Chimera Investment(CIM) - 2022 Q3 - Quarterly Report

Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements of Chimera Investment Corporation, including the Statements of Financial Condition, Operations, Comprehensive Income (Loss), Changes in Stockholders' Equity, and Cash Flows, along with detailed notes explaining the company's organization, accounting policies, and specific financial instruments Consolidated Statements of Financial Condition This statement provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific reporting dates Consolidated Statements of Financial Condition (dollars in thousands) | Item | September 30, 2022 | December 31, 2021 | | :---------------------------------------------------------------------------------------------------------------- | :------------------- | :------------------ | | Assets: | | | | Cash and cash equivalents | $86,234 | $385,741 | | Non-Agency RMBS, at fair value | 1,191,298 | 1,810,208 | | Agency RMBS, at fair value | 38,470 | 60,487 | | Agency CMBS, at fair value | 427,984 | 761,208 | | Loans held for investment, at fair value | 11,707,299 | 12,261,926 | | Total assets | $13,669,320 | $15,407,403 | | Liabilities: | | | | Secured financing agreements | $2,820,931 | $3,261,613 | | Securitized debt, collateralized by Non-Agency RMBS | 79,967 | 87,999 | | Securitized debt at fair value, collateralized by Loans held for investment | 7,354,311 | 7,726,043 | | Total liabilities | $11,015,616 | $11,671,212 | | Stockholders' Equity: | | | | Total stockholders' equity | $2,653,704 | $3,736,191 | | Total liabilities and stockholders' equity | $13,669,320 | $15,407,403 | Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income or loss over specific reporting periods Consolidated Statements of Operations (dollars in thousands, except per share data) | Item | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :------------------------------------------- | :-------- | :-------- | :-------- | :-------- | | Interest income | $188,303 | $220,579 | $585,835 | $716,384 | | Interest expense | 83,464 | 71,353 | 226,403 | 260,029 | | Net interest income | 104,839 | 149,226 | 359,432 | 456,355 | | Net unrealized gains (losses) on derivatives | 10,307 | — | 8,689 | — | | Net unrealized gains (losses) on financial instruments at fair value | (239,513) | 239,524 | (848,925) | 545,643 | | Net income (loss) | $(186,145) | $331,468 | $(610,266) | $652,380 | | Net income (loss) available to common shareholders | $(204,583) | $313,030 | $(665,549) | $597,067 | | Basic EPS | $(0.88) | $1.33 | $(2.84) | $2.57 | | Diluted EPS | $(0.88) | $1.30 | $(2.84) | $2.42 | Consolidated Statements of Comprehensive Income (Loss) This statement presents the company's net income or loss and other comprehensive income or loss, reflecting all changes in equity during a period except those resulting from investments by and distributions to owners Consolidated Statements of Comprehensive Income (Loss) (dollars in thousands) | Item | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :----------------------------------------------------------------- | :-------- | :-------- | :-------- | :-------- | | Net income (loss) | $(186,145) | $331,468 | $(610,266) | $652,380 | | Unrealized gains (losses) on available-for-sale securities, net | (61,526) | (17,198) | (160,850) | (82,065) | | Other comprehensive income (loss) | (61,526) | (17,198) | (160,850) | (119,181) | | Comprehensive income (loss) before preferred stock dividends | $(247,671) | $314,270 | $(771,116) | $533,199 | | Comprehensive income (loss) available to common stock shareholders | $(266,109) | $295,832 | $(826,399) | $477,886 | Consolidated Statements of Changes in Stockholders' Equity This statement outlines the changes in each component of stockholders' equity over specific reporting periods Changes in Total Stockholders' Equity (dollars in thousands) | Period | Beginning Balance | Net Income (Loss) | Other Comprehensive Income (Loss) | Stock Based Compensation | Common Dividends Declared | Preferred Dividends Declared | Ending Balance | | :-------------------------- | :---------------- | :---------------- | :-------------------------------- | :----------------------- | :------------------------ | :--------------------------- | :------------- | | Q3 2022 | $2,972,999 | $(186,145) | $(61,526) | $2,339 | $(55,525) | $(18,438) | $2,653,704 | | 9M 2022 | $3,736,191 | $(610,266) | $(160,850) | $4,731 | $(211,933) | $(55,283) | $2,653,704 | | Q3 2021 | $3,627,431 | $331,468 | $(17,198) | $(973) | $(79,268) | $(18,438) | $3,848,548 | | 9M 2021 | $3,779,386 | $652,380 | $(119,181) | $4,993 | $(228,284) | $(55,313) | $3,848,548 | Consolidated Statements of Cash Flows This statement reports the cash generated and used by the company's operating, investing, and financing activities over specific reporting periods Consolidated Statements of Cash Flows (dollars in thousands) | Activity Type | 9M 2022 | 9M 2021 | | :-------------------------------------- | :-------- | :-------- | | Net cash provided by (used in) operating activities | $299,287 | $410,088 | | Net cash provided by (used in) investing activities | $655,521 | $1,840,841 | | Net cash provided by (used in) financing activities | $(1,254,315) | $(2,191,564) | | Net increase (decrease) in cash and cash equivalents | $(299,507) | $59,365 | | Cash and cash equivalents at end of period | $86,234 | $328,455 | Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements, covering accounting policies, financial instruments, and other disclosures Note 1. Organization This note details the company's formation, operational commencement, and election to be taxed as a real estate investment trust (REIT) - Chimera Investment Corporation was organized in Maryland on June 1, 2007, commenced operations on November 21, 2007, and elected to be taxed as a real estate investment trust (REIT)[45] - The Company is an internally managed REIT primarily engaged in investing in a diversified portfolio of mortgage assets, including residential mortgage loans, Agency RMBS, Non-Agency RMBS, Agency CMBS, and other real estate-related assets[46] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the consolidated financial statements, including consolidation, fair value measurements, and derivative accounting - The consolidated financial statements are prepared in accordance with GAAP and include the Company's accounts, wholly-owned subsidiaries, and Variable Interest Entities (VIEs) where the Company is the primary beneficiary[49][50] - The Company uses securitization trusts considered VIEs, and its risks associated with these VIEs are limited to its retained security holdings