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Cherry Hill Mortgage Investment (CHMI) - 2023 Q3 - Quarterly Report

FORM 10-Q This report is a Quarterly Report on Form 10-Q for Cherry Hill Mortgage Investment Corporation for the period ended September 30, 2023 - The report is a Quarterly Report on Form 10-Q for Cherry Hill Mortgage Investment Corporation for the period ended September 30, 20231 Securities Registered | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :--------------------------------------------------------------| :---------------- | :---------------------------------------- | | Common Stock, $0.01 par value per share | CHMI | New York Stock Exchange | | 8.20% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share | CHMI-PRA | New York Stock Exchange | | 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share | CHMI-PRB | New York Stock Exchange | Glossary This section defines key terms used in the report, such as 'Agency RMBS,' 'MSR,' 'REIT,' and 'TBA,' to ensure clarity and understanding of the Company's financial instruments and operational context - This section defines key terms used in the report, such as 'Agency RMBS,' 'MSR,' 'REIT,' and 'TBA,' to ensure clarity and understanding of the Company's financial instruments and operational context3422334352 Cautionary Statement Concerning Forward-Looking Information This section warns that the report contains forward-looking statements subject to substantial risks and uncertainties that could cause actual results to differ materially from expectations - The report contains forward-looking statements subject to substantial risks and uncertainties, which could cause actual results to differ materially from expectations24353 - Key risk factors include general volatility of capital markets, accelerating inflationary trends, interest rate increases, changes in investment objectives, and the Company's ability to maintain its REIT qualification24353 PART I. FINANCIAL INFORMATION This part presents the Company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Consolidated Financial Statements This section provides the unaudited consolidated financial statements, including balance sheets, statements of income (loss), comprehensive income (loss), changes in stockholders' equity, and cash flows, along with extensive notes detailing the Company's organization, accounting policies, and specific financial instrument information Consolidated Balance Sheets The consolidated balance sheets present the Company's financial position as of September 30, 2023, and December 31, 2022, showing assets, liabilities, and stockholders' equity, with total assets increasing slightly due to RMBS and liabilities rising from repurchase agreements Consolidated Balance Sheet Highlights (in thousands) | Item | September 30, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------------------------------- | :----------------- | :---------------- | :------------------------ | | Assets: | | | | | RMBS, at fair value | $1,016,801 | $931,431 | +$85,370 | | Investments in Servicing Related Assets | $266,474 | $279,739 | -$13,265 | | Cash and cash equivalents | $44,733 | $57,320 | -$12,587 | | Restricted cash | $25,697 | $8,234 | +$17,463 | | Derivative assets | $35,831 | $45,533 | -$9,702 | | Total Assets | $1,427,520 | $1,408,825 | +$18,695 | | Liabilities: | | | | | Repurchase agreements | $967,289 | $825,962 | +$141,327 | | Derivative liabilities | $4,215 | $24,718 | -$20,503 | | Notes payable | $172,008 | $183,888 | -$11,880 | | Total Liabilities | $1,169,964 | $1,143,309 | +$26,655 | | Stockholders' Equity: | | | | | Total Cherry Hill Mortgage Investment Corporation Stockholders' Equity | $254,071 | $262,035 | -$7,964 | | Total Stockholders' Equity | $257,556 | $265,516 | -$7,960 | Consolidated Statements of Income (Loss) The consolidated statements of income (loss) show a net income of $15.9 million for Q3 2023, a significant decrease from $41.7 million in the prior year, and a $1.8 million net loss for the nine-month period, primarily due to increased interest expense and unrealized losses Consolidated Statements of Income (Loss) Highlights (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income | $12,864 | $8,213 | $37,193 | $19,736 | | Interest expense | $13,337 | $4,882 | $38,460 | $9,024 | | Net interest income (expense) | $(473) | $3,331 | $(1,267) | $10,712 | | Servicing fee income | $13,225 | $13,426 | $40,535 | $39,730 | | Servicing costs | $2,869 | $2,725 | $8,098 | $8,533 | | Net servicing income | $10,356 | $10,701 | $32,437 | $31,197 | | Realized loss on RMBS, net | $(10,209) | $(9,735) | $(21,464) | $(68,993) | | Realized gain (loss) on derivatives, net | $20,675 | $6,210 | $26,715 | $(7,158) | | Unrealized loss on RMBS (fair value through earnings), net | $(19,755) | $0 | $(26,566) | $0 | | Unrealized gain on derivatives, net | $18,343 | $33,321 | $12,924 | $75,390 | | Unrealized gain (loss) on investments in Servicing Related Assets | $1,578 | $2,293 | $(13,100) | $30,174 | | Total Income | $20,527 | $46,121 | $9,691 | $71,334 | | Total Expenses | $3,366 | $3,100 | $10,258 | $9,750 | | Net Income (Loss) | $15,885 | $41,677 | $(1,811) | $54,942 | | Basic EPS | $0.49 | $1.91 | $(0.35) | $2.42 | | Diluted EPS | $0.49 | $1.90 | $(0.35) | $2.42 | - Net interest income shifted from a gain of $3.3 million in Q3 2022 to a loss of $0.5 million in Q3 2023, and from a gain of $10.7 million in 9M 2022 to a loss of $1.3 million in 