CHIMERA INVESTMENT CORP (CIM) FY 2022 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to those statements included in Item 15 of this 2022 Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in this 2022 Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.

This section of the 2022 Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this 2022 Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Executive Summary

We are a publicly traded REIT that is primarily engaged in the business of investing directly or having a beneficial interest in a diversified portfolio of mortgage assets, including residential mortgage loans, Non-Agency RMBS, Agency RMBS, Agency CMBS, business purpose and investor loans, and other real estate-related assets. The MBS and other real estate-related securities we purchase may include investment-grade, non-investment grade, and non-rated classes. We use leverage to increase potential returns from our investments. Our principal business objective is to provide attractive risk-adjusted returns through the generation of distributable income and through asset performance linked to mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return.

During 2022, we focused our investment activities primarily on acquiring residential mortgage loans. In addition, we acquire and own Non-Agency RMBS and Agency mortgage-backed securities, or MBS. At December 31, 2022, based on the fair value of our interest earning assets, approximately 88% of our investment portfolio was residential mortgage loans, 9% of our investment portfolio was Non-Agency RMBS, and 3% of our investment portfolio was Agency MBS. At December 31, 2021, based on the fair value of our interest earning assets, approximately 82% of our investment portfolio was residential mortgage loans, 12% of our investment portfolio was Non-Agency RMBS, and 6% of our investment portfolio was Agency MBS.

We use leverage to seek to increase our potential returns and to finance the acquisition of our assets. We expect to finance our investments using a variety of financing sources, including securitizations, warehouse facilities and repurchase agreements. We may seek to manage our debt and interest rate risk by utilizing interest rate hedges, such as interest rate swaps, caps, options and futures to reduce the effect of interest rate fluctuations related to our financing sources.

Our investment strategy is intended to take advantage of opportunities in the current interest rate and credit environment. We adjust our strategy in response to changing market conditions by shifting our asset allocations across various asset classes as interest rate and credit cycles change over time. We believe that our strategy will provide us an opportunity to pay dividends throughout changing market cycles. We expect to take a long-term view of assets and liabilities.

Business Update

During 2022, inflation increased to a multi-year high peaking at 9.1%. As a result, beginning in March of 2022, the Federal Reserve increased its benchmark rate from near zero to approximately 4.25% - 4.50% by year-end 2022, including four consecutive 75 basis points increases during the year. The velocity and magnitude of rate increases were greater than both the Federal Reserve and market participants expected. The rapid rise in rates resulted in the equity and bond markets having their worst year since 1980.

Nearly every segment of the fixed income markets experienced declines, especially bonds with long durations. Mortgages rates surged from approximately 3% in 2021 to over 6% by the end of 2022, and at times during 2022 the mortgage rate for conforming mortgage borrowers reached 7%. The combination of increased inflation, higher mortgage rates, and rapid home price appreciation that occurred since 2020, has created a significant decrease in housing affordability as housing costs, on average have increased. Towards the end of 2022, some economic data began pointing to inflation showing signs of moderation.

Higher rates in 2022 significantly impacted our business activity and economic performance. During 2022 investment activity slowed as we acquired $1.7 billion in loans, compared with $3.2 billion in loans during 2021. Our purchases during 2022 comprised of $774 million of re-performing loans, $463 million of prime jumbo loans, $242 million of investor loans and $187 million of business purpose loans. In 2023, in addition to our securitization and business purpose loan activities, we expect to

increase our Agency and Non-Agency RMBS and CMBS portfolios. Subsequent to December 31, 2022, we have committed to

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purchase approximately $900 million of residential mortgage loans, which is expected to be accretive to future earnings.

However, we remained active in the securitization market selling $1.6 billion of re-performing loans into five securitizations in challenging market conditions. Through these transactions, we issued $1.2 billion of new securitized debt with an average advance rate of 74%, locking in long term financing while giving the company the option to call the debt should rates become more favorable in the future. These securitizations helped minimize our loan warehousing risk as our loan balances in our RPL portfolio warehouse agreements were at their lowest balance in over two years.

Increased interest rates also reduced our net interest margin and put further pressure on our financing activity as many of our non-mark-to-market facilities came up for renewal during the year. We took several steps to address the challenges in financing markets. We replaced a $206 million mark-to-market secured financing facility with two new structured facilities with a limited mark-to-market feature and a higher loan amount. We extended another $489 million maturing non-mark-to-market facility by an additional 29 months with a new maturity of February 2025. Lastly, we entered into a $250 million two-year non-mark-to-market facility with a new counterparty in the fourth quarter. This facility has a 7% coupon and an 8% deferred financing cost which is due upon settlement of the agreement. This facility reduced Earnings available for distribution by approximately $0.04 per quarter in the fourth quarter. We expect that this facility will negatively impact Earnings available for distribution in the near and mid-term. We believe this action and the other actions we have taken significantly increased the liquidity position over the previous quarter-end, with cash balance ending the year at $265 million as well as reducing our mark-to-market exposure.

Subsequent to December 31, 2022, we terminated CIM Trust 2020-R4, CIM Trust 2020-NR1, CIM Trust 2018-R5, and CIM Trust 2018-R6 and issued CIM Trust 2023-R1 and CIM Trust 2023-NR1 reducing our recourse borrowing amount by approximately $139 million and releasing approximately $90 million in equity. This termination and issuance will result in a higher interest expense over the term of the new financing. While we expect to invest the released equity into higher yielding investments, any benefit from these new investments will not be recognized in our financial results until we have fully invested the funds. As of January 31, 2023, we had approximately $365 million in cash.

We continue to seek to optimize our liabilities through securitization enabling us to have long-term non-mark-to-market financing on a portion of our residential mortgage loans. The interest expense on our recourse secured financing agreements increased throughout the year due to higher interest rates. Given the market outlook of higher interest rates, and the consequential potential for increasing interest expense during the year, we hedged our interest rate risk with pay fixed interest rate swaps and a pay fixed interest rate swaption. We ended the year with $2.5 billion in hedges comprising of (a) $1 billion pay fixed swaption, (b) $500 million pay fixed three-year swap and (c) $985 million in pay fixed five-year swap to hedge our interest rate exposure.

The fourth quarter of 2022 continued to show market concerns with the path of interest rate increases undertaken by the Federal Reserve. The Federal Reserve raised the Federal Funds target rate by 75 basis points to 4.0% in November; its fourth consecutive 75 basis points increase, followed by a further 50 basis points increase in December. Several Consumer Price Index, or CPI, data points came out indicating a moderation in the pace of inflation, providing some temporary relief to the rate selloff while providing price support to the longer end of the U.S. Treasury yield curve. Mortgages rates edged lower during the quarter, ending the year around 6.35%. However, the decrease in home affordability continues to show its impact on the overall housing market slowdown.

During the fourth quarter of 2022, we settled a $463 million prime jumbo loans purchase. Simultaneous with the purchase of the prime jumbo mortgage loans, to finance them, we entered enter a $383 million, five-year fixed rate senior financing facility that includes embedded pay-fixed interest rate swaps, which results in the facility to be effectively non-mark-to-market during the term. In October 2022, we sponsored CIM 2022-NR1, an unrated securitization of Seasoned Re-Performing residential mortgage loans with a principal balance of $145 million. Securities issued by CIM 2022-NR1, with an aggregate balance of approximately $105 million, were sold in a private placement to institutional investors. These senior securities represented approximately 72% of the capital structure. We retained subordinate interests in securities with an aggregate balance of approximately $40 million and certain interest-only securities We also retained an option to call the securitized mortgage loans at any time beginning in September 2025. Our average cost of debt of this securitization is 10%.