and certain sponsor/depositor risks[51][53] - The Company has not yet had any contracts modified to adopt reference rate reform (LIBOR transition) but will evaluate the impact in accordance with ASU No. 2020-4 when such modifications occur[65] Note 3. Mortgage-Backed Securities This note provides details on the company's investments in mortgage-backed securities, including fair value, unrealized gains/losses, credit loss allowances, and delinquency rates MBS Investments Fair Value and Unrealized Gains/Losses (dollars in thousands) | Category | September 30, 2022 Fair Value | September 30, 2022 Net Unrealized Gain/(Loss) | December 31, 2021 Fair Value | December 31, 2021 Net Unrealized Gain/(Loss) | | :---------------- | :---------------------------- | :-------------------------------------------- | :--------------------------- | :--------------------------------------------- | | Non-Agency RMBS | $1,191,298 | $86,758 | $1,810,208 | $428,175 | | Agency RMBS | $38,470 | $(28,898) | $60,487 | $(42,447) | | Agency CMBS | $427,984 | $(25,784) | $761,208 | $43,686 | | Total | $1,657,752 | $32,076 | $2,631,903 | $429,414 | Allowance for Credit Losses on Available-for-Sale Securities (dollars in thousands) | Item | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :---------------------------------------------------------------- | :-------- | :-------- | :-------- | :-------- | | Beginning allowance for credit losses | $4,890 | $508 | $213 | $180 | | Additions to allowance | 851 | 7 | 2,443 | 475 | | Increase/(decrease) on securities with prior allowance | (2,385) | (544) | 636 | (721) | | Ending allowance for credit losses | $3,355 | $122 | $3,355 | $122 | Non-Agency RMBS Delinquency Rates (% of Unpaid Principal Balance) | Delinquency Status | September 30, 2022 | December 31, 2021 | | :----------------- | :----------------- | :---------------- | | 30 Days Delinquent | 2.8% | 3.4% | | 60 Days Delinquent | 1.0% | 1.3% | | 90+ Days Delinquent | 3.3% | 5.5% | | Bankruptcy | 1.2% | 1.3% | | Foreclosure | 3.1% | 2.6% | | REO | 0.6% | 0.4% | | Total | 12.0% | 14.5% | Note 4. Loans Held for Investment This note describes the company's portfolio of loans held for investment, including their fair value, changes in carrying value, and delinquency status - All Loans held for investment are carried at fair value, with changes reflected in earnings, and no loan loss provision is estimated or recorded[98] Changes in Carrying Value of Loans Held for Investment at Fair Value (dollars in thousands) | Item | 9M 2022 | FY 2021 | | :---------------------------- | :---------- | :---------- | | Balance, beginning of period | $12,261,926 | $13,112,129 | | Purchases | 1,625,222 | 3,364,609 | | Principal paydowns | (1,764,067) | (2,652,767) | | Change in fair value | (1,402,600) | 196,603 | | Balance, end of period | $11,707,299 | $12,261,926 | Residential Loan Portfolio Delinquency (dollars in thousands) | Delinquency Status | September 30, 2022 Unpaid Principal Balance | September 30, 2022 % of Unpaid Principal Balance | December 31, 2021 Unpaid Principal Balance | December 31, 2021 % of Unpaid Principal Balance | | :----------------- | :------------------------------------------ | :---------------------------------------------- | :----------------------------------------- | :---------------------------------------------- | | 30 Days Delinquent | $716,864 | 6.1% | $959,481 | 8.7% | | 60 Days Delinquent | $235,250 | 2.0% | $227,593 | 2.1% | | 90+ Days Delinquent | $419,543 | 3.6% | $582,311 | 5.3% | | Total Delinquent | $2,021,643 | 17.2% | $2,273,654 | 20.7% | Note 5. Fair Value Measurements This note explains the methodologies and inputs used to determine the fair value of financial instruments, categorizing them into a three-level hierarchy based on observability - The Company categorizes financial instruments into a three-level fair value hierarchy based on input observability: Level 1 (quoted prices in active markets), Level 2 (observable inputs for similar assets/liabilities), and Level 3 (unobservable and significant inputs)[106][107][108] Fair Value Reconciliation, Level 3 Financial Instruments (dollars in thousands) | Item | Non-Agency RMBS (9M 2022) | Loans held for investment (9M 2022) | Securitized Debt (9M 2022) | | :------------------------------------ | :------------------------ | :-------------------------- | :----------------------- | | Beginning balance Level 3 | $1,810,208 | $12,032,299 | $7,726,043 | | Transfer due to consolidation | (218,276) | 1,047,838 | 774,514 | | Purchases of assets/ issuance of debt | 23,187 | 1,439,348 | 1,029,050 | | Principal payments | (159,149) | (1,587,269) | (1,498,635) | | Net unrealized gains (losses) included in income | (128,644) | (1,399,689) | (679,125) | | Ending balance Level 3 | $1,191,298 | $11,471,225 | $7,354,311 | Sensitivity of Significant Inputs for Level 3 Non-Agency RMBS (Weighted Average) | Input | September 30, 2022 | December 31, 2021 | | :---------------- | :----------------- | :---------------- | | Non-Agency RMBS Senior: | | | | Discount Rate | 6.5% | 3.9% | | Prepay Rate | 8.1% | 11.4% | | CDR | 1.6% | 1.8% | | Loss Severity | 32.4% | 36.6% | | Non-Agency RMBS Subordinated: | | | | Discount Rate | 8.2% | 5.6% | | Prepay Rate | 9.6% | 17.8% | | CDR | 0.4% | 1.1% | | Loss Severity | 37.8% | 40.1% | | Non-Agency RMBS Interest-only: | | | | Discount Rate | 10.1% | 10.3% | | Prepay Rate | 12.4% | 24.9% | | CDR | 1.1% | 1.3% | | Loss Severity | 30.1% | 33.0% | Note 6. Secured Financing Agreements This note details the company's secured financing arrangements, including repurchase agreements and credit facilities, their outstanding balances, collateral, and borrowing rates - Secured financing agreements include short-term repurchase agreements, long-term financing agreements, and loan warehouse credit facilities, collateralized by Agency and Non-Agency MBS and loans[169][170][171][172] Secured Financing Agreements Outstanding (dollars in thousands) | Item | September 30, 2022 | December 31, 2021 | | :----------------------------------------------------------------- | :------------------- | :------------------ | | Secured financing agreements outstanding secured by: | | | | Agency RMBS | $6,141 | $23,170 | | Agency CMBS | 368,554 | 589,535 | | Non-Agency RMBS and Loans held for investment | 2,446,236 | 2,648,908 | | Total | $2,820,931 | $3,261,613 | | MBS pledged as collateral at fair value on Secured financing agreements: | | | | Agency RMBS | $8,048 | $28,320 | | Agency CMBS | 395,286 | 617,457 | | Non-Agency RMBS and Loans held for investment | 3,314,176 | 3,747,573 | | Total | $3,717,510 | $4,393,350 | Secured Financing