UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
FORM 10-K
☒Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20202021
or
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 1-9819001-09819
DYNEX CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Virginia52-1549373
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
4991 Lake Brook Drive, Suite 100
Glen Allen,Virginia23060-9245
(Address of principal executive offices)(Zip Code)
(804)217-5800 
(Registrant’s telephone number, including area code) 

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareDXNew York Stock Exchange
7.625% Series B Cumulative Redeemable Preferred Stock, par value $0.01 per shareN/ANone
6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per shareDXPRCNew York Stock Exchange

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes           o           No           x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes           o           No           x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes          ��☒         No           ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes           ☒             No           ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☒
Non-accelerated filer☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes           ☐           No            ☒

As of June 30, 2020,2021, the aggregate market value of the votingcommon stock held by non-affiliates of the registrant was approximately $315,650,564$626,912,407 based on the closing sales price on the New York Stock Exchange of $14.30.$18.66.

On February 25, 2021,2022, the registrant had 26,860,47036,665,805 shares outstanding of common stock, $0.01 par value, which is the registrant’s only class of common stock.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the registrant’s 20212022 Annual Meeting of Shareholders, expected to be filed pursuant to Regulation 14A within 120 days from December 31, 2020,2021, are incorporated by reference into Part III.
III of this Annual report on Form 10-K to the extent stated herein.



DYNEX CAPITAL, INC.
FORM 10-K
TABLE OF CONTENTS



Page
PART I.
Item 1.Business
1
Item 1A.Risk Factors
10
Item 1B.Unresolved Staff Comments
24
Item 2.Properties
24
Item 3.Legal Proceedings
24
Item 4.Mine Safety Disclosures
25
PART II.
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
26
Item 6.Selected Financial Data[Reserved]
27
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
48
Item 8.Financial Statements and Supplementary Data
5253
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
5253
Item 9A.Controls and Procedures
5253
Item 9B.Other Information
5254
Item 9C.Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
54
PART III.
Item 10.Directors, Executive Officers and Corporate Governance
5355
Item 11.Executive Compensation
5355
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
5355
Item 13.Certain Relationships and Related Transactions, and Director Independence
5356
Item 14.Principal Accountant Fees and Services
5356
PART IV.
Item 15.Exhibits and Financial Statement Schedules
5457
Item 16.Form 10-K Summary
5659
SIGNATURES
5760





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CAUTIONARY STATEMENT – This Annual Report on Form 10-K contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended (or “1933 Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (or “Exchange Act”). We caution that any such forward-looking statements made by us are not guarantees of future performance, and actual results may differ materially from those expressed or implied in such forward-looking statements.  Some of the factors that could cause actual results to differ materially from estimates expressed or implied in our forward-looking statements are set forth in this Annual Report on Form 10-K for the year ended December 31, 2020.2021. See Item 1A. “Risk Factors” as well as “Forward-Looking Statements” set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K.
 
In this Annual Report on Form 10-K, we refer to Dynex Capital, Inc. and its subsidiaries as the "Company,” “we,” “us,” or “our,” unless we specifically state otherwise or the context indicates otherwise.  


PART I.

ITEM 1.    BUSINESS

COMPANY OVERVIEW

Dynex Capital, Inc. commenced operations in 1988 and is an internally managed mortgage real estate investment trust (“REIT”), which primarily invests in residential and commercial mortgage-backed securities (“MBS”). We finance our investments principally with borrowings under repurchase agreements. Our objective is to provide attractive risk-adjusted returns to our shareholders over the long term that are reflective of a leveraged, high quality fixed income portfolio with a focus on capital preservation. We seek to provide returns to our shareholders primarily through the payment of regular dividends and through capital appreciation of our investments.
We are primarily invested in Agency MBS including residential MBS (“RMBS”), commercial MBS (“CMBS”) and CMBS interest-only (“IO”) securities. Agency MBS have an implicit guaranty of principal payment by an agency of the U.S. government or a U.S. government-sponsored entity (“GSE”) such as Fannie Mae and Freddie Mac. We also have investments in non-Agency MBS, which consist mainly of CMBS IO. Non-Agency MBS are issued by non-governmental enterprises and do not have a guaranty of principal payment.

INVESTMENT STRATEGY

Our investment strategy and the allocation of our capital to a particular sector or investment is driven by a “top-down” framework that focuses on the risk management, scenario analysis, and expected risk-adjusted returns of any investment. Key points of this framework include the following:

•understanding macroeconomic factors, including monetary and fiscal policies, and possible evolving outcomes, including but not limited to, the current state of the U.S. and global economies;
•understanding the regulatory environment, competition for assets, and the terms and availability of financing;
•sector analysis including understanding absolute returns, relative and risk-adjusted returns, and supply/demand metrics within each sector;
•security and financing analysis including sensitivity analysis on credit, interest rate volatility, liquidity, and market value risk; and
•managing performance and inherent portfolio risks, including but not limited to interest rate, credit, prepayment, and liquidity risks.

In allocating our capital and executing our strategy, we seek to balance the risks of owning specific types of investments with the earnings opportunity on the investment. At various times during the last decade, we have allocated capital to a variety of investments including adjustable-rate and fixed-rate Agency RMBS, Agency CMBS, investment grade and unrated non-Agency RMBS and CMBS, Agency and non-Agency CMBS IO, and residual interests in securitized mortgage loans. Our investments in non-Agency MBS are generally higher quality senior or mezzanine classes (typically rated 'A' or better by one or more of the nationally recognized statistical rating organizations) because they are typically more liquid (i.e., they are more easily converted into cash either through sales or pledges as collateral for repurchase agreement
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or pledges as collateral for repurchase agreement borrowings) and have less exposure to credit losses than lower-rated non-Agency MBS. We regularly review our existing operations to determine whether our investment strategy or business model should change, including through capital reallocation, changing our targeted investments as well as hedging instruments, and shifting our risk position.

From time to time, we will analyze and evaluate potential business opportunities that we identify or are presented to us, including possible partnerships, mergers, acquisitions, or divestiture transactions that might be a strategic fit for our investment strategy or asset allocation or otherwise maximize value for our shareholders. Pursuing such an opportunity or transaction could require us to issue additional equity or debt securities.

The performance of our investment portfolio will depend on many factors including but not limited to interest rates, trends of interest rates, the steepness of interest rate curves, prepayment rates on our investments, demand for our investments, general market liquidity, economic and economicglobal political conditions, and their impact on the credit performance of our investments. In addition, our business model may be impacted by other factors such as the statecondition of the overall credit markets, which could impact the availability and costs of financing. See “Factors that Affect Our Results of Operations and Financial Condition” below, Item 1A of Part I, “Risk Factors”, and Item 7A of Part II, “Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report on Form 10-K for further discussion.

RMBS. As of December 31, 2020,2021, the majority of our investments in RMBS were Agency-issued pass-through securities collateralized primarily by pools of fixed-rate single-family mortgage loans. Monthly payments of principal and interest made by the individual borrowers on the mortgage loans underlying the pools are "passed through" to the security holders, after deducting GSE or U.S. Government agency guarantee and servicer fees. Mortgage pass-through certificates generally distribute cash flows from the underlying collateral on a pro-rata basis among the security holders. Security holders also receive guarantor advances of principal and interest for delinquent loans in the mortgage pools.

We also purchase to-be-announced securities (“TBAs” or “TBA securities”) as a means of investing in non-specified fixed-rate Agency RMBS, and from time to time, we may also sell TBA securities as a means of economically hedging our book value exposure to Agency RMBS. A TBA security is a forward contract (“TBA contract”) for the purchase (“long position”) or sale (“short position”) of a fixed-rate Agency MBS at a predetermined price with certain principal and interest terms and certain types of collateral. The actual Agency securities to be delivered are not identified until approximately 2 days before the settlement date. We hold long and short positions in TBA securities by executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase (or sale) of a non-specified Agency RMBS by entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long (or short) position with a later settlement date. TBAs purchased or sold for a forward settlement date are generally priced at a discount relative to TBAs settling in the current month. This price difference, often referred to as “drop income”, represents the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. When the financing costs imputed in TBA dollar roll transactions fall lower than the average repurchase agreement financing rate, this is commonly referred to in the industry as TBA dollar rolls “trading special” or “dollar roll specialness”. Dollar roll specialness happens primarily as a result of supply/demand imbalances or volatility in market prepayment expectations. We account for all TBAs (whether net long or net short positions, or collectively “TBA dollar roll positions”) as derivative instruments because we cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in physical delivery of the underlying Agency RMBS, or that the individual TBA transaction will not settle in the shortest period possible.

CMBS. Substantially all of our CMBS investments as of December 31, 20202021 were fixed-rate Agency-issued securities backed by multifamily housing loans. The loans underlying CMBS are generally fixed-rate with scheduled principal payments generally assuming a 30-year amortization period, but typically requiring balloon payments on average approximately 10 years from origination. These loans typically have some form of prepayment protection provisions (such as prepayment lock-out) or prepayment compensation provisions (such as yield maintenance or prepayment penalty), which provide us compensation if underlying loans prepay prior to us earning our expected return on our investment. Yield maintenance and prepayment penalty requirements are intended to create an economic disincentive for the loans to prepay, which we believe makes the fair value of CMBS less costly to hedge relative to RMBS.

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CMBS IO. CMBS IO are interest-only securities issued as part of a CMBS securitization and represent the right to receive a portion of the monthly interest payments (but not principal cash flows) on the unpaid principal balance of the underlying pool of commercial mortgage loans. We invest in both Agency-issued and non-Agency issued CMBS IO. The loans collateralizing Agency-issued CMBS IO pools are similar in composition to the pools of loans that collateralize CMBS as discussed above. Non-Agency issued CMBS IO are backed by loans secured by a number of different property types including office buildings, hospitality, and retail, among others. Since CMBS IO securities have no principal associated with
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them, the interest payments received are based on the unpaid principal balance of the underlying pool of mortgage loans, which is often referred to as the notional amount. Yields on CMBS IO securities are dependent upon the performance of the underlying loans. Similar to CMBS described above, the Company receives prepayment compensation as most loans in these securities have some form of prepayment protection from early repayment; however, there are no prepayment protections if the loan defaults and is partially or wholly repaid earlier because of loss mitigation actions taken by the underlying loan servicer. Because Agency CMBS IO generally contain higher credit quality loans, they have a lower risk of default than non-Agency CMBS IO. The majority of our CMBS IO investments are investment grade-rated with the majority rated ‘AAA’ by at least one of the nationally recognized statistical rating organizations.

FINANCING STRATEGY

We use leverage to enhance the returns on our invested capital by pledging our investments as collateral for borrowings primarily through the use of uncommitted repurchase agreements. The amount of leverage we utilize depends upon a variety of factors, including but not limited to general economic, political and financial market conditions; the actual and anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing the assets; our opinion of the credit worthiness of financing counterparties; the health of the U.S. residential mortgage and housing markets; our outlook for the level, slope and volatility of interest rates; the credit quality of the loans underlying our investments; the rating assigned to securities; and our outlook for asset spreads. Repurchase agreements 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 pay interest on our repurchase agreement borrowings at a rate usually based on a spread to certain short-term interest rates and fixed for the term of the borrowing. Borrowings under uncommitted repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed roll-over terms.

Repurchase agreement financing is provided principally by major financial institutions and broker-dealers acting as financial intermediaries for short-term cash investors including money market funds and securities lenders. Repurchase agreement financing exposes us to counterparty risk to such financial intermediaries, principally related to the excess of our collateral pledged over the amount borrowed. We seek to mitigate this risk by diversifyingspreading our borrowings across a diverse set of repurchase agreement lenders. As of December 31, 2021, we did not have more than 5% of equity at risk with any of our repurchase agreement lenders and limiting borrowings from lesser capitalized or lightly regulated counterparties. In limited instances, a money market fund or securities lender has directly provided funds to us without the involvement of a financial intermediary typically at a lower cost than we would incur borrowing from the financial intermediary. Borrowing directly from these sources also reduces our risk to the financial intermediaries. Please refer to "Risk Factors-Risks Related to Our Financing and Hedging Activities" in Item 1A of Part I of this Annual Report on Form 10-K for additional information regarding significant risks related to repurchase agreement financing.

From time to time, we will analyze and evaluate potential business opportunities that we identify or are presented to us, including possible partnerships, mergers, acquisitions, or divestiture transactions that might be a strategic fit for our investment strategy or asset allocation or otherwise maximize value for our shareholders. Pursuing such an opportunity or transaction could require us to issue additional equity or debt securities.

HEDGING STRATEGY

We use derivative instruments to economically hedge our exposure to adverse changes in interest rates resulting from our ownership of primarily fixed-rate investments financed with short-term repurchase agreements. Changes in interest rates can impact net interest income, the market value of our investments, and therefore, our book value per common share. In a period of rising interest rates, our earnings and cash flow may be negatively impacted by borrowing costs increasing faster than interest income from our assets, and our book value may decline as a result of declining market values of our MBS.

Our hedging strategy is dynamic and is based on our assessment of U.S. and global economic conditions and monetary policies. We frequently adjust our hedging portfolio based on our expectation of future interest rates,
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including the absolute level of rates and the slope of the yield curve versus market expectations.

Currently, During 2021, we are primarily usingused U.S. Treasury futures, options on U.S. Treasury futures, and options on interest rate swaps (“interest rate swaptions”) to mitigate adverse impacts of interest rate changes on the market value of our investment portfolio. Prior to the first quarter of 2020, we primarily utilized interest rate swaps to mitigate such adverse impacts on the market value of our investment portfolio as well as our net interest earnings. However, during the first quarter
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of 2020, the novel coronavirus (“COVID-19”) was declared a pandemic in the U.S., resulting in significant market disruptions that resulted in interest rates declining significantly and our counterparties increasing margin requirements on our interest rate swap agreements. As a result, during 2020 we either terminated our interest rate swap agreements or allowed outstanding agreements to mature without replacement. Given Federal Open Market Committee (“FOMC”) monetary policy statements made during 2020, management expects funding costs to remain low in the near-term, and so the Company is not currently hedging interest rate risk to its net interest earnings.total economic return.

In conducting our hedging activities, we intend to comply with REIT and tax limitations on our hedging instruments which could limit our activities and the instruments that we may use. We also intend to enter into derivative contracts only with the counterparties that we believe have a strong credit rating to help mitigate the risk of counterparty default or insolvency.

OPERATING POLICIES AND RISK MANAGEMENT

We invest our capital and manage our capital pursuantrisk according to Operating Policiesour “Investment Policy” and “Investment Risk Policy”, which are approved by our Board of Directors. Our Operating PoliciesThese policies set forth investment and risk limitations as they relate to the Company's investment activities and set parameters for the Company's investment and capital allocation decisions. TheyThese policies also require that we manage our operations and investments to comply with various REIT limitations (as discussed further below in “Federal Income Tax Considerations”) and to avoid qualifying as an investment company as such term is defined in the Investment Company Act of 1940 (the "1940 Act") or as a commodity pool operator under the Commodity Exchange Act.

Our Operating Policies place limits on certain risks to which we are exposed, such as interest rate risk, prepayment risk, earnings at risk, liquidity risk, and shareholders’ equity at risk from changes in fair value of our investment securities. As part of our risk management process, our Operating Policies require us to perform a variety of stress tests to modelsecurities, and also set forth limits for the effect of adverse market conditions on our investment portfolio value and our liquidity.Company’s overall leverage.

Our Operating Policies limitInvestment Policy currently limits our investment in non-Agency MBS that are rated BBB+ or lower at the time of purchase by any of the nationally recognized statistical ratings organizations to $250 million in market value and limitlimits our shareholders’ equity at risk with respect to such investments to a maximum of $50 million. We also conduct our own independent evaluation of the credit risk on any non-Agency MBS, such that we do not rely solely on the security’s credit rating. Our Operating Policies also set forth limits forInvestment Risk Policy requires us to perform a variety of stress tests to model the Company’s overall leverage.effect of adverse market conditions on our investment portfolio value and our liquidity.

Within the overall limits established by our Operating Policies,these policies, our investment and capital allocation decisions depend on prevailing market conditions and other factors and may change over time in response to opportunities available in different economic and capital market environments. TheOur Board of Directors may also adjust the OperatingInvestment and Investment Risk Policies of the Company from time to time based on macroeconomic expectations, market conditions, and risk tolerances among other factors.

In 2021, we entered into a services agreement with a third-party asset manager to license its proprietary trading, portfolio management, and risk reporting system and to provide the Company additional services including trade settlement and investment accounting services. We previously subscribed to this third-party’s risk reporting system, and in 2021, we implemented their trading and portfolio management systems and the trade settlement services. We expect to implement the investment accounting services in 2022. We believe this services agreement is an important step in furthering the foundation for a flexible, scalable, well-controlled and automated operating platform that supports our diversified investment, funding, and hedging strategies. Once this system is fully integrated and implemented into our day-to-day operations, we expect to realize operating efficiencies that should enhance our capability to more effectively manage increases in our capital base and assets under management. Furthermore, this system and relationship should allow us to expand our target asset classes with minimal additional costs.

In addition to the policies described above, we manage our operations and investments to comply with various REIT limitations (as discussed further below in “Operating and Regulatory Structure”) and to avoid qualifying as an investment company as such term is defined in the Investment Company Act of 1940, as amended, (the "1940 Act") or as a commodity pool operator under the Commodity Exchange Act.

Factors that Affect Our Results of Operations and Financial Condition

Our financial performance is largely driven by the performance of our investment portfolio and related financing and hedging activity and may be impacted by a number of factors including, but not limited to, the absolute level of interest rates, the relative slope of interest rate curves, changes in interest rates and market expectations of future interest rates, actual and estimated future prepayment rates on our investments, supply of and competition for investments, the influence of economic conditions on the credit performance of our investments, and market required
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yields as reflected by market spreads. All of the above factors are influenced by market forces beyond our control such as macroeconomic and geopolitical conditions, market volatility, U.S. Federal Reserve (“Federal Reserve”) policy, U.S. fiscal and regulatory policy, and foreign central bank and government policy. In addition, our business may be impacted by changes in regulatory requirements, including requirements to qualify for registration underavoid qualifying as an investment company pursuant to the 1940 Act, and REIT requirements.

Our business model is also impacted by the availability and cost of financing and the state of the overall credit markets. Reductions or limitations in the availability of financing for our investments could significantly impact our business or force us to sell assets, potentially at losses. Disruptions in the repurchase agreement market outside of our control may also directly impact our availability and cost of financing. Repurchase agreement lending by larger U.S. domiciled banks has declined in recent years due to increased regulation and changes to regulatory capital requirements. Their repurchase market
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participation has been replaced by smaller independent broker dealers that are generally less regulated and by U.S. domiciled broker dealer subsidiaries of foreign financial institutions.

Regulatory authorities including the Securities and Exchange Commission (“SEC”) and the Federal Reserve are evaluating whether and how much the short-term funding markets, including the repurchase agreement market, may have exacerbated the market volatility experienced in the first and second quarters of 2020. Financial regulators, including the Federal Reserve, continue to closely monitor the short-term funding markets, particularly during times of market stress. In evaluating the short-term funding markets, regulatory authorities are reviewing participants in these markets, including mortgage REITs. The outcome of these evaluations is unknown, but it is possible that the SEC, the Federal Reserve or another regulatory body could impose restrictions on mortgage REITs or structurally change short-term funding markets, which could materially impact our borrowing costs in the repurchase agreement market or the availability of repurchase agreement financing.

The ICE Benchmark Administration Limited, the administrator of the London Interbank Offered Rate (“LIBOR”), has announced that it will cease the publication of one-week and two-month USD LIBOR immediately after December 31, 2021 and will cease the publications of the remaining tenors of USD LIBOR (one, three, six, and 12-month) immediately after June 30, 2023. In the U.S., the Alternative Reference Rates Committee, which was formed by the Federal Reserve Board and the Federal Reserve Bank of New York (“FRBNY”), has promoted the use of the Secured Overnight Financing Rate (“SOFR”), an index calculated by reference to short-term repurchase agreements backed by U.S. Treasury securities, as a preferred alternative rate for USD LIBOR. To the extent we enter into contracts in the future, such as interest rate swaps, we expect such contracts to be based on SOFR. Nonetheless, given the historical importance of LIBOR as a short-term interest rate benchmark, we continue to monitor and evaluate for potential impacts of LIBOR cessation on our business and the markets as a whole.

Please refer to Part I, Item 1A, "Risk Factors" as well as Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" of this Annual Report on Form 10-K for additional discussions of factors that have the potential to impact our results of operations and financial condition.condition, including current events such as recent shifts in the Federal Reserve’s monetary policy and market trends.

ENVIRONMENTAL, SOCIAL, AND CORPORATE GOVERNANCE INITIATIVES

We believe that environmental, social, and corporate governance ("ESG") practices and initiatives are important in sustaining and growing the Company. Our ESG practices seek to create value by improving the environment and lives of our employees, investors, business partners, and the community. We assess our practices with a goal of meeting or exceeding industry and peer standards. We continually search for opportunities in pursuit of the long-term success of our business and to enhance the communities where we operate through corporate giving, employee volunteering, human capital development, and environmental sustainability programs.

Our Board of Directors has formal oversight of our ESG strategies, policies, activities, and communications, including for purposes of risk management. We have adopted the Sustainability Accounting Standards Board (“SASB”) Conceptual Framework, and we have made available on our website disclosures in accordance with the Financials Sector standards of the SASB. Additional details regarding our ESG practices and initiatives will also be available in our 2022 proxy statement.

Human Capital Strategy

The Company views its employees as its most important asset and as the key to managing a successful business for the benefit of all of our stakeholders. Our human capital strategy is designed to create an environment where our employees can grow professionally and contribute to the success of the Company. We believe a supportive, collaborative, engaging and equitable culture is key to attracting and retaining skilled, experienced and talented employees as well as fostering the development of the Company’s next generation of leaders.

As of December 31, 2021, we had 19 full and part-time employees. Our voluntary turnover rate was 0% for the three years ended December 31, 2021 and the average tenure of our employees is 14.5 years as of December 31, 2021. None of our employees are covered by any collective bargaining agreements, and we are not aware of any union organizing activity relating to our employees.

Diversity and Inclusion

We promote diversity within our workforce and believe diversity extends beyond gender, race, ethnicity, age and sexual orientation to include different perspectives, skills, and experiences and socioeconomic backgrounds. We hire based on qualifications and evaluate, recognize, reward and promote employees based on performance without regard to race, religion, color, national origin, disability, gender, gender identity, sexual orientation, stereotypes or
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assumptions based thereon. In addition, equity is fundamental to our philosophy of fair and equitable treatment. We regularly review and analyze our compensation practices and engage in ongoing efforts to ensure pay equity within all levels of employment. We strive to maintain a corporate culture that is welcoming, inclusive, and respectful to all.

As of December 31, 2021, 53% of our employees were women or self-identified minorities.

Health, Safety, and Wellness

The Company strives to offer its employees a healthy work-life balance and an open environment in which they are encouraged to offer thoughts and opinions. Employees have a wide selection of resources available to help protect their health, well-being, and financial security, including an on-site gym (with limited access as necessary as a precaution during the COVID-19 pandemic), coverage of a substantial portion of their health insurance, and a competitive 401(k) company match. We provide our employees with access to flexible, comprehensive and convenient medical coverage intended to meet their needs and the needs of their families. In addition to standard medical coverage, we offer employees dental and vision coverage, health savings and flexible spending accounts, paid time off, employee assistance programs, voluntary short-term and long-term disability insurance, term life insurance, and other benefits. In addition, we have historically offered flexible working arrangements to accommodate the individual needs of our employees.

Since the beginning of the COVID-19 pandemic, we have taken precautionary measures and implemented procedures aligned with the Centers for Disease Control and Prevention to protect, manage, and communicate with our workforce to contain the impacts of the virus. Due to the COVID-19 pandemic, all employees are currently encouraged to work from home, and substantially all do, at least on a part-time basis. Like many companies, COVID-19 has increased our focus on health and safety efforts to protect our employees and their families from potential virus exposure, while ensuring that our critical operations remain fully supported.

Employee Development

Recognizing the vital role that human capital management serves in the long-term success of the Company, we have initiated a Human Capital Strategy Planning process, which is overseen by our Board of Directors, to formalize the process for management and development of employees. In addition to talent management and development initiatives, the Human Capital Strategy Planning process has included the following:

•development of organizational core values and a plan to integrate these values into a variety of human
capital processes and practices;
•offering of a personal development program for all employees;
•formalized process for determining current and future human capital requirements;
•implementation of improved performance measures designed to better determine individual and team developmental needs.

COMPETITION

The business models of mortgage REITs range from investing only in Agency MBS to investing substantially in non-investment grade MBS and originating and securitizing mortgage loans and investing in mortgage servicing rights. Some mortgage REITs will invest in RMBS and related investments only, some in CMBS and related investments only, and some in a mix. Each mortgage REIT will assume various types and degrees of risk in its investment strategy. In purchasing investments and obtaining financing, we compete with other mortgage REITs, broker-dealers and investment banking firms, GSEs, mutual funds, banks, hedge funds, mortgage bankers, insurance companies, governmental bodies, including the Federal Reserve, and other entities, many of which have greater financial resources and a lower cost of capital. Increased competition in the market may reduce the available supply of investments and may drive prices of investments to levels which would negatively impact our ability to earn an acceptable amount of income from these investments. Competition can also reduce the availability of borrowing capacity at our repurchase agreement counterparties as such capacity is not unlimited, and many of our repurchase agreement counterparties limit the amount of financing they offer to the mortgage REIT industry.
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FEDERAL INCOME TAX CONSIDERATIONSOPERATING AND REGULATORY STRUCTURE

Real Estate Investment Trust Requirements

As a REIT, we are required to abide by certain requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”“Tax Code”). To retain our REIT status, the REIT rules generally require that we invest primarily in real estate-related assets, that our activities be passive rather than active, and that we distribute annually to our shareholders amounts equal to at least 90% of our REIT taxable income, after certain deductions. Dividend distributions to our shareholders in excess of REIT taxable income are considered to be a return of capital to the shareholder.

We use the calendar year for financial reporting in accordance with GAAP as well as for tax purposes. Income determined under GAAP differs from income determined under U.S. federal income tax rules primarily because of
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temporary differences in income and expense recognition. The primary differences between our GAAP net income and our taxable income are (i) unrealized gains and losses on derivative instruments, which are recognized in net income for GAAP purposes but are excluded from taxable income until realized; and (ii) realized gains and losses on derivatives that are designated as tax hedges which are recognized in net income for GAAP purposes upon termination or expiration of the instrument but are deferred and amortized for tax purposes.

One of the timing differences between our GAAP net income and taxable income is the losses we realize from terminating derivatives prior to their maturity, which occurs as part of our portfolio and hedge management activities. Deferred tax hedge losses on terminated derivative instruments are recognizedpurposes over the original periods designatedhedged by those terminated derivatives.derivatives (e.g., ten-years for a short position on a ten-year U.S. Treasury futures position). Recognition of certain deferred tax hedge gains and losses may be also be accelerated if the underlying instrument originally hedged is terminated or paid off. The following table provides the net deferred tax hedge lossesgains as of December 31, 20202021 that have already been recognized in our GAAP earnings but which will be recognized as taxable income (or reduce taxable incomeincome) over the periods indicated:
Tax Year of Recognition for Remaining Hedge LossesDecember 31, 2020
($ in thousands)
2021$23,548 
2022 - 202449,255 
2025 and thereafter68,636 
$141,439 

Tax Year of Recognition for Remaining Hedge Gains (Losses), NetDecember 31, 2021
($ in thousands)
2022$(1,982)
2023 - 20257,281 
2026 and thereafter21,685 
$26,984 

We also have tax net operating loss (“NOL”) carryforwards which were all generated prior to January 1, 2018. We have $17.4 million of NOL carryforward remaining as of December 31, 2020,2021, of which $8.1 million will expire in 1 year and the remainder over the next 5following 3 years if not used.

The following table summarizes our dividends declared per share and their related tax characterization for the periods indicated:
Tax CharacterizationTotal Dividends Declared Per Share
OrdinaryCapital GainReturn of Capital
Common dividends declared:
Year ended December 31, 2020$— $1.66000 $— $1.66000 
Year ended December 31, 2019$0.36723 $— $1.64277 $2.01000 
Preferred Series A dividends declared:
Year ended December 31, 2020$— $0.87951 $— $0.87951 
Year ended December 31, 2019$2.12500 $— $— $2.12500 
Preferred Series B dividends declared:
Year ended December 31, 2020$— $1.90625 $— $1.90625 
Year ended December 31, 2019$1.90625 $— $— $1.90625 
Preferred Series C dividends declared:
Year ended December 31, 2020$— $1.12150 $— $1.12150 
Year ended December 31, 2019$— $— $— $— 

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Tax CharacterizationTotal Dividends Declared Per Share
OrdinaryCapital GainReturn of Capital
Common dividends declared:
Year ended December 31, 2021$0.07506 $— $1.48494 $1.56000 
Year ended December 31, 2020$— $1.66000 $— $1.66000 
Preferred Series A dividends declared:
Year ended December 31, 2021$— $— $— $— 
Year ended December 31, 2020$— $0.87951 $— $0.87951 
Preferred Series B dividends declared:
Year ended December 31, 2021$0.63012 $— $— $0.63012 
Year ended December 31, 2020$— $1.90625 $— $1.90625 
Preferred Series C dividends declared:
Year ended December 31, 2021$1.72500 $— $— $1.72500 
Year ended December 31, 2020$— $1.12150 $— $1.12150 

Qualification as a REIT

Qualification as a REIT requires that we satisfy a variety of tests relating to our income, assets, distributions and ownership. The significant tests are summarized below.

Sources of Income. To continue qualifying as a REIT, we must satisfy two distinct tests with respect to the sources of our income: the “75% income test” and the “95% income test.” The 75% income test requires that we derive at least 75% of our gross income (excluding gross income from prohibited transactions) from certain real estate-related sources. In order to satisfy the 95% income test, 95% of our gross income for the taxable year must consist of either income that qualifies under the 75% income test or certain other types of passive income.

If we fail to meet either the 75% income test or the 95% income test, or both, in a taxable year, we might nonetheless continue to qualify as a REIT, if our failure was due to reasonable cause and not willful neglect and the nature and amounts of our items of gross income were properly disclosed to the Internal Revenue Service (the “IRS”). However, in such a case we would be required to pay a tax equal to 100% of any excess non-qualifying income.

Nature and Diversification of Assets. At the end of each calendar quarter, we must meet multiple asset tests. Under the “75% asset test,” at least 75% of the value of our total assets must represent cash or cash items (including receivables), government securities or real estate assets. Under the “10% asset test,” we may not own more than 10% of the outstanding voting power or value of securities of any single non-governmental issuer, provided such securities do not qualify under the 75% asset test or relate to taxable REIT subsidiaries. Under the “5% asset test,” ownership of any stocks or securities that do not qualify under the 75% asset test must be limited, in respect of any single non-governmental issuer, to an amount not greater than 5% of the value of our total assets (excluding ownership of any taxable REIT subsidiaries).

If we inadvertently fail to satisfy one or more of the asset tests at the end of a calendar quarter, such failure would not cause us to lose our REIT status, provided that (i) we satisfied all of the asset tests at the close of the preceding calendar quarter and (ii) the discrepancy between the values of our assets and the standards imposed by the asset tests either did not exist immediately after the acquisition of any particular asset or was not wholly or partially caused by such an acquisition. If the condition described in clause (ii) of the preceding sentence was not satisfied, we
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still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose.

Ownership. In order to maintain our REIT status, we must not be deemed to be closely held and must have more than 100 shareholders. The closely held prohibition requires that not more than 50% of the value of our outstanding shares be owned by five or fewer persons at any time during the last half of our taxable year. The "more than 100 shareholders" rule requires that we have at least 100 shareholders for 335 days of a twelve-month taxable year. If we failed to satisfy the ownership requirements, we would be subject to fines and be required to take curative action to meet the ownership requirements in order to maintain our REIT status.

Under current U.S. federal income tax laws,Exemption from Regulation under the highest marginal individual income tax rate is 37% and individuals, estates and trusts may deduct up to 20%Investment Company Act of certain pass-through income, including ordinary REIT dividends that are not “capital gain dividends” or “qualified dividend income,” subject to certain limitations. For taxpayers qualifying for the full deduction, the effective maximum tax rate on ordinary REIT dividends is 29.6% (plus a 3.8% surtax on net investment income, if applicable). The maximum rate of withholding with respect to our distributions to certain foreign owners that are treated as attributable to gains from the sale or exchange of U.S. real property interests is 21%.

HUMAN CAPITAL STRATEGY

The Company views its employees as its most important asset and as the key to managing a successful business for the benefit of all of our stakeholders. Our human capital strategy is designed to create a supportive environment where our employees can grow professionally and contribute to the success of the Company. We believe a collaborative, engaging and
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equitable culture is key to attracting and retaining skilled, experienced and talented employees as well as fostering the development of the Company’s next generation of leaders.1940

We 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 the U.S. Securities and Exchange Commission (“SEC”) staff no-action letters, companies relying on this exemption must ensure that at least 55% of their assets are committed to promoting diversity within our workforcemortgage loans and believe diversity extends beyond gender, race, ethnicity, ageother qualifying assets, and sexual orientation to include different perspectives, skills,at least 80% of their assets are real estate-related. The 1940 Act requires that we and experiences and socioeconomic backgrounds. We hire based on qualifications and evaluate, recognize, reward and promote employees based on performance without regard to race, religion, color, national origin, disability, gender, gender identity, sexual orientation, stereotypes or assumptions based thereon. In addition, equity is fundamental to our philosophy of fair and equitable treatment. We regularly review and analyze our compensation practices and engage in ongoing efforts to ensure pay equity within all levels of employment.

As of December 31, 2020, we had 19 full and part-time employees, of which 53% are women or self-identified minorities. Our voluntary turnover rate was 0% for the three years ended December 31, 2020 and the average tenureeach of our employeessubsidiaries evaluate our qualification for exemption under the 1940 Act. Our subsidiaries rely either on Section 3(c)(5)(C) of the 1940 Act or other sections that provide exemptions from registering under the 1940 Act, including Sections 3(a)(1)(C) and 3(c)(7). Under the 1940 Act, an investment company is 13.5 years as of December 31, 2020. None of our employees are covered by any collective bargaining agreements,required to register with the SEC and we are not aware of any union organizing activityis subject to extensive restrictive and potentially adverse regulations relating to, our employees.

The Company strives to offer its employees a healthy work-life balanceamong other things, operating methods, management, capital structure, leverage, dividends, and an open environment in which they are encouraged to offer thoughts and opinions. Employees have a wide selection of resources available to help protect their health, well-being, and financial security, including an on-site gym (currentlytransactions with limited access as a precaution during the COVID-19 pandemic) coverage of a substantial portion of their health insurance, and a competitive 401(k) company match. In addition, we have historically offered flexible working arrangements to accommodate the individual needs of our employees who request it. Due to the COVID-19 pandemic, all employees are currently encouraged to work from home, and substantially all do, at least on a part-time basis. Like many companies, COVID-19 has increased our focus on health and safety efforts to protect our employees and their families from potential virus exposure, while ensuring that our critical operations remain fully supported. Since the beginning of the COVID-19 pandemic, we have taken precautionary measures and implemented procedures aligned with the Centers for Disease Control and Prevention to protect, manage, and communicate with our workforce to contain the impacts of the virus.

Recognizing the vital role that human capital management serves in the long-term success of the Company, we have initiated a Human Capital Strategy Planning process, which is overseen by the Board, to formalize the process for management and development of employees. In addition to talent management and development initiatives, the Human Capital Strategy Planning process included the following in 2020:

•development of organizational core values and a plan to integrate these values into a variety of human
capital processes and practices;
•offering of a personal development program in which all employees were encouraged to participate;
•initiation of a formalized process for determining current and future human capital requirements;
•implementation of improved performance measures designed to better determine individual and team developmental needs.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE INITIATIVES

affiliates. We believe that environmental, social, and corporate governance ("ESG") practices and initiativeswe are important in sustaining and growing the Company. We believe ESG initiatives create value by improving the environment and lives ofoperating our employees, investors, business partners, and the community. The following are notable ESG policies we had in place as of December 31, 2020 as well as targets we have established for 2021:

•The Company's Board of Directors follows our Corporate Governance Guidelines, adopted in accordance with the exemption requirements of the New York Stock Exchange (“NYSE”), which provide a framework to assist directors in fully understanding and effectively implementing their functions while assuring the Company’s ongoing commitment to high standards of corporate conduct and compliance. These Corporate Governance Guidelines cover specific issues including, among other things, the Board's key responsibilities, criteria for membership and selection, committeesSection 3(c)(5)(C) of the Board, meetings with management, director continuing education, director performance evaluations and compensation, and management succession planning.
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•Our Code1940 Act. Please refer to Item 1A, "Risk Factors" of Business Conduct and Ethics ("Code of Conduct") applies to all of our employees, officers and directors and covers a wide range of business practices and procedures designed to foster the highest ethical standards in all business relationships. This policy covers, among other things, compliance with applicable laws, conflicts of interest, confidentiality, fair dealing, discrimination and harassment, health and safety, reporting of suspected violations, and enforcement of our Code of Conduct.
•Our Whistleblower Policy provides a structured and formal process to facilitate confidential, anonymous submissions by employees of the Company and others with concerns or complaints regarding the Company's accounting, internal accounting controls, auditing matters or violations of the Company’s Code of Conduct.
•Our Nominating and Corporate Governance Committee is responsiblethis Annual Report on Form 10-K for overseeing our ESG strategies, policies, activities, and communications, including for purposes of risk management.
•In September 2020, our Board of Directors adopted a Board Refreshment and Diversity Policy to ensure a relevant, inclusive and diverse membership on the Board; to provide the Board with the best combination of knowledge, skills, experience and perspectives among its members (including with respect to gender, age, race, culture and experience); and to oversee and support our strategy for the future.
•We adopted the Sustainability Accounting Standards Board (“SASB”) Conceptual Framework in 2020 and are committed to reporting within such framework in 2021.
•We established a Steering Committee in 2020, which is actively developing ESG guidelines and has begun prioritizing measurable ESG goals for the Company for 2021 in response to surveys of our employees. The Steering Committee also intends to survey our Board of Directors, investors and community members to assess the materiality and importance of various ESG matters to these stakeholders.

