Changes in credit spreads represent the market'smarket’s valuation of the perceived riskiness of assets relative to risk-free rates, and widening credit spreads reduce the market value of our investments asbecause market participants typically require additional yield to hold riskier assets. Credit spreads could change based on macroeconomic or systemic factors specific to a particular security such as prepayment performance or credit performance. Other factors that could impact credit spreads include technical issues such as supply and demand for a particular type of security, market psychology, and FOMC monetary policy.policies. In addition, most of our investments are fixed rate or reset in rate over a period of time, and as interest rates rise, the market value of these investments will typically decrease. If market values decrease significantly, we may beexperience a material reduction in our liquidity if we are forced to sell assets at losses in order to maintain liquidity andmeet margin calls from our lenders to repay or renew repurchase agreements at maturity.

Fluctuations in interest rates impact us in a number ofmultiple ways. For example, in a period of rising rates, particularly increases in the targeted U.S. Federal Funds Rate (“Federal Funds Rate”), we may experience a decline in our profitability from borrowing rates increasing faster than interest coupons on our investments reset or our investments mature. We may also experience a decline in profitability from our investments adjusting less frequently or relative to a different index (e.g., six month or one-year LIBOR) from our borrowings (repurchase agreements are typically based on shorter-term rates). Once the Federal Reserve announces a higher targeted range or if markets anticipate that the Federal Reserve is likely to announce a higher targeted range for the Federal Funds Rate, our borrowing costs are likely to immediately increase, thereby negatively impacting our results of operations, financial condition, dividend and book value per common share.

Fluctuations in interest rates may also negatively affect the market value of our securities.securities, resulting in declines in comprehensive income, book value per common share, and liquidity. Since our investment portfolio consists substantially of fixed rate MBS,instruments, rising interest rates will reduce the market value of our MBS as a result of higher yield requirements by the market for these types of securities. Reductionssecurities, and reductions in the market value of our MBS could result in margin calls from our lenders, potentially forcing us to sell securities at a loss. Reductions in the market value of our MBS could also result in declines in comprehensive income and book value per common share, and a material reduction in our liquidity.lenders. Conversely, while declining interest rates are typically more favorable for us, we may experience increasing prepayments, resultingwhich would increase amortization expense of any premiums we pay to acquire our investments and thereby result in reduced profitability.

We are subject to prepayment risk to the extent that we own investments at premiums to their par value or at yields at a premium to current market yields. We amortize the premiums we pay on a security using the effective yield method, which is impacted by borrower prepayments of principal on the loans. Prepayments can occur both on a voluntary basis (i.e., the borrower elects to prepay the loan along with related prepayment fees, if applicable) and involuntary basis (i.e., a loan default and subsequent foreclosure and liquidation). RMBS have no prepayment protection while CMBS and CMBS IO have voluntary prepayment protection in the form of a prepayment lock-out on the loan for an initial period, or by yield maintenance or prepayment penalty provisions which serve as full or partial compensation for future lost interest income on the loan. In certain circumstances, compensation for voluntary prepayment on CMBS IO securities may not be sufficient to compensate us for the loss of future excess interest as a result of the prepayment. The amount of prepaymentsPrepayments on our investments isare impacted by economic and market conditions, the level of interest rates, the general availability of mortgage credit, and other factors.

We have no protection from involuntary prepayments which tend to increase in periodsprepayments. The impact of economic stress and may occur for any of our investment types. Involuntaryinvoluntary prepayments on high premium investments including CMBS IO areand higher coupon Agency CMBS is particularly acute since the investment consists entirely of premium. If we experience anAn increase in actualinvoluntary prepayments we will amortizeresult in the loss of investment premiums at an accelerated rate which could materially reduce our interestprofitability and dividend. Involuntary prepayments typically increase in periods of economic slowdown or stress, such as the slowdown in economic activity experienced as a result of COVID-19, and actions taken as a result by the GSEs and federal, state and local governments. Defaults in loans underlying our CMBS IO, particularly loans in non-Agency CMBS IO securities collateralized by income net incomeproducing properties such as retail shopping centers, office buildings, multifamily apartments and comprehensive income. In addition,hotels, may increase as a result of economic weakness, such as that brought on by the COVID-19 pandemic.

