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CHIMERA INVESTMENT CORP

CHIMERA INVESTMENT CORPCIMEarnings & Financial Report

NYSE · Financials · Real Estate Investment Trusts

Chimera Investment Corp is a US-based real estate investment trust (REIT) primarily investing in residential mortgage-backed securities, residential and commercial mortgage loans, and other real estate-related financial assets. It delivers sustainable risk-adjusted returns for shareholders via regular dividend distributions from its investment portfolio.

What changed in CHIMERA INVESTMENT CORP's 10-K — 2022 vs 2023

Top changes in CHIMERA INVESTMENT CORP's 2023 10-K

459 paragraphs added · 466 removed · 319 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

35 edited+4 added−4 removed74 unchanged
Our Securitization Programs We currently have the following five securitization programs: • Our “R” program, our most active program, securitizes seasoned reperforming mortgage loans, whether newly acquired from a third party or upon the exercise of a call option, in a REMIC transaction; • Our “NR” program securitizes seasoned residential mortgage loans that are not eligible to be securitized in Real Estate Mortgage Investment Conduit, or REMIC, transactions; • Our “I” program securitizes Non-Agency eligible investor mortgage loans; • Our “J” program securitizes jumbo prime residential mortgage loans; and • Our “INV” program securitizes Agency-eligible investor mortgage loans.
Our Securitization Programs We currently have the following five securitization programs: • Our “R” program, our most active program, securitizes seasoned reperforming mortgage loans, whether newly acquired from a third party or upon the exercise of a call option, in a Real Estate Mortgage Investment Conduit, or REMIC, transaction; • Our “NR” program securitizes seasoned residential mortgage loans that are not eligible to be securitized in REMIC, transactions; • Our “I” program securitizes Non-Agency eligible investor mortgage loans; • Our “J” program securitizes jumbo prime residential mortgage loans; and • Our “INV” program securitizes Agency-eligible investor mortgage loans.
We have acquired and may in the future acquire Non-Agency RMBS for our portfolio with the intention of 7 exercising the call rights and re-securitizing the underlying mortgage loans and retaining a portion of the re-securitized Non-Agency RMBS in our portfolio, typically the subordinate certificates. • Secured Financing Agreements.
We have acquired and may in the future acquire Non-Agency RMBS for our portfolio with the intention of exercising the call rights and re-securitizing the underlying mortgage loans and retaining a portion of the re-securitized Non-Agency RMBS in our portfolio, typically the subordinate certificates. 7 • Secured Financing Agreements.
See “Risk Factors - Risks Related to Regulatory, Accounting and Our 1940 Exemption - Loss of our 1940 Act exemption would adversely affect us and negatively affect the market price of shares our capital stock and our ability to distribute dividends.” Licenses While we are not required to obtain licenses to purchase mortgage-backed securities, the purchase and sale of residential mortgage loans in the secondary market may, in some circumstances, require us to maintain various state licenses.
See “Risk Factors - Risks Related to Regulatory, Accounting and Our 1940 Exemption - Loss of our 1940 Act exemption would adversely affect us and negatively affect the market price of shares of our capital stock and our ability to distribute dividends.” Licenses While we are not required to obtain licenses to purchase mortgage-backed securities, the purchase and sale of residential mortgage loans in the secondary market may, in some circumstances, require us to maintain various state licenses.
We now maintain a portion of our financing in non-mark-to-market facilities and mark-to-market holiday facilities (meaning, the market value of the collateral must drop below a threshold before a lender can issue a margin call) to finance a portion of our non-Agency RMBS, including risk retention securities.
We maintain a portion of our financing in non-mark-to-market facilities and mark-to-market holiday facilities (meaning, the market value of the collateral must drop below a threshold before a lender can issue a margin call) to finance a portion of our non-Agency RMBS, including risk retention securities.
In addition, most of these subordinate securities are subject to the Dodd-Frank Act and related laws and regulations relating to credit risk retention for securitizations, or the Risk Retention Rules, which significantly limits the liquidity of these securities.
In addition, most of these subordinate securities are subject to the Dodd-Frank Act and related laws and regulations relating to credit risk retention for securitizations, or the Risk Retention Rules, 3 which significantly limits the liquidity of these securities.
Our Board of Directors and our investment committee have adopted the following guidelines for our investments and borrowings: • No investment shall be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes; • No investment shall be made that would cause us to be regulated as an investment company under the 1940 Act; • With the exception of real estate and housing, no single industry shall represent greater than 20% of the securities or aggregate risk exposure in our portfolio; and • Investments in non-rated or deeply subordinated ABS or other securities that are non-qualifying assets for purposes of the 75% REIT asset test will be limited to an amount not to exceed 50% of our stockholders’ equity.
Our Board of Directors and its committees have adopted the following guidelines for our investments and borrowings: • No investment shall be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes; • No investment shall be made that would cause us to be regulated as an investment company under the 1940 Act; • With the exception of real estate and housing, no single industry shall represent greater than 20% of the securities or aggregate risk exposure in our portfolio; and • Investments in non-rated or deeply subordinated ABS or other securities that are non-qualifying assets for purposes of the 75% REIT asset test will be limited to an amount not to exceed 50% of our stockholders’ equity.
Our risk and audit committees of our Board of Directors also review our investment portfolio and related compliance with our investment policies and procedures and investment guidelines at regularly scheduled risk and audit committee meetings.
Our Board of Directors and its committees also review our investment portfolio and related compliance with our investment policies and procedures and investment guidelines at regularly scheduled risk and audit committee meetings.
We make available on the website under “Filings & Reports,” free of charge, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any other reports that we file with the Securities and Exchange Commission, or SEC, (including any amendments to such reports) as soon as reasonably practicable after we electronically file or furnish such materials to the SEC.
We make available on the website under “Filings & Reports,” free of charge, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports and investor presentations on Form 8-K and any other reports that we file with the Securities and Exchange Commission, or SEC, (including any amendments to such reports) as soon as reasonably practicable after we electronically file or furnish such materials to the SEC.
As discussed below, during 2022 our use of leverage with respect to the retained securities from the securitizations we sponsored remained low and we have entered into several new non-mark-to-market facilities to finance these retained securities. In addition, we have purchased and expect to continue to purchase business purpose loans.
As discussed below, during 2023 our use of leverage with respect to the retained securities from the securitizations we sponsored remained low and we have entered into several new non-mark-to-market facilities to finance these retained securities. In addition, we have purchased and expect to continue to purchase business purpose loans.
We believe these business purpose loans strengthened our portfolio in 2022 because they are short duration assets and have a high average coupon, providing an attractive risk reward profile in times of rate volatility. Currently, we do not use term securitization to finance business purpose loans because of their short duration.
We believe these business purpose loans strengthened our portfolio in 2023 because they are short duration assets and have a high average coupon, providing an attractive risk reward profile in times of rate volatility. Currently, we do not use term securitization to finance business purpose loans because of their short duration.
In acquiring real estate-related assets, we compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, hedge funds, governmental bodies (including the U.S. Federal Reserve) and other entities.
In acquiring real estate-related assets, we compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, exchange traded funds, mutual funds, institutional investors, investment banking firms, financial institutions, hedge funds, governmental bodies (including the U.S. Federal Reserve) and other entities.
During 2023, we expect to continue acquiring and securitizing mortgage loans as well as calling our existing securitizations depending on market conditions. When we securitize mortgage loans, we typically retain the most subordinate classes of securities, which means we are the first-loss security holder.
During 2024, we expect to continue acquiring and securitizing mortgage loans as well as calling our existing securitizations depending on market conditions. When we securitize mortgage loans, we typically retain the most subordinate classes of securities, which means we are the first-loss security holder.
A TRS is subject to U.S. federal income tax. 1940 Act Exclusion 8 We continued to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the 1940 Act.
A TRS is subject to U.S. federal income tax. 1940 Act Exclusion 8 We continue to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the 1940 Act.
We did not sponsor any securitizations under our “J” and “INV” programs during the year ended December 31, 2022. “R” and “NR” Non-Rated Programs. The securities issued in our “R” and “NR” securitizations are generally not rated and are subject to the Risk Retention Rules.
We did not sponsor any securitizations under our “J” and “INV” programs during the year ended December 31, 2023. “R” and “NR” Non-Rated Programs. The securities issued in our “R” and “NR” securitizations are generally not rated and are subject to the Risk Retention Rules.
We acquire pools of such loans which are eligible sale to one of the Agency as well as pools of loans which are not eligible for such sales. In both cases, we securitize the investor loans as part of our loan securitization program.
We acquire pools of such loans which are eligible for sale to one of the Agencies as well as pools of loans which are not eligible for such sales. In both cases, we securitize the investor loans as part of our loan securitization program.
We have a matching gift program to encourage personnel to be charitable and to support 501(c)(3) organizations. At December 31, 2022, we had 39 employees, all of whom were full-time. We believe that diversity and inclusion are conducive to a stronger workplace and better decision making.
We have a matching gift program to encourage personnel to be charitable and to support 501(c)(3) organizations. 9 At December 31, 2023, we had 39 employees, all of whom were full-time. We believe that diversity and inclusion are conducive to a stronger workplace and better decision making.
(2) At the time of issuance. Our Investment Portfolio 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.
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.
As of December 31, 2022, 74% of our workforce was either gender or racially diverse. We believe that our relationship with our employees is good. None of our employees are unionized or represented under a collective bargaining agreement. 9 Competition Our net income depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs.
As of December 31, 2023, 72% of our workforce was either gender or racially diverse. We believe that our relationship with our employees is good. None of our employees are unionized or represented under a collective bargaining agreement. Competition Our net income depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs.
We have granted waivers to two mutual funds to own a certain class of our preferred stock above the 9.8% limitation. Also, we have elected to treat certain of our subsidiaries as taxable REIT subsidiaries, or TRS.
We have granted waivers to two mutual funds to own certain classes of our preferred stock above the 9.8% limitation. Also, we have elected to treat certain of our subsidiaries as taxable REIT subsidiaries, or TRS.
We are not required to maintain any specific debt-to-equity ratio as we believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At December 31, 2022 and 2021, our ratio of debt-to-equity was 4.0:1 and 3.0:1, respectively.
We are not required to maintain any specific debt-to-equity ratio as we believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At December 31, 2023 and 2022, our ratio of debt-to-equity was 4.0:1 .
See “ Risk Factors - Risks Associated with Our Investments - A significant portion of the RMBS we acquire through securitization is subject to the U.S. credit risk retention rules which materially limit our ability to sell or hedge such investments as needed, 3 which may require us to hold investments that we may otherwise desire to sell during times of severe market disruption in the mortgage, housing or related sectors, such as those experienced in the early stages of COVID-19 pandemic.” discussion in Item 1A “Risk Factors” section for more details.
See “ Risk Factors - Risks Associated with Our Investments - A significant portion of the RMBS we acquire through securitization is subject to the U.S. credit risk retention rules which materially limit our ability to sell or hedge such investments as needed, which may require us to hold investments that we may otherwise desire to sell during times of severe market disruption in the mortgage, housing or related sectors” discussion in Item 1A “Risk Factors” section for more details.
In these programs, we typically sell the senior securities to an unrelated third party and retain the subordinate securities, which include the first-loss securities which are subject to the Risk Retention Rules, and the interest-only securities. During 2022, we sponsored three “R” securitizations and one “NR” securitization.
In these programs, we typically sell the senior securities to an unrelated third party and retain the subordinate securities, which include the first-loss securities which are subject to the Risk Retention Rules, and the interest-only securities. During 2023, we sponsored four “R” securitizations and two “NR” securitization.
During 2022, we focused our investment activities primarily on acquiring and securitizing pools of residential mortgage loans and, when we believed market or other conditions were favorable, exercising call options on existing securitizations to acquire the underlying mortgage loans and use additional securitization to re-finance those called mortgage loans at lower rates and/or more efficient leverage.
During 2023, we focused our investment activities primarily on acquiring and securitizing pools of residential mortgage loans and, when we believed market or other conditions were favorable, exercising call options on existing securitizations to acquire the underlying mortgage loans and use additional securitization to re-finance those called mortgage loans.
We sponsored one securitization under our “I” securitization program.
We sponsored two securitization under our “I” securitization program.
As of December 31, 2022, we hold licenses or exempt status, through two of our wholly owned subsidiaries in 23 states, which require either a license or an exemption. We are required to comply with various information reporting and other regulatory requirements to maintain those licenses and exemption statuses.
As of December 31, 2023, we hold all required licenses or exempt status through two of our wholly owned subsidiaries in 22 states.. We are required to comply with various information reporting and other regulatory requirements to maintain those licenses and exemption statuses.
In addition, we have purchased residential mortgage loans on a servicing-retained basis, which means a third-party servicer (which may or may not be the seller of the mortgage loans) retained the right to service the loans.
Servicing procedures typically follow Fannie Mae guidelines but are specified in each servicing agreement. In addition, we have purchased residential mortgage loans on a servicing-retained basis, which means a third-party servicer (which may or may not be the seller of the mortgage loans) retained the right to service the loans.
We currently finance these loans using repurchase facilities, but we may look to finance these loans with revolving securitization structures in the future. In 2023, in addition to our securitization and business purpose loan activities, we expect to increase our Agency and Non-Agency RMBS and CMBS portfolios.
