Matthew J. Lambiase - President and CEO Robert Colligan - Chief Financial Officer Mohit Marria - Chief Investment Officer.

Steven DeLaney - JMP Securities Douglas Harter - Credit Suisse.

Good day and welcome to the Chimera Investment Corporation's Second Quarter 2014 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. (Operator Instructions). I would now like to turn the conference over to Willa Sheridan, please go ahead. .

Good morning and welcome to the second quarter 2014 earnings call for Chimera Investment Corporation. Any forward-looking statements made during today's call are subject to risks and uncertainties which are outlined in the risk factors section in our most recent annual and quarterly SEC filings.

Actual events and results may differ materially from these forward-looking statements. We encourage you to read the forward-looking statement disclaimer in our earnings release in addition to our quarterly and annual filings.

Additionally the content of this conference call may contain time sensitive information that is accurate only as of the day of this earnings call. We do not undertake and specifically disclaim any obligation to update or advice this information.

Participants on this morning's call include Matthew Lambiase, President and Chief Executive Officer; Rob Colligan, Chief Financial Officer; Mohit Marria, Chief Investment Officer; Bill Dyer, Head of Underwriting; and Choudhary Yarlagadda, Head of Structuring. I will now turn the conference over to Matthew Lambiase. .

Thank you, Willa and thank all of you for joining us this morning on the second quarter 2014 earnings call. Before we open the call up for questions I would like to discuss some recent portfolio activity and also talk about how the company is currently positioned in the market.

And then I would like to turn the call over to Rob to go over the financial results of the second quarter. We had a significant amount of activity in our portfolio in the first half of this year.

In the first quarter we took advantage of the strong demand for credit assets by repurchasing all the existing senior debt on a $540 million non-agency Re-REMIC deal that we had consolidated on our balance sheet. We then collapsed the trust and sold the underlying bonds.

That transaction narrowed the difference between our GAAP book value and economic book value and resulted in a $25 million gain. In the second quarter, once we believed we were going to be current on our financial statements we increased the size of our balance sheet.

We purchased 6 billion in agency mortgage backed securities and funded them with repo and hedged them with a mix of swaps and futures.

The additional agencies increased Chimera's total portfolio of $12.4 billion which is supported by $3.4 billion of equity giving us a leverage ratio of 2.6 to 1 which puts Chimera in the lower range of leverage in its peer group.

At this leverage ratio we feel confident that we will be able to earn our current dividend run rate which puts us at an attractive level versus our peer group. And so the Board of Directors has pre-announced the third and fourth quarter dividends of 2014 at $0.09 per share.

Chimera's earnings are largely driven by its $4.4 billion non-agency residential mortgage credit portfolio. This portfolio is purchased during 2009 and 2010 at a time when few market participants had liquidity.

Market yields at that time were higher than they are today and it would be very difficult to replicate a portfolio of this size and quality in today's market.

Because we restructured the bonds into Re-REMIC securitizations and sold off the senior tranches, we now have the majority of our credit portfolio invested in longer duration assets that are largely locked out from prepayments.

This is important because it means we have a high-yielding portfolio that has minimal reinvestment risk in the current low-rate environment. We estimate that we will have less than $200 million of non-agency pay downs in the year ahead which is very manageable for us.

Operating at low leverage has its obvious benefits when interest rates rise but also provides for flexibility as the investment landscape changes. We maintain the ability to add leverage in order to help us produce consistent returns over the quarters ahead.

In July we added experienced talent to our investment team to participate in the agency guaranteed project loan market. Project loans are loans secured by multi-family buildings, assisted living facilities, and government housing.

The project loan market is one of the few areas in the mortgage space that has exhibited growth over the last year and looking at the housing starts numbers which show increased multi-family construction, we expect this trend to continue.

Project loans offer a compelling leverage return and we plan to opportunistically add them to our portfolio over the course of the next year. Looking forward I believe Chimera can earn a consistent attractive risk adjusted dividend while keeping overall leverage at a reasonable level.

By operating at lower leverage we retain the ability to take advantage of opportunities when they arise. And as we have seen before, markets that endure low volatility for long periods are often punctuated by high volatility events. It is beneficial to have capital to invest when these events happen.

