Emily Mohr - Investor Relations Matthew Lambiase - President and Chief Executive Officer Mohit Marria - Chief Investment Officer Robert Colligan - Chief Financial Officer.

Douglas Harter - Credit Suisse Trevor Cranston - JMP Securities George Bahamondes - Deutsche Bank Lee Cooperman - Omega Advisors.

Ladies and gentlemen, thank you for standing by. Welcome to the Chimera Investment Corporation Second Quarter 2017 Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question-and-answer session [Operator Instructions].

It is now my pleasure to turn the floor over to Emily Mohr of Investor Relations. Please go ahead..

Thank you, Kristal. And thank you everyone for participating in Chimera's second quarter 2017 earnings conference call. Before we begin, I'd like to review the Safe Harbor statements. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which are outlined in the risk factor 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. During the call today, we may also discuss non-GAAP financial measures. Please refer to our SEC filings and earnings supplement for reconciliation to the most comparable GAAP measures.

Additionally, the content of this conference call may contain time sensitive information that is accurate only as of the date of this earnings call. We do not undertake and specifically disclaim any obligation to update or revise this information. I will now turn the conference over to our President and Chief Executive Officer, Matthew Lambiase.

Please go ahead..

Thank you, Emily. Good morning and welcome to the second quarter 2017 earnings call. Joining me on the call this morning, I have Mohit Marria, our CIO; Rob Colligan, our CFO; Choudhary Yarlagadda, our COO; and Victor Falvo, the Head of our Capital Markets.

I'll make some brief comments, then Mohit and Rob will review the quarter and then we'll up the call for questions. Chimera posted solid income and book value results for the second quarter. Since the Presidential Election in November, interest rates and LIBOR rates have written significantly.

Through this period, we continue to produce an attractive risk adjusted return on equity, while operating of some of the lowest recourse leverage in the sector.

Chimera closed the second quarter at 1.7 to 1 recourse leverage, which will lead to be appropriate in light of the Federal Reserve raising short term interest rates and the discussion surrounding in light of its agency mortgage portfolio. In the current challenging fixed income market, we believe Chimera is well positioned.

We continue to earn our strong dividend while operating with defensive leverage. We have plenty of dry powder to invest and would be comfortable increasing our leverage when market conditions clarify and when quality investment opportunities become available.

As an eternally managed company, we are mindful of maintaining a consistently high return on equity rather than just growing our assets under management. The $470 million in preferred equity capital that we raised in the previous two quarters has allowed us to meaningfully increase the size of our loan portfolio, which was beneficial this quarter.

And we are still in the process of deploying the remainder of that capital into additional loan packages. Our portfolio team continues to express the opinion of the best investment in the mortgage credit space is in low loan balance seasoned loans.

This quarter, Chimera closed on $377 million pool of loans and expects to close another $1.4 billion of similar loans in the third quarter. As a long term investor and risk container of mortgage credit, finding the right investments takes time.

It's important to use discretion to find the right assets rather than just rush to invest capital in any one quarter. The $12.4 billion portfolio of seasoned low loan balanced mortgages that we have assembled has had slowed prepayments and experienced better credit performance metrics than what we expected when we originally purchased them.

Our loan portfolio is unique and in my opinion would be very difficult to recreate. We consolidate on our balance sheet over 138,000 loans with an average coupon of 7% at an average balance of just less than $90,000. These loans on average have been outstanding for over 10 years.

The prepayment rates have been low on the portfolio, due to the relatively high refinancing costs for these borrowers and a general lack of credit available to them.

We expect our securitized interest in this portfolio to have roughly a seven year average life at current prepayments fees, which means that the earnings power this portfolio will be driving our dividend for years to come.

Chimera's book value was up over 2% this quarter and over 4% in 2017, reflecting the strong investor demand for mortgage credit and the type of assets we hold in our portfolio.

This strong book value performance coupled with Chimera's high dividend has generated economic return measure to the change in book value plus dividends in excess of 10% for the first six months of 2017.

As the housing market fundamentals continue to improve with a decline in unemployment rates and increases in home values, we see investors' expectations of future cash flows becoming more positive.

We think that this positive trend will most likely continue as the housing market improves and could be a catalyst for higher prices on our portfolio in the future. In summary, this is a challenging fixed income market to navigate and prudent leverage is the best course.

We are comfortable earning our dividend at current leverage ratio and retain the option to increase leverage should the opportunities present themselves. We're bullish on low loan balance, season mortgages and continue to have success finding assets to add to our portfolio.