Market Conditions and our Strategy

As discussed above, during 2022, spreads on all fixed income sectors significantly widened due to the rapid increase in market volatility, credit risk and rising Federal Funds Rate. High yield credit spreads widened from approximately 295 basis points to over 475 basis points during the quarter ended December 31, 2022. The spreads on securitized products also widened significantly from historical tight levels and, in some cases doubling or tripling. In mortgage sectors, Non-Qualified Mortgages, or Non-QM, and investor loans ended the year at nearly triple the spread from the beginning of the year. Asset backed securities, or ABS, issuance continued to be strong, but deal issuance projections fell short of initial expectations. Agency mortgage spreads widened substantially as prepayment rates fell dramatically from the 2021 refinancing wave. The outlook

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going forward hints at continued challenges, but with some more certainty that inflation has peaked and will likely be more moderate going forward.

During the fourth quarter 2022, spreads on all fixed income sectors continued to fluctuate, ending the quarter mixed. High yield credit spreads tightened by approximately 125 basis points during the quarter. Equity markets recovered some of their losses over the quarter. The spreads on securitized product spreads also tightened, albeit at a moderate rate, with some bright spots. In mortgage sectors, Non-QM and investor loans ended the fourth quarter of 2022 at almost the same levels as the beginning of the quarter. Reperforming Loans, or RPL, and Non-performing Loans, or NPL, transactions were in short supply, with low supply indicating a better whole loan bid rather than securitization. The outlook going forward hints at continued challenges, but with some glimmer that a major recession may be avoided and the Federal Reserve may have a path to eventually easing interest rates.

As a result of higher rates and wider spreads in 2022, we experienced declines in prices on our Agency and residential credit portfolios. This was the primary reason for a decline of $4.35 per common share in our book value per common share to $7.49, as of December 31, 2022 as compared to $11.84 as of December 31, 2021. However, as the market began to show some moderation in inflation during the fourth quarter and, the credit spreads tightened in fourth quarter as mentioned earlier, resulted in a modest gain of book value from $7.44 at September 30, 2022 to $7.49 at December 31, 2022.

Operating expense for the year was higher by 2%, driven mainly by higher compensation of 5.5% during the year due to severance payments related to our separation agreement with our former CEO in December 31, 2022. As noted above, we have purchased additional hedges to protect against rising interest rates.

In addition, the significant movement in our share price relative to our book value, provided us with an opportunity to repurchase our common stock that we believed would be beneficial to our shareholders over the long term. As a result, during the year ended December 31, 2022 we repurchased 5.31 million of our common stock at a weighted average price of $9.10 per share. Total share repurchases amounted to $49 million during 2022.

The significant increase in interest expense during the quarter driven by increase in Federal Funds Rate led to a decline in our Earnings available for distribution. As a result, our Board of Directors declared a $1.12 dividend per common share during the year ended December 31, 2022 down from $1.42 dividend per common share during the year ended December 31, 2021. Dividends declared for the fourth quarter of 2022 remained unchanged at $0.23 per common share. On February 2, 2023,

our Board of Directors announced the declaration of our first quarter 2023 cash dividend of $0.23 per common share. The

dividend is payable April 27, 2023 to shareholders of record on March 31, 2023. The ex-dividend date is March 30, 2023.

While the current market conditions present challenges, we expect to maintain our strategy of acquiring new assets for the portfolio, adding new diversified asset classes to our portfolio. Specifically, we expect to continue acquiring and securitizing mortgage loans as well as calling our existing securitizations depending on market conditions. In addition to our securitization and business purpose loan activities, we expect to increase our Agency and non-Agency RMBS and CMBS portfolios. We also have financed and may continue to finance a portion of our loan portfolio with long-term secured financing facilities rather than securitization depending on market conditions.

Business Operations

Net Income (Loss) Summary

The table below presents our net income (loss) on a GAAP basis for the years ended December 31, 2022, 2021 and 2020.

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(1) Includes interest income of consolidated VIEs of $551,253, $586,580, and $683,456 for the years ended December 31, 2022, 2021, and 2020, respectively. See Note 9 to consolidated financial statements for further discussion.

(2) Includes interest expense of consolidated VIEs of $197,823, $203,135, and $285,142 for the for the years ended December 31, 2022, 2021, and 2020, respectively. See Note 9 to consolidated financial statements for further discussion.

See accompanying notes to consolidated financial statements.

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Results of Operations for the Years Ended December 31, 2022 and 2021.

Our primary source of income is interest income earned on our assets, net of interest expense paid on our financing liabilities. For the year ended December 31, 2022, our net loss available to common shareholders was $587 million, or $2.51 per average basic common share, compared to a net income of $596 million, or $2.55 per average basic common share for the year ended December 31, 2021. The net loss available for the year ended December 31, 2022 was primarily driven by mark-to-market losses on our portfolio's asset prices due to continued increases in interest rates and credit spread widening. During the year ended December 31, 2022, we had net unrealized losses on financial instruments at fair value of $737 million, other expenses of $124 million and net realized losses on sale of investment of $76 million, partially offset by net interest income of $440 million. During the year ended December 31, 2021, we had net interest income of $611 million and unrealized gains on financial instruments at fair value of $437 million, partially offset by losses on extinguishment of debt of $284 million and other expenses of $135 million.

The increase in net loss available to common shareholders for the year ended December 31, 2022, as compared to the year ended December 31, 2021 was primarily driven by an increase in unrealized losses on financial instruments at fair value of $1.2 billion, a decrease in net interest income of $171 million and an increase in realized losses on sale of investments of $122 million, which was partially offset by a decrease in losses on extinguishment of debt of $281 million related to acquisitions of securitized debt collateralized by Loans held for investment and a decrease in total other expense of $11 million.

Interest Income

Interest income decreased by $165 million, or 18%, to $773 million for the year ended December 31, 2022 as compared to $938 million for the year ended December 31, 2021. This decrease in our interest income during the year ended December 31, 2022 was primarily driven by a decline in our average interest earning assets, lower prepayment penalties on our Agency CMBS investments and lower yields on our Non-Agency RMBS and Loans held for investments as compared to the year ended December 31, 2021. We reduced our average interest earning asset balances by $783 million to $13.6 billion as compared to $14.4 billion from the same period of 2021 to due to prepayments in excess of purchases as well as targeted sales of specific assets which were not accretive to our net interest spread. Our Non-Agency RMBS and Loans held for investment portfolio interest income decreased by $80 million and $17 million due to lower asset balances and lower yields during the year ended December 31, 2022 as compared to the same period of 2021. Our Agency CMBS interest income decreased by $70 million, primarily due to lower prepayment penalties earned during the year ended December 31, 2022 as compared to the same period of 2021.

Interest Expense

Interest expense increased by $6 million, or 2%, to $333 million for the year ended December 31, 2022 as compared to $327 million for the year ended December 31, 2021. This increase in our interest expense during the year ended December 31, 2022 was primarily driven by the increases higher borrowing rates on our secured financing agreements, due to increases in the Federal Funds Rate. The increasing borrowing rates were offset in part to lower average financing balances due as we reduced our secured financing agreements by using the securitization market, taking advantage of fixed rates, as well as lower invested asset balances due to a more challenging investment market in 2022.

