Chimera Investment(CIM) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for Q1 2024 Item 1. Consolidated Financial Statements This section presents Chimera Investment Corporation's unaudited consolidated financial statements for Q1 2024, covering financial condition, operations, comprehensive income, equity, cash flows, and accounting policies Consolidated Statements of Financial Condition This section presents the Company's consolidated financial position, detailing assets, liabilities, and equity at March 31, 2024, and December 31, 2023 MBS Investments Summary (March 31, 2024) | Metric | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :--------------------------------------------------------------------------------------------------------------------------------------------------------- | :--------------------------- | :------------------------------ | | Cash and cash equivalents | 168,958 | 221,684 | | Non-Agency RMBS, at fair value | 1,059,863 | 1,043,806 | | Agency MBS, at fair value | 65,999 | 102,484 | | Loans held for investment, at fair value | 11,074,519 | 11,397,046 | | Total assets | 12,546,572 | 12,928,998 | | Secured financing agreements | 2,384,678 | 2,432,115 | | Securitized debt, collateralized by Non-Agency RMBS | 73,162 | 75,012 | | Securitized debt at fair value, collateralized by Loans held for investment | 7,336,345 | 7,601,881 | | Total liabilities | 9,900,986 | 10,370,079 | | Total stockholders' equity | 2,645,586 | 2,558,919 | | Total liabilities and stockholders' equity | 12,546,572 | 12,928,998 | - Total assets decreased from $12,928,998 thousand at December 31, 2023, to $12,546,572 thousand at March 31, 2024[9][67] - Total liabilities also decreased from $10,370,079 thousand to $9,900,986 thousand over the same period[9][67] - Stockholders' equity increased from $2,558,919 thousand to $2,645,586 thousand[9][67] Consolidated Statements of Operations This section presents the Company's consolidated results of operations, detailing revenues, expenses, and net income for Q1 2024 and Q1 2023 Consolidated Statements of Operations | Metric | Q1 2024 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------------- | :-------------------- | :-------------------- | | Net interest income | 65,106 | 69,635 | | Increase/(decrease) in provision for credit losses | 1,347 | 3,062 | | Net gains (losses) on derivatives | 10,665 | (39,866) | | Net unrealized gains (losses) on financial instruments at fair value | 76,765 | 64,592 | | Net realized gains (losses) on sales of investments | (3,750) | (5,264) | | Total other gains (losses) | 88,366 | 21,888 | | Total other expenses | 22,663 | 31,095 | | Net income (loss) | 129,454 | 57,366 | | Net income (loss) available to common shareholders | 111,016 | 38,928 | | Basic EPS | 0.46 | 0.17 | | Diluted EPS | 0.45 | 0.17 | - Net income increased significantly to $129,454 thousand in Q1 2024 from $57,366 thousand in Q1 2023, primarily driven by a substantial increase in net gains on derivatives and net unrealized gains on financial instruments at fair value[25] - Net interest income slightly decreased, and total other expenses were lower[25] Consolidated Statements of Comprehensive Income (Loss) This section presents the Company's consolidated comprehensive income (loss), including net income and other comprehensive income, for Q1 2024 and Q1 2023 Consolidated Statements of Comprehensive Income (Loss) | Metric | Q1 2024 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------------- | :-------------------- | :-------------------- | | Net income (loss) | 129,454 | 57,366 | | Unrealized gains (losses) on available-for-sale securities, net | (221) | (5,905) | | Other comprehensive income (loss) | (221) | (4,590) | | Comprehensive income (loss) before preferred stock dividends | 129,233 | 52,776 | | Comprehensive income (loss) available to common stock shareholders | 110,795 | 34,338 | - Comprehensive income available to common shareholders increased to $110,795 thousand in Q1 2024 from $34,338 thousand in Q1 2023, reflecting the higher net income despite a smaller unrealized loss on available-for-sale securities[26] Consolidated Statements of Changes in Stockholders' Equity This section details changes in the Company's consolidated stockholders' equity, reflecting net income, other comprehensive income, and dividends, for Q1 2024 Consolidated Statements of Changes in Stockholders' Equity | Metric | December 31, 2023 ($ thousands) | March 31, 2024 ($ thousands) | | :------------------------------------ | :------------------------------ | :--------------------------- | | Total Stockholders' Equity (Beginning) | 2,558,919 | 2,558,919 | | Net income (loss) | 129,454 | 129,454 | | Other comprehensive income (loss) | (221) | (221) | | Stock based compensation | 2,983 | 2,983 | | Common dividends declared | (27,111) | (27,111) | | Preferred dividends declared | (18,438) | (18,438) | | Total Stockholders' Equity (Ending) | 2,645,586 | 2,645,586 | - Stockholders' equity increased from $2,558,919 thousand at December 31, 2023, to $2,645,586 thousand at March 31, 2024, primarily due to net income, partially offset by common and preferred dividends declared[13] Consolidated Statements of Cash Flows This section presents the Company's consolidated cash flows from operating, investing, and financing activities for Q1 2024 and Q1 2023 Cash Flow Activity | Cash Flow Activity | Q1 2024 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------ | :-------------------- | :-------------------- | | Net cash provided by (used in) operating activities | 57,274 | 30,441 | | Net cash provided by (used in) investing activities | 248,336 | (82,009) | | Net cash provided by (used in) financing activities | (358,336) | 19,360 | | Net increase (decrease) in cash and cash equivalents | (52,726) | (32,208) | | Cash and cash equivalents at end of period | 168,958 | 232,392 | - Operating cash flow increased to $57,274 thousand in Q1 2024 from $30,441 thousand in Q1 2023[47][63] - Investing activities shifted from a net use of $82,009 thousand in Q1 2023 to a net provision of $248,336 thousand in Q1 2024, mainly due to higher principal payments received and sales of Agency MBS[47][63] - Financing activities used $358,336 thousand in Q1 2024, compared to providing $19,360 thousand in Q1 2023, primarily due to repayments of securitized debt and secured financing agreements[47][63] Notes to Consolidated Financial Statements This section provides detailed