# Chimera Investment Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Chimera Investment Corp](/companies/cim.md) (CIK 1409493)
- Form: 10-Q
- Filed: 2023-11-02
- Accepted by EDGAR: Nov 2, 2023, 16:16 ET
- Period: 2023-09-30
- Accession: 0001628280-23-036403
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1409493/000162828023036403/cim-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1409493/000162828023036403/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $132.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $383.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $75.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $100.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $2.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $95.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.17 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.07 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $0.17 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 226,734,643 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 232,288,318 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $181.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $152.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $33.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $138.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $12.89bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $10.39bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $2.49bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 106,003 characters.

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to those statements included in Item 1 of this Quarterly Report on Form 10-Q.

In this Quarterly Report on Form 10-Q, references to “we,” “us,” “our” or “the Company” refer to Chimera Investment Corporation and its subsidiaries unless specifically stated otherwise or the context otherwise indicates. The following defines certain of the commonly used terms in this Quarterly Report on Form 10-Q: Agency refers to a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae; MBS refers to mortgage-backed securities secured by pools of residential or commercial mortgage loans; RMBS refers to mortgage-backed securities secured by pools of residential mortgage loans; CMBS refers to mortgage-backed securities secured by pools of commercial mortgage loans; Agency RMBS and Agency CMBS refer to MBS that are secured by pools of residential and commercial mortgage loans, respectively, and are issued or guaranteed by an Agency; Agency MBS refers to MBS that are issued or guaranteed by an Agency and includes Agency RMBS and Agency CMBS collectively; Non-Agency RMBS refers to residential MBS that are not guaranteed by any agency of the U.S. Government or any Agency; IO refers to Interest-only securities.

### SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about, among other things, possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words ‘‘believe,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘plan,’’ ‘‘continue,’’ ‘‘intend,’’ ‘‘should,’’ ‘‘may,’’ ‘‘would,’’ ‘‘will’’ or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, are forward-looking by their nature:

- our business and investment strategy;
- our ability to accurately forecast the payment of future dividends on our common and preferred stock, and the amount of such dividends;
- our ability to determine accurately the fair market value of our assets;
- availability of investment opportunities in real estate-related and other securities, including our valuation of potential opportunities that may arise as a result of current and future market dislocations;
- our expected investments;
- changes in the value of our investments, including negative changes resulting in margin calls related to the financing of our assets;
- changes in inflation, interest rates and mortgage prepayment rates;
- prepayments of the mortgage and other loans underlying our mortgage-backed securities, or MBS, or other asset-backed securities, or ABS;
- rates of default, delinquencies, forbearance, deferred payments or decreased recovery rates on our investments;
- general volatility of the securities markets in which we invest;
- our ability to maintain existing financing arrangements and our ability to obtain future financing arrangements;
- our ability to affect our strategy to securitize residential mortgage loans;
- interest rate mismatches between our investments and our borrowings used to finance such purchases;
- effects of interest rate caps on our adjustable-rate investments;
- the degree to which our hedging strategies may or may not protect us from interest rate volatility;
- the impact of and changes to various government programs;
- the impact of and changes in governmental regulations, tax law and rates, accounting guidance, and similar matters;
- market trends in our industry, interest rates, the debt securities markets or the general economy;
- estimates relating to our ability to make distributions to our stockholders in the future;
- our understanding of our competition;
- our ability to find and retain qualified personnel;
- our ability to maintain our classification as a real estate investment trust, or REIT, for U.S. federal income tax purposes;
- our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or 1940 Act;
- our expectations regarding materiality or significance;
- the effectiveness of our disclosure controls and procedures; and
- changes in Adjustable Interest Rate (LIBOR) Act (the “Act”), additional regulations under the Act or changes in the interpretation of the Act and related regulations.

Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

### Executive Summary

We are a publicly traded REIT that is primarily engaged in the business of investing directly or having a beneficial interest in a diversified portfolio of mortgage assets, including residential mortgage loans, Non-Agency RMBS, Agency RMBS, Agency CMBS, business purpose and investor loans, and other real estate-related assets. The MBS and other real estate-related securities we purchase may include investment-grade, non-investment grade, and non-rated classes. We use leverage to increase potential returns from our investments. Our principal business objective is to provide attractive risk-adjusted returns through the generation of distributable income and through asset performance linked to mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return.

We currently focus our investment activities primarily on acquiring residential mortgage loans. In addition, we acquire and own Non-Agency RMBS and Agency mortgage-backed securities, or MBS. At September 30, 2023, based on the fair value of our interest earning assets, approximately 91% of our investment portfolio was residential mortgage loans, 8% of our investment portfolio was Non-Agency RMBS, and 1% of our investment portfolio was Agency MBS. At December 31, 2022, based on the fair value of our interest earning assets, approximately 88% of our investment portfolio was residential mortgage loans, 9% of our investment portfolio was Non-Agency RMBS, and 3% of our investment portfolio was Agency MBS.

We use leverage to seek to increase our potential returns and to finance the acquisition of our assets. We expect to finance our investments using a variety of financing sources, including securitizations, warehouse facilities and repurchase agreements. We may seek to manage our debt and interest rate risk by utilizing interest rate hedges, such as interest rate swaps, caps, options and futures to reduce the effect of interest rate fluctuations related to our financing sources.

Our investment strategy is intended to take advantage of opportunities in the current interest rate and credit environment. We adjust our strategy in response to changing market conditions by shifting our asset allocations across various asset classes as interest rate and credit cycles change over time. We believe that our strategy will provide us an opportunity to pay dividends throughout changing market cycles. We expect to take a long-term view of assets and liabilities.

### Business Update

After gaining nearly 17% in the first half of 2023, the S&P 500 posted a negative return of 3.3% in the third quarter. Increased concerns over government deficit spending and high inflation caused bond prices to decline and their yields to rise further. Many fixed-income investors began the quarter optimistic that the Federal Reserve had orchestrated a soft landing for the economy, and that the era of tight monetary policy would soon come to an end. That outlook turned negative over August and September, and the prospect of a sustained period of higher rates prevailed. Overall, the U.S. labor market appears very strong. Inflation, rose slightly in August, but has been on a downward trend since the third quarter of 2022; however, overall inflation still remains high. Comments from Fed policymakers suggest a further rate hike is likely to come before the end of the year, while the dot plot now illustrates a higher median rate for 2024. Overall, in the third quarter, the fixed-income markets experienced both increased volatility and higher interest rates. Financing costs for the government and private sector increased to levels not seen in well over a decade. Considering the market conditions our investment activity was limited to purchase of $32 million of Residential transition loans with a weighted-average-coupon of 10.84% and a $4 million of Non-Agency bond.

Interest rate volatility had a larger impact on medium to longer-term maturities along the yield curve. Over the quarter, the 2-year treasury increased by 15 basis points and the 10-year treasury increased by 73 basis points. At the July FOMC meeting, the Fed increased overnight rates by 25 basis points and did not further increase rates in September. Higher interest rates experienced in 2023 have negatively impacted the cost of borrowing for homeowners and consumers. According to Freddie Mac, the 30-year mortgage rate ended the quarter at 7.5 %, up from their low of 2.8 % in 2021. We believe the Federal Reserve could raise short-term rates again in the fourth quarter, and market sentiment will continue to be higher rates for the longer term. As such, strengthening our balance sheet and managing our liabilities continue to remain the top focus of management. The repurchase financing markets continued to operate smoothly in the third quarter, and during the quarter we continued to roll existing repurchase fundings while committing to de-lever the portfolio, where appropriate, and until market conditions improve. For the third quarter, our securitized debt and repurchase borrowings decreased by $444 million and $83 million, respectively. We continue to believe securitization is the optimal financing technique for our liabilities as it enables long-term non-mark-to-market financing on our residential mortgage loans. Our repurchase funding costs increased by 23 basis-points during the quarter, modestly higher than the second quarter and securitized debt represented approximately 74% of our total liabilities. Additionally, during the third quarter, we began the process of refinancing an existing high fixed rate non-mark-to-market financing into a new two-year limited mark-to-market variable rate with a rate cap that is significantly lower than existing facility. This refinancing was completed in October 2023.

### Market Conditions and our Strategy

Looking ahead to the fourth quarter, financial markets continue to be roiled by a litany of factors both economically and geopolitically. The increase in rates along the yield curve will likely impact inflation and the economy as much as Fed actions. While it does appear that the Fed is nearing the end of its hiking cycle of short-term interest rates, it is also clear that there is a likely prospect of persistent higher rates. The uptrend in yields could continue and a persistent move in 10-year Treasury yields above 5% is possible. Home sales are on pace for the slowest year since the great financial crisis in 2008. Elevated home prices, constrained housing inventory, and high mortgage rates have created a housing affordability crisis. Apart from data driven volatility, there is also a rising risk of a government shutdown that could further exacerbate volatility in the capital markets.

Corporate bond markets outperformed government bonds, with spreads tightening in Investment Grade (IG) and modestly wider in High Yield (HY).

Securitized Products spreads ended the quarter mixed with tops of the capital stack seeing marginal widening while bottoms of the stack seeing significant tightening – driven by strong housing market fundamentals and strong technical indicators. While Non-Agency RMBS supply picked up this quarter – new issuance is still running approximately 50% less than the same period last year. Reperforming loans held up well given its shorter duration and strong credit profile driven by seasoning and low amortized HPI adjusted LTVs. Agency RMBS spreads hit historic wides. Spread widening was driven by increased volatility as longer-term treasuries sold-off. Technical indicators also remain negative with continued runoff from the Fed and reduced bank participation. The outlook going forward points to continued uncertainty over interest rates as well as spreads, especially given the recent geopolitical turmoil.

Higher interest rates at the end of the quarter drove a decline in our book value per common share to $6.90 as of September 30, 2023, as compared to $7.29 as of June 30, 2023.

We continue to manage our portfolio consistent with our belief that interest rates will be higher for longer. For the first nine months of 2023, we reduced our total recourse financing exposure by $831 million. We continue to seek opportunities to finance our retained notes from securitizations with long-term, limited, or non-mark-to market finance facilities. We currently have 58% of our recourse financings with these facilities. To further manage our interest rate risk, we intend to use financial derivatives such as futures, interest rate swaps and swaptions to hedge against securitization executions, net interest margin compression and the protection of our book value.

Cash management is critical to our business. We monitor our ongoing needs for margin, repurchase financing maturities, liquidity, and new investments. Over time, we expect to continue to acquire and securitize mortgage loans as well as further implementation of the company’s call optimization strategy on our securitizations. With available funds, we plan to evaluate the merits of any new investments and compare them to the merits of repurchasing outstanding common and preferred stock, or reducing higher cost liabilities as they mature. The timing of these re-securitizations is impacted by many factors, including credit performance, prepayment speeds and interest rates.

As we navigate current market conditions, we are focused on maintaining low recourse leverage and managing our liquidity with a proper balance of both cash and unencumbered securities. Our credit portfolio continued to perform well in the third quarter. Our current credit performance on our portfolio is within, or better than, our original investment expectations on mortgage delinquencies, default rates, and recoveries. We monitor our portfolio regularly and seek opportunities to improve upon our liquidity, capital structure and investment returns. We have historically achieved success through re-securitization and have a substantial amount of capital that can be re-captured in the future. We believe there will be ample opportunity to extract additional portfolio value when interest rates moderate and the capital markets improve.

During the third quarter, we declared $0.18 dividend per share of common stock. Our Economic Return (as measured by the net change in book value per common share plus common stock dividend) was (2.9%) for the third quarter of 2023 and 0.0% for the nine months ended September 30, 2023.

### Business Operations

### Net Income (Loss) Summary

The table below presents our net income (loss) on a GAAP basis for the quarters ended September 30, 2023 and June 30, 2023, and the nine months ended September 30, 2023 and September 30, 2022.