During the year ended December 31, 2022 our average interest bearing liability balances reduced by $971 million to $11.3 billion as compared to $12.2 billion, from the year ended December 31, 2021, primarily due to principal repayments. During the year ended December 31, 2022, our interest expense on secured financing agreements collateralized by Loans held for investments and Agency CMBS increased by $15 million and $5 million, respectively, due to the higher Federal Funds Rate. This increase in interest expense was offset in part by a decrease in interest expense on securitized debt by $9 million as the average balance on this same debt declined by $242 million as compared to the average balance for the year ended December 31, 2021.

Economic Net Interest Income

Our Economic net interest income is a non-GAAP financial measure that equals GAAP net interest income adjusted for interest expense on long term debt, net periodic interest cost of interest rate swaps and excludes interest earned on cash. For the purpose of computing economic net interest income and ratios relating to cost of funds measures throughout this section, interest expense includes net payments on our interest rate swaps, which is presented as a part of Net gains (losses) on derivatives in our Consolidated Statements of Operations. Interest rate swaps are used to manage the increase in interest paid on secured financing agreements in a rising rate environment. Presenting the net contractual interest payments on interest rate swaps with the interest paid on interest-bearing liabilities reflects our total contractual interest payments. We believe this presentation is useful to

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investors because it depicts the economic value of our investment strategy by showing all components of interest expense and net interest income of our investment portfolio. However, Economic net interest income should not be viewed in isolation and is not a substitute for net interest income computed in accordance with GAAP. Where indicated, interest expense, adjusting for interest payments on long term debt and any interest earned on cash, is referred to as Economic interest expense. Where indicated, net interest income reflecting interest payments on long term debt, net periodic interest cost of interest rate swaps and any interest earned on cash, is referred to as Economic net interest income.

The following table reconciles the Economic net interest income to GAAP net interest income and Economic interest expense to GAAP interest expense for the periods presented.

(1) Primarily interest expense on Long term debt, periodic net interest cost on swaps and interest income on cash and cash equivalents.

Net Interest Rate Spread

The following table shows our average earning assets held, interest earned on assets, yield on average interest earning assets, average debt balance, economic interest expense, economic average cost of funds, economic net interest income and net interest rate spread for the periods presented.

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Economic Net Interest Income and the Average Earning Assets

Our Economic net interest income (which is a non-GAAP measure, see “Economic net interest income” discussion earlier for details) decreased by $177 million to $436 million for the year ended December 31, 2022 from $613 million for the year ended December 31, 2021. Our net interest rate spread, which equals the yield on our average interest-earning assets less the economic average cost of funds, decreased by 130 basis points for the year ended December 31, 2022, as compared to the same period of 2021. The net interest margin, which equals the Economic net interest income as a percentage of the net average balance of our interest-earning assets less our interest-bearing liabilities, decreased by 100 basis points for the year ended December 31, 2022, as compared to the same period of 2021. Our Average net interest-earning assets increased by $188 million to $2.4 billion for the year ended December 31, 2022, compared to $2.2 billion for the same period of 2021. The decrease in our net interest rate spread for the year ended December 31, 2022 as compared to the year ended December 31, 2021 is primarily due to decline in our asset yields, higher interest expense due to higher Federal Funds Rate and lower prepayment penalties received on our Agency CMBS portfolio.

Economic Interest Expense and the Cost of Funds

The borrowing rate at which we are able to finance our assets using secured financing agreements is typically correlated to Secured overnight funding rate, or SOFR, and the term of the financing. The borrowing rate on majority of our securitized debt is fixed and correlated to the term of the financing. The table below shows our average borrowed funds, Economic interest expense, average cost of funds (inclusive of periodic interest costs on swaps), average one-month SOFR, average three-month SOFR and average one-month SOFR relative to average three-month SOFR.

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Average interest-bearing liabilities decreased by $971 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. Economic interest expense increased by $11 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021 due to increase in our secured financing agreements borrowing rates driven by higher Federal Funds Rates. While we may use interest rate hedges to mitigate risks related to changes in interest rate, the hedges may not fully offset interest expense movements.

Provision for Credit Losses

For the year ended December 31, 2022 we recorded an increase in provision for credit losses of $7 million, as compared to an increase in provision of credit losses of $33 thousand for the year ended December 31, 2021. The increase in provision for credit losses for the year ended December 31, 2022 as compared to the year ended December 31, 2021, is primarily due to an increase in expected losses and delinquencies. In addition, certain Non-Agency RMBS positions, now have higher unrealized losses and resulted in the recognition of an allowance for credit losses which was previously limited by unrealized gains on these investments.

Net Gains (Losses) on Derivatives

We use derivatives to economically hedge the effects of changes in interest rates on our portfolio, specifically our secured financing agreements. Unrealized gains and losses include the change in market value, period over period, on our derivatives portfolio. Changes in market value are generally a result of changes in interest rates. We may or may not ultimately realize these unrealized derivative gains and losses depending on trade activity, changes in interest rates and the values of the underlying securities. The net gains and losses on our derivatives include both unrealized and realized gains and losses. Realized gains and losses include the net cash paid and received on our interest rate swaps during the period as well as sales, terminations and settlements of our swaps, swaptions and Treasury futures.

The table below shows a summary of our net gains (losses) on derivative instruments, for the years ended December 31, 2022, 2021 and 2020, respectively.

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Unrealized gains and losses include the change in market value, period over period, on our derivatives portfolio. Changes in market value are generally a result of changes in interest rates. We may or may not ultimately realize these unrealized derivative gains and losses depending on trade activity, changes in interest rates and the values of the underlying securities. During the year ended December 31, 2022, we recognized total net losses on derivatives of $4 million. We did not have any derivative positions during the year ended December 31, 2021. We paid $561 thousand to terminate interest rate swaps with a notional value of $1.0 billion during the year ended December 31, 2022. The terminated swaps had original maturity of 2024. Changes in our derivative positions were primarily a result of changes in our secured financing composition and changes in interest rates.

Net Unrealized Gains (Losses) on Financial Instruments at Fair Value

During the year ended December 31, 2022, there was an increase in Federal Funds Rate, an increase in headline inflation, an inversion of yield curve, and widening of credit spreads. As a result, we experienced mark-to-market losses in our Agency MBS and Residential Credit portfolios compared to prior year. In addition, our securitized debt also experienced mark downs, resulting in mark-to-market gains that offset some of the mark-to-market losses on our asset portfolio.

We recorded Net unrealized losses on financial instruments at fair value of $737 million for the year ended December 31, 2022, as compared to Net unrealized gains on financial instruments at fair value of $437 million for the year ended December 31, 2021. During the year ended December 31, 2022, we had Net unrealized losses of $1.3 billion, $105 million, $32 million and $9 million on Loans held for investments, Non-Agency RMBS, Agency MBS, and Secured Financing Agreements at fair value respectively, which were offset by Net unrealized gains on securitized debt collateralized by loans held for investment of $684 million.

Gains and Losses on Sales of Assets

We do not forecast sales of investments as we generally expect to invest for long term gains. However, from time to time, we may sell assets to create liquidity necessary to pursue new opportunities, to achieve targeted leverage ratios as well as for gains when prices indicate a sale is most beneficial to us, or is the most prudent course of action to maintain a targeted risk adjusted yield for our investors.

During the year ended December 31, 2022 we sold some of our Agency IO and Non-Agency RMBS investments as a part of our portfolio optimization efforts and realized a loss of $76 million. We recorded a realized gain of $45 million for the year ended December 31, 2021 as we sold some of our Agency CMBS and Non-Agency RMBS investments to strengthen our liquidity during that period.

