MFA FINANCIAL, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion should be read in conjunction with our financial statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K. GENERAL We are a specialty finance company that invests in and finances residential mortgage assets. We invest, on a leveraged basis, in residential whole loans, residential mortgage securities and other real estate assets. Through our wholly-owned subsidiary, Lima One, a leading nationwide originator and servicer of business purpose loans (or BPLs), we also originate and service business purpose loans for real estate investors. Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential 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. We are an internally-managed real estate investment trust. On April 4, 2022, we effected a one-for-four reverse stock split of our issued and outstanding shares of common stock (or the Reverse Stock Split). Accordingly, all share and per share data included in the consolidated financial statements and applicable disclosures have been adjusted retroactively to reflect the impact of the Reverse Stock Split. For all periods presented, all share and per share data have been adjusted on a retroactive basis to reflect the effect of the Reverse Stock Split. At December 31, 2023, we had total assets of approximately $10.8 billion, of which $9.0 billion, or 84%, represented residential whole loans. Our residential whole loans include primarily: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a “Qualified Mortgage” in accordance with guidelines adopted by the Consumer Financial Protection Bureau (or Non-QM loans), (ii) short-term business purpose loans collateralized by residential and multi-family properties made to non-occupant borrowers that intend to rehabilitate and refinance or sell the properties (or Transitional loans), (iii) business purpose loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (or Single-family rental loans), (iv) loans on investor properties that conform to the standards for purchase by a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (or Agency eligible investor loans), (v) previously originated loans secured by residential real estate that is generally owner occupied (or Seasoned performing loans) and (vi) loans on which a borrower was previously delinquent but has resumed repaying (or RPLs) and loans on which the borrower continues to be more than 60 days delinquent with respect to payment (non-performing loans or NPLs). In addition, at December 31, 2023, we had approximately $746.1 million in investments in securities, including Agency MBS, Term notes backed by MSR collateral, CRT securities and Non-Agency MBS. Our remaining investment-related assets, which represent approximately 3% of our total assets at December 31, 2023, were primarily comprised of REO, capital contributions made to loan origination partners, other interest-earning assets, and loan-related receivables. The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income and the market value of our assets, liabilities and hedges that are accounted for at fair value through earnings, which is driven by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, the terms and availability of adequate financing, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate and mortgage sector, and the credit performance of our credit sensitive residential mortgage assets. Changes in these factors, or uncertainty in the market regarding the potential for changes in these factors, can result in significant changes in the value and/or performance of our investment portfolio. Further, our GAAP results may be impacted by market volatility, resulting in changes in market values of certain financial instruments for which changes in fair value are recorded in net income each period, including certain residential whole loans, securitized debt and Swaps. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense), the level of loan delinquencies, which may result in changes in the amount of non-accrual loans, and prepayment speeds, the behavior of which involves various risks and uncertainties. Interest rates and conditional prepayment rates (or CPRs) (which is an annualized measure of the amount of unscheduled principal prepayments on an asset as a percentage of the asset balance), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our financial results are impacted by estimates of credit losses that are required to be recorded when loans that are not accounted for at fair value through net income are acquired or originated, as well as changes in these credit loss estimates that will be required to be made periodically. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to increase; (ii) the value of certain of our residential mortgage assets and securitized debt to decline; (iii) coupons on our adjustable-rate assets to reset, on a delayed basis, to higher interest rates; (iv) prepayments on our assets to decline, thereby slowing the amortization of purchase premiums and the accretion of our purchase discounts, and slowing our ability to redeploy capital to generally higher yielding investments; and (v) the value of our derivative hedging 39 Table of Contents instruments, if any, to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to decrease; (ii) the value of certain of our residential mortgage assets and securitized debt, to increase; (iii) coupons on our adjustable-rate assets, on a delayed basis, to lower interest rates; (iv) prepayments on our assets to increase, thereby accelerating the amortization of purchase premiums and the accretion of our purchase discounts, and accelerating the redeployment of our capital to generally lower yielding investments; and (v) the value of our derivative hedging instruments, if any, to decrease. Further, changes in credit spreads will also impact the valuation of our residential whole loans and securitized debt, which could result in volatility in GAAP earnings. In addition, our borrowing costs and credit lines are further affected by the type of collateral we pledge and general conditions in the credit market. Our investments in residential mortgage assets expose us to credit risk, meaning that we are generally subject to credit losses due to the risk of delinquency, default and foreclosure on the underlying real estate collateral. Our investment process for credit sensitive assets focuses primarily on quantifying and pricing credit risk. With respect to investments in Purchased Performing Loans, we believe that sound underwriting standards, including low LTVs at origination, significantly mitigate our risk of loss. Further, we believe the discounted purchase prices paid on Purchased Non-performing and Purchased Credit Deteriorated Loans mitigate our risk of loss in the event that we receive less than 100% of the par value of these investments. Premiums arise when we acquire an MBS or loan at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value) or when we acquire residential whole loans at a price in excess of their aggregate principal balance. Conversely, discounts arise when we acquire an MBS or loan at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance. Accretable purchase discounts on these investments are accreted to interest income. Premiums paid to purchase loans, are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the interest income earned on these assets. CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general. In particular, CPR reflects the conditional prepayment rate, which measures voluntary prepayments of a loan, and the conditional default rate (or CDR) measures involuntary prepayments resulting from defaults. CPRs on our residential mortgage securities and whole loans may differ significantly. For the year ended December 31, 2023, the average CPRs on certain of our loan portfolios were: 8.0% for Non-QM loans, 5.8% for Single-family rental loans, 6.2% for Purchased Credit Deteriorated loans, and 11.7% for Purchased Non-Performing loans. In addition, for the year ended December 31, 2023, the repayment rate (which includes both voluntary and involuntary repayments of principal) was 38.0% for our Transitional loans. It is generally our business strategy to hold our residential mortgage assets as long-term investments. On at least a quarterly basis, excluding investments for which the fair value option has been elected or for which specialized loan accounting is otherwise applied, we assess our ability and intent to continue to hold each asset and, as part of this process, we monitor our investments in securities that are designated as AFS for impairment. A change in our ability and/or intent to continue to hold any of these securities that are in an unrealized loss position, or a deterioration in the underlying characteristics of these securities, could result in our recognizing future impairment charges or a loss upon the sale of any such security. Our residential mortgage investments have longer-term contractual maturities than our non-securitization related financing liabilities, and the interest rates we pay on our non-securitization related financings will typically change at a faster pace than the interest rates we earn on our investments. In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which currently include Swaps. 