Dynex Capital, Inc. Reports Fourth Quarter and Annual 2006 Results

Business Wire, Feb 14, 2007

GLEN ALLEN, Va. -- Dynex Capital, Inc. (NYSE: DX) today reported net income for fourth quarter 2006 of $2.3 million, compared to net income of $955 thousand for fourth quarter 2005. Net income to common shareholders for the fourth quarter of 2006 was $1.3 million, or $0.11 per common share, versus a net loss of $382 thousand, or $0.03 per common share, in the same period of 2005. For the full year ended December 31, 2006, the Company reported net income of $4.9 million, or $865 thousand after consideration of preferred stock dividends, versus net income of $9.6 million, or $4.2 million after consideration of preferred stock dividends, for the same period in 2005. Net income per common share was $0.07 for all of 2006 and $0.35 for all of 2005.

Book value per common share, which is derived by subtracting the Series D Preferred Stock redemption value from total shareholders' equity, was $7.78 at December 31, 2006 versus $7.65 at the end of 2005. The Company also reported adjusted common equity book value of $98.7 million, or $8.13 per common share, at the end of 2006. Adjusted common equity book value consists of common equity book value, adjusted to include certain investments, net of associated financing, at their estimated fair values, based on anticipated cash flows from these investments discounted at estimated market rates. A reconciliation of the adjustments to common equity book value and adjusted common equity book value per share is included in this press release.

The Company has scheduled a conference call for Friday, February 16, 2007, at 1:30 p.m. Eastern Time to discuss fourth quarter and full year results. Investors may participate in the call by dialing (888) 568-1647.

Discussion

Thomas B. Akin, Chairman of the Company, stated, "We are quite pleased with our results for 2006, both from an earnings point of view and how we have positioned the Company going forward. We entered into a joint venture with Deutsche Bank in 2006, and we recently hired Sandler O'Neill to expand our access to investment opportunities. We are hopeful that we will begin seeing results from these efforts in 2007. We also continued to enhance our financial position, and we now have $68 million in readily available, investable capital. Finally, we completed a partial redemption of our preferred stock which enhanced returns to our common shareholders during the year in lieu of reinvesting that capital."

Mr. Akin continued, "With respect to our fourth quarter results, net interest income was a respectable $3.1 million, and excluding one-time income from a commercial loan prepayment, that equates to an approximate 8% yield on our book equity capital. Including the earnings from our joint venture with Deutsche Bank, the yield on our book capital was 10% before expenses and the preferred stock dividend. Our objective for 2007 will be to move that yield higher as we redeploy our cash. In terms of our overall risk profile, credit performance on our investment portfolio continues to remain excellent, and I am pleased to state that, as of the date of this release, we have no remaining delinquent commercial loans in our balance sheet, and only one loan, with a principal balance of $1.4 million, is delinquent in our joint venture entity with Deutsche Bank. Our assets and liabilities are carried at nominal premiums to their principal balances, mitigating prepayment risk, and our investment assets have minimal interest rate risk."

Mr. Akin concluded, "We are optimistic that 2007 will ultimately provide acceptable investment opportunities for the Company, with the assistance of Sandler O'Neill, enabling us to begin the process of utilizing our substantial tax net operating loss carryforward to grow book value per common share. Recent negative news around the mortgage market suggests that there may be buying opportunities for mortgage assets at reasonable prices in the future. We continue to review investment opportunities in mortgage assets and operations, but will look outside these investments for opportunities to strategically invest our capital with partners who bring complimentary expertise to the Company. The goal will be to diversify our investment portfolio, with an overall expectation that new capital investments for the Company will have acceptable returns relative to the risk involved in owning these assets."

Discussion of Fourth Quarter Financial Results

Net income for the fourth quarter included net interest income of $3.1 million, versus $2.1 million for the same period in 2005. Net interest income for the fourth quarter included $455 thousand of favorable level yield adjustments from a commercial loan prepayment. Net interest spread for the quarter was 1.76%, consisting of the weighted-average yield on average earning assets of 8.04%, less the weighted-average cost of funds of 6.28%. Excluding the favorable level yield adjustment of $455 thousand, net interest spread was 1.20%. Net interest spread for the same period in 2005 was a negative 0.17%, and it was 0.65% for the third quarter of 2006. Net interest spread for the fourth quarter improved as a result of the derecognition of lower yielding commercial assets which were contributed to the joint venture, higher yields on cash balances, and higher net interest spreads on LIBOR based adjustable rate assets as these assets have reset to higher rates while rates on associated LIBOR based financing has remained constant. Net interest spread for all of 2006 was 0.39%, versus 0.26% for 2005. Net yield on average interest earning assets, which consists of net interest income divided by average interest earning assets, was 3.30% for the fourth quarter of 2006, and 1.86% for the full year.