Alison G. Griffin – Director-Investor Relations Byron L. Boston – President, Chief Executive Officer and Co-Chief Investment Officer Stephen J. Benedetti – Chief Financial Officer, Chief Operating Officer Smriti L. Popenoe – Executive Vice President, Co-Chief Investment Officer.

Douglas Harter – Credit Suisse Trevor Cranston – JMP Securities LLC Jason Michael Stewart – Compass Point Research & Trading, LLC Michael R. Widner – Keefe, Bruyette & Woods, Inc. Jason Stankowski – Clayton Capital Partners.

Good morning and welcome to the Dynex Capital Incorporated Third Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Alison Griffin, please go ahead..

Thank you. Good morning everyone. The press release associated with today’s call was issued and filed with the SEC today, November 04, 2014. You may view the press release on the company’s website at www.dynexcapital.com under Investor’s center as well as on the SEC’s website at www.sec.gov.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The words believe, expect, forecast, anticipate, estimate, project, plans, and similar expressions identify forward-looking statements that are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified.

The company’s actual results and timing of certain events could differ considerably from those projected in or contemplated by those forward-looking statements as a result of unforeseen external factors or risks.

For additional information on these factors or risks please refer to the Annual Report on Form 10-K for the period ended December 31, 2013, as filed with the SEC. The document may be found on the company’s website under Investor center as well as on the SEC’s website.

This call is being broadcast live over the Internet with a streaming slide presentation and can be found through a webcast link under Investor center of the website. The slide presentation may also be referenced by clicking on the Dynex Capital’s third quarter 2014 earnings call link also on the presentation page of the webcast.

With me on the call today, I have Byron Boston, CEO, President and Co-CIO, Thomas Akin, Executive Chairman, Smriti L. Popenoe, EVP, and Co-CIO; and Steve Benedetti, EVP, CFO and COO. I’d now have the pleasure of turning the call over to Byron..

Good morning and thank you very much for joining us this morning. Let me first state the facts and then I’ll give a brief high level overview of what is happening at Dynex behind the numbers. We’re happy with our third quarter results, as book value was stable while we generated a solid 11% return on equity based on core net income.

We did not experience any surprises in the third quarter, prepayments did not surprise us, rate movements did not surprise us, the spread level did not surprise us. We told you at the beginning of this year that the global markets have become increasingly more complex and hence this is not the environment for taking outsize risk positions.

As such, we have made several small portfolio adjustments to better position ourselves for continued environment where central bank activity plays a major role in capital markets, the full impacts of new government regulations are yet to be realized and the interconnecting this of the global financial markets makes future moves and asset prices highly uncertain.

Nonetheless, we’re confident in our approach to this environment and we continue to manage our capital with the same level of discipline that we have exhibited for the past decade. We’ve been very consistent at Dynex in our approach to managing our capital. The core of our strategy has been discipline and capital deployment.

When risk spreads were wide in Agency ARMs, we bought as many as we could while adhering to a disciplined approach of specified pool selection to ensure our prepayments would be better than average.

In 2011, when risk spreads were wide in the CMBS sector and most investors stood on the sidelines, we deployed as much capital as possible to capture the excess returns offered from potential spread tightening. We have experienced spread tightening of 300 to 500 basis points from the wide levels that we enjoyed and we deployed capital in 2011.

Today and keeping with our disciplined approach, we have begun to adjust our portfolio because risk premiums globally in most asset classes have become so tight. Our first move has been to move up in credit quality and to increase the liquidity of our balance sheet.

In addition, we have made multiple adjustments in our repo book and the structure of our derivative portfolio to maximize our returns in this dynamic environment. Smriti and Steve will give you more specifics on our results and the structure of our portfolio today.

As I stated, we’re very happy with our third quarter results as they demonstrate that despite the unusual nature of the global markets, we continue to generate attractive net income for our shareholders without taking too much risk. With that, I’ll turn it over to Steve..

Thanks, Byron. I’ll cover Slides 4 and 5 for those of you that are following the presentation. My comments are going to be referencing a number of non-GAAP financial measures which are detailed on Slides 27 and 28 in the appendix to the deck.