Considering the low return, low volatility environment that we are in and all the economic and geo-political uncertainty in the world today, I believe Chimera is well positioned to benefit from any market volatility while delivering attractive risk adjusted returns. And with that I will turn the call over to Rob Colligan..

Thanks Matt and good morning. I will now provide selected financial highlights for the second quarter. In the second quarter the company reported net income of $105 million compared to $100 million for the first quarter of 2014. Net income for the first six months of the year was $205 million compared to $223 million for the first half of 2013.

At quarter end, GAAP book value is $3.35 per share, an increase of 2% from the end of the first quarter and an increase of 3% from year end. Economic book value is $3.09 per share, an increase of 2% from the end of the first quarter and an increase of 10% from year-end.

The increases in book value reflects favourable market fundamentals for both agency and non-agency RMBS during the second quarter.

On a year-to-date basis economic book value increased more than GAAP book value as the portions of the re-securitizations retained by the company and reflected in the economic book increased in value more than the collateral of the re-securitization trusts consolidated by the company and reflected in the GAAP book.

For further explanation of the securitizations we have posted a new exhibit on our website that explains the securitization process and differences between GAAP and economic book value.

For the second quarter the yield on average interest earning assets was 7.84%, and the annualized cost of average borrowed funds including net interest payments on interest rate swaps was 2.92%, for a net interest spread of 4.92%, net interest margin of 5.93%, and return of equity of 12.38%.

Asset yields and net interest margin declined from the first quarter of 2014 driven primarily by lower yielding agency purchases.

Although our return on average equity increased in the first quarter from 11.98%, and importantly net interest income as a percentage of average equity was 12% this quarter, up almost a 100 basis points from 11.04% last quarter.

Further since the agency securities were purchased at various points during the second quarter interest income for the quarter is not fully reflective of the earnings potential of the portfolio at quarter end. The annualized dividend on the company's common stock based on the quarter end price of $3.19 and quarterly dividend of $0.09 was 11.3%.

That concludes my remarks and we will now open the call for questions. .

Thank you. We will now begin the question and answer session. (Operator Instructions). And our first question is from Steve DeLaney of JMP Securities. Please go ahead. .

Thank you. Good morning everyone. It is very nice to be back on a quarterly call with you. .

Thank you, Steve..

The first thing I wanted to ask about, if we look at the securitization detail on page 8 of the supplement, it appears in the second quarter you have added a new transaction, the 2014-4R and that seems a -- maybe it’d be structured a little differently than some of the priors and that we don’t see any seniors sold.

Matt, I just wondered can you talk about that transaction, what the collateral is and what the structure is, thank you?.

Sure, this is Rob Colligan. .

Oh, hey Rob..

Hi, so if you take a look at the detail, a lot of the collateral in the 2014-4R deal was actually from the 2010-12R deal from the middle of the page. .

Yes..

So, we are able to class that deal, narrow the GAAP to economic spread, create a little bit more of a liquid and marketable security, and that deal, the 2014-4R deal if you look at it in Bloomberg there is more to it. We retained a 100% of certain tranches which we are following what's called silo consolidation.

So we are consolidating the tranches of that deal, where we bought a 100% of it and each tranch for that deal is essentially collateralized by a single bond. So there is no cross-collateralization in the deal which is why we are consolidating it.

But unlike other deals within buy whole pool and sell the seniors and retain subs, we just retained certain pieces but are following consolidation accounting for that deal. .

Okay, so essentially the same collateral and the same credit risk just in -- and it's kind of just been repackaged but you essentially have I guess very similar economic exposure and opportunity as you had before, is that fair?.

That's correct. And importantly there is no debt on it. .

Okay, great, unlevered, yeah. .

You know that deal if you looked back to the old supplements, there is only about $50 million worth of debt left on that deal so it made sense to optimize it by doing what we did. .

Okay, thank you.

And I guess moving a little more just big picture, back in 2012 when RMBS 2.0 was starting to get some legs, you guys were in three transactions; we’ve had some rough times in the past year but we were seeing more liquidity and some new issues even coming from the large banks and hearing that issuer economics have improved, I wonder if we -- what your views are on the prime jumbo securitization market and if we might see you become active there again?.

Yeah, thank you Steve. We are always looking at the prime jumbo market and right back in 2012 we did three deals, roughly $1.5 billion worth of securitizations and the economics back in 2012 were a lot better than they are today.

