cim-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: September 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-33796

CHIMERA INVESTMENT CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Maryland		26-0630461
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification Number)
630 Fifth Avenue, Ste 2400
New York,	New York	10111
(Address of Principal Executive Offices)		(Zip Code)

(888) 895-6557

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share	CIM	New York Stock Exchange
8.00% Series A Cumulative Redeemable Preferred Stock	CIM PRA	New York Stock Exchange
8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	CIM PRB	New York Stock Exchange
7.75% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	CIM PRC	New York Stock Exchange
8.00% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	CIM PRD	New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes þ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes þ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:


Class			Outstanding at October 31, 2023
Common Stock, $0.01 par value			226,762,239

CHIMERA INVESTMENT CORPORATION

FORM 10-Q

TABLE OF CONTENTS


	PART I. FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS
	Consolidated Statements of Financial Condition as of September 30, 2023 (Unaudited) and December 31, 2022 (Derived from the audited consolidated financial statements as of December 31, 2022)	2
	Consolidated Statements of Operations (Unaudited) for the quarters and nine months ended September 30, 2023 and 2022	3
	Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the quarters and nine months ended September 30, 2023 and 2022	4
	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the quarters and nine months ended September 30, 2023 and 2022	5
	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2023 and 2022	7
	Notes to Consolidated Financial Statements (Unaudited)	9

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	46
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	70
ITEM 4	CONTROLS AND PROCEDURES	76

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	77
ITEM 1A.	RISK FACTORS	77
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	77
ITEM 6.	EXHIBITS	77
	SIGNATURES	80

Part I - Financial Information

Item 1. Consolidated Financial Statements


CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share and per share data)
(Unaudited)
	September 30, 2023		December 31, 2022

Cash and cash equivalents	$	138,591	$	264,600
Non-Agency RMBS, at fair value (net of allowance for credit losses of $16 million and $7 million, respectively)	1,024,609		1,147,481
Agency MBS, at fair value	127,706		430,944
Loans held for investment, at fair value	11,426,932		11,359,236

Accrued interest receivable	72,815		61,768
Other assets	96,764		133,866
Derivatives, at fair value	—		4,096
Total assets (1)	$	12,887,417	$	13,401,991
Liabilities:
Secured financing agreements ($3.7 billion and $4.7 billion pledged as collateral, respectively, and includes $340 million and $374 million at fair value, respectively)	$	2,603,911	$	3,434,765

Securitized debt, collateralized by Non-Agency RMBS ($250 million and $276 million pledged as collateral, respectively)	75,819		78,542
Securitized debt at fair value, collateralized by Loans held for investment ($11.0 billion and $10.0 billion pledged as collateral, respectively)	7,598,721		7,100,742

Payable for investments purchased	6,237		9,282
Accrued interest payable	35,670		30,696
Dividends payable	49,881		64,545
Accounts payable and other liabilities	22,721		16,616

Total liabilities (1)	$	10,392,960	$	10,735,188

Commitments and Contingencies (See Note 15)

Stockholders' Equity:
Preferred Stock, par value of $0.01 per share, 100,000,000 shares authorized:
8.00% Series A cumulative redeemable: 5,800,000 shares issued and outstanding, respectively ($145,000 liquidation preference)	$	58	$	58
8.00% Series B cumulative redeemable: 13,000,000 shares issued and outstanding, respectively ($325,000 liquidation preference)	130		130
7.75% Series C cumulative redeemable: 10,400,000 shares issued and outstanding, respectively ($260,000 liquidation preference)	104		104
8.00% Series D cumulative redeemable: 8,000,000 shares issued and outstanding, respectively ($200,000 liquidation preference)	80		80
Common stock: par value $0.01 per share; 500,000,000 shares authorized, 226,760,148 and 231,824,192 shares issued and outstanding, respectively	2,268		2,318
Additional paid-in-capital	4,291,775		4,318,388
Accumulated other comprehensive income	181,227		229,345
Cumulative earnings	4,134,502		4,038,942
Cumulative distributions to stockholders	(6,115,687)		(5,922,562)
Total stockholders' equity	$	2,494,457	$	2,666,803
Total liabilities and stockholders' equity	$	12,887,417	$	13,401,991

(1) The Company's consolidated statements of financial condition include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations and liabilities of the VIE for which creditors do not have recourse to the primary beneficiary (Chimera Investment Corporation). As of September 30, 2023, and December 31, 2022, total assets of consolidated VIEs were $10,758,561 and $10,199,266, respectively, and total liabilities of consolidated VIEs were $7,337,986 and $6,772,125, respectively. See Note 8 for further discussion.