9M 2023, primarily due to increased interest expense339 - Unrealized loss on RMBS measured at fair value through earnings increased significantly to $19.8 million for Q3 2023 and $26.6 million for 9M 2023, compared to $0 in the prior year periods, reflecting changes in interest rates and widening credit spreads339221 Consolidated Statements of Comprehensive Income (Loss) The consolidated statements of comprehensive income (loss) show a comprehensive income of $1.4 million for Q3 2023, an improvement from a $4.9 million loss in the prior year, and a $4.8 million comprehensive loss for the nine-month period, significantly less than the $23.3 million loss in the same period last year, primarily due to a reduced unrealized loss on available-for-sale RMBS Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) | $15,885 | $41,677 | $(1,811) | $54,942 | | Unrealized loss on RMBS, available-for-sale, net | $(14,485) | $(46,592) | $(2,968) | $(78,286) | | Net other comprehensive loss | $(14,485) | $(46,592) | $(2,968) | $(78,286) | | Comprehensive income (loss) | $1,400 | $(4,915) | $(4,779) | $(23,344) | | Comprehensive loss attributable to common stockholders | $(1,091) | $(7,285) | $(12,079) | $(30,244) | - The unrealized loss on available-for-sale RMBS significantly decreased from $(46.6) million in Q3 2022 to $(14.5) million in Q3 2023, and from $(78.3) million in 9M 2022 to $(3.0) million in 9M 2023, contributing to the improved comprehensive income (loss)11 Consolidated Statements of Changes in Stockholders' Equity The consolidated statements of changes in stockholders' equity detail movements in common stock, preferred stock, additional paid-in capital, accumulated deficit, and accumulated other comprehensive loss, showing a decrease in total stockholders' equity from $265.5 million to $257.6 million primarily due to net and comprehensive losses Key Changes in Stockholders' Equity (in thousands) | Item | Balance, Dec 31, 2022 | Balance, Sep 30, 2023 | Change | | :-------------------------------------------- | :-------------------- | :-------------------- | :----- | | Common Stock Amount | $239 | $274 | +$35 | | Additional Paid-in Capital | $344,510 | $363,664 | +$19,154 | | Accumulated Deficit | $(168,989) | $(193,174) | $(24,185) | | Accumulated other comprehensive loss | $(29,104) | $(32,072) | $(2,968) | | Total Cherry Hill Mortgage Investment Corporation Stockholders' Equity | $262,035 | $254,071 | $(7,964) | | Total Stockholders' Equity | $265,516 | $257,556 | $(7,960) | - Issuance of common stock contributed $19.2 million to additional paid-in capital during the nine months ended September 30, 202329 - Net loss before preferred stock dividends and other comprehensive loss significantly impacted the accumulated deficit and total equity29 Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, operating activities provided $22.1 million in cash, investing activities used $164.1 million, and financing activities provided $147.0 million, resulting in a net increase of $4.9 million in cash, cash equivalents, and restricted cash Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $22,063 | $44,721 | | Net cash used in investing activities | $(164,143) | $(137,062) | | Net cash provided by financing activities | $146,956 | $81,307 | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $4,876 | $(11,034) | | Cash, Cash Equivalents and Restricted Cash, End of Period | $70,430 | $65,743 | - Cash used in investing activities increased by $27.1 million YoY, primarily due to higher net purchases of RMBS343 - Cash provided by financing activities significantly increased by $65.6 million YoY, driven by higher borrowings under repurchase agreements and common stock issuance343 Notes to Consolidated Financial Statements These notes provide detailed explanations of the Company's organization, significant accounting policies, financial instruments, equity, related party transactions, fair value measurements, commitments, and income taxes, offering crucial context for the consolidated financial statements Note 1 — Organization and Operations Cherry Hill Mortgage Investment Corporation, incorporated in Maryland in 2012, invests in residential mortgage assets, operates as a REIT, and is externally managed by Cherry Hill Mortgage Management, LLC - The Company was incorporated in Maryland on October 31, 2012, and commenced operations around October 9, 2013, after its IPO345 - The Company is externally managed by Cherry Hill Mortgage Management, LLC, an SEC-registered investment adviser, which is owned by a blind trust for the benefit of Mr. Stanley Middleman181345 - The Company elected to be taxed as a REIT for U.S. federal income tax purposes starting December 31, 2013, with its Operating Partnership contributing assets to a Sub-REIT, effective January 1, 202033205 Note 2 — Basis of Presentation and Significant Accounting Policies This note outlines the GAAP basis for financial statements, emphasizing estimates for fair value and credit losses, details exposure to credit and market risks, REIT status, and accounting policies for RMBS (including the 2023 shift to fair value option), MSRs, derivatives, cash, and income taxes - Financial statements are prepared in conformity with GAAP, requiring significant estimates for fair value of Servicing Related Assets, RMBS, and derivatives, as well as credit losses34 - The Company faces credit risk (default on investments) and market risk (changes in value due to interest