 30, 2024.
The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:
Nine Months Ended
September 30,
2025
2024
($s in thousands) Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Financing Cost (3)(4)
Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Financing Cost (3)(4)
Agency RMBS $ 329,734 9,188,117 4.78 % $ 207,291 $ 6,241,078 4.43 %
Agency CMBS 8,059 256,516 4.14 % 2,487 108,767 3.00 %
CMBS IO (5)
6,685 105,316 8.48 % 8,424 146,482 7.51 %
Other investments
42 926 4.37 % 59 1,502 4.83 %
Subtotal
$ 344,520 $ 9,550,875 4.81 % $ 218,261 $ 6,497,829 4.47 %
Cash equivalents 11,964 12,777
Total interest income $ 356,484 $ 231,038
Repurchase agreement financing (285,612) 8,407,509 (4.48) % (232,048) 5,574,573 (5.47) %
Net interest income (expense)/spread
$ 70,872 0.33 % $ (1,010) (1.00) %
Net periodic interest (6)
37,465 0.59 % 4,179 - %
Economic net interest income (expense)/spread (6)
$ 108,337 0.92 % $ 3,169 (1.00) %
*Table Note: Data may not foot due to rounding.
(1)Average balance for assets is calculated as a simple average of the daily amortized cost and excludes securities pending settlement if applicable.
(2)Average balance for liabilities is calculated as a simple average of the daily borrowings outstanding during the period.
(3)Effective yield is calculated by dividing interest income by the average balance of asset type outstanding during the reporting period. Unscheduled adjustments to premium/discount amortization/accretion, such as for prepayment compensation, are not annualized in this calculation.
(4)Financing cost is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year.
(5)Includes Agency and non-Agency issued securities.
(6)Net periodic interest is the difference between the fixed interest rate we pay and the variable interest rate we receive on our interest rate swaps. It is a component of economic net interest income (expense), a non-GAAP measure. Please refer to the section below "Non-GAAP Financial Measures" for a reconciliation to the most comparable GAAP measure.
The following table presents information regarding the performance of our TBA dollar roll transactions for the periods indicated:
Nine Months Ended
September 30,
2025 2024
($s in thousands)
Implied Net Interest Income (1)
Average Balance
Implied Net Spread
Implied Net Interest Expense (1)
Average Balance Implied Net Spread
TBAs
$ 13,091 $ 2,496,558 0.69 % $ (3,154) $ 1,994,660 (0.21) %
(1)Implied net interest income (expense) is also referred to as "drop income (loss)" and represents a portion of the total realized gain (loss) from our TBA dollar roll transactions recorded within "gain (loss) on derivative instruments, net."
Gains (Losses) on Investments and Derivative Instruments
During the nine months ended September 30, 2025, gains on our investment portfolio exceeded losses on our hedges by approximately $138 million, which includes $37 million in net periodic interest we earned from interest rate swaps. The fair value of our investment portfolio increased during the nine months ended September 30, 2025 primarily due to the tightening of mortgage spreads to U.S. Treasuries relative to wider spreads at the time we purchased investments this year. Interest and SOFR-based swap rates declined overall during the nine months ended September 30, 2025, which resulted in losses on our hedging portfolio.
During the nine months ended September 30, 2024, gains on our investment portfolio exceeded losses on our hedges by $114 million primarily because we purchased higher coupon investments during the nine months ended September 30, 2024 when spreads were wider as compared to September 30, 2024 when spreads were tighter.