We currently finance these loans using repurchase facilities, but we may look to finance these loans with revolving securitization structures in the future. In 2024, in addition to our securitization and business purpose loan activities, we will explore opportunities to increase our Agency MBS portfolio.
We offer internal training programs on financial markets, business ethics, government regulatory rules and other topics. We encourage personnel to attend industry sponsored or other conferences and have a tuition reimbursement program to help personnel to further develop their skills and to stay current on evolving trends impacting our industry.
We encourage personnel to attend industry sponsored or other conferences and have a tuition reimbursement program to help personnel to further develop their skills and to stay current on evolving trends impacting our industry.
We have also financed and may continue to finance a portion of our loan portfolio with long-term secured financing facilities rather than securitization depending on market conditions.
We have also financed and may continue to finance a portion of our loan portfolio with long-term secured financing facilities rather than securitization until the securitization market improves once the Fed begins rate cuts.
At December 31, 2021, based on the fair value of our interest earning assets, approximately 82% of our investment portfolio was residential mortgage loans, 12% of our investment portfolio was Non-Agency RMBS, and 6% of our investment portfolio was Agency MBS.
(2) At the time of issuance. Our Investment Portfolio At December 31, 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.
We seek to maintain formal relationships with many counterparties with the intent to obtain financing on the most favorable terms available while diversifying counterparty credit risk. We modified our financing strategy in 2020 following the dislocations experienced in the financial markets in connection with the onset of the COVID-19 pandemic.
We seek to maintain formal relationships with many counterparties with the intent to obtain financing on the most favorable terms available while diversifying counterparty credit risk.
Subject to maintaining our REIT status and exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act, we do not have any limitations on the amounts we may invest in any of our targeted asset classes.
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. Subject to maintaining our REIT status and exemption from registration under the 1940 Act, we do not have any limitations on the amounts we may invest in any of our targeted asset classes.
We currently do not intend to establish a loan origination or loan servicing platform. Currently, we acquire mortgage loans in the secondary market that are originated by third parties and are not underwritten to our specifications. Third-party servicers service the mortgage loans in our portfolio.
Currently, we acquire mortgage loans in the secondary market that are originated by third parties and are not underwritten to our specifications. Third-party servicers service the mortgage loans in our portfolio. We conduct a due diligence review of each servicer before the servicer is retained and periodically thereafter.
We believe our management team has the experience necessary to effectively implement our growth strategy and continue to drive shareholder value. We provide competitive compensation and benefits to attract and retain key personnel, while also providing a safe, inclusive and respectful workplace. We continue to have a focus on diversity initiatives.
We provide competitive compensation and benefits to attract and retain key personnel, while also providing a safe, inclusive and respectful workplace. We continue to have a focus on diversity initiatives. We offer internal training programs on financial markets, business ethics, government regulatory rules and other topics.
Human Capital The human capital objectives we focus on in managing our business include attracting, developing, and retaining key personnel. Our employees are critical to the success of our organization and we are committed to supporting our employees’ professional development.
Our employees are critical to the success of our organization and we are committed to supporting our employees’ professional development. We believe our management team has the experience necessary to effectively implement our growth strategy and continue to drive shareholder value.
Removed
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.
Added
The table below sets forth certain information about our “R”, “NR” and the “I” securitizations we completed during the year ended December 31, 2023. 4 DEAL (1) TOTAL ORIGINAL FACE ORIGINAL FACE OF TRANCHES SOLD (2) ORIGINAL FACE OF TRANCHES RETAINED (2) TOTAL REMAINING FACE REMAINING FACE OF TRANCHES SOLD REMAINING FACE OF TRANCHES RETAINED (dollars in thousands) CIM 2023-R1 585,718 512,503 73,215 529,930 456,713 73,215 CIM 2023-NR1 134,016 97,161 36,855 112,401 75,706 36,695 CIM 2023-R2 447,384 364,841 82,543 411,467 328,913 82,543 CIM 2023-I1 236,161 205,578 30,583 220,543 189,960 30,583 CIM 2023-NR2 66,661 48,328 18,333 59,315 41,896 17,419 CIM 2023-R3 450,834 394,479 56,355 422,026 365,626 56,355 CIM 2023-R4 393,997 343,368 50,629 371,149 320,507 50,629 CIM 2023-I2 238,530 202,750 35,780 225,752 189,972 35,780 (1) For certain of the above securitization deals, we retained certain IO and/or excess servicing classes.
Removed
The table below sets forth certain information about our “R”, “NR” and the “I” securitizations we completed during the year ended December 31, 2022. 4 DEAL (1) TOTAL ORIGINAL FACE ORIGINAL FACE OF TRANCHES SOLD (2) ORIGINAL FACE OF TRANCHES RETAINED (2) TOTAL REMAINING FACE REMAINING FACE OF TRANCHES SOLD REMAINING FACE OF TRANCHES RETAINED (dollars in thousands) CIM 2022-R1 328,226 263,729 64,497 290,201 225,724 64,476 CIM 2022-R2 508,202 380,389 127,813 471,030 343,363 127,667 CIM 2022-I1 219,442 122,997 96,445 212,738 116,293 96,445 CIM 2022-R3 369,891 283,891 86,000 355,613 269,613 86,000 CIM 2022-NR1 144,912 105,061 39,851 141,410 101,843 39,567 (1) For certain of the above securitization deals, we retained certain IO and/or excess servicing classes.
Added
As discussed in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” we reduced some of our Agency MBS positions during 2023.
Removed
As discussed in “Management's Discussion and Analysis of Financial Condition and Results of Operations,” the changes in the composition of our assets during 2022 relates primarily to the acquisition of seasoned re-performing loans, or RPLs, and business purpose loans, while preserving low leverage and ample liquidity.
Added
In one or more states, in lieu of relying on such licenses, we may contribute our acquired residential mortgage loans to one or more trusts in which we or our subsidiaries hold beneficial interests; title to these residential mortgage loans may be held by one or more federally-charted banks as trustee, which may be exempt from state licensing requirements.
Removed
We conduct a due diligence review of each servicer before the servicer is retained and periodically thereafter. Servicing procedures typically follow Fannie Mae guidelines but are specified in each servicing agreement.
Added
There can be no assurance that the use of the trusts will satisfy an exemption from licensing requirements because regulatory agencies may adopt different interpretations of applicable laws. Human Capital The human capital objectives we focus on in managing our business include attracting, developing, and retaining key personnel.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

106 edited+34 added−55 removed321 unchanged
Certain of our subsidiaries may rely on the exemption provided by Section 3(c)(6) which excludes from the definition of “investment company” any company primarily engaged, directly or through majority-owned subsidiaries, in a business, among others, described in Section 3(c)(5)(C) of the 1940 Act (from which not less than 25% of such company’s gross income during its last fiscal year was derived) together with an additional business or additional businesses other than investing, reinvesting, owning, holding or trading in securities.
Certain of our subsidiaries may rely on the exemption provided by Section 3(c)(6) of the 1940 Act which excludes from the definition of “investment company” any company primarily engaged, directly or through majority-owned subsidiaries, in a business, among others, described in Section 3(c)(5)(C) of the 1940 Act (from which not less than 25% of such company’s gross income during its last fiscal year was derived) together with an additional business or additional businesses other than investing, reinvesting, owning, holding or trading in securities.
Pursuant to the statute, our Board of Directors has by resolution exempted business combinations between us and any other person, provided, that such business combination is first approved by our Board of Directors (including a majority of our directors who are not affiliates or associates of such person). • Unsolicited Takeovers : The “unsolicited takeover” provisions of Maryland law, permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to elect to be subject to any or all of five provisions, including a classified board, a two-thirds vote requirement for removing a director, a requirement that the number of directors be fixed only by vote of the directors, a requirement that a vacancy on the 35 board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred, and majority requirement for the calling of a special meeting of stockholders.
Pursuant to the statute, our Board of Directors has by resolution exempted business combinations between us and any other person, provided, that such business combination is first approved by our Board of Directors (including a majority of our directors who are not affiliates or associates of such person). • Unsolicited Takeovers : The “unsolicited takeover” provisions of Maryland law, permit our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to elect to be subject to any or all of five provisions, including a classified board, a two-thirds vote requirement for removing a director, a requirement that the number of directors be fixed only by vote of the directors, a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred, and majority requirement for the calling of a special meeting of stockholders.
These risks include the following: (i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors; (ii) information about collateral may be incorrect, incomplete, or misleading; (iii) collateral or bond historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation (e.g., different issuers may report delinquency statistics based on different definitions of what constitutes a delinquent loan); or (iv) collateral or bond information may be outdated, in which case the models may contain incorrect assumptions as to what has occurred since the date information was last updated.
These risks include the following: (i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors; (ii) information about collateral may 24 be incorrect, incomplete, or misleading; (iii) collateral or bond historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation (e.g., different issuers may report delinquency statistics based on different definitions of what constitutes a delinquent loan); or (iv) collateral or bond information may be outdated, in which case the models may contain incorrect assumptions as to what has occurred since the date information was last updated.
Because we are a holding company that conducts its businesses primarily through wholly-owned subsidiaries and majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not 29 have a combined value in excess of 40% of the value of our adjusted total assets on an unconsolidated basis.
Because we are a holding company that conducts its businesses primarily through wholly-owned subsidiaries and majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our adjusted total assets on an unconsolidated basis.
A significant part of our business and growth strategy is to engage in various securitization transactions related to mortgage assets, and such transactions expose us to potentially material risks, including without limitation: 22 • Financing Risk: Engaging in securitization transactions and other similar transactions generally require us to incur short-term debt on a recourse basis to finance the accumulation of residential mortgage loans.
A significant part of our business and growth strategy is to engage in various securitization transactions related to mortgage assets, and such transactions expose us to potentially material risks, including without limitation: • Financing Risk: Engaging in securitization transactions and other similar transactions generally require us to incur short-term debt on a recourse basis to finance the accumulation of residential mortgage loans.
Unless our failure to qualify as a REIT was excused under U.S. federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. The ability of our Board of Directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Unless our failure to qualify as a REIT was excused under U.S. federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. 30 The ability of our Board of Directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Such losses could be significant because of our leveraged structure. The risks associated with leverage are more acute during periods of economic slowdown or recession. The use of leverage to finance our investments involves many other risks, including, among other things, the following: 13 • Our profitability may be materially adversely affected by a reduction in our leverage.
Such losses could be significant because of our leveraged structure. The risks associated with leverage are more acute during periods of economic slowdown or recession. The use of leverage to finance our investments involves many other risks, including, among other things, the following: • Our profitability may be materially adversely affected by a reduction in our leverage.
However, if we have borrowings with two or more maturities and, (1) those borrowings are secured by mortgages 32 or mortgage-backed securities and (2) the payments made on the borrowings are related to the payments received on the underlying assets, then the borrowings and the pool of mortgages or mortgage-backed securities to which such borrowings relate may be classified as a taxable mortgage pool under the Code.
However, if we have borrowings with two or more maturities and, (1) those borrowings are secured by mortgages or mortgage-backed securities and (2) the payments made on the borrowings are related to the payments received on the underlying assets, then the borrowings and the pool of mortgages or mortgage-backed securities to which such borrowings relate may be classified as a taxable mortgage pool under the Code.
The Dodd-Frank Act also affects the securitization of mortgages (and other assets) with requirements for risk retention by securitizers and requirements for regulating rating agencies. Numerous regulations have been issued pursuant to the Dodd-Frank Act, including regulations regarding mortgage loan servicing, underwriting and loan originator compensation and others could be issued in the future.
The Dodd-Frank Act also affects the securitization of mortgages (and other assets) with requirements for risk retention by securitizers and requirements for regulating rating agencies. 26 Numerous regulations have been issued pursuant to the Dodd-Frank Act, including regulations regarding mortgage loan servicing, underwriting and loan originator compensation and others could be issued in the future.
In addition, in response to certain interest rate and investment environments or to changes in market liquidity, we could adopt a strategy of reducing our leverage by selling assets or not reinvesting principal payments as MBS amortize or prepay, thereby decreasing the outstanding amount of our related borrowings.
In addition, in response to certain interest rate and investment environments or to changes in market liquidity, we could adopt a 13 strategy of reducing our leverage by selling assets or not reinvesting principal payments as MBS amortize or prepay, thereby decreasing the outstanding amount of our related borrowings.
Certain of our subsidiaries may rely on Section 3(c)(7) for their 1940 Act exemption and, therefore, our interest in each of these subsidiaries would constitute an “investment security” for purposes of determining whether we pass the 40% test. Certain of our subsidiaries may rely on Rule 3a-7, which exempts certain securitization vehicles.
Certain of our subsidiaries may rely on Section 3(c)(7) for their 1940 Act exemption and, therefore, our interest in each of these subsidiaries would constitute an “investment security” for purposes of determining whether we pass the 40% test. 28 Certain of our subsidiaries may rely on Rule 3a-7, which exempts certain securitization vehicles.
As a result, we might have to limit our use of advantageous hedging techniques or 31 implement certain hedges through a TRS. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.
As a result, we might have to limit our use of advantageous hedging techniques or implement certain hedges through a TRS. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.