See accompanying notes to consolidated financial statements.


CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
(Unaudited)
	For the Quarters Ended				For the Nine Months Ended
	September 30, 2023		September 30, 2022			September 30, 2023		September 30, 2022
Net interest income:
Interest income (1)	$	195,591	$	188,303		$	581,700	$	585,835
Interest expense (2)	132,193		83,464			382,988		226,403
Net interest income	63,398		104,839			198,712		359,432

Increase/(decrease) in provision for credit losses	3,217		(1,534)			9,041		3,203








Other investment gains (losses):
Net unrealized gains (losses) on derivatives	17		10,307			9,460		8,689
Realized gains (losses) on derivatives	—		—			(40,957)		—
Periodic interest cost of swaps, net	4,894		(122)			11,871		(122)
Net gains (losses) on derivatives	4,911		10,185			(19,626)		8,567
Net unrealized gains (losses) on financial instruments at fair value	(43,988)		(239,513)			27,558		(848,925)
Net realized gains (losses) on sales of investments	(460)		(37,031)			(27,482)		(37,031)

Gains (losses) on extinguishment of debt	—		—			6,348		(2,897)
Other investment gains (losses)	2,381		(462)			2,077		517
Total other gains (losses)	(37,156)		(266,821)			(11,125)		(879,769)





Other expenses:




Compensation and benefits	7,124		10,000			25,292		30,211
General and administrative expenses	5,427		4,836			17,674		16,493
Servicing and asset manager fees	8,139		8,516			24,965		27,122
Transaction expenses	90		2,341			14,955		12,872
Total other expenses	20,780		25,693			82,886		86,698
Income (loss) before income taxes	2,245		(186,141)			95,660		(610,238)
Income tax expense (benefit)	75		4			100		28
Net income (loss)	$	2,170	$	(186,145)		$	95,560	$	(610,266)

Dividends on preferred stock	18,438		18,438			55,313		55,283

Net income (loss) available to common shareholders	$	(16,268)	$	(204,583)		$	40,248	$	(665,549)

Net income (loss) per share available to common shareholders:
Basic	$	(0.07)	$	(0.88)		$	0.17	$	(2.84)
Diluted	$	(0.07)	$	(0.88)		$	0.17	$	(2.84)

Weighted average number of common shares outstanding:
Basic	226,734,643		231,750,422			230,099,867		234,671,912
Diluted	226,734,643		231,750,422			232,288,318		234,671,912

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

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




CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except share and per share data)
(Unaudited)

	For the Quarters Ended				For the Nine Months Ended
	September 30, 2023		September 30, 2022			September 30, 2023		September 30, 2022
Comprehensive income (loss):
Net income (loss)	$	2,170	$	(186,145)		$	95,560	$	(610,266)
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities, net	(29,447)		(61,526)			(49,431)		(160,850)


Reclassification adjustment for net realized losses (gains) included in net income	—		—			1,313		—

Other comprehensive income (loss)	(29,447)		(61,526)			$	(48,118)	$	(160,850)
Comprehensive income (loss) before preferred stock dividends	$	(27,277)	$	(247,671)		$	47,442	$	(771,116)
Dividends on preferred stock	$	18,438	$	18,438		$	55,313	$	55,283
Comprehensive income (loss) available to common stock shareholders	$	(45,715)	$	(266,109)		$	(7,871)	$	(826,399)

See accompanying notes to consolidated financial statements.


CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(Unaudited)


For the Quarter Ended September 30, 2023

	Series A Preferred Stock Par Value		Series B Preferred Stock Par Value		Series C Preferred Stock Par Value		Series D Preferred Stock Par Value		Common Stock Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
Balance, June 30, 2023	$	58	$	130	$	104	$	80	$	2,263	$	4,289,449	$	210,674	$	4,132,332	$	(6,055,687)	$	2,579,403
Net income (loss)	—		—		—		—		—		—		—		2,170		—		2,170

Other comprehensive income (loss)	—		—		—		—		—		—		(29,447)		—		—		(29,447)


Stock based compensation	—		—		—		—		5		2,326		—		—		—		2,331
Common dividends declared	—		—		—		—		—		—		—		—		(41,562)		(41,562)
Preferred dividends declared	—		—		—		—		—		—		—		—		(18,438)		(18,438)