rates, spreads, prepayment speeds)35 - Effective January 1, 2023, the Company elected the fair value option for all newly acquired RMBS, with unrealized gains/losses reported in income, a change from prior available-for-sale classification where they were reported in OCI36194 - MSRs are recorded at fair value using the fair value option, with changes recognized in net income, reflecting sensitivity to prepayment risk and market factors67213 - Derivatives (swaps, swaptions, U.S. treasury futures, TBAs) are used for interest rate risk management and duration/basis risk management, generally not designated as GAAP hedges, and are recognized at fair value on the balance sheet69 Note 3 — Recent Accounting Pronouncements This section would typically discuss recently issued accounting standards and their potential impact on the Company's financial statements, but the provided text indicates no significant recent pronouncements or material impact Note 4 — Investments in RMBS The Company's RMBS portfolio, primarily Agency RMBS, had a total carrying value of $1,016.8 million as of September 30, 2023, with a significant portion pledged as collateral for repurchase agreements, and unrealized losses on available-for-sale securities are market-driven, not credit-impaired RMBS Portfolio Summary (in thousands) | Asset Type | Original Face Value | Book Value | Carrying Value (Sep 30, 2023) | Number of Securities | Weighted Average Coupon | Weighted Average Yield | Maturity (Years) | | :---------------------------------------- | :------------------ | :---------- | :---------------------------- | :------------------- | :---------------------- | :--------------------- | :--------------- | | RMBS, available-for-sale (through OCI) | $591,188 | $538,004 | $506,050 | 43 | 4.47% | 4.56% | 28 | | RMBS, measured at fair value (through earnings) | $566,861 | $537,317 | $510,751 | 45 | 4.66% | 4.76% | 29 | | Total/weighted average RMBS | $1,158,049 | $1,075,321 | $1,016,801 | 88 | 4.57% | 4.66% | 28 | - As of September 30, 2023, approximately $979.0 million of Agency RMBS were pledged as collateral for repurchase agreements, an increase from $815.2 million at December 31, 202221 - Unrealized losses on available-for-sale RMBS are primarily due to changes in market factors (interest rates, credit spreads) rather than credit impairment, with management believing carrying values are recoverable21 Note 5 — Investments in Servicing Related Assets The Company's Servicing Related Assets, primarily Fannie Mae and Freddie Mac MSRs, had an aggregate Unpaid Principal Balance (UPB) of approximately $20.3 billion and a carrying value of $266.5 million as of September 30, 2023, with the fair value decreasing by $13.1 million year-to-date in 2023 MSR Portfolio Summary (in thousands) | Item | September 30, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------------------------------- | :----------------- | :---------------- | :------------------------ | | Unpaid Principal Balance | $20,340,103 | $21,688,353 | $(1,348,250) |\ | Carrying Value | $266,474 | $279,739 | $(13,265) |\n| Weighted Average Coupon | 3.49% | 3.49% | 0.00% |\n| Weighted Average Maturity (Years) | 25.2 | 25.8 | -0.6 |\n| Year-to-Date Changes in Fair Value Recorded in Other Income (Loss) | $(13,100) | $22,976 | $(36,076) | - Aurora's MSR portfolio consists entirely of Fannie Mae and Freddie Mac MSRs, with no reserves for unrecoverable advances deemed necessary68107 Geographic Concentration of Servicing Related Assets (Percentage of Total Outstanding UPB) | State | September 30, 2023 | December 31, 2022 | | :------------- | :----------------- | :---------------- | | California | 13.7% | 13.5% | | Virginia | 8.3% | 8.3% | | New York | 8.3% | 8.2% | | Maryland | 6.4% | 6.3% | | Texas | 5.9% | 6.0% | | Florida | 5.4% | 5.5% | | North Carolina | 5.1% | 5.1% | | All other | 46.9% | 47.1% | Note 6 — Equity and Earnings per Common Share This note details the Company's common and preferred stock, equity incentive plans, and earnings per common share calculations, highlighting the issuance of 3,428,112 common shares for $19.5 million in 9M 2023 and a diluted EPS of $(0.35) for the period - The Company issued 3,428,112 shares of common stock under its ATM program for gross proceeds of approximately $19.5 million during the nine months ended September 30, 202385205 - The 2023 Equity Incentive Plan was approved in June 2023, replacing the 2013 Plan, and authorizes the issuance of up to 2,830,000 shares of common stock or equivalent LTIP-OP Units88113 Basic and Diluted EPS (per share) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic EPS | $0.49 | $1.91 | $(0.35) | $2.42 | | Diluted EPS | $0.49 | $1.90 | $(0.35) | $2.42 | - Share-based compensation expense was approximately $507,177 for the nine months ended September 30, 2023, with $809,653 of unrecognized expense remaining91 Note 7 — Transactions with Related Parties This note details related party transactions, primarily with the external Manager (Cherry Hill Mortgage Management, LLC) and Freedom Mortgage, including management fees (1.5% of stockholders' equity), expense reimbursements, and subservicing/recapture agreements with RoundPoint - The Company pays its Manager a management fee equal to 1.5% per annum of stockholders' equity, payable quarterly in arrears94294 Management Fees and Compensation Reimbursement to Manager (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Management fees | $1,590 | $1,485 | $4,684 | $4,662 | | Compensation reimbursement | $150 | $140 | $430 | $370 | | Total | $1,740 | $1,625 | $5,114 | $5,032 | - Aurora has subservicing agreements, including one with RoundPoint (a Freedom Mortgage subsidiary), from which it received $7.8 million in servicing fee income for Q3 2023 and purchased minimal MSRs in 9M 2023 ($5,000 UPB) compared to $441.5 million in 9M 2022142 Note 8 — Derivative Instruments The Company uses various derivative instruments for interest rate risk management, with a total notional amount of $791.4 million as of September 30, 2023, and realized gains on derivatives significantly increased to $26.7 million for 9M 2023 from a $7.2 million loss in 9M 2022 Outstanding Notional Amounts of Derivative Instruments (in thousands) | Derivative Type | September 30, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :------------------------------ | :----------------- | :---------------- | :------------------------ | | Interest rate swaps | $1,132,000 | $1,305,000 | $(173,000) | | TBAs, net | $(486,400) | $(306,100) | $(180,300) | | U.S. treasury futures | $145,800 | $(88,700) | +$234,500 | | Options on treasury futures | $0 | $20,000 | $(20,000) | | Total notional amount | $791,400 | $930,200 | $(138,800) | Realized Gain (Loss) on Derivatives, Net (in thousands) | Derivative Type | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest rate swaps | $496 | $1,319 | $(4,671) | $(4,793) | | Swaptions | $0 | $0 | $0 | $(585) | | TBAs | $14,150 | $1,002 | $17,516 | $(26,164) | | U.S. Treasury futures | $(3,137) | $439 | $(11,794) | $18,910 | | U.S. treasury futures options | $(50) | $203 | $(337) | $(47) | | Total | $11,459 | $2,963 | $714 | $(12,679) | - The Company presents interest rate swaps, swaptions, and U.S. treasury futures assets and liabilities on a gross basis, net of variation margin, while TBA assets and liabilities are presented on a net basis123 Note 9 — Fair Value This note describes the Company's fair value measurements using a three-level hierarchy, classifying RMBS and derivative instruments as Level 2 (observable market data) and Servicing Related Assets (MSRs) as Level 3 (discounted cash flow models with significant unobservable inputs) - Fair value hierarchy categorizes inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs or corroborated market data), and Level 3 (unobservable inputs requiring significant management judgment)330 - All RMBS and derivative instruments are classified as Level 2 fair value assets/liabilities, as their fair values are determined using prices from third-party providers based on recent trades or models with observable inputs151153 - All MSRs are classified as Level 3 fair value assets, valued using discounted cash flow models with unobservable inputs such as constant prepayment speed (6.7% weighted average), uncollected payments (0.8% weighted average), discount rate (10.4% weighted average), and annual cost to service ($87 per loan)152157 Fair Value Measurements (in thousands) as of September 30, 2023 | Assets | Level 1 | Level 2 | Level 3 | Carrying Value | | :------------------------------- | :------ | :---------- | :---------- | :------------- | | RMBS total | $0 | $1,016,801 | $0 | $1,016,801 | | Derivative assets total | $0 | $35,831 | $0 | $35,831 | | Servicing related assets | $0 | $0 | $266,474 | $266,474 | | Total Assets | $0 | $1,052,632 | $266,474 | $1,319,106 | | Liabilities | | | | | | Derivative liabilities total | $0 | $4,215 | $0 | $4,215 | Note 10 — Commitments and Contingencies This note outlines the Company's commitments, including management fees payable to its Manager and forward TBA purchase/sale commitments, and states that no material legal or regulatory claims or proceedings are currently known - The Company has commitments for quarterly management fees to its Manager, calculated as 1.5% per annum of stockholders' equity171 - The Company holds forward TBA purchase and sale commitments for Agency RMBS trades160 - No material legal or regulatory claims or proceedings are currently known as of September 30, 2023137281 Note 11 — Repurchase Agreements As of September 30, 2023, the Company had $967.3 million in outstanding borrowings under repurchase agreements, with a weighted average remaining maturity of 20 days and a weighted average rate of 5.48%, secured by RMBS and cash collateral Repurchase Agreements Characteristics (in thousands) as of September 30, 2023 | Maturity | Repurchase Agreements | Weighted Average Rate | | :---------------- | :-------------------- | :-------------------- | | Less than one month | $814,571 | 5.47% | | One to three months | $152,718 | 5.51% | | Total/Weighted Average | $967,289 | 5.48% | - The weighted average remaining maturity of borrowings under repurchase agreements was 20 days as of September 30, 2023, and 18 days as of December 31, 2022162289 - RMBS and cash are pledged as collateral under these repurchase agreements162 Note 12 — Notes Payable The Company has two MSR financing facilities, a $100.0 million Freddie Mac MSR Revolver and a $150.0 million Fannie Mae MSR Revolving Facility, with $172.5 million total outstanding as of September 30, 2023, both recently extended - The Freddie Mac MSR Revolver, with a maximum of $100.0 million, had $64.5 million outstanding as of September 30, 2023, and was extended for an additional 364 days in July 2023162238 - The Fannie Mae MSR Revolving Facility, with a maximum of $150.0 million, had $108.0 million outstanding