GLEN ALLEN, Va.--(BUSINESS WIRE)--Dynex Capital, Inc. (NYSE: DX) reported its second quarter 2016 results today. As previously announced, the Company's quarterly conference call to discuss these results is today at 10:00 a.m. Eastern Time and may be accessed at 1-888-339-0823 or by live webcast which includes a slide presentation, the link for which is provided under “Investor Center” on the Company's website (www.dynexcapital.com).

Second Quarter 2016 Highlights

• Comprehensive income of $0.35 per common share comprised of net loss to common shareholders of $(0.11) per common share and other comprehensive income of $0.46 per common share
• Core net operating income per common share, a non-GAAP measure, of $0.21
• Net interest spread of 1.94% and adjusted net interest spread, a non-GAAP measure, of 1.87%
• Book value per common share of $7.69 at June 30, 2016, an increase of $0.15, or 2%, from March 31, 2016 book value per common share of $7.54
• Leverage of 6.1x shareholders' equity at June 30, 2016 versus 6.4x shareholders equity at March 31, 2016
• Dividend declared of $0.21 per common share

Earnings Summary

Comprehensive income to common shareholders was $17.4 million for the second quarter of 2016 versus $2.0 million in the first quarter of 2016. Comprehensive income to common shareholders for the second quarter of 2016 was primarily comprised of the following:

• net interest income of $16.7 million
• net unrealized gains on changes in fair value of investments of $23.0 million
• net loss on derivatives of $16.3 million, substantially all of which was an unrealized loss on changes in fair value
• realized losses of $(0.3) million on MBS sales

Net interest income declined $2.1 million to $16.7 million for the second quarter of 2016 versus $18.8 million for the first quarter of 2016. Interest income for the second quarter of 2016 declined $2.3 million compared to the first quarter of 2016 primarily as a result of the declining balance of our investment portfolio and lower prepayment penalty income from CMBS. The decline in interest income was partially offset by a $0.2 million decline in interest expense due to a lower average balance of borrowings for the second quarter of 2016 compared to the first quarter of 2016. Net interest spread decreased 3 basis points from the first quarter of 2016 primarily because a portion of our maturing FHLB advances were replaced with repurchase agreement financings at higher rates.

Net unrealized gains on changes in fair value of investments of $23.0 million and net loss on derivatives of $16.3 million for the second quarter of 2016 were due primarily to the decline in market interest rates during the second quarter of 2016.

Core net operating income to common shareholders was $10.5 million, or $0.21 per common share, for the second quarter of 2016 versus $10.8 million, or $0.22 per common share, for the first quarter of 2016. Core net operating income for the second quarter of 2016 was impacted by the following:

• a decline of $2.3 million in interest income compared to the first quarter of 2016 due to the declining balance of our investment portfolio and lower prepayment penalty income on Agency CMBS during the second quarter as mentioned above;
• a decline of $1.3 million in adjusted interest expense due to a reduction in the average notional balance of current pay-fixed interest rate swaps as discussed below; and
• lower general and administrative costs of $0.4 million as a result of lower salary and stock compensation expense compared to the first quarter of 2016.

Adjusted net interest spread increased 11 basis points to 1.87% for the second quarter of 2016 compared to the first quarter of 2016 because adjusted cost of funds decreased 12 basis points. The decrease in adjusted cost of funds for the second quarter of 2016 was due to lower net periodic interest costs of 14 basis points as a result of terminations of $500.0 million notional of pay-fixed interest rate swaps early in the second quarter of 2016. The benefit from the decrease in net periodic interest cost was partially offset by higher repurchase agreement borrowing costs, which increased as a result of the replacement of maturing FHLB advances with repurchase agreement financings at higher rates as mentioned above.

Shareholders' Equity and Book Value per Common Share

Shareholders' equity increased 2% during the second quarter of 2016 to $491.5 million at June 30, 2016. Book value per common share also increased 2% to $7.69 at June 30, 2016 compared to $7.54 at March 31, 2016. The increase in book value per common share of $0.15 was driven primarily by increases in unrealized gains in investments partially offset by the increase in unrealized losses on derivative instruments. On balance, shareholders' equity and book value per common share increased as a result of the rally in interest rates during the quarter. Economic return on book value was 4.8% for the second quarter of 2016 (calculated by dividing the sum of dividends declared of $0.21 and the $0.15 increase in book value per common share by second quarter's beginning book value of $7.54) and 5.2% for the first half of 2016.

Dynex Capital, Inc. is an internally managed real estate investment trust, or REIT, which invests in mortgage assets on a leveraged basis. The Company invests in Agency and non-Agency RMBS, CMBS, and CMBS IO. Additional information about Dynex Capital, Inc. is available at www.dynexcapital.com.