Exhibit
10.5
 
 SEVERANCE
AGREEMENT
 
 This AGREEMENT is made as of the
11th
day of June, 2004, by and between Dynex Capital, Inc., a Virginia corporation
(the “Company”), and Stephen J. Benedetti (the “Executive”).
 
 The Board of Directors of the Company
(the “Board”) believes it is in the best interests of the Company to diminish
the inevitable distraction of the Executive by virtue of the personal
uncertainties and risks in the event Executive terminates his employment for
Good Reason (as defined below) or is terminated by the Company without Cause (as
defined below) and to encourage the Executive’s full attention and dedication to
the Company currently, and to provide the Executive with compensation and
benefits arrangements upon such termination which ensure that the compensation
and benefits expectations of the Executive will be satisfied and which are
competitive with those of other corporations.  The Executive currently
serves as Chief Financial Officer, Secretary and Treasurer of the Company and as
its Principal Executive Officer.  The Board has approved this
Agreement and authorized its execution and delivery on the Company’s behalf to
the Executive.
 
 NOW,
THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
 
 1.           Term.  The
term of this Agreement shall commence on the date hereof and shall continue for
the duration of the Executive’s employment with the Company (the “Term”).
 
 2.           Certain
Definitions.
 
 (a)           “Change in Control”
shall mean any of the following:
 
 (i)           The
acquisition by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) (a
“Person”) of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (A) the then outstanding shares of common
stock of the Company (the “Outstanding Company Common
Stock”) or (B) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the “Outstanding Company Voting
Securities”); or
 
 (ii)           Individuals
who, as of the date hereof, constitute the Board (the “Incumbent Board”)
cease for any reason to constitute at least a majority of the Board; provided,
however, that any individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company’s shareholders, was
approved by a vote of at least two-thirds of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or con­sents by or on behalf of
a Person other than the Board; or
 
 (iii)           Consummation
of a reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company (a “Business
Combination”), in each case, unless, following such Business
Combination,
  
  
 (A)           all
or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, at least 80% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation a corporation which as a result of
such transaction owns the Company or all or substantially all of the Company’s
assets either directly or through one or more subsidiaries) in substantially the
same proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be; or
 
 (B)           no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination; or
 
 (C)           at
least a majority of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
 
 (iv)           Approval
by the shareholders of the Company of a complete liquidation or dissolution of
the Company.
 
 Provided,
however, that the provisions of item (iii) of this definition will not apply to
the recapitalization plan commenced by the Company on March 29, 2004, and
approved by its shareholders in April, 2004.
 
 (b)           “Date of Termination”
means (i) if the Executive’s employment is terminated by the Company for Cause,
or by the Executive for Good Reason, the date of receipt of the Notice of
Termination or any later date specified therein, as the case may be, (ii) if the
Executive’s employment is terminated by the Company other than for Cause or for
Good Reason, the date on which the Company or the Executive notifies the other
of such termination, as the case may be, and (iii) if the Executive’s employment
is terminated by reason of death or disability, the date of death of the
Executive or the effective date of the disability, as the case may
be.
 
 (c)           The
“Effective
Date” shall mean the first date during the Term on which an event occurs
that give rises to Good Reason for termination of the Executive’s employment
with the Company.
 
 
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  3.           Termination of
Employment.
 
 (a)           Good
Reason.  The Executive may terminate his employment during the
term for Good Reason.  For purposes of this Agreement, “Good Reason”
shall mean any of the following:
 
 (i)           the
assignment to the Executive of any duties inconsistent with the Executive’s
position (including status, offices, titles and reporting requirements),
authority, duties or responsibilities that are not at least commensurate in all
material respects with the most significant of those held, exercised and
assigned at any time during the 120-day period immediately preceding the
Effective Date, notwithstanding the Executive’s official title on the Effective
Date, or any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith and which
is remedied by the Company promptly after receipt of notice thereof given by the
Executive, provided, however, that a dimunition in duties shall not be deemed to
occur solely as a result of the Executive no longer performing those duties
typically assoicated with that of a chief executive officer of a public
company;
 