For the third quarter, we reported GAAP net income per common share of $0.52 and core net operating income per share of $0.25. GAAP net income includes gain on sale of investments of $9.1 million and mark-to-market gains on derivative instruments of $4.8 million.

As Smriti will discuss later, the gain on the sale of investments was primarily related to the sale of a portion of our Freddie K mezzanine CMBS investments which we have continued into the fourth quarter. Core net operating income was $0.25 for the quarter equal to our dividend and comparable to the second quarter’s $0.26.

The $0.25 per share represented 11% return on adjusted common equity as Byron mention and a 11.9% return or yield based on yesterday’s closing stock price. Adjusted net interest income, another non-GAAP measure, was $19.1 million versus $20.1 million due to the smaller earning asset base partially offset by a smaller hedge book and lower repo cost.

You may recall that adjusted net interest income includes the periodic cost of our hedges which our GAAP results do not and we prefer this measure when we analyze the net spread income that we are earning on our investments. Adjusted net interest spread for the third quarter was 193 basis points.

We saw a 4 basis point decline in repo cost during the quarter along with the 3 basis point decline in hedge cost, offsetting 6 basis point decline in asset yields. Just as a remainder, gain on sale of investments is included in taxable income which exceeds distributed income on year-to-date basis by approximately $1 million.

We have continued to sale the Freddie K investments in the fourth quarter and have generated an additional estimated $11 million in gains. We expect the distributor portion of the gains in the fourth quarter to offset the decline in earnings from a temporary lower investment base.

The remainder we expect to keep in book value by utilizing our tax NOL carry forward. With respective to prepayments, we saw a modest increase this quarter in our Agency RMBS but this increase had only a nominal impact on our reported results and our longer term prepayment expectations remain unchanged.

In adhering to the market views into our views on market risk, we’ve continued to reduce our leverage to 5.2 times shareholders equity at 9/30 from 5.7 times last quarter due primarily to the asset sales during the quarter as we built our liquidity and investable capital position.

We did reinvest paydowns received during the quarter mostly in CMBS IO investments where we continue to favor their risk reward profile. As September 30, our investment portfolio was $3.7 billion versus $4 billion at June 30. With respect to book value, it was higher by $0.02 to $9.14 for the quarter.

Spread tightening on our hybrid arms more than offset widening on our CMBS and our hedge is benefited from swap spread widening and their position on the yield curve. Hybrid ARMs tightened the most given their seasoning is – as the securities remain well bid given their short duration profile.

In general, our portfolio is seasoning and rolling down the curve, which also benefits valuations. Book value for the year has increased by $0.45 or 5% and we have generated a total economic return of almost 14% year-to-date when considering dividends declared and paid.

I’ll now turn the call over to Smriti, who will talk about our investment portfolio, performance outlook, and strategy..

higher rated agency multifamily securities, higher rated non-agency CMBS securities particularly the IO cash flow, traditional agency MBS and non-agency residential mortgage backed securities. We are very comfortable with the risk reward in the first two sectors and we’re actively deploying capital in those sectors.

We also see potential opportunities in the agency RMBS sector although the critical issue here is the timing of investments. Technical and agency RMBS are very strong. Low prepayments, muted home sales activity and the winter seasonal downturn are very positive. Investor demand is also expected to be strong.

The major question mark for us in this sector is how the market will behave without a government backstop in the market. You can expect this to be patient, opportunistic and discipline because we believe this sector will have opportunity to put capital to work profitably over the next 6 to 12 months.

I want to highlight also a few other slides in our standard package. Please turn to Slide 14, our equity capital allocation slide. As you can see on this slide, we’ve compared our position from June 30th to September 30th, most of our capital is still allocated to CMBS.

We have reduced our position in Ginnie Mae IOs, but expect our allocation to IOs to move backup and you will see also that our cash position is higher.

On Slide 15, the CMBS portfolio of quarterly comparison, you can see our single A rate tranches went from 17.7% than 9.3%, this position is actually down to about 3% of our total equity as of October 31st pushing that AAA bucket to 88% through October 31.

You can also see on the bottom two charts that the distribution across vintages has changed given the sales that we’ve made in the portfolio. As of June, we have owned more securities in the 2011, 2012 vintages reflecting our investments in the agency multifamily credit.