40 Table of Contents Recent Market Conditions and Our Strategy 2023 was another challenging year for fixed income, as investors faced significant volatility as markets balanced aggressive monetary policy tightening, inflationary pressures, and increasing geopolitical uncertainty along with resilient macroeconomic data, the probability of a recession, and expectations regarding the timing of a potential monetary policy shift. Despite these headwinds, we believe our commitment to prudent risk management and hedging and prioritization of non-mark-to-market financing allowed us to add $3.4 billion of our target assets at increasingly attractive yields. These additions included over $2.1 billion of funded originations of business purpose loans and draws on existing Transitional loans at Lima One, approximately $880 million of Non-QM loans, and approximately $460 million of Agency MBS. Reflecting the impact of our strategy, for the year ended December 31, 2023, the yield on our average interest-earning assets increased by nearly 100 basis points, while our effective cost of funds increased by nearly 40 basis points from the year ended December 31, 2022. During the year we generated GAAP earnings per share (or EPS) of $0.46 per common share and Distributable Earnings, a non-GAAP financial measure that excludes the impact of fair value changes and certain other items, of $1.59 per common share and declared dividends of $1.40 per common share. During the year we executed eight securitizations, issuing $1.8 billion of securitized debt, and repurchased over $20 million of our 6.25% convertible notes due in June 2024 (or Convertible Senior Notes) at a discount to their unpaid principal balance. Subsequent to year-end and through February 21, 2024, we repurchased an additional $39.9 million principal amount of our Convertible Senior Notes; as of February 21, 2024, we had an aggregate principal amount of $169.7 million of our Convertible Senior Notes outstanding. Subsequent to year-end, we issued $115 million of 8.875% senior unsecured notes due in February 2029. 2023 Portfolio Activity and impact on financial results At December 31, 2023, our residential mortgage asset portfolio, which includes residential whole loans and REO, and Securities, at fair value, was approximately $9.9 billion compared to $8.0 billion at December 31, 2022. The following table presents the activity for our residential mortgage asset portfolio for the year ended December 31, 2023: (In Millions) December 31, 2022 Runoff (1) Acquisitions (2) Other (3) December 31, 2023 Change Residential whole loans and REO $ 7,649 $ (1,505) $ 2,987 $ 20 $ 9,151 $ 1,502 Securities, at fair value 333 (33) 457 (11) 746 413 Totals $ 7,982 $ (1,538) $ 3,444 $ 9 $ 9,897 $ 1,915 (1) Primarily includes principal repayments and sales of REO. (2) Includes draws on previously originated Transitional loans. (3) Primarily includes sales, changes in fair value and changes in the allowance for credit losses. At December 31, 2023, our total recorded investment in residential whole loans and REO was $9.2 billion, or 92.5% of our residential mortgage asset portfolio. Of this amount, $7.9 billion are Purchased Performing Loans, $418.1 million are Purchased Credit Deteriorated Loans and $705.4 million are Purchased Non-performing Loans. Loan acquisition activity of $3.0 billion during 2023 included $2.1 billion of business purpose loans (including draws on Transitional loans) and $879.7 million of Non-QM loans. During 2023, we recognized approximately $537.9 million of residential whole loan interest income on our consolidated statements of operations, representing an effective yield of 6.15%, with Purchased Performing Loans generating an effective yield of 5.84%, Purchased Credit Deteriorated Loans generating an effective yield of 6.58% and Purchased Non-performing Loans generating an effective yield of 9.44%. All of our Purchased Non-performing Loans and certain of our Purchased Performing Loans are measured at fair value as a result of the election of the fair value option at acquisition. Included in earnings in Other Income/(Loss), net are net losses on these loans of $89.9 million for the year ended December 31, 2023. At December 31, 2023 and 2022, we had REO with an aggregate carrying value of $110.2 million and $130.6 million, respectively, which is included in Other assets on our consolidated balance sheets. At December 31, 2023, we held $746.1 million of Securities, at fair value, including $559.1 million of Agency MBS, $79.9 million of MSR-related assets, $83.2 million of CRT securities and $23.8 million of Non-Agency MBS. We opportunistically added $456.7 million of Agency MBS during 2023. The net yield on our Securities, at fair value was 7.57% for 2023, compared to 14.67% for 2022. For the year ended December 31, 2023, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $8.9 million. The total allowance for credit losses recorded on residential whole loans held at carrying value at December 31, 2023 was $20.5 million. During 2023, we completed eight securitizations with unpaid principal balance (or UPB) of loans sold of $2.2 billion. This included $1.4 billion of Non-QM loans, $418.6 million of Single-family rental loans, and $376.1 million of Transitional 41 Table of Contents loans. These securitizations provided longer term, non-recourse, non-mark-to-market financing. Subsequent to the fourth quarter, we have completed one additional securitization totaling $192.5 million, further reducing our use of shorter-term recourse, mark-to-market financing. During 2023, heightened interest rate volatility led to significant fluctuations in the fair values of our residential mortgage asset portfolio and associated financing liabilities and hedges, which drove volatility in our quarterly GAAP financial results. We continue to closely follow the actions of the Federal Reserve regarding the path and timing of changes in interest rates and the impact such rate changes would be expected to have on levels of inflation, the overall economic environment and our business. Our GAAP book value per common share was $13.98 as of December 31, 2023. Book value per common share decreased from $14.87 as of December 31, 2022. Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark-to-market gains or losses on our residential whole loans and securitized debt held at carrying value, was $14.57 as of December 31, 2023, a decrease from $15.55 as of December 31, 2022. Decreases in GAAP and Economic book value during 2023 primarily reflect dividends declared in excess of our GAAP earnings. For additional information regarding the calculation of Economic book value per share, including a reconciliation to GAAP book value per share, refer to “Reconciliation of GAAP and Non-GAAP Financial Measures” below. For more information regarding market factors which impact our portfolio, see Part I, Item 1A. “Risk Factors” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report on Form 10-K. Information About Our Assets The table below presents certain information about our asset allocation at December 31, 2023: ASSET ALLOCATION (Dollars in Millions) Purchased Performing Loans (1) Purchased Credit Deteriorated Loans (2) Purchased Non-Performing Loans Securities, at fair value Real Estate Owned Other, net (3) Total Fair Value/Carrying Value $ 7,918 $ 418 $ 705 $ 746 $ 110 $ 644 $ 10,541 Receivable/(Payable) for Unsettled Transactions (104) — — — — — (104) Financing Agreements with Non-mark-to-market Collateral Provisions (1,217) — — — — — (1,217) Financing Agreements with Mark-to-market Collateral Provisions (1,348) (144) (220) (623) (25) — (2,360) Securitized Debt (4,234) (234) (272) — (11) — (4,751) Convertible Senior Notes — — — — — (209) (209) Net Equity Allocated $ 1,015 $ 40 $ 213 $ 123 $ 74 $ 435 $ 1,900 Debt/Net Equity Ratio (4) 6.7 x 9.5 x 2.3 x 5.1 x 0.5 x 4.5 x (1) Includes $3.7 billion of Non-QM loans, $2.4 billion of Transitional loans, $1.6 billion of Single-family rental loans, $68.9 million of Seasoned performing loans, and $55.8 million of Agency eligible investor loans. At December 31, 2023, the total fair value of these loans is estimated to be $7.9 billion. (2) At December 31, 2023, the total fair value of these loans is estimated to be $438.7 million. (3) Includes $318.0 million of cash and cash equivalents, $170.2 million of restricted cash, and $19.8 million of capital contributions made to loan origination partners, as well as other assets and other liabilities. (4) Total Debt/Net Equity ratio represents the sum of borrowings under our financing agreements as a multiple of net equity allocated. 42 Table of Contents Residential Whole Loans The following table presents the contractual maturities of our residential whole loan portfolios at December 31, 2023. Amounts presented do not reflect estimates of prepayments or scheduled amortization. (In Thousands) Purchased Performing Loans (1) Purchased Credit Deteriorated Loans (2) Purchased Non-Performing Loans Amount due: Within one year $ 1,380,603 $ 407 $ 1,738 After one year: Over one to five years 1,047,447 3,225 2,691 Over five years 5,394,890 426,094 700,995 Total due after one year $ 6,442,337 $ 429,319 $ 703,686 Total residential whole loans $ 7,822,940 $ 429,726 $ 705,424 (1) Excludes an allowance for credit losses of $8.8 million at December 31, 2023. Excluded from the table above are approximately $103.7 million of Residential whole loans, at fair value for which the closing of the purchase transaction had not occurred as of December 31, 2023. (2) Excludes an allowance for credit losses of $11.6 million at December 31, 2023. The following table presents, at December 31, 2023, the dollar amount of certain of our residential whole loans, contractually maturing after one year, and indicates whether the loans have fixed interest rates or adjustable interest rates: (In Thousands) Purchased Performing Loans (1)(2) Purchased Credit Deteriorated Loans (1)(2) Purchased Non-Performing Loans Interest rates: Fixed $ 5,133,145 $ 367,030 $ 581,987 Adjustable 1,309,192 62,289 121,699 Total $ 6,442,337 $ 429,319 $ 703,686 (1) Includes loans on which borrowers have defaulted and are not making payments of principal and/or interest as of December 31, 2023. (2) Excludes an allowance for credit losses. For additional information regarding our residential whole loan portfolios, including information about delinquency trends, see Note 3 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. 