Community Commitment

We believe that supporting the communities where we work and live is a meaningful commitment to both our employees and our neighbors. With the help of our employees, we strive to create a positive impact in our communities through charitable contributions and financial support that encourages the future development and well-being of our local communities. Employees are encouraged and given opportunities to donate time and funds to community organizations of their choice, and the Company offers a matching gift program for employee charitable contributions. In addition, the Company has historically supported the following areas to which it feels strongly connected:

•affordable housing
•financial literacy
•children’s health and social services; and
•career counseling in underprivileged communities.

Additional details regarding our ESG initiatives, including our community commitments, will be available in our 2021 Proxy Statement.further discussion.

AVAILABLE INFORMATION

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements, and other information with the SEC. These materials may be obtained electronically by accessing the SEC’s home page at www.sec.gov.

Our website can be found at www.dynexcapital.com. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are made available free of charge through our website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.

Our Code of Conduct is available on our website, along with our Audit Committee Charter, our Whistleblower Policy, our Nominating and Corporate Governance Committee Charter, and our Compensation Committee Charter.Charter, and our latest ESG disclosures under the SASB framework. We will post on our website amendments to the Code of Conduct or waivers from its provisions, if any, which are applicable to any of our directors or executive officers in accordance with the requirements of the SEC or the NYSE.

The information on our website is not a part of, nor is it incorporated by reference, into this report. Further, our references to the URLs for these websites are intended to be inactive textual references only.


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ITEM 1A.    RISK FACTORS

The following is a summarydiscussion of the risk factors that we believe are most relevantmaterial to our business. These are factors which, individually or in the aggregate, we think could cause our actual results to differ significantly from anticipated or historical results. In addition to understanding the key risks described below, investors should understand that it is not possible to predict or identify all risk factors, and consequently, the following is not a complete discussion of all potential risks or uncertainties. Additionally, investors should not interpret the disclosure of a risk to imply that the risk has not already materialized.

RISKS RELATED TO OUR INVESTMENT ACTIVITIES
FluctuationsDeclines in the market value of our investments could negatively impact our net income, comprehensive income, shareholders’ equity, book value per common share, dividends, and liquidity.
Our investments fluctuate in value due to a number of factors including, among others, market volatility (including, as anfor example, market volatility in the first half of 2020 due to the COVID-19 outbreak), geopolitical events (including, for example, war or other military conflicts, such as the military conflict between Russia and Ukraine) and changes in credit spreads, spot and forward interest rates, and actual and anticipated prepayments. Our investments may also fluctuate in value due to increased or reduced demand for the types of investments we own. The level of demand may be impacted by, among other things, interest rates, capital flows, economic conditions, and government policies and actions, such as purchases and sales by the FRBNY.Federal Reserve.
Changes in credit spreads represent the market’s valuation of the perceived riskiness of assets relative to risk-free rates, and widening credit spreads reduce the market value of our investments because market participants typically require additional yield to hold riskier assets.rates. Credit spreads could change based on a number of factors, including, but not limited to, macroeconomic or systemic factors specific to a particular security such as prepayment performance or credit performance. Other factors that could impact credit spreads includeperformance, technical issues such as supply and demand for a particular type of security, market psychology, and FOMCFederal Reserve monetary policies. When credit spreads widen, the market value of our investments will decline because market participants typically require additional yield to hold riskier assets.
In addition, the market value of most of our investments are fixed rate or reset in rate over a period of time, andwill typically decrease as interest rates rise, the market value of these investments will typically decrease.rise. If market values decrease significantly, we may experience a material reduction in our liquidity if we are forced to sell assets at losses in order to meet margin calls from our lenders to repay or renew repurchase agreements at maturity, or otherwise to maintain our liquidity. A material reduction in our liquidity could lead to a reduction of the dividend or potentially the payment of the dividend in Company stock subject to the Tax Code.
Fluctuations in interest ratesInterest rate fluctuations could negatively impact our net interest income, comprehensive income, book value per common share, dividends, and liquidity.
Fluctuations in interest ratesInterest rate fluctuations impact us in multiple 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 frombecause our borrowing rates increasingmay increase faster than the 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 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,net interest income, dividend, and book value per common share.
Fluctuations in interest ratesInterest rate fluctuations may also negatively affect the market value of our securities, resulting in declines in comprehensive income, book value per common share, and liquidity. Since our investment portfolio consists substantially of fixed rate 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, and reductionssecurities. Reductions in the market value of our MBS couldtypically result in margin calls from our lenders. Conversely, while declininglenders, which impacts our liquidity. Declining interest rates are typically more favorable for us, we may experience increasingcause prepayments to increase, which would increase amortization expense of any premiums we pay to acquire our investments and thereby result in a decline in net interest income. DecliningIn addition, declining interest rates may also result in declining market value on RMBS as market participants factor in potentially faster prepayment rates in the future.
It can be difficult to predict the impact on interest rates of unexpected and uncertain global political and economic events, such as the outbreak of the COVID-19 pandemic, epidemic disease, warfare (including the recent outbreak of hostilities between Russia and Ukraine), economic and international trade conflicts or sanctions, the
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change in the U.S. presidential administration and political makeup of the Congress, or changes in the credit rating of the U.S. government, the United Kingdom, or one or more Eurozone nations; however, increased uncertainty or changes in the economic outlook for, or rating of, the creditworthiness of the U.S. government, the United Kingdom, or Eurozone nations may have adverse impacts on, among other things, the U.S. economy, financial markets, the cost of borrowing, the financial strength of counterparties we transact business with, and the value of assets we hold. Any such adverse impacts could negatively impact the availability to us of short-term debt financing, our cost of short-term debt financing, our business, and our financial results.

We invest in to-be-announced, or TBA, securities and execute TBA dollar roll transactions. It could be uneconomical to roll our TBA contracts or we may be unable to meet margin calls on our TBA contracts, which could negatively affect our financial condition and results of operations.
We execute TBA dollar roll transactions which effectively delay the settlement of a forward purchase (or sale) of a TBA by entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering an
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identical TBA long (or short) position with a later settlement date. Under certain market conditions, TBA dollar roll transactions may result in negative net interest income whereby the Agency RMBS purchased (or sold) for forward settlement under a TBA contract are priced at a premium to Agency RMBS for settlement in the current month. Market conditions could also adversely impact the TBA dollar roll market and, in particular, shifts in prepay expectations on Agency RMBS or changes in the reinvestment policy on Agency RMBS by the Federal Reserve. Under such conditions, it may be uneconomical to roll our TBA positions prior to the settlement date, and we could have to take physical delivery of the underlying securities and settle our obligations for cash, or in the case of a short position, we could be forced to deliver one of our Agency RMBS, which would mean using cash to payoffpay off any repurchase agreement amounts collateralized by that security. We may not have sufficient funds or alternative financing sources available to settle such obligations. In addition, pursuant to the margin provisions established by the Mortgage-Backed Securities Division (“MBSD”) of the Fixed Income Clearing Corporation, we are subject to margin calls on our TBA contracts and our trading counterparties may require us to post additional margin above the levels established by the MBSD. Negative income on TBA dollar roll transactions or failure to procure adequate financing to settle our obligations or meet margin calls under our TBA contracts could result in defaults or force us to sell assets under adverse market conditions or through foreclosure and adversely affect our financial condition and results of operations.
As a result ofChanges in monetary easing policies,policy, either implied or implemented by the Federal Reserve, has loweredincluding its intention to increase the targeted Federal Funds Rate and now owns substantial amountsor alter the trajectory of its purchases of longer-term Treasury securities and fixed-rate Agency MBS in order to put downward pressure on interest rates. If the Federal Reserve begins tightening monetary policy or if the FRBNY were to sell these securities or even announce that it intends to sell these securities, longer-termcould cause interest rates are likely to increase dramaticallyrise and/or the yield curve to flatten which could negatively impact the market value of our investments. In addition, an announcement by the Federal Reserve of its intention to increase the targeted Federal Funds rate, investments and/or the market’s anticipation of such an announcement, is likely to increase our borrowing costs.
In response to the COVID-19 pandemic, and in order to mitigate its implications for the U.S. economy and financial system, the Federal Reserve aggressively eased monetary policy in 2020 by reducing the Federal Funds Rate to a range of between 0% and 0.25%. The Federal Reserve ishas also seeking to providebeen providing monetary policy stimulus by expanding the holdings of longer-term securities in its portfolio, including large-scale purchases of Treasury securities and fixed-rate Agency RMBS. The purchases were intended to lower longer-term interest rates in general and mortgage rates in particular and ensure the continued smooth functioning of markets. The Federal Reserve is one of the largest holders of Agency RMBS and, as of February 2021, is committed to purchasing at least $40 billion per month in newly issued Agency RMBS untilCiting substantial progress has been made toward the Federal Reserve'sachievement of its goals of maximum employment and price stability, goals. The purchase activity in Agency RMBS has materially improved market prices in these securities over the balance of 2020. Markets anticipate continued purchases by the Federal Reserve for the foreseeable future givenbegan tapering its net asset purchases in December 2021 and has subsequently continued economic hardship attributable to the negative impactsincreasing its pace of the COVD-19 pandemic. If the Federal Reserve tapers or announces an intention to taper its purchases or it undertakes outright sales of its securities portfolio, the price of Agency RMBS could materially decline, negatively impacting the market value of our investments and thereby, our comprehensive income, book value per common share, and our liquidity.
tapering. In addition, by keeping the Federal Funds Rate at the range of between 0% and 0.25%, the Federal Reserve has kept short-term interest rates low which has benefited our borrowing costs. OnceCiting a strong labor market and an inflation level above 2% as evidence, the Federal Reserve announces a higher targetedannounced in February 2022 that they expect it will soon be appropriate to raise the target range or if markets determine thatfor the Federal Reserve is likelyFunds Rate. The combination of these actions have resulted in an increase in long-term interest rates and flattening of the yield curve, negatively impacting the market value of our investments during the fourth quarter of 2021 and so far into 2022. In addition, the markets have begun pricing in four to announce a higher target range,five rate hikes, and as such, our borrowing costs are likely to increase which will negatively impact our results of operations and could impact our financial condition and book value.in 2022.
We invest in assets that are traded in over-the-counter (“OTC”) markets which are less liquid and have less price transparency than securities exchanges. Owning securities that are traded in OTC markets may increase our liquidity risk, particularly in a volatile market environment, because our assets may be more difficult to borrow
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against or sell in a prompt manner and on terms acceptable to us, and we may not realize the full value at which we previously recorded the investments and/or may incur losses upon sale of these assets.
Though Agency MBS are generally deemed to be very liquid securities, turbulent market conditions, such as market conditions following the COVID-19 outbreak, may significantly and negatively impact the liquidity and market value of these assets. Non-Agency MBS are typically more difficult to value, less liquid, and experience greater price volatility than Agency MBS. In addition, market values for non-Agency MBS are typically more subjective than Agency MBS. Given the trading of our investments in OTC markets, inIn times of severe market stress, a market may not exist for certain of our assets at any price. If the MBS market were to experience a severe or extended period of illiquidity, lenders may refuse to accept
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our assets as collateral for repurchase agreement financing, which could have a material adverse effect on our results of operations, financial condition and business. A sudden reduction in the liquidity of our investments could limit our ability to finance or could make it difficult to sell investments if the need arises. If we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the fair value at which we have previously recorded our investments which would result in lower than anticipated gains or higher losses.
Prepayment rates on the mortgage loans underlying our investments may adversely affect our profitability, the market value of our investments, and our liquidity. Changes in prepayment rates may also subject us to reinvestment risk.
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. Prepayments on our investments are 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. The impact of involuntary prepayments on high premium investments including CMBS IO and higher coupon Agency CMBS is particularly acute since the investment consists entirely of premium. An increase in involuntary prepayments will result in the loss of investment premiums at an accelerated rate which could materially reduce our profitability 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 producing properties such as retail shopping centers, office buildings, multifamily apartments and hotels, may increase as a result of economic weakness, such as that brought on by the COVID-19 pandemic.
Prepayments on Agency CMBS, which are often collateralized by a single loan, could result in margin calls by lenders in excess of our available liquidity, particularly for larger balance investments. Typically, there is a 20-day delay between the announcement of prepayments and the receipt of the cash from the prepayment; however, the repurchase agreement lender may initiate a margin call when the prepayment is announced. If we do not have liquidity available to cover the margin call at that time, we may be in default under the repurchase agreement until we receive the cash from the prepayment. Alternatively, we could be forced to sell assets quickly and on terms unfavorable to us to meet the margin call.
Increases in actual prepayment rates or market expectations of prepayment rates (voluntary or involuntary) could negatively impact our profitability and the market value of our investments, negatively impacting 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. Typically, prepayments will increase when interest rates are declining which can lead to reinvestment in lower yielding investments leading to lower net interest income and reduced profitability.
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We may be subject to the risks associated with inadequate or untimely services from third-party service providers, which may negatively impact our results of operations. We also rely on corporate trustees to act on behalf of us and other holders of securities in enforcing our rights.
Loans underlying non-Agency MBS we own are serviced by third-party service providers. These servicers provide for the 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 may be impacted, and we may incur losses on our investment.
In addition, should a servicer experience financial difficulties, it may not be able to perform its obligations. Due to application of provisions of bankruptcy law, servicers who have sought bankruptcy protection may not be required to make
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advance payments required under the terms of the agreements governing the securities of amounts due from loan borrowers. Even if a servicer were able to advance amounts in respect of delinquent loans, its obligation to make the advances may be limited to the extent that is does not expect to recover the advances due to the deteriorating credit of the delinquent loans. As a result of the COVID-19 outbreak, as well as the loan forbearance programs instituted by the GSEs, many servicers are experiencing financial distress and there is an increased risk that servicers may declare bankruptcy. For Agency MBS, we expect that the GSEs will transfer the servicing or otherwise make the investors in Agency MBS whole. For non-Agency MBS, financial difficulties with the servicer could lead to a material increase in delinquencies or losses to the securities. As a result, the value of the securities may be impacted, and we may incur losses on our investment.
We also rely on corporate trustees to act on behalf of us and other 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 the securities, or fail to take action, we could experience losses.
Provisions requiring yield maintenance charges, prepayment penalties, defeasance, or lock-outs in CMBS IO securities may not be enforceable.
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.
We invest in securities guaranteed by Fannie Mae and Freddie Mac which are currently under conservatorship by the Federal Housing Finance Authority (“FHFA”). The ultimate impact on the operations of Fannie Mae and Freddie Mac from the conservatorships and the support they receive from the U.S. government is not determinable and could affect Fannie Mae and Freddie Mac in such a way that our business, operations and financial condition may be adversely affected.
As conservator, the FHFA has assumed all the powers of the shareholders, directors and officers of the GSEs with the goal of preserving and conserving their assets. At various times since implementation of the conservatorship, Congress has considered structural changes to the GSEs. The U.S. Treasury published the Treasury Housing Reform Plan in 2019 outlining proposed changes to the U.S. housing finance system, which could lead to the release of the GSEs from conservatorship. Furthermore, the FHFA released its Strategic Plan in October 2019, which included in part an outline for the GSEs exiting conservatorship. Recent events related to the COVID-19 outbreak and the associated economic slowdown have raised concerns at the FHFA that the GSEs may need additional capital in order to meet their obligations as guarantors on trillions of dollars of MBS. The market value of Agency MBS today is
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highly dependent on the continued support of the GSEs by the U.S. government. If such support is modified or withdrawn, if the U.S. Treasury fails to inject new capital as need,needed, or if the GSEs are released from conservatorship, the market value of Agency MBS could significantly decline, making it difficult for us to obtain repurchase agreement financing and could force us to sell assets at substantial losses. Furthermore, any policy changes to the relationship between the GSEs and the U.S. government may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued by the GSEs. It may also interrupt the cash flow received by investors on the underlying MBS
MBS. 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.
Credit ratings assigned to debt securities by the credit rating agencies may not accurately reflect the risks associated with those securities. Changes in credit ratings for securities we own or for similar securities might negatively impact the market value of these securities.
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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.
Credit rating agencies may change their methods of evaluating credit risk and determining ratings on securities backed by real estate loans and securities. These changes may occur quickly and often. The market’s ability to understand and absorb these changes, and the impact to the securitization market in general, are difficult to predict. Such changes may have a negative impact on the value of securities that we own.
RISKS RELATED TO OUR FINANCING AND HEDGING ACTIVITIES
Our use of leverage, including repurchase agreements, to enhance returns to shareholders increases the risk of volatility in our results and could lead to material decreases in net interest income, net income, comprehensive income, dividends,shareholders’ equity, book value per common share, dividends, and liquidity.
Leverage increases returns on our invested capital if we can earn a greater return on investments than our cost of borrowing but can decrease returns if borrowing costs increase and we have not adequately hedged against such an increase. Further, using leverage magnifies the potential losses to shareholders’ equity and book value per common share if our investments’ fair market value declines, net of associated hedges.
Repurchase agreements are typically uncommitted short-term financings with no guaranty of renewal at maturity and changes to terms of such financing may adversely affect our profitability and our liquidity. Our ability to fund our operations, meet financial obligations, and finance targeted asset acquisitions may be impacted by an inability to secure and maintain our financing through repurchase agreements or other borrowings with our counterparties. Because repurchase agreements are short-term commitments of capital, lenders may respond to adverse market conditions in a manner that makes it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have, and may continue to, impose more onerous conditions at renewal.borrowings. Furthermore, in times of adverse market conditions, we may have to dispose of assets at significantly depressed prices and at inopportune times, which could result in significant losses, or we may be forced to curtail our asset acquisition activities if certain events occur including, for example, if we:
•are unable to renew our existing or are otherwise unable to access new funds under our financing arrangements;
•are unable to arrange for new financing on acceptable terms;
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•default on our financial covenants contained in our financing arrangements; or
•become subject to larger haircuts under our financing arrangements requiring us to post additional collateral.
In addition, if the regulatory capital requirements imposed on certain of our lenders change, those lenders may be required to significantly increase the cost of the financing that they provide to us, or to increase the amounts of collateral they require as a condition to providing us with financing. At various times, our lenders have revised, and may continue to revise, their eligibility requirements for the types of assets that they are willing to finance or the terms of such financing arrangements, including increased haircuts and requiring additional cash collateral, based on, among other factors, the regulatory environment and a particular lender’s management of actual and perceived risk. Moreover, the amount of financing that we receive under our financing agreements will be directly related to our lenders’ valuation of the assets subject to such agreements. Typically, the master repurchase agreements that govern our borrowings under repurchase agreements grant the lender the absolute right to reevaluate the fair market value of the assets subject to such repurchase agreements at any time. These valuations may be different than the values that we ascribe to these assets and may be influenced by recent asset sales at distressed levels by forced sellers. If a lender determines in its sole discretion that the value of the assets has decreased, it has the right to initiate a margin call, which would require us to transfer additional assets to the lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. We would also be required to post additional collateral if haircuts increase under a repurchase agreement. Furthermore, if we
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move financing from one repurchase agreement counterparty to another with larger haircut requirements, we would have to repay more cash to the original counterparty than we would be able to borrow from the new counterparty. In these situations, we could be forced to sell assets at significantly depressed prices to meet such margin calls and to maintain adequate liquidity, which could cause significant losses. Significant margin calls could have a material adverse effect on our results of operations, financial condition, business, liquidity, and ability to make distributions to our shareholders, and could cause the value of our capital stock to decline.
Our ability to access leverage in the conduct of our operations is impacted by the following:
•market conditions and overall market volatility and liquidity;
•regulation of our lenders and other regulatory factors;
•disruptions in the repurchase agreement market generally, or the infrastructure that supports it;
•the liquidity of our investments;
•the market value of our investments;
•maintaining our REIT status;
•the advance rates by our lenders on investment collateral pledged;
•the available liquidity and capital of our lenders, and;
•the willingness of our lenders to finance the types of investments we choose.
Many of these factors are beyond our control and are difficult to predict, which could lead to sudden and material adverse effects on our results of operations, financial condition, business, liquidity, and ability to make distributions to shareholders, and could force us to sell assets at significantly depressed prices to maintain adequate liquidity. Market dislocations, including those resulting from the COVID-19 outbreak or as a result of other future outbreaks involving other highly infectious or contagious diseases, could limit our ability to access funding or access funding on terms that we believe are attractive, which could have a material adverse effect on our financial condition.
For more information about our operating policies regarding our use of leverage, please see “Liquidity and Capital Resources” within Part II, Item 7 of our Annual Report on Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operation.Operations.”
Our repurchase agreements and agreements governing certain derivative instruments may contain financial and nonfinancial covenants. Our inability to meet these covenants could adversely affect our financial condition, results of operations, and cash flows.
In connection with certain of our repurchase agreements and interest rate swap agreements, we are required to maintain certain financial and non-financial covenants. As of December 31, 2020,2021, the most restrictive financial covenants require that we have a minimum of $30 million of liquidity and declines in shareholders’ equity no greater than 25% in any quarter and 35% in any year. In addition, virtually all of our repurchase agreements and interest rate swap agreements require us to maintain our status as a REIT and to be exempted from the provisions of the 1940 Act. Compliance with these covenants depends on market factors and the strength of our business and operating results.
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Various risks, uncertainties and events beyond our control, including significant fluctuations in interest rates, market volatility and changes in market conditions, could affect our ability to comply with these covenants. Failure to comply with these covenants could result in an event of default, termination of an agreement, acceleration of all amounts owed under an agreement, and generally would give the counterparty the right to exercise certain other remedies under the repurchase agreement, including the sale of the asset subject to repurchase at the time of default, unless we were able to negotiate a waiver in connection with any such default related to failure to comply with a covenant. Any such waiver could be conditioned on an amendment to the underlying agreement and any related guaranty agreement on terms that may be unfavorable to us. If we are unable to negotiate a covenant waiver or replace or refinance our assets under a new repurchase facility on favorable terms or at all, our financial condition, results of operations and cash flows could be adversely affected. Further, certain of our repurchase agreements and interest rate swap agreements have cross-default, cross-acceleration or similar provisions, such that if we were to violate a covenant under one agreement, that violation could lead to defaults, accelerations, or other adverse events under other agreements, as well.
Our use of hedging strategies to mitigate our interest rate risk may not be effective and may adversely affect our net income, comprehensive income, liquidity, shareholders’ equity and book value per common share.
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We may use a variety of derivative instruments to help mitigate increased financing costs and volatility in the market value of our investments from adverse changes in interest rates. Our hedging activity will vary in scope based on, among other things, our forecast of future interest rates, our investment portfolio construction and objectives, the actual and implied level and volatility of interest rates, and sources and terms of financing used. No hedging strategy can completely insulate us from the interest rate risks to which we are exposed. Interest rate hedging may fail to protect or could adversely affect our results of operations, book value and liquidity because, among other things:
•the performance of instruments used to hedge may not completely correlate with the performance of the assets or liabilities being hedged;
•available hedging instruments may not correspond directly with the interest rate risk from which we seek protection;
•the duration of the hedge may not match the duration of the related asset or liability given management’s expectation of future changes in interest rates or a result of the inaccuracies of models in forecasting cash flows on the asset being hedged;
•the value of derivatives used for hedging will be adjusted from time to time in accordance with GAAP to reflect changes in fair value and downward adjustments, or “mark-to-market losses,” will reduce our earnings, shareholders’ equity, and book value;
•the amount of income that a REIT may earn from hedging transactions (other than through taxable REIT subsidiaries) to offset interest rate losses may be limited by U.S. federal income tax provisions governing REITs;
•interest rate hedging can be relatively expensive, particularly during periods of volatile interest rates;
•the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
•the party owing money in the hedging transaction may default on its obligation to pay.
Our hedging instruments can be traded on an exchange or administered through a clearing house or under bilateral agreements between us and a counterparty. Bilateral agreements expose us to increased counterparty risk, and we may be at risk of loss of any collateral held by a hedging counterparty if the counterparty becomes insolvent or files for bankruptcy. Moreover, the expected transition from LIBOR to alternative reference rates adds additional complications to our hedging strategies. For example, we may enter into Secured Overnight Financing Rate (“SOFR”) based swaps to hedge rising borrowing costs, which may not fully offset such rising costs as well as LIBOR-based swaps may have in the past.
Clearing facilities or exchanges may increase the margin requirements we are required to post when entering into derivative instruments, which may negatively impact our ability to hedge and our liquidity.
We are required to post margin when entering into a hedging instrument that is traded on an exchange or administered through a clearing house. The amount of margin is set for each derivative by the exchange or clearinghouse and in prior periods, exchanges have required additional margin in response to events having or expected to have adverse economic consequences, such as the COVID-19 pandemic. In the event that future adverse economic developments or market uncertainty (including those due to governmental, regulatory, or legislative action
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or inaction) result in increased margin requirements for our hedging instruments, it could materially adversely affect our liquidity position, business, financial condition and results of operations.
If a lender to us in a repurchase transaction defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if we default on our obligations under a repurchase agreement, we will incur losses.
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 of bankruptcy either by ourselves or one or more of our third-party lenders, under the U.S. Bankruptcy Code, assets pledged as collateral under repurchase agreements may not be recoverable by us. We may incur losses equal to the excess of the collateral pledged over the amount of the associated repurchase agreement borrowing.
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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.
RISKS RELATED TO OUR QUALIFICATION AS A REIT AND TAX RELATED OR OTHER REGULATORY MATTERS
If we fail to properly conduct our operations, we could become subject to regulation under the 1940 Act. Conducting our business in a manner so that we are exempt from registration under and compliance with the 1940 Act may reduce our flexibility and could limit our ability to pursue certain opportunities.
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 staff 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) of the 1940 Act. We believe that we are operating our business in accordance with the exemption requirements of Section 3(c)(5)(C) of the 1940 Act. Likewise, our subsidiaries will rely either on Section 3(c)(5)(C) of the 1940 Act or other sections of the 1940 Act that provide exemptions from registration thereunder, including Sections 3(a)(1)(C) and 3(c)(7).
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.
We have not established a minimum dividend payment level and we may not have the ability to pay dividends in the future. Furthermore, our monthly dividend strategy could attract shareholders that are especially sensitive to the level and frequency of the dividend. If we were to reduce the dividend or change back to a quarterly payment cycle, our share price could materially decline.
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We currently intend to pay regular dividends to our common shareholders and to make distributions to our shareholders in amounts such that all or substantially all of our taxable income, subject to certain adjustments including utilization of our NOL, is distributed. However, we have not established a minimum dividend payment level, and the amount of our dividend is subject to fluctuation. Our ability to pay dividends may be adversely affected by the risk factors described herein. All distributions will be made at the discretion of our Board of Directors and will depend on our GAAP and tax earnings, our financial condition, the requirements for REIT qualification and such other factors as our Board of Directors may deem relevant from time to time. We may not be able to make distributions, or our Board of Directors may change our dividend policy in the future. To the extent that we decide to pay dividends in excess of our current and accumulated tax earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes. A return of capital reduces the basis of a shareholder’s investment in our common stock to the extent of such basis and is treated as capital gain thereafter.
Our strategy of paying a monthly dividend is designed in part to attract retail shareholders that invest in stocks which pay a monthly dividend. The ownership of our stock may become overly concentrated in shareholders who only invest in monthly dividend paying stocks. These shareholders may be more sensitive to reductions in the dividend or a change in the payment cycle and our share price could materially decline if we were to reduce the dividend or change the payment cycle of our dividend.
Qualifying as a REIT involves highly technical and complex provisions of the Tax Code, and a technical or inadvertent violation could jeopardize our REIT qualification. Maintaining our REIT status may reduce our flexibility to manage our operations.
Qualification as a REIT involves the application of highly technical and complex Tax Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT
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qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. Our operations and use of leverage also subject us to interpretations of the Tax Code, and technical or inadvertent violations of the relevant requirements under the Tax Code could cause us to lose our REIT status or to pay significant penalties and interest. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
Maintaining our REIT status may limit flexibility in managing our operations. For instance:
•If we make frequent asset sales from our REIT entities to persons deemed customers, we could be viewed as a “dealer,” and thus subject to 100% prohibited transaction taxes or other entity level taxes on income from such transactions.
•Compliance with the REIT income and asset requirements may limit the type or extent of hedging that we can undertake and could limit our ability to invest in TBA securities.
•Our ability to own non-real estate related assets and earn non-real estate related income is limited. Our ability to own equity interests in other entities is limited. If we fail to comply with these limits, we may be forced to liquidate attractive assets on short notice on unfavorable terms in order to maintain our REIT status.
•Our ability to invest in taxable subsidiaries is limited under the REIT rules. Maintaining compliance with this limitation could require us to constrain the growth of future taxable REIT affiliates.
•Notwithstanding our NOL carryforward, meeting minimum REIT dividend distribution requirements could reduce our liquidity. Earning non-cash REIT taxable income could necessitate our selling assets, incurring debt, or raising new equity in order to fund dividend distributions.
•Stock ownership tests may limit our ability to raise significant amounts of equity capital from one source.
If we do not qualify as a REIT or fail to remain qualified as a REIT, we may be subject to tax as a regular corporation and could face a tax liability, which would reduce the amount of cash available for distribution to our shareholders. We would also violate debt covenants in certain repurchase and derivative agreements which could put us in default on these agreements.
We intend to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise
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determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis.
If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, after consideration of ourany remaining NOL carryforward but not considering any dividends paid to our shareholders during the respective tax year. If we could not otherwise offset this taxable income with ouran NOL carryforward, the resulting corporate tax liability could be material to our results and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Tax Code provisions, we also would be disqualified from taxation as a REIT until the fifth taxable year following the year for which we failed to qualify as a REIT. In addition, many of our repurchase agreement lenders and derivative counterparties require us to maintain our REIT status. If we were to lose our REIT status, these lenders would have the right to terminate any repurchase agreement borrowings and derivative contracts outstanding at that time. This would further stress our liquidity position, reduce the amount of cash available for distribution to our shareholders and could further exacerbate the adverse impacts on the value of our common stock described above.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to “qualified dividend income” payable to U.S. shareholders that are taxed at individual rates is lower than corresponding maximum ordinary income tax rates. Dividends payable by REITs, however, are generally not eligible for the reduced rates on qualified dividend income. Rather, under the Tax Cuts and Jobs Act (the “TCJA”),current law, qualified REIT dividends constitute “qualified business income” and thus a 20% deduction is available to individual taxpayers with respect to such dividends, resulting in a 29.6% maximum federal tax rate (plus the 3.8% surtax on net investment income, if applicable) for individual U.S. shareholders. Additionally, without further legislative action, the
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20% deduction applicable to qualified REIT dividends will expire on January 1, 2026. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.
Legislative or other actions affecting REITs could materially and adversely affect us and our shareholders.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury. Furthermore, members of the U.S. Congress and the Biden administration have expressed intent to pass legislation to change or repeal parts of currently enacted tax law. Changes to the tax laws, with or without retroactive application, could materially and adversely affect us and our shareholders. We cannot predict how changes in the tax laws might affect us or our shareholders. New legislation, U.S. Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the U.S. federal income tax consequences of such qualification.
In addition, the effect of substantive changes made by the TCJA is highly uncertain, both in terms of their direct effect on the taxation of an investment in our common stock and their indirect effect on the value of our assets. Furthermore, many of the provisions of the TCJA will require guidance through the issuance of U.S. Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. It is also likely that there will be technical corrections legislation proposedUncertainty exists with respect to the TCJA,treatment of our TBAs for purposes of the timingREIT asset and effectincome tests.
There is no direct authority with respect to the qualification of which cannot be predicted and may be adverse to usTBAs as real estate assets or our shareholders.
Our ability to invest in and disposeU.S. government securities for purposes of TBA securities could be limited by our REIT status, and we could lose our REIT status as a result of these investments.
The Code is unclear regarding whether TBA securities are qualifying assets for the 75% asset test and whetheror the qualification of income andor gains from dispositions of TBA securities areTBAs as gains from the sale of real property or other qualifying income for purposes of the 75% gross income test. In addition, there is uncertainty underHowever, we treat our TBAs as qualifying assets for purposes of the Code pursuant to the “5% asset test,” whereby ownership of any stocks or securities that do not qualify under theREIT 75% asset test, must be limited, in respect of any single non-governmental issuer, to an amount not greater than 5%and we treat income and gains from our TBAs as qualifying income for purposes of the value75% gross income test, based on an opinion of a nationally recognized accounting and tax services firm, substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our total assets (excluding ownershipTBAs should be treated as gain from the sale or disposition of any taxable REIT subsidiaries). Given the uncertainty regardingunderlying Agency RMBS. Tax opinions are not binding on the tax treatment of TBAs,IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, we will seekmust emphasize that the opinion is based on various assumptions relating to limit our investment in TBAs and any other non-qualifyingis conditioned upon fact-based representations and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income. If the IRS were to no more than 25% of our assets atsuccessfully challenge the end of any calendar quarter and will limit our investments in TBAs with a single counterparty to no more than 5% of our total assets at the end of any calendar quarter. Further,opinion, we will attempt to limit our gains from TBA transactions and any other non-qualifying income to no more than 25% of our gross income for each calendar year. Accordingly, our ability to invest in TBAs utilizing dollar roll transactions could be limited.
We could be subject to a penalty tax or we could fail to qualifyremain qualified as a REIT if (i) the valuea sufficient portion of our assets consists of TBAs together with our other non-qualifying assets for the 75% asset test, exceeded 25%or a sufficient portion of our gross assets at the endincome consists of any calendar quarterincome or if the value of our investments in TBAs with a single counterparty exceeded 5% of our total assets at the end of any calendar quarter or (ii) our income and gains from the disposition of TBAs, together with our other non-qualifying income for the 75% gross income test, exceeded 25% of our gross income for any taxable year. Any such penalty tax or failure to qualify as a REIT could adversely affect our business operations, financial condition or results of operations.TBAs.
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For REIT testqualification purposes, we treat repurchase agreement transactions as financing of the investments pledged as collateral. If the IRS disagrees with this treatment, our ability to qualify as a REIT could be adversely affected.
Repurchase agreement financing arrangements are structured legally as a sale and repurchase whereby we sell certain of our investments to a counterparty and simultaneously enter into an agreement to repurchase these securities at a later date in exchange for a purchase price. Economically, these agreements are financings which are secured by the investments sold pursuant thereto. We believe that we would be treated for REIT asset and income test purposes as the owner of the securities that are the subject of any such sale and repurchase agreement, notwithstanding that such agreement may legally transfer record ownership of the securities to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the securities during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow and our profitability.
Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a
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foreclosure or considered prohibited transactions under the Tax Code, and state or local income taxes. Any of these taxes would decrease cash available for distribution to our shareholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from prohibited transactions, we may hold some of our assets through a taxable REIT subsidiary (“TRS”) or other subsidiary corporations that will be subject to corporate-level income tax at regular rates to the extent that such TRS does not have an NOL carryforward. Any of these taxes would decrease cash available for distribution to our shareholders.
Recognition of excess inclusion income by us could have adverse consequences to us or our shareholders.
Certain of our securities have historically generated excess inclusion income and may continue to do so in the future. Certain categories of shareholders, such as foreign shareholders eligible for treaty or other benefits, shareholders with NOLs, and certain tax-exempt shareholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to excess inclusion income. In addition, to the extent that our stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of our income. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax.
The stock ownership limit imposed by the Tax Code for REITs and our Restated Articles of Incorporation (“Articles of Incorporation”) may restrict our business combination opportunities. The stock ownership limitation may also result in reduced liquidity in our stock and may result in losses to an acquiring shareholder.
To qualify as a REIT under the Tax Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Tax Code to include certain entities) at any time during the last half of each taxable year. Our Articles of Incorporation, with certain exceptions, authorize our Board of Directors to take the actions that are necessary and desirable to qualify as a REIT. Pursuant to our Articles of Incorporation, no person may beneficially or constructively own more than 9.8% of our capital stock (including our common stock, or any Series of our Preferred Stocks). Our Board of Directors may grant an exemption from this 9.8% stock ownership limitation, in its sole discretion, subject to such conditions, representations and undertakings as it may determine are reasonably necessary. Our Board of Directors has waived this ownership limitation with respect to FMR LLC. Per the terms of the waiver, FMR LLC may own up to 20% of our outstanding capital stock.
Whether we would waive the ownership limitation for any other shareholder will be determined by our Board of Directors on a case by case basis. Our Articles of Incorporation’s constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed as constructively owned by one individual or entity. As a result, the acquisition of less than these percentages of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of these percentages of the outstanding stock and thus be subject to the ownership limit. TheOur Board of Directors has the right to refuse to transfer any shares of our capital stock in a transaction that would result in ownership in excess of the ownership limit. In addition, we have the right to redeem shares of our capital stock held in excess of the ownership limit.
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The ownership limits imposed by the tax law are based upon direct or indirect ownership by “individuals,” but only during the last half of a tax year. The ownership limits contained in our Articles of Incorporation apply to the ownership at any time by any “person,” which includes entities, and are intended to assist us in complying with the tax law requirements and to minimize administrative burdens. However, these ownership limits might also delay or prevent a transaction or a change in our control that might involve a premium price for our stock or otherwise be in the best interest of our shareholders.
The stock ownership limit imposed by the Tax Code for REITs and our Articles of Incorporation may impair the ability of holders to convert shares of our outstanding preferred stock into shares of our common stock upon a change of control.
The terms of our outstanding preferred stock provide that, upon occurrence of a change of control (as defined in the Articles of Incorporation), each holder of our outstanding preferred stock will potentially have the right to convert in conjunction with a change in control all or part of such outstanding preferred stock held by such holder into a number of shares of our common stock per share of outstanding preferred stock, respectively, based on formulas set forth in our Articles of Incorporation. However, the stock ownership restrictions in our Articles of Incorporation also restrict ownership of shares of our outstanding preferred stock. As a result, no holder of outstanding preferred stock will be entitled to convert such stock into our common stock to the extent that receipt of our common stock would cause the holder to exceed the ownership
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limitations contained in our Articles of Incorporation, endanger the tax status of one or more real estate mortgage investment conduits in which we have or plan to have an interest, or result in the imposition of a direct or indirect penalty tax on us. These provisions may limit the ability of a holder of outstanding preferred stock to convert shares of preferred stock into our common stock upon a change of control, which could adversely affect the market price of shares of our outstanding preferred stock.
If we fail to abide by certain Commodity Futures Trading Commission (“CFTC”) rules and regulations, we may be subject to enforcement action by the CFTC.
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.
We believe that we have complied with all of the requirements set forth above as of December 31, 2020.2021. If we fail to satisfy the criteria set forth above, or if the criteria change, we may become subject to CFTC regulation or enforcement action, the consequences of which could have a material adverse effect on our financial condition or results of operations.
OTHER RISK FACTORS RELATED TO OUR BUSINESS
We rely on a third-party service provider for critical operational and trade functions and on other third parties for information and communication systems, and problems in the use, access, or performance of these systems, including as a result of any cybersecurity incident, could increase our costs and significantly disrupt our ability to operate our business, which may have a significant adverse impact on our financial condition and results of operations.
During 2021, we entered into a long-term relationship with a third-party service provider pursuant to which certain critical functions of our business relating to our trading and borrowing activities, including MBS trading and
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repurchase agreement borrowing activities, are operated and managed. This service and related technologies may become unavailable due to a variety of reasons, including outages, interruptions, or other failure to perform. The risk of operational failure, termination or constraints of this third-party service relating to trade settlement, collateral management services, custodians, clearing agents, and other financial intermediaries, transaction settlements, margin calls, could cause us to default on contractual obligations, fail to meet margin calls, or otherwise experience breaches or disruptions to our critical business relationships, which could have a significant adverse effect on our financial condition or results of operations.
Additionally, any failure or interruption of our operational and trading systems or communication or information systems, caused by a cybersecurity breach of our networks or systems, or the third-party service providers’ networks or systems, could cause delays or other problems in our trading or borrowing activities or 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 the unauthorized access, release, misuse, loss or destruction of confidential information, including the personal or confidential information of our employees or third parties, which could lead to regulatory fines, increased expenses due to the costs of remediating a breach, reputational harm, and fewer third parties willing to do business with us.
Computer malware, viruses, computer hacking, and phishing attacks have become more prevalent and may occur on our or our third-party service providers’ systems. Even with all reasonable security efforts, not every system or network breach can be prevented or even detected. Furthermore, because the vast majority of our employees are working remotely from their homes due to the COVID-19 pandemic, there is an increased risk of disruption to our operations because our employees’ residential networks and infrastructure may not be as secure as our office environment. Though we have not detected a material cybersecurity breach to date, there is no assurance that we or our third-party service providers, have not or will not experience a system or network breach. It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cybersecurity breach of our networks or systems (or the networks or systems of our third-party service providers) or any failure to maintain performance, reliability and security of our technical infrastructure, but such computer malware, viruses, and computer hacking and phishing attacks may negatively affect our operations. We may face increased costs as we continue to evolve our cybersecurity defenses in order to contend with evolving risks and to monitor our systems for cyber-attacks and security threats. The costs and losses associated with these risks are difficult to predict and quantify and could have a significant adverse effect on our financial condition and results of operations. We rely heavily on the financial, accounting, risk management and other data processing systems provided by our third-party service providers, and any failure to maintain performance, reliability and security of these systems and our other technical infrastructure could have a significant adverse effect on our financial condition or results of operations. Furthermore, we have no control over the cybersecurity plans or systems used by our third-party service providers, and such third-party service providers may have limited indemnification obligations to us.
Impacts from COVID-19mayCOVID-19 may continue to adversely affect market conditions which in turn could further impact our business, financial condition, liquidity and results of operations. Furthermore, we cannot predict the effect that government policies, laws, and plans adopted in response to the COVID-19 outbreak or other future outbreaks involving highly infectious or contagious diseases and resulting recessionary economic conditions will have on us.
The COVID-19 pandemic caused significant volatility and disruption in the economy and financial markets both globally and in the United States, including as a result of efforts to contain and mitigate the spread of COVID-19. Significant uncertainty remains as to the continued severity of the COVID-19 pandemic and its impact on the domestic and global economy and financial markets. If COVID-19 continues to spread, efforts to contain COVID-19 are unsuccessful, or the United States experiences another highly infectious or contagious disease in the future, our business, financial condition, liquidity and results of operations could be materially and adversely affected. The ultimate severity and duration of such effects will depend on future developments that are highly uncertain and difficult to predict, including the geographic spread of the disease, the overall severity of the disease, the duration of the outbreak, the measures that may be taken by various governmental authorities in response to the outbreak (such as quarantines and travel restrictions), scientific and medical developments, particularly including the efficacy and distribution of vaccines, and the possible further impacts on the national and global economies. The continued spread of COVID-19, or an outbreak of another highly infectious or contagious disease in the future, could also negatively impact the availability of key personnel necessary to conduct our business.
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The COVID-19 outbreak and certain of the actions taken to reduce the spread of the disease, based both on governmental mandates and recommendations and individual behavior patterns - including restrictions on travel, restrictions on the ability of individuals to assemble in groups, restrictions on the ability of certain businesses to operate, emergency legislative and regulatory responses, and mandatory and voluntary “social distancing” practices by individuals and businesses - have resulted in lost business revenue, rapid and significant increases in unemployment, and changes in employer and consumer behavior, all of which have materially and adversely affected economic conditions in the U.S. and globally. These adverse effects of the COVID-19 pandemic on the economy may continue or worsen throughout the course of the outbreak. Future outbreaks involving other highly infectious or contagious diseases could have similar adverse effects.
Government policies, laws, and plans intended to address the COVID-19 outbreak and adverse developments in the credit, financial, and mortgage markets may not be effective, sufficient, or have any positive impact on the economy, the
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credit, financial and mortgage markets, or our business. Moreover, certain actions taken by U.S. or other governmental authorities that are intended to ameliorate the macroeconomic effects of COVID-19 or an outbreak due to any highly infectious or contagious disease in the future could harm our business.
AsFor example, as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by the U.S. Congress, both Fannie Mae and Freddie Mac have implemented mortgage forbearance policies that allowallowed borrowers to delay their mortgage payments for up to 15 months and have placed a moratorium on foreclosures on certain types of residential mortgages through MarchJuly 31, 2021. Individual states also have adopted or may adopt forbearance policies addressing loan payments, rent payments, foreclosures and evictions. These policies may impact our investments in many ways, some that are foreseeable, others that are not. The impact of high levels of forbearance on our MBS could range from immaterial to significant depending upon not only actual losses incurred on underlying loans but also future public policy choices and actions by the GSEs, their regulator the FHFA, the Federal Reserve, and federal and state governments. The nature and timing of any such future public policy choices and actions are unpredictable, including the potential impact on MBS prices and prepayment speeds.
Due to the federal and state recommendations issued and mandates implemented to control the spread of COVID-19, the vast majority of our personnel as well as thecontinue to work remotely. We also believe that a substantial majority of third-party service providers that provide services to us,servicers are also principally working remotely. If these personnel are unable to work effectively as a result of the COVID-19 outbreak, including because of illness, quarantines, office closures, ineffective remote work arrangements, or technology failures or limitations, our operations would be adversely impacted. Further, remote work arrangements may increase the risk of cybersecurity incidents and cyber-attacks on us or our third-party service providers, which could have a material adverse effect on our business and results of operations, due to, among other things, the loss of investor or proprietary data, interruptions or delays in the operation of our business, and damage to our reputation.
The replacement of LIBOR with an alternative reference rate may adversely affect our profitability, liquidity, and financial condition.
The United Kingdom’s Financial Conduct Authority (“FCA”) has announced that it will phase out LIBOR as a benchmark by the end of 2021. The FCA and other official sector bodies have strongly advised end-users of the need to transition from LIBOR by December 31, 2021. On November 30, 2020,Effective January 1, 2022, the ICE Benchmark Administration Limited, (“IBA”), the administrator of the LIBOR, announced that it would consult on its plan to ceaseLondon Interbank Offered Rate (“LIBOR”), ceased the publication of one-week and two-month USD LIBOR immediately after December 31, 2021 and towill cease the publications of the remaining tenors of USD LIBOR (one, three, six, and 12-month) immediately after June 30, 2023. The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Company also issued a statement to encourage banks to transition away from LIBOR as soon as practicable. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we will need to amend or terminate certain of our agreements referencing LIBOR rates. Our repurchase agreement borrowings generally carry a rate of interest based on short-term rate indices that have historically closely tracked LIBOR. Additionally, the terms of our outstanding shares of 6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) reference LIBOR rates but contain fallback provisions that would apply in the event that LIBOR rates are no longer calculated and published. The phasing out of LIBOR could impact short-term market rates in general which could potentially increase the cost of our repurchase agreement borrowings. The impact of phasing out LIBOR on these and other financial instruments is uncertain and may negatively impact their value, liquidity or effectiveness. The transition to an alternative rate, such as the SOFR, which is an index calculated by reference to short-term repurchase agreements backed by U.S. Treasury securities, will require careful and deliberate consideration and implementation so as not to disrupt the stability of financial markets. There is no guarantee that a transition from LIBOR to anSOFR or any other alternative rate will not result in, among other things, financial market disruptions, significant increases in benchmark rates, or short-term interest rates, any of which could have an adverse effect on our profitability, liquidity, and financial condition.
We may change our investment strategy, operating policies, dividend policy, and/or asset allocations without shareholder consent and/or in a manner in which shareholders, analysts, and capital markets may not agree, which could adversely affect our financial condition, results of operations, the market price of our common stock, and our ability to pay dividends to our shareholders.
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A change in our investment strategy or asset allocation may materially change our exposure to interest rate and/or credit risk, default risk and real estate market fluctuations. These changes could have a material impact on our ability to continue to pay a dividend at a level that we had previously paid before the change in strategy. Furthermore, if any change in investment strategy, asset allocation, operating or dividend policy is perceived negatively by the markets or analysts covering our stock, our stock price may decline. Part of our investment strategy includes deciding whether to reinvest payments
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received on our existing investment portfolio. Based on market conditions, our leverage, and our liquidity profile, we may decide to not reinvest the cash flows we receive from our investment portfolio. If we retain, rather than reinvest, these cash flows, the size of our investment portfolio and the amount of net interest income generated by our investment portfolio will likely decline. In addition, if the assets we acquire in the future earn lower yields than the assets we currently own, our reported earnings per share will likely decline over time as the older assets pay down or are sold.
Competition may prevent us from acquiring new investments at favorable yields,Volatile market conditions for mortgages and we may not be able to achieve our investment objectivesmortgage-related assets as well as the broader financial markets can result in a significant contraction in liquidity for mortgages and mortgage-related assets, which may potentially have a negative impact on our profitability.adversely affect the value of the assets in which we invest.
Our net interest income, net incomeresults of operations and comprehensive income will largely depend on our ability to acquireliquidity are materially affected by conditions in the markets for mortgages and mortgage-related assets, with acceptable risk-return profiles at favorable spreads over our borrowing costs. The availabilityincluding Agency RMBS, as well as the broader financial markets and the economy generally.