We remained optimistic that mortgage credit should continue to outperform and produce some of the best risk adjusted returns in the fixed income market as the U.S. economy gets better and investors adjust our expectations on loan performance. With that I'll turn the call over to Mohit to discuss the mortgage market in the quarter..

Thank you, Matt, and good morning everyone. I will briefly review macroeconomic factors and then go over the investment activity for the quarter. During the second quarter, both equity and fixed income markets continue their strong performance as volatility continued at ebb lower.

Since the start of the year, 10 year Treasury yields are valued 14 basis points ending the quarter at 2.3%, while the yield curve has planned 33 basis points. The Federal Reserve at their June meeting raised rates and communicated that they plan to begin selling their MBS and Treasury holdings leader in 2017.

With this of the backdrop, option adjusted spreads on agency MBS were suddenly wider during the quarter or rather than to credit CMBS and corporate bonds continue to tighten. Dollar rates remained low by historical standards, we remained cautious on leverage.

We believe lower inflation expectations and growth projections will limit future rate increases by the Federal Reserve and like many other market participants, we do not expect any meaningful increases in bond yields.

Chimera's agency portfolio was marginally lower this quarter by $104 million and our agency CMBS portfolio was down a modest $27 million. We remained cautious on agencies with the better yield curve and ahead of the potential unwinding of Federal Reserve's 1.8 trillion agency portfolio. We continue to like and deploy our capital in mortgage credit.

This quarter, Chimera bought and securitized 377 million seasoned performing low loan balance residential mortgages. The weighted average coupon on the portfolio was 5.43% and the weighted average loan age was 137 months. This package of loans at a weighted average loan balance of 125,000. The securitization closed at the end of May.

In the second quarter, we also committed to purchase 620 million of similar mortgages with the lack and follow [ph] of 5.10% and 132 months respectively. These loans have not yet settled though we expect to close the securitization in Q3.

Subsequent to quarter end in July, we identified and expect to acquire and securitize an additional 825 million loans bringing our expected secularization to be approximately 1.4 billion. We will discuss these securitizations on future earnings calls. New issue non-agency MBS supply remains limited.

As in fundamentals continue to be strong with the S&P Core Logic Case-Shiller indices, recently reporting 5.6% annual home price gains. These factors have benefited and help to increase Chimera's book value by more than 4% year-to-date.

Much of the increase has been generated by strong investor demand for mortgage credit assets as they exhibit attractive risk adjusted investment returns relative to other fixed income investments.

Our securitized loan portfolio continues to experience moderate fee pay rates and investors to non-agency securities continue to refine their modeling inputs reflect a positive characteristics of the underlying loans resulting in tighter spreads and higher prices.

We believe our loan portfolio and securitizations are poised to perform better than our purchase assumptions and offer us the ability to further optimize our financing costs.

So Chimera is continuing to do credit performance and our currently low recourse leverage, we have ample ability to increase our portfolio when attractive investment opportunities are available. I will now turn the call over to Rob to review our financial results..

Thanks Mohit. I'll review Chimera's financial highlights for the second quarter. GAAP book value at the end of the second quarter was $16.54 per share and our economic return on GAAP book value was 5.2% based on the quarterly change in book value in the second quarter dividend per common share.

GAAP net income for the second quarter was $106 million compared to $158 million last quarter. On a core basis, net income for the second quarter was $112 million or $0.60 per share, up from $96 million or $0.51 per share last quarter.

Securitization deal expenses were $1.3 million in the second quarter compared to $11.4 million incurred in the first quarter. Net interest income for the second quarter was $151 million, up from $141 million last quarter.

Increase in net interest income relates primarily to the increase in Chimera's loan portfolio, partially offset by higher financing costs as LIBOR has increased. The yield on average interest earning assets was 6.2% compared to 6.5% last quarter.

Our average cost of bonds was 3.5% in line with last quarter and our net interest spread was 2.7% compared to 3% last quarter. Total leverage for the second quarter was 4.5% to 1% while recourse leverage ended the quarter at 1.7% to 1%.

Our net interest return on equity was 16.6% for the quarter, up from 16.5% last quarter and our return on average equity was 13% for the quarter compared to 20% last quarter. Expenses for the second quarter excluding servicing fees and deal expenses were $12 million, up slightly from the first quarter.

For the remainder of 2017, we expect these expenses to be $12 million to $13 million per quarter. This concludes our remarks and we'll now open the call for questions..