As of September, since we’ve sold those bonds, our concentration is in the 2014 vintage, but you also remember that we’ve been investing mostly in AAAs in the 2014 vintage as we’ve discussed. Our concerns are around underwriting quality in 2014. So to summarize what we’ve discussed today.

We took profits on a long-term investment in agency multifamily credit as well as our Ginnie Mae CMBS IOs. We believe the risk reward in these positions was asymmetric. We think that this gives us financial flexibility. We can wait for the right investment opportunity.

We have the option to defray any decline in core earnings with gains from our NOL carryforward. We currently see opportunities in three sectors. We’re actively deploying capital in high quality CMBS. We’re going to be opportunistically entering Agency RMBS and non-Agency RMBS.

Our risk position is down both in spread terms and interest rate risk terms and we have the capital and liquidity to both withstand market volatility as well as to deploy capital profitably when those windows of opportunity present themselves. With that, I’ll turn it over to Byron..

Thanks, Smriti. We’ve tried to give you a lot of information. We want you to understand as much as possible what we’re thinking here at Dynex and the decisions that we’re making. Well, let me close by clarifying a few key points.

Number one, just because as we see the markets is having become more complex does not mean we are confused about what is actually evolving in front of us. To the contrary, we are extremely confident in our assessment of the current risk environment and we fully respect the increased level of uncertainty that exist in the markets today.

Number two, just because the markets are more complex does not mean we won't find opportunities to invest. We believe we will continue to see random bouts of volatility in asset valuations on both macro and micro basis. And we will have the chance to deploy capital profitably when it meets our investment criteria.

Number three, just because we have taken profits on a very successful investment does not mean we are adornment. As we stated earlier, we are making portfolio adjustments that risk backs that risk inherent in the overall global macro environment. And then finally, number four, you’ve heard this before, I just want to reiterate this point.

Our shareholders can continue to expect us to manage our capital as a management team that has a significant ownership interest in the company. With that, operator open the floor to questions..

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question is Douglas Harter, Credit Suisse. Please go ahead..

Thanks.

Firstly, when you guys talk about looking for a sort of pockets of volatility, did the first couple of weeks of October present any of those opportunities or sort of the rebound happen sort of too quickly or just kind of how did that those first three weeks of October playoff?.

Hey, Doug, it’s Smriti. So yes we did, we did see the first couple of weeks as providing us opportunity and we were able to put capital to work during that time..

And Doug, let me take on our debt. It’s interesting how these – when I made my comment, I try to emphasize both on a macro basis and on a micro basis. I would consider that one to be more of a macro event where all asset class seem to move in terms of valuations.

But there are other minor ones that take place on a more micro basis within sectors that also can provide the opportunity to invest capital, which we get to $200 million in the market once, but I don’t think the market is going to give us that opportunity to do it..

Got it.

And how are you guys thinking about the GSE risk transfer market, is that an opportunity? It’s obviously one piece that the supply is growing quite substantially and so just – just interested to get your thoughts on that?.

Yes, so we look at that sector on a daily basis, and at this point don’t feel its still attractive long term risk reward. The GSEs are going to be coming out with these deals once a month starting next year. And while the securities have cheapened, we think there is technically a little bit more room to go before it starts to makes sense.

And I think the other piece of that is, can you get long term committed financing for that type of security and that’s the other piece that give us pause right now..

On a higher level, Doug, we do like residential credit just in general. I think the government is clamped down so hard around lenders that we think the credit just we look at is attractive. We are waiting for the price to approach levels that we really find attractive, it is great that the agencies are selling off that credit.

It will be great to see themselves more and more and we believe that at some point that is a very viable asset class that will reprice itself to a level that we’ll find attractive..

Great. Thank you guys..

Our next question is Trevor Cranston, JMP Securities. Please go ahead..

Hi, thanks and congratulations on a nice quarter. I guess my question is with the portfolio repositioning this quarter, Byron you talked a little bit about the potential for kind of a permanent repricing and some of the bonds you sold. I guess the Agency CMBS mess classes in some of the IOs.

But could you just expand a little bit on kind of why you think there is a potential for permanent repricing in those classes, but you said that you still see value in kind of the higher credit Agency CMBS and you’ve seen comfortable with the spread risk there?.