The following tables provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:
Nine Months Ended
September 30, 2025
($s in thousands) Realized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in OCI Total Change in Fair Value
Investment portfolio:
Agency RMBS $ - $ 278,204 $ 35,313 $ 313,517
Agency CMBS - 6,785 2,165 8,950
CMBS IO - 1,148 942 2,090
Other investments
- (19) - (19)
Subtotal - 286,118 38,420 324,538
TBA securities (1)
52,422 24,932 - 77,354
Net gain on investments
$ 52,422 $ 311,050 $ 38,420 $ 401,892
Interest rate hedging portfolio:
U.S. Treasury futures $ (29,129) $ (29,322) $ - $ (58,451)
Interest rate swaps (2)
37,465 (242,450) - (204,985)
Interest rate swaptions
- (286) - (286)
Options on U.S. Treasury futures
- (508) - (508)
Net gain (loss) on interest rate hedges
$ 8,336 $ (272,566) $ - $ (264,230)
Total net gain
$ 60,758 $ 38,484 $ 38,420 $ 137,662
Nine Months Ended
September 30, 2024
($s in thousands) Realized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in OCI Total Change in Fair Value
Investment portfolio:
Agency RMBS $ - $ 78,405 $ 17,207 $ 95,612
Agency CMBS (1,506) 1,073 1,989 1,556
CMBS IO - 1,222 3,370 4,592
Other investments
- 173 47 220
Subtotal (1,506) 80,873 22,613 101,980
TBA securities (1)
87,916 (53,885) - 34,031
Net gains on investments
$ 86,410 $ 26,988 $ 22,613 $ 136,011
Interest rate hedging portfolio:
U.S. Treasury futures $ (237,694) $ 225,525 $ - $ (12,169)
Interest rate swaps
4,179 (14,334) - (10,155)
Net (losses) gains on interest rate hedges
$ (233,515) $ 211,191 $ - $ (22,324)
Total net (loss) gain
$ (147,105) $ 238,179 $ 22,613 $ 113,687
(1)Realized and unrealized gains (losses) on TBA securities are recorded within "gain (loss) on derivative instruments, net" on the Company's consolidated statements of comprehensive income.
(2)Realized gain (loss) for interest rate swaps consists of net periodic interest benefit of $37.5 million for the nine months ended September 30, 2025 and $4.2 million for the nine months ended September 30, 2024.
Operating Expenses
Operating expenses for the nine months ended September 30, 2025 increased $9 million compared to the nine months ended September 30, 2024 due to higher salary, bonus, and share-based compensation expenses, primarily resulting from an increase in performance based compensation expenses and from the hiring of new employees. Audit and legal expenses have also increased in 2025 compared to 2024.
Non-GAAP Financial Measures
In evaluating the Company's financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include earnings available for distribution ("EAD") to common shareholders (including per common share) and economic net interest income and the related metric economic net interest spread. Management believes these non-GAAP financial measures may be useful to investors because they are viewed by management as a measure of the investment portfolio's return based on the effective yield of its investments, net of financing costs and, with respect to EAD, net of other normal recurring operating income/expenses.
Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in EAD because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. However, drop income/loss does notrepresent the total realized gain/loss from the Company's investments in TBA securities.
Management also includes net periodic interest from its interest rate swaps, which is included in "gain (loss) on derivatives instruments, net," in EAD and economic net interest income because interest rate swaps are
used by the Company to economically hedge the impact of changing interest rates on its borrowing costs from repurchase agreements, and including net periodic interest from interest rate swaps is a helpful indicator of the Company's total financing cost in addition to GAAP interest expense.
Non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled measures of other REITs because they may not be calculated in the same manner. Furthermore, though EAD is one of several factors our management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company's REIT taxable income, its distribution requirements in accordance with the Tax Code or total economic return.
Reconciliations of each non-GAAP measure to certain GAAP financial measures are provided below.
Three Months Ended
Reconciliations of GAAP to Non-GAAP Financial Measures: September 30, 2025 June 30, 2025
($s in thousands except per share data)
Comprehensive income (loss) to common shareholders (GAAP) $ 162,527 $ (12,222)
Less:
Change in fair value of investments (1)
(157,435) (37,716)
Change in fair value of derivative instruments, net (2)
28,507 75,200
EAD to common shareholders (non-GAAP)
$ 33,599 $ 25,262
Average common shares outstanding 135,952,339 113,177,331
EAD per common share (non-GAAP)
$ 0.25 $ 0.22
Net interest income (GAAP)
$ 30,611 $ 23,128
Net periodic interest income earned from interest rate swaps
14,265 12,349
Economic net interest income (non-GAAP)
44,876 35,477
TBA drop income (3)
3,548 4,758
Total operating expenses (11,998) (12,293)
Preferred stock dividends (2,827) (2,680)
EAD to common shareholders (non-GAAP)
$ 33,599 $ 25,262
Net interest spread (GAAP)
0.46 % 0.33 %
Net periodic interest from interest rate swaps as a percentage of average repurchase borrowings
0.54 % 0.63 %
Economic net interest spread (non-GAAP)
1.00 % 0.96 %
(1)Amount includes realized and unrealized gains and losses due to changes in the fair value of the Company's MBS.