disclosures on the Company's organization, accounting policies, financial instruments, and other relevant financial information 1. Organization Chimera Investment Corporation, a Maryland-organized REIT, primarily invests in diversified mortgage assets, including residential mortgage loans and various MBS, through its subsidiaries - The Company was organized in Maryland on June 1, 2007, and commenced operations on November 21, 2007, electing to be taxed as a real estate investment trust (REIT)[69] - The Company's primary business is 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[30] - The Company conducts operations through various subsidiaries, including twelve wholly-owned direct subsidiaries, some of which are taxable REIT subsidiaries (TRSs)[49] 2. Summary of the Significant Accounting Policies This section outlines the Company's significant accounting policies, covering basis of presentation, consolidation, financial statement presentation, use of estimates, and recent accounting pronouncements - The consolidated financial statements are prepared in accordance with GAAP and include the Company's accounts, its wholly-owned subsidiaries, and VIEs where the Company is the primary beneficiary[32][50] - The preparation of financial statements requires significant estimates and assumptions, particularly for income recognition, valuation of MBS and loans, and secured financing agreements[36][71] - The Company evaluated ASUs issued in Q1 2024 and determined none are applicable[57] (a) Basis of Presentation and Consolidation This section describes the Company's basis for preparing consolidated financial statements, including wholly-owned subsidiaries and primary beneficiary VIEs - The consolidated financial statements include the Company's accounts, its wholly-owned subsidiaries, and variable interest entities (VIEs) where the Company is the primary beneficiary, with all intercompany balances eliminated[32] - The Company consolidates VIEs where it has the power to direct activities that most significantly impact economic performance and the obligation to absorb losses or right to receive benefits significant to the VIE[52][70] (b) Statements of Financial Condition Presentation This section explains how the Consolidated Statements of Financial Condition present assets and liabilities, including consolidated securitization vehicles, with VIE asset restrictions - The Consolidated Statements of Financial Condition include both the Company's direct assets and liabilities and those of consolidated securitization vehicles, with retained beneficial interests eliminated[35] - Assets of consolidated VIEs are restricted to satisfy their own obligations, and liabilities of consolidated VIEs are non-recourse to the Company[35][53] (c) Use of Estimates This section highlights that financial statement preparation requires management estimates and assumptions, which, if actual conditions differ, could materially impact results - Financial statement preparation requires management to make estimates and assumptions, which, if actual conditions differ, could materially impact financial results[71] - Significant estimates are made in accounting for income recognition and valuation of various financial instruments, including MBS, residential mortgage loans, secured financing agreements, and securitized debt[36] (d) Significant Accounting Policies This section confirms no significant changes to accounting policies from the 2023 Form 10-K and notes no material unrecognized tax positions - No significant changes to accounting policies from the 2023 Form 10-K, except for those discussed in the report[37] - The Company has no material unrecognized tax positions and no accruals for penalties and interest as of March 31, 2024, or December 31, 2023[39] (e) Recent Accounting Pronouncements This section states that the Company evaluated recent FASB accounting standards updates issued in Q1 2024 and determined none are applicable - The Company evaluated accounting standards updates (ASUs) issued by FASB during Q1 2024 and determined none are applicable[57] 3. Mortgage-Backed Securities This section details the Company's MBS portfolio, including Non-Agency RMBS and Agency MBS, providing cost, fair value, unrealized gains/losses, and credit loss allowances MBS Investments Summary (March 31, 2024) | Category | Amortized Cost ($ thousands) | Allowance for Credit Losses ($ thousands) | Fair Value ($ thousands) | Net Unrealized Gain/(Loss) ($ thousands) | | :--------------- | :--------------------------- | :---------------------------------------- | :----------------------- | :--------------------------------------- | | Non-Agency RMBS | 986,693 | (19,907) | 1,059,863 | 93,077 | | Agency MBS | 76,129 | — | 65,999 | (10,128) | | Total | 1,062,822 | (19,907) | 1,125,862 | 82,947 | MBS Investments Summary (December 31, 2023) | Category | Amortized Cost ($ thousands) | Allowance for Credit Losses ($ thousands) | Fair Value ($ thousands) | Net Unrealized Gain/(Loss) ($ thousands) | | :--------------- | :--------------------------- | :---------------------------------------- | :----------------------- | :--------------------------------------- | | Non-Agency RMBS | 963,915 | (18,560) | 1,043,806 | 98,451 | | Agency MBS | 114,824 | — | 102,484 | (12,339) | | Total | 1,078,739 | (18,560) | 1,146,290 | 86,111 | - Gross unrealized losses on Non-Agency RMBS (excluding fair value option) were $15 million at March 31, 2024, and $18 million at December 31, 2023[75] - The Company concluded these were non-credit related and recoverable[75] - The allowance for credit losses on Non-Agency RMBS increased to $19,907 thousand in Q1 2024 from $18,560 thousand in Q4 2023, primarily due to increases in expected losses and delinquencies[603][604] 4. Loans Held for Investment This section describes the Company's loans held for investment portfolio, primarily seasoned residential mortgage loans, detailing carrying value changes and delinquency rates - Loans held for investment are primarily seasoned reperforming residential mortgage loans, jumbo prime, investor, and business purpose loans[89][119] Loans Held for Investment Carrying Value | Metric | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :------------------------------------ | :--------------------------- | :------------------------------ | | Balance, beginning of period | 11,397,046 | 11,359,236 | | Principal paydowns | (306,064) | (1,417,787) | | Sales and settlements | (77,034) | (246) | | Change in fair value | 74,026 | 85,311 | | Balance, end of period | 11,074,519 | 11,397,046 | Residential Loan Portfolio Delinquency Summary | Delinquency Status | March 31, 2024 (% of Unpaid Principal Balance) | December 31, 2023 (% of Unpaid Principal Balance) | | :----------------- | :--------------------------------------------- | :------------------------------------------------ | | 30 Days Delinquent | 6.4% | 6.4% | | 60 Days Delinquent | 2.0% | 2.0% | | 90+ Days Delinquent | 2.8% | 2.8% | | Bankruptcy | 1.5% | 1.5% | | Foreclosure | 2.9% | 2.9% | | REO | 0.3% | 0.2% | | Total | 15.9% | 15.8% | 5. Fair Value Measurements This section details the Company's fair value measurement practices, categorizing financial instruments into a three-level hierarchy and describing valuation methodologies - The Company categorizes financial instruments into a three-level fair value hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable and significant inputs)[95][114][115] - Fair values for MBS and securitized debt are determined using discounted cash flow models incorporating factors like coupon, prepayment speeds, loan characteristics, and expected interest rates, corroborated by third-party pricing[98][124][149] - Non-Agency RMBS and securitized debt collateralized by Loans held for investment are classified as Level 3 due to significant unobservable inputs like weighted average discount rates, prepayment rates, constant default rates (CDR), and loss severity[99][148][150][164] - Loans held for investment (excluding business purpose loans) are classified as Level 3, while Agency MBS and business purpose loans are classified as Level 2[99][122][123] Fair Value Hierarchy This section explains the Company's three-level fair value hierarchy for financial instruments, based on input observability, and notes Level 3 sensitivity - The Company categorizes financial instruments into a three-level fair value hierarchy based on the priority of valuation inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable and significant inputs)[114][115] - Fair value measurements categorized within Level 3 are sensitive to changes in assumptions, and the Company reviews valuation methodologies to ensure appropriateness[96] Valuation Methodologies This section describes valuation methodologies for MBS, loans, securitized debt, and derivatives, using internal models and third-party pricing - For MBS, fair value is determined using discounted cash flows with an internal pricing model, corroborated by independent third-party pricing services[98][99][117][118] - Agency MBS are Level 2, while Non-Agency RMBS are Level 3[99][117][118] - Loans held for investment (seasoned reperforming, jumbo prime, investor loans) are valued using an internally developed model adjusted by loan factors, corroborated by third-party pricing, and classified as Level 3[100][101][102][119][120][121][122] - Business purpose loans are valued based on recent purchase prices adjusted for observable market activity for similar assets, classified as Level 2[123][146] - Securitized debt collateralized by Loans held for investment and Non-Agency RMBS are valued using discounted cash flow models, similar to MBS, and are classified as Level 3[124][148][149][150] - Interest rate swaps and swaptions are valued using market prices or option pricing models, with inputs classified as Level 2[153] - Secured financing agreements are valued using contractual obligations plus accrued interest (Level 2) or at fair value based on market interest rates (Level 2)[131][132] - Equity method investments are not carried at fair value but their fair value characteristics are classified as Level 3 inputs[135][156] Fair Value Level 3 Rollforward This section presents the rollforward of Level 3 financial instruments, detailing changes in assets and liabilities for Q1 2024 Fair Value Level 3 Rollforward - Assets (Q1 2024) | Metric | Non-Agency RMBS ($ thousands) | Loans held for investment ($ thousands) | | :------------------------------------------ | :---------------------------- | :------------------------------------ | | Beginning balance Level 3 (Dec 31, 2023) | 1,043,806 | 11,125,052 | | Purchases of assets | 34,144 | — | | Principal payments | (18,672) | (271,304) | | Sales and Settlements | — | (1,446) | | Net unrealized gains (losses) included in income | (5,153) | 73,535 | | Ending balance Level 3 (Mar 31, 2024) | 1,059,863 | 10,912,604 | Fair Value Level 3 Rollforward - Liabilities (Q1 2024) | Metric | Securitized Debt ($ thousands) | | :------------------------------------------ | :----------------------------- | | Beginning balance Level 3 (Dec 31, 2023) | 7,601,881 | | Principal payments | (272,668) | | Net accretion (amortization) | 5,792 | | Net unrealized (gains) losses included in income | 1,340 | | Ending balance Level 3 (Mar 31, 2024) | 7,336,345 | - No transfers into or out of Level 3 occurred during Q1 2024 or the year ended December 31, 2023[159] Significant Unobservable Inputs This section identifies significant unobservable inputs for Non-Agency RMBS, securitized debt, and loans, including discount rates, prepayment rates, and loss severity - Significant unobservable inputs for Non-Agency RMBS and securitized debt include weighted average discount rates, prepayment rates, constant default rates (CDR), and loss severity[138][164] - Discount rates reflect time value of money and risk, with higher uncertainty leading to higher rates[139][140] - Prepayment rates are based on collateral balance expected to prepay, influenced by interest rates and loan characteristics[139][140] - CDR represents the annualized default rate on mortgages, impacting expected cash flows[141][142][162][163] - Loss severity reflects expected loss from foreclosure and liquidation, with increases decreasing expected cash flows[141][142][162][163] - Significant unobservable factors for Loans held for investment include coupon, FICO score, loan-to-value (LTV) ratios, owner occupancy status, and property type, which are subjective and change with market conditions[167][168][189] Financial instruments not carried at fair value This section lists financial instruments not carried at fair value, including equity method investments, secured financing agreements, and certain securitized debt Financial Instruments Not Carried at Fair Value (March 31, 2024) | Instrument | Level in Fair Value Hierarchy | Carrying Amount ($ thousands) | Fair Value ($ thousands) | | :---------------------------------- | :---------------------------- | :---------------------------- | :----------------------- | | Equity method investments | 3 | 59,623 | 59,623 | | Secured financing agreements | 2 | 2,045,098 | 2,074,211 | | Securitized debt, collateralized by Non-Agency RMBS | 3 | 73,162 | 48,898 | Financial Instruments Not Carried at Fair Value (December 31, 2023) | Instrument | Level in Fair Value Hierarchy | Carrying Amount ($ thousands) | Fair Value ($ thousands) | | :---------------------------------- | :---------------------------- | :---------------------------- | :----------------------- | | Equity method investments | 3 | 45,053 | 45,053 | | Secured financing agreements | 2 | 2,081,877 | 2,111,855 | | Securitized debt, collateralized by Non-Agency RMBS | 3 | 75,012 | 50,430 | 6. Secured Financing Agreements This section details the Company's secured financing agreements, including repurchase agreements and loan warehouse facilities, covering collateral, margin call mitigation, and counterparty exposure - Secured financing agreements include short-term repurchase agreements, long-term financing agreements, and loan warehouse credit facilities[170] - The Company uses non-mark-to-market (non-MTM) facilities ($902 million at March 31, 2024) and limited mark-to-market (limited MTM) facilities ($537 million at March 31, 2024) to mitigate margin call risk[172][416] Secured Financing Agreements Outstanding Principal | Collateral Type | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :------------------------------------ | :--------------------------- | :------------------------------ | | Agency CMBS | 36,434 | 68,502 | | Non-Agency RMBS and Loans held for investment | 2,367,244 | 2,375,589 | | Total | 2,403,678 | 2,444,091 | - The Company was in compliance with all covenants as of March 31, 2024, and had $2.1 billion in unused uncommitted warehouse credit facilities[196] 7. Securitized Debt This section outlines the Company's securitized debt, collateralized by residential mortgage loans or Non-Agency RMBS, detailing principal balances, coupons, and maturity schedules - All securitized debt is collateralized by residential mortgage loans or Non-Agency RMBS and accounted for as secured borrowings, recorded as non-recourse liabilities[200] Securitized Debt Collateralized by Non-Agency RMBS | Metric | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :------------------------------------ | :--------------------------- | :------------------------------ | | Principal balance | 110,000 | 110,000 | | Weighted average coupon | 6.7% | 6.7% | | Maturities | 2036-2037 | 2036-2037 | Securitized Debt Collateralized by Loans Held for Investment | Metric | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :------------------------------------ | :--------------------------- | :------------------------------ | | Principal balance | 8,116,880 | 8,389,563 | | Weighted average coupon | 3.4% | 3.4% | | Maturities | 2029-2067 | 2029-2067 | - The Company did not acquire any securitized debt collateralized by Non-Agency RMBS or Loans held for investment during Q1 2024[177][228][424] 8. Consolidated Securitization Vehicles and Other Variable Interest Entities This section discusses the Company's involvement with Variable Interest Entities (VIEs) for securitization, distinguishing between consolidated and unconsolidated VIEs, and presenting their financial impact - The Company uses VIEs for securitizing mortgage loans and re-securitizing RMBS to obtain long-term, non-recourse financing[210] Consolidated VIEs Assets and Liabilities | Metric | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :---------------------------------------------------------------------------- | :--------------------------- | :------------------------------ | | Total Assets of consolidated VIEs | 10,299,963 | 10,501,840 | | Total Liabilities of consolidated VIEs | 7,093,458 | 7,349,109 | Consolidated VIEs Income and Expense | Metric | Q1 2024 ($ thousands) | Q1 2023 ($ thousands) | | :--------------------------------- | :-------------------- | :-------------------- | | Interest income, Assets of consolidated VIEs | 146,917 | 139,902 | | Interest expense, Non-recourse liabilities of VIEs | 73,123 | 60,152 | | Net interest income | 73,794 | 79,750 | | Servicing fees | 6,865 | 7,126 | - The Company's maximum exposure to loss from unconsolidated VIEs was $796 million at March 31, 2024, and $772 million at December 31, 2023, determined as the amortized cost of the investment[235] 9. Derivative Instruments This section details the Company's use of derivative financial instruments, including interest rate swaps and swaptions, to economically hedge interest rate risk and manage counterparty risk - The Company uses interest rate swaps, swaptions, and U.S. Treasury futures to economically hedge interest rate risk, with all changes in fair value recognized in earnings[215][236] - In Q1 2024, the Company exercised two swaption contracts with $1.0 billion notional into two one-year swaps with a weighted average 3.46% fixed pay rate[264][388] Net Gains (Losses) on Derivatives | Derivative Type | Q1 2024 ($ thousands) | Q1 2023 ($ thousands) | | :--------------------------------- | :-------------------- | :-------------------- | | Net unrealized gains (losses) on derivatives | 5,189 | (8,551) | | Realized gains (losses) on derivatives | — | (34,134) | | Periodic interest cost of swaps, net | 5,476 | 2,819 | | Total net gains (losses) on derivatives | 10,665 | (39,866) | - The Company manages counterparty credit risk by monitoring credit profiles, executing master netting arrangements, and obtaining collateral[216][259] 10. Capital Stock This section details the Company's capital stock, including common and preferred shares, dividend declarations, the share repurchase program, and EPS calculations - Common dividends declared were $27 million ($0.11 per share) in Q1 2024, down from $54 million ($0.23 per share) in Q1 2023[246][456] - Preferred dividends declared for Series A, B, C, and D preferred stockholders remained consistent at $3 million, $7 million, $5 million, and $4 million, respectively, for both Q1 2024 and Q1 2023[222][269][241][488][489][457][596] - The share repurchase program was increased to $250 million in January 2024 to include preferred stock[244][245][485][583] - As of March 31, 2024, $217 million remains available for repurchase[244][245][485][583] - LIBOR-indexed preferred stock dividends (Series B, C, D) will transition to three-month CME Term SOFR plus a spread adjustment, with effective dates in March 2024 and September 2025[243][490] Net Income (Loss) Per Share Available to Common Shareholders | Metric | Q1 2024 | Q1 2023 | | :---------------------------------------------------------- | :------ | :------ | | Net income (loss) available to common shareholders - Basic ($ thousands) | 111,016 | 38,928 | | Basic EPS | 0.46 | 0.17 | | Diluted EPS | 0.45 | 0.17 | | Weighted average basic shares | 243,718,142 | 231,994,620 | | Weighted average diluted shares | 245,154,643 | 235,201,614 | 11. Accumulated Other Comprehensive Income This section presents changes in Accumulated Other Comprehensive Income (AOCI), primarily from unrealized gains and losses on available-for-sale securities, showing a slight Q1 2024 decrease Accumulated Other Comprehensive Income (AOCI) Rollforward | Metric | March 31, 2024 ($ thousands) | March 31, 2023 ($ thousands) | | :------------------------------------------ | :--------------------------- | :--------------------------- | | Balance as of December 31 | 185,668 | 229,345 | | OCI before reclassifications | (221) | (5,905) | | Amounts reclassified from AOCI | — | 1,315 | | Net current period OCI | (221) | (4,590) | | Balance as of March 31 | 185,447 | 224,755 | - AOCI decreased from $185,668 thousand at December 31, 2023, to $185,447 thousand at March 31, 2024, due to net unrealized losses on available-for-sale securities[249] - No amounts were reclassified from AOCI during Q1 2024, compared to $1 million net unrealized losses reclassified in Q1 2023[249] 12. Equity Compensation, Employment Agreements and other Benefit Plans This section outlines the Company's equity compensation plans, including the 2023 Equity Incentive Plan, RSUs, and PSUs, designed to align compensation with performance, and details the 401(k) plan - The 2023 Equity Incentive Plan, approved in June 2023, authorized up to 20,000,000 common shares for awards, replacing the Prior Plan[277] - RSU awards granted to senior management in Q1 2024 totaled 537 thousand units with a fair value of $3 million, vesting over three years[279][492] - PSU awards granted in Q1 2024 totaled 537 thousand units with a fair value of $3 million, with final shares awarded based on Company Economic Return and share price performance over a three-year period[253][280][462][493] - Stock-based compensation expense was $3 million for both Q1 2024 and Q1 2023[254] - The Company matches 100% of the first 6% of eligible compensation deferred by employees in its 401(k) plan, with expenses of $150 thousand in Q1 2024 and $133 thousand in Q1 2023[282] 13. Income Taxes This section outlines the Company's income tax status as a REIT, generally exempt from U.S. federal income tax if it distributes 90% of taxable income, and notes TRSs are taxed - As a REIT, the Company is generally not subject to U.S. federal income tax if it distributes at least 90% of its annual REIT taxable income[314] - Taxable REIT Subsidiaries (TRSs) are subject to U.S. federal, state, and local taxes[283] - The Company recorded current income tax expense of $8 thousand for Q1 2024, with no expense or benefit in Q1 2023[257] 14. Credit Risk and Interest Rate Risk This section addresses the Company's primary market risks: credit risk and interest rate risk, describing strategies to minimize credit risk and mitigate interest rate risk through hedging - The Company's primary market risks are credit risk and interest rate risk[316] - Credit risk is minimized through due diligence, asset selection, portfolio monitoring, compliance with regulatory requirements, geographic diversification, owner-occupied property focus, and moderate loan-to-value ratios[285] - Interest rate risk is minimized through asset selection, hedging (e.g., interest rate swaps), and matching income on mortgage assets with financing costs[316] - Counterparty credit risk from derivatives and secured financing agreements is managed by evaluating counterparty credit, executing master netting arrangements, and obtaining collateral[259][317] 15. Commitments and Contingencies This section states the Company may be involved in ordinary course legal actions and has obligations to repurchase assets under securitization transactions for breached representations - The Company may be involved in various claims and legal actions arising in the ordinary course of business[319] - The Company has obligations to repurchase assets from VIEs upon breach of certain representations and warranties in securitization transactions[319] - No material legal proceedings are reported[320] 16. Subsequent Events This section indicates that there are no subsequent events to report 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 condition and results of operations for Q1 2024, including income, expenses, liquidity, capital, and critical accounting estimates Special Note Regarding Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to risks and uncertainties, based on beliefs and assumptions that may differ from actual results - The report contains forward-looking statements subject to risks and uncertainties, including future business results, financial condition, liquidity, and objectives[291] - These statements are based on beliefs, assumptions, and expectations that can change, and actual results may vary materially[325] - The Company is not obligated to update or revise any forward-looking statements, except as required by law[325] Executive Summary This section provides an overview of the Company's business as a REIT, its investment activities, financial performance highlights, and strategic posture for Q1 2024 - The Company is a publicly traded REIT primarily investing in residential mortgage loans, Non-Agency RMBS, and Agency MBS, using leverage to increase potential returns[295][327] - In Q1 2024, the Company invested $34 million in subordinated tranches of new issue mortgage securitizations and settled $78 million of residential transition loans[299] - Secured financings decreased by $47 million in Q1 2024, including a $10 million prepayment on a longer-term facility[300] - The Company exercised two $500 million swaptions into pay-fixed one-year swaps to hedge against rising interest rates[330] - Book value per common share increased to $7.11 as of March 31, 2024, from $6.75 as of December 31, 2023, with an Economic Return of 7.0% for Q1 2024[304] - The Company maintains a defensive