Balance, September 30, 2023	$	58	$	130	$	104	$	80	$	2,268	$	4,291,775	$	181,227	$	4,134,502	$	(6,115,687)	$	2,494,457

For the Quarter Ended September 30, 2022

	Series A Preferred Stock Par Value		Series B Preferred Stock Par Value		Series C Preferred Stock Par Value		Series D Preferred Stock Par Value		Common Stock Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
Balance, June 30, 2022	$	58	$	130	$	104	$	80	$	2,317	$	4,312,604	$	305,730	$	4,127,887	$	(5,775,911)	$	2,972,999
Net income (loss)	—		—		—		—		—		—		—		(186,145)		—		(186,145)
Other comprehensive income (loss)	—		—		—		—		—		—		(61,526)		—		—		(61,526)



Stock based compensation	—		—		—		—		1		2,338		—		—		—		2,339
Common dividends declared	—		—		—		—		—		—		—		—		(55,525)		(55,525)
Preferred dividends declared	—		—		—		—		—		—		—		—		(18,438)		(18,438)

Balance, September 30, 2022	$	58	$	130	$	104	$	80	$	2,318	$	4,314,942	$	244,204	$	3,941,742	$	(5,849,874)	$	2,653,704


For the Nine Months Ended September 30, 2023

	Series A Preferred Stock Par Value		Series B Preferred Stock Par Value		Series C Preferred Stock Par Value		Series D Preferred Stock Par Value		Common Stock Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
Balance, December 31, 2022	$	58	$	130	$	104	$	80	$	2,318	$	4,318,388	$	229,345	$	4,038,942	$	(5,922,562)	$	2,666,803
Net income (loss)	—		—		—		—		—		—		—		95,560		—		95,560

Other comprehensive income (loss)	—		—		—		—		—		—		(48,118)		—		—		(48,118)
Repurchase of common stock	—		—		—				(59)		(33,043)		—		—		—		(33,102)

Stock based compensation	—		—		—				9		6,430		—		—		—		6,439
Common dividends declared	—		—		—		—		—		—		—		—		(137,812)		(137,812)
Preferred dividends declared	—		—		—		—		—		—		—		—		(55,313)		(55,313)

Balance, September 30, 2023	$	58	$	130	$	104	$	80	$	2,268	$	4,291,775	$	181,227	$	4,134,502	$	(6,115,687)	$	2,494,457



For the Nine Months Ended September 30, 2022

	Series A Preferred Stock Par Value		Series B Preferred Stock Par Value		Series C Preferred Stock Par Value		Series D Preferred Stock Par Value		Common Stock Par Value		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Cumulative Earnings		Cumulative Distributions to Stockholders		Total
Balance, December 31, 2021	$	58	$	130	$	104	$	80	$	2,370	$	4,359,045	$	405,054	$	4,552,008	$	(5,582,658)	$	3,736,191
Net income (loss)	—		—		—		—		—		—		—		(610,266)		—		(610,266)
Other comprehensive income (loss)	—		—		—		—		—		—		(160,850)		—		—		(160,850)
Repurchase of common stock	—		—		—				(54)		(48,832)		—		—		—		(48,886)


Stock based compensation	—		—		—				2		4,729		—		—		—		4,731
Common dividends declared	—		—		—		—		—		—		—		—		(211,933)		(211,933)
Preferred dividends declared	—		—		—		—		—		—		—		—		(55,283)		(55,283)

Balance, September 30, 2022	$	58	$	130	$	104	$	80	$	2,318	$	4,314,942	$	244,204	$	3,941,742	$	(5,849,874)	$	2,653,704

See accompanying notes to financial statements.


CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
	For the Nine Months Ended
	September 30, 2023		September 30, 2022
Cash Flows From Operating Activities:
Net income (loss)	$	95,560	$	(610,266)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Accretion) amortization of investment discounts/premiums, net	16,985		68,632
Accretion (amortization) of deferred financing costs, debt issuance costs, and Securitized debt discounts/premiums, net	27,228		(2,799)

Net unrealized losses (gains) on derivatives	(9,460)		(8,689)

Proceeds (payments) for derivative settlements	(20,509)		(6,200)
Margin (paid) received on derivatives	78,248		(2,301)
Net unrealized losses (gains) on financial instruments at fair value	(27,558)		848,925
Net realized losses (gains) on sales of investments	27,482		37,031
Other investment (gains) losses	(2,077)		(517)
Net increase (decrease) in provision for credit losses	9,041		3,203