If a lender determines in its sole discretion that the value of the assets has decreased, it has the right to initiate a margin call. These 12 valuations may be different than the values that we ascribe to these assets and may be influenced by recent asset sales and distressed levels by forced sellers.
If a lender determines in its sole discretion that the value of the assets has decreased, it has the right to initiate a margin call. These valuations may be different than the values that we ascribe to these assets and may be influenced by recent asset sales and distressed levels by forced sellers.
For example, in response to the changes in rates and margins calls we received during the first months of the COVID-19 pandemic, in 2020, we entered into several non-mark-to-market and mark-to-market holiday financing facilities. Similarly, in 2022, as the Federal Reserve increased interest rates we added more non-MTM facilities.
For example, in response to the changes in rates and margins calls we received during the first months of the COVID-19 pandemic, in 2020, we entered into several non-mark-to-market and mark-to-market holiday financing facilities. Similarly, in 2023 and 2022, as the Federal Reserve increased interest rates we added more non-MTM facilities.
For example, by relying on Third Party Data, especially valuation models, we may be induced to buy certain 25 investments at prices that are too high, to sell certain other investments at prices that are too low, or to miss favorable opportunities altogether. Similarly, any hedging based on faulty Third Party Data may prove to be unsuccessful.
For example, by relying on Third Party Data, especially valuation models, we may be induced to buy certain investments at prices that are too high, to sell certain other investments at prices that are too low, or to miss favorable opportunities altogether. Similarly, any hedging based on faulty Third Party Data may prove to be unsuccessful.
If our investments were liquidated at prices below our amortized cost of such assets, we would incur losses, which would adversely affect our earnings. • Our use of repurchase agreements to borrow money may give our lenders greater rights in the event of bankruptcy.
If our investments were liquidated at prices below our amortized cost of such assets, we would incur losses, which would adversely affect our earnings. 14 • Our use of repurchase agreements to borrow money may give our lenders greater rights in the event of bankruptcy.
Additionally, when investing in new assets or businesses we will be exposed to the risk that those assets, or income generated by those assets or businesses, will affect our ability to meet the requirements to maintain our qualification as a REIT or our 21 exemption from registration under the 1940 Act.
Additionally, when investing in new assets or businesses we will be exposed to the risk that those assets, or income generated by those assets or businesses, will affect our ability to meet the requirements to maintain our qualification as a REIT or our exemption from registration under the 1940 Act.
Furthermore, we will monitor the value of our investments in our TRSs to ensure compliance with the rule that no more than 20% of the value of our assets may consist of 33 TRS stock and securities (which is applied at the end of each calendar quarter).
Furthermore, we will monitor the value of our investments in our TRSs to ensure compliance with the rule that no more than 20% of the value of our assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter).
Our bylaws provide that we are not subject to the “control share” provisions of Maryland law. Our Board of Directors, however, may elect to make the “control share” statute applicable to us at any time and may do so without stockholder approval. • Business Combinations.
Our bylaws provide that we are not subject to the “control share” provisions of Maryland law. Our Board of Directors, however, may elect to make the “control share” statute applicable to us at any time and may do so without stockholder approval. 33 • Business Combinations.
Moreover, in the future, these regulators may propose additional changes that we do not currently anticipate. Changes to accounting rules that apply to us could significantly impact our business or our reported financial performance in ways that we cannot predict or protect against.
Moreover, in the future, these regulators may propose additional changes that we do not currently anticipate. Changes to accounting rules that apply to us 27 could significantly impact our business or our reported financial performance in ways that we cannot predict or protect against.
Qualified dividend income payable to U.S. investors that are individuals, trusts, and estates is subject to the reduced maximum tax rate applicable to long-term capital gains. Dividends payable by REITs, however, generally are not eligible for the reduced 37 qualified dividend rates.
Qualified dividend income payable to U.S. investors that are individuals, trusts, and estates is subject to the reduced maximum tax rate applicable to long-term capital gains. Dividends payable by REITs, however, generally are not eligible for the reduced qualified dividend rates.
Therefore, our REIT dividend distributions may or may not include after-tax net income from our TRSs. Our taxable income may substantially exceed our net income as determined by GAAP. As an example, realized capital losses may be included in our GAAP net income, but may not be deductible in computing our taxable income.
Therefore, our REIT dividend distributions may or may not include after-tax net income from our TRSs. 31 Our taxable income may substantially exceed our net income as determined by GAAP. As an example, realized capital losses may be included in our GAAP net income, but may not be deductible in computing our taxable income.
Because substantially all our repurchase agreements are uncommitted and renewable at our lenders’ discretion, our lenders 14 could determine to reduce or terminate our access to future borrowings at virtually any time, which could materially adversely affect our business and profitability.
Because substantially all our repurchase agreements are uncommitted and renewable at our lenders’ discretion, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time, which could materially adversely affect our business and profitability.
Our Required Credit Risk subjects us to the first losses on our securitizations and is illiquid which may make it more difficult to meet our liquidity needs, each of which may materially and adversely affect our business and financing condition.
Our Required Credit Risk subjects us to the first losses on 18 our securitizations and is illiquid, which may make it more difficult to meet our liquidity needs, each of which may materially and adversely affect our business and financing condition.
If we use adjustable rate debt to fund assets that have a fixed interest rate (or use fixed 17 rate debt to fund assets that have an adjustable interest rate), an interest rate mismatch could exist and we could earn less (and fair values could decline) if interest rates rise, at least for a time.
If we use adjustable rate debt to fund assets that have a fixed interest rate (or use fixed rate debt to fund assets that have an adjustable interest rate), an interest rate mismatch could exist and we could earn less (and fair values could decline) if interest rates rise, at least for a time.
We incur significant ongoing costs to comply with these government regulations. 26 Our portfolio includes or may include investments in mortgage pass-through certificates issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.
We incur significant ongoing costs to comply with these government regulations. Our portfolio includes or may include investments in mortgage pass-through certificates issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.
Certain financing facilities we may enter contain restrictions, covenants, and representations and warranties that, among other things, may require us to satisfy specified financial, asset quality, loan eligibility, and loan performance tests.
Certain financing facilities we may enter into contain restrictions, covenants, and representations and warranties that, among other things, require us to satisfy specified financial, asset quality, loan eligibility, and loan performance tests.
The mortgage loans we have securitized are generally recorded on our balance sheet as “securitized mortgage loans” for GAAP purposes, but in effect we own these assets in the form of securities.
The mortgage loans we have securitized are generally recorded on our balance sheet as “securitized mortgage loans” for 17 GAAP purposes, but in effect we own these assets in the form of securities.
Any failure by servicers to service these mortgages or to competently manage and dispose of 24 the related real properties could negatively impact the value of these investments and our financial performance.
Any failure by servicers to service these mortgages or to competently manage and dispose of the related real properties could negatively impact the value of these investments and our financial performance.
Additional offerings of equity securities, including securities that may be converted into or exchanged for equity securities, may dilute the holdings of our existing stockholders or reduce the market price of our capital stock, or both.
Additional offerings of equity securities, including securities that may be converted into or exchanged for equity securities, may 35 dilute the holdings of our existing stockholders or reduce the market price of our capital stock, or both.
(See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 2022 Form 10-K, for further discussion regarding risks related to exposure to financial institution counterparties in light of recent market conditions.) Our exposure to defaults by counterparties may be more pronounced during periods of significant volatility in the market conditions for mortgages and mortgage-related assets as well as the broader financial markets.
(See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 2023 Form 10-K, for further discussion regarding risks related to exposure to financial institution counterparties in light of recent market conditions.) Our exposure to defaults by counterparties may be more pronounced during periods of significant volatility in the market conditions for mortgages and mortgage-related assets as well as the broader financial markets.
A significant number of the mortgages underlying our Non-Agency MBS and Loans held for investments are concentrated in certain geographic areas. For example, we have significant exposure in California, New York and Florida. For further information on the geographic concentration of our investments see Note 3 and Note 4 to the consolidated financial statements within this 2022 Form 10-K.
A significant number of the mortgages underlying our Non-Agency MBS and Loans held for investments are concentrated in certain geographic areas. For example, we have significant exposure in California, New York and Florida. For further information on the geographic concentration of our investments see Note 3 and Note 4 to the consolidated financial statements within this 2023 Form 10-K.
Item 1A. Risk Factors You should carefully consider the following factors, together with all the other information included in this 2022 Form 10-K, in evaluating our company and our business. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and the value of our stock could decline.
Item 1A. Risk Factors You should carefully consider the following factors, together with all the other information included in this 2023 Form 10-K, in evaluating our company and our business. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and the value of our stock could decline.
Holders of our preferred stock have limited voting rights. The voting rights of holders of any series of our outstanding preferred stock are limited. Our common stock is the only class of our securities that currently carries full voting rights.
The voting rights of holders of any series of our outstanding preferred stock are limited. Our common stock is the only class of our securities that currently carries full voting rights.
For further information regarding our assets recorded at fair value see Note 5 to the consolidated financial statements within this 2022 Form 10-K. Use of different assumptions could materially affect our fair value calculations and our financial results and our actual experience may cause us to substantially revise our assumptions.
For further information regarding our assets recorded at fair value see Note 5 to the consolidated financial statements within this 2023 Form 10-K. Use of different assumptions could materially affect our fair value calculations and our financial results and our actual experience may cause us to substantially revise our assumptions.
If the SEC determines that any of our subsidiaries’ securities are not Qualifying Real Estate Assets or real estate-related assets or otherwise believes such subsidiary does not satisfy the exemption under Section 3(c)(5)(C), we could be required to restructure our activities or sell certain of our assets.
If the SEC determines that any of our subsidiaries’ securities are not Qualifying Real Estate Assets or real estate-related assets or otherwise believes such subsidiary does not satisfy the exemption under Section 3(c)(5)(C) of the 1940 Act, we could be required to restructure our activities or sell certain of our assets.
A significant risk associated with our target assets is the risk that both long-term and short-term interest rates will increase significantly, as occurred during 2022. To the extent long-term rates increase significantly, the market value of these investments will decline, and the duration and weighted average life of the investments will increase.
A significant risk associated with our target assets is the risk that both long-term and short-term interest rates will increase significantly, as occurred during 2023. To the extent long-term rates increase significantly, the market value of these investments will decline, and the duration and weighted average life of the investments will increase.
Many of our competitors are not subject to the operating constraints associated with REIT compliance or maintenance of an exemption from the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us.
Many of our competitors are not subject to the operating constraints associated with REIT compliance or maintenance of an exemption from the 1940 Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us.
The cost and availability of the short-term debt we use to finance our mortgage loan before securitization impacts the profitability of our securitization transactions. This short-term debt cost is affected by several factors including its availability to us, its interest rate, its duration, and the percentage of our mortgage loans that third parties are willing to provide short-term financing.
The cost and availability of the short-term debt we use to finance our mortgage loan before securitization impacts the profitability of our securitization transactions. This short-term debt cost is affected by several factors including its availability to us, its interest rate, its duration, and the percentage of our mortgage loans for which third parties are willing to provide short-term financing.
Changes in interest rates, the interrelationships between various interest rates, and interest rate volatility, such as the changes that have occurred during 2022 and are continuing to occur as the Federal Reserve's interest rate policies in response to inflation continue to affect the financial markets, have had, and may continue to have, negative effects on our earnings, the fair value of our assets and liabilities, loan prepayment rates, and our access to liquidity.
Changes in interest rates, the interrelationships between various interest rates, and interest rate volatility, such as the changes that have occurred during 2023 and may continue to occur as the Federal Reserve's interest rate policies in response to inflation continue to affect the financial markets, have had, and may continue to have, negative effects on our earnings, the fair value of our assets and liabilities, loan prepayment rates, and our access to liquidity.
Nevertheless, if the IRS were to assert successfully that our mortgage loans were secured by property other than real estate, that the Interest Apportionment Regulation applied for purposes of our REIT testing, and that the position taken in Revenue Procedure 2014-51 should be applied to our portfolio, then we might not be able to meet the REIT 75% gross income test, and possibly the asset tests applicable to REITs.
Therefore, we believe that the Interest Apportionment Regulation does not apply to our portfolio. 32 Nevertheless, if the IRS were to assert successfully that our mortgage loans were secured by property other than real estate, that the Interest Apportionment Regulation applied for purposes of our REIT testing, and that the position taken in Revenue Procedure 2014-51 should be applied to our portfolio, then we might not be able to meet the REIT 75% gross income test, and possibly the asset tests applicable to REITs.
A significant portion of our Non-Agency MBS and residential loans are secured by properties in a small number of geographic areas and may be disproportionately affected by economic or housing downturns, natural disasters, terrorist events, regulatory changes, or other adverse events specific to those markets.
A significant portion of our Non-Agency MBS and residential loans are secured by properties in a small number of geographic areas and may be disproportionately affected by economic or housing downturns, natural disasters including natural disasters exacerbated by climate change, terrorist events, regulatory changes, or other adverse events specific to those markets.
Federal Income Tax Risks • Your investment has various U.S. federal income tax risks. • Risks related to compliance with REIT requirements. • Risks related to our qualification as a REIT and our election to qualify as a REIT. • Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors. • Classification of our securitizations or financing arrangements as a taxable mortgage pool could subject us or certain of our stockholders to increased taxation. • Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders. 11 • Our ownership of and relationship with our TRSs will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax. • The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S. federal income tax purposes. • The interest apportionment rules may affect our ability to comply with the REIT asset and gross income tests. • Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. • We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our capital stock.