So if you look at the spread chart that that we’ve got in our presentation, what you’ll see is you can see how much spread tightening has taken place.

So at some point, we said that when we looked at them and we said you know what there is probably a 10% chance we’re going to get maybe 5 basis points or 10 basis points out of this tightening and the 90% chance the one day we’re going to look up that these spreads are going to be wider.

We can’t predict the exact time and – are we trying to predict the exact time. What if all we’re going to get at this point is just carry out of the bonds we might – as we’ll pull that carry forward by selling the bonds and then redeploy the capital elsewhere because the movement wider.

When I look at the goal, when I think about the amount of debt that’s been raised globally whether it’s on a sovereign basis, emerging markets of subprime – it’s a ton of debt. And so the probability of a permanent correction in risk and credit spreads, it’s increasing by the day.

And so, we just look at the position and say, you know what it’s an asymmetric outcome here, 10% tighter and 90% wider. Why do we want to hold the position? That’s from discipline, we’re being discipline. We simply move up in credit at that point, up in credit and up in liquidity..

Okay that makes sense. And you know with the additional changes since the end of the quarter, I mean it sounds like that you continue to reduce some of those CMBS positions, but ultimately you’ve had some opportunities to add some bonds also in the first couple weeks of October.

Can you say about where your leverage is today and kind of what level you targeting getting it up to kind of by the end of the fourth quarter and into the first quarter?.

No, Trevor, I am not sure we can give you sort of an exact update on where it is today, but what I can say is we’ve been able to redeploy you know at least half of what we sold and not more in the first month of October and we expect that to continue..

Okay..

So that we used that October widening as an opportunity to put capital back to work..

Okay that helps..

And part of the problems Trevor when we talk about complex is just the inability to predict to give you those exact numbers and look out into the future and took crystal ball – Trevor right here December 31 we’re going to be at 5.637 leverage, it’s very difficult..

Yes, understood.

And along with the changes, since the end of the quarter, where there any incremental changes to the hedge book, in addition or is that kind of been relatively static since September 30?.

We haven’t made any changes in this quarter to our hedge position. Most of our hedge position actually was early in the third quarter..

And Trevor I’m going to take that question just for an opportunity to address something that I know always in the marketplace especially in 2014 everyone has been so harden bothered about higher interest rates. Dynex, we started in 2008 with the belief that rates would be lower for longer and most people expect.

Now we haven’t changed our opinion, now what lower means could be right in this 2% or 3% range in terms of rate, but what it does mean for us is, we have not adjust it basically this covered our duration gap. And I know many of you in the analyst community have been focused on.

Well do they have this amount hedge versus repo or do they have zero duration gap. We haven’t changed, we haven’t fluctuated. We have not been really concern with the rate environment, as much as we’ve been more concern with the spread environment. So I’ll just leave you with that..

Okay. I appreciate the comments. Thank you..

Our next question is Jason Stewart, Compass Point. Please go ahead..

Thank you.

Just another question on the multifamily, is the reacceleration of lending at the GSE is part of, is that factored into your equation, or are there concerns perhaps deeper that you’re seeing deal structures weaken?.

So that’s a technical factor. And obviously if they do continue to land this, there’s more supply. I would say it really what it was, is a more macro call. We’ve seen spreads on those single A rated tranches just coming so much relative to our entry point. It started to make sense to take some profits, right.

And so at some point, I’m not going to rule out, if they do cheapen up, and they cheapen up enough to where it starts to make sense for us to reenter that trade again. I’m not going to rule that out, but it really was basically looking at that position and saying, it’s come too far for us not to take some profits here..

And then let me plug again a macro comment around this, which is, we still like the multifamily sector.

We think there are some underlying demographic trends they are very very support about the multifamily sector, but the fact of the matter is, when we were buying bonds in 2009, 2010 and 2011, those bonds were structured better than the loans that are being made today.

There were ton of lenders in the marketplace with a ton of lenders in the marketplace with a ton of cash. So we still are involved in multifamily. We are still involved with the Freddie K deal. We just reduced our exposure to the A level and lower rate because we have some triple B bonds also in our portfolio. So we just simply went up in credit.