posture, reducing repurchase agreements and adding swaptions to hedge future liabilities, while seeking long-term, limited, or non-mark-to-market finance facilities for securitization notes[305][306][334] Results of Operations This section analyzes the Company's financial performance for Q1 2024 compared to prior periods, focusing on net income, interest income/expense, credit losses, and derivative gains/losses Net Income (Loss) Summary Net income available to common shareholders significantly increased in Q1 2024 compared to prior periods, driven by unrealized gains on financial instruments and net gains on derivatives Net Income (Loss) Summary | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Net income (loss) available to common shareholders | 111,016 | 12,104 | 38,928 | | Basic EPS | 0.46 | 0.05 | 0.17 | | Diluted EPS | 0.45 | 0.05 | 0.17 | - Net income available to common shareholders increased by $98.9 million QoQ (Q1 2024 vs Q4 2023) and $72.1 million YoY (Q1 2024 vs Q1 2023)[338][367][368] - The increase in net income was primarily driven by $70 million increase in unrealized gains on financial instruments at fair value and $21 million increase in net gains on derivatives QoQ[340] Interest Income Interest income decreased slightly in Q1 2024 compared to prior periods, primarily due to a decline in average interest-earning assets, partially offset by higher yields Interest Income Trends | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :------------- | :-------------------- | :-------------------- | :-------------------- | | Interest income | 186,574 | 191,204 | 189,250 | - Interest income decreased by $4.6 million QoQ (Q1 2024 vs Q4 2023) and $2.7 million YoY (Q1 2024 vs Q1 2023)[338] - The QoQ decrease was primarily due to a $272 million decline in average interest earning asset balances to $12.7 billion[313] - The YoY decrease was due to reduced asset balances (Loans held for investments down $690 million, Agency MBS down $247 million, Non-Agency RMBS down $29 million), partially offset by a 30 basis point increase in average asset yields to 5.8%[370] Interest Expense Interest expense decreased in Q1 2024 compared to Q4 2023 due to de-levering, but slightly increased YoY due to a shift to higher-rate securitized debt Interest Expense Trends | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :--------------- | :-------------------- | :-------------------- | :-------------------- | | Interest expense | 121,468 | 126,553 | 119,615 | - Interest expense decreased by $5.1 million QoQ (Q1 2024 vs Q4 2023) and increased by $1.8 million YoY (Q1 2024 vs Q1 2023)[338] - The QoQ decrease was driven by a $340 million reduction in average interest-bearing liabilities to $10.6 billion due to de-levering efforts[372] - The YoY increase was due to a $13 million increase in securitized debt interest expense, as average borrowing rates on securitizations increased by 60 basis points and balances rose by $157 million, despite a $787 million decrease in average secured financing agreements[373] Economic Net Interest Income Economic net interest income, a non-GAAP measure, remained stable QoQ and decreased slightly YoY, with the net interest rate spread unchanged YoY but slightly decreased QoQ - Economic net interest income decreased slightly by $295 thousand QoQ (Q1 2024 vs Q4 2023) to $68 million[351] - Economic net interest income decreased by $1 million YoY (Q1 2024 vs Q1 2023) to $68 million[352] - Net interest rate spread decreased by 10 basis points QoQ to 1.4% and remained unchanged YoY at 1.4%[351][352] - Net interest margin remained unchanged QoQ at 2.1% and increased by 10 basis points YoY to 2.1%[351][352] Provision for Credit Losses The provision for credit losses increased in Q1 2024 compared to prior periods, primarily due to higher expected losses, delinquencies, and increased unrealized losses on Non-Agency RMBS Provision for Credit Losses | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Increase (decrease) in provision for credit losses | 1,347 | 2,330 | 3,062 | - The increase in provision for credit losses in Q1 2024 was primarily due to higher expected losses and delinquencies, and increased unrealized losses on certain Non-Agency RMBS positions[355] Net Gains (Losses) on Derivatives The Company recognized net gains on derivatives in Q1 2024, a significant improvement from prior quarters, driven by unrealized gains from interest rate movements and swaption exercises Net Gains (Losses) on Derivatives | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Total net gains (losses) on derivatives | 10,665 | (15,871) | (39,866) | | Unrealized gains (losses) on derivative instruments, net | 5,189 | (15,871) | (8,551) | | Realized gains (losses) on derivative instruments, net | — | — | (34,134) | - The Company recognized net gains on derivatives of $10.7 million in Q1 2024, a significant improvement from net losses of $15.9 million in Q4 2023 and $39.9 million in Q1 2023[387] - Changes in derivative positions were primarily due to changes in secured financing composition and interest rates[420] - In Q1 2024, the Company exercised two swaption contracts with $1.0 billion notional into two one-year swaps with a weighted average 3.46% fixed pay rate[388] Net Unrealized Gains (Losses) on Financial Instruments at Fair Value The Company recorded significant net unrealized gains on financial instruments at fair value in Q1 2024, reflecting increased market value of residential credit portfolios due to tightening credit spreads Net Unrealized Gains (Losses) on Financial Instruments at Fair Value | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Net unrealized gains (losses) on financial instruments at fair value | 76,765 | 6,815 | 64,592 | - Net unrealized gains on financial instruments at fair value increased to $76.8 million in Q1 2024 from $6.8 million in Q4 2023 and $64.6 million in Q1 2023[360][390] - This increase was due to residential credit spread tightening, resulting in an increase in the market value of the Company's investments[360] Gains and Losses on Sales of Assets The Company realized losses from the sale of Agency CMBS investments in Q1 2024 as part of its portfolio optimization strategy Net Realized Gains (Losses) on Sales of Investments | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Net realized gains (losses) on sales of investments | (3,750) | (3,752) | (5,264) | - The Company sold approximately $35 million of Agency CMBS positions in Q1 