 (ii)           any
failure by the Company to provide the Executive with compensation and general
benefits that are not at least commensurate in all material respects with those
provided to Executive immediately preceding the Effective Date, other than an
isolated, insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice thereof given
by the Executive;
 
 (iii)           the
Company’s requiring the Executive to be based at any office or location that is
more than 50 miles from the location where the Executive was employed
immediately preceding the Effective Date, or the Company’s requiring the
Executive to travel on Company business for more than two weeks on average per
month after the Effective Date; or
 
 (iv)           the
occurrence of a Change of Control.
 
 (b)           Without Good
Reason.  The Executive may terminate his employment during the
term without Good Reason.
 
 (c)           Cause.  The
Company may terminate the Executive’s employment during the term for
Cause.  For purposes of this Agreement, “Cause” shall mean any of the
following:
 
 (i)           the
willful and continued failure of the Executive to perform substantially the
Executive’s duties with the Company (other than any such failure resulting from
incapacity due to physical or mental illness), if, within 30 days of receiving a
written demand for substantial performance from the Board or the President of
the Company which specifically identifies the manner in which the Executive has
not substantially performed his duties, the Executive shall have failed to cure
such performance or to take measures to cure the performance, or
 
 (ii)           the
willful engaging by the Executive in illegal conduct or gross misconduct which
is materially and demonstrably injurious to the Company.
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 For purposes of this provision, no act
or failure to act, on the part of the Executive, shall be considered “willful”
unless it is done, or omitted to be done, by the Executive in bad faith or
without reasonable belief that the Executive’s action or omission was in the
best interests of the Company.  Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board or a
committee thereof, or based upon the advice of counsel for the Company shall be
conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company.  The cessation of
employment of the Executive shall not be deemed to be for Cause unless and until
there shall have been delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of not less than three-quarters of the entire
membership of the Board at a meeting of the Board called and held for such
purpose (after reasonable notice is provided to the Executive and the Executive
is given an opportunity, together with counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, the Executive is guilty of
the conduct described in subparagraph (i) or (ii) above, and specifying the
particulars thereof in detail.
 
 (d)           Without
Cause.  The Company may terminate the Executive other than for
Cause.
 
 4.           Notice of
Termination.  Any termination of Executive’s employment by the
Company for or without Cause, or by the Executive for or without Good Reason,
shall be communicated by a Notice of Termination to the other party. For
purposes of this Agreement, a “Notice of Termination” means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive’s
employment under the provision so indicated and (iii) if the Date of Termination
is other than the date of receipt of such notice (which date shall be not more
than thirty days after the giving of such notice).  The failure by the
Company or the Executive to set forth in the Notice of Termination any fact or
circumstance which contributes to a showing of Cause or Good Reason shall not
waive any right of the Executive or the Company, respectively, hereunder or
preclude the Executive or the Company, respectively, from asserting such fact or
circumstance in enforcing the Executive’s or the Company’s rights
hereunder.
 
 5.
              Obligations of the
      Company upon Termination.
 
 (a)           Good Reason or Without
Cause.  If the Executive’s employment is terminated by
Executive for Good Reason, or by the Company without Cause, within 30 days after
the Date of Termination, the Company shall pay to the Executive, in cash or
immediately available funds, a lump sum payment in cash equal to the aggregate
of the following amounts:
 
 (i)           the
sum of (A) the Executive’s annual base salary through the Date of Termination to
the extent not theretofore paid and (B) any bonuses to which the Executive is
entitled and to the extent not theretofore paid (the “Accrued
Obligations”); and
 
 (ii)           the
product of (A) the Executive's annual base salary immediately prior to the
Effective Date and (B) a fraction, the numerator of which is the sum of (1) the
number of months of Executive's employment with the Company and (2) the number
of months of Executive's employment with the Company divided by five (rounded to
the nearest whole month), and the denominator of which is 60;
and
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  (iii)           to
the extent not theretofore paid or provided, the Company shall timely pay or
provide to the Executive any other amounts or benefits required to be paid or
provided or which the Executive is eligible to receive under any plan, program,
policy or practice or contract or agreement of the Company and its affiliated
companies (such other amounts and benefits shall be hereinafter referred to as
the “Other
Benefits”).
 