*Net Income (Loss)*

*(dollars in thousands, except share and per share data)*

*(unaudited)*

| Net interest income: | For the Quarters Ended September 30, 2023 | June 30, 2023 | QoQ Change | For the Nine Months Ended September 30, 2023 | September 30, 2022 | YoY Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income (1) | $195,591 | $196,859 | $(1,268) | $581,700 | $585,835 | $(4,135) |
| Interest expense (2) | 132,193 | 131,181 | 1,012 | 382,988 | 226,403 | 156,585 |
| Net interest income | 63,398 | 65,678 | (2,280) | 198,712 | 359,432 | (160,720) |
| Increase (decrease) in provision for credit losses | 3,217 | 2,762 | 455 | 9,041 | 3,203 | 5,838 |
| **Other investment gains (losses):** |  |  |  |  |  |  |
| Net unrealized gains (losses) on derivatives | 17 | 17,994 | (17,977) | 9,460 | 8,689 | 771 |
| Realized gains (losses) on derivatives | — | (6,822) | 6,822 | (40,957) | — | (40,957) |
| Periodic interest cost of swaps, net | 4,894 | 4,159 | 735 | 11,871 | (122) | 11,993 |
| **Net gains (losses) on derivatives** | 4,911 | 15,331 | (10,420) | (19,626) | 8,567 | (28,193) |
| Net unrealized gains (losses) on financial instruments at fair value | (43,988) | 6,954 | (50,942) | 27,558 | (848,925) | 876,483 |
| Net realized gains (losses) on sales of investments | (460) | (21,758) | 21,298 | (27,482) | (37,031) | 9,549 |
| Gains (losses) on extinguishment of debt | — | 4,039 | (4,039) | 6,348 | (2,897) | 9,245 |
| Other investment gains (losses) | 2,381 | (421) | 2,802 | 2,077 | 517 | 1,560 |
| Total other gains (losses) | (37,156) | 4,145 | (41,301) | (11,125) | (879,769) | 868,644 |
| **Other expenses:** |  |  |  |  |  |  |
| Compensation and benefits | 7,124 | 7,677 | (553) | 25,292 | 30,211 | (4,919) |
| General and administrative expenses | 5,427 | 6,471 | (1,044) | 17,674 | 16,493 | 1,181 |
| Servicing and asset manager fees | 8,139 | 8,408 | (269) | 24,965 | 27,122 | (2,157) |
| Transaction expenses | 90 | 8,456 | (8,366) | 14,955 | 12,872 | 2,083 |
| Total other expenses | 20,780 | 31,012 | (10,232) | 82,886 | 86,698 | (3,812) |
| **Income (loss) before income taxes** | 2,245 | 36,049 | (33,804) | 95,660 | (610,238) | 705,898 |
| Income taxes | 75 | 25 | 50 | 100 | 28 | 72 |
| **Net income (loss)** | $2,170 | $36,024 | $(33,854) | $95,560 | $(610,266) | $705,826 |
| **Dividends on preferred stock** | 18,438 | 18,438 | — | 55,313 | 55,283 | 30 |
| **Net income (loss) available to common shareholders** | $(16,268) | $17,586 | $(33,854) | $40,248 | $(665,549) | $705,797 |
| **Net income (loss) per share available to common shareholders:** |  |  |  |  |  |  |
| Basic | $(0.07) | $0.08 | $(0.15) | $0.17 | $(2.84) | $3.01 |
| Diluted | $(0.07) | $0.08 | $(0.15) | $0.17 | $(2.84) | $3.01 |
| **Weighted average number of common shares outstanding:** |  |  |  |  |  |  |
| Basic | 226,734,643 | 231,628,141 | (4,893,498) | 230,099,867 | 234,671,912 | (4,572,045) |
| Diluted | 226,734,643 | 233,867,501 | (5,135,311) | 232,288,318 | 234,671,912 | (2,383,594) |
| **Dividends declared per share of common stock** | $0.18 | $0.23 | $(0.05) | $0.59 | $0.89 | $(0.30) |

(1) Includes interest income of consolidated VIEs of $153,710 and $139,598 for the quarters ended September 30, 2023 and 2022, respectively, and $443,286 and $410,873 for the nine months ended September 30, 2023 and 2022, respectively. See accompanying notes to consolidated financial statements for further discussion.

(2) Includes interest expense of consolidated VIEs of $75,902 and $50,030 for the quarters ended September 30, 2023 and 2022, respectively, and $208,678 and $142,714 for the nine months ended September 30, 2023 and 2022, respectively. See accompanying notes to consolidated financial statements.

**Results of Operations for the quarters ended September 30, 2023, and June 30, 2023, and for the nine months ended September 30, 2023 and September 30, 2022.**

Our primary source of income is interest income earned on our assets, net of interest expense paid on our financing liabilities.

#### Quarter ended September 30, 2023 compared to the Quarter ended June 30, 2023

For the quarter ended September 30, 2023, our net loss available to common shareholders was $16 million, or $0.07 per average basic common share, compared to a net income of $18 million, or $0.08 per average basic common share, for the quarter ended June 30, 2023. During the quarter ended September 30, 2023, we had unrealized losses on financial instruments at fair value of $44 million and other expenses of $21 million, partially offset by net interest income of $63 million.

The continued market volatility and rising interest rates during the third quarter of 2023 resulted in net unrealized losses on financial instruments at fair value, while our other expenses declined, our net interest income remained relatively unchanged resulting in a net loss available to common shareholders, as compared to a net income available to common shareholders during the quarter ended June 30, 2023. During the quarter ended September 30, 2023, our unrealized losses on financial instruments at fair value increased by $51 million and our net gains on derivatives decreased by $10 million which was partially offset by a decrease in realized losses on sale of investment of $21 million, and a decrease in other expenses of $10 million as compared to the quarter ended June 30, 2023.

#### Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

For the nine months ended September 30, 2023, our net income available to common shareholders was $40 million, or $0.17 per average basic common share, compared to a net loss of $666 million, or a loss of $2.84 per average basic common share, for the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, we had net interest income of $199 million and unrealized gains on financial instruments at fair value of $28 million offset in part by operating expenses and preferred stock dividends of $83 million and $55 million. During the nine months ended September 30, 2022 we had $849 million in unrealized losses on financial instruments at fair value, partially offset by $359 million of net interest income. 2022 demonstrated a significant amount of market volatility, resulting in a mark to market losses on our investment portfolio of $849 million. 2023, while still experiencing significant market volatility, has thus far been considerably more stable and market prices relatively unchanged.

### Interest Income

#### Quarter ended September 30, 2023 compared to the Quarter ended June 30, 2023

Interest income decreased slightly by $1 million, or 1%, to $196 million for the quarter ended September 30, 2023 as compared to $197 million for the quarter ended June 30, 2023. The yields on our average interest earning assets increased by 20 basis points at 5.8% while our average interest earning assets decreased by $454 million to $13.3 billion during the quarter ended September 30, 2023, as compared to the yields on average interest earning asset of 5.6% and average interest earning assets of $13.7 billion for the quarter ended June 30, 2023 driving the slight decrease in the interest income.

#### Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Interest income decreased by $4 million, or 1%, to $582 million for the nine months ended September 30, 2023 as compared to $586 million for the nine months ended September 30, 2022. This decrease in our interest income during the nine months ended September 30, 2023 was primarily driven by a decline in our average interest earning assets and lower prepayment penalties on our Agency CMBS investments as compared to the nine months ended September 30, 2022. We reduced our average interest earning asset balances by $180 million to $13.5 billion as compared to $13.7 billion from the same period of 2022. Our Agency CMBS interest income decreased by $27 million, primarily due to lower prepayment penalties and lower asset balances, and Non-Agency RMBS portfolio interest income decreased by $30 million due to lower asset balances and lower yields during the nine months ended September 30, 2023 as compared to the same period of 2022. These decreases were partially offset by an increase in interest income of $46 million on our Loans held for investment due to higher asset balances and higher yields during the nine months ended September 30, 2023 as compared to the same period of 2022.

### Interest Expense

#### Quarter ended September 30, 2023 compared to the Quarter ended June 30, 2023

Interest expense increased slightly by $1 million, or 1%, to $132 million for the quarter ended September 30, 2023 as compared to $131 million for the quarter ended June 30, 2023. The interest expense on securitized debt increased by $3 million for the quarter ended September 30, 2023 due to an increase in average debt balance and higher borrowing rates compared to the quarter ended June 30, 2023. This increase was partially offset by lower interest expense on our secured financing agreements collateralized by Non-Agency and loans of $2 million, due to lower secured financing balances.

#### Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Interest expense increased by $157 million, or 69%, to $383 million for the nine months ended September 30, 2023 as compared to $226 million for the nine months ended September 30, 2022. This increase in our interest expense during the nine months ended September 30, 2023, as compared to the same period of 2022, was primarily driven by the increases in borrowing rates on our secured financing agreements and securitized debt, due to increases in the Federal Funds Rate. The interest expense on our securitized debt increased by $64 million during the nine months ended September 30, 2023, as the average borrowing rates on our securitizations increased by 90 basis points as compared to the nine months ended September 30, 2022. During the nine months ended September 30, 2023, our interest expense on secured financing agreements collateralized by Loans held for investments, Non-Agency RMBS and Agency MBS increased by $45 million, $32 million and $3 million, respectively, due to the higher Federal Funds Rate.

### Economic Net Interest Income

Our Economic net interest income is a non-GAAP financial measure that equals GAAP net interest income adjusted for net periodic interest cost of interest rate swaps and excludes interest earned on cash. For the purpose of computing economic net interest income and ratios relating to cost of funds measures throughout this section, interest expense includes net payments on our interest rate swaps, which is presented as a part of Net gains (losses) on derivatives in our Consolidated Statements of Operations. Interest rate swaps are used to manage the increase in interest paid on secured financing agreements in a rising rate environment. Presenting the net contractual interest payments on interest rate swaps with the interest paid on interest-bearing liabilities reflects our total contractual interest payments. We believe this presentation is useful to investors because it depicts the economic value of our investment strategy by showing all components of interest expense and net interest income of our investment portfolio. However, Economic net interest income should not be viewed in isolation and is not a substitute for net interest income computed in accordance with GAAP. Where indicated, interest expense, adjusting for any interest earned on cash, is referred to as Economic interest expense. Where indicated, net interest income reflecting net periodic interest cost of interest rate swaps and any interest earned on cash, is referred to as Economic net interest income.

The following table reconciles the Economic net interest income to GAAP net interest income and Economic interest expense to GAAP interest expense for the periods presented.

|  | GAAP Interest Income | GAAP Interest Expense | Periodic Interest Cost of Interest Rate Swaps | Economic Interest Expense | GAAP Net Interest Income | Periodic Interest Cost of Interest Rate Swaps | Other (1) | Economic Net Interest Income |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| For the Quarter Ended September 30, 2023 | $195,591 | $132,193 | $(4,894) | $127,299 | $63,398 | $4,894 | $(2,301) | $65,991 |
| For the Quarter Ended June 30, 2023 | $196,859 | $131,181 | $(4,159) | $127,022 | $65,678 | $4,159 | $(2,884) | $66,953 |
| For the Quarter Ended March 31, 2023 | $189,250 | $119,615 | $(2,819) | $116,796 | $69,635 | $2,819 | $(3,035) | $69,419 |
| For the Quarter Ended December 31, 2022 | $187,286 | $106,891 | $1,629 | $108,520 | $80,395 | $(1,629) | $(1,867) | $76,899 |
| For the Quarter Ended September 30, 2022 | $188,303 | $83,464 | $122 | $83,586 | $104,839 | $(122) | $(540) | $104,177 |

(1) Primarily interest income on cash and cash equivalents.

### Net Interest Rate Spread

The following table shows our average earning assets held, interest earned on assets, yield on average interest earning assets, average debt balance, economic interest expense, economic average cost of funds, economic net interest income and net interest rate spread for the periods presented.

*(dollars in thousands)*

*(dollars in thousands)*

| Assets: Interest-earning assets (1): | For the Quarter Ended September 30, 2023 Average Balance | Interest | Average Yield/Cost | June 30, 2023 Average Balance | Interest | Average Yield/Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Agency RMBS | $18,990 | $234 | 4.9% | $18,798 | $305 | 6.5% |
| Agency CMBS | 124,094 | 1,701 | 5.5% | 165,270 | 1,728 | 4.2% |
| Non-Agency RMBS | 961,257 | 28,826 | 12.0% | 976,994 | 29,543 | 12.1% |
| Loans held for investment | 12,188,221 | 162,530 | 5.3% | 12,585,384 | 162,399 | 5.2% |
| Total | $13,292,562 | $193,290 | 5.8% | $13,746,444 | $193,975 | 5.6% |
| Liabilities and stockholders' equity: |  |  |  |  |  |  |
| **Interest-bearing liabilities (2):** |  |  |  |  |  |  |
| Secured financing agreements collateralized by: |  |  |  |  |  |  |
| Agency RMBS | $— | $— | —% | $1,994 | $27 | 5.4% |
| Agency CMBS | 90,205 | 1,200 | 5.3% | 133,306 | 1,651 | 5.0% |
| Non-Agency RMBS | 742,579 | 17,769 | 9.6% | 772,486 | 17,438 | 9.0% |
| Loans held for investment | 1,832,445 | 29,896 | 6.5% | 2,024,638 | 32,652 | 6.5% |
| Securitized debt | 8,663,773 | 78,434 | 3.6% | 8,584,803 | 75,254 | 3.5% |
| Total | $11,329,002 | $127,299 | 4.5% | $11,517,226 | $127,022 | 4.4% |
| **Economic net interest income/net interest rate spread** |  | $65,991 | 1.3% |  | $66,953 | 1.2% |
| **Net interest-earning assets/net interest margin** | $1,963,560 |  | 2.0% | $2,229,219 |  | 1.9% |
| **Ratio of interest-earning assets to interest bearing liabilities** | 1.17 |  |  | 1.19 |  |  |
| (1) Interest-earning assets at amortized cost |  |  |  |  |  |  |
| (2) Interest includes periodic net interest cost on swaps |  |  |  |  |  |  |

