Chimera Investment(CIM) - 2022 Q4 - Annual Report

PART I Item 1. Business The company operates as a REIT investing in a diversified mortgage asset portfolio to generate income and risk-adjusted returns - The company is a REIT focused on investing in a diversified portfolio of mortgage assets, including residential mortgage loans, Agency RMBS, Non-Agency RMBS, and Agency CMBS, with the goal of providing attractive risk-adjusted returns[298] - In 2022, the investment strategy centered on acquiring and securitizing residential mortgage loans, including exercising call options on existing securitizations to refinance at better terms[327] Portfolio Composition by Fair Value | Asset Class | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Residential Mortgage Loans | 88% | 82% | | Non-Agency RMBS | 9% | 12% | | Agency MBS | 3% | 6% | - The company utilizes various financing sources, including securitizations, warehouse facilities, and repurchase agreements, with a key strategy modification involving non-mark-to-market facilities to reduce financing risks during market volatility[301][346][347] - The company operates to maintain its REIT qualification, which requires distributing at least 90% of its taxable income, and to maintain its exemption from the 1940 Act[350] Item 1A. Risk Factors The company faces significant financing, investment, operational, and regulatory risks impacting its business and REIT status - Financing Risk: The company's reliance on short-term repurchase agreements and warehouse facilities creates risk, as lenders may not renew financing or may impose more onerous terms, especially during market disruptions[393][427] - Interest Rate and Market Risk: Rising interest rates and market volatility can decrease asset values, leading to margin calls, while a flattening yield curve compresses net interest margins[396][397][482] - Credit Risk: A significant portion of the portfolio consists of Non-Agency RMBS and residential loans with higher credit risk, which are exposed to losses from borrower defaults in economic downturns[455][456][488] - Securitization and Risk Retention Risk: Retaining the first-loss tranches of securitizations exposes the company to significant credit risk, and U.S. Risk Retention Rules limit the ability to sell or hedge these interests[451][453] - Regulatory and Tax Risk: The company must comply with complex rules to maintain its REIT status and its 1940 Act exemption, with failure resulting in severe adverse effects[255][521][556] - LIBOR Transition: The transition from LIBOR to alternative rates like SOFR introduces uncertainty and potential risks, including higher borrowing costs and asset-liability mismatches[405][438] PART II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations A net loss of $587 million in 2022, driven by unrealized losses from rising rates, contrasted sharply with 2021's net income - The company's financial performance in 2022 was significantly impacted by rising interest rates and credit spread widening, leading to substantial mark-to-market losses on its investment portfolio[664][677] Net Income (Loss) Summary (in thousands) | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net Interest Income | $439,828 | $610,918 | | Total Other Gains (Losses) | ($821,930) | $199,114 | | Net Unrealized (Losses) Gains | ($736,899) | $437,357 | | Total Other Expenses | $124,180 | $135,480 | | Net (Loss) Income | ($513,066) | $670,114 | | Net (Loss) Income to Common | ($586,831) | $596,350 | Per Share Data | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Diluted EPS (GAAP) | ($2.51) | $2.44 | | Earnings Available for Distribution per Share (Non-GAAP) | $1.08 | $1.78 | | Dividends Declared per Common Share | $1.12 | $1.29 | - Strategic actions in 2022 included acquiring $2.1 billion of investments, primarily loans, while maintaining low leverage and repurchasing 5.31 million shares for $49 million[23][536] - To manage liquidity and financing risk, the company increased its use of non-mark-to-market facilities and entered into $2.5 billion of interest rate hedges[626][657] Results of Operations A $587 million net loss was driven by a $1.2 billion negative swing in unrealized gains and a 28% drop in net interest income Net Interest Income Analysis (GAAP, in millions) | Component | FY 2022 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | Interest Income | $773 | $938 | -18% | | Interest Expense | $333 | $327 | +2% | | Net Interest Income | $440 | $611 | -28% | Economic Net Interest Income (Non-GAAP, in millions) | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Economic Net Interest Income | $436 | $613 | | Net Interest Rate Spread | 2.6% | 3.9% | - The company recognized total net losses on derivatives of $4 million in 2022, compared to none in 2021, from terminating interest rate swaps[10] - Net unrealized losses on financial instruments were $737 million in 2022, a stark contrast to net unrealized gains of $437 million in 2021[11][677] - Compensation and benefit costs increased to $49 million from $47 million, primarily due to higher severance expense for the former CEO[15] Financial Condition Total assets and equity declined in 2022 due to fair value losses, while the recourse leverage ratio increased to 1.3:1 Portfolio Composition (by Fair Value of Interest Earning Assets) | Asset Class | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Residential mortgage loans | 88% | 82% | | Non-Agency RMBS | 9% | 12% | | Agency MBS | 3% | 6% | Leverage Ratios | Ratio | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | GAAP Leverage (Total Debt/Equity) | 4.0:1 | 3.0:1 | | GAAP Recourse Leverage | 1.3:1 | 0.9:1 | - During 2022, the company purchased $2.1 billion of investments and received $2.6 billion in principal payments, while selling $66 million of investments[23] Liquidity and Capital Resources Cash decreased as