You know when we look at the jumbo prime securitization market the economics just really aren’t that compelling to us and the way we look at the market.

If we bought a $100 million worth of loans, Chimera would basically put the loans into a trust, securitize them, and we retain probably the bottom $7 million or $8 million, the credit risk in the transaction. .

Right..

And we sell off the 92% in AAAs, the higher grade stuff.

Owning the sub bonds, that bottom $8 million or $7 million piece of the transaction, historically we have gotten returns over 10% owning that credit risk and currently that sub stack is trading around into our loss around models around 5% and it just doesn’t make an awful lot of sense to us to be adding that type of risk to the portfolio.

I mean, we constantly monitor, we still have an underwriting department, we still have structuring people, we are always looking at it. Just the risks and the rewards aren’t that compelling to us at the moment. There are better things for us to do with our capital. .

And namely I guess the multi-family project loans you are seeing much better levered returns there?.

That's a very interesting market for us. Multi-families are a small niche agency market, it's probably been had $10 billion to $12 billion of origination over the last couple of years and then last year it had over $20 billion of origination.

I think there is going to be more bonds available for us in that market going forward and I think the leverage returns are just as good as there as you see anywhere else in the bond market. .

And Matt, this program you are referring to, I had to look into it a bit, this is separate than the Freddie K series issues?.

It’s Ginnie Mae's and the Freddie K series we are talking about the IOs and there are some credit strips. There are a number of different things that we are adding to the portfolio. .

Okay..

We hired Dangerfield who I worked with back in the early 90's. He's probably got about 26 years of experience, 27 years of experience trading in the product space. I think he is one of the -- probably the most experienced people in the market and he is going to take a year or so to build out a portfolio of this product for us.

And he is already -- he has been here for a month and he has already started to add paper to our portfolio. .

Great, thank you guys for the colour. .

Our next question is from Douglas Harter of Credit Suisse. Please go ahead. .

Thanks.

Matt, can you talk about the agency portfolio, is that something that at current size you will likely keep around current sizes or as you source other investment opportunities just kind of use that as a source of funds?.

Well, you know Doug it is very tight market right now for all credit assets. The market is pricing almost everything to perfection in the credit space and when we look out there, we just take a look at junk bonds. Junk bonds are yielding probably 5.5% to 6% right now. The index, even like Spain 10 year debt is at 2.50.

I mean there is not a lot of yield out in the marketplace and so when you put that backdrop against agency mortgage backed securities, when we bought the portfolio they were yielding around 3.25%, that's a very attractive risk adjusted return in this marketplace versus probably just about everything else out there.

So, I look at that, I think well that's probably the right place to put the capital at the moment, to lever up the balance sheet.

And yes, we saw something better come along if there was a dislocation in the marketplace, there was some volatility event we have liquidity in these positions and we could definitely take it down to react to that marketplace. .

Got it and I think I know the answer to this based on the way you answered that but is there anything else in that credit space other than those project, these agency project loans that you find interesting today or that you are looking at?.

I will let Mohit answer that one. .

Yes, good morning Doug. I mean there are selective opportunities in the resi credit space that we have looked at and have added to the portfolio over the course of the first half of the year.

You know as Matt alluded to in the prime jumbo space, the sub stack that we had retained by doing the securitization is yielding around 5% but you have a locked out bond with lot of durations.

We were able to source front paid bonds with similar yield profiles, return profiles which we have added to the portfolio over the course of the first half of the year. .

Yeah, I think some of the AAA bonds and some of the jumbo prime loan securitizations looked kind of attractive. But you got to think, they are probably trading around at 3.40 to 3.50 yield level and the sub stack is trading at 5%. I don’t think I have ever seen a spread that narrow between the subs and the AAA.

So if we are going to buy anything there I would look at the AAA's on the jumbo deals. .

Great, thank you guys. .

And this concludes our question and answer session. I would like to turn the conference back over to Matt Lambiase for any closing remarks. .

Well, thank you everybody for joining us on the call today. We appreciate you joining us and I would just like to say thank you to Rob Colligan and the team of accountants we have here.

They worked very hard to get us current and also to E&Y, they also worked very hard to get us current as well and we appreciate that and we look forward to speaking to you after the third quarter earnings call. Thank you very much..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..