53

*(dollars in thousands)*

*(dollars in thousands)*

| Assets: Interest-earning assets (1): | For the Nine Months Ended September 30, 2023 Average Balance | Interest | Average Yield/Cost | September 30, 2022 Average Balance | Interest | Average Yield/Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Agency RMBS | $18,828 | $861 | 6.1% | $115,393 | $839 | 1.0% |
| Agency CMBS | 199,879 | 6,386 | 4.3% | 496,384 | 33,593 | 9.0% |
| Non-Agency RMBS | 976,616 | 88,467 | 12.1% | 1,168,586 | 118,603 | 13.5% |
| Loans held for investment | 12,326,662 | 477,768 | 5.2% | 11,921,301 | 432,162 | 4.8% |
| Total | $13,521,986 | $573,481 | 5.7% | $13,701,664 | $585,197 | 5.7% |
| Liabilities and stockholders' equity: |  |  |  |  |  |  |
| **Interest-bearing liabilities (2):** |  |  |  |  |  |  |
| Secured financing agreements collateralized by: |  |  |  |  |  |  |
| Agency RMBS | $2,017 | $118 | 7.8% | $14,024 | $111 | 1.1% |
| Agency CMBS | 159,306 | 5,807 | 4.9% | 382,806 | 3,048 | 1.1% |
| Non-Agency RMBS | 756,784 | 51,270 | 9.0% | 835,233 | 19,037 | 3.0% |
| Loans held for investment | 2,013,238 | 97,329 | 6.4% | 1,971,247 | 52,098 | 3.5% |
| Securitized debt | 8,412,347 | 216,594 | 3.4% | 8,077,615 | 152,231 | 2.5% |
| Total | $11,343,691 | $371,117 | 4.4% | $11,280,925 | $226,525 | 2.7% |
| **Economic net interest income/net interest rate spread** |  | $202,363 | 1.3% |  | $358,672 | 3.0% |
| **Net interest-earning assets/net interest margin** | $2,178,295 |  | 2.0% | $2,420,739 |  | 3.5% |
| **Ratio of interest-earning assets to interest bearing liabilities** | 1.19 |  |  | 1.21 |  |  |
| (1) Interest-earning assets at amortized cost |  |  |  |  |  |  |
| (2) Interest includes periodic net interest cost on swaps |  |  |  |  |  |  |

### Economic Net Interest Income and the Average Earning Assets

#### Quarter ended September 30, 2023 compared to the Quarter ended June 30, 2023

Our Economic net interest income (which is a non-GAAP measure, see “Economic net interest income” discussion earlier for details) decreased slightly by $1 million to $66 million for the quarter ended September 30, 2023 from $67 million for the quarter ended June 30, 2023. Our net interest rate spread, which equals the yield on our average interest-earning assets less the economic average cost of funds, increased by 10 basis points for the quarter ended September 30, 2023, as compared to the quarter ended June 30, 2023. The net interest margin, which equals the Economic net interest income as a percentage of the net average balance of our interest-earning assets less our interest-bearing liabilities, increased by 10 basis points for the quarter ended September 30, 2023, as compared to the quarter ended June 30, 2023. Our Average net interest-earning assets decreased by $266 million to $2.0 billion for the quarter ended September 30, 2023, compared to $2.2 billion for the quarter ended June 30, 2023. The increase in our net interest rate spread for the quarter ended September 30, 2023 as compared to the quarter ended June 30, 2023 is primarily due to an increase in our interest earning asset yields.

#### Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

Our Economic net interest income (which is a non-GAAP measure, see “Economic net interest income” discussion earlier for details) decreased by $157 million to $202 million for the nine months ended September 30, 2023 from $359 million for the nine months ended September 30, 2022. Our net interest rate spread, which equals the yield on our average interest-earning assets less the economic average cost of funds, decreased by 170 basis points for the nine months ended September 30, 2023, as compared to the same period of 2022. The net interest margin, which equals the Economic net interest income as a percentage of the net average balance of our interest-earning assets less our interest-bearing liabilities, decreased by 150 basis points for the nine months ended September 30, 2023, as compared to the same period of 2022. Our Average net interest-earning assets decreased by $242 million to $2.2 billion for the nine months ended September 30, 2023, compared to $2.4 billion for the same period of 2022. The decrease in our net interest rate spread for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 is primarily due to higher interest expense on our securitized debt collateralized by loans and secured financing agreements due to higher Federal Funds Rate.

### Economic Interest Expense and the Cost of Funds

The borrowing rate at which we are able to finance our assets using secured financing agreements is typically correlated to SOFR and the term of the financing. The borrowing rate on the majority of our securitized debt is fixed and correlated to the term of the financing. The table below shows our average borrowed funds, Economic interest expense, average cost of funds (inclusive of periodic interest costs on swaps), average one-month SOFR, average three-month SOFR and average one-month SOFR relative to average three-month SOFR.

*(Ratios have been annualized, dollars in thousands)*

|  | Average Debt Balance | Economic Interest Expense | Average Cost of Funds | Average One-Month SOFR | Average Three-Month SOFR | Average One-Month SOFR Relative to Average Three-Month SOFR |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| For the Quarter Ended September 30, 2023 | $11,329,002 | $127,299 | 4.49% | 5.30% | 5.37% | (0.07)% |
| For the Quarter Ended June 30, 2023 | $11,517,226 | $127,022 | 4.41% | 5.04% | 5.13% | (0.09)% |
| For the Quarter Ended March 31, 2023 | $11,258,996 | $116,796 | 4.15% | 4.62% | 4.79% | (0.35)% |
| For the Quarter Ended December 31, 2022 | $11,180,313 | $108,520 | 3.88% | 3.89% | 4.24% | (0.39)% |
| For the Quarter Ended September 30, 2022 | $11,233,052 | $83,586 | 2.98% | 2.45% | 2.84% | (0.39)% |

Average interest-bearing liabilities decreased by $188 million for the quarter ended September 30, 2023, as compared to the quarter ended June 30, 2023. Economic interest expense remained relatively unchanged at $127 million for the quarter ended September 30, 2023, as compared to the quarter ended June 30, 2023.

Average interest-bearing liabilities increased by $63 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. Economic interest expense increased by $145 million for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022 due to the increases in our secured financing agreements and securitized debt borrowing rates driven by higher Federal Funds Rates.

While we may use interest rate hedges to mitigate risks related to changes in interest rate, the hedges may not fully offset interest expense movements.

### Provision for Credit Losses

For the quarters ended September 30, 2023 and June 30, 2023 our provision for credit losses was $3 million and $3 million, respectively, and remained relatively unchanged. For the nine month ended September 30, 2023, we recorded an increase in provision for credit losses of $9 million, as compared to an increase in provision of credit losses of $3 million for the nine months ended September 30, 2022. The increase in provision for credit losses for the nine months ended September 30, 2023 is primarily due to an increase in expected losses and delinquencies. In addition, certain Non-Agency RMBS positions, now have higher unrealized losses and resulted in the recognition of an allowance for credit losses which was previously limited by unrealized gains on these investments.

### Net Gains (Losses) on Derivatives

We use derivatives to economically hedge the effects of changes in interest rates on our portfolio, specifically our secured financing agreements. Unrealized gains and losses include the change in market value, period over period, on our derivatives portfolio. Changes in market value are generally a result of changes in interest rates. We may or may not ultimately realize these unrealized derivative gains and losses depending on trade activity, changes in interest rates and the values of the underlying securities. The net gains and losses on our derivatives include both unrealized and realized gains and losses. Realized gains and losses include the net cash paid and received on our interest rate swaps during the period as well as sales, terminations and settlements of our swaps, swaptions and Treasury futures.

The table below shows a summary of our net gains (losses) on derivative instruments, for the quarters ended September 30, 2023 and June 30, 2023, and, nine months ended September 30, 2023 and September 30, 2022, respectively.

*(dollars in thousands)*

|  | For the Quarter Ended September 30, 2023 | June 30, 2023 |
| --- | ---: | ---: |
| Periodic interest income (expense) on interest rate swaps, net | $4,894 | $4,159 |
| Realized gains (losses) on derivative instruments, net: |  |  |
| Swaps - Terminations | — | — |
| Treasury futures | — | (6,822) |
| Swaptions | — | — |
| Total realized gains (losses) on derivative instruments, net | — | (6,822) |
| Unrealized gains (losses) on derivative instruments, net: |  |  |
| Interest rate swaps | (4,422) | 3,023 |
| Treasury futures | — | 6,851 |
| Swaptions | 4,439 | 8,120 |
| Total unrealized gains (losses) on derivative instruments, net: | 17 | 17,994 |
| Total gains (losses) on derivative instruments, net | $4,911 | $15,331 |

*(dollars in thousands)*

|  | For the Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| Periodic interest income (expense) on interest rate swaps, net | 11,871 | (122) |
| Realized gains (losses) on derivative instruments, net: |  |  |
| Swaps - Terminations | (45,226) | — |
| Treasury futures | (6,344) | — |
| Swaptions | 10,613 | — |
| Total realized gains (losses) on derivative instruments, net | (40,957) | — |
| Unrealized gains (losses) on derivative instruments, net: |  |  |
| Interest rate swaps | $6,510 | 3,718 |
| Treasury futures | — | — |
| Swaptions | 2,950 | 4,971 |
| Total unrealized gains (losses) on derivative instruments, net: | 9,460 | 8,689 |
| Total gains (losses) on derivative instruments, net | $(19,626) | $8,567 |

During the quarter ended September 30, 2023, and June 30, 2023, we recognized total net gain on derivatives of $5 million and $15 million, respectively. During the nine months ended September 30, 2023 and September 30, 2022, we recognized total net losses on derivatives of $20 million and net gains on derivatives of $9 million, respectively.

Unrealized gains and losses include the change in market value, period over period, on our derivatives portfolio. Changes in market value are generally a result of changes in interest rates. We may or may not ultimately realize these unrealized derivative gains and losses depending on trade activity, changes in interest rates and the values of the underlying securities.

The weighted average pay rate on the our interest rate swap at September 30, 2023 was 3.26% and the weighted average receive rate was 5.31%. At September 30, 2023, the weighted average maturity on our interest rate swaps was less than one year. The weighted average pay rate on our interest rate swaps at December 31, 2022 was 4.07% and the weighted average receive rate was 4.30%. At December 31, 2022, the weighted average maturity on our interest rate swaps was 4 years.

We did not enter into or terminate any derivative contracts during the quarter ended September 30, 2023. We paid $45 million to terminate interest rate swaps with a notional value of $2.5 billion during the nine months ended September 30, 2023. The terminated swaps had original maturities ranging from 2025 to 2028.

During the nine months ended September 30, 2023, we entered into three swaption contracts for a one-year forward starting swaps with a total notional of $1.5 billion with a weighted average strike rate of 3.56%. The underlying swap terms will allow us to pay a fix rate of 3.56% and receive floating overnight SOFR rate. Additionally, during the nine months ended September 30, 2023, we terminated our existing $1.0 billion notional swaption contract for a one-year swap. We also entered into and terminated three new swaptions contracts with $2.3 billion notional during the nine months ended September 30, 2023. We had net realized gains of $11 million on these swaption terminations.

During the nine months ended September 30, 2023, we entered into 6,000 short 5-year and 1,875 short 2-year U.S. Treasury futures contract with a notional of $600 million and $375 million, respectively, which we subsequently covered and had no outstanding U.S. Treasury futures contract at September 30, 2023. We had a net realized loss of $6 million on covering these short U.S. Treasury futures contract. We also entered into 400 call options on 2-year and 5-year U.S. Treasury futures and subsequently covered them during the nine months ended September 30, 2023 for a realized loss of $187 thousand.

During the nine months ended September 30, 2022, we purchased a swaption contract for a one-year forward starting swap of $1.0 billion in notional amount with a 3.26% strike rate. We entered into two, pay-fixed-receive-floating, SOFR-based interest rate swaps during the quarter and nine months ended September 30, 2022 with a $885 million notional amount. The weighted average pay rate on our interest rate swaps at September 30, 2022 was 3.94% and the weighted average receive rate was 2.98%. The swaps had remaining maturity range of two years to five years and weighted average maturity of three years.

Changes in our derivative positions were primarily a result of changes in our secured financing composition and changes in interest rates.

### Net Unrealized Gains (Losses) on Financial Instruments at Fair Value

We recorded Net unrealized losses on financial instruments at fair value of $44 million for the quarter ended September 30, 2023, as compared to Net unrealized gains on financial instruments at fair value of $7 million for the quarter ended June 30, 2023. Unrealized losses were due to higher market yields in the market, reducing market prices. Overall increases in market yields during the third quarter of 2023 was due to the market adjusting to higher rates for longer resulted in lower prices and more unrealized losses in the third quarter of 2023 as compared to the same period of 2022.

We recorded Net unrealized gains on financial instruments at fair value of $28 million for the nine months ended September 30, 2023, as compared to Net unrealized losses on financial instruments at fair value of $849 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2023 changes in market value were not significant compared to the nine months ended September 30, 2022. The rate increases in 2022 and overall increased market yields resulted in significant increases in unrealized loss during the nine months ended September 30, 2022.

### Gains and Losses on Sales of Assets

We do not forecast sales of investments as we generally expect to invest for long term gains. However, from time to time, we may sell assets to create liquidity necessary to pursue new opportunities, to achieve targeted leverage ratios as well as for gains when prices indicate a sale is most beneficial to us, or is the most prudent course of action to maintain a targeted risk adjusted yield for our investors.

During the quarters ended September 30, 2023, and June 30, 2023 we sold some of our Agency CMBS investments as a part of our portfolio optimization efforts and realized a loss of $460 thousand and $22 million, respectively. During the nine months ended September 30, 2023 we recorded a realized loss of $27 million as we sold some our Agency CMBS investments. During the nine months ended September 30, 2022, we sold some of our Agency IO investments and realized a loss of $37 million.

### Extinguishment of Securitized Debt

When we acquire our outstanding securitized debt, we extinguish the outstanding debt and recognize a gain or loss based on the difference between the carrying value of the debt and the cost to acquire the debt which is reflected in the Consolidated Statements of Operations as a gain or loss on extinguishment of debt.