Increases in actual prepayment rates or market expectations of prepayment rates (voluntary or involuntary) could also negatively impact our profitability and the market value of our investments. Faster prepayments generallyinvestments, negatively impact the market value of RMBS due to less predictability of payments on the underlying mortgage loans and will increase the required market yield on such security. Faster prepayments will also negatively impact the market value of CMBS IO, depending on the amount of prepayment protection for a given security. Increasing prepayments will typically reduce the value of our securities owned at premiums which will negatively impactimpacting our book value. We are also more likely to experience margin calls from our lenders as a result of the decline in value of our securities, which would negatively impact our liquidity.

Loans underlying non-Agency MBS we own large balance Agency CMBS which are collateralizedserviced by a single-loan. While these Agency CMBS have some form of prepayment protection such as yield maintenance which would compensate usthird-party service providers. These servicers provide for the prepayment,primary and special servicing of these securities. In that capacity these service providers control all aspects of loan collection, loss mitigation, default management and ultimate resolution of a defaulted loan including as applicable the foreclosure and sale of the real estate owned. The servicer has a fiduciary obligation to act in the best interest of the securitization trust, but significant latitude exists with respect to certain of its servicing activities. We have no contractual rights with respect to these servicers. If a third-party servicer fails to perform its duties under the securitization documents, this may result in a material increase in delinquencies or losses to the securities. As a result, the value of the securities are collateralizing repurchase agreements. If the single loan CMBS prepays, typically there ismay be impacted, and we may incur losses on our investment.

In addition, should a 20-day delay between the announcement of such prepayment and the receipt of cash from the prepayment; however, the repurchase agreement lenderservicer experience financial difficulties, it may initiate a margin call when the prepayment is announced. If the margin call were large enough, we might not be able to meet such margin call from available liquidity, and we couldperform its obligations. Due to application of provisions of bankruptcy law, servicers who have sought bankruptcy protection may not be forcedrequired to sell assets quickly and on terms unfavorable to us to meet the margin call. If we cannot meet the margin call, we may be in default under the repurchase agreement until we receive the cash from the prepayment. Because some of our repurchase agreement borrowings containmake

We also rely on corporate trustees to act on behalf of us and margin calls with respectother holders of securities in enforcing our rights. Under the terms of most securities we hold we do not have the right to directly enforce remedies against the issuer of the security, but instead must rely on a trustee to act on behalf of us and other security holders. Should a trustee not be required to take action under the terms of our repurchase agreement borrowings.

Provisions in loan documents for mortgages in CMBS IO securities in which we invest requiring yield maintenance charges, prepayment penalties, defeasance, or lock-out periods may not be enforceable in some states and under federal bankruptcy law. Provisions in the loan documents requiring yield maintenance charges and prepayment penalties may also be interpreted as constituting the collection of interest for usury purposes. Accordingly, we cannot be assured that the obligation of a borrower to pay any yield maintenance charge or prepayment penalty under a loan document in a CMBS IO security will be enforceable. Also, we cannot be assured that foreclosure proceeds under a loan document in a CMBS IO security will be sufficient to pay an enforceable yield maintenance charge. If yield maintenance charges and prepayment penalties are not collected, or if a lock-out period is not enforced, we may incur losses to write-down the value of the CMBS IO security for the present value of the amounts not collected, and we will experience lower yields and lower interest income. This would also likely cause margin calls from any lender on the CMBS IO impacted which could have a material adverse effect on our liquidity.

Finally, reforms to GSEs could also negatively impact our ability to comply with the provisions of the 1940 Act (see further discussion below regarding the 1940 Act).

All of the foregoing could materially adversely affect the availability, pricing, liquidity, market value and financing of our assets and materially adversely affect our business, operations, financial condition and book value per common share.

Rating agencies rate securities based upon their assessment of the safety of the receipt of principal and interest payments on the securities. Rating agencies do not consider the risks of fluctuations in fair value or other factors that may influence the value of securities and, therefore, the assigned credit rating may not fully reflect the true risks of an investment in securities. Also, rating agencies may fail to make timely adjustments to credit ratings based on available data or changes in economic outlook or may otherwise fail to make changes in credit ratings in response to subsequent events, so the credit quality of our investments may be better or worse than the ratings indicate. We attempt to reduce the impact of the risk that a credit rating may not accurately reflect the risks associated with a particular debt security by not relying solely on credit ratings as the indicator of the quality of an investment. We make our acquisition decisions after factoring in other information that we have obtained about the loans underlying the security and the credit subordination structure of the security. Despite these efforts, our assessment of the quality of an investment may also prove to be inaccurate and we may incur credit losses in excess of our initial expectations.