 Executive also shall be fully vested in
any options, stock appreciation rights, stock awards, dividend equivalent
rights, and any other form of incentive stock compensation granted the Executive
under the 2004 Stock Incentive Plan as of the Date of Termination, death or
disability.
 
 In addition, if the Executive’s
employment is terminated by Executive for Good Reason, or by the Company without
Cause, the Company shall be obligated to provide continued coverage at the
Company’s expense under the Company’s medical, dental, life insurance and
disability policies or arrangements with respect Executive for a period of
twelve months following the Date of Termination; provided, however, that if the
Executive becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer provided plan, the
medical and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility
provided that the costs of obtaining such medical and other welfare benefits is
competitive to the costs of such benefits to the Executive immediately prior to
the termination of the Executive’s employment.
 
 (b)           Death.  If
the Executive’s employment is terminated by reason of the Executive’s death
during the Term, this Agreement shall terminate without further obligations to
the Executive’s legal representatives under this Agreement, other than for
payment of Accrued Obligations, the timely payment or provision of Other
Benefits and any payments that may be due Executive under the 2004 Stock
Incentive Plan.  Accrued Obligations shall be paid to the Executive’s
estate or beneficiary, as applicable, in a lump sum in cash or immediately
available funds within 30 days of the Date of Termination.
 
 (c)           Disability.  If
the Executive’s employment is terminated by reason of the Executive’s disability
during the Term, this Agreement shall terminate without further obligations to
the Executive, other than for payment of Accrued Obligations, the timely payment
or provision of Other Benefits and any payments that may be due Executive under
the 2004 Stock Incentive Plan.  Accrued Obligations shall be paid to
the Executive in a lump sum in cash or immediately available funds within 30
days of the Date of Termination.
 
 (d)           Cause; Without Good
Reason.
 
 (i)           If
the Executive’s employment shall be terminated for Cause during the Term, this
Agreement shall terminate without further obligations to the Executive other
than the obligation to pay to the Executive (A) his annual base salary through
the Date of Termination, (B) any bonus to the extent already earned by the
Executive, but unpaid, (C) the amount of any compensation previously deferred by
the Executive, and (D) Other Benefits, in each case to the extent theretofore
unpaid.
 
 (ii)           If
the Executive voluntarily terminates employment during the Term, excluding a
termination for Good Reason, this Agreement shall terminate without further
obligations to the Executive, other than for Accrued Obligations and the timely
payment or provision of Other Benefits.  In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
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 6.           Non-exclusivity of
Rights.  Nothing in this Agreement shall prevent or limit the
Executive’s continuing or future participation in any plan, program, policy or
practice provided by the Company and for which the Executive may qualify, nor,
subject to Section 13(f), shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company.  Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, policy, practice or program of or
any contract or agreement with the Company at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice or
program or contract or agreement except as explicitly modified by this
Agreement.
 
 7.           Full
Settlement.  The Company’s obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others.  In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement
and such amounts shall not be reduced whether or not the Executive obtains other
employment.  The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which the Executive may reasonably
incur as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Executive about the amount
of any payment pursuant to this Agreement), plus in each case interest on any
delayed payment at the applicable Federal rate provided for in Section
7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”).
 