#### Securitized Debt Collateralized by Non-Agency RMBS

We did not acquire any securitized debt collateralized by Non-Agency RMBS during the quarters ended September 30, 2023 and June 30, 2023, and nine months ended September 30, 2023 and September 30, 2022.

#### Securitized Debt Collateralized by Loans Held for Investment

We did not acquire any securitized debt collateralized by loans held for investment during the quarter ended September 30, 2023. During the quarter ended June 30, 2023, we acquired securitized debt collateralized by Loans held for investment with an amortized cost balance of $212 million for $208 million. This transaction resulted in net gain on extinguishment of debt of $4 million.

During the nine months ended September 30, 2023, we acquired securitized debt collateralized by Loans held for investment with an amortized cost balance of $551 million for $545 million. These transactions resulted in net gain on extinguishment of debt of $6 million. We did not acquire any securitized debt collateralized by loans held for investment during the nine months ended September 30, 2022.

### Compensation, General and Administrative Expenses and Transaction Expenses

The table below shows our total compensation and benefit expense, general and administrative, or G&A expenses, and transaction expenses as compared to average total assets and average equity for the periods presented.

*(Ratios have been annualized, dollars in thousands)*

|  | Total Compensation, G&A and Transaction Expenses | Total Compensation, G&A and Transaction Expenses/Average Assets | Total Compensation, G&A and Transaction Expenses/Average Equity |
| --- | ---: | ---: | ---: |
| For the Quarter Ended September 30, 2023 | $12,641 | 0.38% | 1.99% |
| For the Quarter Ended June 30, 2023 | $22,604 | 0.65% | 3.46% |
| For the Quarter Ended March 31, 2023 | $22,678 | 0.66% | 3.41% |
| For the Quarter Ended December 31, 2022 | $28,599 | 0.85% | 4.30% |
| For the Quarter Ended September 30, 2022 | $17,177 | 0.50% | 2.44% |

The Compensation and benefit costs were approximately $7 million and $8 million for the quarters ended September 30, 2023, and June 30, 2023, respectively. The Compensation and benefit costs were approximately $25 million and $30 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. The decrease in Compensation and benefit costs were primarily driven by lower performance based compensation costs.

The general and administrative expenses were approximately $5 million and $6 million for the quarters ended September 30, 2023, and June 30, 2023, respectively. The general and administrative expenses were approximately $18 million and $16 million for the nine months ended September 30, 2023 and September 30, 2022, respectively, and increased by $2 million. The G&A expenses are primarily comprised of legal, market data and research, auditing, consulting, information technology, and independent investment consulting expenses.

We incurred transaction expenses in relation to securitizations of $90 thousand and $8 million for the quarters ended September 30, 2023 and June 30, 2023 , respectively. The decrease in transaction expense for the quarter ended September 30, 2023 as compared to the quarter ended June 30, 2023 was driven by lower call and securitization activity. The transactions expenses were approximately $15 million and $13 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.

### Servicing and Asset Manager Fees

Servicing fees and asset manager expenses remained relatively unchanged at $8 million and $8 million for the quarters ended September 30, 2023 and June 30, 2023, respectively. The servicing fees and asset manager expenses were $25 million and $27 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. These servicing fees are primarily related to the servicing costs of the whole loans held in consolidated securitization vehicles and are paid from interest income earned by the VIEs. The servicing fees generally range from 2 to 50 basis points of unpaid principal balances of our consolidated VIEs.

### Earnings available for distribution

Earnings available for distribution is a non-GAAP measure and is defined as GAAP net income excluding unrealized gains or losses on financial instruments carried at fair value with changes in fair value recorded in earnings, realized gains or losses on the sales of investments, gains or losses on the extinguishment of debt, changes in the provision for credit losses, other gains or losses on equity investments, and transaction expenses incurred. Transaction expenses are primarily comprised of costs only incurred at the time of execution of our securitizations and certain structured secured financing agreements and include costs such as underwriting fees, legal fees, diligence fees, bank fees and other similar transaction related expenses. These costs are all incurred prior to or at the execution of the transaction and do not recur. Recurring expenses, such as servicing fees, custodial fees, trustee fees and other similar ongoing fees are not excluded from earnings available for distribution. We believe that excluding these costs is useful to investors as it is generally consistent with our peer groups treatment of these costs in their non-GAAP measures presentation, mitigates period to period comparability issues tied to the timing of securitization and structured finance transactions, and is consistent with the accounting for the deferral of debt issue costs prior to the fair value election option made by us. In addition, we believe it is important for investors to review this metric which is consistent with how management internally evaluates the performance of the Company. Stock compensation expense charges incurred on awards to retirement eligible employees is reflected as an expense over a vesting period (generally 36 months) rather than reported as an immediate expense.

Earnings available for distribution is the Economic net interest income, as defined previously, reduced by compensation and benefits expenses (adjusted for awards to retirement eligible employees), general and administrative expenses, servicing and asset manager fees, income tax benefits or expenses incurred during the period, as well as the preferred dividend charges.

We view Earnings available for distribution as one measure of our investment portfolio's ability to generate income for distribution to common stockholders. Earnings available for distribution is one of the metrics, but not the exclusive metric, that our Board of Directors uses to determine the amount, if any, of dividends on our common stock. Other metrics that our Board of Directors may consider when determining the amount, if any, of dividends on our common stock include (among others) REIT taxable income, dividend yield, book value, cash generated from the portfolio, reinvestment opportunities and other cash needs. In addition, Earnings available for distribution is different than REIT taxable income and the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to our stockholders in order to maintain qualification as a REIT is not based on Earnings available for distribution. Therefore, Earnings available for distribution should not be considered as an indication of our REIT taxable income, a guaranty of our ability to pay dividends, or as a proxy for the amount of dividends we may pay. We believe Earnings available for distribution as described above helps us and investors evaluate our financial performance period over period without the impact of certain transactions. Therefore, Earnings available for distribution should not be viewed in isolation and is not a substitute for net income or net income per basic share computed in accordance with GAAP. In addition, our methodology for calculating Earnings available for distribution may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our Earnings available for distribution may not be comparable to the Earnings available for distribution reported by other REITs.

The following table provides GAAP measures of net income and net income per diluted share available to common stockholders for the periods presented and details with respect to reconciling the line items to Earnings available for distribution and related per average diluted common share amounts. Earnings available for distribution is presented on an adjusted dilutive shares basis.

*(dollars in thousands, except per share data)*

|  | For the Quarters Ended September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| **GAAP Net income (loss) available to common stockholders** | $(16,268) | $17,586 | $38,928 | $78,716 | $(204,583) |
| Adjustments: |  |  |  |  |  |
| Net unrealized (gains) losses on financial instruments at fair value | 43,988 | (6,954) | (64,592) | (112,026) | 239,513 |
| Net realized (gains) losses on sales of investments | 460 | 21,758 | 5,264 | 39,443 | 37,031 |
| (Gains) losses on extinguishment of debt | — | (4,039) | (2,309) | — | — |
| Increase (decrease) in provision for credit losses | 3,217 | 2,762 | 3,062 | 3,834 | (1,534) |
| Net unrealized (gains) losses on derivatives | (17) | (17,994) | 8,551 | 10,171 | (10,307) |
| Realized gains (losses) on derivatives | — | 6,822 | 34,134 | 561 | — |
| Transaction expenses | 90 | 8,456 | 6,409 | 3,274 | 2,341 |
| Stock Compensation expense for retirement eligible awards | (392) | (388) | 2,141 | (309) | (310) |
| Other investment (gains) losses | (2,381) | 421 | (117) | 2,383 | 462 |
| **Earnings available for distribution** | **$28,697** | **$28,430** | **$31,471** | **$26,047** | **$62,613** |
| **GAAP net income (loss) per diluted common share** | **$(0.07)** | **$0.08** | **$0.17** | **$0.34** | **$(0.88)** |
| **Earnings available for distribution per adjusted diluted common share** | **$0.13** | **$0.12** | **$0.13** | **$0.11** | **$0.27** |

The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average adjusted diluted shares used for Earnings available for distribution for the periods reported below.

|  | For the Quarters Ended September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| **Weighted average diluted shares - GAAP** | 226,734,643 | 233,867,501 | 235,201,614 | 234,240,836 | 231,750,422 |
| Potentially dilutive shares (1) | 1,997,547 | — | — | — | 2,425,579 |
| **Adjusted weighted average diluted shares - Earnings available for distribution** | 228,732,190 | 233,867,501 | 235,201,614 | 234,240,836 | 234,176,001 |

(1) Potentially dilutive shares related to restricted stock units and performance stock units excluded from the computation of weighted average GAAP diluted shares because their effect would have been anti-dilutive given the GAAP net loss available to common shareholders for the quarters ended September 30, 2023 and 2022.

Our Earnings available for distribution for the quarter ended September 30, 2023 was $29 million, or $0.13 per average diluted common share, and increased by $267 thousand, or $0.01 per average diluted common share, as compared to $28 million, or $0.12 per average diluted common share, for the quarter ended June 30, 2023. Earnings available for distribution remained consistent with prior quarter.

### Net Income (Loss) and Return on Total Stockholders' Equity

The table below shows our Net Income and Economic net interest income as a percentage of average stockholders' equity and Earnings available for distribution as a percentage of average common stockholders' equity. Return on average equity is defined as our GAAP net income (loss) as a percentage of average equity. Average equity is defined as the average of our beginning and ending stockholders' equity balance for the period reported. Economic net interest income and Earnings available for distribution are non-GAAP measures as defined in previous sections.

|  | Return on Average Equity (Ratios have been annualized) | Economic Net Interest Income/Average Equity | Earnings available for distribution/Average Common Equity |
| --- | ---: | ---: | ---: |
| For the Quarter Ended September 30, 2023 | 0.34% | 10.40% | 7.14% |
| For the Quarter Ended June 30, 2023 | 5.51% | 10.24% | 6.75% |
| For the Quarter Ended March 31, 2023 | 8.63% | 10.45% | 7.28% |
| For the Quarter Ended December 31, 2022 | 14.61% | 11.56% | 6.02% |
| For the Quarter Ended September 30, 2022 | (26.47)% | 14.81% | 13.30% |

Return on average equity decreased by 517 basis points for the quarter ended September 30, 2023, as compared to the quarter ended June 30, 2023. This decrease is driven primarily by higher unrealized asset pricing losses. Economic net interest income as a percentage of average equity increased by 16 basis points for the quarter ended September 30, 2023 as compared to the quarter ended June 30, 2023. Earnings available for distribution as a percentage of average common equity increased by 39 basis points for the quarter ended September 30, 2023 as compared to the quarter ended June 30, 2023.

### Financial Condition

#### Portfolio Review

During the nine months ended September 30, 2023, we focused our efforts on taking advantage of the opportunity to acquire higher yielding assets while maintaining low leverage and ample liquidity. During the nine months ended September 30, 2023, on an aggregate basis, we purchased $1.3 billion of investments, sold $288 million of investments, and received $1.2 billion in principal payments related to our Agency MBS, Non-Agency RMBS and Loans held for investment portfolio.

The following table summarizes certain characteristics of our portfolio at September 30, 2023 and December 31, 2022.

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Interest earning assets at period-end (1) | $12,579,247 | $12,937,661 |
| Interest bearing liabilities at period-end | $10,278,451 | $10,614,049 |
| GAAP Leverage at period-end | 4.1:1 | 4.0:1 |
| GAAP Leverage at period-end (recourse) | 1.0:1 | 1.3:1 |

(1) Excludes cash and cash equivalents.

| Portfolio Composition | September 30, 2023 Amortized Cost | December 31, 2022 | September 30, 2023 Fair Value | December 31, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Non-Agency RMBS | 7.4% | 7.5% | 8.1% | 8.9% |
| Senior | 3.9% | 4.0% | 5.4% | 5.9% |
| Subordinated | 2.3% | 2.3% | 2.1% | 2.2% |
| Interest-only | 1.2% | 1.2% | 0.6% | 0.8% |
| Agency RMBS | 0.1% | 0.1% | 0.1% | 0.1% |
| Interest-only | 0.1% | 0.1% | 0.1% | 0.1% |
| Agency CMBS | 1.0% | 3.3% | 0.9% | 3.2% |
| Project loans | 0.9% | 2.3% | 0.8% | 2.2% |
| Interest-only | 0.1% | 1.0% | 0.1% | 1.0% |
| Loans held for investment | 91.5% | 89.1% | 90.9% | 87.8% |
| Fixed-rate percentage of portfolio | 96.6% | 96.5% | 96.1% | 95.6% |
| Adjustable-rate percentage of portfolio | 3.4% | 3.5% | 3.9% | 4.4% |

GAAP leverage at period-end is calculated as a ratio of our secured financing agreements and securitized debt liabilities over GAAP book value. GAAP recourse leverage is calculated as a ratio of our secured financing agreements over stockholders equity.