Repurchase agreement transactions are legally structured as the sale of a security to a lender in return for cash from the lender. These transactions are accounted for as financing agreements because the lenders are obligated to resell the same securities back to us at the end of the transaction term. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities, if the lender defaults on its obligation to resell the same securities back to us, we would incur a loss on the transaction equal to the difference between the value of the securities sold and the amount borrowed from the lender including accrued interest. The lender may default on its obligation to resell if it experiences financial difficulty or if the lender has re-hypothecated the security to another party who fails to transfer the security back to the lender. Additionally, if we default on one of our obligations under a repurchase agreement, the lender can terminate the transaction, sell the underlying collateral and cease entering into any other repurchase transactions with us. Any losses we incur on our repurchase transactions could adversely affect our earnings and reduce our ability to pay dividends to our shareholders.

In the event that one of our lenders under a repurchase agreement files for bankruptcy, it may be difficult for us to recover our assets pledged as collateral to such lender. In addition, if we ever file for bankruptcy, lenders under our repurchase agreements may be able to avoid the automatic stay provisions of the U.S. Bankruptcy Code and take possession of and liquidate our collateral under our repurchase agreements without delay. In the event of a bankruptcy by one of our lenders, or us, we may incur losses in amounts equal to the excess of our collateral pledged over the amount of repurchase agreement borrowing due to the lender.

We seek to conduct our operations to avoid falling under the definition of an investment company pursuant to the 1940 Act. Specifically, we seek to conduct our operations under the exemption provided under Section 3(c)(5)(C) of the 1940 Act, a provision available to companies primarily engaged in the business of purchasing and otherwise acquiring mortgages and other liens on and interests in real estate. According to SEC no-action letters, companies relying on this exemption must ensure that at least 55% of their assets are mortgage loans and other qualifying assets, and at least 80% of their assets are real estate-related. The 1940 Act requires that we and each of our subsidiaries evaluate our qualification for exemption under the 1940 Act. Our subsidiaries will rely either on Section 3(c)(5)(C) or other sections that provide exemptions from registering under the 1940 Act, including Sections 3(a)(1)(C) and 3(c)(7). The SEC issued a concept release in 2011 announcing that it was reviewing of the Section 3(c)(5)(C) exemption, particularly as it relates to mortgage REITs, but has not taken any final regulatory action or issued any binding interpretive guidance since that time.1940 Act. We believe that we are operating our business in accordance with the exemption requirements of Section 3(c)(5)(C).

Under the 1940 Act, an investment company is required to register with the SEC and is subject to extensive restrictive and potentially adverse regulations relating to, among other things, operating methods, management, capital structure, leverage, dividends, and transactions with affiliates. If we were determined to be an investment company, our ability to use leverage and conduct business as we do today would be substantially impaired. This would severely impact our profitability and ability to pay dividends to our shareholders.

On December 7, 2012, the CFTC’s Division of Swap Dealer and Intermediary Oversight (the “Division”) issued no-action relief from commodity pool operator (“CPO”) registration to mortgage REITs that use CFTC-regulated products (“commodity interests”) and that satisfy certain enumerated criteria. Pursuant to the no-action letter, the Division will not recommend that the CFTC take enforcement action against a mortgage REIT if its operator fails to register as a CPO, provided that the mortgage REIT (i) submits a claim to take advantage of the relief and (ii) the mortgage REIT: (a) limits the initial margin and premiums required to establish its commodity interest positions to no greater than 5% of the fair market value of the mortgage REIT’s total assets; (b) limits the net income derived annually from its commodity interest positions, excluding the income from commodity interest positions that are “qualifying hedging transactions,” to less than 5% of its annual gross income; (c) does not market interests in the mortgage REIT to the public as interests in a commodity pool or otherwise in a vehicle for trading in the commodity futures, commodity options or swaps markets; and (d) either: (A) identified itself as a “mortgage REIT” in Item G of its last U.S. income tax return on Form 1120-REIT; or (B) if it has not yet filed its first U.S. income tax return on Form 1120-REIT, it discloses to its shareholders that it intends to identify itself as a “mortgage REIT” in its first U.S. income tax return on Form 1120-REIT.