Extinguishment of Securitized Debt

When we acquire our outstanding securitized debt, we extinguish the outstanding debt and recognize a gain or loss based on the difference between the carrying value of the debt and the cost to acquire the debt which is reflected in the Consolidated Statements of Operations as a gain or loss on extinguishment of debt.

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We did not acquire any securitized debt collateralized by Non-Agency RMBS during the year ended December 31, 2022. During the year ended December 31, 2021, we acquired securitized debt collateralized by Non-Agency RMBS with an amortized cost balance of $370 thousand for $478 thousand. This transaction resulted in net loss on extinguishment of debt of $108 thousand.

We did not acquire any securitized debt collateralized by loans held for investment during the year ended December 31, 2022. During the year ended December 31, 2021, we acquired securitized debt collateralized by Loans held for investment with an amortized cost balance of $3.9 billion for $4.2 billion. This transaction resulted in net loss on extinguishment of debt of $260 million.

Compensation, General and Administrative Expenses and Transaction Expenses

The table below shows our total compensation and benefit expense, general and administrative, or G&A expenses, and transaction expenses as compared to average total assets and average equity for the periods presented.

The Compensation and benefit costs were approximately $49 million and $47 million for the years ended December 31, 2022 and December 31, 2021, respectively. The increase in Compensation and benefit costs for the year ended December 31, 2022 was driven by higher severance expense related to our December 2022 separation agreement with our former CEO as compared to the year ended December 31, 2021.

The G&A expenses were approximately $23 million and $22 million for the years ended December 31, 2022 and December 31, 2021, respectively and remained relatively unchanged. The G&A expenses are primarily comprised of legal, market data and research, auditing, consulting, information technology, and independent investment consulting expenses.

The transactions expenses were approximately $16 million and $30 million for the years ended December 31, 2022 and December 31, 2021, respectively. The decrease in transaction expenses for the year ended December 31, 2022 compared to the year ended December 31, 2021, are driven by lower call and securitization activity.

Servicing and Asset Manager Fees

The servicing fees and asset manager expenses were $36 million and $37 million for the years ended December 31, 2022 and December 31, 2021, respectively. These servicing fees are primarily related to the servicing costs of the whole loans held in consolidated securitization vehicles and are paid from interest income earned by the VIEs. The servicing fees generally range from 2 to 50 basis points of unpaid principal balances of our consolidated VIEs.

Earnings available for distribution

Earnings available for distribution is a non-GAAP measure and is defined as GAAP net income excluding unrealized gains or losses on financial instruments carried at fair value with changes in fair value recorded in earnings, realized gains or losses on the sales of investments, gains or losses on the extinguishment of debt, interest expense on long term debt, changes in the provision for credit losses, other gains or losses on equity investments, and transaction expenses incurred. In addition, stock compensation expense charges incurred on awards to retirement eligible employees is reflected as an expense over a vesting period (36 months) rather than reported as an immediate expense.

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Earnings available for distribution is the Economic net interest income, as defined previously, reduced by compensation and benefits expenses (adjusted for awards to retirement eligible employees), general and administrative expenses, servicing and asset manager fees, income tax benefits or expenses incurred during the period, as well as the preferred dividend charges.

We view Earnings available for distribution as one measure of our investment portfolio's ability to generate income for distribution to common stockholders. Earnings available for distribution is one of the metrics, but not the exclusive metric, that our Board of Directors uses to determine the amount, if any, of dividends on our common stock. Other metrics that our Board of Directors may consider when determining the amount, if any, of dividends on our common stock include (among others) REIT taxable income, dividend yield, book value, cash generated from the portfolio, reinvestment opportunities and other cash needs. In addition, Earnings available for distribution is different than REIT taxable income and the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to our stockholders in order to maintain qualification as a REIT is not based on Earnings available for distribution. Therefore, Earnings available for distribution should not be considered as an indication of our REIT taxable income, a guaranty of our ability to pay dividends, or as a proxy for the amount of dividends we may pay. We believe Earnings available for distribution as described above helps us and investors evaluate our financial performance period over period without the impact of certain transactions. Therefore, Earnings available for distribution should not be viewed in isolation and is not a substitute for net income or net income per basic share computed in accordance with GAAP. In addition, our methodology for calculating Earnings available for distribution may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our Earnings available for distribution may not be comparable to the Earnings available for distribution reported by other REITs.

The following table provides GAAP measures of net income and net income per diluted share available to common stockholders for the periods presented and details with respect to reconciling the line items to Earnings available for distribution and related per average diluted common share amounts. Earnings available for distribution is presented on an adjusted dilutive shares basis. Certain prior period amounts have been reclassified to conform to the current period's presentation.

(1) Included in net realized gains (losses) on derivatives in the Consolidated Statement of Operations

The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted average adjusted diluted shares used for Earnings available for distribution for the years ended December 31, 2022, 2021 and 2020.

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(1) Potentially dilutive shares related to restricted stock units and performance stock units excluded from the computation of weighted average GAAP diluted shares because their effect would have been anti-dilutive given the GAAP net loss available to common shareholders for the years ended December 31, 2022,

The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average adjusted diluted shares used for Earnings available for distribution for the periods reported below.

(1) Potentially dilutive shares related to restricted stock units and performance stock units excluded from the computation of weighted average GAAP diluted shares because their effect would have been anti-dilutive given the GAAP net loss available to common shareholders for the quarters ended September 30, 2022, June 30, 2022, March 31, 2022, and December 31, 2021.

Our Earnings available for distribution for the year ended December 31, 2022 were $256 million, or $1.08 per average diluted common share, and decreased by $173 million, or $0.70 per average diluted common share, as compared to $429 million, or $1.78 per average diluted common share, for the year ended December 31, 2021. The decrease in Earnings available for distribution was driven by an increase in interest expense driven by the higher Federal Funds rate, lower prepayment penalties or early paydowns received and severance payments during the year ended December 31, 2022 as compared to the year ended December 31, 2021.

Net Income (Loss) and Return on Total Stockholders' Equity

The table below shows our Net Income and Economic net interest income as a percentage of average stockholders' equity and Earnings available for distribution as a percentage of average common stockholders' equity. Return on average equity is defined as our GAAP net income (loss) as a percentage of average equity.  Average equity is defined as the average of our beginning

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and ending stockholders' equity balance for the period reported. Economic net interest income and Earnings available for distribution are non-GAAP measures as defined in previous sections.

* Excludes long term debt expense.

Return on average equity decreased by 3,474 basis points for the year ended December 31, 2022, as compared to the year ended December 31, 2021. This decrease is driven primarily by lower unrealized asset pricing losses on our financial instruments and increase in interest expense driven by higher Federal Funds Rates. Economic net interest income as a percentage of average equity decreased by 235 basis points for the year ended December 31, 2022 as compared to the year ended December 31, 2021. Earnings available for distribution as a percentage of average common equity decrease by 346 basis points for the year ended December 31, 2022 as compared to the year ended December 31, 2021. This decrease in Earnings available for distribution as a percentage of average common equity for the year ended December 31, 2022 as compared to the same period of 2021, was primarily driven by an increase in interest expense driven by the impact of the higher Federal Funds Rate on our secured financing agreements, lower prepayment penalties received, and severance payments.