Agreements Remaining Maturities and Borrowing Rates (September 30, 2022) | Remaining Maturity | Principal (dollars in thousands) | Weighted Average Borrowing Rates | Range of Borrowing Rates | | :----------------- | :------------------------------- | :------------------------------- | :----------------------- | | 1 to 29 days | $425,202 | 3.84% | 2.77% - 6.11% | | 30 to 59 days | 434,926 | 3.40% | 2.74% - 4.13% | | 60 to 89 days | 181,282 | 4.26% | 2.45% - 4.93% | | 90 to 119 days | 146,780 | 4.36% | 3.63% - 5.96% | | 120 to 180 days | 546,867 | 5.18% | 3.98% - 6.06% | | 180 days to 1 year | 596,387 | 4.67% | 4.33% - 5.33% | | 2 to 3 years | 489,487 | 6.79% | 6.79% - 6.79% | | Total | $2,820,931 | 4.77% | | Note 7. Securitized Debt This note provides information on the company's securitized debt, which is collateralized by mortgage loans and RMBS, including repayment schedules and fair value - All securitized debt is collateralized by residential mortgage loans or Non-Agency RMBS and accounted for as secured borrowings, with underlying assets recorded as Company assets and securitized debt as non-recourse liabilities[180] Estimated Principal Repayment Schedule of Securitized Debt Collateralized by Non-Agency RMBS (dollars in thousands) | Maturity | September 30, 2022 | December 31, 2021 | | :--------------- | :------------------- | :------------------ | | Within One Year | $751 | $4,374 | | One to Three Years | 533 | 2,361 | | Three to Five Years | 88 | 949 | | Greater Than Five Years | 84 | 82 | | Total | $1,456 | $7,766 | Estimated Principal Repayment Schedule of Securitized Debt Collateralized by Loans Held for Investment (dollars in thousands) | Maturity | September 30, 2022 | December 31, 2021 | | :--------------- | :------------------- | :------------------ | | Within One Year | $1,799,830 | $2,031,445 | | One to Three Years | 2,705,792 | 2,886,255 | | Three to Five Years | 1,767,557 | 1,697,760 | | Greater Than Five Years | 1,821,698 | 1,145,995 | | Total | $8,094,877 | $7,761,455 | Note 8. Long Term Debt This note outlines the status of the company's long-term debt, specifically convertible senior notes, and their outstanding principal amounts - As of December 31, 2021, all outstanding principal amount on the Company's 7.0% convertible senior notes due 2023 were either converted or acquired, with no outstanding principal amount remaining[195] Note 9. Consolidated Securitization Vehicles and Other Variable Interest Entities This note details the assets, liabilities, income, and expenses associated with the company's consolidated securitization vehicles and variable interest entities (VIEs) Assets and Liabilities of Consolidated VIEs (dollars in thousands) | Item | September 30, 2022 | December 31, 2021 | | :---------------------------------------------------------------- | :------------------- | :------------------ | | Assets: | | | | Non-Agency RMBS, at fair value | $281,055 | $399,048 | | Loans held for investment, at fair value | 10,437,514 | 10,205,587 | | Total Assets | $10,790,005 | $10,666,591 | | Liabilities: | | | | Securitized debt, collateralized by Non-Agency RMBS | $79,967 | $87,999 | | Securitized debt at fair value, collateralized by Loans held for investment | 6,905,913 | 7,118,374 | | Total Liabilities | $7,005,717 | $7,223,655 | Income and Expense Related to Consolidated VIEs (dollars in thousands) | Item | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :------------------------------------------------ | :-------- | :-------- | :-------- | :-------- | | Interest income, Assets of consolidated VIEs | $139,598 | $138,984 | $410,873 | $446,198 | | Interest expense, Non-recourse liabilities of VIEs | 50,030 | 43,525 | 142,714 | 159,666 | | Net interest income | $89,568 | $95,459 | $268,159 | $286,532 | | (Increase) decrease in provision for credit losses | $2,284 | $(365) | $(859) | $(117) | | Servicing fees | $6,701 | $6,561 | $20,256 | $20,244 | - The Company's maximum exposure to loss from unconsolidated VIEs was $865 million at September 30, 2022, down from $1.2 billion at December 31, 2021[204] Note 10. Derivative Instruments This note describes the company's use of derivative instruments, such as interest rate swaps and swaptions, for hedging interest rate risk and their impact on financial statements - The Company uses interest rate swaps and swaptions to economically hedge interest rate risk, with all changes in fair value recognized in earnings as these derivatives are not designated as hedges for GAAP[205][208] Derivative Instruments Fair Value (September 30, 2022, dollars in thousands) | Derivative Instrument | Notional Amount Outstanding | Net Estimated Fair Value/Carrying Value (Assets) | | :-------------------- | :-------------------------- | :----------------------------------------------- | | Interest Rate Swaps | $885,000 | $4,187 | | Swaptions | $1,000,000 | $202 | | Total | $1,885,000 | $4,389 | Effect of Derivatives on Consolidated Statements of Operations (dollars in thousands) | Item | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :------------------------------------------------------- | :-------- | :-------- | :-------- | :-------- | | Net unrealized gains (losses) on derivatives (Interest Rate Swaps) | $3,718 | — | $3,718 | — | | Periodic interest cost of interest rate swaps, net | (122) | — | (122) | — | | Net unrealized gains (losses) on derivatives (Swaptions) | 6,589 | — | 4,971 | — | | Total net gains (losses) on derivatives | $10,185 | — | $8,567 | — | Note 11. Capital Stock This note provides information on the company's capital stock, including dividends declared on preferred stock, common stock repurchases, and earnings per share data Dividends Declared on Preferred Stock (dollars in millions) | Series | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :----- | :------ | :------ | :------ | :------ | | Series A | $3 | $3 | $9 | $9 | | Series B | $7 | $7 | $20 | $20 | | Series C | $5 | $5 | $15 | $15 | | Series D | $4 | $4 | $12 | $12 | | Total | $19 | $19 | $56 | $56 | - The Company repurchased approximately 5.4 million shares of common stock for $49 million during the nine months ended September 30, 2022, with $177 million remaining under the repurchase program[227] Net Income (Loss) Per Share Available to Common Shareholders | Item | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 | | :---------------------------------------------------------------- | :-------- | :-------- | :-------- | :-------- | | Net income (loss) available to common shareholders - Basic (thousands) | $(204,583) | $313,030 | $(665,549) | $597,067 | | Basic EPS | $(0.88) | $1.33 | $(2.84) | $2.57 | | Diluted EPS | $(0.88) | $1.30 | $(2.84) | $2.42 | | Weighted average basic shares outstanding | 231,750,422 | 235,887,296 | 234,671,912 | 232,717,010 | | Weighted average diluted shares outstanding | 231,750,422 | 240,362,602 | 234,671,912 | 247,358,823 | Note 12. Accumulated Other Comprehensive Income This note details the changes in accumulated other comprehensive income (AOCI), primarily related to unrealized gains and losses on available-for-sale securities Changes in Accumulated Other Comprehensive Income (AOCI) (dollars in thousands) | Item | 9M 2022 | 9M 2021 | | :---------------------------------------------------------------- | :-------- | :-------- | | Balance as of December 31 (prior year) | $405,054 | $558,096 | | OCI before reclassifications (Unrealized gains (losses) on securities, net) | (160,850) | (82,065) | | Amounts reclassified from AOCI | — | (37,116) | | Net current period OCI | (160,850) | (119,181) | | Balance as of September 30 | $244,204 | $438,915 | - No amounts were reclassified from AOCI during the nine months ended September 30, 2022, compared to $37 million net unrealized gains on available-for-sale securities sold in the prior year[235] Note 13. Equity Compensation, Employment Agreements and other Benefit Plans This note outlines the company's equity compensation plans, including RSU and PSU grants, and associated stock-based compensation and 401(k) expenses - The Company granted 221 thousand RSU awards with a fair value of $3 million during the nine months ended September 30, 2022, and 128 thousand PSU awards with a fair value of $2 million to senior management[238][240] - Stock-based compensation expenses were $2 million for Q3 2022 and $5 million for 9M 2022[241] - 401(k) expenses were $95 thousand for Q3 2022 and $423 thousand for 9M 2022, with the Company matching 100% of the first 6% of eligible employee contributions[243] Note 14. Income Taxes This note discusses the company's income tax status as a REIT, current tax expenses, and the anticipated impact of recent tax legislation - The Company qualified as a REIT for the year ended December 31, 2021, and generally distributes at least 90% of its annual REIT taxable income to stockholders to maintain this status[244] - Current income tax expense was $4 thousand for Q3 2022 and $28 thousand for 9M 2022, primarily from Taxable REIT Subsidiaries (TRSs)[245] - The Inflation Reduction Act (IRA) is not expected to materially impact the Company's financial statements, as REITs are excluded from the corporate alternative minimum tax (CAMT)[246] Note 15. Credit Risk and Interest Rate Risk This note describes the company's primary market risks, credit risk and interest rate risk, and the strategies employed to manage them, including hedging and collateral arrangements - The Company's primary market risks are credit risk and interest rate risk, which are managed through asset selection, hedging, and matching income with financing costs[248] - Counterparty credit risk from derivatives and secured financing agreements is mitigated by monitoring credit profiles, master netting arrangements, and obtaining collateral[250][252] Liabilities Subject to Master Netting Arrangements (September 30, 2022, dollars in thousands) | Item | Gross Amounts Recognized Liabilities | Gross Amounts Offset in Consolidated Statements of Financial Position | Net Amounts Offset in Consolidated Statements of Financial Position | Gross Amounts Not Offset with Financial Instruments | Cash Collateral Pledged | Net Amount | | :---------------------------------- | :----------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | :---------------------------------- | :---------------------- | :--------- | | Secured financing agreements | $(2,820,931) | — | $(2,820,931) | $3,717,510 | $55,642 | $952,221 | | Interest Rate Swaps - Gross Liabilities | $(470) | $470 | — | — | $7,123 | $7,123 | | Total | $(2,806,042) | $(10,500) | $(2,816,542) | $3,717,510 | $68,444 | $969,412 | Note 16. Commitments and Contingencies This note discloses the company's potential legal claims, obligations, and other contingent liabilities arising in the ordinary course of business - The Company may be involved in various claims and legal actions in the ordinary course of business and has obligations to repurchase assets from VIEs upon breach of certain representations and warranties[255] Note 17. Subsequent Events This note reports on any significant events that occurred after the balance sheet date but before the financial statements were issued - No subsequent events were reported[256] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance and condition, discussing net income, interest income/expense, credit losses, fair value changes, and liquidity Executive Summary This summary introduces the company as a publicly traded REIT, its investment focus on diversified mortgage assets, and its objective of providing attractive risk-adjusted returns - The Company is a publicly traded REIT focused on investing in a diversified portfolio of mortgage assets, including residential mortgage loans (88% of portfolio), Non-Agency RMBS (9%), and Agency MBS (3%) as of September 30, 2022[264][265] - The primary objective is to provide attractive risk-adjusted returns through distributable income and asset performance linked to residential mortgage credit fundamentals, utilizing leverage and managing interest rate risk[264][266] Business Update This section provides an update on recent market conditions, including inflation and interest rate hikes, and the company's strategic responses, such as asset purchases and financing activities - Persistent high inflation and Federal Reserve rate hikes (two 75 basis-point increases in Q3) led to surging mortgage rates, negatively impacting residential mortgage markets[268] - The Company committed to purchase $211 million of Seasoned Re-Performing residential mortgage loans and $476 million Prime Jumbo loans in Q3 2022, with expected Q4 settlement[269] - Financing activities included reducing secured financing borrowings by $328 million, sponsoring a $370 million securitization (CIM 2022-R3) of Seasoned Re-Performing residential mortgage loans, and entering two interest rate swaps ($500 million two-year, $380 million five-year) to hedge borrowing costs[270][271][272] Market Conditions and our Strategy This section discusses the impact of rising interest rates and widening credit spreads on the company's portfolio and outlines its strategy for acquiring new assets, maintaining liquidity, and hedging against interest rate risk - Continued rise in forward interest rates and widening credit spreads in Q3 2022, with the Federal Reserve raising