Significant adverse changes in financial market conditions can result in a deleveraging of the global financial system and the forced sale of large quantities of mortgage-related assets meeting our investment criteria depends upon, amongand other things,financial assets. Concerns over economic recession, the levelCOVID-19 pandemic, interest rate increases, policy priorities of activity in the U.S. presidential administration, trade wars, unemployment, the availability and cost of financing, the mortgage market and a declining real estate market or prolonged government shutdown may contribute to increased volatility and diminished expectations for the quality ofeconomy and demand for securities inmarkets. Additionally, concern over geopolitical issues may also contribute to prolonged market volatility and instability. For example, the mortgage securitizationconflict between Russia and secondary markets. The size and level of activity in real estate lending markets depends on various factors, including interest rates, regional and national economic conditions, and real estate values. In acquiring investments, we compete with other purchasers of these types of investments, including but not limited to other mortgage REITs, broker-dealers, hedge funds, banks, insurance companies, mutual funds, GSEs including federal home loan banks and other entities that purchase assets similar to ours. In addition, beginning in March 2020, as a result of economic factors related to the COVID-19 outbreak, the Federal Reserve Bank resumed purchases of Agency RMBS and began purchasing Agency CMBS. Many of these competing entities have greater resources and access to lower cost capital. Because of these factors, we may not be able to acquire sufficient assets at acceptable yields over our borrowing costs, which would adversely affect our profitability.
We are highly dependent on information and communication systems and third parties, and systems failures or cybersecurity incidents could significantly disrupt our business or lead to significant losses, which may, in turn, negatively affect the market price of our common and preferred stocks and our ability to operate our business.
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, orUkraine 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 toinstability 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,volatility in global markets 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.
Computer malware, viruses, computer hacking. and phishing attacks have become more prevalent and may occur on our systems. Even with all reasonable security efforts, not every breach can be prevented or even detected. Though we have not detected a material cybersecurity breach to date, there is no assurance that we, or the third parties that facilitate our business activities, have not or will not experience a breach. It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of our networks or systems (or the networks or systems of third parties that facilitate our business activities) or any failure to maintain performance, reliability and security of our technical infrastructure, but such computer malware, viruses, and computer hacking and phishing attacks may negatively affect our operations. We rely heavily on our financial, accountingindustries. The U.S. government and other data processing systems,governments in jurisdictions have imposed severe economic sanctions and any failure to maintain performance, reliabilityexport controls against Russia and securityRussian interests, have removed Russia from the SWIFT system, and have threatened additional sanctions and controls. The impact of these systems and our other technical infrastructure could have a significant adverse effect on our financial condition or results of operations.
Furthermore, because substantially all of our employees are working remotely from their homes duemeasures, as well as potential responses to the COVID-19 pandemic, therethem by Russia, is an increased risk of disruption to our operations because they are utilizing residential networks and infrastructure which may not be as secure as in our office environment.unknown.

23Increased volatility and deterioration in the markets for mortgages and mortgage-related assets as well as the broader financial markets may adversely affect the performance and market value of our investments. If these conditions exist, institutions from which we seek financing for our investments may tighten their lending standards, increase margin calls or become insolvent, which could make it more difficult for us to obtain financing on favorable terms or at all. Our profitability and financial condition including our liquidity may be adversely affected if we are unable to obtain cost-effective financing for our investments.

ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.

ITEM 2.    PROPERTIES
The Company does not own or lease any physical properties that are material to its business, financial condition or results of operations.

ITEM 3.    LEGAL PROCEEDINGS
As previously disclosed in the Company’s 20192020 Form 10-K, the Company and DCIreceiver (the “Receiver”) for one of the plaintiffs awarded damages in a judgment (the "DCI Judgment") against Dynex Commercial, Inc. (“DCI”("DCI"), a subsidiary of 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 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 did not file for a rehearing with the Fifth Circuit or request a hearing before the U.S. Supreme Court within the allowed timeframe and the Company considers this matter closed.
Also as previously disclosed in the Company’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 millionthe
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damages awarded in connection with the DCI Judgment, alleging that the Company breached a litigation cost sharing agreement, as amended (the “Cost Sharing Agreement”"Agreement"), that was initially entered into initially in December 2000 betweenby the Company and DCI. The case is pendingDCI in the Northern District Court.December 2000. On November 21, 2019, the U.S. District Court, Northern District Courtof Texas ("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 filedFollowing a claim for damages withbrief trial in September 2021, on November 1, 2021, the Northern District Court of $12.6 million, whileentered a take nothing judgment in the Company filed claims for damages ranging from $13.3 million to $30.6 million, including interest. TheCompany’s favor against 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 ofdismissed the Receiver’s claim relatedagainst the Company. The Receiver did not file an appeal to attorneys' fees incurred by the Receiver whichUnited States Court of Appeals for the Fifth Circuit within the allowed timeframe, and 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 $16.0 million based on simple interest and $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 $1.3 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.
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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 applicable state law 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.
The Company believes that the Receiver Litigation will be resolved without a material adverse effect on the Company’s consolidated financial statements as a whole. The outcome, however, of any legal proceeding, includingconsiders this matter cannot be predicted with certainty. As such, no assurances can be given that the Company will be successful in its defense of this action on the merits or otherwise. If the Company is not successful in its defense efforts, the resolution of this matter could have a material adverse effect on the Company’s consolidated financial statements in a future reporting period.closed.
Other than as described above, toTo 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.

ITEM 4.    MINE SAFETY DISCLOSURES
None.
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PART II.


ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NYSE under the trading symbol “DX”. The common stock was held by approximately 340353 holders of record as of February 24, 2021.23, 2022. On that date, the closing price of our common stock on the NYSE was $18.99$15.19 per share. The Company currently pays a monthly dividend on its common stock. When declaring dividends, theour Board of Directors considers the requirements for maintaining our REIT status and maintaining compliance with dividend requirements of the Series C Preferred Stock. In addition, theour Board of Directors considers, among other things, our total economic return, earnings available for distribution (“EAD”) to common shareholders, taxable income, gains and losses including carryforwards for tax purposes, the Company's long-term outlook the Company’s financial condition and results of operations during recent financial periods,for future performance, and trends in the investment and financing markets.market.
The following graph is a five-year comparison of shareholders’ cumulative total return, assuming $100 invested at the close of trading on December 31, 20152016 with reinvestment of all dividends, in each of: i)(i) our common stock, ii)(ii) the stocks included in the Standard & Poor’s 500 Index (“S & P 500”); iii)(iii) the stocks included in the S&P 500 Financials Index; iv)and (iv) the stocks included in the FTSE NAREIT Mortgage REIT Index; v) the stocks included in the Bloomberg Mortgage REIT Index; and vi) the stocks included in SNL U.S. Finance REIT Index. The Company is adding the S & P 500 Financials Index because it is a broad index of stocks of companies in the financial sector. The Company is replacing the Bloomberg Mortgage REIT Index with the FTSE NAREIT Mortgage REIT Index because we believe the latter is more useful as a benchmark for peer comparison. In addition, the Company will no longer be using the SNL U.S. Finance REIT Index in this comparison as this index will no longer be published by S & P Global.

dx-20201231_g1.jpgdx-20211231_g1.jpg
Cumulative Total Stockholder Returns as of December 31,
Index (1)
201620172018201920202021
Dynex Capital, Inc. Common Stock$100.00 $113.72 $104.05 $115.65 $135.32 $138.40 
S&P 500 Index$100.00 $121.82 $116.47 $153.14 $179.11 $230.47 
S&P 500 Financials Index$100.00 $122.14 $106.21 $140.30 $137.83 $185.89 
FTSE NAREIT mREIT Index$100.00 $119.81 $116.68 $141.50 $115.22 $133.16 

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Cumulative Total Stockholder Returns as of December 31,
Index (1)
201520162017201820192020
Dynex Capital, Inc. Common Stock$100.00 $121.23 $137.86 $126.14 $140.20 $164.05 
S&P 500 Index$100.00 $111.95 $136.38 $130.39 $171.44 $200.51 
S&P 500 Financials Index$100.00 $122.75 $149.93 $130.38 $172.21 $169.18 
FTSE NAREIT mREIT Index$100.00 $122.83 $147.16 $143.32 $173.81 $141.53 
Bloomberg Mortgage REIT Index$100.00 $122.27 $147.05 $142.77 $176.50 $137.41 
SNL U.S. Finance REIT Index$100.00 $123.18 $143.73 $138.16 $166.58 $135.75 
(1) The sources of this information areSource: Bloomberg and SNL Financial.

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.
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The Company’s Board of Directors has authorized the repurchase up to $40 million of the Company’s outstanding shares of common stock through March 31, 2022. Subject to applicable securities laws and the terms of the Series C Preferred Stock designation, which is contained in our Articles of Incorporation, future repurchases of common stock will be made at times and in amounts as the Company deems appropriate, provided that the repurchase price per share is less than the Company's estimate of the current net book value of a share of common stock. Repurchases may be suspended or discontinued at any time. The Company did not repurchase any shares during the three months ended December 31, 2020.2021.
The Company has an at-the-market agreement ("ATM") whereby the Company may offer and sell through its sales agents up to $104.6 million of aggregate value of shares of the Company’s 7.625% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”) and Series C Preferred Stock. During the year ended December 31, 2020,2021, the Company did not issue any shares of its Series B or Series C Preferred Stock through its ATM program. The Company also has an ATM agreement whereby the Company may offer and sell through its sales agents up to approximately 8.3 million shares of common stock. During the year ended December 31, 2020,2021, the Company issued 553,3645.8 million shares of its common stock through its ATM program at an aggregate value of $9.9$109.0 million, net of $0.1$1.4 million in broker commissions, all of which 0.7 million shares were issued during the three months ended December 31, 2020.

ITEM 6.    SELECTED FINANCIAL DATA
Omitted pursuant to amendments to Regulation S-K Item 301 that eliminated the requirement to disclose selected financial data.fourth quarter of 2021 at an aggregate value of $12.8 million, net of $0.2 million in broker commissions.

ITEM 6.    [Reserved]

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and the related notes included in Item 8, "Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those disclosed in Item 1A, “Risk Factors” elsewhere in this Annual Report on Form 10-K and in other documents filed with the SEC and otherwise publicly disclosed. Please refer to “Forward-Looking Statements” contained within this Item 7 for additional information. This discussion also contains non-GAAP financial measures, which are discussed further below in the section “Non-GAAP Financial Measures”.
For a complete description of our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Item 1 of Part I of this Annual Report on Form 10-K.
EXECUTIVE OVERVIEW

Economic conditions continued to improve in 2021 from the disruptions caused by the COVID-19 pandemic as evidenced by an increase in real GDP in the U.S. to 5.7% versus a decline of 3.4% in 2020. Throughout 2021, Federal Reserve policy was highly accommodative, keeping short-term interest rates low and providing strong demand for risk assets, particularly Agency MBS, in order to aid economic recovery. The combination of the impact on supply and demand imbalances related to the pandemic and the reopening of the economy contributed to inflation levels well above the Federal Reserve’s target of 2.0% throughout 2021. The Federal Reserve initially characterized these elevated levels as transitory and continued to provide substantial monetary stimulus. In the fourth quarter of 2021, the Federal Reserve signaled a reduction in in asset purchases, citing an improving economy, elevated inflation, and further improvement in the labor market. The improving economy combined with monetary policy and fiscal stimulus translated to a somewhat unpredictable interest rate environment during 2021, which saw a sharp steepening in the first quarter led by the mid-range and longer-term portion of the curve, followed by modest flattening through the second and third quarters as longer-term interest rates declined slightly, and further flattening led by the mid-range of the curve in the fourth quarter as markets began adjusting to shifts in the Federal Reserve’s monetary policy announced toward the end of 2021.
27

EXECUTIVE OVERVIEW
Though 2020 began with an improved interest rate environment for our business and industry as a whole, the impact of the global response to the coronavirus (“COVID-19”) pandemic on the financial markets resulted in unprecedented market disruption. Treasury yields moved sharply lower during the first quarter, a trend which continued throughout 2020 until moving higher later in the year as the U.S. Food and Drug Administration’s approvals of coronavirus vaccines were announced. During the first and second quarters of 2020, economic conditions contracted sharply, and the prices of risk assets declined dramatically as market participants sought liquidity to protect their capital and meet margin calls. In response, the Federal Reserve rapidly reduced the targeted Federal Funds rate and expanded its holdings of U.S. Treasuries and Agency RMBS to support the normal functioning of those markets while other central banks around the globe added liquidity to financial markets. In addition, the U.S. Congress passed the CARES Act to provide economic relief to individuals, businesses, state and local governments, and the health care system. The combination of market interventions by the Federal Reserve and other central banks and the passing of the CARES Act helped to stabilize markets over the balance of the year. Credit spreads and pricing on risk assets also improved throughout the year.
The table below shows examples of credit spreads in basis points for certain investment types in our MBS portfolio as of the end of each quarter since December 31, 2019:
Investment Type:12/31/20209/30/20206/30/20203/31/202012/31/2019
Agency RMBS: (1)
2.0% coupon(1)9 36 54 — 
2.5% coupon(2)(2)2 30 30 
3.0% coupon36 35 6 32 30 
3.5% coupon28 30 30 34 37 
4.0% coupon51 64 48 27 49 
Agency DUS (Agency CMBS) (2)
36 45 58 95 60 
Freddie K AAA IO (Agency CMBS IO) (2)
140 180 275 400 135 
AAA CMBS IO (Non-Agency CMBS IO) (2)
165 190 300 450 113 
(1) Option adjusted spreads for RMBS are Company estimates using third-party models and market data. UMBS 2.0% coupon was not available in the model until the first quarter of 2020.
(2) Data represents the spread to swap rate on newly issued securities and is sourced from JP Morgan.
The charts below show the highest and lowest U.S. Treasury and swap rates during the year ended December 31, 20202021 as well as the rates as of December 31, 20202021 and December 31, 2019:2020:    
dx-20201231_g2.jpgdx-20211231_g2.jpg

dx-20211231_g3.jpg

Spreads on risk assets owned by the Company were volatile as well during 2021. While Agency RMBS, CMBS, and CMBS IO all experienced significant tightening in the first quarter, higher coupon Agency RMBS spreads widened in the second quarter while CMBS and CMBS IO spreads experienced further tightening during the same period. In the third quarter, Agency RMBS tightened again while the majority of CMBS and CMBS IO modestly widened. By the end of the fourth quarter after the Federal Reserve announced plans to begin tapering their purchases, spreads on most Agency assets widened again, almost to where they began the year. The table below shows the market spreads in basis points as of the end of each quarter in 2021 for certain investment types in our MBS portfolio:
28

dx-20201231_g3.jpg
Market Spreads (1) as of:
Investment Type:December 31, 2021September 30, 2021June 30, 2021March 31, 2021December 31, 2020
Agency RMBS: (2)
2.0% coupon(6)(10)(6)(20)(1)
2.5% coupon5 (4)1 (16)(2)
4.0% coupon44 39 54 11 51 
Agency DUS (Agency CMBS) (3)
31 26 18 22 36 
Freddie K AAA IO (Agency CMBS IO) (3)
105 65 65 95 140 
AAA CMBS IO (Non-Agency CMBS IO) (3)
112 108 105 130 165 
(1)Negative amounts represent spreads below the benchmark risk free rate and positive amounts represent spreads above the benchmark risk free rate.
(2)Option adjusted spreads are based on Company estimates using third-party models and market data.
(3)Data represents the spread to swap rate on newly issued securities and is sourced from JP Morgan.

Our 20202021 Performance
To manage through the interest rate environment experienced throughout 2021, we focused on actively managing our investment portfolio and hedge position, reducing leverage, and raising capital in preparation for opportunities to expand our balance sheet in anticipation of the Federal Reserve ending its purchases of Agency RMBS and U.S. Treasuries. Active portfolio management allowed us to take advantage of volatility in credit spreads during 2021 as we realized gains by selling MBS when spreads tightened and reinvested the sale proceeds into lower coupon MBS at lower premiums when spreads widened. We shifted our portfolio allocation further into lower coupon Agency RMBS and TBA securities because lower coupons are typically impacted less by duration extension and credit spread widening relative to higher coupon assets in an increasing interest rate environment. We increased our investment in TBA securities during most of 2021 because they allowed us more flexibility in managing leverage due to their higher liquidity relative to specified pools and also offer better risk-adjusted returns due to lower financing costs (implied through the use of dollar roll transactions) versus the repurchase agreement borrowings we typically use to finance purchases of specified pools.
Hedge selection and positioning also played an important role in managing our interest rate risk throughout 2021. The loss in fair value of our investment portfolio (including TBA securities), net of gains from our interest rate hedges was $(0.2) million. We protected our portfolio from duration risk in the increasing interest rate environment by significantly increasing our hedge position over the course of the year, ending 2021 with a notional of $4.4 billion in primarily short positions in ten-year U.S. Treasury futures. For 2020, we generated athe year ended December 31, 2021, total economic return of 15.2% forto our common shareholders which consisted(1) was $0.47 per common share, or 2.5% of $1.66 in common dividends declared and an increase of $1.07 inbeginning book value. While book value per common share declined $(1.09) during the year, we believe the volatility in interest rates noted above could have led to $19.08 aslarger losses without our active portfolio management and hedge positioning.
During 2021, we continuously worked to raise capital through at-the-market and other public offerings, ending the year with additional common equity capital of almost $237.0 million, net of issuance costs. Our capital raising contributed significantly to our ability to maintain a high level of liquidity and lower leverage. As of December 31, 2020. The increase2021, we held approximately $533.1 million in cash and unencumbered Agency MBS, and our leverage, including TBA securities at cost, was 5.7 times shareholders’ equity.
Current Outlook
We believe markets are transitioning to a more favorable environment to add higher yielding assets to our investment portfolio. As the Federal Reserve reduces its purchases of Agency RMBS and tightens monetary policy by
(1)Total economic return to common shareholders is comprised of dividends declared of $1.56 per common share less the decline in book value and our comprehensive income of $66.5 million, or $2.88$(1.09) per common share forduring 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. As we indicated 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 the market’s initial response to the onset of the COVID-19 pandemic in the U.S. In April, we monetized additional gains of $193.1 million from sales of Agency CMBS as credit spreads on those assets had tightened relative to spreads at the time of purchase. Beginning in May, we doubled the investment portfolio balance to capture wider spreads and returns in Agency RMBS just prior to credit spread tightening in the latter half of the second quarter. These purchases combined with the sales of Agency CMBS in April shifted our asset allocation back to predominantly Agency RMBS and TBA securities. Throughout the remainder of 2020, we maintained a diversified investment portfolio, positioning the balance sheet to reap the benefit of recovering asset prices through year-end. We shifted into lower coupon specified pools of Agency RMBS in order to mitigate the impact of prepayment risk on our earnings, realizing an additional gain of $9.4 million from sales of a portion of our higher coupon Agency RMBS. We also invested in lower coupon TBA securities in order to take advantage of dollar roll specialness. As credit spreads tightened further toward the end of the year, we realized gains of $20.8 million through sales of additional Agency CMBS whose asset prices we believed were not reflecting potential cash flow disruptions that may occur over time.
The changes made to the size and composition of our investment portfolio during 2020 warranted continuous risk management, and, as a result, our portfolio of hedging instruments as of December 31, 2020 is substantially different from2021.

29

that of December 31, 2019. As interest rates ralliedraising the Federal Funds Rate, we expect higher risk-adjusted returns on our target investments as private capital replaces the Federal Reserve as the predominant buyers in the first quarter of 2020 andmarket, which we sold assets, and because margin requirements increased substantially on interest rate swaps, we either terminated our interest rate swap agreements or chose not to replace these agreements upon expiration. The termination of the majority of our interest rate swaps during the first quarter comprised the majority of our net loss of $182.9 million on those instruments during 2020 with those losses beingbelieve will more than offset by gains onour borrowing costs which are likely to increase in 2022. While we also expect credit spreads will widen further, we believe we are well positioned to navigate the investments being hedged. Becausebook value risk to wider spreads due to our low leverage, our hedge positioning, and our lower coupon Agency RMBS. As mortgage rates continue to increase, and especially as the Federal Reserve exits its buying program, we anticipate funding costsexpect the supply of higher coupons will increase and bear the brunt of future spread widening while lower coupon MBS will experience limited spread widening due to its seasoning and lack of new supply. As the supply of higher coupons increase and prices fall, we believe we will be able to take advantage of opportunities to acquire these assets at better risk-adjusted returns because we have excess capital to deploy and room to increase leverage.
We remain lowcautious, however, as the pace and scope of monetary policy tightening in 2022 in the near-term dueU.S. and abroad is highly uncertain, and we expect significant moves in the shape of the yield curve and the level of yields across the curve. Furthermore, the global economy continues to evolve to a post-pandemic environment with rising complexities across economic, social and political factors, including, but not limited to:
•high and unsustainable debt levels which pose a risk to economic growth;
•elevated global inflation levels, reflecting pandemic supply and demand dynamics;
•uncertainties regarding ongoing hostilities between Russia and the Ukraine and the related impacts on macroeconomic conditions, including, among other things, interest rates;
•global labor market imbalances, exposing widening gaps in skills, education, healthcare, and digital access;
•shifting demographics, human conflict, and climate change; and
•fast-paced changes in technology and increased cyber-risk.
In summary, our decisions regarding leverage targets and the pace at which we expand our investment portfolio in the near term will depend on many factors including, but not limited to, the pace of tapering of purchases by the Federal Reserve’s indication that it will maintainReserve, the targetedpace at which the Federal Reserve reduces its balance sheet and the resulting impact on credit spread widening for Agency RMBS, the shape of the yield curve, and the level of interest rates, including the rate at which the Federal Reserve decides to increase the Federal Funds Rate at 0%target rate. We remain flexible, patient, consistent, and disciplined in our approach to 0.25% for an extended period of time, we have shifted our interest rateinvestment, financing, and hedging strategy to focus on capital preservation. As we re-invested our capital over the balance of the year, we began using interest rate swaptions, U.S. Treasury futures, and options on U.S. Treasury futures because we believe these hedging instruments have better liquidity and more favorable margin requirements than interest rate swaps. We believe U.S. Treasury futures and options on U.S. Treasury futures protect book value from rising interest rates but minimize risk of liquidity loss if interest rates fall better than interest rate swaps. Interest rate swaptions also mitigate interest rate volatility and convexity risk, but over a longer term versus U.S. Treasury options.
Current Outlook
We believe the current investment environment is favorable, and there is potential for continuing improvement in the second half of 2021. Borrowing rates remain very low with short-term interest rates near 0% and market volatility remains somewhat muted given the historic monetary stimulus measures of the Federal Reserve. Nonetheless,decisions as we continue to maintainseek to generate above average returns for our discipline of planning for future economic or market surprises. The global economy is largely supported by central banks and global debt continues to increase excessively, which pushes against lower interest rates and makes markets more vulnerable to exogenous shocks. Though fiscal stimulus in the U.S. as a result of the COVID-19 pandemic has helped bolster economic activity, the efficacy and outcome of these actions are unknown, and the risk for policy mistakes remains high.
In the near term, uncertainty remains as to how quickly and efficiently the current vaccines will positively offset the negative impacts of the pandemic. In the medium term, we believe the stimulus coupled with the impact of more vaccinations will eventually lead to a period of higher growth as more of our services-driven economy is able to reboot. Longer-term, we believe the world has been permanently reshaped by the global pandemic, and its impact will continue for years across broad segments of our economy, and therefore we continue to factor its lasting impact in shaping our macroeconomic view.
Currently, we believe one of the more probable scenarios for 2021 is a steepening yield curve, which typically offers better opportunities to invest at higher yields, especially as prepayments slow. While financing costs are expected to remain at close to 0% through 2023, we believe longer-term interest rates will likely face pressure from the increased supply of U.S. Treasuries as well as possible increases in real and expected inflation as the economy begins recovery. We expect this will likely result is higher long-term Treasury yields. In addition to slower prepayments, Agency RMBS spreads typically widen in a steeper yield curve environment because of increased competition with other assets, such as higher yielding Treasuries. Furthermore, we believe realized volatility is usually higher in a steeper yield curve environment, which has the potential to further increase our rate of return.
While we believe a steepening yield curve is probable in 2021, we have planned for other potential scenarios that may unfold, including the risk of an exogenous event which we believe remains high. As a result, we continue to focus on maintaining a highly liquid position and investing in Agency MBS where the Federal Reserve is providing material support. Also, though we do not expect dollar roll specialness to continue at the same level as what we experienced in the latter half of 2020, we do expect our 2021 results to benefit from our continued investment in TBA securities, but to a lesser degree. Our leverage targets, including TBA securities, remain between 6-9 times shareholders’ equity, and we will actively increase or decrease leverage based on the risk environment and the expected rate of return on available assets. Longer term, we maintain our belief that the demographics behind the housing sector continue to support our investment thesis of investing in high quality, highly liquid U.S.-based housing assets, and we maintain our focus on capital preservation while generating returns over the long term.

Non-GAAP Financial Measures
In addition to the Company's operating results presented in accordance with GAAP, the information presented above and within Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report on Form 10-K contains the following non-GAAP financial measures: core net operating income to common shareholders (including per common share), adjusted net interest income and the related metric adjusted net interest spread.


Because these measures are used in the Company's internal analysis of financial and operating performance, management believes that they provide greater transparency to our investors of management's view of our economic performance. Management also believes the presentation of these measures, when analyzed in conjunction with the Company's GAAP operating results, allows investors to more effectively evaluate and compare the performance of the Company to that of its peers, although the Company's presentation of its non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Reconciliations of core net operating income to common shareholders and adjusted net interest income to the related GAAP financial measures are provided below and within “Results of Operations”.
Management views core net operating income to common shareholders as an estimate of the Company’s financial performance based on the effective yield of its investments, net of financing costs and other normal recurring operating income/expense, net. In addition to the non-GAAP reconciliation set forth below, which derives core net operating income to common shareholders from GAAP comprehensive income (loss) to common shareholders, core net operating income to common shareholders can also be determined by adjusting net interest income to include interest rate swap periodic interest benefit/cost, drop income on TBA securities, general and administrative expenses, and preferred dividends. 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 core net operating income and in adjusted net interest income 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. Management also includes interest rate swap periodic interest benefit/cost, which is also included in "gain (loss) on derivatives instruments, net", in adjusted 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 therefore represent a cost of financing in addition to GAAP interest expense. However, these non-GAAP measures do not provide a full perspective on our results of operations, and therefore, their usefulness is limited. For example, these non-GAAP measures do not include gains or losses from available-for-sale investments, changes in fair value of and costs of terminating interest rate swaps, as well as realized and unrealized gains or losses from other instruments used by management to economically hedge the impact of changing interest rates on the fair value of the Company’s portfolio and book value per common share. As a result, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, the Company's GAAP results as reported on its consolidated statements of comprehensive income.
For the Year Ended December 31,
Reconciliations of GAAP to Non-GAAP Financial Measures:202020192018
($ in thousands except per share data)
Comprehensive income (loss) to common shareholders$66,472 $43,950 $(31,860)
Less:
Change in fair value of available for sale investments(214,539)(203,995)$50,218 
Change in fair value of derivative instruments, net (1)
188,936 209,256 23,977 
(Gain) loss on investments, net(20)56 (52)
Preferred stock redemption charge3,914 — — 
Core net operating income to common shareholders$44,763 $49,267 $42,283 
Average common shares outstanding (2)
23,106,200 23,620,125 19,234,939 
Comprehensive income (loss) per common share$2.88 $1.86 $(1.66)
Core net operating income per common share (2)
$1.94 $2.09 $2.20 
GAAP net interest income$63,853 $56,057 $50,477 
Add:
TBA drop income (3)
15,067 6,231 14,686 
Net periodic interest benefit of interest rate swaps1,579 16,075 5,830 
Less: accretion of de-designated cash flow hedges (4)
— (165)(237)
Adjusted net interest income$80,499 $78,198 $70,756 
Adjusted net interest spread1.87 %1.30 %1.48 %


(1) Amount includes unrealized gains and losses from changes in fair value of derivatives and realized gains and losses on terminated derivatives and excludes net periodic interest benefit/cost incurred on effective interest rate swaps outstanding during the period and TBA drop income.
(2) Amounts have been adjusted to reflect the effect of the 1-for-3 reverse stock split.
(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. The impact of TBA drop income on adjusted net interest spread includes the implied average funding cost of TBA dollar roll transactions during the periods indicated.
(4) Amount recorded as a portion of "interest expense" in accordance with GAAP related to the amortization/accretion of the balance remaining in accumulated other comprehensive loss as a result of the Company's discontinuation of cash flow hedge accounting effective June 30, 2013.shareholders.