2024, resulting in a realized loss of $4 million, as part of its portfolio optimization strategy[329][422] Gain and Loss on Extinguishment of Debt The Company did not recognize any gains or losses on extinguishment of debt in Q1 2024, compared to a loss in Q4 2023 and a gain in Q1 2023 Gains (Losses) on Extinguishment of Debt | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Gains (losses) on extinguishment of debt | — | (2,473) | 2,309 | - No losses on extinguishment of debt were recognized in Q1 2024, compared to a $2 million loss in Q4 2023 related to early termination of secured financing agreements[362] - In Q1 2023, the Company acquired securitized debt collateralized by Loans held for investment, resulting in a net gain on extinguishment of debt of $2 million[392] Compensation, General and Administrative Expenses and Transaction Expenses Total compensation and benefits increased QoQ but decreased YoY, general and administrative expenses remained stable, and transaction expenses significantly decreased due to lower securitization activity Operating Expenses | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | | Compensation and benefits | 9,213 | 5,278 | 10,491 | | General and administrative expenses | 5,720 | 7,443 | 5,778 | | Transaction expenses | 67 | 425 | 6,409 | | Total other expenses | 22,663 | 20,805 | 31,095 | - Compensation and benefits increased by $3.9 million QoQ but decreased by $1.3 million YoY[338] - General and administrative expenses remained relatively unchanged across the periods[577] - Transaction expenses decreased significantly to $67 thousand in Q1 2024 from $425 thousand in Q4 2023 and $6 million in Q1 2023, driven by lower securitization activity[395] Servicing and Asset Manager Fees Servicing and asset manager fees remained relatively unchanged across the periods, primarily related to servicing costs of whole loans in consolidated securitization vehicles Servicing and Asset Manager Fees | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :-------------------------- | :-------------------- | :-------------------- | :-------------------- | | Servicing and asset manager fees | 7,663 | 7,659 | 8,417 | - Servicing and asset manager fees remained relatively unchanged at approximately $8 million for Q1 2024, Q4 2023, and Q1 2023[396] - These fees are primarily related to servicing costs of whole loans held in consolidated securitization vehicles and generally range from 2 to 50 basis points of unpaid principal balances[396] Earnings available for distribution Earnings available for distribution (a non-GAAP measure) remained relatively unchanged in Q1 2024 compared to prior periods, used by management for performance and dividend decisions - Earnings available for distribution (EAD) is a non-GAAP measure, defined as GAAP net income excluding certain non-recurring or non-cash items like unrealized gains/losses, realized gains/losses on sales, debt extinguishment gains/losses, changes in credit loss provision, other investment gains/losses, and transaction expenses[397][590] Earnings Available for Distribution | Metric | Q1 2024 ($ thousands) | Q4 2023 ($ thousands) | Q1 2023 ($ thousands) | | :------------------------------------------ | :-------------------- | :-------------------- | :-------------------- | | Earnings available for distribution | 30,564 | 30,735 | 31,471 | | EAD per adjusted diluted common share | 0.12 | 0.13 | 0.13 | - EAD remained relatively unchanged at approximately $31 million for Q1 2024, Q4 2023, and Q1 2023[400][431] - EAD is one of the metrics used by the Board to determine common stock dividends but is not an indication of REIT taxable income or a guarantee of dividend payments[429] Net Income (Loss) and Return on Total Stockholders' Equity Return on average equity increased in Q1 2024 compared to prior periods, driven by unrealized asset pricing gains and net gains on derivatives, while other metrics remained stable Return on Equity Metrics | Metric | Q1 2024 | Q4 2023 | Q1 2023 | | :------------------------------------------ | :-------- | :-------- | :-------- | | Return on Average Equity | 19.90% | 4.84% | 8.63% | | Economic Net Interest Income/Average Equity | 10.45% | 10.81% | 10.45% | | Earnings available for distribution/Average Common Equity | 7.31% | 7.70% | 7.28% | - Return on average equity increased by 15% QoQ (Q1 2024 vs Q4 2023) and 11% YoY (Q1 2024 vs Q1 2023), driven by unrealized asset pricing gains and net gains on derivatives[403][433] - Economic net interest income as a percentage of average equity decreased by 36 basis points QoQ and remained relatively unchanged YoY[403][433] - Earnings available for distribution as a percentage of average common equity decreased by 39 basis points QoQ and increased by 3 basis points YoY[403][433] Financial Condition This section reviews the Company's financial condition, including portfolio composition, leverage ratios, and accretable discount, highlighting Q1 2024 focus on higher-yielding assets and low leverage Portfolio Review The Company's investment portfolio is predominantly composed of Loans held for investment, followed by Non-Agency RMBS and Agency MBS/CMBS, maintaining a high fixed-rate percentage - In Q1 2024, the Company purchased $111 million of investments, sold $35 million, and received $325 million in principal payments[434] Portfolio Composition (Fair Value) | Asset Class | March 31, 2024 | December 31, 2023 | | :-------------------------- | :------------- | :---------------- | | Loans held for investment | 90.8% | 90.9% | | Non-Agency RMBS | 8.7% | 8.3% | | Agency MBS | 0.1% | 0.1% | | Agency CMBS | 0.4% | 0.7% | | Fixed-rate percentage of portfolio | 96.0% | 95.9% | | Adjustable-rate percentage of portfolio | 4.0% | 4.1% | Key Portfolio Characteristics (March 31, 2024) | Asset Class | Principal/Notional Value ($ thousands) | Weighted Average Fair Value | Weighted Average Coupon | Weighted Average Yield | | :------------------------------------ | :------------------------------------- | :-------------------------- | :---------------------- | :--------------------- | | Non-Agency RMBS (Senior) | 1,057,200 | $62.83 | 5.7% | 16.9% | | Non-Agency RMBS (Subordinated) | 610,429 | $51.49 | 3.8% | 7.2% | | Loans held for investment | 11,639,449 | $95.32 | 5.6% | 5.4% | - GAAP leverage at period-end decreased to 3.7:1 at March 31, 2024, from 4.0:1 at December 31, 2023[435][436][476] - GAAP recourse leverage decreased to 0.9:1 from 1.0:1[435][436][476] Accretable