the Federal Funds Rate by 75 basis-points to 3.25% in September[275] - Mark-to-market losses in Agency and Residential Credit portfolios led to a $1.38 decline in book value per common share, reaching $7.44 as of September 30, 2022 (from $8.82 on June 30, 2022)[278] - The Company's strategy focuses on acquiring new assets, maintaining low leverage and ample liquidity, and using hedges to protect against rising interest rates, leading to a reduced common stock dividend of $0.23 per share[279] Business Operations This section analyzes the company's operational performance, including detailed discussions on net income, interest income, interest expense, and other key financial metrics Net Income (Loss) Summary This summary presents the company's net income or loss available to common shareholders and basic/diluted EPS, highlighting the primary drivers of changes in profitability Net Income (Loss) Available to Common Shareholders (dollars in thousands, except per share data) | Item | Q3 2022 | Q2 2022 | QoQ Change | 9M 2022 | 9M 2021 | YoY Change | | :--------------------------------------------------- | :-------- | :-------- | :--------- | :-------- | :-------- | :--------- | | Net income (loss) available to common shareholders | $(204,583) | $(179,765) | $(24,818) | $(665,549) | $597,067 | $(1,262,616) | | Basic EPS | $(0.88) | $(0.76) | $(0.12) | $(2.84) | $2.57 | $(5.41) | | Diluted EPS | $(0.88) | $(0.76) | $(0.12) | $(2.84) | $2.42 | $(5.26) | | Dividends declared per share of common stock | $0.23 | $0.33 | $(0.10) | $0.89 | $0.96 | $(0.07) | - The net loss in Q3 2022 was primarily driven by additional mark-to-market losses on the portfolio's asset prices due to continued increases in interest rates and credit spread widening, partially offset by net interest income[288] - The nine-month net loss was primarily due to $849 million in net unrealized losses on financial instruments at fair value, compared to $546 million in unrealized gains in the prior year[290] Interest Income This section analyzes the trends and factors influencing the company's interest income, including changes in interest-earning assets and yields - Interest income decreased by $7 million (4%) QoQ to $188 million in Q3 2022, driven by a $430 million decline in total average interest-earning assets and lower yields on Non-Agency RMBS and Agency CMBS[292] - Interest income decreased by $130 million (18%) YoY to $586 million for 9M 2022, primarily due to a $916 million reduction in average interest-earning assets, lower prepayment penalties on Agency CMBS, and lower yields on Loans held for investments and Non-Agency RMBS[294][296] Interest Expense This section examines the company's interest expense, focusing on the impact of rising interest rates and de-levering efforts on borrowing costs - Interest expense increased by $5 million (6%) QoQ to $83 million in Q3 2022, primarily due to increases in Federal Funds Rate driving secured financing agreement borrowing rates higher[297] - Interest expense decreased by $34 million (13%) YoY to $226 million for 9M 2022, driven by de-levering efforts to reduce secured financing agreements balances and calls of higher-rate securitized debt[298][299] Economic Net Interest Income This section provides a non-GAAP measure of economic net interest income, analyzing the net interest rate spread and its drivers over various periods - Economic net interest income (non-GAAP) decreased by $13 million QoQ to $104 million in Q3 2022, with the net interest rate spread decreasing by 40 basis points due to higher secured financing agreement borrowing rates[309] - Economic net interest income decreased by $100 million YoY to $359 million for 9M 2022, and the net interest rate spread decreased by 80 basis points, primarily due to declining asset yields and lower prepayment penalties[310][311] Economic Net Interest Income Reconciliation (dollars in thousands) | Item | Q3 2022 | Q2 2022 | Q1 2022 | Q4 2021 | Q3 2021 | | :------------------------------------ | :-------- | :-------- | :-------- | :-------- | :-------- | | GAAP Interest Income | $188,303 | $195,357 | $202,175 | $221,162 | $220,579 | | GAAP Interest Expense | 83,464 | 78,467 | 64,473 | 66,598 | 71,353 | | Periodic Interest Cost of Interest Rate Swaps | 122 | — | — | — | — | | Economic Interest Expense | 83,586 | 78,467 | 64,473 | 66,598 | 71,114 | | Economic Net Interest Income | $104,177 | $116,809 | $137,684 | $154,552 | $149,446 | Provision for Credit Losses This section discusses the company's provision for credit losses, detailing the factors contributing to increases or decreases in expected losses and delinquencies - The Company recorded a $1.5 million decrease in provision for credit losses in Q3 2022, compared to a $4.5 million increase in Q2 2022, primarily due to decreased expected losses and delinquencies[316] - For 9M 2022, there was a $3.2 million increase in provision for credit losses, compared to a $58 thousand decrease in 9M 2021, mainly due to higher expected losses and delinquencies, and increased unrealized losses on certain Non-Agency RMBS[317] Net Unrealized Gains (Losses) on Derivatives This section reports the net unrealized gains or losses on derivative instruments, reflecting their fair value changes due to interest rate fluctuations - Net unrealized gains on derivatives were $10.3 million in Q3 2022, compared to net unrealized losses of $1.6 million in Q2 2022, reflecting changes in market value due to interest rate fluctuations[322] - For 9M 2022, total net gains on derivative instruments were $8.6 million, compared to no derivative instruments in 9M 2021[322] Net Unrealized Gains (Losses) on Financial Instruments at Fair Value This section details the net unrealized gains or losses on financial instruments carried at fair value, highlighting the impact of market conditions on portfolio valuation - Net unrealized losses on financial instruments at fair value were $240 million in Q3 2022, similar to $239 million in Q2 2022, driven by mark-to-market losses in Agency MBS and Residential Credit portfolios[323][326] - For 9M 2022, net unrealized losses totaled $849 million, a significant shift from $546 million in net unrealized gains for 9M 2021, primarily due to increased inflation, yield curve inversion, and widening credit spreads[323][327] Gains and Losses on Sales of Assets This section reports the realized gains and losses from the sale of assets, reflecting portfolio optimization efforts and liquidity management strategies - The Company realized a $37 million loss from the sale of Agency IO investments in Q3 and 9M 2022 as part of portfolio optimization efforts[329] - In 9M 