FINANCIAL CONDITION

Investment Portfolio
As of December 31, 2020,2021, our investment portfolio is comprised mostly of Agency fixed-rate investments. Since December 31, 2019, we have shifted our investment portfolio away from Agency CMBS and as of December 31, 2020, our portfolio is predominantly comprised of lower coupon Agency RMBS which offers more liquidity and in our view a more attractive risk/return profile versus Agency CMBS in the current market environment. We sold the majority of our Agency CMBS in 2020 as risk spreads declined sharply, leading to higher prices and diminishing returns on this type of investment.TBA securities. The following chart compares the composition of our MBS portfolio including TBA securities as of the dates indicated:
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dx-20201231_g4.jpg
dx-20211231_g4.jpg
(1) Includes TBA positionssecurities at their implied market value, as if settled, whichof $1.5 billion and $1.6 billion as of the periods indicated, respectively. TBA securities are accounted for asrecorded within “derivative assets (liabilities)” on our consolidated balance sheet.
(2) Total includes other non-Agency MBS investmentssheet at their net carrying value, which represents the difference between the implied market value and the implied cost basis of $1.3 million and $1.7 million for the respective periods shown.TBA security as of the date indicated.

RMBS. As notedDuring the year ended December 31, 2021, we have remained invested in primarily lower coupon securities which limited our exposure to duration extension and credit spread widening as interest rates rose throughout the year. Furthermore, most lower coupon Agency RMBS issued during the year were purchased by the Federal Reserve as part of their open market purchase operations, further limiting the risk of wider spreads. We believe lower coupon Agency RMBS will continue to provide higher risk-adjusted returns due to their seasoning, the lack of new supply in the table below, ashigher rate environment, and the large ownership position of December 31, 2020, we are invested inthe Federal Reserve. In addition, our lower coupon investments toalso mitigate the risk of loss of premiums due to earlytheir lower cost basis and slower prepayment given the lower interest rate environment in 2020 while keeping a modest allocation to specified pools of 4.0% coupon as protection in case interest rates rise. Our lower coupon investments also have lower premiumsspeeds relative to higher coupon assets which further protects our earnings when prepayments occur. Additionally, since December 31, 2019, we have increased our investmentassets.
We continued investing in TBA securities including 15-year fixed-rate TBA, asduring the year ended December 31, 2021 because implied financing rates for dollar roll transactions have beencontinued to be lower than the financing rates for


repurchase agreement borrowings we typically use to finance specified pools. Because TBA securities have higher relative liquidity than specified pools, these transactions allowinvestments also allowed more flexibility should we decide or find it necessary to reducemanage our capital allocation and leverage.

The following tables compare our fixed-rate Agency RMBS investments including TBA dollar roll positions as of the dates indicated:
December 31, 2020
Par/Notional-Long (Short)
Amortized Cost/
Implied Cost
Basis (1)(3)
Fair
Value (2)(3)
Weighted Average
Coupon
Loan Age
(in months)(4)
3 Month
CPR (4)(5)
Estimated Duration (6)
30-year fixed-rate:($ in thousands)
TBA 2.0%$765,000 $789,945 $792,957 n/an/a4.89
2.0%620,238 635,096 646,744 87.7 %5.31
2.5%938,334 973,116 995,889 1013.5 %3.53
4.0%280,474 288,831 303,758 3346.8 %2.48
15-year fixed-rate:
TBA 1.5%250,000 255,068 257,305 n/an/a4.73
TBA 2.0%500,000 519,047 522,687 n/an/a3.09
Total$3,354,046 $3,461,103 $3,519,340 1317.1 %4.10 
31

December 31, 2019December 31, 2021
Par/Notional-Long (Short)
Amortized Cost/
Implied Cost
Basis (1)(3)
Fair
Value (2)(3)
Weighted AveragePar/Notional
Amortized Cost/
Implied Cost
Basis (1)(3)
Fair
Value (2)(3)
Weighted Average
CouponCoupon
Loan Age
(in months)(4)
3 Month
CPR (4)(5)
Estimated Duration (6)
Coupon
Loan Age
(in months)(4)
3 Month
CPR (4)(5)
Estimated Duration (6)
30-year fixed-rate:30-year fixed-rate:($ in thousands)30-year fixed-rate:($s in thousands)
2.0%2.0%$1,311,069 $1,330,353 $1,312,190 11 8.0 %6.69
2.5%2.5%$110,610 $109,341 $109,409 3 — %5.15 2.5%1,165,810 1,215,841 1,199,092 15 11.3 %5.83
3.0%307,380 310,486 314,159 25 9.4 %4.04 
3.5%538,551 549,735 562,921 11 10.9 %2.64 
4.0%4.0%1,352,730 1,384,913 1,429,547 20 23.5 %2.28 4.0%162,868 167,713 175,493 45 34.1 %3.09
4.5%254,413 264,979 272,037 13 29.9 %1.55 
TBA 2.0%TBA 2.0%965,000 957,600 961,080 n/an/a6.54
TBA 2.5%TBA 2.5%135,000 133,059 133,513 n/an/a5.10 TBA 2.5%190,000 193,563 193,585 n/an/a5.23
TBA 3.0%300,000 308,268 308,648 n/an/a1.90 
TBA 4.0%(500,000)(519,143)(520,117)n/an/a1.28 
15-year fixed-rate:15-year fixed-rate:
TBA 1.5%TBA 1.5%375,000 375,259 376,523 n/an/a4.58
TotalTotal$2,498,684 $2,541,638 $2,610,117 17 18.9 %2.91 Total$4,169,747 $4,240,329 $4,217,963 1511.2 %6.01 
December 31, 2020
Par/Notional
Amortized Cost/
Implied Cost
Basis (1)(3)
Fair
Value (2)(3)
Weighted Average
Coupon
Loan Age
(in months)(4)
3 Month
CPR (4)(5)
Estimated Duration (6)
30-year fixed-rate:($s in thousands)
TBA 2.0%$765,000 $789,945 $792,957 n/an/a4.89
2.0%620,238 635,096 646,744 87.7 %5.31
2.5%938,334 973,116 995,889 1013.5 %3.53
4.0%280,474 288,831 303,758 3346.8 %2.48
15-year fixed-rate:
TBA 1.5%250,000 255,068 257,305 n/an/a4.73
TBA 2.0%500,000 519,047 522,687 n/an/a3.09
Total$3,354,046 $3,461,103 $3,519,340 1317.1 %4.10 
(1) Implied cost basis of TBAs represents the forward price to be paid (received) for the underlying Agency MBS.
(2) Fair value of TBAs is the implied market value of the underlying Agency security as of the end of the period.
(3) 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 56 of the Notes to the Consolidated Financial Statements for additional information.
(4) 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.
(5) Constant prepayment rate (“CPR”) represents the 3-month CPR of Agency RMBS held as of date indicated. Securities with no prepayment history are excluded from this calculation.
(6) 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
33

models and empirical data. Different models and methodologies can produce different estimates of duration for the same securities.
CMBS.During
We sold the second and third quarters of 2020, we sold a substantial portionmajority of our Agency CMBS realizing gainsin 2020 as risk spreads declined sharply, leading to higher prices and diminishing returns on investments on which credit spreads had tightened and for whichthis type of investment. In 2021, we did not reinvest in newer issue CMBS because we believed risks of continued investment outweighed potential returns.the risk-adjusted return profile to be less favorable relative to Agency RMBS. The overall composition of the CMBS remaining in our investment portfolio has shifted to moreconsist mainly of seasoned investments with a higher probability of appreciation in the underlying collateral versus newer issue bonds.
The following table presents information about our CMBS investments by year of origination as of the dates indicated:
December 31, 2020December 31, 2019
($ in thousands)Par ValueAmortized Cost
Months to Estimated Maturity (1)
WAC (2)
Par ValueAmortized Cost
Months to Estimated Maturity (1)
WAC (2)
Year of Origination:
Prior to 2009$9,132 $8,964 365.69 %$13,441 $13,080 305.74 %
2009 to 201211,424 12,085 655.56 %28,141 29,153 344.99 %
2013 to 20149,865 10,033 443.61 %11,294 11,528 593.65 %
2015155,760 157,137 692.85 %175,219 177,023 872.86 %
2016— — —— %19,910 19,742 1092.62 %
201730,907 31,294 913.18 %340,638 342,158 1013.07 %
2018— — —— %330,180 329,984 1273.68 %
201919,702 19,988 1513.12 %972,646 983,435 1343.27 %
$236,790 $239,501 773.19 %$1,891,469 $1,906,103 1203.30 %
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December 31, 2021December 31, 2020
($s in thousands)Par ValueAmortized Cost
Months to Estimated Maturity(1)
WAC(2)
Par ValueAmortized Cost
Months to Estimated Maturity(1)
WAC(2)
Year of Origination:
Prior to 2009 (3)
$5,581 $5,464 125.95 %$9,132 $8,964 365.69 %
2009 to 20129,895 10,310 345.63 %11,424 12,085 655.56 %
2013 to 20148,988 9,105 373.58 %9,865 10,033 443.61 %
2015100,598 101,717 562.94 %155,760 157,137 692.85 %
201730,808 31,135 803.18 %30,907 31,294 913.18 %
201919,702 19,964 1403.17 %19,702 19,988 1513.12 %
$175,572 $177,695 663.29 %$236,790 $239,501 773.19 %
(1) Months to estimated maturity is an average weighted by the amortized cost of the investment.
(2) The weighted average coupon (“WAC”) is the gross interest rate of the security weighted by the outstanding principal balance.
(3) The Company has one non-Agency CMBS originally issued in 1998 with an amortized cost and fair value of less than $1.0 million as of December 31, 2021 and December 31, 2020.

CMBS IO.
The following table presentstables present our CMBS IO investments by year of origination as of the periodsdates indicated:

December 31, 2020
AgencyNon-Agency
($ in thousands)Amortized CostFair Value
Remaining WAL (1)
Amortized CostFair Value
Remaining WAL (1)
Year of Origination:
2010-2012$12,037 $11,932 9 $3,237 $3,263 8 
201322,367 24,165 13 10,875 10,912 15 
201424,841 25,749 22 50,777 51,175 20 
201531,875 33,404 26 53,176 54,020 27 
201623,072 24,203 31 16,705 16,906 16 
201726,493 27,952 42 7,733 7,808 34 
20183,792 3,983 62 — — — 
201988,757 91,303 60 — — — 
20203,203 3,264 53 — — — 
$236,437 $245,955 39 $142,503 $144,084 24 

December 31, 2021
AgencyNon-Agency
($s in thousands)Amortized CostFair Value
Remaining WAL (1)
Amortized CostFair Value
Remaining WAL (1)
Year of Origination:
2010-2012$2,120 $2,311 3 $454 $480 3 
20139,627 11,554 7 5,562 5,668 224 
201416,768 17,231 15 33,630 34,123 72 
201522,558 23,571 20 39,407 40,408 20 
201618,186 18,901 24 13,405 13,430 16 
201722,308 23,296 36 6,216 6,452 28 
20183,408 3,687 55 — — — 
201979,858 83,656 53 — — — 
20202,847 2,873 45 — — — 
202121,843 21,778 61 — — — 
$199,523 $208,858 40 $98,674 $100,561 50 
3433

December 31, 2019December 31, 2020
AgencyNon-AgencyAgencyNon-Agency
($ in thousands)Amortized CostFair Value
Remaining WAL (1)
Amortized CostFair Value
Remaining WAL (1)
($s in thousands)($s in thousands)Amortized CostFair Value
Remaining WAL (1)
Amortized CostFair Value
Remaining WAL (1)
Year of Origination:Year of Origination:Year of Origination:
2010-20122010-2012$27,610 $27,609 12 $7,710 $7,869 11 2010-2012$12,037 $11,932 9 $3,237 $3,263 8 
2013201335,794 37,047 16 16,401 16,629 19 201322,367 24,165 13 10,875 10,912 15 
2014201434,077 35,027 25 68,811 69,886 24 201424,841 25,749 22 50,777 51,175 20 
2015201541,549 42,987 29 66,954 69,062 30 201531,875 33,404 26 53,176 54,020 27 
2016201627,956 28,891 35 20,065 20,442 36 201623,072 24,203 31 16,705 16,906 16 
2017201730,409 31,633 46 9,304 9,529 38 201726,493 27,952 42 7,733 7,808 34 
201820184,117 4,287 66 — — — 20183,792 3,983 62 — — — 
2019201997,388 98,144 64 — — — 201988,757 91,303 60 — — — 
202020203,203 3,264 53 — — — 
$298,900 $305,625 40 $189,245 $193,417 27 $236,437 $245,955 39 $142,503 $144,084 24 
(1) Remaining weighted average life (“WAL”) represents an estimate of the number of months of contractual cash flows remaining for the investments by year of origination.

The weighted average interest rate forNon-Agency-issued securities are generally expected to have a higher risk of default than Agency CMBS IO. We mitigate this risk by investing in senior tranches of mostly AAA-rated securities where we have evaluated the credit profile of the underlying loan pool and can monitor credit performance. All of our non-Agency CMBS IO was 0.56%were originated prior to 2018, the majority of which we believe have had underlying property value appreciation. Non-Agency issued CMBS IO are backed by loans secured by a number of different property types, which are shown in the table below as of December 31, 2020 and 0.65% as of December 31, 2019.2021:
Effective
December 31, 2021
($s in thousands)Fair ValuePercentage of Portfolio
Property Type:
Retail$28,293 28.1 %
Office22,514 22.4 %
Multifamily15,957 15.9 %
Hotel13,466 13.4 %
Mixed use7,156 7.1 %
Other (1)
13,175 13.1 %
Total non-Agency CMBS IO$100,561 100.0 %
(1) Other property types collateralizing non-Agency CMBS IO do not comprise more than 5% individually.

Because effective yields on CMBS IO securities are dependent upon the performance of the underlying loans. Ourloans, our return on these investments may be negatively impacted if the loans default, resulting in foreclosures or liquidations of the loan collateral. Non-Agency-issued securities are generally expected to have a higher risk of default than Agency CMBS IO. We are mostly invested in senior tranches of these securities where we have evaluated the credit profile of the underlying loan pool and can monitor credit performance in order to mitigate our exposure to losses. The majority of our non-Agency CMBS IO investments are investment grade-rated with the majority rated ‘AAA’ by at least one of the nationally recognized statistical rating organizations. All of our non-Agency CMBS IO were originated prior to 2017, the majority of which we believe have had underlying property value appreciation.
SinceWhen the economic impacts of COVID-19 began in March,2020, servicers are reportingreported an increase in delinquencies on loans underlying our non-Agency CMBS IO and have takenresponded by taking loss mitigation actions, includingsuch as loan forbearance or allowing the borrower to make loan payments using replacement reserve or similar property related funds. Most of the increases in delinquencies thus far have beenwere in the retail and hotel sectors and have nominally impactedwith a nominal impact on cash flows and yields on the securities. Considering the characteristics of our non-Agency CMBS IO, such as seasoning, loan-to-value ratio, and geographic location of the collateral, as well as the actions taken by servicers so far to
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work with borrowers through various relief measures, we have not seen evidence of and do not currently expect a material adverse effect on our future cash flows for non-Agency CMBS IO. In addition, more recently, our servicers have begun reporting lower delinquencies, and they are now more in line with the level we experienced prior to the onset of the economic impacts of the pandemic. However, the ultimate impact of COVID-19 on the global economy and on the loans underlying any of our securities remains uncertain and cannot be predicted at this time.

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Non-Agency issued CMBS IO are backed by loans secured by a number of different property types which are shown in the table below as of December 31, 2020:
December 31, 2020
($ in thousands)Fair ValuePercentage of Portfolio
Property Type:
Retail$39,934 27.7 %
Office30,904 21.4 %
Multifamily25,658 17.8 %
Hotel19,240 13.4 %
Mixed use9,646 6.7 %
Other (1)
18,702 13.0 %
Total non-Agency CMBS IO$144,084 100.0 %
(1) Other property types collateralizing non-Agency CMBS IO do not comprise more than 5% individually.


Repurchase Agreements 
We usemaintained lower leverage throughout 2021 in order to enhancereduce risk given volatility in the market and the lower marginal returns on our investedavailable due to credit spread tightening. As such, we partially financed investments we purchased during 2021 with repurchase agreement borrowings, which increased $0.4 million, or approximately 17%, to $2.8 billion as of December 31, 2021 in conjunction with a portion of the proceeds received from common equity capital by pledging our investments as collateral for borrowings primarily throughwe raised during the useyear. During the fourth quarter of uncommitted repurchase agreements2021, we worked with major financial institutions and broker-dealers. Repurchase agreements 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 pay interest on our repurchase agreement counterparties to extend the maturities of our borrowings based on short-term rate indices that historically closely track LIBOR and are fixed forfurther into 2022 in order to lock in low financing rates over a longer term in light of possible near term increases in the term ofFederal Funds Rate by the borrowing.
Federal Reserve. Please refer to Note 45 of the Notes to the Consolidated Financial Statements contained within this Annual Report on Form 10-K as well as “Results of Operations” and “Liquidity and Capital Resources” contained within this Item 7 for additional information relating to our repurchase agreement borrowings.

Derivative Assets and Liabilities
We use derivative instruments to economically hedge our exposure to adverse changes in interest rates resulting from our ownership of primarily fixed-rate investments financed with short-term repurchase agreements. Changes in interest rates can impact net interest income, the market value of our investments, and book value per common share. We regularly monitor and frequently adjust our hedging portfolio in response to many factors including, but not limited to, changes in our investment portfolio as well as our expectation of future interest rates, including the absolute level of rates and the slope of the yield curve versus market expectations. As
During 2021, we increased our short positions in U.S. Treasury futures in the 10-year portion of December 31, 2020, approximately 62% ofthe curve in order to protect our MBS portfolio including TBA securities were hedged with thesefrom duration risk in the increasing interest rate derivatives.environment. We significantly reduced our notional balance of interest rate swaptions and removed options on U.S. Treasury futures from our hedging portfolio because our lower coupon assets have less convexity risk to hedge in a rising interest rate environment. Please refer to Note 56 of the Notes to the Consolidated Financial Statements for details on our interest rate derivative instruments as well as “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of this Annual Report on Form 10-K.


RESULTS OF OPERATIONS
The discussion below includes both GAAP and non-GAAP financial measures that management utilizes in its internal analysis of financial and operating performance. Please read the section “Non-GAAP Financial Measures” contained in “Executive Overview” of Item 7at the end of this Annual Report on Form 10-Ksection for additional important information about these financial measures.
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Net Interest Income for the Year Ended December 31, 20202021 Compared to the Year Ended December 31, 20192020

Net Interest Income
Net interest income increased by $7.8declined $(9.5) million for the year ended December 31, 20202021 compared to the year ended December 31, 20192020 because we held a smaller average balance of repurchase agreement borrowings at a lower financing rate, which resulted in a decline of $(81.5) million in our interest expense. We borrowed less because we held a smaller average balance ofyielding investments during the year ended December 31, 20202021 compared to the same period in the prior year. By the end of2020. During the first quarterhalf of 2020, as interest rates rallied and asset prices began to fall, we sold approximately 67%significant portions of our Agency RMBS and CMBS in order to monetizerealize aggregate gains as asset prices began to fall, increaseof $277.9 million, which increased our liquidity, position, and decreasein order to reduce our leverage andas markets experienced extreme volatility during this period primarily as a result of the COVID-19 pandemic. Since that time, we sold an additional $1.8 billion of mostly Agency CMBS during the second quarter of 2020. Wehave only partially replaced these assets through subsequent purchasesas we have focused on keeping our leverage at the low end of $1.9 billionour target range due to the lower risk-adjusted returns available in primarily 30-year Agency RMBS with lower coupons. We also borrowed less becausethe market.
During 2021, we increased our investment in TBA securities which do not requiregiven the more favorable return profile versus Agency RMBS and because they offer greater flexibility in managing leverage due to their higher liquidity relative to
35

specified pools of MBS. Investing in TBA securities has also reduced our average balance of repurchase agreement borrowings, and thereby our interest expense, for the year ended December 31, 2021 compared to the year ended December 31, 2020 as these investmentsTBA securities are financed implicitly through dollar roll transactions. AsIn addition, the decline in our interest expense for the year ended December 31, 2021 compared to the year ended December 31, 2020 was also due to our lower repurchase agreement financing cost, which has been lower primarily as a result of the Federal Reserve maintaining the Federal Funds Rate in a range of 0-0.25%, resulting in a substantial reduction in our smaller average balancecost of lower yielding investments heldfunds during 2020 comparedthis period. We expect our borrowing costs to 2019, our interest income declined $(73.7) million. Please referincrease in 2022 because of the Federal Reserve’s recent announcement that it expects it will soon be appropriate to raise the target range for the Federal Funds Rate and because the markets have begun pricing in four to five rate hikes. As discussed above in “Executive Overview” for, we also expect that we will be able to add higher-yielding assets to our balance sheet in the near-term, which will serve to offset a discussion of how market factors such as interest rates and supply/demand dynamics influenced investment portfolio changes made by management during 2020.rise in borrowing costs.
The following table presents certain information about our interest-earning assets and interest-bearing liabilities and their performance for the year ended December 31, 2020 and December 31, 2019:periods indicated:
Year EndedYear Ended
December 31,December 31,
2020201920212020
($ in thousands)Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Cost of
Funds (3)(4)
Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Cost of
Funds (3)(4)
($s in thousands)($s in thousands)Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Cost of
Funds (3)(4)
Interest Income/Expense
Average Balance (1)(2)
Effective Yield/
Cost of
Funds (3)(4)
Interest-earning assets:Interest-earning assets:Interest-earning assets:
Agency RMBSAgency RMBS$50,546 $2,142,690 2.36 %$92,671 $2,780,832 3.33 %Agency RMBS$36,017 $2,145,989 1.68 %$50,546 $2,142,690 2.36 %
Agency CMBSAgency CMBS25,292 856,869 2.91 %51,933 1,586,730 3.23 %Agency CMBS7,683 210,335 3.62 %25,292 856,869 2.91 %
CMBS IO (5)
CMBS IO (5)
19,361 433,863 4.46 %21,534 492,567 4.37 %
CMBS IO (5)
15,792 330,420 4.78 %19,361 433,863 4.46 %
Non-Agency MBS and other investments (6)
Non-Agency MBS and other investments (6)
1,269 9,125 8.64 %4,030 11,791 16.61 %
Non-Agency MBS and other investments (6)
559 6,329 8.30 %1,269 9,125 8.64 %
Total:Total:$96,468 $3,442,547 2.78 %$170,168 $4,871,920 3.44 %Total:$60,051 $2,693,073 2.23 %$96,468 $3,442,547 2.78 %
Interest-bearing liabilities: (7)
Interest-bearing liabilities: (7)
32,615 $3,190,726 1.01 %114,111 $4,570,837 2.46 %
Interest-bearing liabilities: (7)
(5,671)2,387,764 (0.23)%(32,615)$3,190,726 (1.01)%
Net interest income/net interest spreadNet interest income/net interest spread$63,853 1.77 %$56,057 0.98 %Net interest income/net interest spread$54,380 2.00 %$63,853 1.77 %
(1) Average balance for assets is calculated as a simple average of the daily amortized cost and excludes unrealized gains and losses as well as 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 the sum of gross interest income and scheduled premium amortization/discount accretion (both of which are annualized for any reporting period less than 12 months) and prepayment compensation and premium amortization/discount accretion adjustments (collectively, "prepayment adjustments"), which are not annualized, by the average balance of asset type outstanding during the reporting period.
(4) Cost of funds 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) Interest income for non-Agency and other investments for the year ended December 31, 2020 and December 31, 2019 includes $0.5 million and $2.1 million, respectively, of interest income from cash and cash equivalents. Average balance and yields excludeeffective yield for non-Agency MBS and other investments excludes cash and cash equivalents.
(7) Interest-bearing liabilities consist primarily of repurchase agreement borrowings.

Net interest spread increased 23 basis points for the year ended December 31, 2021 compared to the year ended December 31, 2020 due to the significant decline in our repurchase agreement borrowing costs, which more than offset the decline in the effective yield we earned on our investment portfolio. Effective yield on our investment portfolio for the year ended December 31, 2021 declined 55 basis points because we reallocated a portion of our
37
36

Rate/Volume Analysis.portfolio from 4.0% coupons to 2.0% and 2.5% coupons in order to mitigate prepayment risk and to minimize losses in book value due to change in monetary policy by the Federal Reserve and the increasing interest rate environment.
The following table presents the estimated impact on our net interest income due to changes in rate (effectiveeffective yield/cost of funds)funds (“rate”) and changes in volume (average balance)average balance (“volume”) of our interest-earning assets and interest-bearing liabilities for the periods indicated:
Year EndedYear Ended
December 31, 2020 Compared to December 31, 2019December 31, 2021 Compared to December 31, 2020
Increase (Decrease) Due to Change InTotal Change in Interest Income/ExpenseIncrease (Decrease) Due to Change InTotal Change in Interest Income/Expense
($ in thousands)RateVolume
Prepayment Adjustments (1)
($s in thousands)($s in thousands)RateVolume
Prepayment Adjustments (1)
Total Change in Interest Income/Expense
Interest-earning assets:Interest-earning assets:Interest-earning assets:
Agency RMBSAgency RMBS$(20,869)$(21,331)$75 $(42,125)Agency RMBS$(14,612)$83 $— $(14,529)
Agency CMBSAgency CMBS(2,248)(23,322)(1,071)(26,641)Agency CMBS(37)(18,871)1,299 (17,609)
CMBS IO (2)
CMBS IO (2)
188 (2,172)(189)(2,173)
CMBS IO (2)
1,235 (4,060)(744)(3,569)
Non-Agency MBS and other investmentsNon-Agency MBS and other investments(1,823)(82)(856)(2,761)Non-Agency MBS and other investments(98)(572)(40)(710)
Change in interest incomeChange in interest income$(24,752)$(46,907)$(2,041)$(73,700)Change in interest income$(13,512)$(23,420)$515 $(36,417)
Change in interest expenseChange in interest expense(46,415)(35,081)— (81,496)Change in interest expense(18,832)(8,112)— (26,944)
Total net change in net interest incomeTotal net change in net interest income$21,663 $(11,826)$(2,041)$7,796 Total net change in net interest income$5,320 $(15,308)$515 $(9,473)
(1) Prepayment adjustments represent effective interest amortization adjustments related to changes in actual prepayment speeds and prepayment compensation, net of amortization adjustments for CMBS and CMBS IO.
(2) Includes Agency and non-Agency issued securities.

Adjusted Net Interest Income for the Year Ended December 31, 2020 Compared
Please refer to the Year Ended December 31, 2019
Management includes drop income from TBA dollar roll transactions and net periodic interest benefit/cost of interest rate swaps in asection “Non-GAAP Financial Measures” for additional information about this non-GAAP financial measure “adjusted net interest income” when evaluating the economic performanceused by management to evaluate results of its investments and financings. Please refer to “Non-GAAP Financial Measures” at the end of the “Executive Overview” section of this Annual Report on Form 10-K for additional information.operations.
Year Ended
December 31,
20202019
($ in thousands)AmountRateAmountRate
Net interest income$63,853 1.77 %$56,057 0.98 %
Add: TBA drop income (1) (2)
15,067 0.05 %6,231 (0.03)%
Add: net periodic interest benefit (3)
1,579 0.05 %16,075 0.35 %
De-designated cash flow hedge accretion (4)
— — %(165)— %
Adjusted net interest income$80,499 1.87 %$78,198 1.30 %

Year Ended
December 31,
20212020
($s in thousands)AmountRateAmountRate
Net interest income$54,380 2.00 %$63,853 1.77 %
Add: TBA drop income (1) (2)
43,512 0.10 %15,067 0.05 %
Add: net periodic interest benefit (3)
— — %1,579 0.05 %
Adjusted net interest income$97,892 2.10 %$80,499 1.87 %
(1) 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.
(2) The impact of TBA drop income on adjusted net interest spread includes the implied average funding cost of TBA dollar roll transactions during the periods indicated.
(3) Amount represents net periodic interest cost/benefit of effective interest rate swaps outstanding during the period and excludes realized and unrealized gains and losses from changes in fair value of derivatives.
(4) Amount recorded as a portionThe increase of "interest expense"$17.4 million in accordance with GAAP related to the accretion of the balance remaining in accumulated other comprehensive loss as a result of the Company's discontinuation of cash flow hedge accounting effective June 30, 2013.

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Adjustedadjusted net interest income increased $2.3 million for the year ended December 31, 20202021 compared to the year ended December 31, 2019 because2020 is due to our increased investment in TBA securities at lower implied funding costs relative to the year ended December 31, 2020, which resulted in an increase in TBA drop income outpacedof $28.4 million. This increase in TBA drop income offset the decline of $(9.5) million in net interest income and $(1.6) million in net periodic interest benefit from interest rate swaps. We increased our investment in TBA securities during the year ended December 31, 2020 because
37

When the financing costscost imputed in TBA dollar roll transactions for most of the year wereis lower than the average repurchase agreement financing rate, whichthis is commonly referred to in the industry as TBA dollar rolls “trading special” or “dollar roll specialness”.specialness.” Dollar roll specialness happens primarily as a result of supply/demand imbalances or volatility in market prepayment expectations, and in management’s view, the pace of bank and Federal Reserve purchases was the most significant contributor, resultingresulted in an implied negative financing cost during the majority of 2020. The Company’s implied financing rate for itscosts dropping below 0% during 2021. Due to the recent shift in the Federal Reserve’s monetary policy, we expect TBA long positions was (0.04)% for the year ended December 31, 2020 compared to 2.43% for the year ended December 31, 2019. Thedollar roll specialness will likely decline in net periodic interest benefit from interest rate swaps is discussed below2022, negatively impacting TBA drop income.
Changes in “Loss on Derivative Instruments, Net”.

Gain (Loss) on SaleFair Value of Investments Net
Sales of our investments happen in the ordinary course of business as we manage our risk, capital and liquidity profiles, and as we reallocate capital to various investments. However, our sales during the year ended December 31, 2020 increased significantly compared to prior years. When interest rates rallied early to mid-March of 2020 as the markets initially responded to the COVID-19 pandemic, we chose to realize gains on our Agency RMBS as asset prices began to fall and we chose to de-lever our balance sheet. We used a portion of those proceeds to re-invest in Agency CMBS, the majority of which we sold in subsequent quarters in order to realize gains as asset premiums increased due to spread tightening and to shift our portfolio allocation back to predominantly Agency RMBS as the market stabilized. None of our investment sales during the year ended December 31, 2020 or December 31, 2019 were made under duress. The following tables provide information related to our realized gains (losses) on sales of investments for the periods indicated (1):
Year Ended
December 31,
20202019
($ in thousands)Amortized cost basis soldGain (loss) on sale of investments, netAmortized cost basis soldGain (loss) on sale of investments, net
Agency RMBS$2,312,343 $82,689 $796,193 $506 
Agency CMBS2,021,878 225,395 219,692 (6,493)
Agency CMBS IO— — 22,936 232 
$4,334,221 $308,084 $1,038,821 $(5,755)
(1) Information regarding unrealized gains (losses) on investments during the periods indicated is included under "Results of Operations-Other Comprehensive Income (Loss)" within this Item 7.


Loss on Derivative Instruments, Net
Changes in the fair value of derivative instrumentsour investments result in realized and net periodic interest benefits/costs areunrealized gains and losses. The fair value of our investments is impacted by changinga number of factors including, among others, market volatility, changes in credit spreads, spot and forward interest rates, actual and adjustmentsanticipated prepayments, and supply/demand dynamics which are in turn impacted by, among other things, interest rates, capital flows, economic conditions, and government policies and actions, such as purchases and sales by the Federal Reserve.
Effective January 1, 2021, the Company elected the fair value option for all MBS purchased on or after that we may makedate with changes in fair value reported in net income as “unrealized gain (loss) on investments, net” until the security is sold or matures. Changes in fair value for MBS purchased prior to our hedging positions in any given period. Because of the changes made to our derivatives portfolio from one reporting period to the next, results of any given reporting periodthat date are generally not comparable to results of another.
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recorded within “other comprehensive income (loss).” The following table provides informationdetails on unrealized gains and losses on our financial instruments accounted for as derivative instrumentsinvestments held in our portfolio for the periods indicated:
Year Ended
December 31,
($ in thousands)20202019
Interest rate swaps:
Net periodic interest benefit$1,579 $16,075 
Change in fair value(184,521)(218,525)
Total loss on interest rate swaps, net(182,942)(202,450)
Change in fair value of other derivatives used as hedges:
Interest rate swaptions680 (5,607)
Options on U.S. Treasury futures(26,186)(1,422)
U.S. Treasury and Eurodollar futures(15,046)2,250 
Total loss on derivatives used as hedges of interest rate risk(223,494)(207,229)
TBA dollar roll positions:
Change in fair value (1)
36,137 14,049 
TBA drop income (2)
15,067 6,231 
Total TBA dollar roll gain, net51,204 20,280 
Total loss on derivative instruments, net$(172,290)$(186,949)
Year Ended
December 31, 2021
($s in thousands)Unrealized Gain (Loss) on Investments, NetOther Comprehensive Income (Loss)Total Change in Fair Value
Agency RMBS$(14,917)$(61,563)$(76,480)
Agency CMBS— (11,961)(11,961)
CMBS IO(65)(308)(373)
Non-Agency other— 300 300 
Mortgage loans held for investment130 — 130 
Other38 — 38 
$(14,814)$(73,532)$(88,346)
Year Ended
December 31, 2020
Unrealized Gain (Loss) on Investments, NetOther Comprehensive Income (Loss)Total Change in Fair Value
Agency RMBS$— $(19,270)$(19,270)
Agency CMBS— (74,161)(74,161)
CMBS IO— 203 203 
Non-Agency other— (317)(317)
Mortgage loans held for investment75 — 75 
Other(55)$— (55)
$20 $(93,545)$(93,525)
(1) Changes in fair value for TBA dollar roll positions include unrealized gains (losses) from open TBA contracts and realized gains (losses) on paired off or terminated positions.
(2) TBA drop income represents a portion of the change in fair value and is calculated by multiplying the notional amount of the net TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.

Changes in fair value of our derivative instruments consist of unrealized gains (losses) on instruments held as of the end of the period and realized gains (losses) from instruments terminated or paired offAs longer-term interest rates increased during the period. The following tables provide information regarding realized gains (losses) on derivative instruments for the periods indicated:
Year Ended
December 31,
20202019
($ in thousands)Realized Gain (Loss)Realized Gain (Loss)
Interest rate swaps$(185,985)$(209,107)
Interest rate swaptions(1,934)(4,246)
U.S. Treasury and Eurodollar futures(13,519)1,032 
Options on U.S. Treasury futures(24,376)— 
TBA long positions53,192 25,424 
TBA short positions(11,016)1,234 
Total$(183,638)$(185,663)

Please refer to “Federal Income Tax Considerations” in Part I, Item 1 of this Annual Report on Form 10-K for information regarding recognition of deferred tax hedge losses for terminated derivative instruments.
Our net periodic interest benefit from interest rate swaps decreased $(14.5) million for the year ended December 31, 2020 compared to2021, the year ended December 31, 2019 because, as mentioned previously, we discontinuedfair value of the use of interest
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rate swaps to hedge the impact of interest rate risk on our earnings due to management’s expectation for our borrowing cost to remain low in the near term given current FOMC monetary policy. The table below shows our interest rate swap hedge position as a percentagemajority of our average repurchase agreement borrowings and long TBAs outstanding and details about our net (pay) receive rates for the periods indicated:
Year Ended
December 31,
($ in thousands)20202019
Average repurchase agreement borrowings outstanding$3,189,269 $4,567,716 
Average TBA long positions outstanding - at cost (1)
750,887 550,796 
Average borrowings and TBA long positions outstanding3,940,156 5,118,512 
Average notional amount of interest rate swaps outstanding899,126 4,003,063 
Ratio of average interest rate swaps to average borrowings and TBA long positions outstanding (1)
0.20.8 
Average interest rate swap pay-fixed rate(1.41)%(2.07)%
Average interest rate swap receive-floating rate1.57 %2.44 %
Average interest rate swap net (pay) receive rate0.16 %0.37 %
(1) TBA long positions are included in this ratio becauseinvestments declined. Because we use interest rate swapsderivatives to hedge a portion of the impact of changing interest rates on our investment portfolio (including TBA securities), we evaluate our results by comparing how much the fair valuegain (loss) on our MBS and implied financing cost ofTBAs is offset by the gain (loss) on our TBA long positions and our repurchase agreement financing costs.interest rate hedges, which are discussed below under “Gain
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General and Administrative Expenses
General and administrative expenses increased $5.1 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 due primarily to changes made in 2020 to the payment structure of the executive compensation program that impact the timing of recognition of expenses and higher overall performance-based bonus compensation from management meeting its corporate goals and expenses for the year.