(Gain) loss on extinguishment of debt	(6,348)		2,897

Equity-based compensation expense	6,439		4,731
Changes in operating assets:
Decrease (increase) in accrued interest receivable, net	(11,047)		164
Decrease (increase) in other assets	(13,121)		(57,260)
Changes in operating liabilities:
Increase (decrease) in accounts payable and other liabilities	6,105		15,079

Increase (decrease) in accrued interest payable, net	4,974		6,657
Net cash provided by (used in) operating activities	$	181,942	$	299,287
Cash Flows From Investing Activities:
Agency MBS portfolio:
Purchases	$	(2,006)	$	(57,473)
Sales	285,709		4,187
Principal payments	677		253,131
Non-Agency RMBS portfolio:
Purchases	(3,954)		(23,000)
Sales	—		—
Principal payments	64,796		159,151
Loans held for investment:
Purchases	(1,260,187)		(1,444,542)
Sales	2,611		—
Principal payments	1,087,319		1,764,067


Net cash provided by (used in) investing activities	$	174,965	$	655,521
Cash Flows From Financing Activities:
Proceeds from secured financing agreements	$	22,272,760	$	28,538,545
Payments on secured financing agreements	(23,099,486)		(28,982,125)


Payments on repurchase of common stock	(33,101)		(48,886)
Proceeds from securitized debt borrowings, collateralized by Loans held for investment	2,046,620		1,029,050
Payments on securitized debt borrowings, collateralized by Loans held for investment	(1,461,868)		(1,498,622)
Payments on securitized debt borrowings, collateralized by Non-Agency RMBS	(52)		(2,769)





Common dividends paid	(152,476)		(234,225)
Preferred dividends paid	(55,313)		(55,283)


Net cash provided by (used in) financing activities	$	(482,916)	$	(1,254,315)
Net increase (decrease) in cash and cash equivalents	(126,009)		(299,507)
Cash and cash equivalents at beginning of period	264,600		385,741
Cash and cash equivalents at end of period	$	138,591	$	86,234

Supplemental disclosure of cash flow information:
Interest received	$	587,637	$	654,650
Interest paid	$	350,787	$	223,845


Non-cash investing activities:
Receivable for investments sold	$	—	$	14,118
Payable for investments purchased	$	6,237	$	644,120

Net change in unrealized gain (loss) on available-for sale securities	$	(49,431)	$	(160,850)


Transfer of investments due to consolidation
Loans held for investment, at fair value	$	—	$	1,047,838

Securitized debt at fair value, collateralized by loans held for investment	$	—	$	774,514
Non-Agency RMBS, at fair value	$	—	$	(218,276)






Non-cash financing activities:
Dividends declared, not yet paid	$	49,881	$	63,860

See accompanying notes to consolidated financial statements.

CHIMERA INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Chimera Investment Corporation, or the Company, was organized in Maryland on June 1, 2007. The Company commenced operations on November 21, 2007 when it completed its initial public offering. The Company elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder, or the Code.

The Company is an internally managed REIT that is primarily engaged, through its subsidiaries, in the business of 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. The following defines certain of the commonly used terms in this Quarterly Report on Form 10-Q: Agency refers to a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae; MBS refers to mortgage-backed securities secured by pools of residential or commercial mortgage loans; Agency RMBS and Agency CMBS refer to MBS that are secured by pools of residential and commercial mortgage loans, respectively, and are issued or guaranteed by an Agency; Agency MBS refers to MBS that are issued or guaranteed by an Agency and includes Agency RMBS and Agency CMBS collectively; Non-Agency RMBS refers to residential MBS that are not guaranteed by any agency of the U.S. Government or any Agency. IO refers to Interest-only securities.

The Company conducts its operations through various subsidiaries including subsidiaries it treats as taxable REIT subsidiaries, or TRSs. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. The Company currently has twelve wholly-owned direct subsidiaries: Chimera RMBS Whole Pool LLC and Chimera RMBS LLC formed in June 2009; CIM Trading Company LLC, or CIM Trading, formed in July 2010; Chimera Funding TRS LLC, or CIM Funding TRS, a TRS formed in October 2013; Chimera CMBS Whole Pool LLC and Chimera RMBS Securities LLC formed in March 2015; Chimera RR Holding LLC formed in April 2016; Anacostia LLC, a TRS formed in June 2018; NYH Funding LLC, a TRS formed in May 2019; Kali 2020 Holdings LLC formed in May 2020; Varuna Capital Partners LLC formed in September 2020; and Aarna Holdings LLC formed in November 2020.