The following table presents details of each asset class in our portfolio at September 30, 2023 and December 31, 2022. The principal or notional value represents the interest income earning balance of each class. The weighted average figures are weighted by each investment’s respective principal/notional value in the asset class.

| Non-Agency Mortgage-Backed Securities | September 30, 2023 Principal or Notional Value at Period-End (dollars in thousands) | Weighted Average Amortized Cost Basis | Weighted Average Fair Value | Weighted Average Coupon | Weighted Average Yield at Period-End (1) | Weighted Average 3 Month Prepay Rate at Period-End | Weighted Average 12 Month Prepay Rate at Period-End | Weighted Average 3 Month CDR at Period-End | Weighted Average 12 Month CDR at Period-End | Weighted Average Loss Severity(2) | Weighted Average Credit Enhancement |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | --- |
| Senior | $1,091,694 | $45.58 | $62.64 | 5.6% | 17.0% | 5.8% | 5.2% | 1.6% | 1.8% | 36.0% | 2.7% |
| Subordinated | $588,224 | $50.69 | $45.41 | 3.7% | 6.8% | 6.6% | 6.7% | 1.3% | 0.7% | 20.3% | 6.5% |
| Interest-only | $2,926,629 | $5.44 | $2.52 | 0.5% | 5.5% | 4.8% | 5.2% | 1.1% | 0.9% | 24.8% | 1.6% |
| Agency RMBS |  |  |  |  |  |  |  |  |  |  |  |
| Interest-only | $395,197 | $4.82 | $3.52 | 0.1% | 4.7% | 11.3% | 10.7% | N/A | N/A | N/A | N/A |
| Agency CMBS |  |  |  |  |  |  |  |  |  |  |  |
| Project loans | $117,400 | $101.54 | $89.73 | 4.1% | 4.0% | —% | —% | N/A | N/A | N/A | N/A |
| Interest-only | $481,488 | $1.69 | $1.76 | 0.6% | 8.0% | —% | 2.3% | N/A | N/A | N/A | N/A |
| Loans held for investment | $12,214,857 | $98.36 | $93.69 | 5.6% | 5.4% | 6.7% | 6.8% | 0.7% | 0.7% | 28.4% | N/A |

(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated using each investment's respective amortized cost.

(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.)

| Non-Agency Mortgage-Backed Securities | December 31, 2022 Principal or Notional Value at Period-End (dollars in thousands) | Weighted Average Amortized Cost Basis | Weighted Average Fair Value | Weighted Average Coupon | Weighted Average Yield at Period-End (1) | Weighted Average 3 Month Prepay Rate at Period-End | Weighted Average 12 Month Prepay Rate at Period-End | Weighted Average 3 Month CDR at Period-End | Weighted Average 12 Month CDR at Period-End | Weighted Average Loss Severity(2) | Weighted Average Credit Enhancement |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | --- |
| Senior | $1,153,458 | $46.09 | $66.05 | 5.3% | 16.4% | 5.2% | 10.8% | 1.4% | 1.8% | 34.5% | 2.1% |
| Subordinated | $611,206 | $49.34 | $46.94 | 3.1% | 6.8% | 8.0% | 14.1% | 0.4% | 0.4% | 34.9% | 6.6% |
| Interest-only | $3,114,930 | $5.23 | $3.17 | 0.7% | 5.3% | 5.4% | 11.8% | 1.0% | 0.8% | 38.2% | 1.6% |
| Agency RMBS |  |  |  |  |  |  |  |  |  |  |  |
| Interest-only | $409,940 | $4.58 | $3.70 | 0.9% | 5.0% | 12.9% | 17.4% | N/A | N/A | N/A | N/A |
| Agency CMBS |  |  |  |  |  |  |  |  |  |  |  |
| Project loans | $302,685 | $101.85 | $95.62 | 4.3% | 4.1% | —% | —% | N/A | N/A | N/A | N/A |
| Interest-only | $2,669,396 | $5.23 | $4.73 | 0.7% | 3.4% | 1.8% | 3.7% | N/A | N/A | N/A | N/A |
| Loans held for investment | $12,060,631 | $98.50 | $94.36 | 5.3% | 5.2% | 8.1% | 12.0% | 0.6% | 0.8% | 33.1% | N/A |

(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated using each investment's respective amortized cost.

(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.)

Based on the projected cash flows for our Non-Agency RMBS that are not of high credit quality, a portion of the original purchase discount is designated as Accretable Discount, which reflects the purchase discount expected to be accreted into interest income, and a portion is designated as Non-Accretable Difference, which represents the contractual principal on the security that is not expected to be collected. The amount designated as Non-Accretable Difference may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security is more favorable than previously estimated, a portion of the amount designated as Non-Accretable Difference may be transferred to Accretable Discount and accreted into interest income over time. Conversely, if the performance of a security is less favorable than previously estimated, a provision for credit loss may be recognized resulting in an increase in the amounts designated as Non-Accretable Difference.

The following table presents changes to Accretable Discount (net of premiums) as it pertains to our Non-Agency RMBS portfolio, excluding premiums on interest-only investments, during the previous five quarters.

*(dollars in thousands)*

| Accretable Discount (Net of Premiums) | For the Quarters Ended September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Balance, beginning of period | $145,322 | $157,253 | $176,635 | $207,812 | $241,391 |
| Accretion of discount | (9,022) | (10,620) | (11,663) | (11,128) | (12,989) |
| Purchases | (9) | — | — | — | — |
| Sales | — | — | — | (17,935) | — |
| Elimination in consolidation | — | — | — | — | — |
| Transfers from/(to) credit reserve, net | 10,961 | (1,311) | (7,719) | (2,114) | (20,590) |
| Balance, end of period | $147,252 | $145,322 | $157,253 | $176,635 | $207,812 |

### Liquidity and Capital Resources

### General

Liquidity measures our ability to meet cash requirements, including ongoing borrowing commitments, purchase RMBS, residential mortgage loans and other assets for our portfolio, pay dividends and other general business needs. Our principal sources of capital and funds for additional investments primarily include earnings, principal paydowns and sales from our investments, borrowings under securitizations and re-securitizations, secured financing agreements and other financing facilities including warehouse facilities, and proceeds from equity or other securities offerings.

As discussed earlier, overall, the third quarter saw higher interest rates, increased volatility, and costs of financing that remained high. If these uncertainties become more pronounced, we may experience an adverse impact on our liquidity. We have sought and expect to continue to seek longer-term, more durable financing to reduce our risk exposure to margin calls related to shorter-term repurchase financing.

Our ability to fund our operations, meet financial obligations and finance target asset acquisitions may be impacted by our ability to secure and maintain our master secured financing agreements, warehouse facilities and secured financing agreements facilities with our counterparties. Because secured financing agreements and warehouse facilities are short-term commitments of capital, lenders may respond to market conditions making 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 when rolling forward such financings. If we are not able to renew our existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under our financing facilities or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and dispose of assets.

To meet our short term (one year or less) liquidity needs, we expect to continue to borrow funds in the form of secured financing agreements and, subject to market conditions, other types of financing. The terms of the secured financing transaction borrowings under our master secured financing agreement generally conform to the terms in the standard master secured financing agreement as published by the Securities Industry and Financial Markets Association, or SIFMA, or similar market accepted agreements, as to repayment and margin requirements. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master secured financing agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, net asset value, required 'haircuts' (which are the difference expressed in percentage terms between the fair value of the collateral and the amount the counterpart will lend to us) purchase price maintenance requirements, and requirements that all disputes related to the secured financing agreement be litigated or arbitrated in a particular jurisdiction. These provisions may differ for each of our lenders.

To meet our longer-term liquidity needs (greater than one year), we expect our principal sources of capital and funds to continue to be provided by earnings, principal paydowns and sales from our investments, borrowings under securitizations and re-securitizations, secured financing agreements and other financing facilities, as well as proceeds from equity or other securities offerings.

In addition to the principal sources of capital described above, we may enter into warehouse facilities and use longer dated structured secured financing agreements. The use of any particular source of capital and funds will depend on market conditions, availability of these facilities, and the investment opportunities available to us.

### Current Period

We held cash and cash equivalents of approximately $139 million and $265 million at September 30, 2023 and December 31, 2022, respectively. As a result of our operating, investing and financing activities described below, our cash position decreased

by $126 million from December 31, 2022 to September 30, 2023.

Our operating activities provided net cash of approximately $182 million and $299 million for the nine months ended September 30, 2023 and 2022, respectively. The cash flows from operations were primarily driven by interest received in excess of interest paid of $237 million and $431 million during the nine months ended September 30, 2023 and 2022, respectively.

Our investing activities provided cash of $175 million and $656 million for the nine months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023, we received cash for principal repayments on Agency MBS, Non-Agency RMBS and Loans held for investment of $1.2 billion and from sale of our Agency MBS of $286 million. This cash received was offset in part by cash used on investment purchases of $1.3 billion, primarily consisting of Loans held for investment. During the nine months ended September 30, 2022, we received cash for principal repayments on Agency MBS, Non-Agency RMBS and Loans held for investment of $2.2 billion. This cash received was offset in part by cash used on investment purchases of $1.5 billion, primarily consisting of Loans held for investment of $1.4 billion, Agency MBS of $57 million and Non-Agency RMBS of $23 million.

Our financing activities used cash of $483 million and $1.3 billion for the nine months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023, we primarily used cash for repayment of principal on our securitized debt of $1.5 billion, net payments on our secured financing agreements of $827 million, payment of common and preferred dividends of $208 million and payment for repurchase of our common stock of $33 million. This cash used was offset in part by cash received for issuance of securitized debt collateralized by loans of $2.0 billion. During the nine months ended September 30, 2022, we used cash for repayment of principal on our securitized debt of $1.5 billion, net payments on our secured financing agreements of $444 million, payment of common and preferred dividends of $290 million, and repurchase of our common stock of $49 million. This cash used was offset in part by cash received for securitized debt collateralized by loans issuance of $1.0 billion.

Our recourse leverage was 1.0:1 and 1.3:1 at September 30, 2023 and at December 31, 2022, respectively, and remained relatively low. Our recourse leverage excludes the securitized debt which can only be repaid from the proceeds on the assets securing this debt in their respective VIEs. Our recourse leverage is presented as a ratio of our secured financing agreements, which are recourse to our assets and our equity.

Based on our current portfolio, leverage ratio and available borrowing arrangements, we believe our assets will be sufficient to enable us to meet anticipated short-term liquidity requirements. However, if our cash resources are insufficient to satisfy our liquidity requirements, we may sell additional investments, reduce our dividends, issue debt or additional common or preferred equity securities to meet our liquidity needs. We currently have $467 million of unencumbered assets available to us which can be pledged to access additional short-term financing or sold to raise additional cash, if necessary.

At September 30, 2023 and December 31, 2022, the remaining maturities and borrowing rates on our RMBS and loan secured financing agreements were as follows.

*(dollars in thousands)*

|  | September 30, 2023 Principal (1) | Weighted Average Borrowing Rates | Range of Borrowing Rates | December 31, 2022 Principal (1) | Weighted Average Borrowing Rates | Range of Borrowing Rates |
| --- | ---: | ---: | --- | ---: | ---: | --- |
| Overnight | — | N/A | N/A | — | N/A | NA |
| 1 to 29 days | $200,131 | 7.62% | 6.23% - 8.17% | $493,918 | 4.66% | 3.63% - 6.16% |
| 30 to 59 days | 490,698 | 6.57% | 5.47% - 7.87% | 762,768 | 6.14% | 4.60% - 7.34% |
| 60 to 89 days | 93,144 | 6.46% | 6.31% - 7.16% | 225,497 | 6.04% | 4.70% - 7.12% |
| 90 to 119 days | 84,854 | 6.54% | 6.48% - 7.24% | 43,180 | 6.54% | 5.50% - 6.70% |
| 120 to 180 days | 364,014 | 7.27% | 6.42% - 7.85% | 401,638 | 5.88% | 5.57% - 6.92% |
| 180 days to 1 year | 192,722 | 6.67% | 6.64% - 6.67% | 402,283 | 6.06% | 5.63% - 6.64% |
| 1 to 2 years | 838,510 | 11.10% | 9.07% - 13.98% | 251,286 | 13.98% | 13.98% - 13.98% |
| 2 to 3 years | — | —% | 0.00% - 0.00% | 480,022 | 8.07% | 8.07% - 8.07% |
| Greater than 3 years | 367,619 | 5.11% | 5.10% - 7.06% | 382,839 | 5.14% | 5.10% - 6.07% |
| Total | $2,631,692 | 7.99% |  | $3,443,431 | 6.61% |  |

(1) The outstanding balance for secured financing agreements in the table above is net of $1 million and $1 million of deferred financing cost as of September 30, 2023 and December 31, 2022, respectively.

|  |  |  |
| --- | --- | --- |
| Average remaining maturity of Secured financing agreements secured by: |  |  |
|  | **September 30, 2023** | **December 31, 2022** |
| Agency RMBS (in thousands) | N/A | 17 Days |
| Agency CMBS (in thousands) | 33 Days | 25 Days |
| Non-Agency RMBS and Loans held for investment (in thousands) | 436 Days | 474 Days |

We collateralize the secured financing agreements we use to finance our operations with our MBS investments and mortgage loans held in trusts controlled by us. Our counterparties negotiate a ‘haircut’, which is the difference expressed in percentage terms between the fair value of the collateral and the amount the counterparty will lend to us, when we enter into a financing transaction. The size of the haircut reflects the perceived risk and market volatility associated with holding the MBS by the lender. The haircut provides lenders with a cushion for daily market value movements that reduce the need for a margin call to be issued or margin to be returned as normal daily increases or decreases in MBS market values occur. Haircuts have decreased on our secured financing agreements collateralized by Agency MBS, Non-Agency RMBS and Loans held for investments during 2023 as compared to 2022. At September 30, 2023, the weighted average haircut on our remaining secured financing agreements collateralized by Agency CMBS was 5.1% and Non-Agency RMBS and Loans held for investment was 25.2%. At December 31, 2022, the weighted average haircut on our remaining secured financing agreements collateralized by Agency RMBS IOs was 20.0%, Agency CMBS was 7.8% and Non-Agency RMBS and Loans held for investment was 25.7%.