Other Comprehensive (Loss) Incomeon Derivative Instruments, Net”.
Other comprehensive loss of $(93.5) million for the year ended December 31, 2020 was due to the reclassification of $308.1 million in realized gains on the sale of investments during the year which were reclassified to net income in accordance with GAAP. The gross change in fair value of the Company’s MBS for the year ended December 31, 2020 was $214.5 million and resulted primarily from credit spread tightening for Agency RMBS and CMBS. Other comprehensive
Our sales during the year ended December 31, 2020 were significantly higher than in 2021. When interest rates rallied early to mid-March of 2020 as the markets initially responded to the COVID-19 pandemic, we chose to realize gains on our Agency RMBS as asset prices began to fall and we chose to reduce our balance sheet leverage. We used a portion of those proceeds to re-invest in Agency CMBS, the majority of which we sold in subsequent quarters in order to realize gains as asset premiums increased due to spread tightening and to shift our portfolio allocation back to predominantly Agency RMBS as the market stabilized. None of our investment sales during the years ended December 31, 2021 or December 31, 2020 were made under duress.
The following table provides information related to our realized gains on sales of investments, net for the periods indicated:
Year Ended
December 31, 2021December 31, 2020
($s in thousands)Amortized
cost sold		Realized
Gain		Amortized
cost sold		Realized
Gain
Agency RMBS-designated as AFS$283,471 $3,938 $2,312,343 $82,689 
Agency CMBS-designated as AFS35,106 2,767 2,021,878 225,395 
Total$318,577 $6,705 $4,334,221 $308,084 

Gain (Loss) on Derivative Instruments, Net
Gain (loss) on derivative instruments, net is comprised of unrealized gains and losses due to changes in the fair value of derivative instruments we hold during the period as well as realized gains and losses on derivatives that we terminate or that expire or mature during the period. Results in any given reporting period are generally not comparable to results of another because we frequently adjust our hedging position in any given period and because the fair value of derivative instruments are impacted by market interest rates which continuously change from one period to the next. Because we use derivatives to hedge the impact of changing interest rates on our investment portfolio (including TBA securities), we evaluate our results by comparing how much the gain (loss) on our interest rate hedges offset the gain (loss) on our MBS and TBAs for any given period.
The following table provides information on our financial instruments accounted for as derivative instruments for the periods indicated:
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Year Ended
($s in thousands)December 31, 2021December 31, 2020
Change in fair value of interest rate hedges:
Interest rate swaps (1)
$— $(182,942)
Interest rate swaptions40,330 680 
U.S. Treasury futures61,215 (15,046)
Options on U.S. Treasury futures(2,141)(26,186)
Total gain (loss) on interest rate hedges99,404 (223,494)
TBA dollar roll positions:
Change in fair value (2)
(61,499)36,137 
TBA drop income (3)
43,512 15,067 
Total TBA dollar roll (loss) gain, net(17,987)51,204 
Total gain (loss) on derivative instruments, net$81,417 $(172,290)
(1)Amount for interest rate swaps for the year ended December 31, 2020 is net of periodic interest benefit of $1.6 million.
(2)Changes in fair value for TBA dollar roll positions include unrealized gains (losses) from open TBA contracts and realized gains (losses) on paired off or terminated positions.
(3)TBA drop income represents a portion of $209.6the change in fair value and is calculated by multiplying the notional amount of the net TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.

As interest rates increased during 2021, we increased our hedge position by adding U.S. Treasury futures to hedge duration risk on our lower coupon assets. We reduced our notional balance of interest rate swaptions and did not replace our options on U.S. Treasury futures upon expiration because we believe our lower coupon assets have less convexity to hedge relative to higher coupon assets in the current environment.
For the year ended December 31, 2020, the majority of our net loss on derivative instruments was comprised of realized losses on interest rate swaps, which we either terminated or chose not to replace upon expiration. The decision to terminate or not replace these hedging instruments was because margin requirements increased substantially as a result of the market disruption that occurred at the onset of the COVID-19 pandemic in the first quarter of 2020, and as interest rates rallied, we sold a significant portion of our assets in order to monetize gains and to avoid margin calls when asset prices began to fall.
General and Administrative Expenses
General and administrative expenses increased $3.0 million for the year ended December 31, 2019 was comprised mostly of net unrealized gains in Agency RMBS and CMBS due2021 compared to the overall decline in longer-term interest rates throughout mostyear ended December 31, 2020 due primarily to higher bonus accruals and expenses related to the ongoing implementation of 2019. The following table provides detail ona new investment accounting system as well as new trading and portfolio management systems as part of a large-scale project to streamline and enhance the changes in fair value by type of available-for-sale investment which are recorded as unrealized gains (losses) in other comprehensive income (loss) on our consolidated statements of comprehensive income for the periods indicated:
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Year Ended
December 31,
($ in thousands)20202019
Agency RMBS$(19,270)$85,982 
Agency CMBS(74,161)117,165 
CMBS IO (1)
203 6,486 
Non-Agency other (2)
(317)117 
Unrealized (loss) gain on available-for-sale investments (3)
(93,545)209,750 
Reclassification adjustment for de-designated cash flow hedges— (165)
Total other comprehensive (loss) income$(93,545)$209,585 
(1) Includes Agency and non-Agency issued securities.
(2) Includes non-Agency CMBS and RMBS.
(3) Information regarding realized gains (losses) on investments sold during the periods indicated are included under "Results of Operations-Gain (loss) on Sale of Investments, Net" within this Item 7.

Company’s operating platform.
Please refer to Dynex's Annual Report on Form 10-K for the year ended December 31, 20192020 for the discussion of results of operations for the year ended December 31, 20192020 compared to the year ended December 31, 2018.2019, which is incorporated by reference herein.

Non-GAAP Financial Measures
In addition to the Company's operating results presented in accordance with GAAP, management uses certain non-GAAP financial measures to evaluate results of the Company, which include the following: earnings available for distribution (“EAD”) to common shareholders (formerly core net operating income to common shareholders) (including per common share), adjusted net interest income and the related metric adjusted net interest spread. Because these measures are used in the Company's internal analysis of financial and operating performance, management believes that they provide greater transparency to our investors of management's view of our economic performance.
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Management also believes the presentation of these measures, when analyzed in conjunction with the Company's GAAP operating results, allows investors to more effectively evaluate and compare the performance of the Company to that of its peers, although the Company's presentation of its non-GAAP measures may not be comparable to other similarly-titled measures of other companies. Reconciliations of EAD to common shareholders and adjusted net interest income to the related GAAP financial measures are provided below and within “Results of Operations”.
In September 2021, the Company renamed its non-GAAP measure "core net operating income to common shareholders" to "EAD to common shareholders" in order to clarify what the measure represents. The adjustments made to reconcile "comprehensive income (loss) to common shareholders" to "EAD to common shareholders" are identical to the adjustments previously used to calculate "core net operating income to common shareholders." EAD to common shareholders is a non-GAAP metric used by the Company as a measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and other normal recurring operating income/expenses, net. It is one of several factors our Board of Directors considers in determining the appropriate level of distributions to common shareholders. In addition to the non-GAAP reconciliation set forth below, which derives EAD to common shareholders from GAAP comprehensive income (loss) to common shareholders, EAD to common shareholders can also be determined by adjusting net interest income to include interest rate swap periodic interest benefit/cost, drop income on TBA securities, general and administrative expenses, preferred dividends, and other normal recurring operating income or expense. Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivative instruments, net" on the Company's consolidated statements of comprehensive income, is included in EAD to common shareholders and in adjusted net interest income 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. Management also includes interest rate swap periodic interest benefit/cost, which is also included in "gain (loss) on derivative instruments, net", in adjusted 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 therefore represent a cost of financing in addition to GAAP interest expense. However, these non-GAAP measures do not provide a full perspective on our results of operations, and therefore, their usefulness is limited. For example, these non-GAAP measures do not include the changes in fair value of investments or changes in fair value of and costs of terminating derivative instruments used by management to economically hedge the impact of changing interest rates on the fair value of the Company’s portfolio and book value per common share. As a result, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, the Company's GAAP results as reported on its consolidated statements of comprehensive income. Additionally, similarly titled non-GAAP financial measures used by other companies may not be computed in the same or similar fashion. A reconciliation of the non-GAAP financial measures used in this Annual Report on Form 10-K to the most directly comparable GAAP financial measure is presented below.
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Year Ended
Reconciliations of GAAP to Non-GAAP Financial Measures:December 31, 2021December 31, 2020
($s in thousands except per share data)
Comprehensive income to common shareholders$17,413 $66,472 
Less:
Change in fair value of investments (1)
81,641 (214,559)
Change in fair value of derivative instruments, net (2)
(37,905)188,936 
Preferred stock redemption charge2,987 3,914 
EAD to common shareholders$64,136 $44,763 
Average common shares outstanding32,596,272 23,106,200 
Comprehensive income per common share$0.53 $2.88 
EAD per common share$1.97 $1.94 
Net interest income$54,380 $63,853 
TBA drop income (3)
43,512 15,067 
Net periodic interest benefit of interest rate swaps— 1,579 
Adjusted net interest income$97,892 $80,499 
General and administrative expenses(24,085)(21,080)
Other operating expense, net(1,342)(1,057)
Preferred stock dividends(8,329)(13,599)
EAD to common shareholders$64,136 $44,763 
Adjusted net interest spread (4)
2.10 %1.87 %
(1)Amount includes realized and unrealized gains and losses recorded in net income and other comprehensive income due to changes in the fair value of the Company’s MBS and other investments.
(2)Amount includes unrealized gains and losses from changes in fair value of derivatives and realized gains and losses on terminated derivatives and excludes TBA drop income and net periodic interest benefit from interest rate swaps.
(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.
(4)The reconciliation for adjusted net interest spread to net interest spread is shown in “Results of Operations - Adjusted Net Interest Income”.


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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.investments less related amounts due on our borrowings. Additional sources may also 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 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.
Our liquidity fluctuates based on our investment activities, our financing andleverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our most liquid assets include unrestricted cash and cash equivalents and unencumbered Agency RMBS, CMBS, and CMBS IO whichIO. As of December 31, 2021, our most liquid assets were $533.1 million compared to $415.3 million as of December 31, 2020 compared2020. We increased our available liquidity during 2021 to $224.0 million asprotect our book value and to provide us greater financial flexibility while protecting against market volatility, which we believe has a higher potential of December 31, 2019.occurring given market conditions. Furthermore, there are a number of potential risk events on the horizon including, a shift in Federal Reserve monetary policy, higher interest rates, and widening credit spreads on MBS, all of which have occurred in early 2022.
We analyze 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. In performing these analyses, we will also consider the current state of the fixed income markets and the repurchase agreement markets in order 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. The objective of our analyses is to assess the adequacy of our liquidity to withstand potential adverse events, such as the currentongoing COVID-19 pandemic. We may change our leverage targets based on market conditions and our perceptions
Our perception of the liquidity of our investments.investments and market conditions significantly influence 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 6.3xdeclined to 5.7x shareholders’ equity as of December 31, 2020.2021 from 6.3x as of December 31, 2020 primarily as a result of equity capital we raised in 2021 which increased shareholders’ equity 22% versus an increase in total liabilities plus the cost basis of TBAs of 10%. We include the cost basis of our TBA long positionssecurities in evaluating the Company’sour 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. Management expects leverageWe maintained a lower targeted range of under 7.0x shareholders’ equity throughout 2021 in order to increase modestly overminimize losses in book value, given potential volatility in the first half of 2021 given current expectations of market, conditions. In general, our leverage will increase if we are ableand the lower marginal returns available due to purchase investments with higher expected returns than currently exist today.credit spread tightening.
Our repurchase agreement borrowings are principally uncommitted with terms renewable at the discretion of our lenders and generally have short-term maturities. As such,original terms to maturity of overnight to six months, though in some instances we attemptmay 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. We did not experience any materially adverse changes in terms or conditions in our repurchase agreement borrowings with our counterparties during the year ended December 31, 2020. As part of our
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continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker dealer subsidiaries of regulated financial institutions or primary dealers whom we believe are better capitalized and more durable counterparties.dealers.
The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:
Repurchase Agreements
($ in thousands)Balance Outstanding As of
Quarter End		Average Balance Outstanding For the Quarter EndedMaximum Balance Outstanding During the Quarter Ended
December 31, 2020$2,437,163 $2,500,639 $2,594,683 
September 30, 20202,594,683 2,984,946 3,314,991 
June 30, 20203,314,991 2,580,296 4,408,106 
March 31, 20204,408,106 4,701,010 4,917,731 
December 31, 20194,752,348 4,806,826 4,891,341 
September 30, 20194,872,869 4,955,825 5,191,378 
June 30, 20194,815,452 4,562,992 4,815,452 
March 31, 20194,252,893 3,931,335 4,266,684 
December 31, 20183,267,984 2,992,513 3,269,307 
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Repurchase Agreements
($s in thousands)Balance Outstanding As of
Quarter End		Average Balance Outstanding For the Quarter EndedMaximum Balance Outstanding During the Quarter Ended
December 31, 2021$2,849,916 $2,701,191 $2,873,523 
September 30, 20212,527,065 2,529,023 2,590,185 
June 30, 20212,321,043 2,155,200 2,415,037 
March 31, 20212,032,089 2,158,121 2,437,163 
December 31, 20202,437,163 2,500,639 2,594,683 
September 30, 20202,594,683 2,984,946 3,314,991 
June 30, 20203,314,991 2,580,296 4,408,106 
March 31, 20204,408,106 4,701,010 4,917,731 
December 31, 20194,752,348 4,806,826 4,891,341 

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 financing) 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 some protection against fluctuations in 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 (if the term is renewed) 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 haircutamount required by the lender, the lender has the right to demand additional margin, or collateral, to increase the haircut back to the initial amount. These demands are typically 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. Declines in the fair value of investments occur for any number of reasons including but not limited to changes in interest rates, changes in ratings on an investment, changes in actual or perceived liquidity of the investment, or changes in overall market risk perceptions. Additionally, Fannie Mae and Freddie Mac announce principal payments on Agency MBS in advance of their actual remittance of principal payments, and repurchase agreement lenders generally make margin calls for an amount equal to the product of their advance rate on the repurchase agreement and the announced principal payments on the Agency RMBS. A margin call made by a lender reduces our liquidity until we receive the principal payments from Fannie Mae and Freddie Mac. The weighted average haircut for our borrowings as of December 31, 2021 was consistent with prior periods, which has typically averaged less than 5% for borrowings collateralized with Agency RMBS Agencyand CMBS and between 13-16% for borrowings collateralized with CMBS IO was 4.8%, 4.8%, and 15.6%, respectively, as of December 31, 2020 compared to 4.7%, 4.7%, and 12.8%, respectively, as of December 31, 2019.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”. 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 generally uncommitted nature of the repurchase agreement borrowings. As of December 31, 2020,2021, the Company had repurchase agreement amounts outstanding with 2022 of its 37 available repurchase agreement counterparties and did not have more than 5% of equity at risk with any counterparty or group of related counterparties.
The following table discloses our repurchase agreement amounts outstanding and the value of the related collateral pledged by geographic region of our counterparties as of the dates indicated:
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December 31, 2020December 31, 2019
($ in thousands)Amount OutstandingMarket Value of Collateral PledgedAmount OutstandingMarket Value of Collateral Pledged
North America$1,988,782 $2,134,484 $2,998,440 $3,182,664 
Asia279,901 297,531 972,457 1,023,780 
Europe168,480 177,060 781,451 818,181 
$2,437,163 $2,609,075 $4,752,348 $5,024,625 

We have various financial and operating covenants in certain of our repurchase agreements including, among other things, requirements that we maintain minimum shareholders' equity (usually a set minimum, or a percentage of the highest amount of shareholders' equity since the date of the agreement), limits on maximum decline in shareholders' equity (expressed as a percentage decline in any given period), limits on maximum leverage (as a multiple of shareholders' equity), and requirements to maintain our status as a REIT under the Tax Code and the corresponding provisions of state law and to maintain our listing on the NYSE.New York Stock Exchange. Violations of one or more of these covenants could result in the lender declaring an event of default which would result in the termination of the repurchase agreement and immediate acceleration of amounts due thereunder. In addition, some of the agreements contain cross default features, whereby default with one lender simultaneously causes default under agreements with other lenders. Violations could also restrict us from paying dividends or engaging in other transactions that are necessary for us to maintain our REIT status.
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We monitor and evaluate on an ongoing basis the impact these customary financial covenants may have on our operating and financing flexibility. Currently, 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 December 31, 2020,2021, and we are not aware of any circumstances which could potentially result in our non-compliance in the foreseeable future.

Derivative Instruments
We use certain types of financialDerivative instruments that are accounted for as derivative instruments, including interest rate swaps, futures, options, and long and short positions in TBA securities. Certain of these derivative instrumentswe enter into may require us to post initial margin at inception and daily variation margin based on subsequent changes in their fair value. InDaily variation margin requirements also entitle us to receive collateral from our counterparties if the casevalue of interest rate swaps, our clearing counterparty hasamounts owed to us under the right to require higher initialderivative agreement exceeds the minimum margin in volatile market conditions.requirement. The collateral posted as margin by us is typically in the form of cash or Agency MBS. Counterparties may have to post variation margin to us. Generally, as interest rates decline, we will be required to post collateral with counterparties on our interest rate derivatives and vice versa as interest rates increase.cash. As of December 31, 2020,2021, we had cash collateral posted to our counterparties of $7.1$55.3 million and cash collateral posted as collateralby our counterparties of $1.8 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. Under the terms of these agreements, we may be required to pledge collateral to, or have the right to receive collateral from, our counterparties when initiated or in the event the fair value of our TBA contracts declines. Declines in the fair value of TBA contracts are generally related to such factors as rising interest rates, increases in expected prepayment speeds, or widening spreads. Our TBA contractscounterparty, 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.

Dividends
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. When declaring dividends, our Board of Directors considers the requirements for maintaining our REIT status and maintaining compliance with dividend requirements of the Series C Preferred Stock. In addition, our Board of Directors considers, among other things, our total economic return, EAD to common shareholders, taxable income, gains and losses including carryforwards for tax purposes, the Company's long-term outlook for future performance, and trends in the investment and financing markets. We generally fund our dividend distributions through our cash flows from operations. If we make dividend distributions in excess of our operating cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other strategic reasons, those distributions are generally funded
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either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to the following sections of this Annual Report on Form 10-K for additional important information regarding dividends declared on our taxable income:
•"Federal Income Tax Considerations"Operating and Regulatory Structure" within Part 1, Item 1, "Business";
•Part 1, Item 1A, "Risk Factors"; and
•Part II, Item 5, "Market For Registrant's Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities"

Contractual Obligations and Other Matters
As of December 31, 2020, we do not have any material contractual obligations other than the short-term repurchase agreement amounts discussed above, nor do we believe that any off-balance sheet arrangements exist that are reasonably likely to have a material effect on our current or future financial condition, results of operations, or liquidity other than as discussed above. In addition, we do not have any material commitments for capital expenditures and have not obtained any commitments for funds to fulfill any capital obligations.Securities."

RECENT ACCOUNTING PRONOUNCEMENTS
There were no accounting pronouncements issued during the year ended December 31, 20202021 that are expected to have a material impact on the Company’s financial condition or results of operations. Please refer to Note 1 of the Notes to the Consolidated Financial Statements contained within Part I, Item 81 of this Annual Report on Form 10-K for additional information.

45

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, however, may differ from the estimated amounts we have recorded.
The following discussion provides information on our critical accounting policies that require management's most difficult, subjective or complex judgments, and which may result in materially different results under different assumptions and conditions. Please also refer to Note 1 of our Notes to the Consolidated Financial Statements included within Part II, Item 8 of this Annual Report on Form 10-K for additional information related to significant accounting policies.
Fair Value Measurements. Our Agency MBS, as well as a majority of our non-Agency MBS, are substantially similar to securities that either are actively traded or have been recently traded in their respective market. Pricing services and brokers have access to observable market information through trading desks and various information services. MBS prices are based on prices we receive from third-party pricing services and broker quotes. To determine each security's valuation, the pricing service uses either a market approach or income approach, both of which rely on observable market data. The market approach uses prices and other relevant information that is generated by market transactions of identical or similar securities, while the income approach uses valuation techniques to convert estimated future cash flows to a discounted present value. Management reviews the assumptions and inputs utilized in the valuation techniques. Examples of these observable inputs and assumptions include market interest rates, credit spreads, and projected prepayment speeds, among other things.
In addition, management reviews the prices received for each security by comparing those prices to actual purchase and sale transactions, our internally modeled prices that are calculated based on observable market rates and credit spreads, and the prices that our borrowing counterparties use in financing our securities. If the price of a security is obtained from quoted prices for similar instruments or model-derived valuations whose inputs are observable, the security is classified as a level 2 security. The security is classified as a level 3 security if the inputs are unobservable, resulting in an estimate of fair value based primarily on management's judgment. Please refer to Note 67 of the Notes to the Consolidated Financial
45

Statements contained within Part II, Item 8 of this Annual Report on Form 10-K for additional information on fair value measurements.

FORWARD-LOOKING STATEMENTS
Certain written statements in this Annual Report on Form 10-K that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the 1933 Act and Section 21E of 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, taking into account 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 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 in this Annual Report on Form 10-K may include, but are not limited to statements about:
•Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations, and our views on the future performance of MBS and other investments;
46

•Our views on the macroeconomic environment, monetary and fiscal policy, and conditions in the investment, credit, interest rate and derivatives markets;
•Our views on inflation, market interest rates and market spreads;
���Our views on the effect of actual or proposed actions of the U.S. Federal Reserve the FOMC, the FHFA, or other central banks with respect to monetary policy (including the targeted Federal Funds Rate), and the potential impact of these actions on interest rates, borrowing costs, inflation or unemployment;
•The effect of regulatory initiatives of the Federal Reserve, (including the FOMC),Federal Housing Finance Agency, other financial regulators, and other central banks;
•Our financing strategy including our target leverage ratios, our use of TBA dollar roll transactions, and anticipated trends in financing costs including TBA dollar roll transaction costs, and our hedging strategy including changes to the derivative instruments to which we are a party, and changes to government regulation of hedging instruments and our use of these instruments;
•Our investment portfolio composition and target investments;
•Our investment portfolio performance, including the fair value, yields, and forecasted prepayment speeds of our investments;
•The impact of the COVID-19 pandemic on the economy, as well as certain actions taken by federal, state and local governments in response to the pandemic, and on delinquencies inthe performance of loans underlying our investments;
•Our liquidity and ability to access financing, and the anticipated availability and cost of financing;
•Our capital stock activity including the impact of stock issuances and repurchases;
•The amount, timing, and funding of future dividends;
•Our use of and restrictions on using our tax NOL carryforward;carryforward and other tax loss carryforwards;
•The status of pending litigation;
•The competitive environment in the future, includingFuture competition for, investments and the availability of, financing;investments, financing and capital;
•Estimates of future interest expenses, including related to the Company’s repurchase agreements and derivative instruments;
•The status and effect of legislative reforms and regulatory rule-making or review processes, and the status of reform efforts and other business developments in the repurchase agreement financing market;
•Market, industry and economic trends, and how these trends and related economic data may impact the behavior of market participants and financial regulators;
•Uncertainties regarding ongoing hostilities between Russia and the Ukraine and the related impacts on macroeconomic conditions, including, among other things, interest rates;
•The financial position and credit worthiness of the depository institutions in which the Company’s MBS and cash deposits are held;
•The impact of applicable tax and accounting requirements on the Company;us including our tax treatment of derivative instruments such as TBAs, interest rate swaps, options and futures;
•Our future compliance with covenants in our master repurchase agreements, ISDA agreements, and debt covenants in our debtother contractual agreements;
•Market interest ratesOur reliance on a single service provider of our trading, portfolio management, risk reporting and market spreads; andaccounting services systems;
46

•
The implementation in a timely and cost-effective manner of our operating platform, which includes trading, portfolio management, risk reporting, and accounting services systems, and the anticipated benefits thereof; and
•Possible future effects of the COVID-19 pandemic.
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 of 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 from 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:
47

•the risks and uncertainties referenced in this Annual Report on Form 10-K, especially those incorporated by reference into Part II, Item 1A, “Risk Factors”,Factors,” and in particular, the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto, including the efficacy, distribution, availability and adoption rates of vaccines for COVID-19 and variants thereof;
•our ability to find suitable reinvestment opportunities;
•changes in domestic economic conditions;
•geopolitical events, such as terrorism, war or other military conflict, including increased uncertainty regarding the ongoing hostility between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict;
•changes in interest rates and interest ratecredit 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 servicerservice providers, including our sole third-party service provider for our critical operations and trade functions;
•the loss or unavailability of our loansthird-party service provider’s service and loans underlyingtechnology that supports critical functions of our securities;business related to our trading and borrowing activities due to outages, interruptions, or other failures;
•the level of defaults by borrowers on loans we have securitized;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 System;Reserve;
•the political environment in the U.S.;
•systems failures or cybersecurity incidents; and
•exposure to current and future claims and litigation.


47

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to losses resulting from changes in market factors. Our business strategy exposes us to a variety of market risks, including interest rate, spread, prepayment, credit, liquidity, and reinvestment
48

risks. These risks can and do cause fluctuations in our liquidity, comprehensive income and book value as discussed below.

Interest Rate Risk
Investing in interest-rate sensitive investments such as MBS and TBA securities subjects us to interest rate risk. Interest rate risk results from investing in securities that have a fixed coupon or when the coupon may not immediately adjust for changes in interest rates. Interest rate risk also results from the mismatch between the duration of our assets versus the duration of our liabilities and hedges.
We attempt to manage our exposure to changes in interest rates by entering into interest rate hedging instruments. These instruments help offset the impact of changing interest rates on the market value of our assets and our financing costs. Changes in interest rates impact us in a variety of ways. The amount of the impact will depend on the composition of our portfolio, our hedging strategy, the effectiveness of our hedging instruments as well as the magnitude and the duration of the increasechange in interest rates.
We manage interest rate risk within tolerances set by our Board of Directors. We use interest rate hedging instruments to mitigate the impact of changing interest rates on the market value of our assets and on our interest expense from repurchase agreements used to finance our investments. Our hedging techniquesmethods are highly complex and are partly based on assumedmany factors, including, but not limited to, our estimates with regard to future rates as well as expected levels of prepayments of our assets. If prepayments are slower or faster than assumed, the maturity of our investments will also differ from our expectations, which could reduce the effectiveness of our hedging strategies and may cause losses on such transactions and adversely affect our cash flow. Estimates of prepayment speeds can vary significantly by investor for the same security, and therefore estimates of security and portfolio duration can vary significantly.significantly between market participants.
Because we continuously monitor market conditions, economic conditions, interest rates and other market activity and frequently adjust the composition of our investments and hedges throughout any given period, the projections provided below are limited in usefulness because the modeling assumes no changes to the composition of our investment portfolio and hedging instruments as of the dates indicated. Changes in types of our investments, the returns earned on these investments, future interest rates, credit spreads, the shape of the yield curve, the availability of financing, and/or the mix of our investments and financings including derivative instruments may cause actual results to differ significantly from the modeled results shown in the tables below. There can be no assurance that assumed events used to model the results shown below will occur, or that other events will not occur, that will affect the outcomes; therefore, the modeled results shown in the tables below and all related disclosures constitute forward-looking statements.
The table below shows the projected sensitivity of our net interest income and net periodic interest benefit/cost as of the dates indicated assuming an instantaneous parallel shift in interest rates and no changes in the composition of our investment portfolio:
Projected Change in Net Interest Income and Net Periodic Interest Benefit/Cost Due To
Decrease in Interest Rates ofIncrease in Interest Rates of
50 Basis Points25 Basis Points25 Basis Points50 Basis Points
December 31, 2020 (1)
(1)0.4 %(5.9)%(12.9)%
December 31, 2019 (2)
2.3 %1.3 %(2.2)%(4.8)%
Projected Change in Net Interest Income Due To
Decrease in Interest Rates ofIncrease in Interest Rates of
50 Basis Points25 Basis Points25 Basis Points50 Basis Points
December 31, 2021(1)8.3 %(9.7)%(20.0)%
December 31, 2020(1)0.4 %(5.9)%(12.9)%
(1) Because the Company does not assume financing rates will be less than 0%, a parallel downward shift in interest rates of 50 basis points is not presented as of December 31, 2020.
(2) Projected sensitivity as of December 31, 2019 includes the impact to net periodic interest benefit/cost of interest rate swaps held as of that date.presented.

The projected sensitivity to changesan increase in interest rates on our net interest income and net periodic interest benefit/cost shown in the table above as of December 31, 2021 shows a larger decline in net interest income compared to December 31, 2020 for an increasingbecause portfolio yields are not benefiting as much from slowing prepayments given the higher interest rate environment has increased sinceas of December 31, 2019 because we terminated all2021 versus December 31, 2020, which decreases the benefit of lower amortization expense from higher interest rates.
The projected sensitivity to a decrease in interest rates on our net interest rate swaps in 2020. Given current FOMC monetary policy, management anticipates funding costs to remain low in the near-term, and as such, we shifted our interest rate hedging strategy to options and futures with the principal intention of capital (book value) preservation asincome shown in the two tables below.
The table belowabove as of December 31, 2021 shows a larger increase in net interest income compared to December 31, 2020. This increase is because the forward market funding rate as of December 31, 2021 exceeded 25 basis points, so the projected sensitivityinterest expense for the twelve months subsequent to December 31, 2021 includes the full benefit of a 25 basis point decrease in financing rate. Conversely, the forward funding market value of our financial instruments(1) and the percentage change in shareholders’ equity assuming an instantaneous parallel shift in market interest ratesrate as of the dates indicated:December 31, 2020 was less than 25 basis points,
4849

December 31, 2020
Decrease in Interest Rates ofIncrease in Interest Rates of
100 Basis Points50 Basis Points50 Basis Points100 Basis Points
Type of
Instrument (1)
% of Market Value% of Common Equity% of Market Value% of Common Equity% of Market Value% of Common Equity% of Market Value% of Common Equity
RMBS1.1 %6.5 %0.9 %5.5 %(1.7)%(10.1)%(3.9)%(22.5)%
CMBS0.3 %1.9 %0.2 %1.4 %(0.3)%(1.5)%(0.5)%(3.0)%
CMBS IO0.2 %0.9 %0.1 %0.8 %(0.2)%(1.1)%(0.4)%(2.1)%
TBAs0.9 %5.2 %0.8 %4.6 %(1.5)%(8.9)%(3.4)%(19.6)%
Interest rate hedges(3.4)%(19.6)%(1.9)%(11.0)%3.4 %19.9 %7.5 %43.4 %
Total(0.9)%(5.1)%0.1 %1.3 %(0.3)%(1.7)%(0.7)%(3.8)%
December 31, 2019
Decrease in Interest Rates byIncrease in Interest Rates by
100 Basis Points50 Basis Points50 Basis Points100 Basis Points
Type of
Instrument (1)
% of Market Value% of Common Equity% of Market Value% of Common Equity% of Market Value% of Common Equity% of Market Value% of Common Equity
RMBS0.4 %5.3 %0.5 %5.9 %(0.9)%(11.0)%(2.1)%(25.8)%
CMBS3.3 %41.1 %1.6 %20.0 %(1.5)%(19.1)%(3.0)%(37.2)%
CMBS IO0.3 %3.3 %0.1 %1.6 %(0.1)%(1.6)%(0.2)%(3.1)%
TBAs0.1 %1.4 %0.1 %0.7 %(0.1)%(0.8)%(0.1)%(1.5)%
Interest rate hedges(3.0)%(37.3)%(1.5)%(18.6)%2.3 %29.4 %5.2 %65.5 %
Total1.1 %13.8 %0.8 %9.6 %(0.3)%(3.1)%(0.2)%(2.1)%
so the projected interest expense for the twelve months subsequent to that date did not include the full benefit of a 25 basis point decrease in financing rate.
(1)Changes in market value of our financings are excluded because they are not carried at fair value on our balance sheet. The projections for market value do not assume any change in credit spreads.

Management also considers changes in the shape of the interest rate curves in assessing and managing portfolio interest rate risk. Oftenrisk on the market value of its investments and common equity. Because interest rates do not typically move in a parallel fashion from quarter to quarter. The tablequarter (as can be seen by the graphs for U.S. Treasury and swap rates in Item 7, “Executive Overview”), the tables below showsshow the percentage change in projected sensitivity of the market value of our financial instruments (1) forand the percentage change in shareholders’ equity assuming instantaneous changesparallel shifts and non-parallel shifts in the shape of the U.S. Treasury (“UST”) curve (with similar changes to themarket interest rate swap curves)rates as of the dates indicated:
December 31, 2021
Parallel Decrease in Interest Rates ofParallel Increase in Interest Rates of
100 Basis Points50 Basis Points50 Basis Points100 Basis Points
Type of
Instrument (1)
% of Market Value% of Common Equity% of Market Value% of Common Equity% of Market Value% of Common Equity% of Market Value% of Common Equity
RMBS2.6 %18.6 %1.6 %11.1 %(1.9)%(13.5)%(4.0)%(28.5)%
CMBS0.2 %1.4 %0.1 %0.7 %(0.1)%(0.7)%(0.2)%(1.3)%
CMBS IO0.2 %1.1 %0.1 %0.6 %(0.1)%(0.6)%(0.2)%(1.1)%
TBAs1.4 %9.7 %0.9 %6.1 %(1.1)%(7.5)%(2.3)%(15.9)%
Interest rate hedges(6.9)%(49.1)%(3.5)%(24.6)%3.5 %24.9 %7.0 %49.5 %
Total(2.5)%(18.3)%(0.8)%(6.1)%0.3 %2.6 %0.3 %2.7 %
December 31, 2020
Parallel Decrease in Interest Rates ofParallel Increase in Interest Rates of
100 Basis Points50 Basis Points50 Basis Points100 Basis Points
Type of
Instrument (1)
% of Market Value% of Common Equity% of Market Value% of Common Equity% of Market Value% of Common Equity% of Market Value% of Common Equity
RMBS1.1 %6.5 %0.9 %5.5 %(1.7)%(10.1)%(3.9)%(22.5)%
CMBS0.3 %1.9 %0.2 %1.4 %(0.3)%(1.5)%(0.5)%(3.0)%
CMBS IO0.2 %0.9 %0.1 %0.8 %(0.2)%(1.1)%(0.4)%(2.1)%
TBAs0.9 %5.2 %0.8 %4.6 %(1.5)%(8.9)%(3.4)%(19.6)%
Interest rate hedges(3.4)%(19.6)%(1.9)%(11.0)%3.4 %19.9 %7.5 %43.4 %
Total(0.9)%(5.1)%0.1 %1.3 %(0.3)%(1.7)%(0.7)%(3.8)%
Non-Parallel ShiftsDecember 31, 2021December 31, 2020
Basis Point Change in
2-year UST		Basis Point Change in
10-year UST
% of Market Value (1)
% of Common
Equity
% of Market Value (1)
% of Common
Equity
+2500.3 %2.5 %(0.1)%(1.1)%
+25+500.2 %1.3 %(0.1)%(0.4)%
+50+250.1 %2.5 %(0.5)%(2.7)%
+50+100— %0.1 %(0.2)%(1.2)%
0-25(0.2)%(1.2)%0.1 %0.8 %
-10-50(0.6)%(4.0)%0.3 %1.9 %
-25-75(1.3)%(9.0)%0.2 %1.1 %
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December 31, 2020December 31, 2019
Basis Point Change inPercentage Change inPercentage Change in
2-year UST10-year UST
Market Value of
Investments (1)
Common
Equity
Market Value of
Investments (1)
Common
Equity
+25+50(0.1)%(0.4)%(0.3)%(4.1)%
+50+25(0.5)%(2.7)%(0.2)%(2.6)%
+50+100(0.2)%(1.2)%(0.4)%(4.7)%
-2500.3 %1.7 %— %(0.4)%
-25-750.2 %1.1 %1.0 %12.7 %
-50-100.3 %1.6 %0.1 %1.4 %
(1)Includes changes in market value of our investments and derivative instruments, including TBA securities, but excludes changes in market value of our financings which are not carried at fair value on our balance sheet due to their short-term maturities. The projections for market value do not assume any change in credit spreads.

49Increasing interest rates in both the parallel and non-parallel shifts shown in the tables above as of December 31, 2021 show projected increases in the market value of our investments, net of hedges, and in our common equity because we held a higher notional balance of hedging instruments relative to assets as of December 31, 2021 versus December 31, 2020, which better cushions projected losses in the fair value of our assets and in our common equity in a higher interest rate environment. Conversely, declining interest rate scenarios show projected declines in the market value of our investments, net of hedges, and in our common equity as of December 31, 2021. The higher notional balance of hedges reflects our view of the potential for increasing interest rates in 2022.