And if we do see an adjustment in spreads such that we do reenter that lower credit space. We were very cognizant of the fact. The loans made in 2014-2015 will not be the same as loans made in 2010, 2011, and 2012..

Okay, that’s a good color. And then a broader question that sort of related to I think from your macro thoughts there.

The reintroduction of greater than 95 LTV loans at the GSEs, how does that play into your view of single family RMBS and maybe perhaps if you want to elaborate into multifamily that has an impact here that would be helpful?.

Yes, so that’s going to be a technical issue because you would think that if they put a lot greater than 95 LTV loans to be made that that would incrementally impact supply.

And that’s really where – again the two or three these things that are negative in terms of technicals for the residential mortgage-backed security sector, one is the FEDs not going to be buying and then two what happens if there is really sort of an increase due to an expansion of the credit bonds.

So from a technical standpoint that results in more supply, hopefully that creates a spread widening opportunity for us, right. Fundamentally though I’m not sure that’s the real problem facing the housing market right now. If you look at what home prices have done over the last five years, it’s been an incredible recovery, double-digit increases.

I’m not sure it’s necessarily just the level of rates and the down payment that’s causing buyers not to come in. There is a serious demographic shift that’s happening. You’ve heard a lot of people talk about the student loan debt for first time home buyers. All of that actually leads us to sort of reaffirm our faith in our multifamily investments.

As we’ve said 60% of our capital is in CMBS. We’re a big believer in the multifamily story and we think it’s supportive of that. So I wish the government all the luck in the world in terms of getting this up, but it just feels like structurally we’re going in the multifamily way..

And then let me just (indiscernible) on this because I do have a burden on myself about the amount of debt globally. And there is a lot of talk about growth and how sustainable growth happens today.

It’s the only way we’re going to really generate growth is by getting the American consumer to borrow more money, where there is subprime auto, subprime houses, the subprime credit cards. One of the problems we have here Dynex as we just can’t see how that’s a sustainable situation..

Great, thank you..

Our next question is Mike Widner of KBW. Please go ahead..

Thanks. Good morning guys. I wanted to follow-up just to make sure I understood a couple of things that you would said. You mentioned putting some of the capital back to work in the first part of October. I didn’t get where you sort of indicated where you thought the best opportunities were and where you might have put that capital to work..

We’ve been buying non-agency CMBS IOs on the triple A side, mostly. We’ve also and we mentioned this last quarter, but we’ve been making investments in some of the new single family rental deals that are out on the triple A side as well. So those are two areas we see opportunity right now..

And Mike when we think about reinvestment, let me just remind everyone that we’ve got a broad opportunity set. Even though you watch Dynex over the last six years be mainly in hybrid ARMs and mainly in CMBS and multi-family.

Those are two main sectors that we chose to be involved in, but our opportunity set us much broader, and as we look at the future for in the markets. We will continue to turn over I don’t know Tom’s great price is turn a mini rocks to look for good investments.

We also believe in diversity, so it may turn out that we have more smaller investments just to disperse the risk across the variety of product sectors, which will reflect our concern for macro perspective in terms of the overall risk environment..

Yeah that certainly makes sense..

Mike let me contrast that to. CMBS especially the multi-family in the Freddie case back a few years ago, with Sochi we basically as we say in the all trading price back to truck up and took as many of those single agents we possibly couldn’t took triple Bs, we took IL, we took everything we could, because the (indiscernible).

Well, I’m not sure that type of concentration is smart on idea given the overall macro risk environment..

And opportunities like that don’t exist. I mean there are no easy trades..

I was going to say it’s hard to find spread opportunities like that today and if you do let me know what they are. So let me one other thing I think you said in your introductory remarks and I just want to sort of clarify it or make sure I sort of heard the implication rate, but you mentioned taking some profits on the CMBS trade.

And that’s essentially going some earnings forward.

I thought that I was hearing implication in there that if you guys end up running slightly smaller, lower leverage portfolio for a little while that you can think of those – this profit is potentially supporting the dividend, if you temporarily have less capital deployed just because that’s what seems prudent at the time.

Did I catch that correctly or might sort of putting words in your mouth..