as of September 30, 2023, and its revolving period was extended for an additional 24 months in October 2023164238 Notes Payable Repayment Characteristics (in thousands) as of September 30, 2023 | Maturity (Years) | Freddie Mac MSR Revolver | Fannie Mae MSR Revolving Facility | Total | | :--------------- | :----------------------- | :-------------------------------- | :---- | | 2023 | $0 | $0 | $0 | | 2024 | $64,500 | $0 | $64,500 | | 2025 | $0 | $1,173 | $1,173 | | 2026 | $0 | $7,380 | $7,380 | | 2027 | $0 | $8,008 | $8,008 | | 2028 | $0 | $91,439 | $91,439 | | Total | $64,500 | $108,000 | $172,500 | Note 13 — Receivables and Other Assets Receivables and other assets totaled $32.5 million as of September 30, 2023, a decrease from $36.8 million at December 31, 2022, primarily comprising servicing advances, interest receivable, and deferred tax assets Receivables and Other Assets (in thousands) | Item | September 30, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------- | :----------------- | :---------------- | :------------------------ | | Servicing advances | $8,823 | $15,090 | $(6,267) | | Interest receivable | $6,097 | $4,381 | +$1,716 | | Deferred tax asset | $14,301 | $15,545 | $(1,244) | | Other receivables | $3,278 | $1,749 | +$1,529 | | Total other assets | $32,499 | $36,765 | $(4,266) | - The Company only records servicing advances that are deemed recoverable176 Note 14 — Accrued Expenses and Other Liabilities Accrued expenses and other liabilities decreased to $18.4 million as of September 30, 2023, from $19.5 million at December 31, 2022, including accrued interest on repurchase agreements and notes payable, and amounts due to counterparties Accrued Expenses and Other Liabilities (in thousands) | Item | September 30, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :------------------------------------ | :----------------- | :---------------- | :------------------------ | | Accrued interest on repurchase agreements | $2,684 | $2,796 | $(112) | | Accrued interest on notes payable | $2,021 | $1,710 | +$311 | | Accrued expenses | $1,372 | $3,804 | $(2,432) | | Due to counterparties | $12,318 | $11,197 | +$1,121 | | Total | $18,395 | $19,507 | $(1,112) | Note 15 — Income Taxes The Company operates as a REIT, generally exempt from federal income tax if it distributes at least 90% of its taxable income, with its TRS subject to federal and state taxes, reporting a $1.2 million provision for corporate business taxes for 9M 2023 and $70.0 million in net operating losses - As a REIT, the Company must distribute at least 90% of its annual REIT taxable income to stockholders to avoid federal income tax176 - CHMI Solutions and its subsidiary Aurora are taxed as U.S. C-Corporations and are subject to federal and state income taxes176 Provision for Corporate Business Taxes (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Deferred federal income tax expense | $1,108 | $1,143 | $1,080 | $5,647 | | Deferred state income tax expense | $168 | $201 | $164 | $995 | | Provision for Corporate Business Taxes | $1,276 | $1,344 | $1,244 | $6,642 | - The Company had net operating losses of $70.0 million as of September 30, 2023, which can be carried forward indefinitely180 Note 16 — Subsequent Events The Company evaluated events subsequent to September 30, 2023, and identified no additional events requiring disclosure in the consolidated financial statements - No additional events requiring disclosure were identified after September 30, 2023180 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive discussion and analysis of Cherry Hill Mortgage Investment Corporation's financial condition and results of operations for the quarter ended September 30, 2023, covering business overview, Federal Reserve policy impact, factors affecting operating results, critical accounting policies, and a detailed breakdown of financial performance, liquidity, and contractual obligations Key Financial Performance Indicators (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Jun 30, 2023 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net interest income (expense) | $(473) | $(634) | $(1,267) | $10,712 | | Net servicing income | $10,356 | $10,972 | $32,437 | $31,197 | | Realized gain (loss) on derivatives, net | $20,675 | $11,640 | $26,715 | $(7,158) | | Unrealized loss on RMBS (fair value through earnings), net | $(19,755) | $(6,619) | $(26,566) | $0 | | Unrealized gain (loss) on investments in Servicing Related Assets | $1,578 | $(6,010) | $(13,100) | $30,174 | | Net Income (Loss) | $15,885 | $1,626 | $(1,811) | $54,942 | - Interest income increased by $0.3 million QoQ and $17.5 million YoY, driven by replacing lower-yielding securities with higher-yielding ones and new purchases200 - Interest expense increased by $0.2 million QoQ and $29.5 million YoY, primarily due to rising financing rates and increased repurchase liabilities218 - Realized gain on derivatives increased by $9.0 million QoQ and $33.9 million YoY, mainly from gains on TBAs and interest rate swaps periodic income243 - Unrealized loss on RMBS (fair value through earnings) increased by $13.1 million QoQ and $26.6 million YoY, due to changes in interest rates, widening credit spreads, and an increase in fair value-elected RMBS221 - Unrealized gain on Servicing Related Assets improved by $7.6 million QoQ, but showed a $43.3 million increase in unrealized loss YoY, primarily due to changes in valuation inputs and underlying loan paydowns244 