Spread Risk
Spread risk is the risk of loss from an increase in the market spread between the yield on an investment versus its benchmark index. Changes in market spreads represent the market's valuation of the perceived riskiness of an asset relative to risk-free rates, and widening spreads reduce the market value of our investments as market participants require additional yield to hold riskier assets. Market spreads could change based on macroeconomic or systemic factors as well as the 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 or FOMCFederal Reserve monetary policy. Likewise, most of our investments are fixed-rate or reset in rate over a period of time, and as interest rates rise, we would expect the market value of these investments to decrease. We do not hedge spread risk given the complexity of hedging credit spreads and in our opinion, the lack of liquid instruments available to use as hedges.
Fluctuations in spreads typically vary based on the type of investment. Sensitivity to changes in market spreads is derived from models that are dependent on various assumptions, and actual changes in market value in response to changes in market spreads could differ materially from the projected sensitivity if actual conditions differ from these assumptions.
The Company's exposure to changes to market spreads did not materially shift as of December 31, 20202021 versus December 31, 2019.2020. The table below shows the projected sensitivity of the market value of our investments (1)given the indicated change in market spreads as of the dates indicated:
December 31, 2020December 31, 2019December 31, 2021December 31, 2020
Percentage Change inPercentage Change inPercentage Change inPercentage Change in
Basis Point Change in Market SpreadsBasis Point Change in Market Spreads
Market Value of Investments (1)
Common
Equity
Market Value of Investments (1)
Common
Equity		Basis Point Change in Market Spreads
Market Value of Investments (1)
% of Common
Equity
Market Value of Investments (1)
% of Common
Equity
+20/+50 (2)
+20/+50 (2)
(1.6)%(9.5)%(1.2)%(15.7)%
+20/+50 (2)
(1.3)%(9.2)%(1.6)%(9.5)%
+10+10(0.8)%(4.4)%(0.6)%(7.3)%+10(0.6)%(4.4)%(0.8)%(4.4)%
-10-100.8 %4.4 %0.6 %7.7 %-100.6 %4.4 %0.8 %4.4 %
-20/-50 (2)
-20/-50 (2)
1.6 %9.5 %1.3 %16.4 %
-20/-50 (2)
1.3 %9.2 %1.6 %9.5 %
(1) Includes changes in market value of our MBS investments, including TBA securities.
(2) Assumes a 20-basis point shift in Agency and non-Agency RMBS and CMBS and a 50-basis point shift in Agency
and non-Agency CMBS IO.

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Prepayment Risk
Prepayment risk is the risk of an early, unscheduled return of principal on an investment. We are subject to prepayment risk from premiums paid on investments, which are amortized as a reduction in interest income using the effective yield method under GAAP. Our comprehensive income and book value per common share may also be negatively impacted by prepayments if the fair value of the investment materially exceeds the par balance of the underlying security. Principal prepayments on our investments are influenced by changes in market interest rates and a variety of economic, geographic, government policy and other factors beyond our control, including GSE policy with respect to loan forbearance and delinquent loan buy-outs. The recently enacted FHFA Adverse Market Refinance Fee, which raises mortgage rates by 0.125% for all but the highest quality borrowers, is another example of government policy which we believe may reduce prepayments.
Loans underlying our CMBS and CMBS IO securities typically have some form of prepayment protection provisions (such as prepayment lock-outs) or prepayment compensation provisions (such as yield maintenance or prepayment penalties). Because CMBS IO consist of rights to interest on the underlying commercial mortgage loan pools and do not have rights to principal payments on the underlying loans, prepayment risk on these securities is particularly acute without these prepayment protection provisions. There are no prepayment protections if the loan defaults and is partially or wholly repaid earlier as a result of loss mitigation actions taken by the underlying loan servicer. Loans in non-Agency CMBS IO securities which are collateralized by income producing properties such as retail shopping centers, hotels.hotels, multifamily apartments and office buildings arehave been at a higher risk of default as a result of the economic impact of the COVID-19 pandemic. Over the last several years, we have not experienced material defaults on CMBS IO loans in our portfolio; however, the ultimate impact on the economy and commercial real estate performance and market values from the COVID-19 pandemic, and correspondingly
50

loan defaults, is currently unknown. Please refer to Item 7, “Financial Condition-CMBS IO” for additional information on the composition of the Company’s investment in CMBS IO.
We seek to manage our prepayment risk on our MBS by diversifying our investments seeking investments which we believe will have superior prepayment performance, and investing in securities which either contain loans for which the underlying borrowers have some disincentive to refinance (such as low principal balance remaining, credit characteristics of the borrower, or geographic location of the property) or have some sort of prepayment prohibition or yield maintenance (as is the case with CMBS and CMBS IO). With respect to RMBS,As of December 31, 2021, we have invested substantially in lower coupon securities, with approximately 84% of our capital allocated in 2.0% and 2.5% coupon Agency RMBS as of December 31, 2020. We also tend to favorand TBA securities in whichbecause we believe the underlying borrowers have some disincentive to refinancetheir market value will not be impacted by prepayments as a result of the size of each loan’s principal balance, credit characteristics of the borrower, or geographic location of the property, among other factors, which we estimate represents approximately 90% of our Agency RMBS investmentmuch as of December 31, 2020.higher coupon assets in an increasing interest rate environment.
Credit Risk
Credit risk is the risk that we will not receive all contractual amounts due on investments that we own due to default by the borrower or due to a deficiency in proceeds from the liquidation of the collateral securing the obligation. Credit losses on loans could result in lower or negative yields on our investments.
Agency RMBS and Agency CMBS have credit risk to the extent that Fannie Mae or Freddie Mac fails to remit payments on the MBS for which they have issued a guaranty of payment. Given the improved financial performance and conservatorship of these entities and the continued support of the U.S. government, we believe this risk is low.
Agency and non-Agency CMBS IO represent the right to excess interest and not principal on the underlying loans. These securities are exposed to the loss of investment basis in the event a loan collateralizing the security liquidates without paying yield maintenance or prepayment penalty. This will typically occur when the underlying loan is in default and proceeds from the disposition of the loan collateral are insufficient to pay the prepayment consideration. To mitigate credit risk of investing in CMBS IO, we invest in primarily AAA-rated securities in senior tranches, which means we receive the highest payment priority and are the last to absorb losses in the event of a shortfall in cash flows.  
Liquidity Risk
We have liquidity risk principally from the use of recourse repurchase agreements to finance our ownership of securities. Our repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed roll-over terms. If we fail to repay the lender at maturity, the lender has the right to immediately sell the collateral and pursue us for any shortfall if the sales proceeds are inadequate to cover the repurchase agreement financing. In
52

addition, declines in the market value of our investments pledged as collateral for repurchase agreement borrowings and for our derivative instruments may result in counterparties initiating margin calls for additional collateral.
Our use of TBA long positions as a means of investing in and financing Agency RMBS also exposes us to liquidity risk in the event that we are unable to roll or terminate our TBA contracts prior to their settlement date. If we are unable to roll or terminate our TBA long positions, we could be required to take physical delivery of the underlying securities and settle our obligations for cash, which could negatively impact our liquidity position or force us to sell assets under adverse conditions if financing is not available to us on acceptable terms.
For further information, including how we attempt to mitigate liquidity risk and monitor our liquidity position and in particular, during the current economic crisis, please refer to “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K.
Reinvestment Risk
We are subject to reinvestment risk as a result of the prepayment, repayment and sales of our investments. In order to maintain our investment portfolio size and our earnings, we need to reinvest capital received from these events into new interest-earning assets or TBA securities. Marketsecurities, and if market yields on new investments are substantially lower than the investments we sold in March. As such, we expect new assets that we add at lower yields than the investments sold will lower, our interest income in the near future.will decline. In addition, based on market conditions, our leverage, and our liquidity profile, we may decide to not reinvest the cash flows we receive from our investment portfolio even when attractive reinvestment opportunities are available, or we may decide to reinvest in assets with lower yield but greater liquidity. If we retain capital or pay dividends to
51

return capital to shareholders rather than reinvest capital, or if we invest capital in lower yielding assets for liquidity reasons, the size of our investment portfolio and the amount of income generated by our investment portfolio will likely decline.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and the related notes, together with the Reports of the Independent Registered Public Accounting Firm thereon, are set forth beginning on page F-1 of this Annual Report on Form 10-K.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.


ITEM 9A.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 31, 20202021 to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 31, 20202021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of inherent limitations, a system of internal
53

control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to a change in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013) in “Internal Control-Integrated Framework.” Based on that evaluation, our principal executive officer and principal financial officer concluded that our internal control over financial reporting was effective as of the end of the period covered by this report.
The Company’s internal control over financial reporting as of December 31, 20202021 has been audited by BDO USA, LLP, the independent registered public accounting firm that also audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K. The attestation report of BDO USA, LLP on the effectiveness of the Company’s internal control over financial reporting appears on page F-4 herein.

ITEM 9B.    OTHER INFORMATION
None.

ITEM 9C.    DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
52
54


PART III.

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 will be included in our definitive proxy statement for use in connection with our 20212022 Annual Meeting of Shareholders (“20212022 Proxy Statement”) under the captions “Executive Officers,” “Election of Directors,” “Committees of the Board,” “Delinquent Section 16(a) Reports,” if applicable, and “Code of Business Conduct and Ethics,” and is incorporated herein by reference.

ITEM 11.    EXECUTIVE COMPENSATION
The information required by Item 11 will be included in the 20212022 Proxy Statement under the captions “Executive Compensation” and “Directors’ Compensation” and is incorporated herein by reference.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as of December 31, 20202021 with respect to our equity compensation plans under which shares of our common stock are authorized for issuance.
Equity Compensation Plan Information
Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and RightsWeighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (1)
Equity Compensation Plans Approved by Shareholders:
2020 Stock and Incentive Plan— $— 2,266,371 
Equity Compensation Plans Not Approved by Shareholders (2)
— — — 
Total— $— 2,266,371 
Equity Compensation Plan Information
Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights (1)
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity Compensation Plans Approved by Shareholders:
2020 Stock and Incentive Plan275,099 $— 1,951,245 
Equity Compensation Plans Not Approved by Shareholders (2)
— — — 
Total275,099 $— 1,951,245 
(1) ReflectsAmount shown reflects the maximum number of shares available tothat may be granted under the 2020 Stock and Incentive Plan in the formissued upon future vesting of stock options, stock appreciation rights, restricted stock restrictedunits if time-based service conditions are met and performance-based stock unit andunits if maximum performance unit awards.goals are achieved.
(2) The Company does not have any equity compensation plans that have not been approved by shareholders.

The remaining information required by Item 12 will be included in the 20212022 Proxy Statement under the caption “Ownership of Stock” and is incorporated herein by reference.

55


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 will be included in the 20212022 Proxy Statement under the captions “Related Person Transactions” and “Director Independence,” and is incorporated herein by reference.
ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 will be included in the 20212022 Proxy Statement under the caption “Audit Information,” and is incorporated herein by reference.

5356



PART IV.


ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) and (a)(2) Financial Statements and Schedules:
1. and 2.Financial Statements and Schedules: The information required by this section of Item 15 is set forth in the Consolidated Financial Statements and Reports of Independent Registered Public Accounting Firm beginning at page F-1 of this Annual Report on Form 10-K. The index to the Financial Statements is set forth at page F-2 of this Annual Report on Form 10-K.
(a)(3) Documents filed as part of this report:
Exhibit No.Description
3.1
Restated Articles of Incorporation, effective June 2, 2014May 14, 2021 (incorporated herein by reference to Exhibit 3.1 to Dynex's Registration StatementCurrent Report on Form S-88-K filed September 17, 2014).
3.1.1
Articles of Amendment of the Restated Articles of Incorporation, effective June 20, 2019 (incorporated herein by reference to Exhibit 3.1.1 to Dynex's Registration Statement on Form 8-A12B/A filed June 24, 2019).
3.1.2
Articles of Amendment to the Restated Articles of Incorporation, effective FebruaryMay 18, 2020 (incorporated herein by reference to Exhibit 3.2 to Dynex's Registration Statement on Form 8-A12B filed February 18, 2020)2021).
3.2
Amended and Restated Bylaws, effective as of June 9, 2020May 11, 2021 (incorporated herein by reference to Exhibit 3.2 to Dynex’s Current Report on Form 8-K filed on June 9, 2020)May 12, 2021).
4.1
Specimen of Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to Dynex's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019).
4.2
Specimen of 7.625% Series B Cumulative Redeemable Preferred Stock Certificate (incorporated herein by reference to Exhibit 4.1 to Dynex’s Current Report on Form 8-K filed April 16, 2013).
4.3
Specimen of 6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock Certificate (incorporated herein by reference to Exhibit 4.4 to Dynex's Registration Statement on Form 8-A12B8-A12B filed February 18, 2020).
4.4
Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (filed herewith).
10.1*
Amended and Restated Employment Agreement, dated as of August 31, 2020, between Dynex Capital, Inc. and Byron L. Boston (incorporated herein by reference to Exhibit 10.1 to Dynex's Current Report on Form 8-K filed September 3, 2020).
10.2*
Employment Agreement, dated as of August 28, 2020, between Dynex Capital, Inc. and Smriti L. Popenoe (incorporated herein by reference to Exhibit 10.2 to Dynex's Current Report on Form 8-K filed September 3, 2020).
10.2.1*
Letter Agreement, dated as of December 18, 2020, between Dynex Capital, Inc. and Smriti L. Popenoe (incorporated herein by reference to Exhibit 10.1 to Dynex’s Current Report on Form 8-K filed December 18, 2020).
10.3*
Employment Agreement, dated as of August 28, 2020, between Dynex Capital, Inc. and Stephen J. Benedetti (incorporated herein by reference to Exhibit 10.3 to Dynex's Current Report on Form 8-K filed September 3, 2020).
10.18*
Non-employee directors’ annual compensation for Dynex Capital, Inc. (filed herewith).
54

Exhibit No.Description
10.23
Master Repurchase and Securities Contract dated as of August 6, 2012 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.23 to Dynex’s Current Report on Form 8-K filed August 8, 2012).
10.23.2
Amendment No. 2 to Master Repurchase and Securities Contract dated as of February 5, 2015 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.23.2 to Dynex’s Current Report on Form 8-K filed February 11, 2015).
10.23.3
Amendment No. 3 to Master Repurchase and Securities Contract dated as of April 29, 2016 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.23.3 to Dynex’s Current Report on Form 8-K filed May 3, 2016).
10.23.4
Amendment No. 4 to Master Repurchase and Securities Contract dated as of May 12, 2017 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.23.4 to Dynex’s Current Report on Form 8-K filed May 17, 2017).
57

Exhibit No.Description
10.23.5
Amendment No. 5 to Master Repurchase and Securities Contract dated as of May 10, 2019 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.23.5 to Dynex's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019).
10.23.6
Amendment No. 6 to Master Repurchase and Securities Contract dated as of June 11, 2019 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.23.6 to Dynex’s Current Report on Form 8-K filed June 13, 2019).
10.23.7
Amendment No. 7 to Master Repurchase and Securities Contract dated as of June 8, 2021 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.23.7 to Dynex’s Current Report on Form 8-K filed June 9, 2021).
10.23.8
Amendment No. 8 to Master Repurchase and Securities Contract dated as of January 21, 2022 between Issued Holdings Capital Corporation, Dynex Capital, Inc. (as guarantor) and Wells Fargo Bank, N.A. (filed herewith).
10.24
Guarantee Agreement dated as of August 6, 2012 by Dynex Capital, Inc. in favor of Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 10.24 to Dynex’s Current Report on Form 8-K filed August 8, 2012).
10.24.2
Amendment No. 2 to Guarantee Agreement for Dynex Capital, Inc., in favor of Wells Fargo Bank, National Association, dated June 11, 2019 (incorporated herein by reference to Exhibit 10.24.2 to Dynex’s Current Report on Form 8-K filed June 13, 2019).
10.28*
Dynex Capital, Inc. Executive Incentive Plan (as amended January 1, 2019) (incorporated herein by reference to Exhibit 10.28 to Dynex’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).
10.29
Equity Distribution Agreement among Dynex Capital, Inc., Ladenburg Thalmann & Co. Inc. and JonesTrading Institutional Services LLC, dated November 21, 2016 (incorporated herein by reference to Exhibit 10.29 to Dynex’s Current Report on Form 8-K filed November 22, 2016).
10.29.1
Amendment No. 1, dated September 4, 2018, to Equity Distribution Agreement by and among Dynex Capital, Inc., Ladenburg Thalmann & Co. Inc., and JonesTrading Institutional Services LLC (incorporated herein by reference to Exhibit 10.29.1 to Dynex’s Current Report on Form 8-K filed September 4, 2018).
10.29.2
Amendment No. 2, dated August 4, 2020, to Equity Distribution Agreement by and among Dynex Capital, Inc., Ladenburg Thalmann & Co. Inc., and JonesTrading Institutional Services LLC (incorporated herein by reference to Exhibit 10.29.2 to Dynex’s Current Report on Form 8-K filed August 5, 2020).
10.35
Distribution Agreement, dated June 29, 2018, among J.P. Morgan Securities LLC, JMP Securities LLC, and Dynex Capital, Inc. (incorporated herein by reference to Exhibit 10.35 to Dynex’s Current Report on Form 8-K filed June 29, 2018).
10.35.1
Amendment No. 1 to Distribution Agreement, dated May 31, 2019, among J.P. Morgan Securities LLC, JMP Securities LLC, JonesTrading Institutional Services LLC, and Dynex Capital, Inc. (incorporated herein by reference to Exhibit 10.1 to Dynex’s Current Report on Form 8-K filed May 31, 2019).
55

Exhibit No.10.35.2
DescriptionAmendment No. 2, dated August 3, 2021, to the Distribution Agreement by and among Dynex Capital, Inc., J.P. Morgan Securities LLC, JMP Securities LLC, JonesTrading Institutional Services LLC and BTIG, LLC (incorporated herein by reference to Exhibit 10.1 to Dynex’s Current Report on Form 8-K filed August 3, 2021).
10.36*
Amended and Restated Dynex Capital, Inc. 2018 Stock and Incentive Plan, as amended and restated effective as of June 20, 2019 (incorporated herein by reference to ExhibitExhibit 10.36 to Dynex’s Annual Report on Form 10-K for the year ended December 31, 2019).
10.38*
Form of Restricted Stock Agreement for Executive Officers (for awards on or after February 27, 2019) under the Dynex Capital, Inc. 2018 Stock and Incentive Plan (incorporated herein by reference to Exhibit 10.38 to Dynex’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019).
10.39
Underwriting Agreement, dated February 13, 2020, among Dynex Capital, Inc. and J.P. Morgan Securities LLC, RBC Capital Markets, LLC and Keefe, Bruyette & Woods, Inc. acting as representatives of the underwriters named therein (incorporated herein by reference to Exhibit 1.1 to Dynex’s Current Report on Form 8-K filed on February 19, 2020).
10.40*
Dynex Capital, Inc. Annual Cash Incentive Plan, amended and restated effective as of January 1, 2020 (incorporated2021 (incorporated herein by reference to Exhibit 10.40 to Dynex’s CurrentDynex’s Quarterly Report on Form 8-K filed May 1, 2020)10-Q for the quarter ended June 30, 2021).
10.41*
Dynex Capital, Inc. 2020 Stock and Incentive Plan, effective June 9, 2020 (incorporated herein by reference to Exhibit 10.41 to Dynex’s Current Report on Form 8-K filed June 9, 2020).
10.41.1*
Form of Restricted Stock Agreement for Non-Employee Directors (approved June 9, 2020)May 11, 2021) under the Dynex Capital, Inc. 2020 Stock and Incentive Plan (incorporated herein by reference to Exhibit 10.41.1 to Dynex’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020)2021).
10.41.2*
Form of Restricted Stock Unit Award Agreement for Executive Officers (for awards on or after May 26, 2021) under the Dynex Capital, Inc. 2020 Stock and Incentive Plan (incorporated herein by reference to Exhibit 10.41.2 to Dynex’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).
10.41.3*
Form of Performance Unit Award Agreement for Executive Officers (for awards on or after May 26, 2021) under the Dynex Capital, Inc. 2020 Stock and Incentive Plan (incorporated herein by reference to Exhibit 10.41.3 to Dynex’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021).
58

Exhibit No.Description
10.41.4*
Form of Performance Unit Award Agreement for Executive Officers (for awards on or after February 23, 2022) under the Dynex Capital, Inc. 2020 Stock and Incentive Plan (filed herewith).
10.41.5*
Form of Restricted Stock Unit Award Agreement for Executive Officers (for awards on or after February 23, 2022) under the Dynex Capital, Inc. 2020 Stock and Incentive Plan (filed herewith).
10.42
Underwriting Agreement, dated January 28, 2021, between Dynex Capital, Inc. and J.P. Morgan Securities LLC acting as the representative of the underwriters named therein (incorporated herein by reference to Exhibit 1.1 to Dynex’s Current Report on Form 8-K filed January 29, 2021).
10.43
Underwriting Agreement, dated March 3, 2021, between Dynex Capital, Inc. and J.P. Morgan Securities LLC acting as the representative of the underwriters named therein (incorporated herein by reference to Exhibit 1.1 to Dynex’s Current Report on Form 8-K filed March 5, 2021).
21.1
List of consolidated entities of Dynex Capital, Inc. (filed herewith)(incorporated herein by reference to Exhibit 21.1 to Dynex’s Annual Report on Form 10-K for the year ended December 31, 2021).
23.1
Consent of BDO USA, LLP (filed herewith).
31.1
Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2
Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1
Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101The following materials from Dynex Capital, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2020,2021, formatted in iXBRL (Inline Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Statements of Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to the Consolidated Financial Statements.
104The cover page from Dynex Capital, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2020,2021, formatted in iXBRL (Inline Extensible Business Reporting Language) (included with Exhibit 101).
* Denotes management contract.
(b)    Exhibits: See Item 15(a)(3) above.
(c)    Financial Statement Schedules: None.


ITEM 16.    FORM 10-K SUMMARY

None.
5659

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


DYNEX CAPITAL, INC.
Date:March 1, 2021February 28, 2022/s/ Stephen J. Benedetti
Stephen J. Benedetti
Executive Vice President, Chief Financial Officer and Chief Operating Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

SignatureTitleDate
/s/ Byron L. BostonChief Executive Officer,March 1, 2021February 28, 2022
Byron L. Boston Co-Chief Investment Officer, and Director
(Principal Executive Officer)
/s/ Stephen J. BenedettiExecutive Vice President, Chief FinancialMarch 1, 2021February 28, 2022
Stephen J. BenedettiOfficer and Chief Operating Officer
(Principal Financial Officer)
/s/ Jeffrey L. ChildressVice President and ControllerMarch 1, 2021February 28, 2022
Jeffrey L. Childress(Principal Accounting Officer)
/s/ Julia L. CoronadoDirectorMarch 1, 2021February 28, 2022
Julia L. Coronado
/s/ Michael R. HughesDirectorMarch 1, 2021February 28, 2022
Michael R. Hughes
/s/ Joy D. PalmerDirectorMarch 1, 2021February 28, 2022
Joy D. Palmer
/s/ Robert A. SalcettiDirectorMarch 1, 2021February 28, 2022
Robert A. Salcetti
/s/ David H. StevensDirectorMarch 1, 2021February 28, 2022
David H. Stevens

5760


DYNEX CAPITAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS AND

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

For Inclusion in Annual Report on Form 10-K

Filed with Securities and Exchange Commission

December 31, 20202021



F-1

DYNEX CAPITAL, INC.
INDEX TO FINANCIAL STATEMENTS


Page
Reports of Independent Registered Public Accounting FirmFirm:
BDO USA, LLP; Richmond, Virginia; PCAOB ID #243
F-3
Financial Statements As of December 31, 20202021 and December 31, 20192020 and For the Years Ended December 31, 2020,2021, December 31, 2019,2020, and December 31, 2018:2019:
Consolidated Balance Sheets
F-7
Consolidated Statements of Comprehensive Income (Loss)
F-8
Consolidated Statements of Shareholders’ Equity
F-9
Consolidated Statements of Cash Flows
F-11
Notes to the Consolidated Financial Statements
F-12



F-2

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
Dynex Capital, Inc.
Glen Allen, Virginia

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Dynex Capital, Inc. and subsidiaries (the “Company”) as of December 31, 20202021 and 2019,2020, the related consolidated statements of comprehensive income, (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020,2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20202021 and 2019,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20202021, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020,2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 1, 2021February 28, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period
F-3

audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i)(1) relates to accounts or disclosures that are material to the consolidated financial statements and (ii)(2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinionopinions on the critical audit matter or on the accounts or disclosures to which it relates.


F-3

Valuation of Investments in Mortgage-Backed Securities

As discussed in Notes 1, 2,3, and 67 to the consolidated financial statements, the Company’s investments in mortgage-backed securities (“MBS”) at fair value were $2.6$3.2 billion at December 31, 2020.2021. The fair value for the MBS portfolio is driven by the stated security coupon interest rate, maturity, yield, and prepayment speeds. The Company’s management derived fair value estimates using prices obtained from third-party pricing services and broker quotes.

We identified the valuation of investments in MBS as a critical audit matter. The principal considerations for our determination include the magnitude of the MBS portfolio fair value at December 31, 2020,2021, and the inherent estimation uncertainty associated with fair value measurements, including the use of individuals with specialized knowledge and skill in valuation.

measurements. The primary procedures we performed to address this critical audit matter included:

•Testing the effectiveness of controls over compliance with the Company’s pricing calculation policy and approval of prices used in the determination of fair value.

•Utilizing personnel with specialized knowledge and skill in valuation to assist in evaluating the reasonableness of the Company’s calculated fair values by developing an independent estimate of fair value for MBS selected for testing using key assumptions and market data sources, including the market interest rates, credit spreads, and projected prepayment speeds, and comparing those fair value estimates to the fair value determined by the Company.


We have served as the Company's auditor since 2005.

/s/ BDO USA, LLP

Richmond, Virginia
March 1, 2021February 28, 2022
F-4



Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Dynex Capital, Inc.Inc
Glen Allen, Virginia

Opinion on Internal Control over Financial Reporting

We have audited Dynex Capital, Inc.’sInc’s (the “Company’s”) internal control over financial reporting as of December 31, 2020,2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2021, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and subsidiaries as of December 31, 20202021 and 2019,2020, the related consolidated statements of comprehensive income, (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020,2021, and the related notes and our report dated March 1, 2021February 28, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
F-5

preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
F-5

unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ BDO USA, LLP

Richmond, Virginia
March 1, 2021

February 28, 2022

F-6

DYNEX CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(amounts$s in thousands except per share data)
 December 31, 2020December 31, 2019
ASSETS
Cash and cash equivalents$295,602 $62,582 
Restricted cash7,077 71,648 
Mortgage-backed securities (including pledged of $2,467,859 and $5,024,625, respectively), at fair value2,596,255 5,188,163 
Mortgage loans held for investment (includes $6,264 and $8,857 at fair value, respectively); see Note 36,264 9,405 
Receivable for securities sold150,432 0 
Derivative assets11,342 4,290 
Accrued interest receivable14,388 26,209 
Other assets, net6,394 8,307 
Total assets$3,087,754 $5,370,604 
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Liabilities:  
Repurchase agreements$2,437,163 $4,752,348 
Payable for unsettled securities5 6,180 
Non-recourse collateralized financing111 2,733 
Derivative liabilities1,634 974 
Accrued interest payable1,410 15,585 
Accrued dividends payable5,814 6,280 
Other liabilities8,164 3,516 
 Total liabilities2,454,301 4,787,616 
Shareholders’ equity:  
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; 7,248,330 and 6,788,330 shares issued and outstanding, respectively ($181,208 and $169,708 aggregate liquidation preference, respectively)$174,564 $162,807 
Common stock, par value $0.01 per share, 90,000,000 shares authorized;
23,697,970 and 22,945,993 shares issued and outstanding, respectively
237 229 
Additional paid-in capital869,495 858,347 
Accumulated other comprehensive income80,261 173,806 
Accumulated deficit(491,104)(612,201)
 Total shareholders’ equity633,453 582,988 
 Total liabilities and shareholders’ equity$3,087,754 $5,370,604 
 December 31, 2021December 31, 2020
ASSETS
Cash$366,023 $295,602 
Cash collateral posted to counterparties55,284 14,133 
Mortgage-backed securities (including pledged of $3,011,319 and $2,467,859, respectively), at fair value3,181,839 2,596,255 
Mortgage loans held for investment, at fair value4,268 6,264 
Receivable for securities pending settlement2,771 150,432 
Derivative assets7,969 11,342 
Accrued interest receivable14,184 14,388 
Other assets, net7,400 6,394 
Total assets$3,639,738 $3,094,810 
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Liabilities:  
Repurchase agreements$2,849,916 $2,437,163 
Derivative liabilities2,471 1,009 
Cash collateral posted by counterparties1,834 7,681 
Accrued interest payable1,365 1,410 
Accrued dividends payable6,541 5,814 
Other liabilities6,332 8,280 
 Total liabilities2,868,459 2,461,357 
Shareholders’ equity:  
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized; 4,460,000 and 7,248,330 shares issued and outstanding, respectively ($111,500 and $181,208 aggregate liquidation preference, respectively)107,843 174,564 
Common stock, par value $0.01 per share, 90,000,000 shares authorized;
36,665,805 and 23,697,970 shares issued and outstanding, respectively
367 237 
Additional paid-in capital1,107,792 869,495 
Accumulated other comprehensive income6,729 80,261 
Accumulated deficit(451,452)(491,104)
 Total shareholders’ equity771,279 633,453 
 Total liabilities and shareholders’ equity$3,639,738 $3,094,810 
See notes to the consolidated financial statements.

F-7

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts$s in thousands except per share data)
Year EndedYear Ended
December 31,December 31,
202020192018 202120202019
Interest incomeInterest income$96,468 $170,168 $110,051 Interest income$60,051 $96,468 $170,168 
Interest expenseInterest expense(32,615)(114,111)(59,574)Interest expense(5,671)(32,615)(114,111)
Net interest income Net interest income63,853 56,057 50,477  Net interest income54,380 63,853 56,057 
Gain (loss) on sale of investments, net308,084 (5,755)(23,373)
Loss on derivative instruments, net(172,290)(186,949)(3,461)
Gain (loss) on investments, net20 (56)52 
Realized gain (loss) on sale of investments, netRealized gain (loss) on sale of investments, net6,705 308,084 (5,755)
Unrealized (loss) gain on investments, netUnrealized (loss) gain on investments, net(14,814)20 (56)
Gain (loss) on derivative instruments, netGain (loss) on derivative instruments, net81,417 (172,290)(186,949)
Other operating (expense) income, netOther operating (expense) income, net(1,057)22 (1,567)Other operating (expense) income, net(1,342)(1,057)22 
General and administrative expenses:General and administrative expenses:General and administrative expenses:
Compensation and benefitsCompensation and benefits(11,743)(7,520)(6,605)Compensation and benefits(12,757)(11,743)(7,520)
Other general and administrativeOther general and administrative(9,337)(8,467)(8,500)Other general and administrative(11,328)(9,337)(8,467)
Net income (loss)Net income (loss)177,530 (152,668)7,023 Net income (loss)102,261 177,530 (152,668)
Preferred stock dividendsPreferred stock dividends(13,599)(12,967)(11,801)Preferred stock dividends(8,329)(13,599)(12,967)
Preferred stock redemption chargePreferred stock redemption charge(3,914)0 0 Preferred stock redemption charge(2,987)(3,914)— 
Net income (loss) to common shareholdersNet income (loss) to common shareholders$160,017 $(165,635)$(4,778)Net income (loss) to common shareholders$90,945 $160,017 $(165,635)
Other comprehensive income:Other comprehensive income:Other comprehensive income:
Unrealized gain (loss) on available-for-sale investments, net$214,539 $203,995 $(50,218)
Reclassification adjustment for (gain) loss on sale of available-for-sale investments, net(308,084)5,755 23,373 
Unrealized (loss) gain on available-for-sale investments, netUnrealized (loss) gain on available-for-sale investments, net$(66,827)$214,539 $203,995 
Reclassification adjustment for realized (gain) loss on available-for-sale investments, netReclassification adjustment for realized (gain) loss on available-for-sale investments, net(6,705)(308,084)5,755 
Reclassification adjustment for de-designated cash flow hedgesReclassification adjustment for de-designated cash flow hedges0 (165)(237)Reclassification adjustment for de-designated cash flow hedges— — (165)
Total other comprehensive (loss) incomeTotal other comprehensive (loss) income(93,545)209,585 (27,082)Total other comprehensive (loss) income(73,532)(93,545)209,585 
Comprehensive income (loss) to common shareholders$66,472 $43,950 $(31,860)
Comprehensive income to common shareholdersComprehensive income to common shareholders$17,413 $66,472 $43,950 
Net income (loss) per common share-basic and diluted$6.93 $(7.01)$(0.25)
Weighted average common shares-basic and diluted23,106 23,620 19,235 
Weighted average common shares-basicWeighted average common shares-basic32,596,272 23,106,200 23,620,125 
Weighted average common shares-dilutedWeighted average common shares-diluted32,761,331 23,106,200 23,620,125 
Net income (loss) per common share-basicNet income (loss) per common share-basic$2.79 $6.93 $(7.01)
Net income (loss) per common share-dilutedNet income (loss) per common share-diluted$2.78 $6.93 $(7.01)
See notes to the consolidated financial statements.
F-8

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
($s in thousands)
Preferred StockCommon StockAdditional
Paid-in
Capital		AOCIAccumulated
Deficit		Total Shareholders’ Equity
SharesAmountSharesAmount
Balance as of
December 31, 2017		5,888,680 $141,294 18,610,516 $186 $776,245 $(8,697)$(351,970)$557,058 
Stock issuance65,914 1,599 2,276,549 22 41,836 — — 43,457 
Restricted stock granted, net of amortization— — 71,053 1 1,229 — — 1,230 
Adjustments for tax withholding on share-based compensation— — (19,045)0 (364)— — (364)
Stock issuance costs— (10)— — (85)— — (95)
Net income— — — — — — 7,023 7,023 
Dividends on preferred stock— — — — — — (11,801)(11,801)
Dividends on common stock— — — — — — (42,273)(42,273)
Other comprehensive loss— — — — — (27,082)— (27,082)
Balance as of
December 31, 2018		5,954,594 $142,883 20,939,073 $209 $818,861 $(35,779)$(399,021)$527,153 
Stock issuance833,736 19,924 3,664,418 36 63,852 — — 83,812 
Restricted stock granted, net of amortization— — 68,004 1 1,205 — — 1,206 
Stock repurchase— — (1,709,271)(17)(25,017)— — (25,034)
Adjustments for tax withholding on share-based compensation— — (16,231)0 (296)— — (296)
Stock issuance costs— — — — (258)— — (258)
Net loss— — — — — — (152,668)(152,668)
Dividends on preferred stock— — — — — — (12,967)(12,967)
Dividends on common stock— — — — — — (47,545)(47,545)
Other comprehensive income— — — — — 209,585 — 209,585 
Balance as of
December 31, 2019		6,788,330 $162,807 22,945,993 $229 $858,347 $173,806 $(612,201)$582,988 
Cumulative effect of change in accounting principle— — — — — — (548)(548)
Stock issuance4,460,000 107,843 558,583 6 9,969 — — 117,818 
Redemption of preferred stock(4,000,000)(96,086)— — — — (3,914)(100,000)
Restricted stock granted, net of amortization— — 239,661 2 1,821 — — 1,823 
Preferred StockCommon StockAdditional
Paid-in
Capital		AOCIAccumulated
Deficit		Total Shareholders’ Equity
SharesAmountSharesAmount
Balance as of
December 31, 2018		5,954,594 $142,883 20,939,073 $209 $818,861 $(35,779)$(399,021)$527,153 
Stock issuance833,736 19,924 3,664,418 36 63,852 — — 83,812 
Restricted stock granted, net of amortization— — 68,004 1 1,205 — — 1,206 
Stock repurchase— — (1,709,271)(17)(25,017)— — (25,034)
Adjustments for tax withholding on share-based compensation— — (16,231)— (296)— — (296)
Stock issuance costs— — — — (258)— — (258)
Net loss— — — — — — (152,668)(152,668)
Dividends on preferred stock— — — — — — (12,967)(12,967)
Dividends on common stock— — — — — — (47,545)(47,545)
Other comprehensive income— — — — — 209,585 — 209,585 
Balance as of
December 31, 2019		6,788,330 $162,807 22,945,993 $229 $858,347 $173,806 $(612,201)$582,988 
Cumulative effect of adopting accounting standard ASU 2019-05— — — — — — (548)(548)
Adjusted Balance, January 1, 20206,788,330 $162,807 22,945,993 $229 $858,347 $173,806 $(612,749)$582,440 
Stock issuance4,460,000 107,843 558,583 6 9,969 — — 117,818 
Redemption of preferred stock(4,000,000)(96,086)— — — — (3,914)(100,000)
Restricted stock granted, net of amortization— — 239,661 2 1,821 — — 1,823 
Stock repurchase— — (32,925)— (372)— — (372)
Adjustments for tax withholding on share-based compensation— — (13,342)— (245)— — (245)
Stock issuance costs— — — — (25)— — (25)
Net income— — — — — — 177,530 177,530 
Dividends on preferred stock— — — — — — (13,599)(13,599)
Dividends on common stock— — — — — — (38,372)(38,372)
Other comprehensive loss— — — — — (93,545)— (93,545)
Balance as of
December 31, 2020		7,248,330 $174,564 23,697,970 $237 $869,495 $80,261 $(491,104)$633,453 
Stock issuance— — 12,972,447 130 237,000 — — 237,130 
F-9

Preferred StockCommon StockAdditional
Paid-in
Capital		AOCIAccumulated
Deficit		Total Shareholders’ EquityPreferred StockCommon StockAdditional
Paid-in
Capital		AOCIAccumulated
Deficit		Total Shareholders’ Equity
SharesAmountSharesAmountSharesAmountSharesAmount
Stock repurchase— — (32,925)0 (372)— — (372)
Redemption of preferred stockRedemption of preferred stock(2,788,330)(66,721)— — — — (2,987)(69,708)
Restricted stock granted, net of amortizationRestricted stock granted, net of amortization— — 40,027 — 1,816 — — 1,816 
Other share-based compensation, net of amortizationOther share-based compensation, net of amortization— — — — 700 — — 700 
Adjustments for tax withholding on share-based compensationAdjustments for tax withholding on share-based compensation— — (13,342)0 (245)— — (245)Adjustments for tax withholding on share-based compensation— — (44,639)— (853)— — (853)
Stock issuance costsStock issuance costs— — — — (25)— — (25)Stock issuance costs— — — — (366)— — (366)
Net incomeNet income— — — — — — 177,530 177,530 Net income— — — — — — 102,261 102,261 
Dividends on preferred stockDividends on preferred stock— — — — — — (13,599)(13,599)Dividends on preferred stock— — — — — — (8,329)(8,329)
Dividends on common stockDividends on common stock— — — — — — (38,372)(38,372)Dividends on common stock— — — — — — (51,293)(51,293)
Other comprehensive lossOther comprehensive loss— — — — — (93,545)— (93,545)Other comprehensive loss— — — — — (73,532)— (73,532)
Balance as of
December 31, 2020		7,248,330 $174,564 23,697,970 $237 $869,495 $80,261 $(491,104)$633,453 
Balance as of
December 31, 2021		Balance as of
December 31, 2021		4,460,000 $107,843 36,665,805 $367 $1,107,792 $6,729 $(451,452)$771,279 
See notes to the consolidated financial statements.
F-10