Financial Condition

Portfolio Review

During the year ended December 31, 2022, we focused our efforts on taking advantage of the opportunity to acquire higher yielding assets while maintaining low leverage and ample liquidity. During the year ended December 31, 2022, on an aggregate basis, we purchased $2.1 billion of investments, sold $66 million of investments, and received $2.6 billion in principal payments related to our Agency MBS, Non-Agency RMBS and Loans held for investment portfolio.

The following table summarizes certain characteristics of our portfolio at December 31, 2022 and December 31, 2021.

(1) Excludes cash and cash equivalents.

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GAAP leverage at period-end is calculated as a ratio of our secured financing agreements and securitized debt liabilities over GAAP book value. GAAP recourse leverage is calculated as a ratio of our secured financing agreements over stockholders equity.

The following table presents details of each asset class in our portfolio at December 31, 2022 and December 31, 2021. The principal or notional value represents the interest income earning balance of each class. The weighted average figures are weighted by each investment’s respective principal/notional value in the asset class.

(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated using each investment's respective amortized cost.

(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.)

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(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated using each investment's respective amortized cost.

(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.)

Based on the projected cash flows for our Non-Agency RMBS that are not of high credit quality, a portion of the original purchase discount is designated as Accretable Discount, which reflects the purchase discount expected to be accreted into interest income, and a portion is designated as Non-Accretable Difference, which represents the contractual principal on the security that is not expected to be collected. The amount designated as Non-Accretable Difference may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security is more favorable than previously estimated, a portion of the amount designated as Non-Accretable Difference may be transferred to Accretable Discount and accreted into interest income over time. Conversely, if the performance of a security is less favorable than previously estimated, a provision for credit loss may be recognized resulting in an increase in the amounts designated as Non-Accretable Difference.

The following table presents changes to Accretable Discount (net of premiums) as it pertains to our Non-Agency RMBS portfolio, excluding premiums on interest-only investments, during the previous five quarters.

We invest a significant majority of our capital in pools of Non-Agency RMBS and Loans held for investment. These investments carry risk for credit losses. As we are exposed to risk for credit losses, it is important for us to closely monitor credit losses incurred, as well as how expectations of credit losses are expected to change. We estimate future credit losses based on historical experience, market trends, current delinquencies as well as expected recoveries. The net present value of these expected credit losses can change, sometimes significantly from period to period as new information becomes available. When credit loss experience and expectations improve, we will collect more principal on our investments. If credit loss experience deteriorates, we will collect less principal on our investments. The favorable or unfavorable changes in credit losses are reflected in the yield on our investments in mortgage loans and recognized in earnings over the remaining life of our investments. The following table presents changes to net present value of expected credit losses for our Non-Agency RMBS and Loans held for investment portfolios during the previous five quarters. Gross losses are discounted at the rate used to amortize any discounts or premiums on our investments into income. A decrease (negative balance) in the "Increase/(decrease)" line item in the tables below represents a favorable change in expected credit losses. An increase (positive balance) in the "Increase/(decrease)" line item in the tables below represents an unfavorable change in expected credit losses.

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Liquidity and Capital Resources

General

Liquidity measures our ability to meet cash requirements, including ongoing borrowing commitments, purchase RMBS, residential mortgage loans and other assets for our portfolio, pay dividends and other general business needs. Our principal sources of capital and funds for additional investments primarily include earnings, principal paydowns and sales from our investments, borrowings under securitizations and re-securitizations, secured financing agreements and other financing facilities including warehouse facilities, and proceeds from equity or other securities offerings.

As discussed earlier, during the year ended December 31, 2022, we experienced mark downs in our Agency, residential credit and securitized debt portfolios as a result of the increase in headline inflation, an inversion of the yield curve, an increase in the actual and expected Federal Funds Rate and widening of credit spreads. If these conditions become more pronounced, we may experience an adverse impact on our liquidity. We have sought and expect to continue to seek longer-term, more durable financing to reduce our risk exposure to margin calls related to shorter-term repurchase financing.

Our ability to fund our operations, meet financial obligations and finance target asset acquisitions may be impacted by our ability to secure and maintain our master secured financing agreements, warehouse facilities and secured financing agreements facilities with our counterparties. Because secured financing agreements and warehouse facilities are short-term commitments of capital, lenders may respond to market conditions making it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have and may continue to impose more onerous conditions when rolling forward such financings. If we are not able to renew our existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under our financing facilities or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and dispose of assets.

To meet our short term (one year or less) liquidity needs, we expect to continue to borrow funds in the form of secured financing agreements and, subject to market conditions, other types of financing. The terms of the secured financing transaction borrowings under our master secured financing agreement generally conform to the terms in the standard master secured financing agreement as published by the Securities Industry and Financial Markets Association, or SIFMA, or similar market accepted agreements, as to repayment and margin requirements. In addition, each lender typically requires that we include

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supplemental terms and conditions to the standard master secured financing agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, net asset value, required 'haircuts' (which are the difference expressed in percentage terms between the fair value of the collateral and the amount the counterpart will lend to us) purchase price maintenance requirements, and requirements that all disputes related to the secured financing agreement be litigated or arbitrated in a particular jurisdiction. These provisions may differ for each of our lenders.

Based on our current portfolio, leverage ratio and available borrowing arrangements, we believe our assets will be sufficient to enable us to meet anticipated short-term liquidity requirements. If our cash resources are insufficient to satisfy our liquidity requirements, we may have to sell additional investments, potentially at a loss, issue debt or additional common or preferred equity securities.

To meet our longer-term liquidity needs (greater than one year), we expect our principal sources of capital and funds to continue to be provided by earnings, principal paydowns and sales from our investments, borrowings under securitizations and re-securitizations, secured financing agreements and other financing facilities, as well as proceeds from equity or other securities offerings.

In addition to the principal sources of capital described above, we may enter into warehouse facilities and use longer dated structured secured financing agreements. The use of any particular source of capital and funds will depend on market conditions, availability of these facilities, and the investment opportunities available to us.

Current Period

We held cash and cash equivalents of approximately $265 million and $386 million at December 31, 2022 and December 31, 2021, respectively. As a result of our operating, investing and financing activities described below, our cash position decreased

by $121 million from December 31, 2021 to December 31, 2022. Subsequent to December 31, 2022, we have collapsed CIM

Trust 2020-R4, CIM Trust 2020-NR1, CIM Trust 2018-R5, and CIM Trust 2018-R6 and issued CIM Trust 2023-R1 and CIM

Trust 2023-NR1 reducing our recourse borrowing amount by approximately $139 million and releasing approximately $90

million in equity.

Our operating activities provided net cash of approximately $326 million and $519 million for the year ended December 31, 2022 and 2021, respectively. The cash flows from operations were primarily driven by interest received in excess of interest paid of $519 million and $681 million during the year ended December 31, 2022 and 2021, respectively.

Our investing activities provided cash of $510 million and $2.5 billion for the year ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, we received cash for principal repayments on Agency MBS, Non-Agency RMBS and Loans held for investment of $2.6 billion. This cash received was offset in part by cash used on investment purchases of $2.1 billion, primarily consisting of Loans held for investment of $2.1 billion, Agency MBS of $58 million and Non-Agency RMBS of $23 million. During the year ended December 31, 2021, we received cash from sale of investments of $1.9 billion, primarily consisting of Loans held for investments of $1.7 billion and principal repayments on our Agency MBS, Non-Agency RMBS, and Loans held for investments of $3.7 billion. This cash provided was offset in part by cash used on investment purchases of $3.1 billion, primarily consisting of Loans held for investments of $2.9 billion and Agency CMBS funding of $217 million.