General Cherry Hill Mortgage Investment Corporation is a residential real estate finance company focused on acquiring and managing Servicing Related Assets and Agency RMBS, operating as a REIT, with recent Federal Reserve actions significantly impacting market interest rates and potentially reducing net interest income - The Company's principal objective is to generate attractive current yields and risk-adjusted total returns through dividend distributions and capital appreciation by investing in Servicing Related Assets and RMBS181 - The Federal Reserve has raised the federal funds rate by 550 basis points since March 2022 to a range of 5.25%-5.50%, and has been reducing its holdings of U.S. Treasury and Agency MBS by $60.0 billion and $35.0 billion per month, respectively182 - Federal Reserve actions have resulted in higher interest rates across asset classes, potentially reducing net interest income, though partially offset by lower prepayments on MSRs and RMBS183 Effects of Federal Reserve Policy on the Company Federal Reserve policies, including interest rate increases and quantitative tightening, have led to higher interest rates across asset classes, impacting the Company's net interest income, with potential offsets from lower prepayments possibly counteracted by increased market volatility and hedging costs - Federal Reserve's interest rate increases and quantitative tightening have resulted in higher interest rates across asset classes, including Agency RMBS183 - These actions may reduce economic activity and decrease interest rate spreads, potentially reducing net interest income, although lower prepayments on MSRs and RMBS could partially offset this183 - Any benefit from lower prepayments could be offset by increased market volatility and hedging costs183 Factors Impacting our Operating Results The Company's operating results are significantly influenced by the net spread between asset income and financing/hedging costs, as well as changes in market interest rates and prepayment speeds, with credit risk existing for MSRs and CMOs despite being low for Agency RMBS - Operating results are primarily driven by the net spread between income earned on assets and the cost of financing and hedging activities, along with amortization/accretion of premiums/discounts207 Average Net Interest Rate Spread | Quarter Ended | Average Asset Yield | Average Cost of Funds | Average Net Interest Rate Spread | | :------------------- | :------------------ | :-------------------- | :------------------------------- | | September 30, 2023 | 4.66% | 0.87% | 3.79% | | June 30, 2023 | 4.49% | 0.53% | 3.96% | | March 31, 2023 | 4.40% | 0.73% | 3.68% | | December 31, 2022 | 4.29% | 0.69% | 3.60% | - Prepayment speeds significantly affect the fair value and expected yield of Servicing Related Assets and RMBS; faster prepayments reduce yields on premium assets, while slower prepayments extend the life of lower-yielding assets209191 - The Company is exposed to credit risk on its MSRs and any CMOs, which it mitigates through due diligence and ongoing monitoring192304 Critical Accounting Policies and Use of Estimates This section highlights critical accounting policies and estimates, including fair value measurement of MSRs and RMBS, revenue recognition for securities, and accounting for repurchase transactions and income taxes, where management's judgments and assumptions can materially affect reported amounts - The fair value option is used for MSRs, with changes recognized in net income, relying on unobservable market data inputs like prepayment speeds and discount rates213 - For RMBS, the Company transitioned to the fair value option for new acquisitions in 2023, with unrealized gains/losses reported in income, while older available-for-sale RMBS report unrealized gains/losses in OCI194 - Revenue recognition for RMBS involves amortizing premiums and accreting discounts into interest income over projected lives, with prepayment speed estimates being a key assumption195 - Repurchase transactions are treated as collateralized financing, with securities remaining on the balance sheet as assets and cash received as liabilities196 - Income taxes are accounted for under ASC 740, with deferred taxes reflecting temporary differences, and the Company assesses the realizability of deferred tax assets193 Results of Operations For Q3 2023, net income was $15.9 million, up from $1.6 million in the prior quarter, driven by increased realized gains on derivatives and unrealized gains on Servicing Related Assets, while the nine-month period reported a $1.8 million net loss, a significant decline from $54.9 million in net income in the prior year, primarily due to higher interest expense and unrealized losses Key Financial Performance Indicators (in thousands) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Jun 30, 2023 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net interest income (expense) | $(473) | $(634) | $(1,267) | $10,712 | | Net servicing income | $10,356 | $10,972 | $32,437 | $31,197 | | Realized gain (loss) on derivatives, net | $20,675 | $11,640 | $26,715 | $(7,158) | | Unrealized loss on RMBS (fair value through earnings), net | $(19,755) | $(6,619) | $(26,566) | $0 | | Unrealized gain (loss) on investments in Servicing Related Assets | $1,578 | $(6,010) | $(13,100) | $30,174 | | Net Income (Loss) | $15,885 | $1,626 | $(1,811) | $54,942 | Interest Income Interest income for Q3 2023 was $12.9 