DYNEX CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($s in thousands)
Year Ended
 December 31,
 202020192018
Operating activities:  
Net income (loss)$177,530 $(152,668)$7,023 
Adjustments to reconcile net income (loss) to cash provided by operating activities: 
Loss on derivative instruments, net172,290 186,949 3,461 
(Gain) loss on sale of investments, net(308,084)5,755 23,373 
(Gain) loss on investments, net(20)56 (52)
Amortization of investment premiums, net126,395 133,690 143,036 
Other amortization and depreciation, net1,989 1,684 1,232 
Stock-based compensation expense1,823 1,205 1,231 
Decrease (increase) in accrued interest receivable11,821 (5,190)(1,200)
(Decrease) increase in accrued interest payable(14,175)5,277 6,574 
Change in other assets and liabilities, net4,383 (1,412)(4,118)
Net cash provided by operating activities173,952 175,346 180,560 
Investing activities:  
Purchase of investments(2,436,953)(2,991,311)(1,789,272)
Principal payments received on investments474,731 537,481 188,898 
Proceeds from sales of investments4,491,873 1,033,066 733,064 
Principal payments received on mortgage loans held for investment2,854 2,103 4,210 
Net payments on derivatives, including terminations(184,857)(184,920)(6,135)
Other investing activities0 (121)(102)
Net cash provided by (used in) investing activities2,347,648 (1,603,702)(869,337)
Financing activities:  
Borrowings under repurchase agreements31,054,242 102,505,318 105,236,233 
Repayments of repurchase agreement borrowings(33,369,427)(101,020,954)(104,534,151)
Principal payments on non-recourse collateralized financing(2,646)(738)(2,094)
Proceeds from issuance of preferred stock107,843 19,924 1,599 
Proceeds from issuance of common stock9,891 63,889 41,858 
Cash paid for redemption of preferred stock(100,000)0 0 
Cash paid for stock issuance costs0 (185)(10)
Cash paid for common stock repurchases(372)(25,034)0 
Payments related to tax withholding for stock-based compensation(245)(296)(364)
Dividends paid(52,437)(68,042)(52,790)
Net cash (used in) provided by financing activities(2,353,151)1,473,882 690,281 
Net increase in cash, cash equivalents, and restricted cash168,449 45,526 1,504 
Cash, cash equivalents, and restricted cash at beginning of period134,230 88,704 87,200 
Cash, cash equivalents, and restricted cash at end of period$302,679 $134,230 $88,704 
Supplemental Disclosure of Cash Activity:  
Cash paid for interest$46,054 $108,986 $53,205 
Year Ended
 December 31,
 202120202019
Operating activities:  
Net income (loss)$102,261 $177,530 $(152,668)
Adjustments to reconcile net income (loss) to cash provided by operating activities: 
Realized (gain) loss on sale of investments, net(6,705)(308,084)5,755 
Unrealized loss (gain) on investments, net14,814 (20)56 
(Gain) loss on derivative instruments, net(81,417)172,290 186,949 
Amortization of investment premiums, net118,171 126,395 133,690 
Other amortization and depreciation, net2,308 1,989 1,684 
Share-based compensation expense2,516 1,823 1,205 
Decrease (increase) in accrued interest receivable204 11,821 (5,190)
(Decrease) increase in accrued interest payable(45)(14,175)5,277 
Change in other assets and liabilities, net(5,137)4,383 (1,412)
Net cash provided by operating activities146,970 173,952 175,346 
Investing activities:  
Purchase of investments(1,541,678)(2,436,953)(2,991,311)
Principal payments received on investments430,856 474,731 537,481 
Proceeds from sales of investments472,943 4,491,873 1,033,066 
Principal payments received on mortgage loans held for investment2,101 2,854 2,103 
Net receipts (payments) on derivatives, including terminations86,247 (185,482)(184,920)
(Decrease) increase in cash collateral posted by counterparties(5,847)5,681 (1,717)
Other investing activities— — (121)
Net cash (used in) provided by investing activities(555,378)2,352,704 (1,605,419)
Financing activities:  
Borrowings under repurchase agreements12,635,222 31,054,242 102,505,318 
Repayments of repurchase agreement borrowings(12,222,469)(33,369,427)(101,020,954)
Principal payments on non-recourse collateralized financing(118)(2,646)(738)
Proceeds from issuance of preferred stock— 107,843 19,924 
Proceeds from issuance of common stock237,130 9,891 63,889 
Cash paid for redemption of preferred stock(69,708)(100,000)— 
Cash paid for stock issuance costs(329)— (185)
Cash paid for common stock repurchases— (372)(25,034)
Payments related to tax withholding for share-based compensation(853)(245)(296)
Dividends paid(58,895)(52,437)(68,042)
Net cash provided by (used in) financing activities519,980 (2,353,151)1,473,882 
Net increase in cash including cash posted to counterparties111,572 173,505 43,809 
Cash including cash posted to counterparties at beginning of period309,735 136,230 92,421 
Cash including cash posted to counterparties at end of period$421,307 $309,735 $136,230 
Supplemental Disclosure of Cash Activity:  
Cash paid for interest$5,709 $46,054 $108,986 
See notes to the consolidated financial statements.
F-11

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

Dynex Capital, Inc. (“Company”) was incorporated in the Commonwealth of Virginia on December 18, 1987 and commenced operations in February 1988. The Company is an internally managed mortgage real estate investment trust, or mortgage REIT, which primarily earns income from investing on a leveraged basis in debt securities, the majority of which are specified pools of Agency mortgage-backed securities (“MBS”) consisting of residential MBS (“RMBS”), commercial MBS (“CMBS”), residential MBS (“RMBS”), and CMBS interest-only (“IO”) securities and non-Agency MBS, which consist mainly of CMBS IO. Agency MBS have a guaranty of principal payment by a U.S. government-sponsored entity (“GSE”) such as Fannie Mae and Freddie Mac, which are in conservatorship and are currently supported by a senior preferred stock purchase agreement from the U.S. Treasury. Non-Agency MBS are issued by non-governmental enterprises and do not have a guaranty of principal payment. The Company also invests in other types of mortgage-related securities, such as to-be-announced securities (“TBAs” or “TBA securities”).

Impact of COVID-19

As a result of the economic, health and market turmoil brought about by the coronavirus (“COVID-19”) pandemic, fixed income and equity markets experienced severe disruption beginning in mid-March of 2020. The disruption resulted in a substantial rally in interest rates and a decline in fair value of MBS from spread widening, which together led to significant demands on liquidity from margin calls from derivative and repurchase agreement counterparties. During this time, the Company met all margin calls and was not forced to sell any assets. Since early in the second quarter of 2020, fixed income markets, equity markets and Agency MBS prices have stabilized with the Federal Reserve announcing multiple programs to support economic activity and to support the smooth functioning of markets. In addition, the CARES Act was passed by the U.S. Congress to provide economic relief, which included certain assistance to homeowners and renters. As part of the CARES Act, both Fannie Mae and Freddie Mac have implemented mortgage forbearance policies that allow borrowers to delay their mortgage payments for up to 15 months and have put a moratorium on foreclosures on single-family homes until March 31, 2021. The impact of high levels of forbearance on the Company’s MBS could range from immaterial to significant depending upon not only actual losses incurred on underlying loans but also future public policy choices and actions by the GSEs, their regulator the FHFA, the Federal Reserve, and federal and state governments. The nature and timing of any such future public policy choices and actions are unpredictable, including the potential impact on MBS prices and prepayment speeds. Though these supportive actions have helped cushion the economic damage from the disruption of the pandemic to date, the Company can give no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets.

Basis of Presentation

The accompanying consolidated financial statements of Dynex Capital, Inc. and its subsidiaries (together, “Dynex” or, as appropriate, the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) the instructions to the Annual Report on Form 10-K and Article 3 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). 

All references to common shares, per common share amounts, and restricted stock have been adjusted to reflect the effectUse of the Company’s 1-for-3 reverse stock split effected on June 20, 2019 for all periods presented.Estimates

“FairThe preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. The most significant estimates used by management include, but are not limited to, amortization of premiums and discounts and fair value adjustments, net”measurements of its investments. These items are discussed further below within this note to the consolidated financial statements. The Company believes the estimates and assumptions underlying the consolidated financial statements included herein are reasonable and supportable based on the information available as of December 31, 2021.

Reclassifications

    Certain items on the Company’s consolidated comprehensive incomebalance sheet as of December 31, 2020 have been reclassified to conform to the current period’s presentation. In the Company’s 2020 Form 10-K, restricted cash on the consolidated balance sheet as of December 31, 2020 consisted of the cash collateral posted by the Company to its counterparties to cover initial and variation margin related to its financing and derivative instruments, net of any cash collateral received by the Company from its counterparties. Restricted cash has been renamed “cash collateral posted to counterparties” within total assets, and cash collateral of $7,681 posted by counterparties as of December 31, 2020 has been reclassified to “cash collateral posted by counterparties” within total liabilities. This change in presentation also impacted the cash flow statements for prior periods has been retitled to “gain (loss) on investments, net”. Thisthe years ended December 31, 2020 and December 31, 2019, resulting in the addition of “(decrease) increase in cash collateral posted by counterparties” of $5,681 and $(1,717) which is the difference in the balances of that line item includes changes inon the Company’s consolidated balance sheets as of December 31, 2019 and December 31, 2020.

The Company has changed the method used to record its U.S. Treasury futures from gross fair value for mortgage loans held for investment,before variation margin settlements to net for which the Company elected the fair value option effective January 1, 2020. Please refer to Note 3 for additional information about thisafter variation margin settlements. This change in accounting policy.presentation resulted in a reclassification of $625 from “cash collateral posted to counterparties” to “derivative liabilities” as of December 31, 2020 and a corresponding increase in “net payments on derivatives, including terminations” on the consolidated statement of cash flow for the year ended December 31, 2020.

In addition, “non-recourse collateralized financing” and “payable for unsettled securities” on the consolidated
F-12

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

balance sheet as of December 31, 2020 have been reclassified to “other liabilities”.

Consolidation and Variable Interest Entities
 
The consolidated financial statements include the accounts of the Company and the accounts of its majority owned subsidiaries and variable interest entities (“VIE”) for which it is the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

The Company consolidates a VIE if the Company is determined to be the VIE’s primary beneficiary, which is defined as the party that has both: (i) the power to control the activities that most significantly impact the VIE’s financial performance and (ii) the right to receive benefits or absorb losses that could potentially be significant to the VIE. The Company reconsiders its evaluation of whether to consolidate a VIE on an ongoing basis, based on changes in the facts and circumstances pertaining to the VIE. Though the Company invests in Agency and non-Agency MBS which are generally considered to be interests in VIEs, the Company does not consolidate these entities because it does not meet the criteria to be deemed a primary beneficiary.

The Company consolidates a securitization trust, which has residential mortgage loans included in “mortgage loans held for investment” on its consolidated balance sheet, of which a portion is pledged as collateral for one remaining bond recorded as “non-recourse collateralized financing” on its consolidated balance sheet. The Company is the primary beneficiary because it owns all of the subordinate classremaining interests in the trust, and has been deemed the primary beneficiary.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. The most significant estimates used by management include, but are not limited to, amortization of premiums and discounts and fair value measurements of its investments. These items arewhich is discussed further below within this note to the consolidated financial statements.in Note 4.

Income Taxes

The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986 and the corresponding provisions of state law. To qualify as a REIT, the Company must meet certain tests including investing in primarily real estate-related assets and the required distribution of at least 90% of its annual REIT taxable income to shareholders after consideration of its net operating loss (“NOL”) carryforward and not including taxable income retained in its taxable subsidiaries. As a REIT, the Company generally will not be subject to federal income tax on the amount of its income or capital gains that is distributed as dividends to shareholders.

The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities and records these liabilities, if any, to the extent they are deemed more likely than not to have been incurred.

Net Income (Loss) Per Common Share

The Company calculates basic net income (loss) per common share by dividing net income (loss) to common shareholders for the period by weighted-average shares of common stock outstanding for that period. The Company did not have any potentially dilutive securities outstanding duringPlease see Note 2 for the years ended December 31, 2020, December 31, 2019, or December 31, 2018.calculation of the Company’s basic and diluted net income (loss) per common share for the periods indicated.

Holders ofThe Company currently has unvested shares of the Company’srestricted stock, service-based restricted stock units (“RSUs”) and performance-based stock units (“PSUs”) issued and outstandingoutstanding. Upon vesting (or settlement, in the case of units), restrictions on transfer expire on each share of restricted stock, RSU, and PSU, and each such share represents one unrestricted share of common stock. Restricted stock are eligible to receive non-forfeitable dividends. As such, these unvested sharesawards are considered participating securities and therefore are included in the computation of basic net income per common share using the two-class method. Upon vesting, restrictions on transfer expire on each sharemethod because holders of unvested shares of restricted stock are eligible to receive non-forfeitable dividends. Holders of unvested RSUs and eachPSUs accrue forfeitable dividend equivalent rights over the vesting period, receiving dividend payments only upon the settlement date if the requisite service-based and performance-based conditions have been achieved. As such, unvested RSUs and PSUs are excluded from the computation of basic net income per common share, but are included in the computation of restricted stock represents one unrestricteddiluted net income per common share ofunless the effect is to reduce a net loss or increase the net income per common stock.share (also known as “anti-dilutive”).

F-13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

Because the Company’s 7.625% Series B Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”) and its 6.900% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”) (collectively, the “Preferred Stock”) wereis redeemable at the Company’s option for cash only and convertible into shares of common stock only upon a change of control of the Company (and subject to other circumstances) as described in Article IIIB and
F-13

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

Article IIIC of the Company’s Articles of Amendment to the Restated Articles of Incorporation, (the “Restated Articles of Incorporation, as amended”), the effect of those shares and their related dividends were excluded from the calculation of diluted net income per common share for the periods presented.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid investments with original maturities of three months or less as well asincludes unrestricted demand deposits at highly rated financial institutions. The Company’s cash balances fluctuate throughout the year and may exceed Federal Deposit Insurance CompanyCorporation (“FDIC”) insured limits from time to time. Although the Company bears risk to amounts in excess of those insured by the FDIC, it does not anticipate any losses as a result due to the financial position and creditworthiness of the depository institutions in which those deposits are held.

Restricted Cash Collateral Posted To/By Counterparties

Restricted cash consists of cash the Company has pledgedCash collateral posted to/by counterparties represents amounts pledged/received to cover initial and variation margin with itsrelated to the Company’s financing and certain derivative counterparties.instruments.

The following table provides a reconciliation of cash, cash equivalents,“cash” and restricted cash“cash posted to counterparties” reported on the Company's consolidated balance sheetsheets as of the periods indicated that sum to the total of the same such amounts shown on the Company’s consolidated statementstatements of cash flows for the years ended December 31, 20202021 and December 31, 2019:2020:
December 31, 2020December 31, 2019
Cash and cash equivalents$295,602 $62,582 
Restricted cash7,077 71,648 
Total cash, cash equivalents, and restricted cash shown on consolidated statement of cash flows$302,679 $134,230 
December 31, 2021December 31, 2020
Cash$366,023 $295,602 
Cash collateral posted to counterparties55,284 14,133 
Total cash including cash posted to counterparties shown on consolidated statement of cash flows$421,307 $309,735 

Mortgage-Backed Securities
 
The Company’s MBS are recorded at fair value on the Company’s consolidated balance sheet. MBS purchased prior to December 31, 2020January 1, 2021 are designated as available for saleavailable-for-sale (“AFS”) with changes in fair value reported in other comprehensive income (“OCI”) as an unrealized gain (loss) until the investmentsecurity is sold or matures. Upon the sale of an AFS security, any unrealized gain or loss is reclassified out of accumulated other comprehensive income (“AOCI”) into net income as a realized “gain (loss) on sale of available-for-sale investments, net” using the specific identification method. Effective January 1, 2020,2021, the Company elected the fair value option for all MBS purchased on or after that date with changes in fair value reported in net income as “gain“unrealized gain (loss) on investments, net”. until the security is sold or matures. Upon the sale of an MBS, any unrealized gain or loss is reclassified to “realized gain (loss) on sale of investments, net” using the specific identification method. Management is electingelected the fair value option so that GAAP net income will reflect the changes in fair value for its future purchases of MBS in a manner consistent with the presentation and timing of the changes in fair value of its derivative instruments. Electing the fair value option is increasing as an industry trend for mortgage REITs who have not elected cash flow hedge accounting.

The “Unrealized gain (loss) on investments, net” also includes changes in fair value offor mortgage loans held for investment for which the Company’s MBS pledged as collateral against repurchase agreements is disclosed parenthetically onCompany elected the Company’s consolidated balance sheets.fair value option effective January 1, 2020.

Interest Income, Premium Amortization, and Discount Accretion. Interest income on MBS is accrued based on the outstanding principal balance (or notional balance in the case of interest-only, or “IO” securities) and their contractual terms. Premiums or discounts associated with the purchase of Agency MBS as well as any non-Agency MBS rated ‘AA’ and higher are amortized or accreted into interest income over the projected life of such securities using the effective yield method, and adjustments to premium amortization and discount accretion are made for actual cash payments. The Company’s projections of future cash payments are based on input and analysis received from external sources and internal models and include assumptions about the amount and timing of loan prepayment rates, fluctuations in interest rates, credit losses, and
F-14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

other factors. On at least a quarterly basis, the Company reviews and makes any necessary adjustments to its cash flow projections and updates the yield recognized on these assets.

The Company does not currently hold any non-Agency MBS that were purchased at a discount with credit
F-14

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

ratings of less than ‘AA’ or not rated by any of the nationally recognized credit rating agencies at the time of purchase.

Determination of MBS Fair Value. The Company estimates the fair value of the majority of its MBS based upon prices obtained from pricing services and broker quotes. The remainder of the Company’s MBS are valued by discounting the estimated future cash flows derived from cash flow models that utilize information such as the security’s coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected losses, and credit enhancements as well as certain other relevant information. Please refer to Note 67 for further discussion of MBS fair value measurements.

Allowance for Credit Losses. The Company recently adopted Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments - Credit Losses. On at least a quarterly basis, the Company evaluates any MBS designated as available-for-saleAFS with a fair value less than its amortized cost for credit losses. If the difference between the present value of cash flows expected to be collected on the MBS is less than its amortized cost, the difference is recorded as an allowance for credit loss through net income up to and not exceeding the amount that the amortized cost exceeds current fair value. Subsequent changes in credit loss estimates are recognized in earnings in the period in which they occur. Because the majority of the Company’s investments are higher credit quality and most are guaranteed by a GSE, the Company is not likely to have an allowance for credit losses related to its MBS recorded on its consolidated balance sheet.

Repurchase Agreements
 
The Company’s repurchase agreements, which are used to finance its purchases of MBS, are accounted for as secured borrowings under which the Company pledges its securities as collateral to secure a loan, which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral.collateral, which is disclosed parenthetically on the Company’s consolidated balance sheets. At the maturity of a repurchase agreement, the Company is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Company may renew the agreement at the then prevailing financing rate. A repurchase agreement lender may require the Company to pledge additional collateral in the event of a decline in the fair value of the collateral pledged. Repurchase agreement financing is recourse to the Company and the assets pledged. Most of the Company’s repurchase agreements are based on the September 1996 version of the Bond Market Association Master Repurchase Agreement, which generally provides that the lender, as buyer, is responsible for obtaining collateral valuations from a generally recognized source agreed to by both the Company and the lender, or, in an instance when such source is not available, the value determination is made by the lender.

Derivative Instruments

TheDuring the year ended December 31, 2021, the Company’s derivative instruments generally includehave included U.S. Treasury futures, options on U.S. Treasury futures, options on interest rate swaps futures, options,(“swaptions”) and TBA securities, which are forward contracts for the purchase or sale of Agency RMBS on a non-specified pool basis, commonly referred to as to-be-announced (“TBA”) securities.basis. Derivative instruments are reported at their fair value on the Company’s consolidated balance sheet as derivative assets if in a gain position or as derivative liabilities if in a loss position, at the end of the period reported. All periodic interest benefits/costsincome/expenses and changes in fair value of derivative instruments, including gains and losses realized upon termination, maturity, or settlement are recorded in “gain (loss) on derivative instruments, net” on the Company’s consolidated statement of comprehensive income (loss). Cash receipts and payments related to derivative instruments are classified in the investing activities section of the consolidated statements of cash flows in accordance with the underlying nature or purpose of the derivative transactions.

The Company enters into long andcurrently has short positions in U.S. Treasury futures contracts, which are valued based on exchange pricing with daily margin settlements. The Company realizes gains or losses on these contracts upon expiration at an amount equal to the difference between the current fair value of the underlying asset and the contractual price of the futures contract. Daily margin exchanges for the Company’s U.S. Treasury futures are not considered legal settlement of the instrument.

F-15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

The Company’s put options on U.S. Treasury futures provide the Company the right, but not an obligation, to buy U.S. Treasury futures at a predetermined notional amount and stated term in the future. Put optionsOptions on U.S. Treasury
F-15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

futures are valued based on exchange pricing without daily exchanges of margin amounts. The Company records the premium paid for the option contract as a derivative asset on its consolidated balance sheet and adjusts the balance for changes in fair value through “gain (loss) on derivative instruments” until the option is exercised or the contract expires. The Company may also purchase options for interest rate swaps (“interest rate swaptions”)swaptions and defer the premium payment until the effective date. The premium payable and underlying swaption are accounted for as a single unit of account.

As of December 31, 2020, the Company does not have any interest rate swap agreements outstanding due to management’s expectations of low financing costs for the near term and the increase in margin requirements from counterparties since the onset of the pandemic. All of the Company’s interest rate swap agreements held as of December 31, 2019 were centrally cleared through the Chicago Mercantile Exchange (“CME”), which required the Company to post initial margin as collateral as well as variation margin for changes in the fair value of the CME cleared swaps. The exchange of variation margin for CME cleared swaps is legally considered to be the settlement of the derivative itself as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily exchange of variation margin associated with CME cleared interest rate swaps as a direct increase or decrease to the carrying value of the related derivative asset or liability.

A TBA security is a forward contract (“TBA contract”) for the purchase (“long position”) or sale (“short position”) of a non-specified Agency MBS at a predetermined price with certain principal and interest terms and certain types of collateral, but the particular Agency securities to be delivered are not identified until shortly before the settlement date. The Company accounts for long and short positions in TBAs as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in physical delivery of the underlying Agency RMBS or that the individual TBA transaction will not settle in the shortest time period possible.

Please refer to Note 56 for additional information regarding the Company’s derivative instruments as well as Note 6 7 for information on how the fair value of these instruments areis calculated.

Share-Based Compensation

Pursuant to theThe Company’s 2020 Stock and Incentive Plan (the “2020 Plan”), the Company may grant share-based compensation reserves for issuance up to 2,300,000 common shares for eligible employees, non-employee directors, or consultants, orand advisors to the Company includingto be granted in the form of stock options, restricted stock, awards,restricted stock options,units (“RSUs”), stock appreciation rights, performanceperformance-based stock units (“PSUs”), and performance-based cash awards (collectively, “awards”). As of December 31, 2021, 1,951,245 common shares are available for issuance under the 2020 Plan. Awards previously granted under the Company’s 2018 Stock and Incentive Plan (“2018 Plan”) or any other prior equity plan remain outstanding and valid in accordance with their terms, but no new awards will be granted under the 2018 Plan or any other prior equity plan.

Currently, the Company has shares of restricted stock units, and performance cash awards. The Company’s restricted stock currentlyRSUs issued and outstanding may be settled only in shares of its common stock, and thereforewhich are treated as equity awards withand recorded at their fair value using the closing stock price on the grant date. The compensation cost is recognized over the vesting period with a corresponding credit to shareholders’ equity using the straight-line method.

The Company also has PSUs issued and outstanding which contain either Company performance-based or market performance-based conditions. PSUs subject to Company performance-based conditions are initially recognized as equity at their fair value which is measured byusing the closing stock price on the grant date andmultiplied by the number of units expected to vest based on an assessment of the probability of achievement of the Company performance-based conditions as of the grant date. The grant date fair value is recognized as compensation costexpense on the Company’s consolidated statements of comprehensive income within “Compensation and benefits” on a straight-line basis over the requisite servicevesting period withand adjusted if necessary based on any change in probability of achievement which is re-assessed as of each reporting date and on at least a corresponding creditquarterly basis.

PSUs subject to shareholders’ equity. market performance-based conditions are recognized as equity at their grant date fair value determined through a Monte-Carlo simulation of the Company’s common stock total shareholder return (“TSR”) relative to the common stock TSR of the group of peer companies specified in the award agreement. Awards subject to market performance-based conditions are not assessed for probability of achievement and are not remeasured subsequent to issuance. The grant date fair value is recognized as expense on the Company’s consolidated statements of comprehensive income within “Compensation and benefits” on a straight-line basis over the vesting period even if the market performance-based conditions are not achieved.

The Company does not estimate forfeiture rates,forfeitures for any of its share-based compensation awards, but adjusts for actual forfeitures in the periods in which they occur. The requisite service period is the period during whichBecause RSUs and PSUs have forfeitable dividend equivalent rights that are paid only upon settlement, any accrued dividend equivalent rights on forfeited units are reversed with a participant is requiredcorresponding credit to provide service“Compensation and benefits.”
F-16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in exchange for an award, which is equivalent to the vesting period specified in the terms of the time-based restricted stock award. None of the Company’s restricted stock awards have performance-based conditions. The Company does not currently have any share-based compensation issued or outstanding other than restricted stock issued to its employees, officers, and directors.thousands except share data)


Contingencies

In the normal course of business, there may be various lawsuits, claims, and other contingencies pending against the Company. On a quarterly basis, the Company evaluates whether to establish provisions for estimated losses from those matters. The Company recognizes a liability for a contingent loss when: (a) the underlying causal event has occurred prior to the balance sheet date; (b) it is probable that a loss has been incurred; and (c) there is a reasonable basis for estimating that loss. A liability is not recognized for a contingent loss when it is only possible or remotely possible that a loss has been incurred, however, possible contingent losses shall be disclosed. If the contingent loss (or an additional loss in excess of any accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible material loss, or range of loss, then that fact is disclosed.

F-16

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

As previously disclosed in the 20192020 Form 10-K, the receiver (the “Receiver”) for one of the plaintiffs awarded damages in a judgment (the "DCI Judgment") against Dynex Commercial, Inc. ("DCI"), a subsidiary of a former affiliate of the Company, filed a separate claim in May 2018 against the Company seeking payment of the damages awarded in connection with the DCI Judgment, alleging that the Company breached a litigation cost sharing agreement, as amended (the "Agreement"), that was initially entered into by the Company and DCI in December 2000. On November 21, 2019, the U.S. District Court, Northern District of Texas ("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 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 Agreement and that the Company can recover amounts due to it from DCI under the Agreement. The Receiver subsequently filedFollowing a claim for damages withbrief trial in September 2021, on November 1, 2021, the Northern District Court entered a take nothing judgment in the Company’s favor against the Receiver, and dismissed the Receiver’s claim against the Company. The Receiver did not file an appeal to the United States Court of approximately $12,600, whileAppeals for the Fifth Circuit within the allowed timeframe, and the Company filed claims for damages ranging from $13,300 to $30,600, 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 Agreement and amounts incurred under the Agreement after January 31, 2006, including interest, which is the date that DCI’s corporate existence ceased under Virginia law. The Company has disputed the Receiver’s Objections, arguing, among other things, that the Receiver's Objections are not supportable under Virginia law and has further refined its damages claim to range from $15,961 based on simple interest to $22,752 based on a combination of simple and compound interest, which the Company believes is supportable under Virginia law. There have been no material developments inconsiders this matter during the year ended December 31, 2020. After consultation with litigation counsel, the Company believes, based upon information currently available and its evaluation of Virginia law, that the likelihood of loss 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 cannot be reasonably estimated, and therefore, no contingent liability has been recorded.closed.

Recently Issued Accounting Pronouncements

The Company evaluates Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”) on at least a quarterly basis to evaluate applicability and significance of any impact on its financial condition and results of operations. There were no accounting pronouncements issued during the year ended December 31, 20202021 that are expected to have a material impact on the Company’s financial condition or results of operations.

ASU 2020-04,
 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provides optional expedients and exceptions to GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from LIBOR, and certain other floating rate benchmark indices to alternative reference rates. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. ASU 2021-01, Reference Rate Reform (Topic 848): Scope, was issued to clarify the scope of ASU 2020-04 includes any derivative instrument that uses an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The guidance in ASU 2020-04 and ASU 2021-01 is optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. Based on the terms of its derivative instruments held as of December 31, 2020 and its current expected hedging strategy, the Company does not believe either of these pronouncements will have a material impact on its consolidated financial statements.
NOTE 2 – NET INCOME (LOSS) PER COMMON SHARE

Please refer to Note 1 for information regarding the Company’s treatment of its preferred stock and stock awards in the calculation of its basic and diluted net income (loss) per common share and to Note 8 for information regarding the Company’s stock award activity for the periods presented. The following table presents the computations of basic and diluted net income (loss) per common share for the periods indicated:

F-17

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

Year Ended
December 31,
202120202019
Weighted average number of common shares outstanding - basic32,596,27223,106,200 23,620,125 
Incremental common shares-unvested RSUs55,019——
Incremental common shares-unvested PSUs110,040——
Weighted average number of common shares outstanding - diluted32,761,33123,106,20023,620,125
Net income (loss) to common shareholders$90,945 $160,017 $(165,635)
Net income (loss) per common share-basic$2.79 $6.93 $(7.01)
Net income (loss) per common share-diluted$2.78 $6.93 $(7.01)
The Company did not have any potentially dilutive instruments outstanding during the years ended December 31, 2020 or December 31, 2019.


NOTE 23 – MORTGAGE-BACKED SECURITIES
 
The majority of the Company’s MBS are pledged as collateral for the Company’s repurchase agreements. The following tables present the Company’s MBS by investment type (including securities pending settlement) as of the dates indicated:
 December 31, 2020
 ParNet Premium (Discount)Amortized CostGross Unrealized GainGross Unrealized LossFair Value
Agency RMBS$1,839,046 $57,997 $1,897,043 $49,348 $0 $1,946,391 
Agency CMBS235,801 3,152 238,953 19,597 0 258,550 
CMBS IO (1)
0 378,940 378,940 12,081 (982)390,039 
Non-Agency other1,499 (440)1,059 267 (51)1,275 
Total MBS:$2,076,346 $439,649 $2,515,995 $81,293 $(1,033)$2,596,255 
December 31, 2021
Agency RMBSAgency CMBS
CMBS IO (1)
Non-Agency OtherTotal
MBS designated as AFS:
Par value$1,193,951 $174,899 $— $966 $1,369,816 
Unamortized premium (discount)38,787 2,312 276,354 (189)317,264 
Amortized cost1,232,738 177,211 276,354 777 1,687,080 
Gross unrealized gain7,779 7,636 11,713 63 27,191 
Gross unrealized loss(19,994)— (426)(42)(20,462)
Fair value1,220,523 184,847 287,641 798 1,693,809 
MBS measured at fair value through net income:
Par value$1,445,796 $— $— $— $1,445,796 
Unamortized premium35,373 — 21,843 — 57,216 
Amortized cost1,481,169 — 21,843 — 1,503,012 
Gross unrealized gain— — 57 — 57 
Gross unrealized loss(14,917)— (122)— (15,039)
Fair value1,466,252 — 21,778 — 1,488,030 
Total as of December 31, 2021$2,686,775 $184,847 $309,419 $798 $3,181,839 
(1) The notional balance for Agency CMBS IO measured at fair value through net income was $441,217 as of December 31, 2021. The notional balance of Agency CMBS IO and non-Agency CMBS IO designated as AFS was $10,189,497 and $8,635,666 respectively, as of December 31, 2021.


F-18

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

December 31, 2020
Agency RMBSAgency CMBS
CMBS IO (1)
Non-Agency OtherTotal
MBS designated as AFS:
Par value$1,839,046 $235,801 $— $1,499 $2,076,346 
Unamortized premium (discount)57,997 3,152 378,939 (440)439,648 
Amortized cost1,897,043 238,953 378,939 1,059 2,515,994 
Gross unrealized gain49,348 19,597 12,081 267 81,293 
Gross unrealized loss— — (981)(51)(1,032)
Fair value1,946,391 258,550 390,039 1,275 2,596,255 
MBS measured at fair value through net income:
Par value$— $— $— $— $— 
Unamortized premium— — — — — 
Amortized cost— — — — — 
Gross unrealized gain— — — — — 
Gross unrealized loss— — — — — 
Fair value— — — — — 
Total as of December 31, 2020$1,946,391 $258,550 $390,039 $1,275 $2,596,255 
(1) The notional balance for the Agency CMBS IO and non-Agency CMBS IO was $11,277,908 and $9,319,520, respectively, as of December 31, 2020.
 December 31, 2019
 ParNet Premium (Discount)Amortized CostGross Unrealized GainGross Unrealized LossFair Value
Agency RMBS$2,563,684 $55,770 $2,619,454 $69,082 $(462)$2,688,074 
Agency CMBS1,890,186 15,414 1,905,600 93,763 (6)1,999,357 
CMBS IO (1)
0 488,145 488,145 11,760 (863)499,042 
Non-Agency other1,938 (780)1,158 552 (20)1,690 
Total MBS:$4,455,808 $558,549 $5,014,357 $175,157 $(1,351)$5,188,163 

(1) The notional balancemajority of the Company’s MBS are pledged as collateral for the Agency CMBS IO and non-Agency CMBS IO was $13,404,824 and $9,799,629, respectively, as of December 31, 2019.
Company’s repurchase agreements, which are disclosed in
Note 5
. Actual maturities of MBS are affected by the contractual lives of the underlying mortgage collateral, periodic payments of principal, prepayments of principal, and the payment priority structure of the security; therefore, actual maturities are generally shorter than the securities' stated contractual maturities.

The following table presents information regarding the "gain (loss)"realized gain on sale of investments, net" on the Company’s consolidated statements of comprehensive income (loss) for the periods indicated:
Year Ended
December 31,
202020192018
Proceeds ReceivedRealized Gain (Loss)Proceeds ReceivedRealized Gain (Loss)Proceeds ReceivedRealized Gain (Loss)
Agency RMBS$2,395,032 $82,689 $796,699 $506 $217,837 $(7,785)
Agency CMBS2,247,273 225,395 213,199 (6,493)242,029 (9,218)
Agency CMBS IO— — 23,168 232 15,700 146 
Non-Agency CMBS IO— — — — 8,695 51 
U.S. Treasuries— — — — 248,803 (6,567)
$4,642,305 $308,084 $1,033,066 $(5,755)$733,064 $(23,373)
Year Ended
December 31,
202120202019
Proceeds ReceivedRealized GainProceeds ReceivedRealized GainProceeds ReceivedRealized Gain
Agency RMBS-designated as AFS$287,409 $3,938 $2,395,032 $82,689 $796,699 $506 
Agency CMBS-designated as AFS37,873 2,767 2,247,273 225,395 213,199 (6,493)
Agency CMBS IO -designated as AFS— — — — 23,168 232 
$325,282 $6,705 $4,642,305 $308,084 $1,033,066 $(5,755)


F-18F-19

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

The following table presents certain information for the AFS securities in an unrealized loss position as of the dates indicated:
December 31, 2020December 31, 2019 December 31, 2021December 31, 2020
Fair ValueGross Unrealized Losses# of SecuritiesFair ValueGross Unrealized Losses# of SecuritiesFair ValueGross Unrealized Losses# of SecuritiesFair ValueGross Unrealized Losses# of Securities
Continuous unrealized loss position for less than 12 months:Continuous unrealized loss position for less than 12 months:    Continuous unrealized loss position for less than 12 months:    
Agency MBSAgency MBS$19,266 $(399)19$215,792 $(1,139)27Agency MBS$1,051,233 $(20,118)23$19,266 $(399)19
Non-Agency MBSNon-Agency MBS33,417 (408)2313,607 (146)7Non-Agency MBS11,667 (247)1433,417 (408)23
Continuous unrealized loss position for 12 months or longer:Continuous unrealized loss position for 12 months or longer:Continuous unrealized loss position for 12 months or longer:
Agency MBSAgency MBS$749 $(133)2$75,745 $(35)2Agency MBS$— $— —$749 $(133)2
Non-Agency MBSNon-Agency MBS2,156 (93)51,099 (31)5Non-Agency MBS1,241 (97)62,156 (93)5

The unrealized losses on the Company’s MBS were the result of declines in market prices and were not credit related; therefore, the Company’s allowance for credit losses on its MBS designated as available-for-saleAFS was $0 as of December 31, 2021 and December 31, 2020. The principal related to Agency MBS is guaranteed by the GSEs Fannie Mae and Freddie Mac. Although the unrealized losses are not credit related, the Company assesses its ability and intent to hold any MBS with an unrealized loss until the recovery in its value in accordance with GAAP.value. This assessment is based on the amount of the unrealized loss and significance of the related investment as well as the Company’s leverage and liquidity position. In addition, for its non-Agency MBS, the Company reviews the credit ratings, the credit characteristics of the mortgage loans collateralizing these securities, and the estimated future cash flows including projected collateral losses.