Our financing activities used cash of $1.0 billion and $3.0 billion for the year ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, we primarily used cash for repayment of principal on our securitized debt of $1.8 billion, payment of common and preferred dividends of $362 million, and repurchase of our common stock of $49 million. This cash used was offset in part by cash received for securitized debt collateralized by loans issuance of $1.1 billion and net proceeds received from our secured financing agreements of $178 million. During the year ended December 31, 2021, our financing efforts were focused on taking advantage of a low interest rate environment to collapse and securitize debt borrowings that significantly reduce our cost of funding. During the year ended December 31, 2021, we primarily used cash for repayment of principal on our securitized debt of $5.9 billion, net payments on our secured financing agreements of $852 million, settlement of warrants of $221 million, and paid common and preferred dividends of $276 million. This cash paid was offset in part by cash received for securitized debt collateralized by loans issuance of $5.1 billion.

Our recourse leverage was 1.3:1 and 0.9:1 at December 31, 2022 and at December 31, 2021, respectively. Our recourse leverage excludes the securitized debt which can only be repaid from the proceeds on the assets securing this debt in their respective VIEs. Our recourse leverage is presented as a ratio of our secured financing agreements, which are recourse to our assets and our equity.

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At December 31, 2022 and December 31, 2021, the remaining maturities and borrowing rates on our RMBS and loan secured financing agreements were as follows.

(1) The outstanding balance for secured financing agreements in the table above is net of $1 million and $3 million of deferred financing cost as of December 31, 2022 and 2021, respectively.

We collateralize the secured financing agreements we use to finance our operations with our MBS investments and mortgage loans held in trusts controlled by us. Our counterparties negotiate a ‘haircut’, which is the difference expressed in percentage terms between the fair value of the collateral and the amount the counterparty will lend to us, when we enter into a financing transaction. The size of the haircut reflects the perceived risk and market volatility associated with holding the MBS by the lender. The haircut provides lenders with a cushion for daily market value movements that reduce the need for a margin call to be issued or margin to be returned as normal daily increases or decreases in MBS market values occur. Haircuts have increased on our secured financing agreements collateralized by Agency MBS and decreased on our secured financing agreements collateralized by Non-Agency RMBS and Loans held for investments during 2022. At December 31, 2022, the weighted average haircut on our remaining secured financing agreements collateralized by Agency RMBS IOs was 20.0%, Agency CMBS was 7.8% and Non-Agency RMBS and Loans held for investment was 25.7%. At December 31, 2021, the weighted average haircut on our remaining secured financing agreements collateralized by Agency RMBS IOs was 15.0%, Agency CMBS was 6.7% and Non-Agency RMBS and Loans held for investment was 27.9%.

The fair value of the Non-Agency MBS is more difficult to determine in current financial conditions, as well as more volatile period to period than Agency MBS, the Non-Agency MBS typically requires a larger haircut. In addition, when financing assets using standard form of SIFMA Master Repurchase Agreements, the counterparty to the agreement typically nets its exposure to us on all outstanding repurchase agreements and issues margin calls if movement of the fair values of the assets in the aggregate exceeds their allowable exposure to us. A decline in asset fair values could create a margin call or may create no margin call depending on the counterparty’s specific policy. In addition, counterparties consider a number of factors, including their aggregate exposure to us as a whole and the number of days remaining before the repurchase transaction closes prior to issuing a margin call. To minimize the risk of margin calls, as of December 31, 2022, we have entered into $1.2 billion of financing arrangements for which the collateral cannot be adjusted as a result of changes in market value, minimizing the risk of a margin call as a result in price volatility. We refer to these agreements as non-mark-to-market (non-MTM) facilities. These non-MTM facilities generally have higher costs of financing, but lower the risk of a margin call which could result in sales of our assets at distressed prices. All non-MTM facilities are collateralized by Non-Agency RMBS collateral, which tends to have increased volatile price changes during periods of market stress. In addition we have entered into certain secured financing agreements which are not subject to additional margin requirement until the drop in fair value of collateral is greater than a threshold. We

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refer to these agreements as limited mark-to-market (limited MTM) facilities. As of December 31, 2022 we have $365 million, of limited MTM facilities. We believe these non-MTM and limited MTM facilities significantly reduce our financing risks. See Note 5 to our Consolidated Financial Statements for a discussion on how we determine the fair values of the RMBS collateralizing our secured financing agreements.

At December 31, 2022, the weighted average borrowing rates for our secured financing agreements collateralized by Agency RMBS IOs was 4.7%, Agency CMBS was 4.5% and Non-Agency MBS and Loans held for investment was 6.9%. At December 31, 2021, the weighted average borrowing rates for our secured financing agreements collateralized by Agency RMBS IOs was 0.7%, Agency CMBS was 0.2%, and Non-Agency MBS and Loans held for investment was 2.8%.

We entered into a secured financing agreement during fourth quarter of 2022 for which we have elected fair value option. We believe electing fair value for this financial instrument better reflects the transactional economics. The total principal balance outstanding on this secured financing is $383 million and the fair value of collateral pledged is $418 million. We carry this secured financing instrument at fair value of $374 million. The weighted average borrowing rate, haircut and maturity were 5.14%, 7.5%, and five years, respectively. Additionally, we entered into a $250 million two-year non-mark-to-market secured financing agreement with a new counterparty during fourth quarter of 2022.

The table below presents our average daily secured financing agreements balance and the secured financing agreements balance at each period end for the periods presented. Our balance at period-end tends to fluctuate from the average daily balances due to the adjusting of the size of our portfolio by using leverage.

Our secured financing agreements do not require us to maintain any specific leverage ratio. We believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At December 31, 2022 and December 31, 2021, the carrying value of our total interest-bearing debt was approximately $10.6 billion and $11.1 billion, respectively, which represented a leverage ratio of approximately 4.0:1 and 3.0:1, respectively. We include our secured financing agreements and securitized debt in the numerator of our leverage ratio and stockholders’ equity as the denominator.

At December 31, 2022, we had secured financing agreements with 16 counterparties. All of our secured financing agreements are secured by Agency MBS, Non-Agency RMBS and Loans held for investment and cash. Under these secured financing agreements, we may not be able to reclaim our collateral but will still be obligated to pay our repurchase obligations. We mitigate this risk by ensuring our counterparties are rated financial institutions. As of December 31, 2022 and December 31, 2021, we had $5.2 billion and $4.4 billion, respectively, of securities or cash pledged against our secured financing agreements obligations.

We expect to enter into new secured financing agreements at maturity; however, there is a risk that we will not be able to renew our secured financing agreements when we desire to renew them or obtain favorable interest rates and haircuts as a result of uncertainty in the market including, but not limited to, uncertainty as a result of inflation and increases in the Federal Funds Rate. We offset the interest rate risk of our repurchase agreements primarily through the use of derivatives, which primarily consist of interest rate swaps, swaptions and Treasury futures. The average remaining maturities on our interest rate swaps at December 31, 2022 ranges from three years to five years and have a weighted average maturity of approximately four years. All of our swaps are cleared by a central clearing house. When our interest rate swaps are in a net loss position (expected cash payments are in excess of expected cash receipts on the swaps), we post collateral as required by the terms of our swap agreements.

Exposure to Financial Counterparties

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We actively manage the number of secured financing agreements counterparties to reduce counterparty risk and manage our liquidity needs. The following table summarizes our exposure to our secured financing agreements counterparties at December 31, 2022:

(1) Represents the amount of securities and/or cash pledged as collateral to each counterparty less the aggregate of secured financing agreement.

