Chimera Investment Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 18, 2021. Chimera is an internally managed mortgage REIT investing primarily in residential mortgage loans and mortgage-backed securities. Its principal earnings source is net interest income, supported by leverage and loan securitizations. This is an annual filing, not a standalone fourth-quarter report.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | FY2020 / year-end 2020 | FY2019 / year-end 2019 |
|---|---|---|
| Interest income | $1,030 million | $1,361 million |
| Interest expense | $516 million | $759 million |
| Net interest income | $514 million | $602 million |
| Net income | $89 million | $414 million |
| Net income available to common shareholders | $15 million; $0.07 per basic share | $341 million; $1.82 per basic share |
| Core earnings, non-GAAP | $334 million; $1.46 per adjusted diluted share | $421 million; $2.24 per adjusted diluted share |
| Common dividends declared | $1.40 per share | $2.00 per share |
| Total assets | $17.5 billion | $27.1 billion |
| Stockholders’ equity | $3.78 billion | $3.95 billion |
| Book value per common share | $12.36 | $16.15 |
| Cash and cash equivalents | $269 million | $110 million |
- Economic net interest income, a non-GAAP measure, was $513 million, down from $597 million. The economic net interest spread rose to 2.3% from 2.0%, and net interest margin to 2.8% from 2.4%; management attributed the improvement largely to the portfolio shift away from lower-yielding Agency assets.
- Operating activities provided $258 million of cash, versus $65 million in 2019. Investing activities provided $8.3 billion, mainly reflecting asset sales and principal repayments; financing activities used $8.4 billion, largely from repayment of secured financing and securitized debt and payment of dividends.
- Debt-to-equity leverage declined to 3.6:1 from 5.5:1; recourse leverage fell to 1.2:1 from 3.4:1. Secured financing agreements declined to $4.6 billion from $13.4 billion. Securitized debt collateralized by loans was $8.7 billion, compared with $8.2 billion.
- At year-end, the interest-earning portfolio, by amortized cost, was approximately 79% residential mortgage loans, 10% Agency CMBS, 10% Non-Agency RMBS and 1% Agency interest-only securities.
Material changes and notable items
- In response to COVID-19 market disruption and margin calls, Chimera sold substantially all of its Agency RMBS portfolio in the first quarter, used proceeds to repay financing and reduce leverage, and terminated its interest-rate hedges. Agency RMBS fell from 26% of the interest-earning portfolio at year-end 2019 to less than 1% at year-end 2020.
- FY2020 net derivative losses were $304 million, including $464 million of losses on terminating swaps; net unrealized losses on financial instruments at fair value were $111 million. These and debt-extinguishment losses of $54 million contributed to the decline in GAAP earnings. Net realized gains on investment sales were $167 million.
- The company purchased $1.9 billion of residential mortgage loans and completed multiple securitizations during the year. It added longer-term and non-mark-to-market financing to reduce exposure to margin calls; such facilities represented about 46% of credit repurchase facilities at year-end.
- Chimera issued $374 million of 7.00% convertible senior notes due 2023. About $321 million converted into approximately 49 million common shares during 2020, leaving $53 million principal outstanding at year-end. Lenders under a $400 million secured credit agreement also received warrants for up to 20.3 million shares at $0.01 per share, with cash settlement permitted under specified terms.
- Fourth-quarter 2020 net income available to common shareholders was $129 million, or $0.55 per basic share; core earnings were $72 million, or $0.29 per adjusted diluted share. The quarterly result included a $61 million net unrealized gain on financial instruments at fair value.
Outlook, risks and contingencies
- Management expects residential mortgage loans to remain a primary investment focus in the near term. It gave no specific earnings, spread, book-value or dividend guidance; future dividends remain at the board’s discretion. The company intends to distribute at least 90% of REIT taxable income, subject to applicable adjustments and requirements.
- Management said conditions improved in the second half of 2020 but uncertainty remained around COVID-19, borrower performance, forbearance, economic conditions, housing markets and mortgage financing. Lower interest rates may increase prepayments and reduce reinvestment yields.
- Financing and liquidity remain key risks: secured financing is often short-term and renewable at lender discretion, and declines in collateral values can trigger margin calls or higher haircuts. Year-end cash was $269 million; $1.1 billion of unused warehouse facilities were uncommitted. The filing states the company was in compliance with financing covenants at year-end.
- Credit and valuation risks are significant. Chimera’s Non-Agency securities include subordinate, first-loss and often illiquid positions; 89% of assets measured at fair value on a recurring basis were Level 3 at year-end. Loan and security values depend on management estimates and unobservable assumptions, including default rates, prepayments and loss severity.
- Loan performance warrants attention: residential loans 90 or more days delinquent had $910 million fair value at year-end, versus $597 million a year earlier. For collateral underlying Non-Agency RMBS, the total reported delinquency, bankruptcy, foreclosure and REO share of unpaid principal rose to 16.3% from 12.6%.
- Other exposures include geographic concentration, counterparty risk, securitization and servicing risks, changing regulations and LIBOR transition. Goldman Sachs and Nomura represented 17% and 11% of equity, respectively, in disclosed secured-financing amounts at risk.
- The auditor issued an unqualified opinion on the financial statements and internal controls. The audit identified Level 3 fair-value measurement and interest-income recognition on Non-Agency RMBS and loans as critical audit matters. No legal proceedings were reported; the filing disclosed ordinary-course potential repurchase obligations for breached securitization representations and warranties and a remaining $26 million capital commitment to Hains Point.
Investor verification priorities
- Review subsequent loan delinquency, forbearance, foreclosure and loss data, especially for the seasoned residential loan portfolio and first-loss Non-Agency exposures.
- Assess the assumptions and sensitivity underlying Level 3 asset and securitized-debt valuations, including the audit’s noted valuation differences from third-party pricing.
- Verify the durability, pricing, maturities, collateral requirements and renewal availability of financing, along with margin-call exposure and counterparty concentrations.
- Track the effect of lower interest income, asset prepayments, financing costs and share dilution on recurring earnings and book value.
- Confirm dividend capacity against REIT taxable income, cash resources and preferred-stock obligations; GAAP earnings and non-GAAP core earnings are not substitutes for taxable income.
- Monitor exercise or cash settlement of the 20.3 million lender warrants and the remaining convertible notes, including potential dilution and book-value effects.