million, an increase of $0.3 million from the prior quarter, and for 9M 2023, it rose by $17.5 million to $37.2 million, driven by new security purchases and portfolio optimization - Interest income for Q3 2023 was $12.9 million, up $333,000 from Q2 2023, due to replacing lower-yielding securities with higher-yielding ones200 - Interest income for 9M 2023 was $37.2 million, an increase of $17.5 million from 9M 2022, primarily due to ATM proceeds used for new security purchases and portfolio yield improvements200 Interest Expense Interest expense for Q3 2023 increased by $0.2 million to $13.4 million compared to the prior quarter due to rising financing rates, and for 9M 2023, it surged by $29.5 million to $38.5 million, driven by higher financing rates and increased repurchase liabilities - Interest expense for Q3 2023 was $13.4 million, up $200,000 from Q2 2023, due to a rise in financing rates218 - Interest expense for 9M 2023 was $38.5 million, an increase of $29.5 million from 9M 2022, due to rising financing rates and increased repurchase liabilities218 Servicing Fee Income Servicing fee income for Q3 2023 decreased by $0.2 million to $13.2 million compared to the prior quarter, while for 9M 2023, it increased by $0.8 million to $40.5 million, both influenced by changes in portfolio size - Servicing fee income for Q3 2023 was $13.2 million, a decrease of $200,000 from Q2 2023, due to changes in the size of the portfolio242 - Servicing fee income for 9M 2023 was $40.5 million, an increase of $805,000 from 9M 2022, due to changes in the size of the portfolio242 Servicing Costs Servicing costs for Q3 2023 increased by $0.4 million to $2.9 million compared to the prior quarter due to changes in MSR portfolio advance expenses, while for 9M 2023, costs decreased by $0.4 million to $8.1 million due to MSR portfolio size changes - Servicing costs for Q3 2023 were $2.9 million, an increase of $400,000 from Q2 2023, due to changes in advance expenses of the MSR portfolio201 - Servicing costs for 9M 2023 were $8.1 million, a decrease of $400,000 from 9M 2022, due to changes in the size of the MSR portfolio201 Realized Loss on RMBS, Net Realized loss on RMBS for Q3 2023 was approximately $10.2 million, a minimal decrease from the prior quarter, and for 9M 2023, the realized loss significantly decreased by $47.5 million to $21.5 million, primarily due to fewer sales of RMBS securities - Realized loss on RMBS for Q3 2023 was approximately $10.2 million, a minimal decrease from Q2 2023219 - Realized loss on RMBS for 9M 2023 was approximately $21.5 million, a decrease of $47.5 million from 9M 2022, due to fewer sales of RMBS securities219 Realized Gain (Loss) on Derivatives, Net Realized gain on derivatives for Q3 2023 increased by $9.0 million to $20.7 million, driven by gains on TBAs and U.S. Treasury Futures, and for 9M 2023, it increased by $33.9 million to $26.7 million, primarily due to gains on TBAs and interest rate swaps periodic income - Realized gain on derivatives for Q3 2023 was approximately $20.7 million, an increase of $9.0 million from Q2 2023, primarily due to increased gains on TBAs and U.S. Treasury Futures243 - Realized gain on derivatives for 9M 2023 was approximately $26.7 million, an increase of $33.9 million from a loss of $7.2 million in 9M 2022, mainly from gains on TBAs and interest rate swaps periodic income243 Unrealized Loss on RMBS, Measured at Fair Value through Earnings, Net Unrealized loss on RMBS measured at fair value through earnings for Q3 2023 increased by $13.1 million to $19.8 million compared to the prior quarter, and for 9M 2023, this loss increased by $26.6 million to $26.6 million, primarily due to changes in interest rates, widening credit spreads, and an increase in fair value-elected RMBS - Unrealized loss on RMBS measured at fair value through earnings for Q3 2023 was approximately $19.8 million, an increase of $13.1 million from Q2 2023221 - Unrealized loss on RMBS measured at fair value through earnings for 9M 2023 was approximately $26.6 million, an increase of $26.6 million from $0 in 9M 2022221 - The increase in unrealized loss was due to changes in interest rates, widening credit spreads, and an increase in the number of RMBS measured at fair value through earnings221 Unrealized Gain (Loss) on Derivatives Unrealized gain on derivatives for Q3 2023 increased by $11.5 million to $18.3 million compared to the prior quarter, while for 9M 2023, unrealized gain decreased by $62.5 million to $12.9 million, both influenced by changes in interest rates and derivative composition - Unrealized gain on derivatives for Q3 2023 was approximately $18.3 million, an increase of $11.5 million from Q2 2023, due to changes in interest rates and derivative composition204 - Unrealized gain on derivatives for 9M 2023 was approximately $12.9 million, a decrease of $62.5 million from $75.4 million in 9M 2022, due to changes in interest rates and derivative composition204 Unrealized Loss on Investments in Servicing Related Assets Unrealized gain on investments in Servicing Related Assets for Q3 2023 was $1.6 million, an improvement of $7.6 million from a loss in the prior quarter, while for 9M 2023, unrealized loss increased by $43.3 million to $13.1 million, mainly due to changes in valuation inputs and underlying loan paydowns - Unrealized gain on Servicing Related Assets for Q3 2023 was approximately $1.6 million, an increase of $7.6 million from a loss in Q2 2023, primarily