Federal Income Tax Risks and Risk Related to Our REIT Status • Your investment has various U.S. federal income tax risks. • Risks related to compliance with REIT requirements. • Risks related to our qualification as a REIT and our election to qualify as a REIT. • Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors. • Classification of our securitizations or financing arrangements as a taxable mortgage pool could subject us or certain of our stockholders to increased taxation. • Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders. 11 • Our ownership of and relationship with our TRSs will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax. • The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S. federal income tax purposes. • The interest apportionment rules may affect our ability to comply with the REIT asset and gross income tests. • We may be subject to adverse tax changes that could reduce the market price of our capital stock.
This defense can be established by showing that the control person exercised due care in his supervision of the violator’s activities by maintaining and enforcing a reasonable and proper system of supervision and internal control. U.S. Federal Income Tax Risks Your investment has various U.S. federal income tax risks.
This defense can be established by showing that the control person exercised due care in his supervision of the violator’s activities by maintaining and enforcing a reasonable and proper system of supervision and internal control. U.S. Federal Income Tax Risks and Risks Related to Our REIT Status Your investment has various U.S. federal income tax risks.
The impact of inflation may adversely affect our financial performance. Inflation by some measures is at the highest readings since 1982, and inflationary pressures have broadened from goods earlier in the pandemic to include shelter costs and a number of labor-intensive services. The rapid acceleration of inflation led to an abrupt shift in the Federal Reserve’s monetary policy stance.
The impact of inflation may adversely affect our financial performance. Inflation by some measures remained elevated since 1982, and inflationary pressures have broadened from goods earlier in the pandemic to include shelter costs and a number of labor-intensive services. The rapid acceleration of inflation led to an abrupt shift in the Federal Reserve’s monetary policy stance.
Risks Related to Our Organization and Structure • Certain provisions of Maryland Law, of our charter, and of our bylaws contain provisions that may inhibit potential acquisition bids that stockholders may consider favorable, and the market price of our capital stock may be lower as a result. • Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit stockholders’ recourse in the event of actions, not in their best interests.
Risks Related to Our Organization and Structure • Certain provisions of Maryland Law, of our charter, and of our bylaws may inhibit potential acquisition bids that stockholders may consider favorable, and may affect the market price of our capital stock. • Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit stockholders’ recourse in the event of actions, not in their best interests.
At December 31, 2022, the Company had amounts at risk with Nomura Securities International, Inc. , or Nomura, of 12% of its equity related to the collateral posted on secured financing agreements. In addition, generally, if we default on a repurchase transaction the counterparty could liquidate the assets and use the proceeds to repay the amounts it is owed.
At December 31, 2023, we had amounts at risk with Nomura Securities International, Inc., or Nomura, of 17% of our equity related to the collateral posted on secured financing agreements. In addition, generally, if we default on a repurchase transaction the counterparty could liquidate the assets and use the proceeds to repay the amounts it is owed.
Through provisions in our charter and Bylaws unrelated to this statute, we already (a) require, unless called by the chairman of our Board of Directors, our chief executive officer, our president or our Board of Directors, the request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at the meeting to call a special meeting of stockholders, (b) require that the number of directors be fixed only by our Board of Directors, (c) have a classified board and (d) have a two-thirds vote requirement for the removal of a director.
In addition, through provisions in our charter and Bylaws unrelated to this statute, we (i) require, unless called by the chairman of our Board of Directors, our chief executive officer, our president or our Board of Directors, the request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at the meeting to call a special meeting of stockholders, (ii) require that the number of directors be fixed only by our Board of Directors, (iii) have a classified board and (iv) have a two-thirds vote requirement for the removal of a director.
Federal laws and regulations have also been proposed or adopted which, among other things, could hinder the ability of a servicer to foreclose promptly on defaulted residential loans, and which could result in assignees being held responsible for violations in the residential loan origination process.
Federal laws and regulations have also been proposed or adopted which, among other things, could hinder the ability of a servicer to foreclose promptly on defaulted residential loans, and which could result in assignees being held responsible for violations in the residential loan origination process, such as those adopted during the COVID-19 pandemic.
Certain mortgage lenders and third party servicers have voluntarily, or as part of settlements with law enforcement authorities, established loan modification programs relating to loans they hold or service.
Certain mortgage lenders and third party servicers may also voluntarily, or as part of settlements with law enforcement authorities, establish loan modification programs relating to loans they hold or service.
It is unclear yet what impact the Court’s ruling may have on the mortgage lending markets but it may give rise to uncertainty, 28 particularly in those markets in the Fifth Circuit. Any such uncertainty could adversely impact the cash flow on mortgage loans.
It is unclear yet what impact these rulings may have on the mortgage lending markets but they may give rise to uncertainty, particularly in those markets in the Fifth Circuit. Any such uncertainty could adversely impact the cash flow on mortgage loans.
For example, interest rate hedging could fail to protect us or adversely affect us because among other things: • interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; • available interest rate hedges may not correlate directly with the interest rate risk for which protection is sought; • the duration of the hedge may not match the duration of the related liability; • the amount of income that a REIT may earn from hedging transactions to offset interest rate losses may be limited by U.S. federal tax provisions governing REITs; • the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; • the party owing money in the hedging transaction may default on its obligation to pay; and • the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value.
For example, interest rate hedging could fail to protect us or adversely affect us because among other things: • interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates; • available interest rate hedges may not correlate directly with the interest rate risk for which protection is sought; • the duration of the hedge may not match the duration of the related liability; • the amount of income that a REIT may earn from hedging transactions to offset interest rate losses may be limited by U.S. federal tax provisions governing REITs; • the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; 15 • the party owing money in the hedging transaction may default on its obligation to pay; and • the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value with downward adjustments, or “mark-to-market losses,” reducing our stockholders’ equity; • during periods of high volatility we may need to post significant cash collateral, which may limit our ability to invest and deteriorate liquidity.
Risks Related to Hedging • Hedging against interest rate exposure may not be successful in mitigating the risks associated with interest rates and may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. • We may enter into hedging instruments that could expose us to contingent liabilities in the future, which could materially adversely affect our results of operations. • The characteristics of hedging instruments present various concerns, including illiquidity, enforceability, and counterparty risks, which could adversely affect our business and results of operations. • Clearing facilities or exchanges upon which our hedging instruments are traded may increase margin requirements on our hedging instruments in the event of adverse economic developments.
Risks Related to Hedging • Hedging against interest rate exposure may not be successful and may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. • Hedging instruments may present various concerns, including illiquidity, enforceability, and counterparty risks, as well as expose us to contingent liabilities which could adversely affect our business and results of operations. • Clearing facilities or exchanges upon which our hedging instruments are traded may increase margin requirements on our hedging instruments in the event of adverse economic developments.
We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our investment performance. Complying with REIT requirements may force us to liquidate otherwise attractive investments.
We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our investment performance.
If we or our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we could, among other things, be required either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could negatively affect the value of our capital stock, the sustainability of our business model, and our ability to make distributions which could have an adverse effect on our business and the market price for our shares of capital stock. 30 We have an indirect ownership interest in a registered investment adviser We own 20.0% of a holding company that wholly owns a registered investment adviser and we are an investor in a fund managed by that adviser.
If we or our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we could, among other things, be required either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could negatively affect the value of our capital stock, the sustainability of our business model, and our ability to make distributions, which could have an adverse effect on our business and the market price for our shares of capital stock.
Summary Risk Factors Risks Related to Financing • Our inability to access funding, or the terms on which such funding is available could have a material adverse effect on our financial condition, particularly during times of severe market disruption in the financial, mortgage, housing or related sectors. • An increase in our borrowing costs relative to the interest we receive on our assets may materially adversely affect our profitability. • Volatile market conditions may result in a decline in the market value of our assets, which may result in margin calls that may force us to sell assets, which may materially adversely affect our liquidity and profitability. • Our business strategy involves the use of leverage, and we may not achieve what we believe to be optimal levels of leverage or we may become overleveraged, which may materially adversely affect our liquidity, results of operations or financial condition. • Failure to effectively manage our liquidity would adversely affect our results and financial condition . • We may have difficulty accessing or be unable to access capital markets. • The elimination of LIBOR may affect our financial results.
Summary Risk Factors Risks Related to Financing • Our inability to access funding, including through the capital markets, or the terms on which such funding is available could have a material adverse effect on our financial condition. • An increase in our borrowing costs relative to interest income may materially adversely affect our profitability. • Volatile market conditions may result in a decline in the market value of our assets, which may result in margin calls that may force us to sell assets, which may materially adversely affect our liquidity and profitability. • Our business strategy involves the use of leverage, and we may not achieve what we believe to be optimal levels of leverage, which may materially adversely affect our liquidity, results of operations or financial condition. • Failure to effectively manage our liquidity would adversely affect our results and financial condition .
Hedging against a decline in loan value due to changes in interest rates may impact the profitability of a securitization. 23 The price that investors in mortgage-backed securities will pay for securities issued in our securitization transactions also has a significant impact on the profitability of the transactions to us, and these prices are impacted by numerous market forces and factors including the uncertainty, potential delinquencies, and lack of liquidity.
The price that investors in mortgage-backed securities will pay for securities issued in our securitization transactions also has a significant impact on the profitability of the transactions to us, and these prices are impacted by numerous market forces and factors including the uncertainty, potential delinquencies, and lack of liquidity.
As of December 31, 2022, we had amounts outstanding under repurchase agreements with 16 separate lenders.
As of December 31, 2023, we had amounts outstanding under repurchase agreements with 12 separate lenders.
Some of the loans and securities we own or may acquire have adjustable-rate coupons (i.e., they may earn interest at a rate that adjusts periodically based on an interest rate index) and some of the subordinate securities we own are entitled to cash flow only after the more senior securities have been paid and those senior securities have adjustable-rate coupons.
Our hedging may not work effectively, and we may change our hedging strategies or the degree or type of interest rate risk we assume. 16 Some of the loans and securities we own or may acquire have adjustable-rate coupons (i.e., they may earn interest at a rate that adjusts periodically based on an interest rate index) and some of the subordinate securities we own are entitled to cash flow only after the more senior securities have been paid and those senior securities have adjustable-rate coupons.
To maintain our qualification as a REIT, we generally must ensure that at the end of each calendar quarter at least 75% of the value of our total assets consists of cash, cash items, government securities and qualifying real estate assets, including certain mortgage loans and mortgage-backed securities.
Complying with REIT requirements may force us to liquidate otherwise attractive investments. 29 To maintain our qualification as a REIT, we generally must ensure that at the end of each calendar quarter at least 75% of the value of our total assets consists of cash, cash items, government securities and qualifying real estate assets, including certain mortgage loans and mortgage-backed securities.
Downward adjustments, or “mark-to-market losses,” would reduce our stockholders’ equity. The hedging transactions we undertake, which are intended to limit losses, may limit gains and increase our exposure to losses. Thus, our hedging activity may adversely affect our earnings, which could reduce our cash available for distribution to our 16 stockholders.
The hedging transactions we undertake, which are intended to limit losses, may limit gains and increase our exposure to losses. Thus, our hedging activity may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.
Additionally, we may enter other operating businesses that may or may not be closely related to our current business. These new assets or business operations may have new, different or increased risks than what we are currently exposed to in our business and we may not be able to manage these risks successfully.
These new assets or business operations may have new, different or increased risks than what we are currently exposed to in our business and we may not be able to manage these risks successfully.
Our bylaws require us to indemnify each present or former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made or threatened to be made, a party because of his or her service to us.
Our bylaws require us to indemnify each present or former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made or threatened to be made, a party because of his or her service to us. 34 Risks Related to Our Capital Stock The market price and trading volume of shares of our capital stock may be volatile.
The current flattening and inversion of the yield curve has caused and may continue to cause differences in timing of interest rate adjustments on our interest earning assets and our borrowings, which has and may continue to adversely affect the net interest spread we earn on our assets.
The current inversion of the yield curve has caused and may continue to cause differences in timing of interest rate adjustments on our interest earning assets and our borrowings, which has and may continue to adversely affect the net interest spread we earn on our assets. Our investment portfolio contains a significant allocation to MBS, as well as Residential Loans.
Consequently, owners of the loans are unable to reinvest money that would have otherwise been received from prepayments at the higher prevailing interest rates.
Consequently, owners of the loans have to reinvest the money received from the prepayments at the lower prevailing interest rates. Conversely, homeowners tend not to prepay mortgage loans when interest rates increase. Consequently, owners of the loans are unable to reinvest money that would have otherwise been received from prepayments at the higher prevailing interest rates.
We may change our investment strategy, asset allocation, or financing plans at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this 2022 Form 10-K.
We may change our investment strategy, asset allocation, or financing plans at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this 2023 Form 10-K. 20 A change in our investment strategy or financing plans may increase our exposure to interest rate and default risk and real estate market fluctuations.