Our business is highly dependent on communications and information systems particularly as it relates to the custodians of our investments and our lenders. Any failure or interruption of our communication or information systems, or any cyber-attack or security breach of our networks or systems, could cause delays or other problems in our trading or borrowing activities, including MBS trading and repurchase agreement borrowing activities, or could lead to unauthorized trading activity, any of which could have a significant adverse effect on our financial condition or results of operations. A disruption or breach could also lead to unauthorized access to and release, misuse, loss or destruction of our confidential information or personal or confidential information of our employees or third parties, which could lead to regulatory fines, costs of remediating the breach, reputational harm, and fewer third parties that are willing to conduct business with us. In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third parties with which we do business or that facilitate our business activities, including custodians, clearing agents or other financial intermediaries we use to facilitate our securities transactions, if their respective communication or information systems experience failure, interruption, cyber-attacks, or security breaches. We may face increased costs as we continue to evolve our cyber defenses in order to contend with changing risks and to monitor our systems for cyber-attacks and security threats. These costs and losses associated with these risks are difficult to predict and quantify and could have a significant adverse effect on our results of operations.

The Company does not own or lease any physical properties that are material to its business, financial condition or results of operations.

As previously disclosed in the Company’s 20182019 Form 10-K, the Company and DCI Commercial, Inc. (“DCI”), a former affiliate of the Company and formerly known as Dynex Commercial, Inc., were defendants in litigation filed by Basic Capital Management, Inc., et al. (the “DCI Plaintiffs”) regarding the activities of DCI while it was an operating subsidiary of an affiliate of the Company (the “DCI Litigation”). Final judgment in the principal amount of $46.5 million, including damages of $25.6 million and attorneys' fees and post-judgment interest of $20.9 million, was entered in the DCI Litigation against only DCI (the “DCI Judgment”) in 2015. The DCI Plaintiffs filed suit in Texas state court against the Company seeking to recover from the Company the $46.5 million under legal theories of fraudulent transfer and alter ego. The case was removed to the U.S. District Court, Northern District of Texas (the “Northern District Court”). The Northern District Court twice dismissed without prejudice the DCI Plaintiffs’ claims against the Company for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), and granted the DCI Plaintiffs two opportunities to replead. On October 28, 2019, the Northern District Court dismissed with prejudice the DCI Plaintiffs’ fraudulent transfer claims as untimely under the statute of repose and their alter ego claim based on res judicata. The Northern District Court also denied the DCI Plaintiffs’ requests for exemplary damages and attorneys’ fees. On December 2, 2019, the Northern District Court entered a final judgment that the DCI Plaintiffs “take nothing” on their claims against the Company “and that those claims are dismissed with prejudice.” The DCI Plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Fifth Circuit (the “Fifth Circuit”) on November 25, 2019. Following briefing and oral argument, on October 2, 2020 the Fifth Circuit affirmed the dismissal of the DCI Plaintiffs’ fraudulent transfer and alter ego claims by the Northern District Court. The DCI Plaintiffs filed their opening brief in the Court of Appealsdid not file for a rehearing with the Fifth Circuit on February 4, 2020. The deadline foror request a hearing before the Company's response brief is March 5, 2020.

Also as previously disclosed in the 2018Company’s 2019 Form 10-K, the receiver for one of the DCI Plaintiffs (the “Receiver”) in the DCI Litigation filed a separate claim (the "Receiver Litigation") in May 2018 against the Company seeking payment of $11.3 million in connection with the DCI Judgment, alleging that the Company breached a litigation cost sharing agreement, as amended (the “Cost Sharing Agreement”), entered into initially in December 2000 between the Company and DCI. The case is pending in the Northern District Court. On November 21, 2019, the Northern District Court granted in part and denied in part summary judgment on the Receiver’s claim and the Company’s claim for offset and recoupment. The Northern District Court found that the Company breached the Cost Sharing Agreement and therefore must pay damages to the Receiver. The Northern District Court simultaneously granted the Company’s motion for summary judgment finding that DCI also breached the Cost Sharing Agreement and that the Company can recover amounts due to it from DCI under the Cost Sharing Agreement. The Northern District Court ordered the parties to submit evidence supporting their damages claimed by January 10, 2020. The Receiver subsequently filed a claim for damages with the Northern District Court of $12.6 million, while the Company filed claims for damages ranging from $13.3 million to $30.6 million, including interest. The Receiver filed objections (the "Objections") with the Northern District Court to, among other things, the Company recovering amounts incurred prior to entry into the Cost Sharing Agreement and amounts incurred under the Cost Sharing Agreement after January 31, 2006, including interest, which is the date that DCI’s corporate existence ceased under Virginia law. The Company subsequently objected to $0.3 million of the Receiver’s claim related to attorneys' fees incurred by the Receiver which the Company asserts is not collectible under Virginia law. The Company has further disputed the Receiver's Objections as not supportable under Virginia law, and has further refined its damages claim to $13.3$16.0 million based on simple interest and $17.8$22.8 million based on a combination of simple and compound interest as of December 31, 2020, which the Company believes is supportable under Virginia law. Both claim amounts include $1.7$1.3 million plus accrued interest for the advancement of attorneys' fees to DCI in 1999 and 2000 in connection with the DCI Litigation prior to the effective date of the Cost Sharing Agreement. There were no material developments during the year ended December 31, 2020.