We regularly monitor our exposure to financing counterparties for credit risk and allocate assets to these counterparties based, in part, on the credit quality and internally developed metrics measuring counterparty risk. Our exposure to a particular counterparty is calculated as the excess collateral which is pledged relative to the secured financing agreement balance. If our exposure to our financing counterparties exceeds internally developed thresholds, we develop a plan to reduce the exposure to an acceptable level. At December 31, 2022, we had amounts at risk with Nomura of 12% of our equity related to the collateral posted on secured financing agreements. The weighted average maturities of the secured financing agreements with Nomura were 582 days. The amount at risk with Nomura were $308 million. At December 31, 2021, there was no amount at risk with any counterparty greater than 10% of our equity.

At December 31, 2022, we did not use credit default swaps or other forms of credit protection to hedge the exposures summarized in the table above.

Stockholders’ Equity

In February 2021, our Board of Directors increased the authorization of our share repurchase program, or the Repurchase Program, to $250 million. Such authorization does not have an expiration date, and at present, there is no intention to modify or otherwise rescind such authorization. Shares of our common stock may be purchased in the open market, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason. Among other factors, we intend to only consider repurchasing shares of our common stock when the purchase price is less than the last publicly reported book value per common share. In addition, we do not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

We repurchased approximately 5.4 million shares of our common stock at an average price of $9.10 for a total of $49 million during the year ended December 31, 2022. We repurchased approximately 161 thousand shares of our common stock at an average price of $11.39 per share for a total of $2 million during the year ended December 31, 2021. The approximate dollar value of shares that may yet be purchased under the Repurchase Program is $177 million as of December 31, 2022.

In February 2022, we entered into separate Distribution Agency Agreements (the “Sales Agreements”) with each of

Credit Suisse Securities (USA) LLC, JMP Securities LLC, Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and

RBC Capital Markets, LLC (the “Sales Agents”). Pursuant to the terms of the Sales Agreements, we may offer and sell

shares of our common stock, having an aggregate offering price of up to $500,000,000, from time to time through any of

the Sales Agents under the Securities Act of 1933. During the year ended December 31, 2022, we did not issue any shares under the at-the-market sales program.

We declared dividends to common shareholders of $266 million, or $1.12 per share, and $308 million, or $1.29 per share, during the years ended December 31, 2022 and 2021, respectively.

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We declared dividends to Series A preferred stockholders of $12 million, or $2.00 per preferred share, during the years ended December 31, 2022 and 2021, respectively.

We declared dividends to Series B preferred stockholders of $26 million, or $2.00 per preferred share, during the years ended December 31, 2022 and 2021, respectively.

We declared dividends to Series C preferred stockholders of $20 million, or $1.937500 per preferred share, during the years ended December 31, 2022 and 2021, respectively.

We declared dividends to Series D preferred stockholders of $16 million, or $2.00 per preferred share, during the years ended December 31, 2022 and 2021, respectively.

On October 30, 2021, all 5,800,000 issued and outstanding shares of Series A Preferred Stock with an outstanding liquidation preference of $145 million became callable at a redemption price equal to the liquidation preference plus accrued and unpaid dividends through, but not including, the redemption date. The dividend rate on shares of Series A Preferred Stock is 8.00% per annum. Our fixed-to-floating rate series B, C and D preferred stock are LIBOR based and will become floating on their respective call dates.

Restricted Stock Unit and Performance Share Unit Grants

Grants of Restricted Stock Units, or RSUs

During the years ended December 31, 2022 and 2021, we granted RSU awards to our employees. These RSU awards are designed to reward our employees for services provided to us. Generally, the RSU awards vest equally over a three-year period beginning from the grant date and will fully vest after three years. For employees who are retirement eligible, defined as years of service to us plus age, is equal to or greater than 65, the service period is considered to be fulfilled and all grants are expensed immediately. The RSU awards are valued at the market price of our common stock on the grant date and generally the employees must be employed by us on the vesting dates to receive the RSU awards. We granted 396 thousand RSU awards during the year ended December 31, 2022 with a grant date fair value of $4 million for the 2022 performance year. We granted 393 thousand RSU awards during the year ended December 31, 2021, with a grant date fair value of $5 million for the 2021 performance year. In addition, during the year ended December 31, 2021, we granted certain of our senior management 1 million RSU awards that vest in five equal tranches with one tranche vested immediately and the remaining four will vest equally over a four-year period. These additional RSUs are not subject to retirement eligible provisions and had a grant date fair value of $10 million.

Grants of Performance Share Units, or PSUs

PSU awards are designed to align compensation with our future performance. The PSU awards granted during the year ended December 31, 2022 and 2021 include a three-year performance period ending on December 31, 2024 and December 31, 2023, respectively. The final number of shares awarded will be between 0% and 200% of the PSUs granted based on our Economic Return compared to a peer group. Our three-year Economic Return is equal to our change in book value per common share plus common stock dividends. Compensation expense will be recognized on a straight-line basis over the three-year vesting period based on an estimate of our Economic Return in relation to the entities in the peer group and will be adjusted each period based on our best estimate of the actual number of shares awarded. During the year ended December 31, 2022, we granted 128 thousand PSU awards to senior management with a grant date fair value of $2 million. During the year ended December 31, 2021, we granted 182 thousand PSU awards to senior management with a grant date fair value of $2 million.

At December 31, 2022 and December 31, 2021, there were approximately 3.0 million and 2.8 million, respectively, unvested shares of RSUs and PSUs issued to our employees and directors.

Contractual Obligations and Commitments

The following tables summarize our contractual obligations at December 31, 2022 and December 31, 2021. The estimated principal repayment schedule of the securitized debt is based on expected cash flows of the residential mortgage loans or RMBS, as adjusted for expected principal write-downs on the underlying collateral of the debt.

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(1) Interest is based on variable rates in effect as of December 31, 2022.

(1) Interest is based on variable rates in effect as of December 31, 2021.

Not included in the table above are the unfunded construction loan commitments of $9 million and $23 million as of December 31, 2022 and December 31, 2021, respectively. We expect the majority of these commitments will be paid within one year and are reported under Payable for investments purchased in our Consolidated Statements of Financial Condition.

We have made a $75 million capital commitment to a fund managed by Kah Capital Management, LLC. As of December 31, 2022, we have funded $27 million towards that commitment, leaving an unfunded commitment of $48 million.

Capital Expenditure Requirements

At December 31, 2022 and December 31, 2021, we had no material commitments for capital expenditures.

Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our taxable income (subject to certain adjustments). Before we pay any dividend, we must first meet any operating requirements and scheduled debt service on our financing facilities and other debt payable.

Critical Accounting Estimates

Accounting policies are integral to understanding our Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance with GAAP requires management to make certain judgments and assumptions, on the basis of information available at the time of the financial statements, in determining accounting estimates used in the preparation of these statements. Our significant accounting policies and accounting estimates are described in Note 2 to the Consolidated Financial Statements. Critical accounting policies are described in this section. An

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accounting policy is considered critical if it requires management to make assumptions or judgments about matters that are highly uncertain at the time the accounting estimate was made or require significant management judgment in interpreting the accounting literature. If actual results differ from our judgments and assumptions, or other accounting judgments were made, this could have a significant and potentially adverse impact on our financial condition, results of operations and cash flows.

The accounting policies and estimates which we consider most critical relate to the recognition of revenue on our investments, including recognition of any losses, and the determination of fair value of our financial instruments.