The fair value of the Non-Agency MBS is more difficult to determine in current financial conditions, as well as more volatile period to period than Agency MBS, the Non-Agency MBS typically requires a larger haircut. In addition, when financing assets using standard form of SIFMA Master Repurchase Agreements, the counterparty to the agreement typically nets its exposure to us on all outstanding repurchase agreements and issues margin calls if movement of the fair values of the assets in the aggregate exceeds their allowable exposure to us. A decline in asset fair values could create a margin call or may create no margin call depending on the counterparty’s specific policy. In addition, counterparties consider a number of factors, including their aggregate exposure to us as a whole and the number of days remaining before the repurchase transaction closes prior to issuing a margin call. To minimize the risk of margin calls, as of September 30, 2023, we have entered into $1.2 billion of financing arrangements for which the collateral cannot be adjusted as a result of changes in market value, minimizing the risk of a margin call as a result in price volatility. We refer to these agreements as non-mark-to-market (non-MTM) facilities. These non-MTM facilities generally have higher costs of financing, but lower the risk of a margin call which could result in sales of our assets at distressed prices. All non-MTM facilities are collateralized by Non-Agency RMBS collateral, which tends to have increased volatile price changes during periods of market stress. In addition we have entered into certain secured financing agreements which are not subject to additional margin requirement until the drop in fair value of collateral is greater than a threshold. We refer to these agreements as limited mark-to-market (limited MTM) facilities. As of September 30, 2023 we have $307 million, of limited MTM facilities. We believe these non-MTM and limited MTM facilities significantly reduce our financing risks. See Note 5 to our Consolidated Financial Statements for a discussion on how we determine the fair values of the RMBS collateralizing our secured financing agreements.

At September 30, 2023, the weighted average borrowing rates for our secured financing agreements collateralized by Agency CMBS was 5.5% and Non-Agency MBS and Loans held for investment was 8.1%. At December 31, 2022, the weighted average borrowing rates for our secured financing agreements collateralized by Agency RMBS IOs was 4.7%, Agency CMBS was 4.5%, and Non-Agency MBS and Loans held for investment was 6.9%.

We entered into a secured financing agreement during fourth quarter of 2022 for which we have elected fair value option. we believe electing fair value for this financial instrument better reflects the transactional economics. The total principal balance outstanding on this secured financing at September 30, 2023 and December 31, 2022 was $368 million and $383 million, respectively. The fair value of collateral pledged was $401 million and $418 million as of September 30, 2023 and December 31, 2022, respectively. We carry this secured financing instrument at fair value of $340 million and $374 million as of September 30, 2023 and December 31, 2022, respectively. At September 30, 2023 and December 31, 2022, the weighted average borrowing rate on secured financing agreements at fair value was 5.11%. At September 30, 2023 and December 31, 2022, the haircut for the secured financing agreements at fair value was 7.5%. At September 30, 2023, the maturity on the secured financing agreements at fair value was four years.

The table below presents our average daily secured financing agreements balance and the secured financing agreements balance at each period end for the periods presented. Our balance at period-end tends to fluctuate from the average daily balances due to the adjusting of the size of our portfolio by using leverage.

*(dollars in thousands)*

| Period | Average secured financing agreements balances | Secured financing agreements balance at period end |
| --- | ---: | ---: |
| Quarter End September 30, 2023 | $2,665,230 | $2,603,911 |
| Quarter End June 30, 2023 | $2,932,424 | $2,686,522 |
| Quarter End March 31, 2023 | $3,209,153 | $3,195,322 |
| Quarter End December 31, 2022 | $3,123,400 | $3,434,765 |
| Quarter End September 30, 2022 | $3,056,286 | $2,820,931 |

Our secured financing agreements do not require us to maintain any specific leverage ratio. We believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At September 30, 2023 and December 31, 2022, the carrying value of our total interest-bearing debt was approximately $10.3 billion and $10.6 billion, respectively, which represented a leverage ratio of approximately 4.1:1 and 4.0:1, respectively. We include our secured financing agreements and securitized debt in the numerator of our leverage ratio and stockholders’ equity as the denominator.

At September 30, 2023, we had secured financing agreements with 13 counterparties. All of our secured financing agreements are secured by Agency MBS, Non-Agency RMBS and Loans held for investment and cash. Under these secured financing agreements, we may not be able to reclaim our collateral but will still be obligated to pay our repurchase obligations. We mitigate this risk by ensuring our counterparties are rated financial institutions. As of September 30, 2023 and December 31, 2022, we had $3.7 billion and $4.7 billion, respectively, of securities or cash pledged against our secured financing agreements obligations.

We expect to enter into new secured financing agreements at maturity; however, there is a risk that we will not be able to renew our secured financing agreements when we desire to renew them or obtain favorable interest rates and haircuts as a result of uncertainty in the market including, but not limited to, uncertainty as a result of inflation and increases in the Federal Funds

Rate. We offset the interest rate risk of our repurchase agreements primarily through the use of derivatives, which primarily consist of interest rate swaps, swaptions and Treasury futures. The average remaining maturities on our interest rate swaps at September 30, 2023 was less than one year. All of our swaps are cleared by a central clearing house. When our interest rate swaps are in a net loss position (expected cash payments are in excess of expected cash receipts on the swaps), we post collateral as required by the terms of our swap agreements.

### Exposure to Financial Counterparties

We actively manage the number of secured financing agreements counterparties to reduce counterparty risk and manage our liquidity needs. The following table summarizes our exposure to our secured financing agreements counterparties at September 30, 2023:

*September 30, 2023*

*(dollars in thousands)*

| Country | Number of Counterparties | Secured Financing Agreement | Exposure (1) |
| --- | ---: | ---: | ---: |
| United States | 9 | $1,681,083 | $619,370 |
| Japan | 2 | 672,176 | 284,559 |
| Canada | 1 | 263,786 | 123,881 |
| Netherlands | 1 | 14,646 | 19 |
| Total | 13 | $2,631,691 | $1,027,829 |

(1) Represents the amount of securities and/or cash pledged as collateral to each counterparty less the aggregate of secured financing agreement.

We regularly monitor our exposure to financing counterparties for credit risk and allocate assets to these counterparties based, in part, on the credit quality and internally developed metrics measuring counterparty risk. Our exposure to a particular counterparty is calculated as the excess collateral which is pledged relative to the secured financing agreement balance. If our exposure to our financing counterparties exceeds internally developed thresholds, we develop a plan to reduce the exposure to an acceptable level. At September 30, 2023, we had amounts at risk with Nomura Securities International, Inc., or Nomura, of 11% of our equity related to the collateral posted on secured financing agreements. The weighted average maturities of the secured financing agreements with Nomura were 379 days. The amount at risk with Nomura was $282 million. At December 31, 2022, we had amounts at risk with Nomura of 12% of our equity related to the collateral posted on secured financing agreements. The weighted average maturities of the secured financing agreements with Nomura were 582 days. The amount at risk with Nomura was $308 million.

At September 30, 2023, we did not use credit default swaps or other forms of credit protection to hedge the exposures summarized in the table above.

### Stockholders’ Equity

In June 2023, our Board of Directors increased the authorization of the Company's share repurchase program, or the Repurchase Program, by $73 million to $250 million. Such authorization does not have an expiration date, and at present, there is no intention to modify or otherwise rescind such authorization. Shares of our common stock may be purchased in the open market, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason. Among other factors, we intend to only consider repurchasing shares of our common stock when the purchase price is less than the last publicly reported book value per common share. In addition, we do not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

We did not repurchase any of our common stock during the quarters ended September 30, 2023 and 2022. We repurchased 5.8 million shares of our common stock at an average price of $5.66 for a total of $33 million during the nine months ended September 30, 2023. We repurchased approximately 5.4 million shares of our common stock at an average price of $9.10 for a total of $49 million during the nine months ended September 30, 2022. The approximate dollar value of shares that may yet be purchased under the Repurchase Program is $217 million as of September 30, 2023.

In February 2022, we entered into separate Distribution Agency Agreements (the “Existing Sales Agreements”) with each of

Credit Suisse Securities (USA) LLC, JMP Securities LLC, Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and

RBC Capital Markets, LLC (the “Existing Sales Agents”). In February 2023, we amended the Existing Sales Agreements and entered into separate Distribution Agency Agreements (together with the Existing Sales Agreements, as amended, the “Sales Agreements”) with J.P. Morgan Securities LLC and UBS Securities LLC to include J.P. Morgan Securities LLC and UBS Securities LLC as additional sales agents (together with the Existing Sales Agents, the “Sales Agents”). Pursuant to the terms of the Sales Agreements, we may offer and sell shares of our common stock, having an aggregate offering price of up to $500,000,000, from time to time in “at the market offerings” through any of the Sales Agents under the Securities Act of 1933. During the quarter and nine months ended September 30, 2023, and year ended December 31, 2022, we did not issue any shares under the at-the-market sales program.

During the quarter and nine months ended September 30, 2023, we declared dividends to common shareholders of $42 million and $138 million or $0.18 and $0.59 per share, respectively. During the quarter and nine months ended September 30, 2022, we declared dividends to common shareholders of $56 million and $212 million, or $0.23 and $0.89 per share, respectively.

We declared dividends to Series A preferred stockholders of $3 million and $9 million, or $0.50 and $1.50 per preferred share, during the quarter and nine months ended September 30, 2023, respectively. We declared dividends to Series A preferred stockholders of $3 million and $9 million, or $0.50 and $1.50 per preferred share, during the quarter and nine months ended September 30, 2022, respectively.

We declared dividends to Series B preferred stockholders of $7 million and $20 million, or $0.50 and $1.50 per preferred share, during the quarter and nine months ended September 30, 2023, respectively. We declared dividends to Series B preferred stockholders of $7 million and $20 million, or $0.50 and $1.50 per preferred share, during the quarter and nine months ended September 30, 2022, respectively.

We declared dividends to Series C preferred stockholders of $5 million and $15 million, or $0.484375 and $1.453125 per preferred share, during the quarter and nine months ended September 30, 2023, respectively. We declared dividends to Series C preferred stockholders of $5 million and $15 million, or $0.484375 and $1.453125 per preferred share, during the quarter and nine months ended September 30, 2022, respectively.

We declared dividends to Series D preferred stockholders of $4 million and $12 million, or $0.50 and $1.50 per preferred share, during the quarter and nine months ended September 30, 2023, respectively. We declared dividends to Series D preferred stockholders of $4 million and $12 million, or $0.50 and $1.50 per preferred share, during the quarter and nine months ended September 30, 2022, respectively.

On October 30, 2021, all 5,800,000 issued and outstanding shares of Series A Preferred Stock with an outstanding liquidation preference of $145 million became callable at a redemption price equal to the liquidation preference plus accrued and unpaid dividends through, but not including, the redemption date. The dividend rate on shares of Series A Preferred Stock is 8.00% per annum.

After June 30, 2023, all LIBOR tenors relevant to us ceased to be published or became no longer representative. We believe that the federal Adjustable Interest Rate (LIBOR) Act (the “Act”) and the related regulations promulgated thereunder are applicable to each of our 8% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”), 7.75% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”) and 8% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series D Preferred Stock,” and together with the Series B Preferred Stock and the Series C Preferred Stock, the “Preferred Stock”). In light of the applicability of the Act to the Preferred Stock, we believe, given all of the information available to us to date, that three-month CME Term SOFR plus the applicable tenor spread adjustment of 0.26161% per annum will automatically replace three-month LIBOR as the reference rate for calculations of the dividend rate payable on the Preferred Stock for dividend periods from and after (i) March 30, 2024, in the case of the Series B Preferred Stock, (ii) September 30, 2025, in the case of the Series C Preferred Stock, or (iii) March 30, 2024, in the case of the Series D Preferred Stock.

### Stock Based Compensation

On June 14, 2023, the Board of Directors recommended and shareholders approved, the Chimera Investment Corporation 2023 Equity Incentive Plan (the “Plan”). It authorized the issuance of up to 20,000,000 shares of our common stock for the grant of awards under the Plan. The Plan will replace our 2007 Equity Incentive Plan, as amended and restated effective December 10, 2015 (the “Prior Plan”), and no new awards will be granted under the Prior Plan. Any awards outstanding under the Prior Plan will remain subject to and be paid under the Prior Plan. Any shares subject to outstanding awards under the Prior Plan that, expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the Plan. Also, shares withheld for tax withholding requirements after stockholder approval of the Plan for full value awards originally granted under the Prior Plan (such as the RSUs and PSUs awarded to our named executive officers) will automatically become available for issuance under the Plan.

As of September 30, 2023, approximately 20 million shares were available for future grant under the Plan.