No. I think you – I think you got that correctly..

Okay. And when they go back I guess broader question, because I always have to ask you guys broad question. You mentioned being more concerned about the spread environment and the rate environment over the past several years.

And I think that was probably the smart move, I mean, obviously rates have not I mean involve a little bit, but as you guys, I think you have been saying for a long-time, lower for longer has turned out to be correct. And you didn’t get the benefit of the spread tightening.

But spreads are a lot tighter now, as you’d just said, as we think about the rate environment, you guys have been through a couple of interest rates cycles in your day. And I can’t help thinking about the fact that every time the Fed decides to end or start the cycle again.

And then how are you want to look at the cycle is a point where the Fed has repeatedly for pretty much 40 years decide to make the curve flat. Completely flat if not inverted when they start tightening. And we’ve been getting certainly plenty of signals from the Fed about. Hey, we might start tightening the short end, sometime in 2015.

Global economy remains challenged and demographically challenged think you guys understand. So I mean how do you feel about the environment where potentially spreads remain tight, and we end up with the short ended 200 in the long ended 200..

I am going to repeat something we set it in the spring of 2008 and we start to building this portfolio on this is one I am stand real firm on. I don’t believe the global economy can handle a flat to inverted yield curve in the U.S. I don’t believe the Fed has effectively to do that one.

That one I think it’s an extreme situation, and I think it’s pushed it there, they will made the 1937 mistake, that they really don’t want to make, and I think it will not only impact the U.S., that will impact the globe. So that’s an extreme situation, where they try to push, I went to the inverted curve in the late 80s, 90s middle of last decade.

I don’t think the global economy can handle that in the U.S. the global economy, where is the growth coming from right now, the American consumer what we’re depending on it the American consumer to borrow money. So that is one extreme case that I do feel that we can stand far more.

Do I think that they could potentially make an attempt to increase short rates at some point in time? Yeah, I think it’s nothing gets in their way, they’re going to feel like obligated like they’ve just got to go do something of that nature.

After they do on one time, I think all bets are off in terms of what may happen, what was proven in the winter of this year was not the cold winter per se, but was how fragile the economy happens to be to any type of exogenous shot.

So it’s not about the economy strong or weak, in fact that the economy is very fragile and we’ll respond to the long type of either tightening as stimulus..

So with that said given the lessons of history, which you say that the Fed has generally made good decisions or bad decisions when it comes to sort of judging how the economy is and how Fed in. Again, I mean I think you’re right we’ll have a very tough time or whatever very tough time handling eight black curve.

That being said, I wouldn’t exactly keep the Feds track record is..

Yes. .

The track record, if you go back to the beginning go back to 1913. The Feds track record is not great. And it’s not because they’re dumb, they’re really smart people, but they’re people. The human beings and they’re always find themselves in an unprecedented time right. So 1937, they tighten credit too soon.

In the 1970, they loosen credit that’s the long time. One we’ve resulted in the recession, the other one resulted in ramp inflation, right. And so then in 2000, they completely missed what was going on. So they did a great job after 2008, but….

May be I think we could get some debate on that issue, but….

Well, just in September 2008 when they stepped in just to protect the financial system..

Yeah, I think that right..

Yeah, so that decision was a good decision, but if you look back at the all of the track record, that’s one of the reasons why we are concerned. Not now, you have a global system.

We’re not only worried about this Fed, but we worry about the Central Banks the John where I would call my old young days Johnny come lately, Japan and Europe Central Banks who got to be concerned on their decisions.

So with the global issue at this point where governments are involved in free flowing capital markets it is changed the game, it’s changed the dynamics, and let’s be frank to say fact U.S. Fed did not had a track record. So what do you think about the Japanese and Europeans..

No (indiscernible) it is what its cook in that kitchen right now, and I’m not any of them know what the rest is..

Right. I think the other thing you want to think about there is even in a flat and yield curve environment, let’s just say the market takes us there right, because the market leads the Fed or there is an expectation that we’re going to go there.

In that situation, the way we think about it is, if risk-free rates start to rise, then risky assets have to reprise in order to reflect how much better return you’re going to get on lower duration risk free assets. And so at that point, it really still is about spread, right.