[Operator Instructions] And your first question comes from the line Bose George with KBW..

Good morning, guys. Eric on for Bose. I'm hoping we can get a little more detail on the pre-pay rates on the low loan balance pools.

Specifically how they compare to the rates on agency specified pools list with low loan balance protection? And then if you can just remind us or give us a rough idea of how sensitive the yield you expect to capture on those loans is to a pickup in CPR in any given quarter?.

Sure Eric, this is Mohit. As far as the speeds we're experiencing on the portfolio I think the average has been around eight or nine CPR. Now that compares to on the on the agency side as well as.

For sudden even if there's $12 billion of 7% whack coupons available out there, but I would expect to speeds on sub 100K loan balance on the agency side with those type of lacks to be probably in the mid to high teens, if you just compared to where you know current production 3.5 and 4 or even say 85K max loans they are probably trade around six or seven CPR assumptions and those have pay until probably north of two to three points on those coupons.

So I mean our portfolio is holding up pretty well given the lack and as Matt mentioned on the opening remarks credit availability for these borrowers as far as the sensitivities to yield, I mean we've held these assets in some cases now for three years.

I mean a slight uptick doesn't really impact us that much, I mean if we do own the bonds of the collateral discounts that let to be accretive from that sense, but we don't see any reason for really pick up here..

Well, that's really helpful Mohit, thanks. The $21.5 million that you show us which moved out of the credit reserve during the quarter, can you be more specific about where in the portfolio that was taken from? Thanks..

Sure that's in the non-agency portfolio. And that's just from improvement on expected cash flow..

Where specifically in the non-agency portfolio though?.

We'll have to come back to you on that, I'm not sure with the level of detail, we'll take a look at the queue that from out later this week..

All right, thanks guys appreciated..

Your next question comes from line of Douglas Harter with Credit Suisse..

Thanks. Can you talk about the yields you are seeing on the 1.4 billion of loans you purchased this quarter and how that compares to what's in the portfolio..

Hey, Doug. This is Mohit again. As I mentioned in my opening remarks, we'll discuss the securitizations in more detail on Q3's earnings call, but I would expect the yields on a levered basis to be somewhat what we've acquired loans at and securitizations at in the past.

Even with tighter spreads in overall basis given how the markets really been up to finance, the leverage available through securitization has also improved with tighter executions there which will help support the yields we've - we will get on the equity pieces we will hold..

Got it. That make sense.

And then on the existing structures, can you talk about how - I guess sort of how those pay down and how those - and you know how the leverage kind of works on that and whether you're able to kind of maintain, kind of what you're doing to sort of maintain that leverage overtime as structures pay down?.

Sure. As we've mentioned on prior calls, most of our deals have either three or four year calls build in from the time they were issued. We acquired the Springleaf portfolio in August of 2014 and have subsequently relevered five of those deals.

Three years in, I mean our first deal that we relevered was in October of 2014 and becomes releverable starting this October if the market presents that opportunity.

And we're heading into 2018 and 2019, we will have three deals next year as well as a couple of deals in 2019 to relever the way the deals are structures all the principal payments are used to pay down the senior bond. So if you look at the 2014 deal, I think that senior bonds delivered to almost 60% of the original balance.

And again based on market conditions, we should be able to relever it come Q4. But again this subject to what we think the execution is if the economics make sense..

Got it.

So if the economics make sense, there could be an opportunity for you to have sort of incremental capital to be able to buy additional pools kind of with your existing capital base?.

That's right..

Perfect, okay. Thank you..

Your next question comes from the line of Trevor Cranston with JMP Securities..

Hi, thanks.

A follow-up question on Mohit the comment you made about better execution on the securitizations, can you elaborate a little bit on that in terms of what you saw in the May deal and what you are expecting for 3Q in terms of the improvement and execution is in the availability of more leverage or on a tighter spreads you are able to step on that or both? Thanks..

Yeah, absolutely. The deal that we executed in May, we altered the structure slightly as we found lack of assets of buy, we only sold top 20% of the collateral and we retained the rest. And with the expectations of both investing dollars as well as spreads tighten further, we could opportunistically sale down the road.

But on securitizations that we see going forward just based on other deals on the market place, the senior bonds have executed a tightest 70 basis points or 70 the swaps on three or four year assets. So if you look at that relative to the start of the year, those new issues were probably around 100-ish over the slops.

So the new issue market has tightened quite significantly in the rating agencies and investor base themselves have done more comfortable with high advance rate overall..