(2)The following table reconciles "change in fair value of derivative instruments, net" to the "gain (loss) on derivative instruments, net" shown on the consolidated statements of comprehensive income.
Three Months Ended
($s in thousands) September 30, 2025 June 30, 2025
Loss on derivative instruments, net
$ (10,694) $ (58,093)
Less:
TBA drop income
(3,548) (4,758)
Net periodic interest income earned from interest rate swaps
(14,265) (12,349)
Change in fair value of derivative instruments, net $ (28,507) $ (75,200)
(3)TBA drop income is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments. Additional sources may include proceeds from the sale of investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to meet margin requirements for our repurchase agreements and derivative transactions, including TBA contracts, under the terms of the related agreements. We may also periodically use liquidity to repurchase shares of the Company's stock.
During the nine months ended September 30, 2025, we issued 61,025,405 shares of common stock through our ATM program, resulting in proceeds of $776 million, net of broker commissions and fees. We partially deployed these proceeds into Agency RMBS and to post initial margin requirements related to a larger hedge portfolio including interest rate swaps, swaptions, and U.S. Treasury futures.
Our liquidity fluctuates based on our investment activities, leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our consolidated balance sheet. In our measure of liquidity, we also include the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement. Our liquidity as of September 30, 2025, was over $1 billion, which consisted of unrestricted cash of $491 million, unencumbered Agency MBS with a fair value of $584 million, and noncash collateral pledged by our counterparties of $10 million. Our liquidity as of December 31, 2024, was $658 million.
We continuously monitor our liquidity, especially with potential risk events on the horizon, such as tariff changes, potential GSE transition, uncertainty regarding Federal Reserve policy decisions, the size of the Federal Reserve's balance sheet, quantitative tightening or easing measures, federal government shutdowns, and the impact on global markets stemming from global central bank policies. We are also monitoring the wars and conflicts around the globe. We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds, which in turn have an impact on margin requirements. In performing these analyses, we also consider the current state of the fixed-income markets and the repurchase agreement markets to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. We have not experienced any material changes in the terms of our repurchase agreements with our counterparties, and they have not indicated to us any concerns regarding access to liquidity.
In addition to the GSE guarantee of principal payments on our Agency investments, we expect the capital and repurchase agreement markets will remain accessible at capacities sufficient to cover our short-term and long-term liquidity needs.
Our perception of the liquidity of our investments and market conditions significantly influences our targeted leverage. In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 7.5 times shareholders' equity as of September 30, 2025. We include 100% of the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment.
Repurchase Agreements
Leverage based solely on repurchase agreement amounts outstanding was 6.0 times shareholders' equity as of September 30, 2025. Our repurchase agreement borrowings are uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances, we may enter into longer-dated maturities depending on market conditions. We seek to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in
the event of a counterparty's failure to renew existing repurchase agreements. As part of our continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker-dealer subsidiaries of regulated financial institutions or primary dealers.
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon several factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in TBA dollar roll transactions versus buying specified pools. The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:
Repurchase Agreements
($s in thousands) Balance Outstanding As of
Quarter End 		Average Balance Outstanding For the Quarter Ended Maximum Balance Outstanding During the Quarter Ended
September 30, 2025 $ 11,753,522 $ 10,468,568 $ 11,754,581
June 30, 2025 8,600,143 7,871,627 8,600,487
March 31, 2025 7,234,723 6,842,485 7,234,723
December 31, 2024 6,563,120 6,431,743 6,568,805
September 30, 2024 6,423,890 5,943,805 6,461,475
June 30, 2024 5,494,428 5,410,282 5,529,856
March 31, 2024 5,284,708 5,365,575 5,469,434
For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement borrowing) in order to support the amount of the financing. This excess collateral is often referred to as a "haircut" and is intended to provide the lender protection against fluctuations in the fair value of the collateral and/or the failure by us to repay the borrowing at maturity. Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged. If the fair value of the collateral falls below the amount required by the lender, the lender has the right to demand additional margin or collateral. These demands are referred to as "margin calls," and if we fail to meet any margin call, our lenders have the right to terminate the repurchase agreement and sell any collateral pledged. The weighted average haircut for our borrowings as of September 30, 2025, was consistent with prior periods, typically averaging less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 10-14% for borrowings collateralized with CMBS IO.