2021, the Company recorded a $45 million realized gain from selling Agency CMBS and Non-Agency RMBS to strengthen liquidity[329] Extinguishment of Securitized Debt This section discusses the acquisition and extinguishment of securitized debt, including any associated net gains or losses - No securitized debt collateralized by Non-Agency RMBS or Loans held for investment was acquired during Q3 or 9M 2022[331][333] - In 9M 2021, the Company acquired $3.9 billion of securitized debt collateralized by Loans held for investment, resulting in a $260 million net loss on extinguishment of debt[333] Compensation, General and Administrative Expenses and Transaction Expenses This section analyzes the trends in compensation, general and administrative expenses, and transaction expenses, often presented as a percentage of average assets Total Compensation, G&A, and Transaction Expenses as % of Average Assets (Annualized) | Period | Total Expenses (thousands) | % of Average Assets | | :--------------------------------- | :------------------------- | :------------------ | | Q3 2022 | $17,177 | 0.50% | | Q2 2022 | $21,530 | 0.59% | | Q1 2022 | $20,868 | 0.54% | | Q4 2021 | $21,275 | 0.54% | | Q3 2021 | $21,426 | 0.54% | - Compensation and benefit costs decreased for 9M 2022 due to a decline in performance-based compensation[335] - Transaction expenses decreased for Q3 and 9M 2022 due to lower call and securitization activity[337] Servicing and Asset Manager Fees This section reports on the servicing and asset manager fees incurred, primarily related to the management of whole loans in consolidated securitization vehicles - Servicing and asset manager fees remained relatively unchanged at $9 million for Q3 2022 and Q2 2022, and $27 million for 9M 2022, primarily related to servicing costs of whole loans in consolidated securitization vehicles[338] Earnings available for distribution This section presents a non-GAAP measure of earnings available for distribution, detailing its components and per-share amounts - Earnings available for distribution (non-GAAP) decreased by $11 million QoQ to $63 million ($0.27 per share) in Q3 2022, driven by increased interest expense due to higher Fed Funds rates and no prepayment penalties[347] Earnings Available for Distribution (dollars in thousands, except per share data) | Item | Q3 2022 | Q2 2022 | Q1 2022 | Q4 2021 | Q3 2021 | | :---------------------------------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | GAAP Net income (loss) available to common stockholders | $(204,583) | $(179,765) | $(281,202) | $(718) | $313,030 | | Net unrealized (gains) losses on financial instruments at fair value | 239,513 | 239,246 | 370,167 | 108,286 | (239,524) | | Net realized (gains) losses on sales of investments | 37,031 | — | — | — | — | | Earnings available for distribution | $62,613 | $73,931 | $93,732 | $110,558 | $102,047 | | Earnings available for distribution per adjusted diluted common share | $0.27 | $0.31 | $0.39 | $0.46 | $0.42 | Net Income (Loss) and Return on Total Stockholders' Equity This section analyzes the company's net income or loss and various return on equity metrics, highlighting the factors influencing profitability relative to equity - Return on average equity decreased by 602 basis points QoQ in Q3 2022, primarily due to lower unrealized asset pricing losses[349] Return on Equity Metrics (Annualized) | Period | Economic Net Interest Income/Average Equity | Earnings available for distribution/Average Common Equity | | :--------------------------------- | :------------------------------------------ | :---------------------------------------------------- | | Q3 2022 | 14.81% | 13.30% | | Q2 2022 | 14.81% | 13.29% | | Q1 2022 | 15.57% | 14.38% | | Q4 2021 | 16.30% | 15.45% | | Q3 2021 | 15.99% | 14.54% | Financial Condition This section provides an overview of the company's financial position, including portfolio composition, liquidity, capital resources, and exposure to financial counterparties Portfolio Review This section reviews the company's investment portfolio, detailing asset purchases, principal payments, and the composition of various asset classes by amortized cost and fair value - During 9M 2022, the Company purchased $1.5 billion of investments and received $2.2 billion in principal payments across its Agency MBS, Non-Agency RMBS, and Loans held for investment portfolios[350] Portfolio Composition (% of Total) | Asset Class | September 30, 2022 Amortized Cost | December 31, 2021 Amortized Cost | September 30, 2022 Fair Value | December 31, 2021 Fair Value | | :------------------------------------ | :-------------------------------- | :------------------------------- | :---------------------------- | :----------------------------- | | Non-Agency RMBS | 7.6% | 10.1% | 8.9% | 12.1% | | Agency RMBS | 0.5% | 0.8% | 0.3% | 0.4% | | Agency CMBS | 3.2% | 5.3% | 3.2% | 5.2% | | Loans held for investment | 88.7% | 83.8% | 87.6% | 82.3% | | Fixed-rate percentage of portfolio | 96.3% | 95.4% | 95.5% | 94.4% | | Adjustable-rate percentage of portfolio | 3.7% | 4.6% | 4.5% | 5.6% | Changes to Net Present Value of Expected Credit Losses (Non-Agency RMBS, dollars in thousands) | Item | Q3 2022 | Q2 2022 | Q1 2022 | Q4 2021 | Q3 2021 | | :-------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Balance, beginning of period | $91,187 | $94,590 | $106,240 | $107,686 | $129,053 | | Increase/(decrease) | 11,136 | (5,108) | (12,503) | (3,387) | (25,518) | | Balance, end of period | $103,394 | $91,187 | $94,590 | $106,240 | $107,686 | Liquidity and Capital Resources This section assesses the company's cash position, cash flow activities, leverage ratios, and the impact of market volatility on secured financing agreements - Cash and cash equivalents decreased from $386 million at December 31, 2021, to $86 million at September 30, 2022, a $228 million decrease[373] - Operating activities provided $299 million in cash for 9M 2022, investing activities provided $656 million, and financing activities used $1.3 billion[374][375][376] - GAAP leverage was 3.9:1 at September 30, 2022 (up from 3.0:1 at December 31, 2021), and recourse leverage was 1.1:1 (up from 0.9:1)[352][377] - The weighted average haircut on secured financing agreements increased across all asset classes from December 31, 2021, to September 30, 2022, reflecting increased perceived risk and market volatility[380] Exposure to Financial Counterparties This section details the company's exposure to various financial counterparties through secured financing agreements, categorized by country and managed for risk mitigation Exposure to Secured Financing Agreements Counterparties (September 30, 2022, dollars in thousands) | Country | Number of Counterparties | Secured Financing Agreement | Exposure (1) | | :-------------- | :----------------------- | :-------------------------- | :----------- | | United States | 9 | $1,422,789 | $498,224 | | Japan | 1 | 717,902 | 258,378 | | Canada | 1 | 406,233 | 113,566 | | Netherlands | 1 | 47,546 | 1,898 | | South Korea | 1 | 122,226 | 6,352 | | Switzerland | 1 | 104,235 | 51,276 | | Total | 14 | $2,820,931 | $929,694 | - The Company actively manages counterparty risk and did not have any exposure exceeding 10% of its equity at September 30, 2022[389][390] Stockholders' Equity This section provides an overview of changes in stockholders' equity, including share repurchase programs, common and preferred dividends declared, and their impact on capital structure - The Company's share repurchase program has $177 million remaining as of September 30, 2022, after repurchasing 5.4 million shares for $49 million during 9M 2022[392] - Common dividends declared were $56 million ($0.23 per share) in Q3 2022 and $212 million ($0.89 per share) for 9M 2022[394] - Preferred dividends declared totaled $19 million for Q3 2022 and $56 million for 9M 2022 across Series A, B, C, and D preferred stocks[395][396][397][398] Restricted Stock Unit and Performance Share Unit Grants This section details the grants of restricted stock units (RSUs) and performance share units (PSUs) to employees and senior management, including their fair value and outstanding amounts - During 9M 2022, the Company granted 221 thousand RSU awards ($3 million fair value) and 128 thousand PSU awards ($2 million fair value) to employees and senior management, respectively[401][402] - As of September 30, 2022, approximately 3.0 million unvested shares of RSUs and PSUs were outstanding[403] Contractual Obligations and Commitments This section outlines the company's contractual obligations, including secured financing agreements and securitized debt, categorized by maturity periods Contractual Obligations (September 30, 2022, dollars in thousands) | Obligation Type | Within One Year | One to Three Years | Three to Five Years | Greater Than or Equal to Five Years | Total | | :---------------------------------------------------------------- | :-------------- | :----------------- | :------------------ | :---------------------------------- | :---------- | | Secured financing agreements | $2,331,444 | $489,487 | — | — | $2,820,931 | | Securitized debt, collateralized by Non-Agency RMBS | 751 | 533 | 88 | 84 | 1,456 | | Securitized debt at fair value, collateralized by Loans held for investment | 1,799,830 | 2,705,792 | 1,767,557 | 1,821,698 | 8,094,877 | | Interest expense on MBS secured financing agreements | 20,026 | 2,491 | — | — | 22,517 | | Interest expense on securitized debt | 208,681 | 299,397 | 176,184 | 169,682 | 853,944 | | Total | $4,360,732 | $3,497,700 | $1,943,829 | $1,991,464 | $11,793,725 | - Unfunded construction loan commitments were $10 million at September 30, 2022, with the majority expected to be paid within one year[410] Capital Expenditure Requirements This section reports on any material commitments for capital expenditures, indicating the company's investment plans for future growth or maintenance - The Company had no material commitments for capital expenditures at September 30, 2022, or December 31, 2021[411] Critical Accounting Estimates This section highlights the critical accounting policies and estimates that require significant judgment, such as revenue recognition, credit loss provisions, and fair value determinations - Critical accounting policies and estimates relate to revenue recognition on investments, including loss recognition, and the determination of fair value for financial instruments[414] - Significant estimates are made in accounting for current expected credit losses of Non-Agency RMBS, valuation of Loans held for investments, Agency and Non-Agency MBS, interest rate swaps, and income recognition[417][418] Recent Accounting Pronouncements This section refers to the notes to consolidated financial statements for a discussion of recently issued accounting guidance and its potential impact on the company - Refer to Note 2 in the Notes to Consolidated Financial Statements for a discussion of recent accounting guidance[419] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the Company's exposure to various market risks, including credit risk, interest rate risk (with specific attention to LIBOR transition, cap, and mismatch risks), prepayment risk, extension risk, basis risk, and market value risk Credit Risk This section describes the company's exposure to credit risk from mortgage-backed securities and residential mortgage loans, and the strategies employed for mitigation - The Company is exposed to credit risk from Non-Agency RMBS and residential mortgage loans, particularly on assets rated below 'AAA' or unrated[422] - Credit risk is mitigated through due diligence, independent review of mortgage files, and quantitative/qualitative analysis of collateral characteristics for Non-Agency RMBS[423][424] Interest Rate Risk This section discusses the impact of interest rate volatility on the company's net interest income, borrowing costs, and asset market values, including the implications of LIBOR transition - Interest rate volatility, driven by inflation and Federal Reserve rate hikes, negatively impacts net interest income, borrowing costs, and market value of assets[425] - The transition from LIBOR to SOFR for LIBOR-based borrowings and adjustable-rate mortgages could result in higher interest costs and increased difficulty in investing, hedging, and risk management[432][435] Projected Percentage Change in Net Interest Income and Market Value (September 30, 2022) | Change in Interest Rate | Projected Percentage Change in Net Interest Income | Projected Percentage Change in Market Value | | :---------------------- | :------------------------------------------------- | :------------------------------------------ | | -100 Basis Points | 5.55% | 6.79% | | -50 Basis Points | 2.62% | 3.25% | | Base Interest Rate | — | — | | +50 Basis Points | (2.37)% | (3.09)% | | +100 Basis Points | (4.78)% | (5.95)% | Prepayment Risk This section explains how changes in prepayment rates affect the amortization of purchase premiums and accretion of discounts on the company's investments - Increased prepayment rates accelerate the amortization of purchase premiums (reducing interest income) and the accretion of discounts (increasing interest income) on investments[447] Extension Risk This section describes the risk that declining