Risks Related to Regulatory Matters, Accounting, and Our 1940 Act Exemption • Our business is subject to extensive regulation. • We are required to obtain various state licenses to purchase mortgage loans in the secondary market and there is no assurance we will be able to obtain or maintain those licenses. • Our GAAP financial results may not be an accurate indicator of taxable income and dividend distributions. • Changes in accounting rules could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against. • Loss of our 1940 Act exemption would adversely affect us and negatively affect the market price of shares of our capital stock and our ability to distribute dividends. • We have an indirect ownership interest in a registered investment adviser.
Risks Related to Regulatory Matters, Accounting, and Our 1940 Act Exemption • Our business is subject to extensive regulation. • There is no assurance we will be able to obtain various state licenses to purchase mortgage loans. • Our GAAP financial results may not be an accurate indicator of taxable income and dividend distributions. • Changes in accounting rules could impact us negatively. • Loss of our 1940 Act exemption would negatively affect our share price, our ability to distribute dividends, and us generally. • We have an indirect ownership interest in a registered investment adviser.
In an effort to be less impacted by market dislocations, we have moved some of our financing to longer-term mark-to-market financing and longer-term non-market-to-market and limited mark-to-market financing which is more expensive than traditional short-term mark-to-market financing.
Historically, we relied primarily on borrowings under repurchase agreements to finance our investments, which have short-term contractual maturities. In an effort to be less impacted by market dislocations, we have moved some of our financing to longer-term mark-to-market financing and longer-term non-market-to-market and limited mark-to-market financing which is more expensive than traditional short-term mark-to-market financing.
Risks Associated with Our Investments Interest rate fluctuations may have various negative effects on us and may lead to reduced earnings and increased volatility in our earnings.
Risks Associated with Our Investments Interest rate fluctuations, including as a result of the Federal Reserve's monetary policy may have various negative effects on us and may lead to reduced earnings and increased volatility in our earnings.
We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation. 34 Risks Related to Our Organization and Structure Certain provisions of Maryland Law, of our charter, and of our bylaws contain provisions that may inhibit potential acquisition bids that stockholders may consider favorable, and the market price of our capital stock may be lower as a result. • There are ownership limits and restrictions on transferability and ownership in our charter .
Risks Related to Our Organization and Structure Certain provisions of Maryland Law, of our charter, and of our bylaws contain provisions that may inhibit potential acquisition bids that stockholders may consider favorable, and the market price of our capital stock may be lower as a result. • There are ownership limits and restrictions on transferability and ownership in our charter .
Risks Related to Our Capital Stock The market price and trading volume of shares of our capital stock may be volatile. The market price of shares of our capital stock, including our common and preferred stock, may be highly volatile and could be subject to wide fluctuations.
The market price of shares of our capital stock, including our common and preferred stock, may be highly volatile and could be subject to wide fluctuations. A variety of factors may influence the price of our common and preferred stock in the public trading markets.
Changes in interest rates may harm the credit performance of our assets. We may seek to hedge a majority of, but not all interest rate risks. Our hedging may not work effectively, and we may change our hedging strategies or the degree or type of interest rate risk we assume.
Changes in interest rates may harm the credit performance of our assets. We may seek to hedge a majority of, but not all interest rate risks.
Volatility in any asset class, including real estate and mortgage-related assets, increases the likelihood of Third-Party Data being inaccurate as market participants attempt to value assets that have frequent, significant swings in pricing. We are dependent on information systems and their failure could significantly disrupt our business. Our business is highly dependent on our information and communications systems.
Volatility in any asset class, including real estate and mortgage-related assets, increases the likelihood of Third-Party Data being inaccurate as market participants attempt to value assets that have frequent, significant swings in pricing.
These types of transactions and investments expose us to potentially material risks. • Our ability to profitably execute or participate in future securitization transactions may be negatively impacted by adverse market conditions beyond our control. • Competition may affect ability and pricing of our target assets. • Our executive officers and other key personnel are critical to our success and the loss of any executive officer or key employee may materially adversely affect our business. • Risks related to third-parties, including their capability to perform certain services, compliance with applicable laws and the use of third-party analytical models and data. • The expanding body of federal, state and local regulations and the investigations of servicers may increase their cost of compliance and the risks of noncompliance and may adversely affect their ability to perform their servicing obligations. • We are dependent on information systems and their failure could significantly disrupt our business.
Risks Associated with Our Operations • Through certain of our wholly-owned subsidiaries we may from time to time engage in securitization transactions relating to residential mortgage loans, which may expose us to potentially material risks. • Our ability to profitably execute future securitization transactions may be negatively impacted by adverse market conditions. • Competition may affect ability and pricing of our target assets. • The loss of any executive officer or key employee may materially adversely affect our business. • Risks related to servicers and other third-parties, including their ability to perform their services at a high level and comply with applicable laws, and the use of third-party analytical models and data. • The expanding body of regulations and the investigations of servicers may increase their cost of compliance and the risks of noncompliance. • We are dependent on information systems and their failure, including through cyber-attacks, could significantly disrupt our business.
A substantial portion of the mortgage loans that we securitize and the subordinate securities that we retain are not newly originated “prime mortgage loans” but rather seasoned reperforming mortgage loans and Non-QM loans that have less strict underwriting standards and are therefore subject to greater risk of loss, as discussed below. 18 When we securitize mortgage loans, we sell the most senior securities backed by those loans and retain the most subordinate classes of securities, which means we are the first-loss security holder and the securities we own represent a portion of the “securitized mortgage loans” on our balance sheet.
A substantial portion of the mortgage loans that we securitize and the subordinate securities that we retain are not newly originated “prime mortgage loans” but rather seasoned reperforming mortgage loans and Non-QM loans that have less strict underwriting standards and are therefore subject to greater risk of loss, as discussed below.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock or any series of our preferred stock. 36 The declaration, amount and payment of future cash dividends on our common stock are subject to uncertainty due to (among other things) disruptions in the mortgage, housing or related sectors.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock or any series of our preferred stock.
The departure of any of our executive officers or other key personnel, or our inability to attract, motivate and retain highly qualified employees at all levels of the firm in light of the intense competition for talent, could adversely affect our business, operating results or financial condition; diminish our investment opportunities; or weaken our relationships with lenders, counter-parties and other parties important to our business and strategy.
The departure of any of our executive officers or other key personnel, or our inability to attract, motivate and retain highly qualified employees at all levels of the firm in light of the intense competition for talent, could adversely affect our business, operating results or financial condition; diminish our investment opportunities; or weaken our relationships with lenders, counter-parties and other parties important to our business and strategy. 23 We rely on third parties to perform certain services particularly as it relates to servicing, comply with applicable laws and regulations, and carry out contractual covenants and terms, the failure of which by any of these third parties may adversely impact our business and financial results.
Risks Associated with Our Investments 10 • Interest rate fluctuations may have various negative effects on us and may lead to reduced earnings and increased volatility in our earnings. • The current flattening and inversion of the yield curve has caused and may continue to cause differences in timing of interest rate adjustments on our interest earning assets and our borrowings, which has and may continue to adversely affect the net interest spread we earn on our assets. • The impact of inflation may adversely affect our financial performance. • A significant portion of our RMBS portfolio is subject to U.S. risk retention rules. • Risks related to our subprime portfolio may affect our financial condition and results of operations • Risks related to our investments in RMBS and Non-Agency MBS. • The nature of the mortgage loans we acquire and that underlie the MBS we acquire, exposes us to credit risk that could negatively affect the value of those assets and investments. • Changes in prepayment rates could negatively affect the value of our investment portfolio, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders. • A significant portion of our Non-Agency MBS and residential loans are secured by properties in a small number of geographic areas and may be disproportionately affected by economic or housing downturns, natural disasters, terrorist events, regulatory changes, or other adverse events specific to those markets. • We may change our investment strategy, asset allocation, or financing plans without stockholder consent, which may result in riskier investments. • Risks related to fair value and our calculation of fair value of the assets we own.
Risks Associated with Our Investments • Interest rate fluctuations may lead to reduced earnings and increased volatility in our earnings. 10 • The current inversion of the yield curve has caused and may continue to cause differences in timing of interest rate adjustments on our interest earning assets and our borrowings, which may continue to adversely affect the net interest spread. • The impact of inflation may adversely affect our financial performance. • A significant portion of our investments are in the most subordinated Non-Agency RMBS, making us the first-loss security holder. • A significant portion of the RMBS we acquire through securitization is subject to the U.S. credit risk retention rules. • We have a significant amount of investments in Non-Agency MBS collateralized by mortgage loans that do not meet the prime loan underwriting standards and are subject to increased risk of losses. • The nature of the mortgage loans we acquire and that underlie the MBS we acquire exposes us to credit risk that could negatively affect the value of those assets and investments. • Changes in prepayment rates could negatively affect the value of our investment portfolio, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders. • A significant portion of our Non-Agency MBS and residential loans are secured by properties in a small number of geographic areas and may be disproportionately affected by adverse events in those markets. • We may change our investment strategy, asset allocation, or financing plans without stockholder consent. • Changes in the fair values of our assets, liabilities, and derivatives can reduce earnings, increase earnings volatility, and create volatility in our book value. • Our calculations of the fair value of the assets we own or consolidate are based upon assumptions that are inherently subjective and involve a high degree of management judgment. • Any deterioration or uncertainty in market conditions for mortgages and mortgage-related assets, as well as in broader U.S. and global economic and geopolitical conditions, could have a material adverse effect on us.
A margin call requires us to transfer additional assets or cash to a lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. An increase in our borrowing costs relative to the interest we receive on our assets may materially adversely affect our profitability.
A margin call requires us to transfer additional assets or cash to a lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings.
Should a trustee not be required to act under the terms of the securities, or fail to act, we could experience losses. The expanding body of federal, state and local regulations and the investigations of servicers may increase their cost of compliance and the risks of noncompliance and may adversely affect their ability to perform their servicing obligations.
The expanding body of federal, state and local regulations and the investigations of servicers may increase their cost of compliance and the risks of noncompliance and may adversely affect their ability to perform their servicing obligations.

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Item 2. Properties

Properties — owned and leased real estate

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The lease on Miami office expires in April 2026. We believe that these spaces are suitable and adequate for our current needs. In addition, we have leases through November 2026, for our off-site back-up facilities and data centers located in Wappingers Falls, New York and Norwalk, Connecticut. Item 3. Legal Proceedings None. Item 4. Mine Safety Disclosures Not applicable.
In addition, we have leases through November 2026, for our off-site back-up facilities and data centers located in Wappingers Falls, New York and Norwalk, Connecticut. Item 3. Legal Proceedings None. Item 4. Mine Safety Disclosures Not applicable. Part II
Item 2. Properties As of December 31, 2022, we do not own any property. Our corporate headquarters is located in leased space at 630 Fifth Avenue, Ste 2400, New York, New York 10111, telephone (212) 626-2300. Our office lease expires in January 2027. We also have an office located at 801 Brickell Avenue, Ste 1970, Miami, Florida, 33131.
Item 2. Properties As of December 31, 2023, we do not own any property. Our corporate headquarters is located in leased space at 630 Fifth Avenue, Ste 2400, New York, New York 10111, telephone (212) 626-2300. Our office lease expires in January 2027. We believe that this space is suitable and adequate for our current needs.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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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 Securities Exchange Act of 1934, as amended, or the Exchange Act.
Shares of the Company's common stock and preferred 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 Securities Exchange Act of 1934, as amended, or the Exchange Act.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock began trading publicly on the NYSE under the trading symbol “CIM” on November 16, 2007. As of January 31, 2023, we had 231,826,520 shares of common stock issued and outstanding which were held by 195 holders of record.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock began trading publicly on the NYSE under the trading symbol “CIM” on November 16, 2007. As of January 31, 2024, we had 241,361,867 shares of common stock issued and outstanding which were held by 177 holders of record.
The comparison is for the period from December 31, 2017 to December 31, 2022 and assumes the reinvestment of dividends.
The comparison is for the period from December 31, 2018 to December 31, 2023 and assumes the reinvestment of dividends.
Our Board of Directors declared dividends of $1.12 and $1.29 per share during 2022 and 2021, respectively. 38 Purchases of Equity Securities In February 2021, our Board of Directors increased authorization of our share repurchase program, or the Repurchase Program to $250 million.
Our Board of Directors declared dividends of $0.70 and $1.12 per share during 2023 and 2022, respectively. Purchases of Equity Securities In June 2023, the Company's Board of Directors increased the authorization of the Company's share repurchase program, or the Repurchase Program, by $73 million to $250 million.
The graph and table assume that $100 was invested in our common stock and each of the two other indices on December 31, 2017. 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Chimera 100 108 137 79 127 53 S&P 500 Index 100 96 126 149 191 157 BBG REIT Index 100 97 120 93 110 83 39 The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness can be guaranteed.
The graph and table assume that $100 was invested in our common stock and each of the two other indices on December 31, 2018. 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Chimera 100 128 73 118 50 51 S&P 500 Index 100 131 156 200 164 207 BBG REIT Index 100 124 96 113 86 98 The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness can be guaranteed.
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.
The program does not obligate the Company 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. The company did not repurchase any of its common stock and preferred stock during the quarter ended December 31, 2023.
Such authorization does not have an expiration date and, at present, there is no intention to modify or otherwise rescind such authorization.
In January 2024, the Company's Board of Directors updated the authorization to include the Company's preferred stock into the Repurchase Program and increased the authorization by $33 million back up 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.