NOTE 3 –4 - MORTGAGE LOANS HELD FOR INVESTMENT NET AND RELATED NON-RECOURSE COLLATERALIZED FINANCING

The Company's mortgage loans held for investment net are single-family mortgage loans which were originated or purchased by the Company prior to 2000. As ofEffective January 1, 2020, management chose to electthe Company elected the fair value option in accountingto account for its mortgage loans held for investment pursuant tothese loans. During the provisionsyears ended December 31, 2021 and December 31, 2020, the Company recorded an unrealized gain of ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326) Targeted Transition Relief, which was issued in May$131 and an unrealized loss of 2019. Management chose to elect the fair value option in order to be consistent with the Company’s other investments which are measured at fair value. The election of the fair value option resulted in a cumulative adjustment of $(548) to retained earnings on its consolidated balance sheet as of January 1, 2020. Subsequent changes in fair value are recorded in “gain (loss) on investments, net” on the Company’s consolidated statements of comprehensive income.$(253), respectively. The amortized cost of the Company’s mortgage loans declined to $4,488 as of December 31, 2021 from $6,613 as of December 31, 2020 from $9,501due primarily to principal payments. The balance as of December 31, 2019 due primarily2021 includes $4,261 of loans remaining in a securitization trust owned entirely by the Company, which is the Company’s maximum exposure to principal payments.

Asloss. The securitization bond is no longer outstanding as of December 31, 2020, $2,331 of the principal balance of the Company’s mortgage loans held for investment was pledged as collateral for the one remaining class of the Company's single-family securitization financing bond, which is recorded on the Company's balance sheet as "non-recourse collateralized financing" and had a remaining principal balance of $118. As of December 31, 2019, $3,452 of the principal balance of the Company's mortgage loans held for investment was pledged as collateral for the remaining principal balance of the outstanding bonds of $2,764.2021.


F-19F-20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

NOTE 45 – REPURCHASE AGREEMENTS

The Company’s repurchase agreements outstanding as of December 31, 20202021 and December 31, 20192020 are summarized in the following tables:
December 31, 2020December 31, 2019 December 31, 2021December 31, 2020
Collateral TypeCollateral Type
Balance (1)
Weighted
Average Rate		Fair Value of
Collateral Pledged		BalanceWeighted
Average Rate		Fair Value of
Collateral Pledged		Collateral TypeBalanceWeighted
Average Rate		Fair Value of
Collateral Pledged		BalanceWeighted
Average Rate
Fair Value of
Collateral Pledged (1)
Agency RMBSAgency RMBS$1,874,176 0.23 %$1,973,608 $2,594,645 1.96 %$2,647,638 Agency RMBS$2,408,126 0.17 %$2,536,094 $1,874,176 0.23 %$1,973,608 
Agency CMBSAgency CMBS237,649 0.23 %255,741 1,735,848 1.98 %1,901,452 Agency CMBS176,268 0.14 %184,847 237,649 0.23 %255,741 
Agency CMBS IOAgency CMBS IO209,393 0.90 %243,042 255,912 2.30 %282,522 Agency CMBS IO180,912 0.68 %192,481 209,393 0.90 %243,042 
Non-Agency CMBS IONon-Agency CMBS IO115,945 1.28 %136,684 165,943 2.67 %193,013 Non-Agency CMBS IO84,610 0.99 %97,897 115,945 1.28 %136,684 
Total repurchase agreementsTotal repurchase agreements$2,437,163 0.34 %$2,609,075 $4,752,348 2.01 %$5,024,625 Total repurchase agreements$2,849,916 0.23 %$3,011,319 $2,437,163 0.34 %$2,609,075 

(1) The amounts for fair value of collateral pledged in the table above as of December 31, 2020 include securities with an amortized cost of $141,215 which were sold but not settled as of that date, and for which the proceeds of $150,432 are recorded aswithin “receivable for securities sold”pending settlement” on the consolidated balance sheet. These securities collateralized $140,612 of the Company’s repurchase agreement borrowings outstanding as of December 31, 2020.

The Company also had $5 and $6,180 payable torepurchase agreement borrowings outstanding with 22 different counterparties as of December 31, 20202021, and December 31, 2019, respectively, for transactions pending settlementits equity at risk did not exceed 10% with any counterparty as of those respective dates.that date.

The following table provides information on the remaining term to maturity and original term to maturity for the Company’s repurchase agreements as of the dates indicated:
December 31, 2020December 31, 2019December 31, 2021December 31, 2020
Remaining Term to MaturityRemaining Term to MaturityBalanceWeighted
Average Rate		WAVG Original Term to MaturityBalanceWeighted
Average Rate		WAVG Original Term to MaturityRemaining Term to MaturityBalanceWeighted
Average Rate		WAVG Original Term to MaturityBalanceWeighted
Average Rate		WAVG Original Term to Maturity
Less than 30 daysLess than 30 days$1,416,608 0.37 %53 $2,078,185 2.12 %34 Less than 30 days$602,994 0.42 %123 $1,416,608 0.37 %53 
30 to 90 days30 to 90 days845,394 0.31 %35 2,674,163 1.93 %52 30 to 90 days763,302 0.14 %166 845,394 0.31 %35 
91 to 180 days91 to 180 days175,161 0.22 %13 — — %— 91 to 180 days1,075,324 0.15 %198 175,161 0.22 %13 
180 days to 1 year180 days to 1 year408,296 0.30 %366 — — %— 
TotalTotal$2,437,163 0.34 %44 $4,752,348 2.01 %45 Total$2,849,916 0.23 %198 $2,437,163 0.34 %44 

As of December 31, 2020, the Company had repurchase agreement amounts outstanding with 20 of its 37 available repurchase agreement counterparties. The Company has an agreement with Wells Fargo Bank, N.A. for a committed repurchase facility, with Wells Fargo thatwhich has an aggregate maximum borrowing capacity of $250,000 and a maturity date of which itJune 8, 2023. As of December 31, 2021, the Company had $121,379$87,152 outstanding with this facility at a weighted average borrowing rate of 1.01% as of December 31, 2020.0.87%. The facility isremaining repurchase facilities available to the Company until its maturity dateare uncommitted with no guarantee of June 11, 2021. The Company did not have more than 5%renewal or terms of its equity at risk with any of its counterparties as of December 31, 2020.renewal.

The Company’s counterparties, as set forth in the master repurchase agreement with the counterparty, require the Company to comply with various customary operating and financial covenants, including, but not limited to, minimum net worth and earnings, maximum declines in net worth in a given period, and maximum leverage requirements as well as maintaining the Company’s REIT status. In addition, some of the agreements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that the Company fails to comply with the covenants contained in these financing agreements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the master repurchase agreement. The Company believes it was in full compliance with all covenants in master repurchase agreements under which there were amounts outstanding as of December 31, 2020.2021.

F-21

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

The Company's repurchase agreements are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the
F-20

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

transactions. The Company reports its repurchase agreements to these arrangements on a gross basis. The following tables presenttable presents information regarding the Company's repurchase agreements as if the Company had presented them on a net basis as of December 31, 20202021 and December 31, 2019:2020:
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net AmountGross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as CollateralFinancial Instruments Posted as CollateralCash Posted as Collateral
December 31, 2021December 31, 2021
Repurchase agreementsRepurchase agreements$2,849,916 $— $2,849,916 $(2,849,916)$— $— 
December 31, 2020December 31, 2020December 31, 2020
Repurchase agreementsRepurchase agreements$2,437,163 $0 $2,437,163 $(2,437,163)$0 $0 Repurchase agreements$2,437,163 $— $2,437,163 $(2,437,163)$— $— 
December 31, 2019
Repurchase agreements$4,752,348 $0 $4,752,348 $(4,752,348)$0 $0 
(1) Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the repurchase agreement liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented.

Please see Note 56for information related to the Company’s derivatives, which are also subject to underlying agreements with master netting or similar arrangements.


NOTE 56 – DERIVATIVES

Types and Uses of Derivatives Instruments

Interest Rate Derivatives.The During the year ended December 31, 2021, the Company is currently usingused short positions in U.S. Treasury futures, put options on U.S. Treasury futures, and interest rate swaptions to mitigate the impact of changing interest rates on its book value. The Company has substantially reduced its notional balance of interest rate swaps since first quarter of 2020 due to the significant reductionfair value of its MBS portfolioinvestments and management’s expectation that financing costs will remain low for the near term.its net interest earnings.

TBA Transactions. The Company purchases TBA securities as a means of investing in non-specified fixed-rate Agency RMBS and may also periodically sell TBA securities as a means of economically hedging its book value exposure to Agency RMBS. The Company holds long and short positions in TBA securities by executing a series of transactions, commonly referred to as “dollar roll” transactions, which effectively delay the settlement of a forward purchase (or sale) of a non-specified Agency RMBS by entering into an offsetting TBA position, net settling the paired-off positions in cash, and simultaneously entering into an identical TBA long (or short) position with a later settlement date. TBA securities purchased (or sold) for a forward settlement date are generally priced at a discount relative to TBA securities settling in the current month. This discount, often referred to as “drop income” represents the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. The Company accounts for all TBAs (whether net long or net short positions, or collectively “TBA dollar roll positions”) as derivative instruments because it cannot assert that it is probable at inception and throughout the term of an individual TBA transaction that its settlement will result in physical delivery of the underlying Agency RMBS, or that the individual TBA transaction will not settle in the shortest period possible.

Gain (Loss) on Derivative Instruments, Net

The table below provides detail of the Company’s “gain (loss) on derivative instruments, net” by type of derivative for the periods indicated:
F-21
F-22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

(Loss) Gain on Derivative Instruments, Net

The table below provides detail of the Company’s “(loss) gain on derivative instruments, net” by type of derivative for the periods indicated:
Year EndedYear Ended
December 31,December 31,
Type of Derivative InstrumentType of Derivative Instrument202020192018Type of Derivative Instrument202120202019
Interest rate swapsInterest rate swaps$(182,942)$(202,450)$10,363 Interest rate swaps$— $(182,942)$(202,450)
Interest rate swaptionsInterest rate swaptions680 (5,607)0 Interest rate swaptions40,330 680 (5,607)
Futures(15,046)2,250 (2,722)
U.S. Treasury futuresU.S. Treasury futures61,215 (15,046)2,250 
Options on U.S. Treasury futuresOptions on U.S. Treasury futures(26,186)(1,422)(658)Options on U.S. Treasury futures(2,141)(26,186)(1,422)
TBA securities - long positionsTBA securities - long positions61,245 20,020 (10,737)TBA securities - long positions(17,987)61,245 20,020 
TBA securities - short positionsTBA securities - short positions(10,041)260 293 TBA securities - short positions— (10,041)260 
Loss on derivative instruments, net$(172,290)$(186,949)$(3,461)
Gain (loss) on derivative instruments, netGain (loss) on derivative instruments, net$81,417 $(172,290)$(186,949)

The table below summarizes information about the carrying value by type of derivative instrument on the Company’s consolidated balance sheets as of the dates indicated:
Type of Derivative InstrumentType of Derivative InstrumentBalance Sheet LocationPurposeDecember 31, 2020December 31, 2019Type of Derivative InstrumentBalance Sheet LocationPurposeDecember 31, 2021December 31, 2020
Options on U.S. Treasury futuresOptions on U.S. Treasury futuresDerivative assetsEconomic hedging$1,094 $2,883 Options on U.S. Treasury futuresDerivative assetsEconomic hedging$— $1,094 
Interest rate swaptionsInterest rate swaptionsDerivative assetsEconomic hedging1,360 573 Interest rate swaptionsDerivative assetsEconomic hedging3,202 1,360 
TBA securities - long positionsDerivative assetsInvesting8,888 834 
TBA securitiesTBA securitiesDerivative assetsInvesting4,767 8,888 
Total derivatives assetsTotal derivatives assets$11,342 $4,290 Total derivatives assets$7,969 $11,342 
Interest rate swaptionsInterest rate swaptionsDerivative liabilitiesEconomic hedging$(107)$0 Interest rate swaptionsDerivative liabilitiesEconomic hedging$— $(107)
U.S. Treasury futuresU.S. Treasury futuresDerivative liabilitiesEconomic hedging(1,527)0 U.S. Treasury futuresDerivative liabilitiesEconomic hedging(2,471)(902)
TBA securities - short positionsDerivative liabilitiesEconomic hedging0 (974)
Total derivatives liabilitiesTotal derivatives liabilities$(1,634)$(974)Total derivatives liabilities$(2,471)$(1,009)

The following table provides details on the Company’s interest rate swaptions held as of the dates indicated:
OptionUnderlying Payer Swap
Months to ExpirationCostFair ValueAverage Term to ExpirationNotional AmountAverage Fixed Pay RateAverage Term in Years
As of December 31, 2020:
6 months or less$6,312 $1,161 3 months$750,000 1.02%10
Greater than 6 months6,688 92 8 months500,000 1.16%10
$13,000 $1,253 $1,250,000 1.07%
As of December 31, 2019:
6 months or less$6,180 $573 1 month$750,000 2.07%10
F-22

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

OptionUnderlying Payer Swap
Average Months to ExpirationCostFair ValueNotional AmountAverage Fixed Pay RateAverage Term in Years
As of December 31, 2021:
6-9 months$9,375 $3,202 $500,000 1.60%10
As of December 31, 2020:
6 months or less$6,312 $1,161 $750,000 1.02%10
6-9 months6,688 92 500,000 1.16%10
$13,000 $1,253 $1,250,000 1.07%

The following table provides details on the Company’s U.S. Treasury futures and options on U.S. Treasury futures held as of the dates indicated:
As of December 31, 2020:As of December 31, 2019:
Notional Amount Long (Short)Fair ValueAverage Term to ExpirationNotional Amount Long (Short)Fair ValueAverage Term to Expiration
Options on U.S. Treasury futures$500,000 $1,094 1 month$1,350,000 $2,883 2 months
U.S. Treasury futures - short positions(825,000)(1,527)2 months— — — 
F-23

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

December 31, 2021December 31, 2020:
Notional Amount Long (Short)Fair ValueAverage Term to ExpirationNotional Amount Long (Short)Fair ValueAverage Term to Expiration
Options on U.S. Treasury futures$— $— n/a$500,000 $1,094 1 month
U.S. Treasury futures(3,890,000)(2,471)3 months(825,000)(902)2 months

The following table summarizes information about the Company's long positions in TBA securities as of the dates indicated:
December 31, 2020December 31, 2019December 31, 2021December 31, 2020
TBA securitiesLong PositionsShort PositionsLong PositionsShort Positions
Implied market value (1)
Implied market value (1)
$1,572,949 $0 $442,161 $(520,117)
Implied market value (1)
$1,531,188 $1,572,949 
Implied cost basis (2)
Implied cost basis (2)
1,564,061 0 441,327 (519,143)
Implied cost basis (2)
1,526,421 1,564,061 
Net carrying value (3)
Net carrying value (3)
$8,888 $0 $834 $(974)
Net carrying value (3)
$4,767 $8,888 
(1) Implied market value represents the estimated fair value of the underlying Agency MBS as of the date indicated.
(2) Implied cost basis represents the forward price to be paid for the underlying Agency MBS as of the date indicated.
(3) Net carrying value is the amount included on the consolidated balance sheets within “derivative assets (liabilities)” and represents the difference between the implied market value and the implied cost basis of the TBA security as of the date indicated.

Volume of Activity

The tables below summarize changes in the Company’s derivative instruments for the period indicated:year ended December 31, 2021:
Type of Derivative InstrumentNotional Amount as of December 31, 2019AdditionsSettlements,
Terminations,
or Pair-Offs		Notional Amount as of December 31, 2020
Interest rate swaps$4,225,000 $2,915,000 $(7,140,000)$0 
Interest rate swaptions750,000 1,250,000 (750,000)1,250,000 
U.S. Treasury futures - short positions0 5,737,600 (4,912,600)825,000 
Options on U.S. Treasury futures1,350,000 5,650,000 (6,500,000)500,000 
TBA - long positions435,000 15,516,000 (14,436,000)1,515,000 
TBA - short positions500,000 3,017,000 (3,517,000)0 
Type of Derivative InstrumentBeginning
Notional Amount-Long (Short)		AdditionsSettlements,
Terminations,
or Pair-Offs		Ending
Notional Amount-Long (Short)
Interest rate swaptions1,250,000 500,000 (1,250,000)500,000 
U.S. Treasury futures(825,000)(15,880,000)12,815,000 (3,890,000)
Options on U.S. Treasury futures500,000 2,350,000 (2,850,000)— 
TBA securities1,515,000 22,920,000 (22,905,000)1,530,000 

Offsetting

The Company's derivatives are subject to underlying agreements with master netting or similar arrangements, which provide for the right of offset in the event of default or in the event of bankruptcy of either party to the transactions. The Company reports its derivative assets and liabilities subject to these arrangements on a gross basis. Please see Note 5 for information related to the Company’s repurchase agreements, which are also subject to underlying agreements with master netting or similar arrangements. The following tables present information regarding those derivative assets and liabilities subject to such arrangements as if the Company had presented them on a net basis as of December 31, 20202021 and December 31, 2019:

2020:
F-23F-24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

Offsetting of AssetsOffsetting of Assets
Gross Amount of Recognized AssetsGross Amount Offset in the Balance SheetNet Amount of Assets Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net AmountGross Amount of Recognized AssetsGross Amount Offset in the Balance SheetNet Amount of Assets Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Received as CollateralCash Received as CollateralFinancial Instruments Received as CollateralCash Received as Collateral
December 31, 2021December 31, 2021
Interest rate swaptionsInterest rate swaptions$3,202 $— $3,202 $— $(481)$2,721 
TBA securitiesTBA securities4,767 — 4,767 — (1,353)3,414 
Derivative assetsDerivative assets$7,969 $— $7,969 $— $(1,834)$6,135 
December 31, 2020December 31, 2020December 31, 2020
Interest rate swaptionsInterest rate swaptions$1,360 $— $1,360 $(107)$0 $1,253 Interest rate swaptions$1,360 $— $1,360 $(107)$— $1,253 
Options on U.S. Treasury futuresOptions on U.S. Treasury futures1,094 — 1,094 0 0 1,094 Options on U.S. Treasury futures1,094 — 1,094 — — 1,094 
TBA - long positions8,888 — 8,888 0 (7,681)1,207 
TBA securitiesTBA securities8,888 — 8,888 — (7,681)1,207 
Derivative assetsDerivative assets$11,342 $— $11,342 $(107)$(7,681)$3,554 Derivative assets$11,342 $— $11,342 $(107)$(7,681)$3,554 
December 31, 2019
Interest rate swaptions$573 $— $573 $0 $0 $573 
Options on U.S. Treasury futures2,883 — 2,883 0 0 2,883 
TBA - long positions834 — 834 (380)0 454 
Derivative assets$4,290 $— $4,290 $(380)$0 $3,910 

Offsetting of LiabilitiesOffsetting of Liabilities
Gross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net AmountGross Amount of Recognized LiabilitiesGross Amount Offset in the Balance SheetNet Amount of Liabilities Presented in the Balance Sheet
Gross Amount Not Offset in the Balance Sheet (1)
Net Amount
Financial Instruments Posted as CollateralCash Posted as CollateralFinancial Instruments Posted as CollateralCash Posted as Collateral
December 31, 2021December 31, 2021
U.S. Treasury futures-short positionsU.S. Treasury futures-short positions$(2,471)— $(2,471)$— $— $(2,471)
Derivative liabilitiesDerivative liabilities$(2,471)$— $(2,471)$— $— $(2,471)
December 31, 2020December 31, 2020December 31, 2020
U.S. Treasury futures-short positionsU.S. Treasury futures-short positions$(1,527)— $(1,527)$0 $1,527 $0 U.S. Treasury futures-short positions$(902)— $(902)$— $— $(902)
Interest rate swaptionsInterest rate swaptions(107)— (107)107 0 0 Interest rate swaptions(107)— (107)107 — — 
Derivative liabilitiesDerivative liabilities$(1,634)$— $(1,634)$107 $1,527 $0 Derivative liabilities$(1,009)$— $(1,009)$107 $— $(902)
December 31, 2019
TBA - short positions$(974)— $(974)$380 0 $(594)
Derivative liabilities$(974)$— $(974)$380 $0 $(594)
(1) Amounts disclosed for collateral received by or posted to the same counterparty include cash and the fair value of MBS up to and not exceeding the net amount of the derivative asset or liability presented in the balance sheet. The fair value of the total collateral received by or posted to the same counterparty may exceed the amounts presented. Please refer to the consolidated balance sheets for the total cash posted as collateral, which is recorded as "restricted cash," and the total fair value of financial instruments pledged as collateral for derivatives and repurchase agreements, which is shown parenthetically.parenthetically, and the total cash pledged or received as collateral which is disclosed in “cash collateral posted to/by counterparties.”

Please see Note 4 for information related to the Company’s repurchase agreements, which are also subject to underlying agreements with master netting or similar arrangements.

F-24

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

NOTE 67 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on the assumptions market participants would use when pricing an asset or liability and also considers all aspects of nonperformance risk, including the entity’s own credit standing, when measuring fair value of a liability. ASC Topic 820 established a valuation hierarchy of three levels as follows:
F-25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)


•Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date.
•Level 2 – Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs either directly observable or indirectly observable through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
•Level 3 – Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best estimate of how market participants would price the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The following table presents the Company’s financial instruments that are measured at fair value on the Company’s consolidated balance sheet by their valuation hierarchy levels as of the dates indicated:
December 31, 2020December 31, 2019
 Fair ValueLevel 1Level 2Level 3Fair ValueLevel 1Level 2Level 3
Assets carried at fair value:    
MBS$2,596,255 $0 $2,594,980 $1,275 $5,188,163 $0 $5,186,473 $1,690 
Mortgage loans held for investment (1)
6,264 0 0 6,264 8,857 0 0 8,857 
Derivative assets:
Options on U.S. Treasury futures1,094 1,094 0 0 2,883 2,883 0 0 
Interest rate swaptions1,360 0 1,360 0 573 0 573 0 
TBA securities-long positions8,888 0 8,888 0 834 0 834 0 
Total assets carried at fair value$2,613,861 $1,094 $2,605,228 $7,539 $5,201,310 $2,883 $5,187,880 $10,547 
Liabilities carried at fair value:
U.S. Treasury futures$1,527 $1,527 $0 $0 $0 $0 $0 $0 
Interest rate swaptions107 0 107 0 0 0 0 0 
TBA securities-short positions0 0 0 0 974 0 974 0 
Total liabilities carried at fair value$1,634 $1,527 $107 $0 $974 $0 $974 $0 
(1) Mortgage loans held for investment were carried at amortized cost of $9,405 on the Company’s consolidated balance sheet as of December 31, 2019.
December 31, 2021December 31, 2020
 Fair ValueLevel 1Level 2Level 3Fair ValueLevel 1Level 2Level 3
Assets carried at fair value:    
MBS$3,181,839 $— $3,181,041 $798 $2,596,255 $— $2,594,980 $1,275 
Mortgage loans held for investment4,268 — — 4,268 6,264 — — 6,264 
Derivative assets:
Options on U.S. Treasury futures— — — — 1,094 1,094 — — 
Interest rate swaptions3,202 — 3,202 — 1,360 — 1,360 — 
TBA securities-long position4,767 — 4,767 — 8,888 — 8,888 — 
Total assets carried at fair value$3,194,076 $— $3,189,010 $5,066 $2,613,861 $1,094 $2,605,228 $7,539 
Liabilities carried at fair value:
U.S. Treasury futures$2,471 $2,471 $— $— $902 $902 $— $— 
Interest rate swaptions— — — — 107 — 107 — 
Total liabilities carried at fair value$2,471 $2,471 $— $— $1,009 $902 $107 $— 

F-25

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

The fair value measurements for the Company's MBS are considered Level 2 when there are substantially similar securities actively trading or for which there has been recent trading activity in their respective markets and are based on prices received from pricing services and quotes from brokers. In valuing a security, the pricing service uses either a market approach, which uses observable prices and other relevant information that is generated by market transactions of identical or similar securities, or an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount. The Company reviews the prices it receives from its pricing sources as well as the assumptions and inputs utilized by its pricing sources for reasonableness. Examples of these observable inputs and assumptions include market interest rates, credit spreads, and projected prepayment speeds, among other things.

The Company owns other non-Agency MBS and mortgage loans that are considered Level 3 assets because there has been no recent trading activity of similar instruments upon which their fair value can be measured. The fair
F-26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

value for these Level 3 assets is measured by discounting the estimated future cash flows derived from cash flow models using significant inputs which are determined by the Company when market observable inputs are not available. Information utilized in those pricing models include the security’s credit rating, coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected credit losses, and credit enhancement as well as certain other relevant information. The Company used a constant prepayment rate assumption of 10%, default rate of 2%, loss severity of 20%, and a discount rate of 7.0% in measuring the fair value of its Level 3 assets as of December 31, 2020.2021. Significant changes in any of these inputs in isolation may result in a significantly different fair value measurement. Level 3 assets are generally most sensitive to the default rate and severity assumptions.

The activity of the Company’s Level 3 assets during the year ended December 31, 20202021 is presented in the following table:
Year EndedYear Ended
December 31, 2020December 31, 2021
Other Non-Agency MBSMortgage LoansOther Non-Agency MBSMortgage Loans
Balance as of beginning of periodBalance as of beginning of period$1,690 $9,405 Balance as of beginning of period$1,275 $6,264 
Change in fair value (1)
Change in fair value (1)
(316)(253)
Change in fair value (1)
(195)131 
Principal paymentsPrincipal payments(439)(2,854)Principal payments(533)(2,101)
Accretion (amortization)Accretion (amortization)340 (34)Accretion (amortization)251 (26)
Balance as of end of periodBalance as of end of period$1,275 $6,264 Balance as of end of period$798 $4,268 
(1) Change in fair value for mortgage loans is recorded within “unrealized gain (loss) on investments, net” in net income and change in fair value for other non-Agency MBS is recorded as unrealized gain (loss) in “other comprehensive income”. Change in fair value for mortgage loans is recorded as unrealized gain (loss) in “gain(loss) on investments, net“ and the amount shown for the year ended December 31, 2020 is net of a cumulative adjustment of $(548) made to the amortized cost as of December 31, 2019 as a result of the Company’s election of the fair value option for its mortgage loans effective January 1, 2020.income.”

U.S. Treasury futures and options on U.S. Treasury futures are valued based on closing exchange prices on these contracts and are classified accordingly as Level 1 measurements. The fair value of interest rate swaptions is based on the fair value of the underlying interest rate swap and time remaining until its expiration and is carried on the balance sheet net of any deferred premium to be paid upon expiration. The fair value of TBA securities is estimated using methods similar those used to fair value the Company’s Level 2 MBS.

The Company also had interest rate swap agreements outstanding as of December 31, 2019. The fair value of interest rate swaps is measured using the income approach with the forward interest rate swap curve as its primary input, which is considered an observable input, and thus their fair values are considered Level 2 measurements. The carrying value on the Company’s consolidated balance sheet as of December 31, 2019 nets to $0 because the daily exchange of variation margin is legally considered as settlement of the derivative as opposed to a pledge of collateral. The Company did not have any interest rate swap agreements outstanding as of December 31, 2020.


F-26

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

NOTE 78 – SHAREHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

Preferred Stock. The Company's articles of incorporation authorize the issuance of up to 50,000,000 shares of preferred stock, par value $0.01 per share. The Company’s Board of Directors has designated 6,600,000 shares of the Company’s preferred stock for issuance as Series C Preferred Stock, andof which the Company soldhas 4,460,000 of such shares during the first quarter of 2020 through a public offering for which it received proceeds of $107,843, net of $3,657 in broker commissions and other expenses. The Company used the proceeds to redeem all 2,300,000 outstanding shares of its 8.50% Series A Cumulative Redeemable Preferred Stock at an aggregate redemption price of approximately $25.35 per share, which included accumulated and unpaid dividends declared as of the redemption date March 14, 2020. The Company also used the proceeds to partially redeem 1,700,000 shares of its Series B Preferred Stock at an aggregate redemption price of approximately $25.32 per share, which included accumulated and unpaid dividends declared as of the redemption date March 16, 2020. The excess of the $25.00 liquidation price per share over the carrying value of the preferred stock redeemed resulted in a charge of $(3,914) to net income to common shareholders for the year ended December 31, 2020.

2021. The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption, and will remain outstanding indefinitely unless redeemed or otherwise repurchased or converted into common stock pursuant to the terms of the Series C Preferred Stock. The Company had 2,788,330 shares of its Series B Preferred Stock remaining as of December 31, 2020, which could be redeemed at any time and from time to time at the Company's option at a cash redemption price of $25.00 per share plus any accumulated and unpaid dividends. Except under certain limited circumstances described in Article IIIC of the Company’s Restated Articles of Incorporation, as amended, the Company may not redeem the Series C Preferred Stock prior to April 15, 2025. On or after that date, the Series C Preferred Stock may be redeemed at any time and from time to time at the Company's option at a cash redemption price of $25.00 per share plus any accumulated and unpaid dividends. Because the Series C Preferred Stock is redeemable only at the option of the issuer, it is classified as equity on the Company’s consolidated balance sheet.

The Series BC Preferred Stock paid a cumulative cash dividend equivalent to 7.625% of the $25.00 liquidation preference per share each year. The Series C Preferred stock pays a cumulative cash dividend equivalent to 6.900% of the $25.00 liquidation preference per share each year until April 15, 20252025. The terms of the Series C Preferred Stock state that upon which dateApril 15, 2025 and thereafter, the Company will pay cumulative cash dividends at a percentage of the $25.00 liquidation value per share equal to an annual floating rate of three-month3-month LIBOR plus a spread of 5.461%. The Company paid its regular quarterly dividendHowever, because 3-month LIBOR will cease to be a published rate as of $0.4765625 per shareJune 30, 2023, the fallback provision provided in the terms of Series B Preferred Stock and $0.43125 per share ofthe Series C Preferred Stock on January 15, 2021will allow for the Company to shareholdersappoint a third-party independent financial institution of record as of January 1, 2021.

Common Stock. The following table summarizes information regarding monthly dividend declarations on the Company’s common stock during the year ended December 31, 2020:
Year Ended
December 31, 2020
Declaration DateAmount DeclaredRecord DatePayment Date
January 13, 2020$0.15 January 24, 2020February 3, 2020
February 14, 20200.15 February 24, 2020March 2, 2020
March 10, 20200.15 March 23, 2020April 1, 2020
April 8, 20200.15 April 22, 2020May 1, 2020
May 12, 20200.15 May 22, 2020June 1, 2020
June 10. 20200.13 June 22, 2020July 1, 2020
July 13, 20200.13 July 23, 2020August 4, 2020
August 10, 20200.13 August 21, 2020September 1, 2020
September 14, 20200.13 September 24, 2020October 1, 2020
October 13, 20200.13 October 23, 2020November 2, 2020
November 10, 20200.13 November 20, 2020December 1, 2020
December 10, 20200.13 December 21, 2020January 4, 2021
national
F-27

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

standing to select an industry accepted alternative base rate. The Company paid its regular quarterly dividend of $0.43125 per share of Series C Preferred Stock on January 17, 2022 to shareholders of record as of January 1, 2022.

During the first quarter of 2021, the Company redeemed the remaining 2,788,330 outstanding shares of its 7.625% Series B Cumulative Redeemable Preferred Stock at an aggregate redemption price of approximately $25.15 per share, which included accumulated and unpaid dividends declared as of the redemption date February 15, 2021. The excess of the $25.00 liquidation price per share over the carrying value of the preferred stock redeemed resulted in a charge of $(2,987) to net income to common shareholders for the year ended December 31, 2021.

Stock and Incentive Plans.Common Stock. The Company’s Board adoptedDuring the 2020 Stock and Incentive Plan, which was approved by the Company’s shareholders on June 9, 2020. The 2020 Plan, which replaced the Company’s 2018 Stock and Incentive Plan (the “2018 Plan”), reserves for issuance up to 2,300,000 common shares for eligible employees, non-employee directors, consultants, and advisors toyear months ended December 31, 2021, the Company to be grantedissued 5,784,947 shares of its common stock through its ATM program at an aggregate value of $108,980, net of $1,380 in broker commissions and fees, of which 730,499 shares were issued during the formfourth quarter of stock options, restricted stock, restricted stock units, stock appreciation rights, performance units,2021 at an aggregate value of $12,780, net of $162 in broker commissions and performance cash awards. Awards previously granted under the 2018 Plan or any other prior equity plan will remain outstanding and valid in accordance with their terms, but no new awards will be granted under the 2018 Plan or any other prior equity plan. fees.

Share-Based Compensation. Total stock-basedshare-based compensation expense recognized by the Company for the year ended December 31, 20202021 was $1,823$2,516 compared to $1,205$1,823 and $1,231$1,205 for the years ended December 31, 20192020 and December 31, 2018,2019, respectively. The following table presentstables present a rollforward of the restricted stock activityshare-based awards for the periods indicated:
Year EndedYear Ended
December 31, 2020December 31, 2019December 31, 2018 December 31, 2021
SharesWeighted Average Grant Date Fair Value Per ShareSharesWeighted Average Grant Date Fair Value Per ShareSharesWeighted Average Grant Date Fair Value Per ShareRestricted StockRSUsPSUs
Restricted stock outstanding as of beginning of period119,213 $18.56 113,904 $19.19 117,701 $21.02 
SharesWeighted Average
Grant Date Fair Value
Per Share		SharesWeighted Average
Grant Date Fair Value
Per Share		SharesWeighted Average
Grant Date Fair Value
Per Share
Awards outstanding, beginning of periodAwards outstanding, beginning of period281,761 $14.74 — $— — $— 
GrantedGranted40,027 19.02 55,019 19.40 110,040 19.40 
VestedVested(123,984)15.28 — — — — 
Awards outstanding, end of periodAwards outstanding, end of period197,804 $15.27 55,019 $19.40 110,040 $19.40 
Year Ended
December 31, 2020
Restricted StockRSUsPSUs
SharesWeighted Average
Grant Date Fair Value
Per Share		SharesWeighted Average
Grant Date Fair Value
Per Share		SharesWeighted Average
Grant Date Fair Value
Per Share
Awards outstanding, beginning of periodAwards outstanding, beginning of period119,213 $18.56 — $— — $— 
GrantedGranted240,293 13.88 68,004 18.09 71,053 18.95 Granted240,293 13.88 — — — — 
VestedVested(77,113)17.94 (62,695)19.20 (74,850)21.85 Vested(77,113)17.94 — — — — 
ForfeitedForfeited(632)17.10 — — — — Forfeited(632)17.10 — — — — 
Restricted stock outstanding as of end of period281,761 $14.74 119,213 $18.56 113,904 $19.19 
Awards outstanding, end of periodAwards outstanding, end of period281,761 $14.74 — $— — $— 
F-28

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.
(amounts in thousands except share data)

Year Ended
December 31, 2019
Restricted StockRSUsPSUs
SharesWeighted Average
Grant Date Fair Value
Per Share		SharesWeighted Average
Grant Date Fair Value
Per Share		SharesWeighted Average
Grant Date Fair Value
Per Share
Awards outstanding, beginning of period113,904 $19.19 — $— — $— 
Granted68,004 18.09 — — — — 
Vested(62,695)19.20 — — — — 
Awards outstanding, end of period119,213 $18.56 — $— — $— 

The number of RSUs that may potentially vest will range from 0% if the recipient’s time-based vesting condition is not met to 100% if the time-based vesting condition is met. The number of PSUs that may potentially vest will range from 0% to 200% based on the achievement of the performance goals defined in the grant award. As of December 31, 2020,2021, the Company expects 100% of the 110,040 PSUs will vest on December 31, 2023.

The following table discloses the grant date fair value of the Company’s remaining nonvested restricted stock is $2,760unvested awards as of December 31, 2021, which will be amortized into compensation expense over a weighted averagethe period of 2.1 years.disclosed:

December 31, 2021
Remaining Compensation CostWAVG Period of Recognition
(in Years)
Restricted stock$1,712 1.3
RSUs841 2.3
PSUs1,622 2.0
Total$4,175 1.7


NOTE 89 – INCOME TAXES

The Company's estimated REIT taxable income before consideration of its NOL carryforward was $14,884 for the year ended December 31, 2021, $77,492 for the year ended December 31, 2020, and $23,334 for the year ended December 31, 2019, and $21,085 for the year ended December 31, 2018.2019. After common and preferred dividend distributions during those years as well as utilization of the Company's NOL carryforward to offset taxable earnings, the Company does not expect to incur any income tax liability for the year ended December 31, 20202021 and did not incur any material income tax liability for the years ending December 31, 20192020 or December 31, 2018.2019. As of December 31, 2020,2021, the Company has $17,353 of NOL carryforward remaining which will expire over the next 54 years.

After reviewing for any potentially uncertain income tax positions, the Company has concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria of ASC Topic 740 as of December 31, 2020,2021, December 31, 2019,2020, or December 31, 2018,2019, although its tax returns for those tax years are open to examination by the IRS. In the event that the Company incurs income tax related interest and penalties, its policy is to classify them as a component of provision for income taxes.

F-28

NOTE 9 – RELATED PARTY TRANSACTIONS

As noted in previous filings, DCI, a former affiliate of the Company, was named a party to several lawsuits in 1999 and 2000 regarding the activities of DCI while it was an operating subsidiary of an affiliate of the Company. The Company was named a party to several of the lawsuits (the “DCI Litigation”) due to its affiliation with DCI. In December 2000, the Company and DCI entered into a Litigation Cost Sharing Agreement (the “Agreement”) whereby the Company agreed to advance DCI's portion of the costs of defending against the DCI Litigation. As discussed in Note 1, certain plaintiffs are seeking to enforce the DCI judgment against the Company under various legal theories including pursuant to the Agreement. The Company's advances to cover DCI's costs for the DCI Litigation during the years ended December 31, 2020, 2019, and 2018 were $0, $63, and $307, respectively, not including interest. As of December 31, 2020, the Company has a receivable on its consolidated balance sheet of $15,961 for advances made in connection with the DCI Litigation and amounts due, including interest, under the Agreement, which has been fully reserved for collectability by the Company because DCI does not currently have any assets. DCI is currently wholly owned by an unaffiliated company whose sole shareholder is an executive of the Company..

NOTE 10 – SUBSEQUENT EVENTS

Subsequent to December 31, 2020:

•the Company issued 3,162,500 shares of common stock through an underwritten public offering for which it received proceeds of approximately $55,510, net of expenses; and

•the Company redeemed the remaining 2,788,330 shares of its Series B Preferred Stock at an aggregate redemption price of approximately $25.15 per share, which included accumulated and unpaid dividends declared as of the redemption date of February 15, 2021.
F-29