 8.           Limitation on
Benefits.  It is the intention of the parties that payments to
be made to the Executive pursuant to this Agreement and under any other plan,
agreement or arrangement maintained by the Company shall not constitute "excess
parachute payments" within the meaning of Section 280G of the Code and any
regulations thereunder.  If the independent accountants serving as
auditors for the Company on the Effective Date (or any other accounting firm
designated by the Company) determine that any payment or distribution by the
Company to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise) would be nondeductible by the Company under Section 280G of the Code
(and any successor provision) as amended from time to time, then the amounts
payable or distributable under this Agreement will be reduced to the maximum
amount which may be paid or distributed without causing such payments or
distributions to be nondeductible.  The determination shall take into
account (a) whether the payments or distributions are "parachute payments" under
Section 280G, (b) the amount of payments and distributions under this Agreement
or any other plan, agreement or arrangement that constitute reasonable
compensation, and (c) the present value of such payments and distributions
determined in accordance with Treasury Regulations in effect from time to
time.
 
 9.           Successors.
 
 (a)           This
Agreement is personal to the Executive and without the prior written consent of
the Company shall not be assignable by the Executive otherwise than by will or
the laws of descent and distribution.  This Agreement shall inure to
the benefit of and be enforceable by the Executive’s legal
representatives.
 
 (b)           This
Agreement shall inure to the benefit of and be binding upon the Company and its
successors and assigns.
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 (c)           The
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to assume expressly and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
 
 10.           Miscellaneous.
 
 (a)           This
Agreement shall be governed by and construed in accordance with the laws of the
Commonwealth of Virginia without reference to principles of conflict of
laws.  The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.  This Agreement may not be
amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal
representatives.
 
 (b)           All
notices and other communications hereunder shall be in writing and shall be
given by hand delivery to the other party or by registered or certified mail,
return receipt requested, postage prepaid, addressed as follows:
 
 If to the
Executive:
 
 Stephen
      J. Benedetti
 ________________
 ________________
 Facsimile:
      __________________
 
 If to the
Company:
 
 Dynex Capital, Inc.
 4551 Cox Road, Suite 300
 Glen Allen, Virginia
23060
 Facsimile: 804-217-5860
 
 or to
such other address as either party shall have furnished to the other in writing
in accordance herewith.  Notice and communications shall be effective
when actually received by the addressee.
 
 (c)           The
invalidity or unenforceability of any pro­vision of this Agreement shall not
affect the validity or enforceability of any other provision of this
Agreement.
 
 (d)           The
Company may withhold from any amounts payable under this Agreement such federal,
state, local or foreign taxes as shall be required to be withheld pursuant to
any applicable law or regulation.
 
 (e)           The
Executive’s or the Company’s failure to insist upon strict compliance with any
provision of this Agreement or the failure to assert any right the Executive or
the Company may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason pursuant to Section 2(a) of
this Agreement, shall not be deemed to be a waiver of such provision or right or
any other provision or right of this Agreement.
 
 (f)           The
Executive and the Company acknowledge that, except as may otherwise be provided
under any other written agreement between the Executive and the Company, the
employment of
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 the
Executive by the Company is “at will” and, therefore, the Executive’s employment
may be terminated by either the Executive or the Company at any
time.  From and after the Date of Termination, this Agreement shall
become effective, and shall replace and supercede any existing employment
agreement between the Company and the Executive, to the extent its terms are
more advantageous to the Executive, except that any covenants contained in any
prior agreement between Executive and the Company restricting Executive’s
ability to compete with or to solicit the employees, clients or customers of the
Company, or to use or disclose any Confidential Information (as that term may
defined in any such agreement), shall remain in full force and
effect.
 
 
 
 [SIGNATURES
ON FOLLOWING PAGE]
 
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 IN WITNESS WHEREOF, the Executive has
hereunto set the Executive’s hand and, pursuant to the authorization from its
Board of Directors, the Company has caused these presents to be executed in its
name on its behalf, all as of the day and year first above written.
 
 COMPANY:
 DYNEX CAPITAL, INC.
 
 
 By:         _____________________________________
 Thomas B. Akin
 
 Title:                      Chairman of the Board of
Directors
 
 
 
 EXECUTIVE:
 
 __________________________________________
 Stephen J. Benedetti
 
 
 1000981.04
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