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.
The timing, manner, price and amount of any repurchases will be determined at the Company's discretion and the program may be suspended, terminated or modified at any time, for any reason.
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Among other factors, the Company intends to only consider repurchasing shares of its common stock and preferred stock when the purchase price is less than the last publicly reported book value per common share. In addition, the Company does not intend to repurchase any shares from directors, 38 officers or other affiliates.
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The approximate dollar of shares that may yet to be purchased under the share repurchase program was $217 million as of December 31, 2023.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Weighted Average Yield is calculated using each investment's respective amortized cost.
Weighted Average Yield is calculated using each investment's respective amortized cost.
We determine the fair value of all of our Non-Agency RMBS investment securities, including Non-Agency represented as securitized debt, based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, 64 repayment speeds, expected losses, expected loss severity, discount rates and other factors.
We determine the fair value of all of our Non-Agency RMBS investment securities, including Non-Agency represented as securitized debt, based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, repayment speeds, expected losses, expected loss severity, discount rates and other factors.
We believe this presentation is useful to 45 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.
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.
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.
Management has made significant estimates in several areas, including current expected credit losses of Non-Agency 64 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.
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.
In addition, when financing assets using the standard form of SIFMA Master Repurchase Agreements, the counterparty to the agreement typically nets its 59 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.
Critical accounting policies are described in this section. An 63 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.
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.
In addition, our operating results and cash flows include the gross amounts 65 related to the assets and liabilities of the VIEs as opposed to the actual economic interests we own in these VIEs. Our interest in these VIEs is restricted to the beneficial interests we retained in these transactions.
In addition, our operating results and cash flows include the gross amounts related to the assets and liabilities of the VIEs as opposed to the actual economic interests we own in these VIEs. Our interest in these VIEs is restricted to the beneficial interests we retained in these transactions.
Average equity is defined as the average of our beginning 53 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.
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.
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.
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. 66
Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this 2022 Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this 2023 Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
These estimates require significant judgment which change over time as our expectations change due to changes in market conditions and changes in our investments as principal and interest, other cash flows or losses are experiences. These estimates are compared to actual results of the investment and other similar investments on a regular basis and updated as necessary.
These estimates require significant judgment which change over time as our expectations change due to changes in market conditions and changes in our investments as principal and interest, other cash flows or losses are experienced. These estimates are compared to actual results of the investment and other similar investments on a regular basis and updated as necessary.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 15 of this 2022 Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 15 of this 2023 Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties.
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 December 31, 2022 and December 31, 2021. The principal or notional value represents the interest income earning balance of each class.
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 December 31, 2023 and December 31, 2022. The principal or notional value represents the interest income earning balance of each class.
In addition, each lender typically requires that we include 57 supplemental terms and conditions to the standard master secured financing agreement.
In addition, each lender typically requires that we include supplemental terms and conditions to the standard master secured financing agreement.
Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in this 2022 Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in this 2023 Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
Our net interest rate spread, which equals the yield on our average interest-earning assets less the economic average cost of funds, decreased by 130 basis points for the year ended December 31, 2022, as compared to the same period of 2021.
Our net interest rate spread, which equals the yield on our average interest-earning assets less the economic average cost of funds, decreased by 130 basis points for the year ended December 31, 2023, as compared to the same period of 2022.
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.
Shares of our common stock and preferred 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.
Financial Condition Portfolio Review During the year ended December 31, 2022, we focused our efforts on taking advantage of the opportunity to acquire higher yielding assets while maintaining low leverage and ample liquidity.
Financial Condition Portfolio Review During the year ended December 31, 2023, we focused our efforts on taking advantage of the opportunity to acquire higher yielding assets while maintaining low leverage and ample liquidity.
For VIEs’ that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design of the VIE. Our Consolidated Statements of Financial Condition contain the assets and liabilities related to thirty-eight consolidated variable interest entities or VIEs.
For VIEs’ that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design of the VIE. Our Consolidated Statements of Financial Condition contain the assets and liabilities related to 40 consolidated variable interest entities or VIEs.
The RMBS re-securitization transactions contain Non-Agency RMBS comprised of primarily first lien mortgages of 2005-2007 vintages. Our determination to consolidate these thirty-eight VIEs was significantly influenced by management’s judgment related to the activities that most significantly impact the economic performance of these entities and the identification of the party with the power over such activities.
The RMBS re-securitization transactions contain Non-Agency RMBS comprised of primarily first lien mortgages of 2005-2007 vintages. Our determination to consolidate these 40 VIEs was significantly influenced by management’s judgment related to the activities that most significantly impact the economic performance of these entities and the identification of the party with the power over such activities.
We declared dividends to Series B preferred stockholders of $26 million, or $2.00 per preferred share, during the years ended December 31, 2022 and 2021, respectively. We declared dividends to Series C preferred stockholders of $20 million, or $1.937500 per preferred share, during the years ended December 31, 2022 and 2021, respectively.
We declared dividends to Series B preferred stockholders of $26 million, or $2.00 per preferred share, during the years ended December 31, 2023, and 2022, respectively. We declared dividends to Series C preferred stockholders of $20 million, or $1.937500 per preferred share, during the years ended December 31, 2023, and 2022, respectively.
During the year ended December 31, 2022 we sold some of our Agency IO and Non-Agency RMBS investments as a part of our portfolio optimization efforts and realized a loss of $76 million.
During the year ended December 31, 2023, we sold some of our Agency MBS investments as part of our portfolio optimization efforts and realized a loss of $31 million. During the year ended December 31, 2022, we sold some of our Agency IO and Non-Agency RMBS investments and realized a loss of $76 million.
We declared dividends to Series D preferred stockholders of $16 million, or $2.00 per preferred share, during the years ended December 31, 2022 and 2021, respectively.
We declared dividends to Series D preferred stockholders of $16 million, or $2.00 per preferred share, during the years ended December 31, 2023, and 2022, respectively.
Compensation expense will be recognized on a straight-line basis over the three-year vesting period based on an estimate of our Economic Return 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.
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.
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 Secured overnight funding rate, or SOFR, and the term of the financing. The borrowing rate on majority of our securitized debt is fixed and correlated to the term of the financing.
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.
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, interest expense on long term debt, changes in the provision for credit losses, other gains or losses on equity investments, and transaction expenses incurred.
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.
We believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At December 31, 2022 and December 31, 2021, the carrying value of our total interest-bearing debt was approximately $10.6 billion and $11.1 billion, respectively, which represented a leverage ratio of approximately 4.0:1 and 3.0:1, respectively.
We believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At December 31, 2023 and December 31, 2022, the carrying value of our total interest-bearing debt was approximately $10.1 billion and $10.6 billion, respectively, which represented a leverage ratio of approximately 4.0:1 and 4.0:1, respectively.
Not included in the table above are the unfunded construction loan commitments of $9 million and $23 million as of December 31, 2022 and December 31, 2021, 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.
Not included in the table above are the unfunded construction loan commitments of $5 million and $9 million as of December 31, 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.
Level 3 liabilities represent approximately 95% and 100% of total liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021, respectively. Our accounting policies for the determination of fair value of our investments are described in further detail in Note 2 and Note 5 of the consolidated financial statements.
Level 3 liabilities represent approximately 96% and 95% of total liabilities measured at fair value on a recurring basis as of December 31, 2023 and 2022, respectively. Our accounting policies for the determination of fair value of our investments are described in further detail in Note 2 and Note 5 of the consolidated financial statements.
We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return. During 2022, we focused 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.
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.
We include our secured financing agreements and securitized debt in the numerator of our leverage ratio and stockholders’ equity as the denominator. At December 31, 2022, we had secured financing agreements with 16 counterparties. All of our secured financing agreements are secured by Agency MBS, Non-Agency RMBS and Loans held for investment and cash.
We include our secured financing agreements and securitized debt in the numerator of our leverage ratio and stockholders’ equity as the denominator. At December 31, 2023, we had secured financing agreements with 12 counterparties. All of our secured financing agreements are secured by Agency MBS, Non-Agency RMBS and Loans held for investment and cash.
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 100 basis points for the year ended December 31, 2022, as compared to the same period of 2021.
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 120 basis points for the year ended December 31, 2023, as compared to the same period of 2022.
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 59 refer to these agreements as limited mark-to-market (limited MTM) facilities. As of December 31, 2022 we have $365 million, of limited MTM facilities.
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 December 31, 2023 we have $546 million, of limited MTM facilities.
This section of the 2022 Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
This section of the 2023 Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.
Our estimates are deemed to be significant to the fair value measurement process, which renders the resulting Non-Agency fair value estimates Level 3 inputs in the fair value hierarchy. Level 3 assets represent approximately 95% and 93% of total assets measured at fair value on a recurring basis as of December 31, 2022 and 2021, respectively.
Our estimates are deemed to be significant to the fair value measurement process, which renders the resulting Non-Agency fair value estimates Level 3 inputs in the fair value hierarchy. Level 3 assets represent 65 approximately 97% and 95% of total assets measured at fair value on a recurring basis as of December 31, 2023 and 2022, respectively.
Economic Net Interest Income Our Economic net interest income is a non-GAAP financial measure that equals GAAP net interest income adjusted for interest expense on long term debt, net periodic interest cost of interest rate swaps and excludes interest earned on cash.
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.
Servicing and Asset Manager Fees The servicing fees and asset manager expenses were $36 million and $37 million for the years ended December 31, 2022 and December 31, 2021, 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.
Servicing and Asset Manager Fees The servicing fees and asset manager expenses were $33 million and $36 million for the year ended December 31, 2023 and December 31, 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.
Due to the non-recourse nature of these VIEs our net exposure to loss from investments in these entities is limited to our retained beneficial interests. At December 31, 2022, we consolidated thirty-six residential mortgage loan securitizations and two RMBS re-securitization transactions which are VIEs. The residential mortgage loan securitizations contain jumbo prime and Non-QM residential mortgage loans.
Due to the non-recourse nature of these VIEs our net exposure to loss from investments in these entities is limited to our retained beneficial interests. At December 31, 2023, we consolidated 38 residential mortgage loan securitizations and 2 RMBS re-securitization transactions which are VIEs. The residential mortgage loan securitizations contain jumbo prime and Non-QM residential mortgage loans.
We have made a $75 million capital commitment to a fund managed by Kah Capital Management, LLC. As of December 31, 2022, we have funded $27 million towards that commitment, leaving an unfunded commitment of $48 million. Capital Expenditure Requirements At December 31, 2022 and December 31, 2021, we had no material commitments for capital expenditures.
We have made a $75 million capital commitment to a fund managed by Kah Capital Management, LLC. As of December 31, 2023, we have funded $46 million towards that commitment, leaving an unfunded commitment of $29 million. Capital Expenditure Requirements At December 31, 2023 and December 31, 2022, we had no material commitments for capital expenditures.
At December 31, 2022 and December 31, 2021, there were approximately 3.0 million and 2.8 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 December 31, 2022 and December 31, 2021.
At December 31, 2023 and December 31, 2022, there were approximately 3.6 million and 3.0 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 December 31, 2023 and December 31, 2022.
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 Non-Agency Mortgage-Backed Securities 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 $ 439,591 $ 68.60 $ 65.27 4.2 % 6.8 % 5.9 % 12.3 % 0.5 % 0.3 % 34.2 % 6.6 % Interest-only $ 3,286,545 $ 4.95 $ 3.01 0.6 % 5.3 % 5.8 % 12.1 % 0.9 % 0.8 % 38.3 % 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.
(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.) 56 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 Non-Agency Mortgage-Backed Securities 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 $ 439,591 $ 68.60 $ 65.27 4.2 % 6.8 % 5.9 % 12.3 % 0.5 % 0.3 % 34.2 % 6.6 % Interest-only $ 3,286,545 $ 4.95 $ 3.01 0.6 % 5.3 % 5.8 % 12.1 % 0.9 % 0.8 % 38.3 % 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.
To minimize the risk of margin calls, as of December 31, 2022, 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.
To minimize the risk of margin calls, as of December 31, 2023, we have entered into $924 million 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.
Our operating activities provided net cash of approximately $326 million and $519 million for the year ended December 31, 2022 and 2021, respectively. The cash flows from operations were primarily driven by interest received in excess of interest paid of $519 million and $681 million during the year ended December 31, 2022 and 2021, respectively.
Our operating activities provided net cash of approximately $213 million and $326 million for the years ended December 31, 2023 and 2022, respectively. The cash flows from operations were primarily driven by interest received in excess of interest paid of $304 million and $519 million during the year ended December 31, 2023 and 2022, respectively.
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.
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 U.S. Treasury futures.
Current Period We held cash and cash equivalents of approximately $265 million and $386 million at December 31, 2022 and December 31, 2021, respectively. As a result of our operating, investing and financing activities described below, our cash position decreased by $121 million from December 31, 2021 to December 31, 2022.
Current Period We held cash and cash equivalents of approximately $222 million and $265 million at December 31, 2023 and December 31, 2022, respectively. As a result of our operating, investing and financing activities described below, our cash position decreased by $43 million from December 31, 2022 to December 31, 2023.
During the year ended December 31, 2022, we granted 128 thousand PSU awards to senior management with a grant date fair value of $2 million. During the year ended December 31, 2021, we granted 182 thousand PSU awards to senior management with a grant date fair value of $2 million.