Discount (Net of Premiums) Accretable Discount for the Non-Agency RMBS portfolio decreased in Q1 2024, reflecting the portion of original purchase discount expected to be accreted into interest income - Accretable Discount reflects the portion of the original purchase discount on Non-Agency RMBS expected to be accreted into interest income[438] Accretable Discount (Net of Premiums) Rollforward | Metric | March 31, 2024 ($ thousands) | December 31, 2023 ($ thousands) | | :------------------------------------------ | :--------------------------- | :------------------------------ | | Balance, beginning of period | 139,737 | 147,252 | | Accretion of discount | (8,179) | (12,840) | | Transfers from/(to) credit reserve, net | (2,782) | 5,325 | | Balance, end of period | 130,624 | 139,737 | - The Accretable Discount decreased from $139,737 thousand at December 31, 2023, to $130,624 thousand at March 31, 2024[580] Liquidity and Capital Resources This section discusses the Company's liquidity management, including capital sources, cash flow activities, and secured financing agreements, highlighting strategies to mitigate margin call and counterparty risk General The Company's liquidity is crucial for meeting cash requirements, funding investments, and paying dividends, with primary capital sources including earnings, asset sales, and financing facilities - Liquidity measures the Company's ability to meet cash requirements, including borrowing commitments, asset purchases, dividends, and general business needs[472] - Principal sources of capital include earnings, principal paydowns and sales from investments, borrowings under securitizations, secured financing agreements, and proceeds from equity or other securities offerings[472][474][593] - The Company seeks longer-term, more durable financing to reduce risk exposure to margin calls related to shorter-term repurchase financing[410][440] Current Period Cash Flows Cash and cash equivalents decreased in Q1 2024, with operating and investing activities providing cash, while financing activities used cash for debt repayments and dividends - Cash and cash equivalents decreased by $53 million from December 31, 2023, to March 31, 2024, ending at $169 million[412] - Operating activities provided $57 million in Q1 2024, primarily from interest received in excess of interest paid[475] - Investing activities provided $248 million in Q1 2024, driven by $325 million in principal repayments and $35 million from Agency MBS sales, partially offset by $78 million in Loans held for investment purchases and $34 million in Non-Agency RMBS purchases[443] - Financing activities used $358 million in Q1 2024, primarily for $273 million in securitized debt repayment, $40 million in net payments on secured financing agreements, and $45 million in common and preferred dividends[413] Secured Financing Agreements The Company uses secured financing agreements, collateralized by MBS and mortgage loans, with varying haircuts and borrowing rates, employing non-mark-to-market and limited mark-to-market facilities to reduce margin call risk - The Company collateralizes secured financing agreements with MBS investments and mortgage loans, with haircuts reflecting perceived risk and market volatility[478] - Weighted average haircut on Agency CMBS was 5.4% and on Non-Agency RMBS and Loans held for investment was 26.0% at March 31, 2024[195][478] - The Company uses non-mark-to-market ($902 million) and limited mark-to-market ($537 million) facilities to significantly reduce financing risks and margin calls[416] Secured Financing Agreements Principal Outstanding and Borrowing Rates | Maturity | March 31, 2024 Principal ($ thousands) | March 31, 2024 Weighted Average Borrowing Rates | December 31, 2023 Principal ($ thousands) | December 31, 2023 Weighted Average Borrowing Rates | | :------------------- | :------------------------------------- | :-------------------------------------------- | :---------------------------------------- | :--------------------------------------------- | | 1 to 29 days | 259,229 | 7.56% | 272,490 | 7.35% | | 180 days to 1 year | 616,005 | 9.50% | 39,620 | 7.06% | | 1 to 2 years | 244,967 | 8.33% | 808,601 | 9.36% | | Greater than 3 years | 358,581 | 5.08% | 362,215 | 5.11% | | Total | 2,403,678 | 7.48% | 2,444,091 | 7.51% | - The total interest-bearing debt decreased to $9.8 billion at March 31, 2024, from $10.1 billion at December 31, 2023, resulting in a GAAP leverage ratio decrease from 4.0:1 to 3.7:1[481] Exposure to Financial Counterparties The Company actively monitors and manages its exposure to financing counterparties to mitigate credit risk, allocating assets based on credit quality and internal metrics - The Company monitors exposure to financing counterparties for credit risk and allocates assets based on credit quality and internal metrics[452][484] - At March 31, 2024, the amount at risk with Nomura Securities International, Inc. was $474 million (18% of equity), up from $433 million (17% of equity) at December 31, 2023[173][174][452] Exposure to Secured Financing Agreement Counterparties (March 31, 2024) | Country | Number of Counterparties | Secured Financing Agreement ($ thousands) | Exposure ($ thousands) | | :------------ | :----------------------- | :---------------------------------------- | :--------------------- | | United States | 8 | 1,189,408 | 490,137 | | Japan | 2 | 938,934 | 503,674 | | Canada | 1 | 267,942 | 139,936 | | Netherlands | 1 | 7,394 | 280 | | Total | 12 | 2,403,678 | 1,134,027 | Stockholders' Equity This section details changes in stockholders' equity, including common and preferred stock, dividend declarations, equity compensation plans, and the share repurchase program Common Stock The Company's common stock activities include an at-the-market sales program and a share repurchase program, with no shares issued or repurchased in Q1 2024 - The Company has an at-the-market sales program allowing the sale of up to $500 million of common stock[272][454][486][487] - As of March 31, 2024, $426 million remains available[272][454][486][487] - No shares were issued under the at-the-market sales program during Q1 2024 or Q1 2023[272][487] - The share repurchase program was increased to $250 million in January 2024 to include preferred stock[244][245][485][583] - As of March 31, 2024, $217 million remains available[244][245][485][583] - No common stock was repurchased during Q1 2024 or Q1 2023[245](index=245&ty