The Company records a contingent liability when, in the opinion of management, the likelihood of loss is probable and the amount of the loss can be reasonably estimated. After consultation with litigation counsel, the Company believes, based upon information currently available and its evaluation of Texas and Virginiaapplicable state law as applicable, that the likelihood of loss in connection with the DCI Litigation is remote and that the likelihood of loss in connection with the Receiver Litigation is not probable, and given the range of potential claims for damages by the Company to offset the Receiver's claims, the amount of possible loss in the Receiver Litigation cannot be reasonably estimated and, therefore, no contingent liability has been recorded for either matter.

Other than as described above, to the Company’s knowledge, there are no pending or threatened legal proceedings, the resolution of which, in management’s opinion, individually or in the aggregate, could have a material adverse effect on the Company’s results of operations or financial condition.

None.

Our common stock is traded on the New York Stock ExchangeNYSE under the trading symbol “DX”. The common stock was held by approximately 334340 holders of record as of February 21, 2020.24, 2021. On that date, the closing price of our common stock on the New York Stock ExchangeNYSE was $20.17$18.99 per share.

The historical information set forth above is not necessarily indicative of future performance. Accordingly, we do not make or endorse any predictions as to future share performance.

The Company has an at-the-market agreement ("ATM") whereby the Company may offer and sell through its sales agents up to $83.1$104.6 million of aggregate value of shares of the Company’s 7.625% Series AB Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”) and Series BC Preferred Stock. During the year ended December 31, 2019,2020, the Company issued 833,736did not issue any shares of its Series B or Series C Preferred Stock through its ATM program at an aggregate value of $19.9 million, net of $0.3 million in broker commissions.program. The Company also has an ATM agreement whereby the Company may offer and sell through its sales agents up to 10,000,000approximately 8.3 million shares of common stock. During the year ended December 31, 2019,2020, the Company issued 981,328553,364 shares of its common stock through its ATM

For 2020, we generated a total economic return of 10.8%15.2% for our common shareholders, for 2019 which consisted of $2.01$1.66 in common dividends declared and a lossan increase of $0.06 of$1.07 in book value per common share. Givenshare to $19.08 as of December 31, 2020. The increase in book value and our comprehensive income of $66.5 million, or $2.88 per common share, for the year ended December 31, 2020 were primarily driven by improving asset valuations as a result of the credit spread tightening and declining funding costs as a result of the reduction in the targeted Federal Funds rate mentioned above. Realized and unrealized gains from MBS and TBA securities, net of hedges were approximately $1.83 per common share, driving a large part of our comprehensive income and total economic return for the year. Our net interest income increased 14% from the year ended December 31, 2019 despite a 29% decline in the average balance of interest earning assets and a 66 basis point decline in effective yield on our assets. The increase in net interest income is due to a smaller average balance of borrowings at a lower cost of financing for 2020 versus 2019. Despite the increase in net interest income, our core net operating income to common shareholders, a non-GAAP measure, declined 9% versus 2019 primarily due to higher general and administrative and other operating expenses. In addition, though our drop income for 2020 increased $8.8 million compared to 2019, it was outpaced by a decline of $(14.5) million in net periodic interest benefit from interest rate swaps.

Dynex’s results for 2020 reflect how actively we managed our portfolio and risk position as well as the strategic allocation of our capital, which enabled us to take advantage of opportunities that arose during the evolving economic conditions discussed above,above. As we took actionindicated at the beginning of 2020, we foresaw a higher risk environment building in the global financial markets, so we prepared Dynex to weather increased volatility by increasing liquidity and decreasing leverage. In early March, we strategically timed the sale of approximately 38% of our portfolio, primarily Agency RMBS, monetizing gains of $84.8 million before asset prices began to fall during 2019 by:

The changes made to the size and liquiditycomposition of our common stockinvestment portfolio during 2020 warranted continuous risk management, and, reduced shareholders' transaction costs as a percentageresult, our portfolio of total share value. And finally, we repurchased shareshedging instruments as of common stock during the third quarter when management believed the Company's common shares to be undervalued at a market price significantly below their intrinsic value.December 31, 2020 is substantially different from