So it is about spread, so even though you have short term rates rising, if you compare that, now the investor will be faced with, can I buy a two-year treasury note at 2% or should I buy Agency MBS at 2.5% or 3%. That’s the different trade off.

And you’re going to – people will make a different risk reward decision at that time and it’s going to impact spread assets, it’s got to..

Yes, now, I think that’s actually that certainly fair..

Right. Well, I appreciate the comments and the thoughts and the color is always good, thanks..

Thanks, Mike..

(Operator Instructions) Our next question is Jason Stankowski from Clayton. Please go ahead..

Hi guys, great job in taking a little profits in protecting book value and growing it. We appreciate it as long term holders.

I was wondering couple of things I know buying back stock deleverages certain ratios for us, but is there a level where you guys think about that as an opportunity to opportunistically deploy capital?.

Yes, Jason, just giving some empirical evidence, I think we had a down graph last year, am I right Steve?.

Yes..

When we actually entered the market to abide some of our shares, we didn’t get a great opportunity. I don’t think we got chance to buy small amount before the market, before the price of the stock turn up. I can’t give you a specific level to say this is exactly where we sit in the market with the bid..

Right..

Some price level, especially if you’re thinking like your long term holders, it makes sense, right, for us..

It’s not an opportunity said..

Yes..

In terms of use of capital for us..

Right, Jason..

It’s a great way to put. And I think historically our behavior has suggested a low-to-mid teen type discount before we got enacted. That’s not to suggest that’s past results predict future behavior, but that’s what we’ve done in the past..

That’s where you’ve gotten active.

Okay and you’ve talked about a bunch of different asset classes and I know different people in the space have looked at mortgage servicing rights and few different areas where there is possibly some good risk adjusted returns to be had and just curious if you are still looking at other things in the mortgage or mortgage related area and if there is anything left out there that could possibly have those types of characteristics or we just sort of sticking with what we’ve done in the past and just waiting for kind of the right opportunities in those asset classes..

Hi, Jason, it’s Smriti. So we’ve actually looked at a lot of opportunities, MSRs is one, we’ve looked at whole loans, we’ve looked at commercial whole loans, you name it. We are out there looking to see whether the risk adjusted returns meet long-term through the cycle sort of criteria that we have set up.

And what I can say is, as we’ve been through this process, the regulatory concerns, liquidity reputation risks all of those things as of now haven’t caused us to come out and say this is an exciting investment opportunity for us to put capital.

We’re watching a lot of these and as Byron mentioned earlier, our investment opportunity is actually really broad. Even though we choose to invest our capital on these two narrow sectors, we are out there beating the bushes for every potential opportunity and right now we just don’t see that attractive long-term risk we’ve already at.

That doesn’t mean it is never going to be there. We actually think this volatility and this is what we’re talking about this is going to give us a chance to get in and we just need to be ready to do that..

And let me give you some other points on this Jason. One, Dynex Capital was a pretty decent servicer and originator of loans back in the 90s. So we’ve had that business model under our rule, far more complicated in this business model and it generates assets that are far or less liquid on the balance sheet than we have today.

We believe we’ll place a huge priority on liquidity within the overall macro environment. So when we look at investments such as in MSR whole loan, we expect returns to exceed the more liquid asset by some amount that will make it more attractive take down today.

Here is the other issue, the closer you get to the consumer, the more you’re moving toward a regulatory buzz, whether it’s the CFPB or some other regulatory body NDC have made it absolutely miserable for most originators.

And recently at the MBA conference, just a couple of weeks ago, a very senior mortgage professional who runs a very large mortgage origination arm and he said, these people are paying for these MSRs and they’re paying really high prices, and they don’t realize the enforcement cost that comes along with the service and as you can see from the New York state attorney general tacking [Ph] is going after some non-bank services..

Alright..

So there is more risk there than return as we look at it right now. We factor in all these issues and we then take our own experience of having these more complicated business strategies under our roof and as Smriti said we – we haven’t found, be attracted today..

So far – nothing is (indiscernible) the service, so that’s good. You got to walk away from things that don’t make sense otherwise you can destroy value.