During 2022, the Company exchanged its interest in Kah Capital Management, LLC for an interest in Kah Capital Holdings, LLC, which is accounted for as an equity method investment in other assets on the Statement of Financial Condition at September 30, 2023. Kah Capital Holdings, LLC is the parent of Kah Capital Management, LLC. The Company paid $150 thousand and $445 thousand for mortgage asset servicing oversight fees to Kah Capital Management during the quarter and nine months ended September 30, 2023. The Company did not pay any fees to Kah Capital Management during the quarter ended September 30, 2022 and paid $250 thousand during the nine months ended September 30, 2022 in fees to Kah Capital Management, LLC. These fees were paid for investment services provided, and are reported within Other Expenses on the Statement of Operations. The Company has made a $75 million capital commitment to a fund managed by Kah Capital Management, LLC. As of September 30, 2023, the Company has funded $46 million towards that commitment. The Company's investment in this fund is accounted for as an equity method investment in other assets on the Statement of Financial Condition. The Company records any gains and losses associated with its equity method investments in other investment gains (losses) on the Statement of Operations.

2. Summary of the Significant Accounting Policies

(a) Basis of Presentation and Consolidation

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. In the opinion of the Company, all normal and recurring adjustments considered necessary for a fair presentation of its financial position, results of operations and cash flows have been included. Investment transactions are recorded on the trade date. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the Company's Form 10-K, filed with SEC.

The consolidated financial statements include the Company’s accounts, the accounts of its wholly-owned subsidiaries, and variable interest entities, or VIEs, in which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

The Company uses securitization trusts considered to be VIEs in its securitization transactions. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly impact the VIEs’ economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. For VIEs that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design and structure of the VIE.

The trusts are structured as entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. The Company’s risks associated with its involvement with these VIEs are limited to its risks and rights as a holder of the security it has retained as well as certain risks associated with being the sponsor and depositor of and the seller, directly or indirectly to, the securitizations entities.

Determining the primary beneficiary of a VIE requires judgment. The Company determined that for the securitizations it consolidates, its ownership provides the Company with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company has the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance, or power, such as rights to replace the servicer without cause, or the Company was determined to have power in connection with its involvement with the structure and design of the VIE.

The Company’s interest in the assets held by these securitization vehicles, which are consolidated on the Company’s Consolidated Statements of Financial Condition, is restricted by the structural provisions of these trusts, and a recovery of the Company’s investment in the vehicles will be limited by each entity’s distribution provisions. Generally, the securities retained by the Company are the most subordinate in the capital structure, which means those securities receive distributions after the senior securities have been paid. The liabilities of the securitization vehicles, which are also consolidated on the Company’s Consolidated Statements of Financial Condition, are non-recourse to the Company, and can only be satisfied using proceeds from each securitization vehicle’s respective asset pool.

The assets of securitization entities are comprised of residential mortgage-backed securities, or RMBS, or residential mortgage loans. See Notes 3, 4 and 8 for further discussion of the characteristics of the securities and loans in the Company’s portfolio.

(b) Statements of Financial Condition Presentation

The Company’s Consolidated Statements of Financial Condition include both the Company’s direct assets and liabilities and the assets and liabilities of consolidated securitization vehicles. Retained beneficial interests of the consolidated securitization vehicles are eliminated in consolidation. Assets of each consolidated VIE can only be used to satisfy the obligations of that VIE, and the liabilities of consolidated VIEs are non-recourse to the Company. The Company is not obligated to provide, nor does it intend to provide, any financial support to these consolidated securitization vehicles. The notes to the consolidated financial statements describe the Company’s assets and liabilities including the assets and liabilities of consolidated securitization vehicles. See Note 8 for additional information related to the Company’s investments in consolidated securitization vehicles.

Certain prior period investment balances for Non-Agency Subordinate and Interest-Only securities were updated to conform to current period presentation.

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could be materially different than anticipated in those estimates, which could have a material adverse impact on the Company’s results of operations and its financial condition.

The Company has made significant estimates including in accounting for income recognition on Agency MBS, Non-Agency RMBS, IO MBS (Note 3) and residential mortgage loans (Note 4), valuation of Agency MBS and Non-Agency RMBS (Notes 3 and 5), residential mortgage loans (Notes 4 and 5), secured financing agreements (Notes 5 and 6), and securitized debt (Notes 5 and 7). Actual results could differ materially from those estimates.