#### Grants of Restricted Stock Units, or RSUs

We did not grant any RSUs during the quarters ended September 30, 2023 and 2022. During the nine months ended September 30, 2023 and 2022, we granted RSU awards to employees. These RSU awards are designed to reward our employees for services provided to us. Generally, the RSU awards vest equally over a three-year period beginning from the grant date and will fully vest after three years. For employees who are retirement eligible, defined as years of service to us plus age, is equal to or greater than 65, the service period is considered to be fulfilled and all grants are expensed immediately. The RSU awards are valued at the market price of our common stock on the grant date and generally the employees must be employed by us on the vesting dates to receive the RSU awards. We granted 817 thousand RSU awards during the nine months ended September 30, 2023 with a grant date fair value of $5 million for the 2023 performance year. We granted 221 thousand RSU awards during the nine months ended September 30, 2022 with a grant date fair value of $3 million for the 2022 performance year.

#### Grants of Performance Share Units, or PSUs

We did not grant any PSUs during the quarters ended September 30, 2023 and 2022. PSU awards are designed to align compensation with our future performance. The PSU awards granted during the nine months ended September 30, 2023 and 2022, include a three-year performance period ending on December 31, 2025 and December 31, 2024, respectively. For the PSU awards granted during the nine months ended September 30, 2023, the final number of shares awarded will be between 0% and 200% of the PSUs granted based on our Economic Return and share price performance compared to a peer group. Our three-year Economic Return is equal to our change in book value per common share plus common stock dividends. Share price performance equals change in share prices plus common stock dividends. Compensation expense will be recognized on a straight-line basis over the three-year vesting period based on an estimate of our Economic Return and share price performance in relation to the entities in the peer group and will be adjusted each period based on our best estimate of the actual number of shares awarded. For the PSU awards granted during the nine months ended September 30, 2022, the final number of shares awarded will be between 0% and 200% of the PSUs granted based on the our Economic Return compared to a peer group. During the nine months ended September 30, 2023, we granted 605 thousand PSU awards to senior management with a grant date fair value of $3 million. During the nine months ended September 30, 2022, we granted 128 thousand PSU awards to senior management with a grant date fair value of $2 million.

At September 30, 2023 and December 31, 2022, there were approximately 3.4 million and 3.6 million, respectively, unvested shares of RSUs and PSUs issued to our employees and directors.

### Contractual Obligations and Commitments

The following tables summarize our contractual obligations at September 30, 2023 and December 31, 2022. The estimated principal repayment schedule of the securitized debt is based on expected cash flows of the residential mortgage loans or RMBS, as adjusted for expected principal write-downs on the underlying collateral of the debt.

*September 30, 2023*

*(dollars in thousands)*

| Contractual Obligations | Within One Year | One to Three Years | Three to Five Years | Greater Than or Equal to Five Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Secured financing agreements | $1,425,563 | $838,510 | $367,619 | $— | $2,631,692 |
| Securitized debt, collateralized by Non-Agency RMBS | 311 | 379 | — | 81 | 771 |
| Securitized debt at fair value, collateralized by Loans held for investment | 1,488,382 | 2,416,199 | 1,802,768 | 2,806,476 | 8,513,825 |
| Interest expense on MBS secured financing agreements (1) | 25,225 | 7,760 | 1,670 | — | 34,655 |
| Interest expense on securitized debt (1) | 272,683 | 416,901 | 278,999 | 290,737 | 1,259,320 |
| Total | $3,212,164 | $3,679,749 | $2,451,056 | $3,097,294 | $12,440,263 |

(1) Interest is based on variable rates in effect as of September 30, 2023.

*December 31, 2022*

*(dollars in thousands)*

| Contractual Obligations | Within One Year | One to Three Years | Three to Five Years | Greater Than or Equal to Five Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Secured financing agreements | $2,329,284 | $731,308 | $382,838 | $— | $3,443,430 |
| Securitized debt, collateralized by Non-Agency RMBS | 640 | 523 | 71 | 92 | 1,326 |
| Securitized debt at fair value, collateralized by Loans held for investment | 1,636,544 | 2,535,642 | 1,733,022 | 1,949,240 | 7,854,448 |
| Interest expense on MBS secured financing agreements (1) | 28,915 | 6,147 | 1,750 | — | 36,812 |
| Interest expense on securitized debt (1) | 208,059 | 307,001 | 187,281 | 176,580 | 878,921 |
| Total | $4,203,442 | $3,580,621 | $2,304,962 | $2,125,912 | $12,214,937 |

(1) Interest is based on variable rates in effect as of December 31, 2022.

Not included in the table above are the unfunded construction loan commitments of $5 million and $9 million as of September 30, 2023 and December 31, 2022, respectively. We expect the majority of these commitments will be paid within one year and are reported under Payable for investments purchased in our Consolidated Statements of Financial Condition.

We have made a $75 million capital commitment to a fund managed by Kah Capital Management, LLC. As of September 30, 2023, we have funded $46 million towards that commitment, leaving an unfunded commitment of $29 million.

### Capital Expenditure Requirements

At September 30, 2023 and December 31, 2022, we had no material commitments for capital expenditures.

### Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our taxable income (subject to certain adjustments). Before we pay any dividend, we must first meet any operating requirements and scheduled debt service on our financing facilities and other debt payable.

### Critical Accounting Estimates

Accounting policies are integral to understanding our Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance with GAAP requires management to make certain judgments and assumptions, on the basis of information available at the time of the financial statements, in determining accounting estimates used in the preparation of these statements. Our significant accounting policies and accounting estimates are described in Note 2 to the Consolidated Financial Statements. Critical accounting policies are described in this section. An accounting policy is considered critical if it requires management to make assumptions or judgments about matters that are highly uncertain at the time the accounting estimate was made or require significant management judgment in interpreting the accounting literature. If actual results differ from our judgments and assumptions, or other accounting judgments were made, this could have a significant and potentially adverse impact on our financial condition, results of operations and cash flows.

The accounting policies and estimates which we consider most critical relate to the recognition of revenue on our investments, including recognition of any losses, and the determination of fair value of our financial instruments. Refer to the heading titled “Critical Accounting Estimates” under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of our critical accounting estimates.

The consolidated financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities, or VIEs, for which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

### 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially adversely impact our results of operations and our financial condition. Management has made significant estimates in several areas, including current expected credit losses of Non-Agency RMBS, valuation of Loans held for investments, Agency and Non-Agency MBS, forward interest rates for interest rate swaps, and income recognition on Loans held for investments and Non-Agency RMBS. Actual results could differ materially from those estimates.

### Recent Accounting Pronouncements

Refer to Note 2 in the Notes to Consolidated Financial Statements for a discussion of accounting guidance we have recently adopted or expect to be adopted in the future.

## Market risk

As filed, 32,899 characters.

The primary components of our market risk are related to credit risk, interest rate risk, prepayment risk, extension risk, basis risk and market risk. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk and to maintain capital levels consistent with the risks we undertake.

Additionally, refer to Item 1A, "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information on risks we face.

### Credit Risk

We are subject to credit risk in connection with our investments in Non-Agency RMBS and residential mortgage loans and face more credit risk on assets we own that are rated below ‘‘AAA’’ or not rated. The credit risk related to these investments pertains to the ability and willingness of the borrowers to pay, which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. We believe that residual loan credit quality, and thus the quality of our assets, is primarily determined by the borrowers’ credit profiles and loan characteristics.

In connection with loan acquisitions, we or a third-party perform an independent review of the mortgage file to assess the origination and servicing of the mortgage loan as well as our ability to enforce the contractual rights in the mortgage. Depending on the size of the loans, we may not review all of the loans in a pool, but rather a sample of loans for diligence review based upon specific risk-based criteria such as property location, loan size, effective loan-to-value ratio, borrower’s characteristics and other criteria we believe to be important indicators of credit risk. Additionally, we obtain representations and warranties from each seller with respect to the residential mortgage loans, including the origination and servicing of the mortgage loan as well as the enforceability of the lien on the mortgaged property. A seller who breaches these representations and warranties in making a loan that we purchase may be obligated to repurchase the loan from us. Our resources include a portfolio management system, as well as third-party software systems. We utilize third-party due diligence firms to perform an independent mortgage loan file review to ensure compliance with existing guidelines. In addition to statistical sampling techniques, we create adverse credit and valuation samples, which we individually review.

Additionally, we closely monitor credit losses incurred, as well as how expectations of credit losses are expected to change on our Non-Agency RMBS and Loans held for investment portfolios. We estimate future credit losses based on historical experience, market trends, current delinquencies as well as expected recoveries. The net present value of these expected credit losses can change, sometimes significantly from period to period as new information becomes available. When credit loss experience and expectations improve, we will collect more principal on our investments. If credit loss experience deteriorates, we will collect less principal on our investments. The favorable or unfavorable changes in credit losses are reflected in the yield on our investments in mortgage loans and recognized in earnings over the remaining life of our investments. The following table presents changes to net present value of expected credit losses for our Non-Agency RMBS and Loans held for investment portfolios during the previous five quarters. Gross losses are discounted at the rate used to amortize any discounts or premiums on our investments into income. A decrease (negative balance) in the "Increase/(decrease)" line item in the tables below represents a favorable change in expected credit losses. An increase (positive balance) in the "Increase/(decrease)" line item in the tables below represents an unfavorable change in expected credit losses.

*(dollars in thousands)*

| Non-Agency RMBS | For the Quarters Ended September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Balance, beginning of period | $80,532 | $79,875 | $89,234 | $103,394 | $91,187 |
| Realized losses | (1,727) | (2,445) | (2,293) | (3,063) | (1,517) |
| Accretion | 2,576 | 2,765 | 2,949 | 3,133 | 2,588 |
| Losses on purchases | 6 | — | — | — | — |
| Losses on sold/paid-off | 95 | — | — | (4,444) | — |
| Increase/(decrease) | (246) | 337 | (10,015) | (9,786) | 11,136 |
| Balance, end of period | $81,236 | $80,532 | $79,875 | $89,234 | $103,394 |

*(dollars in thousands)*

| Loans held for investment | For the Quarters Ended September 30, 2023 | June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Balance, beginning of period | $254,354 | $285,823 | $321,017 | $285,174 | $315,299 |
| Realized losses | (8,200) | (10,281) | (7,992) | (11,023) | (8,127) |
| Accretion | 3,444 | 3,554 | 3,650 | 3,715 | 3,989 |
| Losses on purchases | — | — | 404 | 7,677 | — |
| Increase/(decrease) | 1,404 | (24,742) | (31,256) | 35,474 | (25,987) |
| Balance, end of period | $251,002 | $254,354 | $285,823 | $321,017 | $285,174 |

Additionally, the Non-Agency RMBS which we acquire for our portfolio are reviewed by us to ensure that they satisfy our risk-based criteria. Our review of Non-Agency RMBS includes utilizing a portfolio management system. Our review of Non-Agency RMBS and other ABS is based on quantitative and qualitative analysis of the risk-adjusted returns on Non-Agency RMBS and other ABS. This analysis includes an evaluation of the collateral characteristics supporting the RMBS such as borrower payment history, credit profiles, geographic concentrations, credit enhancement, seasoning, and other pertinent factors.

### Interest Rate Risk

Our net interest income, borrowing activities and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from the effect of inflation and updated Federal Rate increase projections in 2023. As the Federal Reserve increases its Federal Funds Rate, the margin between short and long-term rates could further compress. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in the current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. We are subject to interest rate risk in connection with our investments and our related debt obligations, which are generally secured financing agreements and securitization trusts. Our secured financing agreements and warehouse facilities may be of limited duration that is periodically refinanced at current market rates. We typically mitigate this risk through utilization of derivative contracts, primarily interest rate swap agreements, swaptions, futures and mortgage options. While we may use interest rate hedges to mitigate risks related

to changes in interest rate, the hedges may not fully offset interest expense movements.

### Interest Rate Effects on Net Interest Income

Our operating results depend, in large part, on differences between the income from our investments and our borrowing costs. Most of our warehouse facilities and secured financing agreements provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR or SOFR. The fixed spread varies depending on the type of underlying asset which collateralizes the financing. During periods of rising interest rates, the borrowing costs associated with our investments tend to increase while the income earned on our investments may remain substantially unchanged or decrease. This will result in a narrowing of the net interest spread between the related assets and borrowings and may even result in losses. Further, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Such delinquencies or defaults could also have an adverse effect on the spread between interest-earning assets and interest-bearing liabilities. We generally do not hedge against credit losses. Hedging techniques are partly based on assumed levels of prepayments of our fixed-rate and hybrid adjustable-rate residential mortgage loans and RMBS. If prepayments are slower or faster than assumed, the life of the residential mortgage loans and RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions.

### Interest Rate Effects on Fair Value

Another component of interest rate risk is the effect changes in interest rates will have on the fair value of the assets we acquire. We face the risk that the fair value of our assets will increase or decrease at different rates than that of our liabilities, including our hedging instruments, if any. We primarily assess our interest rate risk by estimating the duration of our assets compared to the duration of our liabilities and hedges. Duration essentially measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.

It is important to note that the impact of changing interest rates on fair value can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the fair value of our assets could increase significantly when interest rates change beyond 100 basis points. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, in the event of changes in actual interest rates, the change in the fair value of our assets would likely differ from that shown below and such difference might be material and adverse to our stockholders.