And I guess lastly, has there been any development in the market place with regard to the Federal Home Loan bank and or any other sort of longer term funding with regard to REIT or folks in our position, just in the last quarter or so?.

So the Home Loan bank – the FHFA came out with ruling kind of putting on whole, that whole movement of – only folks on REITs, but what they did do is – they increased the comment period to January, now the significance of it is – I have had direct conversations with senior people of FHFA and I have the impression that it is still up for debate and open for development.

So we are submitting a letter along with other mortgage REITs along with the other trade groups.

We Dynex still very strong, there are companies like Dynex we’re 26 years, we have been focussed on the housing finance system; we have made our money focussed in the housing finance system that we should be the type of entity that for home loan banks should want to finance.

So, we are making that case to FHFA, other people are making their cases they have different stories than here at Dynex, but as I mentioned earlier we’ve been involved in residential, multifamily servicing, originations, securities ownership, Agency, non- Agency, across the entire board from the mortgage finance system to 26 years.

So, the comment period is open, we will learn more as the comment period closes in January, we are submitting a letter – I really have the impression that is still open for development and from those the ideas..

So stay tuned from first quarter and see where they come out after the comment period. Okay, great good job guys, thanks a lot..

Thanks Jason..

Our next question is Ken Bruce [Ph] Bank of America Merrill Lynch, please go-ahead..

Thank you, good morning. My question its’ really to a – a follow up to one of the other questions around the dividend in your prepared remarks, obviously you pointed out that you’ve got some net operating loss and net capital loss carryforwards to take advantages.

Could you just remind us of the amount that you’ve got to be sheltered and how to think about how much dividend support might come from that as you look at that going forward?.

Again Steve, Benedetti here. So the aggregate amount of the NOL carryforward is roughly around a $140 million. We incurred an ownership several years ago when we issued stock that limited the annual usage to $13.4 million. And effectively what happens there is that $13.4 million gets released if you will over the year.

So, if we don’t use it one year, it gets released and then the next year, it adds to the $13.4 million that gets released that year, so it’s on a compounding basis. So today we can use up to approximately $25 million in NOL for 2014 and that will continue to grow year-after-year..

Okay. And just so I understand that you’ve got, I think you recognized something around $20 million in gains thus far. So, that would go against the NOL.

You wouldn’t have any taxable income to show, so that allows you to in essence increase your book value, but how was that going to slow back into or otherwise support the dividend going forward?.

Yeah, so the NOL is asking the dividends pay deduction, so we can use the NOL to offset the income or we can distribute it. And then what’s left is the NOL to offset it..

And Gary, what we’ve said over the years, a big key with the NOL is it gives us financial flexibility. That means we can make that decision, and we’ve got the flexibility to do that and Tom Akin has always said, we like to have options..

You like to have options that you can exercise even better..

Yeah..

I guess maybe just to sort of belabor this, I’m happy to take it offline but just as you’re kind of looking at the portfolio today, is there a way to frame how much earnings power comes about just if you didn’t add anything at these levels, it sounds like there is still some you had an opportunity to put capital back in the market, you sounded to me as if maybe that was passing opportunity and so, you maybe sitting under lever today..

Well, here is the challenge on that. We believe that, if you go back a few years ago, we were investing to get carry plus rate compression. At this point, we are just – we are investing for carry because we believe spread compression pretty much will happen across the board in asset class. At any moment we can obviously fall-in opportunities to invest.

Again get back to trying to predict where that would be December 31 is difficult. That’s kind of how we describe the macro environment is being complex, but Smriti, I’m going to let her to jump in because she is….

Yeah, I mean one thing Ken…..

Talk about what she is doing….

Well, we’re just – the earning assets as of September 30 though were at $3.7 billion versus $4 billion on June 30 and we’ve actually been able to redeploy some of that capital.

So the sales haven’t been a massive reduction in earning assets and maybe that gives you a little bit of an idea in terms of the magnitude to help you frame what might be the base of earning assets..

Okay, yes. I will do some work and we can talk about that offline. That’s helpful to put into perspective. Well, great thank you for all your comments and feedback..

Thanks, Ken..

You’re welcome..

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Byron Boston for any closing remarks..

Thank you very much for joining us today and we look forward to having you to join us in approximately three months. Thank you..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..