financing activities used cash, while the company increased its use of non-mark-to-market facilities Cash Flow Summary (in millions) | Activity | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $326 | $519 | | Net Cash from Investing Activities | $510 | $2,548 | | Net Cash used in Financing Activities | ($957) | ($2,951) | | Net (Decrease) Increase in Cash | ($121) | $117 | - The company's recourse leverage increased to 1.3:1 at year-end 2022 from 0.9:1 at year-end 2021[30] - Weighted average haircuts on secured financing increased for Agency MBS but decreased for Non-Agency RMBS and Loans during 2022[31] - The company entered into new secured financing agreements in Q4 2022, including a $383 million five-year facility and a $250 million two-year non-mark-to-market facility[32] - As of December 31, 2022, the company had a significant counterparty risk exposure to Nomura, representing 12% of its equity related to collateral[34] Critical Accounting Estimates Critical estimates involve revenue recognition and fair value determination for Level 3 assets using significant unobservable inputs - The most critical accounting policies relate to revenue recognition on investments and the determination of fair value for financial instruments[546] - Fair value for Non-Agency RMBS and Loans held for investment is determined using internal discounted cash flow models with significant unobservable inputs (Level 3)[45][78][741] - As of December 31, 2022, Level 3 assets and liabilities represented approximately 95% of total assets and liabilities measured at fair value, respectively[79] - The company consolidates thirty-eight VIEs where it is deemed the primary beneficiary, a determination involving significant judgment[47][80] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to credit, interest rate, and prepayment risks, which are managed via hedging and due diligence - The primary market risks are credit risk, interest rate risk, prepayment risk, extension risk, basis risk, and market value risk[745] - Credit risk is concentrated in Non-Agency RMBS and residential mortgage loans and is managed through independent reviews of mortgage files[50][113] Interest Rate Sensitivity Analysis (as of Dec 31, 2022) | Change in Interest Rate | Projected % Change in Net Interest Income | Projected % Change in Market Value | | :--- | :--- | :--- | | -100 Basis Points | 2.35% | 5.91% | | -50 Basis Points | 1.12% | 2.51% | | +50 Basis Points | (0.97)% | (3.52)% | | +100 Basis Points | (1.80)% | (6.22)% | - The company is managing the transition from LIBOR to SOFR for its floating-rate borrowings and assets, a process that introduces uncertainty[54][55] - Risk management strategies include monitoring asset/liability repricing, using derivatives for hedging, and employing securitization for long-term financing[173] - The company has a comprehensive cybersecurity program, including security controls, regular training, and an incident response plan[176] PART IV Item 8. Financial Statements and Supplementary Data This section contains the unqualified auditor's opinion and the core consolidated financial statements for the fiscal year - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[197][259] - Critical Audit Matters identified were the valuation of Level 3 financial instruments and the recognition of interest income on certain assets[199][229][231] Consolidated Statement of Financial Condition Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $13,401,991 | $15,407,403 | | Total Liabilities | $10,735,188 | $11,671,212 | | Total Stockholders' Equity | $2,666,803 | $3,736,191 | Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net Interest Income | $439,828 | $610,918 | $514,069 | | Net (Loss) Income | ($513,066) | $670,114 | $88,854 | | Net (Loss) Income to Common | ($586,831) | $596,350 | $15,104 | Item 9A. Controls and Procedures Management and the independent auditor concluded that disclosure controls and internal controls over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[181] - Based on the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[183] - The independent registered public accounting firm, Ernst & Young LLP, audited and expressed an unqualified opinion on the effectiveness of the company's internal control over financial reporting[160] - There were no material changes in internal control over financial reporting during the fourth quarter of 2022[184][210] Item 15. Exhibits and Financial Statement Schedules This section indexes all filed exhibits, including governance documents, material contracts, and Sarbanes-Oxley certifications - The Exhibit Index lists all documents filed as part of the annual report, including corporate governance documents, material contracts, and required certifications[190] - Key filed documents include employment agreements, a separation agreement with the former CEO, and forms of various stock and incentive awards[220] - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[193] Notes to Consolidated Financial Statements The notes detail key accounting policies, including VIE consolidation, fair value measurements, and specifics on financial instruments - The company consolidates VIEs for which it is the primary beneficiary; as of Dec 31, 2022, assets and liabilities of consolidated VIEs were $10.2 billion and $6.8 billion, respectively[849][1120] - A majority of financial instruments are carried at fair value, with Level 3 instruments, valued with significant unobservable inputs, constituting a large portion of the balance sheet[838][957] - The company uses interest rate swaps and swaptions to hedge interest rate risk, holding derivative assets with a fair value of $4.1 million as of Dec 31, 2022[1015][1041] - The company repurchased 5.4 million shares for $49 million in 2022, with $177 million remaining available under the share repurchase program[1047]