43 Table of Contents Securities, at Fair Value The following table presents information with respect to our Securities, at fair value at December 31, 2023 and December 31, 2022: (Dollars in Thousands) December 31, 2023 December 31, 2022 Agency MBS Face/Par $ 554,300 $ 131,165 Fair Value 559,144 131,700 Amortized Cost 555,624 132,025 Weighted average yield (2) 5.59 % N/A (1) Weighted average time to maturity 29.3 years 30.0 years Term notes backed by MSR collateral Face/Par $ 85,000 $ 105,000 Fair Value 79,895 97,898 Amortized Cost 74,184 86,399 Weighted average yield (2) 16.96 % 14.30 % Weighted average time to maturity 1.8 years 0.8 years CRT Securities Face/Par $ 79,617 $ 80,791 Fair Value 83,222 79,214 Amortized Cost 68,971 70,438 Weighted average yield (2) 10.30 % 9.96 % Weighted average time to maturity 17.9 years 19.0 years Non-Agency MBS Face/Par $ 28,485 $ 29,858 Fair Value 23,828 24,552 Amortized Cost 23,482 24,552 Weighted average yield (2) 5.84 % N/A (1) Weighted average time to maturity 27.8 years 28.8 years (1) These securities were acquired at the end of the reporting period and, therefore, no interest income was recorded with respect to these securities in 2022. (2) Weighted average yield is annualized interest income divided by average amortized cost for Securities, at fair value held at December 31, 2023 and December 31, 2022. Tax Considerations Current period estimated taxable income We estimate that for 2023, our REIT taxable income was approximately $133.7 million. Key differences between GAAP net income and REIT Taxable Income Residential Whole Loans and Securities The determination of taxable income attributable to residential whole loans and securities is dependent on a number of factors, including principal payments, defaults, loss mitigation efforts and loss severities. In estimating taxable income for such investments during the year, management considers estimates of the amount of discount expected to be accreted. Such estimates require significant judgment and actual results may differ from these estimates. Potential timing differences can arise with respect to the accretion of discount and amortization of premium into income as well as the recognition of gain or loss for tax purposes as compared to GAAP. For example: a) while our REIT uses fair value accounting for GAAP in some instances, it generally is not used for purposes of determining taxable income; b) impairments generally are not recognized by us for income tax purposes until the asset is written-off or sold; c) capital losses may only be recognized by us to the extent of its capital gains; capital losses in excess of capital gains generally are carried over 44 Table of Contents by us for potential offset against future capital gains; and d) tax hedge gains and losses resulting from the termination of Swaps by us generally are amortized over the remaining term of the Swap. Securitization Generally, securitization transactions for GAAP and tax can be characterized as either sales or financings, depending on transaction type, structure and available elections. For GAAP purposes, our securitizations have been treated as on-balance sheet financing transactions. For tax purposes, they have been characterized as both financing and sale transactions. Where a securitization has been characterized as a sale, gain or loss is recognized for tax purposes. In addition, we own or may in the future acquire interests in securitization and/or re-securitization trusts, in which several of the classes of securities are or will be issued with original issue discount (or OID). As the holder of the retained interests in the trust, for tax purposes we generally will be required to include OID in our current gross interest income over the term of the applicable securities as the OID accrues. The rate at which the OID is recognized into taxable income is calculated using a constant rate of yield to maturity, with realized losses impacting the amount of OID recognized in REIT taxable income once they are actually incurred. REIT taxable income may be recognized in excess of economic income (i.e., OID) or in advance of the corresponding cash flow from these assets, thereby affecting our dividend distribution requirement to stockholders. For securitization and/or re-securitization transactions that were treated as a sale of the underlying collateral for tax purposes, the unwinding of any such transaction will likely result in taxable income or loss. Given that securitization and re-securitization transactions are typically accounted for as financing transactions for GAAP purposes, such income or loss is not likely to be recognized for GAAP. As a result, the income recognized from securitization and re-securitization transactions may differ for tax and GAAP purposes. Whether our investments are held by our REIT or one of its Taxable REIT Subsidiaries (TRS) We estimate that for 2023, our net TRS taxable loss will be $24.3 million. Net income or loss generated by our TRS subsidiaries is included in consolidated GAAP net income, but may not be included in REIT taxable income in the same period. REIT taxable income generally does not include taxable income of the TRS unless and until it is distributed to the REIT. For example, because our securitization transactions that are treated as a sale for tax purposes are undertaken by a domestic TRS, any gain or loss recognized on the sale is not included in our REIT taxable income until it is distributed by the TRS. Similarly, the income earned from loans, securities, REO and other investments held by our domestic TRS is excluded from REIT taxable income until it is distributed by the TRS. Net income of our foreign domiciled TRS subsidiaries is included in REIT taxable income as if distributed to the REIT in the taxable year it is earned by the foreign domiciled TRS. A TRS may carry forward its net taxable losses indefinitely as net operating losses to offset up to 80% of its taxable income in future tax years, but REIT taxable income generally does not include the net taxable loss of a TRS unless the TRS liquidates for tax purposes. Consequently, our REIT taxable income calculated in a given period may differ significantly from our GAAP net income. 45 Table of Contents Results of Operations In this section, we discuss the results of our operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. For a discussion related to our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, please refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the Year Ended December 31, 2022, which was filed with the SEC on February 24, 2023, and is available on the SEC’s website at www.sec.gov and on our website at www.mfafinancial.com. Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 The following table summarizes the changes in our results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022. 46 Table of Contents Year Ended (In Thousands) December 31, 2023 December 31, 2022 YoY Change Interest Income: Residential whole loans $ 537,883 $ 441,223 $ 96,660 Securities, at fair value 42,376 28,921 13,455 Other interest-earning assets 9,027 7,437 1,590 Cash and cash equivalent investments 16,311 4,838 11,473 Interest Income $ 605,597 $ 482,419 $ 123,178 Interest Expense: Asset-backed and other collateralized financing arrangements $ 413,517 $ 243,083 $ 170,434 Other interest expense 15,601 15,760 (159) Interest Expense $ 429,118 $ 258,843 $ 170,275 Net Interest Income $ 176,479 $ 223,576 $ (47,097) Reversal of Provision for Credit Losses on Residential Whole Loans $ 8,853 $ 2,646 $ 6,207 Provision for Credit Losses on Other Assets — (28,579) 28,579 Net Interest Income after Provision for Credit Losses $ 185,332 $ 197,643 $ (12,311) Other Income/(Loss), net: Net gain/(loss) on residential whole loans measured at fair value through earnings $ 89,850 $ (866,762) $ 956,612 Impairment and other net gain/(loss) on securities and other portfolio investments 6,225 (25,067) 31,292 Net gain on real estate owned 9,392 25,379 (15,987) Net gain/(loss) on derivatives used for risk management purposes 3,761 255,179 (251,418) Net gain/(loss) on securitized debt measured at fair value through earnings (99,589) 290,639 (390,228) Lima One - origination, servicing and other fee income 43,384 46,745 (3,361) Net realized loss on residential whole loans held at carrying value (1,240) — (1,240) Other, net 11,331 8,623 2,708 Other Income/(Loss), net $ 63,114 $ (265,264) $ 328,378 Operating and Other Expense: Compensation and benefits $ 85,799 $ 76,728 $ 9,071 Other general and administrative expense 44,147 35,138 9,009 Loan servicing, financing and other related costs 34,136 42,894 (8,758) Amortization of intangible assets 4,200 9,200 (5,000) Operating and Other Expense $ 168,282 $ 163,960 $ 4,322 Net Income/(Loss) $ 80,164 $ (231,581) $ 311,745 Less Preferred Stock Dividend Requirement $ 32,875 $ 32,875 $ — Net Income/(Loss) Available to Common Stock and Participating Securities $ 47,289 $ (264,456) $ 311,745 Basic Earnings/(Loss) per Common Share $ 0.46 $ (2.57) $ 3.03 Diluted Earnings/(Loss) per Common Share $ 0.46 $ (2.57) $ 3.03 General For 2023, we had net income available to our common stock and participating securities of $47.3 million, or $0.46 per basic and diluted common share, compared to a net loss available to our common stock and participating securities for 2022 of $(264.5) million, or $(2.57) per basic and diluted common share. This increase in net income available to common stock and participating securities primarily reflects higher Other Income/(Loss), net, of $328.4 million, primarily driven by mark-to-market gains in the current period on our residential whole loans that are measured at fair value through earnings, partially offset by lower net gains on derivatives used for risk management purposes and unrealized losses on securitized debt measured at fair value through earnings. Net interest income for 2023 decreased by $47.1 million from 2022, primarily due to higher 47 Table of Contents funding costs associated with our financing arrangements given the impact of significantly higher interest rates over the past twelve months, partially offset by higher asset yields earned on our residential whole loans portfolio and higher amounts invested in our residential mortgage asset portfolio. The prior year period also included a Provision for Credit Losses on Other Assets of $28.6 million, reflecting an impairment charge against the carrying value of our investment in one loan origination partner, bringing the net carrying value of this investment to zero. No such provision was recorded in the current year period. The current year period also includes a $6.2 million larger net reversal of the Provision for Credit Losses on Residential Whole Loans held at carrying value. The reversal of provision recorded in the current period primarily reflects updated modeling assumptions, as well as run-off of loans held at carrying value, partially offset by the impact of loan charge-offs. The prior period reversal primarily reflects run-off of loans held at carrying value and adjustments to certain macro-economic and loan prepayment speed assumptions used in our credit loss forecasts. Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense), the level of loan delinquencies, which may result in changes in the amount of non-accrual loans, and prepayment speeds on our investments. Interest rates and CPRs (which measure the amount of unscheduled principal prepayment on a bond or loan as a percentage of its unpaid balance) vary according to the type of investment, conditions in the financial markets and other factors, none of which can be predicted with any certainty. The changes in average interest-earning assets and average interest-bearing liabilities and their related yields and costs are discussed in greater detail below under “Interest Income” and “Interest Expense.” For 2023, our net interest spread and margin (including the impact of swaps) were 2.05% and 2.90%, respectively, compared to a net interest spread and margin (including the impact of swaps) of 1.74% and 2.52%, respectively, for 2022. Our net interest income, which does not include the benefit of swap carry, decreased by $47.1 million, or 21.1%, to $176.5 million from $223.6 million for 2022. For 2023, net interest income includes lower net interest income from our residential whole loan portfolio of $51.1 million compared to 2022, primarily due to higher rates paid on our financing agreement borrowings partially offset by higher asset yields and higher amounts invested in the loan portfolio. In addition, net interest income for 2023 includes lower net interest income for our Securities, at fair value portfolio of approximately $8.5 million compared to 2022, primarily due higher accretion income recognized in the prior year period due to the impact of the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020 and higher financing agreement borrowings in 2023, partially offset by higher amounts invested in the portfolio due to Agency MBS purchases during 2023. Net interest income for 2023 also includes approximately $13.1 million of additional interest income from other interest earning assets and cash compared to the prior year period. 48 Table of Contents Analysis of Net Interest Income The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the years ended December 31, 2023 and 2022 . Average yields are derived by dividing interest income by the average amortized cost of the related assets, and average costs are derived by dividing interest expense by the daily average balance of the related liabilities, for the periods shown. The yields and costs include premium amortization and purchase discount accretion which are considered adjustments to interest rates. For the Year Ended December 31, 2023 2022 Average Balance Interest Average Yield/Cost Average Balance Interest Average Yield/Cost (Dollars in Thousands) Assets: Interest-earning assets (1) : Residential whole loans $ 8,740,248 $ 537,883 6.15 % $ 8,506,728 $ 441,223 5.19 % Securities, at fair value (2) 559,434 42,376 7.57 197,188 28,921 14.67 Cash and cash equivalents (3) 465,481 16,311 3.50 507,798 4,838 0.95 Other interest-earning assets 68,959 9,027 13.09 63,254 7,437 11.76 Total interest-earning assets 9,834,122 605,597 6.16 9,274,968 482,419 5.20 Liabilities: Interest-bearing liabilities: Collateralized financing agreements (4) $ 3,389,774 $ 246,598 7.18 % $ 3,511,565 $ 139,585 3.98 % Securitized debt (5) 4,168,322 166,919 4.00 3,456,319 103,498 2.99 Convertible Senior Notes 224,768 15,601 6.94 227,097 15,760 6.94 Total interest-bearing liabilities 7,782,864 429,118 5.47 7,194,981 258,843 3.60 Net interest income/net interest rate spread (6) 176,479 0.69 223,576 1.60 Impact of net swap carry (7) 107,154 1.36 10,042 0.14 Net interest rate spread (including the impact of Swaps) $ 283,633 2.05 % $ 233,618 1.74 % Net interest-earning assets/net interest margin (8) $ 2,051,258 2.90 % $ 2,079,987 2.52 % (1) Yields presented throughout this Annual Report on Form 10-K are calculated using average amortized cost data for residential whole loans and securities, which excludes unrealized gains and losses. For GAAP reporting purposes, purchases and sales are reported on the trade date. Average amortized cost data used to determine yields is calculated based on the settlement date of the associated purchase or sale as interest income is not earned on purchased assets and continues to be earned on sold assets until settlement date. (2) The net yield of 14.67% includes $7.8 million of accretion income recognized in 2022 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020. Excluding this accretion, the yield reported would have been 10.73%. (3) Includes average interest-earning cash, cash equivalents and restricted cash. (4) Collateralized financing agreements include the following: mark-to-market asset based financing and non-mark-to-market asset based financing. For additional information, see Note 6, included under Item 8 of this Annual Report on Form 10-K. (5) Includes both securitized debt, at carrying value and securitized debt, at fair value. (6) Net interest rate spread reflects the difference between the yield on average interest-earning assets and average cost of funds. (7) Reflects the impact of positive or negative swap carry. Positive swap carry results when income from the receive leg of a swap is greater than the expense on the pay leg. Negative swap carry results when income from the receive leg is less than the expense on the pay leg. (8) Net interest margin reflects net interest income (including net swap income or expense) divided by average interest-earning assets. 49 Table of Contents Rate/Volume Analysis The following table presents the extent to which changes in interest rates (yield/cost) and changes in the volume (average balance) of interest-earning assets and interest-bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) the changes attributable to changes in volume (changes in average balance multiplied by prior rate); (ii) the changes attributable to changes in rate (changes in rate multiplied by prior average balance); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately, based on absolute values, to the changes due to rate and volume. Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 Increase/(Decrease) due to Total Net Change in Interest Income/Expense (In Thousands) Volume Rate Interest-earning assets: Residential whole loans $ 12,492 $ 84,168 $ 96,660 Securities, at fair value 32,811 (19,356) 13,455 Cash and cash equivalents (434) 11,907 11,473 Other interest-earning assets 706 884 1,590 Total net change in income of interest-earning assets $ 45,575 $ 77,603 $ 123,178 Interest-bearing liabilities: Residential whole loan financing agreements $ (19,524) $ 103,657 $ 84,133 Securities, at fair value repurchase agreements 16,422 5,550 21,972 REO financing agreements 97 811 908 Securitized debt 24,025 39,396 63,421 Convertible Senior Notes (159) — (159) Total net change in expense of interest-bearing liabilities $ 20,861 $ 149,414 $ 170,275 Net change in net interest income $ 24,714 $ (71,811) $ (47,097) The following table presents certain quarterly information regarding our net interest spread and net interest margin for the quarterly periods presented: Total Interest-Earning Assets and Interest- Bearing Liabilities Quarter Ended Net Interest Spread (1) Net Interest Margin (2) December 31, 2023 2.13 % 2.96 % September 30, 2023 2.17 3.02 June 30, 2023 2.14 2.99 March 31, 2023 1.74 2.64 December 31, 2022 2.21 3.04 September 30, 2022 1.64 2.43 June 30, 2022 1.37 2.13 March 31, 2022 1.96 2.63 (1) Reflects the difference between the yield on average interest-earning assets and average cost of funds (including net swap expense). (2) Reflects annualized net interest income (including net swap income or expense) divided by average interest-earning assets. 50 Table of Contents The following table presents the components of the net interest spread earned on our Residential whole loans for the quarterly periods presented: Quarter Ended December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Purchased Performing Loans Net Yield (1) 6.22 % 6.06 % 5.66 % 5.38 % 5.04 % 4.75 % 4.20 % 4.18 % Cost of Funding (2) 4.43 % 4.23 % 3.97 % 3.95 % 3.70 % 3.60 % 3.28 % 2.74 % Net Interest Spread 1.79 % 1.83 % 1.69 % 1.43 % 1.34 % 1.15 % 0.92 % 1.44 % Purchased Credit Deteriorated Loans Net Yield (1) 6.49 % 6.63 % 7.09 % 6.13 % 6.59 % 6.49 % 6.85 % 6.79 % Cost of Funding (2) 2.68 % 2.43 % 1.98 % 2.23 % 2.13 % 2.72 % 3.17 % 2.88 % Net Interest Spread 3.81 % 4.20 % 5.11 % 3.90 % 4.46 % 3.77 % 3.68 % 3.91 % Purchased Non-Performing Loans Net Yield (1) 9.65 % 9.59 % 10.11 % 8.46 % 11.15 % 9.84 % 9.40 % 9.82 % Cost of Funding (2) 3.63 % 3.65 % 3.53 % 3.53 % 3.01 % 2.86 % 3.34 % 3.09 % Net Interest Spread 6.02 % 5.94 % 6.58 % 4.93 % 8.14 % 6.98 % 6.06 % 6.73 % Total Residential Whole Loans Net Yield (1) 6.47 % 6.34 % 6.10 % 5.68 % 5.62 % 5.30 % 4.85 % 4.94 % Cost of Funding (2) 4.29 % 4.10 % 3.83 % 3.82 % 3.56 % 3.49 % 3.28 % 2.79 % Net Interest Spread 2.18 % 2.24 % 2.27 % 1.86 % 2.06 % 1.81 % 1.57 % 2.15 % (1) Reflects annualized interest income on Residential whole loans divided by average amortized cost of Residential whole loans. Excludes servicing costs. (2) Reflects annualized interest expense divided by average balance of agreements with mark-to-market collateral provisions (repurchase agreements), agreements with non-mark-to-market collateral provisions, and securitized debt. Cost of funding shown in the table above includes the impact of the net carry (the difference between swap interest income received and swap interest expense paid) on our Swaps. While we have not elected hedge accounting