prepayment rates in a rising interest rate environment could extend the life of fixed-rate assets beyond hedging terms, negatively impacting financial results - If prepayment rates decrease in a rising interest rate environment, the life of fixed-rate assets could extend beyond hedging instrument terms, negatively impacting results as borrowing costs rise while asset income remains fixed[448] Basis Risk This section defines basis risk as the potential for widening spreads between mortgage-backed securities and hedges, leading to a net decline in book value - Basis risk is the risk that the spread between MBS and hedges widens, causing a greater decline in the fair value of MBS than the increase in fair value of hedges, resulting in a net decline in book value[449] Market Risk This section covers various market risks, including market value fluctuations of available-for-sale securities and real estate market volatility impacting collateral values Market Value Risk This section explains how the fair value of available-for-sale securities is influenced by changes in interest rates, prepayment speeds, market liquidity, and credit quality - The fair value of available-for-sale securities fluctuates due to changes in interest rates, prepayment speeds, market liquidity, and credit quality, with increased volatility in rising interest rate environments or decreased liquidity[452][453] Real Estate Market Risk This section discusses the volatility of residential property values due to economic conditions, local real estate factors, and natural disasters, which can impact collateral value and lead to loan losses - Residential property values are subject to volatility from economic conditions, local real estate factors, and natural disasters, which can reduce collateral value and lead to loan losses[454] Risk Management This section outlines the company's strategies for managing various risks, including monitoring asset/financing re-pricing, diversifying financing agreements, and utilizing derivatives and securitization - Risk management strategies include monitoring and adjusting asset/financing re-pricing, structuring diverse financing agreements, using derivatives (swaps, futures, options), and utilizing securitization for long-term financing[455] Interest Rate Sensitivity Gap (September 30, 2022, dollars in thousands) | Period | Within 3 Months | 3-12 Months | 1 Year to 3 Years | Greater than 3 Years | Total | | :---------------------------------------------------------------- | :-------------- | :---------- | :---------------- | :------------------- | :----------- | | Total rate sensitive assets | $2,219,709 | $7,290,374 | $25,733 | $3,934,402 | $13,470,218 | | Rate sensitive liabilities | 5,249,253 | 4,925,987 | — | 4,187 | 10,179,427 | | Interest rate sensitivity gap | $(3,029,544) | $2,364,387 | $25,733 | $3,930,215 | $3,290,791 | | Cumulative rate sensitivity gap | $(3,029,544) | $(665,157) | $(639,424) | $3,290,791 | | | Cumulative interest rate sensitivity gap as a percentage of total rate sensitive assets | (22)% | (5)% | (5)% | 24% | | Cybersecurity Risk This section describes the company's information security controls, risk assessments, and incident response plan to mitigate cybersecurity threats, acknowledging inherent risks - The Company employs a suite of information security controls, including hardware/software solutions, risk assessments, penetration tests, and an incident response plan, actively monitoring for suspicious activities[461] - Despite security measures, inherent cybersecurity risks remain, exacerbated by remote work environments which have seen increased phishing attempts[462][463] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures and reports on changes in internal control over financial reporting, noting the replacement of an investment accounting sub-ledger system Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion regarding the effectiveness of the company's disclosure controls and procedures as of the reporting date - Management, including the CEO, CFO, and Chief Accounting Officer, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2022[465][466] Changes in Internal Control over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting during the period, such as system replacements - During Q3 2022, the Company replaced its investment accounting sub-ledger system; no other material changes to internal control over financial reporting occurred[466] Part II. OTHER INFORMATION Item 1. Legal Proceedings This section reports on any legal proceedings involving the company during the period - No legal proceedings were reported[468] Item 1A. Risk Factors This section addresses any material changes to the risk factors previously disclosed in the company's annual report - No material changes to the risk factors set forth in the Annual Report on Form 10-K for the year ended December 31, 2021[469] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's share repurchase program, including its authorization, the amount of shares repurchased, and the remaining funds available for future repurchases - The Company's share repurchase program has a $250 million authorization, with approximately $177 million remaining available for future repurchases as of September 30, 2022[470][471] - No shares of common stock were repurchased under the program during the quarter ended September 30, 2022[471] Item 3. Defaults Upon Senior Securities This section reports on any defaults concerning the company's senior securities - No defaults upon senior securities were reported[472] Item 4. Mine Safety Disclosures This section provides any required disclosures related to mine safety - No mine safety disclosures were reported[473] Item 5. Other Information This section includes any other material information not otherwise disclosed in the report - No other information was reported[475] Item 6. Exhibits This section provides a comprehensive list of exhibits filed with the Form 10-Q, including organizational documents, preferred stock certificates, certifications, and XBRL-related documents - The exhibits include Articles of Amendment and Restatement, Articles Supplementary for various preferred stock series, Amended and Restated Bylaws, Specimen Common Stock and Preferred Stock Certificates, and certifications under Sarbanes-Oxley Act[477][479] SIGNATURES This section contains the official signatures of the company's authorized officers, certifying the accuracy and completeness of the report - The report is signed by Mohit Marria, Chief Executive Officer and Chief Investment Officer, and Subramaniam Viswanathan, Chief Financial Officer, on November 3, 2022[482][483]