Got it. Okay, that's helpful. And then on the MBS portfolio, can you commented all on your view on whether or not the Wells Fargo trust you hold has - might have any impact on the bonds you own if they become available for call anytime in the near future? Thanks..

On the Wells Fargo side, I mean prior to what they did in June, a lot of the Trustees that have been litigated against. We are reserving cash on a monthly basis anyway. I think the results of the deals being called and the trust being collapsed well expedited the amount of retain. It didn't affect any of our holdings necessarily.

But I mean the way we look at it is anything that will potentially callable based again on economics from the calling party, it may delay calls that may happen in the future if the economics aren't there. As far as the impact on our future holdings, I mean I don't think we are at the top of the capital structure.

Most of the bonds were written off for subs, I don't really suppose any of our holdings being impacted but….

Certainly the bonds that we have issued..

Correct. And not any other securitizations that we've done will not be effected by this litigation..

Alright, okay, thank you..

Your next question comes from the line of George Bahamondes with Deutsche Bank..

Good morning.

You touched on the characteristics of the $620 million of loans that you identified in 2Q, can you repeat that, I missed some of the metrics you guys were touching on during the prepared remarks?.

Sure. On the $620 million that we expect to close in Q3, the weighted average coupon on that is five spot one zero and it's a 132 months seasoned, similar to our other loans..

Got it. Okay, great, that was it for me. Thank you..

Your next question comes from the line of Lee Cooperman with Omega Advisors..

Just couple of questions. When the board looks at setting dividend policy, does it look more a GAAP earnings or core earnings? Question one. And question two, you've done a lot of activity in terms of investing, it is not yet fully reflected in your core earnings.

I am wondering if you could make a comment that on a kind of run rate basis, the moves you've taken if you annualize them whether our core earnings would be high they are presently?.

Yeah, Lee, this is Rob. So just to answer your first question on the board policy on that dividend. The dividend based on taxable, so that's what drives the ultimate decision on how much we pay..

And tax will be closer to GAAP..

It depends on the year, you know unfortunately there are some nuances that create differences between GAAP and tax. You can see that more clearly at the end of the year when we report our table earnings, you can take a look at that versus the annual GAAP and core.

So in some years, there are similar and other years there are timing differences and other things that make the few metrics different..

And with regard - hi, Lee. With regard to earnings, I would say that of the problems with core is that we have - as you said we are always adding to our portfolio. In order to do securitizations, we always take these deal expenses, in the first quarter, we had $11 million with the deal expenses come right out of core.

And we're always adding to the portfolio so we're always - our core is always going to be reduced by that - by those expenses. We take them up front rather than the old days, we used to just level, take them out of the yield of the portfolio overtime.

So there is kind of - in a way you are realizing I think you are being pretty conservative by taking them out front. I think right now, the company is operating at I think pretty low leverage 1.7 turns of leverage. We have a lot of excess capital.

Since raising the preferred in the last two quarters, the company is I would say at the moment slightly under levered. I think we have a higher target going forward. But I want to be extremely careful about how I deploy the capital especially in this market.

I know some investors have said, you just go out and buy a ton of agencies and lever up the balance sheet and get a couple of extra cents of quarter. And I am frankly, I just think that that's not the right trade for us at the moment.

I think you know my investors and the company a whole has a lot better when we differentiate our portfolio from the other people in the market place. And I think the portfolio that we have and we keep adding to is going to be around for a very long period of time.

The securitize interest we have are probably seven years or maybe longer depending on how they prepay. And we are going to be able to produce this dividend I think for a very long period of time in a very challenging market. And so our job right now is to acquire and continue to do what we are doing and growth the earnings sequentially.

If you look at the run rate of the company, our interest income is up. And I think that's a good fact pattern and I think when people stop modelling it in and then if we can find more assets and lever up the balance sheet, you'll see core building up overtime..

Well, if I guess, so my sense and we will advise of getting, you guys have been terrific start to the shareholder's money and just go with your own interesting - your own decision. But you should be very pleased with the performance of your team..

I really am. And you know we look at total return here is about income and preserving book value. And these guys have done a great job..

Thank you..

Thanks Lee..

Thank you, Lee..

At this time, there are no further questions in queue. I will now turn the conference back to Matthew Lambiase..

Well, thank you very much for joining us on the second quarter 2017 Chimera earnings call. And we look forward to speaking to you in early November..

This concludes today's conference call. You may now disconnect..