treatment for Swaps, and accordingly, net carry is not presented in interest expense in our consolidated statement of operations, we believe it is appropriate to allocate net carry to the cost of funding to reflect the economic impact of our Swaps on the funding costs shown in the table above. For the quarter ended December 31, 2023, this decreased the overall funding cost by 140 basis points for our Residential whole loans, 142 basis points for our Purchased Performing Loans, 143 basis points for our Purchased Credit Deteriorated Loans, and 102 basis points for our Purchased Non-Performing Loans. For the quarter ended September 30, 2023, this decreased the overall funding cost by 143 basis points for our Residential whole loans, 146 basis points for our Purchased Performing Loans, 161 basis points for our Purchased Credit Deteriorated Loans, and 89 basis points for our Purchased Non-Performing Loans. For the quarter ended June 30, 2023, this decreased the overall funding cost by 144 basis points for our Residential whole loans, 145 basis points for our Purchased Performing Loans, 206 basis points for our Purchased Credit Deteriorated Loans, and 87 basis points for our Purchased Non-Performing Loans. For the quarter ended March 31, 2023, this decreased the overall funding cost by 127 basis points for our Residential whole loans, 129 basis points for our Purchased Performing Loans, 171 basis points for our Purchased Credit Deteriorated Loans, and 77 basis points for our Purchased Non-Performing Loans. For the quarter ended December 31, 2022, this decreased the overall funding cost by 89 basis points for our Residential whole loans, 87 basis points for our Purchased Performing Loans, 141 basis points for our Purchased Credit Deteriorated Loans, and 76 basis points for our Purchased Non-Performing Loans. For the quarter ended September 30, 2022, this decreased the overall funding cost by 20 basis points for our Residential whole loans, 19 basis points for our Purchased Performing Loans, 43 basis points for our Purchased Credit Deteriorated Loans, and 24 basis points for our Purchased Non-Performing Loans. For the quarter ended June 30, 2022, this increased the overall funding cost by 25 basis points for our Residential whole loans, 23 basis points for our Purchased Performing Loans, 43 basis points for our Purchased Credit Deteriorated Loans, and 29 basis points for our Purchased Non-Performing Loans. For the quarter ended March 31, 2022, this increased the overall funding cost by 35 basis points for our Residential whole loans, 33 basis points for our Purchased Performing Loans, 56 basis points for our Purchased Credit Deteriorated Loans, and 39 basis points for our Purchased Non-Performing Loans. 51 Table of Contents The following table presents the components of the net interest spread earned on our Securities for the quarterly periods presented: Securities, at fair value Quarter Ended Net Yield (1)(2) Cost of Funding (3) Net Interest Rate Spread December 31, 2023 7.20 % 3.75 % 3.45 % September 30, 2023 7.38 3.92 3.46 June 30, 2023 7.67 4.29 3.38 March 31, 2023 8.76 4.52 4.24 December 31, 2022 30.33 5.47 24.86 September 30, 2022 11.06 3.94 7.12 June 30, 2022 10.09 2.54 7.55 March 31, 2022 10.13 1.72 8.41 (1) Reflects annualized interest income divided by average amortized cost. (2) For the quarter ended December 31, 2022, the net yield of 30.33% includes $7.8 million of accretion income recognized in 2022 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020. Excluding this accretion, the yield reported would have been 11.87%. (3) Reflects annualized interest expense divided by average balance of repurchase agreements. Cost of funding shown in the table above for the quarterly periods ended December 31, 2023, September 30, 2023, June 30, 2023 and March 31, 2023 includes the impact of the net carry (the difference between swap interest income received and swap interest expense paid) on our Swaps that is allocated to the financing of our Securities, at fair value. For the quarter ended December 31, 2023, this decreased the overall funding cost by 206 basis points. For the quarter ended September 30, 2023, this decreased the overall funding cost by 191 basis points. For the quarter ended June 30, 2023, this decreased the overall funding cost by 138 basis points. For the quarter ended March 31, 2023, this decreased the overall funding cost by 104 basis points. Periods prior to the quarter ended March 31, 2023 were not impacted as there was no allocation of net swap carry to the financing of our Securities, at fair value for those periods. Interest Income Interest income on our residential whole loans increased by $96.7 million, or 21.9%, for 2023, to $537.9 million compared to $441.2 million for 2022. This increase primarily reflects an increase in the yield to 6.15% for 2023 from 5.19% for 2022 and a $233.5 million increase in the average balance of this portfolio to $8.7 billion for 2023 from $8.5 billion for 2022. Interest income on our Securities, at fair value portfolio increased $13.5 million to $42.4 million for 2023 from $28.9 million for 2022. This increase primarily reflects an increase in the average amortized cost of the portfolio of $362.2 million due to purchases of Agency MBS, partially offset by a decrease in the net yield on our Securities, at fair value portfolio to 7.57% for 2023, compared to 14.67% for 2022. The decrease in the net yield on our securities portfolio primarily reflects higher accretion income recognized in 2022 due to the redemption of MSR-related assets that had been held at amortized cost basis below par due to impairment charges recorded in the first quarter of 2020. Interest Expense Our interest expense for 2023 increased by $170.3 million, or 65.8%, to $429.1 million, from $258.8 million for 2022. This increase primarily reflects an increase in financing rates on our financing agreements and higher overall average balances of our financing agreements. Provision for Credit Losses on Residential Whole Loans Held at Carrying Value For 2023, we recorded a reversal of provision for credit losses on residential whole loans held at carrying value of $8.9 million compared to a reversal of provision of $2.6 million for 2022. The reversal of provision recorded in the current period primarily reflects updated modeling assumptions, as well as the run-off of loans held at carrying value, partially offset by the impact of loan charge-offs. The prior period reversal primarily reflects run-off of loans held at carrying value and adjustments to certain macro-economic and loan prepayment speed assumptions used in our credit loss forecasts. 52 Table of Contents Provision for Credit Losses on Other Assets For 2022, we recorded a provision for credit losses on Other Assets of $28.6 million reflecting an impairment charge against the carrying value of our investment in one loan origination partner, bringing the net carrying value of this investment to zero. No such provision was recorded for 2023. Other Income/(Loss), net For 2023, Other Income/(Loss), net was $63.1 million, compared to an Other Income/(Loss), net of $(265.3) million for 2022. The components of Other (Loss)/Income, net for 2023 and 2022 are summarized in the table below: For the Year Ended December 31, (In Thousands) 2023 2022 Net gain/(loss) on residential whole loans measured at fair value through earnings $ 89,850 $ (866,762) Impairment and other net gain/(loss) on securities and other portfolio investments 6,225 (25,067) Net gain on real estate owned 9,392 25,379 Net gain/(loss) on derivatives used for risk management purposes 3,761 255,179 Net gain/(loss) on securitized debt measured at fair value through earnings (99,589) 290,639 Lima One - origination, servicing and other fee income 43,384 46,745 Net realized loss on residential whole loans held at carrying value (1,240) — Other, net 11,331 8,623 Other Income/(Loss), net $ 63,114 $ (265,264) Operating and Other Expense During 2023, we had compensation and benefits and other general and administrative expenses of $129.9 million, compared to $111.9 million for 2022. Other general and administrative expenses are comprised of leasing and other office expenses, professional fees, insurance costs, board of directors fees, taxes, and miscellaneous expenses. Compensation and benefits expense increased $9.1 million to $85.8 million for 2023, compared to $76.7 million for 2022 primarily reflecting higher expenses for salaries, payroll taxes, and benefits related to increased headcount at Lima One and the acceleration of certain stock-based compensation expenses for retirement eligible employees, partially offset by lower sales commission expense at Lima One. Our other general and administrative expenses increased by $9.0 million to $44.1 million for 2023 compared to $35.1 million for 2022, primarily reflecting higher costs associated with deferred compensation to Directors in the current period, which were impacted by changes in our stock price, higher depreciation and other costs in the current period primarily related to furniture and fixtures and IT infrastructure at our corporate offices and higher tax provisions, partially offset by lower tax compliance professional fees and lower insurance costs. Operating and Other Expense during 2023 also includes $34.1 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses decreased compared to 2022 by approximately $8.8 million, or 20.4%, primarily due to lower expenses recognized related to loan securitization activities, lower diligence and other costs associated with acquiring loans, lower servicing fees, and lower expenses on our REO portfolio. In addition, Other expenses for 2023 and 2022 also includes $4.2 million and $9.2 million, respectively, of amortization related to intangible assets recognized as part of the purchase accounting for the Lima One acquisition. 