The collateral we post in excess of our repurchase agreement borrowing with any counterparty is also typically referred to by us as "equity at risk," which represents the potential loss to the Company if the counterparty is unable or unwilling to return collateral securing the repurchase agreement borrowing at its maturity. The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and uncommitted nature of the repurchase agreement borrowings. As of September 30, 2025, we had amounts outstanding under 28 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.
We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. We do not believe we are subject to any covenants that materially restrict our financing flexibility. We were in full compliance with our debt covenants as of September 30, 2025, and we are not aware of circumstances that could potentially result in our non-compliance in the near future.
Derivative Instruments
Derivative instruments we enter into may require us to post initial margin at inception and daily variation margin based on subsequent changes in their fair value. Daily variation margin requirements also entitle us to receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds
the minimum margin requirement. The collateral posted as margin by us is typically in cash. As of September 30, 2025, we had cash collateral posted to our counterparties of $333 million under these agreements.
Collateral requirements for interest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in excess of the clearing exchange. Collateral requirements for our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income Clearing Corporation and, if applicable, by our third-party brokerage agreements, which may establish margin levels in excess of the MBSD. Our TBA contracts, which are subject to master securities forward transaction agreements published by the Securities Industry and Financial Markets Association as well as supplemental terms and conditions with each counterparty, generally provide that valuations for our TBA contracts and any pledged collateral are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the TBA contract and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business day.
The following table provides details on the "net receipts (payments) on derivative instruments" shown on our consolidated statements of cash flows for the periods indicated:
Nine Months Ended
September 30,
Cash received or paid by instrument:
2025 2024
($s in thousands)
Interest rate swaps:
Net variation margin paid
$ (213,055) $ (15,281)
Net periodic interest (1)
18,659 -
(194,396) (15,281)
U.S. Treasury futures:
Net variation margin (paid) received
(29,580) 205,921
Paid upon maturity/termination
(29,129) (237,694)
(58,709) (31,773)
Options on U.S. Treasury futures
Premium paid at inception
(8,008) -
TBA securities:
Received upon settlement
27,435 85,016
Net (payments) receipts on derivative instruments
$ (233,678) $ 37,962
(1)Net periodic interest from our effective interest rate swaps is recognized as income or expense during the period earned or incurred, but the cash is not received or paid until the anniversary of each agreement's effective date or upon maturity.
Dividends
We set our dividend based on many factors, including our view on long-term returns, yield on comparable investments, liquidity and market risk, and levels of taxable income. Among these factors, we focus on economic returns and taxable income within the context of the distribution requirements. As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions, including the separate dividend requirements of the Series C Preferred Stock.
We designate certain derivative instruments as interest rate hedges for tax purposes. Realized gains (losses) resulting from the difference in fair value and the amount of cash received or paid upon termination or maturity of
designated derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company but are generally not recognized in REIT taxable income until future periods. Non-designated derivative instruments are included in GAAP earning and REIT taxable income in the same period the derivative instrument matures or is terminated by the Company. The table below provides the projected amortization of the Company's net deferred tax hedge gains that may be recognized as taxable income over the periods indicated, given conditions known as of September 30, 2025; however, uncertainty inherent in the forward interest rate curve makes future realized gains and losses difficult to estimate, and as such, these projections are subject to change for any given period.
Projected Period of Recognition for Tax Hedge Gains, Net
September 30, 2025
($ in thousands)
Fiscal year 2025
$ 99,310
Fiscal year 2026
97,916
Fiscal year 2027
93,327
Fiscal year 2028 and thereafter
396,988
$ 687,541
As of September 30, 2025, we also had $500 million in capital loss carryforwards, the majority of which will expire by December 31, 2028. Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income, coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 2025 or in any given year.
We generally fund dividend distributions through portfolio cash flows. If we make dividend distributions in excess of our portfolio cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business," as well as Part I, Item 1A, "Risk Factors" of this Form 10-K for additional important information regarding dividends declared on our taxable income.
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 1of the Notes to the Consolidated Financial Statements contained within Part II, Item 8 of this Quarterly Report on Form 10-Q for additional information.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual results may differ from the estimated amounts we have recorded.