During the year ended December 31, 2023, we granted 605 thousand PSU awards to senior management with a grant date fair value of $3 million. During the year ended December 31, 2022, we granted 128 thousand PSU awards to senior management with a grant date fair value of $2 million.
We declared dividends to common shareholders of $266 million, or $1.12 per share, and $308 million, or $1.29 per share, during the years ended December 31, 2022 and 2021, respectively. 61 We declared dividends to Series A preferred stockholders of $12 million, or $2.00 per preferred share, during the years ended December 31, 2022 and 2021, respectively.
During the year ended December 31, 2022, we declared dividends to common shareholders of $266 million, or $1.12 per share, respectively. We declared dividends to Series A preferred stockholders of $12 million, or $2.00 per preferred share, during the years ended December 31, 2023 and 2022, respectively.
Where indicated, interest expense, adjusting for interest payments on long term debt and any interest earned on cash, is referred to as Economic interest expense. Where indicated, net interest income reflecting interest payments on long term debt, net periodic interest cost of interest rate swaps and any interest earned on cash, is referred to as Economic net interest income.
Where indicated, interest expense, adjusting for any interest earned on 46 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.
Average remaining maturity of Secured financing agreements secured by: December 31, 2022 December 31, 2021 Agency RMBS (in thousands) 17 Days 4 Days Agency CMBS (in thousands) 25 Days 13 Days Non-Agency RMBS and Loans held for investment (in thousands) 474 Days 257 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.
Average remaining maturity of Secured financing agreements secured by: December 31, 2023 December 31, 2022 Agency RMBS (in thousands) N/A 17 Days Agency CMBS (in thousands) 32 Days 25 Days Non-Agency RMBS and Loans held for investment (in thousands) 418 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 three-year Economic Return is equal to our change in book value per common share plus common stock dividends.
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.
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.
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.
At December 31, 2021, based on the fair value of our interest earning assets, approximately 82% of our investment portfolio was residential mortgage loans, 12% of our investment portfolio was Non-Agency RMBS, and 6% 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.
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.
If our exposure to our financing counterparties exceeds internally developed thresholds, we develop a plan to reduce the exposure to an acceptable level. 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.
If our exposure to our financing counterparties exceeds internally developed thresholds, we develop a plan to reduce the exposure to an acceptable level. At December 31, 2023, we had amounts at risk with Nomura Securities International, Inc., or Nomura, of 17% of our equity related to the collateral posted on secured financing agreements.
For the year ended December 31, 2022, our net loss available to common shareholders was $587 million, or $2.51 per average basic common share, compared to a net income of $596 million, or $2.55 per average basic common share for the year ended December 31, 2021.
For the year ended December 31, 2023, our net income available to common shareholders was $52 million, or $0.23 per average basic common share, compared to a net loss of $587 million, or $2.51 per average basic common share for the year ended December 31, 2022.
We granted 396 thousand RSU awards during the year ended December 31, 2022 with a grant date fair value of $4 million for the 2022 performance year. We granted 393 thousand RSU awards during the year ended December 31, 2021, with a grant date fair value of $5 million for the 2021 performance year.
We granted 1 million RSU awards during the year ended December 31, 2023 with a grant date fair value of $6 million for the 2023 performance year. We granted 396 thousand RSU awards during the year ended December 31, 2022 with a grant date fair value of $4 million for the 2022 performance year.
The approximate dollar value of shares that may yet be purchased under the Repurchase Program is $177 million as of December 31, 2022. In February 2022, we entered into separate Distribution Agency Agreements (the “Sales Agreements”) with each of Credit Suisse Securities (USA) LLC, JMP Securities LLC, Goldman Sachs & Co. LLC, Morgan Stanley & Co.
The approximate dollar value of shares that may yet be purchased under the Repurchase Program is $217 million as of December 31, 2023. In 2022, we entered into separate Distribution Agency Agreements (the “Existing Sales Agreements”) with each of JMP Securities LLC, Goldman Sachs & Co. LLC, Morgan Stanley & Co.
Our investing activities provided cash of $510 million and $2.5 billion for the year ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, we received cash for principal repayments on Agency MBS, Non-Agency RMBS and Loans held for investment of $2.6 billion.
Our investing activities provided cash of $552 million and $510 million for the year ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, we received cash for principal repayments on Agency MBS, Non-Agency RMBS and Loans held for investment of $1.5 billion and from sale of our Agency MBS of $313 million.
Provision for Credit Losses For the year ended December 31, 2022 we recorded an increase in provision for credit losses of $7 million, as compared to an increase in provision of credit losses of $33 thousand for the year ended December 31, 2021.
Provision for Credit Losses For the year ended December 31, 2023, we recorded an increase in provision for credit losses of $4 million, to $11 million, as compared to the provision of credit losses of $7 million for the year ended December 31, 2022.
LLC and RBC Capital Markets, LLC (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 through any of the Sales Agents under the Securities Act of 1933.
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.
Our Average net interest-earning assets increased by $188 million to $2.4 billion for the year ended December 31, 2022, compared to $2.2 billion for the same period of 2021.
Our Average net interest-earning assets decreased by $240 million to $2.1 billion for the year ended December 31, 2023, compared to $2.4 billion for the same period of 2022.
These provisions may differ for each of our lenders. 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.
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.
The PSU awards granted during the year ended December 31, 2022 and 2021 include a three-year performance period ending on December 31, 2024 and December 31, 2023, respectively. The final number of shares awarded will be between 0% and 200% of the PSUs granted based on our Economic Return compared to a peer group.
For the PSU awards granted during the year ended December 31, 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.
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.
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.
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.
At December 31, 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.
Economic interest expense increased by $11 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021 due to increase in our secured financing agreements borrowing rates driven by higher Federal Funds Rates.
Economic interest expense increased by $157 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022 due to the increases in our secured financing agreements and securitized debt borrowing rates driven by higher Federal Funds Rates.
During the year ended December 31, 2022, our interest expense on secured financing agreements collateralized by Loans held for investments and Agency CMBS increased by $15 million and $5 million, respectively, due to the higher Federal Funds Rate.
During the year ended December 31, 2023, our interest expense on secured financing agreements collateralized by Loans held for investments and Non-Agency RMBS increased by $42 million and $33 million, respectively, due to the higher Federal Funds Rate as compared to the year ended December 31, 2022.
This increase in our interest expense during the year ended December 31, 2022 was primarily driven by the increases higher borrowing rates on our secured financing agreements, due to increases in the Federal Funds Rate.
This increase in our interest expense during the year ended December 31, 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.
Our Earnings available for distribution for the year ended December 31, 2022 were $256 million, or $1.08 per average diluted common share, and decreased by $173 million, or $0.70 per average diluted common share, as compared to $429 million, or $1.78 per average diluted common share, for the year ended December 31, 2021.
Our Earnings available for distribution for the year ended December 31, 2023 were $119 million, or $0.51 per average diluted common share, and decreased by $137 million, or $0.57 per average diluted common share, as compared to $256 million, or $1.08 per average diluted common share for the year ended December 31, 2022.
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.
As of December 31, 2023 and December 31, 2022, we had $3.6 billion and $4.7 billion, respectively, of securities or cash pledged against our secured financing agreements obligations. 60 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.
Haircuts have increased on our secured financing agreements collateralized by Agency MBS and decreased on our secured financing agreements collateralized by Non-Agency RMBS and Loans held for investments during 2022.
Haircuts have decreased on secured financing agreements collateralized by Agency CMBS and increased slightly on secured financing agreements collateralized by Non-Agency RMBS and Loans held for investments during 2023 as compared to 2022.
In addition, stock compensation expense charges incurred on awards to retirement eligible employees is reflected as an expense over a vesting period (36 months) rather than reported as an immediate expense. 51 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.
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.
During the year ended December 31, 2022, on an aggregate basis, we purchased $2.1 billion of investments, sold $66 million of investments, and received $2.6 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 December 31, 2022 and December 31, 2021.
During the year ended December 31, 2023, on an aggregate basis, we purchased $1.3 billion of investments, sold $316 million of investments, and received $1.5 billion in principal payments related to our Agency MBS, Non-Agency RMBS and Loans held for investment portfolio.
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.
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, during 2023 we experienced higher interest rates, increased volatility, and elevated costs of financing.
December 31, 2022 December 31, 2021 Interest earning assets at period-end (1) $ 12,937,661 $ 14,893,829 Interest bearing liabilities at period-end $ 10,614,049 $ 11,075,655 GAAP Leverage at period-end 4.0:1 3.0:1 GAAP Leverage at period-end (recourse) 1.3:1 0.9:1 (1) Excludes cash and cash equivalents. 54 December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Portfolio Composition Amortized Cost Fair Value Non-Agency RMBS 7.5 % 10.1 % 8.9 % 12.1 % Senior 4.0 % 4.5 % 5.9 % 6.5 % Subordinated 2.3 % 4.2 % 2.2 % 4.4 % Interest-only 1.2 % 1.4 % 0.8 % 1.2 % Agency RMBS 0.1 % 0.8 % 0.1 % 0.4 % Interest-only 0.1 % 0.8 % 0.1 % 0.4 % Agency CMBS 3.3 % 5.3 % 3.2 % 5.2 % Project loans 2.3 % 4.2 % 2.2 % 4.2 % Interest-only 1.0 % 1.1 % 1.0 % 1.0 % Loans held for investment 89.1 % 83.8 % 87.8 % 82.3 % Fixed-rate percentage of portfolio 96.5 % 95.4 % 95.6 % 94.4 % Adjustable-rate percentage of portfolio 3.5 % 4.6 % 4.4 % 5.6 % GAAP leverage at period-end is calculated as a ratio of our secured financing agreements and securitized debt liabilities over GAAP book value.
December 31, 2023 December 31, 2022 December 31, 2023 December 31, 2022 Portfolio Composition Amortized Cost Fair Value Non-Agency RMBS 7.5 % 7.5 % 8.3 % 8.9 % Senior 4.0 % 4.0 % 5.4 % 5.9 % Subordinated 2.3 % 2.3 % 2.2 % 2.2 % Interest-only 1.2 % 1.2 % 0.7 % 0.8 % Agency RMBS 0.2 % 0.1 % 0.1 % 0.1 % Interest-only 0.2 % 0.1 % 0.1 % 0.1 % Agency CMBS 0.7 % 3.3 % 0.7 % 3.2 % Project loans 0.6 % 2.3 % 0.6 % 2.2 % Interest-only 0.1 % 1.0 % 0.1 % 1.0 % Loans held for investment 91.6 % 89.1 % 90.9 % 87.8 % Fixed-rate percentage of portfolio 96.5 % 96.5 % 95.9 % 95.6 % Adjustable-rate percentage of portfolio 3.5 % 3.5 % 4.1 % 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.
This cash received was offset in part by cash used on investment purchases of $2.1 billion, primarily consisting of Loans held for investment of $2.1 billion, Agency MBS of $58 million and Non-Agency RMBS of $23 million.
This cash received was offset in part by cash used on investment purchases of $2.1 billion, primarily consisting of Loans held for investment of $2.1 billion, Agency MBS of $58 million and Non-Agency RMBS of $23 million. Our financing activities used cash of $808 million and $957 million for the year ended December 31, 2023 and 2022, respectively.
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. 50 We did not acquire any securitized debt collateralized by Non-Agency RMBS during the year ended December 31, 2022.
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.
If our cash resources are insufficient to satisfy our liquidity requirements, we may have to sell additional investments, potentially at a loss, issue debt or additional common or preferred equity securities.
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 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 year ended December 31, 2022. We repurchased approximately 161 thousand shares of our common stock at an average price of $11.39 per share for a total of $2 million during the year ended December 31, 2021.
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 year ended December 31, 2023. We repurchased approximately 5.4 million shares of our common stock at an average price of $9.10 61 for a total of $49 million during the year ended December 31, 2022.
Interest Expense Interest expense increased by $6 million, or 2%, to $333 million for the year ended December 31, 2022 as compared to $327 million for the year ended December 31, 2021.
Interest Expense Interest expense increased by $177 million, or 53%, to $510 million for the year ended December 31, 2023 as compared to $333 million for the year ended December 31, 2022.