due to changes in valuation inputs or assumptions244 - Unrealized loss on Servicing Related Assets for 9M 2023 was approximately $13.1 million, an increase of $43.3 million from a gain in 9M 2022, primarily due to changes in valuation inputs or assumptions and paydown of underlying loans244 General and Administrative Expense General and administrative expense for Q3 2023 decreased by $0.4 million to $1.6 million compared to the prior quarter due to lower professional fees, while for 9M 2023, the expense increased by $0.4 million to $5.1 million due to higher professional fees - General and administrative expense for Q3 2023 was $1.6 million, a decrease of $400,000 from Q2 2023, due to lower professional fees245 - General and administrative expense for 9M 2023 was $5.1 million, an increase of $400,000 from 9M 2022, due to higher professional fees245 Net Income Allocated to Noncontrolling Interests in Operating Partnership Net income allocated to noncontrolling interests represented approximately 1.8% of net income for Q3 2023 and 1.9% for 9M 2023, with the decrease in allocation for the nine-month period compared to the prior year attributed to the issuance of additional common stock - Net income allocated to noncontrolling interests was approximately 1.8% of net income for Q3 2023 and 1.9% for 9M 2023246 - The decrease in allocation for the nine-month period was due to the issuance of additional shares of common stock246 Segment Summary Data This section provides a breakdown of financial data by segment, including Servicing Related Assets, RMBS, and All Other categories, showing the net assets and income/loss contributions from each segment and their overall impact on consolidated results Segment Net Assets (in thousands) | Segment | September 30, 2023 | December 31, 2022 | | :--------------------- | :----------------- | :---------------- | | Servicing Related Assets | $116,376 | $166,384 | | RMBS | $105,720 | $95,651 | | All Other | $35,460 | $3,481 | | Total Net Assets | $257,556 | $265,516 | Segment Net Income (Loss) (in thousands) for Three Months Ended September 30, 2023 | Segment | Net Income (Loss) | | :--------------------- | :---------------- | | Servicing Related Assets | $8,890 | | RMBS | $9,626 | | All Other | $(2,631) | | Total Net Income (Loss) | $15,885 | Non-GAAP Financial Measures This section introduces Earnings Available for Distribution (EAD) as a non-GAAP financial measure, defined as GAAP net income (loss) adjusted for various items, with EAD for Q3 2023 increasing slightly QoQ to $4.4 million but decreasing YoY for 9M 2023 to $13.9 million due to higher interest expense and lower TBA drop income - EAD is a non-GAAP measure defined as GAAP net income (loss) adjusted for specific items like realized/unrealized gains/losses on RMBS, derivatives, MSRs, and includes interest rate swap periodic income and TBA drop income250 - EAD is provided for comparability and insight into ongoing operational performance but has limitations and may not be comparable across issuers250 EAD Attributable to Common Stockholders (in thousands, except per share data) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Jun 30, 2023 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Income (Loss) | $15,885 | $1,626 | $(1,811) | $54,942 | | Total EAD | $7,025 | $6,831 | $21,694 | $24,465 | | EAD Attributable to Common Stockholders | $4,435 | $4,237 | $13,894 | $16,562 | | EAD Attributable to Common Stockholders, per Diluted Share | $0.16 | $0.16 | $0.54 | $0.86 | - EAD for the three months ended September 30, 2023, increased by $198,000 QoQ, driven by higher RMBS interest income and lower professional fees251 - EAD for the nine months ended September 30, 2023, decreased by $2.7 million YoY, primarily due to higher interest expense on repurchase agreements and lower TBA drop income251 Our Portfolio The Company's portfolio primarily consists of Fannie Mae and Freddie Mac MSRs with an aggregate UPB of $20.3 billion and Agency RMBS with a total carrying value of $1,016.8 million as of September 30, 2023, with the net interest spread for the RMBS portfolio at 3.60% MSRs Aurora's portfolio of Fannie Mae and Freddie Mac MSRs had an aggregate Unpaid Principal Balance (UPB) of approximately $20.3 billion as of September 30, 2023, with a weighted average coupon of 3.49% and a weighted average maturity of 302 months - Aurora's MSR portfolio consists of Fannie Mae and Freddie Mac MSRs with an aggregate UPB of approximately $20.3 billion as of September 30, 2023226 MSR Collateral Characteristics as of September 30, 2023 | Item | Current Carrying Amount | Current Principal Balance | WA Coupon | WA Servicing Fee | WA Maturity (months) | WA Loan Age (months) | ARMs % | | :--------------------------------- | :---------------------- | :------------------------ | :-------- | :--------------- | :------------------- | :------------------- | :----- | | MSRs | $266,474 | $20,340,103 | 3.49% | 0.25% | 302 | 39 | 0.1% | RMBS The Company's RMBS portfolio had a total carrying value of $1,016.8 million as of September 30, 2023, comprising both available-for-sale and fair value through earnings classifications, with a weighted average coupon of 4.57% and an average maturity of 28 years RMBS Portfolio Characteristics as of September 30, 2023 (in thousands) | Asset Type | Original Face Value | Carrying Value | Number of Securities | Weighted Average Coupon | Weighted Average Yield | Maturity (Years) | | :----------------