53 Table of Contents Selected Financial Ratios The following table presents information regarding certain of our financial ratios at or for the dates presented: At or for the Quarter Ended Return on Average Total Assets (1) Return on Average Total Stockholders’ Equity (2) Dividend Payout Ratio (3) Total Average Stockholders’ Equity to Total Average Assets (4) Leverage Multiple (5) Recourse Leverage Multiple (6) December 31, 2023 3.46 % 19.04 % 0.44 18.16 % 4.5 1.7 September 30, 2023 (0.56) (2.96) — 19.10 4.3 2.0 June 30, 2023 (0.27) (1.31) — 20.99 3.9 1.9 March 31, 2023 3.14 14.40 0.56 21.81 3.5 1.6 December 31, 2022 0.29 1.32 — 21.59 3.5 1.8 September 30, 2022 (0.58) (2.57) — 22.53 3.6 1.7 June 30, 2022 (1.06) (4.35) — 24.33 3.3 1.8 March 31, 2022 (0.89) (3.33) — 26.63 3.1 1.9 (1) Reflects annualized net income divided by average total assets. For the quarters ended September 30, 2023, June 30, 2023, September 30, 2022, June 30, 2022 and March 31, 2022, the amounts calculated reflect the quarterly net income divided by average total assets. (2) Reflects annualized net income divided by average total stockholders’ equity. For the quarters ended September 30, 2023, June 30, 2023, September 30, 2022, June 30, 2022 and March 31, 2022, the amounts calculated reflect the quarterly net income divided by average total stockholders’ equity. (3) Reflects dividends declared per share of common stock divided by earnings per share. The ratio has not been calculated for periods where earnings per share is negative as the calculations are not meaningful. (4) Reflects total average stockholders’ equity divided by total average assets. (5) Represents the sum of our borrowings under financing agreements and payable for unsettled purchases divided by stockholders’ equity. (6) Represents the sum of our borrowings under financing agreements (excluding securitized and other non-recourse debt) and payable for unsettled purchases divided by stockholders’ equity. Reconciliation of GAAP and Non-GAAP Financial Measures Reconciliation of GAAP Net Income to non-GAAP Distributable Earnings “Distributable earnings” is a non-GAAP financial measure of our operating performance, within the meaning of Regulation G and Item 10(e) of Regulation S-K, as promulgated by the Securities and Exchange Commission. Distributable earnings is determined by adjusting GAAP net income/(loss) by removing certain unrealized gains and losses, primarily on residential mortgage investments, associated debt, and hedges that are, in each case, accounted for at fair value through earnings, certain realized gains and losses, as well as certain non-cash expenses and securitization-related transaction costs. The transaction costs are primarily comprised of costs only incurred at the time of execution of our securitizations and include costs such as underwriting fees, legal fees, diligence fees, bank fees and other similar transaction related expenses. These costs are all incurred prior to or at the execution of our securitizations and do not recur. Recurring expenses, such as servicing fees, custodial fees, trustee fees and other similar ongoing fees are not excluded from distributable earnings. Management believes that the adjustments made to GAAP earnings result in the removal of (i) income or expenses that are not reflective of the longer term performance of our investment portfolio, (ii) certain non-cash expenses, and (iii) expense items required to be recognized solely due to the election of the fair value option on certain related residential mortgage assets and associated liabilities. Distributable earnings is one of the factors that our Board of Directors considers when evaluating distributions to our shareholders. Accordingly, we believe that the adjustments to compute Distributable earnings specified below provide investors and analysts with additional information to evaluate our financial results. Distributable earnings should be used in conjunction with results presented in accordance with GAAP. Distributable earnings does not represent and should not be considered as a substitute for net income or cash flows from operating activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies. 54 Table of Contents The following table provides a reconciliation of our GAAP net income/(loss) used in the calculation of basic EPS to our non-GAAP Distributable earnings for the quarterly periods below: Quarter Ended (In Thousands, Except Per Share Amounts) December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 GAAP Net income/(loss) used in the calculation of basic EPS $ 81,527 $ (64,657) $ (34,146) $ 64,565 $ (1,647) $ (63,410) $ (108,760) $ (91,266) Adjustments: Unrealized and realized gains and losses on: Residential whole loans held at fair value (224,272) 132,894 130,703 (129,174) 68,828 291,818 218,181 287,935 Securities held at fair value (21,371) 13,439 3,698 (2,931) 383 (1,549) 1,459 2,934 Residential whole loans and securities at carrying value 332 — — — — — — — Interest rate swaps 97,400 (9,433) (37,018) 40,747 12,725 (108,917) (31,767) (80,753) Securitized debt held at fair value 108,693 (40,229) (30,908) 48,846 (44,988) (100,767) (84,348) (62,855) Investments in loan origination partners 254 722 872 — 8,526 2,031 39,162 780 Expense items: Amortization of intangible assets 800 800 1,300 1,300 1,300 1,300 3,300 3,300 Equity based compensation 3,635 4,447 3,932 3,020 2,480 2,673 3,540 2,645 Securitization-related transaction costs 2,702 3,217 2,071 4,602 1,744 5,014 6,399 3,233 Total adjustments (31,827) 105,857 74,650 (33,590) 50,998 91,603 155,926 157,219 Distributable earnings $ 49,700 $ 41,200 $ 40,504 $ 30,975 $ 49,351 $ 28,193 $ 47,166 $ 65,953 GAAP earnings/(loss) per basic common share $ 0.80 $ (0.64) $ (0.34) $ 0.63 $ (0.02) $ (0.62) $ (1.06) $ (0.86) Distributable earnings per basic common share $ 0.49 $ 0.40 $ 0.40 $ 0.30 $ 0.48 $ 0.28 $ 0.46 $ 0.62 Weighted average common shares for basic earnings per share 102,266 102,255 102,186 102,155 101,800 101,795 102,515 106,568 Selected Financial Ratios (using Distributable earnings) The following table presents information regarding certain of our financial ratios at or for the dates presented: At or for the Quarter Ended Return on Average Total Assets (1) Return on Average Total Stockholders’ Equity (2) Dividend Payout Ratio (3) December 31, 2023 2.23 % 12.29 % 0.71 September 30, 2023 1.98 10.36 0.88 June 30, 2023 2.06 9.81 0.88 March 31, 2023 1.69 7.76 1.17 December 31, 2022 2.45 11.34 0.73 September 30, 2022 1.53 6.79 1.57 June 30, 2022 1.99 9.60 0.96 March 31, 2022 2.82 11.90 0.71 (1) Reflects annualized Distributable earnings divided by average total assets. (2) Reflects annualized Distributable earnings before preferred dividends divided by average total stockholders’ equity. (3) Reflects dividends declared per share of common stock divided by Distributable earnings per share. 55 Table of Contents Segment Reporting (using Distributable earnings) The following tables present our non-GAAP Distributable earnings by segment for the periods below: (Dollars in Thousands) Mortgage-Related Assets Lima One Corporate Total Year Ended December 31, 2023 GAAP Net income/(loss) used in the calculation of basic EPS $ 130,271 $ 33,453 $ (116,435) $ 47,289 Adjustments: Unrealized and realized gains and losses on: Residential whole loans held at fair value (69,486) (20,363) — (89,849) Securities held at fair value (7,165) — — (7,165) Residential whole loans and securities at carrying value 332 — — 332 Interest rate swaps 68,609 23,087 — 91,696 Securitized debt held at fair value 56,032 30,370 — 86,402 Investments in loan origination partners — — 1,848 1,848 Expense items: Amortization of intangible assets — 4,200 — 4,200 Equity based compensation — 521 14,513 15,034 Securitization-related transaction costs 145 — 12,447 12,592 Total adjustments $ 48,467 $ 37,815 $ 28,808 $ 115,090 Distributable earnings $ 178,738 $ 71,268 $ (87,627) $ 162,379 (Dollars in Thousands) Mortgage-Related Assets Lima One Corporate Total Year Ended December 31, 2022 GAAP Net income/(loss) used in the calculation of basic EPS $ (88,913) $ (9,665) $ (166,505) $ (265,083) Adjustments: Unrealized and realized gains and losses on: Residential whole loans held at fair value 730,028 136,734 — 866,762 Securities held at fair value 3,227 — — 3,227 Interest rate swaps (174,424) (34,288) — (208,712) Securitized debt held at fair value (232,194) (60,764) — (292,958) Investments in loan origination partners — — 50,499 50,499 Expense items: Amortization of intangible assets — 9,200 — 9,200 Equity based compensation — 164 11,174 11,338 Securitization-related transaction costs — — 16,390 16,390 Total adjustments $ 326,637 $ 51,046 $ 78,063 $ 455,746 Distributable earnings $ 237,724 $ 41,381 $ (88,442) $ 190,663 56 Table of Contents Reconciliation of GAAP Book Value per Common Share to non-GAAP Economic Book Value per Common Share “Economic book value” is a non-GAAP financial measure of our financial position. To calculate our Economic book value, our portfolios of Residential whole loans and securitized debt held at carrying value are adjusted to their fair value, rather than the carrying value that is required to be reported under the GAAP accounting model applied to these financial instruments. These adjustments are also reflected in the table below in our end of period stockholders’ equity. Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the impact of fair value changes for all of our investment activities, irrespective of the accounting model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders’ Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies. The following table provides a reconciliation of our GAAP book value per common share to our non-GAAP Economic book value per common share as of the quarterly periods below: Quarter Ended: (In Millions, Except Per Share Amounts) December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 GAAP Total Stockholders’ Equity $ 1,899.9 $ 1,848.5 $ 1,944.8 $ 2,018.6 $ 1,988.8 $ 2,033.9 $ 2,146.4 $ 2,349.0 Preferred Stock, liquidation preference (475.0) (475.0) (475.0) (475.0) (475.0) (475.0) (475.0) (475.0) GAAP Stockholders’ Equity for book value per common share 1,424.9 1,373.5 1,469.8 1,543.6 1,513.8 1,558.9 1,671.4 1,874.0 Adjustments: Fair value adjustment to Residential whole loans, at carrying value (35.6) (85.3) (58.3) (33.9) (70.2) (58.2) 9.5 54.0 Fair value adjustment to Securitized debt, at carrying value 95.6 122.5 129.8 122.4 139.7 109.6 75.4 47.7 Stockholders’ Equity including fair value adjustments to Residential whole loans and Securitized debt held at carrying value (Economic book value ) $ 1,484.9 $ 1,410.7 $ 1,541.3 $ 1,632.1 $ 1,583.3 $ 1,610.3 $ 1,756.3 $ 1,975.7 GAAP book value per common share $ 13.98 $ 13.48 $ 14.42 $ 15.15 $ 14.87 $ 15.31 $ 16.42 $ 17.84 Economic book value per common share (1) $ 14.57 $ 13.84 $ 15.12 $ 16.02 $ 15.55 $ 15.82 $ 17.25 $ 18.81 Number of shares of common stock outstanding 101.9 101.9 101.9 101.9 101.8 101.8 101.8 105.0 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements include the accounts of all of our subsidiaries. The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements, giving due consideration to materiality. Actual results could differ from these estimates. Our accounting policies are described in Note 2 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. Management believes the policies which more significantly rely on estimates and judgments to be as follows: 57 Table of Contents Fair Value Measurements - Residential Whole Loans GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. The following describes the valuation methodologies used for our financial instrument investments categorized as level 3 in the valuation hierarchy, which require the most significant estimates and judgments to be made. We determine the fair value of our residential whole loans after considering valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price levels. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. The estimation of cash flows used in pricing models is inherently subjective and imprecise. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. See “Quantitative and Qualitative Disclosures about Market Risk” for further information about the sensitivity of our investment portfolio to changes in market factors, particularly market interest rates. See Note 13 to our consolidated financial statements included under Item 8 of this Annual Report on Form 10-K for information regarding the assumptions used in valuing our residential whole loans. Residential whole loans, at fair value are recorded on our consolidated balance sheets at fair value and changes in their fair value are recorded through earnings. We held $7.5 billion and $5.7 billion of residential whole loans, at fair value, at December 31, 2023 and 2022, respectively, which represented 69.7% and 62.9% of our total assets at those dates, respectively. Residential whole loans, at fair value recorded valuation changes of $89.9 million, $866.8 million and $16.2 million during the years ended December 31, 2023, 2022, and 2021, respectively. With respect to Residential whole loans, at carrying value, the fair value for these loans is disclosed in the footnotes to the consolidated financial statements and changes in their fair value do not impact earnings. We held $1.5 billion and $1.8 billion of residential whole loans, at carrying value, at December 31, 2023 and 2022, respectively, which represented 14.2% and 19.7% of our total assets at those dates, respectively. Residential whole loans, at carrying value experienced net fair value changes of $34.6 million, ($223.7) million and ($20.4) million during the years ended December 31, 2023, 2022, and 2021, respectively. Allowance for Credit Losses on Residential Whole Loans An allowance for credit losses is recorded at acquisition, and maintained on an ongoing basis, for all losses expected over the life of the respective loan. Any required credit loss allowance would reduce the net carrying value of the loan with a corresponding charge to earnings, and may increase or decrease over time. Significant judgments are required in determining any allowance for credit loss, including assumptions regarding the loan cash flows expected to be collected, including related economic forecasts, the value of the underlying collateral and our ability to collect on any other forms of security, such as a personal guaranty provided either by the borrower or an affiliate of the borrower. Allowances for credit losses on our residential whole loans, at carrying value recorded at December 31, 2023, 2022, and 2021 were $20.5 million, $35.3 million and $39.4 million, respectively. For further discussion of the allowance for credit losses during these periods, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses on Residential Whole Loans Held at Carrying Value.” Recent Accounting Standards to Be Adopted in Future Periods In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures (or ASU 2023-07). The amendments in ASU 2023-07 primarily require entities to disclose certain significant segment expenses and other segment items on both an annual and interim basis. ASU 2023-07 is effective for public business entities for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We do not expect that the adoption of ASU 2023-07 will have a significant impact on our financial statement disclosures. 58 Table of Contents In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures (or ASU 2023-09). The amendments in ASU 2023-09 primarily require entities to disclose more details about their income tax rate, expense and payments. ASU 2023-09 is effective for public business entities for fiscal years beginning after December 15, 2024. Early adoption is permitted. We do not expect that the adoption of ASU 2023-09 will have a significant impact on our financial statement disclosures. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of cash generally consist of borrowings under repurchase agreements and other collateralized financings, payments of principal and interest we receive on our investment portfolio, cash generated from our operating results and, to the extent such transactions are entered into, proceeds from capital market and structured financing transactions. Our most significant uses of cash are generally to pay principal and interest on our financing transactions, to purchase and originate residential mortgage assets, to make dividend payments on our capital stock, to fund our operations, to meet margin calls and to make other investments that we consider appropriate. We seek to employ a diverse capital raising strategy under which we may issue capital stock and other types of securities. To the extent we raise additional funds through capital market transactions, we currently anticipate using the net proceeds from such transactions to acquire additional residential mortgage-related assets, consistent with our investment policy, and for working capital, which may include, among other things, the repayment of our financing transactions. There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms. We have available for issuance an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, depository shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our universal shelf registration statement and, at December 31, 2023, we had approximately 2.0 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement. During 2023, we issued 6,666 shares of common stock through our DRSPP, raising net proceeds of approximately $74,000. We did not repurchase any shares of our common stock through the stock repurchase program during the year ended December 31, 2023. During 2022, we repurchased 6,476,746 shares of our common stock through the stock repurchase program at an average cost of $15.80 per share and a total cost of approximately $102.1 million, net of fees and commissions paid to the sales agents of approximately $161,000. Upon expiration of the repurchase authorization on December 31, 2023, approximately $202.5 million remained unused under our stock repurchase program. In February 2023, our Board authorized a repurchase program for our Convertible Senior Notes pursuant to which we may repurchase up to $100 million of our Convertible Senior Notes. The convertible notes repurchase program does not require the purchase of any minimum amount of Convertible Senior Notes. The timing and extent to which we repurchase our Convertible Senior Notes will depend upon, among other things, market conditions, share price, liquidity, regulatory requirements and other factors, and repurchases may be commenced or suspended at any time without prior notice. During the year ended December 31, 2023, we repurchased $20.4 million principal amount of the Convertible Senior Notes for $20.2 million and recorded a gain of $89,000 to Other Income/(Loss), net on the consolidated statement of operations. At December 31, 2023, the aggregate principal amount of the our Convertible Senior Notes outstanding was $209.6 million. Subsequent to December 31, 2023 and through February 21, 2024, we repurchased an additional $39.9 million principal amount of the Convertible Senior Notes for $39.8 million and recorded a loss of $63,000; as of February 21, 2024, the aggregate amount of our Convertible Senior Notes outstanding was $169.7 million. 59 Table of Contents Financing Agreements Our borrowings under financing agreements include a combination of shorter term and longer arrangements. Certain of these arrangements are collateralized directly by our residential mortgage investments or otherwise have recourse to us, while securitized debt financing is non-recourse financing. Further, certain of our financing agreements contain terms that allow the lender to make margin calls on us based on changes in the value of the underlying collateral securing the borrowing. As of December 31, 2023, we had $2.4 billion of total unpaid principal balance related to asset-backed financing agreements with mark-to-market collateral provisions and $6.1 billion of total unpaid principal balance related to asset-backed financing agreements that do not include mark-to-market collateral provisions. Repurchase agreements and other forms of collateralized financing are uncommitted and renewable at the discretion of our lenders and, as such, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time. The terms of the repurchase transaction borrowings under our master repurchase agreements, as such terms relate to repayment, margin requirements and the segregation of all securities that are the subject of repurchase transactions, generally conform to the terms contained in the standard master repurchase agreement published by the Securities Industry and Financial Markets Association (or SIFMA) or the global master repurchase agreement published by SIFMA and the International Capital Market Association. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts (or the percentage amount by which the collateral value is contractually required to exceed the loan amount), purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default and setoff provisions. Other non-repurchase agreement financing arrangements also contain provisions governing collateral maintenance. At December 31, 2023, we had unused financing capacity of approximately $2.4 billion across our financing arrangements for all collateral types. Margin calls are typically determined by our counterparties based on their assessment of changes in the fair value of the underlying collateral and in accordance with the agreed upon haircuts specified in the transaction confirmation with the counterparty. We address margin call requests in accordance with the required terms specified in the applicable agreement and such requests are typically satisfied by posting additional cash or collateral on the same business day. We review margin calls made by counterparties and assess them for reasonableness by comparing the counterparty valuation against our valuation determination. When we believe that a margin call is unnecessary because our assessment of collateral value differs from the counterparty valuation, we typically hold discussions with the counterparty and attempt to resolve the matter. If this is not successful, we will look to resolve the dispute based on the remedies available to us under the terms of the repurchase agreement, which in some instances may include the engagement of a third-party to review collateral valuations. For certain other agreements that do not include such provisions, we could resolve the matter by substituting collateral as permitted in accordance with the agreement or otherwise request the counterparty to return the collateral in exchange for cash to unwind the financing. For additional information regarding our various types of financing arrangements, including those with non-mark-to-market terms and the haircuts for those agreements with mark-to-market collateral provisions, see Note 6 to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. At December 31, 2023, we had a total of $3.9 billion of residential whole loans and securities and $19.0 million of restricted cash pledged to our financing counterparties. We expect that we will continue to pledge residential mortgage assets as part of certain of our ongoing financing arrangements. When the value of our residential mortgage assets pledged as collateral experiences rapid decreases, margin calls under our financing arrangements could materially increase, causing an adverse change in our liquidity position. Additionally, if one or more of our financing counterparties choose not to provide ongoing funding, our ability to finance our long-maturity assets would decline or otherwise become available on possibly less advantageous terms. Further, when liquidity tightens, our counterparties to our short term arrangements with mark-to-market collateral provisions may increase their required collateral cushion (or margin) requirements on new financings, including financings that we roll with the same counterparty, thereby reducing our ability to use leverage. Access to financing may also be negatively impacted by ongoing volatility in financial markets, thereby potentially adversely impacting our current or future lenders’ ability or willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will exist to permit us to consummate additional securitization transactions if we determine to seek that form of financing. Our ability to meet future margin calls will be affected by our ability to use cash or obtain financing from unpledged collateral, the amount of which can vary based on the market value of such collateral, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs. (See “Interest Rate Risk” included under Item 7A. of this Annual Report on Form 10-K and our Consolidated Statements of Cash Flows, included under Item 8 of this Annual Report on Form 10-K.) 60 Table of Contents The table below presents certain information about our borrowings under asset-backed financing agreements and securitized debt: Asset-backed Financing Agreements Securitized Debt Quarter Ended (1) Quarterly Average Balance End of Period Balance Maximum Balance at Any Month-End Quarterly Average Balance End of Period Balance Maximum Balance at Any Month-End (In Thousands) December 31, 2023 $ 3,682,792 $ 3,576,952 $ 3,717,477 $ 4,438,548 $ 4,750,805 $ 4,750,805 September 30, 2023 3,574,547 3,486,440 3,766,848 4,014,161 4,332,936 4,332,936 June 30, 2023 3,148,269 3,370,327 3,370,327 3,924,422 3,969,274 4,043,482 March 31, 2023 3,145,555 3,042,802 3,189,587 3,680,042 3,830,309 3,838,654 December 31, 2022 3,147,303 3,226,651 3,226,651 3,842,757 3,357,590 3,855,013 September 30, 2022 3,351,046 3,229,640 3,411,200 3,643,872 3,832,311 3,832,311 June 30, 2022 3,638,476 3,530,510 3,761,049 3,170,406 3,374,716 3,374,716 March 31, 2022 3,920,895 3,942,343 4,138,377 2,555,241 2,859,061 2,859,061 December 31, 2021 3,313,641 3,501,839 3,501,839 2,302,990 2,650,473 2,650,473 September 30, 2021 2,516,940 3,278,941 3,278,941 2,008,639 2,045,729 2,137,773 June 30, 2021 2,063,852 2,156,598 2,156,598 1,778,909 2,046,381 2,046,381 March 31, 2021 2,632,791 2,221,570 2,443,149 1,535,995 1,548,920 1,602,148 (1) The information presented in the table above excludes $230.0 million of Convertible Senior Notes issued in June 2019, of which the aggregate principal amount outstanding was $209.6 million at December 31, 2023, and $100.0 million of Senior Notes issued in April 2012. During the first quarter of 2021, we redeemed all of our outstanding Senior Notes. Cash Flows and Liquidity for the Year Ended December 31, 2023 Our cash, cash equivalents and restricted cash decreased by $5.9 million during 2023, reflecting: $1.5 billion used in our investing activities, $1.4 billion provided by our financing activities and $108.7 million provided by our operating activities. At December 31, 2023, our debt-to-equity multiple was 4.5 times compared to 3.5 times at December 31, 2022. Our recourse leverage multiple at December 31, 2023 was 1.7 times compared to 1.8 times at December 31, 2022. At December 31, 2023, we had borrowings under asset-backed financing agreements of $3.6 billion, of which $2.9 billion were secured by residential whole loans, $622.6 million were secured by securities and $25.2 million were secured by REO. In addition, at December 31, 2023, we had securitized debt of $4.8 billion in connection with our loan securitization transactions. At December 31, 2022, we had borrowings under asset-backed financing agreements of $3.2 billion, of which $3.1 billion were secured by residential whole loans, $111.7 million were secured by securities and $25.5 million were secured by REO. In addition, at December 31, 2022, we had securitized debt of $3.4 billion in connection with our loan securitization transactions. During 2023, $1.5 billion was used in our investing activities. We utilized $2.9 billion for acquisitions and origination of residential whole loans, loan related investments and capitalized advances and $588.9 million for acquisition of securities. During 2023, we received $1.4 billion of principal payments on residential whole loans and loan related investments and $115.0 million of proceeds on sales of REO. In addition, during 2023, we received cash proceeds of $35.6 million from principal payments on our securities. In connection with our repurchase agreement financings and Swaps, we routinely receive margin calls/reverse margin calls from our counterparties and make margin calls to our counterparties. Margin calls and reverse margin calls, which requirements vary over time, may occur daily between us and any of our counterparties when the value of collateral pledged changes from the amount contractually required. The value of securities pledged as collateral fluctuates reflecting changes in: (i) the face (or par) value of our assets; (ii) market interest rates and/or other market conditions; and (iii) the market value of our Swaps. Margin calls/reverse margin calls are satisfied when we pledge/receive additional collateral in the form of additional assets and/or cash. 61 Table of Contents The table below summarizes our margin activity with respect to our repurchase agreement financings and derivative hedging instruments for the quarterly periods presented: Collateral Pledged for Margin Cash and Securities Received for Reverse Margin Net Assets Received/(Pledged) for Margin Activity For the Quarter Ended (1) Fair Value of Securities Pledged Cash Pledged Aggregate Assets Pledged for Margin (In Thousands) December 31, 2023 $ 10,616 $ 4,085 $ 14,701 $ 23,060 $ 8,359 September 30, 2023 35,690 4,363 40,053 34,846 (5,207) June 30, 2023 5,982 2,909 8,891 5,328 (3,563) March 31, 2023 676 2,965 3,641 6,529 2,888 (1) Excludes variation margin payments on our cleared Swaps which are treated as a legal settlement of the exposure under the Swap contract. We are subject to various financial covenants under our financing agreements, which include minimum liquidity and net worth requirements, net worth decline limitations and maximum debt-to-equity ratios. We were in compliance with all financial covenants as of December 31, 2023. During 2023, we paid $143.1 million for cash dividends on our common stock and dividend equivalents and paid cash dividends of $32.9 million on our preferred stock. On December 13, 2023, we declared our fourth quarter 2023 dividend on our common stock of $0.35 per share; on January 31, 2024, we paid this dividend, which totaled approximately $35.8 million, including dividend equivalents of approximately $119,000.