(d) Significant Accounting Policies

There have been no significant changes to the Company's accounting policies included in Note 2 to the consolidated financial statements of the Company’s Form 10-K for the year ended December 31, 2022, other than the significant accounting policies discussed below.

Fair Value Disclosure

A complete discussion of the methodology utilized by the Company to estimate the fair value of its financial instruments is included in Note 5 to these consolidated financial statements.

Income Taxes

The Company does not have any material unrecognized tax positions that would affect its financial statements or require disclosure. No accruals for penalties and interest were necessary as of September 30, 2023 or December 31, 2022.

(e) Recent Accounting Pronouncements

Reference Rate Reform (Topic 848)

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2020-4, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Inter Bank Offering Rate (or LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for contracts held by the Company subject to reference rate reform that fall within the scope of this update beginning immediately through December 31, 2024, as extended under ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The guidance in the ASU was effective for the Company as of July 1, 2023. The Company has elected to apply the optional expedient across all contracts and considers the replacement of LIBOR-based rates to SOFR-based rates plus the appropriate spread as a qualifying modification that does not require contract remeasurement or reassessment of previous accounting determination. The adoption of this guidance did not have any material impact on the Company's consolidated financial statements.

3. Mortgage-Backed Securities

The Company classifies its Non-Agency RMBS as senior, subordinated, or Interest-only. The Company also invests in Agency MBS which it classifies as Agency RMBS to include residential and residential interest-only MBS and Agency CMBS to include commercial and commercial interest-only MBS. Senior interests in Non-Agency RMBS are generally entitled to the first principal repayments in their pro-rata ownership interests at the acquisition date. The tables below present amortized cost, allowance for credit losses, fair value and unrealized gain/losses of the Company's MBS investments as of September 30, 2023 and December 31, 2022.


September 30, 2023
(dollars in thousands)
	Principal or Notional Value		Total Premium		Total Discount		Amortized Cost		Allowance for credit losses		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Net Unrealized Gain/(Loss)
Non-Agency RMBS
Senior	$	1,091,694	$	6,230	$	(587,415)	$	510,509	$	(12,966)	$	683,849	$	194,562	$	(8,256)	$	186,306
Subordinated	588,224		3,556		(290,352)		301,427		(3,264)		267,120		17,023		(48,066)		(31,043)
Interest-only	2,926,629		159,171		—		159,171		—		73,639		13,764		(99,296)		(85,532)
Agency RMBS

Interest-only	395,197		19,042		—		19,042		—		13,893		409		(5,558)		(5,149)
Agency CMBS
Project loans	117,400		1,804		—		119,205		—		105,341		—		(13,864)		(13,864)
Interest-only	481,488		8,142		—		8,142		—		8,473		1,225		(894)		331
Total	$	5,600,632	$	197,945	$	(877,767)	$	1,117,496	$	(16,230)	$	1,152,315	$	226,983	$	(175,934)	$	51,049



December 31, 2022
(dollars in thousands)
	Principal or Notional Value		Total Premium		Total Discount		Amortized Cost		Allowance for credit losses		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Net Unrealized Gain/(Loss)
Non-Agency RMBS
Senior	$	1,153,458	$	7,377	$	(624,803)	$	536,032	$	(4,418)	$	761,808	$	237,127	$	(6,933)	$	230,194
Subordinated	611,206		3,872		(310,757)		304,321		(2,770)		286,909		22,035		(36,677)		(14,642)
Interest-only	3,114,930		162,820		—		162,820		—		98,764		15,968		(80,024)		(64,056)
Agency RMBS

Interest-only	409,940		18,768		—		18,768		—		15,148		1,371		(4,991)		(3,620)
Agency CMBS
Project loans	302,685		5,805		(192)		308,298		—		289,418		—		(18,880)		(18,880)
Interest-only	2,669,396		139,738		—		139,738		—		126,378		1,654		(15,014)		(13,360)
Total	$	8,261,615	$	338,380	$	(935,752)	$	1,469,977	$	(7,188)	$	1,578,425	$	278,155	$	(162,519)	$	115,636

The following tables present the gross unrealized losses and estimated fair value of the Company’s Agency and Non-Agency MBS by length of time that such securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022. All Non-Agency RMBS held as available-for-sale, and not accounted under the fair value option election in an unrealized loss position have been evaluated by the Company for current expected credit losses.