Chimera Investment Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; quarterly figures below refer to the fourth quarter ended that date. Comparisons are primarily with 2021. Chimera is a leveraged mortgage REIT investing mainly in residential mortgage loans and mortgage-backed securities.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Interest income | $773 million | $938 million |
| Interest expense | $333 million | $327 million |
| Net interest income | $440 million | $611 million |
| Economic net interest income (non-GAAP) | $436 million | $613 million |
| Economic net interest spread / margin | 2.6% / 3.2% | 3.9% / 4.2% |
| Net income (loss) available to common shareholders | $(587) million; $(2.51) per share | $596 million; $2.55 per share |
| Earnings available for distribution (non-GAAP) | $256 million; $1.08 per adjusted diluted share | $429 million; $1.78 per adjusted diluted share |
| Common dividends declared per share | $1.12 | $1.29 |
The annual loss was driven principally by $737 million of unrealized losses on financial instruments, including $1.3 billion of losses on loans held for investment, partly offset by $684 million of gains on securitized debt carried at fair value. Chimera also recorded $76 million of realized investment-sale losses and a $7 million increase in its credit-loss provision.
Fourth-quarter net interest income was $80 million, down from $105 million in the third quarter; interest expense rose to $107 million from $83 million. Fourth-quarter earnings available for distribution were $26 million, or $0.11 per adjusted diluted share. GAAP net income available to common shareholders was $79 million, or $0.34 per share, including a $112 million unrealized gain on financial instruments.
- Balance sheet at year-end: Total assets were $13.4 billion, total liabilities $10.7 billion, and stockholders’ equity $2.7 billion, compared with $15.4 billion, $11.7 billion, and $3.7 billion, respectively, in 2021. Cash and cash equivalents were $265 million, down from $386 million.
- Portfolio: At fair value, interest-earning assets were approximately 88% residential mortgage loans, 9% Non-Agency RMBS, and 3% Agency MBS. Loans held for investment had a fair value of $11.4 billion.
- Leverage and financing: GAAP debt-to-equity leverage was 4.0:1 versus 3.0:1; recourse leverage was 1.3:1 versus 0.9:1. Interest-bearing debt was $10.6 billion. Secured financing agreements totaled $3.4 billion, with a weighted-average borrowing rate of 6.61%, versus 2.30% at year-end 2021. The company had $1.2 billion of non-mark-to-market facilities and $365 million of limited mark-to-market facilities.
- Cash flows: Operating activities provided $326 million, investing activities provided $510 million, and financing activities used $957 million. Cash declined by $121 million during the year. Financing cash uses included $1.8 billion of securitized-debt principal repayments, $362 million of common and preferred dividends, and $49 million of common-stock repurchases.
- Book value: Book value per common share fell to $7.49 from $11.84, primarily due to higher interest rates and wider credit spreads. It increased modestly from $7.44 at September 30, 2022.
Changes, outlook, and notable items
Inflation and rapid Federal Reserve rate increases weighed on asset values and financing costs. The company’s average interest-earning assets declined to $13.6 billion from $14.4 billion, while higher borrowing rates reduced its net interest spread. Loan purchases were $1.7 billion, down from $3.2 billion in 2021. Chimera sold $1.6 billion of reperforming loans through five securitizations, issuing $1.2 billion of securitized debt at an average advance rate of 74%.
Management expects to continue acquiring and securitizing mortgage loans, consider calling existing securitizations, and expand Agency and Non-Agency RMBS and CMBS holdings, subject to market conditions. After year-end, the company committed to purchase approximately $900 million of residential mortgage loans. It reported approximately $365 million in cash as of January 31, 2023.
Management reported that a new $250 million, two-year non-mark-to-market facility carries a 7% coupon and an 8% deferred financing cost; it reduced fourth-quarter earnings available for distribution by about $0.04 per share and is expected to weigh on that measure in the near and medium term. Subsequent securitization transactions were expected to reduce recourse borrowings by approximately $139 million and release approximately $90 million of equity, with higher interest expense over the new financing term. The company also reported exercising a call option after year-end to retire $337 million of securitized debt at par.
Key risks include rate and yield-curve movements, rising funding costs, margin calls and refinancing access, mortgage credit losses and prepayments, and concentration in illiquid or subordinated assets. Chimera typically retains first-loss securitization interests, some subject to risk-retention restrictions that limit sales and hedging. Approximately 95% of assets measured at fair value on a recurring basis were Level 3 at year-end, relying on significant unobservable inputs and management estimates. A 100-basis-point rate increase was modeled to reduce net interest income by 1.80% and market value by 6.22%; actual results may differ materially. LIBOR transition and the floating-rate terms of certain preferred shares also remain relevant. The company reported no material legal proceedings and stated that its financial reporting controls were effective. The auditor issued unqualified opinions on the financial statements and internal controls, while identifying Level 3 valuation and interest-income estimates as critical audit matters.
Important facts for investors to verify
- How sustainable the common dividend is relative to taxable income, cash generation, and earnings available for distribution; the 2022 declared dividend was $1.12 per share versus $1.08 of adjusted diluted-share earnings available for distribution.
- Whether cash, committed financing, and post-year-end transactions provide adequate protection against collateral calls, refinancing needs, and portfolio purchases.
- The sensitivity of reported book value and earnings to management’s Level 3 valuation assumptions, including the loans and securitized debt carried at fair value.
- The credit performance and concentration of the loan portfolio, including delinquencies, first-loss exposures, and geographic exposure to California, New York, and Florida.
- The cost and terms of future financing, the effects of LIBOR replacement on assets, debt, and preferred shares, and the execution and funding of the approximately $900 million post-year-end loan commitment.