### Effect of U.S. Dollar London Inter Bank Offered Rate or, LIBOR transition

The interest rates on our certain adjustable-rate mortgage loans in our securitizations are based on LIBOR, as are some classes of our preferred stock. On March 5, 2021, the United Kingdom Financial Conduct Authority, or FCA, which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincides with the March 5, 2021, announcement of LIBOR's administrator, the ICE Benchmark Administration Limited, or IBA, indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based adjustable-rate mortgage loans have been converted to an equivalent SOFR-based rates plus the appropriate spread adjustment as of July 1, 2023.

On March 15, 2022, President Biden signed the Adjustable Interest Rate (LIBOR) Act (the "Act"), which transitions contracts that use LIBOR as a benchmark for adjustable interest rates to another benchmark, effective July 1, 2023 as LIBOR is permanently discontinued. The Act provides, among other things, that a default alternative benchmark based on SOFR published by the New York Federal Reserve Bank will automatically apply after the LIBOR replacement date for any contract that does not select a benchmark replacement for LIBOR or identify a person authorized to select a benchmark replacement after LIBOR is permanently discontinued. The Act also provides that if the SOFR-based benchmark replacement is selected to replace LIBOR, the person responsible under a contract for determining values is not required to obtain the consent of anyone before determining values based on that benchmark replacement. The Act further creates a safe harbor by ensuring that the SOFR-based benchmark replacement is by law a commercially reasonable replacement for LIBOR, that the use of that benchmark replacement cannot be deemed a breach of a contract or an impairment of the right of any person to receive payment under that contract, and that no person can be liable for selecting or using that benchmark replacement. The Act further authorizes the Board of the Federal Reserve to promulgate regulations under the statute to designate specific SOFR-based rates that incorporate the statutory spread adjustments as replacement rates for covered LIBOR contracts. The Federal Reserve's final rules were issued in December 2022 and provide for the following SOFR-based replacement rates: (i) SOFR compounded in arrears for derivatives, using the same methodology as under the International Swaps and Derivatives Association protocol, (ii) CME Term SOFR for all covered cash products, except FHFA-regulated entity contracts and (iii) a 30-day compounded SOFR average for certain FHFA-regulated entity contracts.

We have evaluated the impact of the Act on our adjustable-rate mortgage loan investments covered by the legislation including the impact on certain classes of our outstanding fixed-to-floating preferred stock and determined that LIBOR transition to SOFR-based rates had no material impact on our financial statements.

### Interest Rate Cap Risk

We may also invest in adjustable-rate residential mortgage loans and RMBS. These are mortgages or RMBS in which the underlying mortgages are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the security’s interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our adjustable-rate residential mortgage loans and RMBS would effectively be limited. This problem will be magnified to the extent we acquire adjustable-rate RMBS that are not based on mortgages which are fully indexed. In addition, the mortgages or the underlying mortgages in an RMBS may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on our adjustable-rate mortgages or RMBS than we need in order to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

### Interest Rate Mismatch Risk

We fund a substantial portion of the acquisitions of our investments with borrowings that have interest rates based on indices and re-pricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and re-pricing terms of the mortgages and mortgage-backed securities. In most cases the interest rate indices and re-pricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. Our cost of funds would likely rise or fall more quickly than would our earnings rate on assets. During periods of changing interest rates, such interest rate mismatches could negatively impact our financial condition, cash flows and results of operations. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above. Our analysis of risks is based on our experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results.

To mitigate potential interest rate mismatches, we have entered into agreements for longer term, non-mark-to-market financing facilities at rates that are higher than short term secured financing agreements. These longer term agreements are primarily on our less liquid Non-Agency RMBS assets. Having non-mark-to-market financing facilities may be useful in this market to prevent significant margin calls or collateral liquidation in a volatile market. If the market normalizes and repurchase rates fall, we may be locked into long term and higher interest expenses than are otherwise available in the market to finance our portfolio.

Our profitability and the value of our investment portfolio including derivatives may be adversely affected during any period as a result of changing interest rates. The following table quantifies the potential changes in net interest income and market value on the assets we retain and derivatives, if interest rates go up or down 50 and 100 basis points, assuming parallel movements in the yield curves. All changes in income and value are measured as percentage changes from the projected net interest income and the value of the assets we retain at the base interest rate scenario. The base interest rate scenario assumes interest rates at September 30, 2023 and various estimates regarding prepayment and all activities are made at each level of rate change. Actual results could differ significantly from these estimates.

| Change in Interest Rate | September 30, 2023 Projected Percentage Change in Net Interest Income | Projected Percentage Change in Market Value (1) |
| --- | ---: | ---: |
| -100 Basis Points | 3.00% | 7.09% |
| -50 Basis Points | 1.76% | 3.45% |
| Base Interest Rate | — | — |
| +50 Basis Points | (1.53)% | (3.19)% |
| +100 Basis Points | (2.58)% | (6.16)% |

(1) Projected Percentage Change in Market Value is based on instantaneous moves in interest rates.

### Prepayment Risk

As we receive prepayments of principal on these investments, premiums and discounts on such investments will be amortized or accreted into interest income. In general, an increase in actual or expected prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accelerated and accreted into interest income increasing interest income when prepayments increase. Actual prepayment results may be materially different than the assumptions we use for our portfolio.

### Extension Risk

Management computes the projected weighted-average life of our investments based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when fixed-rate or hybrid adjustable-rate residential mortgage loans or RMBS are acquired via borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that attempts to fix our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates as the borrowing costs are managed to maintain a net interest spread for the duration of the fixed-rate portion of the related assets. However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument while the income earned on the fixed and hybrid adjustable-rate assets would remain fixed. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

### Basis Risk

We may seek to limit our interest rate risk by hedging portions of our portfolio through interest rate swaps or other types of hedging instruments. Basis risk relates to the risk of the spread between our MBS and hedges widening. Such a widening may cause a decline in the fair value of our MBS that is greater than the increase in fair value of our hedges resulting in a net decline in book value.

### Market Risk

### Market Value Risk

Certain of our securities classified as available-for-sale are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The estimated fair value of these securities fluctuates primarily due to changes in interest rates, prepayment speeds, market liquidity, credit quality, and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of these securities would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our investments may be adversely impacted.

### Real Estate Market Risk

We own assets secured by real property and may own real property directly. Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions and unemployment (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; natural disasters and other acts of God; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to incur losses.

### Risk Management

Subject to maintaining our REIT status, we seek to manage risk exposure to protect our portfolio of residential mortgage loans, RMBS, and other assets and related debt against the effects of major interest rate changes. We generally seek to manage risk by:

- monitoring and adjusting, if necessary, the reset index and interest rate related to our RMBS and our financings;
- attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods, rights to post both cash and collateral for margin calls and provisions for non-mark-to-market financing facilities;
- using derivatives, financial futures, swaps, options, caps, floors and forward sales to adjust the interest rate sensitivity of our investments and our borrowings;
- using securitization financing to receive the benefit of attractive financing terms for an extended period of time in contrast to short term financing and maturity dates of the investments not included in the securitization; and
- actively managing, through assets selection, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our investments and the interest rate indices and adjustment periods of our financings.

Our efforts to manage our assets and liabilities are focused on the timing and magnitude of the re-pricing of assets and liabilities. We attempt to control risks associated with interest rate movements. Methods for evaluating interest rate risk include an analysis of our interest rate sensitivity “gap,” which is the difference between interest-earning assets and interest-bearing liabilities maturing or re-pricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Because different types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or conditions, changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.

The following table sets forth the estimated maturity or re-pricing of our interest-earning assets and interest-bearing liabilities at September 30, 2023. The amounts of assets and liabilities shown within a particular period were determined in accordance with the contractual terms of the assets and liabilities, and securities are included in the period in which their interest rates are first scheduled to adjust and not in the period in which they mature and includes the effect of the interest rate swaps, if any. The interest rate sensitivity of our assets and liabilities in the table could vary substantially based on actual prepayments.

*September 30, 2023*

*(dollars in thousands)*

|  | Within 3 Months | 3-12 Months | 1 Year to 3 Years | Greater than 3 Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Rate sensitive assets | $549,482 | $— | $— | $12,047,168 | $12,596,650 |
| Cash equivalents | 138,591 | — | — | — | 138,591 |
| Total rate sensitive assets | $688,073 | $— | $— | $12,047,168 | $12,735,241 |
| Rate sensitive liabilities | 3,897,310 | 731,709 | 2,653,336 | 2,997,792 | 10,280,147 |
| Interest rate sensitivity gap | $(3,209,237) | $(731,709) | $(2,653,336) | $9,049,376 | $2,455,094 |
| Cumulative rate sensitivity gap | $(3,209,237) | $(3,940,946) | $(6,594,282) | $2,455,094 |  |
| Cumulative interest rate sensitivity gap as a percentage of total rate sensitive assets | (25)% | (31)% | (52)% | 19% |  |

Our analysis of risks is based on our management’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of investment decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in the above tables. These analyses contain certain forward-looking statements and are subject to the safe harbor statement set forth under the heading, “Special Note Regarding Forward-Looking Statements.”

### Cybersecurity Risk

We have a suite of information security controls including enterprise technology hardware and software solutions, security programs such as cybersecurity risk assessment and tabletop exercise specific to our industry, testing of the resiliency of our systems including penetration and disaster recovery tests to continually improve our Business Continuity program against ever-changing threat landscape. We have established an incident response plan and team to take steps it determines are appropriate to contain, mitigate and remediate a cybersecurity incident and to respond to the associated business, legal and reputational risks. Our round-the-clock Security Operation Center actively monitors suspicious activities including tactics, techniques, or procedures related to state-sponsored threat actors and associated groups. Our cybersecurity user awareness program provides regular training sessions on cybersecurity risks and mitigation strategies. We assess our cybersecurity risk awareness, prevention, detection, response and recovery capabilities against industry standard frameworks and maturity models. In addition, we periodically perform an independent third-party cybersecurity maturity assessment of our systems, policies and procedures focused on the National Institute of Standards and Technology, or NIST, Cybersecurity Framework and the SEC's Office of Compliance Inspections and Examinations, or OCIE cybersecurity guidance. The most recent review noted positive findings as well as a few low-risk recommendations which have been implemented to further improve our cyber security maturity level.

There is no assurance that these efforts will fully mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

We have been working remotely since March 2020 and have adopted a hybrid work schedule since the middle of March 2022. While we feel our remote work environment is secure, cybersecurity attacks have increased in an attempt to breach our system and take advantage of employees working from home. The technology in employees’ homes may not be as robust as in our offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. We have experienced higher than normal phishing and other attempts to access our systems. We have not had a cybersecurity breach and maintain vigilance around our technology platforms, but there is no assurance that all cybersecurity risks will be mitigated.

### Enterprise Risk Management

We employ a “Three Layers of Defense Approach” to Enterprise Risk Management (“ERM”) designed to assess and manage risk to achieve our strategic goals. The “First Layer of Defense” consists of assessing key risks indicators (“KRIs”) facing each respective business unit within the Company. Our risk management unit is an independent group that acts as the “Second Layer of Defense”. The risk management unit partners with various business units to understand, monitor, manage and escalate risks as appropriate. The financial reporting unit operates under the requirements of the Sarbanes Oxley (“SOX”). The “Third Layer of Defense” consists of many of our internal controls which are subject to an independent evaluation by our third-party internal auditors. As an independent third-party, the mandate of the internal auditor is to objectively assess the adequacy and effectiveness of our internal control environment to improve risk management, control and governance processes. Periodic reporting from the risk management unit is provided to executive management and to our audit committee.

### Business Continuity Plan (“BCP”)

Our BCP is prepared with the intent of providing guidelines to facilitate (i) employee safety and relocation; (ii) preparedness for carrying out activities and receiving communication; (iii) resumption and restoration of systems and business processes and (iv) the protection and integrity of the Company’s assets.

Our BCP is designed to facilitate business process resilience in a broad range of scenarios with a dedicated Disaster Recovery Team (“DRT”) which is comprised of executive management, head of technology, and professionals across our various business units. Our BCP identifies the critical systems and processes necessary for business operations as well as the resources, employees, and planning needed to support these systems and processes. Critical systems and processes are defined as those which have a material impact on core operations, financial performance, or regulatory requirements. This includes applications which facilitate financial transactions, transaction settlements, financial reporting, and business communication and the personnel who perform such actions. Our BCP provides guidelines to aid in the timely resumption of business operations and for communication with employees, service providers and other key stakeholders needed to support these operations. Our BCP is a "living process" that will evolve with the input and guidance of the key stakeholders, subject matter experts and industry best practices and is reviewed and updated at least annually.

## Controls and procedures

As filed, 1,404 characters.

### (a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer, Chief Financial Officer and the Chief Accounting Officer. Based on that evaluation, the Company’s management, including the Chief Executive Officer, Chief Financial Officer and the Chief Accounting Officer, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

### (b) Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) under the Securities Exchange Act of 1934, the Company’s management, including its Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the Company’s internal control over financial reporting to determine whether any changes occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such changes, during the third quarter of 2023.

## Risk factors

As filed, 434 characters.

*Under “Part I — Item 1A — Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 we set forth risk factors related to our business and operations. You should carefully consider the risk factors set forth in our Form 10-K for the year ended December 31, 2022. As of the date hereof, there have been no material changes to the risk factors set forth in our Form 10-K for the year ended December 31, 2022.*

Filed Nov 2, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-036403. Last ingested by Listed: Oct 30, 2026, 11:29 ET. No prices; not investment advice.