Business Operations Net Income (Loss) Summary The table below presents our net income (loss) on a GAAP basis for the years ended December 31, 2022, 2021 and 2020. 43 Net Income (Loss) (dollars in thousands, except share and per share data) (unaudited) For the Year Ended December 31, 2022 December 31, 2021 December 31, 2020 Net interest income: Interest income (1) $ 773,121 $ 937,546 $ 1,030,250 Interest expense (2) 333,293 326,628 516,181 Net interest income 439,828 610,918 514,069 Increase (decrease) in provision for credit losses 7,037 33 180 Other investment gains (losses): Net unrealized gains (losses) on derivatives (1,482) — 201,000 Realized gains (losses) on terminations of interest rate swaps (561) — (463,966) Periodic interest cost of swaps, net (1,752) — (41,086) Net gains (losses) on derivatives (3,795) — (304,052) Net unrealized gains (losses) on financial instruments at fair value (736,899) 437,357 (110,664) Net realized gains (losses) on sales of investments (76,473) 45,313 166,946 Gains (losses) on extinguishment of debt (2,897) (283,556) (54,418) Other investment gains (losses) (1,866) — — Total other gains (losses) (821,930) 199,114 (302,188) Other expenses: Compensation and benefits 49,378 46,823 44,811 General and administrative expenses 22,651 22,246 22,914 Servicing and asset manager fees 36,005 36,555 39,896 Transaction expenses 16,146 29,856 15,068 Total other expenses 124,180 135,480 122,689 Income (loss) before income taxes (513,319) 674,519 89,012 Income taxes (253) 4,405 158 Net income (loss) $ (513,066) $ 670,114 $ 88,854 Dividends on preferred stock 73,765 73,764 73,750 Net income (loss) available to common shareholders $ (586,831) $ 596,350 $ 15,104 Net income (loss) per share available to common shareholders: Basic $ (2.51) $ 2.55 $ 0.07 Diluted $ (2.51) $ 2.44 $ 0.07 Weighted average number of common shares outstanding: Basic 233,938,745 233,770,474 212,995,533 Diluted 233,938,745 245,496,926 226,438,341 Dividends declared per share of common stock $ 1.12 $ 1.29 $ 1.40 (1) Includes interest incom e of consolidated VIEs of $551,253, $586,580, and $683,456 for the years ended December 31, 2022, 2021, and 2020, respectively.
Business Operations Net Income (Loss) Summary The table below presents our net income (loss) on a GAAP basis for the years ended December 31, 2023, 2022, and 2021. 44 Net Income (Loss) (dollars in thousands, except share and per share data) (unaudited) For the Year Ended December 31, 2023 December 31, 2022 December 31, 2021 Net interest income: Interest income (1) $ 772,904 $ 773,121 $ 937,546 Interest expense (2) 509,541 333,293 326,628 Net interest income 263,363 439,828 610,918 Increase (decrease) in provision for credit losses 11,371 7,037 33 Other investment gains (losses): Net unrealized gains (losses) on derivatives (6,411) (1,482) — Realized gains (losses) on derivatives (40,957) (561) — Periodic interest cost of swaps, net 17,167 (1,752) — Net gains (losses) on derivatives (30,201) (3,795) — Net unrealized gains (losses) on financial instruments at fair value 34,373 (736,899) 437,357 Net realized gains (losses) on sales of investments (31,234) (76,473) 45,313 Gains (losses) on extinguishment of debt 3,875 (2,897) (283,556) Other investment gains (losses) 1,091 (1,866) — Total other gains (losses) (22,096) (821,930) 199,114 Other expenses: Compensation and benefits 30,570 49,378 46,823 General and administrative expenses 25,117 22,651 22,246 Servicing and asset manager fees 32,624 36,005 36,555 Transaction expenses 15,379 16,146 29,856 Total other expenses 103,690 124,180 135,480 Income (loss) before income taxes 126,206 (513,319) 674,519 Income taxes 102 (253) 4,405 Net income (loss) $ 126,104 $ (513,066) $ 670,114 Dividends on preferred stock 73,750 73,765 73,764 Net income (loss) available to common shareholders $ 52,354 $ (586,831) $ 596,350 Net income (loss) per share available to common shareholders: Basic $ 0.23 $ (2.51) $ 2.55 Diluted $ 0.23 $ (2.51) $ 2.44 Weighted average number of common shares outstanding: Basic 230,057,356 233,938,745 233,770,474 Diluted 232,617,866 233,938,745 245,496,926 Dividends declared per share of common stock $ 0.70 $ 1.12 $ 1.29 (1) Includes interest income of consolidated VIEs of $593,384, $551,253, and $586,580 for the years ended December 31, 2023, 2022, and 2021, respectively.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Because different types of assets and liabilities with the same 70 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.
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.
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.
We primarily assess our interest rate risk by estimating the duration of our assets compared to 68 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.
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.
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 69 the yield curves.
However, if prepayment rates 69 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.
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.
These factors could lower our net interest 68 income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.
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.
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 December 31, 2022 and various estimates regarding prepayment and all activities are made at each level of rate change.
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 December 31, 2023 and various estimates regarding prepayment and all activities are made at each level of rate change.
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 elsewhere in this 2022 Form 10-K for additional information on risks we face.
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 this 2023 Form 10-K for additional information on risks we face.
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.
Most of our warehouse facilities and secured financing agreements provide financing based on a floating rate of interest calculated on a fixed spread over SOFR. The fixed spread varies depending on the type of underlying asset which collateralizes the financing.
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 2022. As the Federal 66 Reserve increases its Federal Funds Rate, the margin between short and long-term rates could further compress.
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.
Real Estate Market Risk We own assets secured by real property and may own real property directly.
Real Estate Market Risk 70 We own assets secured by real property and may own real property directly.
Financial Statements and Supplementary Data Our consolidated financial statements and the related notes, together with the Reports of Independent Registered Public Accounting Firm thereon, are set forth in Part IV of this 2022 Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
Financial Statements and Supplementary Data Our consolidated financial statements and the related notes, together with the Reports of Independent Registered Public Accounting Firm thereon, are set forth in Part IV of this 2023 Form 10-K. 72 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.
The following table sets forth the estimated maturity or re-pricing of our interest-earning assets and interest-bearing liabilities at December 31, 2022.
The following table sets forth the estimated maturity or re-pricing of our interest-earning assets and interest-bearing liabilities at December 31, 2023.
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.
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.
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 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.
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.
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.
December 31, 2022 Change in Interest Rate Projected Percentage Change in Net Interest Income Projected Percentage Change in Market Value (1) -100 Basis Points 2.35 % 5.91 % -50 Basis Points 1.12 % 2.51 % Base Interest Rate — — +50 Basis Points (0.97) % (3.52) % +100 Basis Points (1.80) % (6.22) % (1) Projected Percentage Change in Market Value is based on instantaneous moves in interest rates.
December 31, 2023 Change in Interest Rate Projected Percentage Change in Net Interest Income Projected Percentage Change in Market Value (1) -100 Basis Points 6.22 % 7.92 % -50 Basis Points 3.01 % 3.77 % Base Interest Rate — — +50 Basis Points (3.00) % (3.34) % +100 Basis Points (5.84) % (6.55) % (1) Projected Percentage Change in Market Value is based on instantaneous moves in interest rates.
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.
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.
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.
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.
Dollar London Inter Bank Offered Rate or, LIBOR transition The interest rates on our secured financing agreements, as well as adjustable-rate mortgage loans in our securitizations, are generally based on LIBOR, as are some classes of our preferred stock.
Dollar London Inter Bank Offered Rate or, LIBOR transition The interest rates on our certain adjustable-rate mortgage loans in our securitizations were based on LIBOR, as were some classes of our preferred stock. After June 30, 2023, all LIBOR tenors relevant to us ceased to be published or became no longer representative.
In addition to statistical sampling techniques, we create adverse credit and valuation samples, which we individually review. 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.
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.
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.
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.” 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.
We are evaluating the impact of the final rules on assets and liabilities covered by the legislation and will continue to consider all available options, including the potential impact on certain classes of our outstanding fixed-to-floating preferred stock.
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.
December 31, 2022 (dollars in thousands) Within 3 Months 3-12 Months 1 Year to 3 Years Greater than 3 Years Total Rate sensitive assets $ 82,439 $ 398,440 $ 8,887 $ 12,468,605 $ 12,958,371 Cash equivalents 264,600 — — — 264,600 Total rate sensitive assets $ 347,039 $ 398,440 $ 8,887 $ 12,468,605 $ 13,222,971 Rate sensitive liabilities 4,486,303 6,057,869 — 3,716 10,547,888 Interest rate sensitivity gap $ (4,139,264) $ (5,659,429) $ 8,887 $ 12,464,889 $ 2,675,083 Cumulative rate sensitivity gap $ (4,139,264) $ (9,798,693) $ (9,789,806) $ 2,675,083 Cumulative interest rate sensitivity gap as a percentage of total rate sensitive assets (31) % (74) % (74) % 20 % Our analysis of risks is based on our management’s experience, estimates, models and assumptions.
The interest rate sensitivity of our assets and liabilities in the table could vary substantially based on actual prepayments. 71 December 31, 2023 (dollars in thousands) Within 3 Months 3-12 Months 1 Year to 3 Years Greater than 3 Years Total Rate sensitive assets $ 26,728 $ 407,205 $ 9,151 $ 12,118,598 $ 12,561,682 Cash equivalents 221,684 — — — 221,684 Total rate sensitive assets $ 248,412 $ 407,205 $ 9,151 $ 12,118,598 $ 12,783,366 Rate sensitive liabilities 2,421,880 4,907,278 — 2,767,244 10,096,402 Interest rate sensitivity gap $ (2,173,468) $ (4,500,073) $ 9,151 $ 9,351,354 $ 2,686,964 Cumulative rate sensitivity gap $ (2,173,468) $ (6,673,541) $ (6,664,390) $ 2,686,964 Cumulative interest rate sensitivity gap as a percentage of total rate sensitive assets (17) % (52) % (52) % 21 % Our analysis of risks is based on our management’s experience, estimates, models and assumptions.
Removed
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.
Added
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.
Removed
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.
Added
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.
Removed
These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate. Moreover, any adjustable-rate mortgage loans based upon LIBOR will need to convert by that time too. 67 On January 1, 2022, ICE discontinued the publication of the 1-week and 2-month tenors of USD-LIBOR.
Added
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.
Removed
In the United States., the Alternative Reference Rates Committee, or ARRC, a committee of private sector entities with ex-officio official sector members convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate, or SOFR, and in some cases, the forward-looking term rate based on SOFR published by CME Group Benchmark Administration Ltd, or CME Term SOFR, plus in each case, a recommended spread adjustment as LIBOR's replacements.
Added
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.
Removed
The Board of Governors of the Federal Reserve has also named CMEE Term SOFR as the Board-selected replacement rate for most cash products under the Adjustable Interest Rate (LIBOR) Act of 2021, which governs instruments for which there is no determining person to choose a LIBOR replacement or which have no fallback provisions specifying an alternate replacement rate.
Added
For the Quarters Ended (dollars in thousands) Non-Agency RMBS December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 Balance, beginning of period $ 81,236 $ 80,532 $ 79,875 $ 89,234 $ 103,394 Realized losses (1,225) (1,727) (2,445) (2,293) (3,063) Accretion 2,569 2,576 2,765 2,949 3,133 Losses on purchases — 6 — — — Losses on sold/paid-off — 95 — — (4,444) Increase/(decrease) 12,786 (246) 337 (10,015) (9,786) Balance, end of period $ 95,366 $ 81,236 $ 80,532 $ 79,875 $ 89,234 67 For the Quarters Ended (dollars in thousands) Loans held for investment December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 Balance, beginning of period $ 251,002 $ 254,354 $ 285,823 $ 321,017 $ 285,174 Realized losses (8,457) (8,200) (10,281) (7,992) (11,023) Accretion 3,427 3,444 3,554 3,650 3,715 Losses on purchases — — — 404 7,677 Increase/(decrease) (32,328) 1,404 (24,742) (31,256) 35,474 Balance, end of period $ 213,644 $ 251,002 $ 254,354 $ 285,823 $ 321,017 Additionally, the Non-Agency RMBS which we acquire for our portfolio are reviewed by us to ensure that they satisfy our risk-based criteria.
Removed
There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured lending rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities.
Added
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.
Removed
While some market participants are still evaluating what convention of SOFR will be adopted for various types of financial instruments and securitization vehicles, the mortgage market, including our repurchase agreements, has currently adopted the daily compounded and paid in arrears SOFR convention. That convention, however, may change in the future.
Added
This means that all 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.
Removed
As our LIBOR-based borrowings are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available, which could have a material adverse effect on our operating results.
Added
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.
Removed
In addition, and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management. The process of transition involves operational risks.
Removed
It is not yet possible to predict the magnitude of LIBOR's end on our borrowing costs and other operations given the remaining uncertainty about which rates will replace LIBOR and the related timing. Holders of our fixed-to-floating preferred shares should refer to the relevant prospectus to understand the USD-LIBOR cessation provisions applicable to that class.
Removed
We do not currently intend to amend any of our fixed-to-floating preferred shares to change the existing USD-LIBOR cessation fallbacks. On March 15, 2022, President Biden signed the Adjustable Interest Rate (LIBOR) Act, which transitions contracts that use LIBOR as a benchmark for adjustable interest rates to another benchmark, once LIBOR is permanently discontinued after June 30, 2023.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
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.
Removed
However, we believe that the Act should provide some measure of certainty with respect to the treatment of such instruments once LIBOR is permanently discontinued. Interest Rate Cap Risk We may also invest in adjustable-rate residential mortgage loans and RMBS.
Removed
The interest rate sensitivity of our assets and liabilities in the table could vary substantially based on actual prepayments.
Removed
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.
Removed
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.
Removed
In addition, we had an independent third-party perform a 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 in 2022.
Removed
The 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.
Removed
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.
Removed
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 71 systems.
Removed
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.
Removed
The financial reporting unit operates under the requirements of the Sarbanes Oxley (“SOX”) Act and is subject to an independent, external quarterly review and an annual audit from Ernst & Young. Our board of directors risk committee reviews risk, portfolio, and financial reporting material.
Removed
Periodic reporting from the risk management unit is provided to executive management and to our audit committee.

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