Critical accounting estimates are defined as those that require management's most difficult, subjective, or complex judgments, and which may result in materially different results under different assumptions and conditions. Our critical accounting estimates are discussed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2024 Form 10-K under "Critical Accounting Estimates." There have been no significant changes in our critical accounting estimates during the three months ended September 30, 2025
FORWARD-LOOKING STATEMENTS
Certain written statements in this Quarterly Report on Form 10-Q that are not historical facts constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management's beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, considering all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by the use of words such as "believe," "expect," "anticipate," "estimate," "plan," "may," "will," "intend," "should," "could," or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
Forward-looking statements are inherently subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Not all these risks and other factors are known to us. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. The projections, assumptions, expectations, or beliefs upon which the forward-looking statements are based can also change as a result of these risks or other factors. If such a risk or other factor materializes in future periods, our business, financial condition, liquidity, and results of operations may vary materially from those expressed or implied in our forward-looking statements.
While it is not possible to identify all factors that may cause actual results to differ from historical results or any results expressed or implied by forward-looking statements or that may cause our projections, assumptions, expectations, or beliefs to change, some of those factors include the following:
•the risks and uncertainties referenced in this Quarterly Report on Form 10-Q, especially those incorporated by reference into Part I, Item 1A, "Risk Factors,"
•our ability to find suitable reinvestment opportunities;
•changes in domestic economic conditions;
•geopolitical events, such as terrorism, war, or other military conflict, including the war between Russia and Ukraine and the conflict in the Middle East, and the related impact on macroeconomic conditions as a result of such conflict;
•tariffs that the U.S. imposes on trading partners or tariffs imposed on the U.S. from trading partners;
•global government policy changes and the ability or inability to react to rapidly changing global economic policies;
•changes in interest rates and credit spreads, including the repricing of interest-earning assets and interest-bearing liabilities;
•our investment portfolio performance, particularly as it relates to cash flow, prepayment rates, and credit performance;
•the impact on markets and asset prices from changes in the Federal Reserve's policies regarding the purchases of Agency RMBS, Agency CMBS, and U.S. Treasuries;
•actual or anticipated changes in Federal Reserve monetary policy or the monetary policy of other central banks;
•adverse reactions in U.S. financial markets related to actions of foreign central banks or the economic performance of foreign economies, including in particular China, Japan, the European Union, and the United Kingdom;
•uncertainty concerning the long-term fiscal health and stability of the United States;
•the cost and availability of financing, including the future availability of financing due to changes to regulation of, and capital requirements imposed upon, financial institutions;
•the cost and availability of new equity capital;
•changes in our leverage and use of leverage;
•changes to our investment strategy, operating policies, dividend policy, or asset allocations;
•the quality of performance of third-party service providers, including our sole third-party service provider for our critical operations and trade functions;
•the loss or unavailability of our third-party service provider's service and technology that supports critical functions of our business related to our trading and borrowing activities due to outages, interruptions, or other failures;
•the level of defaults by borrowers on loans underlying MBS;
•changes in our industry;
•increased competition;
•changes in government regulations affecting our business;
•changes or volatility in the repurchase agreement financing markets and other credit markets;
•changes to the market for interest rate swaps and other derivative instruments, including changes to margin requirements on derivative instruments;
•uncertainty regarding continued government support of the U.S. financial system and U.S. housing and real estate markets, or to reform the U.S. housing finance system, including the resolution of the conservatorship of Fannie Mae and Freddie Mac;
•the composition of the Board of Governors of the Federal Reserve;
•the political environment in the U.S.;
•the effect of the U.S. federal government shutdown on economic conditions;
•systems failures or cybersecurity incidents; and
•exposure to current and future claims and litigation.
Regulation FD Disclosures
We routinely announce material information to investors and the marketplace using filings with the SEC, press releases, public conference calls, presentations, webcasts, and the investor relations page of our website at www.dynexcapital.com/investors and our LinkedIn page. We use these channels for purposes of compliance with Regulation FD and as routine channels for distribution of important information. While not all of the information that we post to the investor relations page of our website or to our LinkedIn page is of a material nature, some information could be deemed to be material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The web addresses are included in this Quarterly Report on Form 10-Q as textual references only and the information posted on these channels are not incorporated by reference in this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC.
Dynex Capital Inc. published this content on October 27, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on October 27, 2025 at 20:20 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]