The consolidated financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities, or VIEs, for which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management 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 our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially adversely impact our results of operations and our financial condition. Management has made significant estimates in several areas, including current expected credit losses of Non-Agency RMBS, valuation of Loans held for investments, Agency and Non-Agency MBS, forward interest rates for interest rate swaps, and income recognition on Loans held for investments and Non-Agency RMBS. Actual results could differ materially from those estimates.

Recognition of Revenue

We primarily invest in pools of mortgage loans. All mortgage loans are carried at fair value with changes in fair value recognized in earnings. Our investments in mortgage loans pay principal and interest which is accrued when due. We also invest in MBS representing interests in obligations backed by pools of mortgage loans. Our investments in MBS includes investments in both Agency MBS and Non-Agency MBS. We delineate between (1) Agency MBS and (2) Non-Agency RMBS as follows: The Agency MBS are mortgage pass-through certificates, collateralized mortgage obligations, or CMOs, and other RMBS representing interests in or obligations backed by pools of residential mortgage loans issued or guaranteed as to principal and/or interest repayment by agencies of the U.S. Government or federally chartered corporations such as Ginnie Mae, Freddie Mac or Fannie Mae. The Non-Agency RMBS are not issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and are therefore subject to credit risk. We also invests in Interest Only Agency MBS strips and Interest Only Non-Agency RMBS strips, or IO MBS strips. IO MBS strips represent our right to receive a specified proportion of the contractual interest flows of the collateral.

Income on our investments is recognized based on an effective interest rate we expect to earn over the life of the investment. The effective interest rate is determined based on the cost of the investment and the expectation of future cash flows. To determine the future cash flows, we estimate the amount and timing of principal and interest, referred to as the repayment rate, and our expectations of defaults on payments of principal and interest. These estimates require significant judgment which change over time as our expectations change due to changes in market conditions and changes in our investments as principal and interest, other cash flows or losses are experiences. These estimates are compared to actual results of the investment and other similar investments on a regular basis and updated as necessary. These comparisons may result in a favorable or unfavorable change in the effective interest rate expected to be collected. Any favorable or unfavorable changes are reflected as a change in income. Our estimates of the timing and amount of principal and interest, including our expectation of defaults on payments of principal and interest are critical to accurately reporting interest income.

Our accounting policies for recognition of interest income and current expected credit losses related to MBS investments are described in further detail in Note 2 of the consolidated financial statements.

Determination of Fair Value

Substantially all of our investments are carried at fair value. In accordance with current accounting guidance, fair value of our financial instruments represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the financial statement reporting date. We use internally developed models to determine fair value of our investments.

We determine the fair value of all of our Non-Agency RMBS investment securities, including Non-Agency represented as securitized debt, based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon,

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repayment speeds, expected losses, expected loss severity, discount rates and other factors. Estimates of repayment speeds, expected losses and expected loss severity, require significant judgment and are based on what we believe a market participant would use to determine the cash flows. To corroborate that the estimates of fair values generated by these internal models are reflective of current market prices, we compare the fair values generated by the model to non-binding independent prices provided by an independent third party pricing services.

We estimate the fair value of our Loans held for investment consisting of seasoned subprime residential mortgage loans on a loan by loan basis using an internally developed model which compares the loan held by us with a loan currently offered in the market. The loan price is adjusted in the model by considering the loan factors which would impact the value of a loan. These loan factors include loan coupon as compared to coupon currently available in the market, FICO, loan-to-value ratios, delinquency history, owner occupancy, and property type, among other factors. A baseline is developed for each significant loan factor and adjusts the price up or down depending on how that factor for each specific loan compares to the baseline rate. Generally, the most significant impact on loan value is the loan interest rate as compared to interest rates currently available in the market and delinquency history. The determination of the baseline, the market expectation, requires significant judgment. To corroborate that the estimates of fair values generated by these internal models are reflective of current market prices, we compare the fair values generated by the model to non-binding independent prices provided by an independent third party pricing service.

To the extent the inputs used to estimate fair value are observable, the values would be categorized in Level 2 of the fair value hierarchy; otherwise they would be categorized as Level 3. Our fair value estimation process utilizes inputs other than quoted prices that are observed in the market. Our estimates are deemed to be significant to the fair value measurement process, which renders the resulting Non-Agency fair value estimates Level 3 inputs in the fair value hierarchy. Level 3 assets represent approximately 95% and 93% of total assets measured at fair value on a recurring basis as of December 31, 2022 and 2021, respectively. Level 3 liabilities represent approximately 95% and 100% of total liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021, respectively.

Our accounting policies for the determination of fair value of our investments are described in further detail in Note 2 and Note 5 of the consolidated financial statements.

Variable Interest Entities

VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/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 VIE’s 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 of the VIE.

Our Consolidated Statements of Financial Condition contain the assets and liabilities related to thirty-eight consolidated variable interest entities or VIEs. Due to the non-recourse nature of these VIEs our net exposure to loss from investments in these entities is limited to our retained beneficial interests.

At December 31, 2022, we consolidated thirty-six residential mortgage loan securitizations and two RMBS re-securitization transactions which are VIEs. The residential mortgage loan securitizations contain jumbo prime and Non-QM residential mortgage loans. The RMBS re-securitization transactions contain Non-Agency RMBS comprised of primarily first lien mortgages of 2005-2007 vintages.

Our determination to consolidate these thirty-eight VIEs was significantly influenced by management’s judgment related to the activities that most significantly impact the economic performance of these entities and the identification of the party with the power over such activities. For the residential mortgage loan securitizations, we determined that our ability to remove the servicer without cause resulted in us having the power that most significantly impacts the economic performance of the VIE. For the three consolidated RMBS re-securitization transactions, we determined that no party has power over any ongoing activities of the entities and therefore the determination of the primary beneficiary should be based on involvement with the initial design of the entity. Since we transferred the RMBS to the securitization entities, we determined we had the power over the design of the entity, which resulted in us being considered the primary beneficiary. This determination was influenced by the amount of economic exposure to the financial performance of the entity and required a significant management judgment in determining that we should consolidate these three entities.

Due to the consolidation of these VIEs, our actual ownership interests in the securitization and re-securitizations have been eliminated in consolidation and the Consolidated Statements of Financial Condition reflect both the assets held and non-recourse debt issued to third parties by these VIEs. In addition, our operating results and cash flows include the gross amounts

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related to the assets and liabilities of the VIEs as opposed to the actual economic interests we own in these VIEs. Our interest in these VIEs is restricted to the beneficial interests we retained in these transactions. We are not obligated to provide any financial support to these VIEs.

Our Consolidated Statements of Financial Condition separately present: (i) our direct assets and liabilities, and (ii) the assets and liabilities of our consolidated securitization vehicles net of intercompany eliminations representing securities from the securitization trusts retained by us. Assets of all consolidated VIEs can only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs are non-recourse to us.

We have aggregated all the assets and liabilities of the consolidated securitization vehicles due to our determination that these entities are substantively similar and therefore a further disaggregated presentation would not be more meaningful. The notes to our consolidated financial statements describe our direct assets and liabilities and the assets and liabilities of our consolidated securitization vehicles. See Note 9 to our consolidated financial statements for additional information related to our investments in VIEs.

Recent Accounting Pronouncements

Refer to Note 2 in the Notes to Consolidated Financial Statements for a discussion of accounting guidance we have recently adopted or expect to be adopted in the future.